CHAPTER THREE

Responsibility Redefined

RULE #3
Corporate Responsibility Is Defined Far outside the Business Gates

We know a lot about how to manage companies from the inside, but the factors that are going to makefirms flourish are increasingly external.
—ROSABETH MOSS KANTER

MY FIRST JOB after college was in the California State Legislature, where I worked as a legislative aide and lobbyist for public interest groups. In 1976, I jumped at the chance to work for Arlen Gregorio, a creative and principled Democratic state senator from San Mateo County who chaired the Senate Health and Welfare Committee. An issue that was beginning to draw the attention of Senate staff was the sale of infant formula by Nestlé to mothers in what we then called the third world, today’s emerging markets.

A report published in 1974 by a British NGO called War on Want accused Nestlé of aggressive and deceptive marketing to poor women. The report was titled The Baby Killer, and it accused Nestlé of putting its profits before the health and safety of children in developing countries.

By 1977, protests against the company had morphed into an international boycott fueled by outrage that Nestlé would intercede in what nature offered—breastfeeding the young—to profit from families who could ill afford the cost of artificial milk in a can or box. Infant formula, a popular alternative in the United States to breastfeeding baby boomer children like me, was being marketed in the developing world as a path to better nutrition and baby health, but the concern grew that these women might need to dilute the product too much to make it more affordable or might depend on water that was either scarce or polluted, undermining any possible nutritional benefit. Either way, babies could lose out on the natural immunities conveyed through breastfeeding—or worse. Stories circulated about sales reps wearing nurses’ uniforms to gain the confidence of women just trying to do the right thing for their children.

Ad by ad, letter by letter, protest by protest, working through the Catholic sisterhood and networks like the Investor Responsibility Research Center, consumers began to shun Nestlé products while socially motivated investors unloaded Nestlé stock.

It took more than a decade, but with no signs of the boycott losing steam, Nestlé finally bowed to pressure from both campaigners and the World Health Organization. The company pledged to fundamentally rethink its approach to marketing the product outside of the “developed” world, in spite of a great growth opportunity and a lurking question about who decides what products can be offered, where.

Today, Nestlé is a massive enterprise with more than 300,000 employees and 100 brands, operating in nearly 200 countries around the world. A quick Google search will surface both praise and criticism, but the company still bears the scars of a persistent campaign that began over 50 years ago. Marketing practices in specific regions are still monitored against a code of conduct. Type in the words “Nestlé infant formula,” and a half dozen links to stories about the crisis appear.

The Nestlé boycott is an early and remarkable example of campaigners wielding consumer purchasing power and investment to influence global brands. The boycott demonstrates the power of networks positioned far outside the gates of the business or the halls of the legislature. Progress was slow, but the highly committed campaigners eventually succeeded in their quest.

What happens when the same networks are powered by the speed of the Internet?

In the mid-1990s, Greenpeace launched a strike to expose Shell’s plans to sink an abandoned oil platform in the North Sea. Even before broad access to cell phones and the Internet, the news spread so quickly and powerfully that it was reported that Shell sales at the gas pump in Germany had declined by half.

In another rich example from the same era, Nike’s reputation plummeted as a toxic combination of facts and rumors about the company’s dependence on unsavory labor practices took hold in the media. As the Internet expanded from its base within research universities to Silicon Valley and then, with the advent of search engines, into businesses, homes, and schools, the campaigners gained a powerful tool.

For Nike, the mere hint of children working in sweatshops to produce shoes became a serious concern for the key market for their product, teenagers. The impact on sales was never clear, but reports of softening in consumer demand finally hit their mark, and in 1998, Nike’s cofounder and CEO, Phil Knight, was compelled to speak out on allegations of bad conduct deep in the supply chain.

Once he had gone public about the issues that the company was facing, there was no pulling back. Knight announced a set of measures to enhance Nike’s code of conduct and extensive protocols for managing relationships with remote contractors. In doing so, the company raised the bar within its industry. The brand is still a lightning rod for public opinion, but the actions taken, and the commitment to execution over the long haul, largely restored the company’s reputation. Before Nike announced these measures, only Levi Strauss had a policy that extended standards at home to its foreign contractors.

