Major corporations find themselves at the center of conflicting demands from virtually every direction:
- Activist investors are clamoring more loudly than ever for increasing shareholder value, often pushing for major changes
- Customers are becoming increasingly demanding and sophisticated in selecting among an ever-growing list of choices
- New technologies are constantly emerging, many of which are disrupting established ways of doing things — if not entire industries
- As other companies innovate, competitive forces accelerate every day, driving out costs and driving down prices
- Employees are managing their careers more aggressively, seeing themselves as free-agents and taking their skills elsewhere when more attractive opportunities emerge
- Media channels and NGOs are eager to pounce on any slip-ups and convey them worldwide over the Internet, damaging reputations instantly
As innovation thought-leader Rowan Gibson says in his seminars, “the world won’t change this slowly ever again.” Every day, the dynamism is only accelerating, and the resulting pressures are only getting more intense.
For corporations in the energy sector, facing multi-billion dollar bets on assets with lifetimes of several decades, the challenge of navigating this minefield of competing concerns is particularly brutal.
How did we find ourselves here?
The Evolution of Corporate Strategy
Although fraught with geopolitical peril as the Cold War combatants rattled their nuclear sabers, the era immediately after World War II was in many respects a wonderful time for the corporate world. Between pent-up demand from the pre-war Great Depression and the need to rebuild much of Europe, conditions for growth were robust.
Accordingly, it was often adequate for companies to utilize simple deterministic concepts from early days of the discipline of corporate strategy — such as the “five-forces” framework or the “structure-conduct-performance” model — to derive insights for setting strategic direction. Not disparaging these tools: they remain useful, but their limitations are now more well-recognized.
It was the OPEC oil embargo in the early 1970’s that served as the first shot across the bow. The resulting spike in oil prices sent companies in many industries reeling: having unduly relied upon just one forecast of a key input that turned out to be woefully inaccurate, their day-to-day operations as well as their longer-term business strategies weren’t robust to a market environment that they had not even remotely anticipated.
In response to this situation, Royal Dutch Shell pioneered the use of scenario planning to facilitate stress-testing of corporate decisions across a wide range of potential futures that might transpire.
Since then, corporate strategy development approaches have continued to become much more sophisticated in dealing with uncertainty and complexity, which have only magnified in recent decades.
In retrospect, in that postwar afterglow, the private sector may have lost sight of a profound truth: that companies weren’t in full control of their own destinies and success wasn’t assured merely by continued operational optimization and minor product enhancements foisted on naive customers, but that outside forces applied by other parties could have significant impact on business success.
This was especially powerfully illustrated by the emergence of environmental concerns in the late 1960s — a decade of immense social change on multiple fronts.
In the U.S., global dominance in heavy industrial activity and the rise of automotive culture spawned many clearly identifiable pollution problems adversely affecting citizens, ranging from the omnipresent smog in the Los Angeles Basin to the burning Cuyahoga River in Cleveland. A population empowered by the rebellious culture of rock’n’roll, the hard-earned successes of the civil rights movement and ongoing protests against the Vietnam War unleashed a wave of consumer boycotts and civic opposition against prominent polluters.
Ultimately, this social pressure culminated in the establishment of environmental protection regulators and regulations with real clout. No longer could companies freely discharge their waste streams with impunity.
The Rise of Corporate Sustainability
Facing a new set of constraints on their activities, companies launched dedicated environmental initiatives — even if with reluctance, in some cases.
Initially, the corporate response was primarily tactical, oriented towards least-cost environmental compliance: meeting government-set requirements at the lowest expense. Frequently, this also involved public advocacy — a.k.a. lobbying — in the aim of getting policymakers to set environmental standards at more lenient levels that would consequently cost less to meet.
For awhile at least, this modest approach to managing environmental matters was generally met with tacit acceptance by stakeholders. However, because many heavy industrial activities intrinsically carry operational risks, this approach could not and did not completely eliminate the potential for exceptional pollution events.
Following incidents such as the Union Carbide Bhopal gas leak in 1984 and the Exxon Valdez oil spill in Alaska in 1989, owners and operators of major industrial activities began to recognize that simply satisfying minimum requirements — especially in developing economies where environmental standards were particularly weak or barely enforced — did not eliminate the risk of financial penalties, tightening of regulations, and customer backlash if (or when) something went wrong and something bad happened.
