The Anthropocene – 3 Reasons Why It Matters to Your Business

 
David Pope, Scratch Media, https://www.scratch.com.au/

Introduction to the Anthropocene

In a wonderful new book, professors Simon Lewis and Mark Maslin at London University College, make a convincing case that the Earth has entered the Anthropocene (combining the Greek words for ‘human’ and ‘recent’). Humans have literally become a force of nature. Meaning that human activity changes the Earth from one state to another. To define the Anthropocene, these scholars define a framework in three parts:

  1. Is there evidence that human activity has begun to push the Earth in a new state? In short, yes. GHG emissions are delaying the next ice age and human actions are influencing evolution. Both will show in future fossil records.
  2. Is the new state marked in geological deposits? Again, the answer is yes. Changes in carbon dioxide levels are stored since the expansion of farming. Pollution of the Industrial Revolution shows in swamp sediments, and trees recorded nuclear fallout.
  3. When did the switch occur? From four candidates, the authors settle on the Columbian Exchange and the resulting Orbis spike (a lowest point in CO2) as the start of the Anthropocene:

(..)following Columbus’ 1492 arrival, approximately 50 million people in theAmericas perished and farming collapsed across a continent. (..) Vast areas ofland grew back to forest, removing billions of tonnes of carbon out of theatmosphere and into the new trees. This is seen as a dip in levels ofatmospheric carbon dioxide (..), with the lowest point being at 1610, capturedin Antarctic glacier ice [i.e. the so-called Orbis spike].

How Lewis and Maslin lead us towards these conclusions is a fascinating read. If you loved Guns, Germs and Steel, Sapiens, The Mating Mind, and The Origins of Political Order, you will love this book. (All of these books are highlighted in another post by the way, you can read that post here.) Below is a nice info-graphic that shows (some) of the topics they will run you through:

Source: UCL, https://www.ucl.ac.uk/news/2018/jun/scientists-propose-changing-rules-history-avoid-environmental-collapse

Why Should Managers Care About the Anthropocene? 3 Reasons.

I can almost hear you think: “All well enough that this is a great read, but why is this also a great read from a business perspective?”. Here are my 3 reasons:

1. The Anthropocene has found its way into mainstream vocabulary in relation to externalities of the firm. The term Anthropocene is a matter of huge debate (whether or not we should officially use the Anthropocene as a new geological time scale that follows the Holocene, that is). The debate itself is of little consequence for business. What is of consequence, however, is that it entered mainstream vocabulary. The link to externalities of the firm are easily made, and that’s why you should familiarize yourself with the term. [An externality is, as you know, a negative consequence of an economic activity experienced by unrelated third parties.] Like climate change entered the mainstream vocabulary in the nineties, the Anthropocene is popping up more and more. Leading newspapers, journals and organizations have already picked up on it, see for example: Nature, Wall Street Journal, the World Economic Forum, and the Guardian. There’s even a multi-media project consisting of a movie, a book, exhibitions and an interactive website that is getting a lot of media attention. This paves the way for systems thinking and more and more people and organizations will start asking questions how your business operations (as an integral part of the Anthropocene) affect the Earth’s systems. Do you already have an all-encompassing answer to this question? Do you have innovative sustainability strategies in place that take into account the Anthropocene is a central concept? Do you have the reporting processes in place to tackle this question?

2. The Anthropocene is central to the rise in ESG-pressures on your firm. Understanding the Anthropocene will answer the question where the ever increasing ESG-pressure on firms is coming from. Since more and more people will understand that the Earth is a closed system (see reason number 1), you can expect that every impact your business has on that system will, sooner or later, be under scrutiny. I argue that putting the era in which we live, i.e. the Anthropocene, as the all-encompassing force on Earth’s systems and, in turn, on people’s well-being, gives you a model to understand why there’s a proliferation of social movements and NGO’s pushing for changes in laws, regulations, reporting practices and business models. A possible depiction of how the Anthropocene ̶  through its pressure on physical and social systems  ̶  sets off pressures all the way down to the level of the firm to change business models, business processes and business practices, could look like this:

sleemanconsulting.com

3. The Anthropocene can be used as a super-structure for all ESG-related topics. If you, like me, have struggled how all different topics in the ESG-realm fit together, the concept of the Anthropocene can be used as a helpful tool. By plotting both social and natural/physical topics in the figure above, you have a super-structure where you can find all ESG-topics that might influence your firm’s business model, strategy and processes. This might be a useful addition to tools that you already have in place (e.g. a materiality or priority matrix) and can be used to track and make sense of topics as diverse as the Paris Agreement, Planetary Boundaries, the SDGs or radical transparency. I plotted a number of well-known concepts in the figure above to end up with the figure below:

sleemanconsulting.com

Why to read “The Human Planet – How We Created the Anthropocene”

The Anthropocene, with all that it entails (just a few of the topics, covered in the book, you should know about are: humans as a force of nature; positive feedback loops; complex systems; utilization of ever more energy; generation and processing of more information; increase in collective human agency) is a handy super-framework to connect ESG-topics that might have been considered separately without such a framework.

Even if you do not see the connection to your firm’s ESG-efforts, strategy or processes, and even if you do not see the need for defining a new geological time scale (I couldn’t care less; also see this article in Scientific American), this is a book worth reading. As the reviewer in the Guardian wrote:

‘Brilliantly written and genuinely one of the most important books I have ever read.’

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How to Structure Agile Companies. A Developing Story.

Everybody, in profit and not-for-profit organizations, will know by now how to run a scrum project or set up agile teams. The topic I try to explore here is more far-reaching: are there any good ideas out there on how to build your entire organizational structure to accommodate agile working?

I use concepts developed by Steve Denning (author of The Age of Agile) for a working definition of agile:

  1. Agile responds to the central challenge of business today: how to provide instant, frictionless, intimate value at scale.
  2. The law of the small team. Agile practitioners share a mindset that work should in principle be done in small autonomous cross-functional teams working in short cycles on relatively small tasks and getting continuous feedback from the ultimate customer or end user.
  3. The law of the customer. In truly agile organizations, everyone is passionately obsessed with delivering more value to customers. Everyone in the organization has a clear line of sight to the ultimate customer and can see how their work is adding value to that customer—or not.
  4. The law of the network. Agile practitioners view the organization as a fluid and transparent network. In the agile manifesto this is described as “individuals and interactions over processes and tools”.

Having worked as a scrum master on various agile projects myself, a question slowly developed over time: How would you draw the lines in an organization that wants to adopt agile working for the entire organization? In other words, what does an agile organizational structure look like?

A number of management thinkers have tried to answer just this question. What follows is a brief overview and some preliminary conclusions.

Bain & Company – Agile at Scale

In a recent Harvard Business Review article, consultants from Bain & Company argued that structuring for agile should at least be situational:

  • Companies often struggle to know which functions should be reorganized into multidisciplinary agile teams and which should not.
  • Not every function needs to be organized into agile teams; indeed, agile methods aren’t well suited to some activities. Even the most advanced agile enterprises – Amazon. Google, Netflix, Bosch, Saab, SAP, Salesforce, Tesla – operate with a mix of agile teams and traditional structures.
  • Changes are necessary to ensure that the functions that don’t operate as agile teams support the ones who do.
  • Routine operations such as plan maintenance, purchasing, and accounting are less fertile ground for agile. In companies that have scaled up agile, the organization charts of support functions and routine operations generally look much as they did before, though often with fewer management layers and broader spans of control as supervisors learn to trust and empower people.

Bain argues that one of the features of Agile is delayering. (Which, by the way, is another well known management concept, just as ‘situationality’ is). According to Bain a delayered organization should speed up decision making. When senior managers then also leave the decision on how to innovate to agile teams, “senior leaders get time to create and communicate long-term visions, set and sequence strategic priorities, and build the organizational capabilities to achieve those goals. Leaders remove constraints and solve problems.”

McKinsey – The five trademarks of agile organizations

In a January 2018 article on their website, McKinsey wants us to believe we are in a paradigm shift (possibly game changing as well?) from thinking about organizations as machines, to thinking about organizations as organisms. Weirdly, the writers mention Gareth Morgan when they write about organizations as machines, but not when describing organizations as organisms. Morgan did so in his 1986 (!) book Images of Organization. (He came up with a number of other useful metaphors for thinking about organizations, such as organizations as a brain, a culture, a political system, a psychic prison, a change or flux, and as an instrument of domination. It’s a classic.) To credit McKinsey though, they are first to attempt to draw an agile organizational structure. It looks like this:

The writers go on to discuss their five trademarks of agile organizations:

Reading through this list of five items; are these all really trademarks that we’ll only find in agile organizations? That’s a question you might want to answer yourself.

London Business School – Adhocracy

Julian Birkinshaw and Jonas Ridderstråle of London Business School, in their recent book Fast/Forward, also argue that in the current VUCA age (volatile, uncertain, complex and ambiguous) we need to say goodbye to old modes of structuring organizations. Their solution is the adhocracy. Not that the adhocracy is a new model, it has been around for multiple decades. The definition that springs to my mind is the one given by Mintzberg in another classic, The Structuring of Organizations:

In adhocracy, we have a fifth [after the simple structure, machine bureaucracy, professional bureaucracy and the division structure] distinct structural configuration: highly organic structure, with little formalization of behavior; high horizontal job specialization based on formal training; a tendency to group the specialists in functional units for housekeeping purposes but to deploy them in small market-based project teams to do their work; a reliance on the liaison devices to encourage mutual adjustment the key coordinating mechanism -within and between these teams; and selective decentralization to and within these teams, which are located at various places in the organization and involve various mixtures of line managers and staff and operating experts. To innovate means to break away from established patterns. So the innovative organization cannot rely on any form of standardization for coordination. In other words, it must avoid all the trappings of bureaucratic structure, notably sharp division of labor, extensive unit differentiation, highly formalized behaviors, and an emphasis on planning and control systems.

