4

Fighting for Corporate Social Responsibility

FROM SUPERFICIAL WINDOW DRESSING TO REAL ACCOUNTABILITY

Even now, more than a decade after the Lehman Brothers collapse dragged the world into financial crisis, one of its architects still believes the work he was doing was good. Not neutral. Not morally permissible but straddling the line. Good.

“We were providing capital to people who had been cut out of the financial system so they could buy houses.1 This was a problem of risk management, not malicious intent,” he insisted.

“But it’s true, our culture was to fight hard on the financial battlefield. To do what was necessary to win and then to distribute the spoils of battle in the form of charity afterward. We always thought that winning was the most important thing.” That desire to win led him to help develop the high-risk financial products that proved toxic to a society already gorged on debt.

Chuck Prince, the CEO of Lehman’s rival Citigroup, put it this way before the financial crisis: “When the music stops, in terms of liquidity, things will be complicated.2 But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Before its collapse, Lehman Brothers had a remarkably forward-thinking corporate social responsibility program. CSR denotes a broad, voluntary set of activities including corporate philanthropy, organized volunteering, environmental efforts, and diversity programs. Today, some call it “sustainability,” while others refer to it as “ESG,” denoting its various environmental, social, and governance metrics and programs. By whatever appellation, it connotes a kind of self-regulation to benefit society and improve a company’s reputation.

Lehman’s 2007 annual report told shareholders, “Strong corporate citizenship is a key element of our culture. We actively leverage our intellectual capital, network of global relationships, and financial strength to help address today’s critical social issues.” It also reported that the company had hired Theodore Roosevelt IV, a great-grandson of the trust-busting, conservationist president, as the chairman of its Council on Climate Change.

Lehman president Joe Gregory was known for his emphasis on diversity and inclusion. As one contemporary recalled, “Great rallies were staged … with free cocktails and hors d’oeuvres served for up to six hundred people, all listening to Joe or one of his henchmen pontificating.3 ‘Inclusion! That must be our aim!’ he would yell.” Rumor has it that the director overseeing diversity initiatives earned more than $2 million per year—and that the diversity division had a bigger budget than the risk management division did.

Yet despite those well-intentioned efforts, Lehman is widely blamed for bringing down the global financial system. How do you square a culture of corporate social responsibility with precipitating the Great Recession—the millions of families displaced and jobs lost?

In the same 2007 annual report to shareholders, Lehman posed a question. At the head of a breathless section listing the various charities to which the company had donated, management wrote: “Where will you make your mark? At Lehman Brothers, that is what we ask all of our employees.”

Today, many people look to CSR as a panacea for our ailing society. Corporations have been happy to play their part, publicizing every dollar they spend on CSR in press releases, glossy reports, and expensive advertising. Eighty-six percent of S&P 500 companies issue sustainability reports of some type, up from only 20 percent in 2011.4 They talk about the environment and the importance of sustainability. They talk about focusing on all of their stakeholders—employees, customers, and communities. They talk about corporate citizenship and shared prosperity. They talk.

But the average company spends less than one-tenth of 1 percent of its revenue on CSR.5 The companies on the Fortune Global 500 had combined annual revenues of $32.7 trillion in 2018.6 For comparison, the entire US gross domestic product that year was $20.6 trillion.7 These companies dominate our world, but not through their CSR departments.

CSR is often small and superficial, a Potemkin village constructed to appease capitalism’s critics. It’s often voluntary and self-reported, lacking any real accountability. It often feels more like a corporation buying an indulgence from society than actually reforming its business to do good. In 2018, Chevron announced it would invest $100 million in lowering emissions through its new Future Energy Fund.8 That same year, it spent $20 billion on capital and exploratory investments in oil and gas.9 It’s hard to argue that you’re committed to change if you’re spending 99.5 percent of your budget doing the same old thing.

Other corporations, however, go deeper. They build their business models to serve employees, customers, communities, and the environment as well as shareholders. They embody a set of values and look for profitable ways to serve all their stakeholders. For them, CSR isn’t a marketing campaign; it’s how they run their companies. Capitalism would look far different if this were what most companies looked like. Unfortunately, they are the exception, not the rule.

In this chapter, we’ll see examples of both the superficial and the fundamental kinds of CSR at some of our largest corporations: Goldman Sachs and Philips, Coca-Cola and CVS, Wells Fargo and the French insurance giant AXA. We’ll see pioneers pushing to make CSR core to business strategy, standardizing the way it is measured and requiring corporations to report on it. A century ago, public company financial statements underwent a process to become transparent, standard, mandatory, and audited. This created a sense of accountability that corporate social responsibility desperately needs today.