Put simply, companies began to realize that they would benefit from building public goodwill through a clear pattern of proactive, more-than-required attention to environmental concerns. Should a major problem occur, the accumulated goodwill would be of immense value.
Gradually, the notion of “corporate social responsibility” (CSR) was born. Corporations with significant impact on their local communities began to acknowledge that part of maximizing profitability meant enhancing their “social license to operate” Spending a little bit extra to do more than the minimum necessary became increasingly viewed as a better path to long-term profit maximization, by increasing the willingness of local stakeholders to allow industrial activities in their backyards.
Over time, CSR morphed into the concept of , in which corporations admitted that they needed to own up to the sometimes-negative implications of their operations on society, and to take actions to minimize these impacts — and in some cases, offset them — to alleviate the accumulation of social pressures against their business.
Today, virtually every major corporation has a substantial sustainability program, usually led by an executive officer and reported on in a glossy brochure touting the many activities being undertaken by the company to preserve environmental conditions. In so doing, these sustainability efforts often burnish the company’s credentials sufficiently so as to meet the tests of socially-responsible investors, who otherwise decline to own shares in non-compliant companies.
Admittedly, some corporate sustainability activities can be philanthropic in nature: spending money in ways that are not necessarily strategic to the business, but that improve perceived corporate citizenship. Funding of community centers, academic scholarships or vocational training programs do help the local population and are appreciated, but often have weak strategic linkages to advancing the interests of the business.
And therein lies the rub. An increasingly discerning and cynical public is beginning to see through blatant examples in which corporations attempt to “buy” good public relations with million-dollar investments to better enable billion-dollar business opportunities. The phenomenon of “astroturfing”, undertaken by a hitherto-unknown advocacy organization created and funded by corporate interests that misleadingly suggest grassroots support of a for-profit agenda, is a particularly egregious practice in this vein that can badly backfire.
At bottom, CSR and corporate sustainability initiatives remain subject to a critical precept of traditional corporate strategy, wherein the company first defines its preferred interests, and then develops plans — including plans to engage with the public — that will maximize prospects to produce desired outcomes. This approach is intrinsically sequential in nature: putting the company first, working in isolation to determine the most appealing path(s) forward, and only subsequently working with others outside the firm.
Framed this way, a provocative question naturally emerges: what would happen if a company and its external stakeholders worked together in developing and pursuing plans to produce a mutually-beneficial future?
An Emerging Synthesis: Creating Shared Value
In the past decade, thought-leaders have begun forging a new synthesis addressing this question: an integrative strategy and sustainability approach called “creating shared value” (CSV).
Since CSV is a nascent theory, some of its basic precepts are still open to interpretation. Also because it’s still early days, the jury is out on the effectiveness and impact achieved when a company commits to CSV.
Even so, in my view at least, CSV opens the door to what could be a tectonic shift in the way business operates. If that turns out to be the case, early corporate adopters of CSV could find themselves riding a long wave of success and enduring leadership, whereas those who fail to make the shift could be at risk.
Through the millennia, as a basic element of any contest between subsets of humans, strategy has always been developed in-house as a means of gaining an advantage to beat other competitors. It is thus historically unnatural to conduct “open-source” strategy.
But the accelerating pace of change in our world today is forcing new ways of thinking. Open innovation, in which companies co-create a business future with outsiders, is becoming more commonplace.
CSV takes this to another dimension, extending beyond for-profit collaborators to bring external stakeholders into strategic alignment with the business.
While companies have always had to care about and create value for their customers and their employees — or else they simply wouldn’t last very long as enterprises. CSV expands the set of relevant parties to include constituencies that are neither customers nor employees. And, CSV pushes companies to weigh the concerns of these constituencies alongside, not subservient or secondary to, the company’s concerns.
Successful corporate pursuit of CSV should result in an enduring bond between the company and its associated social vectors so that all stakeholders benefit when one party benefits, with no party benefitting at another’s expense.
CSV is thus the grandest of grand strategy, while at the same time taking sustainability to its logical extreme: a company’s prospects are only sustainable over the long-term if the prospects for the communities within which it operates are also sustainable for the long-term.
