The upside of trade-offs

In October 2019, Salesforce CEO Mark Benioff declared capitalism was dead in a New York Times op-ed. Earlier in the year, Larry Fink, chairman of BlackRock, caused a seismic stir in a letter to chief executives demanding that companies pursue purpose. In August 2019, CEOs of 181 companies in the Business Roundtable rejected the idea of shareholder primacy in favor of creating value for all stakeholders. Today, increasingly, corporations are being asked, pressured, forced, encouraged, regulated, and coaxed to consider a broader set of stakeholders in their business calculations.

The 2008 financial crisis focused attention on the ways in which corporations have wide-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. Consumers are increasingly conscientious about their buying habits.

Further, in the current political environment, people are turning to corporations to pursue social policy agendas that governments cannot or will not pursue. 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. 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 sets 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.

Trade-offs at the center of social responsibility

Trade-offs, conflicts, and challenges, however, can be the source of innovation and transformation. Companies can develop explicit and coherent plans for addressing the tensions created by trade-offs. The stories of two large, well-known organizations, Walmart and Nike (as well as Levi Strauss & Co., mentioned below), show the ways that well-known organizations with varied stakeholders manage trade-offs. This is not to glorify or vilify them, but simply to show how frequently interests and agendas can conflict and highlight the kinds of difficult decisions that arise most often in today’s globalized economy. Coping with stakeholder trade-offs forced Nike to come up with less toxic glues and more environmentally friendly materials for its shoes and Walmart to pressure suppliers to change both products and their packaging to reduce waste and the environmental effects of shipping.

The predominant rhetoric today for dealing with these trade-offs is to “make a business case” for action. This is at the heart of the shared value concept that is becoming so popular. There might be ways to reframe actions to be win-win, having benefits for both the shareholder and other stakeholders. But I argue that shared value can take you only so far. 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 the moment). In these cases, there are considerations and strategies that can help business leaders make the best possible decision.

I argue there are four modes of action that companies can adopt to understand these tensions (see “Four modes of action for optimizing trade-offs”). Mode 1 is the starting point: Knowing what the trade-offs are. Actions taken in Mode 2 allow leaders to rethink the trade-offs. Mode 3 actions occur when win-wins are not immediately evident. Companies can seek innovative solutions — new technologies, new processes, new ways of doing business — that allow them to innovate around trade-offs. This is where transformative possibilities emerge.

Companies can seek innovative solutions — new technologies, new processes, new ways of doing business — that allow them to innovate around trade-offs. This is where transformative possibilities emerge.

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 (that is, what makes social sense also makes economic sense), at least with creativity, investment, and work. Mode 4 is necessary when the trade-off is 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.

The key here is not to give up, but instead to find ways to engage stakeholders in productive dialogues and experimentation. These dialogues will not always be smooth. In fact, the most productive ones will likely be filled with conflict, but also filled with possibility.

Stakeholders as a source of innovation

In 1992, a Harper’s magazine article by activist Jeffrey Ballinger highlighted the plight of workers in Nike subcontractor factories in Indonesia. Demonstrators appeared at the 1992 Summer Olympics in Barcelona to call attention to the sweatshop conditions at Nike’s factories. By 1997, when a New York Times story brought more attention to the issue, the consumer backlash really grew. This was a crisis for Nike, and, over time, it led to a transformation in its manufacturing practices.

Phil Knight, Nike’s CEO at the time, made a now-famous speech in which he highlighted the trade-off for consumers: Nike shoes would cost at least twice as much if they were manufactured in the United States. But he also announced six new actions that would transform the company’s approach from one in which the supply chain workers were adversaries to one in which they were partners.

Nike committed to improving the health conditions in factories to meet U.S. Occupational Safety and Health Administration standards, in particular, by innovating in new kinds of water-based glue that would not contain the toxic chemical toluene. It raised the minimum age of workers and allowed monitoring to be done by independent NGOs. Nike also expanded education programs and microenterprise loan programs where it operated and said it would fund university research “to explore issues related to global manufacturing and responsible business practices.”

