Social governance: What can we learn from the world around us?

ESG is here to stay – and it’s not just window dressing either. But what has changed in the last 10 years to make an extremely rational, capitalistic magazine like the Economist state “Go Woke or Go Broke”? Aside the unfortunate title, why does the Economist conclude, that there is no way for businesses to avoid acting more responsibly and more sustainably?

Waste is bad for the bottom line

One reason is that many businesses are wasteful – and that is very costly for the environment. It may be cheaper in the short term to not insulate buildings or to throw away returned goods, even if it’s bad for the environment. However, in the long run, it is always better to reduce waste.

Another reason is that consumer awareness has had a huge impact on buying patterns and customer loyalty. Yes, cheap prices are still a major factor for many consumers, but you don’t keep your customers by always offering cheaper prices (which is an unsustainable business model on its own).

Brand and reputation are other big factors. Even Facebook is feeling the impact of the reputational damage they have heaped on themselves over the last few years. Not every company enjoys such a market dominating position, and those companies would simply disappear if they received such societal backlash. In this situation, the strength of the brand is tested. Loyal consumers are willing to pay ridiculous prices when they feel a brand connection, and they are less easily swayed to leave their preferred brands.

Either way, these are rational, bottom-line-impacting factors to consider. To name just a few:

• Impact on the environment
• Human rights
• Diversity
• Employee welfare
• Ethical supply chains

More diversity means better business

In this article, I would like to focus on the S of ESG, so I will elaborate a bit more on those social factors.

To start with, diversity is a particular passion of mine, and one I have worked on for many years. It is far broader than just gender or sexual orientation, and other metrics are just as important as they are and as far away from true fairness and equality as any.

Black Lives Matter has given us much more insights on racial inequity. Culture, religion, and lifestyle are other lenses to look at diversity and recently I have been working on neurodiversity, focusing on people who are cognitively different, like autistic, dyslexic, people with ADHD, etc.

But why is diversity important for a company’s bottom line?

• A diverse workforce, that represents your customer base can deliver better products and services for that customer base.
• It is proven, that diverse perspectives support better risk and decision taking.
• A diverse and collaborative workforce is better at innovation, too – again, because of the different perspectives. In this case particularly, neurodiverse people can add completely new ways of thinking.

If the above are not enough, companies should think about the talent wars and consider the great resignation. Truly inclusive organisations have a much better chance of attracting the best talent and are less likely to lose them.

Unhappy employees are bad for business

And this brings me to the next S factor: employee welfare.

Richard Branson – a neurodiverse entrepreneur, who credits his success to his dyslexia – said years ago: “If you look after your staff, they in turn will look after your customers. It’s that simple.”

Whatever your goal, you want employees to

• walk the extra mile
• do their best
• share their ideas
• share their concerns
• help each other
• treat the customer well

Any of the above will only happen when your employees feel safe and appreciated. High turnover, low morale, mental health issues, and burnout are extremely costly and not sustainable for your business.

Interestingly, it is not a nice cafeteria, longer holidays, or even monetary incentives that make the biggest difference, but it is the leadership’s behaviour and the culture in your organisation that matter the most. It is quite amazing to me that there is still not enough training, development, or reward for these simple and not very costly skills and behaviours like communicating clearly and respectfully, listening well, saying thank you, and empowering. Instead, micromanaging, bad feedback skills, controlling and manipulating still reign in many organisations. This is not only counterproductive but also costly, because you will lose all of the above.

Of course, we should never forget the other aspects of employee welfare: fair and equal pay, social benefits like medical and parental leave, safety & security, data privacy, etc. Any one of them, when forgotten, can have a huge impact on employee motivation and productivity and on the company’s reputation.

These were some aspects of the internal looking social governance, but there needs to be a focus on external factors, too. For example, social opportunity is a great chance to give back, while strengthening your brand and building a community. Smart companies tie this social opportunity to their business model. Let’s say you are a company producing hearing aids, it would make sense to help the deaf and hard-of-hearing community. If your company produces vaccines, it makes sense to give them away to poorer countries.

But what if you produce whiskey? One company used their distillery during the pandemic to produce sanitizers for their community. A gaming supply company used its factories to build masks. When you start thinking about it, social impact opportunities are everywhere. And they are a huge marketing opportunity at the same time.

Integrity is related to trust

We now come to a trickier topic: human rights, where we can have huge dilemmas. For example, the economical power of a country like China can cause you to accept human rights abuses. Or when you make a principled stand, you may face bottom line consequences. When H&M assured their customers that they did not get their cotton from Xinjiang, an area notorious for Uyghur exploitation, they were boycotted in China. For social media companies, there have been similar incidents relating to censorship in China and Russia.

Suddenly the S in ESG is not quite as easily tied to a positive bottom line, when there are direct consequences on the business and their growth.

That is why ESG is a journey, not a one off. And it needs to have a longer term – sustainable – outlook. Calculated, principled decisions appeal to customers. Just look at Nike’s move to put Colin Kaepernick on their billboards; their quarterly sales jumped by 10% as a result.

To conclude (for now): ESG is here to stay. Whatever stage you’re at with your ESG strategy and reporting, look at it as a journey. While it makes absolute sense to start small and focus on your business priorities, you should build the processes to grow your ESG organically both in depth and breadth – and do this change credibly. When you do, you will profit in the long run both in terms of your people and customers, and also in having better control and oversight of your risks.