#11 Sept-Nov 2023
DID FRIEDMAN WIN? NEW RULES ON TALENT
THE RISE OF THE CSO
CLOSING THE SKILLS GAP
TRIPLE BOTTOM LINE REIMAGINED
20 CHF
SUSTAINABILITY TRANSFORMATION A CLEAR VISION FOR A PROSPEROUS FUTURE
ENGAGE OR DIVEST? LEADING SYSTEMS CHANGE
NAVIGATING ESG RULES ibyimd.org
Forge your path to a sustainable future IMD’s Leading Sustainable Business Transformation program empowers you to bridge the knowing-doing gap in spearheading sustainable business changes, while finding renewed purpose. Learn in action Tackle your unique sustainability challenge, crafting a concrete roadmap for successful transformation, ready to action back in your organization. Build your sustainability foundations Explore technology, business model, and organizational implications of embedding sustainability company-wide. Discover best practices Dive into ESG and sustainability best practices, risks and opportunities, deriving insights from top-ranked sustainability enterprises.
Take the next step imd.org/lsbt
[ Foreword ]
We all have a stake in the future, so let’s use it wisely
T
ransforming organizations to become more sustainable is perhaps the defining leadership challenge of our time. The need for change is now urgent, from both a climate and a social perspective. This transformation is a deeply complex and unique task for every business and industry. At IMD, we are fortunate to have the opportunity to learn from and support a diverse range of leaders and organizations as they navigate their way through it. This edition of I by IMD draws on these experiences, as well as deep insights from external experts, to explore the key factors of the sustainable business transformation challenge – from regulation and business models to purpose and talent.
Illustration: Jörn Kaspuhl
Temasek head Dilhan Pillay observes, in our regular CEO Dialogue feature, that stewarding today’s assets for the benefit of those not yet born requires a serious consideration of difficult trade-offs that must be made right away. So, how do we guide our organizations past the fog of challenged planetary boundaries and social inequity toward a state of being sustainable, inclusive, and prosperous? “The future may already be here, but at times it can be damned hard to find,” observes John Elkington, the creator of the triple-bottom-line concept, calling on business to take things a step further toward regeneration.
sponsibilities that CSOs need to shoulder to pilot and orchestrate the transformation journey. Sam Gill and Jan van der Kaaij highlight the new role that boards must play in this journey as well as the threat of the ESG reporting trap – when a company spends more resources on reporting than it does on actually changing the game. Michael Skapinker despairs that neither of the two investment strategies to bring fossil fuel companies to a heel has been particularly effective: divestment equates abdication to more callous investors, and remaining invested in order to drive change requires superhuman patience. He asks: “Could there be a third way?” As always, our issue brims with sparkling insights from our regular columnists. Jerry Davis notes that corporations and their employees were much more rooted in a local context when Milton Friedman famously pronounced that companies had no other welfare obligations than to churn out profits for shareholders. Given that most contemporary corporations are “rootless cosmopolitans”, reading Jerry’s column makes me wonder: if Friedman were to be around today, would he make the same pronouncement? And Shelley Zalis provides a timely reminder of the rising importance of certification and access to training to plug the global tech skills gap.
In our framing article, Jean-François Manzoni, President of IMD, and Julia Binder offer a compelling strategic and organizational framework that organizations can deploy to kickstart their transformation. Knut Haanaes and Bryony Jansen-van Tuyll present the “future back” tool that encourages leaders to imagine that a desirable future state for their organizations has already been achieved in order to work out the necessary steps back from there. Sudhanshu Sarronwala argues that sustainability transformations are likely to work only when companies embed an externally oriented and holistic purpose of “doing the right things”.
