Business as a force for good

_{An article of the London Business Schools, written by Aine Doris.}

For too long, organisations have relied on accounting systems that prioritise financial flows at the expense of other metrics. Accounting has become our principal measurement of success. But as Covid-19 and an abundance of immediate environmental, societal, climate and geopolitical risks demonstrate, as a standalone reporting mechanism, this is no longer fit for purpose.

So says André Hoffmann, Vice Chair of Roche, board member of the World Economic Forum and former International Vice President of the World Wide Fund for Nature (WWF). The renowned businessman and environmentalist has a vision of success that looks very different to the current dominant business model, as he told Dr Tom Gosling, Executive Fellow in the Centre for Corporate Governance at London Business School, in a recent conversation.

For a start, we need to look beyond financial performance, he argues. “I would like to look at impact and not just performance. I need to make sure that I find a metric which allows me to measure the impact one has on not only the capital of the company, but the capitals that are in front of us: the human capital, in other words, our individual talent; the social capital, which is the way we work together, the way we interact; and the natural capital, the natural environment, and the relationship between these three. And perhaps even more importantly, the interdependencies – how much of nature depends on social, how much social depends on human.”

Hoffmann is also Chairman of the Capitals Coalition, a global multi-stakeholder initiative that is leading international efforts to enact new methods for non-financial accounting – reporting and valuation protocols that integrate different forms of capital – social, natural and human – to fully capture business impact. These efforts are critical, if we want to drive more effective decision-making, long-term prosperity – and ultimately, safeguard our own wellbeing as a species.

We need sufficient data to take the right decisions, he says. And if we only look at the end of the value creation chain, we’re missing much of the intermediate data.

“So not just profit and loss, but an impact account. And that's one of the aims that the Capitals Coalition is trying to bring forward… a decision tool, which will allow you to look at other factors than just financial before deciding to enter into a capital allocation decision or perhaps a risk management decision.”

The work of the Coalition is critical, but the challenges ahead of it are numerous and complex. Time, for one, is not on our side, says Hoffmann. With science pointing to the immediacy of the risks in front of us, we do not have the “luxury” to make this kind of shift in thinking and practice over the next few decades. As a result, there is an imperative to “do more with less.” And to do so urgently.

Technology can be a useful tool here, he says. But there are other issues that need to be addressed urgently, among them our tendency to separate risks out – to “overspecialise” or simplify our approach to threats” – and a generalised resistance to rules and regulations around sustainability or compliance.

Human, natural and social capital are hugely interdependent, argues Hoffmann. It’s more complex than just focusing on one thing – CO2 emissions, say – and neglecting other dimensions. He likens this to addressing CO2 by cutting down a forest to sell timber and then replanting. We end up with an incentive that satisfies CO2 metrics, he says, but which is detrimental to the ultimate result. The decisions and strategies we pursue need to integrate it all – environmental metrics with biodiversity, society and so on – to create genuinely sustainable models of nature-based solutions.

Then there’s our problem with rules. More specifically, there’s our propensity to find ways of “getting around sustainability regulation” so we can continue to focus on immediate growth or short-term profit maximisation.

We need to find ways to incentivise working in synchronicity with regulation and not against it, says Hoffmann. The good news here is that coming out of the pandemic, there’s evidence of a palpable shift in stakeholder values and expectations.

“There is a change of mood. Employees are asking about the purpose of companies… So if you want to recruit talent, you need to be able to articulate this in a clear way… Your customers want more transparency, they want to be able to see what it is you're doing. And politicians realise that this is something that will get them re-elected".

People in big corporations in particular are starting to realise that the current model based on shorter profit maximisation brings more harm than good. The big bosses of corporations all have children who at home asking them: "what are you doing?”

That said, for businesses there remains a big ask: a shift in approach from securing the best prices for customers, to building an inevitable “risk premium” into transactions – a premium that covers all potential impact – that must surely translate into additional costs for organisations and their client bases.

