Sustainablog

This blog will cover some news items related to Sustainability: Corporate Social Responsibility, Stewardship, Environmental management, etc.

9.7.05

Text of the G8 Climate Change, Clean Energy and Sustainable Development agreement and the Gleneagles plan of action

G8 Gleneagles 2005: Climate Change, Clean Energy and Sustainable
Development
Text of the G8 Climate Change, Clean Energy and Sustainable Development
agreement and the Gleneagles plan of action
G8 Gleneagles 2005 agreement
1. We face serious and linked challenges in tackling climate change,
promoting clean energy and achieving sustainable development globally.
(a) Climate change is a serious and long-term challenge that has the
potential to affect every part of the globe. We know that increased need
and use of energy from fossil fuels, and other human activities,
contribute in large part to increases in greenhouse gases associated with
the warming of our Earth's surface. While uncertainties remain in our
understanding of climate science, we know enough to act now to put
ourselves on a path to slow and, as the science justifies, stop and then
reverse the growth of greenhouse gases.
(b) Global energy demands are expected to grow by 60% over the next 25
years. This has the potential to cause a significant increase in
greenhouse gas emissions associated with climate change.
(c) Secure, reliable and affordable energy sources are fundamental to
economic stability and development. Rising energy demand poses a challenge
to energy security given increased reliance on global energy markets.
(d) Reducing pollution protects public health and ecosystems. This is
particularly true in the developing world. There is a need to improve air
and water quality in order to alleviate suffering from respiratory
disease, reduce public health costs and prolong lives.
(e) Around 2 billion people lack modern energy services. We need to work
with our partners to increase access to energy if we are to support the
achievement of the goals agreed at the Millennium Summit in 2000.
2. We will act with resolve and urgency now to meet our shared and
multiple objectives of reducing greenhouse gas emissions, improving the
global environment, enhancing energy security and cutting air pollution in
conjunction with our vigorous efforts to reduce poverty.
3. It is in our global interests to work together, and in partnership with
major emerging economies, to find ways to achieve substantial reductions
in greenhouse gas emissions and our other key objectives, including the
promotion of low-emitting energy systems. The world's developed economies
have a responsibility to act.
4. We reaffirm our commitment to the UNFCCC and to its ultimate objective
to stabilise greenhouse gas concentrations in the atmosphere at a level
that prevents dangerous anthropogenic interference with the climate
system. We reaffirm the importance of the work of the Intergovernmental
Panel on Climate Change and look forward to its 2007 report.
5. We face a moment of opportunity. Over the next 25 years, an estimated
$16 trillion will need to be invested in the world's energy systems.
According to the IEA, there are significant opportunities to invest this
capital cost-effectively in cleaner energy technologies and energy
efficiency. Because decisions being taken today could lock in investment
and increase emissions for decades to come, it is important to act wisely
now.
6. We will, therefore take further action to:
(a) promote innovation, energy efficiency, conservation, improve policy,
regulatory and financing frameworks; and accelerate deployment of cleaner
technologies, particularly lower-emitting technologies
(b) work with developing countries to enhance private investment and
transfer of technologies, taking into account their own energy needs and
priorities.
(c) raise awareness of climate change and our other multiple challenges,
and the means of dealing with them; and make available the information
which business and consumers need to make better use of energy and reduce
emissions.
7. Adaptation to the effects of climate change due to both natural and
human factors is a high priority for all nations, particularly in areas
that may experience the most significant change, such as the Arctic, the
African Sahel and other semi-arid regions, low-lying coastal zones, and
small island states also subject to subsidence. As we work on our own
adaptation strategies, we will work with developing countries on building
capacity to help them improve their resilience and integrate adaptation
goals into sustainable development strategies.
8. Tackling climate change and promoting clean technologies, while
pursuing energy security and sustainable development, will require a
global concerted effort over a sustained period.
9. We therefore agree to take forward a Dialogue on Climate Change, Clean
Energy and Sustainable Development, and invite other interested countries
with significant energy needs to join us. We will:
(a) address the strategic challenge of transforming our energy systems to
create a more secure and sustainable future;
(b) monitor implementation of the commitments made in the Gleneagles Plan
of Action and explore how to build on this progress; and
(c) share best practice between participating governments.
10. We will ask our Governments to take the Dialogue forward. We welcome
Japan's offer to receive a report at the G8 Summit in 2008.
11. We will work with appropriate partnerships, institutions and
initiatives including the International Energy Agency (IEA) and World
Bank:
(a) The IEA will advise on alternative energy scenarios and strategies
aimed at a clean clever and competitive energy future.
(b) The World Bank will take a leadership role in creating an new
framework for clean energy and development, including investment and
financing.
12. Following the success of the Energy and Environment Ministerial
Roundtable held in London in March, the UK will hold meetings to take the
Dialogue forward in the second half of this year, including by identifying
specific implementation plans for carrying out each of the commitments
under the Plan of Action.
13. We welcome the Russian decision to focus on energy in its Presidency
of the G8 in 2006 and the programme of meetings that Russia plans to hold.
14. We acknowledge that the UNFCCC is the appropriate forum for
negotiating future action on climate change. Those of us who have ratified
the Kyoto Protocol welcome its entry into force and will work to make it a
success.
15. We will work together to advance the goals and objectives we have
agreed today to inform the work of the UN Climate Change Conference in
Montreal 2005. We are committed to move forward in that forum the global
discussion on long-term co-operative action to address climate change.
Gleneagles Plan of Action
1. We will take forward actions in the following key areas:
Transforming the way we use energy
Powering a cleaner future
Promoting research and development
Financing the transition to cleaner energy
Managing the impact of climate change
Tackling illegal logging
Transforming the way we use energy
2. Improvements to energy efficiency have benefits for economic growth and
the environment, as well as co-benefits such as reducing greenhouse gas
emissions, preventing pollution, alleviating poverty, improving security
of energy supply, competitiveness and improving health and employment.
3. At Evian, we agreed that energy efficiency is a key area for G8 action.
And following agreement at the Sea Island Summit in 2004, the 3Rs (Reduce,
Reuse, Recycle) initiative was launched in Tokyo this April - an important
step towards encouraging more efficient use of resources and materials,
which increases economic competitiveness whilst decreasing environmental
impacts.
4. We also recognise the importance of raising consumer awareness of the
environmental impact of their behaviour and choices including through
international efforts such as the United Nations Decade of Education for
Sustainable Development.
Buildings
5. To promote energy efficient buildings, we will:
(a) invite the International Energy Agency (IEA) to review existing
building standards and codes in developed and developing countries,
develop energy indicators to assess efficiency, and identify policy best
practices;
(b) encourage the work of existing partnerships such as the Renewable
Energy and Energy Efficiency Partnerships in outreach to developing
countries; and
(c) develop domestic guidelines or standards for the procurement and
management of public buildings in our respective countries.
Appliances
6. To encourage co-ordination of international policies on labelling,
standard setting and testing procedures for energy efficiency appliances,
we will:
(a) promote the application of the IEA's 1 Watt Initiative;
(b) ask the IEA to undertake a study to review existing global appliance
standards and codes, building on its existing capacity on energy
efficiency in appliances;
(c) extend the use of clear and consistent labelling to raise consumer
awareness of energy consumption of appliances;
(d) work nationally and in co-operation with other countries to seek
improvements in the efficiency and environmental performance of products
in priority sectors; and
(e) explore the potential to co-ordinate standards with other countries,
building on the examples provided by existing international bodies.
Surface transport
7. We will encourage the development of cleaner, more efficient and
lower-emitting vehicles, and promote their deployment, by:
(a) adopting ambitious policies to encourage sales of such vehicles in our
countries, including making use of public procurement as appropriate to
accelerate market development;
(b) asking the IEA to review existing standards and codes for vehicle
efficiency and identify best practice;
(c) encouraging co-operation on technology research, development and,
where relevant, deployment in areas including cleaner gasoline and diesel
technologies, biofuels, synthetic fuels, hybrid technology, battery
performance and hydrogen-powered fuel cell vehicles;
(d) continuing our discussions on these issues at the United Kingdom's
international conference in November on cleaner, more efficient vehicles;
and
(e) raising consumer awareness of the environmental impact of their
vehicle choices, including through clear and consistent labelling for
relevant energy consumption, efficiency and exhaust emissions data, and
encouraging the provision of clearer information on the result of driving
behaviour and choices for mode of transport.
Aviation
8. We will:
(a) undertake a programme of collaborative work to explore and accelerate
the potential for operational advances (including air traffic control and
ground operations) that will continue to enhance safety, improve fuel
efficiency and reduce emissions in air transport;
(b) work with the IPCC to provide, as part of its forthcoming Fourth
Assessment Report, an up-to-date assessment of the latest evidence on
aviation's impacts on the climate;
(c) support climate science research, aimed at improving our understanding
of specific issues such as contrails and cirrus cloud effects, to inform
technological and operational responses;
(d) encourage co-ordination among our existing national research
programmes on long-term technology developments with the potential to
significantly reduce emissions.
Industry
9. We will:
(a) Work with the multilateral development banks (MDBs) to expand the use
of voluntary energy savings assessments as a part of major investments in
new or existing projects in energy intensive sectors;
(b) invite the IEA to develop its work to assess efficiency performance
and seek to identify areas where further analysis of energy efficiency
measures by industry sector could add value, across developed and
interested developing countries;
(c) develop partnerships, including sectoral and cross-border
partnerships, with industry to reduce the greenhouse gas emissions
intensity of the major industrial sectors of our economies; and
(d) continue to support the work of the UNFCCC clearing house on
technology transfer TT:Clear in disseminating information on available
technologies, and cooperate further on sharing information on best
practices and national policies to encourage the deployment of energy
efficiency technologies.
Powering a Cleaner Future
10. Reliable and affordable energy supplies are essential for strong
economic growth, both in the G8 countries and in the rest of the world.
Access to energy is also critical for poverty alleviation: in the
developing world, 2 billion people lack access to modern energy services.
11. To respond to the scale of the challenges we face, we need to
diversify our energy supply mix, including increased use of renewables.
Fossil fuels will continue to be an important part of the global energy
mix, and we will need to find ways to manage the associated air pollution
and greenhouse gas emissions. We need to capitalise on all the
opportunities available to improve the efficiency along the entire process
chain, from extraction, to energy generation and transmission, and to
maximise the large and untapped potential of lower-emitting alternative
sources of energy.
12. We take note of the efforts of those G8 members who will continue to
use nuclear energy, to develop more advanced technologies that would be
safer, more reliable and more resistant to diversion and proliferation.
Cleaner Fossil Fuels
13. We will support efforts to make electricity generation from coal and
other fossil fuels cleaner and more efficient by:
(a) supporting IEA work in major coal using economies to review, assess
and disseminate widely information on energy efficiency of coal-fired
power plants; and to recommend options to make best practice more
accessible;
(b) inviting the IEA to carry out a global study of recently constructed
plants, building on the work of its Clean Coal Centre, to assess which are
the most cost effective and have the highest efficiencies and lowest
emissions, and to disseminate this information widely; and
(c) continuing to work with industry and with national and international
research programmes and partnerships on projects to demonstrate the
potential of advanced fossil fuel technologies, including clean coal.
14. We will work to accelerate the development and commercialization of
Carbon Capture and Storage technology by:
(a) endorsing the objectives and activities of the Carbon Sequestration
Leadership Forum (CSLF), and encouraging the Forum to work with broader
civil society and to address the barriers to the public acceptability of
CCS technology;
(b) inviting the IEA to work with the CSLF to hold a workshop on
short-term opportunities for CCS in the fossil fuel sector, including from
Enhanced Oil Recovery and CO2 removal from natural gas production;
(c) inviting the IEA to work with the CSLF to study definitions, costs,
and scope for 'capture ready' plant and consider economic incentives;
(d) collaborating with key developing countries to research options for
geological CO2 storage; and
(e) working with industry and with national and international research
programmes and partnerships to explore the potential of CCS technologies,
including with developing countries.
15. We will encourage the capture of methane, a powerful greenhouse gas,
by:
(a) supporting the Methane to Markets Partnership and the World Bank
Global Gas Flaring Reduction Partnership (GGFR), and encouraging expanded
participation; and
(b) working bilaterally to support an extension of the World Bank's GGFR
Partnership beyond 2006.
Renewable energy
16. We will promote the continued development and commercialisation of
renewable energy by:
(a) promoting the International Action Programme of the Renewables 2004
conference in Bonn, starting with a Conference at the end of 2005, hosted
by the Chinese government, and supporting the goals of the Renewable
Energy Policy Network (REN 21);
(b) welcoming the work of interested parties, including in partnerships,
to take forward the Johannesburg Plan of Implementation, including the
Renewable Energy and Energy Efficiency Partnership (REEEP) and the
Mediterranean Renewable Energy Partnership (MEDREP);
(c) working with developing countries to provide capacity-building
assistance, develop policy frameworks, undertake research and development,
and assess potential for renewable energy, including bioenergy;
(d) launching a Global Bioenergy Partnership to support wider, cost
effective, biomass and biofuels deployment, particularly in developing
countries where biomass use is prevalent following the Rome International
Workshop on Bioenergy;
(e) welcoming the establishment and further development of the range of
IEA implementing agreements on renewable energy.
Electricity Grids
17. We will work with the IEA to:
(a) draw together research into the challenges of integrating renewable
energy sources into networks and optimising the efficiency of grids, and
produce a report; and
(b) identify and link "Centres of Excellence" to promote research and
development in the developed and developing world; and
(c) promote workshops during 2006/07 aimed at evaluating and promoting
means to overcome technical, regulatory and commercial barriers.
Promoting networks for research and development
18. We recognise the need for increased commitment to, international
cooperation in and co-ordination of research and development of energy
technologies. We will continue to take forward research, development and
diffusion of energy technologies in all the fields identified in the Evian
Science and Technology Action Plan.
19. We express our support for research and development of technologies
and practices that use hydrogen as an energy carrier. We encourage
continued support for the work of the IEA and International Partnership
for the Hydrogen Economy (IPHE) to co-ordinate research efforts in this
area.
20. We take note of the Energy Research and Innovation Workshop held in
Oxford in May 2005, and will:
(a) work with the IEA to:
build on the work already underway through its implementing agreements to
facilitate cooperation and share energy research findings;
reinforce links with the international business community and developing
countries;
create an inventory of existing collaborative efforts to facilitate
exchange on their effectiveness; and
(b) raise the profile of existing research networks and encourage broader
participation where appropriate; and
(c) seek ways to improve the current arrangements for collaboration
between developed and developing countries, and enhance developing country
participation in existing networks.
Financing the transition to cleaner energy
21. Positive investment climates and effective market models are critical
to the uptake of new technologies and increased access to energy for
economic growth. We recognise that there are a range of tools to support a
market-led approach to cleaner technology and energy resources and that
each country will select those appropriate to its national circumstances.
22. We will:
(a) support a market-led approach to encouraging energy efficiency and
accelerating investment and the deployment of cleaner technologies which
will help transition to a low-emission future;
(b) adopt, where appropriate market-based policy frameworks which:
support re-investment in capital stock turnover;
remove barriers to direct investment;
leverage private capital for clean development;
use standards, or use pricing and regulatory signals
to provide confidence in the near- and long-term value of investments, so
as to reduce emissions of greenhouse gases and / or pollutants.
(c) We will promote dialogue on the role, suitability, potential synergies
and timing of various policy approaches within the context of each
country's national circumstances, including:
developing long-term sectoral, national or international policy frameworks
including goals;
market-based instruments including fiscal or other incentives for the
development and deployment of technologies, tradable certificates and
trading of credits for reductions of emissions of greenhouse gases or
pollutants; and
project-based and voluntary offset mechanisms.
23. Those of us who have ratified the Kyoto Protocol will
(a) work to strengthen and develop the implementation of the market
mechanisms (including Joint Implementation, international emissions
trading and the Clean Development Mechanism); and
(b) use our best endeavours to ensure that the CDM Executive Board and
related institutions to support emissions trading are adequately funded by
the end of 2005.
24. We acknowledge the valuable role of the Global Environment Facility in
facilitating co-operation with developing countries on cleaner, more
efficient energy systems, including renewable energy, and look forward to
a successful replenishment this year, along with the successful conclusion
of all outstanding reform commitments from the third replenishment.
25. We will invite the World Bank and other multilateral development banks
(MDBs) to increase dialogue with borrowers on energy issues and put
forward specific proposals at their annual meetings to:
(a) make the best use of existing resources and financing instruments and
develop a framework for energy investment to accelerate the adoption of
technologies which enable cleaner, more efficient energy production and
use;
(b) explore opportunities within their existing and new lending portfolios
to increase the volume of investments made on renewable energy and energy
efficiency technologies consistent with the MDBs' core mission of poverty
reduction;
(c) work with interested borrower countries with significant energy
requirements to identify less greenhouse gas intensive growth options
which meet their priorities; and ensure that such options are integrated
into Country Assistance Strategies.
(d) develop local commercial capacity to develop and finance
cost-effective projects that promote energy efficiency and low-carbon
energy sources.
26. We will continue to work through our bilateral development programmes,
in line with our national priorities, to promote more sustainable energy
policies worldwide.
27. We will work with Export Credit Agencies with a view to enhancing the
economic and financial viability of cleaner and efficient energy projects.