As for Lehman: after it had gone bankrupt, it received one last accolade for its responsibility—an award in 2008 for a ten-year mentoring project at an East End secondary school in London.10 The firm had been reduced to ashes and a handful of ongoing lawsuits, a symbol of Wall Street’s excessive risk taking and greed. Nevertheless, here it was, receiving posthumous praise for its outstanding corporate social responsibility.

GOLDMAN SACHS AND THE CRUSADE FOR GENDER EQUALITY

Around the time of the Great Recession, Goldman Sachs had something of an image problem. In 2010, Matt Taibbi wrote an article for Rolling Stone that included the following colorful indictment:

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.11

Like Lehman, Goldman was in deep on subprime mortgages. But unlike Lehman, Goldman was properly hedged—by betting against the very mortgages it was underwriting. “That’s how audacious these assholes are,” Taibbi quoted one hedge fund manager as saying. “At least with other banks, you could say that they were just dumb. … Goldman knew what it was doing.”

With vampire squid–level brand issues, Goldman was desperately in need of something positive on the PR front. It launched the 10,000 Women initiative, designed to educate women entrepreneurs in faraway places and provide them with access to capital. It also gave Goldman some virtue to trumpet.

In partnership with the World Bank, the program has committed $1 billion to 50,000 women in twenty-six emerging markets to date.12 These are women such as Ayodeji, who was able to start a catering business in Lagos, Nigeria.13 Goldman makes much of these successes: “As a financial services company, we know that gender equality isn’t just important, it’s an economic imperative.”14

If Goldman believes that gender equality is an economic imperative, how has it changed its core business? In 2018, only two women sat on its eleven-person board of directors.15 This put Goldman 358th out of the Fortune 500 on board gender diversity.16 Only four women sit on its thirty-person management committee.17 In the United Kingdom, where firms must report their gender pay gaps, Goldman reports that its female employees earn 55 percent less than its male employees on average.18 Goldman argues that for the same job, women make 99 percent of what men do across the firm. The 55 percent gap only reflects the fact that there are more men than women in senior positions.19 Well, exactly.

The 10,000 Women initiative seems like a wonderful use of money addressing a very real need. An investment of $1 billion over the last five years is a real expenditure. But in 2018 alone, Goldman earned nearly $37 billion in revenue off $933 billion of assets.20 It spent $12 billion on salaries and benefits for its employees—those same employees who experience a 55 percent pay gap by gender.21

To be fair, Goldman managers insist that gender and diversity are a top concern. According to one former manager, when a woman and a man compete for a job, the firm always goes with the woman if the candidates are close. And the company’s struggle for diversity is shared across the field of finance. Goldman announced in 2019 that it is targeting 50 percent women for all entry-level hires and is focused on improving the representation of women in senior positions as well, though it’s got a long way to go.22

“Purpose & Progress,” Goldman’s environmental, social, and governance report for 2017, highlighted the company’s sustainable growth, results for all stakeholders, and being an “influential, positive force in the world.”23 It talked about gender pay equity and highlighted the 10,000 Women initiative as evidence of the company’s commitment.

Compare this to that same year’s annual report to shareholders, in which the terms “gender,” “women,” and “female” come up in only two contexts:24 first, in a footnote stating that “words denoting any gender include all genders”; second, in reference to a class action lawsuit filed by three female former employees alleging that Goldman “systematically discriminated against female employees in respect of compensation, promotion and performance evaluations.”

Like many corporations, Goldman has developed a split personality. It’s what the late William T. Allen, a former chancellor of the Delaware Court of Chancery, which handles the internal affairs of companies, called “our schizophrenic conception of the business corporation.” We alternately understand corporations in two contradictory ways. First, we see them as the private property of shareholders, their only purpose to maximize their financial value. Second, we see them as social entities “with purposes, duties, and loyalties of their own; purposes that might diverge in some respect from shareholder wealth maximization.”25 Corporate law itself oscillates between these two conceptions. This is exactly the Two-Buffett Paradox we saw in chapter 1. Goldman is trying to respond to two contradictory demands.

And so Goldman issues two annual reports, one about its business for shareholders and the other about its social and environmental impact for the rest of us. Both are signed by David Solomon, its CEO. Both offer a picture of what Goldman does, why it exists, and how it affects the world. But there is little connection between the two.

CSR can be a vehicle for clarifying the core purpose of a corporation. It can also be window dressing, an afterthought meant to appease the activists. Our largest corporations have already adopted the language and posture of CSR. In addition to the 86 percent of the S&P 500 issuing sustainability reports, half of the companies on that list referenced environmental, social, or governance topics during their quarterly earnings calls.26 Nine in ten public company leaders now say that serving stakeholders beyond shareholders is important to them.

