When transparency reigns, corporations have nowhere to hide.
In June, ExxonMobil, the world's largest oil company, was hit by a lawsuit from the International Labor Rights Fund. The NGO accuses the company of being complicit in genocide, murder and torture because it uses Indonesian military forces to secure its operations in Aech, a region of Indonesia threatening to separate. Exxon has vigorously denied any responsibility, but has temporarily shut down its operations, forfeiting up to 1.66 billion cubic feet a day in natural gas production. On other fronts, Exxon is under pressure to change its approach to climate change. Two resolutions from religious institutional investors to promote investment in renewable resources and tie executive pay to environmental performance were tabled at its recent annual meeting. In Europe, a boycott led by Greenpeace and Friends of the Earth UK is gathering momentum, attracting the support of several European parliamentarians and celebrities protesting Exxon's environmental record.
Corporate leaders around the globe are reinventing their organizations to respond to the intersecting realities of globalization, transparency, instant communications and organized civil society. The networked economy demands deep transformations in business processes across the firm -- from the way firms deal with stakeholders and manage their supply chains, to the way they measure their success and govern their organizations. The urgency of change is being driven by the emergence of a broader corporate bottom line where shareholder returns are based as much on a firm's track record as corporate citizen as they are on solid economic performance. Only one thing is certain: firms that demonstrate vision in embracing new roles and responsibilities will gain public trust and reap rewards in the marketplace.
For a good sense of the direction in which we are headed, we can look to the American response to the horrific events of Sept 11.
In responding to the terrorist attacks, there was an immediate understanding by all sectors of society that behaviour would be judged by a higher standard.
The federal government immediately swung into action. The Federal Emergency Management Agency took charge and coordinated the activities of all federal government departments. Jurisdictional disputes were eliminated. Agencies were instructed to work together to provide the maximum amount of service with the least amount of bureaucracy. Citizens overwhelmed charitable organizations with offers of assistance and donations. People lined up for hours to donate blood.
The private sector responded in the same spirit. President Bush acknowledged the many difficulties companies would have in coping with the disaster, but said "there is more to corporate life than just profit and loss." There were many examples of companies embracing this philosophy. Insurance companies immediately stepped forward and said that even though many insurance policies would preclude payouts in the case of acts of war or terrorism, they would not exercise these loopholes. Companies donated money, goods, services and employees to the recovery project. Banks began to cooperate like never before to assist in tracking down financial transactions related to the terrorists.
This type of response is not unprecedented. We have seen similar behaviour in the US and other countries in times of war or natural disasters such as floods or earthquakes.
In almost every case business as usual was set aside and everyone's behaviour was measured against much tougher metrics. Because of technology and other influences these higher standards and tougher metrics are going to play an increasing role in our economy in general and corporate behaviour in particular. In fact, the rapid response of companies to the September 11 tragedy may signal this change has already begun.
Due to communications technologies, we are working within a much more transparent and inquisitive world. This is changing virtually everyone's behaviour, from consumers, taxpayers, educational institutions, government and corporations.
Conventional wisdom holds there are only two ways to achieve competitive advantage. One is to offer products or services at a lower cost. The second is to offer a good or service that is superior or distinctive from the competition.
Today there is a third path. The values and candor with which your corporation functions will be increasingly judged by consumers, employees, governments and other stakeholders -- and your corporate behaviour will be rewarded or punished in the marketplace.
For starters, stakeholders will want to know how you produce your products. Is your supply chain ethical? Does your corporate strategy exploit flags of convenience by shifting activity to countries with less stringent labour or environmental laws? You will soon have to answer a host of questions going far beyond price and delivery dates.
Today you may resent these questions. Tomorrow you will welcome them. Tomorrow, encouraging scrutiny of your operations will form a large part your success. Moreover, astute companies will work hard to make larger contributions to the community and help shape the values that form the basis of our society and the types of questions consumers will ask.
