Business and society in the coming decades
In
the long term, corporate and societal interests converge. Walmart CEO Doug
McMillon and SVP of sustainability Kathleen McLaughlin argue companies have an
opportunity to use their scale and expertise to reshape global systems and
mitigate complex problems.
Business exists to serve
society.
Over
the past several decades, one of the great discussions within capitalism has
centered on defining exactly what a business is and what its obligations are to
society at large and to the many stakeholders participating in business
systems, including customers, shareholders, employees, suppliers, and communities,
to name a few.
The obligations to society
have been defined in different ways at different points. For many retailers,
including Walmart founder Sam Walton, the focus has been first and foremost on
serving the customer. For others over the past couple of decades, the focus was
myopically on the shareholder. With the advent of shared-value,
double-bottom-line, triple-bottom-line, and related movements, we have seen a
broadening of the discussion to recognize the importance of multiple stakeholders
and the need to promote social, environmental, and financial value.
Long-term capitalism goes
one step further, asking companies to actively reshape the systems in which
they operate. Those systems could include the complex of logistical and
shipping services that move goods around the globe, the web of overseas
contract manufacturers on which companies rely, or the array of energy
suppliers that fuel worldwide operations. Long-term capitalism takes a deeper
view of business’s role in society, recognizing that, in the long run, the
interests of stakeholders converge with the interests of the broader community.
The actions of any one company may reverberate throughout the various systems
in which it operates, generating second- and third-order benefits as well as
negative externalities. Under long-term capitalism, companies recognize that
fact and, through concerted action with others of sufficient scale, work to
ensure constant improvements to those systems.
There are compelling
reasons companies should seize the initiative to drive social and business
benefits. First, in an interconnected world facing unprecedented environmental
and social challenges, society will demand it. Increasingly, a basic
expectation among customers, governments, and communities will be that the
companies they do business with provide a significant net positive return for
society at large, not just for investors. This will be a part of the implicit
contract or license to operate.
Second, adding these other
forms of positive return and improving systems will make the business more
sustainable in the long term. Every company should be able to contribute value
to society through its core businesses. By collaborating with other members of
their networks and pursuing initiatives that draw on their particular
capabilities, they can make society stronger in ways that also fortify their
business. There is generally ample scope to do this, even for companies facing
near-term earnings pressure, because the overlap between short-term, close-in interests
and longer-term, societal interests is almost always large.
The basics: Add value for society as well as
business
When it comes to serving
society, a company’s first task is to ensure that its core business is
fundamentally value creating—not just for shareholders but also for customers,
employees, suppliers, communities, and the environment.
This stakeholder-value
principle may seem obvious, especially given the extent to which
triple-bottom-line thinking has seeped into mainstream business discourse. Yet
financial short-termism still drives day-to-day decision making for much of the
corporate world. For many, shareholder value creation remains the driving force
of business initiatives; creating value for stakeholders becomes a by-product
or a means to an end. Even when faced with reputational challenges, companies
sometimes launch social initiatives as side projects only tenuously linked to
the core business, rather than strengthening and articulating the ways in which
the core business adds value to society.
Taking a more expansive
view of serving society means first ensuring the core business delivers value
to the broader set of stakeholders. Is it adding value to the local community,
for example, through taxes and engagement with local organizations? It also
means addressing externalities related to the core business.
At Walmart, that includes
trying to minimize the environmental footprint of our operations. Between 2010
and the end of 2013, we reduced our energy consumed per square foot by 7 percent,
and we now source 24 percent of our global electricity needs from renewable
sources—progress toward our long-term goal of 100 percent. By the end of 2014,
we were diverting more than 81 percent of our waste in the United States from
landfills through recycling and reuse, on our way to our goal of generating
zero waste.
Go beyond the core to change the system
While it is important to
operate the core business in a way that delivers value for society and the
business, a healthy, high-performing company can and must go further. The world
faces social, environmental, and financial challenges of unprecedented
magnitude and complexity. No one actor can resolve these issues
single-handedly. Governments and civil society are increasingly calling
business to the table.
