Why Environment, Social Issues, and Governance (the ESGs) are the Future of Leadership

Can you guess who didn’t get the memo about the future direction of business and leadership? Most current business schools. What’s on the memo? The “shareholders and profits first” philosophy, set in motion by Milton Friedman’s Shareholder Value Theory in the 1970s, will not work in the 2020s and beyond.

The singular measurement of a rising stock price is being replaced by a triple top line: Planet, People, and Profit. That means measuring a company’s positive impact on Environmental and Social issues in addition to Governance, for long-term sustainability.

Imminent world crises, a universal movement for equity, and an increasing expectation for businesses to address global issues are driving this new gauge for long-term, sustainable success.

To succeed you will need to rewire the leader in you, rehumanize the workplace and reinvent the future.

Organizations and leaders who care about doing the right things for their employees, their organizations, their communities, and the world, especially creating an inclusive and high-performing culture that provides employees with a great human experience, are the ones who will thrive.

It starts with understanding the ESGs and how they pave a road to a sustainable future.

What are the ESGs?

Environmental, social, and governance (ESG) is a set of standards for how a company operates with regard to the planet and its people, as part of the equation of how it succeeds financially. The idea is to create sustainable development in business by “meeting the needs of the present stakeholders without compromising the ability of future generations to meet their needs,” according to the UN’s 1987 Brundtland Commission (UN). The commission recognized all three pillars, citing that if one was ignored it would lead to negative outcomes for either of the other two.

Environmental criteria examine how a company performs as a steward of the planet. Social criteria examine how a company manages relationships with employees, suppliers, customers, and the communities where it operates. This is where Diversity, Equity, and Inclusion are front and center, as well as corporate responsibility. Governance defines a set of rules and best practices, along with a series of processes that determine how an organization is managed and controlled.

?Why is Leading around the ESGs Critical Now?

“We need more sustainable Capitalism...CEOs who do not take a multi-stakeholder approach are at risk and extremely vulnerable during economic times that are particularly turbulent.”?

That quote is from Marc Benioff, President and CEO of Salesforce in a ‘Squawk on the Street’ Interview from October 2019…BEFORE the pandemic and the George Floyd protests and the Russian invasion of Ukraine. Then there’s “VUCA,” an acronym coined by social scientists at the U.S. Army War College almost three decades ago. (Baran, 2020) VUCA is the Volatility, Uncertainty, Complexity, and Ambiguity the world throws at you.

As VUCA has been increasing, people’s trust in governments and NGOs to respond is decreasing. At the same time, there is a growing expectation that corporate leaders will speak out about, if not solve, societal challenges.?That’s according to the 2022 Edelman Trust Barometer, an online survey of 36 thousand respondents from 28 countries. The survey found that business, at 61%, is the topmost trusted institution.

The survey also revealed that 80% said they “Will invest based on their beliefs and values.” People want to purchase from, do business with, and work for companies whose values align with their own. The old model of touting quarterly returns for stockholders in a vacuum is not what will attract and retain the best talent.

People are looking to businesses to make a difference.

That puts an urgency on leaders to lead the change. Accelerated by technological advances, social dilemmas, and environmental disasters, CEOs and their team need to build a keen sense of curiosity, courage, care, and commitment that goes beyond lip service on how their organizations respond to social dilemmas.

Any leader who wants to lead into the future needs to be comfortable in the role of company leadership but also be able to connect the dots between decisions made today and how they drive a long-term vision for the world.

This is where the future is going.

While the debate continues as to how best to meet the demands of this century’s business environment, leading business schools are still catching up. An article in the economist from April criticized “How MBA-wielding bosses boost profits.” It was not by increasing sales, investment, or productivity overall. It was by moving pieces of a pie around to favor shareholders over other stakeholders—not increasing the overall package.

Transformation: Building a model that is sustainable for business and the world.

