The Business Roundtable, a group comprised of the world’s leading CEOs, recently issued a new Statement on the Purpose of a Corporation asserting for the first time that maximizing shareholder profits should no longer be the sole objective for CEOs. Instead, the BRT said that addressing the needs of a company’s broader stakeholder cross-section must now take priority. While this huge and historical change in priorities will understandably appeal to certain stakeholders (e.g., employees, media, government, general public, etc.), how will existing shareholders respond to this revised corporate focus?
To prevent dramatic shareholder flight and to continue to attract new shareholders, companies will have to contextualize this expanded corporate purpose, and continuously communicate how their Environmental, Social, Governance (ESG) initiatives will help strengthen the company while also providing value to shareholders.
This decision by the BRT did not come out of nowhere; a number of recent trends and developments have compelled this highly influential CEO group to adopt a new view of corporate responsibility.
ESG initiatives from corporations are increasingly desired by broad segments of global stakeholders who believe that the relentless corporate pursuit of shareholder profit has led to income inequality, damage to the environment, and societal harm. As governments are proving unwilling or unable to address these and other societal challenges, stakeholders are now more than ever looking to corporations, whom they see as having hoarded enormous resources and capabilities, to address these concerns. These groups are consistently targeting corporations in an attempt to alter their behavior, and in some cases they have been successful. Without proper preparation and communication, a company and its reputation could be harmed by the newly emboldened efforts of external stakeholders to push for further change in corporate action, policy, or strategy.
Furthermore, the backlash against corporate behavior related to globalization has led to a rise in populism which, in its isolationist objectives, could reduce a business enterprise’s ability to function within the current global economic framework. Witness the ongoing market-rattling caused by the U.S.-China trade war and Brexit—both resulting from the strength of populist movements.
THE MOVE TOWARD ESG INITIATIVES
There has perhaps been no more influential proponent of the need for companies to shift their focus beyond profits than Larry Fink, Chairman and CEO of BlackRock, the world’s largest asset manager. In 2018 and 2019, he published letters urging companies to move away from an emphasis on short-term profits and begin focusing on targeted, long-term investment strategies that would help address the multi-dimensional needs of society.
Because of BlackRock’s enormous global influence, not meeting the objectives stated by Mr. Fink could potentially mean losing the support of key investors and exclusion from popular index funds. In response, many companies began evolving their messaging and initiatives to show that they were moving forward on ESG initiatives.
The metrics by which corporations are evaluated are undergoing a fundamental shift. From shareholder returns, the exclusive measurement for the past several decades, we are moving toward: ESG + profit. This new formula, supported by some large institutional investors as well as key demographic and stakeholder groups, is already having an impact. Research from Morning Consult shows that younger Americans (Millennials and Gen-Z) in particular are more likely to believe corporations should be involved in social and political issues, and a recent Fortune/NP Strategy poll shows that 80% of Millennials would prefer to work for an “engaged company.” Corporations are beginning to work toward cultivating a growing investor and talent base that wants to see the companies they invest in and work for contribute more to society.
There is growing risk that companies which do not undertake and communicate ESG initiatives will be less able to attract top talent and maintain and attract new shareholders.
COMMUNICATING TO STAKEHOLDERS
KARV works with clients to identify and effectively communicate with their various stakeholder constituencies: employees, shareholders, partners, elected officials, regulators, media, customers, and many others. This entails working with clients to develop messaging, platforms and outreach strategies to ensure that each stakeholder group is kept fully abreast of corporate strategy, has its concerns addressed, and sees the company as a trustworthy partner that is willing and capable of following through on its objectives.
Several of our clients have already seen the need to implement ESG-focused initiatives and messaging, and we have worked closely with them to ensure that each of their constituencies sees value in these efforts. In order to thrive as corporate responsibility expectations increase/expand, companies will need to reshape their expressed goals beyond maximizing profits and develop compelling narratives that show both progress and financial justification for these new initiatives. This will include messaging for shareholders to show how including measures such as employee retention, local community support, environmental sustainability, and customer loyalty is a necessary aspect of a company’s long-term financial success.
As companies focus more resources on initiatives that are not directly linked to gains on the balance sheet, shareholders must be assured that their investments are being managed responsibly. Active communication to shareholders regarding the strategic purpose of ESG investments is crucial: In order to succeed in an evolving corporate environment, companies must effectively communicate that adding value across all measures stakeholders increasingly seek will ultimately translate into gains for investors.