Speaker 1:
You’re listening to Rattle and Pedal, divergent thoughts on marketing and growing professional services firms. Your hosts are Jason Mlicki and Jeff McKay.

Jason Mlicki:
ESG, it’s easy as 1, 2, 3. I had to do that, that was a given. So Jeff convinced me, he suggested we do a series, I mean a short series, we haven’t really defined how many yet, on ESG, environmental, social, and corporate governance. I will profess to say that I don’t feel super knowledgeable about the topic, so I came into it with a little bit of trepidation only because I don’t know that I have a whole lot to say. All of that said, Jeff, I am going to turn it over to you right away to lead us down this path of ESG and what it is and what’s going on in this world and as it relates to professional services firms. So let me pause there.

Jeff McKay:
Well, thank you, Michael Jackson. By the time we’re done, I want to hear your rendition of Thriller.

Jason Mlicki:
Trust me, nobody wants to hear that. Nobody wanted to hear my rendition of that either, did they?

Jeff McKay:
Maybe we should title this episode or this series With Trepidation. One might not think that talking about environmental, social, and governance issues would be that big of a deal, but I think it is. And maybe that’s just my personality or maybe that’s because my focus is on strategy, and I see the complexity of strategic choices around ESG and how firms are or are not using it to promote and position their businesses. So I think it’s of strategic importance, particularly to CEOs and practice leaders, business unit leaders to think this through because it’s something that is growing and growing fast. Firms are going to have to deal with it, I think, because it’s being driven, I think, for the most part by a new generation of consumers, whether that’s B2C or B2B, with certain expectations about businesses and the roles they play in society.
I think it has taken on even more emphasis in the past year because of the racial tensions that we’ve seen in the country. I think there are important things that exist in ESG and there are great rewards associated with it, but I do think there are serious risks associated with how firms position around ESG. Because these attributes of environment, social, and governance have become deeply politicized. And as a result, firms need to be smart about what they’re doing short-term and long-term around these things. But I also think it has important ramifications not only on positioning, but demand gen, intellectual capital agendas, and probably just as important, employer brands.
So we’re going to get into all of that. We’re going to talk about what’s really driving this, what it is, how to think about it. And hopefully, some of our friends will come on and talk about what they’re doing or not doing around this in their various firms in a couple of episodes as well.

Jason Mlicki:
All right, so let’s start at the beginning. ESG stands for environmental, social, governance. What does that mean? That phrase when it’s used, from your research, what does that mean?

Jeff McKay:
I will not say that I am an expert on this by any stretch of the imagination. So if listeners have comments they want to share, please share them with us. But to me, ESG at its current stage, and it is constantly evolving, is the outgrowth of a more conscious way for corporations to behave and for consumers to consume. I think it’s a 20th-century phenomenon but really got moving in the ’60s, particularly around the environment. You’ve probably heard of socially responsible investing if you’re old enough, and some of our listeners may not be. They know about big tobacco and investment choices around that industry, apartheid in South Africa, and there’s any number of isolated events that investors use their political clout to influence situations on the ground.
I think it just continues to evolve and particularly in the social dimensions of this past year. Just to ground this, Jason, I think it’s important. In environmental we’re talking about carbon emissions and climate change, air and water pollution, deforestation, energy efficiency, waste management, all of the things that we would think about traditionally when we think about the environment. But the real driver, I think, in the E is climate change. The S is social. This is really a focus on people, on humans in a multidimensional way, right? So it’s looking at the customers and customer satisfaction, protecting data. It gets into gender, diversity, inclusion, employee engagement, how corporations interact with their communities, human rights, labor standards. We’re all aware of controversies around slave labor or sweatshop production, shoes, and clothing, and stuff like that.
Then the third one is governance, right? It’s about having clear standards for running a company, board composition, the diversity of the boards, bribery, corruption. One of the big issues is executive compensation levels because we see in the news all the time disproportionality of executive compensation to the average employee, and any number of things related to how the corporation interacts with governments, whether that’s lobbying or bribery or other things that erode trust.

