Separating smart from great
Embedding accountability into business practices isn't easy.
(Fortune Magazine) -- How could BP (Charts) and Ford (Charts), two global sustainability icons, have messed up so badly? The British oil company, widely acknowledged for its leadership in advancing public debate on climate change, was responsible earlier this year for the worst oil spill on Alaska's North Slope, and the American automaker, which has been campaigning for greener cars and factories, has seen its market share and profits erode because it hasn't made vehicles relevant to customers in a carbon-costly world.
What these two cases show is that embedding accountability models into the heart of a business is tougher than most of us imagined. Comprehensive accountability - that is, accountability to stakeholders representing social and environmental interests as well as economic ones - requires companies to align their vision, strategies and innovation not only with today's competitive markets but also with the social and environmental conditions that will shape the markets of tomorrow.
Yet notions about how to do this are just the start. They then need to be put into practice, which is what the Accountability Rating seeks to measure.
Ford, while able to imagine the future, got stuck making yesterday's cars. The company's precipitous loss of market share and lack of real leadership in bringing carbon-light vehicles to market demonstrate just how out of touch William Ford Jr.'s vision was with ground-level performance.
Such was the case with the sustainability icons of another era: the overextended and underperforming Ben & Jerry's, now surviving courtesy of Unilever, and the Body Shop, swallowed up by L'Oréal, once its ideological foe.
BP's acquisition strategy during the 1990s took it from being a second-class oil company to a first-class energy company. The "Beyond Petroleum" vision is, undoubtedly, core to its long-term strategy. But BP finds itself struggling with the far tougher execution challenge of integrating its acquisitions and delivering more efficient processes and outcomes.
It's worth keeping these examples in mind when considering such recent converts to sustainability as Wal-Mart's Lee Scott, GE's Jeff Immelt, or Richard Branson, who has pledged to plow $3 billion of Virgin's profits into combating climate change. Certainly these companies have understood that their markets are undergoing fundamental change because of social and environmental factors.
A decade ago topics like climate change, marketing to the bottom of the pyramid or obesity would have drawn blank looks from all but the most prescient of executives. Today no corporate social responsibility report is without mention of one or all of them. But from the examples of BP and Ford we can learn that the initial insight and reconfiguration of strategy is only the beginning.
One clue as to what may increase a company's chances of making its strategic vision operational is contained in this year's Accountability Rating: How companies approach third-party assurance remains a significant differentiator. Companies that score high in this category by taking steps to have independent auditors monitor their performance tend to score higher across the board.
The spread of such practices among the 64 companies in this year's ratings is worth considering more systematically, as it allows one to spot winning and losing characteristics and to group companies into four clusters:
These are companies that remain opaque about their nonfinancial performance and typically score below 15. Given the breadth and depth of the debate on sustainability issues, one may conclude that these companies have decided that more money can be made in the shorter term by ignoring what many - including their competitors - agree are critical drivers of tomorrow's markets.
The most striking example is Berkshire Hathaway (Charts), where the publicly available information doesn't provide even a hint that the company takes into account its social and environmental impacts on stakeholders. Another is PEMEX, the Mexican oil company, which doesn't reflect at all in public on its obvious sustainability issues.
These are companies with an average score of 35 that are cautiously addressing nonfinancial issues by demonstrating accountability to a small number of stakeholder groups such as customers, employees, governments and shareholders. But they are unlikely to be innovators in the development of tomorrow's markets. A good example is Exxon Mobil (Charts), which does not even recognize as legitimate stakeholder representatives the many civil-society organizations that have criticized its behavior.
These are companies showing average scores of about 50 that are repositioning themselves as potential leaders. They are actively engaging with stakeholders, not only for reputation management but also to understand the world around them. They believe stakeholders are an asset and appreciate that getting them to play ball requires embracing their concerns.
But companies in this group often fail to undertake a comprehensive impact assessment. Allianz, for example, is discussing microfinance schemes as part of its contribution to society, as well as the likely implications of climate change on its business. Both are commendable. But at the same time Allianz (Charts) doesn't adequately consider the social and environmental impact of its mainstream products, services and investment decisions.
These are companies scoring 60 or higher that are actively shaping societal expectations regarding their sectors, thereby creating tomorrow's markets and setting themselves up to profit from them. They have understood that to create what IBM chief executive Sam Palmisano has called a "globally integrated enterprise" requires that strategic learning and innovation take place throughout the company. To achieve this, these companies are pioneering new approaches to drive learning and innovation, supported by appropriate governance, systems, structures and incentives.
At Shell, this process is institutionalized at the highest level, with sustainable development being the explicit responsibility of the CEO, who is chairman of the company's sustainable-development committee. This has resulted in a comprehensive consideration of most of the major sustainability issues currently facing Shell's industry. And the importance given to these issues has trickled down in the form of well-developed management systems.
But gaps still remain in the stakeholder-engagement practices of many companies in this group, an area where further development is bound to unlock more potential by creating healthier relationships with key actors shaping the business environment.
Smart companies make a big splash, but great companies develop comprehensive accountability practices to drive sustainable performance. They stumble at times but are more likely to get back on their feet. Identifying the great ones is a competitive sport among management gurus. The Accountability Rating, with its focus on how companies deal with the social and environmental factors that will become embedded in future markets, offers a unique quantitative approach to identifying great companies.
SIMON ZADEK is chief executive of AccountAbility. He can be reached at firstname.lastname@example.org.
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