28. We will build on the work in other fora, including the UNFCCC Experts
Group on Technology Transfer, to support necessary capacity building,
enabling environments and information dissemination.
29. We will also work through multi-stakeholder partnerships to develop
the policy, regulatory and financing frameworks needed in the major
developing countries to provide a commercially attractive balance of risk
and reward to private investors.
Managing the impact of climate change
30. We reaffirm the importance of the Intergovernmental Panel on Climate
Change and welcome the extensive analysis of research being undertaken to
complete its Fourth Assessment Report by 2007.
31. All countries need further access to information and to develop the
scientific capacity that will allow their governments to integrate
climate, environmental, health, economic and social factors into
development planning and resilience strategies. We note that Africa's data
deficiencies are greatest and warrant immediate attention.
32. We note the work of the UNFCCC in supporting developing countries to
improve their capacity for adaptation and mitigation, including through
the adaptation priority of the Global Environment Facility.
33. We look forward to further discussions on how development and energy
strategies can be strengthened to build resilience to climate impacts,
including at the Millennium Review Summit in September 2005.
Monitoring and Data Interpretation
34. The G8 made a commitment at Evian to strengthen international
cooperation on global Earth observations. We will continue to exercise
leadership in this area, and welcome the adoption of the 10-year
implementation plan for development of the Global Earth Observation System
of Systems (GEOSS) at the Third Earth Observations Summit which took place
in Brussels in February this year. We will:
(a) move forward in the national implementation of GEOSS in our member
states;
(b) support efforts to help developing countries and regions obtain full
benefit from GEOSS, including from the Global Climate Observing System
(GCOS) such as placement of observational systems to fill data gaps,
developing of in-country and regional capacity for analysing and
interpreting observational data, and development of decision-support
systems and tools relevant to local needs;
(c) in particular, work to strengthen the existing climate institutions in
Africa, through GCOS, with a view to developing fully operational regional
climate centres in Africa.
Risk Management
35. We will:
(a) Invite the World Bank to develop and implement 'best practice'
guidelines for screening their investments in climate sensitive sectors to
determine how their performance could be affected by climate risks, as
well as how those risks can best be managed, in consultation with host
governments and local communities; and
(b) invite other major multilateral and bilateral development
organisations to adopt the World Bank guidelines, or develop and implement
similar guidance.
Tackling illegal logging
36. We recognise the impacts that illegal logging has on the livelihoods
of many in the poorest countries in Africa and elsewhere, on environmental
degradation, biodiversity loss and deforestation and hence global
sustainable development. We particularly recognise the importance of
global carbon sinks, including the Congo Basin and the Amazon.
37. We agree that working to tackle illegal logging is an important step
towards the sustainable management of forests. To tackle this issue
effectively requires action from both timber producing and timber
consuming countries.
38. We endorse the outcome of the G8 Environment and Development
Ministerial conference on illegal logging. To further our objectives in
this area we will take forward the conclusions endorsed at that meeting,
with each country acting where it can contribute most effectively.

Corporate lobbying - Rising up the CSR Agenda

* Corporate lobbying - Rising up the CSR Agenda

Article by Mallen Baker

Anyone with an eye towards where are the emerging issues in corporate
social responsibility will have registered the question of corporate
lobbying of governments. Indeed, it wasn't that long ago that we last
dealt with the question here. Since then things have continued to move
significantly.

One of the growing messages within Corporate Social Responsibility
over the last couple of years has been that CSR is about how you
create wealth, not just how you spend it. Of course, there are already
a lot of rules that govern how companies are, and are not, allowed to
create wealth. There is no such thing as a really free market.
Legislation to ensure minimum standards of protection for the
consumer, and good conduct on the part of companies, has been a part
of the landscape for centuries.

