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S2_Ep8 Disclosure is Not the Same Thing as Action with Alison Taylor of Ethical Systems

Transcript

Michael Young:

Welcome to the Purpose, Inc., the podcast where we discuss corporate purpose and stakeholder capitalism. I'm your host, Michael Young.

Just when I think I'm starting to understand the issues and ideas around stakeholder capitalism, ESG, or DEI, I'll open my Twitter feed and discover an article by my guest today that forces me to completely re-examine my thinking. It's quite wonderful actually, and that's exactly what happened recently. My guest today is Alison Taylor. She's coming back to the podcast for a second appearance. And Alison is the executive director of Ethical Systems, a research collaboration at NYU Stern School that looks at business ethics primarily as the name would imply. And she comes back today to help broaden our understanding of the ethical, moral, and conceptual boundaries around stakeholderism, ESG, purpose, and DEI. And Alison wrote two pieces, both of which I'll link in the show notes.

The first in The Wall Street Journal entitled, “So Many Stakeholders: How Do Companies Choose Who to Satisfy.” And in that article, Alison sets out a framework for how organizations should determine relevance and prioritize the issues that impact their business. It's a very tidy two-over-two matrix approach, and I quite like it. It's a very, very well thought out article and approach.

And then again, in Quartz, Alison argues interestingly and I would say uniquely that disclosure is not the same thing as doing something to close the gaps in and around diversity, equity, and inclusion, that there's been more and more and more disclosure but the gaps persist whether those are gender, racial, pay equity, representation throughout the business, that those gaps persist and yet more and more is being measured.

So again a very, very interesting point of view. And then I also heard Alison on another podcast with her colleague Jonathan Haidt also of NYU talking about business ethics more broadly, and we touch on some of that in our conversation today.

So as always, Alison is precise in her analysis, withering in her criticism. She's one of the most quotable people I've ever spoken to. It's with great pleasure that I welcome Alison back to Purpose, Inc. Alison, thank you so much for coming back on the podcast.

Alison Taylor:

Thank you so much for having me back. It's wonderful to be here.

Michael Young:

Fantastic. All right. A lot to talk about, lots, lots, lots. So first up, I thought if you could unpack for us the argument you made in The Wall Street Journal under the heading, “So Many Stakeholders: How Do Companies Choose Who to Satisfy.” And in that, you had some very practical advice and a framework for how to do it.

Alison Taylor:

Absolutely. So I would start off by saying, as I'm sure your listeners are very well aware, we've had this rhetorical shift away from the Milton Friedman shareholder value model and towards this idea that we should do business for the benefit of all stakeholders. This was what the Business Roundtable famously said in 2019. We will work for the benefit of customers, employees, suppliers, communities, and investors. And they put investors last. And the point of my article I suppose is that it is very easy to say we're going to work for the benefit of all stakeholders, but it's almost entirely meaningless in practice because not everything is a win-win. Responsible business people like to make the point that doing the right thing is very profitable over the long term, but that is not at all the same thing as saying we can satisfy all of the stakeholders all of the time. And if you are a leader in any business, you need to regularly make decisions about who am I going to offend and who am I going to disappoint and who am I going to satisfy. And so I think by having this slightly banal conversation about we’ll satisfy everybody, companies feel trapped in this idea that they have to keep everybody happy and they can't be explicit about how they prioritize issues and how they prioritize stakeholders.

And then I suppose the other point I'm making in the article is that today if you open the news, you will see that big businesses are under pressure to do the right thing on climate change, on supply chain oversight, on diversity and inclusion, on racial justice, on inequality, on protecting democracy. And the net result I believe of this is that we tend to conclude that big businesses are total hypocrites because the reality is you cannot have a deep all-encompassing strategy on all of these issues and still do the core job of running your business. You have to prioritize a few issues and work on those deeply and properly so that people do not see this as a shallow PR exercise. And so my article is about how to think about those priorities and how to think about who you satisfy and who you offend and to put some rigor around that and really try and evolve the conversation from this idea that you can be everything to everybody at all times, which we all know, if we think about it for one second, is not true.

