“Why should the citizens of this world keep companies around whose sole purpose is the enrichment of a few people?”
Paul Polman, the highly successful and far-sighted departing CEO of Unilever.
“Society demands that companies “serve a social purpose”
Larry Fink, CEO BlackRock, world largest asset manager
“In the eyes of many Americans and Britons, their style of capitalism has become too ruthless, too unequal and too focused on maximising short term returns to shareholders.
S Pearlstein, FT 27th January 2019
Like ripples in a pool pointed remarks like these spread ever wider. Staying relevant means ethical leaders needs to keep adapting and evolving.
A company wanting to do “good” in society at the expense of profits once seemed almost blasphemy. At least that’s how the powerful Chicago school of economists led by Milton Friedman viewed it.
The neo liberals as they came to be called, considered making a social contribution at the expense of profits as irrelevant, or outrageous as a leadership aim.
Today we’re witnessing the complete erosion of the long-running “Chicago curse”. Its baleful influence has blighted and distorted company purposes for decades.
At the current 2019 World Economic forum in Davos, Paul Polman’s successor Alan Jope at Unilever seemed bent on emulating his ex-boss: Consumers: “…want to know how brands are making society and the planet a little better.”
Supporting him, fellow CEO at Walmart Doug McMillon claimed consumers wanted clarity about: “How the product was made and delivered and how people were treated in the supply chain.”
Not to be outdone, David MacLennan CEO of food trading giant Cargill reported that employees were starting to ask questions about a company’s ethical standards:“They want to know we respect the cultures and communities where we operate.”
Staying relevant means ethical leaders must adapt and evolve by responding to least six important trends. Each challenges a previously narrow view of what a company is for
Staying relevant–changing role of ethical
Acceptance of the Social License
The social license idea can no longer be confined to academics. Many business leaders now accept the “license” is a reality. Staying relevant requires them to accept that for all practical purposes, a community grants each company “permission” to trade. If abused, this may lead to an ending of the license.
That notorious one-liner by the boss of GM, America’s largest US car maker in the 1950s, no longer holds sway:
“…for years I thought what was good for our country was good for General Motors, and vice versa.”
Charles Erwin Wilson, CEO GM, 1953
Though the social license may be intangible, a company can still encounter solid opposition to exploiting people and the planet solely for its own selfish ends.
Nor does employing people or creating useful products alone justify a company’s existence. In deciding what to do, smart companies now factor in concerns about the Environment, Social issues, and how they are Governed (ESG).
For example, concern about excessive executive rewards used to be confined to internal considerations. Now boardroom pay and the growing gap between the highest and lowest paid employees makes regular headlines. The ratio between highest and lowest pay even attracts talk of possible government intervention. Governments already set minimum limits.
In staying relevant responsible business leaders must be willing to consider pay differentials as part of their ethical focus. It matters to them if the gaps become excessive or ever expanding.
Changing employee expectations
What employees expect from their work also causes waves. Ethical leaders must adapt to these. Younger and more demanding generations now expect a larger say in how they’re best employed. The so-called millennials for example, expect to make a worthwhile contribution to society. This desire may affect recruitment costs, retention rates and eventually profitability.
Many employees also wish to work in a company that takes an ethical approach to doing business. For example, research consistently shows most employees will accept less pay if they can work for trustworthy firms. Employment specialist Unum surveyed 3000 people in 2018. Over half felt companies also had a duty to make a positive contribution to society.
Advances in technology also keep influencing workplace attitudes. Any firm fixated on short-term profits at the expense of its long term future may find itself failing to recognise the extent of technical support and learning its employees need.
Legislation such as the minimum wage, paternity leave and the extension of maternity leave, has also transformed what employees expect from their employer.
For instance, not only do they expect to be treated fairly and with respect, but they want to be fulfilled, empowered and to work flexibly. This means the company being willing to amend the social and legal contract between employer and employee.
Millennials with spare money are twice as likely as conventional investors to place their funds where they generate a positive social impact. Staying relevant as this younger age group gains power demands that ethical business leaders work harder on pursuing social impact projects.
Growth of social impact investing
“There is mounting evidence that funds which observe Environmental, Social and Governance (ESG) standards in their strategies tend to outperform those that don’t by a significant margin.”
Financial Times, Sept 3rd 2017
Directing resources into socially desirable projects once generated a negative response from most financial experts. They saw such decisions as a misdirection of resources for which: “You can expect a worse return on your investment.”
