A press release on September 22, 2020 announced the publication of “COVID-19 and Inequality: A Test of Corporate Purpose” by KKS Advisors and the Test of Corporate Purpose (TCP) initiative. TCP was founded by Mark Tulay. I co-chaired this effort with Hiro Mizuno, former Chief Investment Officer of Government Pension Investment Fund, and Sacha Sadan, Director of Corporate Governance and board member of Legal & General Investment Management. The report is based on global survey by GlobeScan of 561 individuals and an empirical analysis of 800 large companies by KKS Advisors using data provided by Truvalue Labs. Here I will focus on the empirical research and tomorrow I will discuss the survey results.
On September 22, 2020 Peter Goodman of The New York Times wrote that“The study enhances doubts that corporations can be depended upon to moderate their quest for profits to pursue solutions to challenges like climate change, racial injustice and economic inequality. Skeptics argue that a single stakeholder will always retain primacy: the shareholder.” These doubts include many of the signatories to the Business Roundtable’s (BRT) “Statement of the Purpose of a Corporation.”
The survey found that only eight percent believe that the purpose of business is simply to generate profits for shareholders versus 92 percent for all stakeholders (See Figure 1). Much has been said over the past several weeks on the 50th anniversary of Milton Friedman’s famous letter to The New York Times about the purpose of business. In this survey, only 11 percent of corporates and 24 percent of investors agree. In the total sample, only 13 percent believe that corporates’ actions are matching their words about purpose; 44 percent felt there was some consistency and 43 percent felt there was no consistency.
The empirical analysis assesses how well companies are responding to the issues of COVID-19 and inequality. It helps explain why many doubt that companies are practicing what they preach when it comes to purpose. A global sample of companies comprising the S&P 500 and the FTSEurofirst 300 indexes as of July 17, 2020 was used to analyze the corporate response to COVID-19 and inequality. Also included were the companies who signed the BRT’s statement. The analysis was based “Insight scores” calculated through sophisticated artificial intelligence/big data algorithms using over seven million real-time data points from 115,000 news sources for the period January 2015 through July 2020. This methodology reflects broad public sentiment about each company and is not based on data reported by companies. These data were aggregated into COVID-19 and inequality performance metrics based on the relevant environmental, social, and governance issues developed by the Sustainability Accounting Standards Board (SASB). These scores were based on the SASB issues relevant to each topic and weighted based on their relevance to each issue.
The major findings of the study are:
· There was no significant difference between European and U.S. companies
· Companies with a good track record on COVID-19 and inequality issues performed better·
Companies that responded quickly to the COVID-19 crisis performed better throughout the entire period
· The BRT companies performed slightly less well on COVID-19 and slightly better on income inequality
Table 1 shows that companies with a proactive ESG strategy performed better on both COVID-19 and inequality in the period from the onset of the COVID-19 crisis on February 21, 2020 through July 17, 2020. A company was considered to have a proactive ESG strategy if it was in the top 20 percent of a score distribution for at least three of the five years for the period between January 2015 and February 2020. For the former, the impact was greater for European companies and for the latter it was greater for U.S. companies.
Table 1 shows that companies that had a rapid speed of response to the COVID-19 crisis, “Early Responders,” performed better throughout the period. Early Responders were identified as companies with positive COVID-19 Response scores (top 40% of distribution) in every week between February 21st, 2020 and March 23rd, 2020, which corresponds to the start of the S&P 500 downfall and the start of the recovery.
Finally, Table 1 shows that the companies that are signatories to the BRT statement (131 are U.S. companies and eight are European) underperformed on COVID-19 by a small amount and outperformed on inequality by a small amount.