Equally, companies have always sought to influence governments in the
nature of these rules. This is entirely legitimate. After all, any
stakeholders in a piece of legislation ought to be able to make
representation. That's how you get good legislation.

Now, the issue about how companies lobby, and for what, is
increasingly being drawn into the CSR microscope. Recently for
instance, the Institute of Business Ethics produced a report laying
out some of the challenges that exist.

Such challenges appear in a number of areas. The easiest target for
campaigners is where a company's stated values or CSR positions are
directly contravened by the objectives and conduct of its lobbying
activity. Environmental campaigners recently slammed BP for opposing a
piece of legislation in the US related to climate change, a position
that totally contradicts its stated commitment to action on climate.

Charges of hypocrisy aimed at CSR leaders is the easiest news copy
there is. As the business editor of the Uk's Sunday Times said at a
recent CSR event, "when you get a company that proclaims its
environmental credentials getting caught out polluting - it doesn't
get much better than that for people like me".

Of course, it's not often as simple as that when it comes to lobbying.
Just because there's a piece of proposed legislation, it doesn't make
it necessarily a good piece of legislation that would actually achieve
its desired aims. BP would draw attention, for instance, to the fact
that there were three different versions of legislation on offer on
climate change in that instance - they supported the one that they
thought would work with business, and opposed the one that was
basically anti-business. One has to beware of campaigners whose
argument follows the "something must be done, and this is something,
therefore this must be done" line. BP, after all, has probably done
more in terms of effective pro-active action than most others.

But it is one of the biggest no-win propositions for a company to be
faced with legislation the aims of which are unarguably desirable but
the quality of which falls far short of its aspirations, and which
would damage the company for no real societal gain. The company is
obliged to oppose the legislation, and the campaigners have a field
day suggesting that company X is showing it is against human rights /
environmental sustainability or whatever the issue is.

There are some companies that are hearing the message that this is now
an area that calls for disclosure. The UK's Co-operative Bank won the
ACCA best sustainability reporting award, with commendation for the
Bank's approach to disclosure on lobbying.

There are also certainly some leading businesses who have aimed to
lobby the political process in order to help achieve socially
beneficial solutions. BP's endorsement of the climate change levy, for
instance. Electrolux supporting producer responsibility on electrical
goods is another example, as is Marks & Spencer's call for more
legislation on the use of chemicals.

But a friend of mine who works with one of the largest PR firms
carrying out corporate lobbying services is very clear about the
nature of the beast - at least in the UK. Companies lobby on matters
affecting the bottom line. Ultimately, every piece of legislation that
could hurt is scrutinised, and positions formed accordingly. Many of
his colleagues, he said, saw the Institute of Business Ethics document
and dismissed it as being generally naive and unrealistic.

This should not be a big surprise. The corporate communications people
who deal with corporate lobbying will follow the logic of their
calling, just the same as so many others do. Purchasing managers, for
instance, have very rarely been able to square the CSR aspirations of
their companies with the on-the-ground pressure to get the best
possible price and terms from suppliers. The best companies have to
find a way to strike a balance - still putting pressure on their
buyers (after all, without good prices they will become uncompetitive,
and the company which goes bust in the pursuit of CSR is really not
very responsible at all) but also letting them know that there is a
red line they should stay the right side of.

There hasn't been much of a debate where that red line is in regard to
corporate lobbying. After all, there is nothing wrong with companies
lobbying to benefit the bottom line. Unless, of course, by so doing
they are resisting some effective and necessary piece of legislation
enforcing good principles. But then it's a judgement as to whether
that's the case.

At the very least, it seems fair enough to say that businesses should
expect that their attempts to influence legislation should be in line
with their corporate values and CSR positions. It is also fair to say
that companies should disclose the aims and objectives of their
lobbying.

It is unrealistic to expect companies to disclose each occasion when
representations have been made. Some companies will feel that
disclosing such information might give advantage to competitors in
certain situations. Others will feel that the burden of documentation
would far outweigh any public or business benefit.

The truth is that there is no way to really audit or confirm whether
what a company said about its lobbying was correct. Of course, when
companies send in formal written submissions on legislation it is on
the record. But the quiet word at a charity event, the brief
conversation in the Wimbledon enclosure, these will always take place
and be unrecorded. Indeed, a burdensome process of formalising
lobbying activity would only drive more of it into such informal
arenas.

And attitudes to certain aspects of lobbying differ enormously in
different countries. In the UK, payments associated with lobbying
would be seen as corruption. In the US, they have been part of the
price of doing business. Even after the McCain-Feingold campaign
finance reform bill banning corporate donations to political parties
became law two years ago, major loopholes have ensured that the
expectation that companies will 'pay to play' is finding other avenues
of expression.

We shouldn't be expecting the introduction of a regime whereby
corporations can be audited or policed on how they seek to exercise
influence. It is, however, seeking to join up in the mind of the CEO,
the CSR department and the corporate communications department, the
realisation that lobbying, like every other aspect of corporate
behaviour, should accord with values and responsible business
practice. And that if it doesn't, at some point the disparity will be
exposed. And for the companies that aspire to be leaders in social
responsibility, that could be one of the most damaging incidents of
all.

This issue is now already advanced enough in perceptions on CSR that
it is beginning to enter the benchmarks. Canada's Corporate Knights
Top 50 responsible businesses list, for instance, includes
transparency and progressive intent in corporate lobbying amongst its
criteria.

But lobbying is big business, and we shouldn't expect that the edifice
will be easy to reshape. There are, for instance, something like
15,000 lobbyists in Brussels, goodness knows how many in Washington.
You can even study for an MBA certificate in corporate lobbying
covering areas such as 'principles of successful lobbying',
'lobbying/campaigning for business today', 'interest representation
and public policy', 'corporate lobbying strategies' and 'negotiation
skills and practice'. Not yet a module on lobbying and social
responsibility.

Equally, we should be clear sighted about the lobbying that is carried
out one stage removed from the individual businesses. Companies that
don't lobby on an issue that would not be seen as socially
responsible, but which tacitly supports its industry association to do
it on their behalf should expect to be found out. Increasingly, the
campaign groups are focusing on such associations. The socially
responsible corporation should be able to show real leadership in the
positions it promotes, both to legislators and to its respective trade
bodies. It is an area that is due to get increasing scrutiny.

CSR reporting continuing to grow

CSR reporting continuing to grow

There is continuing support for CSR and sustainabiity reporting by the
world's biggest companies, according to a recent survey by
international accounting firm KPMG.

Japan and the UK show the strongest lead in reporting, with a dramatic
shift from purely environmental reporting to reporting that includes
social, ethical, environmental and economic indicators. The financial
sector in particular is showing a two-fold increase in reporting since
2002.

In the report's introduction, Mike Rake, Chairman of KPMG
International and Chairman of Business in the Community, says: "The
survey reflects the growing importance within the business community
of corporate responsibility as the key indicator of non-financial
performance, as well as a driver of financial performance. It also
reflects the responsibility that business has to be transparent and
accountable not just to shareholders but also to the wider community."

Global Wind Power: there is easily enough potential wind power to meet the world's electricity demands.

Global Wind Power
By TR Staff and Freelance Writers August 2005 1 of 1


A new study by researchers at Stanford University has estimated the global
potential for wind power at 80 meters above the ground (the approximate
height of today's wind turbines). The researchers used wind-speed
measurements taken at 10 meters at 8,000 locations around the world to
estimate wind speeds at 80 meters. They concluded that 13 percent of the
sites had winds of 6.9 meters per second or faster--strong enough to make
wind-based power generation cost-effective. If these locations represent a
good sample of the world's land area, the researchers report, there is
easily enough potential wind power to meet the world's electricity
demands. In 2002, just .3 percent of the world's electricity supply came
from wind power.

Revving up: Money is piling into Europe's new markets for pollution permits

Revving up
Jul 7th 2005
From The Economist print edition

Money is piling into Europe's new markets for pollution permits
IF ONLY melting icebergs looked up with the eyes of hungry children,
global warming might have stood a chance at Gleneagles. But Europe's new
carbon markets aren't hanging around for substantive new measures from the
G8. Prices, participants and volumes are increasing quickly.
The Kyoto treaty, which came into effect in February, saw an international
emissions-trading system as one weapon against greenhouse gases. The idea
is that a market-based system which gives countries and companies
flexibility to meet their targets will produce the greatest emission
reductions at the lowest cost.
Already Britain (in 2002) and then the European Union (from January 2005)
have set up trial systems for carbon dioxide, the biggest of Kyoto's
greenhouse gases. Europe's energy and industrial plants are being issued
tradable annual allowances for emissions. Polluters that cannot squeeze
under their caps buy the surplus of light polluters. The right wrists are
slapped, and emissions overall are reduced at a lower cost than if each
installation had had to meet an individual target.
Though the markets stuttered into life, they have grown surprisingly
quickly. Volumes traded recently topped 2.2m tonnes a day. New exchanges
are appearing: Austria launched an energy exchange on June 28th. Older
ones are consolidating: Amsterdam's European Climate Exchange is joining
Paris's Powernext to offer spot and futures contracts on the same screen.
What has made headlines, however, is the recent surge in the price of
carbon allowances. On July 4th, it touched €29.35 ($34.90), a record (see
chart). The cost of the allowances to produce one kilowatt-hour of
coal-fired power is now greater than the cost of the coal itself, reckons
Louis Redshaw of Barclays Capital.

Many reckon that the rise in emissions prices simply mirrors the rise in
gas prices. When gas is dear, as it is now, utilities use more coal;
because coal is dirtier, they have to buy more pollution permits in
penance. And a heatwave in Europe since late June has dried up hydro power
in the Iberian Peninsula and in Scandinavia.
Others, however, see a structural imbalance between supply and demand that
may be harder to resolve. One reason why demand is outstripping supply is
that a lot of firms that might have permits to sell are not yet
participating, especially in new EU member states where allocation
registries have not yet been set up. Many smaller firms do not have credit
ratings and credit lines, so others are reluctant to do trades for future
delivery with them, points out John Marlow of Rabobank.
The shortage, if there is one, may be eased by credits from projects
outside Europe. Under Kyoto's Clean Development Mechanism (CDM),
rich-country companies can earn certified emission reductions (CERs) by
cleaning up emissions in developing countries. The EU allows them to be
used to comply with caps. There is a rush to do just that, especially
since CERs are changing hands for €7 or €8 and European allowances are
heading for €30.
Europe's carbon-trading markets have a touch of the Wild West about them.
At least two-thirds of the trades are over-the-counter and relatively
opaque. Though part of the huge price gap between CERs and allowances is
justified by the former's greater riskiness, it nonetheless invites
swingeing arbitrage. “It's an emerging market with an awful lot to learn,”
says James Cameron, chief executive of Climate Change Capital, a small
investment bank, but he is confident that there is plenty of interest in
just these sorts of strategies.
That people will make—and lose—money in the carbon markets seems assured.
But will the markets help to reverse global warming? At these volumes, no.
“It is just one tool but a very important tool,” says Elliot Morley,
climate-change minister at Britain's agriculture department. Now, if only
his boss could persuade George Bush to follow suit.

