Value Creation Archives

November 6, 2011

You Can't Impress Stock Analysts...and Shouldn't Try

ExxonMobil reported last week that its net income reached $10.3 billion...in just the third quarter. The oil giant is arguably the most profitable corporation in history. Ten billion in three months is historic, but as the New York Times reported, "analysts were not impressed."

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Is there a better distillation of the serious problem with our economic system? Not to put too fine a point on it, but the relentless pursuit to satisfy analysts, and not customers or other stakeholders, is killing our economy and our planet.

Earlier this year, I asked a CEO of Fortune 100 company how he dealt with analyst pressure. Even though he answered on stage in a public forum, I'll keep this anonymous in case it was a moment of mistaken honesty. What he said was this: "I don't know any CEO that would want to run a company the way analysts would want us to."

And yet...I keep hearing from top executives at large, profitable companies that they're under "P&L pressure." This pressure comes not from being anywhere near unprofitable; no, it stems from fear of not hitting growth targets for earnings per share. What all senior executives seem to have forgotten — in some mass delusion — is that these growth targets are arbitrary.

Who declared 7 or 10 or 15 percent growth in earnings a sacrosanct pursuit, above all other corporate goals — like the innovation that leads to novel solutions that address customer needs? If you believe the best-selling business books from the last 25 years, companies are "In Search of Excellence" or trying to go from "Good to Great." Nobody writes a paean to the search for 9 percent EPS growth.

Moreover, pure growth targets are even wackier right now. The debt and overleverage explosion artificially inflated our economies and corporate earnings. So expecting growth in earnings today, while we re-set the economy to a more "normal" growth level, is absurd.

Now imagine for a moment that a proverbial alien lands on the planet and looks at the financial statements of many of our largest companies (I know, aliens might have better things to do, but go with it). They would see massive profits, tons of free cash flow, and healthy balance sheets. Since they wouldn't know that the companies had set and missed growth targets, they'd declare them very successful. But not the analysts.

Our big, profitable companies have the resources to do everything they might consider a priority in the long run — invest in R&D, pay shareholders well, build new businesses and hire people, create a more sustainable enterprise...whatever.

The strategic decisions that would lead to these outcomes require broader thinking, not quarterly focus. But the pressure to "impress analysts" means that leaders can't pursue the long-term perspective that creates truly lasting, great, and sustainable organizations. It's a strategic and operational straight-jacket.

A few leaders — from companies such as Google and Unilever — have told Wall Street that they won't provide "guidance" anymore. In essence, they'll report their results to GAAP standards and as the SEC, FASB, and other quasi-regulatory bodies require...but they won't answer to analysts. Not coincidentally, these CEOs are also deep sustainability thinkers.

I have a sneaking suspicion that most CEOs and CFOs would enjoy this kind of freedom from analyst conversations. Wouldn't it be more personally rewarding for them — and all the layers of management beneath them — to build and lead fundamentally more profitable organizations (versus maximizing short-term profits)?

As Unilever CEO Paul Polman told the crowd at the World Economic Forum in Davos in January, "The worse thing would be to do what is probably right for the long-term benefit of society and being forced out of that because you don't get the short-term results...I want people to focus on cash flow, which is a much longer-term measure than short-term profit."

Sustainability is about the real long-term health of both the planet and enterprise. I hope we see more leaders walking away from these absurd pressures that keep them from building innovative, profitable, sustainable companies.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

Related Posts

"Wall Street Doesn't Get It"

December 22, 2011

Top 10 Green Business Stories of 2011

Yes, it's December again somehow: time to look back on what we've learned and oversimplify into a handy list. Here's my take on the 10 big stories in sustainability and green business this year:

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1. The usual sustainability drivers got stronger
Ok, this one is cheating a bit, but on a fundamental level, the top themes in green business haven't actually changed too much (see the 2010 list). So, rather than take up valuable list real estate with these perennial favorites and big-picture drivers, I'll quickly list them in one big bucket of mega-trends:

  • The rise of the consumer around the world, related to...
  • China, China, and China. From relentless demand for resources to bamboo-like 9% growth to vicious competition for the technologies and industries of the future, China will be the big story for a long time.
  • The greening of the supply chain. Big organizations keep asking more of their suppliers.
  • Increased demand for transparency and its close partners, (a) the quest to define and develop useful sustainability metrics and (b) the growing sustainability data explosion.
  • The military continues to lead the way on energy and climate.
  • The ongoing failure of policy at a global level (with the important exceptions of some successes/workarounds such as new mileage targets for cars and trucks and a carbon tax in Australia).

