Making a good impression

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  • Picture of Gillian Tett
    Gillian Tett
  • Economics and Finance
  • Institutional reform

How cultural shifts are driving radical change in enterprise

The Yale School of Management is not usually regarded as a bastion of radical activism. This year, however, it unexpectedly became a striking symbol of the new cultural zeitgeist stalking the business world.

The trigger was Russia’s brutal invasion of Ukraine in February 2022. A few days after the invasion started, Yale professor Jeffrey Sonnenfeld commissioned his students to create a webpage tracking the response (‘withdraw’ vs ‘remain’) of Western companies with business operations in Russia. Initially, few business leaders took note. After all, student protests and calls for boycotts are nothing new and, while businesses have been giving a greater emphasis to ‘sustainability’, generally, and to environmental, social and governance (ESG) criteria, particularly, in recent years, the topic of war has not been central.

But in 2022, the world is changing, even (or especially) for CEOs. The site quickly caught the attention of anti-Russia activist groups, who publicised and protested against the holdouts choosing to ‘remain’. Investors and employees took note. Then, as Sonnenfeld and his students began updating the information in real time, the number of companies withdrawing from Russia spiked. By late May, the pressure was so intense that almost 1,000 of the 1,200-odd companies tracked by Sonnenfeld and his team had withdrawn.

It might be easy to dismiss this as ‘just’ a story about war, which in some sense it is. But the Yale website is also a powerful symbol of a much bigger shift in the 21st century Western cultural zeitgeist highlighting the implicit contract between society and businesses.

I was a cultural anthropologist before I became a financial journalist. A universal feature of human society is that we always assume the way we see the world is natural, inevitable and unchanging, whether viewed from the Amazon jungle or an Amazon warehouse. The Western business elite has the same natural tendency, assuming the way it runs its business is also ‘natural’ and set in stone.

Today, the culture of Western business – and its underlying assumptions – are in flux

But it is not. Our cultural patterns and the assumptions we use to make sense of the world do not exist, like Tupperware boxes, as fixed, closed structures able to be neatly stacked in a hierarchy of values. On the contrary, cultural norms are constantly shifting as new influences emerge and integrate with the old, like streams flowing into a slow-moving river. We cannot always see how our ideas are changing. The power of culture is that, while we inherit our assumptions from our surroundings, we take these assumptions so deeply for granted that we rarely notice either their presence or how they are continuously, subtly changing.

Today, the culture of Western business – and its underlying assumptions – are in flux. And while the rise of ESG is an indicator of this, it does not tell the entire story. What the story of the Yale website teaches us is how a combination of once unimaginable levels of digital transparency, shifting social mores and the power of cyber crowds is changing the cultural context of 21st century business, albeit in a way that the modern CEO tribe does not always fully understand. ESG is not the cause of this shift, but it is a very visible symptom.

Rise of the shareholder

To understand these changes, it pays to consider a historical figure central to the creation myth upon which modern business schools are founded: the American economist Milton Friedman, best known for his pioneering free-market economic theories. In September 1970, Friedman published what was arguably his most influential idea, an essay in

The New York Times Magazine which argued that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits” for the benefits of its owners, ie its shareholders. To focus on anything other than maximising shareholder profits was a dereliction of duty, according to Friedman, if not a downright subversion of capitalism.

These days, Friedman’s concept of ‘shareholder-first’ capitalism tends to be discussed as a universal, eternal phenomenon, free of context, to be embraced or rejected. Anthropologists, however, believe that ideas must be placed in their historical and cultural context to reveal the unstated assumptions around them. Friedman’s vision is no exception. His ideas were developed during the Cold War era in reaction to a post-war period in which many large American companies were poorly run, dogged by paternalistic and indulgent managers.

Several other factors influenced Friedman’s ideas. First, they evolved during a period when American and European society, emerging from the wartime economy, believed in the responsibility of the state to fix social and political problems. It was assumed that business could – and should – outsource environmental and social problems to government. Thus, when the first wave of green activists started campaigning against pollution in America, they focused their campaign on politicians, not business leaders. Second, the only tools of transparency and external scrutiny that existed during this period were corporate accounts (generally issued after a significant time lag) and official company statements. Third, an important (and largely unstated) feature of this era was a blossoming reverence for technology and mathematics.

Most notably, by the middle of the 20th century, rapid tech innovation was delivering huge benefits for the West, including a dramatic rise in computing power. This spurred an infatuation among corporate leaders, economists, investors and policymakers with the idea of using computers to create clever mathematical tools that could not only track trends in the economy, financial markets and corporate life, but predict what would happen next. Economists and financiers borrowed frameworks from Newtonian physics to track business economics and determine whether or not companies were delivering value for their shareholders.

