Understanding ESG & EDI in Family Businesses
Part 1 of 2
From boardrooms to executive level meetings, two acronyms have taken over discussions with ever-increasing frequency: ESG and EDI.
They have become hot topics at the highest levels of many businesses. ESG, which stands for “Environmental, Social, and Governance,” and EDI, or “Equity, Diversity, and Inclusion” are becoming increasingly vital concepts to grapple with in companies of all sizes and across industries.
But moving beyond the realm of simple acronyms demands deeper thought, both in how we conceptualize them and how they are applied. This is especially true in the family enterprise space. Most of our understandings of these concepts to date have tended to focus on large, publicly-traded companies. But what weight do they carry for families that own and operate businesses? And how can business families begin to integrate them into their own strategic planning?
Over a couple of posts, I will spend some time considering both of these concepts with regard to their practical implications for family businesses. First, let’s unpack ESG and EDI, and then we can turn our attention to a question I am regularly asked by clients: “What are the implications of ESG and EDI in the family business space?”
ESG and EDI Defined
As with any of the terms we hear ad nauseum in our corporate level discussions, it is vital to get on the same page regarding the general definitions of the terms we are using, and what their underlying implications and opportunities are.
Let’s begin with getting to a clear understanding of ESG - the Environmental, Social, and Governance issues that businesses, boards and families are considering with increased urgency. Broadly, ESG is a concept that draws together principles of corporate social responsibility and the evolution of the broader shareholder and stakeholder’s importance to the firm.
Recently, there has been a groundswell of corporations and stakeholders interested in prioritizing these principles, which has driven its increasing uptake amongst high-level executives. One such push in British Columbia (B.C., Canada), for example, has come via legislation that amended the Corporations Act to allow Benefit Companies (commonly known as B-Corps) to be registered. Where the act traditionally focuses on the primacy of the shareholder - meaning that members of Boards had a fiduciary responsibility to act in the best interests of the company and its shareholders - the amendments have diversified these responsibilities to allow registered B-Corps to include community interests, environmental impact, and other social responsibilities as part of their fiduciary duty.
It is not difficult to anticipate the array of implications that a legislative shift like this can have. This example demonstrates that even lawmakers in some regions have begun to push companies to think beyond their narrow focus on shareholders to consider their wider impacts on the regions that they operate in. As a result, it has begun to force a high-level shift away from a narrow focus on the bottom line.
Equity, Diversity and Inclusion, or EDI, somewhat naturally evolves out of the implications of ESG. When we begin to consider the wider social and environmental responsibilities of corporations as one of their core responsibilities, then issues surrounding human equity and inclusion take on sharper focus. As Boards more seriously contemplate the social, environmental and community responsibilities of the company that they oversee, then invariably they must address subjects such as social identity, inclusion, and company culture. Specifically, the people that comprise a firm - how representative they are of our wider community, and how effectively our organizations create truly equal, inclusive, diverse and respectful workplaces - begin to take on increased urgency at the highest levels of strategy and organizational discussions.
Equity, diversity, and inclusion are now, more than ever, critical components of the social expectations of a corporation.
ESG and EDI for Family Businesses: Optimized to Implement
ESG and EDI have myriad implications for enterprising families. And for many families with one or more operating businesses, these concepts may not be new. The acronyms and names may have changed, but the underlying principles are the same, and family firms have often been addressing them for decades. For these families and businesses, the human elements - especially relationships with employees who are often seen as part of the extended family - are persistently at the forefront of their strategy and process discussions. Likewise, community engagement and societal contribution is often at the heart of their commercial efforts. This reality makes family businesses quite different from their publicly-traded counterparts. While they may not be talking about ESG or EDI directly, these two concepts capture many of the key concerns and value systems of family-based firms.
As the business world progresses, it is crucial for family firms to likewise “move from the intuitive to the intentional” in their discussions about ESG and EDI. First and foremost, it is important to consider them from a risk assessment point of view. Families need to be asking themselves questions like “what risks are generated by our environment, by the society we operate in, and our governance practices?” and “what responsibilities do we have in these areas?”
Many family businesses are currently struggling with what to do about ESG/EDI, whether it applies to them, and if they should be starting conversations at the board or executive level. My advice is unequivocally “Yes.” Often family enterprises are doing more than they know and are farther along than their publicly-traded counterparts.
There are three ways that family businesses are better positioned and uniquely optimized to implement ESG/EDI, no matter their size.
First, family businesses often have a long-term, multigenerational view. ESG and EDI objectives can often be pushed aside by the short-term goals of a corporation, but a family business has much more patient capital and an outlook that often reaches decades into the future. This provides them the runway they need to have a significant impact on their ESG and EDI initiatives.
Second, family enterprises frequently lead through a values-based approach, which often aligns with ESG and EDI principles. For families, their values are often directly informed by their experiences, communities and environments. By extension, they tend to ensure their operations, strategies and policies fall into line. The result? Even if families are not talking directly about ESG or EDI per-se, they are often fundamentally working from the same principles these concepts promote.
And finally, many family businesses are deeply rooted in their communities. This means that they intimately know and comprehensively understand the diversity of the people and environments they live and operate in. They frequently have unique perspectives on what resources and support their communities need, and the special opportunities and gifts these communities enjoy. Enterprising families also engage in philanthropy, offer employment to their local networks, and work to solve community-based problems-- all key principles of ESG.
One of the primary superpowers of family businesses is that they often naturally connect with their communities through entrepreneurial energy and innovation. Navigating the human and environmental concerns at the heart of ESG and EDI have been cornerstones of family-based firms long before the concepts became commonplace topics for Board members and executives.
Nevertheless, it is important that family businesses directly address ESG and EDI to improve their understanding of both the role of these paradigms in the broader marketplace and how they can (or already do) influence operations and decision-making. If enterprising families speak to their values and practices in the context of ESG and EDI, it will only enhance their continued economic leadership while encouraging their strength and stability.
In my next post, I will consider the question of how family firms can go about implementing ESG and EDI principles without overwhelming their businesses. Stay tuned!
Kathy Bright has worked with family enterprises for nearly twenty years and is an integral part of the Telos Group team. Her range includes hands-on experience with strategy and governance and she has acted as the President and an Officer of the Board for Family Enterprise Canada and Director of the Board of the Business Families Centre at UBC’s Sauder School of Business. Kathy’s interests include leadership, succession and continuity planning, strategy, risk management, governance structures, fiduciary responsibility, and the development and maintenance of positive relationships in family enterprises.