Anna Triponel | June 2020
I commonly get asked to help managers make the business case internally for human rights respect – in particular when actions they are seeking to put in place cost money in the immediate term, and may be viewed as conflicting with cost-cutting measures the company is implementing.
This post describes some relevant research and studies that might be helpful complements to data managers can gather internally.
I’ll update this over time. Feel free to send over research and studies that you have found helpful in your work and I can add them. Last update: 27 June 2020
- Limitations of making the business case: focus instead on alignment with the company’s values and mission
- There are limitations to seeking to make the business case: focus instead on the leadership role business can assume faced with the world’s faltering political will to tackle long-term social and environmental challenges
- Senior leaders already believe in the business case: rather, the issue is that they are unaware of how social problems are caused by business activities
- During the period of market turbulence and economic uncertainty linked to COVID-19, BlackRock (the world’s largest asset manager) finds that sustainable companies fared better
- A sustainability business case for the 21st century corporate executive includes six elements: (1) driving competitive advantage through stakeholder engagement, (2) improving risk management, (3) fostering innovation, (4) improving financial performance, (5) building customer loyalty and (6) attracting and engaging employees
- Link between sound sustainability standards and the cost of capital, operational performance and stock price performance
- Link between high employee satisfaction and future stock returns, current valuation ratios, future operating performance, and earnings surprises
- Link between stakeholder engagement and opportunity costs, costs of delayed production and indirect costs – including staff time (extractive sector)
Limitations of making the business case: focus instead on alignment with the company’s values and mission
Headline finding: There are limitations to the business case, as well as the moral argument, in creating change within companies. It is more effective for employees to use moral language while framing the social issue as part of the organization’s values and mission.
David M. Mayer, Madeline Ong, Scott Sonenshein and Susan J. Ashford, To Get Companies to Take Action on Social Issues, Emphasize Morals, Not the Business Case (Harvard Business Review, 14 February 2019)
The authors “set out to scientifically study whether the business case or the moral case for combatting social problems was most persuasive to managers.” They asked over “400 U.S. employees across several organizations whether they had ever ‘spoken up to management about an important ‘social issue’ to try to create a positive change that they thought would benefit others or society.'” The authors find that:
- Using economic language (i.e. the business case) was not particularly effective. “[M]anagers were no more or less likely to devote time, attention, money, or other resources to address the social issue when the employee made a business case.” This is consistent with research that “shows the business case can activate a leader’s “economic schema,” or a tendency to make decisions solely from an economic viewpoint, which can lead to less compassionate behavior.”
- Using moral language (e.g., it is the morally right thing to do) had a weak or non-significant relationship with effectiveness
- The most effective way to create change was “when employees used moral language and framed the social issue as part of the organization’s values and mission.” “By tailoring the moral message to also fit with something perceived as legitimate — what the company stood for — it provided cover, license, and an impetus for the manager to put energy into working on the social problem.”
Building on this research, the authors provide three takeaways for employees who want to influence their companies to tackle a social issue:
- Social change is often bottom up: “Research finds that employees have more agency to initiate change, even social change, than they typically perceive. … When multiple employees highlight the moral implications of an issue and highlight its connection to the company’s core values, it may become difficult for a manager to dismiss their views as naïve or not core to the business.”
- Assume the best: “Our research suggests that changing [the narrative that people are motivated more by self-interest] and assuming the best of others — that they want to make a positive difference — may be a more useful influence strategy for persuading managers to create social change. It may be too early to throw out the business case, but an appropriately framed moral case seems to be effective.
- Target your message: “Research finds that tailoring messages in a way that will resonate with a particular audience, based on their personality, values, and/or motivations, leads to the greatest influence. Thus, it is important to think about the characteristics and incentives of one’s manager to craft a message that is most likely to appeal to them.”
There are limitations to seeking to make the business case: focus instead on the leadership role business can assume faced with the world’s faltering political will to tackle long-term social and environmental challenges
Headline finding: There are significant limitations to seeking to make the business case for doing the right thing. These include the fact that:
- It is challenging to find short-term planning metrics that can capture the business benefits;
- Senior executives are competitive, audacious people and less likely to want to focus on risk prevention upon which many business case arguments are based; and
- An argument that resonates more for senior leaders relates to the leadership role business can assume faced with the world’s faltering political will to tackle long-term social and environmental challenges.
