The 360° Corporation
From Stakeholder Trade-offs to Transformation
Sarah Kaplan

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CHAPTER 1

CREATIVE DESTRUCTION REDUX

How Stakeholder Needs Create Performance Trade-Offs

EVEN BEFORE HURRICANE KATRINA hit the Gulf Coast in August 2005, Walmart’s Emergency Operations Center sprang into action. Managers started with the usual stuff. Their sophisticated information systems had already told them that when hurricanes strike, people want flashlights, tarps, generators, bottled water, and strawberry Pop-Tarts. Yes, strawberry Pop-Tarts. Logistics teams quickly got these items to the stores in advance of the storm. But as Katrina hit land and its seriousness became apparent, the company shifted from priorities of supply and demand to loss prevention—dispatching armored trucks to get cash out of the stores and executing plans to prevent looting.

Amid this shift, an interesting thing happened.

In addition to stocking shelves with the right Pop-Tarts and safeguarding their stores against looters, managers at Walmart stores all over the affected areas were opening up their warehouses to supply food, water, and clothing to local residents and emergency workers. Orders came down from Walmart headquarters to deliver canned food, peanut butter, and other supplies directly into the disaster zone, and to distribute them—for free. In other words, Walmart was taking action that didn’t directly benefit its bottom line. The company had thrown out the corporate disaster-relief playbook.

Walmart employees often arrived in distressed areas before FEMA did. After the storm, Philip Capitano, mayor of Kenner, Louisiana, home to the New Orleans airport, would look back on Walmart’s role and acknowledge that during the worst of Katrina,

the only lifeline in Kenner was the Walmart stores. We didn’t have looting on a mass scale because Walmart showed up with food and water so our people could survive. . . . The Red Cross and FEMA need to take a master class in logistics and mobilization from Walmart.1

On top of this, Walmart then donated $17 million in cash, more than 100,000 meals, and a hundred truckloads of free merchandise to the areas that had been most severely affected by the storm, and, in an unprecedented move for the company, ensured jobs for all of its displaced workers. “I want us to respond in a way appropriate to our size and the impact we can have,” CEO Lee Scott said. It worked. By mid-September 2005, only 13 of the 126 stores that had been shut down by Katrina remained closed, and the company had relocated 97 percent of the displaced employees.2

This was an instance in which Walmart’s incredible scale and deep capabilities in logistics were truly able to shine. In the wake of Katrina, the company was able to mobilize its whole distribution network, on an extremely compressed timeline, to get supplies from all over the country to precisely where they were needed. Aaron Broussard, president of Jefferson Parish in Louisiana, put it this way on NBC’s Meet the Press: “If the American government would have responded like Walmart has responded, we wouldn’t be in this crisis.”3

Walmart received a lot of positive attention for its response. Former presidents George H. W. Bush and Bill Clinton, who were heading up a hurricane-relief fundraising effort, praised Walmart for its quick action. Lee Scott appeared on CNN’s Larry King Live to describe Walmart’s work. A September 6 Washington Post article was titled “Walmart at Forefront of Hurricane Relief.” These reactions are an indication of how rare it is for a company to act altruistically, as Walmart did. Walmart was only doing what many would agree was the right thing, but too often, if a course of action doesn’t lead to a profit, a company will simply choose not to do it.

But was it all so altruistic? It is surely the case that the workers on the ground in ’05 were motivated by the desire do the right thing, but from a corporate standpoint there are questions worth raising about Walmart’s less explicit incentives. Hurricane Katrina came at a critical moment for Walmart, just as it was facing negative press about a slew of issues. Robert Greenwald’s movie, an aggressive takedown of Walmart’s practices titled Wal-Mart: The High Cost of Low Price, was about to be released. News stories revealed that Walmart’s lowest-paid workers made so little that they qualified for Medicaid and food stamps. So perhaps it’s no surprise that, as Walmart was beefing up its disaster-relief efforts, it was also firing up its public relations engines by hiring the top international PR firm, Edelman, to get the word out.

As an article published in Advertising Age a month after the flood put it: “Millions in corporate-image advertising in the past year failed to do much to help Wal-Mart’s reputation. . . . But now, in the wake of Hurricane Katrina, Wal-Mart is getting the kind of advertising no marketer can buy.”4

More critical observers argued that the aid efforts were the least that Walmart could do. After all, the company had received millions of dollars of government subsidies through infrastructure assistance and tax rebates for distribution centers it had built in the area. Ad Age’s conclusion: Walmart’s efforts after Hurricane Katrina were “laudable but not heroic.”5

Walmart announced subsequently that quarterly profits were hurt by a mere $.01 per share. But the stores also benefited in the longer term by creating shopping wish lists for victims of the storm. In short, critics argued that Walmart, rather than being altruistic, did the bare minimum, and that its efforts, while they may have seemed well intentioned, were simultaneously motivated by the company’s bottom line.

