The S in ESG
Staying true to core values of your Company and your Stakeholders
Environmental, Social, and Governance (ESG) continues to evolve in terms of its scope, impact, and meaning in practice. While a key challenge to the ‘E’ is a disconnect between leadership priority and how to make an impact, the companion challenge for the ‘S’ is how to navigate the turbulent waters of controversy while staying true to the organization’s core values.
Most would agree that the “S” ESG has multiple meanings and spans: 1) sensitivity and leadership around social justice issues; 2) fairness and equity in managing the company’s workforce in terms of compensation and opportunity across the entire employee base; and for some, 3) speaking out as a corporation on public issues with a message consistent with the Company’s stated views on social justice.
The evolving meaning of the “S” for companies has some pitfalls; some potentially divisive outcomes. How active should a corporation be in putting out statements or press releases on views of social issues that are or could be controversial? In 2021 several companies spoke out in support of moving baseball’s All-Star Game from Atlanta to Denver. At that time, many took issue with proposed voting legislation in the State of Georgia. The problem for companies is straightforward: taking a stand on divisive issues is certain to make a significant percentage of your employees, customers, vendors, and others uncomfortable, not to mention media attention, whether wanted or not. Today it is unclear who is the arbiter of “the right thing.”
Other examples would be company views on health care, abortion, endorsing specific candidates for political office, and views on religion (promoting or criticizing certain faiths), among others. The reality is that many of these issues are highly polarizing. A consumer products company could easily experience a boycott by half of its customers. Not a good outcome. Endorsing political candidates is also fraught with peril, given the polarized political views that are presently so evident in our society. It is not a stretch to envision a company seeking to be accountable to stakeholders could put shareholders at a disadvantage. Of course, shareholders are also stakeholders and an important one to be sure.
As the “S” continues to evolve, what are the actions that can yield the best benefit to all stakeholders? The most impactful are those investment initiatives that yield a durable benefit -- namely investing in your people at all levels. Focus on fairness and equity in compensation and promotion, internal opportunities for advancement, and ensure that your people see that management and fostering of human resources is a critical priority. The data is clear—turnover is expensive due to recruiting and retraining costs. Over the years, studies have estimated this cost at anywhere from 25% up to 200% of compensation costs for the positions to be filled. If a company’s investment in, and management of its people are a shining example of what we would want to prevail in our society broadly, something important will have been achieved. Leading by example is certainly more impactful than a press release.
In the current environment, the risk of annoying or even alienating customers, clients, employees, and other company stakeholders is palpable. Given the risk, discussing the company’s public posture with the Board of Directors makes good sense. Jumping into the fray without significant thought and discussion can serve to undermine important relationships.
Having identified the issue with the ‘E’ and the “S” in ESG, our next note will explore ‘G’—how to use the governance process to deal with the ESG challenge at this early stage in its evolution.