Monday, September 14, 2009

The More Money You Have, the More You Should Care About CSR

The more money you have at stake, the more should you care about CSR – corporate social responsibility.

CSR is a business philosophy and profit-making strategy that links a company’s value to all those who contribute to its success: customers, employees, owners, creditors, suppliers, community, environment.

CSR also stands for “company stakeholder relationships”.

Managing stakeholder relationships is the best and surest way to build value.

Those who have assets and those who hope to acquire assets need to worry a lot about value.

Some of their most valuable assets are in a company; others in land or real estate; more in securities and other contracts for investment return.

In every case, upholding the asset value of their wealth draws thoughtful concern.

This is especially true today after the meltdown of financial markets and the resulting global recession.

The vital insight here is that a focus on cash, on income, on short-term profit is not enough. Current income is only a step towards real wealth. For if income comes with too much risk or is vulnerable to new conditions, then the wealth underneath that earning power is not that valuable.

How can assets be enhanced to hold their value?

The first step is to reduce the risks association with earning a profit. Quality not quantity is important. Quality in a company and in any investment in that company; quality in the location of land and real property; quality in the reliability and safety of investment contracts like stocks and bonds.

This is where CSR comes in. CSR teaches how to secure customer loyalty, build up brand equity, and charge higher prices for value-added in the customers’ minds.

CSR teaches how to motivate employees and get loyalty and high productivity from them. This is increasingly vital for sustainable profitability in all service, high tech and other businesses that need know-how.

CSR teaches how to retain the trust of owners and investors and creditors so that financial strength is there when it is most needed and at a fair cost.

CSR teaches how to get the most from suppliers so that one’s quality is shock-proof.

CSR teaches how to take care of the environment and communities so that social capital is available in education and culture, public health, infrastructure, government is supportive and not corrupt, and the competitive and natural environments are fruitful for sustainable business.

What CSR teaches in each of these management arenas is how to maximize stakeholder value. Such value is in the relationship with each stakeholder constituency. Taking care of relationships builds long-term value and puts worries to rest.

As asset holders grow older, have less time to run the business and an investment portfolio, and think more and more about the financial needs of their children and grandchildren, they need to have long-term value locked in place. They don’t need assets that might collapse in value due to a breakdown in some key stakeholder relationship like loss of brand equity in the eyes of customers or suppliers.

Take millionaires for example: the more wealthy they become, the more they must rely on agents and managers. They need to trust investment advisors and asset managers; vice-presidents and division chiefs. They can’t do it all. And they don’t want to. After a point in a successful business career, the attractions of spending time in travel, study, collecting, social leadership, cultural entrepreneurship, etc., grow more enticing and distract some owners from hands-on management of their companies and business affairs. Age too has its impact on the inevitable need for us to trust others with stewardship of our wealth.

CSR values and CSR cultures promote trust. Wild-west, Bernie Madoff style, dog-eat-dog capitalism is neither friendly nor trustworthy. In such business environments, we are surrounded by potential cheats and thieves, rascals and schemers. Who can secure success under such conditions? Who can enjoy life when everything is always at risk of loss?

If we need to rely on others, we need to promote a moral capitalism. What goes around, comes around. If we insist on high standards of transparency, accountability, honesty and good work habits, we will benefit as others adopt those practices towards us. CSR is the win/win formula for social justice and all wealth is happier and more secure when society is just.

Old Wisdom

Minnesota’s business prosperity is not what it once was, and not just because of the current recession. Recently David Beal, the now retired business reporter for the St Paul Pioneer Press, analyzed the 2009 Pioneer Press 100, the paper’s ranking of the top Minnesota publicly traded companies. His conclusions do not make for happy reading.

This year for the first time in the list’s 27 year history no new company joined the list via an IPO stock offering to the public. From 2000 to 2009 only 29 companies going public made the list. But in 2009, it was easier than ever to make the list as the current fall in equity prices lowered the threshold for entry to only $12 million in valuation from a level of $45 million just one year ago.

In early 1970’s there were 350 or so publicly traded companies in Minnesota. Now there are less than 150, down from 260 in 1998.

Now, being publicly traded doesn’t necessarily make a company inherently better. No, privately held companies can still very profitably produce goods and services, hire employees, pay taxes and otherwise contribute to the community.

In fact, most employees work for small and medium size companies which are not publicly held. And, privately held, largely family owned, companies produce the lion’s share of GDP in most countries around the world. (Over 93% of GDP in Italy for example.)

But the great engines of Minnesota’s economic growth and reputation were those companies that went public and continued to grow – 3M, Honeywell, Northwest Airlines, Pillsbury, General Mills, Dayton’s, Medtronic, Supervalu, Best Buy, United Health, etc. Their profits partially ended up in financial support of important community institutions.

Though Cargill demonstrates how a closely held company can grow to strategic size, most privately held firms will hit a glass ceiling in mobilizing the financial investment necessary for reaching the big leagues of global market presence.

Minneapolis has lost its own investment banking firms that take local companies public. And, the liability risks of compliance with Sarbanes Oxley legislation is a deterrent to some in taking their company public.

But the decline in vitality of Minnesota companies attaining all the conditions favorable for a successful IPO indicates that something else has changed for the worse as well.

I think a kind of strategic leadership instinct is missing.

It is the common sense wisdom that was common place in an older generation of Minnesota business owners and executives.

In my work for the Caux Round Table on blending business success with ethics and social responsibility, I have run across pieces of sound advice from members of that generation. This home grown wisdom is now needed more that ever.

For example, I have an article from 1972 written by Wheelock Whitney, whose local investment bank (now owned by ING out of The Netherlands) once took many local companies public, that talks of the need for hard-working, sharp-minded boards of directors who are not rubber-stamps for management.

I have a 1975 letter from Whitney MacMillan, then CEO of Cargill and in the process of taking that family company to world class success, setting forth in one page the core ethical stance of the company: it would do business with honesty and integrity. Period.

And, I have several articles by Ken Dayton, who with his brother Bruce led the Dayton company to great wealth and profitability. Ken wrote on how business must take the lead in helping communities reach high standards of cultural achievement and social justice. Ken wrote too on the role of directors in providing strategic guidance to management.

What is the common theme put forth over three decades ago by Wheelock Whitney, Whitney MacMillan and Ken Dayton: high standards.

This is the very kind of “soft power” or “soft assets” that I wrote about in my July column.

From high standards comes growth and success. Lowering the bar for achievement, going with the flow, following the cautious advice of counsel, not sticking your neck out, covering for what the team or the boss is comfortable with – none of these approaches can ever build a great company.

Just read Jim Collins again in his book From Good to Great.

Mediocre standards and a focus on personal survival can indeed sometimes produce a business that survives, but not one that thrives, especially in hard times.

I think that every day we need to ask ourselves: is this the best that I can do?

Or, in the team setting: is this the best that we can do?

What can we do more and better for customers, for innovation, for better cost control, for more dedicated and motivated employees, for our brand equity, for the community? These are the standards of genuine business success.

What is a bit surprising to me is that the answer to how best to do business has been here all along. Like Dorothy returning to Kansas from Oz, Minnesota business people can learn much from our own legacy.

We don’t need to spend money on the latest consultancy fads or gurus or technologies. No, just seek out the human wisdom of what worked in the past to make Minnesota a great place to live, work and build a company.