Yet capitalism remains unchanged. Of those company leaders who believe that serving stakeholders is important, 96 percent say they are satisfied with the job their company is already doing to serve them.27 Back in 2005, the deputy editor of The Economist wrote, “The movement for corporate social responsibility has won the battle of ideas.”28 Maybe so. But it’s losing the war of substantive action. CSR risks becoming no more substantive than the typical episode of Undercover Boss, at the end of which CEOs appear saintly in their magnanimity by paying an employee’s tuition or medical bills but leave their companies otherwise unchanged.29

THE STATE OF CSR TODAY

If you watched the 2018 Super Bowl, you saw a tear-jerking commercial by Hyundai.

Unwitting fans who happened to be Hyundai owners were dramatically removed from the stadium entrance and taken to a small, windowless room. There they watched a video of Hyundai helping child cancer survivors. “Every time you buy a Hyundai, a portion of those proceeds go to childhood cancer research,” a narrator stated.30 One mother, looking into the camera, told the fans, “You helped save my child’s life and the lives of so many children.” A door opened, and then the big reveal came: the fans were introduced to the survivors in person. There were hugs. There were tears. During one embrace, a survivor said into a fan’s ear, “I just want to thank you for owning a Hyundai.”

Let’s not denigrate this project. It’s noble to fight childhood cancer, and this funding is money well spent. But let’s be clear: Hyundai is a car company. It sells cars. It’s wonderful that it also donates money to charity, but cancer funding is a long way from its core business.

During that same Super Bowl, you may also have seen Budweiser’s attempt to cast itself as a disaster relief organization: hydrating the afflicted by providing canned water instead of beer. NBC charged $10 million for a minute-long commercial that year, a new record. Rather than using their precious time to advertise their products, many companies used it to show how much they cared.

The problem with CSR today, as it’s practiced by the vast majority of corporations, is that it is unrelated and marginal to the corporation’s core business. It’s not that these programs don’t do good. It’s just that whatever good they do is small compared to the principal impact the corporations have. Kellogg’s and McDonald’s, two companies at the center of our food system, have both been featured on Ethisphere Magazine’s “World’s Most Ethical Companies” list.31 We don’t doubt that they were deserving based on the metrics the Ethisphere Institute tracks. But we do question whether the metrics put enough emphasis on the health impact of eating Froot Loops every morning and a Big Mac every afternoon.

Take Coca-Cola. In its advertising, it has highlighted its donations to help the children of battered women and its partnership with the Special Olympics. These are wonderful projects, though admittedly far from the core business. A little closer to home, it became the first Fortune 500 company to reach water neutrality, returning 257 billion liters of water to nature and reducing total water use in manufacturing by 16 percent.32 Improving the environmental impact of production starts to feel like more fundamental change. Nonetheless, the company still makes most of its money by selling carbonated sugar water. The average American drinks about 150 liters of the stuff every year.33 Corporate philanthropy and even more sustainable production won’t change Coca-Cola’s core product and what it does to people’s health.

We used to call type 2 diabetes “adult-onset” diabetes because, as recently as 2000, it was almost unheard of in children. That is sadly no longer true; if you’re a black child in America, the chance that you’ll get type 2 diabetes has increased by well over 50 percent since then. Meanwhile, researchers have found that companies including Coca-Cola specifically targeted “Black and Hispanic consumers with marketing for their least nutritious products, primarily fast-food, candy, sugary drinks, and snacks.”34 Coca-Cola executives went so far as to channel funds through industry organizations to researchers who would discredit the idea that sugar in beverages is a contributor to obesity, instead emphasizing the importance of physical activity in controlling weight.35

We shouldn’t let Coca-Cola’s support for the Special Olympics—or even its admirable sustainability programs—disguise the fact that its core products are consumed in a way that’s making its customers sick. Under Muhtar Kent’s leadership from 2008 to 2017, the company also grew its sales of water and other better-for-you drinks to nearly a third of revenue as a matter of corporate strategy.36 This has probably had more impact on society than the rest of its CSR efforts combined.

Managers reflect their priorities in how they organize their companies. CSR is rarely a responsibility of the corporate strategy team, the operations team, or even the risk management team. Instead, it’s relegated to the marketing or investor relations department. Companies seem to care about corporate social responsibility only insofar as it affects their perception by the public. But capitalism doesn’t have a public relations problem. It has a purpose problem.

