Can CEOs Really Make Companies More Sustainable?

CEOLast month GM Chairman and CEO Mary Barra delivered a commencement address at the Stanford Graduate School of Business. GM’s Green website shared a couple of quotes from her speech, framing them as “soundbites that reinforce her commitment to sustainability.” Here’s what they chose:

“A company’s success depends on how well you satisfy your customers.  But changing the world goes well beyond serving customers – it’s also about serving society.”

“As a visionary leader, you should be thinking about more than just the next quarter. You should also be thinking about the next decade … and what your company’s reputation and place in the world will be after 40 quarterly results.”

Six months earlier GM proudly reported that in 2015 it was the No. 1 seller in the U.S. and China, the two largest car markets in the world. “In the U.S., GM’s total sales were up 5 percent supported by the momentum of vehicles like the Chevrolet Silverado and Colorado, the GMC Sierra and record crossover deliveries,” the company said in a statement. And in China, “SUV deliveries were up 144 percent, led by new models such as the Buick Envision and Baojun 560.”

Every month since January 2014 — the same month May Barra became CEO — the company has sold “more full-size pickups than any other original equipment manufacturer, ” GM said in another update published this month. And last week GM reported on a record second-quarter profit, driven by increased demand for pickup trucks and large sport utility vehicles (SUVs) in North America.

It seems that while CEO Barra claims to be committed not just to meeting customers’ wants but also to sustainability, GM’s sales data portrays a very different picture. Now, is it an example of greenwashing? Not necessarily. I do think, however, this could be an example of CEOs’ limited power to advance sustainability in their companies, even if they share Barra’s sentiment that “as leaders, we have an obligation to act responsibly and courageously for people and the planet.”

Usually it is assumed that CEOs play an important role in implementing sustainability and integrating a triple-bottom-line approach in their organizations. A new report entitled CEO Decision-Making for Sustainability explores the complexity behind this assumption, looking more specifically at the question: Why do some CEOs make the shift to incorporate sustainability into their decision-making (and what holds others back)?

Published by the Network for Business Sustainability South Africa, this report provides not just valuable answers to this question, but also some clues to the question I’d like to raise about the overall capabilities of CEOs when it comes to putting sustainability at the center of their businesses.

The report is based on a review of prior research combined with insights gathered from interviews with 84 CEOs, board members, and sustainability executives from a range of global companies (most interviewees though were from South Africa). And it suggests three themes influencing CEO decision-making: personal readiness, factoring in the internal and external contexts, and a final ‘gut check’ (including the following drivers: meeting performance expectations, being seen as a good steward of the company, and the need to uphold personal legacy in the company).

In addition, the authors, Dr. Stephanie Bertels, Jess Schulschenk, Andrea Ferry, Vanessa Otto-Mentz and Esther Speck, point out to three main obstacles preventing CEOs from prioritizing sustainability:

  1. I didn’t know enough about environmental and social issues.
  2. I wasn’t able to make a clear link to why this mattered for my business.
  3. I could understand the link, but there were competing priorities.

These findings indicate two main factors – personal and environmental — dictating what CEOs do and don’t do when it comes to sustainability. While the study does not suggest which one of the two is more powerful, I believe it is the latter – the environment in which the CEO operates. It should be noted this refers to both the internal environment, i.e. inside the company, and external environment, i.e. markets, level of competition and trends.

One reason is that sustainability is usually associated with long-term goals, and hence could be left aside or ignored when short-term issues come up. As one CEO was quoted in the report:

“I think if there’s a very full agenda of near-term business-type problems, when you prioritize the different things that the organization can be doing, I think it’s at that point that sustainability can get pushed pretty firmly to one side.

“People are saying we’ve got pressure from shareholders to raise the economic performance in the business and that will tend to push out much of the other stuff. Any management team has only got a finite amount of bandwidth and the organization has only got so much change muscle. They will devote that to what they see as the highest priority things.

“If the near-term pressures are very great, then some of the longer-term corporate social responsibility pressures will just get pushed to one side.”

Another reason is connected to the way the CEO compensation is structured. One of the CEOs interviewed explained:

“On the one hand, boards say that sustainability is what we believe in, but they remunerate their people on a basis that actually forces them to go against this.

“On paper, we’re all for corporate governance, but they’re actually encouraging bad behavior. I think … if you don’t tackle this one, we’ll be talking about this in 20 years’ time.”

These observations are refreshing in their honesty, as in many cases CEOs seem to ignore or underestimate these issues. For example, in PwC’s 19th Annual Global CEO Survey, 82 percent of CEOs said their company prioritizes long-term over short-term views. Can you really believe it when at the same time climate change and environmental damage is at the bottom of their list of key threats? According to this list, CEOs are mostly concerned about over-regulation, geopolitical uncertainty and exchange rate volatility.

More indication on what’s really going on can be found in Rana Foroohar’s excellent new book “Makers and Takers: The Rise of Finance and The Fall of American Business.” In her book, Foroohar explores the impact of the financial-ization of America — “the trend by which finance and its way of thinking have come to reign supreme” on American business and society. And she makes the case that “the type of short-term, risky thinking, that nearly toppled the global economy in 2008” is still very dominant, especially in American public companies.

This short-termism is a reflection of the idea that companies need first and foremost to maximize shareholder value and pressures by investors and the markets on companies for short-term decision making (for example, stock buybacks), which many times result in sacrificing long-terms interests.

Foroohar writes that most CEOs don’t push back against short-term pressures, except the ones who are also “high-profile founder-owners who have a certain cult of personality” like Alibaba’s Jack Ma and Starbucks’s Howard Schultz. (I would add to this list visionary and fearless CEOs like Unilever’s Paul Polman.) All the rest tend to accept the shareholder value model, either because it’s very hard to push back against Wall Street or because they also benefit from it: Their incentives are usually aligned with short-term financial metrics, and the bulk of their salary is paid in stock options.

It seems that the business environment in which most companies operate is more powerful than most CEOs. And when this environment still doesn’t prioritize sustainability, what you get at the end of the day is a CEO preaching sustainability, while making record profits by selling more SUVs and light trucks. This is important not because CEOs should walk the talk (and they should), but because it means that in order for business to embrace sustainability we need to focus on changing and redesigning the business environment, not on the CEOs. If the environment changes, they will follow.

Image credit: Flickr/Banalities

Raz Godelnik

Raz Godelnik is an Assistant Professor and the Co-Director of the MS in Strategic Design & Management program at Parsons School of Design in New York. Currently, his research projects focus on the impact of the sharing economy on traditional business, the sharing economy and cities’ resilience, the future of design thinking, and the integration of sustainability into Millennials’ lifestyles. Raz is the co-founder of two green startups – Hemper Jeans and Eco-Libris and holds an MBA from Tel Aviv University.

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