Can Companies Do Well by Doing Good?

It's an issue that has bedeviled students of management for years: Can companies do well by doing good?

Is this just a Pollyanna-ish way of thinking, and is the only real way to succeed in business by being ruthlessly bottom-line oriented?

The research analyzed how environmental and social goals affect organizational performance.

Source: David McEachan / Stocksnap

There have long been legitimate uncertainties surrounding these questions, which is why I was pleased to see a serious study on this general subject this summer from the Stanford Graduate School of Business delving into these issues on a global basis and replacing speculation with data.

Environmental, social, and governance goals

The Stanford study examined the linking of executive compensation to ESG goals. As the study explains, ESG goals stand for "environmental, social, and governance" objectives, such as "reducing carbon emissions, diversifying the workplace, and improving corporate culture."

In essence, the research was probing: If CEO pay is tied not just to an organization's financial results but also to its broader pro-social policies and footprint, how will that affect corporate performance? Will it help companies, or will it hinder them?

Significant national differences

In this study, a Stanford business professor (Stefan Reichelstein), working with several colleagues from other universities, analyzed the performance of 4,400 public companies in 21 countries. The research found interesting insights into the "rapid growth of ESG pay."

Specifically, the study noted that the number of firms using ESG metrics to help determine executive performance "grew from just 3 percent in 2010 to 38 percent in 2021." The study also saw major national differences in the adoption of ESG metrics: only 16 percent of U.S. companies in the sample were using such metrics, compared to more than 50 percent of companies in Germany, France, Belgium and Canada.

Longer-term benefits

So what did the study find? While the researchers noted "that pay does not have a positive impact on companies’ financial performance or share price," they also significantly concluded that there was "no indication that it’s the drag on profitability that detractors assume it is."

In short, the financial findings were neutral; there didn't seem to be a clear advantage or disadvantage to firms employing such metrics.

Over the longer term, however, the study's authors noted that there could well be subtler benefits to ESG-focused companies that take more time to play out.

For example, in an era of destructive climate change, if a firm focuses on positive climate-resilience metrics, these activities may well buy public goodwill for the organization. Likewise, if a company is known to have an inclusive, engaged culture, that can enhance the organization's attractiveness for prospective employees.

"If you’re showing that you’re conscious of the problems and you can say, ‘We’re working on it, and we’re incentivizing our management to improve things,’" Reichelstein noted, "that probably buys you a lot of goodwill with some stakeholder groups." After all, some of these ESG measures "reflect a common good for society."

This whole subject seems to be a big important field warranting further detailed academic investigation.

One last personal observation: Most of the talented young professionals I know today are very concerned about the character of the companies they work for. That bodes well for the future workforces (and performance) of companies with a definite pro-social orientation.