Business Needs to Do What Government Can't
How easy is it to change a flawed economic or governance system, such as our current 1.5-planets-and-counting forms of capitalism? Most of us would say it's exceptionally hard, particularly when power is concentrated in a few incumbent companies with deeply rooted vested interests. The financial crisis is a prime example of too few people holding the reins.
But this focused power may be a benefit, not a risk. Harvard professor Robert Eccles' research spotlights the often overlooked fact that, "Globalization has concentrated economic power within a group of large companies who are now able to change the world at a scale historically reserved for nations." Just under 1,000 companies account for half of the world's market capitalization, Eccles notes. If they decided to act, the impact could be immense.
When it comes to the corporate sector's relationship with the planet, it is clear something has to give. Our climate is warming, our population is growing and many critical natural resources are stretched beyond their limits. Last year's Rio+20 summit underscored the fact that global governance mechanisms are unlikely to ensure viable solutions. Change must now come from business itself. Depending on the level of their involvement through 2050, we see three scenarios.
The first is breakdown, where early experiments fade in the face of resistance. In this scenario, our businesses, cities and economies overshoot natural boundaries, bringing the planetary roof down on our heads. Few companies' profits could withstand such a shock.
The second is change-as-usual, where earnest but unspectacular efforts are made. We'd see more corporate social responsibility, socially responsible investing and sustainability reporting, but overall the outcome would be little more than a set of patches on the existing, dysfunctional system. In short, change would happen, but at a dangerously slow pace.
The third scenario is breakthrough, where business leaders work to address problems inherent in the system. This means transforming how investors, suppliers, customers, employees and competitors define and pursue value. Business would change the rules of the game.
Our research with members of the global C-suite, and with leading sustainability and innovation experts, has identified seven vectors of breakthrough change.
1. Breakthrough Science
Breakthrough means new forms of knowledge, from classrooms to corporate R&D departments. For example, the rapidly evolving field of biomimicry examines nature's models and processes to help solve human problems. It has business applications in areas from manufacturing to architecture, as Exploration's project to 'turn the desert green' shows. Levi Strauss, intriguingly, has used biomimetic techniques in developing new production techniques for jeans. "Biology must move from the design table to the Board table," we were told by Janine Benyus, co-founder of consultancy Biomimicry 3.8.
2. Breakthrough Activism
Breakthrough means taking a stand. In a 2012 poll of 1,600 sustainability and corporate social responsibility (CSR) experts, 81% saw activists as central to further progress in the environmental agenda. But activism isn't just the prerogative of NGOs, as business leaders begin to pursue agendas that go far beyond commercial lobbying. The oft-cited CEO of Unilever, Paul Polman, announced the company's Sustainable Living Plan, saying to investors: "if you don't buy into [our long-term value model], I respect you as a human being, but don't put your money in our company."
3. Breakthrough Institutions
Breakthrough implies old institutions changing and new ones evolving. As Ashoka CEO Bill Drayton told us, the ongoing shift in our economies means we must abandon institutions where a few people tell "everyone else how to repeat together efficiently, be it a law firm or an assembly line, a world characterized by a limited and vertical nervous system." The future, he argued, lies with institutional forms based on networks, "an open, fluid team of teams".
4. Breakthrough Access
Breakthrough requires an end to systemic inequities by opening up processes, information - and markets. Perhaps surprisingly, two leading examples come from pharmaceutical companies. Companies like Unilever are on an open innovation drive, while GSK and Novartis are focusing on access to medicines in poorer markets. "We're moving towards innovation in technology, pricing, business models and partnerships," explains head of corporate responsibility management, Dorje Mundle, of the company's base-of-the-pyramid operations. Novartis's Indian business, Arogya Parivar, now provides access to health information and medicine for over 40 million people across 10 Indian States. Not only is this approach hugely impactful, but it is also "financially sustainable, and hence, scalable."
5. Breakthrough Finance
Breakthrough involves a shift to new types of impact investment. And here the signs are encouraging: "The progress in the past year has been frightening," reported Jonathan Jenkins, CEO of the Social Investment Business. "There's so much opportunity." London's new Social Stock Exchange will provide a mechanism for investors easily to find and invest in publicly listed social businesses.
6. Breakthrough Economics
Breakthrough is about the establishment of new models that better account for businesses' negative (and positive) externalities. "We need true costing, true pricing, true taxing," says Ralph Thurm, Director of Deloitte Sustainability Strategies and Innovation. PUMA has led the field; its then-CEO Jochen Zeitz conceived an Environmental Profit and Loss (EP&L) for the company with PwC and Trucost. By assigning a monetary value to its environmental impact, PUMA can make meaningful investment decisions to change how it operates internally, and also sends an external message to its investors that goes beyond any current integrated annual report. Zeitz is also rolling out the EP&L across the holding group PPR.
7. Breakthrough Culture
Breakthrough feeds on experimentation, fueled by a willingness to fail. At a time when 'innovation' and 'entrepreneurship' are never far from the lips of CEOs, a cultural shift towards failing fast and well seems within our grasp. Pamela Hartigan, director of the Skoll Centre for Social Entrepreneurship explains, "Social innovation is becoming part of the competitive equation." Culture change is both necessary for business leaders to make sense of the other six vectors, and is also a likely result of changes in those different areas of the economy.
Major questions remain over how some of this systems thinking can be operationalized across big, complex organizations. But pioneering business leaders are now starting to aim for breakthrough, without knowing all the answers. Governments, investors and the social innovation sector should support them to the hilt.
Insights from HBR and The Bridgespan Group