The cry for a more inclusive form of capitalism is growing. But, according to Mr Rajeev Peshawaria, CEO, Stewardship Asia Centre, the irony is we are using the same tools that caused the excesses of shareholder capitalism to drive responsible behaviour: incentives and regulations.
Socio-economic inequality, climate change and cyber vulnerability are some of the challenges that we face today. Whether as a corporate you do something about these and act or you don’t do anything about these. Either way, your action or inaction is in full public view. Out of the world’s top 100 economies, only 31 are countries and 69 are businesses. So, businesses must take more responsibility for these challenges than nations.
Our current solutions will not solve the problems. We need different solutions. ESG is supposed to be the be-all and end-all of solving all problems. Whereas in our research, we found the need of the hour is for businesses to do well by doing good. You can make billions of dollars of profit. We are not against profit. Make money by doing something about these challenges. That is our call to the business leaders of the world.
According to the World Economic Forum, climate change alone represents $10.1 trillion of new business opportunities every year for the next 30 years and 395 million new jobs. When the polar ice cap is melting and creating havoc, it is also creating new agricultural opportunities under the ice. Is it possible to drive superior shareholder growth by addressing these challenges of climate change, inequality and vulnerability?
Yes, it is possible and I want to give you some proof points. Here is a CEO who during his 10 year tenure provided 290% return to shareholders. His company did it by creating a sustainability based business plan. They exited highly profitable lines of business because they were harming the environment or the society and came up with environmentally and socially responsible products. Initially, in the first two years, the share price of the company went down; profits went down and market share went down. 75% of his leadership team quit their jobs because they thought he was going to take the company down to zero. Yet, the board continued to support him. Then the magic happened. They gave 290% return to shareholders. The company is Unilever and its CEO was Paul Polman.
Healthcare for All: Inspiration from a Broken Leg
The next is an example of a company that had 21,000% stock price appreciation since its IPO in 1992. They’ve been in the 14 most admired companies’ list for more than 21 years now. They are in 77 countries and growing strong. They focus on the ‘S’—the social aspect of ESG. They were the first employers in the world to provide full healthcare benefits even to part time workers. Till today, they are one of the largest employers of people with special abilities. This is Starbucks.
Its founder and former CEO Howard Schultz is a son of very poor immigrants. His father was a temporary truck driver. One day he broke his leg and came home. He couldn’t work for three months because he couldn’t drive with a broken leg. He had no money for medicines or food. Oftentimes, Howard Schultz had to go hungry and sleep without dinner because they needed to save money for daddy’s medicines. At 17, he swore to himself that he would create a company that his father never had a chance to work for; where everybody is included and treated with respect and dignity irrespective of skin colour and economic situation. Hence, Starbucks became the first company in the world to provide full healthcare benefits, even to part time workers. The rest, as they say, is history.
Stakeholder is Our Purpose
This company is in business and growing profitably for over 155 years, while the average lifespan of a company, is only 18 years these days. Their mission is to bring enhancements to the communities in which they serve. They are into steel, software, hospitality and every possible business. 66% of their share capital is owned by the philanthropic trust. It is ‘The Tata’ group.
Some startups feel that sustainability is for big companies. Jamshedji Tata said in the 1800s, “In a free enterprise, the community is not just another stakeholder in business, but is in fact, the very purpose of its existence.” Before the first steel plant went up in Jamshedpur, hospitals went up. Community parks and schools were built. He was giving money away in charity. He wasn’t a billionaire at that time, but he knew it was the right thing to do for the business. There are many examples of startups that are today big giants and who started with this kind of thinking. We researched 100 such companies and found something in common with them. They thought about the society and environment from day zero.
A Green Transformation
30 years ago, Doi Tung mountain area in Thailand looked like a very lush green forest. Then it was completely deforested. It is at the mountain border with Myanmar and Lao, called the Golden Triangle. Till 30 years ago, the heavily armed militia was controlling this region and it was not under any government control. There were only two professions: prostitution and opium production. Because of opium cultivation, all the deforestation had already taken place. Anyone who did not succumb to one of these two professions was beaten up mercilessly and forced into either prostitution or drug trade. There were no schools or hospitals nearby. If one felt sick, the only medicine was opium.
One fine day, the Thai Princess Mother landed there in a helicopter and told her Mae Fah Lung Foundation to build a different future for its people. She was already in her late 70s and was just a ceremonial head of state. Her foundation was not super rich. They raised money to change the present into a better future. Fast Forward 30 years. Doi Tung is a beautiful lush green forest now, totally reforested. Gone are prostitution and drug production. Those same impoverished villagers who were beaten up, now own at least five highly profitable businesses: single origin coffee, macadamia nuts, handicrafts, fabrics and tourism. They make readymade garments and use Italian designers. They sell to Moojimooji, IKEA and many other brands. Many airports sell their products; they have hugely profitable community owned businesses. It is therefore possible to do well by doing good. But it takes a different kind of orientation and approach.
