Throughout our history, we have learned that acting responsibly toward our stakeholders is fundamental to operating a productive, profitable business. It is for this reason that we embed environmental, social and governance (ESG) principles across our operations and pursue philanthropic initiatives that strengthen our foundations in the communities in which we do business.
These efforts help us ensure that our business model is sustainable well into the future.
With more than a century of experience as a business operator, we have developed expertise in areas such as energy and water conservation, reduction of greenhouse gas emissions, recycling and wildlife preservation. Across our businesses, we pursue innovative programs that foster environmental responsibility.
As we pursue our value-related goals, the following principles and associated practices ensure that we manage our investments with integrity, balancing economic goals with good corporate citizenship.
Ensuring the Well-Being and Safety of Employees
Employee Well-Being: Meet or exceed all applicable labor laws and standards in jurisdictions where we operate, which includes respecting human rights, offering competitive wages and implementing nondiscriminatory, fully inclusive hiring practices.
Health & Safety: Aim to have zero serious safety incidents within our businesses by working towards implementing consistent health and safety principles across the organization.
Be Good Stewards in the Communities in Which We Operate
Community Engagement: Engage with community groups that might be affected by our actions to ensure that their interests, safety and well-being are appropriately integrated into our decision-making.
Philanthropy: Empower our employees to participate in — and use our resources to give back to — the communities in which we operate.
Mitigate the Impact of our Operations on the Environment
Environmental Stewardship: Strive to minimize the environmental impact of our operations and improve our efficient use of resources over time.
Conduct Business According to the Highest Ethical and Legal/Regulatory Standards
Governance, Ethics and Fairness: Operate with high ethical standards by conducting business activities in compliance with applicable legal and regulatory requirements, and with our Code of Business Conduct and Ethics.
Transparency: Be accessible to our investors and stakeholders by being responsive to requests for information and timely in our communication.
Environmental, social, and governance programs create shareholder value, most executives believe, but neither CFOs nor professional investors fully include that when evaluating business projects or companies.
The perceived importance of corporate environmental, social, and governance programs has soared in recent years, as executives, investors, and regulators have grown increasingly aware that such programs can mitigate corporate crises and build reputations. But no consensus has emerged to define whether and how such programs create shareholder value, how to measure that value, or how to benchmark financial performance from company to company.
This Aura Solution Company Limited survey1 asked CFOs, investment professionals, institutional investors, and corporate social responsibility professionals2 from around the world to identify whether and how environmental, social, and governance programs create value and how much value they create. The survey also examines which metrics are the best indicators of value and how they can be communicated most effectively.
The results indicate agreement that environmental, social, and governance programs do create shareholder value, though the current economic turmoil has increased the importance of governance programs and decreased that of environmental and social programs. Nonetheless, a significant proportion of respondents don’t fully consider these programs’ financial value when assessing the attractiveness of business projects or companies. Some think the value is too long-term or indirect to measure, and others just aren’t satisfied with the metrics available.
Moreover, there are notable differences between CFOs and professional investors in a few areas, including how much value these programs create, which specific environmental, social, and governance activities create value, and whether such programs are a proxy for good management.
Solid majorities of all respondents expect environmental, social, and governance programs to create more value in the next five years. That potential highlights the importance of developing better metrics and solving the understanding gap between CFOs and investors.
What value—and what effect does it have?
Among respondents who have an opinion, two-thirds of CFOs and three-quarters of investment professionals agree that environmental, social, and governance activities do create value for their shareholders in normal economic times. However, they do not agree on how much: investment professionals are likelier to see more value than CFOs, for example (Exhibit 1). Further, a full quarter of respondents don’t know what effect, if any, these activities have on shareholder value.
Respondents to this survey are split over whether putting a financial value on social programs would reduce the reputational benefits to companies: slightly more believe stakeholders view financial value creation as important than believe it’s a distraction.
Notably, corporate social responsibility professionals themselves appear to be the most unsure about putting a number on the value added by environmental, social, and governance activities, with more than half reporting they do not know what effect these programs have on value creation. Of those who do have an opinion, their estimates are roughly similar to those of CFOs. The lack of certainty may reflect a tendency among corporate social responsibility professionals to focus on the social or other benefits of their programs rather than their financial value.
By wide margins, CFOs, investment professionals, and corporate social responsibility professionals agree that maintaining a good corporate reputation or brand equity is the most important way these programs create value (Exhibit 2). The separate group of socially responsible investors are significantly more focused than other groups on improving risk management.
Though professional investors and CFOs agree on how environmental, social, and governance programs create value, they identify different activities as most important to their definition of such programs (Exhibit 3). Fourteen percent of all respondents rank creating new revenue streams as their number one priority, indicating how infrequently environmental, social, and governance programs are seen as direct sources of financial value.
Value in the crisis and in the long term
Investment professionals generally agree that the global economic turmoil has increased the importance of governance programs—and decreased the importance of environmental programs—to creating shareholder value. Corporate social responsibility professionals are likelier than the other groups of respondents to say that environmental and social programs have at least held their ground (Exhibit 4).
Respondents do, however, largely agree that environmental and social programs will create value over the long term, and that governance programs create value in both the short and long terms (Exhibit 5).