Alison Taylor , We Shouldn’t Always Need a “Business Case” to Do the Right Thing (Harvard Business Review, 19 September 2017)
The author finds that “our obsession with making the business case for ethics makes us sound apologetic and hollow. After all, there is also a business case for tax avoidance, deregulation, and even higher death rates. We do ourselves — and the world — no favors by locking ourselves into this instrumentalist argument.” The author identifies three major flaws with seeking to make the business case:
- Metrics Are Not Your Friends: “A growing body of evidence shows that ethical companies outperform financially over time, but trying to translate such a broad finding into the short-term planning metrics used by most businesses is perilous.” Further, difficulties in measuring the business benefits from ethics programs “have led to a focus on recording effort rather than impact, and they have driven initiatives that are incremental rather than transformational.”
- You’ll Never Convince a Skeptic: “There is evidence that simply introducing the concept of the financial benefits of ethics might muddy your case, since focusing on money undermines peoples’ ethical intentions.” Further, “[w]hile the argument for risk prevention can be compelling, it ignores the culture of most private sector organizations. … Given that senior decision makers in organizations often attained leadership precisely because they are keenly competitive, audacious people, they are particularly unlikely to be swayed by calls for caution.”
- It’s Not Your Best Argument: “On the other hand, senior executives often respond enthusiastically to the potential of business integrity to provide an inspirational narrative. Amid the world’s faltering political will to tackle long-term social and environmental challenges, business is well-placed to assume a leadership role. Most corporate leaders know this. They understand the power of reputation and relationships. They think often and hard about their personal legacy at the company and their opportunity to change the world for the better. They are less subject to short-term operational pressures, and accordingly less risk-averse.”
The author concludes that “[c]orporations today have a critical role in building a sustainable future for our children and our planet. Doing so offers a path to restoring public trust and ensuring long-term survival. In this context, isn’t the business case a bit reductive?”
Senior leaders already believe in the business case: rather, the issue is that they are unaware of how social problems are caused by business activities
Headline finding: Company executives already believe in the business case for CSR-related activities, but the psychological process that leads them to believe in the business case (i.e. holding a positive view of the market economy) also prevents them from seeing social problems that are caused by business activities — and that could be addressed by investing in CSR projects.
Sebastian Hafenbraedl and Daniel Waeger, Most Executives Believe in the Business Case for CSR. So Why Don’t They Invest More in It? (12 September 2018)
The authors set out to explore why some executives refrain from leading their companies in socially responsible ways, and what would motivate them to invest in corporate social responsibility (CSR). They recruited several samples of executives from around the world and found the following:
- “Across the four studies we conducted, we found that 80% of the participants already believed in this business case — thus contradicting the assumption that most executives are skeptical about the existence of such a business case.”
- “[E]xecutives believe in the business case when such a belief aligns with their general worldview regarding the economic system. Specifically, executives with a positive ideological view on the market economy (a concept termed ‘fair market ideology’ in the academic literature) are more likely to believe in the business case for CSR”
- “[T]he executives who held a positive view of the market economy were not more likely to make social or environmental investments, even though these executives believed more strongly in the business case than other executives. The explanation for this disconnect: Their market ideology not only leads executives to believe in the business case for CSR but also blinds them to the existence of potential social or environmental problems in the economy. This thereby reduces their appreciation of the need for action to remedy these problems.”
In short, “executives were skeptical about CSR, but their skepticism did not stem from a lack of belief in the business case. Rather, the very same psychological process that led them to believe in the business case for CSR (their general worldview/fair market ideology) was preventing them from seeing social problems that are caused by business activities — and that could be addressed by investing in CSR projects.”
The authors therefore recommend that instead of seeking to make the business case, managers should help “executives to take off their blinkers and overcome their ideology, and in that way make them more sensitive to the social and environmental problems in their vicinity.”
During the period of market turbulence and economic uncertainty linked to COVID-19, BlackRock (the world’s largest asset manager) finds that sustainable companies fared better
Headline finding: During the period of market turbulence and economic uncertainty linked to COVID-19, BlackRock (the world’s largest asset manager) finds that sustainable companies fared better, with 94% of sustainable indices outperforming their parent benchmarks in Q1 2020
BlackRock, Sustainable investing: Resilience amid uncertainty (May 2020)
BlackRock, the world’s largest asset manager ($7.4tn AUM) published a report in May 2020 for institutional and professional investors, titled Sustainable investing: Resilience amid uncertainty. Here are some of the findings from their research:
- “Companies with strong profiles on material sustainability issues have potential to outperform those with poor profiles. In particular, we believe companies managed with a focus on sustainability should be better positioned versus their less sustainable peers to weather adverse conditions while still benefiting from positive market environments.”
