Chicago Booth Review Podcast How Should Companies Respond to ‘Woke Capitalism’?

Alison Taylor: It's almost evolved into sort of if a majority of your stakeholders cares about this thing, you need to take action on this thing almost like stakeholders or maybe just employees are like the electorate and company leaders are like governments. And if we yell loud enough, if we yell loud enough at the Google CEO of contracts with Israel, maybe he'll listen. That's dangerous as hell because there is no mechanism for democratic decision-making in an organization.

Hal Weitzman: Companies in the US have faced a new kind of pressure in recent years, not a financial challenge, but the complexities of what some call stakeholder capitalism and others deride as woke capitalism. It started with demands on corporations to limit and disclose their impact on the environment, moved on to pressure to be more transparent about diversity and inclusion, and has evolved further into calls for companies to take explicit stances on domestic and international politics. How should corporations respond?

Welcome to the Chicago Booth Review Podcast, where we bring you groundbreaking academic research in a clear and straightforward way. I'm Hal Weitzman and today we're listening in on a conversation between Alison Taylor, a clinical associate professor at NYU's Stern School of Business and the author of Higher Ground: How Business Can Do the Right Thing in a Turbulent World, and John Paul Rollert, an adjunct associate professor at Chicago Booth and our in-house ethicist, whose voice you will have heard before if you're a subscriber to this podcast.

Some companies spend a lot of time responding to social media, a trend that Taylor thinks is dangerous. Instead, she holds up examples of companies that have focused on specific goals and made them call to their overall mission. This conversation was recorded at an event co-sponsored by Chicago Booth Review and Booth's Rustandy Center for Social Sector Innovation.

John Paul Rollert: Excellent. Alison, thank you. Thank you so much. And thank you so much for coming here to Chicago to join us. So what I'm struck by both in your talk and reading through your book is that so much of this argument is in the shadow of a famous figure for us here at the University of Chicago, Milton Friedman, and his famous 1970 essay in The New York Times Magazine, The Social Responsibility of Business is to Increase Its Profits.

Alison Taylor: Yes.

John Paul Rollert: And very early on you say that, I mean really for 40 years, that gave us a very clear mandate in the way companies should be run, maximize profits, don't break the law. But you note that that's begun to break down in part of writing a book like this. The necessity of a book like this takes that fact into account. What happened? Why did that break down that consensus?

Alison Taylor: Well, I mean I think it broke down earlier. It broke down because in 1970, capitalism was, what? Japan, the US, arguably a bit of Europe. So then there is the end of the Cold War and business globalizes. Business goes abroad to look for cheap raw materials and cheap labor partly to avoid the law. So you've then got this problem of national laws and whether national laws work. And for anyone odd enough to remember the '90s, there was a lot of noise about sweatshops and sweatshop labor and cheap labor and globalization and protests at the WTO in Seattle. So I think that was breaking down. And then we started to have this conversation in the '90s and the early 2000s about, "Well, what are company's responsibilities abroad and what should they do and how can we think about these things?" And that was a really promising conversation.

But in around 2004, 2005, two things happen. There was a really influential article written called Creating Shared Value by Michael Porter, and ESG is coined at the UN. So really a bunch of people start to ask query in the early 2000s this idea or this dichotomy that was accepted in the 20th century that you can make profit or you can do the right thing for the planet or society, but there's a trade off. It was accepted in the 20th century if you're going to be a sustainable ethical investor, that is lower returns, that you cannot both maximize profit and do the right thing, and that is something that you need to navigate. Even the idea of responsible business that Friedman's reacting to is CSR. I mean, what he was irritated by was CEOs giving away corporate shareholder money to donate to the opera or something, which they were, by the way, trying to do to resist regulation.

