How to turn your company into a CSO leader?

Moving from CSR (Corporate Social Responsibility) to CSO (Corporate Social Opportunity)

Laurent Ledoux30/07/09

Laurent Ledoux 1

1. High-level process to be followed by a top level working group: How to identify, develop & implement CSOs?

Many leading companies around the world today are convinced that finding new ideas to meet the challenges of sustainability will be a key part of their future. Environmental, social and economic sustainability, they believe, will be among the most important drivers of innovation across their businesses as they move forward, and they are transforming their operations to make the most of it. Provided there is top-level commitment, the working group will follow the high-level process sketched hereunder to assess the implications of CSR on their overall business strategy, and consequently to spot business opportunities.

1. Clarify the company’s CSO vision (“raison d’être”)

This clarification is essential to rebuild public trust in the corporate sector. In order to do so, we could follow the following steps:

1.1. Assess CSR/CSO SWOT

- Reach out the whole web of accountability – including consumers, employees, investors, NGOs, activists, journalists, bloggers, social networks, politicians, attorney and watchdog groups – and answer “What pressing social, ethical and environmental needs and problems are most relevant to stakeholders?”. These needs are called “triggers” that can affect the company’s strategy.

- Answer “What are the company’s greatest strengths?” - Search the web and piece the highlights together to form the company’s “true” story and see how this

differs from the answer you gave regarding your greatest strengths.

1.2. Set intent

- Based on the results of step 1.1., answer “What results does our company wish to create in the world?” (utmost social, environmental and financial value): convergence of answers here above should form the basis of a sustainable strategic intent (e.g. GE’s Ecomagination);

- Establish a compelling high-level business case that substantiates the willingness to move forward, highlighting the risks associated with not following the intent, the potential opportunities associated with it and the gap in terms of high-level competencies, products or services that should be developed or acquired for the company to pursue that intent.

Laurent Ledoux 2

1.3. Formulate our CSO vision

- Elaborate on the answers provided in step 1.2. by answering the following questions: Raison d’être: Beyond making profits, what in the world is the company here to do? What does it

fight for? Where is it moving? How does it contribute to the common good, to human welfare? Specificity: Why is the company specifically doing all this? What is the originality of this raison

d’être? How will the company challenge conventions? How would the world be different if the company did not exist?

Inspiration: Are these goals inspiring for our employees and our other stakeholders? Capabilities: Why should stakeholders trust the company to be willing and capable to achieve

these goals?

Note such a raison d’être should be the result of a collaborative effort that includes a core team of people from different businesses: cross-functional group effort will ensure buy-in, inspire innovation and give everyone a vested interest in the outcome. It should go beyond being a tagline but express a corporate-wide commitment, a cycle of self-improvement, a marketing initiative and a growth strategy, in short an ultimate value proposition.

2. Translating the CSO vision into concrete projects

The following actions should be undertaken, as much as possible, in partnerships with stakeholders.

2.1. Assess how triggers can pave the way for a revision of business strategies and operational practices.

- Based on the previous steps, discuss the way in which significant changes in the company strategy will be triggered by the ‘global forces for change’ identified earlier, such as the impact of a shift in demographic trends to an older population, or new technology creating ethical dilemmas in healthcare.

2.2. Scope what matters

- Keeping shareholder interests squarely in mind and without scrapping existing processes all at once, investigate how current strategies should be revised to take issues of social responsibility into account;

- Investigate which novel and profitable solutions could meet deep social, ethical and environmental needs. For this, allow each business leader to work with their inter-departmental group to devise a list of possible ideas. Give it time. Regroup the core purpose team, evaluate the ideas proposed by each business and select the winning ideas. Rather than attempt to push sustainability-driven innovation too hard, too far, too soon, experience suggests it is better to focus on one or two nuggets of opportunity that look promising and demonstrate some tangible benefits;

- Reflect upon what you have discovered and how you did it: learn about how to generate revised strategies in light of triggers, stakeholder impacts and inputs. Leading companies have strong processes to identify current and potential customers’ key social and environmental issues and needs over the next five to ten years, assess full value chain risks and spot new business opportunities. Examples of good practice include: Involving customers in scenario planning and translating customers’ full life-cycle risks into new

business opportunities Developing initiatives that enable you to better understand the social and environmental

challenges facing your customers; Exploring the role that technology, new business models, new partnerships and new ways of

working might play in meeting them.

