Beyond Great

CHAPTER 1

DO GOOD, GROW BEYOND

With climate risks and inequality increasing, employees, civil society, and governments are demanding more of companies. Firms that can integrate doing good into their core operations will not only positively impact these stakeholders but also deliver higher long-term shareholder returns.

Several years ago, the vice chairman of a US-based global industrial company related to us how governments embracing protectionist policies were now obliging firms like his to invest in their countries if they wanted access to their markets. His firm’s existing strategies, which sought to maximize profits by exporting Western products into developing markets, would no longer suffice in an age of economic nationalism. His firm and others like it would have to take their role as corporate citizens in local markets far more seriously than they had in the past, reorienting their strategies to deliver a broader social purpose as well as profits. Otherwise, they would jeopardize their future growth. “There is nothing wrong,” he said, “with governments… asking us what we are doing to further their countries’ development. We have to earn the ‘license to operate and grow’ in these markets.”

Positively impacting all stakeholders (including governments, regulators, communities, customers, employees, and the environment) is the right thing to do in a world of growing inequality and climate risk. But pursuing a purpose and delivering societal impact to multiple stakeholders isn’t just a matter of altruism or righteousness. In many countries and industries, it’s a prerequisite for retaining a license to operate. And, more than that, it’s emerging as a powerful core business strategy for companies seeking to sustain high performance in a volatile era. Integrate a concern for societal impact into your core strategies and operations, and you can create new levers of advantage that directly improve long-term profitability. Unfortunately, many global leaders haven’t yet internalized these possibilities. As accepting as they might be of multi-stakeholder models, they haven’t embraced these models fully to reinvent mindsets, strategies, and operational norms. They continue to limit their firms’ involvement to their traditional corporate social responsibility (CSR) efforts, convinced that doing good for all stakeholders would mean sacrificing shareholder returns—something they’re loath to do.

Antonio Luiz Seabra, visionary founder of the Brazilian cosmetic giant Natura, is one such innovative leader. When he started Natura in 1969, he was pursuing a purpose that, as Andrea Álvares, Natura’s chief brand, innovation, international, and sustainability officer, told us, transcended a concern for profits.² Seabra sought to use cosmetics as a means of promoting healthy connections among individuals, society, and the natural world—what the company calls bem estar bem, or “well-being well.”³ This social purpose, derived from Seabra’s philosophical belief in the interconnectedness of all things, permeates Natura’s business strategies and operations to this day.⁴

Consider, for instance, Natura’s distribution strategy. Initially operating out of a small storefront in São Paolo, the company by the mid-1970s developed a direct-sales model similar to what Avon had created in the United States. But for Natura, direct sales wasn’t just another distribution option. Rather, it was, as Álvares notes, “born from an understanding that relationships are one of the strongest, most valuable things.” Natura’s army of female sales consultants formed close bonds with consumers, and the company in turn formed uniquely deep, meaningful bonds with the consultants, energizing them as a salesforce. By 2019, some 1.8 million consultants were selling Natura products (as were hundreds of company and franchisee stores, and online channels).⁵

Natura didn’t just throw these consultants into the market and ask them to sell. Recognizing that they tended to hail from low- and middle-income families,⁶ the company provided them with extensive skills training in business and personal development. Together with valuable work experience, this training empowered consultants to become entrepreneurs in their communities and more effective advocates on the company’s behalf.⁷ For many of the consultants, the association with Natura proved transformative, allowing them to pay for shelter, schooling for their children, and more.⁸ Consultants in turn became strong brand ambassadors and advocates, helping Natura build strong and lasting relationships with consumers. They also helped make the company more resilient. During the 1980s, when high inflation besieged the Brazilian economy and department stores and other traditional cosmetics distributors closed, Natura’s business exploded, experiencing annual growth of more than 40 percent for the decade, thanks to its direct-sales distribution model.⁹

As its company name suggests, protection of the environment was another key expression of Natura’s founding purpose. The company began focusing on sustainable development during the early 1980s, long before the practice became fashionable. Today, that focus permeates every part of Natura’s operating model. The company has a complete leadership and organizational structure focused on sustainability and publishes an annual environmental profit-and-loss statement alongside its financials.¹⁰ In 2011, it debuted its Amazônia program bent on “promoting new sustainable business based on science, innovation, production chains and local entrepreneurship.”¹¹ The initiative included an innovation center in the Amazon, expansion of sustainable production, and the creation of collaborative sustainable development projects.