We hope you enjoy reading this edition of I by IMD, and that the articles we present here resonate with you by offering relatable, relevant insights and clear, actionable impact as you seek to lead and transform your organizations. Dive in! ■
Natalia Olynec traces the evolution and explosion in popularity of the Chief Sustainability Officer (CSO) role, outlining the re-
Anand Narasimhan, Dean of Research Sept-Nov 2023 • I by IMD 1
[ CONTENTS ] 04 [ In good company ]
Milton Friedman’s “profits above all” was the doctrine of the 1970s. While the look of big business in the US has evolved beyond recognition, the motivations seem little changed, argues Jerry Davis.
43
#11 Sept-Nov 2023
THE RISE OF THE CSO
DID FRIEDMAN WIN? NEW RULES ON TALENT
[ Sustainability transformation ]
CLOSING THE SKILLS GAP
TRIPLE BOTTOM LINE REIMAGINED
20 CHF
SUSTAINABILITY TRANSFORMATION A CLEAR VISION FOR A PROSPEROUS FUTURE
ENGAGE OR DIVEST? LEADING SYSTEMS CHANGE
NAVIGATING ESG RULES ibyimd.org
11_IMD_2023_Edition_11_Sept-Nov_2023_COVER_Final_PROOF.indd 19
04.09.23 12:34
Our 39-page in-depth report offers up-to-the-minute analysis and guidance on the best way of delivering a successful sustainable business transformation.
07 Jean-François Manzoni and Julia Binder set out a clear vision for sustainable business transformation that not only includes environmental sustainability but also social and economic inclusion. 14 The fast-paced developments in
global ESG regulations are transforming the position of the board of directors from one based on engagement to one requiring true commitment, write Sam Gill and
Jan van der Kaaij.
18 The Church of England has moved
away from engagement and sold its fossil fuel shares, but to whose benefit? Michael Skapinker explores the arguments.
21 Focusing on a company’s triple
bottom line has yielded mixed results. Sudhanshu Sarronwala offers advice on how all businesses can “do the right thing”. 2 I by IMD • Sept-Nov 2023
24 John Elkington created the concept of the triple bottom line. Now he is an advocate of the 3Rs: responsibility, resilience, and regeneration.
28 Using the “Future Back” tool can set
your organization on the path to a successful sustainable business transformation. Knut Haanaes and Bryony Jansen-van Tuyll explain how it works.
32 More than 300 sustainability standards
and eco-labels have been established. A new legal framework is needed to cut through the jungle, argue Jonathan Normand and Fabio Monnet of B Lab Switzerland.
58 39 The I reader: IMD professors recommend five books to help you navigate the complexities of sustainable business transformation.
40 Amanda Williams and Knut Haanaes
talk to systems-change leaders to explore how organizations can collaborate across sectors and supply chains to keep within Earth’s limits.
43 Chief sustainability officers are becoming more senior and cross-functional. They need the ability and skills to address ESG issues across the spectrum. Suitable candidates are rare and a “talent war” is raging, writes Natalia Olynec.
36 CEO dialogue: CEO of Singapore’s
global investment giant Temasek, Dilhan Pillay, discusses the importance of a carbon tax with Jean-François Manzoni and explains how his company is working to ensure ‘every generation prospers’.
28
46 [ The human touch ]
Policymakers and business can raise “techquity” in the global labor market by improving access to digital skills training, writes Shelley Zalis.
47 [ I quote ]
Be inspired by some pearls of wisdom taken from a book of quotations compiled by IMD’s Dominique Turpin.
48 [ Finance ]
36 73
Measuring economic profits rather than accounting profits is a far more reliable indicator of a company’s performance, argue Simon Evenett and Felix Reitz. And value-creating firms are well-equipped to help fund sustainability.
Illustration: Jörn Kaspuhl ; Photos: Yasunobu Tamari, Wikipedia, Pinterest, Infarm, Temasek, Egon Zehnder
46
67
56 [ In the mind's eye ]
The COVID-19 pandemic altered the art of leadership. George Kohlrieser suggests seven changes that are worth making permanent.
58 [ Team spirit ]
Mayuka Yamazaki explains how working as a team on
21 67 [ Human resources ]
ikebana, the Japanese art of flower arrangement, can help us to become better leaders.
