At the 50-year anniversary of Milton Friedman’s famous statement that the one and only social responsibility of business is to increase profits, is it possible we are witnessing a turning point in how companies view their responsibilities after The Business Roundtable in 2019. The global pandemic and death of George Floyd have sent seismic waves through the corporate community, pushing companies to take a decisive stance on how they treat their stakeholders during a crisis and their role in addressing inequality. 2020 is a make-or-break year for companies to live up to their commitments from The Business Roundtable and how they respond to a crisis now and in the future.
What is TCP? A first effort to measure companies’ performance against statements of purpose
Objectives:
- Evaluate companies’ performance through the COVID-10 pandemic and social unrest in response to inequality
- Assess alignment with recent statements of corporate purpose and commitments to stakeholder primacy
Analysis & Context - quantitative stress test of corporate purpose, analyzing a sample of companies constituting the S&P500 and FTSEEurofirst indexes set against a backdrop of growing corporate commitments on purpose and a state of global crisis
Key Points
Three Tests of Corporate Purpose (Quantitative Stress Tests)
1. The commitment to purpose test – is there any relationship between being a company with aspirations to be purpose-driven and how a company performs when put to the test during times of crisis?
2. The historical performance test – what is the relationship between proactive company strategies to address issues before a crisis and their performance during a crisis?
3. The speed of response test – does it matter how quickly a company responds to a crisis?
Results - Resilience as a predictor/indicator of future performance
CONSISTENT BEHAVIOUR
- A strong track record (5+ years) of proactively managing issues that may become material during a crisis and whether a company is an early responder is more important indicator of future performance
CRISIS RESPONSIVENESS
- Companies that responded positively to the COVID-19 crisis at its onset continued performing better than late responders
COMMITMENT BUILDS A FOUNDATION
- Corporate commitments to purpose are less informative about a company’s future performance on social and human capital issues than other indicators.
Key Takeaways:
INTERNAL MEASUREMENT INDICATORS:
RESEARCH & MEASUREMENT BEST PRACTICES:
- Test continuity between companies’ statements and evidence of implementation (and their efforts to shape policy)
- Devise evaluation mechanisms that do not rely exclusively on companies’ own reporting (independent and external monitoring)
- Engage subject matter experts to help devise comprehensive research and monitoring strategies
- Include a full range of resilience measurements at all stages of growth (e.g. before / during / after a crisis)
Inspired Companies Insights
Commitment to purpose is the enabler, authentically implementing and acting upon it is the value driver + a proactive, strong track record and an early response to a crisis are important indicators of future performance
Recommendations - To companies:
- translate corporate purpose commitments into action
- Be authentic in purpose or run the risk of adopting a corporate strategy that lacks focus and generates reputational issues when unfulfilled claims are inevitably scrutinized
Recommendations - To investors:
- Pay attention to company track record on social issues
- Identify companies that respond quickly to events as a signal of superior future performance
Calls to action
• Track and disclose performance metrics related to your purpose and stakeholders
• Focus on understanding how your purpose drives value creation
• Embed purpose throughout your organization
• Communicate your purpose to shareholders
