Following the evidence on responsible business

19 December 2021

My first year since leaving PwC has been devoted to figuring out what the best evidence says about a range of responsible business issues. This is some of what I’ve learned.

Happy Holidays! 

…as our American cousins have taught us to say.

I’m now coming to the end of the first full year of my new life, having left my main professional career with PwC in 2020. 

My mission in life now (beyond improving my forehand) is to promote the evidence-based practice of responsible business by connecting academic research, public policy, and corporate action. I mainly do this through my role as an Executive Fellow at London Business School.

So here’s what I’ve been looking at this year and a few things I’ve learned. 

Executive pay

Although my work goes far beyond executive pay these days, I still find fascination in the topic on which I built my career. It’s also been the subject of my first proper academic paper since commencing my new life: CEO Compensation: Evidence from the Field. Co-authored with Alex Edmans of LBS and Dirk Jenter of the LSE, we surveyed and interviewed UK directors and investors on how they think about CEO pay. 

The conclusion: they think quite differently about it. If I were to summarise the paper in a sentence it would be as follows. Investors think boards are weak and should cut pay and sharpen incentives, whereas boards think that investors don’t understand the reality of recruiting and motivating CEOs and should keep out of things they don’t understand. Beyond that, there are fascinating insights on the importance of intrinsic motivation and fairness, however that is defined, factors that are largely ignored in academic models. To move this debate forward we need to find a way for company Chairs and investors to come together to increase common ground on this topic, outside of the crucible of company-specific engagements.

There’s a brief summary of the research here and a longer, but still practitioner-oriented, write-up here. If podcasts are your thing, you can get the gist of the main findings in this interview I did for Andrew Jennings’ Business Scholarship Podcast.

The other topic of the year in executive pay has been the push to link bonuses to ESG targets. You can take the boy out of PwC, but you can’t take PwC out of the boy. So I was delighted to be able to explore this question of ESG and executive pay in a comprehensive collaboration between LBS and my old firm. The apparently obvious step of linking pay to ESG is, in my view, much more problematic than commonly assumed. Particularly if you think it’s a way to force CEOs who aren’t interested in ESG to become so. The risk is we just end up with more pay, not more ESG. I summarise the arguments in this piece for London Business School’s Think magazine. 

The full report, which you can download here, has been recognised as one of the more thoughtful contributions on this topic. I was joined by Phillippa O’Connor, Partner at PwC and Harlan Zimmerman, Senior Partner at Cevian Capital, to discuss our findings at an event facilitated by Helen Thomas of The Financial Times. You can see a video of the full event here. It lasts around 90 minutes, split between my presentation of the results, a discussion between the panellists, and audience Q&A. But the pay-back is that it covers a lot of the relevant ground in this debate.

Sustainable investing

One of the beauties of an academic life is being able to go where your interest takes you. An area I’ve become fascinated in is sustainable investing, which brings together two passions of mine: the geeky world of capital markets and how to move to a more sustainable world. 

Is sustainable investing the route to meeting the Paris goals, as Mark Carney and his GFANZ buddies would have us believe? Or is former BlackRock (not all that) senior executive Tariq Fancy right when he says it’s all a money-making scam for the investment industry and a dangerous placebo for society?

I was delighted to interview Alex Edmans on this topic for our Grow the Pie podcast series, which is based around the topics in Alex’s book: Grow the Pie: How Great Companies Deliver Purpose and Profit. You can listen to the episode here and find out more about Alex’s book here. As normal, the answer is somewhere between the two extremes. Blanket divestment and impact investing (at least in public equities) probably doesn’t achieve that much. Engagement and tilting (investing more in the better environmental performers in a sector and less in the worse) probably works better. But overall we should be modest about what sustainable investing can achieve in terms of real-world outcomes.

The topic of this podcast relates to a presentation I was asked to do for the FCA on what the academic evidence has to say about real-world impact of different “sustainable” investment approaches. This has been of interest to me from a personal perspective: how should I invest my money in the best way to balance my wish for returns with my wish to do better by the planet? Taking this more individual perspective, I summarised the findings in an article here on my financial coaching website. You can link through to a more academic exposition from this shorter version of the article. 

Finally on this topic, the theory is all well and good, but there’s nothing like speaking to a real-life investor on how they view sustainability. Andy Brown, Founder and Chief Executive of Cedar Rock Capital, runs a very long-term long-only portfolio from his clients for which sustainability (with a small “s”) has long been a founding principle. And because his fund is closed, he’s not corrupted by the temptation to falsely burnish his sustainability credentials to attract new clients. So how does a long-term investor of this type think about sustainability? You can find out here in my podcast interview with him. It was a delightful conversation. Andy emphasises the importance of linking sustainability to company strategy and of helping problematic sectors improve rather than divesting from them.

Responsible business

Responsible business is having a moment (I mean, who’d admit to running an irresponsible business?). But it’s often misunderstood. Two sides shout at each other across a chasm of incomprehension. On the one hand the Responsibilistas want to divert the corporation away from the dirty business of making profits towards hoovering up the mess left behind by humanity instead. On the other the Friedmanites want business to maintain its purity in the pursuit of shareholder value, unencumbered by social goals (or regulation). 

