ETHIC$: Morals and Values with a Bottom Line
Is it really free to be kind?
In hypercompetitive industries where firms look for every opportunity to earn a leg up, it can be perceived as inefficient and costly to make 'nice' managerial decisions with the interests of everyone in mind. In fact, historic corporate behaviour and its approach to environmentalism, sustainability, and corporate governance (ESG) imply a fundamental conflict of interest between profit generation and community enrichment. A blatant disregard for ethics becomes evident when examining instances in the past few decades.
The Lay of the Land
Navigating the political landscape and aiding the community has always been an expectation of businesses. In the late 1920's and the early 1930's, business managers distinctly began simultaneously balancing both profit maximization and the maintenance of client, labour force, and community needs. Following the end of World War II and the 1940's, the social perception of companies had changed; people began to see businesses as organizations with requisite social responsibilities. These rudimentary concepts of CSR were more clearly defined in the 1950's and further developed in following decades. However, since the 1970's, companies began to behave according to a notion described by famed economist Milton Friedman, which is that the only social responsibility of business is to increase its profits for shareholders. The free-market era of 'Reaganomics' and 'Thatcherism' in the 1980's western economies gave corporations little regulation with great power, which incentivized them to focus on excelling in market competition and stakeholder profits over any other social or environmental factor. With increased social awareness amongst the public following anti-war sentiments in the 1970's and the years following landmark civil rights movements, consumers began to put less trust in corporations to reflect and advocate for their wants and needs as well as their social attitudes. Although corporate social responsibility (CSR) increased in popularity during the 1980s and 1990s—driven in part by George W. Bush's 'thousand points of light' initiative and at least for show—consumers are still largely cynical about corporate ethics. This doubt is perhaps understandable when remembering how moral hazards in companies have transpired to historic catastrophes.
Do you remember Enron? The once ground-breaking, innovative energy company that was the darling of Wall Street? The former Fortune 500 firm boasting revenues of $111 million USD in 2000? The firm behind the largest corporate corruption and fraud scandal in US history? Although once revered as the top energy company in America, Enron came crashing down with the unmasking of its large-scale use of accounting schemes and deceptive holdings, designed to hide unprofitability and mountains of debt. Enron was able to go under the radar for years using instruments such as the Special Purpose Entities (SPEs) and with abetting from Arthur Andersen, one of the biggest accounting firms of the time. Enron exploited the fact that SPEs are subsidies of the parent companies, conventionally created for financial risk isolation, and that its financials would not appear in the parent company’s balance sheet – its complex use of SPEs included transferring depreciating assets and other unprofitability to the SPE, thereby masking losses on Enron’s own balance sheet. Despite these malpractices, Arthur Andersen approved Enron’s reports for years. The stock crash and the bankruptcy that ensued following the exposure of Enron’s crimes caused billions to be lost for stakeholders. This was on top of the $74 billion USD that they had already lost in four years leading up to the Chapter 11 filing. For thousands of Enron employees, billions in pension benefits also disintegrated along with their jobs.
While Enron is now defunct, plenty of the world's largest firms today also have a history of generally overlooking ethics in pursuit of higher bottom lines. Nestlé, the same firm behind the KitKat in your bag or the Pure Life water on your desk, can be a prime example. The world's largest food company is also behind the controversies of aggressive baby milk formula marketing that intentionally implied the superiority of its formula over breastfeeding. This tactic—which was prominent in less developed countries—led to malnourishment and illness in many babies. This was further exacerbated by the dilution of the formula with unclean water. Its bottled water division also saw controversy when it was revealed that the company was extracting millions of litres from the Indigenous Six Nations treaty land in Grand River reserves, while the Six Nations members do not have access to clean water—or water at all. Although the specific problem is interconnected with the Canadian government's unjust treatment of the Indigenous peoples, Nestlé's water venture has been involved in many independent controversies such as the depletion of Strawberry Creek through water diversions and a similar case in Flint, Michigan. Such aggressive water withdrawals caused notable, dangerous water shortages in those regions.
Beyond a Reasonable Doubt
In theory, legislation regulates companies and encourages them to make decisions that also consider the interests of surrounding communities. However, businesses have long tried to bend the rules to their favour, leveraging their substantial influence and capital to sway policymakers. An infamous example is the American tobacco industry. Prominent firms such as Philip Morris, Altria, and Reynolds American were found guilty in a 2006 United States federal court ruling of 145 acts of racketeering, violating the Racketeer Influenced and Corrupt Organizations Act or RICO. The trial's findings exposed the effort firms made to impede public health-related legislation that would damage tobacco sales. For instance, the companies have tried to defeat proposed legislation in all 50 mainland American states that would restrict workplace smoking, limit tobacco marketing, advance health research into tobacco and smoking prevention, reduce juvenile access to smoking, and raise tobacco taxes. If defeats were not feasible, companies would then shift focus into delaying and weakening the measures to minimize the impact. Methods that the firms used to fight legal anti-tobacco initiatives included bullying experts to speak and create controversy about established tobacco facts or using front groups and alliance industries to publicly oppose movements or legislations.