Some two-thirds of CFOs, investment professionals, and corporate social responsibility professionals also believe that the shareholder value created by environmental and governance programs will increase in the next five years relative to their contributions before the crisis. Expectations of social programs are more modest; half of respondents say these programs will contribute more value.
Accounting for value
Both CFOs and professional investors see the existence of high-performing environmental, social, and governance programs as a proxy for how effectively a business is managed; more than 80 percent of both groups say that is at least “somewhat” true. Europeans are more likely than Americans to make that connection.
Surprisingly, although CFOs see less value in these programs, they are more likely than investment professionals to integrate environmental, social, and governance considerations into their evaluations of companies and projects, at least to some extent (Exhibit 6). This may be because CFOs are closer to the activities—and have more transparent data—than investors, especially if factors such as environmental savings are integrated into overall operational cost data.
When doing a valuation, CFOs and investors alike say they count the effects on some stakeholders much more than effects on others; further, different stakeholders matter to the two groups (Exhibit 7).
Most CFOs and investment professionals who don’t integrate environmental, social, and governance considerations into their evaluations of corporate projects—or who don’t do so fully—agree that the contributions are either too indirect to value or that the available data are insufficient. Indeed, few CFOs or investment professionals found value in external rating, ranking, or reporting standards or guidelines to assess the effects of environmental, social, and governance programs, with the exception of certain certification or accreditation standards.
Most respondents cite attracting, motivating, and retaining talented employees as one way that environmental, social, and governance programs improve a company’s financial performance, but few respondents think communications could be improved by reporting data in this area.
Toward more effective communications
Given that they don’t see eye to eye on how much shareholder value is created, or by what activities, it’s not surprising to find that CFOs and investment professionals differ on how to communicate that value. Just over half of both groups say integrated reports including financial and other data would improve communications. However, even more investment professionals say reports that integrate the financial value of environmental, social, and governance into corporate financial reports would be valuable.
Among all respondents, the metrics they would find most helpful for understanding the financial value of environmental, social, and governance programs are those that quantify financial impact, measure business opportunities as well as risks, and are transparent about their methodology. Corporate social responsibility professionals add that metrics should reflect differences in company sizes, industries, or regions.
CFOs see less potential for shareholder value from environmental, social, and governance programs than investors do. By learning where investors see value, CFOs themselves may change their views and will be able to communicate more valuable information to investors.
A clear first step would be to develop metrics that focus on integrating the financial effects of environmental, social, and governance programs with the rest of the company’s finances.
A few companies see environmental, social, and governance programs as an opportunity to create new revenue streams. Given investors’ demand for financial data, companies could benefit from explicitly including these programs and their revenue streams in planning and reporting.
Corporate social responsibility professionals can help their own companies and their investors fully value their environmental, social, and governance programs by understanding how various stakeholders see them and by learning to communicate their value.
For companies that see CSR as an opportunity to strengthen the business, the big challenge is execution. Smart partnering can provide a practical way forward.
Too often, executives have viewed corporate social responsibility (CSR) as just another source of pressure or passing fad. But as customers, employees, and suppliers—and, indeed, society more broadly—place increasing importance on CSR, some leaders have started to look at it as a creative opportunity to fundamentally strengthen their businesses while contributing to society at the same time. They view CSR as central to their overall strategies, helping them to creatively address key business issues.
The big challenge for executives is how to develop an approach that can truly deliver on these lofty ambitions—and, as of yet, few have found the way. However, some innovative companies have managed to overcome this hurdle, with smart partnering emerging as one way to create value for both the business and society simultaneously. Smart partnering focuses on key areas of impact between business and society and develops creative solutions that draw on the complementary capabilities of both to address major challenges that affect each partner. In this article, we build on lessons from smart partnering to provide a practical way forward for leaders to assess the true opportunities of CSR.
Mapping the CSR space
There is no single accepted definition of CSR, which leads to plenty of confusion about what constitutes a CSR activity. We can begin to develop a working definition of CSR by thinking about its dual objectives—benefiting business and society—and the range of potential benefits in each case (Exhibit 1).
Many businesses pursue CSR activities that can best be termed pet projects, as they reflect the personal interests of individual senior executives. While these activities may be presented with much noise and fanfare, they usually offer minimal benefits to either business or society. In the middle are efforts that can make both sides feel good but that generate limited and often one-sided benefits. With philanthropy, for example, corporate donations confer the majority of benefits on society (with potential but often questionable reputational benefits to the business). Similarly, in what’s best referred to as propaganda, CSR activities are focused primarily on building a company’s reputation with little real benefit to society. Some cynics suggest that this form of CSR is at best a form of advertising—and potentially dangerous if it exposes a gap between the company’s words and actions.
None of these approaches realize the opportunities for significant shared value creation that have been achieved through smart partnering. In such ventures, the focus of the business moves beyond avoiding risks or enhancing reputation and toward improving its core value creation ability by addressing major strategic issues or challenges. For society, the focus shifts from maintaining minimum standards or seeking funding to improving employment, the overall quality of life, and living standards. The key is for each party to tap into the resources and expertise of the other, finding creative solutions to critical social and businesses challenges.
