The Economist, September 14, 2022, commentary of Jeffrey Sonnenfeld: "People trust executives to intervene in social issues, says Jeffrey Sonnenfeld" [Studied view of responsibilities for leadership of enterprise communities]

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For a subsequent interview of the author addressing the foundations and evolving views of business leadership, see the following May 2, 2024, Barron's interview: "Yale School of Management’s Jeffrey Sonnenfeld didn’t shy away from sharing his thoughts."

 

Note: Jeffrey A. Sonnenfeld, the author of the article below, is Senior Associate Dean for Leadership Studies and Lester Crown Professor in the Practice of Management of the Yale School of Management, and is the founder and president of Yale's Chief Executive Leadership Institute. Professor Sonnenfeld has contributed his guidance to several of the public Forum programs during the past two decades that defined investor interests in the leadership responsibilities of corporate managers.

 

Source: The Economist, September 14, 2022, commentary

By Invitation | Woke business

People trust executives to intervene in social issues, says Jeffrey Sonnenfeld

Company decisions are rarely driven by a boss’s personal positions, the management scholar adds

Sep 14th 2022


In august the Business Roundtable, an American corporate lobby group, updated its 2019 “Statement of the Purpose of a Corporation”. It emphasised that shareholders, employees, customers, suppliers and communities depend on each other for success. Doing good is not antithetical to doing well. Yet certain Republican politicians attack executives who speak up on social issues—attempting to cancel voices they disagree with, even while lamenting “cancel culture”—and press state pension funds to retaliate against firms supporting goals pertaining to environmental, social and governance (ESG) aims.

I have thought about the role of businesses in society for almost five decades. In 1977 George Weyerhaeuser, a lumber baron, told me how he viewed his firm’s position: “We have a licence to operate from society, when we violate its terms, it can be revoked.” In 1985 Johnson & Johnson’s CEO, James Burke, told me that “our most powerful tool is institutional trust which is real, palpable and bankable. Every act that builds that trust enhances the value long-term of the business.” Stakeholder capitalism is not new. But the backlash against it is.

Of course, the good intentions of ESG’s advocates are sometimes hijacked by self-interested parties. The number of shareholder voting-rights groups, which encourage interventions in how companies are run, has doubled in the past five years. Many have overlapping names and conflicting missions. The world of ESG investment is ballooning in size, as is confusion about terms, definitions and measurements. There were 836 registered investment companies proclaiming ESG missions in 2020, including 718 mutual funds and 94 exchange-traded funds, with assets of $3.1trn. Their value will only have increased in the years since. Add to the list 905 alternative funds with ESG missions (private equity, venture capital funds and hedge funds). They are on track to exceed $53trn by 2025, or a third of all global assets under management. In reality, the definitions of ESG used by these funds are vague and inconsistent. But that does not stop many from charging higher fees than “regular” funds do.

Executives are on the front line in the culture wars. Ed Stack, then the CEO of Dick’s Sporting Goods, didn’t await a shareholder referendum before pledging to stop selling assault-style weapons and high-capacity magazines and to require age limits for gun purchases and to call for universal background checks after the school shooting in Parkland, Florida in 2018. Doug McMillon as CEO of Walmart followed suit by introducing age restrictions on gun and ammunition purchases despite the howls of the National Rifle Association. Ed Bastian of Delta, Doug Parker of American Airlines, Michael Dell and James Quincey of Coca-Cola encouraged hundreds of CEOs to speak out on voting access. Meanwhile ESG funds, institutional investors and others tacitly shun controversy.

Some critics worry that corporate interventions are at the expense of shareholder value and driven by politically correct executives keen to appease interest groups. Our recent research at the Yale School of Management into companies’ responses to the overturning of Roe v Wade showed rather that these were rarely driven by the personal politics of a given boss. Instead, industry, geography, the workforce and a firm’s customer base largely determined company positions.

A lot of academic research suggests that even imperfect ESG metrics are associated with superior financial results (at least at the margins), stronger operational transparency and better credit ratings. This was shown in a paper published last year by Sang Kim and Zhichuan Li of Western University in Canada, for example. But debate continues over whether ESG metrics lead to superior performance, or whether they are rather associated with well-run companies. Our own analysis on 1,300 multinational corporations shows that the timing and scale of corporate exits from Russia over the Ukraine war led to significant boosts in firms’ market value. This was independent of industry sector, company size or geography and followed immediately after firms announced that they were leaving Russia.

Research also suggests that people want more intervention from executives, not less. For one thing the latest “Trust Barometer” survey, which is published each year by Edelman, a public-relations firm, reports that business leaders inspire far more trust than political leaders, media types, clergy and academics. In a survey of some 36,000 respondents across 28 counties, 77% identified “my employer” as their most trusted source of information. An astounding 81% of respondents want captains of industry to speak out on public-policy matters and what they have done to address social problems. Business leaders are seen as stabilising forces in society. That makes sense. Bosses themselves need social harmony for efficient operations, not constituents divided by the wedge-issue scheming of political opportunists.

To those cynics who say, “stay in your lane” to CEOs they call “woke”, I ask “what lane do you mean? The breakdown lane?” The strategic context of business is the chief executive’s lane. Milton Friedman, the American economist, acknowledged as much in a famous article published in 1970. “It may well be in the long-run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects.” Friedman never said the only social responsibility was “the bottom line”, and neither do today’s responsible CEOs.
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Jeffrey Sonnenfeld is the Lester Crown Professor in the Practice of Management at the Yale School of Management in New Haven, Connecticut.

This article appeared in the By Invitation section of the print edition under the headline "People trust executives to intervene in social issues, says Jeffrey Sonnenfeld"

 

Copyright © The Economist Newspaper Limited 2022.

 

 

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