Are we seeing the emergence of a new breed of CEO, one that treats society as a key stakeholder? And do these CEOs have a better understanding of how to create value?
The need for organisations to have social purpose was the hot topic in Davos, and a number of credible reports are showing that more sustainable businesses are outperforming their peers on share price and profit. But how does a CEO take the lead on this?
Our guest host Robert Phillips, author and expert on trust, led a discussion with panel that included;
This was a great event for those in senior leadership positions within large organisations who want to share their views on shape of a new generation of leadership. Discussion areas included authenticity, transparency, social media, the citizen and co-creation.
You can view Robert's slides here
This table will digest the panel conversation, considering whether we are seeing a new generation of “enlightened” CEOs. What are the characteristics that mark them out from their predecessors, and are there situations where they are more valuable leaders?
What is enlightenment?
• See profit as being more than just cash
• Able to picture their company in 50 years’ time
• Constantly evolving: is the next paradigm to do with reducing consumption?
Who is enlightened?
• Approximate top 10 (the usual suspects including the CEOs of M&S, Unilever & Kingfisher)
• Enlightened CEOs:
o Consumer-facing brands: ROI improved by reputation
o Resource-reliant businesses: business reasons for managing resources
o The most visionary = not consumer facing but still doing these things to position themselves for the future e.g. Interface
• We seem to give the classic names as examples. Where are the new kids on the block? Are Zipcar, Airbnb etc. enlightened by the nature of their business?
• Is it the biggest companies with the biggest marketing budgets that produce the biggest leadership names? Are there enlightened leaders without the same public face?
• Have the big names have simply been working on these issues for a longer time?
• How do you know if they are enlightened?
• We need to ask CEOs challenging questions: “Is your business sustainable?”, “How?”
• Need supportive, enlightened individuals e.g. on boards
• Look at sustainability through the lens of risk or as a license to operate
• Commit to long term outcomes by committing to be CEO for 20 years
A new generation of CEOs?
• Old concept: should always have had to consider these issues e.g. nutritional value of food
• New concept: we are in an era in which stakeholders are more conscious of local and global challenges – more space for enlightened leaders to emerge and resonate.
• Has living by your values become increasingly acceptable? Perhaps not new values, just a new freedom to act on them?
• Or has there has always been the space to act? 19th century - people judged by social good e.g. Cadbury
• Cyclical process? Have we broken it? (Mood of the table = yes)
• Who comes next? E.g. next M&S CEO?
Characteristics of an ‘enlightened’ CEO
• Confidence that sustainability works
• Live by their values
• Trusting of other people – cooperative mentality
• Have personal values & a moral compass? Or judged simply on end impact?
o Different tiers of values – how do you judge?
o Is it just a scientific concept or are values inherent in sustainability?
o Under stress, companies revert to type
What are the principles by which a company decides its tax planning strategy? What are the key considerations? Who decides and is there a role for strategic sustainability input? (Chatham House rules apply to this table)
Apple CEO Tim Cook’s sharp response to an activist shareholder on the ROI on Apple’s clean energy investments has triggered a debate, arguing some environmental investments should be made without an explicit ROI. Does the table agree with this statement, and how else can the business case be effectively made?
