Socially Responsible Corporations

Stephen DeAngelis

February 13, 2007

Last week I reviewed Harvard Business Review’s “Breakthrough Ideas for 2007” [Part 1, Part 2]. One of the ideas, from Karen Fraser, was titled “Conflicted Consumers” and discussed how ethical questions about a company can adversely affect customer loyalty. I noted that I had previously discussed corporate responsibility in an earlier blog [Corporate Conscience] and concluded: Corporations that do the right thing will eventually discover that it pays off. Pete Engardio, writing for BusinessWeek, concludes the same thing [“Beyond the Green Corporation,” 29 January 2007]. Engardio begins his piece with the revelation that Unilever CEO Patrick Cescau is just as likely to talk to about deprived villages in Africa and global warming as he is to talk about selling more shampoo than Procter & Gamble. Engardio continues:

“The world is Unilever’s laboratory. In Brazil, the company operates a free community laundry in a São Paulo slum, provides financing to help tomato growers convert to eco-friendly ‘drip’ irrigation, and recycles 17 tons of waste annually at a toothpaste factory. Unilever funds a floating hospital that offers free medical care in Bangladesh, a nation with just 20 doctors for every 10,000 people. In Ghana, it teaches palm oil producers to reuse plant waste while providing potable water to deprived communities. In India, Unilever staff help thousands of women in remote villages start micro-enterprises. And responding to green activists, the company discloses how much carbon dioxide and hazardous waste its factories spew out around the world. As Cescau sees it, helping such nations wrestle with poverty, water scarcity, and the effects of climate change is vital to staying competitive in coming decades. Some 40% of the company’s sales and most of its growth now take place in developing nations. Unilever food products account for roughly 10% of the world’s crops of tea and 30% of all spinach. It is also one of the world’s biggest buyers of fish. As environmental regulations grow tighter around the world, Unilever must invest in green technologies or its leadership in packaged foods, soaps, and other goods could be imperiled.”

Cescau has a Global Resilience view of the world and is positioning Unilever to be what IBM’s Sam Palmisano calls a “globally integrated enterprise.” Palmisano wrote about this new corporate model in the Financial Times (see my post on that letter Globalization and Resilient Enterprises). Palmisano wrote in part:

“This kind of innovation is much more than the creation of new products. …This kind of innovation changes how business processes are integrated, how companies and institutions are managed, how knowledge is transferred, how public policies are formulated – and how enterprises, communities and societies participate in and benefit from it all. Leaders in public and private sectors recognise that innovation is key to our future. Today, innovation is inherently global.”

Engardio reports that companies are now taking corporate responsibility much more seriously than they did a decade or so ago. Public relations (although still a part of any corporate responsibility strategy) is now often a secondary consideration when corporate policies are being made.

“Now there’s a more sophisticated understanding that environmental and social practices can yield strategic advantages in an interconnected world of shifting customer loyalties and regulatory regimes. Embracing sustainability can help avert costly setbacks from environmental disasters, political protests, and human rights or workplace abuses—the kinds of debacles suffered by Royal Dutch Shell PLC in Nigeria and Unocal in Burma. ‘Nobody has an idea when such events can hit a balance sheet, so companies must stay ahead of the curve,’ says Matthew J. Kiernan, CEO of Innovest Strategic Value Advisors. Innovest is an international research and advisory firm whose clients include large institutional investors. … The roster of advocates includes Jeffrey Immelt, CEO of General Electric Co., who is betting billions to position GE as a leading innovator in everything from wind power to hybrid engines. Wal-Mart Stores Inc., long assailed for its labor and global sourcing practices, has made a series of high-profile promises to slash energy use overall, from its stores to its vast trucking fleets, and purchase more electricity derived from renewable sources. GlaxoSmithKline discovered that, by investing to develop drugs for poor nations, it can work more effectively with those governments to make sure its patents are protected. Dow Chemical Co. is increasing R&D in products such as roof tiles that deliver solar power to buildings and water treatment technologies for regions short of clean water. ‘There is 100% overlap between our business drivers and social and environmental interests,’ says Dow CEO Andrew N. Liveris. Striking that balance is not easy. Many noble efforts fail because they are poorly executed or never made sense to begin with. ‘If there’s no connection to a company’s business, it doesn’t have much leverage to make an impact,’ says Harvard University business guru Michael Porter. Sustainability can be a hard proposition for investors, too. Decades of experience show that it’s risky to pick stocks based mainly on a company’s long-term environmental or social-responsibility targets. Nevertheless, new sets of metrics, which Innovest and others designed to measure sustainability efforts, have helped convince CEOs and boards that they pay off.”

Engardio reports that socially responsible companies are attracting serious money, primarily because watchdog groups continue to gain clout thanks to the Web and other media outlets. That means investors are betting that social responsibility will be a hallmark of resilient enterprises. To that end, companies are now being graded on social as well as fiscal responsibility.

“Besides conventional financial performance metrics, Innovest studies 120 different factors, such as energy use, health and safety records, litigation, employee practices, regulatory history, and management systems for dealing with supplier problems. It uses these measures to assign grades ranging from AAA to CCC, much like a bond rating, to 2,200 listed companies.”

One outcome of these changes is that, eventually, a new “chief” will be added to the panoply of corporate bosses to oversee many of these factors — a Chief Resilience Officer. The CRO will be a visionary, a long-term planner, and a “what if” expert. That will happen even though a causal link between social responsibility and fiscal success has yet to be proven. Sustainability measures show resilience beyond the bottom line.

“[Matthew J. Kiernan, CEO of Innovest Strategic Value Advisors], and many other experts maintain sustainability factors are good proxies of management quality. ‘They show that companies tend to be more strategic, nimble, and better equipped to compete in the complex, high-velocity global environment,’ Kiernan explains. That also is the logic behind Goldman Sachs’s intangibles research. In its thick annual assessments of global energy and mining companies, for example, it ranks companies on the basis of sustainability factors, financial returns, and access to new resource reserves. Top-ranking companies, such as British Gas, Shell, and Brazil’s Petrobras, are leaders in all three categories. For the past two years, the stocks of elite companies on its list bested their industry peers by more than 5%—while laggards underperformed, Goldman says.”

Engardio reports “the corporate responsibility field is littered with lofty intentions that don’t pay off” but, he writes, “amid turbulent global challenges, they could help investors sort long-term survivors from the dinosaurs.” Sounds like resilience to me.