Money Matters

The Future Economy Project: Q&A with Andrew Liveris

(Source: hbr.org)

HBR: Dow has committed itself to an ambitious sustainability approach. Why did you decide to do that?

Liveris: The sustainability agenda of Dow, from the founder to present day, has been very community-centric. Dow’s thinking, whether it be on safety, whether it be on environment, whether it be on employee health, has always been geared toward: We are a good neighbor, a good citizen, a part of our community. As a result, when the world started to figure out that the community fence is not literally your physical fence line — but it’s actually the planet — and sustainability meant the management of finite resources, Dow had a natural seat at the table. Dow was one of the first companies ever to publish a corporate report for public use on the triple bottom line: environment, social, and political (ESP) parameters. Doing well and doing good is in the DNA of the CEO job, and for that matter in the jobs of every divisional leader and every employee at the company. So when I ascended to the CEO job, as a DOW corporate veteran, it was very natural to me to assemble our sustainability committee and say, “OK, how do we change our entire modus operandi so that it becomes part of our business model?”

Many sustainability initiatives that improve the bottom line in the long term don’t pay off initially. How do you bring along stakeholders in that early stage when there won’t be an immediate payoff?

Well, you’re right, even today investors and portfolio managers still ask, Why do you have to do these sorts of things? If you go back in time 20 or 30 years, they were almost never thought of. And so the way we think about them at Dow, to be simplistic, is there are denominator goals and there are numerator goals.

The denominator goals actually became the simplest to talk about to investors and to the financial community. There’s a license to operate, there’s a regulatory environment that comes through federal, state, or local authorities, and those regulatory environments are born from inputs that are garnered from everywhere — and we need to be one of those that provide that input. In fact, we need to be a primary source, because we have science-based input. So that means giving the Environmental Protection Agency access to our toxicology lab and our analytical lab so that they can get sounder science.

It means being collaborative with NGOs so that we can understand their views of what a regulatory environment would look like. If you have the same regulatory standard globally — and that standard is to protect the environment and protect people — if you are one of the very few that can actually overcome that regulatory standard, and actually comply with it, and actually be the corporate citizen that every jurisdiction wants to see, you find a competitive advantage. That’s our motto at Dow. Our mojo and motto is always comply with the highest standard, no matter which country we’re operating in. That’s denominator-driven. You can have that conversation with investors in the financial community, because if you don’t comply, you could be out of business.

When it comes to things that have planetary impacts, with climate change being a great example, the financial community would really prefer that you don’t invest in it, because the cost is intangible — unless there’s some tangible way of measuring it, like a price on carbon. How we overcome that in Dow is by doing full life-cycle analysis on what we call our footprint and our handprint — our footprint being our facilities and our handprint being our products that we send out to the world. And when we do the full life-cycle analysis and look at the cost our products have in society versus the benefit they bring, we need to have a benefit that outweighs the cost.

If we can have less waste or emissions, that implies we’re actually converting the input to a useful product, one that goes to a benefit, versus a waste that goes to a negative value. If we can do it for emissions, like with carbon, if we can burn less BTUs so that we emit less carbon, we can deliver that to the bottom line, and in fact, we invested $1 billion in energy efficiency, water, waste, and emissions reduction projects from 1995 to 2005, and we can tangibly show investors how we saved $5 billion.

Our new goals have us delivering $2 billion of new value through 2025 by managing inputs for less outputs, by managing ourselves on emissions and waste so that we impact the environment less. These sorts of metrics, which we now track for ourselves, we can articulate to the investment community. Those are numerator goals. The world is not used to those yet. We have some forward-thinking collaborations that actually try to put a value on them, but frankly these are the goals the world is struggling with the most.

The U.S. federal government right now doesn’t seem to be making regulations a priority. How does that change things for you and how do you think it changes things for U.S. businesses generally?

When it comes to our sustainability agenda, we are beyond this notion of thinking about the regulatory environment. If we can have the objective of delivering pure, clean water to the 1.5 billion people in the world who don’t have access to it, or if we can deliver energy efficiency into areas that are energy-scarce, those initiatives are independent of the regulatory environment. For example, food packaging: If we can deliver a package based on plastic that is lighter, more functional, recyclable, and ultimately renewable — the holy grail — that’s a sustainability agenda that has a profit output that is beyond regulation.

Here in the United States, what’s happening with the Trump administration is a peeling back of regulations that were put forward without a lot of inputs and a lot of sound science. There’s no question the Obama administration allowed the agencies to create regulations without doing the risk/reward benefit profiles at the front end. For example, in 2009 the U.S. manufacturing sector’s regulatory cost per employee was $9,500. In 2016 that same number was $19,900. We had a doubling of regulatory costs.

I think you’re saying that the Trump administration, in your view, is more science-based on these issues than the Obama administration. Is that right?

That’s a bridge too far. What I was trying to say is [the Trump administration] is much more interested in getting the input of those jurisdictions that are being regulated. So the regulator is talking to the regulated. The Obama administration did not do that.

Look at sustainability as part of your business model; don’t look at it as a side initiative.

What is the obligation of businesses to lobby for action around sustainability and generally try to engage in society?

