Business, society, and the future
of capitalism
Unilever
chief executive Paul Polman explains why capitalism must evolve, his company’s
efforts to change, and how business leaders are critical to solving intractable
problems.
Capitalism has served us enormously well. Yet while it has helped to
reduce global poverty and expand access to health care and education, it has
come at an enormous cost: unsustainable levels of public and private debt,
excessive consumerism, and, frankly, too many people who are left behind. Any
system that prevents large numbers of people from fully participating or
excludes them altogether will ultimately be rejected. And that’s what you see
happening. People are asking, “What are we doing here? The amount of resources
we currently use is 1.5 times the world’s resource capacity. Is that
sustainable? A billion people still go to bed hungry. Is that sustainable? The
richest 85 people have the same wealth as the bottom 3.5 billion. Is that
sustainable?” Digitization and the Internet have given consumers enormous
abilities to connect and aggregate their voices. Power is dispersed, but wealth
is concentrated. Further development and population growth will put a lot more
pressure on our planet.
Capitalism needs to evolve, and that
requires different types of leaders from what we’ve had before. Not better
leaders, because every period has its own challenges, but leaders who are able
to cope with today’s challenges (see sidebar, “From the archives: The social role
of the world enterprise”). Most of the leadership skills we talk
about—integrity, humility, intelligence, hard work—will always be there. But
some skills are becoming more important, such as the ability to focus on the
long term, to be purpose driven, to think systemically, and to work much more
transparently and effectively in partnerships. There are enormous challenges,
but business leaders thrive on them and are well placed to solve them, as they
also offer enormous opportunities. I often say it’s too late to be a pessimist.
The new corporation
Business is here to serve society.
We need to find a way to do so in a sustainable and more equitable way not only
with resources but also with business models that are sustainable and generate
reasonable returns. Take the issues of smallhold farming, food security, and
deforestation. They often require ten-year plans to address. But if you’re in a
company like ours and you don’t tackle these issues, you’ll end up not being in
business. We need to be part of the solution. Business simply can’t be a
bystander in a system that gives it life in the first place. We have to take
responsibility, and that requires more long-term thinking about our business
model.
In our effort to achieve that at
Unilever, we first looked inward. We actually had a ten-year period of no
growth, and that forces you to make your numbers or you’re under pressure from
your shareholders. You end up underinvesting in IT systems and training your
people; your capital base erodes. And bit by bit, you become internally
focused, think in the shorter term, and undertake activities that don’t create
long-term value. So how do you change that?
The first thing is mind-set. When I
became chief executive, in 2009, I said, “We’re going to double our turnover.”
People hadn’t heard that message for a long time, and it helped them get back
what I call their “growth mind-set.” You simply cannot save your way to
prosperity. The second thing was about the way we should grow. We made it very
clear that we needed to think differently about the use of resources and to
develop a more inclusive growth model. So we created the Unilever Sustainable
Living Plan, which basically says that we will double our turnover, reduce our
absolute environmental impact, and increase our positive social impact.
Because it takes a longer-term model
to address these issues, I decided we wouldn’t give guidance anymore and would
stop full reporting on a quarterly basis; we needed to remove the temptation to
work only toward the next set of numbers. Our share price went down 8 percent
when we announced the ending of guidance, as many saw this as a precursor to
more bad news. But that didn’t bother me too much; my stance was that in the
longer term, the company’s true performance would be reflected in the share
price anyway. Our final internal change was to alter the compensation system to
bring in some incentives related to the long term. Ultimately, a year or so was
needed to make it very clear internally that we were focused on the long term, on
sustainable growth. To reinforce that message externally we focused our effort
more on attracting the right longer-term shareholders to our share register.
The
benefits of long-term thinking
Thinking in the long term has
removed enormous shackles from our organization. I really believe that’s part
of the strong success we’ve seen over the past five years. Better decisions are
being made. We don’t have discussions about whether to postpone the launch of a
brand by a month or two or not to invest capital, even if investing is the
right thing to do, because of quarterly commitments. We have moved to a more
mature dialogue with our investor base about what strategic actions serve
Unilever’s best interests in the long term versus explaining short-term
movements.
That’s very motivational for our
employees. We may not pay the same salaries as the financial sector, but our
employee engagement and motivation have gone up enormously over the past four
or five years. People are proud to work on something where they actually make a
difference in life, and that is obviously the hallmark of a purpose-driven
business model. We’re getting more energy out of the organization, and that
willingness to go the extra mile often makes the difference between a good
company and a great one.
