Managers could once decide if they should make profits and principles compatible. But today, there is no choice. It is imperative that managers develop strategies that deliver a return for investors and society at large. These coauthors, who have written a valuable and insightful book on the subject, distill their research into seven strategies that business leaders can use to build profits with principles.
Companies today are under intense pressure to rebuild public trust and be competitive in a global economy. To do this, they must act with greater accountability, transparency and integrity, while remaining profitable and innovative. They must engage with activists as well as analysts, cooperate as well as compete, manage social and environmental risks as well as market risks, and leverage their intangible assets as well as their financial and physical assets. Today, CEOs, directors and managers alike are faced with a complex, unprecedented challenge: How can they continue to deliver shareholder value while delivering societal value?
Some companies are making sincere, concerted efforts to fundamentally reshape markets and governance structures. They are trying to make a profit and contribute to the public good. In every way, they are committed to creating value and upholding certain values. In the process, they are changing the rules of the game. However, mastering these new rules and constantly changing expectations of society requires the articulation and adoption of clear business principles, and the design and successful use of new tools and management competencies.
We have studied 60 multinational companies that are taking a lead in responding to these challenges. Drawing on their experiences, we have developed seven strategies that move the concept of corporate responsibility beyond the boundaries of compliance, public relations and philanthropy, to become a more integral part of corporate governance, strategy, risk management and reputation. Applied broadly, this values-driven approach offers companies new opportunities for value creation, benefiting not only shareholders, but employees, customers, communities, and society at large.
Seven strategies for combining profits with principles Our research and experience have lead us to identify seven operating disciplines that values-driven companies are employing to meet and master the new rules of the game. They are:
- Harness innovation for the public good.
- Put people at the centre.
- Spread economic opportunity.
- Engage in new alliances.
- Be performance-driven in everything.
- Practice superior governance.
- Pursue purpose beyond profit
1. Harness innovation for the public good
The ability to turn good ideas into deliverable solutions has never been more important to the success of business and society. Innovation that responds to changing consumer needs and societal expectations is the lifeblood of corporate competitiveness, value creation, and sustainable growth. It is also vital to solving many of the major challenges that our world faces.
Great companies, like Procter&Gamble, 3M, Toyota and Dupont, understand the immense opportunities and responsibilities of innovation. As a result, they go further than others by integrating ethical, social and environmental considerations into their R&D efforts. They carry out due diligence to minimize negative impacts. They also create new value by developing profitable customer solutions that meet emerging environmental, safety, and social needs, in addition to providing customers with good quality, reliability and value.
P&G, one of America’s largest makers of household goods and a pioneer in consumer branding and brand marketing, is creating new shareholder and societal value by pursuing what it calls corporate social opportunity — the production of new products that improve customers’ lives while making important contributions to environmental quality and social well being. P&G’s PuR Water Purifier, for instance, a simple-to-use, low-cost water purifier developed in conjunction with the U.S.-based Centers for Disease Control and the International Council on Nurses, has the potential to save the lives of thousands of children who die each day in developing countries due in large part to lack of clean water. P&G’s Safeguard antibacterial soap and its Nutristrar fruit-flavored drink powder, offer other examples of innovative products that solve health dilemmas through more affordable and potentially profitable new products.
Dupont, the oldest industrial company listed on the Fortune 500, is entering its third century committed to an explicit corporate strategy of sustainable growth, which it takes to mean increasing shareholder and societal value while decreasing the company’s environmental footprint. Through rigorous metrics, clear targets, due diligence, and a strategy of knowledge intensity, increased productivity and integrated science, Dupont continues to set an impressive pace of innovation. It has turned its legendary commitment to workplace safety into a successful business proposition and started to explore ways to provide affordable consumer products and agricultural services to some of the world’s poorest countries and communities. Over the past decade, the company has increased shareholder value by 340 percent while decreasing its environmental footprint by 60 percent.
2. Put people at the center
The quality of relationships that a company has with its employees and other key stakeholders along its value chain is crucial to its success and its ability to anticipate or respond to changing competitive circumstances and societal expectations. It is the ideas, interests, and energy of people who work in and interact with a business that underpin innovation and drive transformation. Leading companies aim to build relationships that are based on mutual benefit, learning, accountability, transparency and trust.
Every company seems to assert that its employees are its most important asset. Yet, many fail to ‘walk the talk’. Great companies have learned that, as Adrian Levy, founder of Canadian firm RLG has observed, “people are not the most important asset of a company – they are the company. Everything else is an asset.” (Speech by Adrian Levy, founder RLG International, March 2001.)
Consider Alcoa, the world’s leading producer of aluminum, operating in a heavy industry and challenging business environment. Having made an extraordinary commitment to make safety the company’s number-one priority and performance measure, the company has reduced lost workday injuries by 90 percent since 1988. Seventy-five percent of Alcoa’s 487 locations worldwide had zero lost workdays in 2002 – ten times better than the record of its industry peers. Stakeholder engagement at both the corporate and plant level has been a core element of the company’s commitment.