At a session of the Word Economic Forum in Davos I listened to Minoru Mkaihara, Chairman of Mitsubishi. During his speech he noted:
"Corporations are widely seen to have increased power, but at the same time, the public's knowledge of corporations has been greatly increased by the Internet and NGOs. So we need to ask: how can corporations enter into dialogue with the public, increase transparency of their accounts, deepen discussion with NGOs and develop meaningful corporate codes?"
Almost everyone I talked to after Mkaihara's speech agreed with the idea that technology and networks are propelling us toward a restructured society that demands new attitudes and behaviour from all sectors.
It is increasingly clear that technology is not only changing how we work, but the context within which we all function. This became glaringly clear during the study we just finished of the public sector's role in the new economy.
There are a host of problems with the public sector today. Voter apathy is growing. Voters see the ballot box as irrelevant. They question a system where governments do what they want and seek reaffirmation from the electorate every four years or so.
I think it is fair to say that were we to design government today from scratch we would not put in place the lumbering beast that now exists. We want something more supple, nimble and responsive. We want a government that supports and enables rather than simply constrains or obstructs.
Our program concluded that there is a changing division of labor in society regarding who delivers the value of governance. We studied dozens of new partnerships where governments, civil society and private companies cooperate (made possible through the Internet) to create new value for citizens. This is leading to profound changes in the nature of government and of governance itself.
The corporation is now subject to similar changes. Yesterday was much simpler. The public and private sectors had distinctive roles. Government made the laws and passed the regulations. It created the arena in which the private sector would compete. As long as they stayed within the law, businesses could pretty much do what they wanted. Tomorrow will be far less straightforward.
Let me summarize the powerful drivers of change which are buffeting corporations today, and then I will speak in detail on a couple of them.
-- Transparency: If you're going to have children working in sweat shops, everyone will know about it. The "out of sight, out of mind" approach to low-cost offshore production is dead. Firms and their supply-chains have a global audience. In fact as companies build new networked business models -- business webs -- their suppliers and partners are, in a sense, part of their enterprise. New technologies enable fast dissemination of information by customers and civil society organizations. They also place, at the fingertips of hundreds of millions of people, the most powerful tool for organizing ever.
-- Public relations and mass communications have become inadequate tools for the digital age. The Internet makes information abundant, empowers citizens and communities of interest and provides a robust medium through which firms can engage their stakeholders. Shell can say it's a green company until the cows come home, but if it isn't everyone will know. This is particularly true of the new generation of Net-savvy youngsters (the Net Generation) that have grown up interacting and authenticating rather than being the passive recipients of broadcast television.
-- Brand vulnerability: As a result of this, Internet-enabled activism is having an impact on corporate decision-making and inducing firms to make substantial changes in business practices to maintain shareholder value.
-- The global environment has become complex. Firms need political and social smarts and a global perspective to navigate and shape an increasingly challenging global landscape and regulatory environment. There is a global economy with powerful global corporations, yet no corresponding institutions of governance. This leaves a vast gap on the global scale. The civil society is stepping in to fill the gap, organizing powerful lobby movements. Companies now need to do the same.
-- This is leading to new political imperatives. Firms will take on new political responsibilities and policy-making roles as traditional government institutions lose the capacity to deal with global issues.
-- Emerging markets pose difficult challenges for global firms that are being held to higher levels of social responsibility where sound political and legal institutions in the host country are still developing.
-- There is also a new social consciousness emerging. I just met a 22-year-old who is buying his first car. He refuses to buy an SUV because he views them as unethical. Regardless of the merit in this, consumers are skeptical of corporate power, have higher social expectations for global firms and are demanding more what they consider to be "ethical" products and services. University presidents have also told me that they have not seen their campuses as politicized since the radical days of the 1960s and early 70s.
-- Shareholder value is shifting from a purely financial orientation to an increasingly holistic measure based on three principles: economic performance, environmental sustainability and social responsibility. Similarly, I've noticed a change in thinking of many CEOs who want their corporations based on a strong sense of values. Today there are CEOs who are often asking the question "What's the right thing" to do is a given situation, versus "what's the expedient thing?" So what effect will these influences have in the day-to-day behaviour of corporations? Let's look at a few examples.
