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What Companies Owe Us

What Companies Owe Us

As the coronavirus rages, business leaders may believe they must sacrifice their ideals in service of their bottom line. That would be a costly mistake.

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During a crisis, the question businesses leaders should be asking themselves is not whether they can afford to do good–but how can they afford not to?

Witold Henisz has been thinking a lot about morality. Specifically, Henisz, a professor of management in the Wharton School at the University of Pennsylvania, has been grappling with questions of moral obligation, i.e. what we owe to each other. This theory of interpersonal morality—also known as contractualism—was developed by the American philosopher T. M. Scanlon and recently popularized by the fictional TV character Chidi Anagonye on The Good Place, and Henisz is applying its ideas to business strategy during a pandemic.

“We should be thinking about how we can not just focus on ourselves but focus on the whole ecosystem,” he says. “And that’s not a moral responsibility—that’s good business.”

Henisz is far from the only person pondering such questions these days. Even during normal times, businesses that strive to do good in the world may seem at odds with those that strive to make money above all else. During an unprecedented global health and financial crisis, wherein companies are shedding workers and losing customers (not to mention billions of dollars), investors and business leaders may well ask themselves: How can we afford to do good? But Henisz would say that line of thinking gets it exactly wrong. As he might put it: How can we afford not to?

A network of family farms across the U.S. has continued to supply pork to their communities while larger meat-processing plants have shut down during the pandemic. Photo: Niman Ranch

Corporate good doesn’t have to come from a boardroom.

Take Niman Ranch, for example. Founded in 1969, the nationwide collective of 750 family farms delivers locally raised meat to shops, wholesalers, and restaurants across the United States. Niman Ranch insists that all prospective members demonstrate both that their land-use is sustainable and their animals are raised humanely—and that commitment has buoyed its business during the coronavirus crisis.

While broken supply chains have forced industrial farms to euthanize their herds, Niman Ranch has continued to fill grocery stores and feed customers without interruption, thanks to its broad network of small farmers—like Kirsten Eckerman, who raises hogs and works as an ER nurse in southern Wisconsin. Eckerman says she has seen increased demand from her local community this year. And in turn, she has been giving back during the pandemic by sending neighboring families free meat and produce.

“I believe it all starts with the business model that we have,” says Chris Oliviero, general manager of Niman Ranch, which was acquired by Perdue in 2015. Since that acquisition, Niman Ranch has greatly influenced Perdue’s farming and animal welfare practices for the better. “That confidence in not losing money and making a profit leads to a willingness to participate in these kinds of more sustainable practices. And you kind of get to this virtuous cycle.”

Niman Ranch and farmers like the Eckermans are just a small part of a larger trend that is emerging: Businesses that care about sustainable practices, humane treatment of workers, and other social issues seem to be better positioned to withstand the current crisis. MSCI keeps track of the stock market performance of publicly traded companies—and for the past 10 years, it has also rated those companies on their ESG factors. (ESG stands for environment, social, and governance and is the corporate shorthand for the abstract idea that doing good is also good business.) Data from the past three to four months show that the performance of companies who ranked the highest on ESG factors was measurably better than that of their traditional portfolio of companies. In aggregate, companies that adopted ESG before the coronavirus pandemic were better positioned to deal with the crisis because they had better relationships with their employees, suppliers, customers, and communities. This minimized their risk for crisis.

“All of them have outperformed—in some cases by quite a bit—over the course of the pandemic so far,” says Meggin Thwing Eastman, research editorial director for MSCI ESG Research. “So it’s been a significant real-world test of this question of whether [ESG] really does measure resilience. And so far, it has.”

Eastman hesitates to make predictions about individual companies, especially in a time when almost every sector is taking heavy losses. But what she has seen is that, over a 10-year period, companies that are better rated tend to be more profitable and less vulnerable to crises. “At this point, there is some very solid research from us and others backing the idea that when you do ESG in this way, with the goal of looking at financial relevance and resilience in this changing world, that it has been effective,” she says.

Activists protest against inaction on climate change in Washington, D.C. in February, 2019. The new generation of investors, including Millennials and Gen Z, expects companies to share their values.

The concept of socially responsible investing dates back hundreds of years. Some people trace it to 1758, when the Quakers prohibited members from participating in the slave trade. The modern incarnation of ESG originated in the 1960s, with pension funds managed by trade unions, and gained momentum in the ’70s and ’80s, when Americans started paying more attention to issues like South Africa’s apartheid regime. Today, Millennials, Gen Z, and an increasing number of female investors expect companies to attend to the issues they most care about, like human rights, gender parity, and climate change. Meanwhile, the internet and social media have given them more power than ever to hold companies accountable.