Recently, I was privileged to assist a large energy company in establishing the primary parameters of its CSV strategy: the Board had already firmly decided to adopt CSV, but wanted additional detail on what this would mean for the business.
In addition to better defining the general societal themes in which the company would focus its CSV efforts for joint pursuit with external stakeholders, the engagement quickly made apparent that pursuing CSV implied ongoing reinforcing activities up and down and across the corporation, including:
- Extensive internal and external communications of the intentions and rationale underlying the decision to adopt CSV
- Tracking and measurement of key progress indicators, since corporate accountability is essential for CSV to be deemed credible
- Allocation of considerable resources to work constructively and intensively with many outside parties, who may be pursuing differing goals with radically different measures of success
Most crucially, CSV demands a degree of openness with outsiders that many corporations have historically found highly uncomfortable. The adoption of CSV quickly separates out companies with merely good intentions from companies actually dedicated to allowing other parties “inside the tent” potentially including participation in sensitive deliberations and decision-making activities. With CSV, there is virtually no room for “greenwashing”.
Consequently, CSV is not something that every company will want to undertake. Then again, CSV offers the potential to create much more long-term value for some companies than for others.
The best candidates for CSV are large industrial corporations with large long-lived operations that intrinsically prone to producing significant environmental impacts. Most major players in the energy sector fit this description. Such companies can more easily afford the resources required to dedicate to a meaningful CSV initiative, bearing the certainty of additional short-term costs in exchange for the likelihood of long-term benefits. They also have an enduring stake in their communities, and for better or worse can easily become viewed as the “bad guys” if not careful in their dealings with the public.
From our review of activities to date in the corporate world, those visibly pushing ahead on CSV include:
- BASF (FWB: BAS), whose “AgBalance” methodology provides a balanced holistic scorecard spanning economic, environmental and sociological concerns for application to agricultural activities in the aim of “protecting the future of food production”.
- Microsoft (NASDAQ: MSFT), whose “Cloud for Global Good” initiative involves a multi-pronged effort involving investments and advocacy with various parties to bring “trusted, responsible, inclusive” cloud computing to everyone.
- Nestle (SIX: NESN), whose shared value framework consists of 42 corporate commitments spanning three priority areas where the company “can create the most value and make the most difference”: nutrition, rural development and water.
- Schneider Electric (Euronext: SU), whose “Access to Energy” program entails the investment of both capital and staff time to nurture the success of emerging ventures aiming to electrify rural villages in developing economies worldwide.
As these examples illustrate, CSV has ample potential to generate substantial financial benefits to the companies, while also addressing important social concerns.
A New Era of Shared Value Creation in Energy?
More strikingly, these CSV examples hint at the possibility for a fundamental change in the role of business in society, wherein companies transcend solely financial interests and go far beyond mere philanthropy to meaningfully address a broad spectrum of fundamental challenges facing humankind in the 21st Century.
In the face of declining citizen trust in governmental and social institutions, CSV represents an opportunity for corporations to elevate their position in society. In stark contrast to the robber-barons of the late 19th Century, exploiting less advantaged constituencies in the relentless maximization of near-term profits, 21st Century corporations can utilize CSV to become a reliable civic partner that aids society in navigating an increasingly uncertain and volatile future.
CSV can thus be seen as a corporate embodiment of an ancient aphorism: with great companies, comes great responsibility; to great companies, go great rewards.
This is especially the case for corporations in the energy sector, where the difference between valued social contributor and reviled social predator can be vast.
Over the coming years, it will be interesting to follow which companies in the energy arena will aspire to such greatness and most earnestly pursue CSV as a means of securing a place that can take them (and us) to the 22nd Century.
It will be even more interesting to see which companies come to view that decision as critical for putting them on a better path for enduring viability. Almost certainly, those companies will point to the following key success factors:
- Clarity of vision on which areas of social impact declared as the focal point of CSV activities
- Sincerity of commitment to CSV, as reflected by adequacy of dedicated resources
- Superior execution on the tangible initiatives being pursued under the umbrella of CSV
Only time will tell, but the emergence of CSV as a management principle gaining traction among multinationals is intriguing — and cause for cautious optimism.