So it’s tricky. What is a corporation to do? Should companies do only what’s in the shareholders’ interest? Some view this as the corporate mandate: do only what is good for the owners of the company’s stock. Should Walmart have taken only actions that increased profits and sales? That is, should it have sold as many Pop-Tarts as possible to the people who made it into its stores but left its displaced workers out to dry, without jobs for a foreseeable future? Was it appropriate for the retailer to help the workers and the communities simply because it was the right thing to do, even though many saw it as a transparent attempt to burnish its public image? In this case, perhaps we can deem Walmart’s decision a no-brainer. But what would have happened if the interests of the shareholder and those of other stakeholders such as communities, workers, consumers, suppliers, and the environment had conflicted irreconcilably? This is the crucial debate for corporations in the twenty-first century—not just during crises but on a daily basis.

This book is designed to provide some answers to these questions, showing leaders how to engage with stakeholders in ways that are productive for every one. Many recognize that a consideration of a broad range of stakeholders is important, but few know exactly how to do it. Indeed, few even appreciate the ways their business models make implicit, if not explicit, trade-offs across stakeholders. I’ll argue that taking stakeholders seriously can lead to innovative business-model transformation. This is not just about how to make the business case for diversity or for sustainability—though that’s of course a part of the story—it is about how companies can look through the lenses of different stakeholders and see new ways of doing business. This change might be effortful and filled with uncertainty, but when companies come out the other side, they’ll be ready to participate in the twenty-first century.

For Walmart, the experience of the Katrina crisis was transformational—it provided a window into a new way of being. It began a series of explorations that have led it to make radical changes in how it does business, including commitments to zero waste, 100 percent renewable energy, women’s economic empowerment, and many other initiatives. The complexities of that moment offered a path forward for the company.6 This is the message I want readers to take away from The 360° Corporation: trade-offs, conflicts, and challenges can be the source of innovation and transformation.

TRADE-OFFS

Today, increasingly, corporations are being asked, pressured, forced, encouraged, regulated, and coaxed to consider a broader set of stakeholders in their calculations. There are many reasons for this. The 2008 financial crisis focused attention on how corporations can have broad-ranging effects on society. Climate change has attuned people to the potentially toxic effects of corporate policies. The global supply chain is more visible than ever before, and many consumers are more conscientious when it comes to their buying habits than they were in the past. In the current political environment, people are looking to corporations to pursue social-policy agendas. The net effect has been that, more and more often, companies need to consider stakeholders other than the shareholder in developing their strategies and managing their organizations.

It has been an extraordinarily rapid sea change. In 2011, only twenty of the S&P 500 companies produced sustainability or responsibility reports along with their annual reports to shareholders. In 2015, the figure was 81 percent.7 Some countries—Denmark, the United Kingdom, South Africa, and soon the entire European Union—require all companies to report on environmental, social, and other related issues. The Global Reporting Initiative database included reports from 5,481 companies around the world in 2015.8

Some think that this turn toward a multiplicity of stakeholders is a good and much-needed development. They see corporations as deeply implicated in many social ills, from pollution to poverty, to discrimination, to global inequality—and also as potentially powerful actors in finding solutions to these social challenges. Others are genuinely opposed to the change, not because they don’t want to fix these kinds of problems, but because they feel that tasking the corporation with managing them is likely to lead to suboptimal outcomes.9 These opponents of corporate social responsibility (CSR) are concerned that taking away from the singular focus on creating economic value (as measured by total returns to shareholders) is either unethical or would open up the corporation to many inefficiencies. It would be hard, they claim, to monitor and control managers’ performance when multiple objectives are at stake. It is also worrisome to turn over social agendas to corporate decision makers.

The challenge for those who want to consider these diverse stakeholders (and the worry for those who think it’s a bad idea) is that each stakeholder comes to the party with different interests and views about what is of value. When these interests aren’t aligned, corporate leaders are required to make trade-offs. For example, when the capital costs of installing pollution-control filters on a power plant or the operating costs of raising chickens in cage-free environments or the costs of improving conditions for workers in Bangladeshi clothing factories are high, those costs are likely to erode the financial returns of the companies implementing these changes or to prevent firms from undertaking the changes to begin with. Even more than just creating conflicts between stakeholder interests and financial returns, the needs of different stakeholders may be at odds with each other. When Walmart charges low prices, its decision benefits consumers—but those low prices have historically been based on low wages for workers. When consumers win, workers may lose.