Birkinshaw (in Forbes) puts the emphasis on action:

Adhocracy is an action-based view of the organization focused on capturing opportunities, solving problems and getting results.

Ask yourself the question: is this really new, or is it an old concept that might be adopted by more and more firms now that more business environments seem to get more turbulent? I give you some more Mintzberg quotes from 1979 (emphasis added):

Contrary to the other configurations, large parts of the organization are organized into ad hoc project teams which solve specific projects.

This team grouping makes mutual adjustment the favored coordinating mechanism.

On a daily basis, the organization’s work force may be grouped into functional units, but if required by the managers, almost everybody can participate in temporary market based units. Intergroup coordination and communication with the strategic apex is done by the use of liaison devices.

Nobody in the organization monopolizes the power to innovate, and management typically does its best to ensure a setting that nurtures creativity and innovation.

An attempt to describe an agile organization structure

With all of the above in mind, here are some things to take into account when trying to build your agile organizational structure:

  • Agile is about small teams that can freely innovate to deliver value to internal and external customers. There still needs to be management direction on where to innovate, however.
  • To draw the lines in the organization, it is best to adhere to proven management methods in building organizational structures. Senior management still has to decide at least three things:
    • how to divide labor, or ‘who is doing what?’
    • how to make decisions, or ‘who decides what?’
    • how to coordinate activities, or ‘who talks with whom about which topics?’
  • You might want to consider keeping to one of the traditional structures (functional, geographic, product) for housekeeping purposes such as HRM-processes, but at the same time deploying staff to agile teams for day-to-day work.
  • Before you do anything else, ask yourself the question if your business environment warrants a highly flexible organization that structures work around every opportunity or customer whim in sight. Is your specific business environment really VUCA? We all like to be Spotify or Tesla. But in reality, we also need traditional production and logistics firms that might not operate in VUCA environments.
  • Probably it is best to deploy a few agile teams, track the results, and deploy more teams when business results improve because of agile.
  • ‘Only VUCA needs an adhocracy’, could be a useful credo.

Don’t get carried away

The first of two closing comments that buttress my attempt to describe an agile organizational structure comes from The Economist:

(..) companies need to adapt to a world that is VUCA (volatile, uncertain, complex and ambiguous) and which requires continuous innovation in order to keep up. Agile teams are the equivalent of in-house startups. It is worth remembering, however, that many startups fail to gain traction. There is a danger that, while a firm’s best talent is off pursuing new ideas, the core revenue-generating business deteriorates due to neglect. Permanent revolution may sound an enthralling idea in theory but may lead to chaos in practice.

The second closing comment is from Steve Jobs. I often have to think about this quote when agile practitioners preach about the need to listen to customer’s wishes:

“A lot of times, people don’t know what they want until you show it to them.”

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Which ESG-Topics Should You Disclose Using The Economist as a Proxy?

Digging through the first four months of The Economist for relevant ESG-articles, I thought it would be nice to group the articles and see which groups get the most coverage in this highly regarded newspaper. My effort in the form of a Materiality Matrix is shown above, with the number of articles per topic on the Y-axis and the – debatable – impact on a firm’s profitability if this topic is not tackled by its management, on the X-axis. If The Economist can be used as a guide, the topics that should be covered by your organization are thus governance, green technology, pollution and climate change.

Some interesting snippets taken from the articles can be found below, grouped per topic. (Almost all quotes are adopted directly from The Economist).

Governance

  • Must read governance-article on women on boards: Skirting Boards
  • Norway introduced compulsory quotas requiring stockmarket-listed companies to give women at least 40% of their board seats.
  • In Belgium, Germany and France women make up 30-40% of board directors in large listed firms.
  • Quotas have done little to advance women further down the career ladder: in Britain, France, Germany and the Netherlands 80-90% of senior-management jobs are still held by men.

Green Tech

  • Oil firms Shell and Total plan to take on utilities in deregulated markets to provide electricity and gas direct to homes and businesses. They are toying with a strategy that could move their core business from oil to electricity. Must read article: From Mars to Venus
  • Solar cells made from perovskite (a compound of calcium, titanium and oxygen) are coming to the market and might drive silicon-based cells out of business. It’s early stages though.
  • Solar power gets a lot of attention but generates only 2% of the world’s electricity.
  • Microchip costs have fallen a million times faster than those of solar panels.
  • Solar suffers from “value deflation”: the more solar is installed, the less of the electricity that is produces in the middle of the day is needed. Unless it can be stored, the more costs it imposes on the rest of the system.
  • In an article on electrical vehicles, The Economist doubts if batteries will displace diesel in trucking anytime soon. Batteries have to replace part of the cargo and that makes it too pricey for a thin margin business.
  • To see how hard governments can push for renewable energy, look to South Australia: all coal-fired power stations have been closed, it gets 50% of its power from renewables and recently set a target of 75% renewables for 2025.

Pollution

  • Must read article on plastic pollution: Plastic Surgery
  • China is not only the world’s biggest emitter of carbon, but the world’s largest recycler, treating just over half of exported plastic waste. On January 1st China banned the import of 24 categories of waste, including household plastics.
  • China furthermore has taken a harder line and pressed on with pollution controls, hitting coalminers, cement-makers, paper mills, chemical factories, textile firms and more.
  • The European Union launched a “plastics strategy”, aiming, among other things, to make all plastic packaging recyclable by 2030 and raise the proportion that is recycled from 30% to 55% over the next seven years.
  • On current trends, by 2050 there could be more plastic in the world’s waters than fish, measured by weight.
  • Just 10% of 3.6m tonnes of solid waste discarded each day the world over is plastic. Whereas filthy air kills 7m people a year, nearly all of them in low- and middle-income countries, plastic pollution is not directly blamed for any.
  • Researchers have identified 400 species of animal whose members either ingested plastics or got entangled in it.
  • Trucost, a research arm of Standard & Poor’s, puts the overall social and environmental cost of plastic pollution at $139bn a year.
  • To put that into perspective, the United Nations Development Programme says that the costs of overfishing and fertiliser run-off amount to some $50bn and $200bn-800bn a year, respectively. By 2100 ocean acidification, which is caused by atmospheric carbon dioxide dissolving into water, could cost $1.2trn a year.

Climate Change

  • Must read article on including carbon pricing in decision making: Low-Carb Diet
  • Of the 6,100-odd firms which report climate-related data to CDP, a British watchdog, 607 now claim to use “internal carbon prices”.
  • Investors increasingly demand that companies take a carbon tax seriously.
  • The atmosphere contains two-and-a-half times as much of methane (a powerful greenhouse gas) as it did before the Industrial Revolution.
  • Methane emissions must be slashed. Several giants have made strides to limit fugitive emissions. If all the world’s gas producers attained BP’s leakage rate of 0.2%, instead of an industry average of over 2%, it would prevent 100m tonnes or so of methane from entering the atmosphere every year. This would spare Earth as much warming as cutting all the carbon dioxide emitted since the 19th century by one-sixth.
  • The X Prize Foundation awards companies that come up with carbon capture and storage techniques: Four of the finalists plan to produce sturdy building materials such as cinder blocks made from the slag left over from steel production, cured with carbon dioxide. Another four will fashion the gas into plastics or carbon-fibre composites. The remaining two have invented ways to turn the stuff into carbon monoxide or methanol, which are industrial raw materials.
  • Shipping and airlines were the only greenhouse-gas-emitting industries not mentioned in the 2016 Paris climate agreement.
  • Shipping produces 3% of the world’s greenhouse-gas emissions, similar to an economy the size of Germany’s. Lack of cleaner shipping technology is not a constraint. Zero-carbon fuels are becoming available. Slowing ships down by 10% could reduce fuel usage by almost a third. Diplomats argue that the slow progress is because their actions affect not just the shipping industry, but exporters too. If regulators move too aggressively they may reduce the competitiveness of seaborne trade.

This was a first attempt to a materiality matrix inspired by articles that appeared in the Economist in the first quadrimester of 2018. I hope to also create materiality matrices for the remaining quadrimesters of 2018.

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The Most Surprising Thing I Learned from Finishing a Climate Change Course

There’s a lot of good knowledge packed into the SDG Academy’s Climate Change course. You learn about the science behind climate change, what the Paris Agreement entails, and which multi-stakeholder initiatives try to combat climate change. The one thing that was maybe lacking was a chapter on how climate change poses threats to individual businesses; in the form of reputational risk, funding risk and any direct consequences of climate change. (For a comprehensive discussion of these risks, please refer to Climate Smart Business Decision-Making.) The biggest eye-opener for me, though, was the realization that most IPCC scenarios include a form of carbon capture to keep the planet well below 2°C warmer than pre-industrial levels.

It is time to start the debate on capturing carbon directly from the air, now that the price of capturing a ton of CO2 has fallen considerably. Of course, there are numerous arguments against capturing CO2, such as:

  • it promotes coal-fired energy plants;
  • it distracts from a move towards renewable energy;
  • there is little support for storing CO2;
  • it’s better to stop producing CO2 than to capture and store it.

But the most persuasive argument that I can think of in favor of capturing CO2 is the realization that most of the IPCC scenarios include it to be able to limit warming to 2°C. Add to that a growing number of jurisdictions that either implement a carbon tax or a cap and trade system (and a falling price for carbon capture), and you have a possible business case for companies to start capturing CO2.

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Could You Be Wrong in Thinking Climate Change Does Not Affect Your Business?

Credit: Takver via Flickr

Introduction: what The Economist has to say about climate change and business

More than a year ago, we started off a series of blog posts on mandatory non-financial disclosures with a post on climate change. At that point, four risk groups of climate change were identified and suggestions were made on how to integrate climate risks in your overall risk management strategy. It is time to revisit and update the story on climate change, as climate science is advancing and impacts are becoming clearer.