Years later, Shell was once again the principal target of a publicity campaign. This one rode the wave of social media and aimed at the environmental costs of drilling in the Alaskan Arctic. A three-year campaign of eye-catching, media-friendly acts of individual sabotage—from climbing the Shard in London to hanging from rigs and bridges in the Pacific Northwest to hacking the Shell-sponsored Formula One awards ceremony—caused Shell in 2015 to vacate its plans to drill in Alaska.

Greenpeace is an environmental organization with offices in more than 50 countries around the world. It excels at employing media. In the campaign against Shell, it once ran a clever video featuring a polar bear made of Lego blocks, stranded in a polluted Artic, to bring the costs of drilling into the living rooms of millions who would never wave a flag or scale a building. By one count, as many as six million individuals responded. Shell received at least a million emails imploring the company to stop the drilling.

Every step ignites and illuminates the power of the World Wide Web.

For companies caught in the crosshairs of a public protest, social media is a complex game. The target of the boycott may have only an indirect connection to the underlying motivation for protest. In 2017, Uber was singled out after a newly elected President Trump signed an order to stop citizens of seven Muslim-majority nations from entering the United States.

When taxi drivers, including many who hailed from Pakistan and Bangladesh, joined in solidarity with protesters converging on airports across the country, the demand for Uber airport pickups quickly grew. Uber’s pricing, which automatically increases in response to a surge in demand, angered customers who just needed a way to get to or from the airport—and protesters shunned the drivers for tacitly supporting the president’s move against immigration. The fact that Uber’s CEO, Travis Kalanick, was a member of the president’s newly organized business council didn’t help matters.

A campaign to delete the Uber ride-hailing app swiftly emerged on social media, and #DeleteUber became a vehicle for public outrage at the White House’s stance on immigration. Hundreds of thousands deleted the app, at least for a few days, and for reasons that spanned a host of concerns about the company, its culture, and its controversial CEO.

What was Uber to do? The decision of the president of the United States to ban citizens of foreign nations from entering the country sits way outside the control of the CEO of Uber or any other company. Yet his own employees began to speak up, and within days, Kalanick announced that he was stepping down from the president’s council. When other CEOs followed suit, the newly created business advisory group was disbanded.

But is Uber, or Shell, a bad actor?

By some measures, Shell has the best reputation in its industry. Royal Dutch Shell is headquartered in Holland and incorporated in Britain. Shell mirrors the values and sensibility of its European home base. This became clear when the company spoke out on the need for action on climate change in the early 2000s, a decade or more before its US competitors began to take the issue to heart.

Fast-forward to 2018, when Royal Dutch Shell CEO Ben van Beurden called climate change “the most important discussion of our time” and announced aggressive goals for reducing carbon emissions, investment in renewables, and advancing technology to rapidly charge electric vehicles. Shell leaped ahead of competitors again in 2019 when it quit the American Fuel and Petrochemical Manufacturers trade association over differences on climate policy, and once again by detailing aspirations for net-zero carbon emissions throughout the company’s operations and expressing the intention to require offsets on the use of Shell products by wholesale customers in the manufacturing, airline, and shipping sectors.

Yet, in the age of the Internet, a brand as visible as Shell is also a convenient and tactical bull’s-eye. Greenpeace and Oxfam, another highly networked global NGO, can’t rally consumer power against a company we have never heard of.

Sophisticated campaigns of activist or grassroots organizations succeed because they are able to link an urgent need for massive change in the harvesting or production of faceless commodities, or in the working conditions of laborers and service workers, to the consumer brands that depend on them. In one remarkably complex example, Oxfam launched a campaign to tie the burning of forests in Indonesia to make way for expansion of palm oil plantations—to cookies made with Nestlé cocoa and lotions and cosmetics sold by Unilever. The winning formula relies on social media to stir up consumer outrage against brands with high-asset value. The underlying goal is to motivate consumer product companies to demand change from miners, developers, refiners, transporters, and manufacturers with no brand to protect. In between the consumer-facing companies and the commodity producers lie local and national governments, international agencies that oversee trade and product standards, consortia with their own codes of conduct, and workers just trying to put food on the table.

