Book review: Measuring Good Business - Chap. 1

Book review: Measuring Good Business - Making Sense of Environmental, Social and Governance (ESG) Data - Chapter 1 - Moral merchants

In my introductory post last week, I explained that I have endeavored to summarize key insights and takeaways from this book (which I highly recommend) in five weekly posts, each one corresponding to a different chapter. This week is Chapter 1: Moral merchants.

(I offer my gratitude to the author Richard Hardyment for his thorough research and captivating narrative. 🙏)

This chapter is a journey back in time to provide the historical context for what we understand to be corporate sustainability.

The ancient history of commerce as a social activity

The author starts by going back to ancient civilizations, for whom the concept of financial gain was morally corrupt, and money and business should exist only for the social good. 

In the Roman Empire, which created the corporation as a legal entity, this privilege was granted by the authorities only to those with a clear public purpose or social benefit (e.g., building a hospital or orphanage).

In Ancient China, greed among merchants was considered morally degrading, and trade was accepted as means of making a living, but profit maximization was not.

Medieval guilds were social entities with a commercial role. They regulated prices, provided training and apprenticeships, contributed to charitable causes, and supported the welfare of members’ families. 

Priest and philosopher Thomas Aquinas wrote that selling something for more than its just price was unjust and unlawful. 

Over centuries, “businesses across the world evolved voluntary systems to self-regulate according to social expectations”, notes the author.

Even those proning a free-market system, such as Adam Smith and Joseph Schumpeter, also believed that this freedom was predicated on moral conduct, solidarity, and cooperation. For the author, “when a ‘free market think-tank’ slams sustainable investing as against the principles of Smith, it’s based on sheer ignorance about everything he stood for. Smith taught that ethics has to underpin free markets. No one in business can avoid moral choices.”

The author also traces the birth of modern capitalism to the world explorers of the late 1400s, with the creation of joint stock companies. These were a form of pact with the government: “the national interest was advanced in exchange for exclusive and profitable trade monopolies. As a result, the charters of the joint stock companies all enshrined an explicit social objective. [...] So at the point that shareholders first step onto the stage, the state required a social purpose as an explicit commercial objective in the legal form of charters. [...] “The right to make money was a carefully controlled privilege”. This period of fast expanding global trade also gave rise to the accounting profession, in order to help manage the complexity of international trade, reassure shareholders, and build credibility. 

The enlightenment revolution in measurement

According to the author, the tremendous advancements of science during the period of “enlightenment changed the paradigm for the world and business’s role in it… [teaching us] that nature could be understood, ordered, and controlled, and most of all, it could be measured. [...] Plants, people and profits morphed from things to facts. They were recorded in a new language: numbers”.

From the 17th century, both nature and people became commoditized and “a new era had begun where people and nature could be counted and exploited at scale for national prestige and private profit”.

The shift in corporate focus from social purpose towards profits accelerated the 19th century, with the creation of the public limited company in England in 1856, quickly imitated by other countries. “An explicit link between social purpose and incorporation was broken. Anyone could now set up a company [...] for purely private profit.” 

The proliferation of for-profit corporations also led to the increase in the number of stockholders and the creation of the management profession, separating the two functions. In this new form of managerial capitalism, the author notes that “business, its people and environment were to be surveyed, labeled, categorised, standardised, quantified, tracked, compared, rated, valued and monetized.” 

Yet despite this dramatic shift in corporate activity, industrialists remained mindful of their social obligations (even if to keep regulators at bay) and responsible business practices prevailed thanks to the benevolence of ‘enlightened owners’ and ‘philanthrocapitalists’ – the author citing examples like Rockefeller, Cargenie, Krupp, Levi Strauss, and Cadbury.

Also, the Wall Street Crash of 1929 shifted the role of big business and private enterprise to contributing to job creation, welfare support, and regenerating communities. “Companies had obligations to stockholders but were expected to balance those with the interests of other constituencies: employees, communities, suppliers, and customers. [...] Morals and ethics were centre stage [and] the board’s role was seen as a ‘mediator’ that could navigate competing needs between different stakeholder groups.” In 1943, management expert Peter Drucker made the case that a company wasn’t simply an economic entity - it was a political and social one. The author points to numerous examples throughout the mid 20th century to illustrate that “business was connected to and embedded within society – a mutually entwined relationship based on shared values. Stockholders needed a reasonable return, but profit was not the motivation for responsibility.” 

The end of the chapter sums it up well:

“The idea that you should do business and invest responsibly to make more money is an incredibly recent idea. If the past 2,000 years of history is a 24-hour clock, we’ve had 23 and a half hours of business as shared, social endeavour: balancing different constituencies; the right to make a profit weighed against social obligations that were accepted as a cost. Now, in the last 30 minutes to midnight, we’ve flipped it on its head: people and planet matter because they shape corporate valuations. This extraordinary narrowing of the frame has crucial implications for measurement. It’s occurred just as a deluge of data, disclosures and dollars have flooded the scene. To find out what this dramatic new era means for measuring sustainable business, we must lift the curtain on ESG World.”

This is my favourite chapter of Richard Hardyment’s book because it is grounding. It provides the historical context for the concept of corporate sustainability. It (re)connects us with things that people who came before us already knew, and (re)surfaces worldviews, mindsets, and values that are so very much needed to achieve a sustainable ecosystem. That also means it’s deeply humbling for any sustainability practitioner to realize that none of what we talk about today is new. As is often the case, others have trodden before us.

Last week: Introduction

Next up: Chapter 2 - ESG World

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