This plan was the beginning of an innovative — Mode 3 — journey. Nike began developing an important in-house capability for understanding the details of the supply chain and ensuring that standards could be applied even to factories several degrees removed from direct relationships with the company. It used the trade-offs surfaced by its outsourced manufacturing business model as an opportunity to look at how the upstream processes of design, commercialization, and sourcing might have been undermining efforts to improve practices downstream.

Levi’s went through a similar experience in balancing trade-offs. An early mover on factory-compliance initiatives in the 1990s, Levi’s still struggled with worker turnover and absenteeism, a sure sign that work conditions were not desirable. So it launched an initiative called Improving Worker Well-Being. Discovering that there was no one-size-fits-all for the 72 factories and 140,000 participating workers around the world, Levi’s leaders tasked vendors to come up with plans to increase well-being. These vendors found they couldn’t do that until they asked their workers what was going on in their lives.

In Mexico, vendor Apparel International organized peer-led sessions with an NGO, Yo Quiero, Yo Puedo (I Want, I Can), to learn about worker experiences and train supervisors. The vendor made seemingly small changes at work, like providing better fans and water fountains, shaded parking for motorcycles, and microwaves in the break room. Importantly, the NGO sessions helped supervisors communicate more effectively with employees — with more coaching and less shouting. The result: lower absenteeism, lower turnover, and changes in how the staff interact. “It’s a win-win situation, believe me,” said Oscar González Franch, the president of Apparel International.

Let’s be clear: Factory conditions are still poor in many locations. Analysis of the efforts made by Nike and Levi’s shows that there are ways to make things better, and the solutions involve collaborative innovation among all of the stakeholders, many of whom have competing interests: the brands, the suppliers, the suppliers to the suppliers, NGOs concerned with labor practices and environmental impact, consulting and accounting firms that conduct audits, and, of course, governments. For leaders interested in adopting Mode 3 actions, here are a few key concepts.

First, innovation is not possible without deep insights into what the experiences of the stakeholders actually are, not (only) through reports but through on-the-ground fieldwork to get behind the numbers. Sometimes it is unpleasant or stressful to engage with stakeholder representatives who might be enraged about existing conditions. It’s worth keeping in mind, though, that outrage has as its base a compassionate caring for those stakeholders who are affected by the actions of corporations. The outrage can serve as an effective call to action.

Avoid getting trapped in Mode 2. Often there is not an immediate win-win. Building a business case for better worker conditions flies directly in the face of delivering products to consumers at reasonable prices. The demands created by those prices are often used as an excuse by global brands and local vendors not to take action. The conversation needs to hold the business-case logic in a bubble while the innovation process is allowed to unfold. The question of funding should be part of the innovation itself.

One of the most important paths forward is to co-create with the stakeholders. In the end, no company can innovate for stakeholders and get it right. The company must innovate with stakeholders. It’s impossible even to know what the pain points are for different stakeholders, such as factory workers, without consulting them and engaging them. The state of the art is embedded innovation: an innovation process in which the stakeholders are at the center of the inquiry. Nike’s big step forward in addressing factory conditions was when it started working with the factory owners and workers to come up with solutions.

This will require leaders to take an expansive view. You’ll likely need to look more broadly than you think you need to. If Nike had tried to solve the problem of worker conditions in factories by focusing just on the factories, it would never have gotten there. Nike had to rethink design processes, order processes, and global product mixes. The situation also required that headquarters shift its mind-set from compliance to innovation. A key insight: Innovative solutions are unlikely to be narrow, but rather will address the complex systems that create the trade-offs.