• Business really is the biggest driver for change, but they tend to act when they have to; not because it’s the right thing for society but because it’s the right thing to do for the business
• Apple might be investing in green data centres, but do they look at suppliers’ environmental footprint whilst considering their bid to supply? Equally, supermarkets that pressure suppliers based on cost. An important issue is Business-to-Business policies, not just consumer demand
Red Flags (warnings)
• Currently, in the life of a CEO, time is of the essence; manifested by quarterly reports and targets, therefore if sustainability initiatives don’t ‘pay off’ within a couple of quarters, they can be terminated
• Engaging with the triple bottom line does not speak of enlightenment, it has been around for over 20 years. The business case is proven and now it is about how smartly and cleverly we design these initiatives
• Governments do enact a lot of legislation; it is not necessarily true they are at the side-line
• If the sustainability programme is able to engage the executives, eventually it becomes self-supporting
• Many corporate initiatives, including those tied up to the environment and social reasons, make ROI sense in the long-term
• ‘If something is good for the community and for society, by definition it is good for the economy’
• Companies do plan for the long-term, they do need to know and prepare for what will happen in their competitive landscape in 5 years’ time; furthermore a lot of businesses that appear ‘enlightened’ on this arena are simply doing good business planning. E.g. preparing for the event where their customers or suppliers are flooded, by anticipating possible solutions and mitigation strategies to these problems
• An influential study released in 2013 concluded that most people around the world would not care if 73% of all brands disappeared. Slightly less than a third of consumers think brands communicate honestly. The study does however show that consumers reward brands that provide good quality innovative products at fair prices, make their lives healthier and happier, and support the environment, the economy and the community. I.e. apparent is a new model cantered around the idea of human potential and wellbeing. In this context genuine sustainability initiatives fit in particularly well with the business case.
• Business is never just about pure immediate financial ROI, it is a flawed question. Fundamentally there has to be return of value generated from all initiatives, but that value comes in many shapes and forms: customer retention, public image, avoided losses. Overall ROI is a great tool for integrating initiatives into business; especially because if not self-sustaining the initiative is more likely to disappear during change of tenure
• To better quantify the value of sustainability initiatives, one should look at proxies; e.g. quantifying the benefits of staff retentions leads to important quantifications about annual savings and reputational risk reduction.
• Suppliers’ Code of Conduct are becoming increasingly stringent
• The big necessary changes will only get delivered if you lose the ROI argument; it should be about reimagining the product and the relationship with the customer, redesigning the supply chain, etc. ‘It is amazing how creative product developers can be when they need to find solutions without the issue of cost being brought up!’. The really exciting, inspiring initiatives lie with redesigning business models. Furthermore, the greatest ROI typically comes from the big great bold goals where the ROI had come second; following ROI does not push you and make you a game changer.
• Environmental valuation helps to encourage capex and opex decisions within a business; it is one good way to demonstrate ROI on environmental expenditures. Puma published an environmental profit and loss account from a communications perspective and for risk management purposes; they illustrated that they have a long way to go which was a bold decision.
• The nature of public pressure is also changing. Whilst before the likes of Greenpeace had to focus on activism initiatives to grab corporate attention, today league tables and rankings generate a lot more attention as companies care where they stand in those rankings.
Managing costs and securing supplies will be vital to maintain business continuity and profitability. But growing environmental awareness means how companies buy, generate and use energy is also increasingly seen as an issue which impacts on communities and consumers. How can companies manage the risks whilst safeguarding their reputation?
Q): Are energy issues putting your reputation on the line?
• Yes (general census around the table);
• Companies focus effort on producing accurate CPD reports;
• Reporting and reducing energy consumptions is a defensive strategy;
• Energy issues can be used to enhance your reputation. E.g. Gentoo work with customers and communities to provide advice on energy efficiency;
• Reducing energy consumption has been used as an effective PR strategy (e.g. M&S - Plan A);
• Increasing energy costs and security of supply is a strong driver in reducing energy consumption rather than “doing the right thing”;
• Companies are taking frequent, small steps forward and can this really improve your reputation?
• Carbon Credentials found a company’s internal reputation was damaged as their staff believed the company wasn’t doing enough to improve energy efficiency;
Q) Is legislation or government incentives encouraging energy reduction?
• Legislation / subsidies / tax benefits from the government constantly change and cannot be relied upon when making green energy investments;
• There is a question of how “green” the energy is from suppliers – can this be tightened up?
• Companies are investing in green energy due to resilience and rising energy costs. Any government subsidies that can be applied on this are considered “juice on top”;
• Business will drive the way in energy efficiency – not legislation;
Q) What is driving the business decision?
