CEOs should think twice about transparency

BUSINESS is under intense pressure to embrace social responsibility. Asset managers allocate billions on the basis of ESG (environmental, social and corporate governance) scores. The public trusts business more than politicians to solve social problems. Activists beat the drum of corporate responsibility more loudly by the day.

Yet, the idea of ethical business is a conceptual and practical minefield. Companies such as Unilever that take the lead are often slammed not just by investors but also by activists. Conservatives are pig-wrestling mad about “woke corporations”. Governments exploit corporate activism as a way of handing social problems to the private sector.

How can sensible people find their way through this maze? A new book by Alison Taylor, Higher Ground: How Business Can Do the Right Thing in a Turbulent World, provides the best guide that I have read so far.

Most chief executive officers these days claim to believe in “stakeholder capitalism” – the idea that companies should engage with all their stakeholders in order to secure a licence to operate. But who is not a stakeholder in this scenario? And how do you weigh one interest group against another? This approach risks giving every business unlimited liability for the world’s problems.

ESG suffers from the same defect. In March 2022, Philippe Zaouati, the CEO of Mirova, the ethical investing division of Natixis Investment Managers, described Russia’s invasion of Ukraine as “one of the most important ESG issues we’ve ever had”. ESG deals in the spurious precision of indexes and numbers, but in fact, it is a conceptual mess that combines things that do not necessarily go together and then throws in anything else that comes to mind (cybersecurity, criminal justice, migration, public health).

Some CEOs have gone further than stakeholder capitalism and embraced political activism. Marc Benioff, the CEO of Salesforce, even told CNBC that corporate leaders “need to take direct action”, whatever that might mean, on social issues such as gun safety and abortion rights. Such a strategy not only exposes them to the risk of being “Disneyed” (Bob Chapek, the CEO of Walt Disney, lost his job after venturing into Florida politics), but it is also hypocritical. Corporations routinely spend heavily, through political action committees (PACs) and trade associations, on supporting politicians who advance the very opposite of woke agendas.

Given the threat of being “Disneyed” by wily politicians or forced to sign a blank cheque to society by voracious pressure groups, it is tempting to forget about corporate social responsibility entirely and go back to the good old days of Milton Friedman. Friedman argued that companies’ corporate responsibility is limited to increasing shareholder value. “Pursuing the common good” is just an excuse for indulging the CEO’s ego at the expense of the people who own the company.

The biggest problem with a reversion to Friedman’s world is that it can be self-defeating. Some 60 per cent of the market value of S&P 500 companies sits in intangibles such as reputation and trust. Shareholders have a direct interest in ethical questions. Friedman qualified his shareholder-first views by saying that companies have an obligation to obey the law. But “obeying the law” is not as fail-safe as it sounds when the US law is such a tangled mess, and you operate in dozens of different countries. Hong Kong-based financial service firms need to honour conflicting Chinese and US regulations.

The course that Taylor charts between these two extremes is not without some misdirections: she is kinder to fashionable buzz words such as “corporate purpose” than I would be. She thinks that the notion of “human rights” provides a sounder basis for ethical business thinking than ESG, when, in fact, it suffers from the same defect of vagueness.

But whenever she is in danger of giving in to enthusiasm, her practical intelligence kicks in. Taylor is a “clinical professor” at New York University’s Stern School of Business – she has spent decades advising companies on corporate ethics rather than just cogitating on campus. She is splendidly dismissive of happy-talk about doing well by doing good. Business decisions always involve trade-offs, and ethical decisions will inevitably mean making sacrifices. She fills her book with practical examples of companies struggling with ethical pressures and problems. She also provides, sometimes in passing, sensible suggestions of how to proceed in the real world: a world that involves constant trade-offs (no “win-win thinking”, please) and real dilemmas.

Here are the five suggestions that I found particularly notable:

• Fix the top of the company – No amount of “ethical talk” can make up for skewed incentive systems. The Wells Fargo fake-accounts scandal, which broke in 2014, resulted from the relentless push by top management on employees to hit unrealistic targets: in 2008, then CEO John Stumpf announced that he expected them to sell eight products a day because he liked the sound of the phrase “eight is great”. Companies in the United States are particularly prone to ethical scandals because their boards are so often beholden to CEOs rather than providing a robust system of oversight.
• Beware of virtue-signalling CEOs – CEOs who want to make their companies world leaders in “ethics” can be as dangerous as those who push their employees to hit unrealistic sales targets. At best, they waste corporate energy going after headlines. At worst, they turn the company into targets for activists who can never be satisfied: the more “responsible” you claim to be, the more criticism you are likely to attract. A study from Stanford Business School found that companies with more narcissistic CEOs tend to earn higher ESG scores – striking support for Friedman’s theory that do-goodery is often about the CEO indulging himself at other people’s expense.
• Do not overrate transparency – Transparency is the great cure-all of our age: whenever CEOs or government ministers are put under pressure, they call for “more transparency”. But some decisions are best made in private, and some facts (for example, about relative pay) are best kept secret. Transparency can encourage leaders to be more secretive about their decision-making. Alternatively, it can oblige them to engage in endless rounds of firefighting as every corporate decision finds its way on to Twitter. Ethan Bernstein of Harvard Business School talks of “the transparency trap”: the quality of people’s work is often reduced when they feel that they are being watched and monitored.
• Do not leave business ethics to ‘compliance’ – The compliance department is important for dealing with obvious ethical lapses and providing training in, say, financial rules. But it is a blunt instrument. The compliance approach assumes that the problem lies with providing information through (often generic) training programmes or, alternatively, with identifying and punishing “bad apples”. But an overemphasis on rules can undermine trust, by signalling that managers distrust their employees. Even powerful compliance departments are powerless against a sick corporate culture or a skewed incentive system. The CEO has a responsibility not only to send the right signals to the workforce but also to create a culture that values good behaviour.
• Prioritise – The problem with both the stakeholder approach and ESG is that they are so generic. Some companies are left confused (trying to please everyone), even as other companies exploit loopholes (tobacco companies can focus on decarbonisation when their core business is selling addiction to a lethal substance). Ethical companies need to focus on what really matters for their business rather than indulging themselves with fripperies: tackling abuses in your supply chain if you are a clothes manufacturer, or preventing the dissemination of deepfake pornography if you are Twitter.

The problem with the current debate about corporate social responsibility is not just that it polarises public opinion while feeding the general cynicism about institutions of all kinds. It is that it distracts attention from the core responsibility of companies. Excel at your core products, clean up your messes after you, avoid doing harm, look after your workers, and you’ve passed the ethics test.

The writer is a global business columnist for Bloomberg Opinion and author of The Aristocracy of Talent: How Meritocracy Made the Modern World