Center for
Issue #44
March 2023
ESG Factors and Corporate Culture

Companies are experiencing competing demands from multiple stakeholders who encourage them to assume responsibility for desirable changes in society. The era of maximizing profits as the legitimate purpose of businesses seems to be over. To be sensitive to those pressures, companies must pay attention now to other global concerns about people and planet, even if some of those concerns have only remote implications for companies´ daily operations and strategic goals. The ESG (Environmental, Social, and Governance) standards emerging to guide and assess the nonfinancial performance of companies have formalized certain practices that have limitations but are increasingly considered good citizenship behaviors. This formalization contributes to conveying a sense of urgency and concreteness that makes change and oversight more possible and actionable. This pressure on companies may be good and necessary, but it carries a risk. 
The risk is two-fold. First, in some cases it may disperse attention too widely.  While some ESG practices are hygienic and should command immediate attention, others may be less crucial for a particular company. Company attention and resources are limited and therefore a meaningful focus on many ESG concerns may crowd out time and space for other worthwhile outcomes, which could be more urgent or important for that company.  For example, many have argued that the S of ESG is not getting the attention it deserves because the E of Environment is the dominant focus of activists.  A UNDP program officer working in India told me of the difficult tradeoffs he faced in balancing the urgent concerns of economic development together with those of reducing the country´s carbon footprint. Prioritizing, balancing, and integrating those concerns is not simple.  Senior managers are always making decisions that involve trade-offs, but this one is particularly complex.
The second risk is that those competing pressures can produce a culture of compliance in organizations that may result in managing to the test, being fixated on metrics or targets, and/or in what organizations scholars call “decoupling,” which means symbolically endorsing certain policies while enacting different practices instead. While according to neo-institutional scholars, decoupling has become a practical necessity for organizations to survive in modern formalized societies as they confront competing prescriptions to be considered legitimate, it can also lead to greenwashing and hypocrisy attributions, which undermines the ultimate goals of real, not pretended, sustainability strategy and policies. 
To avoid those risks, companies should pay attention to integrating ESG goals and policies into strategy, by internalizing ESG underlying values more than specific practices, especially focusing their attention on those values most directly connected to the business model and main activities. Designing and implementing a well-crafted corporate purpose that is aligned with the personal values and preferences of internal stakeholders (founders, board members, senior managers, colleagues, etc.), and crucial ESG values, can be a fruitful way for companies to integrate and give meaning to their daily operations and to build a mission-driven and strategic culture. A compelling inside-out purpose which begins with the inner transcendent motivations of colleagues (the motivation to serve others) can mobilize their heads, hearts, and hands into a coherent and energizing set of activities that amplify, unify, and channel their goals and balance the interests of profit, people, and planet. Internalizing those core nonfinancial ESG values means understanding the reasons behind them, being motivated by them, and translating those values into meaningful organizational decisions, activities, and a sound business model. 
Without internalizing those values, many companies may hit the targets but miss the point -think of the emissions scandal of Volkswagen or Wells Fargo’s fake accounts- casting a shadow of cynicism on all the genuine efforts to improve sustainability by many organizations. By integrating the goals of society, corporate purpose, strategy and business model in a coherent way, companies will develop more sustainable business models and will amplify their positive impact.
Corporate Governance Trends and News.

Boards of directors should understand global risks, the implications for their companies and include risk oversight as a priority topic in the board agenda, especially in these times of high uncertainty. The World Economic Forum has published its annual Global Risks Report for 2023, which offers a useful summary and the views of more than 1,200 experts to navigate current and future global risks and crises, and be better prepared to mitigate them.
A full copy of the report can be found here
Given the challenges and uncertainties that companies are expected to face in 2023, KPMG and Deloitte give some useful insights on topics that should be included on the agendas of boards of directors this year.
 Read more here...
..and here
CEO development and succession planning is a duty of boards of directors that is often improperly managed. A new study by Spencer&Stuart tracking CEO transition among S&P 500 companies in 2022 offers interesting data and trends on CEO appointments, departments and tenures.
 Read the study here
In recent years, several countries such as the UK, Germany and the US have put in place stewardships codes for institutional investors, asset managers and proxy advisors. Recently, the Spanish National Markets Authority (CNMV) published its stewardship code with the aim of promoting greater engagement of shareholders in the companies in which they invest to pursue an efficient model of management and corporate governance.
 Read more here
The 2022 proxy season had one of the highest records for majority-supported environmental, social, and governance (ESG) shareholder proposals. However, according to a recent study performed by the Principles for Responsible Investment Association, fewer than two out of every five of those shareholder proposals, are being implemented by the board of directors. Misalignment between shareholders and boards of directors can lead to instability and have a negative impact on company governance. More information on this study and the recommendations on how investors should engage with the board can be found here
In the past months, ESG-related issues have given rise to divisive political views and certain US states and lawmakers are formulating "anti-ESG" regulations and divesting from funds that consider ESG factors. Large institutional investors are having a hard time navigating this landscape and balancing conflicting stakeholders (i.e. BlackRock stated in its last annual report that the divergent views on ESG-related matters could adversely affect its reputation and financial performance). An interesting summary of the current ESG landscape and trends to watch in 2023 can be found in a recent article published by Simpson Thacher. Read more here
IESE's Recent Research.

Almandoz, J. (2023). Inside-out and outside-in perspectives on corporate purpose. Strategy Science.
Read here
CANALS, J. (2023). Boards of Directors in Disruptive Times. Cambridge: Cambridge University Press.
Know more here
Upcoming events.

March 7, 2023 6:00 pm. London.
Speakers: Prof. Jordi Canals and José Viñals (Chairman of Standard Chartered)
March 15, 2023 19:00 pm. Madrid.
Speakers: Prof. Jordi Canals and Rafael del Pino Calvo-Sotelo (Ferrovial, President)
Upcoming programs.