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The Age Of Business Profits And Societal Impact

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The Age Of Business Profits And Societal Impact

During the late twentieth century, most leaders of global companies felt obliged to serve one master above others: investors. The game, they thought, was to maximize returns to shareholders, and they left it to governments and nongovernmental organizations (NGOs) to solve global warming, poverty, water scarcity, and other abiding societal problems. The economist Milton Friedman justified this view, writing, “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.” In line with this philosophy, many companies channeled a portion of their profits to fund Corporate Social responsibility (CSR) initiatives—that charitable action felt good to leaders, and it was good for the brand. Yet CSR was always thought of as “the ‘poor cousin’ of the business world,” as one CEO has noted, even as the need to address Environmental, Social, and Corporate Governance (ESG) goals mounted.

Today, companies and leaders know they can no longer sit on the sidelines when it comes to social and environmental issues. Problems like climate change, inequality, and pandemics are worsening, requiring action beyond what government alone can manage and fueling public demands for business to take responsibility and show leadership. As Roberto Marques told us, “If the world dies, we won’t have a business.”

Stakeholders also have more power than ever to hold individual firms accountable for taking action. With the democratization of media, the public enjoys unprecedented access to immediate and reliable information about companies, their operations, and their impacts. Standards, metrics, and data relating to ESG issues are becoming more plentiful and reliable. In 2018, 86 percent of the S&P 500 included data about their sustainability performance in their annual reports. Reporting on ESG performance was becoming an industry in itself, estimated to be worth over $400 million by 2020. Even more information about companies will become available in the years ahead. In 2018, investors representing $5 trillion in assets requested that the US government require public companies to disclose standard ESG measures relevant to their businesses. That same year, Chinese regulators announced that, by 2020, listed companies in that country would also have to disclose data on ESG performance.

In our age of transparency and mounting global crises, consumers no longer simply seek a satisfying product, service, or experience from companies with whom they do business. They expect that companies will minimize their negative impacts on society and the environment and even contribute solutions to pressing problems. Research shows that a strong majority of consumers around the world make purchasing decisions based on societal or environmental considerations. Politics play a role, as consumers are becoming increasingly polarized and eager to express themselves via their buying choices. One survey found almost a third of Generation Z consumers globally have refused to do business with a brand they regarded as unsustainable, while in the United States over 90 percent of millennials would leave brands that didn’t advocate for a cause for ones that did. Over three-quarters of Americans indicated they would express their displeasure with a brand whose stances clashed with their beliefs by boycotting the brand.

Case Study: PepsiCo’s Impact Strategy

These shifts translate into actual business results. When Indra Nooyi took over as PepsiCo’s CEO in 2006, the company and its peers were facing consumer concerns around the health effects of carbonated beverages, rising demands for a “soda tax” by activists, and questions around the sustainability of its production processes (including its water usage). Determined to reinvent the company and deliver positive benefits to all stakeholders, Nooyi in 2006 introduced a new vision for the company called Performance with Purpose (PwP), which integrated sustainability and purpose into the company’s core operations. As Nooyi remarked, the strategy reflected a recognition that “our success—and the success of the communities we serve and the wider world—are inextricably bound together.”

To bring PwP to life, the company pursued a strategy aimed at delivering top-tier performance for all its stakeholders by focusing on three pillars: “Improving the products we sell, operating responsibly to protect our planet, and empowering people around the world.” PepsiCo made its existing products healthier (eliminating excessive sugars, saturated fats, and sodium while removing trans fats entirely) and built a portfolio of healthy products. It hired its first chief scientific officer to help it focus on improving current products and drive its investments in new products. To operate more responsibly, the company launched a sustainable farming program (SFP) designed to make farming more productive and profitable for growers, reduce farming’s impact on the planet, and support the rights of farm workers. To empower its people, the company started PepsiCo University, with online courses that helped associates upskill, and it also placed a greater focus on ensuring the diversity of its workforce.

These efforts have yielded tremendous benefits for all stakeholders, including shareholders. By 2016, “good for you” and “better for you” products accounted for about 50 percent of the company’s revenues, up from 38 percent a decade earlier. By 2018, PepsiCo sourced over half of its crops directly from farmers in the SFP, and by 2016 its water usage in its legacy operations had become 25 percent more efficient. The company also greatly improved the diversity of its workforce, with women holding 40 percent of its global managerial positions in 2018. All these social benefits have accompanied similarly impressive financial performance. Between 2006 and 2017 (Nooyi’s last full year as CEO), PepsiCo’s TSR was nearly double that of the S&P 500. Since taking over from Nooyi in 2018, PepsiCo’s new CEO, Ramon Laguarta, has built on this strategy, further elevating a sustainability agenda by articulating a vision of Winning with Purpose.

Every Corner Of Society Wants More From Corporations

Governments and local communities are also expecting more from companies in exchange for the right to operate. Recognizing that government bodies at all levels can’t bring about a more sustainable future on their own, elected leaders, officials, and activists are looking to business to fill in the gap. “Governments must take the lead with decisive steps,” former UN secretary-general Ban Ki-moon has said. “At the same time, businesses can provide essential solutions and resources that put our world on a more sustainable path.” Governments in emerging markets such as India and China have long run more tightly regulated economies based in part on the belief that businesses must operate on society’s behalf. (India, for instance, was the first country to mandate that companies invest in CSR.) Enterprises seeking to grow in these and other markets will have to respond to local governments’ concerns and demands, demonstrating their commitment to impact society in positive ways. Doing so makes enterprises more resilient, especially if they operate in industries like mining, oil and gas, and pharmaceuticals, which are heavily regulated or otherwise susceptible to strong government or community pressures.

Employees and investors seek more from companies too. Top talent is gravitating toward firms that share their eagerness to make a difference. In one survey, 92 percent of entry-level employees and students indicated their desire to work for an environmentally conscious company. Investors likewise are clamoring for more sustainable strategies from companies. One survey found that 80 percent of investors make values-based decisions when picking where to channel capital.

Evidence is mounting that companies that pursue sustainable business strategies deliver superior returns. Funds of sustainable companies are less volatile than those of traditional companies, with 20 percent less market-value deviation on the downside. A study spanning the years 2009–2018 found that a company’s commitment to social impact seemed to be correlated with higher valuation, lowered volatility, and improved returns. And another review found that in 80 percent of cases, a multi-stakeholder approach boosted companies’ stock prices. Because of investor demand, pursuit of a broader social purpose is increasingly helping companies gain access to capital. In recent years, the CEOs of many leading investment firms have expressed their intentions to pursue sustainable investing strategies. Pressure from investors is poised to become even more intense. “Over time,” Blackrock CEO Larry Fink wrote in his much-read 2020 letter to CEOs, “companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital. Companies and countries that champion transparency and demonstrate their responsiveness to stakeholders, by contrast, will attract investment more effectively, including higher-quality, more patient capital.”

Contributed to Branding Strategy Insider By: Dr. Arindam Bhattacharya, Dr. Nikolaus Lang and Jim Hemerling, excerpted from their book: BEYOND GREAT: Nine Strategies for Thriving in an Era of Social Tension, Economic Nationalism, and Technological Revolution

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