Episode #5: Stakeholders (Part 2)
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Stakeholder and Conscious Capitalism (Part 2): join us for this deeper dive into why stakeholders matter now more than ever, listen as Timothy and Raj discuss importance and relevance of the second pillar of Conscious Capitalism.
Conley, C. (2007). Peak: How Great Companies Get Their Mojo from Maslow. John Wiley & Sons.
Fisher, R., Ury, W. (2012). Getting to Yes: Negotiating an Agreement Without Giving In. Random House Business.
Mackey, J., Sisodia, R. (2014). Conscious Capitalism: Liberating the Heroic Spirit of Business. Harvard Business Review Press.
Sisodia, R., Henry, T., Eckschmidt, T. (2018). Conscious Capitalism Field Guide. Harvard Business Review Press.
Timothy: Hi everyone, and welcome to Episode 5 of The Conscious Capitalists Podcast, with myself, Timothy Henry, and my partner in Conscious Capitalism, Raj Sisodia. Hi Raj!
Raj: Hi Timothy, good to see you again.
Timothy: Lat time, we spoke about some of the basics of stakeholder orientation, and today we would like to go a little deeper with that conversation.
Do we really understand our stakeholders? Do we really understand their needs? Not what they need from us, but what are their problems? What are the issues that they face? I was particularly touched working with one company that’s in the airport logistics area where we brought them together, I got their executive team together and their executive team was looking through the stakeholders and realized that being in the airport logistics, one of their stakeholders were clearly the security groups that they work with in each country and they realized that there was an interesting opportunity for them to host a meeting that had the airport authorities, had some software providers who were providing the logistics software, a couple of the big national security groups that were involved in monitoring the security of these airports, and bringing them together and saying, hey, how can we solve this problem that we have across the world. Here we’ve got two really big airports talking about the issues that they’ve got. They’ve got the government people talking about the issues they’ve got. They’ve got their experience, their people in the room, and they’ve got the software in the background sort of saying like how can we tile these pieces together in a meaningful way that everybody can track an item from the time it enters the airport to the time it leaves, and they received tremendous benefit out of that idea and bringing those people together and created tremendous goodwill with the airport authorities around this, which just was really helpful in further marketing to other airport authorities because there was a buzz around them of like, wow, did you see what they were doing, this forward thinking approach to solving problems that our stakeholders and which we are a part of and if we can solve it, the whole system is better, strong, in this case more secure, and cheaper to manage. So, it was a win/win for multiple people in terms of the safety at the airports, the ability to smooth and quicken the pace of logistics so that things moved faster and in a more secure way.
Raj: That’s a great example. So I think this is not an or but an and, right? So we want to look at each individual stakeholder. It’s like a family, right? You want to spend one on one time with each kid and understand them deeply and then you want to think of the family as a system. So, with each of the stakeholders having deep listening really, empathetic listening and understanding their pain points and so forth, all of which are opportunities for value creation. And the way Chip Conley talked about it in his book, Peak, was he used Maslow’s Hierarchy of Needs with each of his stakeholders. He distilled it down to three for employees. It was job, career, and calling. For investors it was returns, impact, and legacy. And for customers, they had similar kinds of things. So we can think about each stakeholder, go deep with them, and understand exactly how we can serve them at a deeper level in a win/win way, and then bring them all together. Once we’ve done that, I think that should come first, the deep listening, understanding, and aligning what we do for them, and then we come together from that place to cocreate even at the next level across stakeholders. I think that would be a powerful combination of things to do.
Timothy: Well you know, as you say that, you brought up Chip’s example of investors and I think the elephant in the room in many of the discussions we have is what about the shareholder? Because one of the things that we’re not doing here is we’re not ignoring the shareholder. We think that the shareholder is an extremely important stakeholder and needs to have a seat at the table. Now the other side of that is…I know a phrase that you and I have talked about in the past, you get the investors you work for or the investors you deserve. So when people say, well, our investors or stakeholders, they’re not in this space. Then we start to have this question of alignment. Are the investors aligned with the purpose and values that we’re trying to build our business around? And are we willing to do the work and at times say no to money in order to attract and nurture the right type of investors, the investors who are looking for long-term sustainable value, who are wanting to be informed about how we’re creating shared value, who are looking at this from the perspective of being, in a sense, patient capital versus the activists. I think it’s also important to look at your shareholders and start to say how do we create better communication with our shareholders? How do we make sure that they understand exactly why we’re doing these things and bring them along on the journey and maybe even, dread the thought, invite some of them to participate in some of these stakeholder meetings that we’re having so that they can understand and have a voice at the table.