These are either-or choices. The demands are irreconcilable. And if you’re a corporation facing these choices, once you conclude that your decision is either-or, you’re stuck. Governments might pass regulations requiring pollution controls or improvements in living conditions for animals on industrial farms, and thus make your decision for you, or you look to your firm’s existing guidelines, which probably advise you to act in the way that will maximize the return to shareholders. Indeed, some economists and business leaders believe that in every case, a corporation ought to adhere to Milton Friedman’s 1970 dictate: “There is one and only one social responsibility of business: to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”10 In short, one should not decide in favor of any stakeholder other than the shareholder.

How then can diverse stakeholders be accommodated? Government regulation is certainly one means. Regulations give social values a place at the table by requiring firms to conform to rules about pollution, worker safety, zoning, water use, and so on. These regulations create the “rules of the game” to which Friedman referred. Yet given the power that corporations have to influence government policy through lobbying, one might be concerned that regulations won’t get us all the way to where we need to be. Granted, we are gradually seeing companies voluntarily taking on responsibilities in these domains, beyond what is regulated, but this voluntary action does not diminish the underlying trade-offs. If corporations are surrounded on all sides by stakeholders who are making trade-offs increasingly salient—suppliers, workers, consumers, the environment—then the solution is to become what I call the 360° Corporation.

The 360° Corporation is an organization that can productively and effectively address the tensions created by these trade-offs. This book offers signposts to leaders who want to spearhead the 360° revolution. In it, I argue that companies can develop explicit and coherent plans for addressing the tensions created by trade-offs. As I’ll explain throughout the following pages, sometimes there’s a win-win. Sometimes, creative thinking may lead to an innovative, mutually beneficial solution. There are still other times when a solution is not particularly appealing to any stakeholder, and yet it’s still the best way to go (for now). In these cases, there are considerations and strategies that can help business leaders make the best possible decision. The 360° Corporation will address all of these modes of action and serve as a comprehensive playbook for managers, CEOs, and innovators who are burned out by constantly being tugged in many (360, to be exact) different directions.

A precursor to mastering trade-offs the way that only the 360° Corporation can is, of course, knowing what the trade-offs are. I call this Mode 1 because it is the starting point. There is no possibility for action without a clear understanding of who is gaining and who is losing. Trade-offs are implicit in every business, but most organizations haven’t analyzed them enough to see them clearly. Indeed, in my conversations with leaders in many companies, they often have not even thought about how their way of doing business embeds a series of potentially unintended choices about which stakeholders to value and which to disregard. Getting clear on the trade-offs makes the tensions evident, and this lays the groundwork for three additional modes of action.

The predominant rhetoric today is to make a business case for action. This is what I call Mode 2 action, and it allows leaders to rethink the trade-offs. This is at the heart of the shared value concept that is so popular. There might be ways to reframe actions to be win-win, with benefits for both the shareholder and other stakeholders. If supporting a local school system in Bangladesh where your company manufactures garments improves the quality of workers over time and assures the support of the company by the community, then that’s a pretty easy win. It’s not just CSR; it’s good for business. This is the origin of things like the business case for diversity—if you can show that increased diversity leads to more innovative output of project teams, then diversity is not just good practice, it’s smart economics.

My argument here: shared value can take you only so far. There are plenty of situations where a business case is just not evident. Then companies can move into Mode 3, which takes them beyond shared value. When win-wins are not immediately evident, companies can seek out innovative solutions—new technologies, new processes, new ways of doing business—that allow them to innovate around the trade-offs. This is where the transformative possibilities of the 360° Corporation emerge. If your shoe-manufacturing process creates a lot of wasted materials, the answer may not be to just cut the materials more efficiently. It may instead be to come up with an entirely new manufacturing process that knits the upper of the shoe in one piece (think of Nike’s Flyknit). If your just-in-time delivery system is leading to higher pollution and energy use, the answer might not be to find a way to stuff the trucks with more product. It might instead be to redesign trucks entirely (Walmart has done this in collaboration with Peterbilt in the Advance Vehicle Experience program) or to find new ways to deliver products (maybe one day, Amazon’s drones). Mode 3 is transformative.

