Taking Corporate Governance Forward: Using EHS To Build Brand Value
Post-Enron, there is a new paradigm for business -- using corporate governance as another way to build brand value. By Dennis R. Minano
Post-Enron, there is a new paradigm for business -- using corporate governance as another way to build brand value. By Dennis R. Minano
“Post Enron.” A year ago, who would have predicted that two-word phrase would ever exist, let alone occupy a prominent place in our collective vocabulary? A lot of attention has focused on who got caught, why they got caught, and why it didn’t happen sooner. Instead, I would contend that where the focus belongs is on a new paradigm for business -- using corporate governance as another way to build brand value.
A lot of stakeholders have been hurt by corporate upheavals. Employees have watched their financial security and future dreams evaporate virtually overnight. Shareholders have clearly been taken advantage of. Customers have also been hurt. The businesses that put these stakeholders at risk span the globe and a long period of time:
”In simple terms, corporate governance is about strong business principles consistent with a commitment to the expectations of society.”
The Business Round Table summed it up nicely: “…the substance of good corporate governance is more important than its form; adoption of a set of rules or principles or any particular practices or policy is not a substitute for, and does not itself assure, good corporate governance.” What does that mean? Without the integrity implied by the word “good,” no rules or policies will enable a business to achieve success.
In simple terms, corporate governance is about strong business principles consistent with a commitment to the expectations of society. Corporate governance is intended to provide a framework for the management and accountability of key decision-making bodies. It includes the arrangements that have been put in place to provide checks and balances. Its goal is to ensure that those to whom the employees, shareholders, suppliers and communities entrust the direction and success of the company act in the best interests of these stakeholders.
Where Governance Begins
Corporate governance begins with the Board of Directors. It is in this arena that the EHS officer can provide unique input. The EHS officer has experience in managing health and safety risk, assuring compliance, and relating these issues to multiple groups, e.g., non-government organizations, the Securities and Exchange Commission, strategy boards, audit committees, and, sometimes, the public. In the end, the company’s record in this area reflects its ability to manage risk and brand reputation or value. The EHS officer can help board members clarify key points about the company they serve.
First of all, the EHS officer can help the Board comprehend the strategic vision of the company’s services and/or products, and the role the company plays in the global marketplace. Consider the auto industry. The current vision of mobile society centers primarily on personal cars. But today, 100 years after the invention of the automobile, only 12% of the people in the world enjoy that vision. And for developing nations, mobility is one of the keys to improved quality of life. Balanced against that is the fact that if vehicle ownership were as pervasive globally as it is in the U.S., there would be some three billion cars in the world. Obviously, the world could not sustain that -- even if the vehicles used today’s clean internal combustion engines. So at GM, we spent considerable time developing a vision that didn’t require a compromise for our customers. In January, GM unveiled a concept vehicle that put that vision on wheels. It’s called the AUTOnomy, and it’s the first vehicle designed around a hydrogen-powered fuel cell propulsion system.
Second, the EHS officer can help the Board see a plan for enhancing the brand -- which in turn enhances shareholder value. That means the Board needs to understand what the market expects, and the inherent future risks in that business sector. In the auto industry, the market expects vehicles that meet certain performance characteristics. In recent years, the market has defined those characteristics as those of SUVs. Building and selling those vehicles comes with risks, such as different emissions and fuel economy than smaller passenger cars.
”First of all, the EHS officer can help the Board comprehend the strategic vision of the
company’s services and/or products, and the role the company plays in the global
marketplace. Consider the auto industry.”
The third area in which the EHS officer can help the Board is in understanding how the company relates to its many stakeholders. This means not only interacting with NGOs, but also with stakeholders such as Wall Street analysts, unions, employee groups, opinion leaders and government entities worldwide. Companies need to be in touch with these groups. Corporate governance is about leadership. Leadership with integrity, responsibility, and transparency.
Integrity. Responsibility. Transparency.
