Rising Expectations for Corporate Social Impact

February, 2022

Photo by Markus Spiske on Unsplash

The COVID-19 pandemic and ensuing economic chaos, a global focus on racial inequity, and the worsening climate crisis have all increased pressure on companies to better manage their Environmental, Social and Governance (ESG) and community support activities.

These days companies are expected not just to participate in — but to lead — the advancement of social and environmental solutions.

Leadership requires transparency and authenticity to build trust among the numerous stakeholders involved. And the findings from Edelman’s 22nd annual trust and credibility survey, the 2022 Edelman Trust Barometer, indicate that trust is needed in today’s world.

In this global survey (in which the US represents less than 25% of respondents, p. 58), participants chose business as the most trusted institution — above nonprofits, government, and media — for the second year in a row. We should note that “business” in this report includes family-owned businesses, which are arguably viewed as more trustworthy than their public counterparts, especially by employees. (p. 54)

Of the top 10 findings, four speak directly to business leaders and the rising expectations of corporations in society:

1. Of the studied institutions, business is once again the most trusted.

2. Business needs to step up on societal issues.

3. Societal leadership is now a core function of business.

4. Business must lead in breaking the cycle of distrust.

The survey results also show that various stakeholder groups plan to hold business accountable:

58% of consumers will buy or advocate for brands based on the consumer’s beliefs and values

60% of employees will choose a place to work based on the employee’s beliefs and values

61% of investors will invest based on the investor’s beliefs and values

88% of institutional investors subject ESG to the same scrutiny as operational and financial considerations

Even if you're not sure that Edelman’s survey accurately reflects public sentiment in your local community, it does highlight the growing role of business leadership in societal issues.

In 2019 the Business Roundtable (BRT) declared that the purpose of a corporation is not just to serve shareholders (their official position since 1997), but “to create value for all our stakeholders.”

So how should business leaders navigate the often competing interests of various stakeholder groups while stepping up on environmental and social issues?

Reactions to BlackRock’s Larry Fink’s 2022 annual letter to CEOs, titled “The Purpose of Capitalism”, show that the answers aren’t straightforward or even the same for every company.

Fink’s letter is markedly longer than previous years, so here’s Investorplace’s quick recap of top takeaway quotes from Fink’s letter.

“Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not “woke.” It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper. This is the power of capitalism.”

“The pandemic has turbocharged an evolution in the operating environment for virtually every company. It’s changing how people work and how consumers buy. It’s creating new businesses and destroying others.”

“COVID-19 has also deepened the erosion of trust in traditional institutions and exacerbated polarization in many Western societies. This polarization presents a host of new challenges for CEOs.”

“Political activists, or the media, may politicize things your company does. They may hijack your brand to advance their own agendas. In this environment, facts themselves are frequently in dispute, but businesses have an opportunity to lead. Employees are increasingly looking to their employer as the most trusted, competent, and ethical source of information — more so than government, the media, and NGOs.”

“It’s never been more essential for CEOs to have a consistent voice, a clear purpose, a coherent strategy, and a long-term view. Your company’s purpose is its north star in this tumultuous environment.”

“Workers demanding more from their employers is an essential feature of effective capitalism. It drives prosperity and creates a more competitive landscape for talent, pushing companies to create better, more innovative environments for their employees — actions that will help them achieve greater profits for their shareholders.”

“Companies not adjusting to this new reality and responding to their workers do so at their own peril. Turnover drives up expenses, drives down productivity, and erodes culture and corporate memory.”

“Young, innovative companies have never had easier access to capital. Never has there been more money available for new ideas to become reality. This is fueling a dynamic landscape of innovation.”

“CEOs of established companies need to understand this changing landscape and the diversity of available capital if they want to stay competitive in the face of smaller, more nimble businesses.”

“We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.”

“Divesting from entire sectors — or simply passing carbon-intensive assets from public markets to private markets — will not get the world to net zero. And BlackRock does not pursue divestment from oil and gas companies as a policy.”

“Capitalism has the power to shape society and act as a powerful catalyst for change. But businesses can’t do this alone, and they cannot be the climate police. That will not be a good outcome for society. We need governments to provide clear pathways and a consistent taxonomy for sustainability policy, regulation, and disclosure across markets.”

“When we harness the power of both the public and private sectors, we can achieve truly incredible things. This is what we must do to get to net zero.”

We’ve been covering these influential letters from the Chairman and CEO of the world’s largest asset manager for years (2018, 2020). We noticed increased negativity in response to this most recent edition, in which Fink is criticized for attempting to please everyone.

As Bloomberg’s Matt Levine opines:

There is something odd about the world’s largest shareholder advocating for stakeholder capitalism, saying to corporate CEOs “no, don’t put shareholders first, prioritize your workers and customers and communities above shareholder profits.” But of course he’s not saying that. The point of this year’s letter is to dispel the idea that he might be saying that. He’s saying that sometimes having good customer service, paying employees enough to motivate them, and not breaking the law can help maximize the long-term value of a company’s cash flows to shareholders, and so companies should do those things. Their executives should run the company, you know, well, like a business. They should make good choices and not bad ones, so that the business is valuable, for its shareholders, who are Fink’s clients.

Whatever your opinion of Fink’s annual letter to CEOs, it does highlight the complexity of navigating stakeholders and the importance of ESG activities in today’s world.

McKinsey examines the role of ESG in a recent episode of the Inside the Strategy Room podcast. In this edited transcript, “two experts who have long studied the connection between purpose and ESG explain how to align these commitments and embed them in organizations’ lived experiences.”

McKinsey partner Robin Nuttall answers the question “What are the key early decisions that business leaders who want to embed a purpose in their organizations need to make?” with this advice:

Number one is to pose the question about materiality and value at stake. What factors matter to my business and my stakeholders above all else? The second question is about focus. Some of the most successful ESG leaders have a focus, whether on sustainable living or reimagining food, and that drives two or three clear ESG commitments. Ask yourself what one or two topics you want to lead in your sector versus those topics where you are content to share the lead with others or follow. That focus will give you more impact, both with your colleagues and with the markets.

People are looking for CEOs to lead the collaboration and innovation charge. As expectations around corporate responsibility continue to rise, many corporate leaders are investing capital for transformative social impact as one way to live up to the sustainability, equity, inclusion, and fairness commitments they have made over the past few years.

While we don’t know exactly how stakeholder expectations will shape corporate actions, we do know that executive leadership cannot ignore the importance of societal obligations.

StartingUpGood supports fresh entrepreneurial approaches to doing good in the world. We help corporate leaders activate all their resources towards setting and achieving authentic social and environmental impact goals. Check us out on Twitter: StartingUpGood.

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