Attempts to influence policymakers are not exclusive to the tobacco industry. Big Tech companies, which include some of the most giant corporations in North America, are also some of the most powerful lobbyers. 2022 has seen lobbying efforts increase from tech companies, amidst rising antitrust concerns. For instance, Apple spent $2.5 million USD in an attempt to fight legislations such as American Innovation and Choice Online Act, which aims to prevent Big Tech companies from giving favourable treatment to their products on their platforms or creating cheaper replicas of existing products. Another is the Open App Markets Act, aiming to regulate the internal management of app markets in Big Tech platforms. Similar to competitors in its industry, Apple has historically lobbied against bills that can hurt its interests. Past examples include the Uyghur Forced Labor Prevention Act that mandates companies’ guarantees of forced labour-free products from Xinjiang, China, or the Fair Repair Act that allows consumers to independently repair purchased electronics.
Observing these examples begs the question: can ethics and successful business be written in the same sentence? Can a business be successful while also implementing meaningful ESG policies?
Turning a New Leaf
Perhaps the best modern-day response to that question is Patagonia. The 1970-born American outdoor apparel brand has been a pioneer in the field of ESG and a social justice advocator that many brands of its size are not. Patagonia has fully embraced its image of conscientious, ethical brand wanting to take care of the planet, and its marketing and operations harnesses elements such as transparency, consistency and purpose to convince its customers of such. For instance, despite the popularity and notoriety recognized by New York City's finance professionals, it has notably refused to create products with financial firm logos through its corporate sales program in protest of profit strategies Wall Street firms pursue.
What truly differentiates Patagonia is its commitment to its purposes through internal initiatives include the Patagonia Action Works platform connecting volunteers and donors to environmental activism organizations or the 1% for the Planet policy that commits 1% of its total annual sales to environmental groups. On top of these policies, it has made headlines for taking bold actions to uphold their values, such as its audacious lawsuit in 2018 against the then-president Trump, the Interior Secretary, the secretary of agriculture, the director of the Bureau of Land Management and the chief of the Forest Service for reducing the size of Bear Ears and Grand Staircase Escalante National Monuments. Despite such defined historic stances from the brand in support of social activism, which undoubtedly encountered some backlash and lost profits, Patagonia managed to nonetheless rake in revenue of more than $1 billion in 2020.
Although Patagonia has taken unconventional and perhaps unmatched actions for social and environmental causes, companies today are increasingly trying to incorporate more ESG into their operation. In the wake of modern human rights movements in the last few years, companies have faced a great deal of public attention for their responses to various social causes. This was kickstarted through the Black Lives Matter movement in 2020, where many of the most prominent companies in all market industries came together in support of racial justice. Companies were quick to issue statements of solidarity with the Black community and committed to take meaningful actions towards racial equality. The current war in Ukraine and the overturning of Roe v. Wade had similar, proactive responses from companies, implying a commitment to create positive social change. In fact, actions such as ceasing operations in Russia or subsidizing travel for abortions demonstrate that companies have made ethics and social impact key to their business strategies.
Too Good to be True
However, a more cynical viewpoint of this movement questions the sincerity of these actions. Companies are clearly aware of how consumer demographics and values have changed, with Gen Z starting to become more influential customers. The transition of consumer power is explicit when observing that in 2021, the demographic had $360 billion USD of spending power in the US alone. A 2021 Oxford Economics report estimated that Gen Z's work income will total a staggering $3.5 trillion USD by 2030, and consumer spending was accordingly projected to $3 trillion USD. As the most diverse and well-educated generation ever with widely progressive beliefs, the generation considers their values foundational to consumption. The new consumers expect brands to 'take a stand' on social issues – silence can no longer be an expression of neutrality. In 2021, 55 per cent of American consumers responded that it is important for companies to take stands on ESG issues. As a result, companies who promote social activism can be rewarded with revenue and a positive brand image from younger generations. This was illustrated with Nike's 2018 Q2 commercials with the former NFL quarterback Colin Kaepernick, who had famously protested racial injustice by kneeling during the national anthem. Nike sales jumped 10 per cent in that quarter despite the ad’s controversy from some customers. In seeing the success of Nike, many companies have opted to make social activism a core part of their marketing.
Although businesses have learned how activism can appeal to the emerging consumer generation, they may not yet be ready to practice what they preach. Companies' chief executives have mainly written public letters; some have even pledged actions to shape a more equitable society. However, the statements can be seen as merely performative if companies are unwilling to take substantial accountable commitments to contribute to the movements. It is worth noting that while American companies have pledged more than around $65 billion USD in racial equality measures following the BLM demonstrations, only $500 million USD of that has been used. Even when making united statements against discriminatory legislation, America's biggest companies were hesitant to call out specific controversial voting rights bills such as the ones in Georgia, Texas, and Michigan. This was in fear of prominent lawmakers in the states threatening to rescind tax breaks. While Black executives made individual requests to America's biggest companies, striking omissions on the signatures were noticeable, such as Coca-Cola and Delta—both of which publicly condemned the passing of the controversial Georgia bill before.
Beyond the Bottom of the B/S
Companies argue for an internal existence of a 'triple bottom line': a framework that postulates businesses to factor all three of planet, people, and profit in its operations. However, examining the corporate track record surrounding corporate social responsibility leads to doubts of how sincere these values are. Even in the modern era where companies have taken unprecedented measures towards social activism, the hesitancy of meaningful, long-term commitments in fear of consumer and shareholder backlash continues to linger. Many companies are simply not ready for a practical triple bottom line operational strategy that pursues more than accounting profits. To further advance social justice, businesses must do more than black, rainbow, or Ukraine-colored social media profile photos, carefully worded Twitter statements during periods of injustice, and tokenistic representations of POC employees in PR materials. It may not be free to be kind, but businesses should put money where their mouth is to prosper in the contemporary era of vigilant and conscious consumers.