Policy Innovations Digital Magazine (2006-2016): Briefings: Beyond CSR: Doing Good Business

Big companies like Unilever, Wal-Mart, and Standard Chartered have ambitious plans to alter their conduct, recalibrating toward a business model that is "good." The slogan at Standard Chartered, for example, blends longevity with beneficence: Here for Good. These plans will put them on a different trajectory than their peers. They see that "Business as Usual" has no future, with its growing social, environmental, and economic imbalances.

Yet, for all the corporate social responsibility (CSR) announcements, there have been few success stories that illustrate going beyond business as usual, or even going beyond traditional CSR practices.

Ben & Jerry's, The Body Shop, Patagonia, Whole Foods Markets, and Interface carpets are often cited, but these firms were founded by leaders who had a different purpose in mind from day one. They have been characterized by their care for people and the environment, finding a balance between economic efficiency and the common good. But their molds were set before they grew into multibillion dollar firms.

Established multinational companies start from a different place and many CEOs argue that moving beyond business as usual is not realistic given investor constraints and prevailing management norms. Modest shifts beyond CSR compliance are all that is possible, they say. But corporations like Unilever, Puma, IBM, GE, and Danone have challenged that paradigm by fusing innovation with sustainable and social enterprise, creating new sources of value across their business.

Recalibrating a firm towards sustainable practices is both challenging and risky for traditional forms of business management. Compliance becomes the default position with strategic tweaks for reputational benefits. But an increasing number of business leaders are beginning to understand that compliance is a short-term strategy with long-term consequences. For example, Tim Cook of Apple eventually had to engage with the Fair Labor Association (FLA) to address environmental and labor concerns throughout Apple's supply chains in Asia.

In the wake of incidents in Bangladesh, including the appalling loss of more than 1,000 lives in the Rana Plaza factory collapse, textile brands have had to recalibrate rapidly. H&M was among 50 prominent international companies to sign the Accord of Fire and Building Safety in Bangladesh in 2013. The accord covers wide-ranging employee safety conditions and includes a provision for legal enforcement, a new breakthrough from previous ineffective and voluntary codes of the past.

With brands thus tied to risk, buyers will be required to select vendors on the basis of multi-partner, legally-backed agreements such as the Bangladeshi Accord. We may even see the emergence of brand-based manufacturing plants in the future.

VOCAL STAKEHOLDERS DEMAND MORE THAN COMPLIANCE

Many of the more vocal stakeholders are no longer satisfied with compliance processes, and executives are seeking to integrate "good" into their strategies so as to meet these expectations. Increasingly, it is the institutional investors that are required to report on environmental, social, and governance criteria in their investment portfolios. For some, integrating sustainability into strategy has led in innovative directions. They are discovering a competitive edge that late adopters cannot easily replicate. Late adopters are more likely to fail to engage fresh customers and generate excitement in the marketplace.

CSR is a process whereby a firm becomes aware of these risks, engages them as an organization (leadership first), builds capacity for change (reduction of risk or positioning for opportunity), and then proceeds through various stages of strategic execution. It is not simply volunteering, nor is it philanthropy. It is developing a wide scope of understanding around the company's value.

This means that a proper CSR assessment must include:

• the risks and opportunities that exist within the workplace (such as Environment, Health, and Safety, employee wellness, and diversity);
• the transparency and oversight of decisions, processes, and individual actions (governance issues);
• environmental footprints (emissions, water usage, energy reduction);
• communities impacted by operations; and
• the attitudes and expectations of customers, as well as citizens.

There are three key areas of corporate responsibility that have consistently shown to be of critical importance to the viability of companies: environment, governance, and workplace.

1. Environment

While global discussion on the environment tends to focus on planetary warming and what to do about it, environmental issues for the average firm are still mostly local or internal. Water shortages, air pollution, and other negative impacts are now significant business concerns. There are three main causes. First, the impacts of social, financial, and environmental regulations and citizen campaigns. Second, the increased costs of doing business due to natural resource supply constraints. Third, economic pressures have forced attention toward resource usage, biodiversity impacts, and environmental externalities. As environmental failures continue to grow in size and frequency, the firms that understand how these failures align with their value chain will ultimately mitigate the risks and maximize the opportunities.

2. Governance

One of the factors that is bringing greater transparency to company boards is greater scrutiny by institutional investors and fund managers of environmental, social, and governance issues.

While the U.S. Securities and Exchange Commission, the New York Stock Exchange, and state laws in the United States have complex and contradictory regulations which have led to charges of confusion and ineffectiveness, investment hubs in Asia, notably Singapore, Hong Kong, and India, are stepping up their regulatory environments along different lines. All three have updated their governance codes within the past 18 months, to ensure greater transparency in meeting the code. If companies do not meet the standards, then listed companies are required to explain why not. This so-called "comply or explain" principle was first established in the United Kingdom code. It places firms under pressure from the market and the media to explain why governance standards are not being met, rather than clogging up courts with legal teams arguing about differing interpretations of legal rules.

