On the 3rd of January 2020, two of the largest Private Equity funds, KKR and TPG, with a combined asset base of approximately $330bn between them, decided to report by April 2020, both the positive impacts as well as negative externalities, of their investments, on environmental, social and governance aspects. This announcement illustrates the growing popularity amongst investors to adhere to the tenets of Socially Responsible Investing (“SRI”). SRI has transcended from being a mere exercise in lip service to a set of binding principles that determines the growth trajectory of many Multinational Enterprises. In tandem with the investor bent of mind, even corporates themselves are beginning to transform the way they operate. Shareholder activism is no longer the sole driver spurring a company along. Shareholder value has been replaced by stakeholder value where the latter encompasses within its ambit the Environment, Society and Governance (“ESG”).
American entrepreneur, investor and former advisor to the White House Business Council in his forthcoming book, “Elevated Economics” illustrates these transformational trends ushered in by a shifting consumer mindset that demands ‘values’ over value and invests in a product more for what it stands rather than for what it does. The book is an outcome of extensive research and interviews conducted with CEOs and Ivy League Professors of business, marketing, and consumer behaviour. Hence the plethora of anecdotal emphasis that runs throughout the book.
Mr. Steel defines Elevated Economics as “a coalescence of several complex factors. Changes in consumer employment, social, marketing, environmental, and corporate governance practices all contribute to this single term. Essentially the Elevated Economy represents what research and analysis seem to indicate will be the next great change in capitalism.” This change, Dr, Steel emphasizes, would be triggered, to a significant extant, by a humungous “Wealth Migration” where approximately $68.4 trillion would change hands over the course of the next couple of decades, from Baby Boomers to Gen Z and the Millennials. When it comes to customer preferences, the new owners of wealth surely know to put their money where the mouth is. They also demand accountability, responsibility and societal obligations. This is the very demand that made Nike abandon their whole ‘sweatshop’ initiative and remake themselves as a brand of responsibility. Not to be left behind, its fiercest competitor Adidas teaming up with “Parley for The Oceans”, are making sneakers out of plastic ocean waste. As Mr. Steel illustrates in his book many companies such as Method, Impossible Foods, Patagonia, TOMS shoes, and Birdies have taken the concept of ESG to hitherto unseen levels. In India, the business practices of the TATA Group of companies have birthed a paradigm shift in the very fundamental manner in which a Corporate Group goes about its activities. The “TATA way” thus stands for integrity, empowerment and aggrandizement. One classic illustration of the apotheosis that is the TATA way is the path-breaking labour welfare measures which were instituted within the Group even before the relevant statutes were incorporated. Some of them include an eight-hour working day, free medical aid, establishment of a welfare department, leave with pay, workers’ provident fund scheme, workmen’s accident compensation scheme, maternity benefits, profit sharing bonus and retiring gratuity. Maybe this is the direct result of TATA employees putting in decades with the company, ignoring much more lucrative competing offers.
On the 19th of August 2019, some of the top CEOs in the US, jointly pledged to place stakeholder value over shareholder value in a remarkable show of societal obligation. Mr. Steel identifies four “Cornerstones” that might have a solid and significant influence on the changing Corporate Philosophy.
- Diversity and Inclusion (going beyond mere tokenism and compliance with hiring policies);
- Equality in Pay;
- Impact (ensuring that ESG activities impact the community as illustrated by Wells Fargo in its CSR initiatives);
- Bring The Market (instead of Go To Market);
The impact of all this is a burgeoning growth in “ESG” assets. According to the US SIF Foundation’s “Report on US Sustainable, Responsible and Impact Investing Trends”, Socially Responsible Investor assets are growing at nearly 40% year-over-year since 2016. In fact, more than $12 trillion are invested in a variety of socially responsible ways.
While the book contains many interesting illustrations of companies consciously deciding to invest in CSR initiatives and the consumer loyalty towards such companies, the one segment where I have serious issues reconciling with Mr. Steel’s views and his own practice is his patronage towards Starbucks. Waxing eloquent over their matching 401(k) payments even for part time employees and The Starbucks Partner Achievement Program, Mr. Steel says he will not mind dishing out a premium to enjoy his Pike Place every morning. In a report damningly titled, “How Starbucks avoids UK Taxes”, Tom Bergin of Reuters illustrates that “Accounts filed by its UK subsidiary show that since it opened in the UK in 1998 the company has racked up over 3 billion pounds ($4.8 billion) in coffee sales, and opened 735 outlets but paid only 8.6 million pounds in income taxes, largely due because the taxman disallowed some deductions.” Over the past three years [since 2012], Starbucks has reported no profit, and paid no income tax, on sales of 1.2 billion pounds in the UK. McDonald’s, by comparison, had a tax bill of over 80 million pounds on 3.6 billion pounds of UK sales. Kentucky Fried Chicken, part of Yum Brands Inc., the no. 3 global restaurant or cafe chain by market capitalization, incurred taxes of 36 million pounds on 1.1 billion pounds in UK sales, according to the accounts of their UK units.”
Katherine Campbell and Duane Helleloid of the University of North Dakota have published a full-length paper titled, “Starbucks: Social Responsibility and Tax Avoidance.” The European Commission has also initiated proceedings against the tactics initiated by Starbucks to avoid paying its rightful share of taxes, even though to the credit of the beverage giant the European Commission was unable to demonstrate the existence of an advantage bestowed by the Dutch Tax authorities in favour of Starbucks.
Thus, this is the only part of the book that rankles me. Else “Elevated Economics” is a thought-provoking work that illustrates in telling detail the future vector of both buyer behaviour and Corporate Strategy.
(Elevated Economics: How conscious consumers will fuel the future of business by Richard Steel is distributed by the Green Leaf Book Group and published by Fast Company Press, and and will be released on the 6th of October 2020.)