Calling an end to poverty | Mobile-phone firms have found a profitable way to help the poor help themselves

Mobile phones and development

Calling an end to poverty
Jul 7th 2005
From The Economist print edition

Still Pictures

Mobile-phone firms have found a profitable way to help the poor help
themselves
Get article background
ALL eyes are on what governments can do to end poverty, with aid, debt
relief and trade top of the agenda at this week's G8 summit. But what
about the role that business can play—and, in particular, technology
firms? It is increasingly clear that, when it comes to bridging the
“digital divide” between rich and poor, the mobile phone, not the personal
computer, has the most potential. “Emerging markets will be
wireless-centric, not PC-centric,” says C. K. Prahalad, a management
scholar and author of “The Fortune at the Bottom of the Pyramid”, a book
that highlights the collective purchasing power of the world's 4 billion
poorest people and urges firms to try to profit from it.
Mobile phones have become indispensable in the rich world. But they are
even more useful in the developing world, where the availability of other
forms of communication—roads, postal systems or fixed-line phones—is often
limited. Phones let fishermen and farmers check prices in different
markets before selling produce, make it easier for people to find work,
allow quick and easy transfers of funds and boost entrepreneurship. Phones
can be shared by a village. Pre-paid calling plans reduce the need for a
bank account or credit check. A recent study by London Business School
found that, in a typical developing country, a rise of ten mobile phones
per 100 people boosts GDP growth by 0.6 percentage points. Mobile phones
are, in short, a classic example of technology that helps people help
themselves.
But despite rapid subscriber growth in much of the developing world, only
a small proportion of people—around 5% in both India and sub-Saharan
Africa—have their own mobile phones. Why? The price of handsets is the
“biggest obstacle” to broader adoption, says Alan Knott-Craig, boss of
Vodacom, which runs networks in five African countries. Azmi Mikati of
Investcom, which runs networks in Africa and the Middle East, estimates
that the number of users would double in those markets if the cheapest
handset cost $30 instead of $60.

Ringing the changes
Handset-makers earn most of their profits from fancy phones sold to
consumers in rich countries, where on average a handset costs around $200
(before operator subsidies). But as markets have become saturated in the
rich world, manufacturers have started to realise that their future growth
depends on catering to the needs of developing nations. As a result, they
have been working with operators to develop new extremely cheap handsets
and to boost adoption in the poor world.
Several operators from developing countries teamed up earlier this year
under the auspices of the GSM Association, which promotes the use of GSM,
the world's dominant mobile-phone standard. They invited the
handset-makers to bid for a contract to supply up to 6m handsets for less
than $40 each. The contract was won by Motorola. Delivery of handsets
began in April. The low cost is not due to cross-subsidy from high-margin
handsets or “corporate social responsibility” funding, insists David
Taylor of Motorola. “We do make a margin—a much smaller margin, but it is
still a margin,” he says.
This week the procurement process began for more handsets, to be delivered
from next January. As well as letting smaller operators pool their
bargaining power, this scheme aims to draw manufacturers' attention to the
needs of developing countries. “This was the first time that
emerging-market operators had come together,” says Ben Soppitt of the
GSMA. Each operator is small, but together they represent a big market.
“We believe we can increase the market by 100m-150m customers a year for
five to ten years if we can get the affordability right,” he predicts.
That means encouraging handset-makers to design new extremely cheap phones
on which they can still turn a small profit.
Such a phone cannot simply be a cut-down version of an existing handset.
It must be very reliable and have lots of battery capacity, as it will be
used by people who do not have reliable access to electricity, says Mr
Taylor. Motorola's low-cost handset has a standby time of two weeks. And
the handset must conform to local languages and customs: Motorola's
handset, for example, includes a football game in Africa, but a cricket
game in India.
Nor can the makers skimp on design. Kai Oistamo of Nokia, the world's
largest handset-maker, notes that people in poor countries have to spend a
far larger proportion of their income than those in the rich world to buy
even the cheapest handset. “So looks and brand are highly important—it is
much more of a status symbol in those societies,” he says. And it is
wrong, points out Mr Prahalad, to assume that consumers in poor countries
will not be interested in fancy features such as music-playback. Since
they cannot afford multiple devices—an iPod, a PC, a PlayStation—they may
want more from their mobiles.
As handset-makers respond to this new market, prices will continue to
fall. “We will give you the volumes so that you can continue to drive down
prices,” promised Sunil Mittal, boss of Bharti, a big Indian operator, at
a recent industry conference. On June 29th Philips, a Dutch electronics
firm, announced a new range of chips designed to take handset costs below
$20.
Lower prices will make a second barrier ever more apparent: high taxes and
duties imposed by many governments on handsets and services, often just as
growth in the sector starts to take off. “It does seem strange for
countries to say that telephone access is a public-policy goal, and then
put special or punitive taxes on telecoms operators and users,” says
Charles Kenny, an economist at the World Bank. “It's a case of sin taxes
on a blessed product.”
In Turkey, new subscribers must pay a special tax of 20 new liras ($15)
for a connection. A sales tax of 18%, plus a special communications tax of
25%, is added to all mobile bills. Uganda has just imposed a 10% tax on
mobile phones. In Afghanistan, telecoms taxes account for 14% of
government revenue, says Mr Kenny. In Bangladesh, the government has just
imposed a tax of 900 taka ($14) on all new connections, in addition to an
import duty of 300 taka levied on all imported handsets.
In big markets, such as Brazil, handset-makers have set up local factories
to avoid import duties. That will not pay in smaller, poorer places. To
avoid taxes and duties, many mobile operators in sub-Saharan Africa do not
supply handsets, but rely on customers to get them on the black market,
says Mark Burk of Informa, a research firm.
Yet there is anecdotal evidence that reducing taxes on handsets can boost
government revenues. People would rather pay a small tax on a legal
handset than no tax on a smuggled one that cannot be returned if it goes
wrong. There are some hopeful signs: India cut its import duty on handsets
to 5% last year and plans to scrap it altogether. Mauritius recently cut
its taxes on handsets to boost adoption.
The GSMA is now making a 50-country study that will, it hopes, provide
conclusive proof of the benefits of cutting taxes on mobile phones. The
aim, says Mr Soppitt, is to show that a “win-win-win” scenario is
possible, in which customers get cheaper access, manufacturers and
operators sell more handsets and airtime and governments raise their tax
revenues. (Oh, and the “digital divide” vanishes, too.) With its new focus
on low-cost handsets, the industry is doing its part to extend access to
communications technology. Now governments must do their part, too.

Less is more
Jul 7th 2005
From The Economist print edition

Mobile phones can boost development in poor countries—if governments let
them

iAfrica

Get article background
IMAGINE a magical device that could boost entrepreneurship and economic
activity, provide an alternative to bad roads and unreliable postal
services, widen farmers' access to markets, and allow swift and secure
transfers of money. Now stop imagining: the device in question is the
mobile phone. Not surprisingly, people in the developing world are
clamouring for them, and subscriber growth is booming. The fastest growth
rates are to be found in Africa, albeit from a low base. Already, 80% of
the world's population lives within range of a mobile network; but only
about 25% have a mobile phone.
The primary obstacle to wider adoption is the cost of handsets. In the
rich world, these typically cost around $200 (though most pay less than
this thanks to subsidies from network operators), or less than 1% of the
average income per person. In the developing world, in contrast, a $50
handset would account for 14% of the annual income of someone earning $1 a
day. So the first step in promoting the adoption of mobile phones, say
operators in developing countries, is to reduce the cost of the handsets.
Several such schemes are under way: in particular, several operators in
developing countries have joined together to aggregate their buying power,
and Motorola, the world's second-largest handset-maker, has agreed to
supply up to 6m handsets for less than $40 each (see article). There is
already talk of prices falling below $30 next year.
Industry observers believe cheaper handsets could expand the market by as
many as 150m new subscribers a year. As well as boosting economic
development in poor countries, this will help to close the “digital
divide” between the communications-rich and communications-poor.
Governments, you would have thought, would be doing everything in their
power to promote the spread of mobile phones.
But rather than treating mobile phones as an important tool for
development, many governments see them instead as an opportunity to impose
hefty taxes and milk a fast-growing industry for all it is worth. In both
Turkey and Bangladesh, for example, anyone buying a new mobile phone must
pay a $15 connection tax. Many countries slap large import duties on
handsets and impose special taxes on subscribers and operators. In many
cases, these taxes double the cost of acquiring a mobile phone. As handset
prices fall, such taxes will become an ever more prominent obstacle to
wider adoption.
Governments should reduce these taxes at once. Indeed, by doing so, they
can both speed adoption and increase revenues. High import tariffs
discourage legal imports of phones and encourage people to buy them on the
black market instead. Reducing such tariffs would boost revenues as legal
imports increased. Lower taxes on phone calls would encourage adoption and
increase the tax base. It can be done: both Mauritius and India have
recently reduced their taxes and tariffs.
Mobile phones have created more entrepreneurs in Africa in the past five
years than anything else, says the boss of one pan-African operator.
Promoting their spread requires no aid payments or charity handouts:
handset-makers, acting in their own interest, are ready to produce
low-cost phones for what they now regard as a promising new market. Mobile
operators across the developing world would love to sign up millions of
new customers. But if developing countries are to realise the full social
and economic benefits of mobile phones, governments must ensure that their
policies help, rather than hinder, the wider adoption of this miraculous
technology.