MOVING CSR TOWARD THE CORE BUSINESS

In the nineteenth century, when William Lever launched what would later become Unilever, he offered a promotion:37 he would donate £2,000 to the charity that received the most votes from customers. But the promotion failed to garner much enthusiasm; the customers didn’t vote. So he changed course. Rather than donating a portion of the company’s profits, he worked on changing the core of its operations: the conditions of its workers, how it bought raw materials, and the products it sold.

“Core” as a business term has become prevalent over the last twenty years, due in large part to business consultant Chris Zook’s book Profit from the Core: A Return to Growth in Turbulent Times. First published in 2001, the book has a simple thesis: successful companies develop a strong, well-defined core business that drives their growth. It’s a useful heuristic in the context of corporate social responsibility: if the change is at the core of the business, it’s powerful. If it isn’t, it’s window dressing.

This notion has some high-profile advocates, including Larry Fink, the chairman and CEO of BlackRock. With $6 trillion of assets under management, when Fink talks, the business world listens.38 In 2018, he changed the conversation around CSR.

Each year, Fink writes a public letter to CEOs. For many years, the letters garnered little attention beyond the business press. In 2012, he discussed corporate governance; in 2014, innovation. But in 2018, he wrote a longer letter under the title “A Sense of Purpose.”39 Within days, it was being reported in the New York Times, debated endlessly on Wall Street, and assigned in business school classes.

In his letter, Fink expressed hope that the private sector would make up for the inability of government to solve our social problems. But his proposal went beyond hope: he argued that society demanded that companies serve a social purpose that would benefit all their stakeholders. Fink’s letter did not advocate giving more money to charity or supporting volunteer programs. Instead, it focused on the inextricable link between long-term growth and sustainability:

Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth.

We can see what more fundamental CSR looks like through three very different companies: CVS, AXA, and Wells Fargo. Each reveals the power of making CSR core to the company’s strategy rather than relegating it to a marketing afterthought.

Our first example is the way CVS changed its approach to selling tobacco.40 In February 2014, its CEO, Larry Merlo, released a video announcing that over the following year, CVS would stop selling cigarettes and tobacco products in all of its 7,800 stores. In his message, he positioned CVS as a health care company, saying that it wanted to play an expanding role in improving its customers’ health while reducing the cost of health care in the United States. “Cigarettes and tobacco products have no place in a setting where health care is delivered,” he said.

At the time, CVS was selling $2 billion of tobacco products each year. Dollar stores had recently introduced tobacco products, drawing traffic away from other retailers.41 When CVS made the change, its merchandise sales fell by 8 percent.42

But over time, the company helped to reduce smoking. Smokers didn’t start buying cigarettes elsewhere; they bought 95 million fewer packs overall. Total cigarette sales declined by 1 percent in the states where CVS had a significant presence.43 CVS didn’t just donate some portion of its profits to a cancer foundation or promote smoking cessation in its stores; it went to the core of its business model—the very product categories it sells—and made a change. Lives were changed as a result.

CVS was not the only company to reconsider tobacco’s role in its core business. AXA went a step further. AXA is one of the largest insurance conglomerates in the world. Headquartered in France, it has $992 billion in assets, 171,000 employees, and 105 million clients across 61 countries. In 2016, it recognized a contradiction in its business. “As a health insurer, we see every day the impact of smoking on people’s health and wellbeing,” said CEO Thomas Buberl.44 “Insurers should always be part of the solution rather than the problem when it comes to health risk prevention.”45

Céline Soubranne, the head of AXA’s corporate social responsibility department in France, described the contradiction: “It was nonsense.46 On the one side, you earned money thanks to the tobacco industry. On the other side, you lose money because of the tobacco industry.” AXA decided to resolve the contradiction. “As health is one of our key business priorities,” said Buberl, “we adopted the bold decision to become the first insurer to stop providing insurance to tobacco manufacturers.” The company went on to stop providing capital to tobacco companies, divesting €2 billion in loans and equity investments from its portfolio.

As an insurance company, AXA specializes in risk. It is natural for the company to reorient its business around solutions that minimize global risk, whether that involves ostracizing tobacco or fighting climate change. Though AXA has a separate CSR department, even Soubranne, the head of that department, hopes to see it integrated into the rest of the company in the future. “It’s my dream that we will be fully integrated. I don’t think my function will be necessary in the future.”

