Meeting The Needs Of Society: Whose Job Is It, Corporations' Or Government's?

Meeting The Needs Of Society: Whose Job Is It, Corporations' Or Government's?

September 2016

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Chris Pinney is the High Meadows Institute’s founding President. The Boston-based Institute was established in 2013 by business leaders to explore the role of business in defining a 21st century social contract that ensures economic and social progress for all. Chris has over twenty-five years of experience working with C-suite executives nationally and internationally on this issue. Prior to the Institute, Chris was Vice President at the Alliance for Business Leadership, a nonpartisan group of CEOs, business leaders, entrepreneurs and investors committed to defining a path forward for business leadership on sustainability.


Christopher P. Skroupa: What is the 21st century operating environment and what are the new challenges posed to business?

Chris Pinney: The 21st century presents a highly complex and volatile operating environment for business. Although there are many factors to consider, such as the impact of artificial intelligence, or globalization or rising political uncertainty; one of the most difficult challenges for business is how to manage its changing role in society. Clearly, the winner in our global economy is business. Over half of the top 150 economies in the world are now large corporations. The losers are governments that find themselves mired with a 20th century policy toolkit, ill-suited for managing the changes created by globalization. As the government proves to be increasingly incapable of driving action, society is now looking to corporations for accountability for their impacts and leadership in addressing social challenges.

In this environment, to be a good corporate citizen, it is no longer sufficient to manage the formalistic bare-minimum of following the law and giving a little to charity. Today, a successful global corporation must consider a wide variety of stakeholders and negotiate their license to operate with them. Most major global corporations now follow a set of voluntary or “soft-law” codes and standards that go well beyond legal requirements. These firms are also issuing corporate social responsibility (CSR) or sustainability reports detailing their efforts. Large firms are expected to provide directorship in order to solve domestic and global issues; such as reforming education, eradicating poverty and ensuring access to clean water. In the US, this reality was solidified by Hurricane Katrina, where the first responders were not FEMA, but rather WalMart, FedEx, Home Depot and other large companies with robust logistical capacities that were able to assist. These companies were able to respond quickly in ways that the government simply could not. Public opinion following the hurricane showed that Americans were now looking to business to provide leadership on a host of social challenges, beyond disaster relief. Navigating this turbulent corporate responsibility interface will be a continuous challenge for 21st century firms.

Skroupa: Has management recognized this pivotal development? What have they done in response?

Pinney: Most managers of large global corporations are actively working to understand this new reality, however, many smaller firms are only beginning to appreciate this challenge. There are roughly three stages to this process. The first is often triggered by outside attacks from advocacy non-governmental organizations or consumer groups around a specific social, environmental or governance (ESG) issue; such as human rights abuses in the supply chain, bad environmental practices or bribery and corruption. These attacks frequently surprise firms, because they are technically abiding by the established law. The response is usually a public relations strategy designed to create a positive image for the company. This is often dismissed as “greenwashing” by their critics.

The second stage: management recognizes these attacks as a signal of grander changes in the operating environment that require a more proactive approach. This often involves outreach and engagement with key stakeholder groups to establish a dialogue around emerging ESG issues. It can also involve developing a dedicated staff to manage this process and to produce sustainability reports that outline the firm’s ESG commitments and strategic advancement. Almost all global Fortune 500 firms now produce such reports.

The third stage of engagement is when firms understand the new risks and opportunities presented, which then requires a fundamental change to their business model. This can lead firms to participate in self-regulatory initiatives based on voluntary codes of conduct that go well beyond legal requirements to assure products and supply chains are managed responsibly (such as fair trade coffee). On the opportunity side, the focus is on introducing new products and integrating sustainability factors into the core business, reflecting where the markets and expectations are moving. Doing well by doing good becomes a new path to value. GE’s Ecomagination, which started off simply as a marketing platform (and was seen as greenwashing by some) is now their platform for a fast growing renewable energy technology business. Wal-Mart’s integration of sustainability into its business model has arguably had a greater impact on sustainability progress, more than most government mandated programs. It was driven by CEO Lee Scott’s realization over a decade ago that waste is a cost. Walmart was not doing this just to be green or please environmentalists, but rather to save money.

Skroupa: Can we really expect companies or industries to regulate themselves the way you suggest?

Pinney: Industry self-regulation or soft law codes as accountability to standards are not sufficient; government regulation and oversight will always be critical. Any successful global governance model will have to include values-based corporate leadership, self-awareness, self-regulation, as well as regulation by governments. As we saw in the financial crisis of 2008, relying on patchworks of regulation at the national level is grossly insufficient for regulating capital markets. The high mobility of capital, coupled with vigorous competition for business investment, means there will always be other jurisdictions to escape to. In this kind of environment, voluntary multi-stakeholder industry standards have a vital role to play as they are monitored continuously by global networks of NGOs that can quickly call out those not complying. Finally, rules alone are simply deficient. The regulatory regime has to be owned by the actors who are expected to abide by those rules. This mindset needs to be genuinely imbedded into their culture. For example, the safety and responsibility culture in the chemical industry is quite extraordinary; you may hear stories about outliers, but overall, there hasn’t been a major chemical spill or disaster in this country for the past 30 years. This is possible only because of the industry’s responsible care self-regulation program that includes independent third party auditing.