Meanwhile, globalization
and technology have heightened interdependence in our social, environmental,
and financial systems. Even seemingly small actions can have serious
consequences for others far away in space and time. Globalization and technology
have also greatly increased transparency. Actions and their consequences,
however far removed, are much more visible to all.
These forces have increased
the opportunities—and the responsibilities—of business. If in the past 20 years
the discussion has been about the need for business to serve stakeholders
beyond just the customer and the shareholder, the next 20 years will be about
the need for companies to improve the networks and systems they depend on.
Leading businesses are actively using their scale and their particular assets
to accelerate progress on tough social and environmental issues.
So, how can companies
define their unique contribution to making society stronger? At Walmart, we use
five screens.
1. Prioritize issues
that are relevant to the company mission
Like most companies, we
look for those issues that sit at the convergence of our business interests and
the interests of society. For example, as the world’s largest grocer, we
believe the sustainability of the world’s food supply is one of the areas in
which we can make a significant contribution.
The United Nations projects
that food production must increase by roughly 70 percent to feed the estimated
nine billion people who will inhabit the planet by 2050. We will need to meet
that challenge in a way that is sustainable for the environment and equitable
for consumers and farmers (who make up two-thirds of the population in emerging
markets). Our goal is to make the food system safer, more transparent,
healthier, and more accessible—and to lower the “true cost” of food for the
environment as well as customers and farmers.
2. Draw on the
company’s particular capabilities
Even in purely
philanthropic areas, companies can have greater impact by drawing on their
unique business capabilities and applying those skills to complex societal
problems. In our own efforts, we try to add value in ways that are different
from—and ideally additive to—what others can do.
For example, to address
hunger in the United States, we make use of our particular assets. Over the
past several years, we have donated nearly 1.5 billion pounds of food to food
banks across the United States, including an increasing amount of fresh food
nearing the end of its shelf life. This improves nutrition among those most in
need, while reducing the amount of food we send to landfills as waste. We also
donated more than 180 trucks and refrigerated trucks, as well as time and
expertise in logistics (since this is an area we understand well), to help
strengthen the country’s charitable cold chain.
3. Aim for a triple
bottom line
In tackling priority
issues, we design our initiatives to promote benefits for society as well as
business. We set ambitious targets, and we track progress rigorously.
In food sourcing, for
example, we pursue initiatives that lower the environmental and financial cost
of food production. One of these initiatives, agriculture optimization, aims to
reduce greenhouse-gas emissions by eight million metric tons across ten million
acres of row crops such as oats and rice by 2020. Similar initiatives in the
food chain and our own operations have allowed us to reduce our greenhouse-gas
emissions by approximately 18 million metric tons since 2010. To do so, we are
working with the Environmental Defense Fund, as well as other large food
companies, including Cargill and General Mills, to adjust the use of fertilizer
and other inputs. We measure progress by tracking improvements in
greenhouse-gas emissions, water, yields, and other critical factors per ton of
food produced, by supplier and by category.
Such initiatives provide
classic triple-bottom-line results. Besides the important reduction in
greenhouse-gas emissions, they helped us to cut the price of fruits and
vegetables in the United States by a total of $3.5 billion through 2012 and
2013, offering important benefits for our customers and improving the world’s
food supply.
4. Reshape the system
for lasting improvement
In the era of long-term
capitalism, companies can and must go beyond the kinds of improvements
described above. They can do this by harnessing their expertise and scale and
by joining with other organizations to reshape global systems for lasting
improvement.