Phil Knight of Nike, in a speech before the National Press Club in 1998, put it simply: “The Nike product has become synonymous with slave wages, forced overtime, and arbitrary abuse. I truly believe that the American consumer does not want to buy products made in abusive conditions.”¹

Don Tapscott, a visionary thinker who seems to see around corners, started writing and speaking about the impact of new media years before the age of a communications tool in every pocket. In the book he coauthored with David Ticoll, The Naked Corporation: How the Age of Transparency Will Revolutionize Business, Tapscott archly captures the business risks of what he calls radical transparency: “If you are going to be naked,” he warns, “you had better be buff.”²

Nestlé. Nike. Shell. Unilever. Each of these examples demonstrates how the rules of engagement that link global brands and local labor and environmental standards are changing in real time—and are determined by forces outside the control of the executive. What might have seemed like normal business practices one day can morph into a new norm, seemingly overnight. The early stages of a sophisticated campaign may be invisible to the C-suite. When it emerges on social media, it takes the company by storm.

My daughter Anna came home from high school one day reporting that kids in her homeroom had sworn off M&Ms because they were tied to child labor. This was 2001; reports of West African children bonded to small cocoa farmers in the Ivory Coast were hitting the mainstream press, but facts were elusive. I tried to explain that the issue was a lot more complicated than a single company that might, or might not, be linked to unsavory labor practices. In fact, if her friends were trying to join the boycott-du-jour, they needed to do more research to make sure they had the right company.

It reminds me of the game of Telephone we played at birthday parties when I was a kid. A mix of facts and rumors spreads like wildfire, and global companies invest in rapid-response communications systems to both tell their story and keep an eye on events that could disrupt business operations overnight. The best ones scrub their supply chains to identify and eliminate weak links—such as contractors whose performance would not hold up well under public scrutiny. The companies have a valuable asset to protect—corporate reputation affects access to talent, investment capital, and the actual license to operate locally and globally.

But rumors aside, there are plenty of examples of business excess, greed, and short-term behavior to digest. Traditional news sources, blogs, and late-night television programs shower us with examples. They put my trust in business and markets to the test.

REDEFINING RESPONSIBILITY: THE BUSINESS RESPONSE

In a global economy, the role of the traditional standard-setters is in flux—especially against the backdrop of growth in social media and Internet-enabled networks and NGOs operating at a great remove from the company. Governments may set the most basic rules, but these new forces that exist outside of commerce and government are better equipped to raise the bar on business practices—to ratchet up the norms and protocols and see that they migrate into the competitive environment.

Corporate responsibilities have grown to include not just the supply chain but the entire ecosystem of inputs and actors. Before Phil Knight gave his speech, the standards of contractors in foreign countries were someone else’s problem. The lines between strict legal liability and morality continue to blur as the understanding of corporate responsibility extends even to the personal habits and private use of products in the consumer’s own home. Gun manufacturers and bartenders have already felt the pressure. The list of products linked to social consequences—from soda to cell phones—is growing.

NGOs and loose confederations of networks have little to lose. The rules that define the company’s footprint are set far from headquarters. How will companies deal with this reality?

The courage of a teen-aged Swedish climate campaigner, Greta Thunberg; the fiery commitment of Emma González and her classmates in Parkland, Florida, who turned grief into political action in the wake of the mass shooting at their high school—these individuals put a fresh face on the word future. They enlist millions of voices and, by extension, raise public consciousness and expectations about business’s role.

But when it comes to translating that energy, to converting public expectations into product design or the protocols of sustainable development, the greatest levers are deployed at the precompetitive level. Agents of change know to enlist business competitors who in turn can influence the standards of shared producers, even before the first purchase order is issued.

