Integrity + innovation = sustainable performance
What do Marks & Spencer and HSBC have in common? They are both focusing more and more on integrity and innovation. Could this be the way to achieve total sustainable performance?
Between 1999 and 2006, the number of companies issuing reports in accordance with the guidelines of the Global Reporting Initiative rose from 20 to more than 1,000.
Responsible behaviour in the corporate world is not new. Financial services provider Friends Provident was founded by Quakers in the first half of the 19th century, and these roots continue to inform its management ethos. Long before socially responsible investment had become a buzzword, the company had established its stewardship ethical fund range, encouraging investee companies to espouse similar values regarding ethical, social and environmental standards. Having grown steadily over two decades, these funds topped £3B by the end of 2006.
What recent years have produced is a much greater focus among companies across all sectors, on winning and keeping the trust of their stakeholders. This focus at least partly reflects growing public awareness about, and rising expectations of, corporate ethics – in both developed and developing economies.
Leading companies are using sustainability-driven innovation to create real business value. US firm GE has reported doubling of the sales of its Ecomagination range of green products and services to $12B (£5.9B) in two years. At around the same time, Citigroup has announced investment of $50B (£24.6B) over ten years in environmental projects. And IBM pledged to spend $1B (£490M) a year on similar projects.
While all this activity is taking off, the familiar competitive pressures of business are not going away. Instead, they continue to mount, compelling companies to keep finding new and better ways to deliver the goods and services that society wants, more efficiently and profitably.
The business landscape is undoubtedly changing. And there is considerable confusion as to how business should respond. Jargon around issues of corporate responsibility, social responsibility, corporate citizenship and accountability abounds. But it does little to help corporate leaders to identify the principles, policies, actions and metrics they need to build more sustainable businesses. Meanwhile, media scrutiny of corporate behaviour and alleged double standards is widespread and condemnatory, to the extent that some companies hesitate to make necessary decisions and actions for fear of falling foul of the press.
But the way ahead is becoming clearer. Increasingly, we see industry’s different sectors being led by companies – such as Marks & Spencer in retail, BT in communications, Novo Nordisk in healthcare, and HSBC in banking – that have two things in common:
- Integrity: Consistently fulfilling their stated business principles as an integral part of decision-making, rather than managing CSR as an additional business activity
- Innovation: Finding successful new ways of value creation in response to the changing needs of markets, societies and the environment
What is it about the combination of integrity and innovation that seems to lead to higher performance? To understand this, it is worth taking a closer look at the attributes involved.
On one hand, a company with integrity is one that does not let stakeholders down. Promises made become promises delivered. On the other hand, strong innovation capability is characteristic of organisations that constantly deploy new, improved ways to deliver what they promise to their different stakeholders.
Both integrity and innovation are intuitively connected with improving the overall performance of a business, and the sustainability of that performance, because both are inherent in the major routes to sustainable performance:
- Cost reduction
- Risk reduction
- Creation of new opportunities
- Building of stakeholder support
The business value of innovation is well recognised. Most leading companies emphasise their innovation focus and strengths in external communication and for internal motivation.
Although notoriously difficult to measure, the premise that effective innovation creates company value – in terms of additional sales – is now generally taken as given. Research by Arthur D Little has shown that innovative firms achieve on average six times higher earnings before interest and tax, and a growth rate that is 13% higher than the underperformers’.
Leading companies also understand the importance of being seen to be innovative, because a reputation for being innovative enhances a company’s reputation – among investors, customers, business and government partners, staff and target recruits – and thereby generates additional value.
Less well recognised is the value created by integrity. But the logic is similar. Integrity breeds trust; trust creates a good reputation; and, once again, reputation builds value. Conversely, several incidents of recent years show how costly – and even economically fatal – loss of integrity can be (eg Enron, Dynergy, Global Crossing, etc).
Efforts to ensure company integrity take a variety of forms. Among the best known and most debated are corporate governance and responsibility. More companies are developing sophisticated approaches to handling these. Still, in most cases, such activities run parallel to – and largely separate from – the innovation efforts. As a result, most companies are not achieving their full potential.
The way we do business
Increasingly, outstandingly successful companies in specific sectors and in the global marketplace appear to be those where both integrity and innovation are the way they do business – not adjuncts to the day-to-day corporate working, relegated to a compliance committee or an research and development department head. Such companies demonstrate integrity, evidenced by clear principles that are consistently fulfilled in the business as a whole. They also excel at innovation, turning their promises into creative action, in line with these declared principles, to meet their stakeholders’ needs and expectations in sustainable ways.
One example is Deutsche Telekom, which has undertaken a strategic overhaul of processes and operations to establish a more sustainable supply chain.
The company recognises in this transformation the potential to deliver cost and risk reduction, create opportunities for profitable innovation and build stakeholder support and advocacy in a sector under increasing pressure on many fronts: health and safety, labour and employment, environment and ethics.
Meanwhile, Vodafone has created a space where new products and services can be systematically identified, selected and piloted with the goal of delivering some explicit social or environmental value. Its mobile payment services – using mobile phones as a delivery channel for microfinance services to communities normally excluded from banking – have proved the viability of mobile-based services that significantly reduce transaction costs. At the same time, the communities have gained affordable, safe, convenient and efficient access to a range of services, such as loans, savings, withdrawals, funds transfer and electronic payments.
These examples provide intriguing evidence of increased corporate value where integrity and innovation have come together in leadership strategies. Integrity and innovation therefore can and should be classified as corporate assets. And they need to be managed coherently as such.
One of the steps inherent in the process of managing any asset is its measurement and evaluation. There is still considerable debate about how innovation is best measured. The concept of evaluating corporate integrity is even less established. But there are tools and techniques available. Evaluating innovation is just as complex.
The research that Arthur D Little has under way is designed to take the understanding to the next level, through the connection between innovation and integrity – which can be summarised as living the positioning. The research passes on a number of key performance indicators on both the integrity and innovation dimensions. Indicators include:
- Is there evidence that the business operates to a set of business principles, guiding strategic planning and decision-making and visibly endorsed by senior management?
- Can the business demonstrate that it is actively engaging with its stakeholders, identifying and prioritising material issues and setting goals to address these issues?
- Is there clear evidence that the company consistently fulfils the promises set out in these principles and goals – ie is it delivering on its performance commitments?
- Is the company targeting its innovation effectively, deploying innovative business models meeting requirements to manage complexity (product portfolio, customer segment, brand variety)?
- Can the business demonstrate that it is innovating effectively, including resource planning and development, idea management, product development?
- Is the company effective in identifying possible future societal requirements, including the availability, performance and applications of technology?
Sustainability issues continue to emerge. Is your business aligned and equipped to meet the future that awaits it?
This article is based on the Arthur D Little report, Integrity + Innovation = Sustainable Performance written by Justin Keeble, David Lyon, Richard Clarke and Anne St-John-Hall