McDonalds’ founder Ray Kroc once famously said that it took him 30 years to become an overnight success. The same could be said about the great pivot that American business is making toward social responsibility. The concept is firmly in the mainstream now, but it’s taken decades to develop.
More than 25 years ago, for example, I was fortunate to be part of a team at Bank of America that launched a wide-ranging environmental initiative. Then-CEO Dick Rosenberg had a vision. He understood the bank’s enormous influence on the financial value chain, and he also had an affinity for environmental responsibility. So, he came to work one day and told his management team, “I want us to be a bank that plays a role in protecting and sustaining our environment. Give me some ideas.” The result was an initiative that integrated environmental factors across the enterprise, from purchasing to credit decisions. It created a legacy; just this week, BofA committed $300 billion to low-carbon sustainable business.
In the early 2000s, while at Visa International, I commissioned a study by Global Insight to determine the full financial value of electronic payments as the industry approached its fifth decade. In addition to measuring the huge stimulus that e-payments made to GDP (including a $6.5 trillion increase in consumer spending power, 1980-2000), the study also revealed significant social benefits that electronic payments provide by democratizing access to credit, such as expanding access to banking in developing economies.
Fast-forward another eight years. As manager of Corporate Affairs at Chevron, my team developed a communications platform called “shared prosperity,” based on the notion that the core business of oil and natural gas production radiated out to a wide spectrum of suppliers. Using Chevron’s home state of California as a case study, the Milken Institute determined that Chevron supported a total of 68,700 jobs in the state – many of them small minority- or women-owned businesses – and generated more than $9 billion in economic value.
The common theme to these examples, of course, is that businesses do not operate in a vacuum, but within complex economic and social ecosystems. What they do — or don’t do — has repercussions far beyond the bottom line. Over the last several decades, large businesses slowly – and sometimes painfully – realized they could either disregard this interdependency with wider society or embrace it as part of a long-term business strategy.
Today, businesses are pivoting from a shareholder-centered model to a stakeholder-centered version in which the impact of business decisions on employees, customers, suppliers, communities and the environment is taken into account.
The shorthand for this tilt toward social purpose is ESG — environmental, social and governance factors in business strategy. It’s going mainstream. One of the most dramatic examples was the annual letter that BlackRock CEO Larry Fink wrote in 2018. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society,” Fink wrote. Just last week, Fortune magazine published a list of the top 10 companies globally making material contributions to social wealth. Their combined value is well beyond $1 trillion.
The list of business leaders embracing ESG – including Jamie Dimon at J.P. Morgan, Howard Schultz at Starbucks, Marc Benioff at Salesforce and Rod Antolock at Charlotte-based Harris Teeter, which has raised millions of dollars for education through its affinity marketing programs – is growing.
The impacts are measurable. According to the Drucker Institute Corporate Effectiveness Index, stocks with higher social values – customer satisfaction, employee engagement, innovation and social responsibility – generated higher returns versus the broader S&P 500 over the past month, year, three-year and five-year periods. In the year to date, these socially oriented companies returned 17.4 percent versus the S&P at 14.7 percent. Morgan Stanley also came to the same conclusion in an analysis of the returns from sustainability funds during 2020.
Like Ray Kroc’s overnight success, it’s taken a while for businesses to arrive at this point. But over time, they have thought about the concepts of ESG deeply and realistically and come to the realization that they are fundamentally good for business.
For instance, in the Bank of America example cited above, Dick Rosenberg wasn’t only thinking about the environment. He saw the early emergence of an electric vehicle industry coming out of CalTech research and wanted to position the bank to take advantage of the opportunities that represented. Visa wanted the economic and social value of electronic payments to open up new opportunities for acceptance. And Chevron wanted its stakeholders to understand the very powerful economic and social value of energy production.
The bottom line: businesses increasingly understand that they operate at the pleasure of their stakeholders, not just shareholders. They know they cannot ignore their interdependency with the communities where they operate. And they realize if they structure their strategies and operations accordingly, they’ll be stronger and more profitable in the long run.
In other words, operating on a stakeholder model with ESG as part of a long-term strategy isn’t just “good” business, it’s smart business. Leaders like Larry Fink are helping to drive that kind of thinking. American business — and American society — will be all the better for it.