It’s Hard to Be Good

On the following pages, HBR profiles five “good” companies that do more than just pay lip service to community engagement, labor relations, environmental protection, corporate governance, and supply chain accountability. Neither our editors nor the academics we consulted have voted them the world’s most socially responsible corporations. But each excels in one or more of the areas just listed, and does so by making them part of its internal corporate logic—something that Rosabeth Moss Kanter argues, in another article in this Spotlight, that all businesses should do.

These firms have also succeeded commercially—hard evidence that doing the right thing as a company doesn’t conflict with bottom-line imperatives. As Zhang Yue, the founding chairman of Broad Group, says, “The survival and growth of a company is the same thing as its social responsibility.”

The Experts

Pamela Hartigan is the director of the Skoll Centre for Social Entrepreneurship at the University of Oxford’s Saïd Business School. She is also a founding partner of Volans.

…

Royal DSM

A decade ago, Royal DSM’s core offerings were petrochemicals, plastics, and base chemicals and materials. Today the Dutch firm is in the same sector, but its output is very different: nutritional supplements, pharmaceutical ingredients, and energy-efficient building materials.

Facts and Figures

Notable Strength Community Engagement Core Business Chemicals Country Netherlands Year Founded 1902 Employees 22,000 2010 Revenue €8.2 billion 10-year Annualized Total Shareholder

…

If the company’s first step on the path to being a good corporate citizen was to develop and sell more-sustainable, health-enhancing technologies and products, the second step is even bolder—and less obviously commercial: giving them away to those who need them most.

But both moves are strategic and designed to promote long-term corporate success in an increasingly complex global economy. The biggest initiative is a partnership with the World Food Programme to distribute DSM’s vitamins, nutrient mixes, and fortified food to malnourished people in Nepal, Kenya, Bangladesh, and Afghanistan; 10 million will be served by the end of this year. But the company, which has 250 sites in 50 countries, also participates in many smaller initiatives. For instance, it has contributed lightweight composite modules to a new school in Pune, India, which reduced the costs, time, and environmental impact of construction; the school’s students will also be given access to a DSM nutrition program. Elsewhere in India, one of DSM’s anti-infectives units offers free medical services to nearby villagers. And in Mexico, DSM employees hold monthly seminars on safety, health, and the environment for local schoolchildren.

Fokko Wientjes, the director of sustainability at DSM, says the company believes that providing aid is both the right thing to do and critical to the future growth of the business. “The benefit isn’t difficult to explain,” he says.

“First, in the war for talent, this way of thinking makes DSM an attractive employer. This is a company that’s doing more than just working for shareholders. We have extremely low turnover.

“Second, it helps us understand what the needs are in the different countries where an organization like the World Food Programme operates, which helps us innovate.

“And third, when you work with these groups you really get the message out on issues like the importance of nutrients. And in the end that will lead to interventions and investments that could be profitable.”

The service mentality starts at the top with CEO Feike Sijbesma, who spearheaded the sustainability-focused rebalancing of DSM’s product portfolio. Rank-and-file employees participate by nominating small projects for the company to fund. In the middle, local managers are encouraged to budget for outreach and engagement in their communities.

“You look at your environment and think, What can I contribute here?” says Wientjes, whose stints with DSM’s South American and Egyptian operations involved work on safer house construction and environmental cleanup. There’s just one rule: “It needs to be linked to our strategy, to our expertise. We wouldn’t do language lessons for children. But chemistry and math? That suits our company. That’s what we know.

“With big projects, you have to find the right partner and the right cause. You have to think, What more can I do with these competencies to build something both for society and for the company?”

It’s not just donations. In India, one of DSM’s most important growth markets, the company has a subsidiary tasked with helping local base-of-the-pyramid businesses move toward more-sustainable production, primarily in agriculture (for example, by using better cow feed to improve milk yields) and energy (by providing enzymes to improve the efficiency of gas plants powered by animal manure).

Wientjes acknowledges that DSM’s return on its social investment is hard to quantify. “We don’t really put a value on it right now, and maybe we should to have the investor community better understand,” he says. “But shareholders haven’t ever called me and said, ‘Please stop.’”

