Sustainability has rapidly become an indispensable part of corporate governance. But as companies commit to green practices, a worrying trend is also surfacing: Some corporations are painting themselves as green while failing to back their claims with concrete actions. Numerous examples abound: The UK Advertising Standards Authority (ASA) has recently banned a number of ads from prominent companies, including HSBC for being “misleading” about efforts to tackle climate change. The ASA also banned the ads of Ryanair for the company’s unsubstantiated claim of being Europe’s lowest emissions airline.

In addition to regulators, companies that project an unsubstantiated green image are also being called out by investors, and consumers, who may punish such “greenwashing” through penalties, divestment, boycotts, or even protests. Yet, our recent research suggests that some companies may be engaging in similar behavior while escaping, to a certain degree, scrutiny and sanctions.

We found that a certain type of firm — specifically, a firm that sits atop of what is known as a Business Group (BG) — seems to largely avoid scrutiny for greenwashing. BGs are prevalent yet understudied entities across the globe in both developing and developed economies, accounting for much, if not the majority, of economic activity in countries as varied as India, Korea, Turkey, and Chile. Each BG is essentially a web of affiliate companies that typically span multiple industries, share resources, and are interconnected through both equity holdings and social ties. The firms in a BG are typically coordinated by a core or apex firm that is often the top corporate owner. Our research reveals a curious dynamic within these arrangements: we found that apex firms are able to report on the sustainability efforts of their lower-tier affiliates “for free,” i.e., without substantiating them with their own actions. And they can do this without incurring the greenwashing label.

To shed light on this phenomenon, we analyzed data from 515 publicly listed companies that are members of BGs across 35 different countries. Specifically, we obtained environmental, social, and governance (ESG) data from Refinitiv (formerly ASSET4) which measures each company’s ESG performance relative to its industry peers, relying on company-reported information. We used it to distinguish between a company’s substantive sustainability actions (i.e., those related to socially responsible policies and programs) and symbolic ones (i.e., reporting, claims, or disclosures). The gap between these two sets of actions was our measure of the extent to which companies decouple “talk” from “action.”

We found that apex firms engaged in fewer substantive sustainability actions despite communicating sustainability at similar levels to their lower-tier affiliates. Put differently, these firms systematically “advertised” more than they actually “did” relative to other group members. Adding another layer to this dynamic, we observed that apex firms sharing a brand name with their affiliates engaged in even fewer substantive sustainability actions compared to apex firms that did not have a shared name. Unfortunately, the equity markets appear to extend some tolerance towards this particular type of greenwashing by apex firms compared to their lower-tier affiliates.

What explains this discrepancy? It’s possible that what might be perceived as blatant greenwashing elsewhere could be interpreted as a legitimate division of labor in the unique BG ecosystem. Apex firms, using their influential role and symbolic power, can act as “communicators,” that amplify the group’s overall sustainability initiatives; lower-tier affiliates, in contrast, take on the role of “implementers,” substantively implementing these initiatives.

This may provide a short-term advantage to apex firms who essentially attempt to free-ride on the global sustainability movement. However, it’s vital to recognize that the markets’ tolerance of apex firms’ apparent greenwashing does not absolve them of their responsibilities. Eventually, greenwashing may severely damage long-term reputation and erode stakeholder trust. Leaders should seize upon this understanding as an opportunity to bolster their sustainability practices and reporting. Indeed, our study has important implications for managers, not just within BGs but, more broadly, within firms that are affiliated to others (e.g., through alliances and joint ventures).

Be honest about sustainability efforts.

Overstating sustainability efforts can severely backfire if a gap between rhetoric and reality is exposed. Like the way in which one affiliate’s good reputation reflects well upon the whole group, so would a greenwashing scandal reflect poorly beyond the affected affiliate. Leaders should therefore ensure that public communications about sustainability accurately reflect the group’s actual practices. They should report on and rectify potential discrepancies between sustainability actions and communications. Additionally, establishing comprehensive monitoring through external assurance services can promote transparency and accountability, reducing the chance of perceived greenwashing.

Motivate sustainability among affiliated firms through a shared identity.

Leaders of apex firms should not solely rely on their coordination abilities within the group to ward off perceptions of greenwashing. They also benefit from being the source of a group identity — that includes core values and principles — that can and should be used to mobilize group members towards achieving long-term sustainability. In fact, many BGs do this through appeals to their history. For instance, Japan’s Sumitomo group builds upon its 400-year-old founding principles (the “Sumitomo Spirit”) about mutual prosperity and respect for the public good to motivate its sustainability efforts.

Share sustainability best practices and talent.

Managers at apex firms should not only report on the sustainability efforts carried out by other affiliates, but also diffuse them across the group affiliates. Managers can leverage the well-developed internal HR networks within BGs to recruit personnel adept at corporate sustainability practices or develop teams that can identify and diffuse sustainability actions throughout the group. One example of this is the Tata Sustainability Group (TSG), a team of the apex firm Tata Sons that has the “mission to guide, support and provide thought leadership to all Tata group companies in embedding sustainability in their business strategies.” In other words, extending the communication role of apex firms towards internal stakeholders can help develop groupwide substantive sustainability strategies.

Be mindful of evolving stakeholder expectations.

The business world is rapidly shifting, and stakeholders’ expectations for sustainability are no exception. Ignoring this evolution can strain relationships with essential stakeholders, including customers, employees, and investors. Leaders should strive to stay in tune with their expectations and make sure their commitment to sustainability is transparent and genuine.

In the end, the pursuit of sustainability is not a marketing gimmick, but a commitment that demands substantive, long-term action. A strong group identity may provide some protection for apex firms within BGs, but beneath it, the audience, the stakeholders, and indeed the world, are demanding substantive, not just symbolic, actions. Particularly in the context of BGs and similar organizational setups, any reputational damage is likely to spill over to the entire group of firms, severely damaging the entire organizational ecosystem. Therefore, over the long run, companies will consistently benefit only through a sincere commitment to sustainable practices.

This content was originally published here.

The post Research: How Some Companies Avoid Accusations of Greenwashing appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

The days of operations that pursue speed, quality, and cost efficiency above all else have come to an end. Today, the objectives that manufacturers must pursue to ensure competitiveness have evolved. Sustainability, long seen as incompatible with these traditional goals, is now a strategic imperative.

This raises a question for manufacturers: How can they make products and production processes more sustainable while remaining profitable?

There is a vibrant ecosystem of companies that have started to break this trade-off with deep tech: the innovative use of emerging physical technologies enabled by digital technologies to solve large-scale problems. As they try to increase profitability and sustainability, it’s time for manufacturers to use deep tech more widely and at scale.

A confluence of factors is converging to make this possible. First, the urgency to deliver sustainability is on the rise, driven by net-zero commitments and stakeholder demands. Second, financial and regulatory support for developing green technologies has never been greater. The Inflation Reduction Act in the United States and the European Green Deal in the EU are prime examples of this. And third, potentially transforming technologies are moving out of the lab and into the real world, with many demonstrating success at scale. These shifting dynamics present opportunities for manufacturers such as creating or moving to new markets or securing a head start in addressing supply scarcities, especially for green materials.

To capture these opportunities, break their trade-offs, and deliver sustainability, leaders should apply deep tech across their products as well as their processes. They will also need to consider how to collaborate with the innovation ecosystem, especially with younger deep tech firms.

Deep Tech Can Enhance the Profitability-Sustainability Profile of Products

With deep tech, manufacturing companies can reimagine the very essence of their products. Instead of offering incremental enhancements or partial substitutions — which often don’t yield significant benefits and may even be counterproductive — it’s essential for businesses to consider more fundamental product updates.

Manufacturers can develop and use new materials that are delinked from legacy materials’ supply chains or environmental footprints. Synthetically produced biological materials can act as sustainable building blocks or as drop-in substitutes. Market segments in which a sustainable manufactured product translates into a new relevant product claim are more likely to command a green premium, for example in the personal beauty space.

Consider Geno, a San Diego-based company that has developed plant-based alternatives for palm oil and fossil-based beauty, cleaning, and apparel ingredients based on its synthetic biology platform. The carbon footprint of Geno’s synthetic biology–based palm oil is up to 50% lower than conventional palm-derived ingredients. By offering traceability and lowering the reliance on traditional palm-oil supply chains, its use also drives supply chain transparency and resiliency. Similarly, Modern Meadow has developed a synthetic biology–derived collagen with unique bioactive effects. Specialty ingredients supplier Evonik has partnered with Modern Meadow to bring this to scale across the personal care and cosmetics sector.

Deep tech can contribute to both supply and price stability of raw materials, which are key for a manufacturer. Switching to renewable or more abundant materials answers both of those needs and can even shorten supply chains, reducing the complexity and carbon footprint of their logistics network. Niron Magnetics, for instance, has developed and is scaling up production of high-performance magnets. Their magnets are made from widely abundant nitrogen and iron, a viable alternative to alleviate the rare earth metals supply chain, which is concentrated in a few sources and processed in only a few plants worldwide. While initially targeting applications such as sensors or loudspeakers, these magnets could soon contribute to making EV motors, such as those from Tesla, rare earth-free.