Michael Young:

Absolutely. And you dip into right away relevance and materiality. And so how should organizations think about that and frame the issues that they are going to pay attention to? And where do they gather those insights and then how do they prioritize those?

Alison Taylor:

Right. So I think what I would generally suggest is that you need to start with the landscape of possible issues that are relevant to your business and relevant to your stakeholders. So you create a long list let's say of all possible issues. You can get those from reporting frameworks. But one of the problems I think we're seeing now with the rise of ESG is that everything is now run around reporting and disclosure. And so the average company will be expected to disclose on let's say 30, 40, maybe hundreds of metrics. But of course, you can't be a leader on every one of those issues. So I would say start off with the full landscape of relevant environmental, social, and governance issues that you have to deal with. And then what you want to do is create a two-by-two like any good consultant. In the top right are the issues that are highest priority to your external stakeholders and highest priority to your business. And I'm advising that there should be a maximum of five issues. I prefer there to be one to three. And those are the issues on which you're really going to go deep, you're really going to differentiate yourself, you're really going to outwardly message for the people that aren't tracking what you're doing that closely but want to know what you stand for. And you should not try and do that on 30 issues. You will be incoherent, and you will sound like a hypocrite. But you should try and do that one to three and really have an aspiration. I think of being a leader and making a difference on those issues that are also directly relevant to your business.

This approach will also allow you to identify issues that may be very relevant to your stakeholders, perhaps to your suppliers or NGOs or your employees. But maybe you're not business critical, and you very often see issues—or not perceived to be business critical. I should clarify there. You very often see issues there that are very important to stakeholders like climate change and human rights but where the company hasn't quite figured out what to do and doesn't have a strategy. And then there will be issues that the business perceives as very, very important and that stakeholders don't care about at all, and that may be an issue either with how you're framing and what you're doing or they may be issues that are just a big internal fuss but actually aren't that significant. And then finally there are issues where you need to be prepared with a response, but you shouldn't try to be a leader. And so if you can put your issues into these four buckets, you will have a much clearer idea of where you lead and where you're on the front foot, where you need to play defense and where you might have issues with your messaging or strategy.

Michael Young:

And you make, Alison, a point about young employees and in some cases, maybe out ahead or at least have very strong ideas and opinions about what the corporate values should be because they want their careers to sync with those. How much weight do you put on external versus internal?

Alison Taylor:

Well, one of the things I think that has been super fascinating about I'd say the last five years but accelerating over the past two is the rise of employee voice and employee leverage. I think there is a very strong case now to say that your employees are your most significant stakeholders. If you even look at a company like Facebook where obviously the investors and the CEO have enormous amounts of power, the only thing that really seems to move the needle for Facebook is employees making public statements and comments about their dissatisfaction with the culture and leadership. So one of the things I think that's happened that is super interesting when we think about business ethics and values is that—you asked a question about internal versus external—increasingly that division between internal and external is kind of melting away because what you now see young employees doing is they're less inclined to call the whistleblowing line or stay and be dissatisfied and they're far more inclined to leak confidential information to the media, to start Instagram pages and hashtags. Lots and lots of employees after Black Lives Matter and racial justice reckonings last summer created Instagram pages or Twitter feeds saying whatever this company is saying about their values around diversity, this is what it's actually like to work here, and it does not align with this message. So what we're seeing I think overall is companies finding it much, much harder to craft their reputations and craft their outward messaging, and they're being forced to have a much more interactive dialogue with their stakeholders and be far more responsive. And employees are so interesting because regardless of what they're paid and the amount of leverage they have in the labor market, they have the ability to take confidential information and put it out there in the public domain, and that can render companies really, really, really vulnerable. So this idea I think that you can create a barrier around your organization and manage your reputation via PR strategies is fading because those walls of confidentiality that you used to be able to maintain are melting away through a combination of social media and the rise of employee activism.