- “The recent downturn was a key test of this conviction. In the first quarter of 2020, we have observed better risk-adjusted performance across sustainable products globally, with 94% of a globally-representative selection of widely-analyzed sustainable indices outperforming their parent benchmark.”
- “Casual observers initially attributed the strong performance of ESG funds to their relative underweighting to traditional energy companies, whose prices fell further than the overall market during the downturn. However, our own analysis in this paper and third- party research shows that the underperformance of traditional energy explains only a fraction of the outperformance seen in many sustainable funds.”
BlackRock identifies fifteen “descriptors” that focus on different, material sustainability issues, and seeks to understand the relevance of each descriptor to a company’s long-term prospects. BlackRock finds that the following three sustainability descriptors play a particular role in driving company outperformance:
- Job satisfaction of employees;
- The strength of customer relations; and
- The effectiveness of the company’s board
A sustainability business case for the 21st century corporate executive includes six elements: (1) driving competitive advantage through stakeholder engagement, (2) improving risk management, (3) fostering innovation, (4) improving financial performance, (5) building customer loyalty and (6) attracting and engaging employees
Headline finding: Available studies and company experience related to the business case for sustainability can be aggregated into six themes which together form a sustainability business case for the 21st century corporate executive. These six themes are:
- Driving competitive advantage through stakeholder engagement;
- Improving risk management;
- Fostering innovation;
- Improving financial performance;
- Building customer loyalty; and
- Attracting and engaging employees
Tensie Whelan and Carly Fink, The Comprehensive Business Case for Sustainability (Harvard Business Review, 21 October 2016)
Drawing on available studies, the authors create a sustainability business case for the 21st century corporate executive. Available studies on the business case for sustainability can be aggregated into six themes, and the authors provide studies and company examples to illustrate each one.
1. Driving competitive advantage through stakeholder engagement: “Through regular dialogue with stakeholders and continual iteration, a company with a sustainability agenda is better positioned to anticipate and react to economic, social, environmental, and regulatory changes as they arise. When firms fail to establish good relationships with their stakeholders, it can lead to increased conflict and reduced stakeholder cooperation. This can disrupt a firm’s ability to operate on schedule and budget.”
2. Improving risk management: “Climate change, water scarcity, and poor labor conditions in much of the world increase the risk. McKinsey reports that the value at stake from sustainability concerns can be as a high as 70% of earnings before interest, taxes, depreciation, and amortization. … Unlike traditional forms of business risk, social and environmental risks manifest themselves over a longer term, often affect the business on many dimensions, and are largely outside the organization’s control. Managing risks therefore requires making investment decisions today for longer-term capacity building and developing adaptive strategies. … [U]npriced natural capital costs are generally internalized until events like floods or droughts cause disruption to production processes or commodity price fluctuation.”
3. Fostering innovation: “Investing in sustainability is not only a risk management tool; it can also drive innovation. Redesigning products to meet environmental standards or social needs offers new business opportunities.”
4. Improving financial performance: “Significant cost reductions can result from improving operational efficiency through better management of natural resources like water and energy, as well as minimizing waste. … Mounting evidence shows that sustainable companies deliver significant positive financial performance, and investors are beginning to value them more highly.”
5. Building customer loyalty: “Today’s consumers expect more transparency, honesty, and tangible global impact from companies and can choose from a raft of sustainable, competitively priced, high quality products.”
6. Attracting and engaging employees: “Corporate sustainability initiatives aimed at improving ESG performance and proving value to society can increase employee loyalty, efficiency, and productivity and improve HR statistics related to recruitment, retention, and morale.”
Link between working conditions, productivity and profitability (apparel sector)
- Factories in Vietnam that improved their working conditions increased their revenue-cost ratio by 25 per cent over four years.
- Factories with better working conditions were up to eight per cent more profitable than their counterparts – with higher profitability driven by increased productivity.
- Empowering supervisors resulted in a 22 per cent increase in productivity, as well as lower injury rates and a lower turnover (of both supervisors and workers on their factory line).
