The R-factor when it comes to sustainability

In a recent report from McKinsey on the business value of sustainability, the management consultancy asked nearly 2,000 global business executives several questions related to reputation management. And year after year, global executives report back that enhancing reputation is a top factor as to why companies spend time and resources devoted to sustainable initiatives. Executives also say that reputation has the "highest value-creation potential for their industries over the next five years." That's quite an endorsement of the ROI of reputation management. And when asked what are the activities they do the most to arrive at these reputation-inducing sustainability perceptions, executives mention communicating their sustainability to customers and continuing to build and safeguard relations with stakeholders. This makes sense because if customers and other stakeholders do not know what a company's sustainable practices are, they can only guess or most probably assume they don't exist. On the other hand, I would also assume that sustainability is table stakes for most companies and most consumers expect companies to care about sustainability. Unless they are told otherwise, they would be surprised if a company was not pursuing sustainable activities aggressively. I recall my shock several years ago when Apple received the lowest scores from Climate Counts for its environmental actions and position. That has been reversed in recent years. Bottom line -- it pays to communicate.

Lower on the reputation-building front for having a sustainable image are having company leaders join the external dialogue on environmental, social and economic issues. Understandably, having your CEO take a public stance carries all sorts of risks when it comes to environmental practices, particularly if it is not aligned with your business strategy. Even when it is aligned, CEOs remain cautious because of the scrutiny and spotlight they place themselves under when they are out in front. As they say, risky business. I presume that longer-tenured CEOs have less to risk for taking environmental stands externally because they already have a decent track record for leading a well-managed company and have a bank of credibility built up. 

Despite their reluctance to go hyper-public with their views on sustainability, McKinsey found that more CEOs today versus two years ago consider sustainability a top strategic priority and it is among their top three priorities overall. It is definitely at the top of CEOs' agendas and a solid reputation-builder that drives value.  (Chart from McKinsey report)

CSR through the eyes of CFOs

iFi9LQtu_uFAI often get asked how entrenched CSR/corporate social responsibility is in America. Afterall, CSR activities and behavior are an important driver of reputation. From my travels, I used to think that CSR was more deeply embedded in European company thinking but over the past few years, I've come to think that CSR has taken a greater hold in U.S. companies. Therefore I was particularly interested in hearing how CFOs regard the importance of CSR, the ones who have to sign the checks for embarking on this critical reputation-building initiative. With CSR, once companies start the process, there is no turning back. We gladly saw during the financial collapse of the past few years, that companies did not abandon their CSR efforts. They may not have grown their efforts but they certainly held steady. This speaks to the power of the commitment from the top, including CFOs. A survey by Duke University's Fuqua School of Business and CFO Magazine Global Business among senior finance executives across six continents recently reported that U.S. CFOs regard the importance of CSR to a lesser extent than their global peers. Nearly half rate CSR/sustainability (51%) as important in their business strategies compared to their counterparts in Europe (63%), Asia (67%), LatAm (76%) and Africa (83%). When asked why they engage in CSR activities, the top reasons according to the sample of  U.S. chief financial officers are:

  1. It's the right thing to do (66%)
  2. To improve external reputation, brand or image (61%)
  3. To improve internal good will, employee morale, employee hiring/retention (49%)
  4. In response to legal/regulatory requirements 27%)
  5. To improve cost efficiencies (14%)
  6. It increases customer demand (13%)
  7. Helps drive innovation (11%)
  8. To improve the bottom line (10%)

Interestingly, doing well by doing good and corporate reputation are at the top. CFOs in the U.S. are surely getting CSR religion. They are finally seeing that helping the world is the right thing to do and improves company reputation and also helps drive the best talent your way. I was a bit surprised that CFOs did not realize the growing relationship between what customers are now demanding from companies in the way of sustainable behavior and their own CSR initiatives. As we have repeatedly pointed out at Weber Shandwick, the link between customer expectations of responsible companies and their willingness to buy those companies' products and services is stronger than ever. I am confident, however, that the  interdependence between corporate responsibility and customer purchase decision-making will only grow in the years ahead.

The ongoing Duke University research provides good fodder for realizing that U.S. CFOs have a ways to go in realizing the importance of CSR and how it positively improves the bottom line. That's where the BIG divide exists.

Is reputation the new sustainability?

statementLately I have been wondering if reputation is going the way of sustainability. Years ago, sustainability and corporate social responsibility was on everyone's agendas in corporate American and around the world. It was hard to distinguish what was the difference between corporate social responsibility, corporate responsibility, community development, philantrophy, charitable giving,  sustainability and all the other terms that were increasingly undefined, bundled together and fuzzy around the edges. Today, nearly all companies have CSR reports and it is expected of leading companies. CEOs too agree that CSR is critical to their business. A recent Accenture/UN Global Compact study found that 93% of global CEOs believe that sustainability issues will be critical to the future success of their business and 72% cite “brand, trust and reputation” as one of the top three factors driving them to take action on sustainability issues. Revenue growth and cost reduction are second at 44%. Everywhere you turn, sustainability is on the agenda. All in all, that's a good thing. However, I still think that the terms have been interchangeable and are used indiscriminately except by those really in the know. In a new book I just heard about, The Nature Of The Future: Dispatches From The Socialstructed World by Marina Gorbis, she argues that in the future we may start to see Reputation Statement Accounts just like we get from the bank. But these monthly statements will not inform you of your monetary transactions, but will tell you "how much you’ve earned by contributing to sites such as Wikipedia or Flickr, how many points you’ve earned by providing rankings or ratings on various community sites, or how much social currency you’ve spent by asking someone for advice." We already have these kinds of ratings through Kred and Klout although somewhat different.