What remained unstated in the credo delivered by Friedman in 1970 was an assumption that governments could and should fix social problems, that only shareholders and managers knew what a company really did, and that neat technical models could capture and predict what companies should do next and what risks they faced. Friedman’s vision was thus not just about corporate ‘discipline’; it was also about celebrating the concept of tunnel vision. Shareholders – and only shareholders – mattered. Issues such as war, social tensions, environmental problems and pandemics, did not.

Benefits of tunnel vision

As with any creation mythology (including those embraced by journalists or academics), Friedman’s vision was reflected and reproduced through numerous rituals in subsequent decades. Business schools taught the principle of shareholder-first capitalism and the mysteries of the mathematical models underpinning it to trainee executives each year, in much the same way that Catholic seminaries in Europe trained priests in the Latin language, which laypeople could not even understand, and the mysteries of Christian theology.

Institutions such as the Chartered Financial Analyst Institute orchestrated rituals, in the form of exceptionally difficult exams, that served as quasi-initiation rites, spreading this shareholder-first gospel not just in America, but across the globe. Corporate boards and investment funds invoked the shareholder-first mantra at annual general meetings, in corporate reports and financial strategies. Tunnel vision seemed not just normal, but natural, inevitable and proper. Put another way, it seemed appropriate to embrace mathematical models and tightly defined balance sheets as tools to navigate the world, while ignoring whatever factors these models or balance sheets were unable to accommodate.

In some senses, this tunnel vision approach delivered huge benefits. As the economist Adam Smith noted in The Wealth of Nations, competition between different economic actors is a powerful force for driving innovation and growth, and economic dynamism tends to be most potent when there is a clear division of labour, and specialisation. Focus matters. So does accountability and discipline. A shareholder-first mantra can, and did, engender both.

But, by the time the 21st century got under way, it became increasingly clear that tunnel vision also had its drawbacks. Using just a balance sheet or economic model to navigate the world is like walking through a wood with your eyes fixed only on a compass; even if your compass is wonderfully accurate, if you only ever stare down at the dial you will eventually walk into a tree. Should you throw away the compass? No, but you also need to look up at your surroundings.

In practical terms, it was becoming clear that there were issues outside ‘compasses’ which were upending business plans. Some of these were social in nature, such as a sudden, rapid shift in Western society’s attitudes towards racism and sexism, which meant that the mores which dominated in the mid-20th century (such as casual harassment at work) were no longer deemed acceptable. Others reflected the wider political economy: by the second decade of the 21st century, society no longer assumed that relying on state institutions was an effective way to fix social and environmental problems. Another major shift was environmental: issues such as climate change were starting to have material impacts on companies’ actions. Geopolitical strife was another ‘externality’ coming to the fore. So, too, was political populism, of the sort unleashed by Donald Trump in the US and Boris Johnson in the UK. Pandemics were yet another; before 2020, this type of risk was not incorporated into business forecasts at all.

Companies that ignore key social and environmental issues will suffer reputational damage, regulatory fines, or the loss of employees, investors and customers

But the biggest shift in the context of business and, arguably, the one that has made those listed above so extraordinarily threatening for corporate leaders, has been technology. In 1970, when Friedman wrote his treatise, printed shareholder reports were the main source of information about business. By the second decade of the 21st century, an explosion of digital tools was enabling society to not only track what companies were doing with new timeliness and accuracy, but to come together in force to criticise it.

The sudden appearance of the Yale University website, which offers real-time, crowd-sourced transparency, is just one example of this, and one that would have been unimaginable during Friedman’s day. ClimateTrace, a website co-founded by Al Gore, the former vice president of the US, is another. It uses satellites to monitor the source of carbon emissions from around the world in such granular detail that activists can see, with real-time transparency, which industrial enterprises are spewing out these emissions, and so hold them to account. Websites such as Glassdoor offer the public a way to track what employees really think and offer inside information on bullying, racism, pay or gender relations within thousands of workplaces.

And, even though much of the time this information is ignored, transparency has real consequences. Consider the #MeToo movement. For decades, a ‘culture of silence’ existed behind the closed doors of many workplaces. But when abused women started to share their stories of harassment and sexual abuse in cyberspace in 2018, coalescing into a digital howl of rage, the power dynamics changed: suddenly a cyber crowd had gained power by organising itself in a way that could cause reputational embarrassment for companies, and this led to a host of once-omnipotent corporate leaders losing their jobs. Given the scale of new data that now exists, corporate leaders now know that they are being watched, and this is a potent deterrent.

