New Decade, New Focus: The role of business is to be in business
JOHANNESBURG – Milton Friedman, the economist, said that the only social responsibility a corporate has is to increase profits within the rules of the game. In simple terms “the role of business is to be in business”. One cannot think of a more germane time than now to puncture that theory.
By focusing on our future, we need to prioritise tomorrow by concentrating on environmental, social and governance (ESG) factors. The next decade will be defined by embedding ESG into your business strategy and making decisions mutually inclusive. Companies should begin to consider those externalities attributable to the sectors they operate within and internalising them. Measuring the impact of decisions is a smarter game for the long term.
Mercer, Alexander Forbes’s strategic partner, released a survey entitled “Global Talent Trends 2020”. The findings of this survey demonstrate that companies are rebooting balance, purpose and profit, spurred by younger generations’ concerns, government directives, investor requirements and business leadership.
The new decade starts with a refreshed mandate: “Executives’ concern around demand for ethical products has risen 40 percent in two years.”
The survey states that 75 percent of companies that have ESG metrics embedded into the chief executive’s agenda report revenue growth of more than 6 percent. In addition, 72 percent of CEOs with ESG responsibilities believe their organisation is change-agile.
In 2020, we have witnessed leaders – and of course the average citizen in society – being summoned to take action across government, corporates and public health service. We collectively grapple with the new normal. We tap into emotional quotient balances and sharpen toolkits so that we can respond respectfully.
A company should have the following it its quiver:
Strong appreciation for ESG factors
Companies with stronger ESG credentials place value on externalities, link them to their strategy and operate accordingly. Whilst ESG track records are ripe for debate, evidence exists to show that well-governed, responsive businesses endure market troughs better than their riskier counterparts.
Capital allocation response plan
Companies that consider stakeholders more acutely now stand to have a stronger workforce, client base, commitment and so on. Intangible value-add is preparation for recovery after Covid-19.
Dividends and share buybacks
Use cash distributions effectively in managing operational expenses. In the short term, dividend or buyback cuts might suggest a pecking order between shareholder and stakeholder. In the longer term, the market will place greater weight on the strength of a business model.
Business continuity plan (BCP)
A comprehensive, practical yet evolving plan outlines a playbook in the event of business disruption.
Effective corporate governance in the form of a balanced, diverse board may prove useful when addressing softer issues like employee engagement and morale. Stakeholders look for evidence when assessing if companies have window-dressed their responses.
Rehiring costs way more. Companies will have to weigh up retrenchments, salary adjustments, and executives’ compensation plans in light of the cash reserves in place and legislative environment in a country.
The value of a business after Corona
Companies will be measured by their agility at this inflection point. Flexible methods of work, embracing trust and valuing employee loyalty become the norm. Business preparedness becomes an agenda item on management committees.
We think that whilst these are robust responses in the short term, there are two more nuggets to note:
- The clarion call for climate change strategy and a company’s response to United Nations Sustainable Development Goals (SDGs).
- The companies of tomorrow will add long-term value, not by marketing ESG and philanthropy but by linking their strategy intricately to externalities that affect the business. Consider Covid-19 your dry run. Business is unusual.
Premal Ranchod CA (SA) is a senior manager research analyst and ESG champion at Alexander Forbes.