As a heuristic (always a good idea, see this post), we gathered that the number of times The Economist, a weekly current events newspaper, wrote an article on ESG-related topics (i.e. risks stemming from environmental, social or governance aspects) would be a proxy for how serious firms should take ESG-risks. Climate change was the topic of the most articles by far in the period from roughly the end of 2015 to the end of 2017. We counted the following number of articles on ESG-topics:

  • Climate change: 38 articles.
  • Renewable energy: 18 articles.
  • ESG-risks: 12 articles.
  • Natural resource depletion and pollution: 11 articles.

Here’s how we think these topics fit together:

Please note we don’t claim any scientifically established causal relationships here; just a framework to put different topics loosely together and offer a way to think about interrelations. If you are looking for a scientific take on this, please visit the excellent report A Guide to SDG Interaction: from Science to Implementation from the International Council for Science.

Since climate change as a topic has the highest count in articles, is central to other topics such as the worldwide push for renewables and natural resource depletion (see schematic above), and climate change is advancing rapidly, we felt it was time to update our previous post on climate change risk. The importance of climate change risk is echoed by The Economist:

Ignoring the climate issues altogether looks like the biggest risk of all.

We will therefore revisit the four business risks already identified earlier (i.e. asset and infrastructure risk, yield and price risk, regulatory risk and reputational risk), and will propose a number of new risk groups that we found by reading recent articles by The Economist on ESG-topics.

Climate change and business risk, updated

In the table below, you will find all the business risks stemming from climate change found in The Economist. New risks (compared to our earlier blog post) are shown in bold italics. First, there are two additional business risks added to the risk group ‘external stakeholder actions to curb climate change’. Second, we found an entirely new risk group: ‘funding risk’.

For every business risk identified, we will now briefly describe the risk, give the examples found in The Economist, and offer a way to mitigate the risk.

Regulatory risk. More and more jurisdictions are introducing cap and trade schemes or carbon taxes. This inevitably means that firms have to take into account (future) carbon prices in investment decisions. According to the Carbon Pricing Leadership Coalition (a World Bank funded outfit that puts together business and governments to advance carbon pricing), ‘as of 2017, 42 national and 25 subnational jurisdictions are pricing carbon’. That already accounts for more than 20% of global CO2 emissions. In Canada, the announcement of a national carbon price puts high emitters at immediate risk. The province of Quebec in Canada, for instance, is lobbying to funnel $1 billion to Bombardier, an aircraft-maker, to make up for its payments of carbon taxes under a nationwide introduction of a carbon tax. Even if your own government is not imposing a carbon tax, there is increased risk that other governments start installing an import tax for every ton of CO2 emission in the making of a product. Indian steel makers, for example, will have to take into account a carbon tax when exporting to the EU, even though they do not currently face a carbon tax in India. What to do? More and more firms are using a price for carbon emitted in their long-term investment decisions. Putting a price on carbon in decision-making – and using a realistic price, say in the range of €50-60 per ton – will take into account any future carbon tax or cap and trade system. The Economist lists a number of companies that already use such internal carbon prices: Microsoft, DSM, AkzoNobel, Indian cement manufacturers ACC, Ambuja & Dalmia, French building materials producer Saint-Gobain, and supermarket chains Carrefour and Sainsbury’s.

Reputation risk. The sectors that face reputational risk include an obvious one and a, maybe, not so obvious one. To start with the obvious sector, the fossil fuel industry, it is not only CO2 emissions that are the target of environmentalists, but also methane leaks. That leaves companies like Shell, BP and ENI vulnerable to reputational risk even if they pledge to switch more and more to natural gas (infamous for methane leaks). Already, NGOs such as the Environmental Defence Fund are drawing attention to methane emissions in the production of natural gas that ‘now surpasses cow burps as a source of [methane] emissions’ according to The Economist. A sector that, as of yet, has not attracted the attention of environmental campaigners, is the cement industry. That might be about to change however, as more and more NGOs draw attention to an increasing number of industries now that it becomes clear that humanity is unlikely to keep temperatures less than 2°C warmer than pre-industrial times. Cement, together with steel, makes up a large part of the CO2 footprint for any building. And as firms try to lower their CO2 footprint, buildings, and thus cement, is another link in the chain in trying to reduce emissions. Firms that are exposed to this type of risk (i.e. reputational) are, according to The Economist, especially the major players in the cement industry, e.g. Heidelberg Cement Group and Cemex. Examples for mitigating these risks, as listed by the same newspaper, include setting publicly available targets (and reporting against those targets), carbon capture and storage, and using higher internal carbon prices for long-term investment decisions.

Shareholder pressure. An unlikely pressure group that turns its attention to climate change, are shareholders. Unlike environmental groups, who strive for direct reduction in emissions, shareholders would like to see that companies identify the impact of climate change regulations and policies on business plans. Again, the industry where shareholders are, at the moment, most active is the fossil fuel industry. The Economist refers to Shell, Total, Chevron and Exxon as firms where shareholders are particularly active to push towards pricing in carbon in investment decisions as the preferred mitigation strategy. Total goes further: ‘It plans to set out its ambition to develop an energy mix by 2035 consistent with Paris-style global-warming limits, including a pledge to invest $500m a year in renewables, and a “symbolic objective” to raise their share to 20% of its portfolio, from 3%. In an effort to complement its acquisition of a solar-energy company, it launched an offer to acquire a battery-maker, which will bolster its expertise in electricity storage’. Hidden in this mixture of Total’s plans, are a plethora of mitigation strategies that would please many shareholders pushing for just that: increasing the stake in renewable energy, taking head of broad international movements like the Paris agreements and adjusting strategies accordingly, and setting publicly available targets. Do this, and add to the mix internal carbon prices for investment decisions, and your firm will have a good policy mix to satisfy shareholder demands.

Lawsuit risk. In an article dubbed ‘Lawsuits against climate change’, The Economist points out that the number of lawsuits where the negative effects of carbon emissions are central, are rising. The targets are both governments and big energy firms. Ironically, governments also sue energy firms: San Francisco is taking BP, Chevron, Exxon and Shell to court. All of this is made possible by improved climate science: ‘Scientists are increasingly confident that they know roughly what shares of the greenhouse gases in the atmosphere were emitted by individual countries, and even by the biggest corporate polluters. (..) just 90 belched out 63% of all greenhouse gases between 1751 and 2010.’ In a fascinating report by the Carbon Majors Database, all these companies are listed. Unsurprisingly, the 90 firms are either big energy firms, mining corporations, or cement manufacturers. Even if your firm is not listed, you might want to check if a similar study is done for your own country, and you may find that your company is listed in that ranking. Climate litigation is on the rise. The focus is on big energy firms for now, but cement manufacturers and mining corporations might be next. The sooner you map your firm’s GHG emissions and estimate the risk that an interest group or government targets you in the near future, the better.

Decreased access to capital markets. The last new risk that we identified as compared to our last post on climate related risk for companies, is a funding risk. As climate change becomes more of an issue, investor demand for green bonds is increasing. At the same time, investors are backing away from industries that run greater risk from climate change (these risks are, essentially, all other risks described here). Moody’s, a rating agency, puts energy firms and car makers, for example, in a higher risk category. This can obviously translate in lower stock prices and higher premiums in bond markets. Big investors are adopting climate strategies rapidly. Allianz, for example, is not putting money in firms that derive more than 30% of their energy from coal; and even the biggest asset management firms like BlackRock have set-up dedicated green-bond funds fueled by investor demand. Another recent development is that rating agencies are threatening cities with downgrades if they don’t do more on climate change mitigation (also see asset and infrastructure risk below). Companies might well be next.

Asset and infrastructure risk. As 2017 proved, with hurricanes Harvey and Irma as horrifying examples, climate change increasingly poses a threat for assets and infrastructure. As wet places get wetter and stormy places get stormier, cities around the world are making plans to raise roads and improve drainages. Your business would be well advised to do the same. As an example, you could use impact models (such as the Inter-Sectoral Impact Model Intercomparison Project (ISI-MIP)) to establish which of your business locations are at risk, and implement a mitigation strategy for those locations accordingly. We could not find any specific examples in The Economist of businesses that have already implemented mitigation strategies for asset and infrastructure risk, however. It mainly refers to cities and governments to take action to protect assets and infrastructure. Your firm should follow the example of cities.

Price and yield risk. What we discussed for asset and infrastructure risk, more or less also holds for price and yield risk. Although The Economist acknowledges the risk (‘by 2050, even if temperature rise is successfully limited to 2°C, crop yields could slump by a fifth’), we could not find any mention of individual firms that are already affected by this. Again, this should not be a reason for a wait-and-see attitude. A good starting point is the Agricultural Model Intercomparison and Improvement Project (AgMIP). This major international collaborative is an effort to improve agricultural simulation and to understand climate impacts on the agricultural sector at global and regional scales. AgMIP produce highly useful maps for your businesses to gauge the impact of climate change on yields for crops in your supply chain.

Industry climate change risk profile

Reading through the business risks in the previous section, you will have been able to quickly assess if your firm faces a particular risk or not. By deconstructing climate change risk into seven distinct business risks (i.e. regulatory, reputational, shareholder pressure, lawsuit, funding, asset & infrastructure, and price & yield), you now have a tool to help you decide if the – arguably – abstract concept of climate change is relevant to your organization.

