Have Hope

Companies Do Well When They Do Good

By Yuet Mee Ho-Nambiar

Doing good in this article is defined as advancing social and environmental objectives and the concept of ‘generating financial returns’ as ‘doing well’.  While there are many dimensions to businesses doing well, I am only focusing on the profit element of business, this being an important contributor to long-term growth and survival of businesses.  This measure is also a meaningful one for most business leaders, as Prof Alex Edmans said “Profits are valuable signals for what society wants” in his book Grow the Pie: How Great Companies Deliver Both Purpose and Profit.

It has been reported in the media that businesses in Malaysia are open to ESG (often used interchangeably here in this country with – sustainability) adoption though they are also struggling to see its value.  The World Business Council for Sustainable Development and United Nations Global Compact also reported similar struggles by business leaders globally.  That while many corporations have expressed commitment to comply with the requirements, many leaders are in fact facing challenges to align operations with their aspirations. They explained that it is because ‘companies lack a thorough understanding of the business case that sustainability practices represent.’

Business

There is no question that business is the main engine of growth for thriving and dynamic economies, responsible for majority of spending, wealth creation and investment.  Businesses, being composed of communities of people working together to create value from inputs by people and nature, have a significant influence on the people, the social and the environment and in turn, are impacted by social and environmental changes.

For decades, the common sense in the business world has been dominated by the focus on continued growth and profitability. You would be familiar with Milton Friedman’s famous view that the social responsibility of business is to increase its profits.  It is this very worldview that has been driving businesses to maximize output with minimum input.  Unsurprisingly then, over time, this paradigm has resulted in huge consequential impact on society and our environment. For example, in 2010, the explosion of BP deep-water horizon drilling rig had 4.9 million barrels of oil spill into the sea, threatening eight national parks, endangered 400 species and spoiling 1000 miles of coastline.  You would have heard many other similar scary reports.

On the other end of the spectrum, there are also companies which are more socially conscious, and which have benefited from being so.  Edmans cited that Costco pays its workers well above the national average for similar role, gives workers health care before its rivals, and provides all paid public holidays off (even though those are likely to be big shopping days). These investments in workers resulted in a more efficient and motivated workforce which led to redoubling their company’s revenues.

Another example he gave was on the river blindness which affected over 18 million people in West Africa and Latin America.  As these populations were poor and unable to pay for drugs, a pure profit motive for pharmaceutical companies was never there. But Merck’s then-CEO, Roy Vagelos, decided to divert company R&D resources to study the disease. And when it found a cure, he decided to give the medicine away for free. While he did this for science and society, not only profit, he was so praised by the business and scientific community for his decision that the company’s reputation and standing (and hence profit) also gained a boost.

Navigating in this new landscape

Covid revealed that many businesses did not have the financial resilience to withstand unpredictable changes.  The numerous lockdowns with many consequential impacts, led to liquidity crunch for many businesses.  Clearly, businesses have to re-think fast about what and how they need to be able to adapt to be financially resilient to weather future unpredictable forces.

Over and above the shocks and the disruptions, businesses are also facing increasing demands to demonstrate their social license to operate, earned from the ways the businesses manage themselves in their wider environment.  Communities are demanding that businesses cannot keep treating people and the planet as something expendable, and consumers are increasingly less likely to tolerate businesses which are not striving for more equitable and sustainable practices.

For business leaders navigating these crosscurrents, the question then is how to deliver the business transformation so that it remains financially sound to withstand future unpredictable events, as well as meet their societal and environmental obligations. 

There is increasing realisation that profit and sustainability are not mutually exclusive; that making socially and environmentally-responsible choices is, in itself, a smart investment.  An Alliance of CEO Climate Leaders comprising CEOs from 79 companies with operations in over 150 countries, had seven years ago, called upon governments to take bold action at the Paris climate conference.  They ended their call by stating that the shift to a low-carbon economy will generate growth and jobs.  Similarly, Edmans urged companies and investors to seek profits by creating value for society, by expanding the total value available to shareholders and stakeholders. He believes that “Creating social value is neither defensive nor simply ‘worthy’ — it’s good business.”

ESG:  The Pathway to doing good

The ESG framework, the pre-dominant approach used by businesses in Malaysia, is substantially based on balancing trade-offs among goals across the dimensions of environment, the social, the governance with the economic. It enables business to think across the three dimensions on matters such as mitigating climate change, upholding rights for employees, local populations, corporate governance commitment to workplace equality, and transparency, as well as ESG risks and opportunities.

The nomenclature and concept of ESG factors is easy to understand and relate to. Indeed, the ESG framework is set up to encourage adoption. Companies in the early stages of their ESG strategy are not expected to be at an optimum level of sustainability in all categories.

They start by demonstrating their commitment to transparency and by establishing a roadmap covering the three ESG pillars. Once the ESG approach is more established within the companies, they then begin to track and disclose, often supported by third-party validation.  This flexible entry approach makes the framework accessible to many companies.

There are many academic studies that provide empirical evidence that there is positive co-relationship between ESG practices and various variables of ‘performance’ of the companies, ranging from profitability to cashflows, to equity valuations.  They attribute the contributing factors to these companies having more engaged workforce, more secure license to operate, more loyal and satisfied customer base, better relationships with stakeholders, greater transparency, a more collaborative community, and a better ability to innovate. 

Edmans is convinced that many of the challenges we are now facing Is because we have been operating on a flawed underlying assumption of a binary choice between business (us) and society (them), shareholders (us) and stakeholders (them), executives and shareholders (us) and workers and customers (them).  He rejects the notion that it is a zero-sum game, and that stakeholders lose when shareholders won and vice versa.  He upholds that when we collaborate and work together, the pie or wealth expands benefiting all stakeholders.

Malaysia

In Malaysia, we are still at a nascent stage of this journey.  We do not yet have many with sufficient knowledge and experience in Malaysia.  Collecting and analysing good data is also problematic, and much groundwork is needed. 

But there are also many hopeful developments of late.  The Government and key regulators are actively steering and providing support; public listed companies and financial institutions are stepping up by embracing the ESG approach;  many financial institutions are helping to ensure capital acts for the long term and are offering innovative financial structures to better serve sustainable business; more civil society organisations and social enterprises are asking the right questions; and more academicians are providing local perspectives to help shape societal expectations.

If we do nothing, nothing will change

Now that it is clear that businesses need to be both financially resilient to withstand disruptions in this volatile landscape, as well as be socially and environmentally responsible, and that there are clear empirical evidence that when businesses adopt ESG based strategies (do good), they are in fact helping to make their business improve their long-term financial performance (do well), I invite you to look at your own organisation, and at your own niche in the economic system, and consider what it would take for you to rethink your business practices.

This is the decade for action.

“We are the first generation that through its neglect could destroy the relationship between humans and the planet, and perhaps the last generation that can prevent dangerous climate change.” observed Lord Nicholas Stern, in his book, Why are we waiting? The Logic, Urgency and Promise of Tackling Climate Change.

We need the business community to be at the arrowhead of this urgent transformation journey with you, business leaders, as its champions to ward off this existential crisis we find ourselves hurling into.

Guided by personal ethics of ‘do more good’, Yuet Mee Ho-Nambiar has a long involvement with sustainability and community building activities. Belief in the oneness of humanity and the nobility of man underpins her interest in matters relating to unity and social cohesion of communities, while her background in a finance-related profession focuses her interest to the area of inclusive economics and development.  

The views expressed here are that of the writer’s and not necessarily that of Weekly Echo’s.