Going for woke: Companies treading a fine line on social licence

Companies considering their social responsibility is nothing new. But business leaders say navigating social issues is increasingly complicated.

“CEOs don’t have a playbook on how to deal with these issues,” says University of South Australia associate professor Sukhbir Sandhu.

“It used to be that a business will make profits and generally will not be part of the social activism. It is, however, getting more and more difficult for CEOs not to take a stand … It’s now becoming riskier if an organisation does not.”

‘Mind the gap’

The term ESG – environment, social and governance – has gained huge prominence in recent years, billed as a way to understand a company beyond its bottom line. Bloomberg estimates global ESG assets are on track to exceed $53 trillion by 2025, as responsible investing gains pace.

But in some circles, a backlash against ESG has been brewing. The concept is facing serious blowback from Republican lawmakers, who have described it as “woke” and have targeted fund managers who have ESG funds. The hashtag “go woke, go broke” has gained some traction on social media, most recently after vows to boycott PayPal over its move to fine customers who promote misinformation (the company later abandoned the policy).

Concerns have also been raised globally about greenwashing – misleading or misrepresenting the extent to which something is sustainable or ethical – as well as questions about how ESG is defined and measured.

Adding to this complexity is the incredibly broad range of issues that ESG encapsulates. While often spoken about in the context of climate change action, experts say it’s the “S” and “G” – the social and governance issues – where it can often be harder for companies to stay ahead of the curve.

A recent editorial in The Economist went so far as to suggest ESG should be boiled down to a single measure – emissions. Sandhu says everything in her research cautions strongly against this decoupling.

“Environmental progress cannot and should not come at the cost of social inequity. And governance is the thread that binds them together. E is often easier to measure, S is harder. But just because it’s harder, it doesn’t mean that we don’t pay it enough attention.”

In fact, her research has shown that market logic, characterised by Nobel Prize-winning economist Milton Freidman’s 1970 essay, “The social responsibility of business is to increase its profits”, is slowly being challenged.

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“It’s still green shoots, but this logic is what we call this the societal-community logic,” she says. “Those that subscribe to this logic, they’re willing to bow before dual gods. And what I mean by that is, yes, profits are important, but people subscribing to this new emerging logic, they’re arguing that environmental and societal concerns are also important.”

This logic is spreading faster in some segments of the society, such as among Millennials and Generation Z.

“Under the market logic, of course, ‘go woke go broke’ logic kind of sensibility makes sense,” says Sandhu. “The point is there are other forms of logics that are starting to challenge it … Employees within organisations, communities around organisations, individuals are starting to think that a business has a bigger purpose than profits.”

The Ethics Centre’s executive director, Simon Longstaff, has worked as a consultant with businesses to help them navigate this tricky terrain. He says what has changed in recent years is greater levels of transparency, driven by media and technology. Companies need to be authentic and sincere; gaps between a company’s actions and what it stands for can be irreparably damaging.

‘Wherever there is a gap between what you say and what you do, no matter how minor or remote you might think it is, that is the thing that people will notice.’

Simon Longstaff, executive director of The Ethics Centre

“The risk of hypocrisy is the biggest risk the company faces,” he says. “I often say to companies – mind the gap, like the famous warning on the subways of London. Wherever there is a gap between what you say and what you do, no matter how minor or remote you might think it is, that is the thing that people will notice.

“It used to be that’s what you did. Now it’s what you stand for that makes the critical difference.”

This dynamic is more intense than ever, Longstaff says, and it’s a hot topic in the boardroom as companies try to work out where to put their name and in what circumstances.

“I think there is a lot of danger in joining a campaign and publicly committing to a certain cause if you don’t really believe it, if you’re doing it just in order to fit in with the crowd or because you’re being pressured by your investors or customers or employees,” he says.

Longstaff says it is important to remember, not just to please consumers, but employees. And in a tight labour market, he says, companies cannot afford to get it wrong.

‘Not for the faint-hearted’

It was several months after mining giant Rio Tinto had destroyed two ancient rock shelters in the Juukan Gorge,  Western Australia, when experienced board director and philanthropist Simon McKeon, then a director of the mining giant, visited Perth. He started talking to an employee who was about to leave for a lunch-time run.

“The employee said, ‘The sad thing is I don’t run in my Rio Tinto t-shirt’. It hit me like a ton of bricks,” says McKeon. “He no doubt had run in the old t-shirt for years and hadn’t thought much about it. But then decided not to because of the embarrassment of what the company had done.”