Raj: Yeah, and they have to be part of it, but you have to be selective. I think one of the most critical relationships is who you choose to take money from because it is a long-term relationship. I remember Ron Shaich (the Founder of Au Bons Pain and Panera Bread) gave a very powerful talk about that, that a lot of people, when they are looking to raise capital, whether it’s venture capital or other kinds of capital, they’ll simply look at how much are they willing to value our company at, that and they’ll go with he maximum valuation without looking at the alignment among other things.
Raj: And that can come back to really hurt you and you can lose control and the company can be taken off in a whole different direction as a result of that, so it really is a critical decision. And anytime that you have a relationship with a transaction, then you become selective. With the customers, you won’t just say every customer is the right customer. We have customers who align with us on our purpose and values and those are the ones we should really focus on. And obviously, with employees as well, our purpose should resonate with their purpose, our values should be aligned so that their work indeed goes from being a job to a career to a calling that even if they win the lottery on Friday, they still will show up on Monday because the work has meaning for them beyond the paycheck. So again, being selective is very important. The investor one is especially critical because employees can’t hijack and take your company away from you and neither can customers, but investors can, because many times the founders have lost control and John Mackey, I think, likens it to venture capitalists are like hitchhikers with credit cards, right? And as long as you’re going in their direction they’ll help pay for the gas, but when you decide you’re taking the right fork and they want to go to the left fork, they’ll leave you in a ditch and take the car.
Timothy: Well, I like to think that’s more the private equity rather than the venture capital, but you’re right. It is doing your due diligence on where you’re getting the money and what are their expectations for the long term and how do you make sure, particularly, in the time horizons match up.
Raj: Yeah, they have an exit strategy, that’s a real warning sign. And what is that exit strategy and how is it going to impact this business?
Timothy: Yep. Have that discussion upfront. The other last point I’d like to make about some of these particular stakeholders is a very popular phrase all of a sudden is how resilient is your supply chain, so with COVID everybody is now suddenly looking and going, well, we’re suddenly getting this idea, oh, some supply chains are more resilient than others and it’s fascinating because if you look at it through the long-term relational point of view versus the short-term transactional point of view. You start to see a strong core relation between the long-term relational point of view and the resiliency of your supply chain. So when you create deep partnerships with your suppliers, when you are cocreating with them products or cocreating logistics and managing those in a relational point of view, then you’re much more likely to be looking to support each other during these difficult times. As I remember Kip Kendall from The Container Store saying when it comes down to that last palette of the hottest product of the season and the supplier is going to decide who gets it, it’s not always based on the price alone, and I think we’re seeing that with resilience.
Raj: It is, and I think part of it also, it’s a tricky balance between having a strong relationship and exclusive suppliers and actually having multiple suppliers that are able to meet those needs, so having multiple relationships, not just a single relationship in each of those areas I think is also important, just from a resilience standpoint.
Timothy: Yeah. I think like L’Oréal has taken a very strong approach with some of its suppliers as a reaction to COVID. I mean they have… with their smaller suppliers they have said, listen, we’re going to make almost immediate payments to you because we recognize that you’re in a financially difficult situation and so we’re going to, rather than extend our terms like some companies are, so we’ve got to preserve cash, we’re going to extend our term, for the smaller, more vulnerable suppliers, they’ve said, hey, listen, how do we help you with your cash position? We can do that by paying you faster than we have in the past, so in a sense, counterintuitive at one level and on the other hand by keeping a thriving set of smaller suppliers on the comeback they will be in a much healthier position.
Raj: Also what it means to think about them as stakeholders and not just as suppliers, right? So their well-being matters to you inherently and of course it’s going to help your business if they are thriving as well.
Timothy: My favorite story in this space, my favorite current story is actually with a company called The Body Shop and The Body Shop obviously was very iconic with Anita Roddick when it started in the 90s, maybe one of the first conscious capitalist companies that came out of the closet, so to speak, but recently purchased by Natura and they’ve really revived it as a company with purpose and one of the big initiatives they’ve had is with their suppliers in Ghana of shea butter, so they’ve got an initiative to help women farmers and collectives, farm collectives, and get better at the collecting and distribution logistics behind the shea butter that they produce and getting it into the products that The Body Shop uses. And they’re launched a campaign in their stores where you go in and you see big pictures of these women working on the farms and you see the product that this goes into and in a sense they’ve connected their suppliers with their customers, who now have a story about when I buy this shea butter I’m actually helping to support these women collectives in Ghana make a living wage and by creating this sense of shared value and taking a stakeholder point of view, you’ve actually created more value for the business as customers become more loyal to your brand, and you’ve got a pretty cool product.
