Nestlé: Corporate Citizenship and the Value Chain

Nestlé: Corporate Citizenship and the Value Chain

Nestlé is traveling its own road with a proposed new corporate social responsibility model. By Ken Stier

Nestlé's recently unveiled Latin America corporate social responsibility report is the food giant's bear-hug attempt to understand its operational impacts across a vast sourcing, production and distribution chain.

It is also a stab at defining a new corporate responsibility model, one that sits more comfortably with the firm's defiantly unapologetic corporate culture.

The company's operational reach or "footprint" is huge, involving sourcing from close to 275,000 farmers (for its three principal raw materials -- 218,000 coffee farmers, 35,000 milk farmers and 22,000 other farmers), who supply some 4 billion Swiss francs (£1.8 billion) worth of goods and services, for 72 factories domiciled in South America.

These have more than 38,000 workers, producing products for more than 400 million consumers in the region. Nestlé’s milk-producing district in Brazil alone is larger than Switzerland.

Nestlé retained the Foundation Strategy Group consulting firm, affiliated with Harvard Business School’s Michael Porter, to study its existing practices and "the social impact the company has had over several decades" in Latin America, where it set up its first factory in 1921, in Brazil.

"Our research clearly demonstrates that Nestlé has had a profound and positive impact on the people and the environment in Latin America," concluded FSG in "The Nestlé Concept of Corporate Social Responsibility" (which follows a similar report devoted to Africa, published last year.)

Depth of Detail

The result -- or least the publicly available report -- is an impressive new effort by the company to get in better step with rising corporate responsibility expectations. But to some it still sounds more an effort in public relations than in stakeholder relations. And despite its new reach, the report lacks the depth of detail to allow any analytically rigorous assessment of just how well the company is managing its impacts.

Numerous examples of how Nestlé ties local needs to business objectives are described but all too often with a happy postcard pastiche quality. Even the case studies, as laudatory as they may be, seem hatched in a sporadic catch-as-catch-can fashion, lacking any larger, apparent design. This is at least tacitly acknowledged by FSG, which recommends Nestlé move “beyond individual initiatives to encompass its entire global value chain of activities.”

As a “first step” the company should “set goals and to measures progress against them on a global basis in the area of agricultural development, manufacturing impacts, and consumer benefit and education in order to tighten the link between Nestlé’s strategy and its social responsibility,” FSG recommends.

Company executives say its variegated initiatives are the natural outcome of the particular needs of local circumstances and what is doable on the ground. At the same time Nestlé intends to become “more systematic and structured” in the way its activities create wider social benefits.

“Until more success stories are replicated across all of Nestlé’s markets, it will not be clear whether they are merely excellent initiatives or if they truly represent a mode of operation that is embedded in corporate strategy,” says FSG’s managing director, Mark Kramer.

The Nestlé Way

It’s a challenge Nestlé has taken on, while insisting it will do so on its own terms. In an introductory discussion Nestlé chief executive Peter Brabeck-Letmathe lays out his conviction that corporate social responsibility is “inherent to Nestlé business strategy.”

But at the same time he defines that responsibility in his own way, in terms of business’s “unique capacity to create wealth and benefit society through long-term value creation.”

It’s a starting point that rejects the premise that companies incur some existential societal debt. Quite the opposite: companies’ raison d’etre is to create both wealth for shareholders and value for all stakeholders along the entire value chain.

“While corporate social responsibility and sustainability represent a set of useful principles and practices, we believe that the true test of a business is whether it creates value for society [and hence for shareholders too] over the long term,” says Brabeck.

This is an approach that can be misinterpreted, or distorted, as company officials insist occurred in the flap kicked up by a speech Brabeck gave at a Boston College CEO forum last year. But it is one Brabeck maintains unflinchingly.

“The most important social responsibility that the CEO of a company has … is to be sure that this company will continue to exist in 100 years from now -- and in order to do that, you must have a very long-term approach to business,” he said at the report’s New York launch in March.

'Shared Value’

This nicely dovetails with the proposed new corporate responsibility model -- dubbed Creating Shared Value -- that the FSG consultants devised while studying Nestlé’s operations. “Creating Shared Value is a very different approach to CSR, because it is not focused on meeting a set of standard external criteria, or on philanthropy; the idea of winners and losers does not fit this model of CSR,” said FSG’s Kramer, a colleague of Porter’s at Harvard.

