Why Every Leader Needs to Understand These 3 Letters

Why Every Leader needs to Understand These 3 Letters

Russia’s unprovoked and brutal invasion of Ukraine has triggered the biggest humanitarian crisis since the second world war. The ongoing conflict has sent shock waves politically, economically and socially throughout the world.

It has also presented a reckoning for global companies with a stake in Russia.

In the face of the indiscriminate targeting of civilians in a peaceful sovereign nation, the world watched to see if these firms would do the right thing. Would they set aside profit considerations and pull out of Russia?

Corporations such as Apple, Samsung and TikTok were among the first to withdraw their business. Companies that were slower to suspend operations, such as McDonald’s and Coca Cola, quickly felt the blowback of enraged consumers, investors, and stakeholders.

This unified response—of prioritising what matters to the global community—has brought into sharp focus a seismic shift that is seeing stakeholders becoming increasingly intolerant of corporations driven purely by the pursuit of profit.

Investors, consumers and employees expect to see companies taking positive action promoting social and environmental change and operating to expected high standards of corporate governance. Increasingly they are voting through their purchasing power and their decision to work for or leave companies based on their social, environmental and good governance efforts.

Shareholders too are becoming more active with their voting.

In 2020, despite delivering a solid financial performance, the CEO of Rio Tinto was forced out by shareholders after it emerged that the mining company had destroyed Aboriginal rock shelters dating back 46,000 years.

Focusing on what matters is not only about avoiding risk. It is also good business practice.

When the US retailer, Dick’s Sporting Goods, made the bold move to restrict gun sales in 2018 it cost the company $150 million in lost sales, or slightly less than 2 percent of yearly revenue. Yet the company’s stock climbed 14 percent in a little over a year following the shift.

What these examples point to is that companies around the world are now, more than ever, being held to account on their sustainability, environmental and social commitments—as well as benefitting when they hold their nerve and follow through on them.

Typically, these commitments are captured in a company’s environmental, social, and corporate governance (ESG) statement.

ESG criteria were originally developed for investors to evaluate a firm’s collective conscientiousness for social and environmental factors.

• Environmental criteria consider how a company performs as a steward of nature.
• Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates.
• Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

Put simply, ESG is a company’s framework for thinking about what matters.

However, it can also be a double-edged sword if these statements of intent are not embedded at every level of the business.

For example, in the case of Rio Tinto, just one year before their own engineers destroyed the ancient Aboriginal caves, the company had a seemingly complete set of policies, standards and guidance on social and cultural heritage issues. The company also scored well on various ESG metrics used by investors.

However, developing detailed standards at the Board and Executive level is just the first step. What is most critical is that those policies must be embedded and implemented on the ground, at the operating level.

In other words, ESG commitments need to be cascaded throughout an organisation. That means every leader needs to understand what their organisation is committing to—and know how to translate those statements of intent into the way they lead their teams and the business as a whole.

Here are four steps to follow:

1. Read and digest: Understand the ESG commitments of your company.
2. Make it real: Consider how to apply these principles to your team’s goals and objectives. For example, how are behaviours that promote diversity and inclusion rewarded and recognised?
3. Bring them with you: Test your ideas and assumptions with your team to get buy-in.
4. Visibility and Energy: Set a mechanism for monitoring how ESG commitments are being implemented.

At SMG, our purpose is to help develop leaders the world needs. In the current global geopolitical, environmental and social context, that means helping leaders take a socially sensitive and environmentally intelligent approach to delivering value for their teams, organisations, and for their communities.