This is no longer true. Financial returns from social impact investing often exceed those from conventional investments. News that investors who integrate ESG into their decisions win better returns keeps invading capital markets. Consequently many firms and fund managers report regularly on their social and environmental contribution.
It’s also becoming easier to learn what impact the newly directed resources actually achieve. As a result of this transition thousands of professionals from around the world now hold the job title “ESG Analyst”. The continual media coverage, including within the financial sections of the world’s leading newspapers, partly reflects this change.
However, despite the interest in ESG, reliable performance metrics remain in their infancy. Almost seven in 10 asset managers lament the lack of quality information. There are signs new technology based on machine learning will help to redress this shortfall.
Given these developments, ethical business leaders must adapt and learn to talk about the numerous demands of ESG. Staying relevant implies helping their companies focus on the critical factors where a company can indeed make a useful social contribution.
Moves to long-termism and sustainability
“At Amazon the customer comes first, ahead of “short-term profitability considerations or short-term Wall Street reactions.”
Jeff Bezos CEO Amazon
Taking more account of the long term continues to invade the thinking of many CEOs and of regulators. A recent report on sustainability in Europe found three out of four (73%) business leaders believe that ignoring sustainability will affect their company’s ability to create long-term value. More than half (53%) say their board sees a solid business case for sustainability.
When experts sat down to write the UK’s new Corporate Governance Code in 2018, they drafted a critical first principle that the role of a board is:
“To promote the long-term sustainable success of the company. Boardroom members should generate value for shareholders, but they should also be contributing to wider society”.
Such an approach puts values and the principle of sustainability at the heart of running a company today. This trend has important implications for the role of ethical business leaders. A responsible leader must now accept the multifaceted nature of sustainability. It embraces the long-term interests of shareholders. It also includes responsibilities to society, customers and local communities.
This core message of the need to build sustainability into company strategy keeps filtering through to investment managers. The latter for example, often express concern that companies should be building new strategies. That is, ones taking into account risks involving environmental, social and governance (ESG) factors.
Ignoring such risks may make it harder for a company to attract capital. Among 2,200 studies undertaken since 1970, most (63%) reported a positive link between a company’s ESG performance and its financial performance.
Apart from the trend to take into account ESG factors, there’s the ongoing tension to be resolved between taking the short term view and the contrasting long term view.
On the one hand in a survey of over a thousand C-level executives and board directors, most believed they faced more, not less pressure to focus on the short term. Yet there is also the desire of many leaders and investors to give more weight to the long term. Consequently, ethical business leaders need to become more aware of the downside of acting short-term and its negative impacts. As ethical leaders part of staying relevant includes talking openly about these issues.
Rise of Anti-globalisation
“The rules of the game have been largely set by the advanced industrial countries”, who unsurprisingly “shaped globalisation to further their own interests.”
Nobel economist Joseph Stiglitz, Making Globalization Work: The Next Steps to Global Justice 2006
There’s a shortage of favourable views of capitalism. For instance, only a slim majority of Americans retain a positive view of it. Countless and seemingly endless business scandals undermine trust in finance or companies to decide what’s best for society.
Many sectors of society regard globalisation as a negative force because it distributes the gains unevenly across society. Opponents of globalisation believe it mainly benefits an elite. The post Lehman crash of 2008/9 shook capitalism to its roots.
For ethical business leaders globalisation and people’s strong reaction to it demand yet more adaptation. Empathy and understanding are not enough. Ethical leaders need to promote positive counter measures.
Advances in technology
We are starting to understand how technology affects ethical leadership. Technical changes prompt the alert leader to think and act in adaptive ways. For example, they must evolve their approach to embrace learning, communication and diversity.
At a world-wide level, successful ethical business can stay relevant by understanding how technology can aid them in managing people. For example, in building teams and keeping track of work across all channels and in any location of the world. The advances continually present new kinds of ethical dilemmas to which business leaders must respond.
Developing self-drive vehicles might seem to pose mainly a technological challenge. For leaders there are less tangible issues that cannot be delegated elsewhere, such as ensuring that controlling software reflects basic human values.
Or take drug development. New technology using genomic data, poses ethical choices that leaders cannot just offload to committees.
Artificial intelligence (AI) presents many ethical choices to which business leaders must respond. For example, voice recognition may seem to deliver an obvious gain in some business situations. Yet there are critical ethical choices around openness and potential invasions of privacy.
Machine learning and big data also may unlock valuable insights. For example, by helping to obtain better ESG financial information.