Michael Young:

That's a really interesting point about the asymmetric power that employees have today. And if we could then pop over to your thoughts around disclosure and how another form of seemingly highly important and beneficial activity, disclosure around ESG, DEI, etc. has almost become a substitute for action—and I'm using your words—and not a driver of it. How are you thinking about that and what are the issues underlying that?

Alison Taylor:

Yeah. So I think this is a really interesting and fraught area. So if you are a responsible business practitioner as I am, you tend to see enormous amounts of dialogue and enormous amounts of effort around company transparency and disclosure. And that's for very good reason, right? I mean how can you hold a company accountable on an issue like diversity or climate change or any of these issues if you don't know what they're doing and they can keep that a secret? And we've already talked about how that confidentiality is much, much harder. But what I think a very common mistake to make is to say transparency and accountability as if it's one phase, as if transparency automatically leads to accountability. And I don't believe it does, and I don't believe there is a direct causal mechanism there. The examples I use in the article is that we have needed to disclose on the pay gap between the CEO and average employee since I believe 2013. During that time, the CEO pay gap has got worse. We have needed to disclose on various other diversity issues. Nothing is getting any better there. And so it's unavoidable I think really to look at companies are now putting a lot of effort into disclosure at the expense of actually doing something about climate change or diversity and inclusion.

If you look at how companies are assessed and measured on these efforts, a lot of ESG indexes actually just look at the quantity of disclosure, not the quality of it. So as long as you're disclosing something, you get points with investors. And so really this means you can game the system, you can, in the words of The Wire, juke the stats. And then I think my bigger concern is that all this energy and effort is going into gathering this data. I work with many, many reporting teams who spend all year gathering and assessing and assuring this data. That's what PWC and others I think are betting on when they say they're going to hire 100,000 people in ESG and invest $1 billion. They're betting on this assurance and disclosure industry becoming this huge area. But I suppose I just want to ask the question, is this really the best use of all our effort given that the world seems to be burning and flooding and we only have a limited number of years to solve the climate crisis? And at the moment, we are rewarding the quantity of disclosure and not the quality. And that traveling from transparency to accountability and change, we seem to have got very stalled of the disclosure and not the actual change. And having seen all of this work for a very long time, I think if you give companies metrics to report on, they immediately put all their effort into making those metrics look as good as possible and not actually doing the right thing. Something else I'm seeing is that very often the leading companies that disclose the most get punished the most by activists because they're easy to target. And so I think I'm not for one moment saying that transparency is bad and disclosure is bad, but I worry that we are going to spend the next decade perfecting quote-unquote our ESG metrics. And we don't have that long, and getting ESG metrics right is incredibly challenging at the best of times.

Michael Young:

And the point about no good deed goes unpunished I think is important here because, again, back to the balance of power and if an organization is disclosing say pay equity or DEI actual versus goal, it seems they are quickly pilloried without much, much reward. So where should organizations be focused when it comes to disclosure and transparency? You made a very strong case for relevance and materiality. Within disclosure, is that the look? And so that's one question. Then I do want your thoughts on tying CEO compensation to the achievement of diversity, equity, inclusion, climate, good governance, pay gap, things like that.

Alison Taylor:

Sure. So on the question of disclosure, yes, I think you absolutely need to be driven by materiality. This really takes us back to The Wall Street Journal article about what you prioritize and don't imply or suggest you're doing amazing ambitious things on 40 things because you aren't. You don't have the bandwidth or the people or the budget. Pick three and do them properly. If one of your three is diversity, equity, and inclusion, it is not enough to look at the number of women on your board or the number of—people keep saying diverse people which is driving me crazy. I don't think people can be diverse—but the racial and gender composition of your senior leadership team. You need to also look at your hiring processes, your promotion processes, your rewards, your community investments, what you are doing or not doing about things like cultural fit and employee referrals, whether you set various criteria for diverse suppliers, etc., etc. So if you're going to do these things properly, it needs to be a whole organization effort. Oh, the political candidates you fund would be another issue. And so to suggest that you can go that deep and broad and all these efforts involve the whole organization on more than a handful of issues I think is not convincing. So I would suggest doing a few things and doing them properly, and then meeting median assumptions for everything else. And I would suggest being clear and honest about that.