Her book also refers to the Whuffie Bank which is a nonprofit built on a new reputation currency that can be redeemed for real and virtual products and services. "The Whuffie Bank issues whuffies based on a reputation algorithm that blends information from different social networks and provides an accurate reflection of people's web reputations. And as the Internet and social networks become a large part of people’s lives, your web influence will become an increasingly accurate reflection of you.” That sure is the truth looking us in the eye.

I am afraid to say that everyone is a reputation expert today. Reputation means so many things that it is getting harder and harder to pin down. And I hope it does not become the new sustainability which has meaning depending on who you are talking to.

On to the future.

Good Question

   Interesting article on what boards talk about when they talk about sustainability.  The interview was in MIT's Sloan Management Review with Christoph Lueneburger, head of Egon Zehnder's sustainability practice. He tells a wonderful story about something that was said by the founder of Patagonia that is worth repeating.

"I think Patagonia is a leader. I had a conversation with Rick Ridgeway the other day, who leads sustainability at the company, and he said something fascinating. They were doing their Christmas catalogue, and Rick was down there, looking at the always-beautiful pictures and so forth. And Yvon Chouinard, the founder, says in the meeting, “That’s a nice catalogue, but tell me how it is that we’re not just incenting people to buy more stuff they don’t need?”

As Lueneburger says, Patagonia is not saying that its all about growth but instead saying, “It is not growth that will ensure our sustainability, but values.” Yes, Patagonia is exceptional and privately-held but this is where the intersection between value and values happens in the right way.

Boosting Brand Reputation

MIT Sloan Management Review and Boston Consulting just launched a new study that found that nearly 7 in 10 companies intend to accelerate their investment in sustainability this year. The global survey among 3,100 corporate leaders also found that improved brand reputation is the biggest benefit of addressing sustainability....nearly 50% agree that this is true.  Brand reputation seems to be the bottom line these days.

CEO Fibs, Sustainability and Tiredness

 A few interesting reputationally-related items crossed my desk or should I say my network. First, David Larcker and Antastasia Zakolyukina of Stanford University analyzed 30,000 conference calls between 2003 and 2007 to determine if the Q & A period offered clues to when CEOs are being deceptive. They reviewed financial restatements to determine whether CEOs or CFOs were misleading or being untruthful.  The researchers believe that these top execs know if they are manipulating results and clues can be uncovered in their spontaneous comments in the Q&A session. They based their findings on "deception detection research" -- a field I had not heard of!  Who would have known. The findings are relevant to those of us in the communications business since it is all about words. It is hard not to recall former CEO of Enron Jeff Skilling cursing on the phone during an investor call near the end. Cursing is probably another telltale sign. So what are the cues they found in this robustly-researched undertaking?  The Economist summed it up best so will borrow their words: 

"Deceptive bosses, it transpires, tend to make more references to general knowledge (“as you know…”), and refer less to shareholder value (perhaps to minimise the risk of a lawsuit, the authors hypothesise). They also use fewer “non-extreme positive emotion words”. That is, instead of describing something as “good”, they call it “fantastic”. The aim is to “sound more persuasive” while talking horsefeathers. When they are lying, bosses avoid the word “I”, opting instead for the third person. They use fewer “hesitation words”, such as “um” and “er”, suggesting that they may have been coached in their deception."

Congrats to David Larcker who I met a few years back when I was researching the impact of CEO reputation on corporate reputation. David was at Wharton and he was able to help me demonstrate that it was indeed impactful.

Second, I just browsed a  report that came across my desk from MIT Sloan Management Review on The Business of Sustainability which was conducted by Boston Consulting Group (BCG). It is their first annual study and provides some very interesting results among 1500 global corporate executives. Overall they found that 92% of this executive class believes their companies are addressing sustainability issues now and less than 25% reported that their companies have reduced their commitment during these tough economic times. Reputation-wise, these executives said that the greatest benefit to company sustainability commitment was "improved company or brand image."  This benefit far exceeded other pluses such as cost savings, competitive advantage, employee satisfaction, etc.

Third, this funny subject line came through on my email at work.  "Why do business executives feel doubtful, even tired?" It just struck a chord with me. I think it describes most people I work with these days....isn't everyone in business tired? My favorite question to ask people I meet is how many hours do you work on the weekend? I am always trying to place myself on a spectrum of weekends spent working. So far, I have not figured out how people turn it off.