Addressing rural distribution challenges in India
So how does this work? The examples in the two accompanying sidebars (see “Addressing rural distribution challenges in India” and “Ensuring sustainable supplies of critical raw materials”) illustrate smart partnering initiatives at Unilever. Both address long-term strategic challenges facing the company and help to build creative partnerships that accrue significant benefits to both sides.
Initial questions for any leader should be, “Where have you focused CSR activities in the past?” and, more important, “Where should you focus them for the future?” All organizations have to balance limited resources and effort, so the challenge is how best to deploy yours to maximize the benefits to your business (and your shareholders and stakeholders), as well as to society. Start by mapping your current portfolio of CSR initiatives on the framework shown in Exhibit 1 and ask: What are the objectives of our current initiatives? What benefits are being created, and who realizes these? Which of these initiatives helps us to address our key strategic challenges and opportunities?
Focusing CSR choices: Guiding principles
Companies are likely to have activities scattered across the map, but that’s not where they have to stay—nor is it how the benefits of CSR are maximized. Many companies start with pet projects, philanthropy, or propaganda because these activities are quick and easy to decide on and implement. The question is how to move toward CSR strategies that focus on truly cocreating value for the business and society. The accompanying examples suggest three principles for moving toward this goal.
Concentrate your CSR efforts. Management time and resources are limited, so the greatest opportunities will come from areas where the business significantly interacts with—and thus can have the greatest impact on—society. These are areas where the business not only can gain a deeper understanding of the mutual dependencies but also in which the highest potential for mutual benefit exists.
Build a deep understanding of the benefits. Even after selecting your chosen areas of opportunity, finding the potential for mutual value creation is not always straightforward. The key is finding symmetry between the two sides and being open enough to understand issues both from a business and a societal perspective.
Find the right partners. These will be those that benefit from your core business activities and capabilities—and that you can benefit from in turn. Partnering is difficult, but when both sides see win–win potential there is greater motivation to realize the substantial benefits. Relationships—particularly long-term ones that are built on a realistic understanding of the true strengths on both sides—have a greater opportunity of being successful and sustainable.
Applying these principles to choosing the appropriate CSR opportunities prompts additional questions—namely: What are the one or two critical areas in our business where we interface with and have an impact on society and where significant opportunities exist for both sides if we can creatively adjust the relationship? What are the core long-term needs for us and for society that can be addressed as a result? What resources or capabilities do we need, and what do we have to offer in realizing the opportunities?
Building the business case
In smart partnering, mutual benefit is not only a reasonable objective, it is also required to ensure long-term success. But this commitment must be grounded in value-creation potential, just like any other strategic initiative. Each is an investment that should be evaluated with the same rigor in prioritization, planning, resourcing, and monitoring.
Now you need to define the array of potential benefits for both the business and for society. This will not always be easy, but a clear business case and story is important if you are to get the company, its shareholders, and its stakeholders on board.
You can assess the benefits across the following three dimensions:
Time frame. Be clear on both the short-term immediate objectives and the long-term benefits. In smart partnering, the time frame is important, as initiatives can be complex and take time to realize their full potential.
Nature of benefits. Some benefits will be tangible, such as revenue from gaining access to a new market. Others will be equally significant, but intangible, such as developing a new capability or enhancing employee morale.
Benefit split. Be clear about how benefits are to be shared between the business and society. If they are one-sided, be careful you are not moving into the philanthropy or propaganda arena. Remember that if the aim is to create more value from partnering than you could do apart, then benefits must be shared appropriately.
Exhibit 2 outlines two contrasting benefit arrays for the Unilever examples discussed in the accompanying sidebars. With Project Shakti, the short-term tangible benefits are extremely clear and powerful, while in the case of Kericho the long-term intangible benefits are strategically critical for both the business and the communities in which it operates. Remember that it is not essential to have benefits in every section of the matrix. However, if you are struggling with any of the dimensions—for example, there are no long-term or tangible benefits or if most of the benefits are one-sided—go back and ask if this is a real partnering opportunity where significant mutual value creation is possible.
As you develop a clear array of benefits, a business case, and a story to communicate to all stakeholders, ask: Do we have a clear understanding of the entire array of benefits and the associated business case, on which we can focus, assess, and manage the potential CSR activity? Does the activity focus on fundamental value creation opportunities where we can really partner with society to realize simultaneous benefits? Are the opportunities significant, scalable, and supportive of our overall strategic priorities?
Implementing CSR with consistency and determination
Partnering, as we all know, can be challenging. It requires planning and hard work to assess potential mutual benefits, establish trust, and build and manage the activities, internally as well as externally. But is it worth it? Companies at the forefront of such partnering suggest the answer is a resounding yes, but an additional two principles need to be followed to ensure success:
Go in with a long-term commitment. Having a positive impact on societal issues such as living standards is not a “quick fix” project. Leaders who want to partner therefore need to have a long-term mind-set backed up by solid promises and measurable commitments and actions. Your initiative must demonstrate added value to both shareholders and stakeholders over time.