These drivers underpin a number of stories from 2011, but a few new themes came out as well. Here's the rest of my top 10 stories, with callouts for companies and examples that typify the trend.

2. Malthus strikes back: Coca-Cola takes an $800 million hit on commodity costs
Coca-Cola was not alone in facing increasing costs in 2011; one of my clients, Kimberly-Clark, took an earnings hit from record pulp prices. These companies are notable victims of a new reality: resources are constrained and input prices are fundamentally rising.

For over 200 years, from Thomas Malthus to the Limits to Growth gang, many people have made the case that it won't be long before we'll run out of food, energy, materials, and on and on. It's an idea that has enthralled many, but has seemed to be wrong. But this year, something felt different as we hit 7 billion hungry, striving humans on the planet. While "running out" isn't really the right phrase, it's clear that delivering many commodities to market is getting harder and more expensive (we don't dig for oil a mile under the ocean for the heck of it). And the dangerous mix of supply crunch and rising demand is only increasing, across nearly all commodities.

In January, China "seized" its rare earth metals (meaning it wouldn't export them anymore). In June, the New York Times declared a warming world hostile to food production. The best analysis of the resource scarcity mega-trend came from asset manager Jeremy Grantham. His analysis of commodity availability on a finite planet is compelling, thorough, and absolutely fascinating. Here's the gist: after 100+ years of fundamentally declining resource prices, the data show a rising trend for nearly every input into our society. Business as usual is no more.

3. Climate Change Arrives: Texas weather triumphs over (some) ignorance
Climate change is here. The list of "once-in-a-century" storms, floods, and droughts this year is too long to list. I know, I know — no single storm or season "proves" climate change. Was a year like 2011 possible in a world without climate change? Of course. But please. Was a year like 2011 likely? Not at all. In the words of climate scientist Jim Hansen, we've loaded the dice in favor of extreme weather events.

From Thailand to Pakistan to Texas, some areas are deluged with water, while others have absolutely none. Please look at the numbers for how dry and hot Texas was this summer (I'll wait). The data speaks for itself: Texas' heat was literally off the charts this year. What was once temporary drought is looking more like permanent change. For another angle on a changing "normal," read Jeff Goodell's piece in Rolling Stone on "Climate Change and the End of Australia." Finally, if the immediacy of the "look out the window" method of gauging climate change didn't work for some, at least one major climate skeptic changed his tune based on longer-term data. Richard Muller ran the models himself and discovered that, surprise, the thousands of scientists before him had gotten it right. It's probably wishful thinking, but I believe the climate debate is actually over (and a solid majority of Americans agree).

4. High-profile "failures" shake up clean tech: Solyndra has its day in the, um, sun
What can one say about the failure of solar company Solyndra? It certainly has become a media darling for clean tech skeptics. Soon after this quasi-fiasco, a few other stories seemed to indicate that corporate America was backing off of green tech. Google stopped its high-profile pursuit of cheaper-than-fossil-fuel renewables, and California utility PG&E quietly pulled the plug on its carbon offset program. In my view, none of this is all that distressing. So one technology and company failed miserably (and perhaps the government made a bad investment choice). And some initiatives didn't work out as planned. So what. Whether it's government money, venture capital, or corporate initiatives, you gotta place lots of bets to get some winners. These were all experiments, and you always learn from what doesn't work. But the real reason I'm not too worried is that...

5. ...clean tech is rising fast: Renewable investment tops fossil fuels for first time
Markets have a remarkable way of sorting the wheat from the chaff. While the overall carbon emissions news is not good, the renewable energy market is growing very fast. The sector is larger than most people realize, with clean tech investment hovering around $200 billion globally. Total investment in new power generation is a good indication of where we're headed, and for the first time renewables beat fossil fuels globally. Right now, the U.S. and China are entering a trade battle over solar subsidies, which tells me it's a real market now. They wouldn't be arguing if the prize were not very large.

5b. Nuclear on the outs

Following the nuclear meltdown in Fukushima, Japan, the once-resurgent nuclear industry is flatlining: generation actually fell globally in 2011, with Germany alone shutting down 8 gigawatts' worth. In September, Siemens, one of the world's largest nuclear power plant suppliers, exited the business. CEO Peter Loscher declared Germany's plans to move aggressively toward renewables "the project of the century."

