REDEFINING CAPITALISM IN A WORLD OF SEVEN BILLION SOULS
There are several questions that have been on my mind for years: Is it possible to identify and isolate a new set of core principles that demonstrate how companies must incorporate socially responsive practices into their operations as they compete in an increasingly uncertain global business environment? And once done, is it possible to tie these principles directly to quantifiable measures of stock and societal value?
When I use the term “quantifiable measures,” I am referring to such areas as increased revenues and profits, improved efficiency, and an expanded global customer base. These measures, however, are not limited to financial performance.
Let me expand on this idea.
The way in which a corporation responds in three areas—environmental concerns, social issues that affect people throughout the world, and the quality and integrity of its governance team—is becoming more and more important. The success of a business, once defined exclusively by profitability, is now moving toward a process that also takes into account its concern for the needs of people everywhere.
This has come about with the development of environmental, social, and governance (ESG) metrics. These measures or criteria have become the basis of an expanded way of understanding and evaluating the principles, practices, and performance of corporations. They are the three areas around which social response capitalism coalesces, and they now stand alongside profit as key criteria for corporate success. Here is a brief and basic overview of these areas:
Environmental criteria take into account a company’s energy use, waste, pollution, natural resource conservation, and animal treatment. They also evaluate which environmental risks might affect a company’s income and how the company is managing those challenges. For example, a company would be evaluated on how it manages such environmental challenges as the ownership of contaminated land, its responsibility for an oil spill, its disposal of hazardous waste, its management of toxic emissions, or its compliance with the government’s environmental regulations.
Social criteria involve the company’s business relationships. Does it work with suppliers who hold the same values that the company itself claims to hold? Does the company donate a percentage of its profits to the community or perform volunteer work? Do the company’s working conditions show a high regard for its employees’ health and safety? Are shareholders’ interests taken into consideration?
With regard to governance, investors want to know that a company uses accurate and transparent accounting methods, and that common stockholders are allowed to vote on important issues. They also want companies to avoid conflicts of interest in their choice of board members. Finally, they prefer not to invest in companies that engage in illegal behavior or use political contributions to obtain favorable treatment. In addition, governance criteria also takes into account how thoroughly the company’s management makes decisions on the welfare of its employees and the degree to which it is involved in the development of key corporate policies.
Corporations need to direct their focus on ESG metrics in order to achieve and improve their financial performance, as well as to create a culture that responds to the most pressing needs of the people they serve. I use the word “serve” advisedly; in a real sense, corporations are evolving into public servants who address not only the needs of their shareholders, but also the needs of the seven billion people of this world.
THE IMPACT OF ESG ON GLOBAL BUSINESS
Despite the great variance in cultures, languages, and politics around the world, ESG metrics are becoming a growing part of the universal measure of corporate success. Thanks to their inclusion into business practices, we are finding that the voices of all the people on this planet are being heard. And the new world companies described in this book are among the growing number of firms that are listening. By taking these metrics into account, corporations—in addition to enhancing their financial well-being—are gaining significant value in terms of their ability to respond socially to the needs of the world’s citizens.
What’s really fascinating is that throughout the world (and my business has taken me to countries on four continents), the principles I’ve outlined in this book are being adopted by a growing number of global corporations. Environmental-, social-, and governance-based measures are increasingly being taken into account as customers, investors, and analysts define what matters in the way corporations conduct their business.
While profit is obviously necessary for corporate survival, the attention to profitability must now share its place in the corporate hierarchy with what is coming to be recognized as sustainable value—the incorporation of ESG metrics into a company’s philosophy. The growing inclusion of ESG values into analysts’ assessments makes it clear that corporate success is starting to be seen as a much longer-term social process. The transition from focusing on quarterly and annual reports to viewing corporate success in the long term is one of the key focuses of this book.
In effect, as the business community is being transformed from a multi-national culture in which hundreds of languages are spoken to a global culture, we are increasingly requiring that corporations adopt as one of their mottoes: “ESG Practiced and Spoken Here.”
As it stands now, the ESG principles and practices associated with social response capitalism are, in fact, becoming part of the analyses of corporate performance by scholars, investment managers, business analysts, and social commentators. (Unfortunately, when it comes to social responsibility, the media tends to focus on what businesses are doing wrong, rather than on the benefits they gain when behaving with intelligent responsiveness.) Incorporating the fundamentals of social response capitalism enables firms to grow and thrive in today’s global business environment.