Jason Mlicki:
Do you think leadership malfeasance fall in that? There’s a big story about this former CEO of McDonald’s and a lot of just improprieties around sexual relationships, that type of stuff from the CEO, it was a really scandalous mess. Does that fall into the G?

Jeff McKay:
I think this is really important, you bring up a great example. I don’t think the E, S, and the G are clearly delineated and mutually exclusive-

Jason Mlicki:
Okay.

Jeff McKay:
… categories because you might argue that those types of abuses are related to gender inequality, a patriarchal leadership structure, but that would also lead to governance, right? Why weren’t the things in place that prevented this or allowed somebody to report it up and not fear retribution?

Jason Mlicki:
Like the whole Wells Fargo scandal where they were falsifying accounts at the front of the house, right? They would make an account for Jeff that he never asked for and using that to hit sales targets. It just unwound in all these levels of governance problems and structural problems, and cultural problems. I mean, it wasn’t just a handful of people that were bad actors, it was a whole system of cultural problems that led to very poor frontline behaviors, right?

Jeff McKay:
Yeah. Yeah. When you and I went through school… Well, at least when I went through school…

Jason Mlicki:
Yeah, Jeff’s a lot older than I am. I don’t know if the listeners know. He’s like a dinosaur, whereas I’m more like a sprite young bug.

Jeff McKay:
You’re a tadpole.

Jason Mlicki:
Yeah, Jeff’s has a better definition. No, keep going.

Jeff McKay:
This was stakeholder capitalism, right? Instead of just looking at the shareholders, you were looking at the communities and the customers and the suppliers, and thinking more holistically about the corporate contribution to the world’s wellbeing. I think this is just the evolution of that.

Jason Mlicki:
This is a curiosity question. I know I shared this journey. You suggested you wanted to do this a couple of months ago, and I said, “I’m fine with that.” Well, I said I didn’t think I had much to say, and over the course of that journey, I’ve shared a few articles with you. I think I shared an opinion piece about some of the changes in society. I know in that piece, it was talking about the shift in business school education in a way to guide people down the path of shareholder value is everything, kind of what we were taught in business school, right? Things like your job as a manager or as a senior leader is to grow shareholder value, and that’s all that matters. Is that a true thing, the idea that there was a time when maybe executives had a stakeholder view? There’s all these different stakeholders that we have responsibility towards, and then there was a shift in business culture that led us down a path of it’s all about enterprise value and shareholder value? Is that a thing? I know you probably remember the article. I can’t remember the details of it, but do you have a better memory for that stuff than I do?

Jeff McKay:
Well, I think that’s the core of the strategic choices that we’re going to be talking about here. I think it is a thing. That’s the University of Chicago and Milton Friedman, the purpose of the corporation is to make money for its shareholders, right? All the rest, be damned. I think Friedman thought that the boards and the management team would make smart choices in order to produce shareholder value, that you didn’t need all this other stuff, that it would take care of itself because consumers would self-select. If they weren’t buying your product, it was because of the particular attribute that they disagreed with, whether that was cultural or operational or product feature, you’d correct that.
I do think that’s still a very viable and appropriate way to run an organization. But I think on the other side we’re starting to see a much stronger emphasis of purpose-driven organizations, the evolution of the B Corp, and any number of emphasis on things other than shareholder value, because the mindset is, “Well, we’ll do all these things right, the shareholder value will come as a result.” And I think that’s perfectly viable as well. To me and the purpose of our discussion is to focus on that big middle, if you will, where those two circles overlap. So if you have on the far left purists and purpose-driven companies and on the right you have the Randian libertarian, free market, unfettered capitalism where we’re just producing shareholder value. In the middle, in that gray area where people are wrestling with where to fall and how to balance that, I’d probably call that the herd, right? We’re going to go with the herd where it’s safe. What does that get you? I’m not sure, we’re going to talk about that. But I see that all in on E, S, and G and all out, if you will, and then the big middle that needs to answer some hard questions.