6. Water rising — both literally and as a serious issue for business: Honda's supply chain gets slammed, Levi's gets creative
A list of floods that devastated lives, homes, and countries this year would be tragically long. So it's no wonder that business started to wake up to the serious danger that storms and shortages present to their operations, both from direct damage to property and from massive production interruptions (i.e., "business continuity"). Think back to the January floods in Australia which covered an area larger than France and Germany combined. The extreme weather seriously disrupted coal production, one of the most important economic engines in the country. At the microeconomic level, consider what Thailand's floods have done to the market for disk drives, or to supply chains for Honda and Toyota (which are dealing with a double flood hit from the tsunami as well).

On the use side of the water issue, companies with products that depend on water in production (beverages) or in use (shampoo, apparel) are also seeing the writing on the wall and getting creative. Levi's announced a low-water jeans production method, Unilever started asking customers to shorten showers, and beverage companies are working with farmers and NGOs to drive water use down throughout the value chain (see my last blog, co-written with Andy Wales from SABMiller). In 2011, the phrase "water footprint" became a lot more common.

7. Value chain and transparency partnerships growing: The apparel industry bands together
One of my favorite new partnerships is the new Sustainable Apparel Coalition, an impressive mix of powerful retailers, apparel manufacturers, and NGOs. The group is leveraging extensive data from Nike and the Outdoor Industry Association on supplier sustainability performance (energy, water, toxicity, etc.) for "every manufacturer, component, and process in apparel production." The goal: to reduce negative environmental and social impacts of the $1.4 trillion market for clothes and shoes.

The larger trend here is the continued growth of "open" — open data and open innovation, including new value-chain business partnerships and cattle-call contests inviting in any and all ideas. The movement has been building for years, from P&G opening up its product development pipeline early in the 2000s to the launch of the GreenXchange for sharing green patents early in 2010. But the trend accelerated this year, with GE's expanded Ecomagination Challenge and other coalitions and open competitions.

8. Valuing and internalizing the externalities: Puma Calculates its Environmental P&L
A few very cutting edge companies are starting to ask some deeper questions about the value they create and destroy in the world. Puma, in a surprise leap to the front of the sustainability leadership pack, commissioned TruCost and PwC (full disclosure: I have a partnership with PwC) to assess the value of its total environmental impacts from operations and supply chain, including carbon pollution, water use, land use, and waste generated. The total: 145 million euros. In a similar vein, Dow Chemical launched a 5-year, $10 million partnership with The Nature Conservancy to "value nature" (so called "ecosystem services") as an input into their businesses. It's unclear what companies can do with these numbers since externalities are by their nature, well, external to the regular P&L. But it's the beginning of something very important — companies are starting to understand the real value and costs of their businesses, to themselves and to society. Watch this space.

9. The people speak: Keystone and OWS
Speaking of getting companies and governments to think longer term about value and costs to society: against all odds and expectation, the protests against the Keystone XL pipeline from Canada — led most prominently by uber-environmentalist Bill McKibben — were successful (for now). And what can one say about Occupy Wall Street? The movement is, in part, about this larger question of value and values. Do we value the right things (equity, fairness, justice) or just promote growth and profit above all? Currently, our businesses are driven entirely by quarterly profits. Pursuing the short-term payback can cause a firm to deviate wildly from actual, long-term, sustainable profitability. This disconnect was bound to stir some passions eventually. Whatever your politics, ignoring or dismissing this movement is a big mistake. The concerns underpinning the anger out there stem from concern about what's good for the long-term, and what's truly sustainable. None of these questions are going away.

10. A path to sustainable consumption begins to emerge: Patagonia asks us to buy only what we need
Perhaps the most heartening business story of the year came from perennial thought (and action) leader, Patagonia. Its Common Threads campaign/business model questions consumption at its core. The company announced that it would take back its clothing and refurbish, resell, reuse, re-whatever. The website proposes a grand bargain - we make clothes that last, and you don't buy what you don't need. A holiday ad got more specific and demanded we "Don't buy this jacket." Patagonia is testing new ground and it's not a gimmick — it's a sign of the future.

Looking Forward to 2012 and beyond: New business models coming
Patagonia has always been at the leading edge; it was one of first companies to buy organic cotton or to turn recycled plastic into fleece. Now it's showing the way to new business models. I've written about this kind of heresy before, but the few examples out there are generally B-to-B (Waste Management, Xerox). Patagonia's move is a warning shot over the bow that the consumer-facing consumption question is coming. The near future will hold more questions about how businesses can and should operate in a resource-constrained, hotter, drier (or wetter) world. And companies will increasingly question the wisdom of focusing on quarterly profits. It won't all come to fruition in 2012, but it's on its way.

