Managing Environmental Impacts: What Bible Are You Relying On?

Art Stewart, MPM (Managing Partner) and SIP Contributor Robert Pojaseck, PhD., Harvard University.
(May 5, 2019.)

If you’re trying to navigate through the maze of issues, internal dynamics and external market factors to determine how your business activities align with established standards for ethical behavior and environmental responsibility, join the club!

Unfortunately, if you looked to two of the leading organizations that are partnered with the large sourcing companies to help suppliers manage their conformance and compliance requirements around environmental impacts, you are not likely to get the most current guidance that will be helpful.

Missing the Mark: Which Standards Make Sense
Sedex and its partner, Verite, have missed the mark when providing information on environmental topics in the Sedex Supplier Workbook(1). The most recent version of ISO 14001:2015 has changed considerably from what is presented by these organizations. The latter standard is very different from the former version and is designed to be used with the International Organization for Standardization’s (ISO) high-level structure. In the Health and Safety area, Sedex uses OHSAS 18001:2007, a national British Standard which is currently being phased out, rather than ISO 45001:2018, which is part of the international high-level structure and internally consistent with ISO 14001:2015 and other similar ISO standards.

Any new approach to environmental management should include the practices for the Social and Business Ethics sections to align with what is being used by the Global Reporting Initiative (GRI). These frameworks are consistent with the newly published GRI disclosure requirements and should be supported with standards SA8000:2014 (Social Accountability International); ISO 26000:2010 (Social Responsibility Guidelines); and the ETI Base Code Ethical Trading Initiative 2018 version (Sedex is using the 2014 version).

In 2012, ISO rolled out its new High-Level Structure(2) to more than 180 working groups tasked with aligning the frameworks with specific country contexts. This structure not only presents a management system standard with its useful Plan-Do-Check-Act (PDCA) functionality, but it helps integrate and embed management systems into the way the organization operates (click figure below to enlarge).

This high-level structure improves the effectiveness of an organization seeking to operate with no harm to the environment. An overview of the impact of an environmental management system within an organization may be accessed on the ISO website(3).

Addressing the Broadening, Complex Landscape of Risk Management
All the new and revised ISO management system standards begin with the scanning of the external and internal context of the organization.

This is part of a risk management program that searches for opportunities and threats, or what we refer to as the “New Risk Management”(4). This section also explains how the organization should engage with internal and external stakeholders. Since all organizations are inherently different, each one must address environmental management in a manner that best suits their contexts.

The second element of the high-level structure seeks to identify the “top leader” and make this person fully accountable for meeting all the organization’s conformance and compliance objectives. The other responsibilities of the collective leadership are also identified. In addition, this section also prescribes how to prepare an environmental policy that influences every element of the environmental management system and assigns responsibilities to all the other managers with respect to dealing with environmental impact issues.

The planning section completes the risk management activity by determining the most impactful opportunities and threats(5). Organizations use the opportunities to offset the threats to their environmental management program. Objectives for the environmental program are presented. All the compliance obligations of the organization must be included within the environmental management system. If the country’s environmental regulations are not protective of the environment or are not widely enforced, the organization can use the risk management activity to determine what initiatives are required of them to close any gaps and avoid having any of their business activities create harm.

Nothing Missing: Maximum Traceability, Integration and Scope
All of the ISO standards for Environment (the entire ISO 14000-series) can be linked to the new GRI standards. If your approach utilizes an Ethical Trade SaaS solution, you will have complete traceability to all the corresponding international standards with references, not just the narratives.

While the Sedex workbook specifically mentions energy and greenhouse gas emissions in its Environmental Standards Workbook, ISO does not specify what environmental activities must be addressed for an ethical trading program even though energy and greenhouse gas emissions are included in the overall ISO 14000 family of standards.

ISO 14001 uses risk management to address potential adverse effects (threats) and potential beneficial effects (opportunities). Within the defined scope of the environmental management system, the organization determines the environmental aspects of its activities, products and services that it can control and those that it can influence, along with the associated environmental impacts within a life cycle perspective(6). There is also a new energy management standard, ISO 50001:2018 (7).

If a company wants to formally address risk management issues, ISO 31000:2018 can be added to the high-level structure. An Ethical Trade SaaS solution will have already incorporated this standard into the management system. The SaaS solution will incorporate the most widely used and current international standards along with the GRI Standard disclosures. Any Sedex information that is not in the standards can be verified in what Sedex provides and inserted into the high-level structure with a reference back to Sedex.

Organizations seeking to more effectively prepare for a Sedex ethical trade audit can take a new approach by using an Ethical Trade SaaS solution to improve their ability for managing the environmental impacts that stem from their direct and indirect business activities. By creating the requisite environmental objectives, and determining the best means for achieving and monitoring them, they will gain greater clarity as to how to work with the Sedex Suppler Workbook.

Any independent auditor conducting an ethical trade audit can view the summary information prior to the facility visit to better plan the audit while the supplier organization will have all of the information available to support the environmental and energy elements of the initiative. SIP

Making the Smart Business Case: Supply Chain ESG and the New Competitive Advantage

Art Stewart, MPM
Managing Partner
(September 2, 2019.)

After decades of advocating for the supremacy of shareholder interests, this August the Business Roundtable came to a consensus on a bold 300-word statement recasting the purpose of the American corporation.

As an association of nearly 200 CEOs representing America’s most prominent companies, the declaration is significant and falls on the heels of other influencing bodies that have redefined their position regarding the role of business in the larger context of societal obligations.

The Roundtable cited creating value for customers, investing in employees as well as fostering diversity and inclusion as three key foci but it was the other three that particularly relate to the supply chain: “dealing fairly and ethically with suppliers,” “supporting the communities in which we work,” and “protecting the environment.”

Clearly the glacier of collective CEO leadership on public interest concerns has moved. The days of marginalizing ‘responsible’ business practices as “nice to have” add-ons or standalone window dressing are over.

Why This Matters Now
Whether you’re a major sourcing company, one of its preferred suppliers or aspire to be, complying with the rigorous standards of supply chain operations now is daunting. Everyone faces a significant undertaking to fully grasp the myriad of concerns involved: From human resources (e.g., equal opportunity, worker rights); environment, health and occupational safety; and advertising standards to consumer rights and protections; product safety and labeling; and business development (sales).