Job roles are continuously evolving, leaving many talent management practices in the dust. Tania Lennon and Mikolaj Jan Piskorski suggest new rules to upgrade your talent strategy.
63 [ Future investing ]
70 [ In my view ]
Executives need to be equipped with the tools to take a more integrated approach to impact and business. The impact economy offers alternatives and inspiration, write Vanina
Farber, Patrick Reichert, and Shih-Han Huang.
Technology may lead to a more efficient process, but it’s not the best option if it worsens the customer experience. Sometimes going back to the whiteboard is better, writes Bali Padda.
73 [ The forecaster ]
Coca-Cola has been forced to diversify to cater for rapidly changing tastes. We can all learn from the company’s agility and adaptability, writes Howard Yu.
76 [ Preview ]
Join us in December when I by IMD will focus on the increasingly important role of the impact economy. Sept-Nov 2023 • I by IMD 3
[ In good company ]
Friedman and the case against social responsibility: did he win after all? Profits before all was the doctrine espoused in the 1970s, and while the look of big business in America has evolved beyond recognition, the motivations seem little changed, argues Jerry Davis
Opponents of ESG and those who decry corporate social responsibility almost inevitably harken back to an article published a half-century ago by Nobel prize-winning economist Milton Friedman in the New York Times Sunday Magazine. The headline gives away the punchline: “A Friedman doctrine – The social responsibility of business is to increase its profits.” In the decades since it appeared, this short piece has become one of the most widely assigned articles in business schools, often paired with a reading on stakeholder capitalism on the obligatory ethics day. As a piece of writing, it is a slippery work of sophistry full of hidden premises and hairpin turns. But its impact on the discourse cannot be denied, even as the world of business has been fundamentally transformed in ways that render its arguments in favor of unbridled capitalism and against corporate do-gooding sketchier. The Friedman doctrine in brief
Friedman’s argument runs as follows: only a person can have a responsibility, not “business”. Corporate executives, as people, are responsible to the corporation’s owners to make as much money for them as pos4 I by IMD • Sept-Nov 2023
sible – executives are agents acting on behalf of the shareholder-principals who employ them, and shareholders love profits. If executives engage in do-gooding that reduces returns to shareholders (say, by cutting pollution more than is required by law), they are illegitimately imposing additional taxes on their employers and spending the income from those taxes at their own discretion. Taxing and spending are the functions of elected government, not unelected businesspeople, and allocating resources through politics rather than markets is socialism. Moreover, business executives have no particular expertise in pursuing goals beyond profit, and if they try their shareholders will probably fire them. Do-gooding is permissible when it ultimately contributes to profits – say, supporting amenities in the community that make it easier to attract and retain talented employees, or to reduce pilferage and sabotage. But these actions are only justified if they contribute to the corporation’s self-interest. The article closes with a flourish on the proper place of markets and politics in making societal choices. Markets involve voluntary cooperation for mutual benefit with unanimous consent. Politics requires conformity to decisions handed down by “a church, or a dictator, or a majority,” enforced by “the iron fist of government bureaucrats”. The choice for businesspeople was clear: maximize profits and avoid “social responsibility”, or be a hapless tool of socialism on the road to serfdom. Friedman left out a couple of steps in his fevered dash. In particular, the moral case for maximizing profits may not be entirely intuitive, so here’s what he might have said. Profit represents the difference between what it costs to create a good or service and how much customers are willing
Illustration: Jörn Kaspuhl
C
an businesses do well by doing good? Should they? This question has eluded resolution for generations and is now taken up by Republican presidential candidates in the US from Ron DeSantis to Mike Pence, who are campaigning against ESG investing and what they see as the sinister threat of “corporate wokeism”. One candidate, pharma investor Vivek Ramaswamy, has even published an anti-ESG screed titled Woke Inc. and launched a family of anti-ESG exchange traded funds, evidently to prove that you can still do well by not doing good.
