This post is by John Browne from HBR.org
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It is no coincidence that when I succeeded in business, it was often because I engaged effectively and sustainably with the world outside the corporation, and when I failed, it was usually because I got this wrong. Research by McKinsey shows that, on average, 30% of corporate earnings are at stake when it comes to a company’s relationships with society. Indeed, when the news broke that Volkswagen had been accused of cheating emissions standards tests last year, its share price fell by almost 35% in the next two days of trading.
The VW scandal, among others, highlights the continued failure of companies to engage successfully with the world outside the corporation. As a global survey conducted by McKinsey shows, only 21% of business executives think their company frequently engages successfully. The current model is not working.
Companies have relied on corporate social responsibility (CSR) to govern their relationships with society
the past 20 years. For Connect: How Companies Succeed by Engaging Radically with Society, a new book I wrote with Robin Nuttall and Tommy Stadlen, I interviewed more than 70 business leaders, who viewed CSR as commercially irrelevant. There was a consensus that CSR focuses more on boosting employee morale than addressing the way a company engages with society’s concerns.
One big problem is CSR departments lack the participation of big-spending commercial functions and the input of managers on the ground who better understand the local context. Their programs focus on limiting the downside of reputational damage, not on the commercial upside of better stakeholder engagement. This means CSR initiatives tend to be short-lived, dependent as they are on the whims of senior executives rather than the value they deliver.
In CSR’s place, I propose a new model of engagement, which I call connected leadership. It is not an academic hypothesis; it is built on the collective wisdom of interviews with business, government, and third-sector leaders, as well as my own experience.
There are four tenets of connected leadership that can help revolutionize the way companies engage with society.
Map your world. This tenet calls on companies to be rigorous in analyzing macroeconomic environments, public attitudes, and the company’s own behavior in order to identify, early on, the challenges it might face and the ways this might affect profitability.
Shell is an excellent example. It conducts an exercise in mapping their world, identifying 10 major drivers of change and assessing the respective value at stake for the company and society. It measures the impact of these drivers across three horizons: the near-term financial impact, the long-term financial impact, and the impact on reputation.
If companies can successfully apply this level of analysis, it will help them understand their stakeholders, calculate the value of external relationships, and help them tackle the second tenet of connected leadership.
Define and communicate your company’s contribution to society. Purpose is the litmus test of sustainability in business. Companies that want to be around for decades to come must ensure that society is at the heart of everything they do. At Unilever, the Sustainable Living Plan is doing just that. It aims to double the size of the business while helping 1 billion people improve their health and well-being, halving the company’s environmental footprint, and enhancing suppliers’ livelihoods.
These are not philanthropic ambitions. Each goal is tied to Unilever’s core business activity. Improving hygiene habits halves the number of people who die from disease and increases sales of its soap products; reducing carbon emissions and water usage cuts costs and limits the company’s exposure to water-scarcity.
Apply world-class management. Successfully embedding societal concerns deeply within business operations, as Unilever has done, requires a new approach to management at every level of the company from the boardroom to the shop floor. Companies need the right people with the skills and experience to incorporate external considerations into their decision making. However, there are only a handful of companies that do this proficiently. Less than a quarter of business executives interviewed by McKinsey reported having the management resources, talent and processes to engage with stakeholders effectively.
Walmart is one example of a company embedding a clear societal purpose into the aims of its management team. In 2005, when Lee Scott and Rob Walton, who were then Walmart’s CEO and chairman, respectively, decided to make environmental issues a priority, the company’s top executives were asked to apply their excellent strategic skills to building a more sustainable business. Sustainability became an integral part of every commercial conversation both within and outside the company. Walmart is still evolving in this area, but by the end of 2012 it had reached its target of reducing its carbon emissions by 20%, one year ahead of schedule.
During my time at BP, the ability to succeed in challenging political and social environments was equally dependent on our ability to apply the analytical rigor, project management, and financial skills of our teams to a vast array of environmental and social issues.
Engage radically. This means engaging on someone else’s terms rather than your own. The most successful and innovative example of this during my time at BP was on the island of Papua, in Indonesia.
The company had acquired a gas field in Tangguh and was seeking to construct a liquefaction plant to enable gas exports. However, it was a region in which ethnic conflict and secessionist demands overlaid a history of environmental damage caused by Western mining companies.
Against this backdrop, BP’s innovation was to establish an independent advisory panel to hear community concerns, encourage debate, examine BP’s activities, and report its findings publicly and fully, all without any influence from BP. The panel was chaired by U.S. Senator George Mitchell, who had led the Northern Ireland peace process, and the panel was given its own independent resources.
The panel generated the credibility necessary to construct the plant successfully. Not everyone within BP welcomed an independent reporting body that could reveal errors before the company had a chance to fix them. However, in a situation such as this, trust is only built when you are willing to step out of your comfort zone and operate with radical transparency. The rewards for this radical approach to engagement are significant. The evidence shows that a company’s ability to engage successfully with stakeholders is worth over 20% in superior stock performance over the course of a decade.
Finding solutions to today’s greatest, global, social problems — from smoking to climate change to obesity — will rely on the resources and innovation of business. The winning companies of the future will be those that successfully redefine their purpose and deploy their best teams in pursuit of these great social and environmental challenges.