Why your board needs to implement a future proofing strategy

Business is changing and your board and management's future proofing strategy needs to encompass how business is done, argues BWD head of advisory Luke Heilbuth.

Edison often gets the credit, but it was Tesla who changed the world. His discovery in 1888 of alternating current allowed for the safe movement of electricity over long distances. Alternating current, not the incandescent light bulb, proved the connective tissue of the industrial age, powering industries and cities on a scale previously unimaginable.

In On Electricity, Tesla reflected on the formula behind his success: “With ideas it is like with dizzy heights you climb: at first they cause you discomfort and you are anxious to get down, distrustful of your own powers; but soon… the altitude calms your blood; your step gets firm and sure, and you begin to look for dizzier heights.”

Tesla captured the essence of future-proofing a century before the term became a corporate buzzword. No-one changes the world by clutching onto the status quo. New ideas are intimidating. But identifying trends as they emerge — and turning them to your advantage — is the basis for lasting success.

In thinking about the future, most executives focus on the risks and opportunities of new technologies. They see technological change all around and attempt to adapt their business models accordingly. Fewer, though, are grappling with an interrelated trend that might prove almost as important to their company’s ability to prosper over time: the changing relationship between business and society.

Social licence

Community expectations on the role business should play are changing, so companies are being asked a question few can answer: what are you doing to create value for all your stakeholders? Not only shareholders, but consumers, employees, suppliers, communities, future generations and the planet?

Many directors and business leaders continue to reject as politicised nonsense the notion that a company owes a broader obligation to the world around it. AMP chair David Murray AO FAICD exemplified the view when dismissing, in August 2018, proposed ASX Corporate Governance Principles and Recommendations, which would incorporate the concept of a social licence to operate.

Murray had a point that the introduction of the concept formally may add unnecessary uncertainty and complexity to the principles, which the AICD also argued in its submission. Nonetheless, business needs to accept that the social expectations of the private sector are changing.

The kind of capitalism that promotes both self-interest and the benefit of society (ironically, as Adam Smith originally intended) is being shaped by the planet’s two most important allocators of capital — Wall Street and millennials.

It is understandable that some directors are sceptical of the importance of this shift. The investor community has also only recently begun to convert. Earlier this year, BlackRock CEO Larry Fink wrote to the heads of BlackRock’s investee companies with an ultimatum — find a social purpose or a new source of funding.

In making the case, Fink argued that governments were failing to prepare for the future, on issues ranging from retirement to automation.

“As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges,” Fink said. “Indeed, the public expectations of your company have never been greater. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

When the leader of the largest asset manager on Earth begins to talk like this, it’s time to pay attention. Still, the sustainable business movement won’t change the world overnight. Fink, for instance, has been criticised in recent months for failing to divest BlackRock’s fossil fuel investments.

Sustainable business

But the shift towards a more conscientious approach to capital allocation is underway and accelerating. BlackRock is now one of the world’s largest suppliers of sustainable exchange-traded funds (ETFs), including the largest low-carbon ETF. Competitors BNP Paribas, HSBC, Aviva and the Norwegian sovereign wealth fund have committed to help carbon-intensive companies transition to a lower-carbon future.

In Australia, $46b industry super fund HESTA is leading a group of global investors with more than $6 trillion in assets under management to end the financing of tobacco at the UN General Assembly. Olam International, a sustainability-focused global food trader based in Singapore, has negotiated with 15 banks to cut the interest rate on a US$500m loan if it meets a series of environmental, social and governance (ESG) targets — an example of how the financial system is starting to “price” beneficial social and environmental outcomes.

So what of millennials? It’s tempting to scoff at avocado brunches and kombucha, but millennials matter. The largest generation in history, by 2025 they will account for 75 per cent of the Australian workforce, according to Galaxy research commissioned by Kronos. And companies failing to articulate their societal value proposition — how they benefit the world around them — will have trouble hiring the best of them. According to a recent Stanford Graduate School of Business study, 90 per cent of MBA graduates in Europe and North America preference organisations committed to social responsibility.

Businesses that fail to build a more sustainable business model will also struggle to gain investment dollars. A 2018 survey by TD Ameritrade found that 60 per cent of millennials think making investments based on ESG principles is important (compared to 36 per cent of baby boomers).

Benefits of purpose-led business

It’s easy to frame the growing global response to this trend in the negative; as a risk-mitigation exercise pursued out of reluctant necessity. But building a purpose-led or sustainable business (the words are used interchangeably) should be viewed through the lens of opportunity, especially for small and medium-sized enterprises.

With their legacy cultures, large companies often have trouble pivoting their business models to take advantage of people’s changing expectations. Smaller companies, by contrast, can introduce new systems, structures, values and objectives in quick time, potentially providing them with an advantage over competitors whose success relies on maintaining the status quo.

HuskeeCup, a reusable cup made from discarded coffee husk, is an example of a sustainable Aussie business with a big future. The brainchild of Pablo & Rusty’s coffee co-founder, Saxon Wright, Huskee solves problems of waste at both the cafe and farm level. Australians throw away over 50,000 takeaway cups every half-hour, while farmers traditionally discard coffee husk as waste.

Huskee’s social value proposition is to make cafes and homes more sustainable while achieving zero waste at the farm, including through its innovative cup exchange program HuskeeSwap. Google and a number of other multinationals have signed on as partners to improve their eco footprint.

For companies big and small, the advantages of a sustainable business model are becoming increasingly obvious. Financial benefits include:

• Increased investment inflows — a 2018 study by JP Morgan found that socially responsible investment is becoming mainstream, and is now worth nearly $23 trillion globally
• Bigger profits — Unilever’s Sustainable Living brands, which include Vaseline, Rexona and Dove, are growing 46 per cent faster than the rest of the business and delivered 70 per cent of the company’s turnover growth in 2017
• Protection against recession — a Harvard Business Review study found that in the GFC of 2008, US companies committed to sustainability achieved “above average performance” in financial markets, translating to an average of US$650m in incremental market capitalisation.

Practical steps

If you’re interested in future-proofing, but don’t know where to start, here are a few tips worth consideration.

Get management to prepare a future-proofing strategy Don’t become a Blockbuster or Kodak. Ask your leaders to formally assess and prioritise risks and opportunities likely to shape your prospects — financial, social or environmental. Ask them to prioritise three or four issues only. Your business strategy should then consider how you’re responding to each issue and make changes as necessary.

Build a value-creation model Once you’ve got a grasp of the big issues facing your business, identify the value you create to understand the needs and interests of your stakeholders. In a single page, preferably an infographic, you should be able to explain what makes your business unique (its competitive advantage), what value you create for society and what stakeholder needs you meet.

Create an SVP Once these issues become clear, you can create a social value proposition (SVP) — a single phrase that captures the “why” behind your business. Delivery startup Sendle, for example, is about “helping good businesses deliver”. It helps SMEs by guaranteeing a lower price for national parcel delivery than Australia Post, and is fully carbon-offset. With an SVP in place, life becomes easier. Employees know why they come to work, customers are motivated to buy your products and shareholders can see the long-term business case for investment.

Communicate There’s no point building a purpose-led business if no-one knows about it. How you communicate your strategy is just as important as the strategy itself. Start with your internal audience. Explain why you’re creating a more sustainable business. What benefits will it deliver and how will you measure them? Who will be responsible for ensuring progress is made? What risks are you prepared to take? Don’t confuse things by trying to do too much initially. Set one or two simple goals and build from there.