You may have heard the term signal-to-noise ratio. It’s a measure used in science and engineering that compares the level of a desired signal to the level of background noise, reports Forbes.
This is an especially important concept for business leaders in this transitional moment in time.
Why now? As a business leader, you’re being barraged daily by what may feel like a constantly escalating level of noise. Mostly it’s the background kind. But more important, if you’re hearing what I am, you’ve also noticed two distinct signals that your predecessors in business leadership, even only ten years ago, did not:
- There’s a continually growing desire among the people in your organization to understand your perspective on issues of broader societal impact, including climate change, diversity, humanitarian response to natural disasters, and so on. The Internet and social media have moved the center of gravity for anyone aiming to influence. Due to the ease and reach of these tools, communication has become more frequent, compact, and arguably more influential—and failing to communicate bears its own set of consequences.
- You and your organization are increasingly asked to show a watching world the actions that demonstrate you’re living your key values. The impact of this signal can be seen in the proliferation of corporate social responsibility (CSR) reports along with an emergent style of environmental, social, and governance (ESG), or socially responsible, investing, which explicitly references a company’s holistic impact on the world. According to a study from McKinsey & Co. published late last year, ESG accounts for more than $23 trillion in assets under management and more than a quarter of assets under management globally. And it’s being integrated into portfolios at a growth rate of 17 percent a year.
This latter signal is the consequence of the intersection of two trends—one societal, the other financial. On the societal level, various and voluble voices are expressing concern about a potential disjoin: the separation between companies doing well and society doing well, fueled by observations about income inequality, retirement insecurity, and continuing asymmetric access to healthcare. On the financial front, the rise of passive investing in index funds has produced vehicles that take a disciplined approach. Although this robs investors of the ability to vote with their feet by buying or selling, it leaves them with the option of influencing companies in other ways, such as scrutinizing their practices that relate to societal outcomes.
Transition involves change, and change is often hard—nothing new there.
Making my way in CEO circles, I see leaders tugged in disparate directions, struggling with the transition that’s now in motion. At chief executive gatherings, I increasingly hear—in response to a sometimes-skeptical society—allusions to companies needing to “earn their license to continue doing business.” At the same time, other leaders are focusing on shareholder value—for example, spending the better part of their companies’ gains from tax reform on share buybacks, which (hopefully) are productive for shareholders but not necessarily for other constituents.
All of which leads me to question why this transition tends to be viewed through a lens of either/or. Can’t a performance-based company be a good global citizen? Can’t a socially responsible company serve its investors?
I say yes to both.
Two truths become apparent when corporate social responsibility meets shareholder value—one is new, the other evergreen:
First the new: Customers sometimes prefer to do business with a company that’s proactive and invested in CSR. Consumer-facing companies have learned this (occasionally the hard way) for a while. But nowadays, we see this even in business-to-business companies like Verisk. When potential customers are considering doing business with us, we’re being vetted more and more for socially responsible behaviors such as our climate disclosure or supplier diversity program.
Now the evergreen: You can’t be corporately responsible, socially or otherwise, if you aren’t operationally excellent. Even if you’ve accurately measured your carbon footprint, you can’t reduce it if you don’t have control over your operations and the ability to modify them without sacrificing productivity. Similarly, in stewarding your supply base, if you don’t have effective processes and systems for vetting and transparently collaborating with your suppliers, you’ll fail in any effort to influence their behavior.
Yes, the investments to become more corporately responsible (read: in greater control of your operations) may create an extra cost burden. But since time immemorial, the work of business leadership has always been to balance cost and revenue to achieve the best return. But in this case, the operational excellence applied to corporate responsibility can potentially yield greater customer affiliation and reliably contribute to shareholder value in the long run.
You’ll also need to balance the execution of a well-tuned operation today with a compelling long-term vision. A leader who doesn’t pay attention to performance may not be around to experience the potential long-term harmony of shareholder value and corporate social responsibility. Start with a quantified view of the increased value, denominated in money, that you and your organization can bring to the world. Ultimately, it should and will serve all stakeholders. And when everyone lines up behind this compelling view, you’ll find it easier to navigate the trade-offs that inevitably occur when making short-term investments for long-term gains.