In a compelling TED Talk, environmentalist Jason Clay offers up the math behind the strategy pursued by his employer, WWF, and peer organizations with the staying power to lead systemic change.³ He drills down from the broad scope of the consuming public to precise levers in the supply chain. There are 6.9 billion consumers on the planet and 1.5 billion business-to-consumer producers that supply their needs. Yet it’s a much smaller number of global marketers and traders of key commodities who set the rules that ensure—or destroy—biodiversity.

Jason at WWF focuses on 15 basic products—including farmed salmon, cotton, and palm oil—commodities with an outsized impact on places where biodiversity is threatened, from rainforests to the spawning grounds of specific fish vulnerable to extinction. Jason and his co-conspirators then map out companies, numbering in the hundreds, that represent the lion’s share of the buying and selling of those commodities.

At the end of this funnel, as few as 100 companies touch multiple commodities and are deemed the most influential in the market. Try to influence the buying habits of seven billion consumers or use those 100 agents to set new rules and standards? As Jason states, it’s not easy to build effective working groups across fiercely competitive producers and industries, but it’s an easy choice to make.

At the heart of the change is the reality of business risk.

Companies face risk of interruptions to their supply chain, fueled by climate change, media, or economic and political unrest. They face costly risks to their reputations in consumer markets, but also in credit, investor, and labor markets. These disruptions pummel big industrial firms with massive footprints, but also the consumer brands and retailers, from Tiffany to Procter & Gamble to Walmart.

The disruptions extract tremendous cost when consumers reject the product or governments reject the business model—from California’s mandate that Uber put independent drivers on the payroll with benefits, to Amazon’s failed bid to win New York City’s support—and subsidy—for a massive expansion in Queens, to numerous challenges to Facebook’s highly profitable but morally questionable use of artificial intelligence to customize and target commercial and political advertising.

THE STORY OF CHANGE

The strategy and tactics deployed to influence a B2B corporation like Maersk, the global shipping line, or Dow, the chemical manufacturer, are different than for consumer businesses. Either way, the early adopter or first mover—the company that raises the bar and sets a new course for its industry—is responding to a complicated stew of both instrumental and intrinsic motivations.

In 2001, we hosted a group of business executives and scholars on the Aspen Institute campus to consider the role of business in leading change—specifically the question of how more enlightened standards of behavior evolve and become common practice. Roger Martin expanded on the ideas that the group explored in a 2002 Harvard Business Review article titled “The Virtue Matrix.”⁴

Examples like Merck and the campaign to end river blindness demonstrate intrinsic motivation—when the financial value to the company’s shareholders or investors of a socially beneficial practice or investment is either negative or intangible—i.e., hard to capture in dollars and cents. But Martin and colleagues went further to map how a conscious choice in one company can start to build a higher foundation for a sector or industry—and reward a first mover as well as strengthen the foundation for positive change.

Another example of the return on doing the right thing was playing out in real time. When the Aspen dialogue took place, the HIV-AIDS epidemic was still a major threat. Patients in the United States were able to access promising treatments, but the cost of therapy was a massive burden to families and partners. Prudential Insurance Company decided to allow victims of HIV to access the cash value of their life insurance policies, so-called viatical benefits, to support their care. The decision was well received, and competitors soon followed suit, but that was far from a given when Prudential took what looked like an uncompetitive financial risk.

Costco’s elevated wage rates, Patagonia’s commitment to organic cotton farming, Southwest’s passion for employees, Chipotle’s introduction of healthy and sustainable products to the fast-casual food industry—each required initial investment and higher operating costs, motivated by market positioning and at least the potential for competitive advantage. The payback comes through heightened reputation among consumers, investors, and employees. For B2B companies—mining, extractives, utilities—the license to operate granted by countries or local jurisdictions and the dependent relationships with retailers and producers are what elevate behavior. These enterprises are rooted to place; it takes decades to realize a return on investment. The license to operate is not just a metaphor—it is linked to a complex set of relationships, behaviors, and expectations that need to stand the test of time.

Successfully raising the bar in an industry while protecting the franchise requires a kind of corporate fitness. It requires continuous and careful management of the core operations of the enterprise— think lean management or TQM, not CSR. It requires delivering on the promise of superior service and being a good neighbor, as well as investments that test the balance between profitability today and long-term competitive advantage.

