One of the most vexing problems for companies committed to sustainable development is to settle on the right organisational model to deliver on the promise. Where should the talent, budgets and decision-making rights for such investment be located? How are managers’ incentives aligned with sustainable development goals? How closely should the organisational unit be linked to the core business units?
Our research suggests that answers to such questions lead to a “Goldilocks zone”: not too firmly embedded in the core business, where it is “too hot” and treated as a cost centre or under fire as an under-performing unit, but not too far removed from the core business either, where it is “too cold”, considered a distant appendage and largely irrelevant.
Sustainable and inclusive business activity has to be organised so that the location is “just right”.
We discerned a broad shift in organisational motivations in our Inclusion Inc. research initiative, where we studied strategies for investments in sustainable development by major multinational companies. Increasingly, companies are moving away from a philanthropic grant-making mindset to allocating resources on the basis of shared value, (where value to society through advancement of the sustainable development also creates value for the business). A third value is also material: the first two forms of value must intersect with value to managers responsible for allocating resources and for execution. Visionary aspirations can set the organisational culture, but managers’ incentives have to be aligned with execution at the ground level.
Our research suggests three broad organizational models for companies to consider in attempting to reconcile these forms of value. They range from the least to the most risky.
For many companies, a natural hub for sustainable development activities is the corporate foundation. This is, after all, the unit with a mandate to “do good.” Foundations often have credibility within the organisation and historically have had the license to operate under rules different from those of the core business. To solve the Goldilocks zone problem, however, the foundation’s activities must be brought closer to those of the core business units. In order to get the three different kinds of value – societal, business and managerial – to intersect, some foundations have been transforming from their historical focus on charitable giving at arm’s length to greater coordination with the business.
Consider three foundations at different stages of this journey.
The Levi Strauss Foundation (LSF) has operated as a separate entity from Levi Strauss & Company (LS&Co). More recently, in addition to its traditional role of grant-making in a variety of thematic areas, the foundation has been expanding its role as an incubator and partner to the business.
LSF works “very closely with the company’s supply chain and [aims] to ensure [its] work aligns with the company’s priorities as well, ” according to Kimberly Almeida, senior programme manager at LSF. The LSF’s worker wellbeing initiative is a collaborative effort involving LSF, LS&Co and its vendors. The initiative involves surveys of workers at LS&Co partners’ sites, determines the most critical needs and areas of interest, and then creates a tailored programme targeted towards improving wellbeing for each site. The programme generates up to $4 (£3) in productivity benefits for every $1 (75p) invested. The positive return has made the initiative popular with procurement managers and is now a requirement for key strategic suppliers.
LSF initially acted as an incubator and pilot for the programme. which is now owned by LS&Co. LSF’s role has shifted to impact measurement and developing toolkits to scale the programme over the long term.
Another company in the apparel industry, Gap, has gone through a parallel re-focusing of its foundation. Like its peers, the Gap Foundation used to operate as a broad grant-making institution. However, there was a philosophical shift. Although it was giving to nearly 200 organisations, this model of philanthropy was not achieving Gap’s impact goals. As a result, Gap began prioritising socially and environmentally inclusive initiatives that were more closely aligned with the company’s expertise,business interests and operations. The launch of This Way Ahead in 2006 and P.A.C.E. (Personal Advancement & Career Enhancement) in 2007 marked the foundation’s shift from a philanthropic organisation to one that manages its programmes in a way that also advances its business objectives.
Creating a talent pipeline through This Way Ahead has increased the retention rate of young employees, while the company’s P.A.C.E program has trained female garment workers to advance their careers as suppliers and managers.
Not all companies have made their way out of the traditional foundation paradigm; some are still exploring options. Fossil, for example, hired a global head of sustainability, highlighting its commitment to prioritise this effort. The Fossil Foundation’s focus has been on grants promoting social entrepreneurship for underserved youth. Prospectively, its aim is to more directly integrate the foundation’s activities into the company’s business, as was the case with LS&Co and Gap. Fossil’s CEO, Kosta Kartsotis, firmly believes that integrating its social mission is essential for the continued growth of its business, especially with the rise of conscious consumerism among younger shoppers, its prime clientele. As part of this strategy, the company is exploring how to evolve its foundation’s mandate and business focus.
Adapting venture capital and startup accelerator models
Some companies are considering navigating through the Goldilocks zone by adapting models from the venture capital industry and start-ups. On the whole, the area of social impact investing is still a nascent field and large corporations have been slow to embrace it. However, given the success of the venture model in sparking exciting startups, the experience of some early mover companies can provide valuable lessons.
Barclays is an example of a company that shifted from traditional philanthropyventure funding, led through its Social Innovation Facility (SIF). SIF is an internal accelerator that sets the company’s strategies for investment in sustainable development and provides funding to individual business units as they develop socially innovative products and services. Like a venture fund, it maintains a portfolio of ventures. The facility has multiple factors as part of its objectives and, in principle, has the opportunity to use corporate relationships to help scale up ventures. How likely is it that such models will succeed and sustain? The jury is still out.
The one-stop shop subsidiary unit
At some companies, the resolution to the Goldilocks zone problem has led to a separate unit with heavyweight leadership to minimise the chances of it being left out in the cold. At Essilor, the Corporate Mission Office (CMO), a subsidiary of the parent company, manages sustainable and inclusive business activities. Jayanth Bhuvaraghan, who was former president of south-east Asia and India at Essilor, was appointed chief corporate mission officer. This newly formed executive-level position was created to elevate such activities to the highest levels of the corporate hierarchy while implementing a global strategy for sustainable development. Bhuvaraghan is responsible for overseeing a wide portfolio: an inclusive business arm of the company, the philanthropic foundation, social impact funding, advocacy initiatives, the Vision Impact Institute, and all other environmental, social, and governance (ESG) and corporate social responsibility (CSR) initiatives.
To ensure credibility with the core business, the inclusive business arm is held to the same rigorous standards as the commercial units, even if the metrics are different. The goal of the inclusive business arm is to address the vision needs of consumers at the bottom of the pyramid. This separate legal structure provides the group’s managers with more flexibility for innovation and loosens constraints surrounding profit and loss requirements and operation expenditures. For Essilor, the business value of the inclusive business unit’s activities is for facilitating entry in emerging markets.
Finding the “just right” organizational model is not easy Fortunately, it is, in many ways, a familiar challenge and simply requires some experimentation. There are ways that range from adapting existing structures to establishing new standalone units altogether. Companies have struggled with similar questions in the context of organising for innovation. After all, the two kinds of investments – on sustainable development and innovation – have features in common. They involve costs today for uncertain payoffs tomorrow; the payoffs are hard to measure and may not meet higher ROI hurdles set by the core businesses; managers are motivated by short-term incentives and place a high premium on avoiding risk. With sustainable development there is an additional barrier to overcome: the payoffs may accrue to the entire industry, thereby diluting a company’s and its managers’ unilateral incentives to invest.
This might make the Goldilock’s zone narrower and more challenging to navigate but when it works it can feel not only “just right”, but also the right thing to do.