THE PEOPLE PRINCIPLE
In his book Small Is Beautiful British economist E. F. Schumacher advises businesses to practice “economics as if people mattered.” By these words, Schumacher led me to understand that business is not solely about price and quality or the management science of optimization; ultimately, it is about people. This principle has been important in my understanding of social response capitalism, and I’ve come to believe that making this principle central to the way companies conduct business will enable them to improve their potential for success, as well as the quality of life of the people who work for, invest in, and patronize them.
Corporations of all types represent what I see as the most powerful and influential shapers of behavior at every level that exists on this planet . . . for better or for worse.
From the freedom and initiatives they give their employees, to the quality of their products, to the good they do for their clients and customers, businesses must take the lead in managing resources and responding to the world’s mounting social needs as they compete for investment capital. Corporations must seek to provide solutions in all significant areas—including food and energy supplies, information technology, health care, and transportation—for the more than seven billion citizens of this world.
As we look toward a future in which we understand our shared responsibility for improving the lives of our brothers and sisters around the world, it is my strong conviction that social response capitalism has become the most important force for good on this planet. By exploring the in-depth meaning of this term in the chapters that follow, I hope to change the focus of anyone who has an interest in how corporations define their responsibilities. This group includes corporate officers who define the culture, policies, and practices of the companies they run, to the analysts and brokers who examine these businesses in an effort to assess their value and predict their stock worth and success. It also includes the consumers, who purchase the goods and services these companies provide. Even beyond that, though, because international businesses today have such a profound and far-reaching influence on how we manage our resources, every person in the world is affected, directly or indirectly, by the level of social responsibility practiced by these global giants.
In redefining the way businesses can and should practice social response capitalism, I am broadening the term “social responsibility” significantly. As you read on, you will better understand what this term means and how it can evolve to create a much bigger umbrella than has been articulated to this point. By integrating the principles and practices associated with this concept into corporate business policies, you will see how new world companies can dramatically improve their performance in measurable ways—ways that incorporate sustainable, value-based practices into their business models.
Let me share a statistic that demonstrates how important it is for businesses to focus on ESG metrics if they are to succeed in the growing global business community. Since 1981, more than 60 percent of Fortune 500 companies have either gone out of business or have been significantly downgraded in size, influence, and/or governance structures. Many have had to sell off parts of their businesses, which, in some cases, were the very brands on which they had built their success.
The fact that the majority of these once vibrant Fortune 500 companies have lost so much ground clearly demonstrates that the critical elements of social response capitalism impact the people who work for and patronize these companies. The overwhelming reason that these corporations failed is because they did not adapt to the global corporate culture that was becoming more aligned with ESG principles and practices.
I have come to view this planet as a new world in which corporations are in a position to transform what many see as an increasingly limited world into one of unlimited possibilities—a transformation that can occur through the adoption of social response business policies and practices.
New world companies that follow these practices are much more likely to prosper and grow than firms that ignore them. My company’s team has been able to bring about positive change in the corporate behavior of a large number of companies—many of which are reviewed in this book. The reason I am telling you this is because today I feel more strongly about my convictions regarding sustainability and social responsiveness than when I started my company in 1981.
THE PURPOSE OF THIS BOOK
My primary purpose in writing this book is to lay out a practical blueprint for companies throughout the world to adopt socially responsive corporate practices as an integral part of their operations. This is not simply because shareholders will benefit as bottom lines are improved, but also because the lives of those who buy and use the products and services will be positively affected. And, as you will see, in an indirect way, the lives of our fellow citizens will experience valuable results as well.
My blueprint is also designed to show investors how to analyze a company’s philosophies and corporate practices. This will help make them aware if the business supports sound practices that will improve its chance of success. They will gain a better understanding of the connection between adopting the principles of social response capitalism and increasing a firm’s sustained value, its connection to and alignment with key social stakeholders, and its future prospects.
It is important for consumers to assert their influence on companies, insisting that they follow the best practices in this new world. No longer should it be acceptable for corporations not to follow the business practices presented in this book. The approval and support of customers and clients, reflected in how they choose from the extraordinary variety of available products and services, is one of the most influential ways of making sure their interests are being served.