Another way to enhance the profitability-sustainability profile is to change the performance profile of a product, for example by extending its life or endowing sustainable product properties that aren’t possible with conventional materials.

Basilisk, for instance, has developed a bio-based drop-in treatment, made of engineered microorganisms using syn-bio techniques, that can be mixed in with mortar or applied to existing concrete structures. This repair system uses limestone-producing microorganisms to eliminate the need for crack repair and maintenance. Depending on the product, this can lower CO₂ emissions by 30–50% versus conventional concrete by extending the lifetime of the concrete and reducing the amount of steel needed for reinforcement. If applied at scale, this could mean a reduction of global CO₂ emissions by more than 1.5%, since currently more than 6% of global CO₂ emissions come from concrete.

Deep Tech Can Make Sustainable Process Economics More Compelling

It’s not just the products themselves that create constraints, but also the processes used to make them.

Boston Metal reimagined the conventional carbon-intensive steelmaking process by inventing a new electrolytic process and associated apparatus able to run on 100% renewable electricity and emitting no CO₂. The molten-oxide electrolysis technique, made possible by new electrode materials that can withstand high temperatures and are stable in the presence of oxygen, has the potential to reduce the carbon footprint of the steel industry, currently responsible for as much as 8% of global GHG emissions.

Deep tech can enable innovation on processes to deliver step-changes in energy efficiency. Combined with new production enablers — like a shift from linear assembly lines to small, cellular factories — manufacturers can increase flexibility, introduce optionality for local manufacturing, and transition to a lower carbon footprint production network.

For instance, Syzygy Plasmonics’ scalable photoreactor combines LED light and photocatalytic nanoparticles to conduct chemical reactions, made possible by combining advancements in architected materials and innovation in photonics. Because the reactor focuses the energy from light exactly where it is needed, conversions become much more efficient and sustainable than a conventional reaction. By removing the need for combustion in the emissions-heavy chemical industry, Syzygy Plasmonics aims to avoid one gigaton of CO₂ emissions by 2040.

Lastly, manufacturers can develop and use entirely new processes, like new additive manufacturing or precision fermentation techniques, that enable the realization of conventionally unmanufacturable sustainable products. With deep tech, manufacturers can engineer processes that reduce the number of energy-requiring transformations by building from the atom up.

Geno has successfully scaled their synthetic biology technology and farm-based supply chain to tackle large ingredients markets like butanediol (BDO), an industrial chemical, and nylon critical to the sustainability goals of its brand partners like Unilever, L’Oréal, and Lululemon.

Operations executives should look for incentives, subsidies, and other opportunities created by recent government policies. In the United States, the IRA alone covers $71 billion in stimulus for advanced manufacturing, industrial facilities, and energy efficiency.

Build an Innovation Ecosystem

Deep tech operates at the intersection of several emerging technologies, such as synthetic biology and 3D printing. It addresses complex issues that cross different scientific fields. It needs to serve real market needs, while often demanding significant funding and extended development periods.

Traditional companies may find it difficult to navigate this swiftly changing landscape. And few, if any, will have the tools and capabilities to do it alone.

To start making progress, manufacturers should seek to collaborate with partners — through commercial alliances, incubators, or ecosystems that can even include governments and academia, for example. Counterintuitive as it might seem, younger deep tech firms and incumbent manufacturers should not compete but rather collaborate. Established manufacturers can expect to get access to novel technologies and specific know-how that enables them to apply deep tech in their products and processes. When partnering with deep tech startups, manufacturers should look for solutions that are most compatible with their domain and build on the unique assets and capabilities they can leverage to create value for their joint efforts.

Chicago-based biotech company LanzaTech, for instance, has developed a microbe-based technology that uses residual gases containing carbon monoxide and hydrogen as feedstock to produce bioethanol. In partnerships such as with BASF, the world’s largest chemicals manufacturer, LanzaTech is working to convert the carbon in the exhaust gases from industrial processes, such as steel making, into sustainable raw materials for various industries. By capturing and utilizing carbon in this way, the technology can help reduce the carbon emissions of many manufacturers and associated supply chains. BASF thus improves the sustainability of their customer’s resource use and helps create demand for LanzaTech’s technology.

This example is just one of many. When looking to collaborate with deep tech startups, manufacturers can consider partnerships, joint ventures, or M&A approaches. The optimal engagement strategy and suitable partner will depend on the specific constraints a manufacturer faces in their domain, the need to complement missing in-house capabilities, and desired ambition level or scale.

To achieve commercial success activated by deep tech at scale, manufacturers should combine their product or process innovation with foundationally different value chains. Our extensive research on business ecosystems shows that value chain transformations, while challenging and often requiring extensive collaboration, will unlock enormous value. Manufacturers can leverage their unique capabilities and existing relationships to influence suppliers and distributors to transition to solutions or infrastructure that will support the new processes and products or help navigate the regulatory environment.

Consider the fashion industry, which accounts for around 4% of greenhouse gas emissions globally. Sustainability innovation efforts, which need to be effective throughout complex global fashion value chains, are particularly challenged in the current economic environment. Companies are pooling risk by collaborating cross-industry through a consortium like Fashion for Good. Fashion for Good has established an innovation program that connects brands, retailers, manufacturers, and investors to develop and scale disruptive solutions within the textile industry.

The members of this industry-wide initiative are looking to realize collective goals of making sustainable change happen in areas such as materials, processing, or end of use — but are unable to do it individually. The group has, for example, launched the Renewable Carbon Textiles Project, focusing on producing fibers from polyhydroxyalkanoates (PHA) polymer fibers, which could offer a sustainable, biodegradable alternative to traditional, fossil-based fibers, with the potential to significantly cut emissions in fashion’s value chain while simultaneously allowing manufacturers to fine-tune fabric properties. The project combines expertise of innovators like Danimer Scientific, Bio Craft Innovation, Paques Biomaterials, Helian Polymers, and Newlight Technologies with other players in the industry who will test the solutions, provide funding, and help scale the solution.

The examples of deep tech ventures and collaborations with manufacturing incumbents show that deep tech can already help companies deliver on the operations paradigm, advancing a common sustainability agenda without sacrificing long-term profitability. The real challenge is not the technology itself, but the inertia of long-established capital investments and time-tested manufacturing approaches — overcoming this is no small feat.

Given the pressing urgency for sustainability, manufacturers need to act swiftly and decisively. Manufacturers that leverage their unique capabilities and succeed in identifying the right engagement models can use deep tech as their critical driver of competitive advantage — and now is the time to get started.

This content was originally published here.

The post How Deep Tech Can Drive Sustainability and Profitability in Manufacturing appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

It’s March 2020. Store shelves sit empty, without any toilet paper or cleaning supplies in sight. Tablets and electronic devices are out of stock. Consumers are clamoring for the basics they need to suddenly work and learn from home and live under quarantine. Meanwhile, on Zoom calls and in email threads, company leaders around the world are racing to put in giant orders with their suppliers to speed up supply-chain lags and get products to customers. In the supply-and-demand equation, demand seems infinite.

Now, three-plus years later, we’re seeing the stark aftereffects of that spike in demand. After the race to order key components and manufacture products, suppliers are left with mountains of excess inventory as growth has slowed to normal levels. In the tech industry, it’s common for warehouses to be full of now-outdated semiconductors and other technology components. When those components were ordered, they were in hot demand. Now, companies are dispositioning excess electronic components (selling them at lower prices, scrapping them, using them in alternate products, and trying to sell them back to suppliers) to get them off their balance sheets.

Beyond the obvious environmental cost, an inventory glut of high-end electronics components is an expensive problem. Excess inventory is a $250+ billion problem in the U.S. alone, according to a 2023 Kearney study. On a global scale, U.S. census data shows excess inventory amounts to trillions of dollars. Someone pays for all that extra inventory.

And this problem isn’t a pandemic-era anomaly. New demand spikes are coming our way — you only have to consider the seemingly “infinite” demand for electric vehicle batteries or the boom of chipsets that drive AI-powered technology to see how similar cycles could play out in the near future.

As we look ahead at a new age of operations, leaders have the opportunity to address the current inventory problem and be stewards of a healthy, sustainable industry ecosystem. Players in every part of the value chain (from component suppliers to manufacturers) have a key role in preventing this kind of waste in the future. We see the opportunity for forward-thinking leaders to blaze a trail, modeling a more sustainable way of collaborating for shared success.

How Inventory Gluts Occur

Inventory challenges aren’t new. Electronics littered shelves in 2001 after the dot-com bubble burst. Then, in 2009, the financial crash left manufacturers with excess inventory when consumer buying power suddenly dropped. And now, the high-tech industry is feeling the weight of a volatile market that has led to excess component inventory.