2.3. Draft business cases

- Analyze the impact of the strategies on revenues & costs, informed by marketing mix & organizational considerations;

- Analyze the alignment between CSR, shareholder value and financial performance;- Assess how the proposed strategies fit with organizational culture. Leading companies have

implemented a number of measures, for example: Recruiting individuals with an active interest in sustainability issues Rewarding initiatives that use sustainability to drive innovation Challenging your next generation leaders to explore the long-term opportunities opened up by

changes in societal attitudes and the changing pressures facing your business customers Encouraging a systems perspective and a questioning culture to understand the linkages between

sustainability issues and your company;

Laurent Ledoux 3

- Rank the most attractive strategies or projects based on the possible importance for the business (core vs. periphery, impact on top and/or bottom-lines, scalability, costs…);

- Identify performance metrics that will be used to measure and monitor success on an ongoing basis.

3. Commit to action & Launch

3.1. Commit to action

- Assess the implications of proposed strategies or projects on the company’s values and leadership – and vice versa;

- Assess the implications for governance and management arrangements; - Identify the appropriate public commitments to be made and communications signals to be given.

External commitments such as joining a CSR organization like Business in the Community or the International Business Leaders Forum can help to reinforce the company’s commitment;

- Gather the resources needed to implement proposed strategies and operational changes.

3.2. Engage stakeholders

- Identify the roles required of stakeholders to enable implementation of the strategies;- Identify the necessary actions needed to ensure the desired roles are undertaken;- Engage stakeholders in the shaping and delivery of business strategies.

3.3. Launch implementation, measure, report & learn

- Implement and track the progress of actions identified and agreed to be necessary during progression;- Communicate with and discharge accountability to, stakeholders, as it involves measuring and

reporting social, ethical and environmental information. The disclosure of social responsibility information in the form of published reports, websites, press releases, is an essential stage in establishing CSR, and in demonstrating to stakeholders that corporate social opportunities are being identified and seized by business;

- Reflect upon what you achieve and what you can learn from it.

Laurent Ledoux 4

2. General principles to be followed by the working group

We identified ten basic principles, grouped into two categories: Strategic Orientation & Key Resources. These principles might seem obvious and to some extent already respected in our company. It might be true. And yet, it seems important to reassert them if we want to become a truly “sustainable company”.

The respect of these principles shall allow us to “embed” sustainability in every part of our business. That means to undertake more CSR initiatives that relate directly to our core activities (and not just to activities at the periphery): sustainability should run through every core system, from talent management to supplier evaluation, customer relationship management (CRM), and, of course, the balanced scorecard. We need to go from viewing CSR as “importing constraints” to viewing it as “finding business opportunities”, to turn CSR into what some call CSOs (Corporate Social Opportunities). CSOs are commercially viable activities which also advance environmental and social sustainability. These tend to be based on one or more of three dimensions of the cube shown hereunder. Note that the term CSO is inspired by the eponymous book by D. Grayson & A. Hodges.

Strategic orientationThese principles should help define or characterize the type of projects and activities we want to develop to promote sustainable activities.

1. “Core” - Integrate CSR into core business activities

We need to embed sustainability in every part of our business. That means to undertake more CSR initiatives that relate directly to our core activities (and not just to activities at the periphery, non-core): sustainability should run through every core system, from talent management to supplier evaluation, customer relationship management (CRM), and, of course, the balanced scorecard. We need to go from viewing CSR as “importing constraints” to viewing it as “finding business opportunities”, to turn CSR into what some call CSOs (Corporate Social Opportunities). CSOs are commercially viable activities which also advance environmental and social sustainability. These tend to be based on one or more of three dimensions of CSO:

Innovations in developing new or improved products and services: As we will see, this may involve working with an NGO either at the initiative of the NGO or of the business (ex: IBM with the organization SeniorNet). Equally it may be with a social enterprise or a university department or an international agency. In the case of Procter & Gamble’s PuR® product, it involved collaboration with several such partners. The point here is openness to approaches from, and a willingness to turn to, a more eclectic range of potential collaborators.

Serving under-served or creating new markets (such as the Bottom of the Pyramid …)

Organizing the business differently in a new business model: For example, in how it conceives and develops the new products and services, or how they are financed, marketed and distributed. CSOs in new business models can be found in terms of: How a business is developed; How finance is raised; How purchasing practices are organized; How a business is staffed; How products and services are delivered to market (e.g. through collaboration with a community group such as Bank of America and Citigroup to sell mortgages to low-income neighborhoods).