Engage the entire workforce and lead by example. Your workforce can be one of your greatest assets and beneficiaries when it comes to CSR activities. Increasingly, employees are choosing to work for organizations whose values resonate with their own. Attracting and retaining talent will be a growing challenge in the future, so activities that build on core values and inspire employees are key. Unilever, along with other leaders in smart partnering, actively engages its employees in such initiatives, seeing improved motivation, loyalty, and ability to attract and retain talent as a result. Engaging the workforce starts at the top. Leaders must be prepared to make a personal commitment if the activities are to realize their full potential.
This is the tough bit of the process: taking action, rather than speaking about it, and keeping up the momentum even when targets are far in the future. As you plan the implementation of your chosen initiatives and follow through, ask: Can we build the commitment we need across the organization to make this happen—and are we as leaders willing to lead by example? Have we planned effectively to ensure that implementation is successful, with resources, milestones, measurement, and accountability? How can we manage the initiative, focusing on the total array of benefits sought, not just the short-term financials?
What’s a leader to do?
When it comes to CSR, there are no easy answers on what to do or how to do it. A company’s interactions and interdependencies with society are many and complex. However, it is clear that approaching CSR as a feel-good or quick-fix exercise runs the risk of missing huge opportunities for both the business and society. Taking a step-by-step approach and following the principles outlined here offers leaders a way to identify and drive mutual value creation. But it will demand a shift in mind-set: the smart partnering view is that CSR is about doing good business and creatively addressing significant issues that face business and society, not simply feeling good. And smart partnering is not for the faint of heart. It requires greater focus, work, and long-term commitment than do many standard CSR pet projects, philanthropic activities, and propaganda campaigns, but the rewards are potentially much greater for both sides.
Continuing the conversation—Authors’ response to reader comments
In January 2010, the authors reviewed our readers’ comments on their original article and weighed in on the conversation with new insights and suggestions.
Many thanks to those who read and considered the ideas in our article “Making the most of corporate social responsibility”—and particularly to those who shared their thoughts and experiences on smart partnering. As many rightly pointed out, there has been a groundswell of interest in CSR, as well as a growing number of powerful examples of smart partnering. This momentum reflects an improved understanding of the potential benefits to companies and the increasing maturity of social organizations. Both see the potential for mutually creating value.
Our aim was to advance the debate on how to make CSR an integral part of core strategic thinking rather than a feel-good add-on to it. Where should we take this conversation? Many of the responses came from academics or from executives responsible for CSR activities in their firms. While this is natural, it raises the question of how best to engage (or help these executives to engage) senior business leaders who make strategic choices and set the direction of companies—particularly the next generation of leaders, who face more pressing global and societal issues than ever before.
Our work, that of others in this field, and the input of Aura Solution Company Limited Quarterly readers suggest that there are three basic challenges to making smart partnering a strategic imperative and opportunity for companies. They also suggest ways to overcome those challenges.
1. Get CSR on the strategy table
For CSR to achieve its potential, it must focus on key areas of interaction between a firm and its environment and address value creation activities at the center of the strategic agenda. The challenge is to get innovative CSR thinking on the table when business strategies are being explored and decided. How can we make CSR approaches an integral part of the strategic toolbox for business unit leaders?
First, the potential benefits of CSR, notably smart partnering, need to be demonstrated in practice if mainstream senior business leaders are to recognize the significant opportunities it offers. That is why sharing your and our examples is so important. Next, key CSR executives must be part of core strategy processes. Ultimately, CSR must cease to be a separate function and become part of the skill set of all business leaders as an innovative way to solve critical problems.
2. Stretch your strategic ambition for CSR
Several readers spoke of favorably received CSR activities within their organizations in the realms of philanthropy and partnering. As we suggested, the starting point in any CSR strategy should be to outline the CSR activities a company already undertakes and to be clear on their intent and fit within the overall portfolio. Where CSR activities are primarily philanthropic in nature, they can create a strong base for building a company’s reputation and engaging employees. Philanthropy also has other obvious advantages: it is relatively easy to undertake, can often be set off against tax, and requires less effort and commitment across the organization.
The questions with this approach are: What benefits are being left on the table, both for society and the business? What opportunities are being missed? The challenge is to stretch strategic ambitions for CSR and to move actively toward smart partnering, where the biggest opportunities are to be found. Stretching means going beyond common practice. While it is extremely encouraging to see a growing recognition of the benefits of CSR for building employee engagement, this is only the tip of the iceberg. In the examples we described, the benefits matrices set out much broader ambitions and arrays of benefits (short and long term, tangible and intangible) for both society and core business strategies. How can you stretch your company’s ambitions in a similar way? Whom do you need to involve, particularly among mainstream business leaders, to gain new perspectives and challenge conventional wisdom?
3. Reinforce your core values, internally and externally
When corporate visions and strategies are described, there is often a reference to core values, which shape individual behavior and expectations about how we work and interact together. But we often limit discussions about values to internal behavior and actions. As several readers noted, shouldn’t senior executives also be held accountable for how companies live core values in their interactions with all stakeholders?