Porter insists that creating shared value represents a new “third wave” in corporate social responsibility’s evolution, one Nestlé is helping to define by its “front edge” position. At Nestlé’s April annual general meeting, Brabeck told his audience: “The two academics have been able to confirm in Nestlé a theory they developed and which could significantly influence the on-going discussion of corporate social responsibility.”

So far, though, corporate responsibility experts are not exactly won over. London School of Business professor Craig Smith said the approach was “not especially innovative” but nonetheless an “appropriate way to look at Nestlé.”

To Boston University School of Management professor James Post, the Nestlé initiative is “interesting, and suggestive, but not convincing.” Post, who has watched Nestlé for 25 years, including serving nine years on its infant formula audit commission, said the idea of shared creation of value has been around for two decades.

“The more important issue in the 21st century may be one of value-sharing, i.e., how will the benefits of wealth creation to be shared with the stakeholders?” he said.

“Nestlé can buy the advice of the world’s leading experts, but it is never certain that they will actually achieve the good to which they would have us believe they are committed,” Post added, suggesting the company might do well to hire independent external social auditors. “Doing this without the threat of a boycott or other action would be of maximum benefit for Nestlé,” he said, noting that Shell has done so, to “its considerable benefit.”

More to Come

In the short term at least we can expect to hear more from Nestlé about shared value, as it better understands how it contributes to society along its entire value chain: from agricultural sourcing -- helping farmers to provide better quality raw materials and setting higher labor and environmental standards -- to marketing and educating customers about nutritious foods and lifestyles.

In the past, such impacts were perhaps mostly incidental, some fortuitous, and rarely well publicized. How many know, for example, that Nescafe, one of the firm’s signature products, was developed in response to a Brazilian government request for help when the country experienced, in the 1930s, a huge glut of coffee, bankrupting farmers who had no way to preserve surpluses?

“We need to develop a methodology that guides us in maximizing the shared value we create at every point in our value chain for every product we produce and in every region where we operate,” says Brabeck. He concedes the firm could do a “better job informing people” how this approach is “embedded in our brands.”

Any company that has done as much as Nestlé to atone for its past sins related to marketing infant formula and yet is still dogged by an active boycott -- however unwarranted this appears to be today -- would seem to have its work cut out.

Communication Challenges

So how well does Nestlé display its on-the-ground achievements? The discerning reader is likely to be intrigued but ultimately disappointed by the sketchiness of descriptions that rarely paint a comprehensible picture.

Take coffee, the food giant’s most important product. Besides the expected science-based efforts to improve plant yields and bean quality in all its coffee-growing areas, we hear of several new undertakings to promote sustainable high-quality coffee growing, but there is no information as to the scale -- much less impacts -- of these efforts.

Even where Nestlé deserves some credit the report oddly misses the mark. For example, it fails to mention that the company is building a new multi-product factory specifically designed to market to the low-paid (annual family income of under $1,000) in Brazil’s north-east.

Nestlé calls these “popularly positioned products” and it is the company’s first full-fledged effort at what others call marketing to the “base of the pyramid.” “We need to think about how to evolve our business models so we can reach further into disadvantaged segments of society with our products and help improve their quality of life,” says Brabeck.

It is no mean undertaking, requiring separate sourcing chain, manufacturing lines, distribution and sales networks staffed by locals, all geared to meet the primary objective of affordability.

At the same time there is a “great opportunity” to develop brand loyalty at the “lowest level possible” and then to accompany the consumer as purchasing power increases where “our classical, more elaborate ranges where convenience, pleasure and diversity are key considerations,” Brabeck told the annual meeting. “Finally, we reach the area of health, nutrition and wellness and ultimately, perhaps, well-being.”

For an ambitious foray into corporate responsibility territory, the report appears to be not a bad initial effort from Nestlé. However, many commentators note that the company will need to expend considerable improvement in terms of metrics, targets and performance in future efforts to bring the company up to speed with many other companies its size.

Ken Stier is a New York-based journalist.

This article has been reprinted courtesy of Ethical Corporation. It first appeared in the May 2006 edition of that publication.