The unrest in Washington last month not only exposed rifts in the nation’s political culture, but it also put pressure on business leaders to articulate a position about the turmoil in a way that only recently would have been hard to imagine.
Now, as the political discord continues following the impeachment trial of former President Trump, businesses are still wrestling with the right way to respond.
The recent unrest has put a renewed focus on the governance part of ESG.
Rarely, if ever, have business leaders faced this kind of pressure to take a political stand, both from outside their organizations and from within. In normal times, the usual approach has been to remain as neutral as possible, in part to avoid alienating customers.
But these are not normal times, and some prominent business leaders and organizations have now broken with that practice. This shift, in turn, will increasingly be felt by middle market organizations.
It all puts renewed focus on how businesses carry out their commitment to environmental, social and governance practices, or ESG — particularly on the G — and how they respond to events that carry significant risk.
In the wake of the unrest last month, some of the nation’s biggest corporations and most prominent industry groups condemned the violence and the former president’s role. Many corporations have suspended campaign contributions while they review their policies on political donations.
These public positions not only carry obvious risks for the businesses and groups, but they also present opportunities for organizations to uphold their societal commitments, especially those articulated in ESG.
The forgotten part of ESG
Governance is often the overlooked letter in the ESG acronym. It includes business ethics and transparency, competitive behaviors, management of the legal and regulatory environment, critical incident risk management and systemic risk management.
The interaction of governance factors with environmental and social risks is often unavoidable — poor governance can leave a firm vulnerable to environmental and social risks, while strong governance can lessen that vulnerability.
It applies to a range of areas that are fraught with risks for companies — think of climate change, or conflict minerals. Virtually any area that carries risk, and how a company responds, will be guided by a company’s approach to governance.
In a sense, without a strong G, a company will have a harder time implementing effective approaches to the E and the S.
Consider the challenge of deciding when, and how, to make campaign contributions, a decision that many companies are now facing.
Supreme Court Justice John Paul Stevens, writing in the Citizens United decision in 2010 that effectively lifted limits on corporate political contributions, recognized the importance of companies being engaged in the political process, and the value of that engagement to an enterprise.
“Business corporations must engage the political process in instrumental terms if they are to maximize shareholder value,” he wrote.
Yet political contributions also carry risks.
“These risks extend to a company’s reputation, its employee relations, its customer and shareholder relationships, its legal footing, and attainment of its business strategies,” Harvard Business Review outlined in 2015.
In the end, it comes back to governance and the need for directors to exhibit independence, experience and an ethical compass.
Smaller and midsize companies are hardly immune to these risks, and the need for strong governance. Employees and customers pay careful attention to how a company responds to events like the recent turmoil in Washington.
A clear, reasoned response that reflects the values of the company and senior leadership will only reassure stakeholders about what the company stands for and its mission. Conversely, a weak and muddled response will only serve to confuse, and, potentially, alienate stakeholders.
Without strong governance and clear leadership, the company risks losing nothing less than its credibility with customers, and trust with the workers who make the enterprise go.