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I think I hear something.
A decade ago the only people who cared about sexual scandals in the boardroom were the gossip columnists or tabloids. Now, however, they are turning up on investors' radar screens too. Behaviour matters. Reputation is everything. While some 20th century free market economists like Milton Friedman used to think that company executives did not need to worry about anything other than a balance sheet, in the 21st century companies' employees, customers, and investors are asking business leaders to consider S, or social questions too.
Is there sexual harassment in the company? Racial and gender bias? Gay discrimination? Bad working conditions? What about the wider footprint of a company such as its supply chain? Is this beset, say, with slave labour? Why do people care? Well, it would be nice to think that corporate titans have suddenly grown a conscience or a halo. And maybe some have, particularly during Covid. But a more likely explanation is the amazing power shift symbolised by another S, the smartphone.
Consider the tale of #MeToo, or complaints about sexual harassment that erupted in 2018. Sadly, this type of thing has been going on for many years. But the female victims used to be too powerless and too fragmented to spark change. But during #MeToo vulnerable people coalesced online and collectively caused so much embarrassment for CEOs and company executives that heads rolled in unlikely ways.
The Black Lives Matter movement was also sparked by the power of a cyber crowd and digital transparency. And in a less dramatic manner employees today are increasingly posting complaints online, sometimes via websites such as Glassdoor . And investors are demanding disclosure on issues such as gender discrepancy in pay. No, this isn't quite big brother of Orwell's books. But you have numerous little brothers and sisters watching CEOs.
Now this horrifies some executives who say it's unfair to expect them to fix society's laws. And what makes the S of ESG doubly contentious to some is that it's so subjective and slippery to measure, particularly when activists try to scrutinise what happens outside companies, say in their supply chain. But frustrating or not, woke or not, no CEO can afford to ignore that S factor today. Indeed, S was the fastest growing component of ESG during Covid-19, partly because of widespread social pain.
So Milton Friedman might spin in his grave. But just remember, Friedman lived in an era of low transparency and when people trusted the government to fix social ills. That's not the case today. In a world where a digital crowd can exert power, even Friedman might have embraced some elements of that S today to protect shareholder interest too.