Excess inventory can happen at any part of the supply chain. Here’s a hypothetical example: As cloud computing booms, a company selling servers (also known as an original equipment manufacturer or OEM) gets a giant order for server equipment. The OEM, in turn, sends an order to their contract manufacturer for this server. (“We need as many as you can make!”) The contract manufacturer starts sourcing all of the parts they need to make those servers, including two kinds of semiconductors (we’ll call them “A” and “B” semiconductors). The contract manufacturer searches high and low for those semiconductors; getting the parts could take a year. Once all the parts are finally in hand, surprise! The original order has changed. The technology has advanced, and the demand has shifted. Now those same servers use “B” and “C” semiconductors. The contract manufacturer is stuck with warehouses full of the outdated semiconductors “A” and excess quantities of “B,” creating a very expensive and very wasteful problem.

The key problem is in the original order. Demand is never actually “infinite” or fully predictable given technology changes. Every manufacturer must creatively collaborate with their customers to understand realistic demand for what they will manufacture. There’s also an opportunity for suppliers, manufacturers, and distributors to creatively work together to return components that do not get used and get them in the hands of someone who needs them.

How One Manufacturer Is Turning the Tide on Excess Inventory

Let’s look at how one contract manufacturer we have worked with is managing the problem of excess inventory. The manufacturer’s excess inventory was steadily inching toward unsustainable levels, while external factors like increasing interest rates created an intractable problem.

Company leaders started applying the concept of “Inventory Momentum,” a forward-looking metric based on the classic momentum equation: current inventory x rate of inventory change. In other words, having a large inventory isn’t a problem. But when the inventory rate increases, the combined momentum creates a major headache. And when you’re talking about billions of dollars in electronic components that have an expiration date driven by technology transitions, the headache is expensive.

Once they understood their inventory momentum, the leadership team took five key actions to reduce excess inventory, stem the rate of inventory change, and prevent the situation from happening in the future:

The results: The company reduced the total inventory number by more than 10% in just a few short weeks and reduced inventory momentum.

Creating a More Sustainable Inventory Ecosystem

This real-world example isn’t an outlier — it’s the canary in the coal mine. The liability of excess inventory affects every business in the value chain. To create a more sustainable environment, every business needs to start thinking differently about the burden of excess inventory.

To start, leaders must reconsider the narrative of “infinite” demand. Every demand spike will eventually end in an inventory glut. It’s up to the companies placing orders to temper that demand with a dose of reality.

If suppliers maximize revenues and OEMs order more than what they can reasonably sell, contract manufactures get stuck in the middle. That dynamic isn’t healthy or sustainable. Value chain partners like OEMs, contract manufacturers, and suppliers need to be aligned on optimizing inventory. Suppliers should be able to redistribute excess components that are still perfectly useful for another application. Getting products into the hands of people who need them is ultimately good for everyone.

Finally, as new industries emerge, prioritize creating healthy ecosystems from the start. The growing realm of AI represents a major opportunity for high-tech manufacturers — but it’s also an opportunity to build a healthy ecosystem. To do so, we can’t assume an “infinite” demand for AI-powered applications. The same is true of the electric vehicle industry. If the ecosystem over-produces parts for EVs, there’s a high risk those parts will be outdated or unusable by the time demand eventually materializes.

Inventory management is a critical problem that should be on the radar of anyone in an industry with volatile demand and long lead times. And it requires a careful, collective solution. No single company stands alone. Instead, we’d all be well served to consider the broader business ecosystem, making decisions that will serve our bottom lines and the health of all the companies connected to us.

This content was originally published here.

The post The Next Supply-Chain Challenge Isn’t a Shortage — It’s Inventory Glut appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

There’s an unfortunate stereotype that risk management is boring. Risk managers are pessimistic clerks. Compliance officers are scaremongers. Too many managers think this way. As a result, risk management is an unloved and misunderstood discipline. Until disaster strikes, risk management is, for most, a painstaking and costly chore.

In an increasingly volatile world, however, risk management has never been so important. Nonetheless, risk managers struggle to make their voice heard in the face of more immediate and commercial pressures. This is especially true in small- and medium-sized companies — organizations with entrepreneurial cultures, fewer regulatory demands, and more resource constraints. These businesses tend to view risk management as an expensive luxury — and they may be more exposed to risks as a result.

This article presents a more enlightened approach to risk management based on two decades of applying, researching, and teaching risk management to academic and professional audiences. It will help managers — including those at SMEs — to better understand risks and apply effective, positive risk management techniques. It’s a framework that relies on three actions: designing controls proportionate to the risks at stake, analyzing the lessons from success (not only from failures), and using risk management to boost and protect business performance.

Positive risk management is proportionate

Proportionality means that small risks require small fuss; big risks demand big focus. Daily risks are acceptable, such as: forgetting an email attachment, double paying a modest invoice, missing a deadline on an internal report. Errors and slips like these simply show how busy we are. They are understandable oversights in fast-moving enterprises, especially SMEs where teams are lean and resources scarce.

Conversely, extreme risks deserve greater care: a phishing link starting a cyber-attack, the loss of key intellectual property in an innovative start-up, a bacterial infection in the water supply of a care home. Neglecting real dangers costs millions, heartaches, and lives — and that’s when we regret not being more vigilant, more careful, more boring.

Yet, organizations often miscalculate risks. Smaller incidents are the most frequent; they raise attention but do not matter. From a sample of 500,000 operational losses in banks over the years, data show that incidents from the smallest size category are the most frequent (61%) but the least damaging overall (6% of the total loss severity). The real damage comes from largest, rarest incidents: each year, the top 0.3% of incidents cause on average 63% of the total losses. Despite this imbalance, risk managers and businesses dedicate more time and attention to the small issues, rather than preventing serious damage.

Risk management is costly when over-applied. For example, excessive cyber protections slow down computers and logins, and double checks of every single payment and transactions wastes time that could be better used for creative activities. Credibility comes from restraint. Risk managers are respected when they show pragmatism in their calls for prudence. Competent risk managers prepare for severe and plausible scenarios while tolerating limited mishaps.

Proportionate risk management reduces the inefficiencies arising from either too much control or too little control. Being too cautious leads to slowness, rigidities, and opportunity costs. Carelessness causes accidents, instability, and remediation costs. Non-financial risks have a risk-return trade-off like their financial equivalents. Saving costs by lifting some operational controls to increase productivity is a reward for operational risks. Effective risk managers and astute business leaders have a clear view of how much risk they are prepared to accept, and for which benefits. The concept is widely referred to as risk appetite.

Positive risk management celebrates success

It is a good risk management practice to dissect the root causes of accidents, especially those with the largest potential damage. However, when focusing on past losses and future mistakes only, risk managers fail to recognize and reinforce the causes of success. Looking back to the causes of failures is valuable, but it can create resistance through implied criticism.

For example, a senior risk officer of a clearing house in London stormed out of a workshop when some of the causes of the loss discussed were identified as a consequence of his management style. He vetoed further exercises and was let go six months later, for other reasons. The firm in question has now closed.

Reflecting on success stories is inspiring. “Why did we win?” creates more enthusiasm for analysis than “Why did we lose?” Dissecting past achievements is encouraging and insightful. Successes are there, but often overlooked: on Monday morning, no one notices the IT migration that ran smoothly over the weekend, nor praises the absence of customer complaints, thanks to the efficient performance of staff. The negativity bias of the human brain means that negative experiences imprint on our memory more quickly and last longer than positive ones. Deliberate reflection on past victories is a welcome counterbalance to the common risk management focus on what went wrong.

There are accepted rules for effective risk management: vigilance is key, and rapid intervention reduces impact. “If you see something, say something” is the New York City Subway’s motto to prevent terrorist attacks. “See it, say it, sorted” is the equivalent for the London Underground.

For SMEs, discipline and vigilance are also essential for success. Start-ups need more than great ideas to thrive; they depend on the relentless attention of their founders, who must continually monitor performance and be alert on what could go wrong. The international expansion of a nascent brand requires rigorous planning, market knowledge, thorough due diligence, and competent managers who can fix a myriad of potential issues before they turn into disasters. Such as in personal life, the early detection of a theft, a fire, or an illness can make all the difference between a fright and a tragedy.

Praising good risk management practices reinforces winning behaviors and avoids undue criticism, and positive risk managers become mentors, not doomsayers. Welcome and accepted, risk management becomes an ingredient of achievement.

Positive risk management protects performance

Managing risks is inseparable from managing performance. Positive risk management aims to capture the upside of uncertainty, and to prevent the downside as much as possible.

Dream big, risk big: taking risks is necessary, even desirable. But it takes method. Stunt actors are great risk managers, otherwise they would not survive their first movie. Entrepreneurs must balance dare with caution, or they are destined to fail. Firms and governments must watch and respond to threats, or they will create havoc for themselves and others, as we have witnessed too many times. When risk management fails, organizations go down. The Great Financial Crisis, Covid-19, or the recent collapse of Silicon Valley Bank all find their source in the failure of risk management.

Risk management is a condition for ambition: the more ambitious the objective, the more important risk management is to achieve it. Hotels and resorts require flawless processes for a satisfactory customer experience; fintech banks must be first-class cybersecurity experts to operate; healthcare providers need impeccable patient safety procedures to survive.

Particularly for smaller firms, growth comes with risks, and fast-growing start-ups generate operational risks faster than revenues, as complexity increases more rapidly than size. Only those with sound risk management systems will become the Google, Amazon, Disney, or McDonald’s of tomorrow.