Well, I think this is the biggest challenge in front of all of us. What we’re all doing as 7 billion people, and will do as 9 billion people by 2050, is simply not sustainable. And if we take out various slivers of the problem, we will suboptimize and get bad answers, and I think sound public policy based on sound science requires collaboration across business, government, and civil society. I think it’s the role of business to be one of the catalysts for change, and I think you need to find more and more enterprises, big and small, that are willing to have a seat at the table and develop the sound public policy that drives you to have longer-term vision. Our collaborations are geared that way. We have a landmark collaboration with The Nature Conservancy, but we have many collaborations with many of the representatives of civil society, notably the NGOs. Our community advisory panels, which we have in every country and at every site we operate at, serve that purpose.

You’ve partnered with The Nature Conservancy to study how your operations rely on and affect nature. Is that something you would recommend to other CEOs, a partnership like that, and if so, why?

The Nature Conservancy and Dow found each other about 10 years ago. They see the profit motive as a reason to be at the table. In other words, they understand that we aren’t a not-for-profit and that we have the right to do business based on treating nature such that it rejuvenates and can be sustainable. What we’ve been able to do together, using our engineers and scientists and using their scientists and public policy experts, is to develop a suite of tools to help decision makers rapidly assess the value of an ecosystem to a business or a community. We call these “valuing nature projects.” We have other collaborations we’ve developed with other NGOs. Their way of working with us is to understand we have to have bottom-line projects.

What is your advice for companies or CEOs who want to pursue a long-term sustainable agenda? Where do you start?

Nearly every enterprise I’m familiar with in the Fortune 500 that has any number of decades behind it has a set of values that is deeply rooted in its psyche — its credo, as Johnson & Johnson calls it. In other words, [values] are part of the operating philosophy. It’s what sustains enterprises through generational change. The value set almost certainly has words about valuing people and communities in some way. I would urge CEOs to grab those values and make them part of the business agenda, because society today is looking for companies that can actually provide solutions.

And if you can take your values and use your science, use your people, and make it part of your strategic path forward in terms of how your products impact the environment, what you’ll find is that society values your products. Look at sustainability as part of your business model — don’t look at it as a side initiative.

Dow has a complicated story, because you’re making plastics, you’re making petrol derivative products that rely on fossil fuels. How do you tell that story? Is the point that you’re transitioning away from these products, or is that not the way to think about it?

I would say there’s a strong awareness today in the general populace that a company like Dow is no longer — and I can be egregious with my next statement — the company that gave you napalm during the Vietnam War. We’re at the 50th anniversary of the famous Berkeley riots, where the CEO at the time was chased off the campus as an instrument of the U.S. government at war. I think five decades on we’ve done a humongous amount of work to change our image out there based on performance and demonstrable results.

The boom era of substituting natural products with plastic products without due regard to the environment, back in the 1970s and 1980s, is now being replaced by a full life-cycle analysis of minimizing the footprint of the plastics in the environment. But humanity still wants those plastics, and so a big chunk of the responsibility on Dow being in plastics is the path I told you about earlier. We have the resources to work on it and to figure out how we can use less, produce less waste, make the product lighter and recyclable — and then be part of the answer in recycling it and in replacing it with renewables. That’s the Dow that exists today.

In other words, we’re quite willing to cannibalize ourselves. In the IT sector, companies cannibalize themselves; they have short innovation cycles. The car industry is kind of like that too, but they have longer cycles. But most of the industrial sector doesn’t cannibalize itself; the Dow we’ve put in place today is a nimble R&D company. We have the most R&D 100 products in the list every year. We’re willing to cannibalize ourselves and make our innovation cycles shorter. That means we will be less and less of the petrochemical Dow and more and more of the materials-that-are-friendly-to-the-environment Dow.

Are you currently feeling more optimistic or more pessimistic about the future of the environment and human stewardship of it?

There’s a big piece of me that wants to say I’m feeling optimistic, but there’s a lead weight on my feet that keeps dragging me back to reality. The lead weight is that capitalism as a distributor of wealth is starting to fail, and that’s because more and more of the financial outputs of capitalism are going to fewer and fewer people, which is of course leading to a wave of populism. But it is also because in many of the Western economies our thinking has become very short term. In other words, many of these policies that I’m referring to and many of the trajectories that companies like Dow are on are multiyear, if not multi-decade, but the lead weights on people’s feet that ground us in reality are the 90-day march to financial returns, in terms of the earnings results of most companies; the arrival of activism; the arrival of financial ownership; being driven to entry and exit models based on the stock market; and the need for shared buybacks as a way to get shareholder returns in the short term without thinking about returns in the five-to-10-year timeframe.

The pressures on the leadership of public companies are becoming more short-term oriented; sustainability needs to become part of the CEO agenda or it it won’t be taken seriously by owners or communities. I think many of us who get to the CEO job aren’t necessarily primed to be good public speakers and good advocates as marketers, and because of that I think we delegate sustainability. And once we delegate it to the CSO, the awareness factor goes down quite a bit. If sustainability starts becoming part of the CEO agenda, I think more people like me will become more optimistic.

More Info: hbr.org

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