Sourcing company executives and their functional managers are increasingly expected to operationalize policies to meet stakeholder expectations and improve corporate integrity while concurrently ensuring top- and bottom-line growth. Without skipping a beat, they also require their suppliers to be upfront in their dealings with the company, its auditors and audit programs as well as other third parties.

Suppliers are expected to take ownership of their relationships with the facilities that produce the products that their sourcing customers buy from them, which results in a cascading of corporate values throughout the supply chains.

Given that up to 80 percent of a sourcing company’s operations can interact with a supply chain, management of end-to-end supply chain operations has become a way for them to limit risks to their products and services while also controlling brand reputation with customers.

Companies are actively acquiring hundreds of thousands of data points across the supplier universe, cradle to grave, as they invest in technologies that are enabling them to better track, monitor and forecast their risks. It’s much easier to look deeper into a supplier’s corporate structure and the direct behavior of its owners as visibility now extends to the unstructured data of social media and mobile apps. Certain requirements are more often being imposed on all supplier relationships as a result of unrelated mishaps involving just one supplier that may have affected a sourcing company’s overall risk strategy.

Regulatory and advisory bodies are transitioning to the next generation of standards and requirements, modernizing their monitoring capabilities and increasing enforcement activity. Regulations from one country to another are getting more complex and contradictory, creating a minefield for supplier contracts.

Consumers are hyper aware of where their products come from and are holding both sourcing companies and their suppliers directly responsible for improving circumstances throughout the supply chain. Employees share these concerns and in a full-employment economy, the most attractive candidates will only work for a preferred employer brand.

Even shareholders are re-balancing their expectations for stock performance with a recognition of the correlation between ethical practices and lower financial risk. The growing number of proxy actions involving ESG issues is but one indicator of this changed understanding.

A new normal of radical transparency and accountability is bringing technology-driven visibility of everything to everyone across supply networks.

Never-the-less, organizations are still getting trapped in a loop of self-limitation which may become dangerous. Problematic factors that are characteristic of the overall organization culture can metastasize as bigger threats in the intense context of supply chain operations. These include: A hierarchical management framework, fear of any kind, decision bias, a reliance on centralization, inflexible business practices and rigid structures, skills deficits, short-term thinking and acting, insufficient experimentation or even resistance to innovation, and a lack of clarity on and commitment to purpose.

The business case for Supply Chain ESG as the new pathway to strategic competitive advantage has become self-evident. How will your organization capture the opportunity that is before you? SIP

Are Your Customers Requiring You to Use ISO Standards?

Guest Blog, by Alec Alessandra MBA, former John Deere Executive and IMEC Board Member as well as SIP Senior Strategist. With contributions by SIP Collaborator Robert Pojasek, PhD, Harvard University.

From the IMEC (Illinois Manufacturing Excellence Center) blog.
(June 14, 2019.)

Many small and medium-sized supplier organizations are receiving notices from their larger sourcing customers to implement a variety of different international standards at their facilities.

These standards could include:

These requests are usually being driven by an increasing demand for improved accountability and risk management from their shareholders and larger investment firms. Their concern is understandable if you think for a moment about all the potential liabilities of conducting a global business today, including the complexity of supply chain operations and the unpredictability of volatile economic, political and social conditions around the world.

C-suite leaders are being subjected to hyper-scrutiny while Boards are under pressure to do what’s necessary to prevent any sudden financial loss associated with issues stemming from a company’s operations.

Click below for full article. SIP

Gaining New Competitive Capabilities: A Next-Gen Model for Supply Chain ESG

Art Stewart, MPM (Managing Partner) and Robert Pojasek, PhD (SIP Contributor)
(May 16, 2019.)

It doesn’t take much research and nothing more than a few conversations with colleagues to quickly assess where the commonly felt pain points are for supply chain leaders in the current environment. The challenges are equally experienced between a large sourcing company and their preferred supplier organization.

The consensus centers on a range of factors: There is a significant need for better structures to support faster analysis, decision-making and operational execution. Sourcing companies want real-time end-to-end visibility of their entire supply chain, which requires greater transparency and more disclosure from suppliers. Everyone wants to improve predictability and have the right technologies in place to ride the frequent spikes in supply chain velocity due to unanticipated events and the cyclical nature of certain industries, such as retail. There is pressure to keep inventory and cash requirements low.

New delivery models need to be constantly updated to adjust to consumers wanting everything, every time and anywhere. With significant increases in urban traffic, supply chain managers must now monitor urban developments to retain flexibility and speed. Operations managers must develop quicker responses to regulatory changes. Managing a more agile supply chain necessitates powerful interactive communication tools and collaboration platforms that are designed like social media channels. These platforms must be supported with advanced trans-organizational control structures and be integrated with other IT architectures while also ensuring that any overarching system is hack proof.

How do supply chain leaders navigate this complex risk terrain that is now overlaid with increasing scrutiny regarding their ESG policies, operations and employee behavior?

By implementing a next-generation operating model that delivers order and discipline to the rising tide of compliance requirements involving ethical trading/sourcing practices.

Through a combination of operations capabilities and supply chain disclosures, enhanced with digital technologies, sourcing company leaders and their preferred suppliers can create new value, lower costs and improve information that conforms to global ESG sourcing standards. In doing so, they will discover new business growth opportunities and dramatically improve their management of uncertainty.

Any next-gen model needs to account for the range of operational dynamics in two distinct streams:

1. The business that is selling direct to individual customers who are personally concerned with the accuracy of reporting on ESG compliance information.
2. The supplier that is applying technologies and agile operations to improve the effectiveness of their supply chain information submittals from end-to-end processes.

Moving Beyond What Has Been Available
The most widely used model in this area involves the action of a not-for-profit, third-party global membership organization, which has focused its efforts on coordinating the suppliers, standard-setting organizations, auditors and other stakeholders.

It gathers supplier data using a questionnaire that is reviewed prior to submission to the member companies (the sourcing companies). Everyone involved in the process is required to join the organization and pay a fee, which enables this membership company to use a variety of different standards and archived data to help their members make informed sourcing business decisions in approximately 150 countries.