As usual, I'm sure I'm missing many great stories in my list. I look forward to your suggestions. Happy holidays and Happy New Year!

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

March 20, 2012

Corporate Sustainability Efforts -- Feast or Famine?

Is corporate sustainability on the wane or growing more important to top executives? At the beginning of the year, two big-picture reports on the state of green business painted divergent pictures.

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In GreenBiz's annual review of 20 indicators of "how business is doing" on green, we learn that 6 of those indicators are on a downward trend. But in the report "Sustainability Nears a Tipping Point," MIT and BCG prove their point with a fast-rising graph of companies that recently put sustainability "on the management agenda."

While they seem at odds, both views are right — companies are no longer ignoring sustainability; most big companies now have someone focused on it, at least in part. That's why execs can honestly tell MIT that it's on their agenda. But with sustainability often siloed into just one person or department in each organization, it's hardly a surprise that, at the same time, we're seeing some loss of momentum. Sustainability has moved from being a hot, new management trend to being just one more thing for execs to keep an eye on: for many it's become a check-box exercise..

This structural gap reveals the fundamental misunderstanding about what sustainability really means for organizations. I've seen it time and again in the companies that I work with or study. For them, sustainability is a thing to tackle, a functional area; it's a what, like marketing or product development.

But sustainability needs to be viewed as much more of a how concept, like quality or innovation. It's a way of operating that creates the most value when it's embedded throughout the organization.

Of course companies have distinct quality or R&D departments and professionals, but the most committed companies drive the thinking into every aspect of the business. This is the mindset that sustainability needs to engender throughout an organization. And as with quality, this isn't just about ethical or aspirational hopes — acting with sustainable values, for example, as covered well by many, including Dov Seidman in his book How.

No, I'm talking here about the more prosaic, everyday, tactical, blocking-and-tackling of business. Sustainability pressures force changes in how we build our supply chains, how we design and manufacture products, how we deliver services, how we create and execute our business models and strategies, how we develop financial metrics to measure success, how we attract and retain 21st-century, holistic thinkers, and on and on. So sustainability pressures, if acted on, drive us to create and build better products, design more efficient services, execute better, and hire the best. Those are goals that reach throughout the entire organizational structure, and they're actually enabled by sustainable thinking.

Given the scale of these goals — and the global challenges we all face — putting just one (or a few) people against the what of sustainability is a woefully inadequate response.Resource constraints and rising input prices; increasing demands from customers, employees, and consumers; the risks of severe business continuity disruptions from water, climate, or labor problems in the supply chain...the list of big pressures grows more complicated every day. And these issues require a full-court press from all aspects of operations.

It's become a mantra in the sustainability world that green needs to be a part of everyone's job. Of course that's true, since detecting risks and innovating around them will often fall to those closest to the ground (hint, that's rarely the c-suite). But most companies are missing a big step.

To conquer a how you need more than just a mantra. You need a significant investment of resources in time, top-leader focus, people, and money. You need people to ride herd and drive the agenda — to do the cross-cutting analyses such as lifecycle assessments, to track and get a handle on the many diverse and complex issues, to present a unified front to employees and external stakeholders, to question business models and find new, heretical ways to operate and serve customers...the list goes on.

There's no "ideal" structure for sustainability efforts, just as no two companies would tackle innovation the same way. Most large companies have now appointed a lead on sustainability, but have provided limited financial support and fewer human resources. There are exceptions: a few well-known sustainability leaders, such as Starbucks, Nike, and Coca-Cola employ central teams with specialists in areas like water, climate, and packaging, as well as reps spread out around the organization.

One of my clients, Kimberly-Clark, a much quieter sustainability leader, has a centralized team of 5 to 10 sustainability-only managers (and that's only part of the 50-plus central staff covering environmental, health &safety (EHS), OSHA, and, yes, quality). More importantly, Kimberly-Clark has another couple dozen professionals in dedicated sustainability roles (again, not EHS) embedded in business lines and geographic regions.

But even the leaders with robust organizations are rarely putting much money specifically into sustainability-driven innovation or disruptive changes that might dramatically reduce the value chain footprint of the company's products. Let's be honest: It's very hard to assess how much is "enough" when you're investing in a strategic priority. But it helps if the organization first defines it as a strategic priority. And given the ever-rising costs of under-reacting to sustainability pressures (such as direct costs from rising input prices, or business discontinuity risks from extreme weather), it's clear that companies should put a lot more people and money against an agenda as large, complicated, pressing — and let's not forget profitable — as sustainability.