Laurent Ledoux 5

In any case, all this requires creating an ongoing process for getting each part of the company to recognize and understand its environmental, economic and social impacts. It also requires getting each part thinking about how they can use that knowledge to innovate through a systematic and integrated approach. Having understood the possible evolution of these broad social pressures, we need to map long-term options and responses to them. This process clearly needs to be rooted in strategic development. This requires a departure from the way we operate today whereby it is perfectly possible for us to follow many of the prescriptions of CSR and still to be caught short by seismic shifts in our socially-driven business environment (we’ll see example of this later on). For this we need to move the centre of gravity of our CSR functions away from our public- or corporate-affairs departments. Though playing an important tactical role, such departments are often geared towards rebutting criticism, and tend to operate at a distance from strategic decision-making within the company.

2. “Impact on revenues” - Increase attention on initiatives which affect the top-line (revenues), and that are scalable

Too many of our CSR initiatives today have an impact mainly on the bottom-line, by reducing costs or risks. If we want to increase revenues through addressing social, ethical or environmental needs, we will have to innovate. Innovation experts at Arthur D. Little calls for the “Sustainability Value Formula”: Integrity + Innovation = Sustainable Performance. In their High Grounds Survey on Integrity + Innovation (2007), they show how a small minority of companies have successfully integrated sustainability into both their business strategy and product/process design. ADL survey explores how companies are integrating sustainability into their businesses along two dimensions: Business strategy & Product and process design. On the first dimension, a few leaders in Sustainability-Driven Innovation have already fully integrated sustainability into strategic planning and decision making (e.g. future investment, product development, etc.). However, most companies are still some way off, with fewer than 35% of companies believing that they have achieved this.

According to ADL, fewer than 5% of companies have successfully achieved integration on both fronts. In some cases, companies have pushed hard to integrate in one area but not the other. Those that have pushed social and environmental issues up the priority list in their product and process design, but have yet to strengthen integration in their business strategy might be considered to be ´dabbling` with sustainability. Conversely, strong integration into business strategy without sustainability manifesting itself in product and process design might suggest ´bragging` with little action. Most companies are achieving a balance between the two, but only a minority has pushed themselves up into a leadership position, with strong integration in business strategy and product and process design.

3. “Long-term” - Give priority to trust and long-term

We need to emphasize our focus on trust and long-term relationships with our customers, employees, and other stakeholders. Trust is both the necessary condition and consequence of long-term relationships.

Laurent Ledoux 6

Together with commitment and diligence, it is the key to establishing, sustaining and reinforcing strong relationships.

Customers: We need to institutionalize the relationship between the depositor and the borrower, not just with money, but by highlighting the interdependence between the two. The result should be committed depositors who understand what we are using their money for and borrowers who feel supported by it.

Employees: Equally important, the increasingly controversial reward systems that offer inflated financial bonuses need to be informed by the ‘value’ of relationships, not just transactions. Thoughtful advocates of CSR also concede that companies are unlikely to do things that are against their self-interest. The real task is to get them to act in their enlightened long-term self-interest, rather than narrowly and in the short term.

Special interests groups: Much of the information provided to corporates on sustainability is produced by people and institutions that have a cause. The data they produce, the articles published, the speeches are supply-driven. There is a hope that there will be a demand but not enough attention has been focused on how to create the demand. The ‘special interests’ know, or think they know, the behaviors they want from financial recalcitrants. They have a vision. But they spend less, if any at all, on the processes by which change will occur – the processes by which those in the business community will begin to demand and produce for themselves information on issues. We need transformation, not reformation, if the issues of sustainability are to be truly adressed. The constraint is that currently, too often corporates do not seem to want to listen to, or perhaps do not trust, the interest groups, since they come from a different culture. We need to ask ourselves questions such as: - “What are the processes of change – among others, psychological, cultural, institutional,

intellectual and economic – that will lead us to more proactively demand for sustainability information to our stakeholders?”

- “How will we ensure that information is utilized to change institutional arrangements and individual behaviors at all levels within our company?”

- “What incentives are needed to be created, so that our employees adopt a more holistic view of the impacts of their investments?”