In Friedman’s day, it was easy to say that shareholders were the only people that mattered, because civil society was generally unable to bite back with impact. Today, that is no longer true, and ignoring what stakeholders think about the environment, gender relations, racism or other topics that matter to the public is increasingly dangerous for business leaders. It is perhaps unsurprising, then, that in summer 2019 the mighty Business Roundtable in America, once the Vatican of Friedman’s shareholder-first religion, announced that it was abandoning the business gospel that it had previously embraced. Lateral vision was (and is) replacing tunnel vision.

Lateral vision and ESGs

What does this mean for corporate leaders today? The most visible symbol of the zeitgeist shift is the ugly acronym ‘ESG’, a piece of modern business jargon that (like Latin for the medieval church) is both ubiquitous as a source of moral credibility and utterly baffling to laypeople, not least because it reflects a mode of thought that is riddled with contradictions. In some respects, the core impetus behind this trend is not entirely novel; back in the mid-20th century, company leaders liked to say they had ‘social responsibilities’ in a vague sense, and in the late-20th century most major companies created corporate social responsibility (CSR) departments as ring-fenced units often run by part-time staff without much power or many resources.

The ESG movement, though, was different from the CSR concept in subtle, but important, ways. First, ESG departments and principles sit in the core of companies, so much so that most major companies now have ‘chief sustainability officers (CSOs)’ who typically report to the corporate board and often hold crucial decision-making roles. Second, whereas the CSR movement typically discussed the impact that a company had on the world in terms of social and environmental issues, ESG frameworks often do the reverse: they look not only at a company’s external footprint, but also at how factors such as pollution or social protest might harm the company, too.

This leads to a third key difference: the rationale for companies to talk about ESG today is not just because its leaders want to improve the world or avoid harming it; corporate leaders are also driven by a desire to avoid harming themselves. There has been a realisation in the C-suite that, because the public now has access to digital transparency and activism, companies that ignore key social and environmental issues will suffer reputational damage, regulatory fines, or the loss of employees, investors and customers. ESG today is about risk management, not activism.

This is not, of course, how most corporate leaders wish to position their companies’ relationship to ESGs. Public statements are filled with activist language about improving the environment and society, so it is tempting to take ESG rhetoric at face value, assuming that it has an activist agenda. Some corners of the ESG universe genuinely still uphold this, most notably in the sphere of impact investing (a subset of ESG which strives to invest money in a manner that will do no harm and create positive outcomes, even at the cost of sacrificing investment returns). However, to return to the lens of anthropology – and the work of the French intellectual Pierre Bourdieu – when elites create intellectual frameworks or creation myths, rhetoric never precisely matches reality; the language of altruism that frames ESG is about self-defence and self-interest, too. It is a way for companies to recognise the need for lateral vision in their risk management, in a world where tunnel vision no longer works.

Does that make ESG hypocritical? The core tenets of ESG can certainly often seem contradictory. Since the movement exploded in scale following the Business Roundtable’s repudiation of the Friedman doctrine, an entire ecosystem dedicated to measuring companies’ adherence to this new creed has emerged for the benefit of investors. There are now ESG ratings systems, reporting tools, training schools and accounting frameworks, to name but a few, and the size and scale of this new ecosystem has created a self-reinforcing mechanism of its own.

Yet, the fact that these metrics try to track environmental issues alongside social issues is often problematic, since while the former can be (fairly) easy to measure, the latter are not, and while companies can have a good track record with one metric, that does not mean they score well on another. As a result, ESG ratings can vary widely. Consider, once again, the Yale University website, which was so potent as a piece of digital transparency: while ESG investors do not want to put their money in companies with continued involvement in Russia, some of those Russian companies have recently scored well on environmental factors.

But while these contradictions bedevil ESG, the very fact that companies now feel compelled to pay even lip-service to this set of criteria is a victory for social activists, showing that the social contract between companies and wider society is shifting. Perhaps Adam Smith’s vision of how markets should work is finally being properly realised. In decades past, economists such as Friedman celebrated Smith’s Wealth of Nations, which extolled competition, but ignored his Theory of Moral Sentiments, which argues that commerce functions best amid a shared social and moral framework. It may finally be that these two ideas are being united. We can call this the rise of stakeholderism or – perhaps more accurately – the embrace of lateral vision.

Gillian Tett is Chair of the Editorial Board, US, for the Financial Times and co-founder of Moral Money, a newsletter on sustainability. She has a PhD in anthropology and her most recent book, Anthrovision, explains how anthropology insights are relevant to the modern political economy

Follow Gillian Tett on Twitter here: @gilliantett

This article first appeared in the RSA Journal Issue 3 2022.

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