INTRODUCTION
2. MICRO RESET (INDUSTRY AND BUSINESS)
2.1. Micro trends
2.1.4. Stakeholder capitalism and ESG
Over the past 10 years or so, the fundamental changes that have taken place in each of the five macro categories reviewed in Chapter 1 have profoundly altered the environment in which companies operate. They have made stakeholder capitalism and environmental, social and governance (ESG) considerations increasingly relevant to sustainable value creation (ESG can be considered as the yardstick for stakeholder capitalism).
The pandemic struck at a time when many different issues, ranging from climate change activism and rising inequalities to gender diversity and
#MeToo scandals, had already begun to raise awareness and heighten the criticality of stakeholder capitalism and ESG considerations in today’s interdependent world. Whether espoused openly or not, nobody would now deny that companies’ fundamental purpose can no longer simply be the unbridle pursuit of financial profit; it is now incumbent upon them to serve all their stakeholders, not only those who hold shares. This is corroborated by early anecdotal evidence pointing to an even more positive outlook for ESG in the post-pandemic era. This can be explained on three fronts:
1. The crisis will have created, or reinforced, an acute sense of
responsibility and urgency on most issues pertaining to ESG strategies – the most important being climate change. But others, such as
consumer behaviour, the future of work and mobility, and supply- chain responsibility, will move to the forefront of the investment process and will become an integral component of due diligence.
2. The pandemic leaves no doubt in boardrooms that the absence of ESG considerations has the potential to destroy substantial value and even threaten the viability of a business. ESG will therefore become more fully integrated and internalized into the core strategy and governance of a company. It will also alter the way in which investors assess corporate governance. Tax records, dividend payments and
remunerations will become increasingly scrutinized for fear of
incurring a reputational cost when a problem arises or is made public.
3. Fostering employee and community goodwill will be key to
enhancing a brand’s reputation. More and more, companies will have to prove that they treat their workers well, by welcoming improved labour practices and paying attention to health and safety as well as well-being in the workplace. Companies will not necessarily adhere to these measures because they are genuinely “good”, but rather because the “price” of not doing so will be too high in terms of the wrath of activists, both activist investors and social activists.
The conviction that ESG strategies benefited from the pandemic and are most likely to benefit further is corroborated by various surveys and reports.
Early data shows that the sustainability sector outperformed conventional funds during the first quarter of 2020. According to Morningstar, which compared first-quarter returns for more than 200 sustainability equity funds
and exchange traded funds, the sustainable funds performed better by one percentage point or two, on a relative basis. A report from BlackRock offers further evidence that companies with strong ESG ratings outperformed their peers during the pandemic. [133] Several analysts suggested that this
outperformance might simply have reflected the reduced exposure to fossil fuels of ESG funds and strategies, but BlackRock asserts that ESG
compliant companies (another way to say that they adhere to the principle of stakeholder capitalism) tend to be more resilient because of their holistic understanding of risk management. It seems that the more susceptible the world becomes to a broad set of macro risks and issues, the greater the necessity to embrace stakeholder capitalism and ESG strategies.
The debate between those who believe that stakeholder capitalism will be sacrificed on the altar of the recovery and those who argue that it is now time to “build back better” is far from resolved. For every Michael O’Leary (the CEO of Ryanair) who thinks that COVID-19 will put ESG
considerations “on the back burner for a few years”, there is a Brian Chesky (CEO of Airbnb) who is committed to transforming his business into a
“stakeholder company”. [134] However, irrespective of anybody’s opinion about the merits of stakeholder capitalism and ESG strategies and their future role in the post-pandemic era, activism will make a difference by reinforcing the trend. Social activists and many activist investors will scrutinize closely how companies behaved during the pandemic crisis. It is likely that the markets or the consumers, or both, will punish those
companies that performed poorly on social issues. An essay co-written in April 2020 by Leo Strine, an influential judge in corporate America, hammers home this point about a necessary change in corporate
governance: “We are again paying the price for a corporate governance system that lacks focus on financial soundness, sustainable wealth creation and the fair treatment of workers. For too long, the stock market’s power over our economy has grown at the expense of other stakeholders,
particularly workers. Although overall wealth has grown, it has done so in a skewed way that is unfair to the bulk of the American workers who are primarily responsible for that increase. The shift toward satisfying insatiable stock market demands has also led to increasing levels of corporate debt and economic risk”. [135]
For activists, the decency exhibited (or not) by companies during the crisis will be paramount. Businesses will be judged for years to come by their actions – critically not just in a narrow commercial sense but viewed through a broader social lens. Few will forget, for example, that over the past 10 years, US airlines spent 96% of their cash flow on share buy-backs and that, in March 2020, EasyJet paid a £174 million dividend pay-out to its shareholders (including £60 million to its founder). [136]
The activism to which companies may now be subjected is going beyond the traditional confines of social activism (by outsiders) and investor
activism; with employee activism, it is expanding internally. In May 2020, just as the epicentre of the pandemic was moving from the US to Latin America, Google employees, emboldened by a report published by Greenpeace, succeeded in convincing the company to no longer build custom AI and machine learning algorithms for upstream extraction in the oil and gas industry. [137] . Several such examples in the recent past illustrate rising employee activism, ranging from environmental issues to social and inclusivity concerns. They provide a telling example of how different types of activists are learning to work together to further the goals to achieve a more sustainable future.
Concomitantly, a sharp increase has taken place in the oldest form of
activism: industrial action. In the US in particular, while many white-collar workers were riding out the pandemic while working from home, many low-wage essential workers “out in the trenches” who had no choice but to go to work staged a wave of walkouts, strikes and protests. [138] As issues of worker safety, pay and benefits become more central, the agenda of
stakeholder capitalism will gain in relevance and strength.