Let me be clear, though: a
longer-term growth model doesn’t mean underperforming in the short term. It
absolutely doesn’t need to involve compromises. If I say we have a ten-year
plan, that doesn’t mean “trust us and come back in ten years.” It means
delivering proof every year that we’re making progress. We still have
time-bound targets and hold people strictly accountable for them, but they are
longer than quarterly targets. Often they require investments for one or two
years before you see any return. For instance, one of our targets is creating
new jobs for 500,000 additional small farmers. We had 1.5 million small farmers
who directly depended on us, and we’ve already added about 200,000 more to that
group. It’s a long-term goal, but we still hold people accountable. The same is
true for moving to sustainable sourcing or reaching millions with our efforts
to improve their health and well-being. All of this is hardwired to our brands
and all our growth drivers.
Convincing
investors
When we reported on a quarterly
basis, we often saw enormous volatility in our share price, which attracted
short-term speculators. By abolishing full quarterly reporting of the P&L,
we took some of the volatility out. But moving to a longer-term focus required
spending significant time reaching out to the right shareholders. Any
company—certainly a company of our size—has thousands if not millions of
shareholders, and they can have different objectives. Some want you to spin off
businesses and get a quick return. Some want share buybacks, some want dividend
increases, some want you to grow faster. It’s very difficult to run a company
if you try to meet the needs of all your shareholders. So we spent time
identifying those we thought would feel comfortable with our longer-term growth
model instead of catering to shorter-term interests.
We have seen our shareholder base
shift. That’s probably not happening as fast as we would have liked, but we are
starting to see change as our results come in more consistently and we can
provide more proof: several years of consistent top- and bottom-line progress,
many years of consistent dividend increases, and so on. We’re starting to
attract more longer-term thinkers, who are sufficiently numerous to satisfy our
business model. It’s the same thing with consumers. Which consumers are you
seeking? You cannot appeal to all of them; you decide which ones you want and
then target those. Why not apply that same principle to your shareholder base?
It’s not only corporate leaders who
need to take a longer-term view of capitalism. Pension funds own 75 percent of
the capital on US stock exchanges, representing companies like ours. These
funds are actually there to guarantee longer-term returns for all of us when we
eventually retire. They firmly believe in that mission, but many of them have
activity systems that do not support it. They might offer quarterly incentives
to their fund managers; they might employ short-term hedge funds and others,
disturbing the normal economic process. It is increasingly clear now that a lot
of this activity actually destroys more value than it builds.
A fund manager, like a company,
needs to think, “How can I stimulate the right behavior? How can I have a more
mature discussion? How can we look at other drivers so that we see we’ve got a
model for longer-term returns?” I think we will all end up being in a better
position than we otherwise would. At Unilever, we’ve looked at our own pension
fund, with $17 billion of assets, and questioned whether it was invested according
to our views on long-term capitalism. We are seeking to adhere to the
responsible-investment principles that the UN Global Compact is championing. We
have also issued our first “green bond” in consumer goods to galvanize change
in the financial markets. We are talking to the growing group of high-net-worth
individuals about putting their money to good use. More people are becoming
more amenable to the argument than would have in the past.
A
new business model
In the coming 15 years, we need to
align on the new Millennium Development Goals.1
We have a unique opportunity to create a world that can eradicate poverty in a
more sustainable and equitable way. That is very motivational. Business needs
to be part of it. Corporate social responsibility and philanthropy are very
important, and I certainly don’t want to belittle them. But if you want to
exist as a company in the future, you have to go beyond that. You actually have
to make a positive contribution. Business needs to step up to the plate.
Although some people might not like
business or fail to understand that it needs to make a profit, they do
understand that it has to play a key role in driving solutions. In the next ten
years, I think you are going to see many more initiatives undertaken by groups
of businesses to protect their long-term interests and the long-term interests
of society. Governments will join these initiatives if they see business
committed. It is, however, becoming more difficult for governments to initiate
such projects in the current political environment as long as we don’t adjust
our outdated governance model.
The Tropical Forest Alliance2
is a good example of what can be done. If we keep going with deforestation,
which accounts for 15 percent of global warming, our business model and,
frankly, our whole society are at risk. On top of that, the consumer is saying,
“I’m not going to buy products anymore created through deforestation.” So
industry got together and said that we need to use combined scale and impact to
create a tipping point. The Consumer Goods Forum (representing $3 trillion in
retail sales), which we helped to create, is one of these coalitions of the
biggest manufacturers and retailers. When they said, “By 2020, we’re not going
to sell any more products from illegal deforestation, whether soy, beef, pulp,
paper, or palm oil,” that sent an enormous signal across the total value chain
and generated action on the supplier side. Governments are now joining. We’re
actually close to a tipping point to address these issues. That is the new
world we have to learn to live in.
byPaul Polman http://www.mckinsey.com/Insights/Sustainability/Business_society_and_the_future_of_capitalism?cid=other-eml-alt-mkq-mck-oth-1405
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