With the growing focus on climate change, financial regulators and investors such a BlackRock expect organizations to understand, assess and communicate their exposure to climate-related risks. However, what is now required for climate-related risks is valid for all types of business exposures: to protect its business model and performance, managers need to oversee all the relevant changes to their operating environment. For instance, blockchain innovations and cryptocurrencies are most relevant to payment platform providers, while the mining conditions of cobalt and the availability of rare earth elements are essential to monitor for lithium-ion battery producers. Generative AI scares many, but used wisely (with proper risk management), this tool can be a fantastic productivity booster to be embraced rather than fought.

SMEs do not have the same regulatory pressures that can lead larger companies to measure and mitigate their risks, but they also have fewer buffer resources to resist unexpected shocks. They are one large potential incident away from bankruptcy.

By being positive about risk management, professionals can bring an inspiring narrative to their discipline, recognizing the value of taking risks and the necessity of protecting performance. A constructive dialogue between optimists and pessimists, between those who dare and those who prefer caution, powerful engine for business growth without booms and busts. In the pursuit of success and happiness, we need to decide what we can gamble on, and what we cannot afford to lose.

This content was originally published here.

The post Smaller Companies Must Embrace Risk Management appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

Over the past several decades, leaders have turned to scenario planning to identify future risks to their businesses. By analyzing things like revenues or margins across locations globally, this method allows leadership teams to design flexible long-term plans against a defined set of alternative external events and outcomes. The outputs can often include short-term financial forecasting and business planning in a “base case / best case / worst case” fashion.

But this method works best for foreseen risks and stable uncertainties like inflation rate forecasts, the likelihood of a new competitor, or a substitute product entering the market. It often fails spectacularly when firms are hit by shocks outside of leaders’ field of vision. And today, leaders are increasingly confronted with significant, and sometimes existential, events that they would not have contemplated even six months earlier. As an executive lamented to us, “There is great reason to be humble. … The pandemic and the war were not on the risk map at all before they happened.”

Can scenario planning be updated for these new realities? What else must organizations do to prepare for the unexpected?

Scenario Planning Meets Novel Risks

Our research team — which includes a former public company CEO and current chair of several boards, strategy consultants, and a professor at Harvard Business School — wanted to gain insight into how Nordic companies in particular were evolving decision-making and scenario models in the face of novel risks. Nordic leaderships teams provided an interesting benchmark globally for two reasons.

First, because scenario planning is quite effective for foreseeable risks and stable, smaller uncertainties, the method was long well-matched to decades of relatively smooth globalization for Nordic businesses. Leaders learned along the way to watch out for rare “Black Swan” events, but organizations did pretty well by considering in their planning processes a set of scenarios that covered most outcomes. Second, Nordic businesses have also had exceptionally large exposures to both recent seismic events: the pandemic and, due to their geographic proximity, the Russian invasion of Ukraine.

We interviewed and surveyed more than 40 top leaders at 14 global businesses in multiple Nordic countries, spanning air travel to industrial manufacturing to consumer-facing sectors. Our survey and many of the interviews fell during the first quarter of 2022, when the Omicron variant was causing renewed lockdowns and Russia invaded Ukraine. Most of these Nordic companies had major operations in Russia, and all of them were materially affected through factors like energy prices. Further follow-ups happened through 2022 as leaders adapted and pushed their organizations forward.

Our interviewees suggested the last few years presented unique challenges rather than just more severe conditions. They frequently used words like “ambiguous” and “unclear” when discussing what professors Robert S. Kaplan, Herman B. “Dutch” Leonard, and Anette Mikes call novel risks: risks that “arise from unforeseen events, from complex combinations of apparently routine events, and from apparently familiar events occurring at unprecedented scale and speed.” This lack of clarity left the executives at a loss for defining key parameters to place into scenarios; they further found it impossible to parse the future into discrete scenarios per the traditional method.

Organizations and leaders struggled, with one leader decrying, “Plan B ideology has become a permanent state of being.” Yet, leaders did not want to abandon scenario planning (and neither do we). The good news is that, as much as the leaders we studied struggled, we also saw lots of progress in how they adapted scenario planning to fit their new reality.

We’ve organized it into four levels of responses.

Level 1: Stretch the scenarios under consideration.

Not surprisingly, most leaders reported increasing the number of scenarios under study to cover a larger and more diverse set of situations. Discussions now cover events once deemed unthinkable, like an invasion of their own country or a war between the U.S. and China over Taiwan. This expanded view was the most common step taken and the one that all companies should do. Pandemics and wars have happened before, and they will happen again.

There was a notable twist, however. Executives reported that decision-making following the Ukraine invasion was more complex than the pandemic due to the heightened role of moral values of the company, shareholders, and customers in the decisions. Boards became more involved. While some leaders appeared at ease with this — and perhaps even relieved — others were frustrated. “Sensible business decisions could not be made,” said one leader. Thus, the practice of stretching the scenarios under consideration needs to be accompanied by a conversation regarding which criteria will be crucial should a similar type of scenario arise.

Level 2: Use vulnerabilities as prism for looking at scenarios.

One level higher, leaders sought to undergird scenario planning by better studying impacts on key parts the business — especially vulnerabilities.

For example, one leader noted, “In strategy work, crises are not a big thing in themselves; the major impact comes through their consequences like shortages of raw materials.” Following this example, leaders can develop (and maintain) a rigorous working list of their leading vulnerabilities. Some, like single-source supply chains, can be mitigated. Other vulnerabilities are irreducible: two of the companies we interviewed were designed around operations in Russia that could not be repositioned without blowing up the businesses’ cost structure. A company will be better grounded for the next shock, regardless of its origin, by knowing which type of vulnerability will be exposed and how it will propagate into the organization.

Similarly, executives we interviewed often lamented or applauded the financial capacity of their organization to act aggressively during the pandemic and war. While novel shocks can come from unexpected places, companies should be able to readily calculate the financial reserves needed to survive three months with a 50% revenue decline. Accordingly, some leaders we interviewed moved to requiring worst-case scenarios be included in all divisional plans and budgets. One company screened events through a lens of whether they anticipated the shock and its recovery to follow a “V, U, Y, or L” shape.

Executives should also be open-eyed about potential vulnerabilities they may not want to admit. For instance, the departures of key talent can compound a crisis in a devastating way, and organizations with weak bonds with employees may trigger an exodus. One leader lamented, “workers didn’t care at all what was happening” about a past crisis. In another example, the greatest vulnerability was also the company’s key strategic advantage. This organization saw its competitive edge in logistics swiped away as a result of Russia’s retaliation to Western sanctions, forcing a comprehensive revision of the company’s strategy entirely.

Level 3: Building strong action guidelines and internal communication.

The leaders we interviewed frequently noted how pre-defined actions and roles were becoming more important than tidy scenario descriptions. Instead of trying to define detailed scenarios and corresponding action sets, many companies had moved to using “general guidelines in how to handle all kinds of scenarios,” as one executive explained. Another noted: “The key is to find out what actions to do … rather than to specifically determine what the scenario is. Our goal is such that implications are already painted in, and that the implementation phase can then be started quickly.”

In many of these action guidelines, the pandemic favored speed at the local level as opposed to centralized decision-making pushed outward. For example, while boards were initially heavily involved in operating decisions in 2020, our interviewees recommend engaging the board less frequently and with a focus on updates in order to make faster decisions should similar events happen again. “It’s better to make 10 decisions quickly and let a few go bad than not make any decisions at all,” reflected one leader. Top leadership still need to communicate “the general direction of actions to be taken,” but the action guidelines could otherwise guide behavior. Importantly, this approach requires clearly defined responsibilities of all parties ahead of time to be successful.

The Russian invasion of Ukraine was viewed differently, however. Leaders emphasized that the reputation of the company was at stake, and that required all parts of the organization to stay on a consistent, common message. The board’s role was to guide decisions and be deliberate in the process, and the key first action of the management team was to provide it with the necessary information. “Demand a deep understanding,” one leader recommended for these types of situations before they turn into actions. Thus, when developing action plans, leaders must define the characteristics of a crisis that requires this more deliberative mode.

Level 4: Build crisis management into the organization structure.

Moving away from traditional, centralized scenario planning, most companies we studied had delegated decision-making power to local geographies as part of the pandemic response. These policies stuck, with a leader commenting, “There has been a shift from a management hierarchy-based mindset to a more location-based approach.” Other executives said that decentralized operations provided their companies with information advantages, less exposure to idiosyncratic risks, and faster exists from Russia when needed. Internally, most executives felt the company was more meritocratic and less political than in 2019 as a result of these changes.

Beyond localization, companies were quite varied in terms of additional organizational alignment for crisis management. About half handled these events within the pre-existing organizational structures and processes, usually by assigning an executive team member to be responsible for pandemic or war measures. Most of the other companies developed a new task force around these events. Frequently, temporary task forces for the pandemic became permanent after the second crisis hit.

