Moral leadership – the foundation of prosperity

The renowned economist Jeffrey Sachs pinpointed the foundations of a prosperous economy in a recent article. He states: [1]

His post celebrated the life of the late Václav Havel, the Czech playright, who spoke out against the communist regime. His determination to speak out against the suppression of human rights by the communist government saw him imprisoned on multiple occasions. On the collapse of the communist regime, the new Federal Assembly unanimously voted him President of Czechoslovakia.

What is the connection with engagement? Among Václav Havel’s writings is the essay The Power of the Powerless where he decries those societies who force their citizens to “live within a lie”. He was a strong advocate for people having a voice. Moral leadership is about seeking the best interests of the community rather than pursuing a personal agenda. Being imprisoned for speaking out for others is strong evidence of moral leadership.

Corporations have the potential to be as oppressive as a corrupt state if they choose to pursue only their self-interest – and there is plenty of evidence of this (for example, the Enron story). Fortunately, there is a change of consciousness happening as corporates are wising up to the reality of a hot, flat and crowded world and the folly of a myopic short-term focus on profit. Whatever the motive, be it a crucible-forged awakening, altruism or enlightened self-interest, forward thinking corporates are manifesting moral leadership.

Sustainability is inextricably linked to concern for a broad range of stakeholders. To identify and honour stakeholder aspirations requires engagement and a willingness to hear their diverse voices. According to Jeffrey Sachs:

Without restoring an ethos of social responsibility, there can be no meaningful and sustained economic recovery. [2]

So thank you Václav Havel and thank you Jeffry Sachs for being two more voices pointing to a better way to work and live together on planet earth.

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Engagement and the value chain

A quiet revolution is underway that is transforming business practice. For years we talked about the supply chain. Companies can do good and enhance profitability by converting their supply chains to value chains. To keep it really simple, I believe the key difference between these chains is that various parts of the supply chain seek to extract value creating winners and losers. The various stakeholders in the value chain seek to create value, and ideally, create shared value.

The graphic below contrasts the supply chain and the value chain. It deliberately polarises the two concepts to illustrate how the value chain can transform business. If you want a deeper understanding of the value chain, try Bob Willard’s blog. I am going to focus on giving some diverse examples to illustrate the how a value chain ethos can transform business and create multiple benefits.

Supply chain – parks and reserves

Going back two or three decades, most city councils in my country (New Zealand) had in-house parks and reserves departments. As financial reforms swept through the country, this function was contracted out. In the first years, the councils had a number of suppliers, but over time, using their power in the relationship, the contractors were encouraged to “sharpen their pencils” when tendering for contracts. While this was good for the ratepayers, as it drove down costs and the training infrastructure embodied in the old system was severely damaged. Now in a user pays age, staff employed by contractors, have to pay for their own training if they want qualifications.

The supply chain and value chain in gold

Here is an extract from Harriet Lamb’s Fighting the Banana Wars and Other Fair Trade Battles (page 170 – 171).

The most vulnerable people mining gold are getting ripped off, they earn absolutely nothing – and so work in the most appalling conditions…. the men go deep underground hacking out the ore. Kids as young as six then stands on a huge granite rock rolling it over the ore mixed with water and mercury, which gradually absorbs the gold.

 

Then these kids scoop it up with their bare hands into cut off plastic bottles and take it to their homes. There, on their kitchen stoves they evaporate the mercury, so releasing poisonous gasses, to leave the gold.

Mercury is incredibly toxic – just small amounts will kill over time. I imagine these children have to work, because their parents are busy doing the heavy work extracting the ore, and the financial returns are so poor. Do you think these people know that the price of gold has gone through the roof – probably not. I imagine that some of this gold goes to gold plating in the mansions of the opulent, or for rapper “bling”. These consumers would have no idea of the suffering they are complicit in (is that too harsh?).

The Fairtrade movement seeks to extract miners from the supply chain and embed them in a value chain. A major difference will be that those making the purchase will know the good that their purchase creates. Here is a video telling the story of Fairtrade and Fairmined gold. Note the children grinding the ore.

