The Power of a Corporate Mission, Values-Based Leadership and the “S” of ESG
The ESG movement presents numerous opportunities for organizations to promote and improve overall performance. By injecting the important focus on “sustainability,” organizations can take a broader view of their respective corporate missions to advance numerous objectives, including the financial bottom line.
Under “traditional” economic analysis (e.g. Milton Friedman and a shareholder-interests only), a corporation’s sole mission was to increase shareholder value. The market rules and shareholders focus is solely on their stock values. Everyone has to acknowledge this focus. The question is whether a “broader” focus to include environmental, social and governance concerns are consistent with this limited focus or whether the ESG perspective advances shareholder interests.
Let’s start with a basic proposition – governance improvements are low-hanging fruit in the ESG equation and clearly improves corporate sustainability and overall financial performance. This is demonstrated by the basic fact that ethical companies perform better in the marketplace than “un-ethical” companies.
LRN’s 2022 Program Effectiveness Reports over the last few years have demonstrated consistently that values-based leadership with a focus on ethics and compliance “transform culture and impact behavior; rules merely set minimum standards . . . values tell us what we should do.” An organization dedicated to values with improve performance across operations and will be more successful at integrating ethics and compliance into its day-to-day operations. As such, values-based leadership, once defined, can set a valuable foundation for ESG programs.
Some may question the value of each of the two remaining elements of an ESG program – the E for environmental and the S for social justice issues. How do these each translate into advancing shareholder interests? One easy link is access to capital – investors have demanded greater focus on ESG as a condition for investment and access to capital. The “E” part of this makes sense – companies that operate with significant exposure to climate change and environmental issues should be devoting more effort to measuring environmental impact, relevant costs and marketplace influences from environmental and climate change concerns. This is a basic requirement for any business and financial planning.
That leaves the “S” element. This is where definition of the “S” factor is critical. It is important to link the organization’s activities to an appropriate “S” issue. For example, diversity of a company’s board, senior management and overall workforce is an important issue and worthy of designation under the “S” factor. From the shareholder (and investor) perspective, such a focus is well-deserved and inextricably linked to financial performance and sustainability. There is consistent research linking diversity to an overall board’s performance.
In today’s multi-cultural and multi-racial society, companies that ignore the importance of diversity will experience negative perceptions and consequences in the marketplace. Consumers reflect society and the demands for increased focus on diversity. An organization that measures its own performance on this key factor will be rewarded in the marketplace and with its key stakeholders – shareholders and investors.