8.7.05

The go-green argument -- The NEXT Sustainability Wave: Building Boardroom Buy-In

[For those of you who have not met Bob, I'll point out that he's on this
distribution list. bob: Congrats on this positive review! -JFB]

The go-green argument
By HARVEY SCHACHTER
Wednesday, July 6, 2005 Updated at 10:58 AM EDT
The NEXT Sustainability Wave: Building Boardroom Buy-In
By Bob Willard
New Society Press, 353 pages, $29.95
In 1997, Bob Willard was working for International Business Machines Corp.
in leadership development and, through his involvement in a campaign over
a water-treatment plant in his community of Ajax, Ont., he became
increasingly concerned about the environment.
So he wrote a letter to CEO Lou Gerstner asking him to embed sustainable
development principles into IBM's strategies to benefit both the company
and the planet.
His effort bombed.
It was suggested he discuss his ideas with the company's community affairs
director, indicating the top brass viewed sustainability as a
philanthropic issue rather than a strategic business matter.
In part, he realized that was because he embellished his letter with
rhetoric about improving the planet rather than cutting to the chase:
"Dear Lou: I have some thoughts on how IBM could increase its profits by
38 per cent. Interested?"
The lesson was that when you are proposing your company pay more attention
to its ecological and social responsibilities -- whether you are a CEO,
director or member of the rank and file -- you must choose your words
carefully.
"Just broaching the subject risks your credibility as a corporate leader
who has the best interests of the bottom line at heart. It could be a
career-limiting conversation."
To arm you for that conversation, he has written The NEXT Sustainability
Wave, which makes the case -- indeed, hammers home the case -- that
sustainability can increase profits, substantially, while also helping the
planet.
That, he argues, requires moving from simply complying with the laws to
pro-actively looking for ways to improve your company's processes through
environmental consciousness or even rebranding the firm to be seen as a
sustainability leader.
In the past, companies have acted on sustainability either because of the
founder's personal passion, as with Anita Roddick's The Body Shop; a
public relations crisis, as with Royal Dutch/Shell Group when it faced
opposition to disposal of the Brent Spar oil platform; or because of
regulatory pressure.
In the future, he expects two pressures to drive companies toward the next
wave of environmental responsibility:
A Perfect Storm of Threats. Five global forces will cluster together into
a tempest that will threaten many companies:
climate change
pollution and its effects on health
the backlash to globalization
the energy crunch
the erosion of trust in institutions.
Compelling Business Value. Companies that commit themselves to
sustainability benefit economically in seven ways:
It's easier to hire top talent who prefer to work in such companies.
It's easier to retain talent.
Productivity is boosted as employees are energized by contributing to the
success of a firm doing work that is good for the planet.
Manufacturing costs drop due to eco-efficiencies, such as reducing and
re-using materials
Energy and water costs at the company's sites are decreased.
Revenue increases as green consumers are attracted to the firm
Financial risk goes down and easier financing is obtained through risk
avoidance when using more socially responsible practices that lower
insurance costs.
Using conservative estimates, he comes up with a 38-per-cent increase in
profits for a typical high tech company -- the figure that may have caught
Lou Gerstner's interest, if used in that letter.
But even if you list the benefits to your company, you will face
objections. So a portion of the book is what he calls an objection
handling clinic, in which he presents all the arguments senior executives
will raise and the arguments to overcome those concerns.
To those who respond his figures are too good to be true, he says he was
also surprised. But the best way to find out is to apply the examples from
which they are drawn to your own firm. "Try it," he urges.
The book is level-headed, written for business people by a businessman. It
is also a handy and extensive primer on sustainability for those who
haven't followed the issue closely. Mr. Willard also uses an unusual but
highly successful format, making his arguments on right hand pages in
short, one-page bursts, while the left hand pages are reserved for
supporting quotes, statistics and cartoons.

7.7.05

The 21st-century organization: Big corporations must make sweeping organizational changes to get the best from their professionals.

The 21st-century organization
Big corporations must make sweeping organizational changes to get the best
from their professionals.
Lowell L. Bryan and Claudia Joyce
The McKinsey Quarterly, 2005 Number 3