Walmart’s value chains

Earlier blogs have identified how Walmart is created shared value in supplier relationships with companies such as Peterbilt. The massive trucks Peterbilt sells to Walmart are at the heart of their strategy to reduce their emissions 100% by 2015. Peterbilt will benefit both from this long-term relationship with Walmart, and in creating technology to make their vehicles more environmentally friendly – probably opening up other markets.

Another value chain strategy is Walmart’s intention to reduce sugar and sodium content and eliminate transfats from the foods they sell. As they supply 25% of the food in the U.S., they benefit the consumer and the wider community by, hopefully reducing the burden on the health system. Here is Daniel Goleman commenting on the Walmart value chain.

Here are just three examples of the supply and value chain. Feel free to comment and add further examples.

image credit: http://www.officialpsds.com/Pac-Gold-Bling-Gun-PSD50321.html 

Stakeholder engagement pays!

This blog positions stakeholder engagement at the leading edge of sustainability and also, as a core process underpinning a superior business model is transforming older, extractive and exploitative models. However, it is also great to have evidence that stakeholder engagement supports financial sustainability in addition to environmental and social sustainability.

Witold Henisz led a major Wharton School research project to deliver such evidence summarised in Spinning Gold: The Financial Returns to External Stakeholder Engagement. Here is the abstract from their document:

We provide direct empirical evidence in support of instrumental stakeholder theory‘s argument that increasing cooperation and reducing conflict with stakeholders enhances the financial valuation of a firm holding constant the objective valuation of the physical assets under its control. We undertake this analysis using panel data on 26 gold mines owned by 19 publicly traded firms over the period 1993-2008. We code over 50,000 stakeholder events from media reports to develop an index of the degree of stakeholder cooperation or conflict for these mines. By incorporating this index in a market capitalization analysis, we reduce the discount placed by financial markets on the net present value of the gold controlled by these firms from 72 to between 33 and 12 percent.

My (limited) understanding is that the reduction in net present value is increased significantly when stakeholder co-operation is low and stakeholder conflict is high. Here is a video explanation of net present value.

Apart from the great result, what impresses here is the size of the study and the stunningly positive result for stakeholder engagement. Notable too, is the assertion that mining companies that were once known for a myopic short-term view, are now “global leaders in the implementation of stakeholder engagement”.  A participant in the research commented:

It used to be the case that the value of a gold mine was based on three variables: the amount of gold in the ground, the cost of extraction, and the world price of gold. Today, I can show you two mines identical on these three variables that differ in their valuation by an order of magnitude. Why? Because one has local support and the other doesn‘t. (Yani Roditis, COO Gabriel Resources, interview by authors)

The researchers position the two factors of high stakeholder co-operation and low stakeholder conflict as essential to building the implicit or explicit social license to operate. Investing in positive stakeholder relations builds both social and political capital.

The nature of the research confines analysis of the benefits of stakeholder engagement to financial factors and shareholder value. As such it removes the tension between proponents of shareholder value, such as Milton Friedman and the broader stakeholder theory such as Edward Freeman.

Broader stakeholder benefits

In addition to the financial benefits of effective stakeholder engagement, there are other less tangible and quantifiable benefits. As more businesses learn to take a less extractive stance and engage more, the benefits of greater social capital compound. Trust is built and fractured communities develop more cohesion. If the ethos of external engagement of these mining companies becomes culturally embedded throughout the organisation, local people employed in mining operations, should also benefit from a more engaging workplace. Ideally these cultural practices become more manifest and normalised in worker’s families and the wider community. How is this quantified?

This landmark research in sustainability provides much-needed hard data to demonstrate the benefits of stakeholder engagement. One disappointment is the title – associating the PR metaphor of “spin” is unfortunate, as effective stakeholder engagement is the antithesis of spin. Ideally engagement is based on authentic and transparent communication rather than the more manipulative intention of spin. But hats off to Witold Henisz and his team for a superb research contribution.