CEOs need a serious new mindset on global challenges
As the world becomes more turbulent, leaders of big business need to go beyond ESG and focus harder and deeper on a set of the most critical societal issues, write Daniel Litvin and Ian Davis.
This is a longer version of an article originally published in The Economist on 16 March 2023, published with permission.
The long-running debate about the societal role of business is currently generating far more heat than light. Angry attacks on ‘environmental, social and governance’ (ESG) activities by companies have been mounting from both those on the left (who see ESG largely as ‘greenwashing’) and right-wingers (who see it as corporate ‘wokery’). CEOs who once happily pronounced publicly on big societal issues, sometimes even usefully, are now more hesitant to do so, for fear of getting caught in the crossfire.
Meanwhile a set of profound societal challenges threatens to shift or upend the long-term operating context for many global businesses – to a degree arguably not seen for a generation. CEOs need to be thinking hard about these, even as they currently shy away from the public stage.
Consider just four of them. First, climate change and resulting moves by policymakers to accelerate the ‘energy transition’ will lead to a radical reshaping of many industries, even if at a slower pace than climate science suggests is needed. Second, growing geopolitical divisions, above all between China and the West, could wreak havoc with supply chains and other global economic linkages, particularly as the risks of outright conflict ratchet up. Third, new technologies, from social media to robotics to AI, seem set not just to unleash huge economic gains but also to create big new social and political strains. Fourth, the erosion of support for democracy in Western countries, together with long-brewing popular suspicions of big business, creates the conditions for further political turbulence. This sets the stage for populist or anti-corporate moves by governments.
Governments are floundering in their response to many of these issues. But the response of the private sector, for all the well-meaning ESG initiatives, is also inadequate, and much stronger on talk than action. Voluntary action to reduce carbon emissions, for example, is patchy. Many firms’ global supply chains remain largely unrestructured. (It seems to take the outbreak of war to trigger big shifts in this respect – hence the belated restructuring of European energy supply chains following Russia’s invasion of Ukraine.) Big Tech’s attempts to curb the societal ill-effects of new technologies are flimsy. Western multinationals profess support for democracy but have done little to bolster public trust in democratic institutions; some actively erode it through lobbying and political donations. Ongoing corporate scandals continue to taint perceptions of business.
Sharpening the focus for next generation ESG
Ironically, at least for some companies and CEOs, thinking about their societal role through the lens of ESG has become part of the problem. It distracts from the focused, hard-edged strategic actions now needed. Blurry ESG thinking encourages the idea that companies should build into their core business a broad range of issues and concerns which matter to ‘stakeholders’. But this risks organisational overload. For many companies, seeking to tackle too many societal goals results in few being managed in any truly strategic sense. It is easier just to talk warm words about them instead (in sustainability reports, for example), particularly those that may require substantive changes in business approach.
Moreover, ESG as an agenda has mostly been pushed on companies from the outside, by investors and NGOs (the latter sometimes doctrinally opposed to big business). It rarely galvanises internal energies as needed. Many companies, in turn, have been reactive, even pusillanimous, in accepting a set of simplistic, box-ticking ESG metrics pushed by investors and their influential service providers, such as proxy advisory firms (even though privately they have significant doubts about such performance measures). Much ESG activity is also premised on the idea that it is the interests of individual companies to behave well because of the long-term commercial benefits this should bring. Such benefits exist. But the idea creates an exaggerated impression of the incentives and capabilities of companies acting alone to solve broader problems in the absence of action by governments.
For CEOs of global businesses, a new mindset is needed – call it ‘next generation ESG’, or perhaps simply securing the societal foundations of the business. It should be built around the following three elements:
- Firms need to build an even deeper understanding of societal challenges, how they might evolve, and how they might impact the business. This should be a genuinely strategic exercise, unlike the ‘materiality assessments’ conducted by corporate sustainability departments whose main purpose is often external reporting. It needs to be led by the CEO and their leadership team, and overseen by the board.
