Global citizenship accountability requires a refresh of the business model to respond to the changing values and expectations of sophisticated institutional and individual investors.

When the CEO of the largest asset management company in the world says it’s time to rethink your business success model, then savvy leaders in business and asset management realise it’s time to sit up and listen.

BlackRock is the world’s largest asset manager, with over $6.3 trillion in assets under management. Earlier this year, its CEO, Larry Fink, wrote to CEOs of public companies outlining his expectation that they start accounting for their effect on society.

Fink warned that managing for the short-term was no longer good enough. Not only has Fink’s letter sent a dramatic shot over the bows of traditional business models, but it has also signalled to other asset managers that they too, have a choice in deciding whether they will use their investment power to be part of a new force for social good.

BlackRock’s CEO, together with other savvy global CEOs, such as the 15 who resigned from Donald Trump’s advisory boards because of Trump’s refusal to participate in the Paris Climate Change agreement, recognise that business is the major institution in the world today.

What counts more than what business you do, is how you do business; whether you profit at the expense of society’s interests or whether you purposely choose to manage your business operations to make an overall net positive contribution to the societies in which you operate.

These leaders know that business as usual is no longer good enough. They accept that to qualify as an ethical and responsible corporation or, to be positioned as the investor of choice, they need to create organisations where people want to belong and create organisations where customers want to shop. By doing so, as they move into new markets, they are welcomed for the positive contributions they will make as responsible global citizens working purposely to raise the ethical floor below the marketplace.

It’s a new world order

Even the banking sector is coming to realise that the new world order of hyper connectivity, ever-increasing global transparency and grassroots activism, is holding leaders to account for their role in stabilising or destabilising societies, such as witnessed during the GFC.

Their role in global climate change, through their funding choices, is increasingly coming under scrutiny, as recently witnessed in the boycott of banks supporting the proposed Adani mining of the Great Barrier Reef.

Other consumer sensitivities, like wealth polarisation and workplace inequalities, are also putting pressure on banks and financial institutions, such that many now recognise that it’s time to look beyond the narrow focus on shareholders and include goals that are aimed at collective social and environmental wellbeing, in addition to economic prosperity.

“Our jobs as CEOs now include driving what we think is right. It’s not exactly political activism, but it is action on issues beyond business,” said Bank of America’s CEO, Brian Moynihan.

The Internet world is enabling far reaching public accountability to be pursued by activist consumers and social cause organisations, as witnessed by the viral campaigns that ‘outed’ some big corporates for not paying ‘their fair share of taxes’. This also includes the work of organisations, like Transparency International, in highlighting the corrupt business practices being employed around the globe to achieve business success at the expense of social progress.

In the United States, institutional investors are increasingly flexing their financial muscle and demanding new success formulas.

Companies with all-male boards have been targeted by institutional investors and, over the last two proxy seasons, at least 45 shareholder resolutions have been filed asking these companies to reveal their approach to increasing gender diversity.

The Australian Council of Superannuation Investors (ACSI) is also waging – with some success – a similar campaign, demanding greater gender representation on Australian boards.

Collectively, the ACSI manages over $2.2 trillion in assets and owns on average 10 per cent of every Australian ASX200 company. Established in 2001, ACSI exists to provide a strong, collective voice on environmental, social and governance (ESG) issues on behalf of its members, who include 38 Australian and international asset owners and institutional investors.

In 2017, ACSI implemented a Gender Diversity Voting Policy to support a  target of 30 per cent female representation on Australian boards. Its policy recommends against the election of directors on companies with poor board gender diversity.

Social and environmental accountabilities

But it’s not just gender diversity that is being pursued by investors. They are now advocating for leaders to choose to conduct their business in a way that manages a wider range of social and environmental accountabilities.

A graphic example of this is the way tech giants are being targeted for what is increasingly recognised as the social impacts of their actions. Concerns revolve around not just the impacts of their products on the social development of their users, but the environmental impacts of their largely non-recycled products and their failure, as powerful global corporate citizens, to pay their fair share of taxes.

For example, Apple has been the subject of successful investor activism that has resulted in Apple bowing to investor pressure and introducing the first parental control mechanisms in its iPhones. Uber was held to account by its major investors for the unacceptable ‘bro’ culture that was allowed to flourish under its former CEO, who was then forced to resign to retain investor confidence in the organisation.

