Is your strategic plan a piece of paper?

One of the biggest challenges facing any manager is execution. Most organisations are fairly competent at strategic planning. However, when it comes to execution of these plans there is a yawning gap between the plan and implementation. A very small percentage of strategic plans actually get executed.
Our experience with facilitating the execution of strategic plans for organisations across the globe suggests that three key steps are essential to bridge the gap between strategic planning and execution.
But before we discuss execution, let us step back a moment and understand the nature of a strategic plan. The usual perception is that of a “big picture” plan that is created and developed at the highest echelons of management, and only parts of which get filtered down to the operational areas of management.
In addition, there are strategic plans at every level of the business, which dovetail into the grand organisational plan. A recruitment plan that lays down how to attract, retain and develop talent at all levels of the organisation, a business development plan that describes strategies to attract and retain customers, a marketing plan that explains how the organisation’s products and services or brands will be positioned, an operational plan that lays down a strategy to reduce operational costs; these are all strategic plans, and each one of them impacts the “big picture”.
So, how do we ensure that these plans get implemented successfully? The answer will vary for each organisation depending on the nature of the leadership, the organisational culture, the willingness of senior management to be open to new ideas for better performance, and the unique operational challenges facing the organisation. Nevertheless, broadly speaking, a focus on three key areas can help improve the success rate of implementation of strategy.

Step 1: Involvement and buy in

Success in execution begins during the planning phase itself by getting a high level of involvement, not just from the senior executives who are part of the planning process, but also from the key managers who will be critical to the implementation of the plan. Who these key managers are will vary across organisations, and differ from department to department, depending on various factors such as organisational structure, key result areas and functional responsibilities. But it is important to identify them and involve them in the planning process. This means ensuring they understand the organisation’s strategy, soliciting their inputs in the planning process, obtaining feedback from them on challenges and opportunities that success is contingent on, and doing a reality check on actions to execute.
With involvement, comes buy in. It is an established fact that, even when people give inputs that are not finally integrated in the strategy, they still feel a sense of involvement and contribution, which helps increase buy in.

Step 2: Commitment

Enhancing and reinforcing the commitment level of people who are responsible for implementation of the strategy is critical to successful execution.
Higher levels of involvement and buy in to a strategic plan also lead to higher levels of commitment for execution. This is why the first step of involvement needs to be applied to all the key people who will be involved in execution. If they have a greater buy in to the plan, they will be more committed to execution of the plan and ensuring its success.

Step 3: Accountability

In most organisations, accountability is a euphemism for allocating responsibility for a problem or for finding someone to blame for mistakes made. The word accountability evokes negative emotions.
We work with organisations to build cultures of accountability by removing the negative emotions associated with the word and building a positive energy around it. The implementation of accountability in its true, positive sense, leads to enhanced performance. This happens because, when people work in organisations that have a culture of accountability, they deliver on their commitments to a greater degree and this leads to more effective execution, which enhances performance.
It is a proven fact that a culture of accountability can enhance the success rate of strategic plans being executed.
It is important here to distinguish between being committed and keeping commitments. These are two very separate things. While involvement and buy in enhance a person’s commitment to the success of a strategy, that does not necessarily mean that this will lead to that person keeping all their commitments. The first pertains to intention and the second to action.
This is why accountability is so critical to successful execution. By focusing on action, it ensures that intention is converted into reality.

Exercise
Here’s a small exercise that can help you assess where your team stands right now. Score the following statements on a scale of 1 to 4, where 1 implies strongly disagree and 4 means strongly agree.
1. My organisation /leadership involves every key member of the team who is responsible for planning and execution of strategy
2. My organisation/leadership has a well defined and effective process or method for reinforcing the commitment of all team members towards the execution of strategy
3. My organisation/leadership has a well defined and effective method for implementing accountability across all levels of the hierarchy
4. In my team people at all levels of management are very clear about the organisation strategy and how it is to be executed
5. In my team at all levels of management agree with and are fully committed to the execution of the strategy
6. In my team people hold each other accountable for delivering commitments

Now, add the scores to get a total. If the total is less than 18 you need to work on making the execution of strategy more effective in your organisation or team by applying the three step process described here within the framework of your organisation structure, organisational culture and operational constraints.

