Beyond Profit – Authentically ‘Aiming Up’ to Serve Society
I’ve been fortunate to work for senior business leaders who were clear about the roles financial services play over and above the drive for profit and shareholder returns. In HSBC, I was captivated by the idea of finance “helping customers’ dreams come true” and in the Bank of China by our role to “Serve Society”. Both ideas created meaning for me and have become important orientating principles. I consequently take responsibility for contributing to their successful delivery.
Profit is the oil that lubricates human progress. At work I introduce and sponsor initiatives to drive profitability. I’m a fierce advocate, however, of businesses serving a higher good, beyond profit. Meaning, for me, is derived from the purpose of my role (helping people to reach their potential), the purpose of the business and its wider ESG (Environment, Social and Governance) contribution to society.
In scanning annual reports and business pages, it seems that most organizations report their commitment to ESG and supporting activities. Maturity levels, however, differ and it is possible to characterize organizations somewhere along a continuum from “mainly driven by profit” to “beyond profit driven” (i.e., by profit and societal responsibility).
Many well-established sectors – tobacco, fast food, financial services, pharmaceuticals, and oil and gas etc – seem to fall mainly towards the “driven by profit” end of the continuum and short of wider societal expectations. But trade-offs are not straightforward, businesses need time to mature, and there is the risk of wider societal harm. Of course, there are also cultural issues and bad actors in play, and it is prudent to judge the authenticity of businesses’ ESG actions. This article covers the important role of ESG and the main questions I ask myself when judging the ethical and ESG credentials of businesses.
Why Beyond Profit?
Commercial organizations are integral parts of society, and their actions have far-reaching consequences. Organizations serve multiple purposes that are best encapsulated by the idea that their superordinate purpose is to create sustainable financial value whilst simultaneously pursuing “good” in support of society.
This broad purpose statement emphasizes the ethical responsibility of organizations to go beyond mere compliance and proactively seek to enhance the lives of individuals and communities. But it is left to the market, to customers and society to judge the value of the “good” beyond the profit created.
There is no easy way for businesses to get around the ethic of pursuing good as part of their implicit or explicit founding principles. The activity of organizations is judged by society and the pressure for them to serve is non-negotiable. Ethical failings are exploitative (or criminal), lead to the erosion of societal trust, brand damage and destruction of value. The stories of these bad organizational actors are well known to all of us - for example, Volkswagen’s emissions scandal or Wells Fargo’s opening of countless unauthorised customer accounts.
‘Aiming Up’ – Businesses Serving Society
There are numerous initiatives which support the ESG role organizations play (e.g., The Global Reporting Initiative (GRI), Task Force on Climate Related Financial Disclosures (TCFD), United Nations Global Compact (UNGC) etc.). ESG framework
s are a robust starting point for conversations around the role organizations should play in comprehensively serving society. The frameworks are tailorable to target specific business challenges. What follows is a brief introduction[1] to the three main ESG pillars with an overview of the benefits for society for comprehensive implementation.
1. Environment Pillar
The environment pillar covers four broad areas: natural resources (e.g., water stress, biodiversity, and land use); climate change mitigation (e.g., carbon emissions, and financing environmental impact); pollution and waste (e.g., packaging and material waste) and environmental opportunity (e.g., clean technology, renewable energy, and green building).
These actions are designed to preserve ecosystems, protect endangered species, support biodiversity, mitigate climate change, reduce the impact of global warming, minimise pollution and environmental degradation, and protect scarce resources.
2. Social Pillar
The social pillar covers four areas: human capital (training and education, diversity and inclusivity, and fair compensation); labour rights (collective bargaining); product safety (product labelling, customer privacy, and customer health and safety); and human rights (indigenous rights, child labour, and access to health and finance).
These actions are designed to support community well-being, build social cohesion, and improve quality of life. From an employee perspective, the drive is towards creating a fairer society with a focus on well-being.
3. Governance
The governance pillar covers two areas: corporate governance (board diversity, executive pay, and stakeholder engagement); corporate behaviour (ethics and integrity, risk and compliance management, anti-competitive practices, and anti-corruption).
This pillar emphasises businesses’ ethical responsibility to do the right thing, build trust with all stakeholders and serve society. It supports financial stability, long-term growth, and reduction in the risk of financial malpractice. It seeks to ensure that the business reaches a consensus with all stakeholders to take balanced decisions, build trust and greater accountability.
ESG reporting frameworks are not without their flaws. They are too rules-based and not sufficiently principle-based (i.e., organizations need to take full moral responsibility in decision making to align with societal values); relatively inflexible (i.e., one size doesn’t fit all - societies have different needs); and are insufficiently systemic (i.e., should focus more directly on social challenges such as poverty alleviation and income inequality rather than activities related directly to business operations). The last point is contentious, and further pushes the boundaries of business responsibilities to serve society , especially in market economies.
‘Aiming Up’- Commercial Benefits
A commercial case can be made for ESG activities supporting cost reduction, talent attraction, employee retention, customer loyalty, brand value, competitive advantage, and comprehensive risk mitigation. Whilst there is initial cost associated with ESG activities, payback over the medium term is through increased profitability. Judging by stock returns, ESG activities improve price performance (0.17% to 1.59%). Although, the most significant impact seems due to enhanced governance practices, with generally positive returns for environmental actions but minimal returns on social investments
Blue Washing ESG Reporting
Whilst there is a moral and commercial case for organizations to drive ESG activities, the frameworks are not binding and allow bad corporates to ‘blue’, ‘green’, ‘pink’, and ‘social’ wash their reporting (that is, they overstate ESG and other socially conscious commitments to to create commercial advantage).