By way of summary, we have added specific industries (mentioned in The Economist articles that we consulted) to the individual business risks identified. This isn’t to say that other industries aren’t impacted by each type of business risk. See the table below:

Coming up with the right strategy mix to mitigate these risks might not be easy. Renewable energy, insurance policies, carbon capture and storage, (higher) internal carbon prices, improving drainages, moving production locations: they could all be visited as possible solutions. Keep in mind that the combination ‘climate change’ and ‘business’ does not feel like a realistic combination. We would argue that this is normal human behavior, since climate change is not a risk that has hurt your business in the past. But we hope to have shown with examples taken directly from The Economist, that your competitors and fellow business organizations are already fully taking on business risks stemming from climate change. A final word of caution from Nicholas Taleb:

People in risk management only consider risky things that have hurt them in the past (given their focus on ‘evidence’), not realizing that, in the past, before these events took place, these occurrences that hurt them severely were completely without precedent, escaping standards.

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A Roadmap Back to Business Fundamentals

One of the catch phrases I picked up in my university days, and still use when appropriate, is: ‘There’s nothing more practical than good theory’. During change efforts in any type of organization (i.e. profit, nonprofit, government), whether they are design changes or execution changes, it is always a good idea to keep a number of business fundamentals in mind to get, or keep, your organization on course. If it is true that it is more beneficial to study older literature that is still in print (see here) rather than reading the latest management book that might turn out to be another fad, you can do worse than read an old (2002) favorite of mine: What Management Is, by Joan Magretta, a former top editor at Harvard Business Review.

In a review of this book, Peter Drucker, arguably the most prolific writer on general management, wrote:

First rate as an introduction for the non-manager and especially for the beginner, but equally excellent as a rounded, complete, and comprehensive “refresher course” for the most experienced executive.

What Management Is defines a number of core management principles that, I suggest, should be at the core of what you, as a manager, try to achieve through your daily activities. By providing you with essential quotes from this book, I attempt to get the business fundamentals back into every activity and every change effort you pursue to help improve the performance of your team, department, business unit, or organization.

Throughout what follows I will use bullet points to highlight – what to me seem ­–fundamental insights into eight crucial management ideas. Beginning with why we need management in the first place, we then move onto the ideas themselves.

Why do we need management as a discipline?

  • Wherever our needs exceed our resources, we need management.
  • Management allows us to achieve a vast array of purpose that none of us could achieve acting alone.
  • We think we live in worlds of our own and can contribute as individuals, but this is only possible because some form of organization (through management) makes the specialized work we do productive.
  • Management is turning complexity and specialization into performance. As the world economy becomes increasingly knowledge based and global, work will continue to grow more specialized and complex, not less. So, management will play a larger role in our lives, not a smaller one.

Management Idea 1: Value Creation

  • Management’s mission, first and foremost, is value creation.
  • Value takes many forms and comes from many sources: a product’s usefulness, its quality, the image associated with it, its availability, the service. The more intangible the value appears, the more important it is to recognize that value is defined by customers. Value is not defined by what an organization does but by customers who buy its goods and services. There is really only one test of a job well done – a customer who is willing to pay for it.
  • Efficiency can be defined as doing things right; effectiveness as doing the right things. Effectiveness is what customers value.
  • The value chain is the sequence of activities and information flows that a company and its suppliers must perform to design, produce, market, deliver, and support its products:
    • you begin to see each activity not just as a cost, but as a step that has to add some increment of value to the finished product;
    • it forces you to see the entire economic process as a whole, regardless of who performs each activity. Managing across boundaries, whether these are between the company and its customers, or the company and its suppliers or business partners, can be as important as managing within one’s own company.

Note: for a discussion on shareholder value versus stakeholder value, see Beyond Shareholder vs. Stakeholder Value.

Management Idea 2: Business Model

  • A business model is a set of assumptions about how an organization will perform by creating value for all the players on whom it depends, not just its customers. Business models reflect the systems thinking that is so central to management.
  • A business model is a story of how an enterprise works.
  • A business model is a story about the basic human activities of making and selling. The twist in a new business model is almost always a variation on some aspect of an existing value chain.
  • Much of what ultimately determines a business model’s success is the behavior of people and organizations in markets.
  • For nonprofit or government agencies, the story always hinges on how the organization will change the world, or at least the specific aspect of the world its mission targets. Here, the twist in the plot – the critical insight about value – is what is sometimes called the organization’s theory of change.

Note: as tempting as stories on winning business models are, be aware that’s just what they are: stories. On why you should be very careful with prescriptive writing on business models, read Successful Businesses and the Halo Effect.

Management Idea 3: Strategy

  • Strategic thinking begins with a good business model.
  • Strategy goes further because the business model does not factor in competition.
  • When you cut away all the jargon, this is what strategy is all about: how you are going to be better by being different?
  • Strategy is about choices: which customers and markets to serve, what products and services to offer, and what kind of value to create.
  • Try to be all things to all people, and your organization will fail to find distinctive ways to compete.
  • A company’s profits are what’s left after subtracting costs from revenues. It follows, then, that there are only two ways one company can outperform another. It can get its customers to pay higher prices or it can operate on lower costs. To do either of those two things, it has to be different – or how else could you explain its ability to charge more or use fewer resources? That’s the simple arithmetic of superior performance.
  • One of the most effective roadblocks to pure competition is a unique positioning.
  • The five forces model (Michael Porter, 1979) has become a foundation of the strategy field. Porter identified the underlying forces that determine the attractiveness of any industry: the competition among existing players, the threat of new entrants, the power of suppliers, the power of customers, and the availability of substitute products. It is the interplay of these forces that determines where on the spectrum of competition – from perfect competition to monopoly – an industry is likely to be.

Note: in the last years, your organization’s positioning on non-financial aspects as environmental, social and human rights matters have become increasingly important for your customers and other stakeholders. For a discussion of non-financial aspects in relation to strategy, see What every manager should know about: Non-Financial Disclosure.

Management Idea 4: Organizational Structure

  • Management’s job, turning complexity and specialization into performance, requires it to draw three different kinds of lines. First, the boundary lines, which separate what’s inside and what’s outside. Second, the lines of the organizational chart, which map how the whole is divided into working units and how each part relates to the others. Third are the somewhat invisible, but always important, lines of authority. These determine who gets to decide what, and how the internal game is played.
  • Because strategy is dynamic, organizations must be flexible. Drawing the lines of organization is an ongoing struggle to stay relevant, not a job done once and for all.
  • Why do companies draw and redraw the lines that define how many of the steps in the value chain they perform themselves? Again, it’s a question of matching strategy and structure, of finding the organization best able to deliver a particular configuration of value at a particular moment in time.
  • Backward integration often made sense for two reasons: first, better coordination leads to lower costs; second, ownership guarantees a source of critical raw materials. With ownership, however, you lose the powerful incentive of the marketplace: the nervous edge that keeps suppliers on their toes.
  • Using participation instead of hierarchy, Toyota developed a host of techniques (collectively known as Total Quality Management, or TQM) to improve the quality of the manufacturing process: participation from everyone, cross-functional teams to solve problems, and cooperation and information sharing across company lines.
  • There is no one best way to organize. Scale, scope, and structure are enormously contingent on what you’re trying to do.
  • Designing an organization is frustrating, because most of the important decisions are at best trade-offs you’d rather not have to make. Treat the latest approach as a panacea, and you will surely be disappointed. Understand the trade-offs that have been made well enough to compensate for them, and everyone will perform better, whether it comes to drawing new lines or living within the existing ones.

Note: the need to manage ESG-risks in your supply chain can be another reason for backward integration. For an example, see the article on IKEA in my list of LinkedIn posts.

Management Idea 5: Measures for Your Mission

  • An organization’s purpose or mission determines what results are meaningful and what measures are appropriate.
  • One of the most fundamental managerial challenges of all is translating mission into action and into performance.
  • For most organizations, performance is multifaceted; it comes from striking the right balance. No one measure can capture 100 percent of what an organization needs to do to perform. And, like medicines, all measures have side effects, some of which can be dangerous to an organization’s health. In short, you can’t manage without measures, but neither can you apply them without thinking long and hard about how well they fit what you have to do.
  • As imperfect as any one measure might be, it’s impossible to work systematically on performance without them. Good managers know they can’t live without performance measures, but neither can they live by them without respecting their limitations.
  • Performance is all about realizing the mission. Performance and mission are never in conflict, if performance is properly understood and defined.
  • Whether we’re talking about a business or a nonprofit organization, performance is impossible without a mission.

Note: investors are increasingly calling for better performance on KPIs relating to ESG-factors, see for example my LinkedIn post on Impact Investing. This may call for an entry of some ESG-topics in your organization’s mission statement.

Management Idea 6: Innovation

  • Innovation is a very special kind of problem solving. It’s the search for new ways to create value, and new value to create.
  • An entrepreneur who doesn’t learn how to manage won’t last long. Nor will a manager last long if he doesn’t learn to innovate.
  • Gathering the information you need to create better bets requires active engagement, not just passive listening. It requires you to actively suspend your own intuition, to observe how other people behave, and without imposing your own logic, to ask why. This takes discipline because it goes against the grain in a number of ways. Most people prefer talking to listening. The more successful they’ve been, the more in danger they are of believing that when it comes to their business, they know best. True curiosity about other people – a passionate interest in understanding why people do what they do – is rare. Suspending judgment, observation, and curiosity – these are the necessary complements (and sometimes antidotes) to the prompting of instinct, intuition, and industry lore.
  • The fact that things can turn out in more ways than one is perhaps the defining characteristic of managerial decision making. You are forced to commit resources today toward performance in an uncertain future.
  • People confuse the best case (what they hope will happen) with the base case (what’s most likely to happen). The cash flows you lay out are only as good as your answers to these questions: What could go wrong? What could go right? How likely is it that those things might happen?
  • We forget that, like all models, Net Present Value rests on a number of assumptions. First, that you can translate your expectations about future events into a specific forecast of revenues and costs. Second, that you can capture the impact of both time and risk in the discount rate you use to adjust those cash flows. And third, that once you set out on the path those cash flows represent, you won’t change your mind along the way.
  • Without innovation and risk taking, there would be no economic progress. The discipline of management helps to increase the odds that the risky business of innovation will pay off.

