Ethical behavior in corporations include anticorruption, sustainability, human rights, culture and behavior, and employee and stakeholder engagement.
This week Jean interviews Alison Taylor and Brian Harward.
Both Alison and Brian are affiliated with Ethical Systems, located in the NYU School of Business.1 Ethical Systems is founded on the principle that good ethics is good business. But is this really so? Is good ethics good business?
Alison is the Executive Director of Ethical Systems, having spent the last two decades consulting to multinational companies on risk, anticorruption, sustainability, human rights, culture and behavior, stakeholder engagement, ESG, and ethics and compliance.
Brian is an Organizational Psychologist and experienced full-cycle statistics/research consultant, specializing in advanced analytics and communicating actionable insights. His doctoral dissertation was on Effort-reward imbalance at work and realization of physical activity intentions.
Jean introduction 0:10
I found Alison and Brian through a publication they wrote called Incentivising ESG: What does it really take?2
ESG stands for environmental, social, and governance principles. The E stands for environment: climate (the climate crisis) and environmental sustainability, for example. The S is for social concerns: human rights, diversity, consumer protection, animal welfare. And then corporate governance includes employee relations, executive compensation, employee compensation, how the business is structured, how the business invests.
Just as a bit of background for some of you who don't know this: corporations used to think and say that their primary mission was to provide value to the stakeholders; in other words, to make money.
Let's start off with your backgrounds; what do you know about racial justice, social justice, what kind of communities did you grow up in?
I grew up in South London in the UK, in a very multicultural community. I moved from an environment that was very diverse to an environment that was much less diverse. And that experience has really influenced my entire career because what I saw was that there was no... I knew some highly intelligent people from very underprivileged backgrounds that didn't seem to have a lot of opportunity.
I was born in Dayton, Ohio, lived there for quite a long time. And there the diversity I would describe as pretty limited. When I went to college in Wright State, there was a really unique cultural experience there, because of a large number of immigrants.
Let's talk about ESG. First, Alison, please define it. What is ESG? And why should we care?
I would define ESG as what happens when the investment and financial services community gets hold of the idea of corporate social responsibility, or what used to be called sustainability.
The term sustainability, I believe, comes from the Brundtland Report,3 which I think was written in 1987 by the UN. And that has a definition of sustainability of working within the earth's natural resources, and also not undermining the ability of future generations to meet their own needs.
It was a definition around environmental responsibility and also tackling inequality and poverty, and so very much an agenda with a moral and ethical component. And that was also the era of socially responsible investing. So, the idea was that we ought to be deploying capital to solve some of these problems, but at the time, that meant a more constrained portfolio and it meant lower returns. In the 2000s the investment community started to all say, "Well, maybe if we do the right thing, and we do something environmentally and socially responsible, maybe businesses will make more money." And so, ESG is an effort to measure and codify those efforts in a way that is lucrative for the financial services community.
I'm getting some contradictory things here. On the one hand, it's a moral approach. On the other hand, the goal is to increase profits.
That movement had a very strong moral and ethical component, and it emerged more and more into the mainstream. And then in 2005, also, the investment community got ahold of this idea and started to look for ways to correlate environmental and social responsibility with making more money.
You said financialization of sustainability. Does that mean the moral imperative is gone?
Well, I think that investors, yes, are trying very hard to remove the moral component of this, they are saying that there is a long-term business case to fighting climate change. They say that more diverse teams get better financial results. They say that because the public wants to buy more environmentally and socially responsible products, there is a business case for going into this area.
I got you. Okay. Brian, is there a contradiction between the moral imperative and the financial gains?
Not necessarily. The opportunity was seen to say that we can do both, and so that it's been embraced, whether it is a contradiction kind of remains to be seen. I think if being more moral causes you to gain more business or causes your employees to perform better, it can be very consistent.
Businesses would like to deny that there's a contradiction because that is a very convenient message. And of course, as Brian has pointed out, sometimes there isn't a contradiction. Sometimes there is convergence between morals and money, and sometimes there isn't.
My professional diversity training [was] that you need to promote the business case for diversity, the business case for sustainability, or else corporations won’t do it.
The name of the article is Incentivising ESG: What does it really take? 4
Give us the bottom line of the answer to your question. What does it really take?
Well, I guess the problem you run into is when incentives are involved, we don’t know if things are being done any more for moral reasons or because of the incentives.
This is goal setting theory. I don’t know if you all are familiar with that. But this is Locke and Latham’s goal setting theory5 and how intrinsic motivation is undermined by extrinsic rewards.
If something is a sacred value that people hold sacred whether that is diversity or environmental responsibility, and then you message around the business case, it undermines the effect it’s trying to have.
The challenge is how to distinguish between a reward and a bribe.
Yes, and how to figure out what you incentivize, with rewards and bonuses and goals and targets. You can’t just tick the box on that and think you will solve your wider diversity problems.
Is there a trend line between companies on how they deal with governance, social, and environment, are those connected? There’s been this fight about whether or not the environmental folks were really concerned about diversity, or whether the diversity folks were really concerned about environment.