Natura’s emphasis on sustainability has long extended to its product and brand strategy. In 1983, the company became an early adopter of refill packages, lowering the company’s carbon footprint while also enabling lower costs and better customer loyalty. In 1995, Natura launched a line of products whose profits were all donated to help provide quality public education to Brazilians. In 2000, the company launched a line of products, Ekos, that made use of recyclable packaging and biodiverse ingredients. In 2013, Natura launched its Sou line of products, whose value chain was optimized for efficient resource usage and whose brand identity centered on the idea that consumption can be socially conscious so long as products are designed with the environment in mind. The company’s products are also completely animal-cruelty-free and, as mentioned, carbon neutral.¹² Further, Natura’s branding openly invites consumers to partake of conscious consumption. In 2019, for instance, Natura adopted the positioning slogan “When you care, you create beauty,” evoking the importance of diversity, animal welfare, and environmental stewardship.¹³

Natura’s production model has supported its broader efforts to build stronger communities and to protect the planet. Sourcing naturally extracted product ingredients from local communities, Natura invests back into those communities, aiming to keep them intact and thriving. By 2019, the company was working with more than five thousand small producers in the Amazon, collaborating on sustainable business models and protecting about 4.5 million acres of rain forest. As part of its production strategy, Natura has invested about $1.8 billion since 2011 into local Amazonian ventures.¹⁴ The company has also helped found the Union for Ethical BioTrade, an organization that seeks to maintain biodiversity and a fair split of benefits with local communities, and since 2010 has spent over $370 million studying cosmetics derived from plants and establishing production capacity, creating, as Natura’s cofounder Guilherme Leal put it, “entirely new value chains that simply did not exist before.”¹⁵

In the words of Keyvan Macedo, the company’s sustainability manager, Natura believes that “we could use the social and environmental challenges in society and create new business opportunities—not just business, but sustainable business.”¹⁶ Incredibly, Natura has been carbon neutral since 2007, and it was only the second company in the world to develop a methodology for monetizing its carbon emissions.¹⁷ “We measure environmental impact along the entire value chain,” Álvares explained. “We innovate our products to reduce emissions, reuse materials. For whatever we can’t fully offset, we use carbon credits that also have a social impact.”¹⁸ One carbon offset program, for instance, removed 3.2 million tons of carbon emissions from the environment while also impacting fifteen thousand families and creating two thousand jobs. For its efforts, the company has received the United Nations Champions of the Earth recognition and the Global Climate Action Award, among many others.

Natura’s business success has allowed it to extend its societal impact initiatives far beyond sustainability and women’s empowerment. The company has programs in place to address other important social issues, such as access to health care, access to education, and freedom from gender violence. The millions of sales consultants play an important role, partnering with their communities on relevant local causes.¹⁹ “There are a series of things we do to give back,” Álvares said, “and we have found ways to monetize that social impact for the society.” In fact, as the company has calculated, it has generated 31 Brazilian reals of value for society for every real invested in the Natura Carbon Neutral Program.²⁰ In 2014, Natura became the first public company to achieve status as a B Corp,²¹ a designation awarded to firms “that meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose.”²² This was a huge accomplishment for an organization of Natura’s size.