Yet as the public row over Facebook’s use of big data and the case of Cambridge Analytics showed, ethical leaders need to play an important role in the sort of choices to be made about the use of such material.
AI also offers ways companies can improve the quality of their governance. For example, in achieving higher standards of employee compliance. Yet should employees be informed they are being monitored and in effect “watched” by a machine?
As Google and Amazon learned, AI in particular creates ethical dilemmas requiring a leadership response. For example, to be more open and transparent about the application of these advances. The changes also stimulate new pressures for increased collaboration, better communication and more readiness to listen to people’s concerns.
The changing role of ethical business leadership
The six trends described generate a major pressure wave for ethical leaders to focus on staying relevant. This is itself a trend and prompts the question:
What does it now mean to be an ethical, or responsible business leader?
As we have seen, in today’s transparent, and social media-driven world, senior executives face constant challenges over their morals and ethics. For example most (63%) managers reported in a 2013 Business in the Community study they’d been asked during their career to act contrary to their own ethical code. Nearly one in ten (9%) said they’d been asked to break the law.
Around the world society and interest groups regularly confront businesses and their leaders. How leaders behave and interact with those around them can win or lose the trust of stakeholders. Lack of trust can damage a company’s reputation and deter the recruitment of new talent.
Individual leader behaviour may also come under the microscope of employee judgement. For example, at the end of 2018, Ray Kelvin founder and chief executive of Ted Baker stood down. His departure followed complaints from over 100 staff and an on-line petition demanding:
“…an end to forced hugging by the CEO. …so many people have left the business due to harassment whether that be verbal, physical or sexual.
This internationally high profile event came on the back of reports of retail entrepreneur Philip Green’s alleged misconduct. And of course the notorious Weinstein downfall over alleged sexual misconduct.
Faced with a complex pressure wave of many different forces, how should an ethical business leader keep changing? Singly or together the trends here deliver a sizeable impact on the typical ethical business leadership role.
Riding this transition to stay relevant will test the most astute and self-aware executive. Google, for instance, faced protesting workers in numerous nations. They united against the company’s handling of sexual misconduct and its business strategies.
The pressure wave represents a shift towards values. It’s why the ethical leader role must keep adapting and evolving. Shareholder primacy once gave an leader a clear sense of direction. This no longer holds true.
Thankfully we are mainly free of the urges of the original Chicago economists. For decades their baleful influence, some would say “curse”, distorted what ethical business leadership meant in practice. If culture meant anything it focused almost exclusively on maximising profits.
Today, culture takes centre stage in ethical business leadership. Even regulators seek assurance about it, and CEOs readily declare its importance. This translates as leaders staying relevant by adjusting their role to
Honour human rights, demonstrate care, prevent long term harm, anticipate unintended consequences, honour sustainability, lead with transparency, promote diversity, and “do what’s right.”
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LIST OF SOURCES
- Kell, The Remarkable Rise of ESG, Forbes, 11, 2018
- Leigh, Why ESG now helps define ethical business leadership, www.ethical-leadership.co.uk, November 22, 2018
- Exploring the shift in employee expectations, Vodaphone report 2012
- Christie, New trends re-shaping the workplace in the year ahead, Daily Telegraph Business, 8th January 2019
- UK Corporate Governance Code that is fit for the future, Financial Reporting Council, 16 July 2018
- Sustainability imperative, Board Agenda 13th January 2019
- Relly et al, Social capitalism is proving profit and sustainability do go together. Daily Telegraph 12th December 2018
- Holt, Generation 2030 will want more than just money, Daily Telegraph, 20th September 2018
- ESG Funds race past $1tn Mark, FT 19th November 2018
- Barton et al, Rising to the challenge of short-termism. FCLT Global, 2016
- Williams, UK ethical fund assets surge to £16bn, FT 29th September 2018
- Edgcliffe-Johnson, Beyond the bottom line, FT, 5th Jan 2019
- Anti-globalisation has switched from a left to a right-wing issue – what now? Manchester University, 29th January 2019
- Pearlstein, Save capitalism by freeing companies to try new models, FT 27th January 2019
- Jacobs, Campaigning platforms help digital workplace activism gather pace, FT 27th January 2019
- Huw van Steenis, Defective data is a serious problem for sustainable investing, FT 21st January 2019
- Marlow, Unilever chief backs trend to put purpose before profit, “ Telegraph 30th January, 2019
- Redefining globalisation on the slopes of Davos, FT 24th January 2019