Throughout this book I have focused on a number of key new world companies that exemplify the best of this new breed of corporations. Among those discussed include energy innovators FedEx and Suncor, and Caterpillar, which, in addition to being a socially responsible product development company, is also a pioneer in the social and governance areas. Flex (formerly Flextronics)—what I call a behind-the-scenes new world company—is involved in the manufacture of products in so many different areas that I have referred to it in numerous places throughout the book.
I consider the heart of New World Companies as my operational handbook for understanding the new world of global business. Those in the military might call this “shared actionable intelligence.” I call it “How Firms Must Compete.”
Chapter 1, “The World on Your Wrist,” explains the role that digital technology has had in generating what can be called a true information explosion. It is this phenomenon that allows consumers to access unlimited amounts of data on just about any subject, including that of corporations. And that information enables anyone to demand that companies become ESG-conscious entities. This chapter further explains how this movement toward cultural and global realignment is instrumental in bringing the people of the world together toward a new era of human rights.
Chapter 2 provides an extensive discussion on what I see as the key component of the ESG trio: the environment. The reason I find this to be the centerpiece of any discussion on ESG metrics is because the environment is inseparably linked to energy. A successful transition to an ESG-aware economy cannot occur without the awareness of how we can make the transition from carbon-based fuels, including oil, natural gas, and coal, to alternative sources of energy.
While alternatives are certainly a key to improving our environment, we are currently in a period of transition from the dense energy of fossil fuels to the more diffuse sources of energy generated by wind and solar power. The global economy cannot continue to operate unless we are able to gradually develop the technologies that allow us to generate energy in amounts equivalent to—and eventually much greater than—what we are able to produce today through carbon-based fuels. So this chapter points out how we can make our conventional energy production much more environmentally sound while focusing attention on the responsible development of replacement energy sources.
Chapter 3 continues the discussion of ESG metrics by examining what I call the “people principles”—the social and governance criteria of the emerging ESG awareness. I briefly catalog some of the high points in the evolution of these areas, then further explore what each represents. I also introduce one of the key reporting agencies that brings to light corporate behavior in these two important areas, and then explore how “corporate mansions” have been irrevocably changed by an increased focus on social and governance metrics—a change that includes the emergence of the chief relationship officer (CRO). Concluding this chapter is an eye-opening look at how we are evolving from a “buyer beware” environment into one that is “buyer be heard.”
I like to refer to Chapters 4 and 5 as the “money chapters.” No matter how successfully we integrate ESG metrics into our analytics and into the policies and practices of corporations, in the words of songwriter Randy Newman, “It’s money that matters.”
Chapter 4 presents a financial profile of the past forty years, explaining how speculative capitalism gained power as the focus of business became ever more concentrated on money alone. At the same time, though, what has now become social response capitalism gradually began to get its message out to the investment community. You will see how its principles have already begun reversing the economic decline brought about by speculative capitalism. An extensive discussion of ESG metrics demonstrates how these criteria have evolved from difficult-to-measure “intangibles” into concrete components that are increasingly being factored into corporate policies and investor decisions.
The focus in Chapter 5 is how ESG metrics has led to the most successful long-term investment practices. You will discover the prime movers in the ESG investment community, and learn how these criteria are now becoming available to investors and analysts as they determine the worth and likely success of the companies they monitor.
“The social response future is now” is the message of Chapter 6, which takes a behind-the-scenes look at Toyota—one of the world’s most successful corporations and largest automobile manufacturers. You will see how Toyota led the way in social response product development and became the standard-bearer for ESG principles. Its corporate culture has become one of the models for responsive social and governance corporate practices.
What I Hope to Accomplish
By taking a new look at how global companies operate in today’s interconnected world, we can help chart the course of a sustainable future for the planet on which we live. In the end, I hope to define the term “new world companies” in such a way that you will understand how to approach, invest in, and choose products from them. I want you to understand how these companies are positioned to create a new future—one in which the people of the world can participate directly in improving corporate behavior and its impact on society. In the process, this book reinforces how today’s electronically interconnected world now allows us to participate in making better products in a better world. Social response capitalism is based on “the many,” not the lucky few or the isolated financial elites. With that said, let’s see what the future has already brought us.