A next-gen model will use an open-source, high-level information collection structure that is currently used in 180 countries, enabling the analysis of data using international standards on a SaaS-based platform that is designed as a management system. The standards are embedded within a company’s everyday functions, ensuring that the data entered in the SaaS platform conforms to the expectations of all stakeholders, including the end customers of any products and services. The entire supply chain uses the same model.

The standards that are utilized are derived from these organizations:

Ethical Trading Initiative
Social Accountability International
International Labor Organization
International Organization for Standardization
Global Reporting Initiative

ESG requirements are expressed through all these standards and guidelines which, regardless of the actual outcome, must be addressed in one form or another. It is critical to the entire supply chain and the customer experience that a “no regrets” strategy be applied; one that maintains the integrity of the operations, including consistently achieving customer satisfaction.

Building a SaaS-Based Supply Chain ESG Program
Utilizing a SaaS-based tool as the foundation for a management system will help suppliers or sourcing companies create, maintain and report on their ESG priorities. By integrating the same high-level structure that is employed in 180+ countries around the world, all the ESG stipulations will work together when addressed by a facility or end-to-end supply chain.

Competency-Based Training methods may be used to assist company personnel in completing the information that will be entered into the SaaS platform. The entire management system can be established and reviewed remotely, using ZOOM video conferencing software.

Once fully implemented, the ESG information in the SaaS-based tool can guide users in self-certifying the package and in providing a Conformity Statement on any aspect of the program on demand. The SaaS information can also be selectively shared with independent auditors in preparation of an audit, or since most large companies already use the international high-level structure in their operations, be used to replace internal audits with an e-audit capability.

The categories within the high-level structure include:

Codes of Conduct and Supplier Self-Determination in the Era of Supply Chain Auditing

Art Stewart MPM (Managing Partner) and SIP Collaborator Robert Pojasek, PhD, Harvard University.
(May 7, 2019.)

The competitive landscape for leading brands, many of which are publicly-held companies, is being transformed by the changing nature of risk and what is required to better manage uncertainty.

What’s driving this transformation?

For one thing, unlike any other time, companies are competing for more buyers of their products and services on price, speed and proximity. They are also competing for better suppliers and more favorable supplier relationships. All of this is re-calibrating their risk exposure.

Many leaders of these organizations acknowledge that threats to brand and reputation are consistently top concerns for them. Beyond lost revenue or asset degradation, a rapid decline in public trust or consumer confidence can taint a hard-earned brand identity, especially when many brands have staked their equity on aligning with customer values.

There is a tremendous amount of equity, as well as financial assets, held in a company’s supply chain. With an investment of this extent, the functional managers and divisional leaders of these companies are expected to operationalize policies to meet stakeholder expectations and improve corporate integrity while they also work to ensure top- and bottom-line growth.

Without skipping a beat, these sourcing companies are requiring suppliers to be upfront in their dealings with them and take ‘ownership’ of their relationships with the facilities that produce the products they sell to them. The effect is a cascading of the sourcing company’s values throughout multiple interdependent supply chains.

A Framework for Driving Expectations
One of the ways leading brands and publicly-held companies impose their standards on suppliers is through a Code of Conduct, which has become part of the expected content you’ll find on their websites. Companies use their codes of conduct to generally establish their mission and strategic objectives, then link them with their standards of professional conduct. In this manner, a Code of Conduct articulates the values an organization wishes to foster in its leaders and employees, thereby defining what they understand to be appropriate, ethical behavior.

Developing a Code of Conduct in a company is a process to reaching consensus on a uniform standard of behavior and the guidelines for maintaining that standard in alignment with what is not only acceptable to the company’s leadership (e.g., the Board), its suppliers, customers, and often shareholders and other investors – but the established norms of their industry, profession and operational context.

Investors in these companies now specifically require formal acceptance of a Supplier Code of Conduct. Traditionally, the suppler code was transmitted to first-tier suppliers by literally attaching it to a purchase order! The signature line on the purchase order was placed below a “notice” that by signing the purchase order, the supplier was acknowledging its intent to abide by the Code of Conduct. Transmitted in this way, the supplier code became a legal contract for compliance to the items presented in the code. History has proven, rather precipitously, that such a manner of compliance was not very effective.

Challenges in Working with the Sedex Partnership
This quagmire created an opportunity for the development of a membership company that would identify and contact the suppliers of the large sourcing companies. Sedex, an independent coordinating entity, assumed this unique role, which was concurrently driven by an opportunity to serve the supplier compliance requirements of the large big box retailers such as Walmart. Sedex became an intermediary that helped seed the development of audit standards and the corresponding oversight system.

The Sedex Members Ethical Trade Audit (SMETA) is one of the most widely used social and ethical audit methodologies worldwide. Some 20,000 audits are uploaded on the Sedex platform each year and another 60,000 audits are conducted for offline use. The current Sedex standard seeks to achieve commonality from the processing of a vast array of codes and incorporating the full farm-to-product development supply cycle, melding 80% of what the Fortune 100 require.

Sedex operates an online service that allows the large sourcing companies to collect, share and analyze information submitted by their suppliers with a compliance-focused ethical sourcing questionnaire. They also maintain a listing of approved auditors that are required to verify the information and create corrective actions when necessary; a concept that is currently used by many large companies.

Sedex provides instruction for outsourced auditors on what to search for when working with a supplier organization and suppliers must select an auditor from their approved list. Challenges emerge when you realize that less than 7% of the overall auditing activity conducted by Sedex is in the U.S. and Canada. Sedex flies in auditing teams from overseas jurisdictions, bringing language issues and cultural idiosyncrasies, in addition to expectations that are out of alignment with American business norms.

Another dilemma is that the Sedex questionnaire contains a large number of fixed answers where a supplier cannot add any wording to it. The questionnaire is black and white, with no shades of gray, requiring many of the responses to be a simple “yes” or “no.”

Despite suppliers being required to pay the auditor fees, Sedex has continued to only disclose to the supplier the general categories to be covered in the audit. The situation is exacerbated for suppliers when sourcing companies rely on questionnaires, checklists and audits that do not reflect the reality of what supplier organization employees are engaged in every day. As a result, suppliers find themselves far less prepared for what a Sedex-based audit will detect.

It’s Time for a Better Approach
With mounting pressure in meeting oversight expectations and navigating the expanding risk landscape, suppliers and auditors could employ a different concept with a range of conformance services that are not available through Sedex or other associations (such as the Responsible Business Alliance).