Raj: No, that reminds me of the need to create more connective tissue across your stakeholders and to get them to actually know each other because usually they only interact with the company and the company interacts with each of them separately, but like Whole Foods would have farmers markets in their parking lot, the same farmers who supplied the store once a week or some frequency would actually directly deal with the customers and Whole Foods would be part of that, but it’s creating that link, the next time I go into the store and I see the name of that particular farmer, I remember that. So I think all of that works to create the sense of oneness across stakeholders, which ultimately then benefits everybody, including the company, as I’m reminded of the classic story of Whole Foods when they were just two years old, and they had that flood in Austin, Texas and essentially destroyed the company. They only had one store and all the inventory was destroyed, all the equipment was destroyed. They had already maxed out their credit line and they owed a bunch of money to their suppliers, so they were bankrupt. They were $400,000 in the red that morning and essentially they thought they would have to shut down and the employees were standing around and some of them were crying because this was the end of the best job they ever had. And the next thing they saw is some of their customers are showing up, the community members are showing up, and others, and they are carrying buckets and mops and they said, come on guys, let’s clean it up. Let’s get this thing fixed up and operational again. And they said, we don’t know if we can do that. They said, let’s just try. So they did that and the employees started working to clean the place up and eventually the suppliers came around and they said, wow, there’s something special going on here so we’re going to restock you on credit and we will write off some of this inventory lost and the bankers came and doubled their credit line even though they didn’t really warrant it from a financial basis, and the friends and family who had invested decided to reinvest what they had invested before and then people were setting up bake sales and music concerts to raise money for Whole Foods.
So were it not for their stakeholders, that company would have died in the crib essentially. It was an infant. But because of that and the way they treated all of those stakeholders and the relationships they had built, those stakeholders rallied around and kept them alive so that way they can be a $16 billion company. And it instilled in them a deep sense of gratitude toward their stakeholders to say we need to be worthy of this love that was given to us, and so it really embedded that orientation into the company in a deeper way. I think that’s…not all companies have to go through that to recognize the importance of stakeholders.
Timothy: Well, I think that’s the other…there’s two other points and then probably wrap it up. The last point is the one you just brought up which is bake it into the DNA of the company. It’s not just enough that the executives at the top are trying to figure out how our stakeholder strategy plays out. It’s really bringing the notion of stakeholders throughout the whole company. We talk about Whole Foods a lot and one of the things they do a great job of is in their leadership development program of asking each leader who are your stakeholders, so that people can have a tangible sense of the company has stakeholders, I have stakeholders. Who are my stakeholders? Do I understand their needs? Am I thinking win/win with them? And you get into the whole training that goes with appreciative inquiry, that goes with the Bill Ury getting to yes with yourself and then with others in creating a win/win mentality. How do you really look for that win/win?
And then I think the final point is that critical to all of this is getting your Board to understand the value and the approach you’re taking with stakeholders, and/or the Board to be asking about it, and that’s where the ESG piece becomes quite interesting because as the pressure comes for investors to be reporting on ESG, it’s at least forcing the Board Members to ask the Executive Team, what are we doing in this thing called stakeholders? And that’s the opportunity for the Executive Team then to start to talk about how they are creating a business strategy aligned with their purpose and their stakeholder approach to create this long-term sustainable value, and then the final piece of that, of course, becomes if that’s true, how is the Board starting to bake that into the compensation system, because I think, in the end, if the compensation system is only focused on the financial returns, then that’s what you will get and, as we know, companies that have a broader point of view and care about their people and their customers and their suppliers, if you start to build those into the comp system, then you start to see different behavior and ultimately this becomes part of the fabric of how the business operates.
Raj: Right. So there has to be full alignment between everything that you do; what you say, what your policies are, how you hire, how you develop, how you compensate, how you incentivize, all of that has to be aligned. I’m reminded, when you talked about the Board, that Amazon has a practice, which a lot of people have heard about, they have an empty chair in every meeting, not just Board meetings, but all meetings, and that chair represents the customer and before the meeting ends you’d better talk about what does this mean for the customer? And that enables them to become perhaps the most customer-centric company in the world by many measures. But it also points to sort of an imbalance. What about a chair for the employees? What about a chair for the community or anybody else that really matters? And so it says that we need an ongoing way to make sure that the stakeholder perspective is present in all deliberations and that maybe that there is like a stakeholder council represented so we don’t just wait for a future search every five years, but on an ongoing basis we’ve got a sounding board to say how does this land with different stakeholders, and there can be an advisory board or an advisory group.
Timothy: Well, I love that idea because I think it also plays into this whole ESG movement. I would think that we’ve got a governance committee, we have an audit committee, at some point we’re going to have an ESG committee that is actually looking at all of the stakeholders and how are we doing across these things, because if we’re going to be reporting it to our investors, and it’s integrated into our strategy and into our culture, we have to have the Board really pay attention and focus to this in some kind of real meaningful way. Love it Raj.
Thank you so much for your time and attention today and thank you all for listening. If you have any thoughts or comments about today’s session, please go to theconsciouscapitalists.com and send us your feedback, and of course, on whatever platform you’re listening to, please subscribe. Thanks so much, Raj.
Raj: Thank you, Timothy.