November 2020

By Peter Debreceny, Echo Research Advisory Board

One of the debates likely to gain even more prominence as we move to a new “Covid normal” 2021 is going to be around the societal role of companies, and especially large companies. No matter what country you’re in, there’s a growing consensus that the Milton Friedman view – companies should worry only about benefiting the shareholder; if a company does well community and society generally will, ipso facto, also do well – that this view has passed its use by date and needs to be replaced with a more caring approach that emphasizes the commitment companies have to all stakeholders. The rise of ESG initiatives, climate change, the promulgation of the U.N. Sustainable Development Goals; the rush to incorporate purpose statements whether or not there is any substance behind them, the positive financial results that have come to those pioneering firms that put social purpose at the centre of their business strategy, all of these attest to the fact that significant strategic change is afoot. Of course, the Covid-19 pandemic has been a powerful reminder that we live in interdependent societies, that every man for him or herself is a self-defeating strategy.

And now institutional investors are demanding social accountability from the companies they invest in, and many companies are heeding the call. Larry Fink, CEO at BlackRock, the world’s largest asset manager, has been advocating for several years that companies need to have a social purpose as a core business strategy, and he’s not alone – asset managers around the world have echoed that call. A few weeks ago, the investment industry research group the Callan Institute released its annual survey of institutional investors. They found that interest in environmental, social, and governance investing is surging.  Thirty-three percent of non-ESG users were now considering incorporating ESG factors into their investment decisions. And of course, in the U.S., the Business Roundtable has issued its own call along these lines.

It is the role of the institutional investor that Andrew Hall, CEO of the Insurance Council of Australia, and I explored in a recent Echo 2020 Leadership Series conversation. Australian institutions have been particularly assertive in holding companies to account for actions that don’t meet society’s expectations. CEOs and Board Chairmen have been forced out at some of the largest Australian companies – companies with a global reach. So accountability has gone to the top, and Institutional investors are flexing their muscles in demanding a higher standard of accountability from corporate boards.

In his comments Andrew reinforced the importance of good governance at every level of the organization. In ESG, it’s the broad perspective of the Governance part that often gets left behind. Yet it’s the most important when meeting the demands of institutional investors. A rigorous governance system will accurately and continuously assess non-financial risk – risk that poses as much threat to the business as financial risk. Indeed, it’s been the reputation damage and loss of trust resulting from business decisions that didn’t take that view that have caused many of the high-level repercussions in Australia, often with consequential severe financial implications.

However, there are some steps companies can take to mitigate the risk. Every organisation needs someone empowered to ask the “can we, should we” questions. That is, not just whether an action can be taken, but whether it should be taken, given a broad stakeholder point of view. This is a role the communications head can play, as one of the few people in the organization, apart from the CEO, that has a 360 degree view of all stakeholders.

A new development is to gain the counsel of an ESG Advisory Board, led by the CEO and with a transparent process of their deliberations and the decisions taken as a result. It helps the organization fully understand stakeholder perspectives.

And most important is a Board that is full engaged, provided with objective empirical research and evidence, and willing to demand accountability.

It may be that what is happening in Australia is a harbinger of things to come elsewhere in the world, and now is the time for organizations to take the steps necessary to be ready to meet the new realities.