Integrity is a pretty old-fashioned value. And it may not have enjoyed this much attention since the first decade of the 20th century when American journalists, novelists, and critics attempted to expose the abuses of business and the corruption in politics. Of course, integrity never really went away –- great companies and great people build on it. People like management guru Peter Drucker, Stephen Covey of Franklin Planner fame, and Max DePree of Herman Miller. Some corporations include integrity among their core values. GM does, as well as other values like Continuous Improvement, Customer Enthusiasm, Innovation, Teamwork, and Individual Respect and Responsibility.
Notice responsibility is also on the list. How does GM achieve it? It begins with the board of directors, who are responsible to the shareholders. It extends to top management, then down into the ranks through several strategy boards. For instance, there’s the Automotive Strategy Board and the Environment and Energy Strategy Board.
Should responsibility be a key value of everyone at the company? Yes, but it’s unfortunately clear that, on occasion, some employees do little more than pay lip service to company values. William Laufer, director of the Zicklin Center for Business Ethics Research at the Wharton School says this spells trouble. He believes top management plays a key role in shaping or tolerating a culture that allows for less-than-ethical behavior. He calls it “winking,” and says that with each wink, a message that such behavior is O.K. is passed down from the top. It’s subtle. That’s one reason transparency is important. It means the company laundry -- clean and dirty -- is all hung out in public.
Transparency lets all stakeholders see not what the company intends to do, but what it actually does. It’s about accountability, and laying all aspects of business performance out on the table.
The Growing Role for Chief Environmental Officers in the Governance Debate
Here, again, the EHS officer is positioned to play a key role. In most cases, the EHS officer is used to integrating metrics into business practices. The EHS officer is probably the keeper of key data -– after all, it’s necessary to show compliance. And the EHS officer knows how to meet the requirements of ISO 9000 and 14000. In other words, the EHS officer has the tools and is uniquely positioned to use the numbers to build a business case for going beyond compliance to building reputation and brand value.
”In other words, the EHS officer has the tools and is uniquely positioned to use the numbers to build a business case for going beyond compliance to building reputation and brand value.”
GM was one of the first companies to hold its environmental and energy performance up to public scrutiny, when it began publishing its sustainability report. The company recognized that, in working to achieve a sustainable balance, it aims for a moving target -- a target attainable only through a combination of innovation, technology and partnership. One such partnership is with the public. The goal is to be transparent to customers and the public, to engage in a dialogue about the future. Environmental and innovative technology highlights from the most recent sustainability report include:
Social and community highlights from the report include:
Another potential “down” is that of disappointment or disillusionment. Any company that has a genuine commitment to improved performance and accountability is bound to be disappointed when a competitor grabs the headlines with a project that’s splashy, but perhaps not of lasting significance.
We need to get beyond these risks because sound corporate governance, and an associated commitment to transparency, is part of the new paradigm for success. GM embraced both early on. Now, more and more companies across the globe are doing the same thing, including Schering in Germany, which is switching to International Accounting Practices; TotalFinaElf and Saint-Gobain in France, which are appointing independent directors and separating the duties of chairmen and CEOs; and Finland’s Nokia, which adopted a one-share-one-vote rule.
Expect more of these kinds of reforms. In April 2002, representatives from at least 200 organizations gathered at the U.N. to celebrate the establishment of the Global Reporting Initiatives as a permanent international body.
The GRI was conceived nearly five years ago as a partnership of CERES and the United Nations Environment Program. It created a successful, global multi-stakeholder process to develop disclosure guidelines for the economic, environmental and social performance of large organizations.
Those involved came from diverse backgrounds: activists, business leaders, accountancy groups, labor and government. But they shared some core beliefs:
”The global aspect of the GRI is another opportunity for the EHS officer. It is very possible that no one else in the company has as good a grasp of the realities of doing business worldwide -- the legalities, government standards, and community and public sensitivities.”