• Energy Reporting (CPD) is encouraging energy reduction and low carbon energy investments;
• CDP score can effect reputation (positive and negative) to shareholders (and thus share price);
• General census around the table is that more could be done with reporting as:
o CDP is diminishing in importance;
o The reputational loss for companies not taking part haven’t been significant;
o League tables could be produced highlighting good and poor scores;
• Is energy actually a large cost to a company? I.e. usually around 1% (This depends on the overall margin and sector. E.g. retail margin is 5% and this will get squeezed with rising energy costs)
• Security of supply is a growing issue and companies are investing in green energy to ensure resilience. However these costs are large and more needs to done to make this affordable, e.g. community schemes, license duties and distributed networks.
• Investments have a long ROI and due to this companies are prioritizing in other investments;
• Pressure groups on businesses can have a large and cascading effect on corporate behavior.
A 2013 World Economic Forum report named water as one of the top global risks facing companies in the 21st century, and 93 multinational companies signed up to the UN Global Compact CEO Water mandate. Does the table feel that water is getting the management time it deserves; what are the obstacles & how can they be overcome?
How should a company determine which social and environmental issues it wants to engage with effectively? What are the merits of trusting the instincts of a CEO or a sustainability expert / advisor, versus comprehensive stakeholder engagement processes?
What is the Objective of Your Materiality Assessment?
• “Materiality is only as useful as what you use it for”.
• Does your organisation want to understand operational risks or opportunities, or is it about brand reputation & PR?
• Most companies use materiality assessment in the context of sustainability reporting but it is also used to inform strategic planning, operational management & risk management.
• The objective defines the scope & scale – if it’s about brand reputation, then external stakeholders are highly important.
• The scope & scale of materiality assessment across different organisations is vast – for some organisations it involved the 10 most engaged employees having a frank discussion, & for others it is a huge survey among a much wider group of stakeholders. A balance needs to be struck.
• In reality, materiality tends to be a contrived process.
Mechanisms for Engaging with Stakeholders
• Organisations require a mechanism to capture internal & external feedback & mechanism to guide way in which they engage with stakeholders that are less vocal.
• There is a risk of ‘death by survey’.
• Materiality should be continually updated & take short, medium & long term perspectives. Including scenario analysis into materiality is useful.
• It is important to unpick the detail in the headline risks e.g. water scarcity.
• Social media can be helpful to understand stakeholders opinion, but it can also be a distraction & create ‘noise’ that often has a strong focus on the short term risks & issues.
Balancing the Voice of Stakeholders
• It is important to balance & synthesize the feedback from more external stakeholders (e.g. the citizen) & those more formally engaged (e.g. employees & senior management).
• It is difficult to get senior management engaged at all as they are very busy, but also difficult engaging them on the ‘technical detail’ because they tend to be interested in the purpose and the outcomes.
• Governance has an important role - ultimately someone has to make a decision on what the organisation believes is material, & where they will take action.
• It is important to look forwards & to think about future generations as stakeholders too – scenario analysis can help.
• Stakeholders can help inform business but in some cases they may not be that well informed. That is why transparency is important.
• Companies have a role to set the agenda & educate consumers & employees on global megatrends & their impacts.
• The relevance of different stakeholders will change over time – which is why it is important to continually assess materiality.
The Risk of Bias
• There is a risk of bias, e.g. pharmaceutical companies engaging with stakeholders from Europe rather than users of their products in Africa where disease is more widespread.
• Some stakeholders have louder voices – e.g. investors.
• There are challenges around giving other stakeholders a voice – e.g. how do you engage with 3.9million small holder farmers globally? There is a risk of aiming your materiality report to the individuals or groups that will read the report & will hold you to account, such as NGOs.
• Language is very important as people understand things differently which can affect results.
Where to Take Action
• Understanding where is there an opportunity to lead other companies & where you have the capacity to make a big impact.
• It is important to understand the detail in the risks & the interconnectedness of them –clusters of risks which are lower down in the risk matrix in isolation may be paramount when viewed together.
• Often there is an issue of how to balance the different issues – e.g. balance providing local employment & associated social benefits with the environmental impact of deforestation. This is why it is important to test local markets, particularly with social issues, & build up materiality from the local to the global.