Skroupa: How far can or should this corporate responsibility approach go?  At what point is business letting government off the hook by doing its job?

Pinney: That’s a good question. The government should be at the forefront of corporate responsibility, but in reality, they are not. Large brands have a reach that few governments can match, especially when it comes to driving change in awareness and behavior.

As global companies struggle with sustainability challenges, they need to have their customers behind them in order to succeed. Levi Strauss & Co is accomplishing outstanding results in the reduction of water and material used in their production of jeans. The largest use of water (as well as potential “waste”) for their jeans is the habits of the consumers who over-wash them. They are actively working to change this behavior by educating their consumers; they began a Stop Washing Your Jeans campaign that encourages consumers to replace washing with spot cleaning.

Walmart removed incandescent bulbs from their shelves long before the federal government’s ban. More companies are getting involved in these “choice editing” initiatives by taking “bad” products out of their system long before they are required to by law or stakeholder action.

More companies and CEOs are stepping up in the public policy space. Mark Bertolini, CEO of Aetna, one of America’s largest insurance companies, declared last month to increase the minimum wage for their employees to $16 an hour. He didn’t proclaim this in order to bolster a more productive workforce (although this might be an added benefit). He invested in this pay raise because he thinks it is the right thing to do. His efforts may revolutionize the healthcare industry.

These initiatives exhibit a realization that a tipping point has been reached. Companies now need to take leadership; they cannot wait for government if they want to maintain public trust and uphold the expectation of their customers.

Skroupa: What are the consequences for companies that don’t acknowledge the importance of this new relationship?

Pinney: The consequences can be costly. Successful consumer boycotts can put a company in the headlines and can lead to a plummeting stock price each day the company appears in the news. It took Nike, Inc. more than a decade to recover from a high profile consumer boycott centered on child labor in their supply chain.

Renewable energy has become increasingly competitive against carbon based fuels. In result of this, we expect that oil and gas companies such as ExxonMobil, a vigorous denier of climate change, will find themselves with “stranded assets,” as investors already refer to it.

The lesson here is, when companies don’t pay attention to the rapidly-changing corporate responsibility expectations of customers and society, they will ultimately pay a heavy price for the failure to keep up in the marketplace.

Skroupa: Should the legal basis for corporations be changed in some way to reflect this new reality?

Pinney: The evolution of corporate charters in the U.S. has a controversial history. Today’s legal model for corporations was not created with the current relationship between business and society in mind. It was developed at a time when the state had the power, primacy and ability to protect and take care of society. In that context, contemporary corporate charters place no explicit social responsibilities on the corporation other than to adhere to the laws of the land. Now there is an active movement demanding that corporate charters be required to include specific social objectives. One of the leading initiatives is the B corporation, which now has legal status in many American states. This requires companies to explicitly state their commitment to benefit all stakeholders, not just shareholders, and provide board members with legal protection to balance financial and non-financial interests when making decisions. Although there are currently few public companies committed to the B corporation model, interest is growing. Paul Polman from Unilever, the world’s third largest consumer product company, has publicly expressed interest in Unilever changing its bylaws to comply with the B corporation standard.

Skroupa: What do you see next in this journey?

Pinney: I think we are in for a difficult period of transition. To be clear, corporations cannot replace the role and responsibility of government to ensure society’s needs are met. They can, however, bring critical skills as well as resources to engage with society in order to solve the environmental and social challenges we now face. Internationally, corporate support for the Paris Climate Accord and the UN development goals are encouraging examples of what is possible.

To realize the potential of corporate leadership, governments at all levels need to create an enabling environment that will encourage and support corporations and other institutions to take greater responsibility and leadership. It is a failure of public policy that in the U.S. we have over a trillion corporate dollars sitting on the sidelines that, with the right incentives, could be invested in growing the economy and rebuilding America’s infrastructure.

Corporations also need to step up to these leadership challenges. They need to embrace the guidance of Peter Drucker, one of America’s best management thinkers, who pointed out that “Every social and environmental challenge is a business opportunity in disguise.” As corporations continue to receive pressure to take on greater responsibility for social well-being, those that embrace this mindset will prosper and best serve the interests of their investors and society.

 

This article was written by Christopher P. Skroupa from Forbes and was legally licensed through the NewsCred publisher network.

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