Sustainable Value Creation

ERIC LOWITT, INDEPENDENT CONSULTANT

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The era of CEO mandate to maximize shareholder value is giving way to the era of whole-company mandate to maximize stakeholder value. This shift is occurring because all facets of society—citizens, employees, local community activists and shareholders alike—have come to distrust institutions.

But here’s the rub: Society needs industry. People need employment. Consumers need food, shelter and clothes. Investors need returns on their investments. And local community activists (and the communities they represent) need their local environmental and social challenges solved.

All facets of society now expect value from corporations in exchange for extending to business a series of licenses to operate. Industry needs these licenses to continue to operate. And grow. And provide returns to shareholders. In short, society and business need each other.

Certain companies—Sustainable Market Leaders—are embracing this new reality. They view sustainability as a path to value creation for stakeholders. They assess their stakeholder interactions; in the process they cast a keen eye toward environmental and social challenges in need of systemic solutions. Once identified, challenges are analyzed, business plans crafted and core competencies applied. To provide returns not only for shareholders but all stakeholders.

Sustainable Market Leaders, a set of companies that includes GE, take five CLEAR steps to integrate sustainability into activities, investments and plans. These companies craft, lead, execute, analyze and renew their sustainability efforts, all within the context of traditional business processes. Central to these fundamental steps is a wholesome—and wholesale—commitment to bring stakeholders into business decision making processes.

GE’s Smart Grid Challenge is an exemplar of this approach. The Company sees potential for massive returns from bringing the long-discussed smart grid to life. Realizing this gargantuan task requires an unending influx of talent, ideas and capital, GE took the right step to ask society for their best thinking. Providing selected ideas (and people) to invest in was also a step in the right direction toward maximizing stakeholder returns.

But stakeholder engagement is an essential step, not a panacea. Sustainable Market Leaders are companies focused on maintaining their licenses to operate in perpetuity. They don’t stop to admire their good steps. Rather, they place self-satisfaction just out of their reach, constantly striving to grasp this carrot.

This unwavering journey requires companies to operate not just in accordance with regulations but also in accordance with social norms. Here’s where the rubber meets the road. GE’s 2010 U.S. Federal tax bill was $0. I paid more in taxes in 2010 than GE. So did you. In fact GE received $3.2 billion from Uncle Sam. From society. From U.S. citizens like me.

This extraction of value from stakeholders is unacceptable. Yes, GE operated within the current set of tax regulations. But its decision to operate out of alignment with social norms only strengthens society’s distrust in institutions. By seeking to maximize shareholder returns, the Company neglected its responsibility to maximize stakeholder returns.

I challenge GE to reconsider its U.S. federal tax strategy. If the Company thinks it can provide a better societal return on the $3.2 billion rebate it received in 2010 (and the $1.1 billion in 2009), then prove it. Recast the Smart Grid challenge by completely reallocating these rebates to invest in more Smart Grid ideas proffered by society.

There’s one other characteristic that separates a small but growing number of Sustainable Market Leaders from their peers. These companies are actively reviewing their individual businesses’ contribution to their overall sustainability goals and commitments. If a business takes more value away from stakeholders than it provides, these companies actively seek to divest the business. In the process, imprisoned resources are freed to be reallocated toward maximizing stakeholder value creation.

I implore GE to both conduct such an analysis and act on the results. When combined with a recast tax strategy, the Company will come closer to claiming its expected place among industrial leaders excelling at creating value for society writ large—and become truly sustainable in the process.

Eric Lowitt is an independent consultant who helps companies grow, innovate and become more agile and competitive by embracing sustainability. His first book, The Future of Value, releases through Jossey-Bass/Wiley in September 2011.

Sustainable Growth 2012

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