RESTORING COMMON RESOURCES AND COMMON DECENCY: WHY WE ARE LAUNCHING THE SHAREHOLDER COMMONS
Frederick Alexander
CORPORATE SUSTAINABILITY EFFORTS ARE FAILING
Today, nearly every large corporation issues an annual CSR (corporate social responsibility) report, detailing the good it does through programs that support local communities, do charitable work or reduce harmful emissions. Indeed, there is now an entire CSR or “sustainability” industry comprised of consultants, trade groups, reporting standards and the like. Yet business operations continue to accelerate the climate crisis, destabilize inequalities and perpetuate shameful abuses of human rights. Moreover, we continue to see headlines about Volkswagen cheating on emissions, Wells Fargo tricking customers and Facebook incurring a $5 billion fine for sharing data.
The reason business has become unsustainable is that we fail to distinguish between profits that come from solving problems and profits that come from endangering our future or exploiting others.
Why isn’t the focus on responsible corporate practices working? The reason is clear: the business sustainability movement relies on executives to make decisions that will safeguard our air and water and address poverty and inequality. But then we require these same executives to generate competitive profits; indeed, we pay them with loads of stock, so that their own interests are aligned with stock price. But when all profits are treated equally, executives who want to create authentic value are put at a stark disadvantage.
SUSTAINABILITY MUST COME BEFORE PROFITS
Corporations and sustainability experts often deny that this contradiction exists. The finance and academic literature about CSR or “ESG (environmental, social and governance) Integration” only looks to find ways to reduce negative social and environmental impacts while increasing long term share value. No one wants to admit that a corporation must sometimes trade-off share value in order to contribute to a safer planet.
But the idea that business can address the climate crisis without sacrifice is a dangerous fantasy. We need to make some hard choices and we need to make them quickly. This means things like every corporation adopting a science-based program for reducing carbon emissions to their fair share of a 1.5˚ budget. It means every supply chain excluding child labor and modern slavery. It means corporate commitment to these rules regardless of cost.
Take slavery: a child as young as seven may have hand-mined the cobalt ore used to make your smart phone battery, and since died from neglect. Maybe this conduct is good for a company’s share value, or perhaps it will decrease that value in the long run if the reputation of the company suffers. But the decisions on this issue are being made by corporate managers seeking profit, so that the financial question factors into every calculation of where to buy raw materials and how much money to spend on supply chain auditing.
This dynamic leads to tragic consequences. Despite our understanding of the climate crisis, we are increasing, not decreasing, carbon emissions. Society’s growing material wealth becomes more concentrated in the hands of the few while a billion human beings live on a dollar a day. Billions of other sentient beings live and die in misery without any consideration whatsoever.
. . . the idea that business can address the climate crisis without sacrifice is a dangerous fantasy. We need to make some hard choices and we need to make them quickly.
WHERE ARE THE REGULATORS?
In an economy based on competition, we simply cannot rely on individual businesses to self-impose sustainability rules that take priority over profit. Sustainability boundaries must be implemented collectively in order to be effective. While law and regulation would be the traditional avenues for addressing these broad concerns, governments themselves suffer from collective action issues in a global economy where jurisdictions compete for jobs and revenue. Moreover, the power of corporations simply overwhelms governments, as any review of campaign finance reveals.
In light of government’s failure, is there any way to impose the boundaries on business that are necessary to address sustainability?
Yes.
INSTITUTIONAL INVESTORS MUST TAKE RESPONSIBILITY FOR BUSINESS SUSTAINABILITY
The global investor community, including institutional investors like pension funds, has the power to create social and environmental boundaries on corporate activity. Through investment in public companies and private equity, institutional investors control a huge portion of private enterprise around the world. Modern investing techniques lead these investors to diversify their holdings; as a result, they are “universal owners” whose returns depend upon the performance of equity as a class and not the relative performance of individual companies. As sustainability decision-makers, they would be better off ignoring competition among companies, and focusing on the success of the economy as a whole.
MANDATING HONORABLE PROFITS
Capitalism and its pursuit of profit are just tools we use to bring together resources, financial capital and labor to find solutions to production and distribution problems. The reason business has become unsustainable is that we fail to distinguish between profits that come from solving problems and profits that come from endangering our future or exploiting others.
In contrast to stock-laden executives, universal owners can make that distinction and insist on honorable profits because they are not subject to the same competitive burdens. They can impose limits on unsustainable practices when (1) the activity hurts the overall economy and thus their own returns (like the climate crisis), (2) the activity directly affects the welfare of their human beneficiaries (for example, depressing salaries by paying low wages) or (3) we share a common understanding that some things are simply wrong (like slavery and child labor). In each case, imposing a boundary won’t interfere with competition, because no single company (or shareholder) will be peculiarly disadvantaged or forced to choose between the right thing and the profitable thing — that decision will already have been made. Corporations will then be free to chase profits within sustainable boundaries.
This would open up a huge opportunity for executives who are eager to pursue genuinely sustainable strategies. Once exploitation is taken off the table, innovation in humane and circular business models that focus on creating widely shared value will be able to rise to the top. If, on the other hand, investors do not take up this challenge, there is no clear way out of the arms race of unsustainable practices that have already led to deadly storms and heat waves, political instability and a world running out of water. This really may be our last chance.
Our new non-profit organization, The Shareholder Commons, is dedicated to catalyzing an investor movement for a sustainable future. Please contact us if you want to be a part it.