When transparency reigns, corporations have nowhere to hide. It is a fact of contemporary globalization that the very transformations making possible higher quality, less expensive products sometimes lead to unacceptable conditions of work in countries around the world. In this ultra-transparent and interconnected environment, the sins of the most distant outsourced production can suddenly smear a retailer's brand.
Nike's efforts to establish global labor standards and a self-monitoring system is a good example of how firms are responding to the new transparent business environment. In 1992, Nike responded to public concern about working conditions in sub-contracted factories by establishing a code of conduct on labor and environmental practices. Subcontractor compliance with the code is monitored through internal evaluation by Nike staff followed by a review by external accounting, health and safety, and environmental consulting firms. Nike also established an initiative called The Global Alliance for Workers and Communities to gather information and to fund development projects that meet needs such as life skills training and small business development. Nike now stands as a world-class firm that allows customers to "see" all the way down the global supply chain, while firms that lack transparent production processes are exposed to the sanctions of public opinion.
Let me cite a similar but more recent example. The chocolate industry was recently rocked by revelations that that chocolate supply chain was tainted by child slavery. A documentary aired on BBC showed several cocoa plantations in the Ivory Coast using slave labour to produce the raw materials sold to chocolate retailers like Nestle, Cadbury and Hershey. Observers were quick to accuse the industry of complicity in slavery. The chocolate industry, on the other hand, vigorously denied any responsibility. Companies buy their raw materials on agricultural commodity exchanges. They had no way of knowing how the cocoa was actually produced. A deadlock seemed inevitable, and many individuals and organizations were calling for boycotts.
But after further dialogue between anti-slavery NGOs, concerned government agencies around the world and the chocolate industry, a consensus emerged that slavery had to be eradicated from the chocolate supply chain. Everybody understood that boycotts would cause great harm not just to the reputations and profits of chocolate retailers, but also to the many African farmers that depend on income from cocoa production. In an agreement forged this past July, the chocolate industry has agreed to fund research into the extent of the problem; concrete steps will be taken in cooperation with the government in the Ivory Coast to eliminate slavery; and an independent board consisting of a broad array of stakeholders has been set up to monitor progress. A potentially explosive issue has been resolved without boycotts or lawsuits, relying instead on dialogue and cooperation. And with NGOs and governments as partners, the chocolate industry can legitimately claim that their supply chains are free of slave labour.
We are witnessing the emergence of an era in which civil society could supersede government in its ability to influence some behaviors of the private sector and market. Ever since the South African boycotts were effective in hastening the end of apartheid, activists have been perfecting this new kind of market campaigning. Now the Internet enables these corporate critics to construct far-flung networks to influence corporate behaviour by attacking corporate brands and mobilizing public opinion. Any company with a reputation and brand to protect is now vulnerable. Even firms that are isolated from consumers, such as resource extractors, can be made to acquiesce -- usually by targeting the firm's partners at the retail end of the supply chain.
Home Depot's experience with the Rainforest Action Network is a telling example. RAN, whose goal was to reduce the amount of rainforest trees being cut down for the benefit of North American consumers, singled out Home Depot -- once the largest retailer of "old growth" lumber. Rather than appeal to government to intervene with legislation against old growth lumber imports, RAN decided to fight in the marketplace. After two years of hard campaigning that blended information age tactics with traditional grassroots organizing, Home Depot was faced with a mounting pile of bad PR and growing local resistance to new store locations. In 1999, Home Depot signed a landmark agreement with the Rainforest Action Network, committing the company to phasing out old growth lumber from its product lines by 2002. As we speak, Home Depot's suppliers are working with environmental and forestry groups to certify that their wood products are not taken from endangered areas.