It is Coming in 2015

  Accenture just completed an impressive research study among global CEOs and other influentials around the world for the UN Global Compact Leaders Summit in 2010.  They say that it is the largest survey ever among CEOs on sustainability. Some of the key findings are worth thinking about as sustainability defines the corporate reputation landscape in a few short years to come: 1. Brand/trust/reputation is the strongest reason why CEOs say they are taking action on sustainability (72% say so). The next best reason lags fairly far behind at 44% --  potential for revenue growth and cost reduction. Reputation seems to be behind the motivation for many CEO and corporate actions these days.

2. CEOs recognize that the consumer is the most influential stakeholder on the issues of sustainability in the years ahead -- 58% of CEOs say so and it is a perception that ranks even higher than employees (45%).  They believe that consumers are King despite the mixed evidence on whether consumers are demanding products that are sustainability-true (a word I just made up).

3. Collaboration is critical to the sustainability movement.  Here I have to agree since I am seeing a greater focus among clients on partnerships and coalitions in all areas, including CSR. As Accenture writes, "...global challenges are too broad and too complex to go it alone." Multi-stakeholder partnerships are the new trend in corporate reputation building.

4. One of the more significant findings was that 81% of CEOs say that sustainability is now embedded into the strategy and operations of their companies -- a big jump from 50 percent three years ago.  New to me was that sustainability is being built into executive compensation packages today.

5. CEOs believe that by 2015, sustainability will be fully integrated into company footprints. A large 80% believe that by then, this dynamic will be commonplace. That is not far away and it is about time. I was telling someone who interviewed me recently that although 2015 feels as if it is upon us, the truth is that this has been a long way coming. I recall back in 1990 when I first learned more about the Fortune Most Admired Companies survey how surprised I was that environmental/social responsibility was so low on the totem pole of reputation drivers. I thought there had to be a mistake. But that is what it was then. All in all, it has been a long progression to get to 2015.

More Responsible, Better Off

  Corporate responsibility is an integral component of reputation.  Even more so than ever because it matters to so many stakeholders – employees, customers, government, prospective talent, academics, media, bloggers and NGOs.  I think it might even matter to the financial community although perhaps to a lesser degree.  However, analysts have noticed its importance as we have seen with the proliferation of socially responsible investing funds.

In 2008, Weber Shandwick's Planet 2050 corporate responsibility and sustainability practice conducted a proprietary analysis that demonstrated the rising prominence of corporate responsibility on leadership agendas. Corporate responsibility mentions in global Fortune 100 annual report CEO Letters to Shareholders increased 18 percent from 2003 to 2007. In 2007, energy efficiency and carbon emissions were the dominant corporate responsibility agenda initiatives addressed in Global 100 CEO Letters to Shareholders. These topics barely figured in CEO annual report Letter mentions in 2003. To a lesser extent, but still noteworthy, leaders in 2007 highlighted their eco-friendly products—such as hybrid cars and healthy food products—in their Letters to Shareholders. Volunteerism, a topic featured in 2003 CEO annual report Letters, appeared less frequently in 2007.

As business leaders seemed to increasingly  commit  to corporate responsibility initiatives prior to the economic meltdown, we thought we’d look into whether such efforts helped soften the financial blow of the stock market collapse in 2008.

Using the 2008 Fortune Most Accountable Companies list as the measure of corporate commitment to social and environmental goals, Weber Shandwick explored the relationship between accountability  and stock price performance within the Fortune Global 100. The Accountability Rating was first developed by AccountAbility and Csrnetwork and designed with Asset4.  Since nearly every company on this list experienced a share price decline during 2008, the analysis focused on the average percentage change of closing prices on December 31, 2007 and December 31, 2008. It was of particular interest that 9 out of the top 10 most accountable companies were European (GE was the only American company).

We found that the top 10 most accountable global companies performed better than the overall global Fortune 500 in terms of share price and profitability.  When compared to the 10 least accountable companies, the most accountable ones performed better. We were a bit surprised by the +1% lift in profitability among the least accountable and discovered that two highly profitable companies – Petronis at #99 and Berkshire Hathaway at #100 – were on the list, therefore driving the 1% increase. Even when we take Berkshire Hathaway out of the group, the difference is not as dramatic as we expected. The nine least accountable companies fell to -3% in terms of profitability. If Petronis and Berkshire Hathaway both come out the eight least accountable companies fall to -16%.

 

Total Global 500

10 Most Accountable

10 Least Accountable

Share price

-43%

-22%

-35%

Profit

+5%

+46%

+1%

 

 

 

 

The analysis shows that even in an unprecedented  year like 2008, the most responsible companies  outperformed their peers. As my fellow colleague and founder of Planet2050 Brendan May said, "It is not surprising that effective and genuine corporate responsibility impacts the bottom line, in good times and bad." Companies cannot afford to abandon their corporate responsibility efforts although it is understandable if progress slows in this economy.  Companies that abandon corporate responsibility and sustainability efforts are proof positive that it was all for show in the first place.