Progress and potential: How Better Work is improving garment workers’ lives and boosting factory competitiveness: A summary of an independent assessment of the Better Work programme (ILO, 2016)
See also Brown, Drusilla; Domat George; Veeraragoo, Selven; Dehejia, Rajeev; Robertson, Raymond, Are Sweatshops Profit-Maximizing? Answer: No. Evidence from Better Work Vietnam (Better Work Discussion Paper no.17, 2014)
Tufts University gathered and analysed close to 15,000 survey responses from garment workers and 2,000 responses from factory managers in Haiti, Indonesia, Jordan, Nicaragua and Vietnam to seek to understand the impact of the Better Work Programme, a joint initiative of the ILO and the IFC that seeks to improve working conditions in the garment industry. This programme has been in operation since 2007 and is active in 1,300 factories around the world.
The researchers used a range of different strategies to evaluate the impact of the programme. These included conducting surveys among workers and managers after varying periods of their factories’ exposure to Better Work services, so as to isolate the change due to Better Work, and running randomized controlled trials to analyse Better Work’s Supervisory Skills Training programme. The researchers also developed case studies to evaluate changes in managerial practices and occupational safety and health.
Tufts University states that “[e]vidence of a win-win outcome – improving working conditions while boosting profit margins – has to date largely been anecdotal.” Their impact assessment provides evidence that there is a link between working conditions and productivity and firm profitability. Further, the assessment found that the longer factories engaged with Better Work, the greater the positive impact on productivity and profitability, even while controlling for external factors such as industry trends.
The results focus on Vietnam due to the availability of relevant data from factories in that country. Data was collected from 2010-2013 in apparel factories enrolled in Better Work Vietnam. More than 5,100 workers in 185 factories provided responses.
Factories participating in the Better Work programme, and therefore focused on providing better working conditions, increased their productivity.
- Workers in a more favourable working environment in Vietnam reached their daily production targets nearly 40 minutes faster than workers in factories with worse conditions
- Workers that were not concerned by verbal abuse took one hour less (ten hours) to reach the daily production target set by her supervisor (as compared to eleven hours, for workers concerned by verbal abuse). These workers had the same education, training and experience
- Empowering supervisors to excel at their work, through targeted training (in this case, through the Better Work’s Supervisory Skills Training) resulted in a 22 per cent increase in productivity (through a reduction of the time needed to reach production targets)
- Training supervisors also resulted in lower injury rates among workers, reduced instances of unbalanced lines (in which garments pile up at one workstation and workers sit idle at another) and lowered the turnover of both supervisors and the workers they oversaw
A note on measuring productivity: the efficiency rate (which measures the actual production relative to targeted production) is typically used to measure productivity in the apparel industry. This impact assessment used a variation of the efficiency rate, based on data elicited from workers, to maximise data and increase reliability.
Participating factories experienced a rise in profitability.
- Across all factories tracked in Vietnam, the revenue-cost ratio increased by 25 per cent after four years of participation in the programme.
- Factories with better working conditions in Vietnam, from the perspective of workers, were up to eight per cent more profitable than their counterparts. Higher profitability is driven by increased productivity among workers in better working environments.
- High-performing firms did not exhibit a high incidence of verbal abuse. Conversely, lost productivity due to worker concerns about verbal abuse led to lower profitability. In factories where verbal abuse was more prevalent, the revenue relative to cost declined as the number of verbal abuse reports rose.
- More profitable factories with more productive workers also paid workers more.
A note on measuring profitability: profitability was measured as the ratio of total revenue versus total costs, constructed from management surveys.
The study found that better working conditions could also effect other factors influencing factory competitiveness. (These results extended beyond Vietnam).
- Better working conditions can improve a firm’s supply chain position, prompt key customers to request larger orders or reduce social audits from individual buyers. All of these can boost business performance.
- Participating factories found that being able to demonstrate better working conditions resulted in better business terms with buyers.
Link between sound sustainability standards and the cost of capital, operational performance and stock price performance
A meta-study, based on over 200 academic studies, industry reports, newspaper articles, and books, found that:
- 90% of the studies on the cost of capital show that sound sustainability standards lower the cost of capital of companies
- 88% of the research shows that solid ESG practices result in better operational performance of firms
- 80% of the studies show that stock price performance of companies is positively influenced by good sustainability practices.
Gordon L. Clark, Andreas Feiner, and Michael Viehs, From the Shareholder to the Stakeholder (University of Oxford and Arabesque Partners, 2015)
Lowering the cost of capital
26 out of 29 studies reviewed (90%) find a relationship which points to a reducing effect of superior sustainability practices on the cost of capital. Firms with good sustainability standards enjoy significantly lower cost of capital, and have improved access to capital.