About half a century ago, Peter Drucker coined the term "knowledge worker"
to describe a new class of employee whose basic means of production was no
longer capital, land, or labor but, rather, the productive use of
knowledge. Today, these knowledge workers, who might better be called
professionals, represent a large and growing percentage of the employees
of the world's biggest corporations. In industries such as financial
services, health care, high tech, pharmaceuticals, and media and
entertainment, professionals now account for 25 percent or more of the
workforce and, in some cases, undertake most typical key line activities.
These talented people are the innovators of new business ideas. They make
it possible for companies to deal with today's rapidly changing and
uncertain business environment, and they produce and manage the intangible
assets that are the primary way companies in a wide array of industries
create value.
Productive professionals make big enterprises competitive, yet these
employees now increasingly find their work obstructed. Creating and
exchanging knowledge and intangibles through interaction with their
professional peers is the very heart of what they do. Yet most of them
squander endless hours searching for the knowledge they need—even if it
resides in their own companies—and coordinating their work with others.
The inefficiency of these professionals has increased along with their
prominence. Consider the act of collaboration. Each upsurge in the number
of professionals who work in a company leads to an almost exponential—not
linear—increase in the number of potential collaborators and unproductive
interactions. Many leading companies now employ 10,000 or more
professionals, who have some 50 million potential bilateral relationships.
The same holds true for knowledge: searching for it means trying to find
the person in whose head it resides, because most companies lack working
"knowledge markets." One measure of the difficulty of this quest is the
volume of global corporate e-mails, which rose from about 1.8 billion a
day in 1998 to more than 17 billion a day in 2004. As finding people and
knowledge becomes more difficult, social cohesion and trust among
professional colleagues declines, further reducing productivity.
A flawed organizational design
Today's big companies do very little to enhance the productivity of their
professionals. In fact, their vertically oriented organizational
structures, retrofitted with ad hoc and matrix overlays, nearly always
make professional work more complex and inefficient. These vertical
structures—relics of the industrial age—are singularly ill suited to the
professional work process. Professionals cooperate horizontally with one
another throughout a company, yet vertical structures force such men and
women to search across poorly connected organizational silos to find
knowledge and collaborators and to gain their cooperation once they have
been found.
Worse yet, matrix structures, designed to accommodate the "secondary"
management axes that cut across vertical silos, frequently burden
professionals with two bosses—one responsible for the sales force, say,
and another for a product line. Professionals seeking to collaborate thus
need to go up the organization before they can go across it. Effective
collaboration often takes place only when the would-be collaborators
enlist hierarchical line managers to resolve conflicts between competing
organizational silos. Much time is lost reconciling divergent agendas and
finding common solutions.
Other ad hoc organizational devices, such as internal joint ventures,
co-heads of units, and proliferating task forces and study groups, serve
only to complicate the organization further and to increase the amount of
time required to coordinate work internally. The result is endless
meetings, phone calls, and e-mail exchanges as talented professionals—line
managers or members of shared utilities—waste valuable time grappling with
the complexity of a deeply flawed organizational structure.
A new organizational model
To raise the productivity of professionals, big corporations must change
their organizational structures dramatically, retaining the best of the
traditional hierarchy while acknowledging the heightened value of the
people who hatch ideas, innovate, and collaborate with peers to generate
revenues and create value through intangible assets such as brands and
networks. Companies can achieve these goals by modifying their vertical
structures to let different groups of professionals focus on clearly
defined tasks—line managers on earnings, for instance, and off-line teams
on longer-term growth initiatives—with clear accountability. Then these
companies should create new, overlaid networks and marketplaces that make
it easier for professionals to interact collaboratively and to find the
knowledge they need.
Companies can not only build this new kind of organization but also reduce
the complexity of their interactions and improve the quality of internal
collaboration by implementing four interrelated organizational-design
principles:
1. Streamlining and simplifying vertical and line-management
structures by discarding failed matrix and ad hoc approaches and narrowing
the scope of the line manager's role to the creation of current earnings
2. Deploying off-line teams to discover new wealth-creating
opportunities while using a dynamic-management process to resolve short-
and long-term trade-offs
3. Developing knowledge marketplaces, talent marketplaces, and formal
networks to stimulate the creation and exchange of intangibles
4. Relying on measurements of performance rather than supervision to
get the most from self-directed professionals
The ideas underlying each of these policies may not be entirely new, but
we don't know of any company that applies all of them holistically—and
this failure limits the ability to perform up to potential. A company that
tries to simplify its vertical organizational structure without helping
large numbers of self-directed professionals to collaborate more easily
might increase its efficiency, for example. But that would be more than
offset by a decrease in its effectiveness.
Simplify the line structure
The first design principle is to clarify the reporting relationships,
accountability, and responsibilities of the line managers, who make good
on a company's earnings targets, for all other considerations will get
short shrift until short-term expectations are met. To achieve this goal,
a company must establish a clearly dominant axis of management—product,
functional, geographic, or customer—and eliminate the matrix and ad hoc
organizational structures that often muddle decision-making authority and
accountability. Dynamic management and improved collaboration, as we show
later, are better ways of accomplishing the purposes of these ad hoc
structures.
A company that aims to streamline its line-management structures should
create an effective enterprise-wide governance mechanism for decisions
that cross them, such as the choices involved in managing shared IT costs.
These mechanisms are typically created by defining and clarifying the
decision-making authority of each member of the senior leadership team and
establishing enterprise-wide governance committees as required. It may
also be necessary to take important support functions, which demand
focused management, out of the line structure, so that specialized
professionals (rather than line managers, who are often, at best, gifted
amateurs) can run these functions as shared utilities.
Finally, to promote the creation of enterprise-wide formal networks,
parallel structures and parallel roles should be established across the
whole extent of the company. Defining the role of the comptroller or the
country manager consistently throughout it, for example, helps the people
in those roles to interact and collaborate.
Manage dynamically
Once the newly simplified vertical structure allows line managers to limit
their attention to meeting the near-term earnings expectations of the
company, it has the luxury of focusing other professionals on the
long-term creation of wealth. The advantages of such a separation are
obvious. As one executive we know put it, you don't want people who are
engaged in hand-to-hand combat to design a long-term weapons program.
Ongoing multiyear tasks such as launching new products, building new
businesses, or fundamentally redesigning a company's technology platform
usually call for small groups of full-time, focused professionals with the
freedom "to wander in the woods," discovering new, winning value
propositions by trial and error and deductive tinkering. Few down-the-line
managers, who must live day to day in an intensely competitive
marketplace, have the time or resources for such a discovery process.
Not that companies should forgo discipline while undertaking such a
project.In fact, the portfolio-of-initiatives approach to strategy enables
them to "plan on being lucky" by using the staged-investment processes of
venture capital and principal investing firms, as well as the R&D
processes of leading industrial corporations.1 Companies that take this
approach devote a fixed part of their budgets (say, 2 to 4 percent of all
spending) and some of their best talent to finding and developing
longer-term strategic initiatives. Each major one usually has a senior
manager as its sponsor to ensure that resources are well invested. Once an
initiative is ready to be scaled up—when revenues and cost projections
become clear enough to appear in the budget—it can be placed in the line
structure.
Of course, at the enterprise level, companies must manage their short- and
long-term earnings in a way that integrates their spending on strategic
initiatives with the overall budget, so they will need to adopt a
systemic, effective way of making the necessary trade-offs. What we call
dynamic management can help: a combination of disciplined processes,
decision-making protocols, rolling budgets, and calendar-management
procedures makes it possible for companies to manage the portfolio of
initiatives as part of an integrated senior-management approach to running
the entire enterprise. Dynamic management forces companies to make
resource allocation trade-offs, explicitly, at the top of the house rather
than allowing them to be made, implicitly, by down-the-line managers
struggling to make their budgets. This change further simplifies the line
managers' role.
Develop organizational overlays
Having stripped away unproductive matrix and ad hoc structures from the
vertical organization and clarified the line structure, a company must
develop organizational overlays in the form of markets and networks that
help its professionals work horizontally across its whole extent. These
overlays make it easier for them to exchange knowledge, to find and
collaborate with other professionals, and to develop communities that
create intangible assets.
Because these market and network overlays help professionals to interact
horizontally across the organization without having to go up or down the
vertical chain of command, they boost rather than hinder productivity.
Companies that establish such overlays are making investments not only to
minimize the search and coordination costs of professionals who exchange
knowledge and other valuable intangibles among themselves but also to
maximize the opportunities for all sorts of cost-effective, productive
interactions among them.
We believe that moving simultaneously into knowledge marketplaces, talent
marketplaces, and formal networks will make all three more effective. A
knowledge marketplace, for example, helps members of a formal network to
exchange knowledge, which in turn helps to strengthen the network. A
talent marketplace works better if the people who offer and seek jobs in
it belong to the same formally networked community. In combination, these
techniques can make it possible for companies to work horizontally in a
far more cost-effective way.
Knowledge marketplaces. For the better part of the past 15 years,
knowledge management has generated a good deal of buzz. Despite heavy
investment, the benefits have been limited. Real value comes less from
managing knowledge and more—a lot more—from creating and exchanging it.
And the key to meeting this goal is understanding that the most valuable
knowledge of a company resides largely in the heads of its most talented
employees: its professionals.
Exchanging knowledge on a company-wide basis in an effective way is much
less a technological problem than an organizational one. As we have
argued, to promote the exchange of knowledge, companies must remove
structural barriers to the interaction of their professionals. These
companies must also learn how to encourage people who may not know each
other—after all, big corporations usually have large numbers of
professionals—to work together for their mutual self-interest. What's the
best way of encouraging strangers to exchange valuable things? The
well-tested solution, of course, is markets, which the economy uses for
just this purpose. The trick is to take the market inside the company.
How can companies create effective internal markets when the product is
inherently intangible? Among other things, working markets need objects of
value for trading, to say nothing of prices, exchange mechanisms, and
competition among suppliers. In addition, standards, protocols,
regulations, and market facilitators often help markets to work better.
These conditions don't exist naturally—a knowledge marketplace is an
artificial, managed one—so companies must put them in place.2 In
particular, the suppliers of knowledge must have the incentives and
support to codify it (that is, to produce high-quality "knowledge
objects"), and "buyers" must be able to gain access to content that is
more insightful and relevant, as well as easier to find and assimilate,
than alternative sources are.
Knowledge marketplaces are a relatively new concept, so they are rare. We
have found that building an effective one in a large company requires
significant investments to get the conditions in place—but that such a
marketplace can indeed be built. A successful mechanism of this kind
substantially improves the ability to create and exchange knowledge and
dramatically cuts search and coordination costs.
Talent marketplaces. A company can create similar efficiencies by
developing a talent marketplace that helps employees in a talent pool,
either within a single organizational unit or across the enterprise, to
explore alternative assignments varying from short-term projects to
longer-term operating roles. Simultaneously, anyone with assignments to
offer can review all of the people looking for new opportunities. As with
marketplaces for knowledge, companies must invest in their talent markets
to ensure that gifted men and women looking for new jobs hook up with
managers seeking talent.
Companies must define the talent marketplace by specifying standardized
roles, validating the qualifications of candidates, determining how
managers receive the job seekers' performance evaluations, and so forth.
The other requirements include pricing (the compensation for a particular
role or assignment), an exchange mechanism to facilitate staffing
transactions, and protocols and standards (how long assignments run, the
mechanics of reassignment, the process of conveying decisions to reassign
employees). Talent marketplaces do exist—particularly in professional
organizations—but like knowledge marketplaces they are at an early stage
of development.
Formal networks. People with common interests—such as similar work
(industrial engineers, say), the same clientele (the automotive industry),
or the same geography (China)—naturally form social networks. These
networks lower the cost of interaction while increasing its value to all
participants. A network often provides them with increasing returns to
scale: the larger it is, the more chances they have to find opportunities
for collaboration.
Social networks do face problems. They often have limited reach (for
example, because they don't extend to many potential members in far-flung
units and geographies). What's more, they sometimes operate inefficiently
(several conversations might be required to reach the right person), may
rely too much on the participants' goodwill, and, most particularly, can
fail to attract enough investment to serve the common good of all members
effectively.
The solution, for a company, is to boost the value of the network by
investing in it and formalizing its role within the organization. One such
move is the designation of a network "owner" to build common capabilities
(for instance, by making investments to generate knowledge). Others
include developing incentives for membership, defining separate
territories (the existence of more than one social network may confuse
would-be members), establishing standards and protocols, and providing for
a shared infrastructure (say, a technology platform supporting the
network's activities).
In fact, a formal network with specific areas of economic accountability
can undertake many of the activities that have inspired companies to use
matrix management structures. A formal network relies on self-directed
people who work together out of self-interest, while a matrix uses a
hierarchy to compel people to work together. In addition, a formal network
enables people who share common interests to collaborate with relatively
little ambiguity about decision-making authority—ambiguity that generates
internal organizational complications and tension in matrixed structures.
Although social networks flourish at many companies, only a few have
formalized them. That next step, though, is one of the most important
things a company can do, because it removes unnecessary complexity from
horizontal interactions among talented people across organizational silos.
Measure performance
The final set of ideas rounding out this new organizational model involves
relinquishing some level of supervisory control and letting people direct
themselves, guided by performance metrics, protocols, standards, values,
and consequence-management systems.
To be sure, accountable leaders must control large companies even as many
of their workers become more and more self-directed. But what's needed is
inspired leadership, not more intrusive management. Of course, management
will continue to be vital—particularly to get value from the many
employees who will go on laboring in "industrially engineered" processes
and to hold all of a company's workers and managers accountable for their
performance.
But as the workforce increasingly comes to consist of self-directed
professionals, leaders will have to manage them by setting aspirations and
using performance metrics that motivate them to organize their work, both
individual and collective, to meet those aspirations. One successful CEO
once told us that to motivate behavior, measuring performance is more
important than providing financial incentives to reward it. The challenge
is that to measure it effectively, the metrics must be tailored to
individual roles and people. Get the metrics wrong and unintended behavior
is the result.
To motivate the collaborative behavior that makes this new organizational
model work, companies must create metrics that hold employees individually
accountable for their contribution to collective success—an idea we call
holding people "mutually accountable." Such metrics are particularly
important for senior and top managers but are required, more broadly, for
all self-directed workers. People who are great at developing the
abilities of other talented people or at contributing distinctive
knowledge, for example, should be more highly valued than those who are
equally good at doing their own work but not at developing talent or
contributing knowledge.
A new organizational model for today's big corporations will not emerge
spontaneously from the obsolete legacy structures of the industrial age.
Rather, companies must design a new model holistically, using new
principles that take into account the way professionals create value. Big
companies that follow these principles will get more value, at less cost,
from the managers and professionals they employ. In the process, they can
become fundamentally better at overcoming the challenges—and capturing the
opportunities—of today's economy.
About the Authors
Lowell Bryan is a director and Claudia Joyce is a principal in McKinsey's
New York office.
Notes
1Lowell L. Bryan, "Just-in-time strategy for a turbulent world," The
McKinsey Quarterly, 2002 special edition: Risk and resilience, pp. 16–27.
The primary stages of such an investment process are diagnosing the
problem or opportunity, designing a solution, creating the prototype, and
scaling it up, with natural stopping points, midcourse corrections, or
both at the end of each stage.
2Lowell L. Bryan, "Making a market in knowledge," The McKinsey Quarterly,
2004 Number 3, pp. 100–11.

Business demands a consistent approach to energy: The writer is chairman and chief executive of GE

Business demands a consistent approach to energy
Financial Times, 29 June 2005 - The US and Europe differ over many things,
some ordinary - such as what kind of game football is - and some vital to
the core of our respective, varied cultures, helping to keep us distinct
and, in turns, engaged and exasperated.
Still, there are many more areas where we agree and I believe we are now
moving toward increasing agreement on an issue that is neither ordinary
nor unique to the US or Europe: that we must revolutionise how we produce
and consume energy and commit firmly to reducing emissions in our shared
environment.
Diminishing oil and natural gas reserves, reliance on imported and
sometimes unstable energy sources, price volatility and global climate
concerns demand that we do so. It will require three elements: the
brain-power to develop new technologies, a market that is open to them and
the wills of our elected leaders, those in industry and those committed to
progress.
It will take work to gather these elements together but the prospect of
success is growing. Since the 1990s, innovations in dramatically cleaner
energy have emerged, not just in the US and Europe but in China, India and
elsewhere. Their common denominator has been a target of higher
efficiency, lower cost and fewer emissions - such as that found in cleaner
coal applications that could shave millions of tonnes of carbon dioxide
from emissions levels. As these technologies take hold, we enhance our
potential to succeed, but a viable market must exist. Signs of such growth
are emerging, both in companies and the capital markets.
In June alone, two of Silicon Valley's top venture firms invested nearly
Euros 33m (Pounds 22m) in solar energy companies. While such "clean tech"
investment represented just 2.6 per cent of North American venture capital
in 2004, that is double the level of 2000. In a recovering capital market,
these numbers show that we are crossing the threshold where solving energy
and environmental problems is the profitable thing to do as well as the
right one - and where fewer pounds of emissions can mean more pounds on
the bottom line.
General Electric is putting its money where its mouth is. We have
committed to doubling annual investment in clean energy technology
research and development to Euros 1.25bn. Instead of a top-down approach
that could potentially stifle creativity and innovation, we are investing
most new funding at the research level, making sure that these new funds
go directly into those innovation engines that offer the most promise. We
also plan to double energy-efficient product revenues over the next five
years and will make big cuts in our greenhouse gas emissions. If GE were
to continue to grow as we project, by 2012 our emissions would have gone
up more than 40 per cent. Instead, we are committing to reduce them by 1
per cent.
Climate change will top the agenda at the Group of Eight summit next week
and we support the European Commission's proposed directive to improve
energy efficiency and manage energy demand. We also applaud the UK
government's decision to invest Pounds 40m in cleaner electricity
generation from coal and gas as well as for hydrogen and fuel cells. But
these commitments and the prospect of exciting new technologies mean
little if leaders on both sides of the Atlantic - along with industry and
other stakeholders - cannot work together to develop coherent processes
and consistent policies.
In the US, the lack of a coherent energy policy has slowed the
exploitation of new innovations. While great progress has been made, we
have failed to realise fully the opportunities that exist in wind, solar,
clean coal, nuclear power and other renewable resources. The result is
that the US has watched Europe and others advance, strengthening their
economies and security.
I am not talking about "one-policy-fits-all" but consistency. GE has
business in hundreds of countries and more than 300,000 workers - more
than 85,000 in Europe alone. To remain competitive, we cannot navigate a
regulatory maze that forces us to modulate every product and process to
suit individual regulatory regimes at their whim. All that we ask for -
and this will allow us to grow as a healthy, responsible company - is
consistency.
Policies that commit to market-based approaches will drive innovation and
lead to environmental improvements. The US and Europe stand at a
crossroads, where the co-operative efforts of governments, industries and
stakeholders can change the course of the world. Taking the proper path
will not be easy, cheap or quick. But nothing worthwhile ever is.
The writer is chairman and chief executive of GE