Something else I would say on disclosure is that I think members of the public and investors and activists are all absolutely sick of reading these very glossy brochures full of smiling children and your one female employee smiling away as well and sort of here are all the amazing things we did, here are our green ticks, here how much we exceeded our goals. Well, if it's that easy, you're not doing that good a job. And so I think there needs to be a little bit more transparency and honesty around the challenges that you have, why these are challenges, what you are doing to address them, and why it's not that easy. I think we need to have a less simplistic conversation, and we don't get to have that conversation if companies are treating all this as like the paramilitary wing of the marketing department and like a sort of stealth PR exercise because I don't think anybody is convinced by that. I think we've moved on. We know that things are much harder than that, and I think we are losing the opportunity to have a grown-up conversation about what it takes to be responsible. And if a company is not perfect, we critique them. But you're absolutely right. Very often the companies that perform best get the most criticism, not least because activists tend to target the best performers and the worst performers for change. So the strategic thing to do is keep your head down and be in the middle of the pack. But I don't think that's going to help us address any of our social or environmental challenges.

Michael Young:

The point about the say-do gap in lobbying is one that you've made, and you touched on it there with what packs are being funded. It seems like an obvious thing that organizations should get alignment around. Why are they out of shape there? Is it just simply they're serving shareholder interests and economic value creation? Why is it that organizations seem tone deaf on that very topic of we're saying one thing in the glossy sustainability report yet we're lobbying for something else?

Alison Taylor:

I think it's a great question. I'm in the early stages of writing a book on this exact topic. But my broad point would be what we currently call business ethics is not so much to do with really figuring out how to make ethical decisions and it's more to do with a set of defenses to deflect regulatory and reputational risk. So we do not currently in our organizations, in most organizations—there are some leading companies that very much are doing this—but most organizations think in terms of siloed defense mechanisms. So you will have the compliance officer whose job it is to set policies and procedures, and if the regulators come knocking, you say, well, look at my great training program. We have people that write these reports and gather this data. And then we have people in government relations whose job is to get favorable regulations and look neutral across the board, or at least that used to be the goal, and donate to the politicians that are going to either fight against regulation or be willing to design favorable regulations for you. And so that's very much shareholder driven. And everybody's doing their job and fulfilling their own goals, and the net result is that the company is putting out a completely incoherent message. So if you read the corporate responsibility report and then you read the 10k or the annual financial report, you usually will get the impression you're reading about two entirely different companies in entirely different businesses. And so because of some of the trends I was talking about earlier and the rise of social media and employee activism and it's just become far more difficult to keep secrets, I think there's now a new imperative to think about what you're disclosing and what you're saying and indeed what you're doing across the board and think about ethics and integrity in a more strategic and holistic way. And I am seeing some organizations start to do that. They're appointing leaders whose job is not just compliance or risk or public affairs, but they have ownership of all those functions. They're creating task forces. Salesforce would be a really good example of a company that has a senior leader that is thinking about the long-term ethical implications of their product development. So that's not a purely compliance driven reputation-driven exercise. They're actually thinking about their long-term social impact, and they are designing their products and thinking that through which is exactly what I'm talking about when I say a strategic approach to ethics. So I think we will need to start seeing that whether that is about where you are supplying from, where you are selling to, what your values and priorities are. You cannot afford I think anymore to be as inconsistent as companies typically have been.

Michael Young:

Yeah. Well, one is just a reflection on the biblical injunction of serving two masters I suppose. That's coming back here. Side note, side note. But maybe, Alison, in the last couple of minutes here, and you mentioned Salesforce, are you at all hopeful around the premise of ethical business practices? Do you think that we are moving positively or at least moving in that direction? Or are we just in this sort of era of adolescent awkwardness and hand waving and PR? And I'll actually have you back on to broadly indict PR since I am a resident of that galaxy. But just summarize for us is it possible and are we going to get there? And maybe that's asking you for a future prediction which is entirely unfair. But if you just look across the landscape as you do, there are a few bright shining lights out there, but how do you think about our collective future on these topics?