JUST Capital is a nonprofit that aims to increase transparency of the 100 largest employers in the U.S. by measuring them on more than 400 factors chosen by the American public in a multiyear poll. During COVID-19, it’s also been tracking how companies have responded during the pandemic, including which ones are providing new benefits, raising wages, and donating to their communities. This list includes companies like Verizon, which gave employees 40 days of paid sick leave, and Home Depot, which has also offered paid sick leave and instituted weekly bonuses. Martin Whittaker, CEO of JUST Capital, cites these and other examples in his prediction that the pandemic will accelerate the demand that businesses be a force for good. In fact, he believes the coronavirus will permanently change the way we view capitalism.

“I think it has really had a dramatic effect. It’s focused everyone’s attention on the importance of workers,” says Whittaker. The public is much more aware of policies like paid sick leave, fair compensation for those workers deemed essential, and health and safety. To Whittaker’s mind, this is a major moment for social issues—the S in ESG.

“I’m not talking about socialism here,” he says. “I’m not talking about anything other than good economics. Stakeholder business performance, as opposed to shareholder primacy, is about business serving the needs of all of its stakeholders, not just one of its stakeholders. I think that’s a much more intelligent way forward.”

Economists disagree on exactly how long recovery will take coming out of the coronavirus crisis, but one thing is clear: We’re in it for the long haul. In the meantime, Americans (those who still have jobs, at least) are feeling either the strain of working from home with children or pets or the anxiety of transitioning back to a transformed office space. Retaining and supporting those employees is paramount to CEOs and other business leaders, according to Constance Hunter, chief economist for accounting and consulting firm KPMG.

“They recognize that [supporting employees] gives them a competitive advantage, especially as we come out of this,” she says. “Employee loyalty and culture are very, very difficult things to establish and maintain and certainly to re-create.”

For the long term, corporations that want to stay competitive need to look further than their employees; they need to look at all their stakeholders, many of whom are struggling small business owners or unemployed small business workers. In other words, businesses need to take stock of “the whole ecosystem,” as Henisz puts it. “I do believe that, in the recovery, firms that attended more to their customers and their suppliers will have an easier time getting back up and running and will have more sustainable runways as they do that,” he says. What’s more, Henisz believes there will be financial returns for companies who take such a holistic view.

Which isn’t to say it will be easy. Our collective ecosystems are in desperate need of help as the U.S. suffers its worst job loss since the Great Depression. By the third week of May, 38.6 million people had filed for unemployment since the start of the shutdown in March. About 23 million were laid off from small businesses alone, which employ 47 percent of the American workforce.

“I used to say, ‘I went to sleep at night worrying about half of America’s jobs.’ And you see this today when you see those unemployment numbers roll in,” says Karen Mills, former administrator for the Small Business Administration under then President Obama and current senior fellow at Harvard Business School.

Mills estimates that the U.S. will lose 20 to 30 percent of its small businesses as a result of the pandemic. She further points out that communities can’t fully recover without support for the small businesses in their ecosystem. It helps to have big business partners lend their organization and expertise in this critical set of days and weeks. “Be a partner to your small suppliers,” she says. “Pay them early, give them a loan, and help them be there for you.”

Mills has been keeping track of the progress of the SBA’s Paycheck Protection Program loans. After she watched big banks overlook the smallest businesses, she worked with fintech companies like Square and PayPal to help extend loans for everyone. “I think they don’t get enough credit for stepping up with the attitude that they were going to solve this problem for these critical folks in their community—at scale and fast,” says Mills. “There was definitely, among these leaders whom I spoke with, a commitment to the community.”

As director of KPMG’s Board Leadership Center, Scott Flynn also takes the long view: When the crisis is over and people have a choice again of where they want to work and buy, they’ll remember how companies behaved. “I think focus on ESG right now is potentially even more important than what it has been historically because of how dramatic these circumstances are and how visible their reactions and actions are,” he says. Companies making the hard choices in the short term, like permanently raising their workers’ hourly pay, will be better off three years from now than companies that cut costs and employees, argues Henisz. “Those are the companies that are enacting the values that I’ve been describing during the crisis,” he says. “They’re not sacrificing the long term for the short term.”