Note: Magretta talks about ‘suspending your own intuition’. Tools to do just that, I described in Three tools to overcome confirmation bias.

Management Idea 7: Focus

  • Paraphrasing Pareto’s Law, performance will depend disproportionally on doing a few things really well. This is why it is critical to match an organization’s resources to those activities that make a difference.
  • Overriding point of Pareto’s Law: In most instances, a few things matter far more than others. An important corollary of the 80-20 principle is that averages and aggregate numbers are useless, if not misleading, because they obscure most of the decisions that are important to performance.
  • Drucker noted repeatedly that the greatest obstacle to innovation is the unwillingness to let go of yesterday’s success, and to free up resources that no longer contribute to results. The solution, says Drucker, is the discipline of “systematic abandonment”, a discipline Jack Welch applied at GE: ‘If you weren’t already in the business, would you enter it today?’ If the answer is no, then ask yourself: ‘What are you going to do about it?’
  • People much prefer to carry on in the hopes that their earlier decisions will be vindicated. The discipline of sunk costs (investments of time or money that can no longer be recovered or put to other use) helps managers avoid this trap, and can deter them from throwing good money after bad.
  • Benchmarking and best practices. These related disciplines are keeping more and more organizations marching to the steady drumbeat of continuous improvement. The idea is to compare the performance of your products or processes with those that are best in class, even if this means going outside your organization or industry.

Management Idea 8: Managing People

  • Most people are deeply – and rightly – resistant to being managed. In fact, the real insight about managing people is that, ultimately, you don’t. The best performers are people who know enough and care enough to manage themselves.
  • Management creates performance through others. Without the willing cooperation of others, management can accomplish very little.
  • Shared beliefs constitute an organizational culture – its set of assumptions about how we do things and who we are.
  • An organization’s values, unlike ethics, are matters of deep belief about which honest people can disagree. The question isn’t whether one company’s values are better than another’s, but which are better-suited to helping the organization achieve its purpose. The real measure is fit.
  • Setting an example is not the main means of influencing others, it is the only means.’ (Albert Einstein)
  • We saw earlier how performance measures make an organization’s mission concrete. Similarly, story, ritual, and symbol are powerful ways of making values tangible.
  • If management had its own golden rule, it would be this: Trust others as you would have them trust you.
  • If management is not trustworthy, employees will neither share their best ideas nor give their all.
  • Increasingly, economics has become a quantitative discipline, one of the “numbers” subjects. But its underlying aim has always been to explain human behavior. Its eighteenth-century pioneers, like Adam Smith, studied ethics and moral philosophy.
  • A manager can help people discover their strengths, and help people get better at what they’re good at, but a manager can’t and shouldn’t change who a person is.
  • Empathy is yet another instance of the outside-in perspective, of seeing the world through other people’s eyes. Working effectively with other people means accepting the limits of your own authority and of your own perspective.
  • As individuals we’re slow to apply the principles of value creation to our own efforts. We persist in defining our performance by how hard we work at something, rather than by the results we achieve.

Now ask yourself: How is my organization doing on these business fundamentals? And how can we improve our performance by looking more closely to what a manager should really do?

 

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What every manager should know about (5/5): Non-Financial Disclosure

Introduction

This ‘What Every Manager Should Know About’-series is intended for managers whose businesses have to disclose (or feel the need or pressure to disclose) non-financial information. The needs or pressures to disclose non-financial information are manifold. Regulatory compliance such as EU directive 2014/95/EU, NGO pressure, ESG-risk management, demands from investors, and many other factors can all be reasons for a firm to start on a journey of non-financial reporting. Different non-financial topics have in common that they arguably feel unfamiliar to business managers who are trained to mainly think in financial terms. Now that the business case for non-financial reporting is well established (see The Business Case for Non-Financial Reporting), it is time for managers to familiarize themselves with the non-financial aspects of their business operations. In this series, I covered climate change, human rights, new governance, and corruption and bribery. Of course, these merely scratch the surface of non-financial aspects. The range of topics discussed, however, allow us to draw a number of general recommendations that will help you make a plan for implementing non-financial disclosure for your organization. After summarizing these general recommendations, pulled from previous posts in this series, I offer you an additional important point for consideration: which organization function should ultimately be responsible for non-financial reporting?

What we can take from previous posts in this series

  1. Non-financial reporting is tied to risk management. The first thing that you should be aware of is that non-financial reporting is closely tied to environmental, social, and governance (ESG) risk management. Focusing on non-financial aspects will tell you much about the risks your firm is facing in these non-financial areas. In the post on climate change for example, the case was made that focusing on climate change offers your firm the chance to gauge asset and infrastructure risk, price and yield risk, government regulation risk, and reputational risk. Reputational risk was also discussed in relation to human rights. Not adhering to human rights principles, can furthermore lead to risks of disruption in your supply chain because of strikes, bad quality of products, or drops in productivity for example. Managing governance or anti-corruption (discussed in two other posts) in an insufficient manner can lead to anything from reputational risk, to profitability risk, to ultimately risking your firm’s license to operate.
  2. Involving stakeholders is key. In the post on governance, we saw that both an explosion of advocacy groups since the 1970’s and increasing globalization lead to ever more importance and influence of a multitude of stakeholders on your business operations. It makes sense to involve your most important stakeholders when you select the most material non-financial topics for your reporting effort.
  3. Don’t reinvent the wheel and use existing guidelines, certification schemes and overarching (inter)national policy goals. A number of authoritative sources for your ESG-policies are readily available. Posts in this series referred to, among others, the OECD Principles of Corporate Governance, the UN Guiding Principles on Human Rights, and the Anti-Corruption Ethics and Compliance Handbook for Business drafted by the UN and World Bank. In the environmental realm, there is a plethora of multi-stakeholder initiatives that can help your business implement proper policies. For example, WWF endorses a number of multi-stakeholder initiatives, such as the Forest Stewardship Council (FSC) for wood and other forest products, Marine Stewardship Council (MSC) for seafood, the Roundtable on Sustainable Palm Oil (RSPO), the Roundtable on Responsible Soy (RTRS) and the Better Cotton Initiative (BCI). Multiple actors offer tools to help you pick the certification scheme that fits the needs and demands of your business, focusing on social, environmental and governance elements. Beyond certification, your company should be aware of overarching goals set by for example the United Nations (see the Sustainable Development Goals) and governments (see for instance the Dutch push for a circular economy in 2050 which is, in turn, based on an action plan for a circular economy drafted by the EU). Aligning your efforts with those grander (inter)national schemes will help structure your message to stakeholders.
  4. Use a step-by-step implementation plan for your ESG-policies. In both the post on human rights and the post on governance, an 8-step approach to implement a policy on any ESG-topic in your company’s operations (including your supply chain) was proposed:

1) Analyze and prioritize. First, perform a risk analysis and determine where your priorities need to be.

2) Engage stakeholders. Engage widely with stakeholders and formalize the dialogue. The engagement should lead to a decision on a compliance strategy: a code of conduct or certification scheme that has the support of your stakeholders.

3) Select suppliers. Select suppliers that are willing to work together on your priority ESG-topics and are willing to work towards compliance with your targets.

4) Develop KPIs & implement processes and policies. Develop KPIs together with suppliers and other stakeholders. Important: do not forget to design and implement processes, policies and systems that can actually deliver on your KPIs.

5) Evaluate. Evaluate your (and your suppliers) efforts on a regular basis. Follow-up frequently to see if expectations are being met and evaluate progress.

6) Enhance performance. Use supplier development strategies to enhance performance. Implement collaboration and training programs at the supplier, invest in assets, or offer technical and (potentially) financial assistance. Informal evaluations and audits could encourage suppliers to take initiative.

7) Report. Communicate your efforts and results according to the compliance strategy you chose in step 2 or integrate the results in your current ESG-report. Reach out to all stakeholders involved in step 2 and get their feedback.

8) Review. Set-up a periodic review board. Make sure it is composed of in-house professionals and external academic, NGO expertise, and worker unions. Review performance evidence quarterly to identify patterns and explore possible solutions

Assigning non-financial reporting to the CFO

Now that we have a number of guidelines on how to implement non-financial policies and reporting in your organization, the next question would be: ‘who should be in charge?’ For a number of reasons, the answer to that question is unequivocal:

  • Non-financial reporting may not be financial reporting, but it is reporting. Consequently, the person in charge should know how to deal with data gathering, reporting processes, reporting systems, compliance and auditing.
  • Non-financial reporting is closely tied to risk management. The person in charge should have strong knowledge of enterprise risk management.
  • Non-financial reporting has implications for the firm’s strategy and vice versa, the person responsible should have a role in which she can influence decisions on both fronts.

For all these reasons, I propose to hand final responsibility for non-financial reporting to the Chief Financial Officer. Ioannis Ioannou, of London Business School, who has published widely on corporate strategy in relation to ESG-topics, tends to agree in an article in The Guardian:

There are important implications in terms of organisational design and structure. How separate should the strategy and sustainability functions be within a corporation? What should the relationship between the CFO and the Chief Sustainability Officer (CSO) be? Current corporate mindsets consider CSSR [corporate sustainability and social responsibility] issues as peripheral or at best, as separate issues, and therefore there is a clear distinction between strategy and CSSR functions. This is an artificial and dangerous segregation. In fact, for a company that truly understands what strategy will look like in the age of sustainability, the CFO and the CSO should be the best of friends, or even, the same person.

