Sustainability at the top

Thursday 16th July 2009

What does it take to get to the top? Ambition, drive and a flair for business are fairly obvious. Traditionally, another key attribute was a single-minded focus on returns for shareholders, relegating matters such as concern for employees, society and the environment.

That view is changing with remarkable rapidity. Back in the 1960s, Milton Friedman argued forcefully for the view that business leaders should concentrate exclusively on maximising the financial return on their shareholders’ investment. As recently as 2005, The Economist echoed that view. Beyond complying with the law, businesses should not concern themselves with ethical, social or environmental issues.

But they have been proven wrong – and, surprisingly perhaps, not so much for moral reasons as for economic ones.

Traders in securitised assets at Lehman Brothers and other banks, divorcing their calculations from the real world of assets such as houses and people’s incomes, represent just one of the more extreme examples of the tendency to operate as though businesses were in a corporate bubble, separate from society and the environment. In letting Lehman Brothers collapse, the US Government appeared to under-estimate the deep connections its business had – not just in North America, but throughout the world. It affected the ability of house purchasers in Spain to secure a mortgage; the job prospects for car sector workers in Germany; the export trade for Chinese manufacturers.

The globalised economy is deeply inter-connected, and reliant upon an increasingly vulnerable environment. The notion that the shareholder interest can be considered in exclusion to all others has been exposed as a pretence. Previously, the argument for long-term sustainability and considering other stakeholders has been swatted aside as being a ‘nice to have’ extra, with the shareholder focus assumed to be better for business. Now we can see it is not even good for business.

This has huge implications for the CEO of the future – with the exciting realisation that the role requires far more than knowledge of market demand and a balance sheet – and that one doesn’t have to leave ethics at reception with your coat and umbrella.

The modern executive has to know about the true nature of assets it uses or invests in; about changing skill requirements and demographic shifts; about technological developments; about the importance of employee engagement and skills retention; and environmental pressures, including impacts on commodity prices and supply of food and water, as well as the controversial matter of climate change. This is a requirement for all CEOs – in traditional manufacturing or retail as much as hi-tech or ‘green’ companies.

Take the following quote: ‘Products can be made all over the world with lots of different raw materials... there is a process, cost accounting, by which each product can be correctly priced. We have to create similar things for carbon accounting – so, wherever it is made, we know the cost.’

This did not come from a spokesman for Greenpeace, but from Sir Terry Leahy, CEO of Tesco, the second-largest retail operator in the world, as he announced the first ‘zero-carbon’ store in Cambridgeshire, UK. Marks & Spencer is undergoing a similarly radical green initiative, which includes recycling all waste materials to produce energy.

What Sir Terry, Stuart Rose at Marks & Spencer, and a growing number of CEOs realise is that executives may ignore other stakeholders; but those other stakeholders won’t ignore them.

I have been involved in what might variously be described as corporate ethics or sustainable governance for more than a decade. What we are living through now, partly as a result of the credit crisis, and partly as a result of the environmental pressures caused by population growth and the rise of emerging economies, is a quite radical change. In ten years’ time, we will see it as pivotal. The change is this: executives no longer see sustainability as something that is nice to have, but something that is essential. It is not separate from the desire to be competitive and innovative; but helps inform these business disciplines.

Venture capitalists tell me that whether or not you believe in climate change is irrelevant – the economy is going green, and they see ways to make money. Does that matter? It may seem like an expedient argument, but businesses do have to make money. I spend some of my time coaching executives from a finance or operations background on the importance of social sustainability; but I also sometimes need to remind people from a more values-based background of the importance of sound business sense.

We need to embrace a broadly encompassing concept of sustainability. True sustainability needs to be considered in both commercial and ethical terms. The two are not identical, but they are far closer to each other than some of the more zealous proponents of the ‘shareholder value’ model used to maintain.

The CEOs of the future, therefore, see environmental and social pressures as opportunities to innovate and seek new markets. They see sustainability as a core business ethic, not just a paragraph heading in the annual report. In the words of Andrew Liveris, CEO of the multinational chemical group DOW – ‘sustainability requires making every decision with the future in mind. It is our relationship with the world around us. Creating economic prosperity and social value whilst contributing to the preservation of our planet.’

This sounds wonderful, but of course while the interests of different stakeholders overlap, they are not the same. And while the long-term is important, the short term still exists too. The excessive focus on short-term shareholder returns and the quarterly report has distorted priorities in the recent past, but companies still have to be solvent, quarter by quarter. Tough decisions have to be made when the unethical decision, for example, leads to lower operating costs.

This is where it gets interesting, however. Leadership requires difficult choices. The innovative CEO of the future will be constantly weighing and balancing the different interests. They will also have a strong sense of what they and the organisation stand for. If the response to one stakeholder has to be ‘no’, this has to be for a sound reason, consistent with the values of the organisation, and with a broadly defined concept of sustainability.

Such a leadership culture is transparent. By that, I do not mean that every decision and discussion is publicly aired; rather that everyone in the organisation knows what the leadership stands for, and that they will honour those principles. A modern CEO will be intellectually curious; restless; engaging in discussions where ideas are challenged.

Leadership can be immensely powerful; and perhaps we need to challenge the emphasis in corporate governance and in politics upon regulation and codes. Stuart Rose’s personal commitment to green business will have a more positive impact on the environment than new taxes or Acts of Parliament.

The style of leadership, and quite consciously qualitative matters – ethics, judgement, character, and so on – need to be properly addressed, rather than regarded as the ‘soft’ stuff. They are actually the most powerful agents of change, sustainability and business success. Leaders need to be identified, nurtured and coached with as much time and expertise as one devotes to development of, say, technological expertise.

For aspiring CEOs, there can never have been a more exciting time. If it was ever thought that you had to dispense with a conscience for society or for the environment in order to climb the corporate ladder, that belief is history.

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