As in most areas of life, the best answers aren’t to be found at the extremes. And I’ve had a lot of fun trying to map out the middle ground. The year started off with a classic example of this stand-off as Emmanuel Faber was ousted from his position as CEO of Danone. Both sides of the argument tried to claim Faber’s defenestration as a point for their team. But as I write here, the reality is more nuanced. More generally, we need to be careful that we don’t expect too much from responsible business. There’s a move, particularly in the EU, and supported here by initiatives such as the British Academy’s Future of the Corporation, to internalise stakeholder issues much more into board decision-making and duties. That’s fine up to a point, but taken too far it will cause more problems than it solves. I lay out some of the arguments here.

Continuing the theme of middle-groundism, Alex Edmans and I recorded an episode of our podcast to discuss the legacy of Milton Friedman, following the 50th anniversary of his famous article on the social purpose of business. We discuss where Friedman was right, where he was wrong, and what we can learn from his thinking today. You can listen here.

Much of my life now is based on looking at what rigorous academic evidence has to say on issues relating to responsible business. But there’s also sometimes great insight to be gained by just speaking to people and asking them what they think. This was the subject of The Purpose Tapes, a series of interviews of CEOs of companies trying to organise themselves according to principles of purpose. Why do they do it? What are the challenges? Not all of these companies are perfect, as subsequent events have shown. But there’s still a lot to learn from how they view the world and describe their motivations and challenges. The report was produced byThe Purposeful Company, where I sat on the Steering Committee through 2021. But the work was almost entirely that of my colleague on the Committee, and founder of The Purposeful Company, Will Hutton. You can read it here. The CEOs Will spoke to are frustrated that investors don’t seem as interested in purpose as they are. From the investors, we hear that this is because too much of what they hear about purpose seems disconnected from strategy and comes across as little more than PR guff. Probably both are right: purposeful companies don’t get the interest in the topic from investors that is warranted, but investors find it hard to sift the wheat from the chaff when for too many companies purpose is only skin deep.

Perhaps one of the most topical issues in responsible business today is diversity. Despite frequent claims to the contrary, the benefits of diversity in terms of business performance stubbornly fail to show up in the numbers. Does this matter? I cover some of the evidence and the issues here. It’s a great case study of an endemic issue in responsible business research: the strong desire by practitioners to use “data” to find the answers that they want. In my view the persistent tendency to overclaim the evidence for a performance enhancement from diversity distracts us from the more important question: why hasn’t  diversity led to improved performance (at least, on average and so far)? This connects to the related issue of inclusion.  If all we do is push underrepresented groups into a system designed largely by and for heterosexual white men, we shouldn’t be surprised if the results are less than spectacular. Yet most (although not all) diversity initiatives focus on raising the numbers from underrepresented groups, rather than getting at the core issues of how work is designed and how an inclusive culture is created, to enable people of all types to give of their best. To do the latter is hard. The reality of what’s involved in this were explored by my colleague Randall Peterson in an interview of Andrew MacKenzie, talking about his time as CEO of BHP. You can listen to it here.  

I’ll be sharing more on the responsible business agenda next year, when we share the results of our work with the Investor Forum on “What does stakeholder capitalism mean for investors?”, which has been a fascinating project to be involved in. More to come in early 2022.

Climate change 

I can’t finish a review of my work in 2021 without mentioning Climate Change. COP26 was variously presented as a triumph and a disaster. I choose to see it as glass half full. The chance to limit to 1.5-degrees of warming has probably passed us by. That’s a moral tragedy as it condemns a number of island nations and coastal communities to a terrible future. But on the positive side there’s a realistic pathway to limiting warming below 2-degrees. It seems to me that the priority for us now must be to grasp the opportunity to make that possibility a reality. 

Over the last couple of years I’ve been sharing what I’ve learned from my own meagre attempts to cut my family’s rather large carbon footprint. I was pleased to share how I’ve been getting on in London Business School’s Think magazine in this article. I’ve got a section of my website dedicated to this issue in the spirit of sharing what I’ve learned rather than claiming any special virtue. After all, from a global perspective, all I’m doing is shifting a little bit where I sit in the right tail of carbon emitters.

If you want to see more of what I’m up to you can visit my website at tom-gosling.com. As a side-hussle I’ve also launched a financial coaching business, inspired by a coaching qualification I’m just finishing with Meyler Campbell. I help professionals use the success they’ve earned to live the life they want to lead. Started as a lock-down toy, it’s surprised me by its success (i.e. it has not been a total failure). You can see what I’m up to in that part of my activities at thegoslingfactor.com.

Thanks to everyone I’ve interacted and collaborated with in 2021 and to everyone who’s inspired, read, watched, listened to, or otherwise engaged with my work. 

Best wishes for the end of 2021 and the start of the year to come!

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