4. “Spirit” - Follow the spirit more than the letter (focus on society)

As a result of the crisis, many companies are now establishing stricter codes of conduct, stating clearly that anyone who doesn’t adhere to it has no place to work with or for them. However, the crisis today is mainly due to the fact that too many managers followed the letter but not the spirit of the law. As Stephen Green puts it, “Rules are never sufficient to enforce morality … The truth is that the value of our business is dependent on the values with which we do our business. Better risk management, enhanced regulation, codification of directors’ responsibilities in company law – all these things are necessary. But they are not, nor can they be, sufficient without a culture of moral values. As individuals, we do not regulate our behavior simply by what is allowed under the law. We take responsibility for our actions. The organs of capitalism – businesses, banks and other financial institutions – have to do the same. This is the sine qua non for the restoration of public trust in the market. It is also essential for the overall health of society.” If we are to try to follow more the “spirit of the norms than their letter, we need to make clear decisions about our ambition level and our readiness to go beyond norms, while recognizing that minimum norms and standards of environmental and social performance are necessary to reduce risks. It is important to note that in suggesting that companies aim for CSO we are not for a moment proposing that a sound understanding and compliance with CSR requirements are not still crucial. On the contrary, CSR is the foundation for learning and attaining the necessary competences through which CSO can be achieved. In any case, if we want to promote the spirit of sustainability, we therefore need to go “beyond codes of conduct” and promote initiatives such as: Training & mentoring

- Training staff to cope with moral ambiguities (which might be one of the most efficient way to avoid the return of the so-called “managers’ arrogance” – which enraged so much public opinion – as soon as the crisis is over);

- Setting-up a system of mentoring; Incentives & controls

- Ensuring incentives aren't so strong that rules get broken;- Creating safe channels for whistleblowers;- Reviewing regularly policies and practices to “ensure that they meet high ethical and moral

standards” Career management

- Considering a candidate's moral character when recruiting and promoting;- Sacking managers who don’t “walk the talk” (to be sure they are still a number of top managers

around who are known by all staff for not walking the talk, who don’t even seem to know what the

Laurent Ledoux 7

“talk” is about). “Not walking-the-talk is the greatest moral hazard” writes Professor Gandz in his latest book.

In short, use “people power”: ensure that sustainability is a clearly stated value at every stage of your people management process, whether it’s advertising for staff, hiring, induction, performance appraisal, remuneration or promotion. Purpose, vision and values need to be constantly reinforced through culture, processes and rewards.

5. “Consistent communication” - Communicate externally only when you have a consistent approach

We need to avoid communicating too hastily about CSR initiatives. We should only communicate when initiatives are fully consistent. For example, if we launch a new product that we want to be part of “sustainable activities”, we also need to look at the way it is developed, “packaged”, distributed, … Regarding the CSR report, consistency has an additional meaning: we are likely to see now the end of CSR reports as “Good news” reports. Reports should avoid self-proclamation and lies by omission. This requires engaging stakeholders much more in the preparation of CSR reports. This may also require promoting the development of truly interactive CSR communications through the internet and other channels.

Key resources

1. “Top-level commitment” - Involve top managers

Chief Executive Officer’s commitment is of course essential. Companies that have already made progress tend to be those where the leader has a clear vision, a well-articulated set of values, and a demonstrated commitment to both innovation and sustainability as being crucial for long-term business success – not mutually-balancing but on the contrary mutually-reinforcing. Obviously there is no point in pushing for a more forceful approach if the top management, fully understanding what it implies, is not utterly convinced of its necessity. Remember that willing to appear “CSR” is not enough. The leadership and senior management team must fully believe in and live those values and purpose—and demonstrably so. Practically, this would imply at least three commitments by top management:

Make innovating for sustainability a part of our company’s vision For this, we might need to update the company’s stated visions, mission and list of values or principles to ensure that sustainability is at the heart, so that the company will be publicly identified, both internally and externally, as sustainability-driven. Looking at the current set of statements in this regard there should not be major barriers to achieve this, which does not mean that it would be easy or unnecessary.

Walk the talk Top leadership has to believe in it. Staff and other stakeholders need to hear their leaders explain regularly what responsibility and sustainability mean for the company and the innovation possibilities they hold, and see the actual programs implemented.

Set up a body with the power to make sustainability matterWe need to set-up of a strong steering committee, sponsored by both CEO’s and ensuring that things move ahead. Such a committee shall: - Set-up effective tools and processes for scoping and then prioritizing risks and opportunities

associated with corporate social responsibility and a framework for deciding how to reach decisions and to check for consistency with corporate values;

- Consider, review, evaluate and supervise integrated sustainability policies (integrating environmental, social and ethical policies to the business strategy);

- Communicate continuously and create a sense of shared ownership and commitment among staff: purpose, vision and values need to be co-created by people throughout the organization rather than being imposed from the top leadership;

- Measure and report appropriately the company’s performance as well as processes for rectifying gaps and learning from the emergence of gaps (capturing and codifying knowledge to ensure continuous improvement);

- Advise the Board of Directors on responsibility and sustainability.