LEADERSHIP IN TIMES OF UNCERTAINTY

LEADERSHIP IN TIMES OF UNCERTAINTY

A 5 POINT STRATEGY FOR LEADERS TO NAVIGATE IN TODAY’S WORLD


We live today in uncertain times. Forecasts, both business and economic, are being revised almost every month, if not more frequently. Even in emerging economies, which seem to have recovered and are faring better than the developed economies – at least in terms of GDP growth – optimism is tinged with caution. The events of the last two years have left an indelible imprint on how business is run and managed; One key learning has emerged, if nothing else: for the foreseeable future, at least, it is prudent not to assume anything.

So, what does this mean for leaders? While there is no manager or leader in the world today who has any sort of experience of managing the business environment we have all experienced over the last two years, there are some basic rules which, if followed diligently, can help leaders navigate their way through a troubled business environment. In fact, all the wisdom of leadership in troubled times can be condensed into a five point strategy that can help leaders move ahead. These five points are basic and simple, probably even obvious. Unfortunately, however, I see many leaders who are aware of them, but for some reason or other are unable to follow them. But this five point strategy can stand leaders in good stead not just today, but even when times are good and business needs to grow, consolidate and become more efficient.

Who can benefit from this strategy? Any one who leads. You could be leading a business, a team within a business or even a specific function. The strategy is agnostic to the kind of leader you are. But the benefits are tangible. They have worked for me in the past and in the current environment and I have seen them work for others as well.

Here are the five points that form the pillars of the leadership strategy that I recommend:

1. Have a vision and have faith in the vision: even if your business is going through the most difficult of times, remember that where there is a trough there will also be a peak. If you are going through bad times, do you have a vision for what you will do when you emerge from the trough or when you are at the peak? If you do not, then you will lose opportunities at the peak. The time for planning and strategising for the peak is when you are in the trough. Unfortunately, it is human nature to get overwhelmed by circumstances and environmental considerations. Very often, leaders tend to get bogged down in the here and now because dealing with the present is also critical. You do need to get out of the trough in order to reach the peak, after all! But that does not mean that you lose sight of the future. It is very important to have a vision and even more important to have faith in the vision. If you, as a leader, are not confident about your vision, how do you expect your team to follow you through the storm?

2. Always introspect: having faith or confidence in your vision, however, does not mean that you leave yourself open to overconfidence. I have seen many leaders fail because of overconfidence; sometimes even hubris. Introspect. It is important. Understand the motivations, the rationale behind your vision. Ensure that it is, to the best of your belief, the best vision you can have. How do you test it? Ask yourself: is my vision the best possible for:

a. The business/team/function that I am responsible for?
b. The company I work for?
c. The people I lead?

If the answer to any of these questions is “no”, then you need to re-think your vision. Very often, leaders do think about the first two questions, but ignore the third question. People sometimes come last or don’t come to mind at all as an important consideration while testing a leader’s vision. But people are important for a vision to be achieved, as we shall see in just a moment.

3. Don’t get operational: this is another trap that many leaders fall into when confronted with tough times. It is easy to give into the temptation of rolling up your sleeves and getting to work in a hands-on way. And sometimes, that may be inevitable. But is it always the best way to get through a trough? Not really. If you are to achieve your vision, your focus must stay on your vision and not waver. And that is just not possible if you get bogged down with operational details. Even if you are most adept at multi-tasking or highly skilled in operational details. Imagine you are the general of an army leading it into battle. Where would you get the best view of the battle from in order to determine if it is going the way you planned? On the ground, surrounded by your own and enemy troops, cutting your way through the enemy ranks? Or in a helicopter high above, surveying the action below; or, as in ancient times, standing on a nearby hill or higher ground, assessing the state of the action far below? But operational details are important, so how do you ensure that they are not neglected in difficult times? By ensuring that you have the best people around. Hire people who are smarter than you; they will prop you up when you need someone to delegate the operational details to. If they are smart and skilled, they will not need close supervision but can run things independently, leaving you as a leader to focus on the vision.

