Who’s in Charge Here? How Bottom-Up Empowerment Still Needs Top-Down Accountability

14th in a series of excerpts from the book The HIP Investor (John Wiley & Sons, 2010). See other articles in the series here.

If sustainability encourages decentralized expertise in an organization, then do the Board and C-level suite need to manage it? To get the best results, the answer is apparently yes - or at least a blend of top-down management and bottom-up empowerment.

In June 2009, sustainability reporting and consulting firm Framework: CR published the results of a survey identifying the accountability structures most associated with recognition for HIP-like practices. As Kathee Rebernak and Aleksandra Dobkowski-Joy explained, sustainability leaders exhibited three characteristics. First, managers in charge of sustainability were of a higher rank, one or two levels away from the CEO. Second, leaders housed the sustainability function in an externally facing group, the most typical being Corporate Affairs, Legal, or a dedicated department. Third, leaders presented to — and interacted more frequently with — the Board of Directors.

These findings are consistent with the success of any new business initiatives, from a new product - think how the late Steve Jobs innovated at Apple (Nasdaq: AAPL), to successful merger integrations, to business reengineering. Executive leadership with focused management structures, visible and accountable to the Board, is a common factor for success in traditional business initiatives — and also in sustainability.

Executive Leadership

Let’s start with the leadership role. At Procter and Gamble (NYSE: PG), the VP of Global Sustainability, Len Sauers, reports directly to the CEO. It’s the same at NIKE (NYSE: NKE) with Vice President of Corporate Responsibility Hannah Jones; DuPont’s (NYSE: DD) Chief Sustainability Officer Linda Fisher; and Campbell’s Soup (NYSE: CPB) VP of Sustainability Dave Stangis. Leading companies give a sustainability the executive heft it needs to succeed in rolling out new initiatives or pushing back against resistance.

Next, this leader can build a department of staff or create a discipline across the enterprise. Dave Stangis of Campbell’s Soup prefers the “discipline” approach. “It’s the highest leverage,” Stangis explains. “Our small team of three can more easily accomplish systemic change when each business group and employee feels like it is part of their job every day, rather than that of a specific department.” This is consistent with leading companies that aggregate a small band of experts who help spread expertise across the organization, not unlike Human Resources might or a Safety Director does in regular business operations.

While NIKE has a small group of about a dozen staff, and Starbucks (Nasdaq: SBUX) more than 20 in their sustainability or CSR department, decentralized companies seek to spread responsibility into multiple business units. Medical firm Johnson & Johnson (NYSE: JNJ), which has more than 200 business units, says, “In keeping with our decentralized organization, primary accountability rests with each franchise Group Operating Committee." At Wells Fargo (NYSE: WFC), Pat Callahan is the executive-level leader of sustainability, as well as the merger integration of Wachovia. Its Environmental Affairs Council is composed of 19 executives from the business units, as well as corporate groups. In addition, 25 “green teams” have emerged from staff networks focused on advancing eco-efficiency. Wells also involves an external advisory board to anticipate new environmental-related opportunities.

Board Engagement

Whether centralized or decentralized, it’s essential for all levels and units of the company to integrate a HIP discipline. This is reinforced when boards of directors are accountable as well. NIKE has a specific committee on Corporate Responsibility, composed of five Board members. Toy maker Mattel has blended it into the Governance committee. At retailer Gap Inc. (NYSE: GPS), it is combined with the Governance, Nominating and Social Responsibility Committee. The most HIP firms typically describe quarterly updates to Board Committees and sometimes twice-annual presentations on specific initiatives — from renewable energy expansion that reduces emissions, carbon, and energy costs, to wellness initiatives for employees that boost health and manage health care costs.

External experts are engaged through Sustainability Advisory Boards, as at Kimberly-Clark, which draws from cutting-edge designers, socially responsible investors, industry innovators, and experts in engaging stakeholders and nonprofits. This external Board reports to the CEO.