Interestingly, some companies built their response on structures and processes that already existed before the shocks and then tailored them in creative ways. A good example was a company that had an already-existing, dedicated business planning and forecasting team devoted to handling the large volatility in their industry. The unit consisted of experts on route planning and capacity management, and also had a robust set of guidelines and processes on how to deal with emergencies. As a result, upper management did not need to be involved in operational decisions. “Emergencies are business as usual to us,” noted the executive we interviewed.

When pandemic hit, the chief operating officer and his team began to oversee the unit, and its processes and practices became a basis for a wider company response. The unit grew and was re-purposed to further handle the effects of the war in Ukraine. Should some unexpected event happen again, this team is on standby. Arrangements like this may be a promising way for companies in managing novel risks going forward.

Scenario planning is not dead, but leaders must be thoughtful about its usefulness. Global companies face an ever-wider range of external shocks, coming one after another. These conditions require a larger toolkit, one that complements bespoke plans with a more generalized capacity to recognize how features of a novel risk/shock will interact with the company’s vulnerabilities and strengths. Leading organizations will further develop the internal communications and structures to guide responses across all outcomes. Plan B shouldn’t be a permanent state of being, but the answer isn’t to better predict the unknowable future. Instead, the answer lies in being better prepared to deal with the shock.

This content was originally published here.

The post When Scenario Planning Fails appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

How to engage customers—and keep them engaged—is a focal question for organizations across the business-to-consumer (B2C) landscape, where disintermediation by digital platforms continues to erode traditional business models. Engaged customers are more loyal, have more touchpoints with their chosen brands, and deliver greater value over their lifetime.

Yet financial institutions have often struggled to secure the deep consumer engagement typical in other mobile app–intermediated services. The average visit to a bank app lasts only half as long as a visit to an online shopping app, and only one-quarter as long as a visit to a gaming app. Hence, customer service offers one of the few opportunities available to transform financial-services interactions into memorable and long-lasting engagements.

Those customers are getting harder to please. Two-thirds of millennials expect real-time customer service, for example, and three-quarters of all customers expect consistent cross-channel service experience. And with cost pressures rising at least as quickly as service expectations, the obvious response—adding more well-trained employees to deliver great customer service—isn’t a viable option.

Companies are therefore turning to AI to deliver the proactive, personalized service customers want, when and how they want it—sometimes even before they know they want it. For transformed organizations, AI-enabled customer service can increase customer engagement, resulting in increased cross-sell and upsell opportunities while reducing cost-to-serve. In global banking alone, research from McKinsey conducted in 2020 estimates that AI technologies could potentially deliver up to $1 trillion of additional value each year, of which revamped customer service accounts for a significant portion.¹“AI bank of the future: Can banks meet the AI challenge,” McKinsey, September 19, 2020.

While a few leading institutions are now transforming their customer service through apps, and new interfaces like social and easy payment systems, many across the industry are still playing catch-up. Institutions are finding that making the most of AI tools to transform customer service is not simply a case of deploying the latest technology. Customer service leaders face challenges ranging from selecting the most important use cases for AI to integrating technology with legacy systems and finding the right talent and organizational governance structures.

But done well, an AI-enabled customer service transformation can unlock significant value for the business—creating a virtuous circle of better service, higher satisfaction, and increasing customer engagement.

The perils and promise of AI customer engagement

Multiple converging factors have made the case for AI-based customer service transformation stronger than ever. Among the most important: increased customer acceptance of (and even preference for) machine-led conversational AI interactions. Meanwhile, related technologies such as messaging platforms are becoming more accessible, and customer behaviors are becoming more understandable with the relentless expansion of data pools institutions can collect and analyze.

Three challenges

But challenges also loom. First, complexity. The COVID-19 pandemic acted as a major catalyst for migration to self-service digital channels, and customers continue to show a preference for digital servicing channels as the “first point of contact.” As a result, customers increasingly turn to contact centers and assisted-chat functions for more complicated needs. That raises the second issue: higher expectations. Customer confidence in self-service channels for transactional activities is leading them to expect similar outcomes for more involved requests. Businesses are therefore rapidly adopting conversational AI, proactive nudges, and predictive engines to transform every point of the customer service experience. Yet these moves raise demand for highly sought-after skills, generating the third challenge: squeezed labor markets that leave customer service leaders struggling to fill crucial roles.

How leaders fulfill AI’s customer engagement promise

What AI-driven customer service maturity looks like

A few leading institutions have reached level four on a five-level scale describing the maturity of a company’s AI-driven customer service.

Level 1: Manual and high-touch, based on paper forms and offered largely via assisted channels.

Level 2: Partly automated and basic digital channels, with digitization and automation of servicing in assisted channels.

Level 3: Accessible and speedy service via digital channels, with self-servicing on select channels and a focus on enabling end-to-end resolution.

Level 4: Proactive and efficient engagement deploying AI-enabled tech, with self-servicing enabled by proactive customer interactions and conversational user experience (UX).

Level 5: Personalized, digitally enabled engagement, bringing back the human touch via predictive intent recognition.

Leaders in AI-enabled customer engagement have committed to an ongoing journey of investment, learning, and improvement, through five levels of maturity. At level one, servicing is predominantly manual, paper-based, and high-touch. At level five—the most advanced end of the maturity scale—companies are delivering proactive, service-led engagement, which lets them handle more than 95 percent of their service interactions via AI and digital channels (see sidebar, “What AI-driven customer service maturity looks like”).

The most mature companies tend to operate in digital-native sectors like ecommerce, taxi aggregation, and over-the-top (OTT) media services. In more traditional B2C sectors, such as banking, telecommunications, and insurance, some organizations have reached levels three and four of the maturity scale, with the most advanced players beginning to push towards level five. These businesses are using AI and technology to support proactive and personalized customer engagement through self-serve tools, revamped apps, new interfaces, dynamic interactive voice response (IVR), and chat.

A few leading institutions have reached level four on a five-level scale describing the maturity of a company’s AI-driven customer service.

Myth busters: Unexpected insights on contact centers

Toward engaging, AI-powered customer service

To achieve the promise of AI-enabled customer service, companies can match the reimagined vision for engagement across all customer touchpoints to the appropriate AI-powered tools, core technology, and data. 

The human factor in AI-supported service

AI-powered does not mean automation-only. It’s true that chatbots and similar technology can deliver proactive customer outreach, reducing human-assisted volumes and costs while simplifying the client experience. Nevertheless, an estimated 75 percent of customers use multiple channels in their ongoing experience.²“The state of customer care in 2022,” McKinsey, July 8, 2022. A reimagined AI-supported customer service model therefore encompasses all touchpoints—not only digital self-service channels but also agent-supported options in branches or on social-media platforms, where AI can assist employees in real time to deliver high-quality outcomes.

Even before customers get in touch, an AI-supported system can anticipate their likely needs and generate prompts for the agent. For example, the system might flag that the customer’s credit-card bill is higher than usual, while also highlighting minimum-balance requirements and suggesting payment-plan options to offer. If the customer calls, the agent can not only address an immediate question, but also offer support that deepens the relationship and potentially avoids an additional call from the customer later on.

AI service in the field: an Asian bank’s experience

Put together, next-generation customer service aligns AI, technology, and data to reimagine customer service (Exhibit 2). That was the approach a fast-growing bank in Asia took when it found itself facing increasing complaints, slow resolution times, rising cost-to-serve, and low uptake of self-service channels.

Over a 12-month period, the bank reimagined engagement. It revamped existing channels, improving straight-through processing in self-service options while launching new, dedicated video and social-media channels. To drive a personalized experience, servicing channels are supported by AI-powered decision making, including speech and sentiment analytics to enable automated intent recognition and resolution. Enhanced measurement practices provide real-time tracking of performance against customer engagement aspirations, targets, and service level agreements, while new governance models and processes deal with issues such as service request backlogs.

Underpinning the vision is an API-driven tech stack, which in the future may also include edge technologies like next-best-action solutions and behavioral analytics. And finally, the entire transformation is implemented and sustained via an integrated operating model, bringing together service, business, and product leaders, together with a capability-building academy.

The transformation resulted in a doubling to tripling of self-service channel use, a 40 to 50 percent reduction in service interactions, and a more than 20 percent reduction in cost-to-serve. Incidence ratios on assisted channels fell by 20-30 percent, improving both the customer and employee experience.

Seizing the opportunity

To leapfrog competitors in using customer service to foster engagement, financial institutions can start by focusing on a few imperatives.

Holistically transforming customer service into engagement through re-imagined, AI-led capabilities can improve customer experience, reduce costs, and increase sales, helping businesses maximize value over the customer lifetime. For institutions, the time to act is now.

This content was originally published here.

The post The next frontier of customer engagement: AI-enabled customer service appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

The word “sustainability” has never been more popular in the corporate world. The number of companies appointing a chief sustainability officer (CSO) is rising rapidly: In 2021 more CSOs were hired than in the previous five years combined.

But despite good intentions — and widespread acceptance of the importance of sustainability — there is still a lack of clarity about a CSO’s tasks and accountabilities. For example, at one large European consumer goods firm we consulted with, there are numerous job titles in a variety of units that include the word “sustainability.” The result is fragmented ownership, internal competition for visibility and resources, and inefficiency with a great deal of overlap and duplication.