So in the early 2000s, people then start to say, "Well, maybe that's wrong." Maybe we can do the right thing and make more money. And so then we strip out the ethical argument, we start to say, "There's no ethical problem here. It's all the win-win. We can do the right thing. We can drive shareholder value and save the planet." And that has really chewed up the debate ever since, which to the degree we're still arguing about whether ESG drives alpha. So the ethical questions and the really fraught geopolitical ethical questions kind of got drowned out by this rise of very convenient and attractive arguments about how we don't need to sacrifice anything and we don't need to compromise anything and that we can still make as much money as possible and save the planet in the first place at the same time, sorry.

John Paul Rollert: I mean, is it part of your own belief then that we should choose? We should be very honest with companies, you can't always have your cake and eat it too. It's great if you can do well and do good, but actually as strong moral adults sometimes we've got to choose between them. And so if we are always saying that we can both do well and do good, we're not actually facing up to some of the real problems we face. Is that fair?

Alison Taylor: Yeah. Yes, so there's a broad do well and do good argument. If you do the right thing, stakeholders will like you and then you'll have a better reputation and then people will want to buy more. There's this very broad ESG win-win, people, planet, profit, triple bottom line kind of argument. It's not very convincing though because the reality is it depends. There certainly are environmental and social initiatives you can put in place that will make more money and drive innovation and help you manage risk. But some of them are about managing your negative externalities and there may not be a clear risk.

And then I think the other kind of consequence of this is if we are not clear whether an ESG issue is a risk or an innovation opportunity or an impact we need to manage with ethical guardrails, we end up putting it all in this big bucket of stuff, sort of ESG stuff that then no one really knows what to do with, the company can't operationalize. And so we get these PR heavy disclosures and a lot of goal setting, but no one then really knows how to integrate it into the business. So our rhetoric is understandable and it was a good idea in the first place, but now it's just trapping us. It's stopping us from moving on and it's stopping us from looking at these topics with the rigor they deserve, in my opinion.

John Paul Rollert: Is part of that then giving up on the goal of profit maximization? So let me frame it for you. One thing I'm struck by whenever I return to Friedman is it's one thing to say my goal in running a company is to be profitable and to therefore be viable and do all these other things, which I actually think is fairly normal if you talk to family businesses, private companies, that's how they think. It's fundamentally different to say no other values matter, we merely need to respect the law and maximi se profits. So is part of this bargain we have to reassess profit maximization as a goal and say, "Actually, no, that can be deeply deleterious and disadvantageous"? Let's just think about profitability and these other things because then we're really actually making choices. Because again, with profit maximization, you're not choosing. You're saying there's one variable that matters. And if everything else falls in with it that's great.

Alison Taylor: And we've kind of evolved to talk about this like it's gravity, like it's some kind of unmovable thing we can't debate and we can't argue about. And then the other thing I just find it really fascinating the way that questions of ethics kind of normative ethical questions. It's like people are like, "Oh, we can't talk about that." It's also really striking to me that whether you are very right or very left, whether you you're pro or anti-ESG, you are all making the argument. Bloomberg makes this argument. Larry Fink made this argument. Certainly Mike Pence makes this argument. I am the rational capitalist. You are ideological. And so it's not a question of ethics and values, it's that there's this weird knee-jerk we can't talk about ethics because that's ideological. And I think that's really interesting because I'm not sure it always is ideological. And so when I bring up corporate values and ethics, which I do a lot, and a lot of people sort of go, "Well, that's ideological," and people disagree and the world's so polarized and how can you possibly navigate through this?

And then I have examples. So I say, "Well, what about..." So Hertz, the car company has just paid $168 million fine for having its customers arrested and accusing them of stealing cars that Hertz had in fact just lost in car lots somewhere. This is literally true. A woman in Florida just spent 30 days in jail and she had a child after Hertz had her arrested. Or we can think of Amazon that makes paid warehouse workers work next to a dead body all day. Or we can think about the Norfolk Southern train derailment where it emerges they've been lobbying safety regulations. And in all three of those cases, I ask you how ideological really is that? Do any of us, no matter what our political beliefs, really think that a corporation should be doing any of those things? And I think the answer is no.