COMPANIES OPERATE UNDER A MICROSCOPE

The ability to deliver on promises is paramount. Chipotle became the first mass marketer of what they called “Food with Integrity.” The company advertised “responsibly raised” meat, poultry, and organic ingredients. With a brand built around these claims, the business becomes vulnerable to challenges from all corners.

A tough year came to a head in fall 2015 when a regional E. coli outbreak at Chipotle stores in the Pacific Northwest brought sales to a standstill. The company added new safety procedures, multiple layers of audits, training, discounts, and freebies to restore consumer trust and rebuild the brand—and then created a marketing campaign to remind people and investors why they fell in love with the company to begin with.

PepsiCo has over a billion dollars in brands and operations spanning virtually every country on Earth. Indra Nooyi joined the company in 1994 and was CEO from 2006 until 2018. Her impact on the company’s strategy was profound. She leaned in hard to early signs of consumer interest in lower-fat and less sugary products and launched and invested in offerings that balanced the “good for you” with the “fun for you.” Marketing dollars were aligned with the new direction. Changing the traditional product mix entailed massive risk in a highly competitive environment. In my occasional visits with her, she spoke in terms of a road race: you need to make a pit stop now and then to refresh and refuel and invest in new capacities, but it’s a long race and requires staying power.

The markets didn’t like Pepsi messing around with the consumer addiction to soda and scolded Indra for her audacity to put purpose before profits. Nelson Peltz, the corporate raider, paid her a call and threatened a shareholder action to take control and split up the company to extract value. Indra weathered the storm with difficulty, compromising along the way, but she is remembered, even revered, as a feisty, hard-charging leader who knew what she wanted to accomplish and relentlessly pursued her goals. She also changed the conversation about women at the helm.

Indra consistently reminds audiences to focus on how you make your money, not how you give it away. There is a role for philanthropy and good works, but to secure reputation among consumers and build trust with investors and regulators entails careful management of everyone who touches the product, from development to delivery. And that level of vigilance requires a fundamental transformation of business mindset and processes.

Adopting new rules and definitions of responsibility also means listening to internal agents of change. They include the managers who take the calls from small investors and citizen groups that connect products or services to economic realities hidden from those of us who just want to buy a can of tuna or school clothes. These managers can offer early warnings about problems deep in the supply chain that will come home to roost in a generation or less time: degradation of soil; clear-cutting of forests; the loss of biodiversity; water scarcity; even enslaved labor on fishing boats that rarely reach shore, and the securing of bonded labor in hotel rooms in far-flung capitals.

As we will explore in the next chapter, the smart companies understand that their own employees can help. The social networks they join exist at the intersection of product and service delivery and demand for change. They can identify risk and protect the reputation before it is on the line. The new rules may be set elsewhere, but employees are able to lean into a complex dance of local needs, global networks, and personal values and awareness. They think like citizens first—citizens who are too impatient to wait for government to act.

Case examples help us understand just how much the rules of engagement have already changed. They illuminate the motivations, the market pressures, and the role of mediating institutions that connect producer to consumer. The brands are the public face of the tensions and trade-offs between consumers drawn to price and convenience on the one hand, and labor markets and systems collapse on the other.

It’s easier to begin a conversation than to get to a critical mass. The actions of a few players determine the outcome for one contest— but the collective action of major players can change the rules of the game. In chapter 6, we see what is required of business when the system itself is at risk of collapse.

WHO LEADS?

The process begins when NGOs apply pressure on the front lines. They unite “teamsters and turtles” to tackle systemic problems: human rights, workplace safety, and fair wages; biodiversity and climate change. The power of social media is catalytic. Changes in protocols and processes in a market leader can redefine choices across entire industries and markets. It requires a steady hand and trusted brokers with a long-term focus. For the front-runners, it also requires respect for the rule of law and agreement among parties that usually compete.

The corporation with global reach and exposure is what is needed to make the changes scale, and stick.

 OLD RULE 
Labor is a cost to be minimized.

Unions and employee activism drive up costs and impede management from doing its job.