Or take Nike, the innovation-driven, customer-focused corporation with the iconic brand and products at the leading edge of performance and design. Faced with an international outcry concerning exploitative labor practices along its global supply chain back in the late 1990s, Nike embarked upon a transformative journey of organizational learning and change, aimed at improving factory conditions among its own contractors. The company has also joined efforts with other footwear and apparel companies, trade unions, and non-governmental organizations to tackle some of the more systemic challenges associated with global supply chains and international trade; challenges that no one company can solve on its own.
3. Spread economic opportunity
Great companies create wealth and increase opportunity. They make systematic efforts to spread economic opportunity as widely as possible, not only to their owners but also in the workplace, along the supply chain, and in local communities. They do so with the knowledge that this will help to enhance the prosperity and loyalty of their employees, business partners, and local neighbors, and may also help to build future markets and business relationships for the company. Efforts to spread economic opportunity include making a commitment to employee diversity, investing in local economic development, building business linkages with small and micro-enterprises, and supporting programs to increase access to information technology, education and training.
Marriott International has been spreading economic opportunity – and gaining loyal employees and competitive advantage – for many years, through its “Pathways to Independence Program”, which trains former welfare recipients for entry-level positions.
Daimler-Chrysler is forming innovative supply chain partnerships in countries such as Brazil and South Africa, which aim to be both anti-poverty and pro-environment while developing high quality raw materials for the company’s premium cars.
In the U.S., minorities and women represent over 30 percent of McDonald’s company franchisees and some 70 percent of all applicants in training.
In less than 30 years, Starbucks has created one of the world’s most valuable brands out of one its most ubiquitous commodities-coffee. In doing so, it has created impressive value for its owners and employees, including being one of the first companies to offer a stock-option program to part-time employees. At the same time, it is starting to spread economic opportunity, as well as environmental, social and quality standards, by working directly with small-scale coffee producers along its global supply chain.
Bank of America, through its recent acquisition of Fleet Financial, inherits a commercial bank that was among the first to transform its legal compliance obligations into a major and sustainable new business opportunity, by aiming to serve the needs of previously marginalized inner-city neighborhoods. Fleet’s Community Bank has grown to 157 innercity branches, with 1500 employees in five states, leveraging its $5 billion in deposits into a $14.6 billion commitment to mortgage and small-business lending. Fleet, and its predecessor BankBoston, not only achieved corporate hurdle rates of return on its inner-city banking, but helped to enfranchise tens of thousands of new customers and hundreds of new businesses – earning accolades from regulators, easing future acquisitions, and gaining a valuable corporate reputation.
4. Engage in New Alliances
There is a growing need and potential for companies to build cross-boundary alliances, often with non-traditional allies beyond the business sector. Successful companies are creating such alliances for a variety of purposes.
Some companies are collaborating to enhance their core business proposition and performance. Unilever, for example, has embarked on a number of multi-stakeholder alliances over the past decade to support more sustainable fisheries and agricultural practices, and to provide affordable, good quality products to consumers in poor countries and consumers. Atlanta-based carpet manufacturer, Interface, has made customer alliances a central tenet of its efforts to transform its business model into a more sustainable ‘closed-loop’ service. It is working with customers to deliver high-quality, high-value carpets that use less raw material and energy in their production, and can be returned to the company for recycling, ensuring that they send less discarded materials into landfills and the atmosphere. In essence, customers are getting a full life-cycle service, rather than a one-off product.
Many companies are building new types of partnership to increase the leverage and effectiveness of their philanthropic and community investment efforts. Some of the key trends here are illustrated in Table 1.
Cisco Systems, for example, has been able to expand its Cisco Networking Academies program to over 10,000 academies in all 50 U.S. states and over 150 countries. Working with partners ranging from the United Nations, the United States Agency for International Development and the Peace Corps, to local schools and non-governmental organizations in Africa and elsewhere, the company has been able to support academies in about forty of the world’s least developed countries, with a growing percentage of the graduates being women. Also in Africa, ChevronTexaco is working with USAID, UNDP and others to support local economic development programs, and the Coca-Cola system is using its extensive distribution network to work in partnership with the UN and local partners to distribute public health messages and other services aimed at tackling HIV/Aids.
5. Be performance-driven in everything
A growing number of the world’s most successful companies make explicit, public commitments to reaching certain targets for their ethical, social and environmental performance, in addition to their financial and commercial performance. Their board of directors and senior management team take a lead in identifying key risks and opportunities. They establish management systems, rigorous metrics, incentive structures, training programs and compliance processes to create the performance-driven culture that is necessary to strive towards the achievement of these targets. They report publicly on progress towards their targets, and are committed to continuous learning as a way to drive improvement and to be better prepared to anticipate new risks and to seize new opportunities.