The Darker Side
Out of all these good stories of the Tatas and the Patagonias of the world, we also have some horrible stories. Volkswagen was involved in the dieselgate emission scandal. They were lying to the US government about the emissions in their cars. They were fined over $15 billion in costs for what they did in 2008. It was not the first time, but the third time, that Volkswagen did it.
You may have heard the story of Theranos, the unicorn in Wall Street that was going to change healthcare and make our lives better. Elizabeth Holmes, was projected as the next Steve Jobs. She’s serving a 12 year sentence now, because when it came to choosing between truth and fraud when the product was not working, she chose fraud.
The Spectrum of Companies & a Few Champions
Looking at the good and the bad stories, we can create a spectrum on environmental and social action by business. On the left-hand side, we have the green washers and the purpose washers, the likes of Theranos and Volkswagen. Then you have a lot of companies and people who are blissfully ignorant about climate change, global warming and inequality. For them, they don’t exist and even if they exist, it is not their problem. Then you have the window dressers. As everybody’s talking about sustainability these days, they put some statues and mannequins on the window and make them look very good, without any substance. There are lots of organizations in these categories. Then you have the box checkers or the box tickers. As there are so many laws about sustainability, they do exactly what the law says and no more because we don’t want to go to jail. Then, a few are true champions of environmental sustainability in business. The key difference is the categories on the left are profiting from today’s challenges, whereas the true champions are creating profitable solutions to today’s challenges.
Moving to The Right
How do we move more organizations to the right and encourage them to take ownership? The commonality between Enron, Theranos and FTX is that besides the ethical issues, there was poor compliance, pure diligence and weak corporate governance. The standard response to such problems is that we bring in more regulations, more compliance and stronger governance to make sure something like these never happens. The boards tighten up with ten new policies and governments come up with ten new laws. And yet, fraud never stops.
I met a very interesting guy a few years ago. His name is Andrew Fastow. He was the last CFO of Enron. He was the guy who was doing all the balance sheet jugglery. He came out of jail after six years while his colleagues spent 14 years in jail, because he became an approver. While in jail, he reflected on how somebody like him coming from a good family with good values and having gone to a good school and college became a white-collar criminal. He wanted to tell the world what not to do and how easy it is to fall into the well of greed. He wanted to write a book and he approached me to write a book on him. I spent two hours with him just after he came back from jail. His stories were very interesting. I created a proposal for the book and I sent it to my publishers in New York. But my publisher advised me not to do it considering the amount of pain Enron inflicted and how because of this man, so many families around the world suffered. So, we didn’t publish the book.
Beer and Candy Analogy
But I learned a lot that day from the two hour conversation. Many people think that Enron was a failure of compliance. No, it wasn’t. It was a culture failure. Andrew Fastow said, “We proved to the world that you can create the biggest financial scandal in corporate history without breaking a single law.” They did not technically break any law. They broke the principles behind the law, by finding loopholes. Eventually they went to jail because the collective intent to defraud was proven. But on individual transactions, they could never prove that they did anything wrong.
Andrew was on the speaker circuit for a while when he came out of jail. He would start his speeches holding two things in two hands. He would say, “I got both these things for the same deals in the same year. This is my CFO of the Year award for the most innovative deals in finance. I got it on January of 2001. This is my prison card, which I got on May of 2001 and both for the same deals.”
His seventeen-and-a-half-year-old son came to visit him three months into his jail sentence and asked him, “Daddy, I read all the court papers. You did nothing wrong. Why are you in jail?” He explained to his son thus: “Son, imagine you tell your mother that you want to go to a party, taking mom’s car. She agrees on the condition that you should not drink alcohol in the party. You promise her and go to the party. You don’t drink beer but instead your friends give you a candy that has an equivalent of three beers of alcohol in it and you eat it. Son, I am in jail, though I didn’t drink alcohol. I am in jail because I ate the candy.” The point is you can have as many regulations as you want. For every beer, there will be a candy. Smart people will find the loopholes.
Failure to Focus on What Really Matters
We asked a bunch of board directors how they spend their time in board meetings. It turned out that 60% of time is spent on regulatory compliance, risk management and financial performance. They said they did not spend enough time on sustainability, culture, strategic innovation, leadership development and talent management. These are the only competitive advantages for businesses today. Boards all over the world are still not doing what they’re supposed to do.
The good news is everybody’s talking about sustainability these days. The bad news is everybody is only talking about sustainability and not doing anything much. What they’re doing is not yielding results. The G of ESG is supposed to save us from E and S challenges. Regulation is, undoubtedly, important. But regulation sets the minimum standard of good behavior. What we need is innovation to find profitable and affordable solutions for today’s problems. You cannot legislate innovation in the court of law. We need regulation to minimise harm. But that’s not enough to save the planet. We need huge amounts of innovation to save the planet. Regulation is reactive. When the 2008 global financial crisis happened, all lawmakers of the world came together to tighten up the financial system. But what about the people who already lost their homes? Did they get any help? No.