The report includes an appendix in which all of the companies in the study are organized into quartiles, by alphabetical order within each quartile. The quartile a company is placed in is a function of four factors: (1) “Insight Scores” calculated by Truvalue Labs, (2) determination of the six SASB issues and their weightings for each topic, also determined by TruValue Labs, (3) COVID-19 and inequality scores calculated by KKS Advisors using these data, and (4) the scores of all other companies. Thus, these quartiles represent relative rankings. Quartiles were used to avoid any spurious precision from absolute rankings. Even then, the clearest distinction is between the first (top) and fourth (bottom) quartiles. It should also be noted that the quartiles are specific to COVID-19 and inequality. A company could be performing well on environmental issues but that was not part of this analysis.
The report also includes min-case studies which include some BRT signatories. These include Baxter International, SAP, and Willis Towers Watson (in the top quartile) and Amazon and Wells Fargo (in the bottom quartile).
The BRT certainly grabbed headlines last year when it published its statement. While this intent is to be commended, it is also fair to ask whether their deeds are matching their words. Studies vary on this point. The TCP study shows that these companies certainly aren’t outperforming against the chosen comparison group. A study by Linda-Eling Lee, Meggin Thwing-Eastman, Ric Marshall of MSCI and the paper “ Do the Socially Responsible Walk the Talk?,” by Aneesh Raghunandan of the London School of Economics and Shivaram Rajgopal of Columbia Business School also find underperformance by the BRT companies. On the other hand, JUST Capital has published a study which shows the BRT companies having better performance during the COVID-19 crisis on six issues important to stakeholders compared to the rest of the Russell 1000.
All of these studies—and certainly there are more to come—should be taken as indicative, not definitive. They use different types and sources of data, different time periods, and different comparison sets of companies. It is not surprising if there are different results, just as it is not surprising that a person can have a good cholesterol score but a poor blood sugar one. There are many variables in measuring the performance of anything and caution should be taken in overinterpreting any single piece of data or any single study.
Rather, the point of these studies is to provide insights on areas where companies need to do better on enacting their stated purpose and how to do so. The TCP report has a number of them in its “Call to Action.” The Enacting Purpose Initiative, which I co-chair with my Oxford colleagues Colin Mayer and Rupert Younger, has provided guidance to board directors and senior executives through the SCORE Framework. In my open letter to the BRT signatories I suggest three ways for a company to put ensure that it is being authentic about its purpose.
The first is a company-specific, stakeholder-inclusive “Statement of Purpose” signed by the board of directors. This is only two or three pages. If a company really is serious about purpose, this should be easy to do. Failure to do so shows lack of real commitment. An integrated report is how a company demonstrates that it is achieving its purpose. This requires better coordination between the finance and sustainability groups and is a good discipline for identifying the key metrics for communicating on purpose.
The third step, convert to a public benefit corporation (PBC), is the hardest but most significant one. It commits the company to a positive duty to stakeholders in addition to shareholders. A recent article, “50 years later, Milton Friedman’s shareholder doctrine is dead,” by Colin Mayer, Leo Strine, and Jaap Winter makes a compelling case that “corporate purpose has to be enshrined in the heart of corporate law as an expression of the broader responsibility of corporations to society and the duty of directors to ensure this.” Many U.S. states now have such laws, including Delaware, where many of the BRT companies (as well as many others) are incorporated. They explain “A PBC has an obligation to state a public purpose beyond profit, to fulfill that purpose as part of the responsibilities of its directors, and to be accountable for so doing.” All a Delaware C Corp needs to convert to PBC status is a majority vote by shareholders. A good way to test investors’ words about the importance of purpose in their portfolio companies.
Having struggled for many years, admittedly with very little success, to convince companies to publish a simple “Statement of Purpose” followed by an integrated report, I am not naïve about the reaction BRT and other companies will have to the suggestion they convert to a PBC. At the same time, I’m a bit perplexed about the fact that almost none of these CEOs got board approval for signing the BRT’s statement. Goodman’s article quotes Josh Bolten, President of the BRT, as saying that board passage was not required, because member companies have already embraced the statement’s principles. “It did not arise from nowhere,” he said. “The statement has to be viewed as both capturing an evolution and expressing an aspiration.”