4. Communicate: Sounds simple and obvious doesn’t it? But you’ll be surprised at the number of leaders who don’t communicate effectively. Communication is not just about talking to your team. Actually, communication works two ways. First, your communication to the team must be clear, specific and relevant. It should convey your expectations, detail your vision and create an inspiring visual of what you want your team to achieve. This gives them something to work towards. How often do you check with your team to ensure that they have interpreted your communication the way you wanted them to? Have they understood your vision and expectations? Or have they made assumptions that distort the meaning of your communication? All of us have filters which influence our interpretation of what we hear. In order for communication to be effective you need to ensure that you get your message past those filters without it getting distorted in any way. Second, your team should be able to communicate with you. How accessible are you to your team? How free does your team feel to be able to say something to you? If they are holding back information or data, it will affect the achievement of your vision. You need to ensure that your team has every opportunity to communicate with you and when they do communicate, they are not inhibited from speaking their minds.

5. Lead: shouldn’t this have been the first point in this list? Perhaps, but leading is an amalgamation of all the points that have preceded this one. If you have a vision you are confident of, you stay focused on it, introspect and communicate you are already more than halfway on the path of true leadership. But there is more to leading than this. The key to leadership is to be inspirational to people who follow you. They must want to follow you; they must be motivated to follow you. And the biggest motivator is integrity. Integrity not just to principles and financials. But integrity to words, thought and intent. You must live the words you speak and the thoughts you voice. A leader does not just articulate the vision and the strategy to achieve it. A true leader lives the path to achieving the vision. It may sound simple, but implementing this in practice is very difficult. But if you follow the first four points, you will find that being a true leader is much easier. And you will find people willingly and happily following you, even through difficult times!

Preparing for the Upturn: Part VI

In an earlier post, I had briefly dwelt on how organizations can focus on making their processes more efficient. I quote from that post:

“The downturn, then, is a great opportunity to weed these inefficiencies out of the system and trim the flab. This will create a leaner and nimbler organization which will be well prepared to grow rapidly when the upturn begins.”

What does this mean for the recovery and how does this help?

The answer lies, not in trying to make the organization even more efficient during the upturn, but in maintaining the efficiencies achieved during the downturn. It is relatively easy to trim the flab during a downturn. The circumstances and the environment compel a firm to put its processes under a microscope and examine them in detail to understand the cost benefits that can be squeezed out of them by making them more efficient.

But, once a recovery sets in, the microscope is set aside all too soon, in favour of a telescope that peeks out at the external environment, seeking out opportunities thrown up by the upturn. Furthermore, any introspection concerns itself with what internal changes are required in order to exploit these opportunities and maximize returns.

It is at this time that the firm faces a very real danger; that of the flab returning and the efficiencies built during the downturn being discarded or ignored in the pursuit of growth. Remember, after all, that this is how the flab had accumulated in the first place.

Organisations that recognize this put in place systems and processes to ensure that there is an eagle eye focus, even in the upturn, on maintaining efficiencies wrung out of their processes during the downturn. This ensures that, even while the topline growth is pursued, the bottomline is protected by sustaining cost savings derived through optimization during the downturn.

In my next post on the upturn, I will examine how talent management and talent development during the downturn can serve an organization well during the recovery.

Preparing for the Upturn: Part V

Here’s how planning helps to prepare for the upturn. Apart from determining long term strategies, it is also important to identify the resources that will be required to implement them.

For a firm to rapidly expand during a recovery, financial resources will be required. These could be either internally generated or external sources of funding. To garner the levels of finance that are required to fund the expansion when it happens, the firm needs to ensure that certain pre-requisites are in place. These could pertain to building up the internal reserves of the firm or ensuring that the firm is credit worthy or attractive to external investors when the recovery starts. And this process must begin in the downturn, supported by short term strategies that enhance survival but do not have a negative impact on these factors in the long term.

A similar logic applies to human resources. I have dwelt at length on cost reduction through headcount management in earlier posts, so I will not go into details here. It will suffice to say that planned human resource management during the downturn will go a long way towards conserving them in the long term. This will enhance the firm’s ability to take advantage of the recovery.