When it comes to the cost of debt, the studies find that:
- Good corporate governance structures, such as small and efficient boards and good disclosure policies, lead to lower borrowing costs
- Good environmental management practices, such as the installation of pollution abatement measures and the avoidance of toxic releases, lowers the cost of debt
- Employee well-being reduces a firm’s borrowing costs
When it comes to the cost of equity, the studies find that:
- The existence of anti-takeover measures increases a firm’s cost of equity, and vice versa
- Environmental risk management practices and disclosure on environmental policies lower a firm’s cost of equity
- Good employee relations and product safety reduces the cost of equity
Better operational performance
44 out of 51 studies reviewed (88%) show a positive correlation between sustainability and operational performance. Meta-studies generally show a positive correlation between sustainability and operational performance:
- With regard to governance, issues such as board structure, executive compensation, anti-takeover mechanisms, and incentives are viewed as most important
- Environmental topics such as corporate environmental management practices, pollution abatement and resource efficiency are mentioned as the most relevant to operational performance
- Social factors such as employee relationships and good workforce practices have a large impact on operational performance
Improved financial market performance
33 out of 41 studies reviewed (80%) document a positive correlation between good sustainability practices and superior financial market performance:
- Superior sustainability quality (as measured by aggregate sustainability scores) is valued by the stock market: more sustainable firms generally outperform less sustainable firms.
- Stocks of well-governed firms perform better than stocks of poorly governed firms.
- On the environmental dimension of sustainability, corporate eco-efficiency and environmentally responsible behaviour are viewed as the most important factor leading to superior stock market performance.
- On the social dimension, the literature shows that good employee relations and employee satisfaction contribute to better stock market performance.
Link between high employee satisfaction and future stock returns, current valuation ratios, future operating performance, and earnings surprises
- Research using lists of the “Best Companies to Work For” in 14 countries found that employee satisfaction is associated with superior long-run returns, current valuation ratios, future profitability, and earnings surprises in flexible labor markets, such as the US and UK (but the findings were different in countries with rigid labor markets, such as Germany).
Alex Edmans, Lucius Li and Chendi Zhang, Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around the World (European Corporate Governance Institute (ECGI) – Finance Working Paper No. 433/2014, February 2017)
Researchers from the European Corporate Governance Institute (ECGI) analyzed the link between employee satisfaction and stock returns in 30 countries across North America, Europe, Asia Pacific, and Latin America, and assessed how this link depends on a country’s labour market flexibility.
To measure employee satisfaction, the research relied on data from country-level Best Companies (BC) lists produced by the Great Place to Work Institute. The researchers only looked at countries with more than five years’ history of BC listings, and only included BCs that are both headquartered and primarily listed in that country, to prevent the results being driven by a small number of multinational firms that are on the BC list of several countries.
To measure the impact of satisfaction on stock performance, the researchers looked at stock performance starting in the month following the list publication date for each company, which allowed the researcher to jointly test whether employee satisfaction has value, and whether this value is immediately capitalized by the market, or not.
To measure country-level labour market flexibility, the research used two versions of the OECD Employment Protection Legislation (“EPL”) index, which measures the procedures involved in hiring workers on either fixed-term or temporary contracts, and in dismissing individuals and groups of workers. It is based on statutory laws, collective bargaining agreements, case law, contributions from OECD member countries, and experts’ advice from each country.
- Overall, the results indicate that companies with high employee satisfaction exhibit higher future stock returns, current valuation ratios, future operating performance, and earnings surprises, particularly in countries with high labour market flexibility
- Employee satisfaction is valuable, particularly in flexible labour markets, and the market partially incorporates its value upon list publication
- The strongest results were identified in Australia, Brazil, Canada, India, Japan, and the US, where being a Best Company according to the Great Place to Work Institute was associated with higher stock performance starting in the next month
- In markets where there is low labour flexibility, e.g. Germany, the value of employee satisfaction is lower.
- These findings are consistent with employee satisfaction being a valuable intangible asset that is not fully priced by the market in countries with flexible labour markets, but having less value in countries with rigid labour markets
Link between CSR (stakeholder engagement and transparency) and lower capital constraints
- Better stakeholder engagement and transparency around CSR performance are important in reducing capital constraints for companies
- Positive CSR performance generates value in the long-run by lowering constraints that a firm faces in financing operations and strategic projects, and allowing it to undertake profitable investments that it would otherwise not be able to
Beiting Cheng, Ioannis Ioannou, and George Serafeim, Corporate Social Responsibility and Access to Finance, Strategic Management Journal (May 2011).