Thriving within intractable trade-offs

Customer demands are often the excuse that companies make when avoiding potentially costly efforts to address harm to workers or the environment. The question about whether the customer will pay more to alleviate such harm is a crucial one. It is often the most intractable of the trade-offs. What do we do with the tension created by wanting to sell more products (as any company must) and the costs associated with consumerism, waste, labor standards, and environmental damage? The biggest challenge for leaders today is addressing the conflicts in which people cannot find the win-win and cannot yet innovate around the problem.

Some companies are using sustainability initiatives as holding places for these tensions. The question becomes: How can a company make consumption less damaging or even neutral? It feels impossible. Yet companies are beginning to operate amid the trade-offs in Mode 4 to uncover potential future solutions by running experiments, entering into partnerships with NGOs, working with consortia of other companies facing the same challenges, making long-term research investments with uncertain payoffs, or involving stakeholders such as workers or communities in problem solving.

The takeaway for Mode 4: Even where there are no innovative solutions, companies can learn to thrive within the tensions created by intractable trade-offs. One way is to hold the trade-offs in tension and use them productively to promote organizational resilience. An emerging literature has begun to explore these intractable moments. It suggests that instead of being afraid of paradoxes, organizations can (and should) embrace them. This can be accomplished by keeping the two sides of the trade-off separate: making profits short-term and sustainability projects long-term, addressing trade-offs in some product lines but not others, creating sustainability teams that are authorized to pursue environmental objectives in certain projects separate from the rest of the business, or running experiments with uncertain outcomes to find resolutions to the trade-offs.

In 2005, Walmart CEO Lee Scott announced three goals for the company: to be supplied 100 percent by renewable energy, to create zero waste, and to sell products that sustain resources and the environment. As part of this initiative, Scott consulted with a number of environmental experts, including major critics of Walmart, in order to identify steps to improve its sustainability. “It wasn’t a matter of telling our story better. We had to create a better story,” said Scott.

Here Walmart’s power over suppliers came in handy. When it wanted to reduce use of water for manufacturing, plastic resin and cardboard for packaging, and fuel for shipping laundry detergent by selling only concentrated versions, the retailer could put the pressure on its suppliers, even major ones like Procter & Gamble, to make the change. Similarly, when environmentalists focused Walmart on the lightbulb — advocating for the company to switch its product line to more energy-efficient compact fluorescent lightbulbs (CFLs) — as a win-win, Walmart leaned on General Electric (GE) and other suppliers.

GE was hesitant. It did not want to give up the prime shelf space for its then best-selling product, the standard incandescent bulb. Leaders weren’t sure that CFLs would perform well enough to satisfy consumers’ expectations. But, seeing Walmart’s demands, GE came to understand that the only way to survive the creative destruction of these new technologies was to get out in front of the change. Now 1,300 suppliers (selling 70 percent of the goods Walmart purchases in the U.S.) use Walmart’s Sustainability Index, and 3,000 have registered to use it in the future. The index is a tool that suppliers can use to track the environmental impact of their products from sourcing through to end use.

What can a company do to survive and thrive in the face of intractable tensions among the needs and interests of different stakeholders? Given that they might hit a wall, the most effective companies will break ties in favor of doing something new. If there isn’t agreement about whether there is a business case for action (Mode 2), decide on the side of action. Forward movement may provoke innovative solutions (Mode 3). When solutions aren’t readily apparent, that’s where Mode 4 action comes in.

It’s worth the effort to identify pilots that break the trade-offs. You don’t have to change the whole organization at once. You can use experiments to learn what future solutions might look like. Even those experiments that fail in the lab or the marketplace may be tremendous sources of learning and stepladders to the next experiment. It is precisely the impasses that can provoke the biggest insights. Impasses are uncomfortable, but the discomfort can lead to breakthroughs, experiments, and new ways of thinking.

Facing impasses also takes courage. Organizations naturally fight back on change. Managers with incentives based on the bottom line will object to the perceived moral judgments imposed by corporate social responsibility. Models of authoritative leadership push away ambiguity in favor of clear choices. But what I have found is that the best companies and the best leaders thrive within these tensions.

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