Planning can also be applied to other resources. Infrastructure and support systems is another area. Once again, this process begins during the downturn itself. Very often, organizations cut down on infrastructure development or the implementation of support systems, citing cost reduction as a reason. This reasoning is myopic. Infrastructure never delivers results in the short term. Expecting it to produce immediate returns is unreasonable. And neglecting infrastructure or support systems essentially results in depriving the firm of long term resources, when they may be needed. There is a gap between the planning of infrastructure and its development. And there is a further gap between its development and utilization. So, by cutting down on infrastructure development during the downturn, the firm is substituting long term utilization of infrastructure with short term cost benefits, a trade off which can severely impair the ability of the firm to respond swiftly to market opportunities that may open up in the long term.

If a firm recognizes this, planning for infrastructure can be derived from the long term strategies that have been set, as described in an earlier post. If the strategies develop as planned, the infrastructure will be utilized in the time frame envisaged, and will deliver the return on investment that was planned. And, if the firm follows the scenario planning method I have mentioned in an earlier post, it is possible to tweak the infrastructure plans (though not significantly, as infrastructure is largely a sunk investment), to match the scenario that eventually develops and the strategy that is finally followed. The important thing to remember is that, irrespective of the scenario that unfolds and the environment that prevails, infrastructure and support systems will always be required in the long run. Compromising on these debilitates the firm in the long term, even if it delivers cost benefits in the short term.

In my next post, I will examine how the need to optimize efficiencies during a downturn can serve an organization well once the recovery sets in.

Preparing for the Upturn: Part IV

So, how does one prepare long term strategies when short term forecasting is difficult?

One answer is scenario planning.

This is how it works. When the future is uncertain, there could be a range of possibilities. While it is difficult to determine exactly which set of possibilities will eventually hold sway, it is possible to arrive at different scenarios with varying probabilities of occurring. Given that in this specific instance we are talking about scenario planning for a recovery, the upside risks will be significantly higher than the downside risks. Which makes it much easier to put together the scenarios, since one can usually anticipate the different opportunities that present themselves during an upturn.

Based on these scenarios, strategies to capitalize on the opportunities presented by each scenario can be prepared. Since each scenario has already been assigned a probability of occurrence, it is relatively easy to prioritise the strategies.

This is just one method of setting long term strategies. If anyone out there has any other suggestions, I’d be glad to hear them.

In my next post, I am going to talk a bit more about planning and how it can help prepare for the upturn.

Preparing for the Upturn: Part III

The second implication for business leaders is planning. Vision helps stay focused on the big picture, so we don’t miss the woods for the trees. Planning ensures that the vision is articulated and the organization works towards achieving the vision.

Vision, by definition, is warm and fuzzy. It lacks structure, but provides purpose. It is all too easy to get lost in the swamplands of the downturn. Planning helps the organization to stay on track.

And this process begins during the downturn, concomitant with the vision.

Based on the vision, a long term plan needs to be drawn up. This plan should reflect not just short term measures to negotiate the downturn, but also long term strategies to capitalize on the recovery. And the short term measures should be evaluated in the perspective of the long term strategies. Each measure should be judged by the value it adds or subtracts from the achievement of the long term strategies. This ensures that short-sighted measures that dilute the resources of the firm are not chosen over actions that will silently reinforce the ability of the firm to accelerate its growth when the upturn begins.

Some of these short term measures that add value to the long term strategies have been discussed in earlier posts, and juxtaposed against those measures that detract from the firm’s long term abilities and resources.

I can hear howls of protest from certain quarters when I speak of long term strategies during a downturn.

The volatility and uncertainty engendered by the current global recession has given rise to a short term mindset.

Where is the ability, you may ask, to forecast sufficiently accurately in the long term, when short term visibility is low? To use the analogy of the ship again, this is like steering a ship through a dense fog, aiming for land thousands of miles away, when you cannot see three feet ahead in the mist.

There is certainly logic in this suggestion. But there is also a solution. And I will explore that solution in my next post.

Preparing for the Upturn: Part II

Following up from the last post, the first implication for business leaders is the need for consistency of vision. Vision is long term and by definition, cannot change irrespective of the change in the external business environment. If this sounds like a paradox, consider this.

Imagine the organization to be a ship that sets sail from Port A, with the destination as Port B. There are several routes across the ocean that can be followed to get from the port of origin to the final destination. There will be a direct route, but that may have challenges and dangers that lie in the path of the ship, which could endanger the ship and crew (read the business and its human capital). So, the ship will need to take a route that circumvents these ocean based perils, which may involve tortuous detours and the deployment of additional resources. Based on the knowledge of the ocean, a route is fixed (read strategy for business).