The researchers relied on a panel data set from Thomson Reuters ASSET4 for 2,439 publicly listed firms across 49 countries during the period 2002 to 2009. Thomson Reuters ASSET4 rated firms’ performance on three dimensions of CSR: social, environmental and corporate governance. The data for social factors included employee turnover, injury rate, accidents, training hours, women employees, donations, and health & safety controversies. The data for environmental factors included information on energy used, water recycled, carbon emissions, waste recycled, and spills and pollution controversies.
Three sectors – light and heavy manufacturing and transportation; communications; electric, gas and sanitary services – represented a large portion of the total number of observations, and approximately 50 percent of the sample originated from Japan, the USA and the UK.
The adoption and implementation of CSR strategies that lead to superior CSR performance result in lower idiosyncratic capital constraints for the firm because of several mechanisms:
- Firms that foster mutual trust and cooperation with stakeholders experience reduced agency costs, transaction costs, and costs associated with team production (leading to greater efficiency, more transparency, and pursuit of longer-term objectives)
- Stakeholder engagement can enhance a firm’s revenue or profit generation through higher quality of relationship with customers, business partners and among employees; which in turn improves interaction with customers and new product development and increases potential for profitability
- Higher levels of transparency associated with higher CSR performance reduce informational asymmetries between the firm and investors, thus mitigating perceived risk
The research also found that when agency costs are low and transparency is high, capital providers perceive a company as lower risk and therefore price capital at a lower interest rate; likewise, if agency costs are high, capital providers price capital at a higher interest rate, constraining capital. These results suggest that superior CSR performance leads to lower capital constraints, but also that lower capital constraints lead to an improvement in CSR performance.
Link between stakeholder engagement and opportunity costs, costs of delayed production and indirect costs – including staff time (extractive sector)
A study focused on the extractive sector quantified the cost of not conducting appropriate stakeholder engagement:
- The greatest costs of conflict were opportunity costs, with companies losing out on future projects, expansion plans, and future sales.
- In terms of productivity, the study showed that a major “world-class mining project” with capital expenditure of US $3-5 billion would suffer costs of around US $20 million per week of delayed production resulting from community conflict.
- Almost half of the cases analysed involved some type of blockade, a third involved a fatality or injuries, damage to property, or the suspension or abandonment of a project.
- The community conflict costs most overlooked by the company were identified as indirect costs by diverting staff to deal with the conflict, in particular those in senior management roles.
Rachel Davis and Daniel Franks, Costs of Company-Community Conflict in the Extractive Sector (Corporate Social Responsibility Initiative Report No. 66. Cambridge, MA: Harvard Kennedy School, 2014)
The research entailed desktop research, involving more than 45 confidential interviews, development of a working typology of potential costs and application of the typology to 50 publicly available cases. This was followed by field research in Peru to test emerging findings at five different mine sites producing gold, copper, and/or zinc. The five sites represented different stages of the mine lifecycle, from advanced exploration all the way through operations and toward mine closure. The research concluded with the refinement of the typology and analysis of data.
The types of costs faced by extractive companies as a result of conflict with local communities include security (e.g. increased operational costs of additional security, payments to state forces or security contractors); project modification (e.g. redesign of a project); risk management (e.g. higher insurance premiums, additional training for staff); material damage; lost productivity (e.g. closure of mine, delays in delivery of supplies); capital (e.g. loss of property value, defaulting on debt, inability to raise new capital); personnel (e.g. staff time spent on conflict management, injuries, low morale, recruitment and retention); reputation (e.g. expenditure on public relations, impact on brand, investor confidence); and redress (e.g. payment of compensation or fines, reclamation and remediation costs, litigation).
Community concerns leading to conflict in the highest proportion of cases included pollution (source of or sink for), distribution of benefits, resources (access to or competition over), community health and safety, consultation and communication, consent, culture and customs and vulnerable and marginalized groups.
- Most extractive companies do not currently identify, understand and aggregate the full range of costs of conflict with local communities, even when they create similar impacts as other project-related issues like technical problems, contractual or regulatory disputes, or environmental or safety breakdowns.