When a supplier is contacted by Sedex on behalf of one of their sourcing customers, their team could utilize a Competency-Based Training (CBT) approach in conjunction with an international high-level structure and a SaaS-based management system that uniquely integrates the most recent versions of all the global standards. Supplier organization leaders are then able to better compile and manage conformance information in four key areas that are essential to effective audit preparedness: Labor; Environment; Health and Safety; and Business Ethics.

Information is derived from standards currently in use in over 180 countries and is organized for teams using the framework of “Plan-Do-Check-Act (PDCA)”. The designated employees at each of the supplier locations submit the information under the supervision of the supplier’s top leader and a credentialed CBT facilitator.

This model enables a supplier organization to self-determine its conformance and “self-certify” to create conformity statements that include maturity matrices. Suppliers using an ESG-based Sourcing SaaS platform could report on a list of indicators, generated and approved for use in investor ESG evaluations by the World Federation of Exchanges and the Global Reporting Initiative. The Competency-Based Training program can be shared with the sourcing companies and the trained auditors with whom they are partnering.

All the essential information is maintained within the SaaS platform and is easily referenced when completing the Sedex compliance questionnaire. This new management system can help both the sourcing company customer and the supplier organization plan for an auditor visit to a facility. By setting aside a module for this purpose, the supplier may grant “permission” to the auditor or sourcing customer to access any area of the SaaS platform. This avoids the cumbersome downloading of information, enabling direct connection to the “objective evidence” of conformance and compliance activity through a simple URL.

For a sourcing company, an e-audit can be conducted by a competent certified auditor to acquire the “objective evidence” and use an approach that is far more rigorous and up-to-date than what Sedex currently offers. Plus, with the “objective evidence” becoming a “record” within the SaaS platform, conformance documentation is memorialized and protected from alterations. Internal auditors or any external third party would be able to officially verify the information and complete its certification.

This new approach represents a game changer for both the supplier organization and its sourcing company customer. Suppliers can initiate a presumptive move to having their conformance accepted without the need for a Sedex intervention. The process of audit preparedness becomes digitized. Competency-Based Training guides the designated leaders in mastering the SaaS structure, content and e-auditing – thereby opening up a new pathway for perpetual value creation and the discovery of unanticipated growth opportunities. SIP

Conscious CEO Awakenings: Human Capital Issues Catching Up

Art Stewart, MPM
Managing Partner
(October 5, 2018.)

Last Spring, I concluded an engagement with a manufacturing organization in Texas that required flying into Dallas early every Monday morning from the east coast. From DFW Airport I would pick up a rental and drive two hours across the serene southwest prairie to Waco, where the client occupied a large parcel of offices and production facilities.

The Waco of images past, with the 1993 burning of the Branch Davidian compound and the tragic death of 82 of its members along with 4 ATF agents, brought about its unfortunate tarnishing as a mecca for extremist groups and religious cults (even though the Davidian’s Mount Carmel compound was outside of Waco itself).

That imagery has dissipated over time into the brighter glow of HGTV’s “Fixer Upper” couple, Chip and Joanna Gaines. Their Magnolia Market empire has helped transition Waco into a booming tourist destination and locale for businesses from other states desiring Texas’ lower cost of operating.

What was most striking about living and working there, in contrast to the outdated perceptions most Americans have of Waco, was vividly illustrated each week in my nearly 100-mile trek up I-75 from DFW Airport, past the omnipresent Baylor University to the outskirts of central Waco.

With cousins and a grandmother having lived in Houston, I visited Texas regularly beginning in the 1960s and often traveled to far-reaching destinations of interest throughout the state. Texas was not foreign territory to me.

Dusty Brown Hills and Armadillos
On my first Monday commuting to Waco I expected a flashback of teenage memories watching tumbleweed blow across vast open plains and low dusty brown hills accentuated by clusters of cacti. There might have even been the thrill of an occasional spotting of armadillo. What was not anticipated was the extent of physical and energetic transformation represented in miles of dense commercial and residential development – from upscale retail and entertainment complexes to restored town centers and historic sites.

The once-open span of I-75, from the immediate edge of downtown Dallas to McLane Stadium at Baylor, had become an interconnected regional megaplex in just 20 years. Yes, miles of the old open I-75 remain, but they were more in patches interspersed with clusters of evolving development. Bit by bit, familiar brand names adorning hotels, restaurants and retail stores reflected a socio-economic-cultural alignment with the norms of the immediate community; it was the makings of a market tribe. I saw no more than three instances of open-carry in those six months. People exuded an air of prideful innocence and a confidence that comes from the allure of the rural, wide-open plain. Texans also exercise an engaging congeniality that can get downright seductive.

It seems to me that where economic prosperity prevails, and people thrive, you encounter a different consciousness with them in that community – one that can be confident yet thoughtful or overly certain and dismissive. It is a study of contrasts in human behavior. With new financial resources, it isn’t just personal tastes that change, but perception, worldview and expectations.

Much of the workforce in Waco is comprised of rural economy and highly-skilled (usually manufacturing or technology) workers with a peppering of C-suite executives and other professionals (e.g., the hospital sector). Everywhere, the financially successful rural economy workers were wired up no differently than what you’d find in mid-town New York. Mobile, digital, live streaming, discerning. The world caught up to, and accelerated a transformation of, one of the most rural and commercially underdeveloped regions in the U.S.

Consumer Transformation is Changing the Expectation for Work Environments
The irony in what I learned living and working amidst this booming Texas ecosystem was that Waco’s highly-connected market tribe of sophisticated rural workers had defined its own affluence and were living a more technology-savvy personal life than one would expect, given our misperceptions. Waco is analogous to what many CEOs in more traditional industries are now facing.

The transformation individuals experience in the consumer market involving their personal lives eventually changes the expectations for where they are employed. Personal lifestyle norms are placing new demands on work environments. Traditionally-oriented business models and cultures that have been the staple of manufacturing companies may now be shifting due to the personal expectations of their workforce – and their customers.

The modernization of many manufacturing processes and the adoption of production best practices have, in some ways, outpaced transformation of the worker experience within the organization culture in terms of employee engagement. For many of those companies, for many years, R&D or engineering had all the toys. We are seeing a new accountability to employee engagement as a priority as much as the continuing pressure to improve operating efficiency, productivity and risk management.