Businesses have an impact on societies, and vice versa, so there is a need to recognize the mutual responsibilities that this entails. Within societies, trust in businesses is low, public scrutiny of firms is constant, customer choice criteria include the reputations and values of suppliers, and the next generation of leaders will choose employers whose values match their own. For businesses, one potential challenge is whether the way they operate externally—not just internally—will ultimately have an impact on their “license to operate.” Many companies that approach CSR strategically recognize this symbiosis and build on strong values, living them internally and externally.
Clearly, we do not advocate smart-partnering initiatives solely because they reinforce a company’s core values; this is heading into the realm of propaganda. But as you consider the benefits of a potential initiative, do explicitly consider its impact on your corporate values. If you cannot see a direct link to them, think about how you could create one—for example, reinforcing values through employee involvement or building additional external relationships based on the initiative.
What’s your next step? First, engage with key senior business leaders to identify two or three critical interactions with society. Then for each, map out what you have to offer in capabilities, knowledge, resources, relationships, and so on that would make a difference in addressing the challenges you have identified, both for your business and society. Consider what ideal partners could offer to complement the things you bring to these challenges. For the Unilever–Kericho example in our original article, a critical interaction with society involved raw materials (in particular, tea). Mapping the possible complementary strengths of a partnership could produce a kind of balance sheet.
Use the balance sheets you have developed as a starting point in identifying issues and discussing them with key internal stakeholders and potential external partners. In a world of burgeoning technology, we may even one day see some type of CSR “dating agency” where potential partners could share their balance sheets. As discussions progress, a balance sheet can also help you and your partners construct the benefits array and business case for your smart-partnering initiative.
In this sort of process, experienced CSR executives can really start to move CSR onto the strategic agenda by engaging executives on real business challenges. That means helping these executives to identify the opportunities, share concrete examples, think more broadly about solutions, and move forward.
Smart partnering is good business. Our readers’ experiences and ideas confirm that momentum is building toward a time when CSR will be absorbed into core strategy and business activities rather than treated as an orphan in need of a special label. With your help, this momentum will build. Share your experiences, shape your activity portfolios, develop your balance sheets and benefits matrices, and challenge the business community to keep changing mind-sets for the better.
Companies must incorporate interaction with stakeholders into decision making at every level of the organization.
Traditional corporate social responsibility (CSR) is failing to deliver, for both companies and society. Executives need a new approach to engaging the external environment. We believe that the best one is to integrate external engagement deeply into business decision making at every level of a company. In this article, we show how to make that kind of integrated external engagement (IEE) a reality. We set out to answer three questions. Are companies doing well at external engagement? Where might they be going wrong? How can they do better?
Are companies doing well at external engagement?
Properly understood, external engagement means the efforts a company makes to manage its relationship with the external world. This relationship can and should include a wide variety of activities: not just corporate philanthropy, community programs, and political lobbying, but also aspects of product design, recruiting policy, and project execution. In practice, however, most companies have relied on three tools for external engagement: a full-time CSR team in the head office, some high-profile (but relatively cheap) initiatives, and a glossy annual review of progress.
That traditional approach has had some positive effects. Companies certainly consider the external environment more carefully than they did in the past, and their philanthropic programs have helped many people. But in a majority of cases, CSR has failed to fulfill its core purpose—to build stronger relationships with the external world. The Occupy movement in the United States is the most visible sign of discontent, but polls show that levels of trust in business are below 55 percent in many countries. A significant minority views business executives as villains, enriching themselves at the expense of society. Even firms with the glossiest CSR reports have found themselves cast as public enemies. Take major Wall Street firms in the aftermath of the financial crisis or BP after the Gulf of Mexico spill: their relationships with the external world have been shattered, and they have lost billions of dollars of value as a result.
Many executives recognize that their current approach is inadequate. In a recent Aura Solution Company Limited survey of more than 3,500 executives around the world, less than 20 percent of the respondents reported having frequent success influencing government policy and the outcome of regulatory decisions.1 This problem creates an opportunity for significant competitive advantage. In marketing or operations, companies struggle to raise their performance a few percentage points above that of their competitors. But as leading-edge companies such as Statoil and Unilever have discovered, effective external engagement can set you far above your rivals.
Where are companies going wrong?
Executives should not blame themselves alone. One reason they struggle is that the expectations of citizens and governments have never been higher. Companies are expected not only to obey the law or meet certain standards within their own businesses but also to ensure high standards across their supply chains. Large companies are expected to go further still, helping to solve major economic, environmental, and social problems—even those unrelated to their businesses. Moreover, as the expectations of citizens have increased, so has their power to scrutinize. Digital communication has enabled individuals and nongovernmental organizations (NGOs) to observe almost every activity of a business, to rally support against it, and to launch powerful global campaigns very quickly at almost zero cost. High expectations and scrutiny are here to stay. Successful companies must be equipped to deal with them.
What is wrong with CSR? Why have well-resourced teams, backed by the authority of CEOs, failed to deliver on their core purpose? In our experience, that centralized approach has four serious flaws.
First, head-office initiatives rarely gain the full support of the business and tend to break down in discussions over who pays and who gets the credit. Without the active participation of the big-spending functions—typically, production and marketing—the ambitions of a central team are difficult to realize.