Pharmaceutical companies and the right to health

Pharmaceutical companies and the right to health
EC Newsdesk
6 Jul 05

In recent years pharmaceutical companies have been under the spotlight
over drug pricing and lobbying issues. Many in the industry realise that
they have a role to play in promoting health rights, but also wonder where
some of the boundaries of activity ought to lie, writes Markus Breuer
The UN recognises "the right of everyone to the enjoyment of the highest
attainable standard of physical and mental health". In other words, the
right to health is a fundamental human right.

It is clear that all human rights, including the right to health, require
protection and empowerment. But there is often only a vague idea of who
bears concrete responsibility in a given situation. Particularly when it
comes to developing countries, we are often faced with an undefined number
of actors with whom human rights responsibility may lie.

The UN charter of human rights calls on all participants in civil society
to respect and promote human rights. Under the charter everyone is
required to define and responsibly fulfil their own role, and to
proactively address others.

As one of these participants, pharmaceutical companies should not be held
responsible for the health of the world's population or disease. Natural
disasters, poor health education, famine and corrupt governments are some
of the uncontrollable factors affecting global health. But while some of
the causes of health problems lie beyond the reach of pharmaceutical
companies, others are of crucial concern to them.

With great power...

A privileged position in society, like that of a multinational company,
does not simply mean the enjoyment of advantages, it also brings with it
obligations.

Pharmaceutical companies have the knowledge and resources to prevent
and/or relieve certain health problems. From this, a certain share of the
responsibility for solving problems can be placed on the industry.
However, many people lack the means to purchase from pharmaceutical
companies if the mechanism of distribution are left purely to market
principles. Should, then, medicines be provided free or at low prices?

And, we must also consider where the responsibility of the individual
company should end.

Companies are confronted with conflicting demands in terms of business and
social needs and they have to opt for or against specific demands with
good reason. Only in this way can an appropriate and sustained balance be
created between public and corporate welfare.

Probably the most important contribution the sector makes is through
research-based pharmaceutical companies providing innovative products that
treat disease and relieve pain, restore health and thus improve the
quality of life.

It is also true to say, however, that the law of the market dictates that
usually such products are developed only where they meet a demand in
places where there is purchasing power and the drugs can be sold at
competitive prices. This can mean that the poor - particularly in the
developing world - have little access to such medicines or treatments.
There is thus a need for research and development of medicines to treat
tropical and poverty-related diseases.

Improving access is primarily about the affordability of treatment. But
the experience of existing programmes, such as the free worldwide
distribution of medicines for leprosy and the forthcoming donation of
treatments for tuberculosis, show that this does not always improve
access.

Systems count

Healthcare systems have to be organised in a way that encourages patients
to seek diagnosis and treatment and these need to be competently provided
in the health services (availability and quality of care). Geographic
accessibility must be ensured and there needs to be cultural acceptance
among patients for the form of services provided.

Company contributions towards the respect and promotion of the right to
health usually extend further than appears to be the case. It is also
apparent that focusing on a single element - such as access to medicines
for disadvantaged people in developing countries - does not necessarily
benefit the cause of access to effective treatment, let alone the right to
health.

Fulfilment of the right to health is dependent on many factors working
together. Pharmaceutical companies can and must certainly contribute, but
by no means alone. But important basic conditions and resources can
ultimately only be created and provided by nations, and strong
international partnerships between states.

Dr Markus Breuer is from the Novartis Foundation for Sustainable
Development and can be contacted at markus.breuer@novartis.com

This article represents the author's personal opinion and does not reflect
the opinion of the Novartis Corporation or its directors, officers or
staff.

Building the healthy corporation: It isdifficult—but vital—for managers to strike a balance between the short and long terms.

Feature Article
Building the healthy corporation
It is difficult—but vital—for managers to strike a balance between the
short and long terms.
Richard Dobbs, Keith Leslie, and Lenny T. Mendonca
The McKinsey Quarterly, 2005 Number 3