What’s still being taught to many current MBA students is the primacy of shareholder value, an individual focus, and a command-and-control style of leadership.* What’s being experienced and needed in the world right now is stakeholder alignment, a community/collective hero, and a “humble hero” style of leadership. According to the Harvard Business Review, the Humble Heroes are leaders “who are willing to make bold decisions (like shedding certain business positions or staking out new ones) in times of uncertainty,” and who “have the humility to acknowledge what they don’t know and to bring on board people with potentially very different skills, backgrounds, and capabilities.

Working toward sustainability is a mindset journey. The old leadership paradigm pushed for quick decisions?with immediate impact. The ESGs provide a future-focused framework for business success measured by the triple bottom line: Planet, People, and Profit.

It’s the role of the CEO to navigate the dance between the three of these, making and standing by bold decisions that may alienate people in the short run, but will support long-term growth and sustainability.

Are you ready?

*If I may, here’s one more acronym to consider: PRME. That’s the Principles for Responsible Management Education, an initiative of the UN Global Compact. PRME is leading the effort to evolve the curriculum at leadership and management schools. (I’ll go deeper on PRME in my next article or you can read more here, now.)

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Resources

These resources support the ideas in this article. Even more, they provide a good base for understanding the ESGs and how they will transform business and leadership into the future. This is foundational for the five mind shifts and practices that I use in training and to coach top leaders for success.

Please let me know if you have any questions or how I can help you prepare to excel as a leader for long-term sustainability.?

Baran, Benjamin, et al. Managing VUCA (August 20, 2020) https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7439966/

Bergman, et al, Introduction to ESG from the Harvard Law School Forum on Corporate Governance. (August 1, 2020) https://corpgov.law.harvard.edu/2020/08/01/introduction-to-esg/

Bobkoff, Dan, The Price of Profits: What Business Schools Teach about Shareholder Value (June 15, 2016) https://www.marketplace.org/2016/06/15/profit-biz-school/

Conmy, Stephen, What is ESG and why is it important? (January 2021) https://www.thecorporategovernanceinstitute.com/insights/news-analysis/what-is-esg-and-why-is-it-important/

The Economist, How MBA-wielding bosses boost profits: Not by increasing sales, investment or productivity. (April 9, 2022) https://www.economist.com/business/2022/04/09/how-mba-wielding-bosses-boost-profits

Edelman Trust Barometer 2022 report, https://www.edelman.com/trust/2022-trust-barometer

ESG The Report, What are the Three Pillars of Sustainability? https://www.esgthereport.com/what-is-esg/the-g-in-esg/what-are-the-three-pillars-of-sustainability/

Friedman, Milton. A Friedman Doctrine—The Social Responsibility of Business Is to Increase Its Profits (NYTimes, September 13, 1970) https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html

Huber et al, UN Sustainable Development Goals—The Leading ESG Framework for Large Companies (October 4, 2018) https://corpgov.law.harvard.edu/2018/10/04/un-sustainable-development-goals-the-leading-esg-framework-for-large-companies/

Leinwand, Paul, et al. 6 Leadership Paradoxes for the Post-Pandemic Era. Harvard Business Review (April 23, 2021) https://hbr.org/2021/04/6-leadership-paradoxes-for-the-post-pandemic-era

Martin, Mercedes, The Evolving Role of Leaders and How to Be Ready. (April 19, 2022) https://www.dhirubhai.net/pulse/evolving-role-leaders-how-ready-mercedes-e-martin/

Tong, Scott, The Price of Profits: How Shareholders Jumped to First in Line for Profits (April 25, 2022) https://www.marketplace.org/2022/04/25/how-shareholders-jumped-to-first-in-line-for-profits-rerun/

United Nations, Academic Impact: Sustainability. (Accessed May 12, 2022) https://www.un.org/en/academic-impact/sustainability

World Economic Forum, World Economic Forum Releases Framework to Help Business Identify ESG Factors for Long-Term Resilience, (March 19, 2020) https://www.weforum.org/press/2020/03/world-economic-forum-releases-framework-to-help-business-identify-esg-factors-for-long-term-resilience