The recent Business Roundtable (BRT), which includes CEO’s of some of the largest companies in America, revised their definition of the purpose of a corporation. The revised purpose statement, signed by 181 of their members, has focused more attention on ESG, environmental, social and governance issues.
For the first time in the history of BRT, the major focus is not just on profitability. There is a subtle move away from the definition of business they had previously followed; that of shareholder value as embodied by Nobel economist Milton Freidman. Friedman in 1970 stated, “But the doctrine of social responsibility taken seriously would extend the scope of the political mechanism to every human activity…. in such society there is one and only one social responsibility of business, to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in fair competition without deception or fraud.”
And for over 47 years the Business Roundtable, an association of CEOs of 193 companies with over $7 trillion in revenue and almost 15 million employees, followed his advice. Shareholder primacy was first and foremost for most American businesses and it was about providing returns to its shareholders.
Smart move, as today’s consumers want to buy from companies that reflect their business values. Business itself creates tremendous value. It’s a given that companies must make a profit in order to be sustainable and BRT is recognizing that the new economy must take into consideration ESG factors and embrace all stakeholders, not just shareholders.
If you’re going to compete in today’s market, a culture of respect, collaboration and engagement needs to be part of the mission. Thomas Reuters, quoted in the most recent NASDAQ reporting guide, says, “ESG is no longer purely ethical, but rather a financially motivated search for enlightened management, best practices and long-term results.
It is estimated that 80% of CEO’s believe demonstrating a commitment to society is important and look to sustainability ratings for guidance and benchmarking. An estimated $30 trillion of assets are invested worldwide that rely in some way on ESG information, up 34% since 2016.
While BRT claims “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country,” how this initiative will be measured is still in question.
There is a lot of ambiguity around the metrics tied to ESG. And so, while sustainable investing seeks to drive positive ESG change alongside financial results and uses these three factors, employees, investors and customers in measuring sustainability and ethical impact in investing, there is still far to go.
While the EU has made great strides in developing measurement, primarily around environmental factors and diversity, surprisingly our own NASDAQ has had a formal, voluntary, corporate sustainability program in place for about six years that focuses on the market impact of sustainability issues.
NASDAQ states that ESG “is an effective and mutually beneficial communication channel between public companies and the investment community.” They believe that how a company manages ESG “undoubtedly had measurably financial consequences.” These broad sets of ESG considerations “may impact a company’s ability to execute its business strategy and create value over the long term.”
NASDAQ has prepared a list of the most persuasive and pervasive ESG metrics, which they base on five key factors: precedent, prevalence, potential, perspective and practicality.
While still ambiguous, there is no doubt that BRT’s new statement of purpose focusing on ESG and the business and investment community realizing that if they are going to compete and succeed in the next 20 years they’d best pay attention to this growing measurement and go beyond just governance and profit issues.
I recently attended a workshop sponsored by the Institute for Excellence in Corporate Governance (IECG) at UT Dallas’ Naveen Jindal School of Business, which focused on BRT’s new purpose and ESG.
The panel of experts talked about how they implemented ESG in their own companies. Moderated by Marc Hodak, Partner at Farient Advisors and an IECG board member, the panel discussed that investors want to hear how companies are addressing broader stakeholder concerns.
Their questions were provocative and promoted a lot of discussion:
- How does your company view ESG?
- How does it relate to your strategy and success?
- Does your company support specific ESG initiatives and/or are ESG related programs incorporated into your core business processes?
- How do you measure progress in ESG and how do you communicate that progress internally and externally?
- How do ESG initiatives translate into financial results?
- How do they impact your company’s bottom line?
How would you answer some of these? We’re going to be hearing a lot more about the “new” purpose of a corporation. So, thank you, BRT, for stepping out in this area. Still, there is a question about what the best metrics are to apply to ESG initiatives, and I look forward to researching, learning more and sharing this timely and pertinent information.
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