What else are we learning?
The old approach of managing “human resources” has become disabling. We’re in a big shift to understanding “personnel” as an asset or “human capital” requiring enablement and empowerment. If employees feel underutilized, they become undernourished and that can create an internal mass of under-performance.

Executive leaders recognize now a new awareness and perceptive ability on the part of stakeholders. Business values and purpose must be operationalized with leadership, management and engagement initiatives that will pass strict muster from smarter and more resourceful employees. The challenge is to improve human capital outcomes through integrity-based practices (such as ethical leadership) while also ensuring that everyone contributes their part to growth of the top and bottom line. Not easy.

Innovation-centric organizations strive to maintain a work environment of safety, support and candor. They emphasize cross-disciplinary approaches over jurisdictional, functional or political control. Fiefdoms and silos are the bane of hierarchical management models, not the lifeblood of operational interdependence that’s key for competitive resilience and sustained growth. Good structure and processes can partition individuals or fiefdoms that may try to thwart interdependence when they perceive a threat to their power.

Certain mindsets and behaviors that become ‘habits of destruction’ work to push against the triggers of change. They are often reinforced by flawed top-down, analytical methods which are outdated. Too many management processes work to identify the one ‘best’ strategy or solution when what is really needed is more bottom-up thinking or organic innovation.

A lot of organizations suffer from behaviors that reinforce the status quo, such as doubling down on defensive thinking, outdated mental models and contentment premised upon overconfidence. A range of factors work individually or collectively to threaten an organization’s ability to advance its state of competitive readiness. These include hierarchy, fear, decision bias, habit, centralization, inflexible business practices, rigid structures, skills deficits, short-term thinking (next quarter mentality), insufficient experimentation, lack of diversity, and no sense or commitment to purpose.

Developing a clear and fully articulated shared purpose is essential for developing a capability for natural adaptation. For employees to thrive they must be happy, have the will to fully buy-in, and commit to the corporate mission. Technology in and of itself is not a belief system, you need to develop capacities beyond it.

Organization culture must become a strategic asset by molding it, and leveraging it, to competitive advantage. Management systems can drive conformity and cohesion at the expense of diversity, divergence and contrarianism. Conscious conversations lead to cultural democracy and confidently adaptable organizations, which in turn encourage unfettered disruptive thinking. One way they accomplish this is by becoming devoid of politics.

See you on the road! SIP

Complex Dynamics Moving Supply Chain Concerns Front and Center

Art Stewart, MPM
Managing Partner
(August 28, 2018.)

Note: This blog post originally appeared on the web site of the Corporate Responsibility Association (CRA) in March 2014 as part of a series that Art Stewart authored in his role as a CRA Blogger.

A variety of factors are changing how organizations view – and calculate – risk, especially regarding competitiveness and business continuity. The concerns range from high capital requirements and lagging utilization rates, volatile energy costs, and expanding global distribution networks to capacity shortfalls, inadequate responses to product demand, infrastructure limitations, security concerns, and complex supply chain integration requirements.

For most industries, the rules of engagement have been shifting; in some instances, dramatically. Pressures to reduce wasted asset utilization, enhance sales and operations planning, and minimize avoidable risks must now be factored into a holistic view that incorporates end-to-end visibility of the global supply chain. Executives must balance driving revenue with lowering costs while also transitioning from a cost compression and containment orientation to one that re-engineers business process for new value creation in operations and the supply chain.

Loss of Control Precipitates Transformation
Aerospace is one industry that illustrates the extent to which externalities and other factors are injecting new risks and vulnerabilities into the competitiveness equation. A massive, integrated market with manufacturing revenues alone exceeding $700 billion, Aerospace companies can view their future with confidence as current estimates expect the global fleet to double in size by 2030.

Nevertheless, the global supply chain for Aerospace parts and raw materials has become increasingly splintered. Primary parts once procured from single sources are now produced by a wide, dynamic universe of standalone sources – each responsible for one or a few micro-components that are then integrated into a more intricate network involving disparate locales around the world.

As a result component access, production, distribution and integration can be greatly impacted by the most subtle of factors – creating a ripple effect across the supply chain in which sourcing companies have little or no direct control. Major occurrences, such as geopolitical unrest, terrorism or natural disasters, can inject fear into networks and create significant uncertainty in supply availability. For example, the tsunami in Japan subjected two major aircraft manufacturers to a disruption so severe that eventually they couldn’t access parts for the fuselage and wing structures of their new aircraft models for months.

There’s more to the aerospace picture: The industry has traditionally relied on labor concessions, capital investment in automation and software, and supplier renegotiation to achieve cost reductions and efficiency gains. Along with the uncertainty of fuel prices as the biggest risk airlines face, there is also an unprecedented level of global retirements expected among senior pilots over the next five to ten years. Factory schools have been established but they are not producing enough qualified personnel at a level that will offset what is now projected to become a worldwide personnel crisis.

On the brighter side, many aerospace analysts agree that the industry has entered a new manufacturing and supply paradigm that is bringing about a near revolution in efficiencies that were unheard of a few years ago. The technology revolution in component manufacturing has enabled certain countries to focus on particular aspects of the aircraft market – prioritizing their R&D dollars and developing advanced manufacturing or technological practices that the airlines want to source. Other players are acquiring pure production cost advantages merely from their location characteristics.

In Japan, enhanced heavy engineering capabilities and investments in battery R&D have enabled manufacturers to reduce costs and produce a better product in wing box and fuselage sections. Out of one region of Italy, advanced composite technologies are helping to bring about a major leap in aircraft design, on par with the introduction of the 747 or the Concorde.

Despite a very different R&D model today, one manufacturer cannot assume the risk for the entire design and development investment that’s required for major initiatives. With the prospect of no government backing or subsidies, manufacturers must create new models of collaboration to share the component and design risk with the micro-manufacturers and/or their suppliers.

These and many other supply chain partnerships are proving to promote better operations integration and synchronization of manufacturing, sales, finance, IT, marketing and distribution – which in turn reinforces supply throughput and velocity as well as network optimization and resiliency.