Only with significant investment can we move down the path to sustainability integration and real, ongoing, full value creation. A robust network of sustainability professionals within a company — whether or not they sit in one "department" — may need to obsolete themselves over time. But until then, sustainability can't drive anything — it will just remain a nice side show.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter@GreenAdvantage)

August 24, 2015

Fortune Magazine's "Change the World" List Needs More Hard Data

Fortune Magazine has taken on a fascinating and very challenging task of ranking companies that are "changing the world" for the good. Their new list could be a solid addition to their other non-financial rankings, such as Best Companies to Work For, Most Admired, or Most Powerful Women.

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But that said, this list is odd, and not for the reasons you might think. Two quick areas that I will not criticize:

- The underlying assumption or impetus. That doing 'good' in the world is also good for business, I'm obviously on board with. Companies can, and should make what I call a "Big Pivot" and put solving the world's largest problems at the center of their business models -- and do it very profitably.

- Who made the list (others will certainly jump on this issue)? Most of the usual suspects that many sustainability watchers (including me) consider clear leaders on tackling environmental and social challenges -- like Unilever, Patagonia, Nike, Marks & Spencer, and Starbucks -- made the cut. As did the more controversial companies that many (again, including me) also give props to (like Walmart). But, of course, people will find fault with every company on the list. Multinational companies are not monolithic and I agree with Fortune that these giants "may be ameliorating one great global problem even as they contribute to another."

But even so, the list is strange in a key way. It's a "ranking" that doesn't exactly rank. Fortune says "We have made no effort here to rate companies on their overall 'goodness' or 'social responsibility.' That's a task beyond our competence." Really? Why?

If we can measure how powerful women are, or who's most admired or most innovative, we should be able to handle this task. Yes, "goodness" is tough to measure, but that's not the same as impossible, and Fortune shouldn't punt on that. If this list is saying that creating societal value creates business value, then let's use some financial (or perhaps blended) metrics.

We could use dollars. My colleague Freya Williams just released a new book, Green Giants, which focuses on 9 brands with over $1 billion in annual revenues that are "directly attributable to a product, service, or line of business with sustainability or social good at its core." Williams includes in her list, which totals $100 billion in revenues from more sustainable products, all of the sales of companies like Chipotle, Unilever, Tesla, Whole Foods, and Natura...and just the greener parts of GE (its ecomagination portfolio), Nike (Flyknit shoes), IKEA, and Toyota (the Prius).

It's not a perfect method, but it's not bad either. So why not rank all of the world's biggest companies by total dollars or percentage of revenues (or profits) coming from "good" products. It's not an exact science, but it would yield interesting results. Total dollars would put Walmart near the top -- even if you just count their organic food sales or some percentage of the business because of its renewable energy investments. Percentage of business dedicated to doing better would highlight those like Patagonia and Natura that are arguably at 100%.

And even without financial metrics, we could estimate how much impact the companies have on the world: number of people whose lives are improved, amount of economic growth driven for those near the bottom of the pyramid, and so on. There's a ton of work going on out there on changing the metrics we use at the scale of companies and the economy (GDP as a measure of well-being has some serious flaws).

Clearly, some of these considerations went into the Fortune ranking -- the think tank that helped build the list, FSG (founded by Michael Porter and Mark Kramer), is a major proponent of "shared value" creation between business and society. But it could all be more concrete. So, by all means, let's recognize the companies finding business value in social and environmental progress. But let's get more specific on how much credit we give them.

(Photo: Flickr, tracyshaun)

(This post first appeared at Huffington Post)

(Andrew's new book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew's TED talk on The Big Pivot. Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

March 9, 2016

Short-termism is Dead! Long Live Short-termism!

Two competing stories I saw recently about the relentless pressure on companies to meet short-term financial goals:

1) Larry Fink, the CEO of Blackrock, the world's largest investor ($4.6 trillion in assets) sent a new letter to S&P 500 CEOs urging them to think about long-term value creation (He also sent one last year lamenting stock buybacks and other short-term games).

A few choice phrases:

· "Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need."

· "We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation."

· "Over the long-term (ESG) issues – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts."

Fink also commented on the macro-economic impacts of our short-term obsession: a lack of investment in infrastructure. That unfortunate political reality, I'd argue, is also due to a rise of an anti-governing coalition in the federal government.

Ok, so far so good -- so the scourge of short-termism in business is finally facing some strong, mainstream opponents. But then I saw this story...