Mode 4 is the toughest. Sometimes there are just no solutions—even innovative ones—to be had. In Modes 2 and 3, there’s still a way to make the business case—what makes social sense also makes economic sense, at least with enough creativity, investment, and work. Mode 4 is necessary when the trade-off is still somehow intractable, when acting for a stakeholder other than the shareholder might hurt the shareholder, and vice versa. In these cases, companies must find ways to function with the tension rather than do away with it. In the long run, these tensions can generate creative insights. In the present moment, companies must find ways to thrive within tension, often by initiating some experiments for future solutions. The key here is not to give up but instead to find ways to engage stakeholders in productive dialogues. These dialogues will not always be smooth. In fact, the most productive ones will likely be filled with conflict, but also filled with possibility.

Table 1.1 gives you a short guide to the modes of action in the 360° Corporation.

To be clear: companies can operate in multiple modes of action at the same time. For some issues, they may only be assessing the trade-offs (Mode 1); for others, they may be acting based on a business case (Mode 2); for still others, they may be innovating around the trade-offs (Mode 3); and for others, they may still be stuck, unsure how to resolve the trade-offs but working on it (Mode 4). Of course, some companies may not be doing any of this.

Becoming the 360° Corporation can be challenging, and the best way to learn the process is to observe it in action. To that end, this book focuses primarily on two large, well-known organizations, Walmart and Nike, and on the many different stakeholders that these companies must balance on a daily basis, revealing how frequently interests and agendas can conflict, and highlighting the trade-offs that arise most often in today’s globalized economy. These are companies that—though far from perfect—have transformed substantial parts of their businesses through their engagement with the trade-offs created by the interests of different stakeholders. Each chapter examines a different stakeholder and Walmart’s or Nike’s response to that stakeholder’s agenda. We’ll also see examples of other companies along the way to demonstrate precisely how organizations can operate in the different modes of action. The goal is to provide you with very practical examples of how the companies uncovered the trade-offs (Mode 1), how they found business cases for action (Mode 2), or, more interestingly, how they sought out innovative solutions (Mode 3). We’ll also see cases where the companies struggled for years with the tensions created by the trade-offs before they were able to find a solution (Mode 4).

TABLE 1.1. Four Modes of Action for the 360° Corporation


In telling these stories, I am not trying to glorify Walmart or Nike, or any other company. Nor am I vilifying them. What you will see in these stories is the unvarnished reality of the struggle with trade-offs and of the work to find meaningful solutions. This struggle is what’s interesting.

Notes

1. Devin Leonard, “‘The Only Lifeline Was the Wal-Mart,’Fortune, October 3, 2005, http://archive.fortune.com/magazines/fortune/fortune_archiv/2005/10/03/8356743/ index.htm, accessed January 9, 2019.

2. Michael Barbaro and Justin Gillis, “Wal-Mart at the Forefront of Hurricane Relief,” Washington Post, September 6, 2005, http://www.washingtonpost.com/wp-dyn/content/article/2005/09/05/AR2005090501598.html, accessed January 9, 2019.

3. Barbaro and Gillis, “Wal-Mart at the Forefront of Hurricane Relief.”

4. As quoted in Philip Mattera, “Disaster as Relief: How Wal-Mart Used Hurricane Katrina to Repair Its Image,” Corporate Research Project, Corporate Research E-Letter, no. 55, September–October 2005, https://www.corp-research.org/e-letter/disaster-relief, accessed January 9, 2019.

5. Mattera, “Disaster as Relief.”

6. Kathleen McLaughlin, quoted in Sarah Kaplan, “Walmart’s Journey to Sustainability,” Rotman Management Magazine, Winter 2017, http://www.rotman.utoronto.ca/Connect/Rotman-MAG/Back-Issues/2017/Back-Issues---2017/Winter2017-SmartPower/Winter2017-SarahKaplan-WalmartsJourneytoSustainability, accessed June 21, 2018.

7. Governance and Accountability Institute, “Flash Report: Eighty One Percent of the S&P 500 Index Companies Published Corporate Sustainability Reports in 2015,” March 15, 2016, http://www.ga-institute.com/nc/issue-master-system/news-details/article/flash-report-eighty-one-percent-81-of-the-sp-500-index-companies-published-corporate-sustainabi.html, accessed August 31, 2017.

8. Global Reporting Initiative reports database, https://www.globalreporting.org/services/Analysis/Reports_List/Pages/default.aspx, accessed August 31, 2017.

9. See, for example, Michael C. Jensen, “Value Maximization, Stakeholder Theory, and the Corporate Objective Function,” Journal of Applied Corporate Finance 14, no. 3 (2005), 8–21. Jensen argues that it is “logically impossible to maximize more than one dimension,” 10.

10. Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” New York Times Magazine, September 13, 1970, available at https://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html, accessed June 28, 2018.