The confusion is not surprising. While other functions and roles, such as the CFO or CMO, are well established, the CSO role was virtually unheard of until recently. History and benchmarks are limited. This partly explains the inconsistent job descriptions, the different mandates and accountabilities, as well as the variety of reporting lines. Despite their increasing profile, only a minority (35%) of CSOs report directly to the CEO. In most cases, the person responsible for sustainability is constrained by a limited and different remit — reporting to the COO when emphasizing an efficiency role; to the CFO when the focus is on investor relations; to the chief communications officer when PR is important; or to the general counsel when attention is on compliance. In other cases, the role is distributed over two or three different departments. ESG separation is not uncommon: the “E” of environmental under the COO, the “S” of social under the CHRO, and the “G” of governance under corporate legal.

We’ve been here before. Fragmentation and a lack of clarity is common when new roles are introduced; think for example of the rise of the chief digital officer or the chief innovation officer in C-suites over the last decade or so. In the beginning their tasks and responsibilities were not well codified, creating confusion about accountabilities, fragmentations, and even tensions with other overlapping functions.

To clear the fog and help C-suites define the position and responsibilities of the CSO, we created a simple visual framework.

Eight Critical Tasks for CSOs

We originally designed our “8-task spider graph” for the role of chief innovation officer. As the tool proved powerful, we revised it for the newly created position of the CSO. It breaks the CSO role into eight distinct tasks:

Visualizing the Eight Tasks

Spider graphs (also known as radar graphs) are often used to display data across several unique dimensions. Plotting the CSO’s eight tasks — and the amount of effort spent on each — on a spider graph can help executives figure out the actual coverage of responsibilities, where the current focus is, where there may be a need to increase efforts, and where gaps are. Visual clarity fosters strategic discussions and attention on what really counts rather than on details.

Start by positioning each of the eight tasks on the outside points of seven concentric octagons, starting at the top and working clockwise. Then have a group discussion to determine how much effort is currently being used on each task and assign them a number using the following scale:

Then for each task, position a dot on the octagon that corresponds with its level of effort. For example, if you rate task two as a four on the effort scale, position its dot on the fourth octagon from the middle.

When we worked with a German manufacturer, the executive team posed many questions about organizational details and specific procedures, but it soon became evident that they lacked focus and strategic thinking on the “what” and the “why” of the CSO role. We encouraged them to clear up the ambiguity by creating an 8-task spider graph in an executive workshop setting, before jumping into the dynamics of organizational design.

In fact, visualizing the current positioning of the role on the spider graph was an awakening exercise. The company realized that several tasks were not sufficiently covered. The CSO role appeared skewed mainly on operational and regulatory aspects. In addition, in discussing each task, they found an almost exclusive emphasis on climate change.

Once the team agreed on the actual positioning, the discussion moved on to the evolution of the CSO role and how to ensure a better balance by investing in underserved dimensions. The executive team updated the graph accordingly.

Putting the Graph into Practice

Here are four tips that can help executives make good use of the eight-task spider graph:

Take ownership of all eight tasks.

To lead the sustainability transformation of their companies, CSOs should be accountable for all eight items. We’ve come across a lot of organizations that are too focused on the regulatory and legal elements or external communications but overlook cultural elements or capability building.

Think beyond “E.”

Each task should be articulated not only around environmental scope (as it often happens), but should also take into consideration the other dimensions of sustainability.

Consider “Scouting & Experimenting,” (task seven on the spider graph): When determining this task’s sub-activities, companies should move beyond only looking at new technologies for CO2 reduction. For example, the CSO could test new approaches for social inclusion of the company’s target communities or new models for more transparent and fair employee compensation.

Define the phases of the evolution.

While it’s key to have a target positioning for the mid-to-long term, it’s often not realistic to invest in all underserved tasks simultaneously. The shift does not happen overnight. Define which gaps to close first and which ones to address later, depending on the context of the company (e.g., type of culture, level of skills, organizational setup) and its sector (e.g., types of external stakeholders and regulations).

For example, a newly appointed CSO we interviewed recognized the need to cover all eight tasks to achieve a more pervasive transformation. However, pressing regulatory issues prompted her to place more emphasis on tasks one and two of the spider graph. This allowed her to concentrate organizational efforts to rapidly close the most critical gaps (skills, systems, and data) and consequently comply with the new directives without incurring significant fines.

Leverage the graph for alignment. Do not put the spider graph in a drawer. Use its visual power to communicate the evolving positioning with the executive team and other units. Transparency and simplicity will reinforce alignment and clarity within the broader organization.

In the end, CSOs and executive teams need to think very carefully about what to do — and what can be done differently — to successfully execute their company’s sustainability agenda. Taking the time to visualize the CSO’s eight tasks will help ensure that the role is balanced, covering the different dimensions of sustainability.

This content was originally published here.

The post The 8 Responsibilities of Chief Sustainability Officers appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

In the past year, ESG investing has become caught up in America’s culture wars, as prominent GOP politicians claim that it is a mechanism investors are using to impose a “woke” ideology on companies. Former Vice President Mike Pence has railed against ESG in speeches and in an op-ed. A variety of Republican governors and red-state legislatures are considering executive action and legislation to boycott asset managers that use ESG as a screening tool for their investments. And in Washington, various Congressional committees have pledged to hold hearings in which the Securities and Exchange Commission (SEC) and major asset managers will face public questioning about the legality of ESG investing.

As an attorney who is a lifelong Republican and a business professor who is a lifelong Democrat, we have been dismayed by the politicization of ESG investing, which until recently was a technical (but important) topic that rarely spilled outside of academic and investment communities. The upcoming congressional hearings on ESG present an opportunity to put facts on the record and to begin the process of working toward a bipartisan consensus that will take the political passion out of ESG. Far from enflaming passions, we hope that hearings will make ESG boring again.

The key will be returning ESG to its original and narrow intention — as a means for helping companies identify and communicate to investors the material long-term risks they face from ESG-related issues. Climate change is one such risk for many companies — particularly those with shoreline assets that are vulnerable to rising seas, or those (such as fossil-fuel companies) for whom future revenue would be greatly reduced if governments start taxing carbon. As a result, greenhouse gas emissions are a material issue for an oil and gas exploration company, as are air quality and employee health and safety. But according to the Sustainability Accounting Standards Board (SASB), which helps identify risks by industry, so are human rights and community relations and business-model resilience. Non-material issues include energy management, customer welfare, and systemic risk management.

As we have previously written, for markets to properly allocate capital, investors need companies to disclose material investment risks. To us, ESG is simply about identifying material risk factors that matter to company profitability and shareholder value over time.

Conservatives have been quick to complain that ESG has been stretched beyond this narrow purpose and is being used to promote a progressive political agenda. While some of their arguments may seem overheated, they are reacting to a real phenomenon. Indeed, many prominent liberal voices want to push sustainable investing further than traditional ESG investing allows. For instance, the NGO Fossil Free California is pushing for state legislation to force California pension funds CalPERS and CalSTRS to divest from fossil fuel companies, which both funds opposed last year. (The legislation was not enacted.) Another example is California legislation mandating a certain number of women on the board of directors, a law ultimately quashed by the courts. Investors, not politicians, should decide whether to invest in fossil fuels and whether they want to prioritize board diversity.

On a more technical level, there is debate within the ESG community about whether to extend ESG measurements to include not just the risks a company faces from ESG issues, but also account for the impact the company has on society and the wider world. Adding fuel to the rhetorical fire on both sides are companies and investors who claim too much for ESG with greenwashing claims of various kinds. Our hope is that by questioning ESG experts, the House committees will draw focus back on ESG’s original and important purpose.

Along with the committee hearings, there is legislation that might help clarify the definition of “ESG” investing: the “Mandatory Materiality Requirement Act of 2022,” which was introduced by Senator Mike Rounds (R–South Dakota) and seven other senators in September 2022. Companion legislation, H.R.9408 was introduced by Congressmen Bill Huizenga (R-Michigan) and Andy Barr (R-Kentucky) in December 2022. The purpose of these bills is “[t]o amend the Securities Act of 1933 to require that information required to be disclosed to the Securities and Exchange Commission by issuers be material to investors of those issuers, and for other purposes.” Although the SEC largely follows this materiality focus in connection with other disclosures, providing clarification would be useful.

This emphasis on materiality will also be useful in calming a current irritant in the ESG debate — the SEC’s proposed rule on climate related-risk disclosures for operating companies. In our view, critics of this rule on the left who want even more disclosure are ignoring the central tenet of materiality. Critics of this rule on the right are ignoring the fact that investors with trillions of dollars in assets under management, and which have a fiduciary duty to maximize long-term risk-adjusted returns, regard how a company is managing the effects of climate change to be a material issue.

In fact, many American companies are already making climate-related disclosures. As an example, consider ExxonMobil, which is aggressively investing in solutions to climate change. It reports on its carbon emissions, along with targets for reduction. Currently there are no requirements for it to do either. It also puts a diversity report in the public domain, again without being required to do so. Finally, it publishes a sustainability report—organized in terms of ESG. Chevron and ConocoPhillips are doing all of this as well.