However, there will always be dangers that are unknown or that may come upon the ship unexpectedly. For example, the weather could change suddenly while at sea; storms can blow up and ocean currents can change without warning. These are changes in the external environment of the ship that cannot be predicted. At best, the ship’s captain and crew can anticipate the probability of encountering such unexpected challenges and prepare contingency plans to counter them.

Does this sound familiar? Can you relate this metaphor to business?

So how is this related to vision? The long term vision for the ship is not confined just to the ship’s journey. It relates to the big picture: the fact that the ship must make multiple journeys back and forth across the ocean and must remain sea worthy to do so.

What is true of the ship is equally true of the business enterprise. It is an animal that needs to endure the hardships and challenges of the business environment, weather all kinds of economic and financial storms and skillfully negotiate the adverse currents of risk.

It must do so to survive the short term and make it out of the downturn, much as the ship must emerged unscathed from the storm. But, as importantly, just as the ship needs to stay seaworthy to make all those future trips across the ocean, the enterprise must stay equipped to flourish in the long term.

This is the vision that must guide business leaders through the downturn. And this is the first step to prepare for the upturn.

Preparing for the Upturn: Part I

Strange as it may sound, preparing for the upturn actually begins in the downturn. Yes, that’s right! Most of the strategies that I’ve described in earlier posts, which help manage the downturn, are double edged strategies that also help organizations prepare for the recovery. And that is why I’ve been at pains to emphasise that while managing a downturn, it is imperative to keep a longer term focus and not resort to knee jerk reactions that may have short term benefits that are superficial in nature, but may simultaneously chip away at the long term competitiveness of the organization by depriving it of resources and competences that will be required once the recovery sets in.

Preparing for the upturn is all about ensuring that processes and resources within the organization are in place to exploit opportunities that will begin to present themselves once the recovery begins. And, as we all know, rigorous preparation can never be done in a day. It takes time, patience and planning. Which is why the downturn itself is a good enough time as any to start. If an organization decides to wait out the downturn, in order to conserve resources, reduce costs and manage profits during the downturn, it may find itself lagging behind competition once recovery sets in, and it may miss the bus when opportunities present themselves. And this will happen precisely for the reasons the organization has waited so long. Since it has conserved resources, it will not have the time to begin building up the resources in time to seize the advantage; its cost reduction measures would have become hardwired in the system and difficult (and costly, ironically!) to reverse, proving to be the proverbial millstone.

What does this mean for the leadership of the organization? The implications will be the subject of the next few posts.

Leadership in a start up

Here's another article I wrote for SHRM....