Alison Taylor:

It's a wonderful question. I'm not dumb enough to try and make a prediction, but I will say a few things I think are going on. The most obvious thing that I'm sure your listeners will have seen and be very interested in is obviously this exponential rise of ESG investing and the ESG kind of craze. If you go on LinkedIn, everybody that's not rebranding themselves as a DEI expert is rebranding themselves as an ESG expert. And a lot of this momentum has come from the idea from shareholders that if you prioritize ESG issues, you make more money over the long term. So I think there is now this kind of conversation going on. And if you read The Financial News, you'll sort of see people saying, well, is the ESG bubble going to continue? Will outperformance continue? And if it doesn't, the implication is the entire ESG project loses credibility. So with this, you can see we've entirely lost sight of the point because the point of ESG is to de-prioritize short-term shareholder value. And instead, many, many, many, many brilliant academics—there are tens of thousands of studies—are spending a lot of time trying to figure out if ESG ratings correlate with financial performance over the long term when the ESG metrics aren't very good and this is not, in fact, what ESG was originally designed to do. So that's one conversation that I think is a little frustrating. But many, many people are kind of making the same point I'm making which is that all these companies are disclosing and everybody reports and everybody says how great they're doing, and yet climate change and inequality continue to get worse and CEO pay continues to rise. So I think there is a need to get back to fundamentals.

I think the other thing I would say is that many business leaders are well intentioned and want to do the right thing and do want to lead in a different way. And there is not that much good advice on how to do that partly because we are so siloed into PR and compliance and government relations and all these different defensive functions and partly because all these areas have a big industry of people saying it's easy and everything's a win-win which it absolutely isn't. So I think we are in a position where we are maybe able to have a conversation now which is—I think that it's rude and this is probably worth another conversation as well—about what is the responsibility of business and what is the responsibility of government and should we really be expecting businesses to take stands and solve all our social problems or have we really got off track because democracy and politics has become so dysfunctional? I would like to see that conversation happening. And then I think also from the rise of CEO activism, I think we are in more of a position to have a conversation about what businesses’ fundamental commitments and obligations should be. But none of those things are easy. I mean if you look at the coverage on Uyghur labor and working with China, that puts companies into very, very difficult strategic geopolitical and supply chain oversight dilemmas that are not easy to resolve. And I'm not sure that we're able to have those honest conversations at the moment because we're treating all this stuff like an extension of PR. So I won't predict what's going to happen next because I think you can see all these forces at work and some of them play against each other and we're not sure where it's all going to go. One thing I am fairly certain about is that scrutiny of political relationships and funding and lobbying and tax responsibility is going to become exponentially more important for investors in the general public over the next five years. So I think that is a real emerging area of pressure for companies, and I feel fairly confident in that prediction.

Michael Young:

Well, that in and of itself is hopeful, right? Because if we follow the money, then we will see real, real change in the future.

Alison Taylor:

I think that's right. There's interesting data showing that there is an almost perfect at the moment inverse correlation between having a high ESG score and your effective tax rate. Because one of the dirty secrets of these ESG indexes is they tend to be very overweight in technology, and tech companies don't pay any tax. So that really is an example of how I think we're missing the wood for the trees on disclosure. Perhaps where we ought to end up—I won't give an opinion this—is if companies pay their taxes and create good jobs, maybe that would be better for the world than them spending all this time and effort trying to get the right data for all these ESG metrics. Just an idea that that could be a better use of time, energy, and money.

Michael Young:

Just an idea. Alison, thank you. This has been fantastic. It's always great to talk to you. I'm thrilled to do this episode with you, and we will definitely be talking again soon. Thank you again.

Alison Taylor:

Thanks so much for having me.

Conclusion:

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