“A lot of companies’ CSR initiatives have nothing to do with their core business. DSM, by contrast, has used its savoir faire, its expertise, and mobilized staff to improve the nutrients in the food given in situations of famine or hunger. If we could clone Feike Sijbesma, the CEO, the world would be a better place.” —Pamela Hartigan, Saïd Business School

Southwest Airlines

Southwest’s first newspaper ad, published in 1971, promised that its flight attendants—then called air hostesses—would serve from the heart. (Later commercials made it clear they would also wear hot pants.) But what the marketing campaigns didn’t explain was how the company planned to create its energetic corps of customer-­loving, costume-wearing employees. The strategy was simple: Southwest would make its staff happy. Customer satisfaction and profits would follow.

Facts and Figures

Notable Strength Labor Relations Core Business Airline Country United States Year Founded 1967 Employees 35,000 2010 Revenue $12.1 billion 10-year Annualized Total Shareholder

…

Today that doesn’t sound new. But back then it was. And the philosophy has paid off. Southwest is now the largest U.S. domestic air carrier and has been profitable for 38 consecutive years, during which many competitors declared bankruptcy or operated in the red.

Last May, on the day the company finalized its $3.2 billion merger with AirTran, Southwest’s management team flew to AirTran’s Atlanta headquarters to throw an air-hangar barbecue for the 6,000 acquired employees based there. CEO Gary Kelly helped serve brisket. The next day the executive group went back to work on a plan that will merge seniority lists in 16 collective bargaining agreements and preserve the job of every manager below the C-suite, though some might be required to relocate. This approach highlights two key elements of Southwest’s employees-first strategy: meaningful interaction between staff and management, and good relationships with organized labor.

The company also champions a corporate culture—“warrior spirit, servant’s heart, fun-loving attitude”—that promotes collaboration. There is a “culture committee,” which is made up of 200 employees from all levels and meets quarterly to plan activities. One favorite initiative is “Delight and Surprise,” when committee members unexpectedly greet the crew of an arriving flight with food and drink and relieve them of plane-cleaning duties.

Employee development starts with intense onboarding and continues through the company’s six-week MIT (managers-in-training) program. Two poster children for career advancement at Southwest are Mike Ryan, a VP of labor relations who started in the mail room, and Teresa Laraba, senior VP of customer services, who began as a part-time agent in the El Paso airport.

Southwest’s pay and benefits are above the industry average. In 1973 it was the first airline to establish profit sharing, and employees now own 5% of company stock. Diversity is a priority, and HR policies allow for small but critical concessions like letting flight attendants trade hours.

Much of this is negotiated with the unions, with which Southwest has always worked well. Senior labor relations counsel Joe Harris, who has represented the company since 1972, remembers the initial thinking of founder and CEO Lamar Muse and his legendary successor, Herb Kelleher. “They simply adopted the position that our employees needed an effective voice so we would partner with these organizations,” Harris recalls. Of course, “we’ve had very contentious negotiations over the years. But we’re not like the Hatfields and the McCoys, where we keep fighting after the fight is over. At the end of the day we have a common objective to keep the company healthy and prosperous.”

Southwest re­in­forces the employee ownership mentality through aggressive internal communication at live events like Kelly’s annual “message to the field” speaking tour and through new technologies. The company offers text alerts for corporate news and has a smartphone app for its intranet, where Kelly posts a weekly audio update and senior managers blog and respond to comments.

Will Southwest be able to keep it going and remain a profit leader among airlines even as the economy stagnates, margins tighten, and competitors cotton on to the employees-customers-shareholder continuum? “It’s a tremendous challenge,” Harris acknowledges. “But this philosophy really does still permeate the entire organization.”

“Southwest has been consistently successful by staying true to its values. Other airlines have said, ‘We know we should improve labor relations, but we have 9/11, Asian flu, gas prices…’ It’s always, ‘We’ll get to that.’ Southwest has said, ‘The only way we can turn these planes around quickly is by having committed, problem-solving employees that work together. So what kind of HR practices promote that?’” —Thomas Kochan, MIT Sloan School of Management

Broad Group

“Responsibility is more important than growth.” “Protecting the environment is more important than profit.” “Love is more important than anything else.”

Facts and Figures

Notable Strength Environmental Protection Core Business Industrial Products Country China Year Founded 1988 Employees 2,600 2010 Revenue RMB 3.6 billion 10-year Annualized Total

…

You might expect to find those lines in the values statement of a company that makes energy-efficient air conditioners. But would you expect them from one based in hypercompetitive, high-pollution China? From one with industrial customers in more than 70 countries and more than $500 million in sales? From one led by a man worth an estimated $850 million? From one that might soon go public?