As I sat down to write this article, I was wondering where I should begin. The topic of leadership in a start up is so interesting and has so many facets that, for a moment, I was undecided about which aspect I should start with.
Then, I realised that, in some respects, the dilemma I was facing while thinking about commencing the article was the same that a leader faces in a start up. There is one critical question that needs to be answered: Where do I start?
However, if you were expecting me to give you an answer to this question, I am sorry I must disappoint you. The answer is that there is no single place to start. And that is what makes the job of starting up a new company or business unit such an exciting and challenging assignment. There is a whole bunch of moving parts that need to be dealt with and managed, and sequential processing is either not possible or undesirable. Let me explain why.
Most start ups, whether entrepreneurial in nature or as subsidiaries of a large (multinational or Indian) corporation have specific timelines within which the operation has to be established, a high quality team recruited, systems and processes put in place, strategies put together and executed, and, most important, revenues to be generated in order to meet a predefined profit or loss target. If these activities are undertaken on a sequential basis and managed piecemeal, two outcomes are possible.
First, at best, the start up will be delayed vis a vis plans and targets, which will be achieved much later than timelines normally set for such operations. Whether it is a venture capitalist or private equity fund or a large parent corporation that is funding the operation, the investing entity expects the start up to take off and begin generating revenues as soon as possible. A reasonable amount of time is normally accepted as a gestation period, during which critical activities such as recruitment and engagement of a team, implementing processes and putting together strategies can be done. However, my experience is that this gestation period is almost always desperately short of what should be the ideal situation. There is always time pressure. Which is understandable.
Second, at worst, the start up may fail to take off at all.
So, the biggest challenge for a leader in a start up is to confront these circumstances and make the best of them. There is no point complaining about time constraints. They will not go away. So how does one tackle them?
The critical competence that supports a leader in this situation is the ability to manage chaos and build a structure out of nothing. Being able to multi-task is very important, as is the ability to run multiple projects simultaneously without taking the eye off any one of them. And since the environment is dynamic and things are constantly developing, it is a bit like a hunter trying to focus simultaneously on several moving targets and trying to hit each one of them all the time.
Sounds impossible? Actually, it’s not. But if you’re accustomed to working in a large organisation, with established systems and processes and a comfortable support system to fall back on (in terms of HR, finance, operations and administration etc), then it becomes very difficult to adjust to a fluid environment where nothing is certain and anything can happen. I know. I’ve been through this when I worked in my first start up, straight out of a large multinational company where I had an assistant, a large operations team, an established sales team and a strong HR and finance support system at head office. From this comfortable and safe environment I jumped straight into a start up where there was nothing. No office, no assistant, no team. Even financial and HR systems were to be established.
It wasn’t easy. But it wasn’t impossible either, and since then I’ve done it many times over again. The key is to be adaptable and change your mindset. If you are able to let go of the cushy perquisites of working in an established organisational structure, it becomes rather simple. Actually, it is extremely enjoyable and very satisfying once you get down to putting the start up together. You may well ask why? Because, instead of inheriting something that you may or may not like (as most managers do, and I’ve done on occasions), you start with a clean slate in a start up. You can build the organisation the way you want to. You can recruit the people you want. There is no inherited baggage of any kind. Who could ask for more?
So much for the challenge of starting up. The other key competence a leader needs in a start up is the ability to lead people. Notice that I didn’t say manage people. True leadership, of the transformational kind, is required. To begin with, the team in a start up is so small that it is extremely critical that everyone works together and at the same pace. Due to cost constraints, it is often possible that the start up begins by recruiting less people than it actually needs to run at an optimal level. Which means that, like the leader, others in the team need to be willing and able to multi-task. There is no room for development of silos or reluctance to go beyond the official job description. In some sense, the job description only provides a guide to the primary responsibilities of the team member. It does not describe the boundaries or limits to what may be required of the team member.
What does this mean for leadership?
First, the leader cannot afford to stay aloof of the operations and expect to delegate everything. The leader must lead by example and be willing to roll up his/her sleeves and get down to brass tacks. Others will follow. Second, the ability to build strong relationships based on mutual trust and respect is extremely important. In a start up, more than instruction, leadership and guidance are required. If the relationships are strong, people will follow the leader. Third, communication is critical. The leader should be able to articulate and communicate the broad vision to the team, which they will then implement. If a single member of a small team is out of synch with the broad vision and strategy or does not understand or agree with a direction or the need for an action, it becomes extremely difficult to build the business with any degree of success. This does not mean that unanimity is a pre-requisite. It simply means that everyone has to be on the same page where strategic direction is concerned. Getting all team members on board irrespective of their personal opinions is the responsibility of the leader. And communication plays a crucial role in this process.
This competence has important implications for motivation and satisfaction. In many cases, especially in start ups funded by venture capitalists, employees are often hired at lower than market levels of remuneration and compensated through stock options or share of profits. Even if employees are hired at normal levels of remunerations, the time pressures and challenges of putting together a start up are so immense that it is easy for people to get frustrated and for motivation to suffer. This is especially true when the start up is a small part of a much larger organisation. There could be any number of challenges in dealing with the parent organisation. Bureaucracy in decision making and financial or other approvals, political issues in dealing with different hierarchies in the parent organisation, clashes of culture between the start up and the parent organisation (yes, this can happen, especially when the leader consciously cultivates a culture in the start up that is different, because he/she feels that culture is better suited to achieve the objectives of the start up); these are just some of the issues that can stymie the efforts of team members in the start up and lead to dissatisfaction and can affect employee morale.
In such situations, the leader has to be able to handle the issues with the parent organisation in a non antagonistic manner, while simultaneously managing the motivation levels of his/her own team to ensure that they are buffered against any negative signals that may emanate as a result of the issues with the parent organisation. This can be quite a tightrope to walk and the leader’s personal credibility and relationships with his/her team members play a very important role in keeping the team morale high.
There is more to leading in a startup, and one could write a book on this, but for the purposes of this article I hope I have been able to provide a glimpse of what leadership in a start up is all about. It is exciting, fulfilling and challenging to build a business from scratch, but the issues that I have highlighted need to be kept in mind in order to succeed.