A study by Governance & Accountability Institute, Inc. found that 96% of the S&P 500 and 81% of the Russell 1000 are producing such reports. The problem with these reports is that, in contrast to financial reporting, they are not based on a set of standards. This makes it difficult for investors to assess their validity and compare performance across different companies. However, progress is being made here through the creation of the International Sustainability Standards Board (ISSB). Its work is leveraging that of SASB, which is now part of the ISSB, to develop standards for material information as defined by the SEC and in the proposed legislation.

People ask us what we think the future is for ESG. In the near term, it is important to separate discussions about investors’ need for disclosures about material risk factors from debates about salient political issues. The pending House hearings could simply be political theater with the Republicans attacking Biden administration policy objectives and the Democrats defending them. Or they could be a learning opportunity to clarify what ESG is and what it isn’t. What it can do, what it can’t do, and what it isn’t supposed to do. How can this happen? By framing the hearings in terms of “materiality,” not “wokeness.”

Absent legislation, the role of Congress is to provide oversight of the rulemaking process as the SEC determines which risk factors are material to investors and balances the need for disclosure with the cost to companies of providing the information.  The financial-disclosure framework established by Congress nearly nine decades ago has resulted in the greatest capital markets the world has ever seen. We believe that preserving and strengthening that framework should be a priority for policymakers on both sides of the aisle.

This content was originally published here.

The post Rescuing ESG from the Culture Wars appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

Starting in the late 1980s, a de-diversification wave swept through corporate America, on the premise that conglomerates and highly diversified companies would perform better by focusing on their core businesses.

At first this strategic shift brought benefits: academic research undertaken at the time found that all this refocusing was, on balance, beneficial for companies. The rationale for it was clear enough: in developed economies where financial markets are quite efficient, investors do not need companies to diversify the risks for them, because they can do that more easily and efficiently themselves. And that, of course, is true: investors can create their own portfolios and divest and redeploy their financial resources at will.

But as time passed, corporate refocusing has started displaying the hallmarks of a management fad, and possibly even a harmful one: firms engage in refocusing because that is what everybody does. The fact that analysts find it easier to analyze and value single-business firms than diversified ones provided even more pressure to refocus.

Is it time to rethink the case for diversification?

The problem is that de-diversification has spread to companies that, from a strategic viewpoint, are already quite focused, even though they may be in different lines of business. For example, the Dutch electronics giant Philips used to be in businesses such as television, audio, consumer electronics, lightning, medical technology, semiconductors, and semiconductor printing machines. A diverse portfolio of businesses to be sure, but all of them connected by a common technology: electronics. Yet, Philips also felt the pressure to de-diversify and is nowadays firmly focused on health-tech. Many other companies have pretty much become single-business firms.

What analysts and consultants seem to have underestimated is that capital is not the only resource that can be redeployed and reconfigured within a diversified corporation. Business school academics have long argued that the logic of diversification is not only about risk reduction: companies diversify into new markets in order to exploit underutilized assets or competences from another business that they cannot easily sell or exploit in the open market.

Research on “institutional voids,” for example, has shown how intangible resources, such as reputation, can be better leveraged and exploited within the confines of a multi-divisional corporation than through a market mechanism. Innovation benefits as well: managers can more easily recognize and capitalize on business opportunities when they fall within the boundaries of a diversified firm than when they occur in the open market. Put differently, the markets for ideas, technologies, and intangible resources often fail and can be inefficient in comparison to sharing and coordination within an organization, even if this company consists of multiple, autonomous divisions.

Consider, for example, the company Euronet (disclosure: one of us has worked with them). The company has three divisions: an electronic funds transfer division (EFT), which is largely focused on operating ATMs; an epay division, which is focused on providing payment transactions for retailers, such as payment codes, vouchers, and digital wallets; and a money transfer business, which enables cross-border payments. These three divisions operate autonomously and Euronet’s top management has wisely refrained from formulating and issuing a joint strategy statement.

The international money transfer industry, however, has been undergoing enormous change over the past years, with more expected: new entrants and apps, by companies such as Wise, OFX and Moneycorp have been attracting large numbers of customers to their user-friendly platforms; cryptocurrencies are increasingly being used for international peer-to-peer money transfers; and the use of electronic payments has risen sharply, particularly in emerging economies.

Euronet’s money transfer business, however, has been able to innovate and respond to these changes in ways that it would not have been able to do had it not had access to the capabilities and resources of the EFT and epay divisions in the Euronet portfolio. It recently launched a new platform, called Dandelion, which not only transfers money abroad (as all other players in the industry do), but is able to do so in real-time because it uses the network and the regulatory framework of its parent’s EFT division, including credit, debit, and cash delivery functions. Moreover, by combining Dandelion with the products and technology of its epay division, Euronet gives customers the opportunity to link it directly to their digital wallets and make payments, top up mobile phones and pay bills.

What allowed Euronet to respond successfully to the significant changes taking place in its industry was its ability to quickly bring together people and technology from different parts of the firm and innovate. Such transfer and recombination of knowledge would have been almost impossible if the three divisions were spun off as independent companies.

Similarly, before Philips had spun off most of its divisions to focus on health tech alone, it had developed several breakthrough innovations by combining knowledge and technology from its different divisions. For example, the “ambient experience” innovation in its health tech division — something that  led to very significant reductions in patient anxiety (and consequently to an 80% reduction in the use of sedatives and a 70% reduction in the need for re-scans) had originated from its lighting division (now spun off). Similarly, the Ambilight technology in its television division (now sold off) — a significant innovation and differentiator in an otherwise largely commoditized market — also came from the Lighting division. Furthermore, much of the technology necessary for the monitoring functions in its Health Watch range, which offers wearable devices for consumers, relied on knowledge and developers from its B2B Health tech division.

It is not just technology that gets leveraged across divisions: Philips has found that its brand and position in the professional sector enhanced the image and reputation of its products in its consumer products division (now partly sold off).

The examples of Euronet and Philips show that having multiple businesses, even when they are largely independent, creates superior options to potentially redeploy non-financial resources swiftly when environments change, or recombine them into novel innovative solutions.

Having options is particularly important in situations of uncertainty and creating them is not something the market, let alone individual investors, can easily do. Nor can we expect start-ups and corporate venture units to fill the void. Start-ups cannot easily tap into an array of existing technologies and knowledge sources at other companies, whereas corporate venturing and scouting units often struggle to apply the external technologies they have invested in. Consequently, the over-focusing of companies has resulted in an unfortunate decrease in a firm’s capability for change and adaptation, which owning a set of businesses can potentially bring. The continued emphasis on focus is particularly unfortunate because changes in the external context have now made diversification even more relevant than before.

Digital has made diversification more relevant.

Of course, there are costs to such diversification and to running a diversified firm: If the firm is seeking to exploit the intangible resource of reputation, for example, it will also have to acquire the complementary resources necessary for running the new business line. This may include technology, labor, or new supply chains. It might then have to operate a head office where all such expertise is present.

But these costs have been decreasing over the past decade, particularly because of the increased use of partnerships and business eco-systems to help implement a diversification strategy. For example, Vodafone can diversify into banking, in order to exploit its capabilities in mobile, without having to create banking products itself, because it operates with a constellation of partners. Of course, the option to work with other firms was available in the past as well, but coordination with other organizations has become easier, and with it more wide-spread, owing to digital technology, which has led to an increase in communication technology and technology standards, among others.

While digitization has decreased the costs of diversification, concurrently, it seems to have increased the benefits of diversification, particularly through the heightened importance of data as a strategic resource. Traditionally, underutilized resources become more difficult to exploit the further a company moves away from its core business. This is certainly the case for physical resources or technological knowledge, but even the benefits of an intangible resource such as reputation, for example, have limited spillovers if deployed in an industry very different from where it was originally created.

And then there’s data, which can often be leveraged in businesses very different from where it originated. For example, Alibaba has successfully moved into movies, using behavioral data generated through its e-commerce platform. Apple can harvest behavioral data from its Apple watch wearers, which it can analyze and utilize to develop insights about their nutrition, shopping, entertainment, or health.

The bottom line is this: with its costs decreasing and its benefits increasing thanks to digital technologies, the optimal level of diversification is rising. Hence, the de-diversification of firms over the past decade is taking place in a context where more diversification is warranted.

The focusing of many companies over the past decade, often done under pressure from boards, analysts and consultants, has gone too far. Innovative constellations of businesses may be difficult to analyze or value, but they also enable options for the future, for recombination and adaption in uncertain times. The forced focusing of companies over the past decades has deprived them of a crucial capability, and that is to be flexible enough to adapt to unpredictable changes. This, ultimately, affects their chances of success and survival.

This content was originally published here.

The post Have Companies Become Too Specialized? appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

For many of us, a new year represents a fresh start. New Year’s resolutions offer an annual opportunity to transform our lives for the better, whether that’s by improving our health, relationships, finances, or whatever else we find most important.