Broad Group, the Changsha-based business we’ve just described, doesn’t see a trade-off between responsibility and growth. Instead, the company—which makes not only air conditioners but also air filtration systems and prefabricated energy-­efficient buildings—is proof that the two can go hand in hand.

“Being good itself is competitive,” says Zhang Yue, who founded the company with $3,000 in 1988 and is now its chairman. “A bad company may be competitive in a market for a while, but it won’t last long. If you offer something of social value, you will survive, and you will prosper.”

Of course that wasn’t clear in the 1990s or even the early 2000s, when Broad was trying to persuade industrial customers to switch to its air conditioners. Its technology, which counterintuitively uses natural gas or waste heat to cool, is better for the environment—it avoids the ozone-depleting refrigerants used in electric cooling, reduces the load on power grids, and requires less energy overall. But the up-front costs are still significantly higher than those of less environmentally friendly options, making it a harder sell.

The company’s earliest successes were in locales with unstable electric systems. Now Broad Group exports to developed markets around the world, supplying airports from Madrid to Bangkok as well as military bases in the United States. It claims to triple the energy efficiency of facilities while dramatically reducing emissions.

The company’s other “good” products were developed partly as a response to social and environmental crises: Its air purification systems were designed after the 2002–2003 SARS outbreak in Asia (a cell phone that monitors air quality is on the way); its prefab building system—which allows for fast, zero-pollution construction of sturdy, well-insulated structures— followed the 2008 Sichuan earthquake.

Zhang sees that system, the BSB (Broad Sustainable Building), as the company’s future. “Buildings consume 40% of the world’s energy,” he explains. As soon as the BSB standards are verified by the Chinese government, the company will tackle its goal of producing 700 million square feet of energy-conserving space by 2020. Working through 100 franchised distributors, it hopes to win a 30% share of the global construction market. “We boldly dream that one day the whole world will cut CO2 emissions by 40% using this technology,” Zhang says.

Observers have been impressed by a video showing a prototype 15-story hotel built in 90 hours. But it’s a long way to world domination—hence the desire to raise more capital by taking the company public.

A stock market listing will bring new stakeholders, but Zhang thinks he can hold fast to the company’s ethos and culture. Indeed, investors will know exactly what they’re buying into: a company with environmental protection at its core, led by an outspoken tycoon who recently renounced his private jet and who refuses to contribute to overpopulation by having a second child.

Zhang really does seem to think he can build a global business on love. “If everybody and every business becomes socially responsible,” he says, “then the earth will become a beautiful hometown for us all.”

“Broad Group continually pushes forward new ideas, products, and services that not only help them meet bottom-line objectives but also satisfy their core mission—solving environmental problems in a way that connects to their existing business.” —Christopher Marquis, Harvard Business School

Potash Corporation

A decade ago, after the grand corporate frauds at Enron and WorldCom unleashed a wave of scandal-inspired regulation, the executives and directors of Potash Corporation made a decision. The Canadian fertilizer producer wouldn’t just follow the new rules. It would get ahead of them.

Facts and Figures

Notable Strength Corporate Governance Core Business Fertilizers Country Canada Year Founded 1975 Employees 5,500 2010 Revenue US$6.5 billion 10-year Annualized Total Shareholder

…

“There was this groundswell around governance in the academic, shareholder, and regulatory communities, and that made us stop and take a comprehensive look at what we were doing,” says Joe Podwika, general counsel. “We had established a sustainability committee, and we realized one of the pillars had to be good corporate governance. Instead of adhering to the minimum requirements, we could implement best-practice programs that in the long run would be good for the company.”

What started with a core values statement and code of conduct has grown to include a host of shareholder-friendly initiatives, from directors elected by majority vote to “say on pay” for executives—all before such measures were customary or mandated. Most initiatives—such as the stock-option plan based on three-year performance that covers 220 managers and goes up for shareholder vote each year—are taken proactively. But PotashCorp also reacts to outside pressures. Not long ago a big Canadian investor group requested direct contact with board members about executive pay, without management or counsel listening in. “The instinct is to say, ‘We can’t do that,’” Podwika says. “But we looked at it and decided we ought to”—even at a time when CEO William Doyle’s annual package of about $10 million (he also held roughly $400 million in stock and options) was generating controversy.