2) "Alcoa CEO: The World is Getting More Short-Term"
Kalus Kleinfeld, Alcoa's chief executive, explains the break up of Alcoa into a core commodity business in aluminum and a "value add" business that sells to aerospace and auto. He makes the case that he needs to separate the high-value business to "have a different investor base" that would care about innovation and growth over time.

We've been hearing this argument more these days, as utilities have been splitting up to separate fossil fuels from clean energy...in part to satisfy different types of investors (although consider NRG CEO David Crane's take on whether short-termism drove his departure from the big energy company).

Kleinfeld isn't super-optimistic on this front, telling Fortune "the whole world is getting more short-term."

So which is it? The end of short-termism or the continued pressure?
Could it be both?

A short-term focus is deeply ingrained in what executives and managers have been trained to do (maximize short-term value) for the last 30+ years. So perhaps we're still heading in that direction...but we're finally slowing the ship and beginning to turn it around.

Fink suggests a solution in a way -- keep giving us quarterly reports and data as a measure of progress along the way to something larger -- like an 'electrocardiogram' of health today vs. a long-term plan for greater health. This seems like a good compromise.

But we clearly need to aggressively ramp up long-term thinking to get them even remotely in balance.

(Andrew's book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew's TED talk on The Big Pivot.

If you enjoyed this blog, please sign up for Andrew Winston's RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

February 8, 2017

Is it Time to Add Morality to the Business Case for Sustainability?

(I'm really interested in everyone's opinion on the below. I started this conversation on Sustainable Brands site last week and there are some good comments. But I always re-post here for my subscribers. Please share with the sustainability community and send me your thoughts (or post them here). Thanks.)

Every manager (or consultant) who has pitched an initiative under the banner of “sustainability” has faced the same question nearly every time: what’s the business case?

On the surface, there’s nothing wrong with the question. Business is all about allocating some form of capital, be it financial, human, or organizational. So it’s not unfair to wonder what the return on the investment might be. But usually, when executives pose the question about sustainability initiatives, they’re asking about the business case in the narrowest sense: Does this thing pay back, in cash, within some short payback period (1 or 2 years)?

In response, we’ve all put a lot of effort into making the case in financial terms. And given the common assumption that sustainability somehow equates with philanthropy and saving the polar bears, it’s generally smart to make it all about money. Certainly, that’s a big part of the case I’ve made for a long time. But maybe I’ve been missing something.

Maybe, in trying to answer the business case question narrowly, we’re overlook something critical about what motivates the decision maker. Or we miss how much the world is changing. Perhaps it’s time to inject the moral case into the discussion and say, boldly, “This is the right thing to do.”

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Let’s face it: given the constant attack on our rights and democratic ideals happening right now, companies – some of society’s largest institutions – are finding themselves in uncomfortable territory. The moral position of a company and its leaders individually are facing more scrutiny. The conversation in executive meeting rooms is not just about shareholder value anymore. Will we defend LGBT rights or protect immigrant employees? Will we continue to tackle climate change, the human and planetary crisis of our time? These are not idle questions anymore.

I will write much more about the macro-level question of the role of business in society over the coming months and years. But for this discussion I want to rethink the specific question about how sustainability professionals and managers make the case for social and environmental action.

So, back to the nitty gritty. Do we have the right arguments for why we should invest in sustainability projects? Let’s consider four broad buckets of initiatives – three that create value for the business and one that’s more about value for society – and explore how (and when) they create value:

(1) short-term financial wins that meet all hurdle rates;

(2) clear financial wins, but with longer paybacks;

(3) investments that have less certain paybacks in cash, but create indirect (yet real) and internalized value, such as improved employee engagement, increased customer loyalty, greater license to operate, brand building, or risk reduction;

(4) projects that create externalized value for stakeholders and improve the shared commons

Of course these categories are not mutually exclusive – any of the first three will create externalized value as well. But for most projects there’s a core bucket of value. A simple lighting retrofit would fall mainly in group 1, for example, while employee volunteering, or providing water infrastructure for the community around a factory, would be mainly group 4 activities. Something like auditing and raising environmental or social standards in the supply chain, or investing in circular models, could hit all four areas, but would hit bucket 3 hard.

For each bucket, the business case we make should vary.

Category 1 is trivial, and the cash benefits of, say, eco-efficiency projects are now broadly accepted. Of course there’s always competition for capital, even between projects with quick paybacks, but it’s not hard to make the case that these things save money.

Category 2 requires more finesse. You can make the case for bending the rules on the hurdle rate for strategic reasons at times. Or, more frequently with sustainability projects, we get these through the system by shifting the conversation to category 3 value and point out that, by the way, it will also save cash, but later.