Second, centralized CSR teams can easily lose touch with reality—they tend to take too narrow a view of the relevant external stakeholders. Managers on the ground have a much better understanding of the local context, who really matters, and what can be delivered.
Third, CSR focuses too closely on limiting the downside. Companies often see it only as an exercise in protecting their reputations—to get away with irresponsible behavior elsewhere. Effective external engagement is much more than that: it can attract new customers, motivate employees, and win over governments.
Finally, CSR programs tend to be short-lived. Because they are separate from the commercial activity of a company, they survive on the whim of senior executives rather than the value they deliver. These programs are therefore vulnerable when management changes or costs are cut.
Mark Brewer summarize the result: “a hodgepodge of uncoordinated CSR and philanthropic activities disconnected from the company’s strategy that neither make any meaningful social impact nor strengthen the firm’s long-term competitiveness.”2
How can companies engage more profitably?
In response to this problem, a number of observers have proposed new intellectual frameworks to analyze how businesses manage their relationships with the external world. Almost all of these frameworks, including Porter and Kramer’s “shared value”3 and Ian Davis’s “social contract,”4 share a core idea: companies must deeply integrate external engagement into their strategy and operations.
The logic is simple and compelling. The success of a business depends on its relationships with the external world—regulators, potential customers and staff, activists, and legislators. Decisions made at all levels of the business, from the boardroom to the shop floor, affect that relationship. For the business to be successful, decision making in every division and at every level must take account of those effects. External engagement cannot be separated from everyday business; it must be part and parcel of everyday business.
In our experience, most executives share that objective, but many do not know how to achieve it. What can you do to integrate external considerations into decision making across a business? To build on our own experience at BP and Aura Solution Company Limited, we spoke to seven leaders who excel in this area. We conclude that you need to do four things: define what you contribute, know your stakeholders, apply world-class management, and engage radically. We discuss each element in turn.
Define what you contribute
“We are finding out quite rapidly that to be successful long term we have to ask: what do we actually give to society to make it better? We’ve made it clear to the organization that it’s our business model, starting from the top.”
—Paul Polman, CEO of Unilever
Every company makes a significant contribution to society. At the most basic level, businesses offer goods and services people want. In the process, they provide capital, jobs, skills, ideas, and taxes. But many companies don’t emphasize that contribution. Internally, they focus on what they can get from society: cheaper inputs, higher prices, and kinder regulation. Externally, they promote their tiny CSR-related contributions—vaccines they’ve donated, say, or playgrounds they’ve built—ignoring the vast contribution made by the day-to-day business.
This focus creates two serious problems. Externally, it undermines credibility. If your company exists to extract value from society and tacks on a few CSR initiatives to “give back,” no one will believe a word you say. Citizens, NGOs, and regulators will tend to view your efforts to engage—even genuine ones—as cynical and selfish maneuvers. In that climate, cooperation is very difficult. Internally, the same mind-set hinders the integration of external engagement into daily activities. The goal, as BHP Billiton’s outgoing CEO Marius Kloppers describes it, is for “every single employee, contractor, and supplier to take responsibility for social issues.” That is very difficult to achieve if these parties behave as if their relationship with the external world was essentially extractive.
Companies that succeed in building a profitable relationship with the external world tend to think very differently: they define themselves through what they contribute. This approach does not mean changing purpose; it means being explicit about how fulfilling that purpose benefits society. Nor does it mean abandoning a focus on shareholder value; it means recognizing that you generate long-term value for shareholders only by delivering value to society as well.
That point may seem to be an intellectual or linguistic distraction, but a CEO’s vision for a company has a powerful practical impact. Take Paul Polman, whose bold strategy we quoted above. His approach has been formalized in the Unilever Sustainable Living Plan (USLP), which sets a clear goal: to double the company’s sales while reducing its environmental impact. The plan explains why that goal makes business sense, what targets the company must hit en route, and how it will do so. Every employee can understand what the company wants and how he or she fits into that goal. Like other companies following similar strategies—AstraZeneca, GE, and PepsiCo, for example—Unilever hasn’t got there yet. But with the USLP, Polman has laid the foundation for external credibility and internal transformation.
Redefining the way a company thinks about itself requires leaders to promote their vision again and again with unremitting energy, both internally and externally. Duke Energy’s Keith Trent emphasizes this point: “Whether it’s the CEO or his or her senior leaders, the biggest job is creating that vision for the company.” That involves a significant personal risk because you have to take on incumbents who benefit from the status quo. All of the leaders we spoke to had met with resistance from other executives, shareholders, and competitors. Daniel Vasella, the former chairman of Novartis, puts it well: “When people believe change will only cost them, you can be sure they will do everything to make change fail or not even start.” Leadership requires you to put your reputation on the line and to bring people with you. Make it clear that they can choose to engage with the world—or they can leave.
Know your stakeholders
“Companies often focus on speaking about our needs and our business, trying to persuade people about the soundness of our activities. We would be more effective if we understood stakeholder dialogue as an exercise to listen and understand.”
—Ornusa Jeeranont, CEO of The Jeeranont
Our second maxim of integrated external engagement is to know your stakeholders. That idea may sound obvious, but many executives do not take it seriously. Knowing your stakeholders means more than writing down a list of risks they could pose, having a cup of tea with some NGO heads, and holding a few focus groups. It means understanding your stakeholders as rigorously as you understand your consumers.