2. “Innovative partnerships” - Build innovative partnerships through an effective stakeholder engagement process

We need to reach out more and develop innovative new partnerships with different and often unexpected stakeholder groups. Joining more networks and actively encouraging NGOs, government agencies,

Laurent Ledoux 8

community-based organizations and universities to participate in our innovation efforts, we shall find a rich source of new ideas and opportunities. Such partnerships are also the key to be better accepted, to reduce misunderstandings, to stimulate dialogue and to improve crisis management ability. Of course, as we mentioned above, this requires a high level of trust, especially where some organizations do not normally work with corporations. This requires an ethical code governing relations with stakeholder partners to determine the fair share of risks and rewards (e.g. in relation to intellectual property rights) in exploiting corporate social opportunities and opportunities for entrepreneurialism and creativity — a set of opportunities that is widened by the spirit of openness and by the culture of enlightened curiosity. Having a robust process for agreeing up-front such allocation of rewards would be one of the critical success factors for a business moving to CSO.

3. “Light structure” - Put business lines at the forefront

Some CSR officers say that their objective is to make themselves redundant. We don’t need to go that far. “Sustainability” is not an end but a journey. Society and environment are continuously evolving, carrying risks and opportunities for companies. There always will be the need for some stewardship. But that does not mean we need to build a bigger team of CSR officers. Instead we should decentralize it as much as possible, involving business lines managers as the key drivers of the process.

4. “Performance indicators” – Benchmark and monitor closely the value created by CSR/CSO initiatives

If we want to go beyond norms as seen above, we will need to regularly perform solid benchmarking exercises (through participating for example to the “Sustainable company of year” FT award) and to pay attention to indicators that monitor the value created by our actions rather than only the respect of norms and constraints. We need to fix for ourselves quantitative objectives with clear deadlines and to be ready to be transparent on the results.

5. “Common sense” - Let common sense be our guideA lot of the CSR rhetoric is plain nonsense and often, paradoxically, pulls us away from what needs to be done to promote sustainability. So is the pursuit of short-term profits. Common sense can often save us from both and help us move closer to innovations that meet people’s needs in a sustainable way.

Laurent Ledoux 9

4. CSR in core business activities is now a must:“The world is changing. How? Where does it go?”

CSR is almost as old as capitalism. Through the centuries, it has taken different disguises, adding more and more layers of responsibilities.

“Sustainability”, which really became a buzzword in 2008, can be seen as a new way of packaging the old clumsy CSR. Never properly defined, it can mean different things to different people. Until the 1980s, business leaders used the word sustainability to mean a company’s ability to increase its earnings steadily. The term became widely used in its present sense in 1987, after it appeared in a UN report, which defined sustainable development as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.”

More recently, the whole idea has been in danger of floating away on a sea of inoffensiveness 1. Everybody, it seems, is for it whatever ‘it’ means. Sustainability even has its dark side: “green washing”—that is, focusing more on communicating your green efforts than on the efforts themselves.

However this apparent inoffensiveness or dark side should not obscure the radical changes that have been taking place for the last decades in the relationships between the different actors within society: companies, consumers, governments, NGO’s, judges. To summarize it, we have evolved from regulation by the state to co-regulation. Co-regulation, even if it is not always explicit, tends to gradually shift more social responsibilities on companies, whether they like it or not. They are even expected to do it in good faith: doing it only to have a good image and reputation is no longer enough. As some companies, such as Nike, have experienced it at their perils, instrumentalizing “ethics” can have dire consequences. For good or for worse, co-regulation is gradually but radically redefining the rules of the game and the role of companies in society.

The slide on the next page sketches how the regulatory innovation process of the last decades in a globalized economy.

Laurent Ledoux 10

The current crisis, which unfolds at multiple2 levels, is somehow speeding up the ripening of this process, awakening brutally many managers to the new reality.

In some cases, this might paradoxically take the form of a retreat from the most glittering CSR project. As firms grapple with a brutal economic downturn, some companies (such as BP) start to show their true colors by pulling out of ethical or CSR programs to save money. Indeed, for many companies, sustainability will take on a new prioritary meaning in 2009: staying in business. But this apparent retreat by some is not too bad. It might even be considered salutary since there was so much complacency and green washing going on. The retreat by some might help to discern better who is serious about it and what it could mean if done seriously.