How to Communicate Materiality
• A materiality ‘report’ may not be the right vehicle for communicating with all stakeholders.
• It is becoming increasingly important to communicate materiality to investors.
Case of Best Practice - Nestle
• Nestle update their materiality every year and genuinely feed it into their business activities. You can chart the inclusion of new issues each year.
• However, not all companies have the resources to do an in-depth materiality and it has to be practical.
• A SWOT analysis is rudimentary version of a materiality assessment which is useful for companies with less resource.
The way that sustainability experts present carbon to their CFO is becoming increasingly sophisticated, and in some cases has resulted in significant increases in the amount of capital being invested. This table will explore what can make the difference: IRR tools, intangible benefits, third party financing, data visualisation and more.
Understanding the CFO
- A CEO is concerned with the big picture but the CFO is looking at the next level, managing performance across the organisation from a financial and risk perspective, but they have to work together
- The business case has to be put across to the CFO and the numbers need to add up, to ensure understanding of the benefit
- Sustainability initiatives needs to start by talking to the CEO to provide the vision. Only then when there is evidence and a business case should it be taken to the CFO to scale it.
Managing and Communicating the Risk
- It is important that risk is understood and managed, in terms of resource scarcity and depletion, price volatility, increasing energy costs and a lack of sustainability in the supply chain – to enable risk-aware decision making, rather than just reporting emissions for compliance
- The reason we should be doing anything is resource depletion rather than climate change as a subject
- Need to get down to a point when people see sustainability as a quantifiable impact on the business
- Increasing electricity prices, particularly future electricity prices predicted by DEFRA, make business sense and provide a compelling business case
- Finance are responsible for communicating the strength of a company and therefore they should be communicating the criticalness of the supply chain of raw materials, for example
- Minimising risk, both short and long-term, needs a predictive capability and an understanding of what is going to be driving consumers in the future
The Meaning of Carbon
- Sustainability needs a new lens to drive innovation – a different way of looking at things. People don’t know what carbon looks like and they can’t measure their daily impact.
- A story needs to be attached to carbon to understand what it means
- Shadow carbon pricing can help to build a business case by talking about carbon in the language of business but it is not commonly used
- The value of shadow pricing to a CFO is questionable as a number is essentially being picked out of nowhere – the problem is that it is not a very recognisable system
- Perhaps we need the government to step in and put a value on carbon?
Tools for Ensuring Investment
- Setting public reduction targets helps to ensure investment in order to meet these targets
- Payback: Companies should be investing in not only projects with a short payback period but also larger projects with a longer payback that can lead to bigger savings
- If companies have a portfolio of things that can be done, it is normally the projects with a shorter payback which are adopted. However, if the easier projects are always completed, it is then harder to get buy in for the projects with a longer payback.
- We need to get beyond payback and understand the business impact of investing in reducing carbon and direct impact on utility costs
- Payback is a simple measure to justify sustainable capital projects and organisations should be using net present value and internal rate of return to make the business case
- Shadow Pricing: PUMA – enhanced its financial reporting by including shadow pricing, which revealed business risk within PUMA’s supply chain
- Payback & Targets: BUPA – haven’t got past the payback story yet and everything that pays back within 6 years gets funding. The risk of increasing energy prices and the cost of not doing anything means investment is available. The CFO is onboard, principally due to a personal interest in climate change, a 2015 reduction target (2015) and the fact it makes financial sense
- M&S, Plan A: the CFOs have been bought in from the start as they did the majority of the number crunching on Plan A’s behalf – what’s really happening when technology is invested is seen through the numbers and finance are seeing them first. However, M&S are also very much at the start of their journey and their biggest challenge in the near-future is their international footprint and ensuring Plan A is embedded in their franchises overseas as they expand internationally.
- Honeywell: CEO selected as ‘CEO of The Year’ for visionary thinking but they are not leading in sustainability. They do a lot to help other companies to improve their energy efficiency, offering a vast range of technologies for reducing emissions but they don’t put these into place in their own organisation.