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It reminded McKeon how much the reputation and responsibility of a company matters to its employees.

“Clearly customers and shareholders are key. If you are on the nose with them, then good luck. But, I’m coming back, time and time again, to the issue of talent,” he says.

“The competition for talent is so ferocious at the moment and it’s not just the remuneration, there’s a whole bunch of other things. It’s very easy to lose good talent, and it’s easier not to be able to get the talent you want, just by sending the wrong message … anyone who dismisses that and thinks at the end of the day it’s just about how much we pay, that’s not right.”

McKeon, now a director at NAB where he chairs the board’s risk and compliance committee, is no stranger to working with companies grappling with reputation issues. He was the AMP chair in the years before the banking royal commission unearthed a raft of failings at the financial services giant, and then was a non-executive director at Rio Tinto when it destroyed the 46,000-year-old caves.

Companies’ decisions to be outspoken on social issues are rarely made on the fly, says McKeon, and are increasingly discussed around the board table. But they are never easy and are not for the faint-hearted.

“The real challenge for contemporary management is not only to recognise that shareholders are still key … but to actually bring the shareholders along on what is the right journey,” he says.

“It is a balance of understanding what do customers want – they certainly want the goods or the service that we are producing, but they also want it produced by a corporation that can be trusted and does the right thing.”

“There are very, very, very few people who can lead an organisation and get that balance right … It’s not a matter of simply just getting a whip out and getting workers to work hard, that doesn’t work anymore.”

Not taking a position was once the easiest option, says Louise Petschler, the head of governance and policy leadership at the Australian Institute of Company Directors, but this is no longer the case.

“It’s a bit like the conversation about diversity in the boardroom was 10 years ago. That started shifting from being seen as virtue signalling to chairs saying actually this is important for our board and for governance,” she says.

‘You need to be resilient in taking a position where there’s controversial issues.’

AICD head of governance Louise Petschler

Petschler, who has worked as a chief executive and across public policy, government and advocacy, says it was something the group has put a lot of thought into in recent years. The Australian Institute of Company Directors put out a guide last year, which says boards should be the ones to make big calls on important social issues.

“The pitfalls will generally be where they haven’t thought through where that connection is to the company’s purpose, and the narrative, because you need to be resilient in taking a position where there’s controversial issues,” she says.

“There are still directors who have a narrower view and who feel that they’re being drawn into a blurring of the lines between the purpose of a company … But in saying that, the mainstream conversation has definitely shifted in the boardroom, and employees and stakeholders expect companies to actively engage with social issues.”

‘Playbooks, scenario and war game testing’

Twenty years on, ASIC commissioner Sean Hughes still remembers a conversation he had with a well-known director at a large bank which he knows would never happen today.

Hughes, a former chief executive of New Zealand’s capital markets and financial services regulator, group general counsel for Tabcorp and the chief risk and legal officer at UniSuper, told the older man he was concerned that reputational risk was not being considered seriously enough by the bank. It should be front of mind, he argued, and added as a regular agenda item at meetings.

“[The director] responded, ‘Credit risk is the most important risk facing this bank … That’s the only thing that would bring this bank down’,” recalls Hughes. “I can guarantee you that that director would not say that today.”

Now working at Australia’s corporate regulator, Hughes says while society is expecting more from companies, a director’s duties haven’t changed – to act in good faith and with care and diligence.

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“Nowhere in the law does it say that those duties only exist in relation to financial considerations,” he says. “So I think it’s quite plausible to mount the argument that this applies in a much broader sense.

During his time at ASIC, Hughes says he hasn’t been aware of a company “overdoing their consideration of broader ESG issues”.

“I think increasing numbers of directors are getting this,” he says. “There’s an increasing focus on playbooks, scenario and war-game testing to see how would they respond, what would they do, what’s the state of readiness and preparedness to deal with an event whether it be an environmental event, whether it be a reputational hit, whether it be a cyber event.”

It’s an evolving space. Associate professor Sandhu says when she did her PhD 10 years ago on what drives businesses to be environmentally responsible, she was dismissed as a tree hugger, the “hippie on the third floor”. Now, she couldn’t be busier. She says in a way it’s unfortunate that her expertise should be in demand.

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“Is there an interest? Yes. Is it because there’s been a change of heart? Perhaps not,” she says.

“I guess all that’s happened is they’ve recognised that these are real risks now. Risks that come from consumers demanding products that are more responsible, communities saying, ‘Not in our backyards,’ and regulations demanding more.”