The global food system is
essential to our business. For it and for us to succeed, the system must evolve
in a way that is sustainable for the environment and smallholder farmers around
the world; the system also must be high-enough yielding to feed a growing world
population. Walmart is working to enable that evolution. For more than a
decade, we have been collaborating with the US Agency for International
Development to improve the lives of smallholder farmers and women in the
agriculture supply chain. Through our direct farm initiative in Central
America, USAID and its implementing agencies have provided agricultural
expertise, training, and capital for infrastructure to smallholder farmers,
preparing them to sell into the organized retail sector. Walmart provides
specifications based on consumer preferences, guidance on timing for different
crops and varieties, and regular purchase orders for offtake of farm
production. Smallholders gain a better price and more stable income, as well as
the skills to improve yields and profitability. Local customers gain a wider
variety of better-tasting fruits and vegetables at the time of year when they
want to buy. The agriculture sector gains productivity and becomes more viable.
In Argentina, for example, more than two-thirds of our fruit and vegetable
supply now comes from such direct-farm programs. In our U.S. private-label
supply chain alone, we depend upon roughly $4 billion per year in agricultural
products from small and midsize farmers.
Now we are exploring
opportunities to collaborate with others to strengthen transportation and
processing infrastructure in emerging markets. This will help develop local
economies, feed local populations, and support local farming families, all
while providing a secure supply of high-quality food products for Walmart
customers.
5. Engage partners in
transforming systems
To achieve lasting
solutions to complex social and environmental challenges, we have learned that
it is essential to engage and collaborate with other leaders of the systems we
seek to strengthen.
The difficult challenges
facing the world today are well beyond the scope of any single player to
address. Solutions will depend on cooperation among leading organizations in
all sectors.
To achieve the magnitude of
change the United Nations, World Wildlife Fund, Climate Disclosure Project and
others have called for in food, such as a reduction in water usage, a 3 percent
annual decrease in private-sector greenhouse-gas emissions, and a 15 percent
increase in yield in the next ten years, leaders of the food system must take
concerted, coordinated action. In recent years, there has been an explosion in
the number of multistakeholder collaborations in the food system, including the
Consumer Goods Forum, which aligns retailers and manufacturers in achieving
global food commitments such as sourcing 100 percent sustainable palm oil and
soy; the World Economic Forum, with its Grow Africa and related initiatives;
USAID’s Global Development Lab, to harness the power of the private sector and
others in addressing development challenges; and the Clinton Global Initiative,
with its innovative approach to sparking collaborative commitments from
corporations, to name just a few.
Embed
the values in the business
The commitment to address
social and environmental issues should be a “whole company” undertaking, woven
into day-to-day business activities; it’s not just a matter of corporate
philanthropy.
Many companies, including
Walmart, develop social and environmental priorities as part of annual
business-planning efforts. We have made bold, public commitments—for example,
to help train one million farmers by 2015 and to source 100 percent sustainable
palm oil by 2015. These commitments focus our efforts and force innovation.
Many of these commitments are made jointly with suppliers and our partners at
nongovernmental organizations.
Leaders in the company,
including the heads of business units and functions, set the social and
environmental agenda for their respective parts of the operation. They set
targets and cascade those down the line into the individual performance
evaluations and business reviews of their team members. The capital-planning
process explicitly addresses the social and environmental agenda.
In the long term, a
company’s business interests and the interests of society converge. Companies,
communities, individuals, and governments: we are all interdependent. Every
healthy, high-performing company has an obligation to use its strengths to help
society, and each can do so in ways that enhance the viability of the business,
too. From how products are grown and made to how they’re transported and sold,
companies can pursue innovative new methods and processes that provide lasting
benefits to their stakeholders and to the communities in which they operate.
Large-scale change does not happen overnight, but the stakes and potential benefits
are immense.
By Kathleen McLaughlin and Doug McMillon
This essay is from Perspectives on the
Long Term: Building a Stronger Foundation for Tomorrow, a book published by
Focusing Capital on the Long Term. For more information about FCLT, an
initiative cofounded by McKinsey & Company and the Canada Pension Plan
Investment Board, visit the FCLT website.
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