February 23, 2024

Leading Business

Business in Evolution

Ever more corporations are global. What are they responsible for?

8 min read
Toyota dealership office with glass paneling
A Toyota dealership in Kyiv, Ukraine, on July 29, 2020. Toyota is headquartered in Toyota City in Japan but does business in 170 countries.

(Image: iStock/Marina113)

Conjure the image of the multinational company, and a few key players come to mind: Google (“Alphabet”), Amazon, Toyota, or certainly any pick of oil companies. But the concept is not new, as any historian might point out—the British East India Company, after all, traded internationally for hundreds of years and dates to the early 1600s.

But these companies, which, by definition, produce or sell in at least two or more countries outside of their home country, have grown in number in an increasingly globalized society, including many from emerging markets—see: Brazilian petroleum multinational Petrobras, or South African fast-casual chicken restaurant Nando’s. And others have expanded manifold from their home country, like Coca-Cola, which operates in nearly every country.

It begs the question: What is a multinational company responsible for, and how should they perceive their relationship with their home country?

From multinational to global

“Multinational companies are global companies,” says Chang Sun Term Professor Regina Abrami, faculty director of the Lauder Institute of Management and International Studies’ Global Program, explaining that many companies that began interacting with just a handful of companies now think even broader. Many of these dealt with natural resources, she adds.

“In the past, we thought of them as companies from advanced industrialized countries going overseas, and often focusing their business activities within the former colonies of their home market. Today, company headquarters are not necessarily even in the same country where a company originated,” she says.

Multinational companies emerged as a big field of study in the early 1960s, Abrami explains, even though many well-known Western brands began to go global much earlier (e.g., Proctor & Gamble). With this, the question of what a corporation is responsible for—society, nation, or shareholders—emerged, to be most famously answered by Milton Friedman in his New York Times 1970 essay where he argued that corporations, first and foremost, were responsible to their shareholders. Titled “The Social Responsibility of Business is to Increase its Profits,” this essay reflects ongoing tension around the responsibilities and impact of corporations.

Today, Abrami says, these conversations have evolved into in-depth analyses of a corporation’s environmental, social, and governance impact. Popularly coined as ESG, it’s a framework that centers a corporation’s impact on the environment (“E”), how it’s structured to act on labor trends and political risk (“S”), and its internal organization (“G”). To support this trend, on July 1, the Wharton School launched two MBA majors and an undergraduate concentration in ESG as part of its Wharton ESG Initiative, which offers an in-depth foundation for students who want to better understand the linkages between these principles and to acquire the necessary analytical skills. In January, Wharton also announced the launch of an ESG executive certificate program that focuses on analysis and strategic thinking, with sessions led by tenured Wharton faculty.

“At stake is demonstrating the material impact of ESG,” Abrami says. “Is consideration of ESG factors costing businesses money or helping their bottom line? That’s where the research sits today. In the wake of global supply chain shortages and increasing tensions between the U.S. and China, we are also beginning to see key stakeholders, including labor, raise again the question of what obligations multinational corporations have to their home market, or founding location?”

Today, most global companies, she says, release ESG reports—especially pertaining to issues of environmental impact and working conditions. In January, at the World Economic Forum Annual Meeting, 137 companies announced they’d also release non-financial disclosures standardized by the Stakeholder Capitalism Metrics first identified at the 2020 Annual Meeting in Davos.

Corporate responsibility and ESG

But ESG’s emergence hasn’t been without critics, many of whom exist in Republican state legislatures and charge that the movement is anti-capitalism or too values-based. Florida Governor Ron DeSantis went as far as to ban the state from making what he called “woke” investments, referencing ESG by name.

A fundamental misunderstanding about ESG, says Witold Henisz, vice dean and faculty director of the ESG Initiative and the Deloitte & Touche Professor of Management, is that it is ideological. Instead, he says, it is about financial analysis on contemporary issues like climate, diversity, and community impacts that can stave off financial risk.

“If we want to fix or address these things, there’s no way to do it unless we show there’s money in it—that there’s a return,” Henisz says. “Adapting to climate change is going to take $50 trillion, and where is that going to come from? It can only come from people who can make money off it; there’s not enough government money to invest $50 trillion in climate mitigation.”

Building toward that reads 'Coca-Cola'
Coca-Cola headquarters in Atlanta, Georgia.

(Image: iStock/wellesenterprises)

Naturally, global companies encounter questions of social responsibility constantly. One example he cites is car companies, like Tesla, that need lithium for car batteries. Lithium mining takes place in areas of the Congo, Chile, China, and beyond, but the United States has determined battery manufacturing is a matter of strategic importance nationally and has subsidized the creation of factories. An ESG approach, then, would be not just ethical—under a view that the global company should aid its home country—but potentially profitable.

