ESG Hot Topic: Do the Right Thing

I am preparing to speak on ESG as a panelist at the upcoming Nasdaq Three Rivers Chapter’s Future of Board Leadership Symposium in Pittsburgh, Pennsylvania, on November 10, 2022. Board Composition, Crisis Management, and ESG Hot Topics are the headline issues. It is exciting and gratifying that Nasdaq, a leader in the ESG space, is putting ESG front and center this way.

It is also a great opportunity for me to reflect on what is hot in this dynamic area. I started my preparation by sifting through recent articles on the political debate surrounding ESG. Next, I re-read updates on shareholder initiatives. Then, I caught up on the news from the United Nations Climate Conference (COP27) that is taking place from 6-18 November in Sharm El-Sheikh, Egypt. Finally, I recalled a webinar on ESG that I listened to last week.

In that webinar the panel discussed the role of stakeholder engagement, a cornerstone of ESG, and the fact that stakeholder engagement leads to business insights. For example, insights from customers, a key stakeholder group, lead to products that customers buy, and increased customer loyalty. Insights, sales, and repeat sales to loyal customers are great outcomes of stakeholder engagement. Similarly, engaging with employees, another important stakeholder group, leads to increased recruiting success, higher retention, and greater employee engagement. More great outcomes.

One webinar panelist agreed that these are superb examples of how ESG helps with managing a business for increased sales and higher employee retention and engagement. He suggested, though, that there is a better reason for listening to stakeholders and making business decisions that honor stakeholder input. That reason, he offered, is doing the right thing.

With that, thinking through how to justify doing the right thing as a rationale for business decision-making became my hot ESG topic. What follows are my thoughts so far.

Recall business decisions that clearly were not made on the basis of doing the right thing:

1. Increasing protein content by adding melamine to baby formula, resulting in infant deaths due to melamine toxicity
2. Using child labor to decrease the cost of making shoes
3. Deploying software to falsify emissions test data, making vehicles appear to have lower emissions than they did.

The goals were superficially business-worthy:

1. Better nourishment for infants at a lower price
2. Reduced cost of a wardrobe essential
3. Lower emissions.

The outcomes were not, however. Direct harms were borne by

1. Infants and their families
2. Children deprived of liberty and the education that could have provided them a path to better economic outcomes in the future
3. All of us who breathed the air made dirtier by fake emissions controls.

What would have happened if the decision-makers in each of these cases had paused and said, wait a minute. I want higher protein content in our formula, but are dead babies and bereft families the only way to achieve that? I want lower-priced shoes, but are children in sweatshops instead of classrooms the best way? And finally, why don’t we just engineer cleaner engines and tell the truth about the ones we have in the meantime?

These companies could have decided to do the right thing. They could have

1. Produced a formula that contains protein that humans can safely ingest, and price it accordingly, knowing that parents will not knowingly sacrifice their infants for the sake of the lowest price
2. Made moderately or premium-priced shoes rather than cheap ones
3. Put engine engineers to work rather than test-falsifying software engineers.

If they had chosen to do the right thing, they would not have have caused significant harm to others, who had no role in the decision-making process. Further, they would not have suffered disastrous PR, reputational damage, customer disaffection, and regulatory sanctions. The companies that made these decisions have their own data that they can use to quantify the cost of their decisions and how long the bad effects persisted. There are case studies that analyze these decisions, which the rest of us can learn from.

It is possible to anticipate and quantify both the extent and duration of the consequences of do-the-wrong-thing decisions because those decisions have been made before and data about them is available.

I therefore offer as my hot ESG topic the suggestion that you apply the “right thing to do” test when making business decisions. If you are challenged by your boss, board, or shareholders, show them the the potential harm to others. Then show them the data that proves that the costs, and the length of time that you will continue to pay those costs, are too high and too long for you not to do the right thing. 

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