We began this chapter by looking at financial companies such as Lehman and Goldman; now let’s apply this thinking to another behemoth of our financial system: Wells Fargo. We’ll set aside its larger scandals and focus on one recent press release, when Wells Fargo announced three ways it was serving people with disabilities.47 First, it had donated $100 million to fifteen thousand nonprofits that help those with disabilities. Second, it had made an effort to hire people with disabilities, employing eight thousand people who self-identify as having a disability. And third, it had reoriented some of its banking services to serve those with disabilities, providing hands-on financial education and help with buying a home or starting a business. Those were all good, worthy efforts, to be sure, but we can now rank Wells Fargo’s efforts according to how close they get to reforming its core business of banking. Philanthropy is good. Hiring different people is better. But changing its core products to better serve its customers is best of all.

The difference between authentic CSR that is core to a company’s strategy and almost-authentic CSR that is marginal is the difference between hope and cynicism, between a better theory of the firm and an empty marketing exercise that exacerbates the underlying distrust in our companies. This leads to a counterintuitive conclusion: if a company really cared about corporate social responsibility, it would fire its CSR team and focus on strategy instead.

MOVING CSR TOWARD STANDARDIZED METRICS

On the current frontier of corporate social responsibility, it can be hard to tell the pioneers from the charlatans, the cynics, and the fools. Even when a corporation has brought CSR into the core of its business, it can be hard to assess how well it is doing or how it compares to its competitors. ESG metrics—the way companies measure the impact of their environmental, social, and governance programs—are notoriously squishy. ESG reports overflow with precise measures, but most of them are self-reported, none of them is standardized, and almost all of them are impenetrable to nonexperts.

Look up the five largest companies in the world by revenue, and every list will be the same. Look up the most responsible, and there’s no agreement. In 2018, only one company made it into the top five of both Barron’s 100 Most Sustainable Companies and Newsweek’s Top 10 Green Companies.48 If we look at a company’s credit rating, there is an almost perfect correlation between how different ratings agencies evaluate them. But between a company’s various ESG ratings, the correlation is about halfway between perfect and zero.49

In 2018, the Wall Street Journal published an article titled “Is Tesla or Exxon More Sustainable? It Depends Whom You Ask.” FTSE Russell, MSCI, and Sustainalytics—ESG ratings agencies commonly used by investors—gave divergent assessments. The author offered the natural conclusion: “Investors should not treat ESG scores as settled facts.”50

No one would say that revenue or cash flow is in the eye of the beholder, but today, many would say that of ESG ratings. Although four in five CEOs believe in the importance of demonstrating a commitment to society, none of them has a reliable set of metrics to guide this commitment—leaving both executives and investors in the dark.51 In a world where fiduciary absolutism leaves room for gaming just about anything, ESG metrics have left the door wide open to abuse.

As a 2019 study showed, the reasons ratings differ are legion:52 different criteria (should we include lobbying?), different measures (should we assess labor according to employee turnover or according to the number of labor-related lawsuits?), different weightings (is water use more important than the minimum wage?), and—underlying all this—inconsistency in how the raw data are collected, consolidated, and compared. Most ratings rely heavily on company disclosures, often found in annual ESG or CSR reports. Since company disclosures are entirely voluntary, self-reporting bias is unsurprising. To counteract reporting bias, ratings agencies such as Truvalue Labs and RepRisk source “objective” external data to create their assessments, using artificial intelligence to comb through news articles and social media.

Compare all this with financial accounting. In the United States, all public companies comply with Generally Accepted Accounting Principles (GAAP), which are set by the Financial Accounting Standards Board (FASB) as overseen by the Securities and Exchange Commission (SEC) and audited by private accounting firms such as EY and PwC. It’s an alphabet soup of accountability, but for the most part, it works. Though each company is unique, all financial statements are reported according to the same standards.

In 2011, the Sustainability Accounting Standards Board (SASB) began working to provide a new, standardized ESG reporting framework to mirror the success of GAAP accounting. One risk with any reporting framework is that it will be too onerous, focused on too many irrelevant factors in too much excruciating detail. Against that, SASB has approached ESG reporting through the lens of “materiality.”

SASB wants companies to focus on disclosing ESG metrics only in areas that are material—what we’ve been calling core—to their businesses.53 For example, data security and customer privacy are core issues for tech companies but not infrastructure companies. Wastewater management is core to mining companies but irrelevant to health care companies. For each industry and subindustry, SASB focuses companies on the ESG metrics that matter for them. These standards were developed in collaboration with investors and accountants to create a framework that is practical and useful.

There is a risk that in an attempt to please everyone, however, SASB reporting has become too complicated to be intuitive and is consequently open to gaming. We know what our largest social issues are, even if we disagree on their relative importance.54 We’d prefer to see a small number of common metrics reported on by all companies in the same way—for example, satisfaction scores for employees and customers and overall carbon emissions. But SASB’s efforts at standardization are a move in the right direction; it is a platform that can be built upon and improved over time.

