Investors Can Hold US Companies Accountable to Roundtable Pledges

Leading US CEOs recently pledged to redefine the role of the corporation in society. But will they make good on their promises? Responsible investors need a clear way to evaluate whether a company is really making progress by doing good for both society and investors.

Earlier this month, 181 American CEOs cosigned a declaration stating that their businesses would include consideration for all stakeholders, not just shareholders. In a statement released by Business Roundtable, corporate leaders from Amazon to Xerox affirmed their commitment to support the environmental and social health of the communities in which they operate and to embrace sustainable practices across their businesses. Increasingly, executives are acknowledging that this approach is the best way to generate greater long-term economic value creation.

Doing Well While Doing Good

Yet skepticism abounds. Critics argue that executives will need to demonstrate accountability to prove that their intentions are true. And the concept isn’t new. Almost a decade ago, Michael Porter, a prominent Harvard Business School professor, promoted the concept of “corporate shared value.” His approach distinguished between simple corporate philanthropy and embedding sustainable practices directly into core business operations to gain a competitive advantage.

In principle, we agree with Porter’s approach and the Business Roundtable statement—as well as the cynics. In our view, financial success and social success aren’t mutually exclusive; rather, they reinforce each other. Pursuing a sustainable agenda that balances the needs of all stakeholders can tie companies to durable long-term growth opportunities, help improve profitability and reduce risk. But translating public relations into action is more challenging—and investors need better ways to measure the impact of corporate actions.

How to Measure Social Value Creation?

Measuring how much social value a company generates is exceptionally difficult. Data are lacking and reporting standards are flawed. What’s more, when assessing social change, it’s notoriously hard to separate cause and effect. But with a clearer understanding of how corporations contribute to creating social value, responsible investors can better assess these companies against their newly defined mission.

Companies impact society in two main ways: through the products they sell and their operational conduct. Firms can sell products that help (vaccines) or hurt (tobacco) society. Their behavior can be positive (fair gender pay) or negative (corruption and bribery). Investors can assess all companies—and portfolios—using these two dimensions of impact, in our view.