What’s your best argument for a board member who says, “What we’ve always done is still working for us. I’m not really seeing a lot of material risk in this,” or, “We don't have space for any of this new kind of expertise”?
I would say that sustainability is driving both huge innovation and growth for those companies who are getting out in front of it, and it is also causing huge risk for those who are falling behind. Your role as a board member is to ensure that the company is pursuing a good overall strategy. That is what you’re supposed to do. If you’re not paying attention to those material issues that can create a competitive advantage or create a major risk, you could potentially be held liable for not holding up your contract as a board member to do the best for the company.
What we’re seeing from the research is that companies that have embedded sustainability are outperforming those that don’t. We did a meta-analysis of 1,000-plus academic studies over the last five years and found that there was a positive correlation between corporate financial performance and ESG. Increasingly it’s becoming clear that this really drives good business.
Is inequality coming more sharply into view in the same way that sustainability has? Is it following the same trajectory?
I see inequality as part of sustainability, part of that social piece. When I talk to companies, the two issues that they talk most about are climate change and inequity—inequity in gender and race, but also wealth, including CEO pay versus worker pay. All of those different elements of inequity or inequality.
They’re at the very beginning of that journey. And there’s no data out there on how companies are performing on metrics around inequality within the company. That is changing as the SEC is now requiring some reporting around human capital, and as states and investors are asking for EEOC reporting to be made public.
Externally, the license-to-operate question will continue to grow. The massive inequality that we’re seeing—a tiny percentage of people controlling 85% of the wealth—that is not a long-term recipe for success, and business is already being caught up in the populist backlash to that. They don’t quite know what to do about it yet, but I think they’re beginning to focus on it.
The slowness to adopt these changes, is it just a question of inertia, people just doing things as they’ve always done? Or is it more a dedication to the old notions of shareholder primacy?
I think bureaucratic inertia cannot be underestimated. [LAUGHTER] People don’t like to change. People have their relationships, their ways of doing things. It’s very hard to move ocean liners quickly to avoid icebergs.
There’s also a hangover of belief that this is a drag on the bottom line. Looking at the ’70s and ’80s when we had “sustainable products” that actually didn’t work well and didn’t get good response in the marketplace, and socially responsible investing that was mainly negative screens that didn’t perform that well. People now point to that and say, “Well, this stuff doesn't work.”
I would say though, that every time we have a generational shift, things get better. When I first got into this business, the CEOs, to a man—because they were all men, you know—thought this was all ridiculous. And now, this next generation says, “Well, this is important, but I’m struggling to actually move it forward because I have this shareholder pressure to focus on short-term quarterly results.” At least they get it, whereas before they didn't even know what you were talking about.
I think the next generation will say, “Actually, this is core to what I’m going to be delivering here as a CEO.” There obviously are CEOs of that older generation who are doing that now—there are always exceptions.
We saw during COVID that despite the Business Roundtable statement, despite statements that say, “We care about our workers,” boards and CEOs went ahead with massive executive compensation packages, with share buybacks, with dividends, and at the same time laid off or substantially reduced their labor force. So there is an ongoing emphasis that is very strongly entrenched.
Regardless of what they say, investors continue to reward that and to discourage more constructive behavior. Over and over again I see investors having a fit when a company announces, “I'm going to increase pay to my front-line workers.” So you see that ongoing challenge. I think the other area, too, that’s really challenging is more and more companies are owned by private equity. A large contingent of private equity—not all—make their money through short-term engineering, and loading companies up with debt, and reducing their labor force. You can't get off that roller coaster because the pension funds, for instance, invest in it—they have a fiduciary duty to make a certain return and they can make those returns through this short-term approach. If they want to go to a more long-term approach, they’re not making the returns that they’ve committed to at a time when it seemed like it made sense that you could commit to whatever it was, 10% return on your portfolio.
So we do have some very entrenched shareholder primacy/short-term capitalism approaches that are going to really take time and real effort to remove. It’s not going to happen overnight.
Speaking of the change in generations: You wrote recently that the changes in MBA programs are happening rather slowly. Is there growing momentum to build this into the next generation?
I’m seeing much more momentum in the last year or two than I saw earlier. If you look around the world, virtually every few months a university is creating a new center for sustainability on the corporate side, and more courses are being offered. You’re seeing more students. I am getting notes from students saying, “I’m coming to Stern because of the sustainability programs.” And also, and this is the most rewarding thing as a professor, I got a note from a young woman from India who as the basis of the course she took with me went back and started a sustainable business in India.
So you see those kinds of things happening, which are very exciting. At the same time, due to the university system of tenure and the way things are set up, you can’t easily change the core courses. The core courses are taught by people who have been teaching them the same way for 30 or 40 years. So that is challenging. It’s changing, but it takes a much longer time. Again, an ocean liner kind of challenge.
We owe it to students to prepare them and not teach them outmoded ways of thinking about things. There’s a lot of work to be done still. But I feel very, very supported at Stern in what we're doing, and there's complete commitment by the dean of Stern and the president of NYU.
Are you a fan of quarterly reporting, going back to these issues of short-termism?
I’m not. I understand the rationale that you want to keep people accountable, make sure that they’re managing things well. But I think that it really drives perverse incentives the way it’s currently structured. The way Unilever has set this up where they provide guidance but have basically told their investors they’re not going to provide quarterly calls and quarterly reports because they want to focus on what’s best for the business in the longer term, to me that makes much more sense.
I think the key thing we need to remember is that managing for the price of the stock is not the same as managing for the well-being of the company. And when we have quarterly reporting, that generally causes an extreme focus on managing for the stock.
Our research in every single area is finding that sustainability drives better performance. We need to build that into our core business strategies. These coming decades are going to be very traumatic in terms of environmental and social issues but also will create an enormous opportunity for business to design new services, processes and products that are going to help solve for those issues. Business has the opportunity to shape our lives in a positive way.
I think that will be very motivating to people working at the company, to suppliers with the company, to investors in the company, to consumers of their products. It’s a great opportunity, and I hope people will take advantage of it.
Maria Figueroa Küpçü is Partner and Head of Brunswick’s New York Office. She also leads the firm’s US Business and Society practice.