As these metrics become more central to an organization’s business—more directly linked to its long-term risk and performance —they begin to shed their do-gooder history. Terms such as responsibility are replaced by sustainability, acronyms such as CSR are replaced by ESG. The terms change, but the concept is the same. The king is dead. Long live the king!

MOVING CSR TOWARD MANDATORY REPORTING

With SASB and other bodies, such as the nonprofit Global Reporting Initiative, pushing for standardization, there remains one other significant gap between financial reporting and ESG reporting. Whereas standard, audited financial reporting is required for all public companies, ESG reporting remains entirely voluntary.

Our goal should be to make corporate social responsibility core to a company’s purpose—to everything it does. To achieve this goal requires simplified, standardized, audited, and mandatory reporting.

According to a former head of the Securities and Exchange Commission, Mary Schapiro, two-thirds of all “comment letters,” or requests for clarification from companies, are now about ESG disclosure. “I think there’s increasing appreciation by the agency that these are important issues,” Schapiro said, “and that they have greater potential to have financial impact on companies as time goes on.”55 If shareholders keep pushing for it and stakeholders keep demanding it, mandatory ESG reporting could end up in the same quarterly reports that contain a company’s accounting statements, and there will be no more split personality as we saw between Goldman’s ESG and shareholder reports.

But some pioneers are not waiting for the government to act. Take Philips, the Dutch health care technology company. Though once an industrial conglomerate (many consumers still associate the brand with light bulbs), Philips now focuses on selling MRI machines, CT scanners, and other medical products. In the process, it’s become a world leader in sustainability under its CEO, Frans van Houten. We now know to take all ESG rankings with a grain of salt, but as of October 2019, CSRHub, which aggregates rankings across dozens of sources, put Philips in the ninety-eighth percentile of all companies globally for corporate social responsibility.56 That’s even ahead of Unilever’s ninety-fourth percentile. Among other accolades, in 2019, Fortune magazine ranked Philips first in the world for sustainability.57

Philips has achieved this by holding itself accountable: It sets specific, measurable goals that are core to the business. It frames them around the widely recognized UN Sustainable Development Goals (SDGs), focusing on three of them. First, to ensure healthy lives and promote well-being for all at all ages. Second, to ensure sustainable consumption and production patterns. And third, to take urgent action to combat climate change and its impacts. Philips breaks each one down into specific goals that it will hold itself accountable to. For example, it has committed to becoming carbon neutral in its operations with 100 percent of its power coming from renewable sources by the end of 2020.

To ensure sustainable consumption, Philips also committed to joining the circular economy. By the end of 2020, it will close the loop on all large medical equipment: when a hospital replaces an MRI machine, Philips will take back the old one to reuse, repurpose, or recycle the parts. The company is committed to doing the same, by 2025, for all medical equipment it sells.

Philips publicly reports on its progress quarterly, including in its annual report to shareholders.58 It spends nearly as many pages outlining its social and environmental performance as it does on detailing its financial performance. And it has the results audited by an outside firm.59

It’s important for Philips to create this accountability, because achieving these goals will require significant, sustained investment. “Short term, there is a cost of fulfilling all these targets we set for ourselves,” said Edward Walsh, who sits on Philips’ sustainability board and is responsible for its sustainability reporting. Committing to the circular economy, for example, is expensive. But in the long term, Philips sees these efforts as more than paying off. “Sustainable business and our vision is an enormous advantage for us,” said Walsh.

He pointed out how important this deeper purpose is in recruiting, retaining, and motivating employees, especially as Philips underwent a significant transformation over the past decade. “When you drive so much change, you can lose people along the way,” he said. “But one of the main constants is everybody believes in our vision and mission. And that has been a big asset for us during this relentless change.”

The pace of change is only accelerating. Tony Davis had spent many years at Goldman Sachs before cofounding Anchorage Capital, a $30 billion investment firm.60 For most of his career, he was skeptical of ESG. He always saw it as more of a PR exercise than something real or fundamental. But after leaving Anchorage, he started doing some personal investing in small, mission-driven businesses and saw how a focus on important ESG matters could build better businesses. “I’d become a full convert,” he told us.61

After he launched a new investment firm a few years ago that would fully integrate ESG into its strategy, many of his industry peers were skeptical.62 “When I told people I was going to do this—especially some of my old private equity friends—they thought I was crazy.” But recently, investment banks have been inviting him to speak to their research divisions about how to integrate ESG into their analysis. “It’s incumbent on all of us that it isn’t just a ‘check the box’ exercise,” Davis says. He echoes many of the themes we’ve examined in this chapter: the necessity for standardized measurement and mandatory disclosures. For its part, Philips would welcome this sort of standardization and regulation in reporting. It knows it would fare well against the competition. “A lot of people talk a good talk,” said Ed Walsh, “but there are a lot of words out there and not enough commitment.”

