Don't Look Back: Build Growth Systems for the New World of Work

ESG has a problem

I was struck by a comment in a recent article in The New York Times about "a prevailing narrative that the people who finance the movies are becoming the enemies of the people who make them". Why, I wondered, are the agendas of these groups so conflicted? Are their views of what is happening in the world so different that they can't come together to make movies that matter?

I can't help thinking this is connected to a broader push behind the "shareholder view" that the sole purpose of business is to generate profit and increase shareholder wealth. This is exemplified by the marshalling of forces (certainly here in the US) in opposition to investing in environmental, social and governance (ESG) outcomes, the allegation being that this is not in the best interests of the shareholder.

It must be said that this movement has some evidence to draw on. ESG funds often underperform non-ESG funds - and not only in financial terms, with some research showing that even their ESG outcomes are often no better, and sometimes worse. Fueled by such evidence, there are now about 20 US states with effective “anti-ESG” rules that seek to limit the weight given to ESG-related factors in investment decisions or actively discourage such investments.

While doubts about the ESG method are certainly valid, the picture is complicated. Some research indicates that many companies publicly embracing ESG may be doing so as a cover for poor business performance. Even when intentions are good, ESG targets are often set as an add-on to rather than as an integral part of organizational strategy and can therefore distort business decisions. ESG just may not have developed into the useful business management tool many hoped it would be.

Impact beyond profit can still be good for business

Such ESG shortcomings don't necessarily prove that businesses can't do better by considering the interests of all their stakeholders - not just their owners. While perhaps stating the obvious, profit and shareholder returns are the outcome of numerous strategic and operational decisions. Seeking to achieve impact beyond profit should explicitly recognize that choices around environmental and social responsibility can improve as well as impair financial results. If we look at the behavior of insurers and re-insurers, clearly climate change is perceived as a major risk to business. Protecting the reputation of our business is similarly essential. It will be impossible to maximize financial returns without managing these risks.

Organizations don't exist in a vacuum. Businesses both shape and are shaped by what happens in the world. Growth requires systems that enable this continuous shape-shifting. At the heart of such systems must be people processing information and finding new and better solutions. We all think differently and the best organizations embrace and meld different behavioral styles to achieve outstanding performance. Multiple studies have shown that companies with the highest employee engagement consistently achieve the best financial performance (see, for example, Gallup 2020 Q12 Meta-Analysis or AON_Hewitt's Global Engagement Study). The most successful leaders recognize that their fundamental responsibility to all stakeholders is to create workplaces that inspire individuals and groups to grow and deliver increasing value. If they don't, any success is likely to be short-lived.?

I fear that a preoccupation with shareholder interests is at odds with this responsibility. People often account for a major share of a business's costs so profit maximization encourages the minimization of these costs. But this shrinkage may also cause a reduction in energy and creativity, as well as increases in other costs, not least those associated with replacing the people that inevitably depart in the search for more fulfilling work (highly engaged employees are 87% less likely to leave their companies). And if every business seeks to minimize its staff costs, having less people earning less money can only reduce the size of the consumer market. There is plenty of evidence to suggest that the streamlining of our organizations has already been a key contributor to the squeeze on middle class incomes - and the consequent social tensions - we have seen in many developed economies over recent years.

New paradigms require new solutions

The shareholder view seems very neat and logical; it may well have been useful in a less volatile and interconnected world. But that doesn't mean we should cling on to it. A significant part of the ESG hullabaloo may be tactical, adding to the smoke and mirrors deployed by climate change deniers and others determined to protect the status quo. We shouldn't get distracted by this noise. Sustainable growth and financial success require a system that monitors the needs of and delivers value to multiple stakeholders. ESG may not be the system that we need, but that just means we must look for a better system - I would argue, one that values human desire, ingenuity and spirit as the source of profit.

Business increasingly finds sustainable advantage through different ways of joining the dots. We shouldn't look back to old ways that discourage us from finding different patterns in the dots. We need to think more boldly if we are to achieve more.