Supply chain partnerships can also relieve infrastructure constraints, reduce bottlenecks, and strengthen efficiencies – generating far greater margins and solidifying longer-term commitments that can protect revenue certainty on all sides of the value equation.

The Responsible Choice: Proactive Value Creation
For many years, one traditional approach to supply chain optimization has been to constrain and compartmentalize procurement personnel to a focus primarily on squeezing excesses out of the supply base – at any cost. Back then there was little view – or will – toward transforming how one thinks about EBITDA and profitability enhancements, especially if they focused on delivering differentiated value creation for the end customer.

Now, if you’re willing to change the nature of your supplier relationships and account for all stakeholders in the chain, you can achieve new efficiencies from a more organic enterprise development process. That, in turn, will more dependably enrich the capital base.

Transforming your supply chain into a mechanized driver of bottom-line value creation requires strengthening of the procurement organization through the integration of best practices, contract negotiation, and organizational structure. New formulas can re-orientate suppliers to a lower cost basis in direct materials; procurement professionals can become the leaders in a new collaborative communication s model between all supply chain interests.

Ultimately the goals should be more efficient processes and operations, strengthened productivity, enhanced resiliency with less downtime, and improved revenue. That in turn will deliver the capacity needed for greater empowerment of the end customer. It’s a more holistic approach to optimization of your top and bottom line.

Here are some questions to help guide your organization toward a more responsible supply chain strategy:

1. What are the priority factors for risk (new regulations, energy cost exposure, resource utilization, financial and human capital)?
2. What governance frameworks need to be established to uncover conflict and appropriately resolve it?
3. What incremental and game-changing sustainable business strategies can help maximize economic, human and ecological capitals (i.e., creating a sustainable supply chain)?
4. What can you do to help evolve your company’s culture to a truly collaborative way of working?
5. What metrics and incentives would help promote big-picture thinking?
6. How do you cultivate a supply base whose values align with yours – especially in corporate, environmental, and social responsibility?
7. How can you engage suppliers in an ongoing dialog that supports your innovation?
8. How do you ensure that your suppliers proactively manage total quality standards for their raw materials as well as those of their own suppliers throughout the chain?
9. What steps can you take now to personally transition your sourcing organization to a driver of value, versus a container of costs?
10. What internal tools and specialized knowledge are needed to integrate sources of new value? SIP

The Widening Divide to Transforming Business Value

Art Stewart, MPM
Managing Partner
(August 28, 2018.)

Note: This blog post originally appeared on the web site of the Corporate Responsibility Association (CRA) in December 2014 as part of a series that Art Stewart authored in his role as a CRA Blogger.

As the reporting sector achieves new milestones in transparency, materiality and integration, other segments of the global responsibility movement struggle amidst the natural tensions created by the missionary zeal of the change agents – and the reflexive resistance of the old-guard establishment who perceives change (to say nothing of transformation) as threatening.

It’s no stretch to recognize some correlation between what characterizes America’s current public policy debates, and the tug of war to fully embrace and assimilate responsible behavior in the journey to a new business paradigm.

Justice, inclusion, equal opportunity, liberty and resourcefulness are only a few of the themes that are playing out in both arenas. The corporate responsibility movement, with its various sub-sets that include Conscious Capitalism and Shared Value, parallels in important ways the broader push to transformation across society.

We see this clearly in how the financial and investment communities increasingly factor a range of traditionally soft drivers such as reputation and brand equity, ethical management, human capital practices, and leadership competency and integrity into a new equation for defining market value versus the traditional calculation for ‘valuation’.

Yet the push to achieve higher standards and more consistent compliance regarding the operational protocols for sustainable supply chains is being hampered, to an extent, by organization cultures and outdated procurement models. Widely applied practices, such as “Total Cost of Ownership” (TCO), incentivize cost containment and the squeezing of excesses out of the supply base over value creation. Procurement personnel are often constrained by policies that require approaching suppliers as cost drivers and inhibitors instead of strategic collaborators and value enablers.

With global networks becoming increasingly intricate and fractured, difficult manufacturing, sourcing, logistics and distribution challenges will only be solved by transparent, trust-based partnerships that reward innovation through open dialogue, team decision-making and interdependent business relationships. Taking a holistic approach to one’s position in the broader ecosystem must be institutionalized with reinforcing systems, processes and policies regarding ground-level operational issues. Internal teams need to take a different look at how they measure success, how problems are approached, and the manner in which opportunities are pursued.

Meanwhile, public stakeholders are grappling with a pervasive breach of trust and confidence regarding their historic relationship to various societal institutions. As a result, many corporations have cause to reconfigure their place in the life of the local communities in which their economic vitality is dependent upon. When an organization’s internal understanding of ‘reality’ diverges from the expectations of its own external constituency, gaps emerge bringing new risks and liabilities. C-suite leaders are now seeing that failing to effectively respond to expectations of accountability can trigger what is already a growing punitive mindset on the part of the American public, consumers and corporate watchdogs. Respecting that fear factor requires responding as diligently as they do when they work with regulatory and legal forces.

Widening divide creates opening for more conscious leadership
These dynamics, and a range of others, are widening the divide between two distinct streams of organization design – providing clarity for contrasting approaches to leadership. All of us can name the obvious players holding forth at both ends but most organizations are navigating the vast landscape that’s in-between the two.

On one end, the old-guard protectionist model reigns, requiring a reflexive clinging to what many argue are the dying assumptions of “conventional wisdom”. Traditional priorities such as share price, multiples, and equity ratios are reinforced by a “divide and conquer” pursuit of market domination. Authoritarian or top-down governance models are accompanied by a lack of disclosure regarding non-essential information (hording of intelligence), an “us or them” inside-out orientation and linear product push-pull strategies. Having the trust of employees and other stakeholders is presumed and mandated. Board dynamics can be incestuous and an ‘old boys club’ culture is perpetuated by a sense of privileged prerogative.

On the other end, an alternative paradigm is forming led, in part, by a new generation of self-actualized contrarians who see recalibrating the balance between profit and purpose as essential to any durable form of capitalism for the 21st century.