This mindset can create new opportunities for businesses as well — but shifting needs and priorities can also bring new risks. What can retailers do to attract consumers in this critical time of the year, as people rethink their goals and chart a new course for the months ahead?

To better understand how today’s consumers are thinking about their New Year’s Resolutions, we surveyed a diverse group of 500 adults from across the U.S. in the last week of 2022. We found that two out of three planned to make at least one resolution for 2023, and the majority indicated that they would be making multiple resolutions.

Diving deeper into the data, we found that the most common type of resolution was health-related, with 58% of our respondents aiming to exercise more, 55% aiming to eat healthier, and 54% aiming to lose weight in the new year. The next most common type of resolution was financial, with 42% of participants resolving to save more money and 41% hoping to pay off debts or spend less by buying fewer non-essential items; buying more lower-cost, off-brand goods; making fewer impulse purchases; doing more research before making expensive purchases; and finding cheaper alternatives to common expenses (such as walking or using a fitness app instead of paying for a gym membership, or cooking instead of eating out). Finally, 21% of our respondents mentioned personal improvement goals, such as learning a new skill, spending more time on hobbies, and being more organized, while relatively fewer made social or work-related resolutions: Just 18% of respondents planned to spend more time with friends or family, 12% planned to spend less time on social media, 12% aimed to improve their work-life balance, and 8% resolved to improve their performance at work.

Clearly, today’s customers are prioritizing a wide range of goals. But despite this variety, our data identified several strategies that can help any business navigate their customers’ shifting priorities and appeal to a New Year’s mindset:

Help your customers build healthy habits.

“I am looking to buy things that could help me reach my goal quicker and reinforce changing habits.”

People know that achieving their goals won’t be easy. While 60% of the people we surveyed were moderately or extremely optimistic about their chances of success, more than half still indicated that they were on the lookout for products to help them turn their New Year’s resolutions into long-term habits. As such, this is a great time for businesses to emphasize how their products can help people do just that.

For example, on its homepage, grocery chain Sprouts called on viewers to “Make 2023 an organic year” with a link to a list of its top organic products, while Target’s homepage similarly featured a “Fresh Start” campaign that offered easy access to “Everything you need to focus on your well-being.” Our participants also expressed particular interest in habit-tracking apps such as Google Fit, which tracks health metrics; Cronometer, which tracks meals; SPAVE, for spending and savings; or general habit-building apps such as Strides. No matter your industry, your customers are looking for ways to build healthier habits. Finding ways to highlight how your product or company can help them track their progress and reach their goals is critical to keep your brand top-of-mind.

Reach out to new customers.

“I think that I will be more open to new products and brands that I currently do NOT use. I think that I will intentionally look for different brands and products in 2023.”

Most of the time, it can be challenging to overcome people’s resistance to change and convince them to try a new brand. But the “fresh start” mindset associated with a new year can often counteract this hesitancy. Indeed, 80% of our participants indicated that they would try a new brand in 2023 if they thought it could help them achieve their goals. That makes the start of a new year a great time to grow your customer base by reaching out to people who might not have considered your products before, perhaps with a special New Year’s promotion or free samples of your most popular items. This is also a particularly important time for smaller, less-well-known brands, as many of our respondents specifically mentioned that they planned to switch to non-brand options as one of their New Year’s resolutions.

Introduce new products. 

“I want to be more open to trying new things…I hope to find new products, [instead of sticking with] products that don’t work as I’d like them to.”

Just as the new year can be a great opportunity to attract new customers, it’s also the perfect time to encourage existing customers to try a new product or new shopping experience. Territorial Seeds Company, for example, emailed its customers in early January introducing a new line of flower seeds. Women’s business attire brand M.M. LaFleur released a new clothing line that its “co-founders believe will define 2023 style.” You don’t have to make drastic changes to your core offerings, but our research shows that highlighting and promoting new options around the New Year is likely to pay off. So consider launching a new product, releasing a new feature, or even just rearranging your store layout. Right now, your customers are particularly open to trying new things — so give them the sense of “newness” they’re looking for!

Foster consumer loyalty.

“I think brand-wise, I will not be as loyal to name brands [in the new year], because the non-name brands’ products are usually just as good, but cheaper.”

Of course, the flip side of people being more open to trying your brand or products is that they might also be more open to abandoning your brand and switching to a competitor’s. Even if they’re not particularly unhappy with your company, the same “fresh start” mindset that might help you attract new customers and may also push your current customers to seek new options. As such, while fostering strong relationships with your loyal customers is always important, it is critical at this time of the year.

That means doing everything you can to build strong personal relationships with your customers. After all, it’s harder to abandon a brand if you feel personally attached to it. For example, in the weeks before New Year’s, pet supplies retailer Chewy sends handwritten holiday cards to all of its major customers. While many big retailers send non-customized cards, Chewy’s handwritten, personalized notes help the brand stand out and foster a sense of real connection with customers.

In addition, rewards programs can also be an effective strategy to boost customer loyalty. This isn’t just about financially incentivizing customers to return. Research shows that rewards programs can help strengthen customers’ relationships with a brand, and in many cases, consumers may value experiential rewards more than material rewards. So rather than just offering discounts or promotions, consider including experiences such as movie tickets or access to exclusive content to help customers feel a stronger connection to your brand. Expedia, for example, offers members special deals on a list of “2023’s best bucket list trips,” giving its loyal customers exclusive access to discounts on these curated vacation spots.

Help customers meet their financial goals.

“I will use coupons, watch for sales, and not make impulse purchases. I will follow a strict list of necessities only.”

Especially in the face of rising inflation and a looming economic downturn, many of our respondents reported that they planned to save more, spend less, and pay off debt in order to achieve their financial goals for the New Year. As one explained, “I will be cutting back on my spending. I am going to cut back on my grocery shopping, and what I save on that will go toward the principal on my mortgage.”

To attract customers who may be increasingly focused on financial responsibility, consider offering promotions, discounts, coupons, and flexible payment options. Home goods retailer Everything Kitchens, for example, ran a New Year’s sale inviting customers to “to kickstart your resolutions!” with their discounted products, Bose ran a similar promotion offering “fresh discounts to get you grooving into the New Year,” and many gyms use creative payment structures such as early bird sales and group deals to draw in new members. You can also consider targeted ad campaigns, partnerships with other brands, or even collaborations with social media influencers such as The Deal Guy to ensure your promotions reach as many people as possible.

Prioritize value.

“I’m going to focus a lot on real value in everything I buy. I will probably buy less stuff that is not absolutely necessary, and only spend money on products that offer value to me.”

Despite heightened price sensitivity, today’s consumers aren’t necessarily looking for cheap options. To the contrary, our research found that people are willing to spend money on products and brands that offer real value and help them reach their goals. “I think if these products can help me achieve my goals, I would be more than willing to purchase them,” one respondent explained. “If, after using them, I find they are helping me stay on course to achieve my goals, I will continue to purchase the products.” Indeed, 75% of our respondents indicated that they actually anticipated spending more to achieve their health goals, with many planning to buy exercise equipment, sign up for a gym membership, or opt for healthier, more expensive food at the grocery store. As one participant lamented, “unfortunately, eating healthy costs more. Buying produce and healthier foods cost more than junk food.” To balance these conflicting goals, many participants planned to spend more on products that promote a healthy lifestyle or seem like a “good deal,” while cutting spending on products such as junk food or luxury items.

So what can brands do to demonstrate their worth to an increasingly value-conscious customer base? Investing in quality is always important, but retailers can also find ways to add additional value to their existing products — and communicate that value to customers. For example, skin care brand One Skin invited its customers to attend a free webinar in which a health coach shared her expertise on how fitness affects longevity and skin health, while supplements brand Vital Proteins emailed its subscribers a list of New Year’s recipes highlighting different ways to use its products. Content like this can be a great way to both provide a bit of extra value to customers and remind them why your core products are worth paying for.

Help your customers do good.

“I will try to buy more products that are environmentally friendly. I will try to reduce my plastic consumption, so I’ll look more for items that are made from recyclable and repurposed packaging.”

Finally, the New Year is a time in which people are often particularly focused not only on their own self-improvement, but also on making a positive impact in the world. As such, consider taking proactive steps to demonstrate your support for the causes most important to you and your customers. That may mean donating to a local charity, launching a social initiative, or even something as tactical as switching to more environmentally-friendly packaging. For example, as part of Patagonia’s Worn Wear initiative to reduce consumption and landfill, the clothing brand offers double store credit during the first month of the year to anyone who trades in used products. While most of the participants in our survey didn’t make outright resolutions related to patronizing businesses that support the issues they care about, many indicated that they did hope to support these issues themselves — so businesses that help them do that will likely be particularly successful in attracting customers right now.

Around the world, the new year is a time of optimism, hope, and change. But the resolutions we make on January 1 don’t just affect our own lives. They also influence our purchasing decisions, which in turn present both opportunities and risks for companies. To set themselves up for success in the new year, retailers must understand how consumers’ shifting mindsets may impact their business — and make their own resolution to anticipate their customers’ evolving needs and provide the value today’s buyers are looking for.

This content was originally published here.

The post What Do Your Customers Want in 2023? appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.