I think that the UN effort and the rise of investor interest in these topics comes from the idea that corporations should stop treating their negative impacts on society and the environment as just externalities that have nothing to do with the business. So I think the rise of awareness and concern over externalities and then the rise of intangible value really explain the rise of ESG.
No business really performs well on all factors. So, if we take, for example, a mining business, very problematic impact on the environment, very problematic impact on human beings in general, but you will likely see quite advanced human rights approaches compared to a company that has less friction and less pressure on these issues.
In an organization that I consulted in, they set up diversity goals as part of the performance appraisal for the managers, and it was terrific. One manager took on: I’m not getting along with my female employees. My direct female direct reports don’t like me, I’m going to take this on. Another one said, I want to mentor the minority assistants who don’t have a chance to break into the professional levels. So, they took on really challenging goals.
Now, that was year one. And eventually, as I understand it, that whole thing faded away. Listening to you now, I’m wondering if year three, [leaders thought it was still] intrinsically motivating. Initially they thought, “oh, this is so cool. And I get a reward at the end for doing this.” The question is whether in year five, that would have become a compulsory compliance – to use Brian's word – compliance thing rather than an intrinsically motivating act for the executives.
The question would be how to communicate to these people the values and opportunities related to this. So, they should know that there's an expectation to make progress in these areas, or certainly at least not to have problems where, say, there's unequal treatment, but even beyond that, to make progress.
At the highest levels, people have the higher need to know that they are responsible for coming up with good ideas, responsible for making them work.
The solution is to make it clear – and this is what Alison was saying before – make it clear that this is the moral, this is the value of the company, this is what we expect.
I would come with the same answer, which is that you need to have a values commitment that is made by the company. We need companies to decide what their values are and make them public and make that very clear. Where I think things start to get tricky is how to design those incentives so they don't have problematic unintended consequences.
Let's take the consumer. Alison, you have written a lot of stuff about should CEOs speak out.
The example I have given a lot in the media is in 2014. Michael Brown was shot on the street in Ferguson and left to die. There were protests. And in general, the corporate world did not want to touch this with a bargepole. There were a few exceptions, but no one wanted to talk about it.
Fast forward to 2021 we have CEOs all over America talking about the verdict in the George Floyd murder and giving their personal opinion on it. So that's a very dramatic change in a period of seven years. Once you have said that you are prioritizing something other than shareholder value, once you have said that corporations should have values, you've opened up a space for debate and negotiation in society, you've opened up a lever for employees to hold you more accountable. You've opened up a new conversation.
A lot of the story we've been telling is a story of political failure and social policy failure. And so, one of the reasons that we have turned to business to solve these problems is that we no longer trust the political process. And we no longer trust social policy to solve these problems.
I agree with that. A lot of that was something I can't say as eloquently, but I feel it and I agree with that. The problem seems to be where we have lost faith in institutions, that loss of faith is not only understandable, but seemingly just plain legitimate.
Are we trending up? Are we trending down? Just one-word answer.
You say down. Alison?
I think we're trending to a reckoning. I think we're trending to a crisis.
Alison is the executive director at Ethical Systems and an Adjunct Professor at the New York University Stern School of business. She is currently writing a book on the new landscape for business ethics, for Harvard Business Review Press.
Her previous work experience includes being a Managing Director at non-profit business network Business for Social Responsibility and a Senior Managing Director at Control Risks.
She holds advisory roles at ESG and risk consultancy Wallbrook and sustainability non-profit Business for Social Responsibility. She has expertise in strategy, sustainability, political and social risk, culture and behavior, human rights, ethics and compliance, stakeholder engagement, anti-corruption and professional responsibility.
Alison received her Bachelor of Arts in Modern History from Balliol College, Oxford University, her MA in International Relations from the University of Chicago, and MA in Organizations Psychology from Columbia University. Her website is www.ethicalsystems.org
Brian Harward PhD
Brian Harward is an Organizational Psychologist and Research Scientist at Ethical Systems, specializing in advanced analytics and creating actionable insights from research. Brian has previous experience in multiple roles as an Independent Research Consultant, University Professor / Director of Research, and Senior Research Analyst.
He is an expert in organizational behavior, job satisfaction, company culture, leadership, motivation, and group dynamics. Brian received a BA in Psychology from Wright State University and a Master’s and PhD in Organizational Psychology from Walden University.
He can be reached at statsfriend.com.
The views and opinions expressed in this or other blog posts at www.leadingconsciously.com are those of the guest author and do not necessarily reflect the official policy or position of Leading Consciously. Any content provided by our bloggers or authors are of their opinion, and are not intended to malign any religion, ethnic group, organization, company, individual, or anyone or anything.
Questions to ask yourself
#ESG #CorporateResponsibility #RewardsVsBribes #InitiateChange
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1 NYU/Stern Business & Society Program. www.ethicalsystems.org
2 Taylor, Alison and Brian Harward (2022). Incentivising ESG: What does it really take? Sustainable views: Navigating ESG policy and regulation. www.sustainableviews.com
3 Report of the world commission on environment and development: Our common future. www.sustainabledevelopment.un.org