meeting the needs of society GOOGLE PLUSChris Pinney is the High Meadows Institute’s founding President. The Boston-based Institute was established in 2013 by business leaders to explore the role of business in defining a 21st century social contract that ensures economic and social progress for all. Chris has over twenty-five years of experience working with C-suite executives nationally and internationally on this issue. Prior to the Institute, Chris was Vice President at the Alliance for Business Leadership, a nonpartisan group of CEOs, business leaders, entrepreneurs and investors committed to defining a path forward for business leadership on sustainability.

Christopher P. Skroupa: What is the 21st century operating environment and what are the new challenges posed to business?

Chris Pinney: The 21st century presents a highly complex and volatile operating environment for business. Although there are many factors to consider, such as the impact of artificial intelligence, or globalization or rising political uncertainty; one of the most difficult challenges for business is how to manage its changing role in society. Clearly, the winner in our global economy is business. Over half of the top 150 economies in the world are now large corporations. The losers are governments that find themselves mired with a 20th century policy toolkit, ill-suited for managing the changes created by globalization. As the government proves to be increasingly incapable of driving action, society is now looking to corporations for accountability for their impacts and leadership in addressing social challenges.

In this environment, to be a good corporate citizen, it is no longer sufficient to manage the formalistic bare-minimum of following the law and giving a little to charity. Today, a successful global corporation must consider a wide variety of stakeholders and negotiate their license to operate with them. Most major global corporations now follow a set of voluntary or “soft-law” codes and standards that go well beyond legal requirements. These firms are also issuing corporate social responsibility (CSR) or sustainability reports detailing their efforts. Large firms are expected to provide directorship in order to solve domestic and global issues; such as reforming education, eradicating poverty and ensuring access to clean water. In the US, this reality was solidified by Hurricane Katrina, where the first responders were not FEMA, but rather WalMart, FedEx, Home Depot and other large companies with robust logistical capacities that were able to assist. These companies were able to respond quickly in ways that the government simply could not. Public opinion following the hurricane showed that Americans were now looking to business to provide leadership on a host of social challenges, beyond disaster relief. Navigating this turbulent corporate responsibility interface will be a continuous challenge for 21st century firms.

Skroupa: Has management recognized this pivotal development? What have they done in response?

Pinney: Most managers of large global corporations are actively working to understand this new reality, however, many smaller firms are only beginning to appreciate this challenge. There are roughly three stages to this process. The first is often triggered by outside attacks from advocacy non-governmental organizations or consumer groups around a specific social, environmental or governance (ESG) issue; such as human rights abuses in the supply chain, bad environmental practices or bribery and corruption. These attacks frequently surprise firms, because they are technically abiding by the established law. The response is usually a public relations strategy designed to create a positive image for the company. This is often dismissed as “greenwashing” by their critics.

The second stage: management recognizes these attacks as a signal of grander changes in the operating environment that require a more proactive approach. This often involves outreach and engagement with key stakeholder groups to establish a dialogue around emerging ESG issues. It can also involve developing a dedicated staff to manage this process and to produce sustainability reports that outline the firm’s ESG commitments and strategic advancement. Almost all global Fortune 500 firms now produce such reports.

The third stage of engagement is when firms understand the new risks and opportunities presented, which then requires a fundamental change to their business model. This can lead firms to participate in self-regulatory initiatives based on voluntary codes of conduct that go well beyond legal requirements to assure products and supply chains are managed responsibly (such as fair trade coffee). On the opportunity side, the focus is on introducing new products and integrating sustainability factors into the core business, reflecting where the markets and expectations are moving. Doing well by doing good becomes a new path to value. GE’s Ecomagination, which started off simply as a marketing platform (and was seen as greenwashing by some) is now their platform for a fast growing renewable energy technology business. Wal-Mart’s integration of sustainability into its business model has arguably had a greater impact on sustainability progress, more than most government mandated programs. It was driven by CEO Lee Scott’s realization over a decade ago that waste is a cost. Walmart was not doing this just to be green or please environmentalists, but rather to save money.

Skroupa: Can we really expect companies or industries to regulate themselves the way you suggest?

Pinney: Industry self-regulation or soft law codes as accountability to standards are not sufficient; government regulation and oversight will always be critical. Any successful global governance model will have to include values-based corporate leadership, self-awareness, self-regulation, as well as regulation by governments. As we saw in the financial crisis of 2008, relying on patchworks of regulation at the national level is grossly insufficient for regulating capital markets. The high mobility of capital, coupled with vigorous competition for business investment, means there will always be other jurisdictions to escape to. In this kind of environment, voluntary multi-stakeholder industry standards have a vital role to play as they are monitored continuously by global networks of NGOs that can quickly call out those not complying. Finally, rules alone are simply deficient. The regulatory regime has to be owned by the actors who are expected to abide by those rules. This mindset needs to be genuinely imbedded into their culture. For example, the safety and responsibility culture in the chemical industry is quite extraordinary; you may hear stories about outliers, but overall, there hasn’t been a major chemical spill or disaster in this country for the past 30 years. This is possible only because of the industry’s responsible care self-regulation program that includes independent third party auditing.