The international growth in legal and regulatory requirements for open governance requires a new breed of managers. This affects recruitment and talent management. Financial services companies are already embracing full-blown ethical background checks on employee candidates. In time, such checks will become best practice for firms wishing to attract quality investors.

3. Workplace

In Southeast Asia, one of the greatest economic and social changes is the rise of employment standards. Illicit and exploitative conditions for workers are declining across the region as wages and conditions improve. Progress is also being made in environmental health and safety, and independent monitoring and reporting is being enforced by companies and governments. To maintain competitiveness in the labor market, many firms are now moving from ad hoc labor arrangements to firmer employment contracts which offer a career path and consideration for personal development and for work-life balance.

Laggard firms, on the other hand, are finding it difficult to attract workers and are under pressure by local governments and communities to clean up or close down.

6 STEPS TO A HIGHER PURPOSE

The starting point is a genuine belief that business can do good in the world, and profitably. This requires what John Mackey, founder of Whole Foods Market, calls conscious leadership:

Conscious leaders are motivated primarily by service to the firm's higher purpose and creating value for all stakeholders. They reject a zero-sum, trade-off oriented view of business and look for creative, synergistic Win approaches that deliver multiple kinds of value simultaneously.

A vision for a higher purpose needs to be rooted in the particularities and culture of the company. Such a purpose goes beyond CSR awards or positive media coverage. So what does doing "good" business actually mean in practice? We suggest the following six actions:

1. Rethink

Explore and analyze your value chain to identify areas of risk, opportunity, and action. For many firms, this is a critical first step that provides the data needed to identify and understand where the firm is misaligned with best practice options for sustainability, and aligned with market opportunities and internal capacity. Rather than accept a boilerplate definition, determine what sustainability means for your own company, in your own terms, as a guideline for all you do.

2. Re-Vision

Be committed to a crystal clear vision and purpose. In the cases of Interface, Unilever, Whole Foods Markets, and many others, this vision came from the CEO or founder who personally drove it forward. For Ray Anderson, founder of Interface, the process was ongoing for 20 years. Before his passing, Anderson had built the capacity within Interface's ranks to maintain their path toward achieving their 2020 goals of zero waste and zero virgin material usage.

3. Restructure

Create a blueprint for applying the new vision. In the case of Interface, this required a review of their processes to see where efficiencies could be found. This led to redesigning products so that processes could be eliminated and material usage and waste could be reduced. In turn this led to a restructuring of equipment specifications, buying practices, and positively engaging employees, suppliers, and customers in the journey.

4. Realign

Strategy needs to be aligned with stakeholder needs, interests, and capacities. Review your investments with an eye toward long-term engagement. Short-term CSR exercises should be reviewed and energies should be devoted a program that is aligned with the firm's vision and purpose. Internal energy should be committed to engaging employees and capturing their interest so that everyone owns the agenda behind the vision.

5. Recalibrate

Conduct a series of pilot projects that are meant to test, tweak, and prepare for a systemic recalibration over time. Interface is 20 years into their process, Wal-Mart and Unilever are both five years into theirs.

Failures will occur, but firms that operate with sustainable principles, that make investments in energy, water, and carbon reduction, tend to see positive paybacks over time. Interface, for example, has reportedly reaped more than $450 million in savings in the last ten years from executing on Anderson's "Mount Sustainability" vision.

Eccles, Ioannou, and Serafei, experts in integrated reporting at Harvard Business School, have provided evidence that "High Sustainability" companies significantly outperform their counterparts over the long term. They say that firms perform better on return on equity (ROE) and return on assets (ROA) and that this outperformance is more pronounced for firms that sell products to individuals (i.e., business to customer [B2C] companies), compete on the basis of brand and reputation, and make substantial use of natural resources.

6. Remain Committed

For firms in the manufacturing space, and who spend capital on equipment, the commitment is embedded the moment the asset is brought online and the process is changed. Any activity that involves the ongoing engagement, training, and measurement of people requires more intensive and challenging processes that can be supported by the culture of a firm as it aligns to the redefined mission. This is especially difficult for CEOs of publicly listed firms who are required to be more sensitive to the short-term demands and expectations of investors. One way of dealing with this pressure is to follow Paul Polman's example in announcing that Unilever only wants to attract longer-term investors and not short termers such as hedge funds. For others the strategy can be to indicate short-term wins along the way such as reduced energy and water costs.

WHAT YOU WANT ARE "TRUSTOMERS"

Building a "good" business demands the wholehearted adoption of ethical and sustainable business behaviors. Who wants to deal with a dishonest or inconsistent firm? Going beyond a basic CSR agenda to a higher purpose for your business builds trust.

Envero, a European brand consultancy, has examined the relationship between corporate behavior, customer trust, and customer advocacy with more than 30,000 adults, across 17 European countries and 14 industry sectors. They found in their studies one consistent customer truth across all industries: People recommend companies and brands that they trust to be honest with them and that care about their wellbeing as customers. Customers decide which companies and brands are trustworthy based on what they see of their corporate behavior.

Doing "good" business is a challenging path. But the investment will have positive returns through better products, more productive employees, a better alignment of brand and consumer needs, and a legacy of trust.