Know Your Stakeholders and Innovate
MEASURING THE CORPORATE IMPACT ON COMMUNITIES AND EMPLOYEES IS PART OF A COMPANY'S INNOVATION PROCESS. STARTING FROM THIS, SARAH KAPLAN WITH 360 CORPORATION OFFERS CEO AND MANAGER A GUIDE TO NAVIGATE AMONG THE INEVITABLE COMPROMISES THAT EACH DECISION ENTAILS. AND TO TURN THEM INTO STRATEGIC OPPORTUNITIES. ON NOVEMBER 13 SHE WILL BE PROTAGONIST OF BUILD BACK BETTER', ONE OF THE EVENTS OF THE 2020 INITIATIVES OF BOCCONI4BOOKCITYBusinesses are under increasing pressure from regulators and investors to deal with their impact on the environment, employees and consumers. “The 360° Corporation” by Sarah Kaplan is a realistic guide for CEOs to identify and navigate these often seemingly intractable trade-offs between creating value for stakeholders and shareholders, going beyond “win-win” thinking to turn these complex situations into strategic opportunities.
Your book is a guide for managers to better understand and deal with the trade-offs that necessarily arise when balancing the needs of different stakeholders. What is the message of “360° Corporation?”
Companies often don’t see how their operations are creating trade-offs that affect their social impact as well as their bottom line. My first message is that companies should be developing mechanisms and procedures for understanding the trade-offs that are created in their business. Once they understand this, the second message is: they have an opportunity to innovate in ways that take care of other stakeholders besides the shareholder.
The book grows out of your course at the University of Toronto’s Rotman School of Management and your observation that business schools study companies as series of disciplines. What is the disadvantage of this approach?
On some level, it does make sense for business schools to teach using different disciplinary areas like finance and strategy and accounting, because there is expertise and specialist knowledge that is useful. But this siloed approach means that students can lose the ability to understand a company’s broader social impact on employees, the community, the environment and others who might be affected by its operations. What I hoped to accomplish by creating the course and writing the book is to get people to understand how interconnected every decision is, and that you are always making trade-offs when you make decisions. For example, when Amazon offers same-day or next-day delivery of products, it’s great for consumers, great for Amazon, but not so great for the delivery people, the warehouse workers, or road congestion and pollution in cites.
Let’s take a step back to look at understanding stakeholder needs. Companies carry out dialogue with stakeholders, they do a matrix, and they put it in their sustainability report. Any ideas guidelines or tips on how to make this listening process better? What should they do with the feedback?
More and more companies are either required to produce sustainability reports by law, or there is a lot of social pressure to do so. These reports are a productive exercise for companies to measure their impact and consult stakeholders. But if all they do is write a sustainability report, and don’t actually do anything about it, it is a waste of energy. The more productive way to operate is to treat that efforts to understand stakeholders and measure impact as part of an innovation process. If you take that information and embed it in innovative activities, you could try to solve some of the challenges that the stakeholder listening process has highlighted. The most powerful innovations can occur when you are working with (not only for) your stakeholders to come up with new solutions.
ESG issues have come into the forefront in 2020 as a leading priority for shareholders and management. Everyone agrees we need to act, but progress is slow. What are the main obstacles for companies and what can managers do about them?
We have to keep in mind that corporations are tools to get things done. One challenge is that most managers get so obsessed with the bottom-line process that they forget that the organization can be mobilized to accomplish other things in society. Another obstacle is that these challenges are simply very hard. Many companies look at dealing with climate change or diversity or sustainability as an “add-on”. What I am trying to say is that these challenges have to be integrated into your day-to-day business. If you think about them as central to what you do, you will come up with more transformational ideas than if you treat them as an add-on.
Let’s talk about the four modes that you lay out to help managers deal with trade-offs between stakeholders and become 360° corporations. The first one is to know their trade-offs. I imagine many managers think they already know them. Is that true?
Managers may think they are nailing this, but my observation is that very few are. They often think about this question very narrowly, as only about strategic trade-offs such as whether to invest in marketing or R&D. But they may not have thought rigorously enough about the trade-offs that are created across the wide variety of stakeholders they have. I suggest in the book that leaders can do this both from the inside out, and outside in. The inside-out process is the internal analyses that are often done as part of producing sustainability reports. The outside-in process is sometimes emotionally harder. The example I give is Walmart. When they decided to pay more attention to social issues that came after hurricane Katrina, one of the first things they did was to bring in some of the environmental activists who had been the most critical to talk to the CEO. This was an outside-in process where the company consulted with and worked with its harshest critics.
The second mode is creating a win-win business case to meet stakeholder needs. You say that this approach is sometimes no longer sufficient for companies in the 21st century. Why is that?
One of the things that has really motivated companies over the past decade or so is the notion of shared value, or win-wins. But following this idea means that companies only do things that are good for stakeholders if it also is good for the bottom line and has a business case associated with it. That’s the source of the whole conversation around, say, the business case for diversity. I argue that most of the things that people do in a shared value framework are incremental and not radical or transformational. If you only go after win-win, if you always have to have a business case before you do anything, you will miss out on the opportunity to do something that is truly transformational.
So this is “the trap of the business case.” How can companies get beyond this model?
My argument is not that there isn’t eventually a business case to be had when innovating around trade-offs. But, often, you just have to invest and see where it comes out. That’s very similar to the way companies think about R&D investing. They can have a broad sense of the potential areas or domains they are pursuing, but you don’t always know what the outcome will be. You have to accept the uncertainty. You have to accept that if you are doing something big, you won’t really know what the outcome is going to be. You will be iterating along the way to get to something good for your business.
The third mode addresses what happens when the trade-off requires companies to rethink their business models. Do you have any suggestions to make it easier?My first suggestion is to frame it as an innovation challenge. Put your best and brightest on this as you would with any other innovation challenge. Instead of a compliance mindset, create an innovation mindset around these challenges. Even with innovation, we know that organizations naturally resist change. So, we have to think of this also as requiring change management competencies. Understand that doing this will require the same skills that any major transformational change in an organization will require.
The fourth is about thriving and prospering, even if these trade-offs don’t get resolved, and there are no easy fixes to the business model. Can you give any advice or pointers on how to do this?
One thing I observed in talking to managers and also in my research is the temptation to say “we just can’t deal with that, there is no way to resolve that tradeoff,” and then put it to the side. This is precisely the moment when you should be doubling down on those ideas. Take Nike Air shoes, for example. Their signature product turned out to use a terrible greenhouse gas. They didn’t have a solution right away. But instead of giving up, they invested a lot in R&D and in thinking about alternative solutions. They ended up over a period of years in coming up with another gas that they could use to put air in the soles of their shoes. They then had to redesign the shoes to accommodate the new properties of that substitute, and, in fact, it gave them some new product ideas. Nike ended up innovating in the product so that they could actually market this gas in a new way. And that took a number of years for them to do. In other words, leaders should not give up on these seemingly intractable challenges, but instead should use them as opportunities for experimentation.
On November 13 Sarah Kaplan will be protagonist of the event ‘Build back better’, part of the initiatives of Bocconi4bookcity. Talking about corporate innovation together with Kaplan will be the Rector of Bocconi, Gianmario Verona, and Francesco Starace, CEO and General Manager of ENEL.
by Jennifer Clark
