- ESG is a catchphrase for an old idea: That corporate values are necessary to create long-term shareholder value.
- Squeezing financial gain and growth out of companies on a quarterly basis often comes at the expense of, not in tandem with, long term value creation.
This article is not about ESG, it's about business.
These three letters strung together, standing for "environmental, social and governance," are being pigeonholed as some new trend, but I don't think that's the case.
What's new is the impetus to build connective tissue that links corporate values and missions with operational excellence and effective management of enterprise and capital.
Booz, Allen & Hamilton published an interesting piece almost 20 years ago summarizing a survey of top leaders and corporate behavior. The punchline: the best ones, the ones that deliver the most stockholder value, crafted or were crafting purpose-driven identities for their organizations — last century. The most cited values were ethical behavior, trust, teamwork, commitment to employees and customers, innovation, social and environmental responsibility, and commitment to diversity. Sound familiar? It should — and these are not charities, these are the largest companies in the world.
On the flip side, this 2002 HBR article highlights when corporate values and missions are sometimes hogwash, even harmful, because they are disconnected from reality.
Peter Drucker, sometimes called the "father of management," many decades ago was advising executives to define the purpose and mission of their businesses as strategic imperatives and value creation pillars. What is our business; what do we want to become; and why — these were the questions he posed to titans of industry.
Contemporaneously, Milton Friedman published his "The Social Responsibility of Business is to Increase Its Profits" essay. Its core thesis is that companies have no public or social responsibility and that their only responsibility is to maximize stockholder wealth.
Drucker and Friedman, outsized influences on us all, seemed to be at odds — but were they?
Just like democracy is the best system for self-governance, capitalism is the best system for an economy. The American economy is driven by entrepreneurship as its engine and capital as its fuel. Capitalism rests on a simple premise: the productive use of private property and efficient allocation of resources to make a profit. For centuries, people and organizations have done this in their interest and that pursuit creates free markets that allow for demand and supply to set prices and for owners to create value and generate profit. Economic growth in America is driven by ideas, business starts, corporate regeneration and job creation.
It is hard to argue with capitalism's raw force, but business leaders and capital allocators are more frequently asking whether "free markets" have been hamstrung by solely focusing on short-term profit making. Increasing shareholder value and maximizing enterprise profit is, and will continue to be, the main purpose of business — but is it the sole purpose? For over half a century, the sole responsibility construct Friedman gave us has been taken for granted by entrepreneurs, investors, capital markets, economists and corporations. Now, all of them are looking more closely, questioning, refining this premise.
The impact of private enterprise in society is influenced, not driven, by environmentalism, sustainability, equity or justice. For investors, executives, and entrepreneurs, the actual drivers are a mix of capital allocation, productivity, sustained innovation, competitive advantage and sound fiduciary duty. This formidable combination has catalyzed lasting changes in society and fueled amazing human progress, but no lunch is free.
The Business Roundtable recently redefined the purpose of a corporation to "promote an economy that serves all" and in earnest galvanized the move away from sole shareholder primacy, committing to deliver value to all stakeholders. This is one of several markers underpinning what seems to be a tipping point, but it will be hard to make the shift to sustainable growth that benefits all stakeholders unless we pivot away from almost exclusively focusing on short-term profit.
Squeezing financial gain and growth out of companies on a quarterly basis often comes at the expense of, not in tandem with, long-term value creation. This lens could in fact limit or destroy long-term value. A longer-term perspective to shared prosperity and stockholder value generation is becoming more prevalent. Value is the ultimate yardstick in business and the most direct path to create it is maximizing profit — long-term, sustainable profit, even better.
The convergence of several macro societal trends and massive secular economic shifts are at the center of this punchy acronym, ESG. McKinsey recently published a piece about reimagining capitalism, writing that: "America's brand of capitalism — the version that has been in place for the past half-century or so—has delivered unmatched economic growth and prosperity. GDP per capita has more than doubled over the past 50 years, while personal consumption expenditure per capita has almost tripled, and there have been significant improvements in longevity and leisure. The private sector — large corporations, small businesses, and entrepreneurship — is at the center of America's model of capitalism."
This is a big topic, central to our economy, future and society. Shared human and corporate values are being linked operationally to delivering sustainable, long-term stockholder value. This is very hard and none of it is new.