So category 3 is where so much of the effort lies. I’ve sacrificed many trees (and digital bits) writing about the importance of recognizing internalized value, even if comes in ways we can’t measure it perfectly. We all make the case that environmental and social initiatives can reduce risk, drive innovation, create employee engagement and loyalty, build the brand, and much more. That case is strong. Most large companies have realized that just considering the attraction, retention, and engagement of talent (especially socially-minded Millennials) can justify many investments in social and environmental progress.

But let’s look at category 4, the “save the world” value bucket that I’ve mostly avoided during my career. A new, challenging political environment is making me even more philosophical about why business should act, or even why a business exists.

Here’s the nub of it. Consider the following benefits a company might create: employee happiness, being a good member of the community, solving a customer need (the original, and some would say only, reason a company exists), and, yes, making sure the polar bears survive. Aren’t these things good in their own right, regardless of how or when they create business value? Maybe this kind of query falls in value bucket three-and-a-half, between the cracks because it begs the question of what value is.

My mini existential question was partly spurred by an interesting article I read recently in the Guardian. Focused on “why time management is ruining our lives,” the essay laments our obsession with personal productivity and talks about creating life balance and having more free time. In the article, John de Graaf, a founder of a group called “Take Back Your Time” challenges what I would describe as the business case for life balance: “People argue that more time off might be good for the economy, but why should we have to justify life in terms of the economy?”

It’s a great point. And it’s a good question to ask about all our efforts to improve employee engagement, connect to purpose and meaning at work, or drive sustainability in business. Why should everything that supports general well-being for people touched by a company – its employees, customers, supply chain workers, community members, future generations, and so on – have to be put only in economic terms?

The time may be ripe to broaden how we talk about sustainability and bring in a moral dimension. Consider one of my favorite sustainable business stories from 2016. After North Carolina passed the absurd “bathroom bill,” some big company CEOs sent an open letter to the Governor saying the law didn’t reflect their values. Companies are increasingly standing up for LGBT rights, and in the last week, for immigrants (bravo Starbucks for pledging to hire 10,000 refugees). A somewhat cynical interpretation would say that companies just want to stay in the good graces of a segment of their customer base. True, so there is some business logic. But it’s also clear that many of these companies and their executives just felt it was the moral thing to do.

I’ve talked to senior executives for many years about why they care about sustainability. And very often it stems from a personal journey. They went to the rain forest, or their children asked them about their work and their legacy.

So am I saying we should abandon the normal business case and stop focusing on how much value sustainability creates for business? Of course not. We should absolutely talk about the cash payback and all the indirect and hard-to-measure internalized value. But perhaps we (or at least I) have gone too far to counteract the “green equals polar bears” view of the world. Depending on the audience or particular executive, it may be time to throw in an element of “hey, this really is the right thing to do and your kids will be proud.”

Yes, the traditional business case will still be critical, particularly in public companies. But it might play the role of justifying something a leader wants to do in her heart anyway. Given what behavioral psychology tells us about the “confirmation bias,” this is how many decisions are made anyway.

My bottom line is this: how we make the case for sustainability needs to vary depending on the category of initiative (from slam dunk in cash terms to indirect value to “other” and societal value), the situation (a CFO presentation meeting vs. drinks with your boss), and a reading of the people involved.

But more and more, I’m wondering if a combined logic of “good for business” and “good for the soul” will work best. I welcome your thoughts.

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(Andrew's book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew's TED talk on The Big Pivot.

(Photo credit: Flickr, Joel Duggan)


September 25, 2017

The Same, But Different: Some Thoughts on Japanese Business

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I recently visited Tokyo on a business trip and had the chance to meet with a number of Japanese companies. At the end of a three-hour meeting with sustainability professionals from a dozen or so multinationals, the host asked me for my impressions of Japanese organizations and their sustainability efforts. My honest answer: “I’m confused.”

My perspective is limited, but I can compare what I know about corporate sustainability in general to how these execs described the way things work in Japan. I left with the impression that these big companies were both leading and lagging. The core tension seems to be between, on the one hand, their unusual ability to take a broad, long-term, systemic view of business and its role in society; while, on the other, approaching sustainability tactically in narrow, somewhat dated terms.

Consider how many Japanese companies have set ambitious, long-reaching sustainability goals, with many focused on what they can accomplish by 2050 (decades further out than most Western companies are comfortable thinking about). Look at Sony’s Road to Zero goal of leaving no environmental footprint by 2050. Or Toyota’s Environmental Challenge 2050, which lays out a similar vision for its vehicles and plants, but then adds expansive statements about building a recycling-based society in harmony with nature.

