Think - AT LONDON BUSINESS SCHOOL

What is responsible business?

A closer look at what impact really means

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Next time you load your dishwasher at home, ask yourself, what price does society put on the tablets you use?

Does £92million seem like too much? This was the 2009 annual pay of the executive behind the Finish Powerball – a dishwasher tablet brand. At the time Reckitt Benckiser CEO Bart Becht was lambasted as a villain and resigned a year later. How could the leader of a company that makes an array of mundane household products, like Dettol, Air-Wick and Strepsils, be worth so much?

Alex Edmans, Professor of Finance at London Business School, argues Becht’s salary could be justified because he took the company in an innovative and profitable direction. He argues that considering a business's responsible impact only in terms of its activity in obvious areas like carbon emissions, social cohesion and healthcare is a limited and partial view of what it means to be responsible.

What is a responsible business?



In the five years before Becht resigned, Reckitt had been the fourth best performing company in the FTSE 100, generating £22 billion of shareholder value. After he quit, it lost £1.8billion in market value. The reason why Becht had been successful, Professor Edmans argues, is that Benckiser had consistently innovated. In the case of the Finish Powerball it reduced the need for separate salt and rinse aid.

“Next time you load your dishwasher at home, ask yourself, what price does society put on the tablets you use?”

“I'm not saying any of these things completely transformed some of these lives in the same way, like a new medicine would,” says Professor Edmans. “But what this did is make everyday chores, like washing the dishes, just a little bit easier for ordinary members of society.”

“And workers benefited as well; headcount grew by 50%, if they were empowered, a lot of innovation bubbled up from the ground below. And clearly all the good performance I mentioned, was not due to Bart, it was due to all his employees, but they were paid well and also the environment benefited.”

“If we think about the company's value being represented by a pie, we often think about how is that pie split between shareholders and maybe executives and stakeholders, customers, employees and the environment, and we often think about a responsible business as one where maybe the CEO pays herself less or investors don't engage in share buybacks.”

“What's more important about responsible business is the idea of growing the pie to generate, more value for both investors and society. So investors actually generating high returns that need not be irresponsible. When we think about the division of the pie, that is important, but the size of the pie is even more critical.”

Responsibility on the march

Ioannis Ioannou, LBS Associate Professor of Strategy and Entrepreneurship, has been researching how responsible business practices are becoming more widespread.

Between 2012 and 2017 he looked at whether responsible governance and best practices are becoming more common and firms are converging on a consensus. He wants to answer the question of whether responsible business is something that can establish a competitive advantage, or is it going to become best practice that is going to become a necessary condition for survival.

“What's more important about responsible business is the idea of growing the pie to generate, more value for both investors and society.”

Reboot

Daniel Summerfield, Head of Corporate Affairs for the Universities Superannuation Scheme argues responsibility needs to be written into an organisation’s structure in a “fundamental reboot”.

“There are companies that are very, very actively trying to do it,” he says “Not that it's easy, but that's where we need to start. It is all hot air and just meaningless stuff until you put it into practice. Unless you're going to be authentic about it, unless it permeates your business model, permeates every single decision you make, it is just not going to work. I think that raises a question of what it means for an organisational design? How do you design an organisation that's going to bring or ally everyone around that same goal? The bigger question then is can you be mainstream and actually do that?”

Business needs to build organisations from scratch in a way that enables responsible business to be profitable as well, agrees Dr Ioannou.

“We are looking at this issue of responsible management quite deeply in recent years,” he says.

He is also interested in how responsible practice actually translates into financial performance. The hope is this work will give responsible business movement the tools and the blueprint for business to grow the pie for stakeholders, for society and for the planet.

 

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