Such a vision accounts for the criticality of traditional financial drivers but within a context of re-apportionment. Accountability and transparency are essential for assimilating alternatives such as self-governing or flat management structures. Decision-making is premised upon knowledge management that flows easily through strategic clusters versus siloed business units. Traditional approaches to R&D are evolved to more collaborative innovation methods that better ensure multi-stakeholder throughput – such as Crowd Sourcing, Shared Value, cross-industry alliances and technology transfer programs.

For these organizations, an outside-in orientation is instinctive. The corporate agenda is more deliberately formed in alignment with public interests appropriate to the competitive context in which they operate. Public policy issues are managed less for liability containment and more to meet stakeholder aspirations. Corporate values and beliefs are “operationalized” into executable strategic acts or behaviors, which are benchmarked against KPIs and metrics for their impact upon value creation. These include human capital strategies such as employee “tours of duty” – and diversity practices that assimilate generational orientation along with diversity of thought or worldview, life experience, as well as cultural, family and community upbringing (norms of origin).

This new paradigm doesn’t shatter any ceilings (glass, pink or otherwise) as by nature, it does not enable traditional corporate socialization – such as groupthink or the politicized sub-cultures many of us have experienced. Ethics policies are used as guideposts to enhance resiliency and risk management, not as punitive oversight mechanisms. The trust of employees is seen as something to be earned and bestowed by consent. Boards are empowered through structures that protect independence.

A new form of leadership
How, then, will organizations create value in an era in which the mere notion of “value” is being redefined? I suggest that the path ahead requires a new form of leadership by those who truly see themselves as part of the ‘conscious’ next generation. These individuals will possess certain essential traits in order to obtain a state of “Conscious Leadership”: Change Agency; Strategic Influence (Shepherd); Emotional Acuity; Visionary Thinking/Peripheral Vision; a Systems Perspective; and a Seamless Integration of the Personal and Professional.

Here is a list of characteristics to compare against some of the old-guard behaviors we know all too well. How does your universe stack up?

“Conscious Leadership” is:

1. Exercised; not preached
2. Personal; not political
3. Consistent; not negotiable
4. Pervasive; not occasional
5. Dependable; not conditional
6. Courageous; not convenient
7. Risk tolerant; not complacent
8. Smart; not ignorant
9. Direct; not dysfunctional
10. Fluid; not fixed
11. Guiding; not controlling
12. Confident; not arrogant
13. Influential; not authoritarian
14. Motivated by altruism; not driven by hubris
15. Models consensus by example
16. Walks the talk; avoids dictating a prescribed “norm”
17. Strives for excellence as habit; “average” is contrary to its nature.

Big Data and the Coming Age of Radical Transparency

Art Stewart, MPM
Managing Partner
(April 17, 2017.)

Conscious Leader Conversations
Art speaks with CSR and Technology Pioneer Bahar Gidwani, Co-Founder and CEO of CSRHub.

Art Stewart: Bahar, given all the recent advances in responsible business practices such as GRI, CDP, SASB (the Sustainability Accounting Standards Board), Dodd-Frank and Sarbanes-Oxley, why do we have this persistent gap between what is actually going on and the public’s recognition of the extent to which business is transforming itself?

Bahar Gidwani: There are a couple of drivers in this scenario, Art. First, it’s a big company versus small company context. A lot of focus is on what the 100 largest companies are doing as we now have a strong feedback loop between society and company performance. When you look at the next 2,000-3,000 companies, many of them do not experience that level of direct pressure or attention from the public or NGOs. As a result, they are moving along doing the best they can and are not necessarily being subjected to the same level of scrutiny or discipline. That is one of the reasons for the gap between perception and reality that has emerged along with a deep sense of distrust.

While a lot of people work for the top 100 companies, most work with or know someone from smaller companies and recognize that they may not be behaving quite as well as they should. They have direct personal experience with the fact that some companies aren’t telling the truth. It’s not just a theory but a big company versus small company distinction. The fertile ground in moving forward is to bring pressure on the medium size and smaller organizations. There are many tools to do that such as obvious ones like social networking. If we can drive consumer preferences or supply chain behaviors through adherence to ethical standards, then such standards become a meaningful contributor to financial performance.

Art Stewart: Is it fundamentally a communications issue given that the largest 100 companies are naturally more exposed due to their enormous interconnected stakeholder universe?

Bahar Gidwani: Likely. It is also due to the watchdog community being well-suited to tracking large company behavior. There is a legacy business based around analysts interacting with a company, chatting with the people, visiting and auditing. This is too big of a world, too complex of an economy for such an old-style approach. It is time to shift to a new operating mode that is web-based, individual and crowd configured – driven to a great extent by new capabilities in aggregating large amounts of data. You’ll end up with radical transparency that enables the influencing of a much broader range of people.

Art Stewart: How can Big Data be leveraged to advance radical transparency and accountability?

Bahar Gidwani: Think about the consumer point of purchase experience; all the information that has been gathered on us, stored, analyzed and shared by advertisers to enhance the efficiency with which they entice you to buy. We can effectively use the same kind of Big Data techniques to help individuals affect the performance of companies. If you’re a procurement manager and trying to decide who to purchase materials from, you can get information pushed to you on the ethical track record of that supply candidate.

Traditionally, these types of assessments were done using mostly credit data. Being able to do behavioral comparisons across an aggregate set of criteria will revolutionize corporate responsibility practice. We haven’t been able to leverage that kind of data integration yet on sustainability but I believe we will soon. Credit is one of the first Big Data businesses and it has shown us the way. Now we need to create a sustainability, or trust, score and make that assessment broadly available to support a range of decision making scenarios.

Art Stewart: A trust score certainly addresses this notion of radical transparency…

Bahar Gidwani: If you think about how credit scores work, you can access credit history information and a score for individuals and companies that is pretty consistent from one credit bureau to another. There is a consistent view because they’re drawing on somewhat the same data involving purchase and payment history, assets and other factors. Recently we’ve seen new credit rating systems that incorporate who your friends are and the extent of your social network on the theory that those factors are legitimate determinants of your credit risk or that they can enhance your credit-worthiness.

It is possible to apply the same kind of formulation to determine ethics and trust by assessing all the different data on what is said about you or written about your company. We can look at what kinds of fines you’ve paid or the lawsuits that have been filed. Then we can analyze what various types of people have said about you and see who you associate with the same way. We can see who’s in your supply chain and customer base. You can determine a trust score very much like a financial credit score.

