The Evolving Role of the Corporation in Society

corporation-role-society

In a new report we explore the evolving role of the corporation in society, recognizing the large capital concentration represented by companies and their increasing engagement in environmental and social activities. We analyze a wealth of field and archival data to provide answers to a few fundamental questions:

Can companies address such issues? Why are company activities important to our ability to achieve better social and environmental outcomes?

Over time, companies have accumulated increased power relative to other stakeholders. This power has given corporations a license not only to operate, but also to grow and reach a wide diversity of stakeholders across geographies. The largest 500 corporations in the world paid more than $700 billion in taxes, sold products and services worth over $22 trillion, controlled assets valued at more than $100 trillion, and in 2014 spent more than $1.6 trillion and $400 billion in capital and research and development expenditures, respectively. The 500 largest companies in the world comprise approximately 50% of the world’s stock market capitalization. This is an astonishing statistic considering that there are close to 50,000 unique publicly listed companies around the world. Given this concentration in financial value, most institutional investors own a piece of the equity of these companies. Institutional investors’ equity shares in these 500 firms are worth approximately $24 trillion. The higher financial, human, and technological capabilities of companies compared with the limitations of governments due to indebtedness, inability to attract human capital, and the lack of jurisdiction in a global marketplace uniquely position corporations to respond to environmental and social challenges.

The emergence of the large corporation in society and the accumulation of profits and power have resulted from two centuries’ worth of important legal, regulatory, and macroeconomic trends. Google and Walmart provide two examples of leading companies that significantly influence a wide range of stakeholders:

  • Google’s Gmail product serves approximately 900 million people, more than the population of Europe. The Google search engine’s 5-minute service lapse in August 2013 caused global internet traffic to drop by 40%.
  • Walmart hosts more than 250 million customers in its stores each week and approximately 80% of all U.S. consumers at some point during a typical year. The company uses approximately 0.5% of all electricity produced in the United States, ranking it ahead of 12 states in electricity consumption.

Companies address social and environmental concerns through several types of activities:

  • Firm-specific Initiatives – Unilever’s Sustainable Living Plan aims to double the size of company’s business, while simultaneously reducing its environmental footprint and improving its social impact.
  • Industry Self-Regulation – Gap, H&M, and other apparel brands have implemented codes of conduct that attempt to self-regulate business activities and influence working conditions in overseas factories.
  • Working with Governments and NGOs – The Extractive Industries Transparency Initiative (EITI) unites national governments, natural resource extractives companies, and civil society organizations to enhance transparency and accountability in the extractive industries.

 How do companies address these issues in relation to their financial performance? Do such investments add or create value, detract value, or have a neutral impact?

Economic motives are among the key drivers of companies’ social sensitivity.  Investors can evaluate companies’ investments in this space by understanding their implications on firm value. These investments can impact firm financial value through numerous mechanisms. The mechanisms range from operational efficiency and protection of brand value, to revenue growth enabled by new products and customer loyalty, to lower cost of capital through enhanced disclosure. Investors can use this framework to understand the value relevance of different investments. We also show that better ESG performance correlates with:

  • higher equity valuation ratios,
  • higher quality earnings and
  • lower credit default swap spreads.

Large corporations in society have a purpose, and that purpose extends beyond simply making profits. Rather, corporations are assuming broader responsibilities that increasingly affect their valuation in the stock market and their value to society. Because corporations are the world’s most powerful engines for growth and prosperity, this behavior is a positive development with global impact. By understanding corporations’ environmental and social activities and integrating this understanding in investment decisions, investors can advance and benefit from companies’ creation of long-term value.

You can find the report here. It is the first that will be produced as part of collaboration between John Streur, the CEO of Calvert Investments, his team and I. John and I comment here on our collaboration.

I hope that both companies and investors will find our analysis illuminating and that both will actively increase their positive contribution in promoting a sustainable society.