Sustainability reporting, in particular, has become a major trend. Several thousand companies, including many of the world’s largest, now report publicly on their social and environmental performance. The multi-stakeholder Global Reporting Initiative, develops and disseminates globally applicable sustainability reporting guidelines, which are used by a growing number of companies and investors around the world. In October 2004, analysts at 17 leading U.S. socially responsible investment firms, representing over $147 billion in assets, recommended that companies start reporting annually on their social and environmental performance, basing their reporting the GRI’s Sustainability Reporting Guidelines.
6. Practice superior governance
The governance agenda for business is being fundamentally reshaped. The emerging agenda calls for more rigorous approaches to corporate governance. But more than this is now required. Superior governance is also about a company’s overall legitimacy and wider acceptance by stakeholders, including but not restricted to, shareholders. It is about increased transparency, accountability, integrity and independent overview of all key areas of corporate performance – ethical, social and environmental, as well as financial – what is increasingly termed as sustainability governance. It is also about tackling bribery and corruption, and ensuring more transparent interaction between business and government everywhere that companies operate -what we have termed public governance.
A growing number of companies are establishing dedicated board committees to address corporate responsibility or public issues. A 2001 study by the Conference Board concluded that 15 percent of U.S. companies surveyed had such committees, compared to fewer than 10 percent in 1980. Early results of research that we are undertaking on Fortune 200 companies at the Kennedy School of Government point to a figure that has grown to almost 30 percent. These board committees are called a variety of names and have wide-ranging responsibilities, but most are chaired by independent directors and cover the ethical, social, environmental and public policy issues of greatest relevance to the company and its industry sector. Notable examples of board leadership in this area include: DuPont, General Motors, McDonalds, Nike, Rio Tinto, BP, Ford Motor Company, GlaxoSmithKline, the Coca Cola Company, and SABMiller.
7. Pursue purpose beyond profit
Sustained, long-term business leadership is built upon clarity of purpose, principles and values. Each company has a core purpose to provide goods or services that meet customer needs or aspirations and yield a profit. In great companies, however, this purpose extends beyond short-term profit and the creation of shareholder value. It often encompasses a longer-term vision to make a contribution to improve peoples’ lives and be a force for progress in the world.
Together with its principles and values, purpose is what a great company stands for and would stand by, even if adhering to them results in a competitive disadvantage, missed opportunity or increased costs. Purpose, principles and values are the bedrock of excellence. The manner in which they are articulated and implemented plays a key role in determining a company’s strategic direction, its corporate culture and the policies and incentive systems by which it operates and impacts the world.
As Jeff Immelt, Chairman and CEO of General Electric, commented in a November 2004 interview with FORTUNE magazine, “The reason people come to work for GE is that they want to be about something that is bigger than themselves. People want to work hard, they want to get promoted, they want stock options. But they also want to work for a company that makes a difference, a company that’s doing great things in the world.” (Gunther, Marc. Money and Morals at GE. Fortune magazine, November 15, 2004.)
This sentiment is shared by John Browne, Group Chief Executive of BP. Over the past fifteen years, Browne has built one of the world’s most innovative, competitive and profitable energy companies, while also being out-in-front of many of his peers, in publicly addressing and starting to tackle some of the world’s most intractable challenges, such as global climate change and the costs of corruption in developing countries. He has argued, “No enterprise, no institution, perhaps no individual can really succeed without a sense of purpose – a purpose which explains and guides every step. Our purpose, our fundamental objective is to be one of the world’s great companies. That means delivering results and doing our business exceptionally well day by day. But it also means aligning our activity with the world’s needs, leading change and being a force for progress in everything we do.” (John Browne, Group Chief Executive, BP. Statement in BP in China: Partnership for Progress, September 2000.)
The potential of delivering profits with principles
The seven business disciplines we describe above call for investment and conviction. There are no simple solutions when it comes to delivering profits with principles in today’s complex world. Goalposts keep moving. Boundaries keep changing.
Competition keeps increasing. Expectations of shareholders, customers, employees, communities, regulators and other stakeholders keep rising. As daunting as the challenges are, it is riskier to do nothing. The long-term self-interests of corporations and the public interest are inextricably interwoven. Successful and sustainable companies need the existence of prosperous and just societies.
Business cannot, and should not, be expected to address or resolve all the world’s economic or social ills. Companies cannot solve international terrorism, poverty and other global dilemmas. Yet there is no more powerful and promising engine for increasing prosperity and opportunity than the market system operating within effectively-regulated and broadly accepted governance frameworks and spearheaded by principled companies and business leaders.
Working in partnership with governments and civic organizations, companies have the resources, technology, creativity, ingenuity, networks and problem-solving skills to produce products and services that can improve the quality of people’s lives, while decreasing the impact on the environment. Companies operating with principles can regain the sense of energy, innovation, optimism and dynamism that characterized the 1990’s, without the greed, hubris and arrogance that precipitated their demise. They can harness the enormous potential of private enterprise to make the world a better place, while remaining profitable and competitive. This, we believe, should be the fundamental purpose of a good business.