Yet it would be wrong for companies to conclude that they can forget about trying to be good. The changes brought about by co-regulation are there to stay. The forces that have pushed companies to fret about sustainability—the scrutiny from the internet, multiplying lobby groups, popular concern about global warming, the threat of lawsuits for misbehavior on human rights—are not about to disappear. The preliminary results of the “CSR stress-test” generated by the crisis are encouraging and validate Gartner’s prediction in 2007: "By 2009, corporate social responsibility (CSR) will be a higher board- and executive-level priority than regulatory compliance. Regulation has become a key issue for government and the corporate world, with the aim of ensuring more-responsible behavior. However, the need for companies to be socially responsible to their employees, customers and shareholders is growing as well. The future will see corporate boards and executives make this social dynamic a more-critical priority."

Several factors can explain why:1. Consumer interest in companies’ sustainability credentials remains strong in spite of the

recession, as surveys show3: consumers’ consciences have “not been put on hold as the explosive growth of SRI.

2. The same goes for employees. For the last years, many firms have spent a great deal of time getting staff involved in sustainability. Any backsliding would probably damage morale and a firm’s chances of recruiting future stars. Surveys show that the desire of potential recruits to work for companies with “values” is unlikely to vanish. It is rather on the rise. In the competition for the best business-school

3 Even if the climate challenge is becoming dangerously obvious to all, most of us are still not ready to adapt their lives to meet it. Consumers, NGO’s, … are also often schizophrenic wanting companies to be more “virtuous” but not ready to pay the price for it

Laurent Ledoux 11

graduates and other high-flyers, especially once the economy starts to recover, companies that show that they are not mere fair-weather friends of sustainability will be at an advantage4.

3. There is an urgent need to restore confidence in business. Surveys5 show that global faith in business is at a 10-year low, with 62% of people worldwide trusting companies less today than they did a year ago, and 77% refusing to buy from companies they distrust. Surveys confirm that it is going to be harder to rebuild our economies because no institution has captured the trust that business has lost. All this is happening while, of the world’s 100 largest economic entities, more than 65 are corporations 6, not countries. Great power creates great expectations of course. The financial crisis in particular has highlighted the flaws of the current business models in the financial services industry, and the enormous extent to which public trust has been damaged. To regain that trust, the financial services industry will have to revisit its role in society and deliver updated business models that meet their customers' expectations of open, transparent businesses that demonstrably deliver value to society.

4. If companies are not seen to take their social responsibility seriously, governments will intervene to change the rules by which they operate. They are doing so already. After rescuing the financial system, many Western governments imagine, for good or for worse, that they are the best judges of how to run businesses responsibly.

5. Last but not least, the shock provoked by the crisis is helping managers of large companies recognize at last that they are not operating in a vacuum7 and that they need to build social issues into strategy in a way, which reflects their actual business importance. In fact, we might witness today the end of a great, long-running debate about business's role in society which opposed for decades those who argued that the “business of business is business” (to borrow Milton Friedman's phrase) and the proponents of CSR. The first argue that the sole legitimate purpose of business is to create shareholder value and therefore that the social issues are peripheral to the challenges of corporate management. The latter, on the other hand, commonly advocate “stakeholder dialogue”, “social and environmental reports” and corporate policies on ethical issues, an approach often too limited, too defensive and too disconnected from corporate strategy. This debate has been rather sterile so far because both perspectives obscured in different ways the significance of social issues to business success8 and reversely the contribution of business to social welfare. As Stephen Green, Chairman of HSBC recently remarked9, “they committed the besetting sin of compartmentalizing our work lives from our other social activities”. They pitted business against society as if their interests were naturally opposed or divergent. Today, on the contrary, many managers start to really understand, beyond the former CSR rhetoric, that they need to articulate business's social contribution and define its ultimate purpose in a way that has more subtlety than “the business of business is business” worldview and that is less defensive than most current CSR approaches.10 If that recognition is unlikely to turn all managers in ethical wonks, it might at least make them more conscious of their companies’ role in society and that is already a lot. What’s more, it becomes more and more apparent, even it is still relatively rare, that some firms really do seem to have found ways of making the world better while making money at the same time11. Many others are starting to notice.

That last point, that CSR/Sustainability can create business value, might explain by itself why CSR/Sustainability is there to stay and is likely to become more important than ever, albeit in a different form. But, if that is the case, why is it that so few companies that have engaged in expensive CSR programs have succeeded in making it a competitive advantage? Why is it that studies still struggle to find a positive correlation between companies’ CSR and ethical activism and their stock value or ROE? 12 The main reason can be summarized in one word: fear.

Indeed, too often, the greatest driver behind CSR programs is ‘fear’, with the emphasis on avoiding trouble rather than looking for opportunities. As a result, CSR is associated with the business discipline of risk management, in which the objective is the avoidance of potential hazards and reduction of potential threats, and with the discipline of “spin”: lately many corporations have been busy repackaging their behavior as CSR and appointing their spin masters as Directors of CSR.

