I was humbled and inspired recently to speak with Dr. Edward Freeman at Global Finance’s (GF) November Global Salon. As GF’s Chief Editor, Andrea Fiano, summarized at the end of the Salon: Dr. Freeman made us think just like all great philosophers do!
Two questions that came out of the conversation kept me thinking and led me to further research:
- Even if there’s no systematic stakeholder report at the moment, would the prevailing ESG rating system and sustainability report share the same measurements of stakeholder interest?
- Many emerging countries emphasize family connection and relationship, which makes these countries more friendly to stakeholder theory. How does this contribute to companies’ financial performance?
The following helped answer my questions: Highlights from a 2015 study paper From the Stockholder to the Stakeholder (2015 Study) summarizing over 200 sustainable studies outcomes from worldwide institutes; and a 2020 study Coronavirus Crisis Adds Urgency to Sustainable Investing Agenda (2020 Study) reviewing multiple analyses of COVID-19 impacts (2020 Q1) to corporations in different ESG rating categories provide some information regarding my questions:
- Both studies connect ESG performance to stakeholder capitalism. The 2020 Study includes corporations from advanced and emerging market countries, which indicates the global trend of adopting stakeholder theory, and the principles of ESG and sustainability.
- The 2015 Study shows positive correlation between stock price and good suitability which proves the theory that a firm’s financial performance goes hand in hand with its ESG performance. The 2020 Study supports the same correlation, and further indicates that good ESG performance makes a firm more resilient under a crisis like the coronavirus pandemic.
- In the 2015 Study, a case study of Abercrombie & Fitch shows the impact of a firm’s reputation from unhappy customers, other cases in the same study concludes good employee relations and product safety lead to lower cost of equity and positive operation performance. It supports the argument that other stakeholders (consumers, employees, lenders and community) also have the power to influence business strategy and behavior changes.
- Although shareholders are not the only beneficiary of a business, they are the ultimate driver for mindset changes and sustainable strategy of the business. The 2020 Study analyzed Home Depot, Microsoft and Alibaba and demonstrated that shareholders’ embrace of stakeholder interests enhances a company’s competitive position and deepens stakeholder engagement.
- The 2015 Study advocates active ownership and argues that structural support from key stakeholder groups can make active ownership a powerful tool to influence corporate culture and behavior. This argument aligns with Dr. Freeman’s stakeholder theory regarding the necessity of stakeholder relationship management.
What’s the Takeaway?
Current ESG rating systems do not provide detail scores for each stakeholder’s interest, but do provide comprehensive ratings for companies’ overall performance for all stakeholders. The 2020 Study only addresses limited emerging market companies in MSCI ACWI Index, but it’s a great step in reporting emerging countries’ participation in the sustainability.
COVID-19 has already led to many discussions regarding stakeholders, ESG and sustainability. I believe further studies regarding correlation between corporate behavior and financial performance throughout the pandemic will lead to a business mindset change globally. At the same time, with worldwide introduction of international frameworks like Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI) and International Integrated Reporting Council (IIRC), sustainability reporting will be better appreciated and accepted by the global business community at a much faster pace.
Our future podcast episodes will try to cover some of these topics and track the upcoming changes.