As firms become more attuned to social and environmental issues, many are finding that they require new systems for measuring and reporting their performance in these areas. Companies legitimately want to demonstrate their progress to customers, shareholders, regulators and stakeholders, so they need the hard data to back up their claims. The traditional metrics used to assess corporate performance simply fail to address what had previously been considered externalities. Various indicators of social and environmental capital are now finding their place on the corporate balance sheet as firms learn how to quantify these new forms of value. In the short term we expect to see companies with the capacity to produce comprehensive reports that measure their total impact on and value-added to the economy, environment and society.
Many companies are headed in this direction. A scan of the latest annual reports from major global firms might suggest to the unwary observer that these corporations had come under the control of environmentalists. Dow Chemical, for example, applies complex statistical analysis to ensure the company is leveraging the maximum economic benefits from its anti-pollution programs. Royal Dutch/Shell has committed to a multi-year process to evolve management systems, indicators, metrics and targets across a broad spectrum of economic, social and environmental dimensions of business performance. Dupont is moving towards web-based access to its sustainability reporting.
So far, so good. Let's agree that good corporate citizenship is needed today. But just as war is too important to be left to the generals, new corporate roles are too important to be viewed simply as an exercise in corporate communications. Companies must scrutinize their own behaviour from a host of new perspectives, and develop new tools to work with outside stakeholders.
However at this time there are more questions than answers:
-- What will NGOs look like in the future, how will they act and how much power will they have?
-- What is the future of national governments (especially government regulation) and how will this impact firms and how might international governance institutions change this scene?
-- What are the new political and economic roles of global firms, especially in emerging markets?
-- Global companies are often the most conspicuous symbol in developing countries of industrialized nations. What should these corporations do to ensure they act in harmony with their home countries' foreign policy?
-- How can corporations' increasing political authority be matched with a greater sense of social responsibility in ways consistent with shareholder economic interests?
-- How can executives effectively manage broader public participation in corporate planning and decision-making ?
-- How will these developments change the way firms manage partners and suppliers and other critical aspects of business?
-- What are the implications of forming deeper relationships with customers as they suddenly start engaging firms in a wider range of issues than just product satisfaction or financial performance?
-- Who are ethical consumers, what are their attitudes and what are their specific needs?
These are difficult questions that demand answers. We are in a crucial period of global restructuring and institution-building, and now is the time for foresight and planning. There is an undeniable consensus that global firms must embrace greater political responsibilities, yet there is scant analysis on how firms need to or can change to embrace these challenges. There is an abundance of information about the social and environmental issues stemming from global economic activity, but few pragmatic solutions for corporate managers seeking to address them.
Wired activists are well organized and effective in attacking corporate brands to influence behavior, yet corporations don't have sensors for social criticism or processes for engaging their critics in dialogue. Consumers increasingly seek out products and services from companies with a strong social commitment, but most firms don't adequately understand these consumers and know little about meeting their needs.
One thing is certain: A new model of the corporation will emerge. That is the inevitable evolutionary process. In this model, firms will pursue commercial activity within a wider framework of global interdependency, environmental sustainability and enlarged social accountability. Firms will partner with other institutions in society to tackle global issues and create new public goods; and firms will operate with a higher level of transparency and openness than ever before.
In an increasingly competitive marketplace, in a world that seems much less certain today that just a month ago, these are tough challenges. Mastering new competencies, transforming business processes, defining a new role in a global society -- firms cannot do this alone. They will need to partner, as industries and as like-minded leaders, to pool their resources. Firms should reach out to responsible stakeholders and include them in their business web as well. Through a dynamic, and occasionally agonizing, process of dialogue, piloting and innovation will emerge a new paradigm in corporate leadership. The task now is for visionary leaders to begin the process of transformation, because the firms that get there first will reap the greatest rewards in the marketplace.
Don Tapscott is an internationally sought authority, consultant and speaker on business strategy and organizational transformation. He has authored or co-authored seven widely read books on the application of technology in business. His newest book, (co-authored with David Ticoll and Alex Lowy), DIGITAL CAPITAL: Harnessing the Power of Business Webs, describes how business webs are replacing the traditional model of the firm and changing the dynamics of wealth creation and competition. This article was adapted from an address to Toronto's Canadian Club on October 9, 2001.