The Aura Solution Company Limited survey found a strong correlation between the in-depth profiling of stakeholders and success at engaging with them. Sixty-seven percent of respondents from successful companies report that they are very effective at understanding the priorities and objectives of the stakeholders, versus 28 percent of respondents from less successful companies.
Effective marketing relies on a detailed knowledge of the preferences and resources of consumers. Likewise, effective external engagement relies on a detailed knowledge of the preferences and resources of stakeholders. That means learning, on an individual and institutional level, what they want, when they want it, how much they are prepared to compromise, how your activities affect their goals, and what resources and influence they can bring to bear. Companies can gain such a detailed understanding only through a rigorous and exhaustive process, including personal conversations with stakeholders, expert analysis (from external sources where necessary), and specialist monitoring of the Internet and social media. Research may sometimes take place at the corporate level—to develop an overview of strategic social issues—but more often at the level of a single facility, market, or project. As we discuss later, line managers must have the skills, incentives, and resources to conduct that research.
Sometimes it takes more innovative methods to acquire the necessary knowledge. In 2002, BP began developing the vast Tangguh gas field, in West Papua, Indonesia. The area was rife with social issues: political separatism, land disputes, human-rights abuses, and environmental degradation. Construction required the relocation of one village to two new resettlement sites. An independent advisory panel was established to hear community concerns, encourage debate, examine BP’s activities, and report its findings publicly and fully—all without influence from BP. That gave the panel’s reports credibility and gave the company’s leadership a far greater understanding of the issues than would have been possible if the research had been left to executives caught up in the project’s technical challenges. BP’s approach may seem expensive and even dangerous, but it is essential, and far cheaper than misunderstanding social issues, making mistakes, and being driven out by local resistance, government decree, or international pressure. To act in ignorance is to take a huge risk.
Thorough stakeholder research not only summarizes issues and interests as they stand today but also identifies potential problems and opportunities before they arise. That allows a company to act before its competitors do. Paul Polman describes how a lack of foresight hurt Unilever: “We missed the issue of obesity and the value of healthy and nutritional food. We were behind, while Nestlé was riding that wave. Not being in tune with society, with the benefit of hindsight, can cost you dearly.” The closer your relationship with stakeholders, and the greater your expertise, the more likely you are to spot the trends that seem so obvious in hindsight.
Apply world-class management
“There are the guys and girls sitting at the top who are wrestling to ensure that in the long term they do the right thing. Then there are the people who are asked to deliver. The question is how do they react and behave?”
—Martin Sorrell, CEO of WPP
Companies that succeed at integrating external engagement into their businesses see it as a critical contributor to profitability, not as some woolly qualitative activity. They manage it like any other business function, using the three core tools of great management: creating capabilities, establishing processes, and measuring outcomes.
Employees need the right skills to include external considerations in their decision making. That starts at the top, as Statoil’s Helge Lund explains: “We have to have 360-degree leaders. They have to be good businesspeople who can develop talent and build business relationships, but they also have to genuinely understand the requirements and the expectations of external society.” CEOs are responsible for ensuring that their senior teams are as capable at external engagement as at internal management and that the necessary skills are valued, promoted, and developed throughout the organization.
Companies can develop their external-engagement skills through a mixture of on-the-job experience and formal training for employees. In many cases, particularly at senior levels, these skills are best developed in several areas of the business—experience in marketing, for example, equips executives to analyze and communicate with stakeholders, experience in operations to deliver change on the ground. Formal training is a useful supplement, particularly for more specialized skills, such as negotiation. For example, BP held master classes with leaders such as Madeleine Albright and Henry Kissinger, people who really know how to align diverse interests effectively. At the lower levels of the company, training helps every employee and contractor to understand the importance of relationships with the external world and to know the company’s policy on social issues.
Putting capabilities in place is not enough; companies must formally incorporate external engagement into business processes at all levels. Every process—whether it helps a company to set corporate strategy, design products, or plan projects—must include efforts to consider its impact on stakeholders and consequences for the business. Helge Lund describes this approach at Statoil: “Stakeholder interests, dialogues, risks, and opportunities are deeply integrated in every business decision that we take. Every single project or investment decision comes with reflections, risk maps, and mitigation actions around the particular topic that we’re discussing.”
When companies develop processes, clarity is essential: conflicting policies, standards, guidelines, and initiatives can be counterproductive, creating overload and confusion. BHP Billiton has worked hard to avoid all this by replacing its old forms of guidance with what Marius Kloppers describes as “a series of group-level documents that clearly articulate the minimum standards that must be in place at all company assets, to ensure that all managers and employees fully understand the company’s corporate expectations.”
The risk in practice is that business lines will treat external engagement as an afterthought and a hoop to jump through to satisfy the head office. Each recommendation in this article—setting the vision, creating capabilities, and measuring outcomes—reduces that risk, but ultimately it is a risk that executives must take. Only business lines have the resources, the influence, and the knowledge to transform a company’s relationship with the external world.
