Week of 21 September 2020
Corporate commitments to purpose, such as those espoused by the Business Roundtable in 2019, are not clear indicators of a company’s future performance on social and human capital issues during times of crisis. Rather, companies that have a history of effectively and proactively managing challenging social issues are more likely to perform positively in the face of crises like the COVID-19 pandemic and the movement for social equality (KKS Advisors and Test of Corporate Purpose initiative)
KKS Advisors (a consultancy firm working to help clients manage economic, environment, social and governance factors) and the Test of Corporate Purpose initiative (TCP) (an initiative evaluating companies’ performance through the COVID-19 pandemic and social unrest) released their report, COVID-19 & Inequality: A Test of Corporate Purpose. Responding to the growing public conversation around corporate purpose—from the 2019 statement by the Business Roundtable to the 50th anniversary of Milton Friedman’s statement that the “social responsibility of business is to increase profits”—this report seeks to conduct a “quantitative stress test of corporate purpose.”
The report focuses on two key areas of social performance, measuring companies’ response to these two issues against their financial performance:
- how companies have responded to the COVID-19 crisis to protect employees and other stakeholders; and
- how they have addressed issues of social inequality in light of the Black Lives Matter movement and other social justice movements.
The authors of the report outline the methodology as follows: “Analyzing a sample of companies constituting the S&P500 and FTSEEurofirst indexes, we employ three tests of corporate purpose:
- The commitment to purpose test – Is there any relationship between being a company with aspirations to be purpose-driven and how a company performs when put to the test during times of crisis?
- The historical performance test – What is the relationship between proactive company strategies to address issues before a crisis and their performance during a crisis?
- The speed of response test – Does it matter how quickly a company responds to a crisis?”
“To answer these questions, we construct a COVID-19 score and an Inequality score for companies, leveraging data from Truvalue Labs (TVL) measuring public sentiment on relevant issues such as Employee Health and Safety (COVID-19) and Employee Engagement, Diversity and Inclusion (inequality) among other issues.”
Links between corporate purpose and corporate performance on COVID-19 and inequality
Some of the top findings from the correlation study are summarized below:
- “Overall, our results suggest that corporate commitments to purpose are less informative about a company’s future performance on social and human capital issues than other indicators. What matters more is whether a company has a strong track record of proactively managing issues that may become material during a crisis, and whether a company is an early responder on relevant issues during a crisis.”
- “Our results indicate that being a Business Roundtable signatory in the United States has a small but negative effect on a company’s response to the COVID-19 crisis (average -0.82 score points), while it has a positive but still small effect on a company’s inequality score (average +2.38 score points).”
- “Across the United States and Europe, companies that have a consistent and positive track record of effectively managing issues relevant to COVID-19 or inequality have continued along the same outperformance trend during the crisis. Companies with a positive track record in the 5-year period leading up to the pandemic scored in average 11.34 points higher, while companies that proactively managed inequality issues scored 20.93 points higher during the crisis. Additionally, companies that responded positively to the COVID-19 crisis at its onset continued performing better (+21.22 points) than late responders during subsequent months.”
- Employee Health and Safety and Access and Affordability are two of the issues that have become the most rapidly material during the past year (the authors define “materiality” here as “the identification of the sustainability issues that matter the most to a company’s key stakeholders and financial performance”):
The report identified a series of high-performing and low-performing companies (see the report for specific case studies on companies, including Amazon, Invesco, SAP, Tyson Foods, Ryanair, eBay, Gilead Sciences, Walt Disney, Wells Fargo, Pfizer, American Express, BlackRock, and others). The study found that:
- “[C]ompanies with a strong track record on COVID-19 and inequality related issues were better positioned to navigate the crisis.” Top performers against the study’s metrics “tend to have all or most of the following characteristics, while the lowest performers tend to be absent of all or most of them”:
To factor the perspectives of external stakeholders into the performance of companies, the study draws on results of a stakeholder survey conducted by GlobeScan in July-August 2020. Some of the key findings highlighted by the authors include:
- “Investors, national governments, and large companies are viewed as underperforming in their efforts to address current crises. […] Instead, it has been academia, civil societies and charities that are considered to have shown strong performance to tackle present issues.”
- “When it comes to addressing inequality, only civil society is seen by the majority as having a strong performance. More than half of the stakeholders surveyed viewed institutional investors, national governments, and large companies as performing poorly in addressing inequality.”
- Despite the findings of the KKS/TCP study, “[a]t least eight in ten stakeholders agreed that companies with a strong corporate purpose are responding better to both the inequality and COVID-19 crises”
- Stakeholders perceived the healthcare and technology/communications sectors as performing best on these issues
Recommendations for companies
The report concludes with recommendations for companies on addressing significant social challenges effectively:
- “Track and disclose performance metrics related to your purpose and stakeholders,” starting by “identifying material issues that will be tracked over time, identifying quantifiable metrics that relate to these issues, and analyzing the performance trend.”
- “Focus on understanding how your purpose drives value creation,” which is important both as a way to protect employees and as a means of increasing innovation and identifying new market opportunities that arise in response to social crises.
- “Embed purpose throughout your organization” from the Board of Directors, to company leadership, to employees. This can be done through incentive systems, corporate governance structures, and training and socialization of the corporate purpose with all employees.
- “Communicate your purpose to shareholders.” In light of growing investor attention to ESG issues, “[c]ompanies should seek to understand which issues their investors deem material and proactively engage in dialogue on these issues.”