Jason Mlicki:
[inaudible 00:13:38] is not necessarily aloud, it’s just silent, right? They’re just not saying anything publicly about it. Doesn’t mean that they’re not doing things internally, right? Or are you implying there are organizations and firms that are now actively sticking their thumb against it saying, “Well, we don’t care about the environment. We don’t care about these social issues. That’s not why we’re here.”?

Jeff McKay:
Yes, there are. As a matter of fact, we’ll cover some examples, but Basecamp. I’m sure many of our listeners are familiar with Basecamp. It’s a software company that made a public announcement that said, “Hey, not that we’re not going to do ESG,” but their focus was more on the S and the social dimension. “We’re not wading into these waters. We are a software company, and we produce software for this result. We’re not entering these political waters. It’s a distraction within our company. It’s tearing our company apart. And we’re just no longer going to talk about it. We’re going to focus on software.”
They had a third of their workforce quit as a result of that. Is that good or not? I don’t know. I’m sure they eliminated a lot of the consternation within the company, but now you’re running shorthanded. What are you going to do? But there may be people who are willing to backfill that third because they’re like, “Yeah, I’m burned out on all this controversy and everything. I just want to work.” And then they filled them.

Jason Mlicki:
Or they may even think more pragmatically than that. They just look at it as an opportunity, saying, “Hey, there are jobs at Basecamp, good jobs, high paying jobs. I’d love to work there.” So that makes people [inaudible 00:15:24].

Speaker 1:
You’re listening to Rattle and Pedal, divergent thoughts on growing your professional services firm. Your hosts are Jason Mlicki, Principal of Rattleback, the marketing agency for professional services firms, and Jeff McKay, former CMO and founder of strategy consultancy, Prudent Pedal. If you find this podcast helpful, please help us by telling a friend and rating us on iTunes. Thank you. Now back to Jason and Jeff.

Jeff McKay:
There are risks and rewards to this, but I think it’s important to understand what’s at stake here. And when I look at this… And not just when I look at it. Before we did this series, I reached out to CEOs and HR leaders and brand leaders, any number of firms, software companies, and professional services, and the reasons for doing it are very different. But I think it’s really important to understand the business rationale because getting back to those three groups of the purpose-driven, the shareholder value-focused and the herd, there are business ramifications for this. ESG is taking on a much more global and focus emphasis coming out of COVID. Banks are going to be using these criteria in terms of lending money. So there’s going to be a certain reality associated with your ESG positioning and access to capital. And whether you’re a private company or a public company, you got to have access to capital. So you have to think through what that looks like.

Jason Mlicki:
Why do you say that? Do you have data or evidence to point that to be true, or is that your opinion that this is a thing?

Jeff McKay:
No, I have data, and we’ll talk about it. I’m not going to talk about it right now.

Jason Mlicki:
Okay.

Jeff McKay:
But yes, very much moving in this direction. One of the people that we could probably have on to talk about this is our friend, Gunnar. Gunnar Branson is CEO of AFIRE, which represents some of the largest investors in real estate. It’s really important to those investors to invest in companies and communities that meet these criteria because they’re all in on the ESG, and you’re not. Your development is not going to get funded unless you’re able to substantiate them. So access to capital is going to be really important.
The second is recruiting. To a large degree, I think the ESG is also being driven from a consumer perspective, from an employee perspective because millennials, in particular, I think, who tend to be less religious look to their work for more fulfillment and want the places they work for to be purposeful and doing good and giving them meaning. By that, that means being aligned with their social views. And if you’re going to want to recruit the best talent, I think a lot of firms are thinking, “We have to say something around these issues because it’s important to the top talent we want to recruit.”

Jason Mlicki:
Okay, makes sense.