Facebook is still embroiled in controversies over its failure to monitor hate speech or protect its users’ privacy rights and its CEO is also being held to account. Mark Zuckerberg is currently changing and reinventing his business model to be more in line with stakeholders’ and investors’ expectations about how a responsible company should be run.

At the individual level, the emergence of information and conversational platforms, as well as global connectivity, has enabled global movements, such as the MeToo and Fairtrade, to call for social and environmental change around fairness to all involved or affected by an enterprise, rather than a mere concentration on shareholder priority.

Ethical investments

This has fuelled an upsurge in the ethical investment movement at citizen level, as they select funds and fund managers that match their values on corporate social and environmental responsibility.

Ethical funds, such as FTSE4Good, Australian Ethical investment funds and Domini, purposely restrict their portfolios to screened investments, with most outperforming the non-screened funds on financial outcomes, as well as societal and environmental impacts.

Ethical investments are one of the fastest growing parts of the investment market. Globally, there are now $22.89 trillion of assets being professionally managed under responsible investment strategies, an increase of 25 per cent since 2014, signalling the global community’s increasing concern to select asset managers attuned to the wider responsibilities of corporate citizenship.

Responding to these wider sensitivities, leading CEOs are now steering their enterprises towards more sustainable economies that in turn, support more stable societies with new visions, such as that outlined by Kenneth Frazier – the CEO of pharmaceutical giant, Merck & Co.

“I don’t see conflict between meeting the needs of shareholders and meeting the needs of society. The role of the chief executive has never been more complex or more consequential,” Frazier said.

“Business leaders today are reshaping the internet, reimagining health care, upending transportation and more. But being a chief executive is no longer just about running a company. It means taking political stands on everything, from immigration to gun rights. It means weighing in on tariffs and taxes — all while balancing short-term profits with long-term goals, dealing with activist investors and attracting talented employees.”

These leading CEOs now talk about transforming capitalism to make it more inclusive, sustainable and net positive. Businesses that aim to be net positive go beyond minimising harm, to actively creating good – creating impact beyond traditional business boundaries, across the whole value chain. It enhances natural and social capital, creates long-term business resilience, and delivers bottom-line benefits in the short-term.

They stress that the business-of-business is not business alone. They recognise that the sustainability of the business is directly tied to the sustainability of market share, of core resources, and of attracting and retaining the best employees. When we change the goal of the system, the system changes.

Ethical leadership

This is not the old idea of morality ethics centred on the character of the CEO alone, but rather one of ethical leadership, where leaders create the ideal context inside their organisations to enable employees to flourish, and where leaders also accept their responsibility for managing all their external impacts.

As part of their responsibility as leaders of major institutions, they have a real sense of being guided by a vision of taking an active role in society by shaping how the ‘global commons’ is protected and global societies evolve.

Unilever is perhaps the poster child for how an organisation can thrive by adopting a sustainable business success formula that purposely sets out to be net positive.

Its success formula has realised tremendous business benefits in the form of efficiencies, growth, and employee engagement and retention. Its portfolio of sustainable living brands has grown 50 per cent faster than the rest of the Unilever business — and delivered more than 60 per cent of Unilever’s overall growth in 2016.

At employee level, 90 per cent report that they are proud to work for Unilever and the company is the number one most searched consumer goods brand on LinkedIn.

Shareholder returns have substantially benefited and these have seen a 290 per cent shareholder return. In fact, financial experts are projecting the Unilever stock may actually outperform the FTSE 100, with earnings per share forecasted to rise at an average rate of 15 per cent per annum over the next two years. Some 70 per cent of shareholders have held their shares more than seven years and 60 per cent of the company’s top 10 shareholders have held their shares for five years or more.

Considering the success of Unilever and other listed enterprises like it, professional asset managers are now being asked to reconsider their investment formulas and to think about the ethical dimension of their investment choices.

Just as with every other aspect of business, asset management can no longer be considered ethically neutral. How they decide to allocate their investments will also determine how fast or how slow social and environmental restoration can take place.

Consumers, investors, commentators and regulators are all coming to the view that the return on investment is not just a short-term numbers game. Thinking about the social and environmental returns is now just as important as the financial returns. In fact, it can be said that one feeds the other.