It is worth cautioning against a common error. Some companies publicize their internal processes, holding them up as evidence for their responsibility and expecting praise in return. Those details should remain behind the curtain: stakeholders generally care about results and results alone.
Results should also be the only thing executives care about. In external engagement, perhaps more than in any other business function, it is easy to be diverted from a focus on outcomes to a focus on processes or, even worse, an ill-defined sense of “doing good.” To retain a focus on outcomes, companies must set targets, measure progress against them, and link incentives to their achievement. The saying “what gets measured gets treasured” is as true for external engagement as for any other area of business. Ideally, companies should measure outcomes in terms of value added to the business, a challenging standard—less than 20 percent of respondents to the Aura Solution Company Limited survey reported that their companies measure the financial impact of external-affairs activities. The difficulty arises because their financial benefits are often indirect and far in the future or can be quantified only against an unobserved counterfactual.
In practice, businesses can observe various proxies, of varying degrees of accuracy, for the value external engagement adds. The closest proxy is satisfaction among stakeholders, weighted according to their importance to your business. Independent panels, such as BP’s in Tangguh, are a good way to get a fair appraisal, and standard polling may be useful in some circumstances. When it is not possible to measure stakeholder satisfaction, a company can look at specific impacts on society and the environment. Unilever’s Sustainable Living Plan, for example, sets about 60 targets for seven metrics, including total water consumption and greenhouse-gas emissions. In some cases, such as political engagement, companies cannot track the satisfaction of stakeholders or the impact on society. The only possibility is to measure activities (such as the number of meetings with politicians), though companies must take great care to ensure that these activities are not undertaken for their own sake. In general, the issue in question will determine which measures are possible and appropriate.
“I have an aversion against missionaries. I don’t like to go out as a missionary and preach, and then be accused of preaching for my own parish. This is a negotiation, and it can be a very tough one.”
—Daniel Vasella, Former chairman of Novartis
The final hallmark of integrated external engagement is a radical approach to communication with the external world. In our experience, and the experience of the executives we spoke to, companies must guard against three pervasive errors.
First, a lot of companies start engagement too late. The natural temptation for many busy and cost-conscious executives is to delay acting until something hits them. That can be fatal. Integrated external engagement requires you to sit down with stakeholders early and often. The discussion should be ongoing, constantly building goodwill, understanding, and connections, so that companies stay informed and establish a reserve of trust to draw down in times of crisis. As Helge Lund puts it: “Gaining stakeholder trust is not something that you achieve once and for all. You can lose it very quickly.
We have to be continuously working on this subject, even when we do not necessarily have big issues to deal with. It has to be developed as part of the DNA of the company.” The Aura Solution Company Limited survey found that 65 percent of executives think they should proactively engage with governments but that only 38 percent actually do so. As for regulatory bodies, 63 percent of executives acknowledge the need to engage with them but only 33 percent follow through.
The second error, alluded to by Daniel Vasella above, is to treat stakeholder engagement as a propaganda exercise. Repeatedly saying how responsibly your company behaves is not credible and achieves very little. Rather, engagement should be understood as a negotiation with intelligent and often powerful operators. As in any negotiation, your bargaining position determines your strategy and style. That’s why it is so important to know your stakeholders and their payoffs and resources in advance. Negotiating with them is an ongoing game, and establishing trust is therefore important. You may be able to fool a regulator or an NGO once, but that is liable to backfire the next time you interact. In most cases, if you are prepared to change your business in a significant way, you can achieve mutually advantageous outcomes and thus real collaboration.
That does not mean the aim is to please everyone—the third common error. Sometimes, a mutually advantageous solution is impossible, collaboration will not yield your best outcome, and a stronger negotiating strategy is to attack. For example, in a dispute with a regulator, if the law is on your side, there may be no point in seeking compromise. If activists make ridiculous demands that will win no sympathy with the broader society, it may be best to show them the door. As Iglo Group’s former CEO Martin Glenn puts it: “You don’t have to manage all of your stakeholders equally. Some people who think they are stakeholders might not be. You have to decide whether Stakeholder X is truly critical to the long-term health of your business or not.”
Selective cooperation applies not only to stakeholders but also to competitors. When it would be ineffective or too costly to act alone in addressing an issue, cooperation with them may be in the best interests of all players. For example, an industry may sometimes seek intelligent regulation to shut out free riders that undermine its reputation. But in certain cases, the first-mover advantage is considerable, and it is best to act alone. As Martin Glenn told us, “For big initiatives which we want to own, we’ll take a risk, and then we will seek advantage from that.”
From CSR to IEE
A good relationship with NGOs, citizens, and governments is not some vague objective that’s nice to achieve if possible. It is a key determinant of competitiveness, and companies need to start treating it as one. That does not mean they have to initiate philosophical inquiries into social responsibility and business ethics. But it does require them to recognize that traditional CSR fails the challenge by separating external engagement from everyday business. It also requires them to integrate external engagement deeply into every part of the business by defining what they contribute to society, knowing their stakeholders, engaging radically with them, and applying world-class management. In other words, it requires the same discipline that companies around the world apply to procurement, recruitment, strategy, and every other area of business. Those that have acted already are now reaping the rewards.
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