I’ve spent a significant amount of time coaching leaders who see their role only through the lens of KPIs, profits and costs to know that conversations about ‘aiming up’ are often driven by the profit motive and ‘blue washing’. Blue washing is a real risk in businesses with poor ethical standards and lack of transparency.
20 Questions to identify the ‘Blue Washers’
As consumers and employees, we all have a moral and ethical duty to support ESG activity and not be complicit in supporting the pure profit motives of bad organizational actors.
Of course, we have different views on what is socially important and the optimum trade-off between profit and serving society. Organizations have a duty to ‘thread the needle’ in achieving the consensus view between all their stakeholders. But if you were taking your ESG responsibilities seriously, what questions would you need to ask to get to the truth about your employers’ or suppliers’ commitment to their ESG responsibilities?
I would encourage you to judge organizations not just by their words but the outcomes of their actions. The typical ESG questions I’ve asked to judge a business’s ESG credentials are below. These are, of course, based on my values and my judgments about some of the competing trade-offs[2]. Your questions will, consequently, be different from mine, but they will provide you with a starting point for your own outcome-centric exploration of the level of an organization’s ESG commitment. I hope this helps you to identify the ESG areas that create meaning for you and some in which you are interested, able and committed to support.
1. Purpose and Values
1.1. Does the business have a clear purpose that brings benefit to society?
1.2. Do the business’s values reinforce ethical decision making and accountability for serving society?
1.3. Are these values reinforced through operational policy and practice (performance, reward etc.)?
1.4. Is there a commitment to ethical business practices and transparency even when it erodes profit and increases costs?
1.5. Is there clear prioritization of environment, society and governance activities alongside profit and cost considerations?
2. Leadership
2.1. Does senior leadership prioritize societal well-being/impact, and take accountability for driving positive change?
2.2. Are leaders transparent? Do they inspire others to contribute to the organization’s purpose and ESG activities?
3. Stakeholder Engagement
3.1. Does the organization actively engage with and listen to the concerns of employees, customers, and communities?
3.2. Does the organization foster relationships with stakeholders based on trust, mutual benefit, and shared value creation?
3.3. Are there robust mechanisms in place to address stakeholder concerns, including those relating to malpractice, ethical issues, and ESG concerns?
4. Impact and Sustainability
4.1. Does the organization offer sufficient support to the well-being and development of the communities in which it operates?
4.2. Is there sufficient focus on sustainability practices to minimise the organization’s ecological footprint, such as resource conservation, waste reduction and sustainability?
4.3. Can the organization demonstrate measurable progress towards social and environmental impact goals? Is this progress sufficient?
5. Fairness and Well-Being
5.1. Is the organization meritocratic? Does it promote fair compensation, performance appraisal, promotion, talent identification etc. practices?
5.2. Does the business value and promote diversity and inclusion? Can it demonstrate material progress?
5.3. Does the business invest sufficiently in the development of its employees and enhance their marketability?
5.4. Does the organization support the well-being of its employees and insist on strict labour conditions across its supply chain?
6. Profit, Cost and Risk
6.1. Does the organization maintain sustainable profit, whilst managing costs and risks effectively?
6.2. Are systemic risks proactively identified, assessed and mitigated, regardless of cost, to comprehensively protect customers, employees, the environment, and society?
6.3. Can the organization demonstrate that cost management practices are not having a detrimental effect on employee well-being, the environment, or the communities in which the organization operates?
Don’t Bury Your Head in the Sand.
Organizations have an ethical responsibility to drive positive change and better serve society. By engaging in impact oriented ESG practices, organizations help to create a better world. There is plenty still to be done but it is increasingly easy to find exemplar ‘beyond profit’ organizations. As an avid hill walker, I am captivated by the outdoor clothing company, Patagonia, which has become synonymous with purposeful engagement and environmental advocacy. The company’s “Worn Wear” program to promote conscious consumption is well known, as are its fair labour and renewable energy policies, and its support for grassroot environmental organizations. Perhaps, more exceptionally, it donates significant proportions of its profit to support environmental causes and engages in public advocacy to raise awareness about critical green issues.
In choosing organizations to engage with it is important to look at the authenticity of their beyond profit motives. A genuine commitment to serving society involves a comprehensive approach that considers the well-being of all stakeholders including employees, customers, communities, wider society, and the environment. As individuals, we bring about change through the collective power of our informed choices. This includes not only who we buy from but who we choose to work for. By aligning our values with those of the organizations we engage with, we can hold bad actors accountable for their exploitative practices and contribute to a more just, ethical, and sustainable world.
Main References
- Positive ESG performance improves returns globally, research shows, Cole Horton and Simon Jessop, Reuters 2022
- United Nations Global Compact – https://www.unglobalcomact.org
- Global Reporting Initiative -https://www.globalreporting.org
- Net Positive: How Courageous Companies Thrive by Giving More Than They Take, Polman and Winston, 2021
- Grow the Pie: How Great Companies Deliver Both Purpose and Profit, Alex Edmans, Cambridge University Press, 2020
- Patagonia – https://www.patagonia.com/activism/
[1] For comprehensive standards try the GRI framework and the UNGC 10 principles.
[2] It is more straightforward to understand the details of an employer’s ESG credentials and, as such, the questions are focussed on the employer rather than suppliers (which given reporting standards typically cover a narrower subset).