“When the U.S. government says, ‘This is nationally strategic and important, and we don’t want to depend on China and we’ll give you $150 million to do it in Utah,’ then suddenly it’s, ‘Maybe I can make money mining’—and it’s not that they don’t care about the ethics, but at the end of the day if you’re going to lose money doing it, the ethics may trigger government policy because so many people think it’s the right thing to do,” Henisz explains.

As a human rights matter, he says, that might deter companies from using—as one example—slave labor in the Uyghur population in China. But it’s ultimately, Henisz says, about finding what are often underappreciated ways to make money, while balancing any number of business factors, whether related to human rights or labor conditions. That business principle stems from a longstanding theory from Wharton alumnus R. Edward Freeman, who established a contrasting view of Friedman’s shareholder theory that claims the goal of a business is to maximize harmony among stakeholders.

“With the ESG movement, what it’s about is saying we’re not doing as good of a job measuring climate impacts, societal impacts, worker impacts, and as a result we’re not really achieving harmony,” Henisz says. “We’re not really doing a good enough job and we’re too close to the shareholder primacy view and we want to rebalance things to more correctly value ESG factors.”

Another rising theme of the ESG movement—and certainly one of interest to any global company—is nearshoring, which has become more common in the wake of the pandemic, considering the identified need to diversify supply chains and address human rights violations in other countries. In short, nearshoring is the relocation of production to neighboring countries, most commonly—for the United States—Mexico. It’s become increasingly more common since the signing of the United States-Mexico-Canada Agreement (USMCA) in 2020, which reshuffled trade agreements between the countries and replaced NAFTA.

“Say there’s a recent exposé about auto parts in Xinjiang and China, with exposure to these human rights violations, are [companies] really going to move back to the U.S.? Maybe not, but they could move to Mexico,” Henisz says. “And so, we can be diversified but not quite as global. We can still go somewhere that labor costs are much lower than in the U.S., but closer to home. Maybe 40% in Mexico, 20% in Canada, 20% in the U.S., and 20% in Korea.”

That’s not to say nearshoring won’t come with its own host of issues, Henisz says, but he’s hopeful that companies can “learn from mistakes of the past and develop better processes” as they set up new factories.

Is local always ethical?

Brian Berkey, an associate professor of legal studies and business ethics at Wharton, challenges the notion that companies need to prioritize their home countries at all, calling it a form of “localism” that’s become intuitively appealing to many but not ultimately ethically justifiable.

“There are people in need, suffering all over the world, and I don’t think the fact that many of them are on the other side of the world makes their suffering any less important than what’s happening around the block from me,” Berkey says, explaining this is what’s referred to as a cosmopolitan view in philosophy. “Often, we’re in a position to do things that will have important beneficial effects near us, but not in nearly as good a position to do things that will benefit people on the other side of the world, but … we don’t have reason to prioritize the interests of people near us in a fundamental way.”

Atypical of a business school, Berkey is one of five philosophers at Wharton and teaches undergraduates who have the option to take either a business ethics or law course. He points out that these discussions came to the forefront during the COVID-19 vaccine rollout, when countries had to decide whether and how to weigh questions of equity. The same, he says, could apply to business decisions.

“The idea that it’s morally praiseworthy to keep jobs in rich countries, rather than providing them to people in need in poorer countries, seems to me deeply mistaken,” he adds. As for ESG’s role in moving companies toward more ethical behavior, he’s less rosy, citing similar notions of social- and environmental-mindedness under the corporate social responsibility business model. Companies, he says, are not always in a position to both do the right thing and be profitable, let alone maximally profitable. “There [could be] a number of options that are sufficiently profitable, where as an executive you’re perhaps choosing between maximally profitable and maybe 5% less profitable, but still plenty profitable for the business to be successful … surely there are cases like that,” he says. “But in other cases, the sacrifices might be bigger and we’re not always talking about certainties about how profitable something will be. For energy companies, continuing with oil and gas might be quite likely profitable at a pretty high level, whereas a dramatic shift to clean energy might be really risky with a small probability of a really big upside.”

While it’s an open question the level of impact ESG principles will have on global companies and their decision-making, it will continue to influence how companies perceive their relationship with their home countries and the world.

ESG as a term, in fact, has origins in a global context: It was first introduced in a United Nations report in 2004 and, as Henisz points out, some of its principles of sustainable investing have been around since at least the Vietnam War. Closer to home, he adds, factoring values in business decisions could be found with Quakers who would not invest in guns.

“The history of what is now the ESG movement is quite long,” Henisz says. “The term became popular in 2015, but ESG is not new—just the fact that it’s so topical and in the headlines is. But neither the label nor what’s going on with the ESG movement is new.”

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