Flawed Measurements & Incentivisation
Then there is another management fad, which says if you want people to behave well, measure and incentivize them. What gets measured and incentivized gets done. Every book on management has this expression. But ooveremphasis on measurement and incentives will create bad behavior.
The latest fad is linking CEO bonuses with ESG markers. If they can improve their ESG scores, they will get a bigger bonus. What do you think CEOs around the world are doing? They hire sustainability officers and teams who produce glossy sustainability reports to make the CEOs look good. Half the people in the sustainability team are communications and PR experts, not environmental or social scientists. When you overmeasure, people resort to greenwashing.
Let me give you a funny example. In basketball, the teams that win more often than lose do one thing better than the losing teams. They pass the ball very effectively. But the NBA (National Basketball Association) which runs the pro basketball and which is billions of dollars’ worth of business in the US and the world, when they draft a pro, the data they look for is how much they scored and not how many effective passes they made. That’s called the folly of rewarding A while hoping for B.
My former boss and mentor wrote 45 years ago, a six page article, warning us against over incentivization and overmeasurement. We keep doing the same thing again and again, hoping for a different result. We ignore the genius of Einstein who told us that doing so is the definition of insanity.
Steward Leadership
We asked people in 25 countries, what motivates the guys who are the true champions of environment—the Patagonia’s of the world. Why do they do what they do? They do it because of genuine proactive leadership intent. The top 100 companies that we studied are doing well by doing good, driving positive shareholder returns by addressing existential challenges of today and surviving for hundreds of years. What they have in common is a new form of leadership called Steward Leadership.
The common definition of leadership is coaching, guiding and directing the people towards achieving common goals. This is an outdated definition of leadership that doesn’t help in the 21st century. Leadership is not a title, nor a position. Leadership is the genuine desire and persistence to create a better future. Steward leaders want to make at least a small difference to the biggest pain points of society.
When we think of the word steward or stewardess what comes to our mind is somebody who serves you. That’s also an outdated definition of stewardship. They are stewards of planet earth and humanity. Steward leaders integrate the needs of stakeholders, society, future generations and the environment. These people are hungry to make money, but they are taking it upon themselves to make money by addressing environmental and social concerns. They have the genuine desire and persistence to create a better future for all stakeholders, the future generations and the environment. Jamshedji Tata was a steward leader. He took responsibility for Mother Earth and the society.
3 Steps to Practice Steward Leadership
The first step is to incorporate four specific stewardship values into the company’s value system: Interdependence; Long term view; Ownership mentality ; and Creative Resilience.
Faber Castell, the German pencil maker, has 270 years of successful track record and they have been very profitable right from day one. They focussed on society first. They provided employee benefits like housing and insurance 14 years before such things became the law in Germany. They believe in interdependence. You must believe that your business is going to be very successful and long lasting, though there may be short term costs and implications. When you have ownership mentality, you want to be a steward of planet Earth and humanity. Making money in this way is not easy and that is why you need creative resilience. You need to innovate. You may fail eight out of 10 times, but never give up. You need both creativity and resilience.
The Story of Netflix and United Airlines
Many companies articulate these ideas, but they are mere posters on the wall and they don’t actually follow them. Netflix has a policy on travel and entertainment for employees. They had a bound volume but decided to throw it away. The new policy is: “Act in Netflix’s best interests.” The travel expenses, in fact, came down by 30%.
The second example is that of United Airlines. Five years ago, they had an overbooked flight. As per their policy, they can offer $400 to any passenger who is ready to give up their seat. But on that day, there were no takers for the $400 offer. The second rule said that if no one is ready to take the offer, pick someone in random. They picked a guy and he refused to give up citing his medical emergency condition. Then they beat up the guy and dragged him in a bloody state out of the aircraft and that that video went viral. To top it all, when the news broke, the CEO defended his employees and said that they followed the company’s stated policy. Instead of feeling compelled to follow a company policy, imagine, how the employees would have acted, if they were empowered to follow ‘company’s values!’ They could have offered more money or done something innovative, without hurting any passenger. But, sadly they were not empowered.
Step two is to articulate the purpose and the better future that you want to create. The final step is that every decision the company makes henceforth must go through this lens. This is the simple management and leadership idea that all these champions follow. We need no more regulation or rules. We need to create a values-based revolution and remind people of human values, and then we will save the planet, not otherwise.
Governance uses the power of rules. Steward leadership uses the power of purpose, values, and profit to save and to thrive. We suggest that ESG should be upgraded to ESL, where L stands for Leadership (Steward leadership).
