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How Well Is Stakeholder Capitalism Holding Up During the Pandemic?

A BRINK interview with Head of Research for Test of Corporate Purpose

Last year, 181 corporate executives in the Business Roundtable made a pledge to broaden their companies’ priorities from just their shareholder interests to include a broader set of stakeholders. 

A major study, funded by the Ford Foundation and called A Test of Corporate Purpose (TCP), has just been released. It assesses these companies’ performance during the pandemic, the economic downturn and the BLM crises of 2020 to see how well the concept of shareholder value has held up.

We spoke to the head of research for TCP, Sara Murphy, to find out what they learned. 

MURPHY: The question we were hoping to answer was: Is it possible to demonstrate with evidence whether or not companies who have made these commitments and public statements actually performed better through this crisis period for their stakeholders, i.e., employees, society, the communities in which they operate, customers, everyone who goes beyond the traditional shareholder model.

Capturing the Data

Our data provider, Truvalue Labs, uses artificial intelligence and machine learning to process something like 7 million data points from 150,000 different sources around the world in 13 different languages. It is sourcing not just from media reports, but also NGO reports, trade and industry publications and so forth. 

The virtue of using that as a data source is that it circumvents companies’ own reporting and disclosure. Corporate disclosures have a lag time built into them, so we’re not really going to be seeing companies’ sustainability reports, in general, until spring of 2021. Our hope is to get signals on this question sooner and to sidestep any possibility of companies’ reporting painting an overly rosy picture.

BRINK: What areas did you look at? Relationships with employees, how the media portrayed the companies — what were the actual inputs?

MURPHY: We looked at topics like employee health and safety, labor practices, employee engagement, diversity and inclusion, each depending on which of the two factors we were weighing. The underlying issue taxonomy came from the Sustainability Accounting Standards Board, and our partner, KKS Advisors, used it to construct scores for these companies, based on all the signals they were getting from Truvalue Labs.

Taking the Pledge Made Little Difference

BRINK: Did you find a significant difference in performance between those that had signed the business roundtable pledge and other companies?

MURPHY: The short answer is no. For U.S. business roundtable signatories, there was actually a slight negative effect in their performance on COVID-19 and a slight, but not particularly strong, positive effect around inequality.

What we thought was really significant coming out of this was that the companies that did the best through these two stress tests were the companies that had already been doing well against these factors prior to the pandemic and to the events of 2020. 

I think that’s really one of the most significant things to take away from this: You don’t turn into a resilient company, a strong server of stakeholders overnight. That’s something you become over time with quite a lot of deliberate effort. 

Boards Really Matter

BRINK: Was there a big difference between U.S. and European companies?

MURPHY: I would have expected European companies to do substantially better. The fact is, they didn’t. European companies did slightly better, but the difference is so small as to be insignificant. And that caught me by surprise, too.

BRINK: What about the role of boards? How did they come out of this?

As a matter of good corporate governance, we know that separating the roles of chair and CEO is really important, but a lot of American companies don’t.

MURPHY: Two things: One, we know that almost none of the business roundtable companies secured board support for their statements of corporate purpose. And we know very well that any matters of import at a company require board support. So that’s an interesting signal right there. 

One of the other factors is that, as a matter of good corporate governance, we know that separating the roles of chair and CEO is really important. A lot of American companies don’t. And that’s just a question of good governance. But to the point of this particular study, almost no boards were engaged in promulgating these statements, and I think that demonstrates how substantial, or maybe not substantial, they are.

BRINK: Did you collect any evidence on whether companies that do walk the walk have performed better from a financial point of view during this crisis?

MURPHY: We haven’t. That’s what we’re hoping to pick up next. 

ESG Is Part of Good Risk Management

BRINK: You advocate a greater shift toward stakeholder capitalism. Why do you think this is now more compelling, as a result of watching these companies go through the last six months?

MURPHY: In 2020, we’ve seen this sudden surge of interest in ESG — environmental, social and governance factors — in investment analysis. People keep characterizing this year as a black swan. I wholly disagree. Everything that we’re experiencing was entirely predictable and was, in fact, predicted by people who do this kind of extended risk analysis by evaluating factors that go beyond the strict balance sheet and looking at how companies engage on social levels, how they handle their employees, what their health and safety track record is, how they manage their supply chains and so forth.

To give you a more concrete example, we often ask companies to do a better job of understanding their supply chains for the purpose of averting human rights issues. 

Here we are in the pandemic, and companies that really knew their supply chains intimately had a much better sense of what was coming when the pandemic shut down a lot of trade routes to China. So there’s this knock-on benefit of having done this good work around social and environmental issues and that coming to bear when you have shocks like this.

One of the things that’s been talked about quite a lot lately is that fiduciary duty precludes asset managers from looking at environmental, social and governance topics if they don’t somehow have a direct bearing on the bottom line. But more and more, we’re seeing that these things do have a direct bearing on business resilience writ large.

That being said, shareholder interests aren’t always going to align neatly with stakeholder interests. That’s something that everybody is going to have to contend with. 

The Rise in Importance of the Social

BRINK: As a result of these last six months, are there areas that you realized companies need to pay much more attention to as part of stakeholder capitalism?

MURPHY: I do think a lot of folks have been taken aback by how significant the social issues turned out to be. This doesn’t come as a surprise to me, but I’m really glad that it’s something on which we’re starting to see more engagement from the broader business universe.

I’m sure you’ve come across this, where you see companies tweeting out messages in support of Black Lives Matter. And a quick response you’ll see from activists is, “That’s great. Will you please tweet a picture of your board?” And, of course, what they’re getting at is your board is a bunch of old white men. What do they say? Male, pale and stale.

I think that’s emblematic of the fact that people are increasingly understanding how to hold companies’ feet to the fire around these topics. And people are getting more sophisticated about how to poke around those messages and see to what extent they really represent something authentic.

Sara Murphy

Head of Research for Test of Corporate Purpose

Sara E. Murphy is head of research for Test of Corporate Purpose (TCP), and founder and CEO of SE Murphy Consulting. She is an expert in sustainable investment, ESG analysis and integration, and corporate responsibility with more than 20 years of experience advising institutional investors and businesses on aligning their portfolios with their environmental and social objectives.

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