The GRI is succeeding because of partnerships. Not imaginary or rhetorical partnerships, but genuine, solid partnerships built on a common vision. These partnerships are based on some more pretty old-fashioned ideas: a willingness to listen and a willingness to act in good faith.
These ideas should be enough to encourage companies to embrace reporting transparency. But if they are not, companies will face the option of forced compliance. And that’s hard to turn into a corporate “win.” After all, obeying the law is the price of entry into the worldwide business arena. But moving beyond compliance? That’s a win for the environment, for customers, and for corporations. And the opportunity to capitalize on this lands squarely on the shoulders of the EHS manager.
For example, consider the management strategy called “eco-efficiency” or “industrial ecology.” This strategy sees business as part of an ecological system and argues that companies can increase profitability if they view themselves this way. Environmental and economic writer Paul Hawken says that companies, not markets, have to drive a move to this business strategy because markets “are superb at setting prices but incapable of recognizing costs.” The World Business Council for Sustainable Development calls this “Establishing the Worth of the Earth.” One of the aims of the industrial ecology is to make businesses aware of and responsible for the full costs of their operations. For example, the cost of producing chemicals would include the cost of potential site remediation and environmental costs associated with spills. Ten years ago, the company producing the chemical might have disregarded these factors in setting prices, thinking it wasn’t responsible for them.
But the chemical industry has been very proactive in this regard. Through both Responsible Care and Community Action Panels, the industry examined with stakeholders the true cost of its business, and addressed the issues head-on. This has enhanced the industry’s reputation and built long-term value for many companies, as well as making expansion easier because communities trust them not to put communities at risk.
A number of businesses, including 3M, IKEA, BP, Dow Chemical, Dupont, BASF and GM, have picked up on this notion and are doing a better job of measuring costs of energy use and waste products, and incorporating these costs into their bottom line. To cite some GM examples:
In today’s business, the EHS manager’s role extends far beyond compliance. The EHS manager helps protect shareholders, helps protect employees, helps enhance the company’s reputation, and adds to the value of the corporate brand.
-------------------
Dennis R. Minano retired as GM vice president environment and energy and chief environmental officer at the end of 2001, following a distinguished 30-year GM career. Minano joined GM in 1971 as an attorney and was involved in several legal areas, including marketing, product liability, energy, and environmental law.
This article was first published in June 2002.
“Post Enron.” A year ago, who would have predicted that two-word phrase would ever exist, let alone occupy a prominent place in our collective vocabulary? A lot of attention has focused on who got caught, why they got caught, and why it didn’t happen sooner. Instead, I would contend that where the focus belongs is on a new paradigm for business -- using corporate governance as another way to build brand value.
A lot of stakeholders have been hurt by corporate upheavals. Employees have watched their financial security and future dreams evaporate virtually overnight. Shareholders have clearly been taken advantage of. Customers have also been hurt. The businesses that put these stakeholders at risk span the globe and a long period of time:
- Lincoln Savings and Loan in 1989
- Salomon Brothers in 1991
- Sotheby’s in 2000
- Swissair in 2001
- And more recently, the Kirch media empire in Germany
- Both the NASDAQ and New York Stock Exchange are considering tightening the corporate governance rules for their listed companies.
- In New York, State Attorney General Eliot Spitzer is scrutinizing Merrill Lynch for what he sees as a conflict of interest between the firm’s research unit and its investment banking department. His reported concern is that the ties between the two departments have led analysts to issue overly optimistic research reports on companies that were also investment-banking clients.
- The media are looking back six or seven years into the dealings of prominent and highly regarded companies. Consider the cover story in the May 20 edition of BusinessWeek, which questions the validity of generally accepted accounting practices in the aerospace industry, and asks whether aircraft giant Boeing used accounting rules to conceal a manufacturing snafu that might have impeded a pending merger with McDonnell Douglas Corp.
”In simple terms, corporate governance is about strong business principles consistent with a commitment to the expectations of society.”