More on Corporate Social Responsibility

I recently wrote an article for SHRM on Corporate Social Responsibility, which took further the address at the Humane Capitalism Conclave and the SHRM event which I've already posted earlier. This one explains a bit more about my viewpoint on CSR.


CORPORATE SOCIAL RESPONSIBILITY: CHASING A CHIMERA?


This is not an article on economic theory. But, in order to understand why I believe that Corporate Social Responsibility (CSR) is an unsustainable concept in the context of the capitalist system within which business today operates, it is necessary to look at what economic theory says about capitalism itself. While the analysis of economic theory that follows is a bit simplistic, it will be sufficient to explain the factors that underpin the capitalist system.

Let us begin the journey with Adam Smith. In The Wealth of Nations (1776), Smith presented the capitalist system as the interplay of capital, labour and land (the factors of production) and profits, wages and rent (returns on the factors of production respectively), within a structure of market exchanges involving production, income and expenditure. Smith described an “invisible hand” at work, created by the market forces of supply and demand, which in turn are the result of the independent decisions of countless individuals. Smith posited that it is this invisible hand that drives markets to a state of equilibrium. Underlying these decisions is the pursuit of self interest (by consumers) and the pursuit of profit (by owners of capital). The point to note is that owners of capital will productively employ capital where it yields the maximum profit.

Karl Marx believed that this theory was flawed. According to him, capitalism has inherent contradictions that are not explained by Smith’s theory. Marx postulated that capitalism promotes the production of commodities that have an “exchange value”, over the satisfaction of human needs through commodities that have a “use value”. This is the conflict that is inherent in capitalism and it is driven by the pursuit of profits. According to Marx, the biggest failure of capitalism is the inability to maximise collective welfare as a result of the pursuit of individual interest in the market.

Max Weber, in his work General Economic History, defines capitalism as a system in which enterprises engage in industrial production in the pursuit of “net profit” which is rationally calculated. By introducing the notion of net profit as an accounting concept, Weber further accentuates the profit motive inherent in an enterprise operating in a capitalist system.

Joseph Schumpeter introduced the concept of “creative destruction”, wherein an entrepreneur exists not to compete, but to change the nature of competition. Through innovation, either the productivity of the factors of production is enhanced or new goods are produced. This leads to profit. This process of creative destruction sweeps away old industries and methods of production, creating new markets or segments in the pursuit of profit. In this scheme of things, entrepreneurs innovate, not for the greater social good or to satisfy human needs, but to build a competitive advantage in the pursuit of greater profits.

Finally, John Maynard Keynes, whose thoughts have been resurrected in the wake of the global economic downturn, explained the role of money and the capital and labour markets in the capitalist system, in his seminal work, The General Theory of Employment, Interest and Money (1936). Without going into the details of this theory, which explained the role of money and interest rates in capitalism, one assertion stands out: capitalism is a monetary production economy which operates with the objective of realising profits.

What do we conclude after this quick look at economic theory over the last two hundred and thirty years? While we’ve just skimmed the surface, there are three inescapable conclusions.

First, capitalism is driven by a single minded obsession with profitability. Second, capitalism is not based on social or collective action, but on the pursuit of self interest. Third, the primary objective for the existence of an enterprise is generating profit for its shareholders, the owners of capital.

And that means that everyone in the system--whether it is enterprises or individuals like you and me—is driven by self interest.

Is it any surprise, then, that larger objectives like social and environmental issues and the quality of life have been subordinated to the pursuit of profit?

I can see some readers saying that this conclusion is not new. We’ve all known all along that the pursuit of profit lies at the heart of capitalism. We really didn’t have to study the theories of five famous economists to reach this conclusion.