The consequence is that business leaders are being conditioned to regard CSR as synonymous with cost, burden, obligation and duty rather than associate it with possibilities of market growth, product or service differentiation and new business opportunities. Typically, CSR officers have little contact with business lines and produce reports that nobody cares to read, except NGO’s and other CSR officers. Consequently, CSR adds further layers of bureaucracy and is too often a ‘bolt-on’ to business operations rather than ‘built-in’ to business strategy, resulting in CSR becoming a distraction and hindrance to business purpose and objectives, rather than a help. According to Michael Porter13, despite a surge of interest in CSR, in most cases it remains “too unfocused, too shotgun, too many supporting someone's pet project with no real connection to the business”14.

Therefore, what some businesses are sometimes painfully starting to realize is this: done badly, CSR is often just a fig leaf and can be positively harmful. Done well, though, it is not some separate activity

Laurent Ledoux 12

that companies do on the side, a corner of corporate life reserved for virtue or ethics: it is just good business. So much so that some financial analysts are starting to think that looking at the quality of a company's CSR policy may be a useful pointer to the quality of its management more generally, to its capacity to think imaginatively about the risks and opportunities they face.

Therefore, the conversation about CSR is not anymore whether companies should do it or not, whether it is brings value or not. What remains is “What specifically, and how?'”. In a 2007 article in The Economist, McKinsey’s former CEO, Ian Davis, summarized the three main strands for a possible new effective approach of business towards CSR/CSO:1. Introduce explicit processes to make sure that social issues and emerging social forces are

discussed at the companies’ highest levels as part of overall strategic planning. This means: Executive managers must educate and engage their boards of directors; They need to develop broad metrics or summaries that usefully describe the relevant social and

environmental issues, in much the same way that most firms analyze customer trends today; Companies need to think of CSR in the way most appropriate to each firm’s strategy instead of the

generic ways imposed by CSR activists external to the company. Overall this means integrating CSR not only into operations but also and primarily into business strategy.

2. Acknowledge and actively manage the implicit contract between big business and society, or indeed between whole economic sectors and society. The activities undertaken by business bring clearly social benefits as well as costs. Similarly, in return for the ability to function, businesses are subject to rules and constraints. At times the contract can come under obvious strain. This requires companies not just to understand their individual “contracts”, but also to actively manage them. To do this they can choose from a range of potential tactics such as: More transparent reporting; Shifts in R&D or asset reorganization to capture expected future opportunities or to shed perceived

liabilities; Changes in regulatory approach; In addition, at an industry level, development and deployment of voluntary standards of behavior. There is scope for much more activity, provided it is aligned with corporate strategic goals. As noted above, an important point is that companies will have quite different tactical responses depending on their circumstances, so off-the-shelf, or simply nice-sounding, solutions may not always be appropriate. Transparency offers a good example. It is easy, but wrong, to say that there can never be enough of it. What might be good for a pharmaceutical firm trying to restore consumers' trust could be damaging for a hedge-fund manager.

3. Shape the debates on social issues much more consciously. This means for top managers: As a starting point, articulating publicly the purpose of their business in less dry terms than

shareholder value. Shareholder value should continue to be seen as the critical measure of business success. However, it may be more accurate, more motivating—and indeed more beneficial to shareholder value over the long-term—to describe business's ultimate purpose as the efficient provision of goods and services that society wants. This is a hugely valuable, even noble, purpose. It is the fundamental basis of the contract between business and society, and forms the basis of most people's real interactions with business. CEOs could point out that profits should not be seen as an end in themselves, but rather as a signal from society that their company is succeeding in its mission of providing something people want—and doing it in a way that uses resources efficiently relative to other possible uses. From this perspective, shareholder-value creation or profits are the measure, and the reward, of success in delivering to society the more fundamental business purpose. The measures and rewards reflect the predominant values of the relevant society. By moving away from a rigid linguistic focus on shareholder value, big business can also make clear to a broad audience that it understands the trade-offs that are inherent in its social contract. The debate between business and society is essentially one over the management of, and agreement over, those trade-offs;

Becoming much more actively involved in external debates and in the media on social issues that shape their business context. As we just saw, this should be eased by the more inspiring, provided it is earnest, articulation of their business purpose;

Establishing ever higher standards of integrity and transparency within their own companies.