For businesses, this is going to be the heaviest lift, warns Hoffmann. Building in a risk premium is more expensive than not doing so. But he encourages decision-makers to think of it like this: you wouldn’t dream of driving a car that’s not insured for fear of having an accident. In business, it’s the same thing. Going into a transaction without assessing and insuring against risks in the long term is foolhardy, he says. And the science is “unequivocal” in this sense. We know about the environmental risks, the loss of biodiversity, the climate change risks. It is simply no longer possible, says Hoffmann, to make an investment decision in the long term without factoring in a risk premium.

Big ask or not, risk management based on different types of capital and impact ultimately boils down to “common sense,” he says. And it’s about making what he calls a contract with nature – reframing the approach such that nature, biodiversity, the environment and human capital become dimensions that organisations work with and not against.

“If you build a house, don’t build it in a place where there’s a lot of dams or flooding. Build it higher up… Look at your whole value chain: which part of your value or supply chain touches your company, which part can be improved, not only in terms of sustainability and the environment, but also in terms of social and human capital. Don’t use child labour. Don’t exploit minorities. Make sure that there are enough women working in your corporation. I mean, all these things work together, in order to create a smaller imprint on the environment.”

In the long run, those companies that integrate capitals-based risk management typically outperform those that do not, says Hoffmann. And the same is true of his own organisation, Roche, which has articulated its purpose in the following call to action: “Doing now what the patient needs next.”

The company was among the first in Europe to institute a sustainability committee and subscribe to the Dow Jones Sustainability Index; an approach to accountability and transparency that has become part of its organisational DNA over the last 25 years. One that has also proactively shaped Roche’s business model.

In recent years, the company has shifted from “managing for financial return” to “managing for impact.” In the pharmaceuticals industry, this means investing in innovation and new technologies to find new therapeutic solutions. Roche systematically reinvests part of its earnings into the R&D process; indeed the company has the biggest R&D budget in the industry, says Hoffmann.

Managing for impact calls for certain leadership qualities or attributes, he adds. Among these are humility, courage and ambition – ambition, he stresses, that is tied to the impact your organisation has on natural, social and human systems. And there is a clear imperative for business schools to educate next generation leaders on the interconnectedness and interdependence of these dimensions; to focus teaching around not one metric, but all of them.

Sustainability needs to be an overarching concern that informs the full curriculum in any kind of business education, be it MBA or executive education, says Hoffmann. Sustainability needs to become a “state of mind” that influences everything and everyone – from financial and economic sustainability to a concrete sense of the actual “durability” of human activity on the planet.

“I was born in 1958. And when I was born, there were about three billion people on the planet. Today, we are eight and a half, and before I die we will be 10 billion.

How can we have a chance of keeping 10 billion alive and thriving on the planet, if we just concentrate on the destruction mechanisms we have had in place for the past 150 years? It's just not going to happen. So, we need a different approach. We need to adapt.”

The world needs graduates who see the theory of the firm as more than just short-term profit maximisation. And who understand “business as a force for good.”

Making the transition to business as a force for good will mean doing more with less, insists Hoffmann. It will mean marshalling scant resources – including time – and leveraging technology among other things, to create more efficient ways of running businesses. It will mean making the focus less on profitability than durability, and addressing wealth and income disparity. Above all, it will mean greater collaboration between different groups and interests such that resource sharing balances out more equitably across the “whole human spectrum.”

Nature has been around for millions of years, Hoffmann says. And nature deals with risk much more effectively than human beings do. What we need now for our future, he says is to forge a “new type of contract” with nature, with natural resources and with humanity.

“I think the real issue is a new contract which will link humanity, nature and natural resources in a way which will allow us to go forward. Because collaboration is far better than domination. We’ve tried domination for the last 5000 years, and it hasn’t worked.”

Listen to André Hoffmann's full conversation with Dr Tom Gosling, as part of Think at London Business School's Responsible Business podcast series.