True. But the point I am making is this: we’ve just seen how economic theory, irrespective of the ideology of the economist in question, supports the profit motive as the basis for an enterprise operating in the capitalist system.

But, where is the economic theory that supports the contention that pursuing social good or--as it is termed nowadays--social responsibility, is a key objective of an enterprise in the capitalist system?

And that brings me to the problem I have with the concept of CSR. It has an inherent conflict with the concept and operation of the capitalist system.

Don’t get me wrong. I have nothing against the objectives of CSR. Indeed, they are laudable. It is in the implementation of the concept that I see an inherent weakness that will prevent CSR from ever becoming a tool that will reshape the factors influencing social and environmental welfare.

This is not to say that CSR has not had or will never have any beneficial impact on social welfare or the environment. Far from that. However, I believe that this impact, however positive, will be limited in its scale and magnitude. From that perspective, the concept of CSR has been hyped beyond its limitations.

Moreover, quite apart from the limitation of the ability of CSR to impact social and environmental welfare on a large scale, there are drawbacks inherent in the concept, which dilute its effectiveness as a tool of welfare.

To begin with, take the words “social responsibility”. If, after the preceding discussion, anyone still believes that the words “social responsibility” have a place in capitalism, I will urge them to delve deeply into the economic theories I have referred to, before reading the rest of this piece. The only responsibility an enterprise has, in capitalism, is to deliver profitability to the owners of capital. I think that, too, has been conclusively established.

The problem with CSR is that it tries to modify the behaviour of a capitalist enterprise by imposing a social objective that is in conflict with its objective of profit. And this can never be as simple as it sounds. CSR is, in essence, an attempt to change the nature of the capitalist system. It espouses the philosophy that an enterprise exists in a community and therefore has a responsibility for the well being of the community. The philosophy is noble and I have no quarrel with it. However, capitalism is not a social or collective socio-economic system as I have demonstrated earlier. Depending on your perspective, you may view that as a serious flaw in the system or the critical factor that makes it the dominant system in the world today. But that doesn’t change the nature of the beast. Let’s face the truth: there is no place in capitalism for social objectives, unless they are profitable in themselves.

The second issue I have with CSR is that this philosophy of giving back to the community is linked closely to the reputation and image of the enterprise. I believe that this is rather a tenuous basis for the pursuit of socially responsible initiatives. While capitalist enterprises strive to be viewed as ethical in their pursuit for profits, that endeavour stems from the fact that their profitability would be adversely impacted if their ethical image were to suffer, since other enterprises would not do business with them for fear of the risk involved in dealing with a firm that is viewed as being less than ethical. There is nothing else in the concept of reputation and image, apart from this profit driven ethical orientation, which would motivate a capitalist enterprise to value reputation or image, especially when it is linked to social responsibility.

The third drawback of CSR is the fuzziness of definition. Ask a clutch of enterprises to define CSR and you will get a variety of definitions. In many cases, CSR really boils down to philanthropy, especially where the enterprise is driven by a promoter family with philanthropic beliefs. And, philanthropy is not a responsibility. It is a philosophy, a way of life.

It is this variability in the definition of CSR and the flexibility of interpretation that opens it up to misuse and affects its implementation. Misuse, because enterprises often pay lip service to CSR and ignore situations where there is a genuine human need, concentrating instead on situations that offer them the opportunity to enhance their reputation and image as a socially responsible organisation. What this means is that, in the pursuit of image and reputation, genuine social or environmental welfare is often neglected, and CSR fails to achieve its objective.

Even where enterprises are genuine about their CSR initiatives, they often focus on areas that are far removed from their core business. This leads to problems of consistency and sustainability of the initiatives. If the CSR activity is not integrated with the business, it becomes difficult to sustain in the long term, unless there is a strong philanthropic motive driving it. Moreover, in such cases, the CSR activity is often driven by the vision of the CEO. It is quite common to find that the nature of the activity and the beneficiaries change when the CEO changes. And, in the long term, no one really benefits.

In summary, therefore, CSR has great objectives, but the concept itself is open to misuse, and because of the variability of interpretation inherent in its definition, it can often be poorly implemented. Finally, as a concept that is imposed on an enterprise, it conflicts with its core business objective, and ends up being a poor tool for driving social and environmental welfare.