John Paul Rollert: As a person who also teaches business ethics, I will not object to overlooking dead bodies and stolen cars. But so let me ask you, because one of the differences that I think you highlight in the book that I think is also different from what Friedman originally had in mind. So Friedman, you're right, he's thinking about the CEO who donates to the ballet and effectively companies that give away money probably to non-objectionable causes. And for him-

Alison Taylor: Yeah, I mean you will know more about this than me because this is your topic, but my understanding is there were all these ethical scandals in the '60s and then there was all this noise about we've got to regulate them because they're all price fixing. And then the CEOs were like, "Oh, no, you don't need to regulate us. We'll donate to charity." And that's irritating. And this is also the origin, I believe, of the split between ethics and compliance and CSR.

John Paul Rollert: One of the things that strikes me it seems to me today, and you highlight some of this, is that CEOs are now being asked not necessarily to donate to charity, right? To do something which facially is unobjectionable, but really ought they to be doing it. It's taking sides on hot political matters. How should we think about those questions? So it's one thing if you have a company that is dumping toxic waste in a river, maybe we can all agree that they ought not to be doing that, right? But it seems to me that a lot of CEOs are really splitting hairs now over third rail political issues that they don't want take a position on. They want to retreat to this kind of Friedmanite view, but they're increasingly being pushed by both their shareholders, the public, as well as their own employees to take stands on issues. Where does that fit in? And when you're counseling leaders, how should they think about those types of challenges?

Alison Taylor: Well, so I think part of what's happened is it seemed easy and it seemed like a no-brainer when it was the Paris Climate Agreement and DACA and now it doesn't. So I think there was a progression here that was fairly predictable. I've been writing about it for a long time, but is now playing out in a very, very uncomfortable way. And with that shift in position came this rise of stakeholder capitalism rhetoric. That is arguably, and you would probably argue, a better approach than the profit maximization shareholder focus. But it's almost evolved, I hear really kind of interesting, it's almost evolved into sort of if a majority of your stakeholders cares about this thing, you need to take action on this thing almost like stakeholders or maybe just employees are like the electorate and company leaders are like governments. And if we yell loud enough at the Google CEO of contracts with Israel, maybe he'll listen.

That's dangerous as hell because there is no mechanism for Democratic decision making in an organization. There are real questions about what capacity leaders, are they representing the company? Are they speaking in a personal capacity? Does that align with political spending? What right do you have to take a position on a controversial topic that your employees may violently disagree with? You are then at minimum creating a subset of resentful silent employees that don't feel psychologically safe. So all of this suggests to me we need to observe human rights principles, which, apart from anything else, suggests that you do not get to impose your values on people that don't share them.

So I think we've got to re-emphasize individual responsibility, individual political engagement. I think companies need to stop surveilling everybody and trying to control what they're saying online and we need to recreate the division between a professional life and a personal life. And then I think leaders need to be much more honest about, I might be able to cut my carbon emissions if the technology's there, but I'm not going to be able to single-handedly solve climate change because there are also policy questions. So I need to be honest about that. I think we've cornered ourselves into a lot of really empty unconvincing over promising that is not solving the problem, but is unfortunately giving some people at least the oppression that the problem is being solved.

John Paul Rollert: Yeah. You talk in the book about companies eschewing, what you call, ESG box ticking, right?

Alison Taylor: Yeah.

John Paul Rollert: In favor of more of this focus on human rights, what you say, a few existential issues on which you need to act oriented around questions of human rights. Can you explain that a little more in terms of how, if you're leading a company, how you think about those matters?

Alison Taylor: Well, yeah. So two slightly different arguments. So I think ESG reporting frameworks, which say report on these 75 metrics, these 200 metrics result in a kind of box ticking. People have ever looked at corporate materiality maps online, they typically have 30 issues on them and they include a lot of issues that the company can't meaningfully influence. So there's a lot of tick box overpromising, here's what we're doing on the environment, here's our glossy brochures, here are all the wonderful things we're doing. No company can prioritize 30 things. It's not convincing. None of this is being built into the incentives and that kind of thing.