The Business Round Table summed it up nicely: “…the substance of good corporate governance is more important than its form; adoption of a set of rules or principles or any particular practices or policy is not a substitute for, and does not itself assure, good corporate governance.” What does that mean? Without the integrity implied by the word “good,” no rules or policies will enable a business to achieve success.
In simple terms, corporate governance is about strong business principles consistent with a commitment to the expectations of society. Corporate governance is intended to provide a framework for the management and accountability of key decision-making bodies. It includes the arrangements that have been put in place to provide checks and balances. Its goal is to ensure that those to whom the employees, shareholders, suppliers and communities entrust the direction and success of the company act in the best interests of these stakeholders.
Where Governance Begins
Corporate governance begins with the Board of Directors. It is in this arena that the EHS officer can provide unique input. The EHS officer has experience in managing health and safety risk, assuring compliance, and relating these issues to multiple groups, e.g., non-government organizations, the Securities and Exchange Commission, strategy boards, audit committees, and, sometimes, the public. In the end, the company’s record in this area reflects its ability to manage risk and brand reputation or value. The EHS officer can help board members clarify key points about the company they serve.
First of all, the EHS officer can help the Board comprehend the strategic vision of the company’s services and/or products, and the role the company plays in the global marketplace. Consider the auto industry. The current vision of mobile society centers primarily on personal cars. But today, 100 years after the invention of the automobile, only 12% of the people in the world enjoy that vision. And for developing nations, mobility is one of the keys to improved quality of life. Balanced against that is the fact that if vehicle ownership were as pervasive globally as it is in the U.S., there would be some three billion cars in the world. Obviously, the world could not sustain that -- even if the vehicles used today’s clean internal combustion engines. So at GM, we spent considerable time developing a vision that didn’t require a compromise for our customers. In January, GM unveiled a concept vehicle that put that vision on wheels. It’s called the AUTOnomy, and it’s the first vehicle designed around a hydrogen-powered fuel cell propulsion system.
Second, the EHS officer can help the Board see a plan for enhancing the brand -- which in turn enhances shareholder value. That means the Board needs to understand what the market expects, and the inherent future risks in that business sector. In the auto industry, the market expects vehicles that meet certain performance characteristics. In recent years, the market has defined those characteristics as those of SUVs. Building and selling those vehicles comes with risks, such as different emissions and fuel economy than smaller passenger cars.
”First of all, the EHS officer can help the Board comprehend the strategic vision of the
company’s services and/or products, and the role the company plays in the global
marketplace. Consider the auto industry.”
The third area in which the EHS officer can help the Board is in understanding how the company relates to its many stakeholders. This means not only interacting with NGOs, but also with stakeholders such as Wall Street analysts, unions, employee groups, opinion leaders and government entities worldwide. Companies need to be in touch with these groups. Corporate governance is about leadership. Leadership with integrity, responsibility, and transparency.
Integrity. Responsibility. Transparency.
Integrity is a pretty old-fashioned value. And it may not have enjoyed this much attention since the first decade of the 20th century when American journalists, novelists, and critics attempted to expose the abuses of business and the corruption in politics. Of course, integrity never really went away –- great companies and great people build on it. People like management guru Peter Drucker, Stephen Covey of Franklin Planner fame, and Max DePree of Herman Miller. Some corporations include integrity among their core values. GM does, as well as other values like Continuous Improvement, Customer Enthusiasm, Innovation, Teamwork, and Individual Respect and Responsibility.
Notice responsibility is also on the list. How does GM achieve it? It begins with the board of directors, who are responsible to the shareholders. It extends to top management, then down into the ranks through several strategy boards. For instance, there’s the Automotive Strategy Board and the Environment and Energy Strategy Board.
Should responsibility be a key value of everyone at the company? Yes, but it’s unfortunately clear that, on occasion, some employees do little more than pay lip service to company values. William Laufer, director of the Zicklin Center for Business Ethics Research at the Wharton School says this spells trouble. He believes top management plays a key role in shaping or tolerating a culture that allows for less-than-ethical behavior. He calls it “winking,” and says that with each wink, a message that such behavior is O.K. is passed down from the top. It’s subtle. That’s one reason transparency is important. It means the company laundry -- clean and dirty -- is all hung out in public.
