RSM Survey Reveals How the Middle Market is Tackling Environmental, Social and Governance (ESG) Issues
As businesses face increased pressure from stakeholders, research shows that middle market companies have an opportunity to set themselves apart
RSM US LLP – the nation’s leading provider of audit, tax and consulting services to the middle market – recently announced, in collaboration with the U.S. Chamber of Commerce, results from its RSM US Middle Market Business Index (MMBI) Environmental, Social and Governance (ESG) special report. The report paints a picture of a middle market economy that recognizes its broader responsibilities but is still grappling with how to put these new ideas into practice.
Last August, the Business Roundtable, which represents the nation’s largest companies, redefined the purpose of a corporation from simply making profits for shareholders to benefiting multiple stakeholders—customers, employees, suppliers, communities and shareholders. This sparked a significant shift in how the entire business community views its role in society. In its special report, RSM explores how this message is reaching the middle market. The responses were collected as part of RSM’s Q4 2019 MMBI survey, and respondents were asked for their views on topics including stakeholder commitments, social responsibility, ESG critieria and culture, diversity and inclusion. While this survey was fielded before the onset of the COVID-19 pandemic, many of these issues will be even more dominant after the crisis passes.
Middle Market Takes Action on Stakeholder Commitment
The report found that middle market companies are focused on more than just shareholder returns, and many have formalized plans to serve a variety of stakholders, including customers (70%), employees (74%), suppliers (56%) and communities (55%). While delivering results to investors remains among the top categories, at 68%, it is not the highest.
However, the findings also indicated that larger middle market companies ($50 million to $1 billion in annual revenue) are more likely to have written objectives and metrics than smaller middle market companies ($10 million to $50 million in annual revenue) within every stakeholder category. For example, a higher percentage of the larger firms had performance standards in place for supplier relationships, such as the amount of business with minority-owned firms (37% compared to 23%) and women-owned firms (37% to 20%), as well as number of fair-trade sourcing commitments (35% to 19%).
“There’s a notable rift between large companies and their smaller middle market counterparts. Smaller companies don’t yet feel the pressure to follow the broader push for corporate social responsibility, while larger businesses are more likely to be held accountable by stakeholders and typically have better resources in place to conduct a deeper level of analysis,” said Anthony DeCandido, partner and financial services senior analyst with RSM US LLP. “We’ll continue to see this trend evolve as the demand for transparency increases and companies face greater regulatory pressure both in the U.S. and globally.”
Social Responsibility Remains High Among Middle Market, But Some Are Slower to Embrace ESG
The vast majority (more than 90%) of middle market executives told RSM that their companies supported social, community or philanthropic causes over the past two years, especially in the communities where they operate, which is similar to last year’s findings. However, there was a decline when companies were asked if their community support was spelled out in a formal social responsibility plan. Overall, 32% said they had such a plan in 2019—a drop from the 38% in 2018.
While the middle market has long engaged in social responsibility efforts, the adoption of ESG criteria is still catching up. Only 39% of executives are familiar with ESG criteria to evaluate the performance of organizations – the same number as 2018. Of that group that is familiar, 79% use ESG to track their own activities, while 74% say they use it to measure the performance of other organizations. As internal debates around ESG continue, RSM expects that awareness of how ESG drives impact on society and creates long-term value will grow among middle market companies.
More Focus is Needed on Diversity and Inclusion and Women’s Issues
RSM’s research shows there is not as much of a formal emphasis on employee diversity and inclusion in the workplace within middle market companies. While 84% of executives surveyed said that they had at least an informal focus on diversity and inclusion, only 53% said they had a somewhat or highly formalized focus.
Women’s issues and empowerment were areas that notably lagged behind other priorities across the board, a striking finding given that women now comprise the majority of workers on America’s nonfarm payrolls. When asked about culture, diversity and inclusion in the workplace, only 46% of companies surveyed said they were focused on women’s issues and empowerment. Multicultural issues, by contrast, received 62% support. Additionally, only 27% responded that gender equality was among the social, community or philanthropic causes their firm has supported over the past two years. These results represents a paradigm shift in how middle market companies need to approach women in the workplace.
“As the demand and expectations for transparency and accountability in the business community continue to grow, it is imperative companies adapt to the new normal and bake ESG into their strategies,” said DeCandido. “Responding to these issues has become even more critical in the age of coronavirus, and middle market companies that invest the time and resources will not only stand out among the crowd, but will create long-term value for their shareholders and their communities.”
To learn more about the middle market and the MMBI, visit the RSM website. Additionally, as middle market businesses respond to the impact of the COVID-19 pandemic, please visit RSM’s COVID-19 Resource Center to stay informed with the latest insights, ideas and countermeasures to minimize the outbreak’s negative effects, as well as prepare for future emergency events.
The survey data that informs the index reading was gathered between October 7 and October 25, 2019.
About the RSM US Middle Market Business Index
RSM US LLP and the U.S. Chamber of Commerce have partnered to present the RSM US Middle Market Business Index (MMBI). It is based on research of middle market firms conducted by Harris Poll, which began in the first quarter of 2015. The survey is conducted four times a year, in the first month of each quarter: January, April, July and October. The survey panel consists of 700 middle market executives and is designed to accurately reflect conditions in the middle market.
Built in collaboration with Moody’s Analytics, the MMBI is borne out of the subset of questions in the survey that ask respondents to report the change in a variety of indicators. Respondents are asked a total of 20 questions patterned after those in other qualitative business surveys, such as those from the Institute of Supply Management and National Federation of Independent Businesses.
The 20 questions relate to changes in various measures of their business, such as revenues, profits, capital expenditures, hiring, employee compensation, prices paid, prices received and inventories. There are also questions that pertain to the economy and outlook, as well as to credit availability and borrowing. For 10 of the questions, respondents are asked to report the change from the previous quarter; for the other 10 they are asked to state the likely direction of these same indicators six months ahead.
The responses to each question are reported as diffusion indexes. The MMBI is a composite index computed as an equal weighted sum of the diffusion indexes for 10 survey questions plus 100 to keep the MMBI from becoming negative. A reading above 100 for the MMBI indicates that the middle market is generally expanding; below 100 indicates that it is generally contracting. The distance from 100 is indicative of the strength of the expansion or contraction.
About The U.S. Chamber of Commerce
The U.S. Chamber of Commerce is the world’s largest business federation representing the interests of more than 3 million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations. For more information, visit uschamber.com and FreeEnterprise.com, like us on Facebook and follow us on Twitter.
About RSM US LLP
RSM’s purpose is to deliver the power of being understood to our clients, colleagues and communities through world-class audit, tax and consulting services focused on middle market businesses. The clients we serve are the engine of global commerce and economic growth, and we are focused on developing leading professionals and services to meet their evolving needs in today’s ever-changing business environment.
RSM US LLP is the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with 51,000 people across 123 countries. For more information, visit rsmus.com, like us on Facebook, follow us on Twitter and/or connect with us on LinkedIn.