Member Blogs

Right before Thanksgiving I attended Sustainatopia. It was the first time the conference was held in Boston (it started in Florida and has also been held in California). It’s a really broad group of people and discussion tracks including impact investment, smart cities, LOHAS (lifestyle of health and sustainability), sustainable strategies and innovation, empowering women and millennials.

I was on a panel with Dr. Stephen Jones, President of Antioch University New England. The Sustainatopia organizers chose the title of our session: Integrative Systems Thinking and Innovation. I have to admit I wasn’t sure if anyone would come (it’s a pretty esoteric title:). But we ended up with a few dozen people who were extremely engaged, including corporate sustainability officers who struggle with building bridges across their organizations.

Steve spoke eloquently about how nature is a wonderful guide to systems thinking. His view was a great companion to my explanations of the integrated thinking/reporting movement. The idea of the capitals is a great bridge to talk about the components of the ecosystems companies build.

The conversation got really interesting when we started talking about innovation. I shared the research my firm did a number of years ago that showed that while most innovation efforts are focused on creating processes, these processes often trip on structural barriers involving missing/mismatched capitals (the right people, culture, connections etc). We had a great group in the room and had a lot of input and questions from the participants. It’s clear that the audience saw the link between innovation and integrated thinking. It’s a good reminder to those of us who talk about integrated reporting that the integrated thinking behind it has far-reaching influence.

In recent weeks, Chipotle has been through a number of crises where customers have grown ill. The first involved e coli-infected in Washington and Oregon. This week, 80 students fell sick with the in Massachusetts. Because I like to use Chipotle to explain integrated thinking, I’ve been paying special attention to this news.

Integrated thinking can be a powerful way of understanding what drives a company’s success. I often use Chipotle and Taco Bell as an illustration of how to unpack value creation using corporate capitals. The two companies seem as different as you can be and still sell the “same” kind of products (tacos and burritos). Chipotle emphasizes their values around healthy and sustainable food. Taco Bell, around cheap food available for a late-night munchie run. Chipotle has different standards for its suppliers but they both have standards to avoid food-borne contamination. This table shows some of the differences (and similarities):

This simple analysis doesn’t begin to give either company justice but it gives you an idea about how to use the capitals framework to compare the two companies. Each company is attracting a different kind of customer (relationship capital) based on very different value propositions (strategic capital). Their processes and real estate strategies (structural capital) are probably pretty similar, even though their recipes and designs differ. Interestingly, they both rely on low-paid workers (human capital). Finally, there is a clear difference in how they talk about their environmental footprint (natural capital).

The reason that I like the capitals approach is that it forces you to consider all the components of the value creation system of a company. In the Chipotle food crises, the table prompts some thoughts:

• Chipotle focuses on an important aspect of food quality: local, sustainable production. This is an important goal. But this is just one piece of the overall puzzle. They are largely silent on a lot of other sustainability issues such as water or air (and don't produce any kind of sustainability reporting).
• They don’t necessarily focus on creating the best jobs for their workers. Livable wages are an emerging issue in this industry. Chipotle is probably with the majority right now in not focusing on wages and worker wellbeing as much as they might. And their recent one-day hiring campaign in September might have brought a large contingent of inexperienced front-line workers.
• Their good intentions may or may not be backed up by rigorous processes. This is often the most important driver of success—how well you ensure that you, your suppliers and partners all live up to your standards. Recently, one of Chipotle’s co-CEO’s said, “The procedures we’re putting in place today are so above industry norms that we are going to be the safest place to eat.”

Many consumers are passionate supporters of Chipotle’s values. But values have to be backed up by a value creation system. The system includes people, partners, property, planet, all in service of your purpose. Problems are rarely caused by just one piece of the system. Fixing it requires an integrated, holistic view. I don’t have the answer to Chipotle’s issues. But I can offer integrated thinking as a powerful way to start asking the right questions.

In the last month or so, I’ve attended a program on Integrated Reporting and another on Integrated Thinking in New York, both organized by Skytop Strategies. Skytop has been boldly moving forward with an agenda of programs designed to bring together a diverse group of integrated thinkers in the U.S.

I’m excited that there is a growing community in the U.S. And it’s fun to compare and contrast the movement here with what I saw at the IIRC Convention in London. First of all, it’s important to note that, while the U.S. community is watching the integrated reporting movement closely, it is not following the model faithfully (not that anyone is—the idea is to allow diverse experimentation around the world). And in the U.S. it’s less about the reporting side of things. In fact, if you look at the IIRC examples database for North America, you’ll see just ten listings. To date, only Clorox and Smithfield Foods specifically call their publications “Integrated Reports.” Other companies bring integrated thinking to their traditional and/or sustainability reports. And many more (in U.S. and abroad) have their own names like net positive (King Fisher), net good (British Telecomm), total contribution (Crown Estate), shared value (Nestle) and net-works cycles (Interface). Others included core capacity, accountability, systems thinking.

