Within a year of the Business Roundtable release of the Statement on the Purpose of a Corporation signed by 181 CEOs who committed to lead their companies for the benefit of all stakeholders, the public health and economic crises have been testing these commitments. To mark the 50th anniversary of Milton Friedman’s famous statement that the one and only social responsibility of business is to increase profits, sustainability consultant KKS Advisors released a new study, The Test of Corporate Purpose, which was financed by the Ford Foundation, to gauge companies’ response to the coronavirus pandemic and to the movement against racial injustice. Test of Corporate Purpose’s finding that companies that consistently effectively manage issues relevant to Covid-19 or inequality have continued to outperform during the crisis makes sense. Prioritizing worker health and safety and customer access and affordability are like muscles—strengthened by exercise.
The pandemic demonstrates why institutional investors must go beyond security selection and portfolio construction to optimize risk-adjusted returns. Investors must also consider the systemic risk that lack of health insurance, sick leave, and consistent employment create. 27.5 million Americans are uninsured and may avoid medical attention because they cannot afford it, allowing employees with influenza to stay home reduces workplace infections by 25-39%, and increasing unemployment can create a downward spiral as the unemployed reduce expenses. By mitigating these systemic risks, sustainable investing can enhance risk-adjusted returns beyond what diversification alone offers. One might argue that the duty of care includes considering sustainability. ESG fund outperformance during the pandemic is a case in point.
Truvalue Labs research shows that Covid-19 has heightened focus on employee health and safety, labor practices, and access and affordability. Since corporate engagement is the most reliable type of sustainable investing for investors seeking impact, we encourage investors to urge companies to consider these key issues as they translate stakeholder capitalism commitments into action or risk reputational and performance issues.
Research supports these marketplace trends. US government agency OSHA finds that trust in employers to maintain a safe and healthy workplace reduces absenteeism during a pandemic, while the Aspen Institute finds that employees with opportunities to advance, good wages, and benefits are more productive and have longer tenures.
Prioritizing the well-being and advancement of employees and affordability and access to a broad spectrum of customers may be just the right approach that companies need to navigate these choppy waters. This study demonstrates that what matters most is whether a company has a strong track record of proactively managing issues and is an early responder on relevant issues during a crisis. Sustainable and other long-term investors may be just the right stakeholders to help companies become proactively early responders.
State Street: A Proactive Early Responder on Diversity Putting A Stake in the Ground on the “S” Topic of Racial and Ethnic Diversity”
The Test of Corporate Purpose found that across the US and Europe, companies with a consistent and positive track record of effectively managing issues relevant to Covid-19 or inequality have continued along the same outperformance trends during the crisis. Leading global investment manager State Street’s formalization last month of its approach to racial and ethnic diversity within its portfolio is a case in point.
Viewing lack of racial and ethnic diversity and inclusion as systemic risk that corporate executives and boards should understand and manage, State Street put a stake in the ground on the “S” topic of racial and ethnic diversity. Following State Street’s longstanding focus on gender diversity and Fearless Girl Campaign in 2017, State Street Global
State Street’s request is grounded in research. Specifically, research demonstrates the positive impact of diversity on risk oversight, innovation, and decision making. Research has also uncovered positive correlations between management diversity and profitability; between workforce diversity and inclusion and greater revenues, market share, and productivity; and between limited diversity and reputational risk. Although regulators require US companies to track racial diversity data, only 4% of Russell 1000 companies publicly disclose data on employees’ gender and ethnicity.
State Street portfolio companies are expected to provide specific communication to shareholders in five key areas:
- Strategy: Articulate diversity’s role in broader human capital management practices and long-term strategy.
- Goals: Describe any diversity goals, how they contribute to the firm’s overall strategy, and how these goals are managed and progressing.
- Metrics: Provide measures of the diversity of the firm’s workforce and board. With respect to workforce, US companies can use the disclosure framework set forth by the United States Equal Employment Opportunity Commission’s EEO-1 Survey, and non-US companies are encouraged to disclose diversity information according to SASB and nationally appropriate frameworks. The EEO-1 survey focuses on employee diversity by race, ethnicity and gender, broken down by industry-relevant employment categories or levels of seniority, for all full-time employees. At the board level, portfolio companies should disclose diversity characteristics, including racial and ethnic makeup, of the board directors.
- Board: Explain goals and strategy related to board racial and ethnic representation, including how the board reflects the diversity of the company’s workforce, community, customers and other key stakeholders.
- Board oversight: Detail how the board executes its oversight role in diversity and inclusion.
State Street Global Advisors Global Co-Head of Asset Stewardship Ben Colton explains, “Consistent with our stewardship approach to other long-term issues, we will be engaging with companies and assessing the data as it becomes more readily available. These are complex, long-term issues and we appreciate that companies may need to time to reach their ultimate goals from a diversity perspective. While we will provide some degree of flexibility, we are prepared to hold companies accountable.”
Issues Affecting 100% of US Equity Markets
Oxford Professor and sustainable investing thought leader Bob Eccles observes that State Street’s stake in the ground on the “S” issue of diversity follows BlackRock’s
Since historical performance on and speed of response to issues relevant to Covid-19 or inequality drive performance during the pandemic, this information needs to be disclosed clearly and consistently. State Street’s letter to its 10,000 portfolio companies is an important step forward.
Bhakti Mirchandani serves on the Advisory Board of Test of Corporate Purpose, which is an unpaid volunteer position.