Transparency lets all stakeholders see not what the company intends to do, but what it actually does. It’s about accountability, and laying all aspects of business performance out on the table.
The Growing Role for Chief Environmental Officers in the Governance Debate
Here, again, the EHS officer is positioned to play a key role. In most cases, the EHS officer is used to integrating metrics into business practices. The EHS officer is probably the keeper of key data -– after all, it’s necessary to show compliance. And the EHS officer knows how to meet the requirements of ISO 9000 and 14000. In other words, the EHS officer has the tools and is uniquely positioned to use the numbers to build a business case for going beyond compliance to building reputation and brand value.
”In other words, the EHS officer has the tools and is uniquely positioned to use the numbers to build a business case for going beyond compliance to building reputation and brand value.”
GM was one of the first companies to hold its environmental and energy performance up to public scrutiny, when it began publishing its sustainability report. The company recognized that, in working to achieve a sustainable balance, it aims for a moving target -- a target attainable only through a combination of innovation, technology and partnership. One such partnership is with the public. The goal is to be transparent to customers and the public, to engage in a dialogue about the future. Environmental and innovative technology highlights from the most recent sustainability report include:
- GM is developing hydrogen-powered fuel cell vehicles that emit only water. Some 300 fuel cell experts in three locations on two continents are working full time on this technology, which should remove the automobile from the environmental and energy debate.
- GM won international recognition with the Stockholm Industry Water Award for its role in improving water quality and reducing water use in the Ramos Arizpe complex of Mexico. The complex employed extensive wastewater treatment and recycling techniques to convert the town’s saline pond into potable water, resulting in increased production and a freshwater lagoon filled with wildlife for the community.
- In early 2000, General Motors approached the World Business Council for Sustainable Development to study sustainable mobility. The result is a three-year project to envision the sustainable movement of people, goods, services and knowledge, on a global basis, by the year 2030.
- GM and The Nature Conservancy entered into a partnership that was unprecedented for both organizations when it was launched in 1994.
Social and community highlights from the report include:
- Since 1995, GM has reduced its recordable injury rate within its global operations by 71% and its lost work day cases by 83%.
- GM has partnered with the National SAFE KIDS Campaign, to help parents properly install child safety seats in their vehicles. This partnership was the catalyst for GM’s trap-resistant trunk kit, an industry first. GM’s partnership with the United Auto Workers has provided more than 100,000 child safety seats to low-income families.
- GM also is supporting Mothers Against Drunk Drivers in its efforts to rid America’s highways of drunk drivers. More than 16,000 Americans died in 2000 in alcohol-related crashes.
- In 2000, GM sold 8.6 million cars and trucks, accounting for 15.1% of the global vehicle market -- more than any other automaker.
Another potential “down” is that of disappointment or disillusionment. Any company that has a genuine commitment to improved performance and accountability is bound to be disappointed when a competitor grabs the headlines with a project that’s splashy, but perhaps not of lasting significance.
We need to get beyond these risks because sound corporate governance, and an associated commitment to transparency, is part of the new paradigm for success. GM embraced both early on. Now, more and more companies across the globe are doing the same thing, including Schering in Germany, which is switching to International Accounting Practices; TotalFinaElf and Saint-Gobain in France, which are appointing independent directors and separating the duties of chairmen and CEOs; and Finland’s Nokia, which adopted a one-share-one-vote rule.
Expect more of these kinds of reforms. In April 2002, representatives from at least 200 organizations gathered at the U.N. to celebrate the establishment of the Global Reporting Initiatives as a permanent international body.
The GRI was conceived nearly five years ago as a partnership of CERES and the United Nations Environment Program. It created a successful, global multi-stakeholder process to develop disclosure guidelines for the economic, environmental and social performance of large organizations.