DOES IT PAY TO BE GOOD?

Peter Thiel—the billionaire we met earlier who bought a panic house in New Zealand—has his own take on corporate social responsibility.

Imagine you’re running a restaurant in Silicon Valley.63 It’s competitive. You’re fighting just to survive. You can’t afford to pay workers more than minimum wage or worry about the environment. Some of the people who eat there work for Google. Google’s market share in online search is over 90 percent.64 Without competition, Google can spend all it wants on its various stakeholders. Google’s corporate social responsibility is “characteristic of a kind of business that’s successful enough to take ethics seriously without jeopardizing its own existence,” Thiel wrote.65 CSR, in other words, is a luxury good.

Thiel’s theory was on display in 2019, when two corporate leaders were having very different Octobers. Marc Benioff, the founder of Salesforce, was publishing a book about “the power of business as the greatest platform for change.” Meanwhile, Mary Barra, the CEO of General Motors, was negotiating with the United Auto Workers to end a monthlong strike that was costing the automaker billions of dollars.66

Does anyone think Mary Barra would rather have been battling with workers over plant closures than preaching the gospel of stakeholder capitalism? In Thiel’s framework, GM is the restaurant; Salesforce is Google. Though GM has nearly ten times as much revenue as Salesforce, Salesforce’s market cap is almost triple GM’s.67 If Benioff argues that corporations should treat their workforces better, we might expect Barra to reply, “Easy for you to say.” So is Thiel right? Is corporate social responsibility a privilege affordable only by the most successful companies? Throughout this book, we’ve seen examples of companies that seem to fare better or worse based on how they treat their stakeholders over the long term. But as the saying goes, “In God we trust; all others bring data.” Let’s look at the data.

In 2015, in one of the most exhaustive analyses to date, researchers in Germany aggregated the results of 2,250 individual studies that compared companies’ environmental, social, and governance criteria with their financial performance since the 1970s. The researchers found that 63 percent of the studies show a positive relationship between ESG and financial performance and only 10 percent of the studies show a negative relationship.68 These results are impressive, given how noisy the ESG data can be. And they held regardless of region, time period, and asset class.

Other researchers found that what really mattered was a company’s ESG rating on issues that were core to the company’s industry. Financial risk management matters in finance but not in transportation. Carbon emissions matter in transportation but not in finance. (May Lehman Brothers rest in peace.) Researchers found that outperforming on unrelated ESG metrics did not improve financial results, but that outperforming on core ESG metrics did. Essentially, doing good in unrelated, marginal ways doesn’t pay. But doing good in the core of your company does. This should be encouraging for any company that is making ESG central to its business model.

In the last study we’ll highlight, researchers compared a company’s sustainability policies in 1993 to how it performed in 2009. Many studies compare ESG and financial performance over several quarters or a few years. This one compared them over a decade and a half. The long time frame allowed researchers to examine how responsibility and return interrelate. After analyzing the data, they found “evidence that High Sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market as well as accounting performance.”69

The metrics aren’t perfect. The data aren’t perfect. But the studies that exist suggest that the anecdotal patterns we’ve written about are part of a broader truth: companies that serve stakeholders well usually serve shareholders well, too.

Why should this be true? A social purpose can clarify strategy, as it helped CVS and AXA to stop doing business with tobacco. A meaningful mission can attract and motivate good workers, as it did at Philips during its transition from an industrial conglomerate to a health care company. It can lead companies to think longer term and make investments in sustainability that eventually reduce costs. It can reduce the long-term risk of legal action, regulation, boycott, or protest.

Or we can boil it down to common sense: When you invest more in stakeholders, they’ll invest more in you. When you genuinely care about serving others, they’ll help you succeed. Successful corporate strategy depends on countless interactions among a large number of different parties, including consumers, employees, competitors, regulators, activists, the press, and communities. We try to describe corporations and strategy in quantifiable metrics—ESG, financial, operational—but the map is not the territory. In a competitive economy, trust, commitment, and goodwill are the intangible lifeblood of long-term success.

And about that restaurant in Silicon Valley: Thiel is right; it’s a competitive business. But today, restaurants are often competing on which can offer the most locally sourced, sustainable fare. The salad restaurant MIXT has nine locations in San Francisco alone—including one just a seven-minute walk from Google’s San Francisco offices.70 MIXT literally paints its impact on its walls: four out of five store managers are promoted from within. The average employee is with the company for three years, compared with a few months for most restaurants. It diverts 99 percent of the waste it generates away from landfills. It’s a Certified B Corporation. So, yes, restaurants are a competitive business. This is how MIXT competes.