A thought for over drinks
- The conversation has focused principally around carbon in terms of energy, but what about water – can you add that to the conversation with the CFO?
Transparency creates a valuable stickiness with stakeholders, but it is a difficult habit to develop. This table will discuss how a large company can overcome the perceived risks of embracing transparency, and identify a number of ways of breaking down the barriers.
The session was chaired by Peter Knight of Context who prior to the event, e-mailed us a question in order to get us thinking. “It is easy to talk about the benefits of total transparency, but the complexities of business life inevitably leads to us being far more opaque than transparent. Is such economy with the truth necessarily a bad thing? During our introductions, please be prepared to tell us a personal story or business anecdote about choosing not to tell all – and the reasons behind that decision.” The question, as we all agreed before we started, was very difficult to answer as it called for a large degree of self-reflection. As we moved around the round table, transparency and truth aversion were framed in terms of needs; the analogy of a having a child, and tailoring the truth to the needs and level of understanding of a dependent child was explored on a few occasions, and the outcome was particularly salient given the panel discussion that had occurred before.
Software business and sustainability
• Working with companies on strategic positioning – there was a big push for consumer society in mid 2000s. There was a constant debate between what is achievable and what is not. Now there is more of a recognition of authenticity, the ethical challenge is to get people to tell the truth.
Transparency in Energy Efficiency
• When entering the industry EE was non transparent we were trying to open up the benefits, through quantifying the benefits, we make sure the results are robust.
Transparency in higher education
• In the final year of university, not communicating personal illness to the university for fear of getting preferential treatment that would undermine personal achievement.
• Discussion point around rhetoric and use of language “I’m going to be honest with you” - is it a statement that implies that you have not been being honest before this point or is it a linguistic tool for engagement when speaking to groups of people. Is our language saturated with rhetoric?
Transparency in a supermarket environment
• Business case for sustainability and the figures behind that case, total transparency will not be possible due to a loss of a competitive advantage, it would be good to talk about investment but you cannot, in order to protect the interests of the company and the “brand” in a competitive arena.
• Discussion point - “shopping experience” is it an honest shopping experience to light food nicely, pump smell of freshly baked bread into the store, and present goods in a uniform shape? Competition leads to difference between the straight truth and something slightly to the left of the straight truth, is it dishonest to have that stance? Telling the complete story is very difficult. When people consume they have little time to engage with the real truth behind the supermarket supply chains. Dishonesty is not right however that is not the real issues consumers demand requires specific elements of honesty.
• Is there really such a thing as transparency? Surely it can be framed in terms of consumer intelligence, is it more about context and interpreting the real story and not the PR? Information needs to be accessible for the consumer when they want to access it.
Transparency in banking
• Banking is very poorly trusted
• They are creating consumer buy-in whist the bank is under a different banner, is this being transparent?
• Sometimes you don’t have the infrastructure available to become completely transparent, when parts of a business is subcontracted to others, viability on the workings of the business is poor even internally so how is that possible externally?
• Social media platform allows some transparency however if the infrastructure is not in place it cannot be utilised properly.
• Correct level of information – how much should you tell your audience? How much consumer intelligence should you assume?
• CEO should be seen as a father figure in the corporate environment. The CEO should understand the consumer and provide enough transparency.
• Banks are having a difficult time as they were not transparent, the need to move on from targets and numbers to being the best business you can be. They need to strip away the jargon and get to the real message. There is always an element of doubt with transparency.
Transparency in Engineering
• Engineering is codified and more often than not it is yes/no however a personal anecdote of not being transparent is when there is threat and danger involved. When leading expeditions on safari in Botswana there were grunting noises that were Lions, the fact that they were Lions would never be explained to the paying customers for fear that they would freak out. However local knowledge of behaviour trumped transparency as the guides knew they wouldn’t attack, whereas the guests would be scared and it would ruin their experience.