- Interviewees identified the greatest costs of conflict as the opportunity costs arising from the inability to pursue projects and/or opportunities for expansion or for sale. Conflict with local communities and the company’s reputation for resolving community conflicts can hurt the ability of the company to pursue new projects.
- Interviewees observed that effective management of community expectations requires “frontloading” the company’s investment in community relations. Attempting to “buy support” too late in a project lifecycle does not typically lead to sustainable relationships with the community if negative impacts and conflicts have already damaged the community-company relationship.
Link between stakeholder engagement and financial market valuation (extractive sector)
Headline finding: This study provides empirical evidence in support of the argument that increasing support for a mining project from external stakeholders enhances the financial market valuation of a company.
Witold J. Henisz, Sinziana Dorobantu, and Lite J. Nartey, Spinning Gold: The Financial Returns to Stakeholder Engagement, Strategic Management Journal Strat. Mgmt. J., 35: 1727–1748 (2014).
To examine the impact of external stakeholder support for a mining project on a company’s market valuation, the authors analyzed 26 gold mines owned by 19 publicly traded companies on the Toronto Stock Exchange that own and operate one, two, or three mines outside of the United States, Canada and Australia over the period of 1993-2008 (a total of 26 mines in 20 countries that have reached the stage of a feasibility study).
To assess the degree and direction of stakeholder support, the authors coded over 50,000 stakeholder events from media reports to develop an index of the degree of stakeholder conflict/cooperation for these mines. A stakeholder event is an instance in which a media-relevant stakeholder acts or expresses sentiment toward the company or vice-versa.
- By incorporating this index in a market capitalization analysis, the authors find a reduction in the discount placed by financial markets on the net present value of the physical assets controlled by these companies from 72 percent to between 37 and 13 percent.
- In other words, the study showed that obtaining and maintaining a social license to operate increased the predicted profitability of a projected investment or project by investors. Investors are using the level of stakeholder conflict/cooperation as a proxy for the likelihood of considerable delays or disruptions. The results point to the existence of a direct positive and economically substantive relationship between stakeholder support and financial market valuation.
Link between long-termism and corporate performance and economic growth
Headline finding: Companies that move away from the pressure to deliver strong short-term results (long term companies) outperform their shorter-term peers on a range of key economic and financial metrics.
Dominic Barton, James Manyika, Tim Koller, Robert Palter, Jonathan Godsall and Josh Zoffer, Measuring the Economic Impact of Short-Termism, McKinsey Global Institute (February 2017).
Using a data set of 615 large- and mid-cap US publicly listed companies from 2001-2015 (representing 60%–65% of total U.S. public market capitalization over this period), researchers from McKinsey Global Institute separated out long-term companies from those companies that are using excessively short time horizons in their strategic planning (short-term companies).
This separation was conducted based on a number of hypotheses: long-term oriented companies will be those that (1) invest more consistently than short-term firms, (2) will generate earnings that reflect cash flow, not accounting decisions, (3) less likely to grow margins unsustainably in order to hit near-term targets, (4) are willing to miss short-term targets if needed and (5) are less likely to over-index on earnings-per-share rather than true earnings and act to boost earnings-per-share (e.g. with buy-backs).
- From 2001-2014, the revenue of long-term firms cumulatively grew on average 47 percent more than the revenue of other firms, and with less volatility. Cumulatively, the earnings of long-term firms also grew 36 percent more on average over this period than those of other firms, and their economic profit grew by 81 percent more on average.
- Long-term companies exhibit stronger financial performance over time. On average, their market capitalization grew $7 billion more than that of other firms between 2001 and 2014. Their total return to shareholders was also superior, with a 50 percent greater likelihood that they would be top decile or top quartile by 2014.
- Although long-term firms took bigger hits to their market capitalization during the financial crisis than other firms, their share prices recovered more quickly after the crisis.
- Long-term firms delivered greater total returns to shareholders than other companies. Examining the quartile distribution of total returns to shareholders for companies relative to industry peers, the researchers find that long-term firms are approximately 50 percent more likely to be in in the top decile and top quartile for total shareholder returns in their industry than other companies, and approximately 10 percent less likely to have total shareholder returns below their industry median. Long-term companies representing 27 percent of the total sample capture a disproportionate 44 percent of the growth in total returns to shareholders from 2001-2014.
- Long-term firms added nearly 12,000 more jobs on average than other firms from 2001- 2015. Had all US publicly listed firms created as many jobs as the long-term firms, the US economy would have added more than five million additional jobs over this period.