The Case for Responsible Business
By Paul Barnett, Founder & CEO Strategic Management Forum
What do you think of when I use the term Corporate Idealist? It is a term that is sure to generate a range of ideas in the minds of people hearing it for the first time. In The Evolution of a Corporate Idealist, Christine Bader says: “corporate idealists believe that business can be a force for good, even as we struggle with our own contradictions: we don’t join anti-globalization protests, but we agree with some of their calls for reform. We’re disgusted by excessive CEO compensation, but we aspire to do better for ourselves and our families. We push our companies to offer sustainable products, but balk at organic prices when doing our own shopping. We have experienced heartache and disillusionment. But we also know that big business can make the world a better place, and feel compelled to do all we can to make it happen”.
It seems to be another one of those friendly but rather woolly terms like Corporate Social Responsibility (CSR), which Christine Bader said in an interview is a term that “can mean everything and nothing”, but should be embedded in the core activity of the business – hard to do if you are not sure what it is. Sustainability also falls into the category of ambiguous terms, along with a bunch of others.
Personally, I think we would do well to just think about what it means to be a Responsible Business, run by a Board that practises Responsible Governance and a management team that practises Responsible Management, and set about defining what we mean by these terms. And then ensuring that they are embedded in practice at all levels. This may also sound difficult, but I honestly do not think it is as difficult as it sounds.
Why would I make the crazy claim that it is simpler than it sounds, you ask? Well, because there are simple ways of bringing about change. Changing the terminology will help change the mindset. In turn, this will change policies that will change actions. The whole system of business can then be re-aligned in this way.
To change the mindset we first need to dispose of the crazy notion that business should only be about making profit. And the even more crazy notion that a business that acts as a force for good is neglecting what some would argue is the primary purpose of a business - maximising shareholder returns. A Responsible Business is a force for good and also maximises shareholder returns. They may not maximise returns for high frequency sharetraders, but whoever said that they should, especially if doing so is very likely to destroy shareholder returns?
If we switch the terminology from profit and “maximising returns” to “maximising value”, not of share prices but of the businesses, we can change the mindset. We can then ask: what does it take to grow the value? What do we mean by value? And, value for whom? This kind of thinking can bring about alignment of the interests of all stakeholders, inside and outside the company, and between the company and society. Companies are also more likely to be run according to sound values and good stewardship principles.
I have previously argued the view: From Values to Value: The Only Sustainable Business Model and the Foundation of Lasting Reputations. I made the link between values and strong reputations and strong cultures. In these ways, values enable the practice of responsible management at all levels. They allow people to make the ‘right’ decisions in most situations, with speed, agility and greater alignment. In a dynamic and competitive environment, this provides many advantages.
This approach forces the creation of a strategy that takes account of all of the capitals that drive the value of the business. It will end the obsession with managing and manipulating one of the capitals of the business, the denominator of most ratios: finance. It will switch the focus to value generation and growth, the nominator / numerator of most management ratios. Those drivers of value creation are all the other capitals: manufactured capital, human capital, social and relationship capital, intellectual capital, natural capital. These broad level categories would be subdivided to include the likes of brand / reputational capital, for example. All of which are at least as important as financial capital, and arguably more so when finance is far from scarce and is relatively very cheap.
Why do we obsess about finance, and the tangible assets that can be given a financial value? Because we have no widely agreed methodologies for valuing most of the capitals that really drive the value of a business, because they are intangible. There are not even any widely agreed ways of measuring them and their impact, in either financial or non-financial terms. Still, nobody questions their importance. And the bolder public companies are not waiting around for the accounting profession to provide better metrics. In fact, companies are developing them on their own. Some very detailed research, over the course of a decade, has demonstrated the enormous value in doing so.
Initiatives such as Integrated Reporting (IR) are aiming to help determine ways in which companies might measure and report in respect of factors that might be considered ‘material’ to the future performance of the business, by investors. And to relate these measures to the actual performance, to a narrative explanation, to strategic plans for the future, and to possible risks.
“An integrated report is a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long-term”. It is beginning to change the mindset, from an obsession with financial capital and the short-term management and manipulation of financial performance, to a focus on “the Capitals”. It is beginning to change policies - as the saying goes: what gets measured gets managed. Lastly, it does offer the hope that the whole system of business can then be aligned.
For these reasons, I think IR is a way in which companies might start to practise Responsible Business, and offers a framework by which to embed sustainability and corporate social responsibility. For the full potential to be realised, the IR framework still has a long way to go in terms of development. The new metrics for measuring the intangibles will need to be agreed, and probably expanded.
Some of the companies which agreed to be part of a pilot project with the International Integrated Reporting Council (IIRC) have themselves become pioneers in this process - one of the most interesting cases being The Crown Estate, which has developed the Total Contribution report as a way to measure and communicate the significant value it creates beyond financial return.
It is much more sophisticated than just another environmental, societal and governance (ESG) approach. It includes a way to value the economic, societal and environmental contribution that the business delivers to the UK. Working with their executives and measurement experts, Crown Estates have designed a process for identifying and monitoring material management issues defined as “an issue that would impact our Board and committee decisions". Each issue is scored on a scale of 1-5 across three areas: 1) economic impact on the business; 2) the degree to which primary stakeholders are concerned with it; 3) the extent it is likely to grow in significance and impact on the business in the future.
In a video taken from a speech at a recent conference, the director Mark Gough explains that the project has had a transformative impact on their ability to evaluate all dimensions of business performance, the value it delivers to all stakeholders, and to the reputation of the business.
The United Nations Global Compact, which calls itself “the largest voluntary corporate responsibility initiative in the world”, and “the world’s largest voluntary corporate sustainability initiative”, seeks to align business operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption. Like the IR initiatives, it is a voluntary initiative that “relies on public accountability, transparency and disclosure”.
To me, the Global Compact deals with only limited number of very high level Responsible Management components, and adds an additional reporting burden. The IR Framework, used properly, already provides for several elements, even if only under the heading of material risks, and could easily incorporate all the material elements, and in a much more tangible way.
So, referring back to my original question, I hope the rather woolly concept of the Corporate Idealists comes to stand for a person who rejects the idea of CSR and Sustainability as separate functions, and will instead embed them within the practices of everything the business does, at all levels of the organisation. And a Corporate Idealist might advise Boards on how to govern in a responsible way, and provide both leadership and coaching to ensure responsible management is practised at all levels. The Corporate Idealist will find that the Integrated Reporting Framework will help them greatly in their role, but the early adopters will also need to join and support the growing community of Responsible Business pioneers.
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In New York City on 23rd September, the Strategic Management Forum, in association with strategy+business magazine, will be hosting an evening with Christine Bader, author of The Evolution of a Corporate Idealist. The evening is sponsored by Growth Leaders. The issues will be debated in discussion with Art Kleiner, editor of strategy+business, and Ann Graham, a senior management writer with a passion for strategy and Responsible Business practice. Attendance is by invitation-only and places are strictly limited. You may apply for an invitation by email. We aim to debate the issues with an audience that reflects a broad range of perspectives, so participation cannot be guaranteed. For those unable to attend, the evening will be recorded and made available for further discussion at a later date. Applications should be sent by email to pbarnett@strategicmanagementforum.org Please include a brief biography and an explanation of your reason for wanting to take part in the event.