Jeff McKay:
The third is revenue and having to deal with buyers of services who want to see your ESG score because they want to choose vendors that are aligned with ESG thinking. A lot of organizations I talk to have not necessarily lost business because of ESG, they cannot point to an example that that that was the loss, but they are regularly being asked in their RFPs to provide ESG supporting materials. I think that’s another important one.
And then the third one, and this overlaps all three of those, and that is this element of risk mitigation and really the purpose of ESG from a business perspective, and that is about ensuring permission to operate, so managing the risk that would threaten your ability to operate, whether that’s a boycott and people not buying your product or having environmental issues that would lead to a shutdown of some kind, that’s probably not as relevant in professional services and software, or having some kind of corporate malfeasance, right, where the governance protocols did not stop something that should have been prevented in those other two. So I think it’s about risk mitigation. And ultimately, all of this is about permission to operate in the industries that we live in.

Jason Mlicki:
Yeah.

Jeff McKay:
It’s going to be a fun conversation, I think.

Jason Mlicki:
I think you missed one.

Jeff McKay:
What?

Jason Mlicki:
So everything you talked about in a lot of ways was talked about through the lens of really risk mitigation, right? It’s, “We have to be able to attract talent and we’re mitigating our risks of not being able to attract talent. We need an ESG score to close a deal.” But there is a giant pot of gold for most firms inside of this universe of ESG because there’s so much opportunity. The thing that I’ve always said on the E side, I leave it on the E side, is that what organizations, I always felt, seemed to misunderstand was that the opportunity to solve climate change issues, the opportunity to decarbonize things, all those types of concepts that we’ve been talking about, that’s a business opportunity knocking. There are firms that are positioned to go create whole new practices and new service offerings they never even dreamed of to solve these problems. So I just think that you also have to look at the flip side of this, is that there’s opportunities to help your clients solve these problems that they face every single day. Don’t miss that window, I guess.

Jeff McKay:
I’m glad you called that out. That is absolutely spot on. I think that’s an excellent perspective. I see that as part of the revenue generation, but it really does cut across all of them because there are opportunities in terms of recruiting just as much, right, a different type of working as a result of some of this thinking as well.

Jason Mlicki:
We won’t get into the details here, but you think about a lot of the push around diversity and hiring. I’m not an expert on this by any stretch of the imagination, but I do think there’s some pretty solid rationale in that bringing diversity and thought into your workforce is probably a pretty healthy thing, right? We’re at a point in society where we’ve competed everything down to the bare bones. If you’ve got a whole bunch of people that all look the same, sound the same, and think the same, it’s pretty hard to innovate. This is reality, you need different points of view to get innovation. I think there’s some real rationale there too.
All right, we’re at time, so let’s take this to wrap. I’m actually going to point it back to you. Where do we go from here? What we’re going to cover next time for listeners that want to go on this journey of ESG with us? What’s next?

Jeff McKay:
I think we’re going to talk a little bit about the risk and rewards of this. So ending right where you and I ended, I think is the perfect setup for that. What are the risks? What are the rewards? Have you accurately assessed them and taken advantage of what’s there? Are you somehow just muddled in the middle of the herd and just doing a little, or maybe you’re going in just to be safe or something? We need to talk about the risk and rewards.

Jason Mlicki:
All right, well, we’ll do that next time. This is going to be an interesting topic. I appreciate you bringing it to the forefront, and we will go into it as deeply as we know how and do our best to bring sound thinking against it to [inaudible 00:24:25].

Jeff McKay:
Well, at least one of us will.

Jason Mlicki:
Yeah, I’ll do my best. We’ll see what you can deliver. Talk to you next week.

Jeff McKay:
See you, buddy.

Jason Mlicki:
See you.

Speaker 1:
Thank you for listening to Rattle and Pedal, divergent thoughts on marketing and growing professional services firms. Find content related to this episode at rattleandpedal.com. Rattle and Pedal is also available on iTunes and Stitcher.