And so a lot of it's self-serving PR. So that's one problem, the kind of dilution of goals and the suggestion that if anyone is making a noise about this, you've got to say something. The reason I land on here and so what I'm arguing more about human rights is that that is the best grounding for ethical commitments, which is not the same thing as saying you run your entire business on human rights grounds, but I'm talking about your code of conduct, your ethical commitments.

I like human rights frameworks. So the UN Guiding Principles on Business and Human Rights are only 13 years old. I like them because there is a body of law that exists since the end of the Second World War. I like them because they have considered trade-offs between different rights like freedom of expression and safety and things like that. So there's a body of law again then you can refer to. I like them also because they are clear, unlike ESG and unlike sustainability, they're clear on this is the government's responsibility and this is business's responsibility.

And so I think we need to think more systemically, but thinking more systemically does not mean companies trying to solve systemic issues. It means companies being more restrained and more thoughtful and more honest about what their role actually is and the role of other institutions and to stop trying to put their thumb on the scale. So there's Luigi Zingales is of course a professor at Chicago, and I love this quote from him. He says, "We've had the corporatization of the political world and the politicization of the corporate world." And so that I think is the problem.

Hal Weitzman: If you're enjoying this podcast, there's another University of Chicago Podcast Network show that you should check out. It's called Nine Questions. Join Professor Eric Oliver as he poses the nine most essential questions for knowing yourself to some of humanity's wisest, the most interesting people. Nine Questions with Eric Oliver, part of the University of Chicago Podcast Network.

John Paul Rollert: To what degree do you think companies are in a bit of a bind? Because often they're reacting to outcries on social media, the requests of their own employees, sometimes even shareholders. How easy is it for them to say, "We want to be neutral in this, we don't want to participate"? And instead, because I think part of what you suggest is what companies should do is say, "These are two or three priorities, commitments that we have." But how easy is it for them to say, if you take the example of Disney, right? Bob Chapek reacts after his own employees say that Disney's reaction to this particular action by the governor of Florida is unacceptable.

Alison Taylor: Well, I think Disney could have quietly signed on to the Human Rights Council letter with everybody else and nothing would've happened. So it was an unforced error. But one of the problems I think is we've encouraged leaders to anchor to reputation. We've said, "If you do these good things, you'll have a better reputation." Unfortunately, it's not true. So then we've ended up with governance by social media, which is, "Oh, all these people are yelling at me, therefore I need to do something about this." That's fairly dangerous as well, really dangerous as well. And activists target the best performers very often. They don't just target the worst performers.

So this story we tell everybody, which is just have a good sustainability program and everyone will love you, is not true. And so we need to anchor somewhere else. So I think we need to be a lot more honest about these kind of consequences and how anchorless you will look if you try and make your decisions based on who's yelling at you the loudest. And internally, I think this also is playing out with, there will be a subset of very loud employees that have very strong opinions on a topic, and those are the employees getting the voice. And then there will be a bunch of other employees that don't agree and don't feel safe to say what they really think. And that has a very, very problematic effect on culture.

John Paul Rollert: Are there good examples of companies that have narrowed... You talk about focusing on say three core priorities. Are there companies that you think have done a good job of this to saying no to the inbound of every different kind of concern that comes in and making it quite clear, "Look, we're not going to be responsive to every concern. We're not going to participate in every debate. These are the limited priorities we have and we're going to commit to them and judge us by those"? Are there any companies that you think stand out and do a good job of that?

Alison Taylor: I mean, yeah, I hesitate to name good and bad companies because I think there's no such thing, but I think GM has done a really good job. It's got a focus on climate change. It's thinking about the climate transition, clearly very key to its core business. Very, very important. An example of a private company I have in the book is Chobani focused on the US agricultural food system, including its human rights impacts, including its issues. Most impressive of Chobani is that they've hired refugees into very red parts of the country into their manufacturing facilities without experiencing the kind of media backlash you might expect. So they're doing something right, and one of the things they're doing right is employee ownership and giving employees at stake.