PotashCorp is not without critics. As recently as 1989 it was a debt-burdened government entity. Its mining operations create serious short-term environmental damage, even if it invests heavily in land reclamation. The company also still places “maximize long-term shareholder value” at the top of its key goals, followed by ones related to customers, communities, employees, and the environment (in that order).

But when it comes to governance, PotashCorp is by all accounts doing the right thing. What benefit does the company get as a result? “One way to think about the ROI is that it’s like an insurance policy,” says Podwika. “There’s a generally understood principle that the real value of the company is our reputation. I’d say that everybody has it on their consciousness—our CEO, our CFO, and certainly our board. People in every part of the company. We talk about it all the time.”

“Potash shows leadership in the clarity and forthrightness of its compensation disclosure. Rather than giving the minimum required and forcing the investor to try to figure out what the compensation really is, it voluntarily reports how much its executives earn from exercising stock options—even though in recent years it has been an embarrassingly high number. And it does so with a very user-friendly and transparent chart.” —Roger Martin, Rotman School of Management

Unilever

To understand the challenge of making Unilever’s supply chain sustainable, consider this: Each year, the company sells 170 billion products across 180 countries, sourcing materials from 150,000 suppliers and operating more than 250 factories. It’s hard to manage that network, much less improve its performance on sustainability. But, according to Pier Luigi Sigismondi, Unilever’s chief supply chain officer, doing better in that area is a strategic imperative. “We have to do business this way to sustain our long-term business goals,” he says. After all, the maker of Lipton tea, Knorr soup, and Dove soap can’t ignore farmland degradation or threats to the world’s water supply. And a leading consumer goods company must respond to consumer demand for sustainably sourced products.

Facts and Figures

Notable Strength Supply Chain Accountability Core Business Consumer products Country UK/Netherlands Year Founded 1930 Employees 167,000 2010 Revenue €44.3 billion 10-year

…

Execution rests on a “prioritize and conquer” approach. For agricultural sourcing, Unilever identified its top 10 raw materials (as measured by volume, strategic importance, and consumer interest in sustainability) and set out goals for moving to sustainable supply (as measured by 11 factors from soil quality to labor practices). For example, it buys 1.4 million tons of palm oil annually, or 3% of the global yield, but this year more than half of that will come from growers certified by the Roundtable on Sustainable Palm Oil, a group it helped establish. By 2015 the company intends to use sustainable palm oil exclusively.

In manufacturing and logistics, the company has set goals for reducing its environmental impact both directly (in factories, distribution centers, and transport) and indirectly (via better packaging and consumer education). Factories are required to submit monthly scorecards on their waste disposal and energy and water use. “We monitor it just as we monitor cost and sales,” Sigismondi says. By 2020 the company aims to reduce CO2 emissions from manufacturing and logistics by more than 40% from a 1995 baseline. So “we know we need to do 4% or 5% a year.”

Unilever typically works with governments and NGOs to ensure that its supply chain is following best practices. Though Sigismondi was recently in India visiting vegetable farms, he admits “it’s impossible to do it all on a one-to-one basis.” Suppliers in markets with no certification bodies are told to “self-certify” against Unilever’s Sustainable Agriculture Code; their progress is monitored with software tools and audits. And when activist groups unearth problems, as Greenpeace did in some of Unilever’s Southeast Asian palm plantations, the company responds (in the plantations’ case by revoking their contracts).

All this requires investment, and the return is variable. Tea growers certified by the Rainforest Alliance offer higher yields, which reduce product costs, but for sustainable palm oil the balance-sheet defense has yet to materialize. Still, “we’re big enough to afford the premiums, and we believe this is the future of the industry,” Sigismondi says. “Today we’re investing. We’ll see the return in years to come.”

There’s more to do. Unilever has not set targets for sustainable sourcing of chemicals, minerals, and packaging other than paper and board. It continues to explore ways to convince customers that they must behave responsibly, too. “Sixty-five percent of our environmental footprint is related to how consumers use our products,” Sigismondi says. “We have to lead beyond our own four walls.”

“Unilever has developed a pathbreaking frame­work for looking at products in a cradle-to-grave, value-chain-wide way. That represents a real step forward in companies’ taking on a higher burden.” —Dan Esty, Yale Law School