Environmental, Social & Governance Briefs

Social Risk: Corporations’ New Convergence Zone

August 08, 2018

Employee petitions, gender discrimination, #MeToo revelations triggering instant market value freefalls—boards of directors and CEOs are searching for how to get ahead of the next viral business disruption, but they are not alone. Their investors are, too. Increasingly, one source of that disruption is their employees.

Corporations are now entering what meteorologists call a convergence zone, where prevailing systems interact to disrupt the status quo. External forces like investor activism are converging with internal forces like employee activism to disrupt business and change the way boards and c-suites are forced to see and respond to risk.

Both top-down and bottoms-up “systems” have their own self interests. External investors have seen instant value erosion, the most recent being investors of CBS, Papa John’s and Facebook. They are seeking sustainable financial growth backed by data showing societal developments can materially affect a company’s long-term financial performance. Internally, employees, particularly the next-generation workforce, are seeking alignment with the company’s purpose as a threshold condition for  joining or staying with the company.

Understanding these converging systems and the collapsing barriers between them is challenging traditional corporate governance and risk management.

Arms race for talent

With baby boomers retiring at the rate of  10,000 a day, recruiting and retaining the next generation has produced a business arms race for talent. CEOs ranked retaining talent their top concern in The Conference Board’s C-Suite Challenge™ 2018: Reinventing the Organization for the Digital Age, underlining why those “bottoms-up systems” simply cannot be ignored.

Until recently, internal employee activism was billed as an opportunity for companies to harness this next generation as external ambassadors to advance brands. Increasingly, however, those same brand ambassadors are using their newly found voice to press for change within their own organizations. Thousands of Google employees, for example, signed a letter to their CEO protesting a lucrative military contract to use Google technology for targeting drone strikes. “We believe Google should not be in the business of war,” the employee letter said. Google responded by announcing plans not to renew the contract in 2019. After more than 10,000 Starbucks baristas joined a campaign on Coworker.org calling for higher wages and increased staffing, the company announced wage increases, more hiring, additional stock options and expanded parental leave for partners.

On a smaller scale but with major impact, a group of Nike women covertly surveyed their female peers about their internal experience with sexual harassment and gender discrimination and delivered the results to CEO Mike Parker. Over the next several weeks, at least six top male executives left the company and Nike initiated a comprehensive review of its human resources operations. An internal compensation review resulted in raises for 7,000 employees.

Shareholder pressure

In parallel with this new internally-focused employee activism, the pace of top-down investor forces is quickening with an uptick in the volume and support for shareholder proposals on environmental and social issues. In his 2018 annual letter to CEOs, Blackrock chairman and CEO, Larry Fink, called for a “new model of shareholder engagement” to increase conversations about improving long-term value. “Your company’s strategy must articulate a path to achieve financial performance,” he wrote. “To sustain that performance, however, you must also understand the societal impact of your business as well as the way broad, structural trends—from slow wage growth to rising automation to climate change—affect your potential for growth.”

Fink’s letter was not an investor outlier. Six months earlier, Vanguard chairman and CEO William McNabb’s letter to directors of public companies worldwide cited Vanguard’s investment stewardship focus on the gender diversity of boards to drive long-term value, “as an economic imperative, not an ideological choice,” as well as its focus on risk mitigation, including climate risk.

The boundaries between these external and internal forces are increasingly porous, creating disruption and an urgency for change. 

Google employees, for example, joined Zevin Asset Management investors at Google’s 2018 shareholder meeting to advance a proposal to increase executive accountability for meeting sustainability and diversity goals. Google’s diversity metrics have reportedly advanced only 1 percent in four years, spurring Google software engineer Irene Knap to testify at the shareholder meeting that the current status quo, “fundamentally hurts the quality of products Alphabet can deliver to users.” Zevin's proposal cited reports of employee departures from Google attributed to racial and gender pay discrimination as well as evidence that superior performance on sustainability issues correlates with superior financial performance and lower cost of capital.

The proposal was voted down, but the joint message demonstrated the blurring lines between internal and external corporate activism. “From the outside, we were able to see that executives were not able to adequately respond to concerns among their own employees about the inclusion situation at Alphabet,” said Pat Miguel Tomaino, director of socially responsible investing at Zevin.

Social impact and growth potential

Today’s redefined business landscape features 24/7 web-enabled auditors of corporate behavior able to disrupt business by amassing followers unconstrained by the boundaries of time or geography. The corporation’s social footprint—its social impact created through its strategies and business life cycle—is now a material factor affecting its resiliency to grow at one end of the spectrum or to survive at the other.

Anticipating and addressing that social footprint before it disrupts business, however, is difficult, particularly for corporate boards and c-suites who believe the traditional assumptions inherent to their 20^th Century corporate governance and risk assessments are sufficient in the 21st Century. That complacency is dangerous.

Resiliency requires breaking through the insulating power of the corporate bubble to gain an outside-in perspective on a company’s social footprint. In this new, dynamic reality, every CEO should be asking about the disruptive forces material to their company’s social footprint that they do not know about, not the ones they have already been identified. Odds are, CEOs are not.