- Companies should focus more narrowly on the few societal issues that are most critical to the business. Identifying those issues should be considered a fundamental responsibility again of the C-suite and board, akin to a company’s strategic portfolio choices. Management of these issues in turn should be driven deeper into corporate strategy. The aim should be not just to strike a position on them, but to tackle them effectively from the perspective of the company’s long-term interests. A narrower focus means less risk of distraction or wading into peripheral issues where the company’s legitimacy may be called into question. For those issues, full compliance with the law should be the watchword. On the strategic societal issues, by contrast, fundamental business changes may be needed, whether to the company’s products, its portfolio of assets, its key relationships, its supply chain or its internal controls.
- Recognising their limitations, companies should look to support and mobilise more powerful coalitions, with governments at the core, to help tackle the issues. The rationale should be protecting the long-term foundations of the business, not signalling virtue. It is true that the ESG movement has already spawned an array of voluntary ‘multi-stakeholder initiatives’. However, many of these are loosely defined and lack government enforcement, with mixed impact as a result.
Deeper strategies – from decarbonisation to geopolitics
This sort of deeper, more focused approach will help CEOs to concentrate on the highest-impact actions needed on the biggest societal problems their companies face or have helped unleash.
Technology giants, for example, would step up collaboration to develop stronger industry norms of behaviour, pushing regulators to enforce them, to head off potential societal strains and disasters from their latest innovations. They might have less bandwidth as a result for, say, climate initiatives but they would at least be focused on the core challenge for their sector.
Oil majors, by contrast, would need to focus with greater intensity on climate change. But rather than concentrating solely on setting tighter targets to limit their own production of fossil fuels (the main demand of ESG activists), these companies would aim to mobilise more effective coalitions to tackle the challenge at the global level. Among the highest-impact moves they could make, however difficult to pull off, would be to persuade state oil companies – which control most of the world’s hydrocarbon reserves – to consider future limits on their own production.
Deeper thinking is needed on geopolitical divisions, too. It would probably lead companies to step up their efforts to make their supply chains more resilient. While being careful not to overstep their legitimate role, CEOs would also engage more with governments as bridge builders to reduce the risk of international conflict. On the issue of popular trust in democracy, major companies surely would see merit in more ambitious initiatives to support good governance, both internally in their own organisation and externally in countries where they operate (while again being careful to avoid an overtly political role).
This is not fantasy. At various junctures in world history, large companies have mobilised powerfully behind or alongside governments to tackle big societal challenges. Just recently, the COVID-19 pandemic was brought under control through a vast mobilisation involving pharmaceuticals firms and governments. With cash and impetus from governments, drugs firms dramatically accelerated the development, manufacture and delivery of vaccines, saving tens of millions of lives.
Or rewind to the aftermath of the second world war, when an economically-devastated Europe was rebuilt and revived in part due to the Marshall Plan, a multibillion-dollar American government aid program, designed and delivered with significant involvement from leading American CEOs and companies. They saw it through the lens of enlightened self-interest: a way to resuscitate a vast foreign market for US goods as well as to help hold back the spread of Communism in Europe.
How today’s great societal problems are tackled likewise holds the key to securing huge amounts of long-term commercial value for global corporations. Away from the noise of current debates about ESG, today’s business leaders need a new mindset – serious, focused and ambitious – as they seek to grapple with these challenges.
Daniel Litvin is the Founder of Critical Resource, Senior Advisor to the Executive Committee of ERM, and author of ‘Empires of Profit: Commerce, Conquest and Corporate Responsibility’. He is also a Visiting Senior Fellow at the Grantham Institute at LSE.
Sir Ian Davis is the former Chairman and Worldwide Managing Director of McKinsey & Company. He was also the Chairman of Rolls-Royce.
Both authors write here in a personal capacity and their views do not necessarily represent those of the Grantham Research Institute.