Cross-Discipline Accountability

In October 2006, Cisco Systems (Nasdaq: CSCO ) vastly expanded the organization’s responsibility for implementing its environmental goals. Did it appoint a new executive? Set up a large department? Nope. Chair and CEO John Chambers instead applied a new multidisciplinary and cross-functional approach: the EcoBoard, which would report to the Board of Directors and CEO on a quarterly basis. Co-led by three executives (Laura Ipsen, John McCool, and Ron Ricci) and comprising a dozen senior executives overall, the EcoBoard was a network of leaders, empowered to seek out, review, and approve a vast set of eco-opportunities.

Cisco’s goals were bold. Its operations needed to reduce greenhouse gases. New products were required to reduce power consumption. Also, network architectures and solutions needed to help customers achieve their environmental goals. Cisco’s new collaboration technologies, like TelePresence videoconferencing and WebEx online meeting software, were applied internally to reduce the company’s own greenhouse-gas emissions from travel by 10 percent. The new “wisdom of the crowd” approach was embedded in the EcoBoard, so as to benefit from expertise across the group while not bogging down in the perils of too much consensus.

Within a company of more than 38,000 people, this horizontal approach helps to avoid traditional vertical silo-driven thinking, eliminate redundancies and encourage an integrated approach from the entire company. Some of Cisco’s Boards are even focused specifically on geographies like Mexico, China, Russia, and overall “Emerging Countries,” which link to global high growth markets, noted in Chapter 2 on HIP trends.

Impact Tied to Pay, Promotion, and Recognition

GE’s (NYSE: GE ) CEO Jeff Immelt is serious about reducing greenhouse gas emissions. He has set a reduction target for each of the business unit leaders at the company. If a business unit meets their profit target but not the GHG emissions target, then those executives will not earn their full bonuses. This is similar to GE’s efforts in the 1990s when implementing a new culture. If a manager “hit the numbers,” but did not live up to the new values, then that person could not receive their full bonus.

Similarly at Alcoa (NYSE: AA ) and Intel (Nasdaq: INTC ) , performance reviews, promotions, pay raises, and recognition are tied to improvements in HIP-like measures. Managers and executives have numerical targets for environmental metrics and for diversity. At Bristol Myers Squibb (NYSE: BMY ), “employees must perform effectively in many areas that are not measured specifically by financial or operational results...

In Conclusion

Top-performing HIP organizations have committed CEO leadership, frequent Board interaction, cross-discipline collaboration, and responsibility across the entire organization. They also link pay and performance to HIP results. But as of 2009, less than 5 percent of the 500 largest U.S. companies have set up accountability in this systematic way. That’s right, fewer than 25 out of 500. However, the number is increasing slowly as companies recognize sustainability as a strategic value.

In our next feature, we will focus on companies that embed HIP criteria into every aspect of corporate decision making processes. By taking a systematic approach to incorporating human impact metrics into their organization, companies can seek higher potential long term profits while co-creating a better world.

To navigate this series, please use this table of contents.

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HIP Investor supports Spring of Sustainability.  For three months, the Spring of Sustainability will feature 100 “stars” of sustainability, from Jane Goodall to Bill McKibben to Van Jones, in free interactive teleseminars throughout the spring of 2012. Live events will also be held in cities across the globe.

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R. Paul Herman is CEO and founder of HIP Investor Inc. Herman is the author of “The HIP Investor: Make Bigger Profits by Building a Better World,”  published by John Wiley & Sons in 2010. Herman is a registered representative of HIP Investor Inc., an investment adviser registered in California, Washington and Illinois.

NOTE: This feature, excerpted and adapted from the HIP book, is not an offer of securities nor a solicitation. The information presented is for information and education purposes, and is not an investment recommendation. Past performance is not indicative of future results. All investing risks losing your principal. The author may invest in the companies mentioned above, and several are included in the HIP 100 Index portfolio. Details and full disclosures are at www.HIPinvestor.com

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