Those involved came from diverse backgrounds: activists, business leaders, accountancy groups, labor and government. But they shared some core beliefs:
- Globalization is irreversible.
- The world’s challenges require the engagement, innovation, and accountability of business.
- Transparency and good governance have become the most important ingredients in a healthy capital market, economy and society.
”The global aspect of the GRI is another opportunity for the EHS officer. It is very possible that no one else in the company has as good a grasp of the realities of doing business worldwide -- the legalities, government standards, and community and public sensitivities.”
The GRI is succeeding because of partnerships. Not imaginary or rhetorical partnerships, but genuine, solid partnerships built on a common vision. These partnerships are based on some more pretty old-fashioned ideas: a willingness to listen and a willingness to act in good faith.
These ideas should be enough to encourage companies to embrace reporting transparency. But if they are not, companies will face the option of forced compliance. And that’s hard to turn into a corporate “win.” After all, obeying the law is the price of entry into the worldwide business arena. But moving beyond compliance? That’s a win for the environment, for customers, and for corporations. And the opportunity to capitalize on this lands squarely on the shoulders of the EHS manager.
For example, consider the management strategy called “eco-efficiency” or “industrial ecology.” This strategy sees business as part of an ecological system and argues that companies can increase profitability if they view themselves this way. Environmental and economic writer Paul Hawken says that companies, not markets, have to drive a move to this business strategy because markets “are superb at setting prices but incapable of recognizing costs.” The World Business Council for Sustainable Development calls this “Establishing the Worth of the Earth.” One of the aims of the industrial ecology is to make businesses aware of and responsible for the full costs of their operations. For example, the cost of producing chemicals would include the cost of potential site remediation and environmental costs associated with spills. Ten years ago, the company producing the chemical might have disregarded these factors in setting prices, thinking it wasn’t responsible for them.
But the chemical industry has been very proactive in this regard. Through both Responsible Care and Community Action Panels, the industry examined with stakeholders the true cost of its business, and addressed the issues head-on. This has enhanced the industry’s reputation and built long-term value for many companies, as well as making expansion easier because communities trust them not to put communities at risk.
A number of businesses, including 3M, IKEA, BP, Dow Chemical, Dupont, BASF and GM, have picked up on this notion and are doing a better job of measuring costs of energy use and waste products, and incorporating these costs into their bottom line. To cite some GM examples:
- A target was set in 1996 to reduce non-recycled, non-product output (emissions, effluents and wastes not incorporated into a final product) from manufacturing facilities by 30% by 2002. At the end of 2000, GM achieved a 42% reduction in non-recycled non-product -- exceeding the goal two years ahead of schedule.
GM used tools such as its Chemicals Management Program to achieve this goal. This program places a single supplier in charge of chemicals coming into a facility. The supplier is paid based on production, not chemicals used, which provides an incentive to reduce volume of chemicals uses. - GM has reduced global energy consumption by 2.5% since 1999. This reduction was achieved partly through energy-efficient ventilation and lighting, and cogeneration.
- GM has achieved an 11% reduction in North American facility energy consumption since 1995, making steady progress toward a goal of a 25% reduction by 2005.This goal is being achieved despite a period in which floor space requirements have increased (air conditioning), and process environmental controls are becoming more energy intensive.
- Global facility emissions of CO2 were reduced 2.7% from 1999. Emissions per vehicle were reduced by 6.2% in 2000.
In today’s business, the EHS manager’s role extends far beyond compliance. The EHS manager helps protect shareholders, helps protect employees, helps enhance the company’s reputation, and adds to the value of the corporate brand.
-------------------
Dennis R. Minano retired as GM vice president environment and energy and chief environmental officer at the end of 2001, following a distinguished 30-year GM career. Minano joined GM in 1971 as an attorney and was involved in several legal areas, including marketing, product liability, energy, and environmental law.
This article was first published in June 2002.