Why do companies with strong Environmental, Social, and Governance (ESG) results tend to perform better financially? Lower operational costs and stronger employee and customer engagement are a few visible reasons. However, our interviews with over twenty business executives indicate a less obvious driver: ESG provides companies with valuable new organizational muscles. In other words, the actions you need take to take to deliver on your ESG promise will indirectly make the rest of your business stronger.
Business leaders traditionally consider their impact on three main stakeholders: customers, employees, and shareholders. ESG adds a new set of stakeholders – the environment, government, and local communities. To serve these new stakeholders, companies must be much more sophisticated, excelling at:
- Collaborating across organizational boundaries to align internally toward a common purpose
- Innovating by solving complex, novel challenges with few easy answers
- Sharpening external listening and sensing skills
- Strengthening relationships with regulators and policymakers, making trade-offs in short and long term time horizons
These are important muscles not just for ESG initiatives but for product development, service excellence, and creating new business models – challenges facing most businesses today.
Here’s an example of how delivering on your ESG purpose, can train organization muscles for other purposes…
A financial services company had a set of fiercely independent business units (BUs) that struggled to work together, even though they shared many similar characteristics in terms of customers and products. Each BU wanted corporate services (HR, Finance, IT, etc.) highly customized to their unique needs. In many cases, services had become so tailored that corporate could not provide efficient support resulting in unrewarded complexity. Corporate functions would then issue rigid, uniform regulations in an effort to create some level of standardization. Policy, practices, and services where neither fit for purpose or efficient and both corporate center and BU leaders were frustrated.
Meanwhile, senior executives wanted to create a more coherent approach to corporate giving and other ESG initiatives across the company. They rightly diagnosed that there weren’t strong precedents for having complex conversations across the enterprise. While this would be hard, it was also an opportunity to practice making decisions together. The senior execs started with a clear, business-linked ESG message that they brought to employees, investors, and customers with a strong “why” behind the campaign. In parallel, they brought together BU and corporate function leaders to create goals and how those goals would play out for each part of the business. Twenty leaders created a framework for enterprise consistency while allowing BU freedom. For example, they decided to measure charitable donations consistently to be able to tell a cohesive story of their collective impact. They also decided BUs would select their own financial education charities in order to stay connected to their local markets. And, they decided to establish a regular forum to collaboratively make decisions and achieve the charitable giving goal in a way that worked for the enterprise strategy as well as local business unit strategies.
This center-led approach was new for the company. It quickly became a powerful mechanism that the leaders wanted to apply to similar problems that needed enterprise consistency, but business unit freedom. For example, Risk Management created a framework for consistently assessing and comparing risk across the enterprise that also allowed BUs to assess risk in a way that was relevant to their local situation and regulators.
How you can get started… ESG has to be built on a shared purpose. Use alignment around ESG goals to practice having honest conversations about where the parts of the enterprise need to have shared strategy and where they should have differences. Use organization design tools to build the needed connective tissue across the enterprise where collaboration is needed. Create formalized networks made up of groups that haven’t successfully collaborated before, and hold them collectively accountable for achieving goals. Change the role of corporate functions to be connectors, best practice identifiers, and facilitators across the business units, while articulating the clear enterprise boundaries. Capture learnings and transfer them to other initiatives that need center-led global collaboration.
Use your ESG initiatives to not only have your company do good. Use them to have your company learn to do well.
Ian Renner is a Manager in Accenture’s Operating Model & Organization Design global practice and a member of the Kates Kesler team.