to pay for it. If customers voluntarily buy something, they must value it at least as much as they paid for it (unless there was deception involved – and Friedman believes businesses shouldn’t deceive). Participants in the enterprise are all volunteers: workers, suppliers, and lenders agree to a fixed price for their contribution, and shareholders get whatever is left, that is, the profit. In this unanimous and voluntary cooperative venture, profit is both a motivator and a measure of the good that the venture has done for its voluntary customers. The greater the profit, the greater the social benefit. QED: business is off the hook for doing good if it does not yield a profit, because profit is good in itself. The context: an economy dominated by ‘Big Business’
The year 1970, when Friedman’s article was published, was arguably the high-water mark for “Big Business” in America. Unscathed by the Second World War, American industry had experienced astonishing growth and become an export powerhouse over the prior generation. Its biggest enterprises kept getting bigger: 25 corporations employed the equivalent of 10% of the US workforce. Big companies paid better than small firms and provided pathways for upward mobility for their
‘Unlikely as it may have seemed, Nixon presided over one of the greatest expansions of corporate regulation in American history’ career employees, growing a prosperous middle class. Moreover, in contrast to Europe, where governments provided health care and old-age income security for their citizens, these responsibilities fell to business. American corporations were like miniature welfare states, and it was no surprise that they were called on to exercise “social responsibility”. Many of them had annual revenues that surpassed all but the largest economies’ GDPs. Consider the 10 biggest American corporations in 1970. Many were vertically integrated manufacturers operating large-scale facilities in the heartland. As Peter Drucker, one of the founders of modern management thinking, had pointed out a generation earlier, Ford’s River Rouge plant (where both my grandfathers worked as welders) was a microcosm of industrial society, employing tens of thousands of people for their entire adult lives in a massive and intricately coordinated enterprise. It is no wonder corporations came to be “imagined communities” on the same plane as states and were expected to be responsive to the popular will. To create and sustain such an enterprise required collaboration among workers, suppliers, investors, and communities – a vast array of diverse interests all brought into harmony by market exchange, according to the Friedman dogma. To impose additional responsibilities on this fragile achievement was beyond the pale, and it was Friedman’s mission to put a stop to it.
TEN LARGEST US CORPORATIONS BY REVENUES, 1970 COMPANY
EMPLOYEES
HEADQUARTERS STATE
General Motors AT&T Exxon (Standard Oil of NJ) Ford Motor Sears Roebuck General Electric IBM Mobil Chrysler ITT
696 773 143 432 359 397 269 76 228 392
Michigan New York New York Michigan Illinois New York New York New York Michigan New York
(thousands)
TEN LARGEST US CORPORATIONS BY REVENUES, 2022 COMPANY
EMPLOYEES
HEADQUARTERS STATE
Walmart Amazon ExxonMobil Apple UnitedHealth Group CVS Health Alphabet McKesson AmerisourceBergen Berkshire Hathaway
2,100 1,541 62 164 400 300 190 51 44 383
Arkansas Washington Texas California Minnesota Rhode Island California Texas Pennsylvania Nebraska
(thousands)
Social responsibility from above
And yet before the ink was dry on Friedman’s article, the “iron fist of government bureaucrats” was about to pummel Big Business into socially responsible submission – thanks to Richard Nixon. Unlikely as it may have seemed, Nixon presided over one of the greatest expansions of corporate regulation in American history. In December 1970, the Environmental Protection Agency was launched to define and enforce environmental standards – taking specific aim at auto emissions and factory pollution. Later that month, Nixon signed the Occupational Safety and Health Act, creating another regulatory agency to make workplaces safer. The Consumer Product Safety Commission was launched in 1972 “to protect the American public from dangerous and deadly products”. And the Equal Employment Opportunity Act of 1972 gave the EEOC litigation authority to take on discriminatory employment practices in order to make the workplace more equitable for women and people of color. Big Business was suddenly drowning in requirements to meet environmental, social, and governance standards. » Sept-Nov 2023 • I by IMD 5
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