So reporting is just one part of the story. (Many would say that reporting is just a catalyst to drive integrated thinking and that the thinking is the ultimate goal). In his keynote at the Skytop Integrated Thinking Symposium, Ralph Thrum framed this by talking about moving beyond the “license to operate” perspective of sustainability and CSR to a concept of thrivability and a “license to grow.” I like this because it gets to the area where I have always used these ideas: to use integrated thinking to drive growth and innovation.

My contribution was on a panel about what’s missing in existing guidance. I had laid out my position in Integrated Thinking: What's Missing that the roots of the movement really come from people trying to unite two completely different conversations—traditional and sustainability. . It was clear in both London and New York that this is still the driving dynamic. But these two are missing the internal sustainability view that takes into account the non-traditional, intangible assets that drive a company’s value creation capabilities.

It’s still early days for this movement. But I’m excited by what Skytop is doing. I met some great people and heard a lot of honest assessments by people on the frontlines striving to integrate thinking across their organizations. Skytop has lots more programs coming up including a deep dive on preparing an integrated report hosted by VMWare in January that will include a presentation by Clorox on how they developed their report.

New Year’s resolutions are just like a lot of corporate goals. They start out sounding great but don’t end up happening as planned. That’s because the primary focus is on the KPI’s, not on building the system to deliver on the KPI’s.
Here's a simple (hopefully not simplistic) analogy: A person has a strategic goal to lose (or gain!) weight. The KPI for this is their monthly weigh-in. Just having the goal is a motivator. But to achieve that goal, a lot of things have to happen. If I’m going to judge their ability to meet the goal, I’m going to take an integrated view of what we call the value creation system.

A value creation system is made up of various kinds of capital. The value creation system this person needs includes the weight loss goal (strategic capital), the training they receive on how to do it (human capital), the support system they get of friends and maybe a nutritionist (relationship capital), a website, app or information they use on exercises or the diet (structural knowledge capital), maybe an exercise bicycle (structural manufactured capital) and an understanding of how their diet affects the environment (natural capital).

The value creation system is like a machine or a factory--it's infrastructure that a person or a company uses to fulfill its goals. For companies, we have good descriptions of the physical infrastructure in financials. But the most important parts are invisible. You need to make the system visible If you want to make the right decisions about how to meet your goals or if you want to get someone (like a bank, an investor, a partner or even an employee) to help you meet them. That’s why integrated thinking and reporting is a critical strategic tool.

If you want to make a New Year’s resolution for yourself or your company, take a systemic view. Here’s a value creation worksheet you can use to model and measure your value creation infrastructure. 

I’m happy to be speaking on a panel Thursday at Skytop Strategies’ Symposium on Integrated Thinking. The panel is called Drivers of Integrated Thinking: What’s Missing from the Existing Guidance.

Sounds pretty esoteric right? Well it’s actually a hugely relevant conversation. Today, every company in the U.S. produces financial statements. And many produce some kind of sustainability statements (for the largest 250 companies in the world, the figure is over 95%). A lot of money and thought is invested in these two perspectives. But they are isolated in their own ghettos and most people have a hard time reconciling the two.

You'll see this in action if you go to a public company’s website. There is a section for investor relations where you can find the traditional financial reporting. There is usually a completely separate section for sustainability reporting (often harder to find). And there are rarely cross-links to take you, for example, from the financial to the sustainability reporting.It’s almost like alternate realities for the same company. Which makes sense on one level—the two kinds of reporting serve different purposes and have different stakeholders. But it begs the question for many—why are these two separate? And, at a deeper level, why is the thinking behind these two perspectives separate? And how can they be connected? This is the goal of integrated thinking. And for the companies taking on this challenge, it's the goal of integrated reporting.

Here’s the key point I want to bring to the discussion:

Traditional + Sustainability ≠ Integrated Reporting/Thinking

What do I mean by this? Traditional reporting/thinking is basically focused on how a company created (or not) shareholder value in past periods. Sustainability reporting/thinking is how the company created (or not) stakeholder value in past periods. But to be truly integrated, we need to ensure that a company ensures its own survival—creates corporate value—while meeting the needs of its shareholders and stakeholders. I’ve increasingly been using the phrase “sustainable value creation” to describe this, which is defined as:

Using the capitals (tangible, intangible and natural) available to a company in a way that creates value for shareholders and stakeholders today…and that also preserves/enhances the company’s ability to create value in the future.

In light of this definition, what’s missing from the various forms of guidance influencing integrated thinking? In my view, we’re missing a way for companies to take responsibility to their capitals, for building and maintaining an infrastructure that gets better every year. In our industrial past, explaining this was the job of the balance sheet. In fact, the tangible capitals on the balance sheet explained over 80% of corporate value. Today, they only explain 16%.

It’s like the instruction we receive on a plane: put your own oxygen mask on before you help others. Companies have to create value for shareholders and stakeholders in a sustainable way. And by the way, (with the exception of short-term traders) shareholders and stakeholders want that to happen too.

I look forward to discussing how to accomplish this at the Symposium!