General discussion on responsible business
• Does responsible business cover enough ground? Should it go into more detail? Sustainability should be imbedded but it is a new issue so often it is not.
• The need to do the “right” thing for your specific community
• Is there a need to redefine along the way to achieving targets? Or should the journey be more flexible? Is hitting a target necessarily the correct thing?
If we agree that there is a positive link between social purpose and value, then the sustainability expert owes it to her organisation to get it on the CEOs agenda. But how? We challenge the table to draw up a menu of options that could work in a wide variety of organisations.
Our challenge: “If we agree that there is a positive link between social purpose and value, then the sustainability expert owes it to her organisation to get it on the CEOs agenda. But how? We challenge the table to draw up a menu of options that could work in a wide variety of organisations”
Engaging a CEO on a subject that is not naturally top of their priority list a not easy, and we came up with 6 options of varying effectiveness.
1. Deep immersion on a key issue.
We heard how a CEO of a major UK company spent a day looking at ice core samples at the British Antarctic Survey, where he was able to see firsthand how the climate had changed. He returned to the office much more interested, and the climate programme has since been invigorated. This immersion process could be repeated for different issues, such as youth unemployment. Two principle challenges were identified; firstly, getting a CEO to find the time is difficult, and secondly, the engaged CEO will then have to engage his/her organisation.
2. Getting a CEO to spend time with a leading mind
We heard and example of a CEO who had become more engaged as a result of spending time with Shaun McCarthy, Chair of the Commission for a Sustainable London. Jonathon Porritt (founder of Forum for the Future) is regarded as having had a significance impact on Sir Stuart Rose, who created Plan A at M&S, and Ronan Dunne at Telefonica O2. The value seemed to lie in regular meetings, rather than a one-off meeting. Again, an engaged CEO still needs to engage his/her key lieutenants.
3. Deep immersion with the board
We heard an example of an organisation that had taken the senior board on a 3-day retreat to discuss what was personally important to each of them, and what kind of business they would need to run. It has a significant impact on the way the organisation was run from a sustainability perspective. Whilst it felt positive to have the whole board engaged, it would require a substantial commitment from the board in the first place.
4. Connecting the CEO with stakeholder values
We kept coming back to the power that can be generated by identifying how much the stakeholders in an organisation care about societal issues, and then showing that to the CEO. The CEO is likely to be surprised about the level of feeling about social and environmental issues, and new online mediums are emerging which enable an organisation to better understand stakeholder preferences. A major supermarket talked about their CEO being emboldened on sustainability by the knowledge of how many his customers cared about sustainability. A major food business discussed the power gained by introducing Yammer, for free.
The experience round the table suggested it is important to find ways of selecting the participating stakeholders (employees, customers, suppliers, shareholders etc) in a credible manner, so that they cannot be disregarded as the views of the engaged minority.
The key strength of this solution were;
a) The CEO is likely to see a commercial benefit. If she (as an aside, our table touched upon the dearth of female leaders – will change happen without a change in the gender balance?) makes progress on issues this important to her stakeholders, she can create greater customer “stickiness”, win the war on talent, have more interested shareholders etc. The connection to value can be easily made.
b) The weightings of the different areas of her sustainability focus will be determined by the organisation, not just what the leader cares about. That means the programme has a better chance of outliving the CEO, which was seen as important.
c) The same forces that engage the CEO will also engage the other board member and the “clay layers”, which will help in the process of engaging the organisation.
5. Linking their remuneration to sustainability
We heard an example of a major property company having linked a portion of its executive bonus to their score on the Dow Jones Sustainability Index. But we also heard firsthand experience from a major bank whose senior executives bonuses are linked to the same index and it hadn’t been helpful. The feeling was that the criterion behind the DJSI we too broad (and malleable!) to be relevant.
6. Finding investors who care
Whilst the number of investors who care about sustainability issues is a distinct minority, the sustainability team can work with the investor relations team to identify the investors who are interested. By ensuring that investors that the CEO meets include a good representation of enlightened investors will help the CEO to see how these issues could positively influence investor interest.
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