"Language is a city to the building of which every human being brought a
stone."—Mark Twain
Growing numbers of organizations—including banks on both sides of the
Atlantic, a global natural-resources group, and a leading UK retailer—are
adding an important new "stone" to the 21st-century business lexicon.
"Performance and health" is a metaphor that derives its power from a
simple comparison with the human body. Just as people may seem reasonably
well today but may not have the physical condition for the rigors of a
long and active life, so too companies that are profitable in the short
term may not have what it takes to perform well year after year.
Managing companies for success across a range of time frames—a requisite
for achieving both performance and health—is one of the toughest
challenges in business. Recently, it has been especially hard: turbulent
economic conditions, for example, have concentrated the collective minds
of many executives on pure survival. The fact that 10 of the largest 15
bankruptcies in history have occurred since 2001 is a strong deterrent to
business building, playing up its inherent risks.
Businesses complain that financial markets increasingly focus on quarterly
results and give little credit to strategies for creating longer-term
value, particularly if they depress today's profits. Empirical evidence
largely contradicts such claims (see sidebar, "The stock market values
health as well as performance"). But some noisy analysts undoubtedly do
focus on short-term performance and thus unwittingly drive wedges between
managements, boards, and investors.
Management teams must urgently take the lead in showing their boards and
the capital markets that they are nurturing the long-term health of their
companies. They must act not only to improve corporate performance in the
near term but also to lay the foundations today for consistent and
resilient growth in years to come.
Companies out of balance
Tools intended to encourage a more balanced approach and to promote
"systems thinking" have been available to managers for some time. But our
experience suggests that these tools are either being applied too
mechanically (and therefore ineffectively) or being squeezed out by the
focus on survival and by perceived pressure from investors. And that's to
say nothing of the increased near-term demands created by new regulations
on financial reporting, particularly in the United States.
Good short-term results are important, of course; only by delivering them
will management build confidence in its ability to realize longer-term
strategies. But companies must also act today to ensure that they can
convert their growth prospects, capabilities, relationships, and assets
into future cash flows.
One major European financial-services company recently discovered how easy
it is for performance and health to get out of balance. After the company
had achieved an impressive turnaround in its short-term financial
performance in the three years to 2004, it found to its dismay that this
success had been accompanied by falling customer service levels, a huge
increase in staff turnover, and a fall in its share price. Management
complained that the financial markets didn't understand what the company
had achieved. But in reality they understood, all too well, that its
short-term success had been purchased at the expense of its underlying
health.
Such shortsighted behavior is widespread. In one recent survey,1 a
majority of the managers polled said that they would forgo an investment
offering a decent return on capital if it meant missing their quarterly
earnings expectations. Indeed, more than 80 percent of the executives
responding said they would cut expenditures on R&D and marketing to ensure
that they met their quarterly earnings targets—even if they believed that
the cuts were destroying long-term value.
This survey shows that even if more organizations are now talking the
language of health, many address the issues only at a superficial level.
For instance, "scorecards"—a favorite approach of many companies to
balancing near- and long-term considerations—too often consist of
disconnected metrics that confuse the organization and lack any real
impact. One public-sector agency we know—an extreme case, to be sure—came
up with 96 key performance indicators at the end of a two-year initiative;
the list was effectively dead on arrival when it was rolled out for
implementation. The chief executive of an international bank was recently
shocked to find that members of his senior-management team were responding
only to revenue targets and deliberately ignoring broader metrics of
performance and health.
What underlies the breakdown of many long-term initiatives is the tendency
of managers to defend the performance of their own silos instead of
debating and helping to shape action across the whole organization. In
silo-structured companies, managers typically argue about the virtues of
one metric as opposed to another (especially if transfer prices are
involved), deflect debate to other parts of the organization, and set up
barriers to change. This kind of behavior isn't deliberately malevolent;
it is driven by deeply held beliefs about a manager's roles and boundaries
and reinforced by the idea that the body corporate is the sum of many
discrete units, each with independent characteristics, that should be
monitored with a battery of metrics. Unfortunately, this mind-set
undermines any systemic understanding of how to manage activities
coherently, across the whole organization, to underpin healthy growth.
An emerging awareness of health
The good news is that a clear health consciousness is developing after the
startling corporate-health failures of recent years, and convincing
prescriptions for change are emerging. In responses to a McKinsey survey,
conducted in early 2005, of more than 1,000 board directors, most of them
made it clear that they want to devote less time to discussing the latest
financial results and much more to setting strategy, assessing risks,
developing new leaders, and monitoring other issues that underpin a
company's long-term health. Fully 70 percent of the directors want
additional information about markets: a more detailed analysis of
customers, competitors, and suppliers, for example. Upward of half want
additional information about organizational issues, such as skills and
capabilities. Two in five are eager for the facts about relations with
outside stakeholders, such as regulators, the media, and the wider
community.2
Above all, boards want to help their companies seize prospects for
long-term growth and avoid exposure to risks from organizational blind
spots or from any unwillingness to acknowledge external change. Thinking
deeply about performance and health helps executives to address both
aspirations.
What makes companies healthy?
Companies that attend to five different aspects of performance and health
can build the resilience and the organizational capacity not only to
deliver but also to sustain both.
Strategy
First, a company's strategy should be reflected in a portfolio of
initiatives3 that consciously embraces different time horizons. A typical
large company does, of course, include business units with distinct
strategies, but few of them could really help it adapt to events or
capitalize on new opportunities. Some initiatives in the kind of portfolio
that we recommend should bolster a company's short-term performance.
Others should create options for the future—new products or services, new
markets, and new processes or value chains. A key management challenge is
to design and implement initiatives that balance the company's performance
and underlying health on a risk-adjusted basis.
Such a portfolio of initiatives helps companies overcome certain
traditional shortcomings of strategy, such as its episodic nature and a
tendency to ignore the resources and capabilities needed for execution and
to plan the future instead of for the future. By developing and managing a
portfolio of initiatives—rather than a single approach to
strategy—companies can lower the risk that unpredictable events will place
them on the wrong foot.
Metrics
A robust set of organizational metrics allows executives to monitor a
company's performance and health. What's needed is a manageable number of
metrics that strike a balance among different areas of the business and
are linked directly to whatever drives its value. A vast assortment of
metrics is self-defeating.
Companies should identify the health and performance metrics most
important to them: product development, customer satisfaction, government
relations, or the retention of talent, for example. (The answer will of
course depend on a company's industry and strategy.) Most organizations
track standard financial metrics. But we would also expect some metrics to
cover operations (the quality and consistency of key value-creating
processes), organizational issues (the company's depth of talent and
ability to motivate and retain employees), the state of the company's
product markets and its position within them (including the quality of
customer relationships), and the nature of relationships with external
parties, such as suppliers, regulators, and nongovernmental organizations
(NGOs).
Systematically identifying and tracking health metrics that reflect the
strategy of a business—and the forces driving its value—is difficult. A
useful framework is to think of value creation in the short, medium, and
long term.
A consumer products company must know whether it raised its profits by
raising prices or by increasing its market share
Short-term health metrics show how a company achieved its recent results
and thus indicate its likely performance over the next one to three years.
A consumer products company, for example, must know whether it increased
its profits by raising prices or by launching a new marketing campaign
that increased its market share. An auto manufacturer must know whether it
met its profit targets only by encouraging dealers to increase their
inventories. A retailer might want to examine its revenue growth per store
and in new stores or its revenue per square foot compared with that of
competitors.
Another set of metrics should highlight a company's prospects for
maintaining and improving its rate of growth and returns on capital over
the next one to five years. (The time frame ought to be longer for
industries, such as pharmaceuticals, that have long product cycles and
must obviously focus on the number of profitable new products in the
pipeline.) Other medium-term metrics should be monitored as well—for
example, metrics comparing a company's product launches with those of
competitors (perhaps the amount of time needed to reach peak sales). For
an online retailer, customer satisfaction and brand strength might be the
most important drivers of medium-term health.
For the longer term, companies should develop metrics assessing their
ability to sustain earnings from their current activities and to identify
and exploit new areas where they could grow. They must monitor any
threats—new technologies, new customer preferences, new ways of serving
customers—to their current businesses. And to ensure that they have enough
growth opportunities to create value when those businesses inevitably
mature, they must monitor the number of new initiatives under way (as well
as estimate the size of the relevant product markets) and develop metrics
that track the initiatives' progress.
Ultimately, it is people who make companies deliver, so metrics should
show how well a business retains key employees and the true depth of its
management talent. Again, what's important varies by industry.
Pharmaceutical companies, for instance, need scientific innovators but
relatively few managers. Companies expanding overseas need people who can
work in new countries and negotiate with governments.4
Constant fine-tuning is needed to come up with the right mix of metrics.
For a typical business unit, top management and the board should monitor
no more than three to five metrics, representing different areas of the
business for each time frame. To make sure that the metrics are
appropriate, the finance department or the performance-management group
should regularly reexamine the way the company creates value.
Companies must avoid the erroneous thinking that too often juxtaposes
"hard" metrics for performance with "soft" ones for health. They can and
should attach hard numbers to health metrics, such as the motivation and
capabilities of their employees. Similarly, they can and should track
their current performance with softer metrics, such as the quality of
their latest earnings or of their relationships with opinion formers.
Communication
The next step is for companies to change the nature of their dialogue with
key stakeholders, particularly the capital markets and employees. For the
capital markets, that means first identifying investors who will support a
given strategy and then attracting them.5 Talking about corporate health
to court hedge fund managers pursuing the next bid, for example, is
pointless.
Management teams should also spend serious time with analysts who follow
their companies, in order to explain their views on the industry and to
show how strategies will create sustainable advantages. It may also be
necessary to highlight metrics tracking performance and health. Vague talk
about shareholder value, without a time frame or without addressing the
specifics of a business, just isn't meaningful.
Companies might also be wise to separate discussions of quarterly results
from those focusing on strategy, as several major international businesses
have recently done. And they should ensure that analysts spend time with
operational managers, whose effectiveness is often the crucial factor in
attempts to estimate a company's ability to sustain its performance.
Reaching out to employees is just as important. The complaint that "we
don't know what's going on" often indicates that a company's leaders are
communicating results rather than long-term intentions.
Leadership
Corporate leaders should remember their obligation to manage both
performance and health. Thinking about health typically requires a range
of new skills and characteristics—not necessarily those that worked well
in the past. One hallmark of great, enduring companies is a willingness to
involve future generations of leaders in their own development.
Few companies recognize the leadership capacity new strategies require.
See "Leadership as the starting point of strategy"
In addition, good leaders understand both the power and the attendant
risks of what former Unilever chairman and CEO Niall FitzGerald called
their "extraordinary amplification system." Those who casually or randomly
articulate themes for action run a risk of making the organization
schizophrenic. The combination of "initiative overload" and a reluctance
on senior management's part to produce a simple and coherent agenda can be
particularly damaging. At one defense industry organization, we counted
more than 1,000 seemingly disconnected initiatives, 234 of them in
procurement alone.
Focusing the leadership on personal behavior is also crucial to
maintaining a company's health. We know of a public-sector body, a
financial institution, and a natural-resources group that all refer to the
leaders of business units as "princes" rather than "barons." This
terminology resonates with the three organizations because princes are
concerned for the whole, while barons protect their own turf—if necessary
at the expense of the other parts. Companies can likewise encourage a
wider perspective on the business, and stronger linkages across
boundaries, by giving senior managers a portfolio of roles. Alternatively,
some companies have successfully developed peer groups of business unit
leaders who share a collective responsibility for their businesses. Other
companies are strengthening their core functions and reversing the trend
toward corporate atomization into a number of semiautonomous business
units.
To create this kind of leadership, companies must take a longer-term view
of the way they manage talent and career tracks and of the incentives
created by money, recognition, and promotion. One company's approach is to
implement a long-term incentive plan for top management—a plan that has
weakened the direct link between remuneration and short-term earnings. By
contrast, the current trend of making people change roles every two or
three years isn't necessarily good for long-term corporate health.
Governance
The growing demand for corporate probity and better governance has
reinforced the CEO's pivotal leadership role. Board meetings therefore
represent a useful opportunity—and discipline—for testing the
organization's resilience to pressure and change over time. As we have
seen from our survey, directors are eager to redirect their attention to
this task. The need for resilience is greatest when investments take a
long time to pay off, as they generally do for natural-resource and
pharmaceutical companies and public-sector bodies. CEOs and boards lack
rapid performance feedback in such cases and thus need to keep a close eye
on a range of considerations: regulatory influence, marketing and supplier
partnerships, and organizational skills.
Given the current economic and regulatory environment, a focus on
short-term performance is understandable, but it is nonetheless
unbalanced. Companies must again learn how to meet next year's earnings
expectations while at the same time implementing the platforms needed to
deliver strong and sustainable earnings growth year after year. Achieving
this dual focus involves thinking about strategy, communication, and
leadership in new ways. And it calls for the creation of a carefully
designed set of metrics—balanced across the business and linked to the
creation of value over the short, medium, and long term—that can help
management teams and boards monitor their ability to stay on course.
The stock market values health as well as performance
The fixation of a few analysts on the short-term results in next quarter's
earnings announcements shouldn't blind management to the reality that
these announcements also contain objective and reliable information about
long-term performance. And that is why most investors pay attention to
them.
However, an examination of share prices shows that expectations of future
performance are the main driver of shareholder returns: in almost all
industries and almost all stock exchanges, cash flow expectations beyond
the next three years account for 70 to 90 percent of a share's market
value. These longer-term expectations in turn reflect judgments on growth
and long-term profitability—a lesson relearned after the dot-com bust.
Long-term expectations vary from one industry to another. Cash flows in
the global semiconductor industry, for example, must grow by more than 10
percent a year during the next ten years to justify current market
valuations. In retailing and consumer packaged goods, the required growth
rate ranges from 3 to 6 percent; in electric utilities, it is around 2
percent.
Future expectations also clearly drive the stock price of individual
companies, thus explaining the often widely differing P/Es or
market-to-book ratios of companies with similar reported earnings. In the
pharmaceutical sector, for example, the market ascribes great value to a
healthy drug pipeline, despite the fact that it will not affect earnings
in the short term.
Even the private equity sector, renowned for its focus on short-term
operational improvements, believes that health matters. Most private
equity firms look to realize their investments in a five-year time frame,
but they must still have a credible proposition for future earnings and
cash flow growth to underpin a sale or IPO.
Return to reference
About the Authors
Richard Dobbs is a director and Keith Leslie is a principal in McKinsey's
London office; Lenny Mendonca is a director in the San Francisco office.
The authors wish to thank Tim Koller, Marc Loch, and David Turnbull for
their contributions to this article.
Notes
1John R. Graham, Campbell R. Harvey, and Shivaram Rajgopal, "The economic
implications of corporate financial reporting," NBER working paper number
10550, January 11, 2005.
2Robert F. Felton and Pamela Keenan Fritz, "The view from the boardroom,"
The McKinsey Quarterly, 2005 special edition: Value and performance, pp.
48–61.
3Lowell L. Bryan, "Just-in-time strategy for a turbulent world," The
McKinsey Quarterly, 2002 special edition: Risk and resilience, pp. 16–27.
4Richard Dobbs and Timothy Koller, "Measuring long-term performance," The
McKinsey Quarterly, 2005 special edition: Value and performance, pp.
16–27.
5Kevin P. Coyne and Jonathan W. Witter, "What makes your stock price go up
and down," The McKinsey Quarterly, 2002 Number 2, pp. 28–39.
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