John Paul Rollert: One thing I wonder about, so obviously at business schools we talk a lot about incentives and part of the revolution that took shape after Milton Friedman was the rise of monetary incentives. And the goal was to focus the mind. Don't think about anything else, think about maximizing profit, your own and, by extension, the company's incentives are well-crafted, that's precisely what will happen.

Alison Taylor: Yes.

John Paul Rollert: Do we need to move away from that as well too? Is that part of the problem that we have a rhetoric and logic that increasingly has told people that's all you must think about and we should design all of our policies consistent with that, right? I mean, that's of course the logic of incentives. Do we need far more complexity? Because it seems here that's, as far as I can read, part of the problem. What do you think?

Alison Taylor: It's definitely part of the problem. Actually, in fact, originally in the first draft of this book had a chapter on incentives and it was so difficult. I think it's really difficult to get incentives right. So something that's happened recently, I think as much as 60% of the S&P 500 now have ESG incentives for their senior leaders, which a lot of people tell me are just a way to get clawback provisions excluded. And a lot of it plays out with executives getting bonuses for things they should have been doing in the first place. There's an example in the book, McDonald's has 15% of its senior executive comp on human capital indicators. So put some women in the C-suite and you'll get 15% of your bonus. And so that's the way that they're rewarded.

But this was all happening at the same time. You can read contemporary press reports of McDonald's redlining Black franchise owners. So it's a good example. The company has maybe not made a thorough organizational level commitment to diversity. It's ticked the box on a few things and some people have got rich, and it hasn't really embedded that into the business. So I think it's really difficult. You focus someone on one goal, you get this good arts law problem, you have too many goals and too many things going on, and people can't focus and it gets incoherent. So I genuinely think this is pretty difficult.

John Paul Rollert: Is there a role for the law to play in this? Are there laws that could help to propel these kinds of changes? Or do you see the legal question as something that's entirely separate, we should really be focused on companies themselves? Or are there ways in which laws can help propel these changes in a positive way?

Alison Taylor: I mean, laws are a big deal. Companies take laws really seriously. If there's a law, then there'll be a compliance team and there'll be a budget, and there'll be people all over it, and there'll general council be in the room and people will. So I think the law is very, very, very important. But a couple of things, the laws are internationally inconsistent. So it's impossible, for example, to do human rights due diligence and not break Chinese espionage laws, for example. I mean, I have the example in the book of anti-corruption. So anti-corruption is this really good news story of legal enforcement. I mean, it's reached a kind of state that a human rights or climate campaigner dreams about, but arguably, corruption hasn't gotten any better. So the law gets a certain response from corporations, but it will be a defensive and self-interested response.

So something I worry about with the EU human rights laws that are playing out now, which say that you've got to do due diligence and manage human rights in your supply chain is what will happen is a lot of legal contracts that say, "If there are any human rights violations in my supply chain, I will now get to sue the smaller business in a developing country for my legal costs and for this violation." So it could super easily play out being just another example of a large, powerful, multinational dumping liability and dumping responsibility on a smaller supplier in a developing country, which is I don't think what we need to do.

John Paul Rollert: And as ways of navigating this complication, you can also pick up Higher Ground: How Business Can Do the Right Thing in a Turbulent World. Please join me in thanking Alison Taylor for joining us.

Hal Weitzman: That's it for this episode of the Chicago Booth Review Podcast, part of the University of Chicago Podcast Network. For more research, analysis, and insights, visit our website at chicagobooth.edu/review. When you're there, sign up for our weekly newsletter so you never miss the latest in business-focused academic research. This episode was produced by Josh Stunkel. If you enjoyed it, please subscribe, and please do leave us a five-star review. Until next time, I'm Hal Weitzman. Thanks for listening.