Blackrock, which manages a whopping $6.3 trillion, is hiring people to hold publicly-traded companies to a higher standard of corporate social responsibility, according to the New York Times.
I have been waiting 15 years for someone with that kind of clout to take action. But to paraphrase retired GE CEO Jack Welch, you can't expect people to deliver what you can't measure.
What is corporate social responsibility? Why does it matter? Isn't it incompatible with boosting shareholder value? And how do you measure it?
Before answering those questions, it is worth mentioning that after the collapse of Enron and WorldCom back in 2001, I was feeling pretty disgusted with the state of corporate America.
So I wrote a book, published in 2003, called Value Leadership. One surprising thing I found in writing the book is that companies that follow the seven principles of Value Leadership -- I called them Value Leaders -- outperformed their peers on variables that investors care about.
For example, Value Leaders grew sales 35% faster and earned 109% higher net margins than their peers and they increased shareholder value almost five times faster than the market.
If Blackrock expects its companies to act in a socially responsible way, it has a big practical problem. How will it communicate what constitutes socially responsible action? and How will it measure whether or not companies are getting more or less socially responsible?
In my book, I identified seven principles of socially responsible corporate conduct and created the Value Quotient -- consisting of 24 specific measures of those principles on which companies were graded from 5=best to 1=worst -- resulting in a score between 0 and 100.
These seven principles are not for good PR -- instead they are intended to make life better for all a company's stakeholders: employees, customers, suppliers, investors and communities. Ultimately, they should help leaders put their values into action
Last year, a group of my students gave Google a VQ of 89. To be fair, this score is based on subjective judgments based on a review of public information about the company and I would encourage Blackrock to do its investigation with more in-depth information.
Here's a definition of each principle, how to measure whether a company uses it, and an analysis of Google's score on each.
1. Value Human Relationships
A company ought to care about people -- specifically its employees -- and the principle, Value Human Relationships, can help an organization act accordingly. Blackrock can measure how well a company follows this principle by researching the following questions about the company:
•Has it committed to core values?
•Does it hire people who it believes will act according to the values?
•Does it measure people's performance based on a balance between quantitative and values-based factors?
•Does it reward employees for achieving results while respecting others?
Google gets 12.9 out of 14.3 points on this principle -- it has core values and hires people who fit them. But it falls slightly short on rewarding people -- many of them have complained of a sense of struggling to advance and to have their ideas turned into products.
2. Foster Teamwork
Companies operate more effectively if their people work as a team -- so they should foster teamwork. How well a company follows this principle depends on the quality of its answers to the following questions:
•Does it train teams?
•Does it rotate its people through a variety of jobs?
•Does it make team decisions?
•Does it reward team behavior?
Google gets 11.4 out of 14.3 points on this principle -- it has made progress in training teams, encouraging managers to serve their teams in decisions and actions, and in giving some experts a chance to rotate through different departments.
3. Experiment Frugally
Companies need to grow and they are better off doing that if they experiment frugally rather than placing huge bets. To test a company on this principle, ask how well it
•Grows organically -- rather than relying heavily on acquisitions;
•Manages development risk;
•Partners across internal divisions and departments; and
Google gets 14.3 points -- which is the maximum -- on this principle. It has developed many new services that support its advertising business while making some acquisitions. Thanks to its Alphabet holding company, it has improved the way it manages its riskier bets and it encourages partnerships internally and externally.
4. Fulfill Your Commitments
Companies operate more effectively and efficiently if people say what they will do and then act accordingly. To test a company on the principle, Fulfill Your Commitments, ask how well it
•Hires and promotes honest people;
•Accounts honestly; and
•Treats customers, employees and communities fairly.
Google gets 13.3 out of 14.3 points on this principle -- it is trying to bring in people with more intellectual humility and accounts honestly. It has a ways to go in creating a diverse work environment and has certainly fallen short of its "Don't Be Evil" motto.
5. Fight Complacency
Success can make companies too comfortable which makes them vulnerable to rivals who adapt more effectively. To test a company on the principle, Fight Complacency, ask how well it
•Plans CEO succession;
•Maintains a healthy paranoia; and
•Attacks new markets.
Google gets 13.3 out of 14.3 points on this principle -- it has restructured and appointed a new CEO for its Google business while creating opportunities for other leaders to manage its bigger bets. It pays attention to competitors and tries to stay ahead and it attacks new markets -- while still maintaining a heavy dependence on its advertising business.
6.Win Through Multiple Means
Companies become vulnerable if their business rests on only one key strength -- such as marketing or engineering. To stay ahead of rivals, companies must be good at many skills that are hard for rivals to copy. To test a company on the principle, Win Through Multiple Means, ask how well it
•Understands the customer;
•Builds diverse capabilities; and
•Sustains competitive superiority.
Google gets 11.4 out of 14.3 points on this principle. It has great insight into search consumers -- but has stumbled in consumer products like Google Glass; it is developing capabilities -- such as autonomous vehicles, cloud services, and home monitoring -- way beyond search but has yet to demonstrate it can lead the industry in these new areas.
7. Give To Your Community
Companies depend on their communities to supply employees and customers. What's more if they violate laws or pollute the local environment, they will pay a price-- so companies should give back. To test a company on the principle, Give To Your Community, ask how well it
•Uses community participation to inspire employees;
•Enriches the community; and
•Attacks big societal problems.
Google gets 13.3 out of 14.3 points on this principle. It does encourage employees to give back but not in ways that are unique compared to the best -- such as Southwest Airlines; it does enrich the communities in which it operates -- but also makes it harder for less well paid people to afford to live there; and its Google.org does attack big societal problems.
I hope Larry Fink will read this and use it to help Blackrock hold companies accountable for socially responsible conduct. But you can use these tests to see whether your company is doing right by society.