Conclusion

This last installment summarized the main takeaways from previous posts in the series ‘What Every Manager Should Know About’ that focused on non-financial reporting. These takeaways should give you an advantage in implementing both regulatory reporting and voluntary reporting. I covered a number of ESG-topics in relation to non-financial reporting and concluded that 1) non-financial reporting should be tied to risk management; 2) involvement of stakeholders is key; 3) you should use existing guidelines, certification schemes and overarching (inter)national policy goals; and 4) a step-by-step implementation plan for each of your ESG-priorities is needed. In addition, I argued that non-financial reporting should be the responsibility of the C-suite: if not the CFO, then a CSO (Chief Sustainability Officer) that works closely together with experts in governance, compliance, risk and reporting that resort under the CFO. What I failed to discuss is the difference in actual frameworks that structure your overall non-financial report. Again, there is an abundance of frameworks available – e.g. GRI, IIRC, ISO 26000, CDP, SASB – and I hope to give an overview of their respective uses in a future blog entry.

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What every manager should know about (4/5): Corruption and Bribery

Introduction

Now that large corporates have to adhere to EU regulation 2014/95/EU, managers should be more familiar with a number of non-financial topics. The EU regulation on the disclosure of non-financial information asks firms to provide information on environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.

In this post, the spotlight will be on corruption and bribery. I will give you definitions of bribery and corruption, explain why businesses can benefit from fighting corruption and bribery, and will show you how to implement an anti-corruption policy.

Corruption and bribery, an attempt at a definition

Transparency International (TI) defines corruption as ‘the abuse of entrusted power for private gain’. In addition TI says: ‘It can be classified as grand, petty and political, depending on the amounts of money lost and the sector where it occurs.’ I use TI’s definition of corruption, and not the definition given by the EU in its regulation, because the EU regulation does not include a definition. Nor does the EU provide a definition of bribery. So, instead, to find a less concise definition than the one used by TI, I consulted the anti-corruption convention endorsed by the highest number of states, the United Nations Convention against Corruption (UNCAC). However, UNCAC also couldn’t agree on the right definition…

According to Leslie Holmes, the reason why defining corruption (and bribery) is so difficult is threefold. In Corruption, A Very Short Introduction, he writes that cultural reasons, jurisdictional reasons and scholarly reasons all contribute to definitional confusion.  To solve this – and to elaborate on the definition offered by TI – Holmes proposes a 5-step approach to identify corruption, which I will use in the remainder of this blog:

  • the action (or omission) must involve an individual (an official) or a group of officials occupying a position of entrusted power;
  • the official has a degree of authority in decision-making;
  • the official must commit the act (or omit to do what he should) at least partly because of personal interests or the interests of an organization to which he belongs, and these interests must ultimately run counter to those of the state and society;
  • the official acts in a clandestine manner, and is aware that his behavior is or might be considered illegal or illicit. If uncertain about the level of impropriety, the official opts not to check this because he wishes to maximize his own interests;
  • the action or omission must be perceived by a significant proportion of the population and/or the state as corrupt.

Corruption encompasses both economic improprieties, such as embezzlement and bribes, and social improprieties such as appointing family (nepotism) or friends (cronyism). (Please note that cultural norms might label the same activities as corruption in one culture, but not in another; this is the reason for including the last step — i.e. the action must be perceived as corruption — in the approach to identify corruption.)

The difference between corruption and bribery, thus, becomes clear: bribery is a form of corruption. The OECD further defines bribery by listing some instruments for bribes: gifts, hospitality and entertainment, customer travel, political contributions, charitable donations, sponsorships, facilitation payments, and solicitation and extortion.

Considering the possible elements of corruption above (i.e. bribery, embezzlement, nepotism and cronyism), bribery is arguably the salient form of corruption in the business world. This is perhaps the main reason why the terms ‘bribery’ and ‘corruption’ are almost used interchangeably in guidance documents targeted at the business world. The OECD Good Practice Guidance on Internal Controls, Ethics, and Compliance, for example, uses ‘ant-bribery’ exclusively. When the same OECD joins forces with the United Nations and the World Bank to draft the Anti-Corruption Ethics and Compliance Handbook for Business, however, the nomenclature is ‘anti-corruption’ instead of ‘anti-bribery’. This confusion of terms should not deter us, though. Bribery is a form of corruption. When a guideline calls for business to implement procedures to combat corruption, I think it’s a safe bet that they want you to implement procedures to combat bribery. In the remainder of this post, I will use the terms interchangeably.

Why should businesses care about corruption and bribery?

Your business should obviously comply with rules and regulation (such as EU regulation 2014/95/EU) on the disclosure of your policies and results in preventing corruption and bribery. There are a number of reasons why governments and international organization would push for such regulations (all that follows is, again, from Corruption, A Very Short Introduction):

  • Societal reasons. Corruption can lead to reduced aid. It can lead to increase inequality and a sense of ‘them and us’, or to reduced social capital and low levels of trust, and higher (organized) crime rates. A specific example where society pays the price for corruption relates to the construction industry where corrupt safety inspectors ignore malpractices in return for bribes, leading to unsafe buildings. (Also see my blog on human rights and the Rana plaza disaster.)
  • Environmental reasons. Corruption and bribery can be a problem in issuing permits for natural resource exploitation. One problem that you have surely heard about is illegal logging in countries like Brazil and Indonesia.
  • Security reasons. ‘For a state to exercise its defense, law enforcement, and welfare function properly it needs adequate funding; if corruption reduces government revenue, this has detrimental effects on the state’s overall capacity to protect its people. There is a strong correlation between weak states and high levels of corruption.
  • Economic reasons. Countries that score high on perceived corruption (see for example the corruption perception index 2016 from Transparency International) face lower levels of Foreign Direct investment, have lower tax revenues, and often face issues like ‘brain drain’.

In addition to the reasons that governments and international organization would offer to combat corruption and bribery, surely there is a conspicuous reason for business to do so as well: free competition. Businesses depend on free markets and free competition. Without it, your firm could lose out on business unfairly. It is one thing to lose business to a competitor where there is a level playing field; it’s an entirely different thing if you lose business to a competitor who engages in bribes to secure sales. The UK Secretary of State for Justice, in his foreword to the guidance for business to the UK Bribery Act (2010), says:

Addressing bribery is good for business because it creates the conditions for free markets to flourish.

A second reason why business should care is to maintain its reputation. The numerous corporate corruption cases which surfaced in the last years didn’t do much good. Holmes gives some examples:

The focus so far has been on the negative impact of corruption in the narrow sense (i.e. that involves state officials). But in the 21st century, the general public has become far more aware of the potentially devastating effects of corruption in its broad sense. As one Western corporation after another – Enron (USA), WorldCom (USA), Parmalat (Italy), Siemens (Germany), AWB (Australia), to name just a few – has been shown to have been engaging in misconduct, including bribery and kickbacks to secure overseas contracts, so the public’s trust in the corporate sector has plummeted.

The Economist, in a review on a new book about corruption, puts it like this:

Corruption is never far from the front page. In recent weeks, thousands of Romanians protested against plans to decriminalize low-level graft, and Rolls-Royce was hit with a [$835m] penalty for alleged bribery. Meanwhile, long-running corruption scandals continue to roil political and corporate leaders in Brazil and Malaysia. The growing attention has spurred governments to pledge action, as dozens did at a global anti-corruption summit in London last year.

Anti-corruption policies thus help companies (i) to defend free markets and (ii) build their reputations as trustworthy and reliable business partners. One way to do this is to explicitly report on bribery and corruption (just as the EU directive demands). Some see this as an extension of corporate governance reporting (see my blog on new governance) and propose to add it to other corporate governance disclosures. Holmes describes the evolution to a quadruple bottom lining as follows:

Since at least the early 1990s, more and more companies have been presenting their annual reports not merely in terms of financial performance – the traditional ‘bottom line’ – but also of their social and environmental achievements. (…) This triple bottom lining – also known as the 3Ps approach, namely ‘people, planet, and profit’- is usually presented as ‘sustainability reporting’. But in recent years, there has been a push to add a fourth bottom line, governance. This would include reporting on what a company has been doing to reduce bribery and corruption. It is argued by proponents of this ‘quadruple bottom lining’ that firms would benefit from reporting a fourth line, since it should enhance a company’s reputation.

To be able to report on your efforts to prevent bribery and corruption — as Holmes describes, and the EU regulation demands — you first have to implement the proper procedures within your firm. This is the subject of the next paragraph.

How to implement an anti-corruption policy

In implementing an anti-corruption policy, you could revert to one of the many guidance documents available. I already mentioned the UK Bribery Act Guidance and the OECD Guidelines. What follows is a (very) short overview of best practices from the Anti-Corruption Ethics and Compliance Handbook for Business drafted in a joint-effort by the OECD, the World Bank, and the UN Office on Drugs and Crime (UNODC). This is not so much a step-by-step guide on how to implement an anti-corruption policy, but an exhaustive list of things to keep in mind while drafting, implementing and following up on your policies and procedures to combat corruption.