A FITTING CODA

For too many, corporate social responsibility and its ilk—ESG ratings, sustainability reports—remain a superficial marketing exercise rather than a fundamental change in strategy. Today’s efforts are often well intentioned. But without accountability, they won’t amount to real and lasting change. We are sympathetic to the words of Paul Adler, a UCLA economist who is skeptical of hollow reform: “When the patient has cancer and needs major surgery, dieting is nice but not a cure, and it is dangerous to encourage the patient to think otherwise.”71

CSR is at its best when it addresses the core impact that corporations have. Its measurement should be standardized and reported in mandatory, audited statements, right beside its financial results. This is how we begin to create the accountability required to achieve real change.

Indeed, even Larry Fink, for all his corporate purpose proselytizing, has come under criticism for failing to line up his actions with his rhetoric. He was protested at the Museum of Modern Art in New York City, where he is on the board, because of BlackRock’s investments in private prisons. He was protested at BlackRock’s annual shareholder meeting for not taking big enough steps on climate change. BlackRock has already offered strong public support for standardized metrics such as SASB, but people are demanding more.

Society’s expectations of corporations have changed over time, but corporations have failed to keep up. Consumers and employers are expecting more from the corporations they interact with. And so are some shareholders.

That last point is significant, because, as we’ve seen, shareholders have the final say in our capitalist economy. This is the Two-Buffett Paradox that we saw in chapter 1: when stakeholders and shareholders butt heads, CEOs too often respond with rational hypocrisy. Making fundamental change the way Unilever, AXA, and Philips have done requires shareholder buy-in to be successful and sustained over time.

Let’s look again at the Business Roundtable. The Business Roundtable has proven itself a bellwether of capitalist sentiment. After its previous rotation on purpose and profit, it turned around again in 2019. It released a statement redefining the purpose of the corporation as being to promote an economy that serves all Americans. It once again listed shareholders last, re-recognizing that building valuable businesses in the long term requires recommitting to a purpose deeper than profit.

There’s just one problem: in capitalism, the capitalist is king. In response to the Roundtable’s new statement, the Council of Institutional Investors released its own. The Council represents members managing $39 trillion of assets.72 If the Roundtable runs our corporations, it does so only at the pleasure of the Council. As the Wall Street Journal editorial board admonished, “CEOs are themselves employees hired by directors who are supposed to be stewards of the capital that shareholders have invested.” The capital holders were ready to speak.73

Against the Roundtable’s vision of stakeholder capitalism, the Council wrote, “Accountability to everyone means accountability to no one.”74 It reminded the Roundtable that corporations need to keep their focus on shareholder value and leave the rest to government. A corporation’s duty—its fiduciary duty—is to maximize profits for shareholders. We’ve heard that one before.

The Watergate scandal taught us to follow the money. When we pull the thread of capitalism, it leads first to corporations blinded by fiduciary absolutism. Keep on pulling, and we find that even CEOs answer to someone: their institutional investors. Pension funds, labor unions, and investment companies manage the assets, but they don’t manage them for their own benefit; they manage them for ours. We are the retirees and savers and union members for whom the Council of Institutional Investors ultimately speaks. We’ve pulled and pulled and pulled and found that the thread leads directly to our own pockets.

We talked about Dr. John Harvey Kellogg and his brother Will as the Dr. Jekyll and Mr. Hyde of our corporate world, dueling between purpose and profit. But as Robert Louis Stevenson wrote it, Jekyll and Hyde are not two people but one. Hyde suffers from a split personality: during the day he is an upstanding citizen; at night he turns into a terrible beast. Over time he is overwhelmed by the murderous Hyde.

Pull the thread on our economy, and we see it’s not a tug-of-war between good guys and bad guys, between the moral and the maniacs. It’s just us. In the Two-Buffett Paradox, we are both Buffetts. We demand that corporations be more responsible, and then the institutional investors that represent us demand that they keep maximizing profit. Just as we think we’ve finally met the villain face-to-face, we find we’re staring at a mirror.

In this chapter, we focused on corporations and the ways they are trying to change for good. But we’ve now seen how essential it is for investors to be on board, if not leading the change. In the next two chapters, we will show how responsible investors are trying to do just that. We’ll start with one of the most contentious battles over responsible capitalism today: divestment. It’s a fight that has pitted two sides against each other—university students against administrators—who couldn’t agree more on the problem of climate change but couldn’t agree less on what to do about it.