More specifically, and in line with the general observation we have discussed so far, a sustainable strategy is, among other things, about: Trying to understand how environmental, social governance and ethical issues are affecting some of the

risks that we write as an organization, whether that is the investments we make or the lending we do. Unfortunately, short-term thinking is now endemic to business strategy;

Balancing economic interests with communities’ social aspirations and minimizing environmental impacts: it is about hard choices, trade-offs and political objectives; there are no absolutes;

Laurent Ledoux 13

Understanding how the principles of sustainable development relate directly to our operations, something too few managers in our business lines are used to doing: this is not for corporate affairs; involvement in sustainable development as just “good for reputation” is not enough;

Developing in-house systems to ensure effective compliance of the international policies (such as the Equator Principles) we signed to;

Understanding the impacts of the industry of our clients and what they must in turn do to mitigate these impacts;

Contributing to making sustainable development happen while ensuring a decent long-term return for shareholders.

Let’s take the example of the banking sector: sSustainable banking has been developing for decades, but it has accelerated rapidly as the financial crisis has taken hold as the recent growth of “sustainability driven-banks such as Triodos show. That Triodos has been able to side step the worst impact of the crisis and prosper despite it, is not a matter of luck. Its example should not be disregarded on the basis that the bank is still so small. As the core of its banking, Triodos finances sustainable businesses delivering clear social, environmental or cultural benefits. As such, it is directly connected to the real economy, only financing businesses and projects that provide services and products that people need. In essence, Triodos offers basic banking. A decent albeit low profit compared to mainstream banks, a strong capital base (15% BIS-ratio) and a stable funding base from savers’ deposits are integral parts of their business approach15.

The exact concept of sustainable banking will evolve over time, responding to experiences gained and to global developments. As we can deduce from Ian Davis’ recommendations, all banks aiming to walk this road will need a combination of brave leadership, long term planning, ambitious policy frameworks, innovative product and process development, effective implementation across the bank’s organization and adequate transparency and accountability procedures. But what is perhaps even more important will be a readiness to question the assumptions on which a bank’s business strategy rests. We should accept the fact that there is an overall business case for sustainable banking, but not all the time, not everywhere. Next to the business case there is also a moral case. In the short term, being truly sustainable sometimes requires making hard choices, foregoing tempting short-term business opportunities.

So, are we unavoidably heading towards “sustainable banking”? In the long term, yes, definitely. But that does not mean we will necessarily get “there” without additional hick-ups. The once-in-a-lifetime opportunity we referred to above could be short-lived. By no means have all bank managers have seen the light yet. The speed at which some banks, recently saved by their respective states, want to reimburse them, is a possible sign that some want to go back to their old habits as quickly as possible. The fact that consumers in some countries might already have a better image of their banks again, as a recent study by Eurogroup Consulting & Ifop just showed, might also give some the wrong signals.16

One should never waste a good crisis, they say. The crisis has showed the banking sector that the world is changing. Will the banking sector get it this time and act accordingly?

15 In the same vein, a recent survey by Co-operative Group’s investment arm found that 18 % more UK investors plan to invest in ethical funds this year than last year. Inflows into ethical funds outpaced outflows throughout the financial crisis, a stark contrast with other retail funds. The financial crisis appears to have encouraged investors to think not only about how much money they make, but also importantly, how it is made.

“Keep the balance steady. Kwaliteitsvergelijking duurzaamheidverslagen 2007”. Ernst & Young

16 Return to the “old fashioned” banking services, more local and less sophisticated.

Laurent Ledoux 14

4. Now is the ideal moment to catch up

As already explained, a “sustainable strategy” should not be pursued out of ethical or moral beliefs only. Plainly, companies need to do it because, in the end, they just can’t avoid it. The “co-regulation system” that is now more and more prevalent won’t let companies off the hook. As we have seen, properly done, a sustainable strategy should also, at least in the long term, lead to the creation of shareholder value , through a series of ways17 which are highlighted by McKinsey’s latest survey on CSR. We will note in particular that, regarding growth opportunities opened by CSR, investors are more sanguine than CSR officials.

The sum of these arguments should be weighty enough to convince us of the business case18 for a more forceful and pro-active approach to a sustainable strategy, even if the road ahead won’t necessarily be easy.

17 To this we should also add a too often forgotten element: “Contributing indirectly to the avoidance of nationalist retrievals (the unraveling of globalization would hurt enormously the banking sector)”. This point is forcefully argued by HSBC’s Stephen Green in his book “Good value”.

Green, S. Good Value: Reflections on Money, Morality and an uncertain world.

Laurent Ledoux 15

Endnotes to appendix 1-6

Laurent Ledoux 16

Laurent Ledoux 17

Laurent Ledoux 18

Laurent Ledoux 19