  1. A risk assessment, addressing the individual circumstances of the corruption and bribery risks faced by your firm and its business partners, should be the basis for any anti-corruption program.
  2. Support and commitment from senior management for the prevention of corruption. Senior management’s involvement should be strong, explicit and visible.
  3. Develop an anti-corruption program. The program should at least include your firm’s anti-corruption efforts, including values, code of conduct, detailed policies and procedures, risk management, internal and external communication, training and guidance, internal controls, oversight, monitoring and assurance. The program should be applicable to all employees.
  4. Oversight of the anti-corruption program. Top management appoints a senior officer to oversee and co-ordinate the compliance program with adequate level of resources, authority, and independence. The senior officer in charge, reports periodically to top management.
  5. Clear, visible, and accessible policy prohibiting corruption. Here, you can think about preparing and disseminating an internal anti-corruption manual.
  6. Detailed policies for particular risk areas. Areas often mentioned are: gifts, hospitality and entertainment, customer travel, political contributions, charitable donations and sponsorships, and facilitation payments.
  7. Application of the anti-corruption program to business partners. Here, you should consider all business partners you may need to include in rolling out your compliance program, such as contractors, suppliers, agents, lobbyists, consultants, auditors, representatives and distributors.
  8. Internal controls and record keeping. This refers to proper financial accounting procedures and other checks and balances.
  9. Communication and training. Periodic communication and periodic documented training for all employees.
  10. Promoting and incentivizing ethics and compliance. The firm’s commitment to an anti-corruption program should be reflected in its human resource practices. It should be clear that compliance with the program is mandatory and that no employee will suffer demotion, penalty or other adverse consequences for sticking to the program, even if it may result in losing business.
  11. Detecting and reporting violations. The anti-corruption program should provide a safe space, and encourage employees and others to raise concerns and report suspicious circumstances.
  12. Addressing violations. Your firm should consider appropriate disciplinary procedures to address, among other things, violations of laws against corruption and bribery, and the company’s ethics and compliance program.
  13. Periodic reviews and evaluations of the anti-corruption program. Install periodic reviews to assess if improvements to your program are needed.

What’s next?

The ESG-topics covered in this series have some common aspects. First, they could all be seen as posing a risk to your company’s efforts for profitability (or even your license to operate). Second, it could be argued that they are not a core element of your firm’s mission but are ‘hygiene’ factors that do not immediately lead to higher profitability per se, but could hurt profitability if not properly managed. Third, external communication on these topics goes beyond communicating to such direct stakeholders as shareholders, customers and regulators. These three common aspects lead me to propose that ESG-topics should be viewed and managed as an integral topic from both an organizational structure as a business process point-of-view.

In my final post on the EU directive and related ESG-topics, I will, thus, revisit the advice given in previous blog posts, and try to synthesize these in a unifying approach towards managing ESG-topics relevant for your organization.

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What every manager should know about (3/5): New Governance

As your organization is getting ready for the implementation of EU guideline 2014/95/EU on the disclosure of non-financial information, I hand you a series of blog posts on non-financial topics that business managers might be less familiar with. My aim for this series of posts is twofold: First, to give you insight into concepts that are integral to non-financial frameworks on reporting, such as the Global Reporting Initiative (GRI) framework. Second, to show why and how you should integrate these specific non-financial disclosures into your overall business and risk management strategy.

The first blog in this series discussed climate change; the second post discussed human rights.

For the third installment in this series on non-financial information, I will focus on governance. Not the governance business managers might already be familiar with; but a new governance arising from a world where a diverse multitude of stakeholders influence the decision-making process within the firm.

I will discuss what new governance is, why new governance is a good way to manage your ESG-risks, and how you should go about implementing a way of working that takes into account new governance.

Corporate Governance

Governance is the process of governing. Governing, in turn, is defined by the Oxford English Dictionary as conducting (i.e. directing or managing) the policy and affairs of a state, organization, or people. Corporate governance, therefore, can be defined as managing the policies and affairs of a corporation.

Business managers will be familiar with corporate governance being described along the lines of the following (and many more) concepts: accountability procedures for board and management team; policies and accountability to shareholders and other stakeholders; transparency; ethical behavior; audit procedures. All these concepts and procedures of corporate governance have been well established: see for example the G20/OECD Principles of Corporate Governance. (Although I have to add that discussions on governance issues such as executive pay, and occurrences of accounting scandals will probably never end, as this article and this article (respectively) in The Economist show; I guess no amount of governance will ever change human nature…)

Since business managers (and their internal and external auditors) already have a very clear understanding of what corporate governance entails, it would not add anything to their knowledge by only restating the principles of corporate governance as defined by (e.g.) the OECD. Instead, I will focus on a broader definition of governance. As you will see, this broader definition will help you understand how governance is a more extensive issue than just corporate governance, and how it is linked to those other ESG-risks: environmental risk and social risk.

Beyond Corporate Governance: New Governance

Setting rules, regulations and policies to govern the organization internally is not sufficient to manage a business organization in the twenty-first century. A number of developments in the last decades have pushed governance from hierarchical structures (such as those followed by most corporates and all national governments) towards new forms of governance.

The first of these developments is the ‘explosion of advocacy groups during the last third of the twentieth century’ as Mark Bevir calls it in Governance, A very Short Introduction. Without a doubt, the increasing range and variety of stakeholders are getting an ever stronger say in policy development, whether it be government policy or corporate policy. A second development is that the rise of globalization has called for global governance to manage international flows of good, money and financial products or investment. Increasing globalization necessitates governance of non-economic issues such as security, food safety standards, climate change, and other issues affecting global commons that transcend national boundaries (e.g. clean air and water, protecting marine life).

The old form of hierarchical governance (via national or international institutions) is increasingly replaced by multi-stakeholder governance models. According to Bevir, the features that these new models have in common are:

  • they combine established administrative arrangements with features of markets and networks;
  • they are multi-jurisdictional and often transnational;
  • they involve an increasing range and plurality of stakeholders;
  • governing arrangements, different levels of governance, and multiple stakeholders are often linked together in networks.

Business firms should be aware of new governance because they increasingly run into non-economic issues that transcend national boundaries. In many cases, they will find that the issue at hand is governed by new governance, instead of by old-fashioned hierarchical governance (i.e. national rules and regulations).

Corporate Governance vs. New (or Network) Governance

Although governance in business organizations is already in place in the form of corporate hierarchical governance, business managers need to be aware of new governance in the form of network governance. There are roughly three types of governance according to Bevir:

Most of the typologies focus on three ideal types: hierarchy, market, and network. Each of the ideal types relies on a particular form of governance to coordinate actions. Hierarchies rely on authority and centralized control. Markets rely on process and dispersed competition. Networks rely on trust across webs of associations. (…) Box 1 provides an overview of the resulting types.

As for corporate governance, organizations are – by their very nature – steeped in hierarchical thinking. In addition, the market variety of governance should not hold too many secrets for business organizations either. Network governance, however, is a different matter. Because of developments described earlier – dramatic increase in advocacy groups, and increasing multi-stakeholder governance for transnational issues –, organizations are faced with mounting pressure to start using network governance as an additional governance model in organizational processes.

Implementing Network Governance

Implementation of network governance within a business organization – to manage issues that transcend the sole responsibility of the company – might feel unconventional for business managers for two reasons. First, companies are built on hierarchical foundations and compete in markets, but the principles of network governance – based on trust – will feel new and alien in a business environment. Second, corporate governance is still very much focused on shareholders (as opposed to stakeholders) as Bevir argues:

A key principle of corporate governance is thus the rights of shareholders. The main issue of corporate governance is how to ensure that the rights of the shareholders are properly safeguarded.

Network governance introduces the concept of interdependency between multiple stakeholders, which comes with a number of sets of conflicting modi operandi: trust vs. authority, interdependent vs. dependent, diplomacy vs. rules and commands, and reciprocity vs. subordination. (Again, see box 1.) It is, thus, not an exaggeration that the ways of network governance are a-typical for how most business managers are used to conduct their business.*

Taking into consideration that i) network governance is a-typical for any business organization, ii) the need for implementing network governance is increasing, and iii) not being able to handle new governance poses an (ESG-) risk in itself, I propose that organizations start implementing new governance on a case by case basis, in order for the organization to get used to the processes of network governance.

In my previous blog post in this series, I introduced an 8-step approach on how to implement a human rights policy in your organization. Here, I repeat that approach in a slightly different format to highlight the elements that I think will help you understand where network governance comes into play.

An approach to start working on an issue that needs involvement of many stakeholders should always start with a broader ESG-risk analysis to determine where your firm’s priorities should be. After that – and this is the first step of implementing network governance in your organization – engage stakeholders. Engage widely with stakeholders and formalize the dialogue. The engagement should lead to a decision on a compliance strategy: a code of conduct or certification scheme(s) that has the support of your stakeholders. (The next four steps in the 8-step approach are mainly geared towards supplier selection in such a way that you can deliver on your results, so I will not discuss these here.)

After you have results from your activities and operations, report and communicate your efforts and results according to your compliance strategy or integrate the results in your ESG-report. Reach out to all stakeholders involved and get their feedback. The last step is setting up a quarterly review board. Make sure it is composed of in-house and NGO experts, external academics, and local stakeholders such as unions and local communities.

In short, to put you on track for implementing network governance in your organization, you should: engage stakeholders, report to stakeholders and get their feedback, and finally discuss your results in a quarterly review board. Putting so much emphasize on stakeholder processes (and regular transparent public reporting) might feel unconventional in a business environment, but it is the only way to adapt the firm’s processes to face non-economic transnational issues.

As I already argued in my blog post The Business Case for Non-Financial Reporting, disclosing non-financial information can lead to insights on how to update your business strategy or improve stakeholder relations. In addition, by implementing the new governance model, your firm will report on ESG-topics in such a way that your stakeholders will endorse your efforts. Implementing network governance thus becomes a powerful mechanism to reduce your overall ESG-risk and manage your firm’s reputation.

(* On a more philosophical note: network governance might also feel a-typical or unconventional because of the reign of the two main theories in international relations. Realists seem to accept that international issues are power-issues not all too different from Thucydides’ history of the power struggle between ancient Athens and Sparta. (Reading the classics really never is a waste of time.) Liberals hope to solve international issues through international institutions and law. Network governance (in this case called global governance), in contrast, seeks a solution that is not found in realist or liberal views; it tries to solve international issues through informal norms and self-monitoring. This could also be called the multi-stakeholder view, I suppose. For a short introduction on these views, again refer to the excellent little book by Bevir on governance.)

