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How do you explain the a positive correlation between adherence to
The Business Roundtable, a non-profit association of the CEOs of America’s largestcorporations, has, since 1978, issued an annual Statement on the Purpose of a Corporation. Inprevious years, the statement put forward that the first and overarching responsibility of acorporation is the creation of wealth for its shareholders. But in 2019, the Business Roundtablebroke with tradition and put forward a statement that mentions shareholder value only fifth aftercustomers, employees, suppliers, and communities.Statement on the Purpose of a CorporationAmericans deserve an economy that allows each person to succeed through hard work andcreativity and to lead a life of meaning and dignity. We believe the free-market system is the bestmeans of generating good jobs, a strong and sustainable economy, innovation, a healthyenvironment and economic opportunity for all.Businesses play a vital role in the economy by creating jobs, fostering innovation and providingessential goods and services. Businesses make and sell consumer products; manufactureequipment and vehicles; support the national defense; grow and produce food; provide healthcare; generate and deliver energy; and offer financial, communications and other services thatunderpin economic growth.While each of our individual companies serves its own corporate purpose, we share afundamental commitment to all of our stakeholders. We commit to:- Delivering value to our customers. We will further the tradition of American companies leadingthe way in meeting or exceeding customer expectations.- Investing in our employees. This starts with compensating them fairly and providing importantbenefits. It also includes supporting them through training and education that help develop newskills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.- Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners tothe other companies, large and small, that help us meet our missions.- Supporting the communities in which we work. We respect the people in our communities andprotect the environment by embracing sustainable practices across our businesses.- Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement withshareholders.Each of our stakeholders is essential. We commit to deliver value to all of them, for the futuresuccess of our companies, our communities and our country.This change in focus reflects a growing understanding that business exists within a broader socialcontext and that, for any given business to be successful, it must adapt to changes in that socialcontext. The ESG (Environmental, Social, Governance) framework has been put forward as anew way for organizations to conceptualize their activities in the marketplace.Environmental - There is growing concern, particularly among corporate leaders, thatenvironmental change poses a risk to the world economy. Business activity uses energy andnatural resources, discharges pollutants into the air and water, and depends on employees andcustomers whose physical well-being depends on a healthy environment. And so, a focus on anorganization’s relationship to the environment is of fundamental importance.Social - Business exists within a broader social context including workers, customers, suppliers,and other stakeholders. The successful organization recognizes that its own well-being dependson that of its workers, the solidity of its supply chain, and the health of the communities both inwhich it operates and serves.Governance – Finally, business success depends on a solid internal governance model. Firmsmust have in place a formalized decision-making process that is compliant with the legal andregulatory environment and considers the long-term impact on shareholders and other relevantstakeholders. As this diagram demonstrates, adherence to an ESG framework is positively correlated withoverall financial performance. It’s difficult to determine whether attention to ESG concernsdirectly contributed to the superior performance. But a November 2019 McKinsey report positsfive ways in which an ESG framework can create value for an organization.Top-line Growth – Attention to ESG concerns improves the relationship between theorganization and its customers, regulators, and community resulting in increased sales revenue.Cost Reduction – Reduced energy use and attention to decreasing resource intensity reduceoperating cost and operating risk and so improve operating margin.Reduced Regulatory Costs – Pro-active attention to regulatory concerns reduces fines andlitigation expenses as well as improves relationships with local, state, and federal governments.Productivity Improvement – Improved job satisfaction and more successful hiring increase laborproductivity and worker retention.Investment Optimization – Attention to ESG directs firm investment activity toward moresustainable investments reducing stranded costs later on. Attention to the broad impact of a firm’s activities on all relevant stakeholders is consistent withour value creation paradigm. Profit and social benefit are both by products of businessefficiency. But ESG appears to go further by treating the pursuit of “social benefits” as equal tothe business with that of profit seeking. But this equality of treatment may simply reflect therealization that the sustainability of profit requires a healthy environment and society forbusiness to operate within.