While I was there, I also learned about some companies I hadn’t been familiar with. An executive from Kao, a $12.5-billion consumer products company, told us about its solid performance on energy, waste, product redesign, and more. But what surprised me was Kao's corporate mission, “The Kao Way,” which begins: “Our mission is to strive for the wholehearted satisfaction and enrichment of the lives of people globally and to contribute to the sustainability of the world.”

Besides Unilever’s Sustainable Living Plan, very few companies have put sustainability at the center of their corporate vison and strategy. For most, the sustainability mission, if there is one, is in a silo.

So, thinking big and long term seems more comfortable for Japanese companies. As one specific proof point, anecdotally I’d say that more Japanese companies (and those in the EU) have embraced the Sustainable Development Goals as a blueprint for their targets. Companies in the U.S. seem to lag on this front.

And yet, there was one really important area where Japanese corporate sustainability was behind. The sustainability and top executives are still talking only in terms of “corporate social responsibility,” not the broader more impactful sustainability-style language we see in the U.S. and EU. It’s about the common good and philanthropy. It’s not like U.S. companies have all made sustainability into core strategic issues, but the language still felt dated in Japan.

For all of those differences, a lot seemed eerily familiar, even when many people I met with insisted that “things are different” in Japan. Part of that perception gap is based on some misperceptions about stakeholder pressure in the West. For example, they told me that consumers in Japan don’t really care much about the environmental or social aspects of products, unlike, they thought, those Western consumers that are forcing the hand of sustainability leaders such as Unilever. Or, they’d tell me, investors don’t care and just want short-term performance.

Sure, there may be some differences in stakeholder pressure – e.g., the people from consumer products companies said the “clean label” movement I described was not big in Japan, and I don’t have regional data to argue the point one way or the other. But I had to break it to them that consumers in the West, outside of a few product categories such as organics and some personal care, are not really driving the agenda, either. In fact, I hear the samecomplaints about consumers from the big CPG companies here.

And the mantra “Wall Street doesn’t get it” is getting less true in Western sustainability circles, but I still hear it a great deal. The institutional investors around the world are asking more questions about long-term issues, but the analysts and hedge fund guys? Not so much.

In total, the conversations I had while sitting down with 20 sustainability execs in Japan to share my Big Pivot story – a saga of mega-trends, a growing clean economy, Millennial attitude shifts, big risks and opportunities, and corporate heroes – felt incredibly familiar.

They face similar hurdles in the marketplace and perhaps more so internally, where they’re not taken as seriously as they should be. Again, that CSR-only languagesidelines them. It likely explains, along with Japanese culture in general, the self-effacing approach I witnessed: It’s really hard to get them to brag about anything they’ve done.

These companies are likely doing more than we realize, and more than they give themselves credit for. But they need to advocate for their importance in their enterprises.

So, in essence, corporate sustainability in Japan is the same as … but also different from ... everywhere else.

On a lighter note, here are some random impressions from an outsider coming to Japan:

  • Business is formal and hierarchy in meetings reigns. But the dress is more casual than you’d think (few ties, short-sleeve business shirts), primarily because the 12-year-old “cool biz” program – which keeps office temps warmer in the summer to save energy – is clearly working.
  • Everyone was unfailingly polite and incredibly helpful as I navigated culture and food (I’m pescatarian) with non-existent Japanese language skills outside of the helpful Styx lyric from the ‘80s, “Domo arigato, Mr. Roboto,” which doesn’t get you as far as you’d think.
  • They follow the rules. Nobody crosses the street until the walk sign is green, no matter how empty the streets. I lived in New York for 12 years, where you walk if there’s any semblance of daylight between cars, so this one felt like torture.
  • Tokyo is the cleanest city I’ve ever seen by far. Many streets looked like Disney’s version of a Japanese city.
  • And they take their personal hygiene seriously. People wear masks, presumably to keep their germs from rudely spreading to others. Also, for no reason I can discern, the urinals flush as you approach them and when you leave (perhaps not the best use of resources). And the toilet in my hotel had more computing power than the Apollo mission.

In total, it was a fascinating and eye-opening trip, from bathrooms to boardrooms.

(This post first appeared at Sustainable Brands online.)

If you enjoyed this article, please sign up for Andrew Winston's RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston

Andrew's book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew's TED talk on The Big Pivot.