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What every manager should know about (2/5): Human Rights

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As your organization is getting ready for the implementation of EU guideline 2014/95/EU on the disclosure of non-financial information, I hand you a series of blog posts on non-financial topics that business managers might be less familiar with. My aim for this series of posts is twofold. First, to give you insight into concepts that are integral to non-financial frameworks on reporting, such as the Global Reporting Initiative (GRI) framework. Second, to show why and how you should integrate these specific non-financial disclosures into your overall business and risk management strategy.

The first blog in this series discussed climate change. You can read it by following this link.

The second blog of the series will discuss the aspects of human rights you should be familiar with as a business manager. I will discuss what human rights are, what the key drivers for respecting human rights are and, finally, how you can build a supply chain that respects human rights.

Defining Human Rights

What should the relationship between business and human rights be? The United Nations (UN) defines the role of business as respecting human rights; as opposed to states, that must protect human rights. Paragraph 12 of the UN Guiding Principles on Business and Human Rights (UNGP) states:

The responsibility of business enterprises to respect human rights refers to internationally recognized human rights – understood, at a minimum, as those expressed in the International Bill of Human Rights and the principles concerning fundamental rights set out in the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work.

Both the International Bill of Human Rights and the International Labour Organization (ILO) are part of the broader human rights movement that arguably started with the Enlightenment. In the table below, the Bill of Human Rights and the ILO are put into historical perspective. I highlight the texts which are referred to in this post (i.e. Bill of Human Rights, ILO, and UNGP) in blue:

table-complete

As we can see from this non-exhaustive timeline, human rights are ever evolving and expanding. In the words of Andrew Clapham in Human Rights: A very Short Introduction:

The human rights catalogue will continue to expand as new challenges emerge and new constituencies find it helpful to frame their claims as issues of human rights.

To list all articles in both frameworks (International Bill of Human Rights and in the ILO’s Declaration on Fundamental Principles and Rights at Work) will not be very helpful for managers to develop a first understanding of business and human rights.  Instead, I use clusters of human rights introduced by The Economist Intelligent Unit (EIU) in a report on the ‘challenges for business in respecting human rights’ (ranked in the order in which companies scored them as relevant to their activities):

clusters-of-rights

Not all rights are the same explains Clapham. We distinguish between:

  • Absolute rights: genocide, crimes against humanity, slavery, and torture are international crimes which are prohibited at all times.
  • Rights limited through legal restrictions designed to protect a defined legitimate objective: rights to liberty, fair trial, freedom of expression, belief, assembly, association, and property; any restriction on these rights has to be justified as proportionate to the aims pursued by the restrictions.
  • Rights that have built-in limitations: free speech and privacy.
  • Social, economic and cultural rights (sometimes called ‘aspirations’ instead of rights): food, education, health, housing and work.

Now that we have an understanding of the historical background of human rights, relevant clusters of human rights for business, and awareness that rights can have limits; we turn to the business drivers of respect human rights that go beyond mere compliance.

Drivers for Implementing Human Rights Policies

Besides compliance (a primary driver), there are a number of reasons why your company should have proper human rights policies in place. These include the protection of the company brand and reputation. Reputational risk is especially high if a firm has complicated supply chains. A 2015 article in the Journal of Business Ethics explains:

Social issues become relevant in supply chains because of the involvement of multiple suppliers who directly affect the reputation of the buying firm. Additionally, an enlightened stakeholder (both internal and external) holding the firm accountable for social issues in supply chains forces the firm to take responsible supply chain actions.

Two examples that are known throughout the business and human rights community are the Rana Plaza disaster and the Rohingya case in Thai fisheries.

In the Rana Plaza disaster in 2013, over a 1,000 garment workers died in the collapse of a factory building in Bangladesh. The EIU report rightfully links it to a failure of respecting human rights:

Spectacular failures of human rights protection still claim headlines. To cite just one of several recent examples, the tragic collapse of the Rana Plaza commercial building in April 2013 led to renewed questions about the quality of companies’ oversight of their suppliers’ human rights practices as well as the role of government in protecting such rights.

How events like these can hurt your companies’ reputation was shown by the bad news coverage Primark, a low cost British garment label, received when it was linked to the disaster (see for example the article Disaster at Rana Plaza in The Economist).

Another example that shocked the world in 2015, was the enslavement of Rohingya (an ethnic people from Myanmar) aboard Thai fishing boats. The Guardian reports:

Rohingya migrants trafficked through deadly jungle camps have been sold to Thai fishing vessels as slaves to produce seafood sold across the world, the Guardian has established.

The seafood was traced to individual leading supermarkets worldwide that had to take immediate action to manage their reputation.

External and internal stakeholder pressure is often mentioned as another driver to implement human rights policies. NGO’s, local communities, investors, and employees can all pressure the corporation into doing more on human rights topics. Risk management might be a fourth driver for implementing human rights policies and procedures. Risks to manage are, apart from the reputational risk already mentioned, risks that stem from disruptions in the supply chain because of issues with human rights (e.g. strikes, bad quality of products, or drops in productivity, etc.). A final driver, which is sometimes overlooked when it comes to human rights policies, is performance improvement. Workers that are well taken care of tend to perform better, which will, in turn, lead to higher output or higher quality of products in your supply chain.

With these five sets of drivers (i.e. compliance, protecting the company reputation, external and internal stakeholder pressure, risk management, and performance improvement) there is surely a business case for implementing human rights policies in your supply chain. We will now discuss how to do just that.

Implementing Human Rights Policy in Your Supply Chain

From all the ESG-topics that firms try to grasp, human rights might prove to be the most difficult one. The head of government relations at Anglo American, a mining corporation, says (in the EIU report):

the notion of human rights abuses is an alien and scary one among technical functions who are more used to ‘impacts’ and structured, technical processes to address them, as opposed to legal ones.

John Ruggie (who drafted the UN Guiding Principles), also in the EIU report, agrees:

It takes time. It takes training. Things have to be translated into operations-speak if they are going to be effectively internalised by people on the ground.

Concluding that implementing human rights policies is not easy, one of the key strategies in implementing those policies is to team-up: involve NGO’s and maybe academia and regulators. In the words of a study published in the Notre Dame Journal of Law, Ethics and Policy:

Human rights are ever evolving so there is a need for open dialogue with government, social groups, NGOs and other stakeholders.

Taking all this into considerations, I propose an eight step approach to implementing human rights policies in your supply chain. This approach borrows insights from the Canadian Network for Business Sustainability, William Bradford’s comprehensive article Beyond Good and Evil: The Commensurability Of Corporate Profits and Human Rights, and Yawar and Seuring’s literature review Management of Social Issues in Supply Chains.

Step 1: Analyze and prioritize. First, perform a risk analysis and determine where your priorities need to be. An example from the EIU report:

Coca Cola conducted a human rights risk analysis of its entire value chain, which identified seven priority risks, ranging from employment and health and safety issues, through to land rights, compliance with transparency and due diligence requirements.

Bradford advises along the same lines:

Corporations should independently perform a rigorous “social audit” to ascertain the current status of their human rights protective practices, the threats to human rights within their spheres of operation, and the internal procedures available to respond to change and rapidly emergent threats.

Step 2: Engage stakeholders. Engage widely with stakeholders and formalize the dialogue. The engagement should lead to a decision on a compliance strategy: a code of conduct or certification scheme that has the support of your stakeholders. Prioritize. Depending on the size of your operations, it might very well be impossible to implement ‘everything everywhere’. On engaging stakeholders, Bradford argues:

With the inputs from NGOs, corporations will be able to further refine their practices and enhance their capacities for compliance while reducing the risks of litigation and injury to reputation.

Step 3: Select suppliers. Select suppliers that are willing to work on respecting human rights. An implementation of virtually anything in your firm can never be just about ‘ticking the box’. Select suppliers that understand what you are trying to achieve and that will work with you in a longer term relationship.

Step 4: Develop KPIs. Develop KPIs together with suppliers and other stakeholders. Again, use the knowledge of your stakeholders. But do not forget to design processes and systems that can actually deliver on your KPIs.

Step 5: Evaluate. Evaluate your suppliers on a regular basis. Since you are implementing something that is also challenging for your firm, you should follow-up frequently to see if expectations are being met and evaluate progress.

Step 6: Enhance performance. Use supplier development strategies to enhance performance. Implement collaboration and training programs at the supplier, invest in assets, or offer technical and financial assistance. Informal evaluations and audits could encourage suppliers to take initiative.

Step 7: Report. Communicate your efforts and results according to the compliance strategy you chose in step 2 or integrate the results in your current ESG-report. Reach out to all stakeholders involved in step 2 and get their feedback.

Step 8:  Review. Set-up a quarterly review board. Make sure it is composed of in-house professionals and external academic, NGO expertise, and worker unions. Review performance evidence quarterly to identify patterns and explore possible solutions. Such formal review sessions might prove invaluable to organizations according to Bradford:

Over the last decade, formal and ongoing dialogues have developed wherein corporations, NGOs, government officials, academics, labour representatives, and community leaders meet to discuss issues of common concern, including monitoring of, and compliance with, CCCs [Corporate Codes of Conduct] governing the protection of human rights. Such dialogues afford corporations valuable and low cost information as to the social expectations of important stakeholders in a setting that enables the ongoing (re)negotiation of the details of broadly-based norms and principles that constitute civil partnerships. In exchange, NGOs acquire additional social status, wealth, prestige, and access. Through dialogues, corporations can calibrate their practices, learn how best to uphold their agreements, and retain the material advantages of identification by NGOs as socially responsible.

As I already argued in my blog post The Business Case for Non-Financial Reporting, disclosing non-financial information can lead to insights on how to update your business strategy or improve stakeholder relations. The discussion on implementing human rights policy – as part of the discussion on disclosure of non-financial information – has shown again that implementing sound ESG-strategies can boost your risk management, manage your reputation towards stakeholders, and enhance performance in your supply chain.

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