Insight: How Corporate Communications Firms Unleashed the Anti-ESG Firestorm
By Bruce Bolger
To people passionate about the principles of stakeholder capitalism, the successive announcements by the Business Roundtable in 2019, by Larry Fink of BlackRock in his 2020 letter to investors, and the re-affirmation of the 1973 Davos Manifesto at the 2020 Davos Conference, created heady days. Unfortunately, these statements and others by perhaps well-meaning corporate communications and public relations firms led to a legitimate backlash because the result was a level of greenwashing that has set back the movement because of the confusion it created.
In effect, the backlash is not against the original principles of stakeholder capitalism and ESG (environmental, social, governance), developed decades before the current controversies, but rather against the greenwashing that ensued in the late 2010s.
By appropriating the language of decades of work in stakeholder management without a full understanding of its definition, the public statements made during the height of social tensions in the late 2010s conflated a more effective and ethical means of management with the concept of corporations getting involved with or considering themselves leaders in solving social issues unrelated to their organizations.
“While it may be true that firms that take exceptionally good care of their stakeholders may also be good corporate citizens, the objective behind stakeholder theory is effective and efficient management in an increasingly turbulent business environment rather than pursuing social welfare for its own sake,” says Jeff Harrison, David Robbins Chair in Strategic Management at the Robins School of Business, University of Richmond since 2004, in an article in ESM.
In fact, in an Enterprise Engagement Alliance YouTube show last year, R. Edward Freeman, author of Strategic Management: a Stakeholder Approach, the 1984 book that helped crystallize stakeholder theory, warned that greenwashing was potentially one of the biggest threats to stakeholder capitalism implementation.
Indeed, the European Union commission that created the new Corporate Sustainability Reporting Directive specifically describes it as an anti-greenwashing act. It requires all organizations eventually subject to the law (all those operating in the EU with $44 million or more in sales or 250 or more employees) to publish audited corporate sustainability reports following a common format for ease of comparison available on a searchable database being created to support the new reports. The law largely mirrors the principles of stakeholder capitalism by requiring companies to make disclosures on how they create risks and opportunities for all stakeholders--customers, employees, distribution and supply chain partners, communities, and the environment and how these stakeholders and the environment create risks and opportunities for organizations.
Note on the definition of stakeholder capitalism: Based on a review of over 100 studies prior to the 2019 proclamation by the Business Roundtable that appears to have set off the controversy, the Enterprise Engagement Alliance produced the following definition with the help of Martin Whittaker, CEO of JUST Capital and Alex Edmans, Professor of Finance at London School of Business who successfully submitted it for publication in Forbes in August 2020: “Enhancing returns for investors only by creating value for customers, employees, distribution and supply chain partners, communities, and the environment.”
Greenwashing Has a Clear Paper Trail, With Justifiable Backlash
Giles Jackson, Baxa Professor of Stakeholder Capitalism at Shenandoah University explains how the greenwashing appears to have unfolded. “Investment, public relations, communications, and marketing firms started seeing in their focus groups and surveys that their stakeholders had a growing interest in sustainability issues, not only the environment but also about the way corporations treat their employees, customers, and communities. This led to a lot of investment firms creating funds or organizations to start publishing glossy corporate sustainability reports touting their environmental practices and community donations with no clear, or auditable principles.”
As he sees it, “So when at the peak of social unrest companies began to issue statements about the need to address the needs of their stakeholders, they never explained what they meant and backed it up with substance.” Noting the work of Harvard Law School Professor Lucian Bebchuk, whose report, “The Illusory Promise of Stakeholder Capitalism” and subsequent work found little evidence that any of these organizations put these principles into action, “these statements indeed turned out to be in many cases hollow words.”
So was it a surprise when the New York Times correspondent Peter S. Goodman published the book “Davos Man,” whose essential message was that all these statements were nothing more than grandstanding. See ESM: Davos Man Author on the Dangers of Stakeholder Capitalism.
To the right, these proclamations were even more dangerous, at the least, a diversion of corporate resources to the pet causes of senior management under pressure from a “woke” left, or even more dangerous, corporatism, in which politicians in many of the very same states pushed through public benefits laws supporting the principles of stakeholder capitalism proposed and passed laws to prevent state pension funds to invest in ESG-oriented funds.
The Path Forward
As R. Edward Freeman, Professor of Business Administration at Darden School at the University of Virginia recently put it, “The debate did set us back, but it won’t for long. The push for new paths to value creation is simply too strong.” Multiple factors will drive the continued drive toward stakeholder management:
- An untapped source of value creation. Organizations will be able to achieve the same improvements in outcomes and experiences in stakeholder management that have been achieved through the application of total quality management principles in manufacturing.
- Breaking down the siloes and unleashing the voice of stakeholders toward a common purpose, goals, objectives, and values is a proven strategy for enhanced efficiency and experiences.
- If the EU Corporate Sustainability Reporting Directive has one impact it will be to reduce and potentially end the practice of publishing unaudited corporate sustainability reporting. The desire for transparency and disclosures is also being drive by significant decline in trust.
- Human capital analytics and related tools are making it possible for organizations to put a better price tag on the potentially huge cost of disengagement they have carried on their books for years.
- Growing numbers of investors, customers, employees, communities, and other stakeholders prefer to do business with organizations focused on making money by creating value rather than extracting it.
- Extensive research and compelling logic demonstrates that organizations that make money by creating value without offloading costs on to society can in every way compete with and in many cases outperform their competitors without such concerns.