As an organization, if you are comprehensive in your self-reporting, lots of people can acquire data on a range of factors that form some measure of trust – including your sustainability performance. SASB can be one of those components. It will be fairly uniform across a group of companies. If you review 130 mining companies and all of them have reported the same eleven things, you hope that the data is a uniform set. The truth is it may not be. Each company might have misunderstood or reinterpreted the data in its own way and, unfortunately, some companies may have lied. With SASB based on company reported data, it doesn’t really give you the full 360 view that you need on trust. This kind of data from companies is an important part of what we’re looking for, but only if it can be externally verified and cross referenced.

The external data is actually the more exciting part and growing the fastest. It is pulled from web tools and sites that are tracking consumer behavior or gathering feedback from supply chain analytics. It also pulls from the broad-based work of various NGOs who are gathering their own data on large numbers of companies in order to achieve social purposes.

Art Stewart: What are the next steps in optimizing the capability you are describing so that you can produce the most reliable snapshot for a trust score or ranking?

Bahar Gidwani: You first make the data free or release it. People may have to pay something for the data, but it has to be a small amount and it must be easy to access. One of the problems we continue to have is there are chunks of data that are not yet shared. One company will audit a supplier, find problems, but not share what they found. The need now is to get certain types of data more broadly shared and sharable. There may have to be ways in which it’s anonymized to address privacy concerns.

We are starting to have enough data to rate at least 10,000 companies and probably soon close to 50,000. This pushes the boundary of where data is available downward into the general market. Then you have to build algorithms to understand each source of data and factor in its biases. You need to account for certain types of data that are missing, that some is more accurate or more useful for certain things; that the mapping, normalizing and aggregating process done by machines moves us away from the human touch points that provide interpretive decisions. It is a shift to a model where machines analyze all the data and provide us with the facts we need as human beings in order to make human decisions.

Art Stewart: You have articulated the ultimate vision for a trust ranking. How far are we from having something more reliable than where we are now?

Bahar Gidwani: By the end of last year we were rating about 13,000 companies just on sustainability. By 2016 we hope it will be 50,000. That’s not enough because in our everyday lives we probably touch 100,000 to 200,000 companies.

It is not possible to cover 100% of life; we can’t rate everything. However, once you know something about 50,000 companies, most industrial or supply chain decisions can be censored through a trust score. Maybe 80-90% of consumer buying decisions can also be filtered as well as many ad buying decisions. Ads you view through your browser could be tuned to suit your particular needs or preferences based upon trust-related criteria or characteristics. All of this is within reach, perhaps a year or two. The question is will it happen?

Art Stewart: Where are we now in the global movement of more responsible business practices? What are the greatest challenges immediately ahead?

Bahar Gidwani: Progress has slowed. We pretty much know everything regarding the top 1,000 companies and where they stand. Reaching that threshold has slowed down improvements. Integrated reporting is moving forward, but many people question whether it is going to make that much of a difference. The challenge ahead is getting the standards that we set for bigger companies to be applied to smaller and medium size organizations – as well as private companies, not-for-profits and government entities. We have all the tools we need and we’ve built a frame. One room is complete; now the rest of the house needs to be finished.

Art Stewart: What is required to encourage real participation from mid-market companies and even the not-for-profits?

Bahar Gidwani: Here is where the entry of SASB is exciting as it effectively forces every publicly traded company that has a U.S. listing to conform to at least a minimal amount of disclosure. If they don’t conform to what SASB suggests are standard material disclosures for their particular industry, they can be sued. Now they may not all be sued instantly, but say their profits are off and there was a provision in the SASB materiality standards that they didn’t disclose that turns out to have been material, that will create a problem. Once it becomes generally accepted accounting practice for larger public companies, private entities tend to hop on board because they have stakeholders who are going to hold them to the same standard. As the accounting firms who conduct the audits become more exposed, they will increasingly drive compliance.

Art Stewart: Do you agree that the new level of interdependency emerging across the global supply chain will be a transformational factor in the impact of initiatives such as SASB?

Bahar Gidwani: Yes. For instance, if SASB requires disclosure of scope two carbon use, then anyone who sells to large companies will be required to disclose how much carbon their business activities are generating. The requirement to measure carbon will necessitate buying software, hiring people, getting tools in place and figuring it out. Sourcing companies may then have to request their suppliers to disclose how much carbon they are generating. SASB may trigger a cascade of new compliance activity throughout the U.S. economy as certain types of reporting will become mandatory. Everyone is watching SASB. Many companies that report in the U.S. are foreign entities. The new requirements will automatically start affecting the rest of the world. Companies that start reporting under SASB will encourage their peers to share the burden through their exchanges and other means, embedding the standards.

The fundamental reality is that just about every company is quickly becoming a participant, to some extent, in the global supply chain; that fact will ensure this scenario. SASB is, therefore, transformational. Everybody wants a safe harbor of not being sued and SASB will deliver it. The downside is: Factors that are deemed as immaterial will be left out of the disclosure picture, which makes SASB somewhat regressive. SASB is essentially a means in which companies may actually take a step back on their CSR commitments to consolidate the number of things that need to be reported.

SASB is going to make sure that investors get a few pieces of data that they think they might want to have. It is investor-focused, not stakeholder-focused. Employees, regulators, all kinds of other stakeholders aren’t going to get the data necessarily that they need or want because companies may actually report less than they used to – or less frequently. The company derived data stream will be broadened to more companies, but narrowed to a smaller set of items. The CSR report will become much less important and so will the annual report. What will emerge as more important is what a company’s suppliers, customers and employees have to say. SIP

Widely recognized as a corporate responsibility and technology pioneer, Bahar Gidwani is Co-Founder and CEO of CSRHub – a global web platform that tracks corporate social responsibility and sustainability metrics for more than 14,000 companies. The site has more than 14,000 users comprised of corporate managers, researchers and socially-conscious individuals. Their ratings are used to manage environmental, governance, social, employment and community issues. The site’s Big Data system aggregates and normalizes tens of millions of data points from more than 380 different sources. A Chartered Financial Analyst (CFA), Bahar was previously CEO of Index Stock Imagery, Vice President at Kidder, Peabody & Co., a Senior Associate for McKinsey and a Software Analyst at Burroughs Corporation.