Today, as Roberto Marques, Natura &Co chairman and chief executive of the group, told us, total societal impact “permeates the way the company thinks and operates.” He added that societal impact has been a “competitive advantage for so many years” and that it remains even more so today given the concern of younger generations for sustainability. The company’s purpose and societal concerns have come to define the firm’s brand and reputation among communities, governments, consumers, and investors. It has also helped Natura in its aggressive program of global expansion fueled by acquisitions, including Aesop (2016), the Body Shop (2017), and Avon (2020). Since all these firms have missions or purposes consistent with Natura’s, integrating them has been that much easier for the company. Natura has also become a magnet for young employees and has built a strong leadership corps, with executives joining Natura to work for a company with similar beliefs in a sustainable business model.²³

Natura’s purpose-driven operational model has benefited shareholders as well as society and the environment. Between May 2004 and September 2019, the company’s valuation increased by a factor of approximately fifteen, between two and three times as much as the Brazil 50 index average. The company has also outperformed other large global beauty companies like L’Oréal, Estée Lauder, and Shiseido, its share price increasing by nearly twice as much as Estée Lauder, the second-best performer in this peer group.²⁴ All told, Natura is an impressive example of a company that has managed to grow beyond great by endeavoring to do good.

Your company has likely taken important steps to address pressing social and environmental problems, but how far have you transformed your core strategies to deliver social impact in addition to profits? As Lord Mark Malloch-Brown, chairman of the Business and Sustainable Development Commission, remarked, “There’s… a realm of difference [between] those who are trying to make sustainability part of their core business strategy and those who still see it as an ‘add-on.’”²⁵ Leading-edge companies understand this difference and are reshaping strategy and operations to pursue social and environmental goals without sacrificing profits. They’re not only becoming more environmentally sustainable, more responsive to local governments and communities, and more supportive of employees and suppliers. Like Natura, they’re leveraging these efforts to open new levers of advantage and long-term profitable growth.

Their precise strategies vary. Our analysis of high-performing and socially responsible firms has uncovered three distinct strategic pathways firms are using to benefit the wider society and deliver sustainable benefits for shareholders. Each socially responsible pathway enables firms to gain a distinct business advantage, such as the chance to tap new markets and customer segments, galvanize employees to innovate, or forge more productive and collaborative relationships with local government and communities. Let’s examine these different pathways that combine TSI and TSR, focusing on three marquee firms from around the world. But first, let’s understand a bit better why societal impact has become such an essential strategy for global firms.

The Push for Total Societal Impact (TSI)

During the late twentieth century, most leaders of global companies felt obliged to serve one master above others: investors. The game, they thought, was to maximize returns to shareholders, and they left it to governments and nongovernmental organizations (NGOs) to solve global warming, poverty, water scarcity, and other abiding societal problems. The economist Milton Friedman justified this view, writing, “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.”²⁶ In line with this philosophy, many companies channeled a portion of their profits to fund CSR initiatives—that charitable action felt good to leaders, and it was good for the brand. Yet CSR was always thought of as “the ‘poor cousin’ of the business world,” as one CEO has noted, even as the need to address environmental, social, and corporate governance (ESG) goals mounted.²⁷

Today, companies and leaders know they can no longer sit on the sidelines when it comes to social and environmental issues. Problems like climate change, inequality, and pandemics are worsening, requiring action beyond what government alone can manage and fueling public demands for business to take responsibility and show leadership. As Roberto Marques told us, “If the world dies, we won’t have a business.”²⁸

Stakeholders also have more power than ever to hold individual firms accountable for taking action. With the democratization of media, the public enjoys unprecedented access to immediate and reliable information about companies, their operations, and their impacts. Standards, metrics, and data relating to ESG issues are becoming more plentiful and reliable. In 2018, 86 percent of the S&P 500 included data about their sustainability performance in their annual reports.²⁹ Reporting on ESG performance was becoming an industry in itself, estimated to be worth over $400 million by 2020.³⁰ Even more information about companies will become available in the years ahead. In 2018, investors representing $5 trillion in assets requested that the US government require public companies to disclose standard ESG measures relevant to their businesses.³¹ That same year, Chinese regulators announced that, by 2020, listed companies in that country would also have to disclose data on ESG performance.³²

In our age of transparency and mounting global crises, consumers no longer simply seek a satisfying product, service, or experience from companies with whom they do business. They expect that companies will minimize their negative impacts on society and the environment and even contribute solutions to pressing problems. Research shows that a strong majority of consumers around the world make purchasing decisions based on societal or environmental considerations.³³ Politics play a role, as consumers are becoming increasingly polarized and eager to express themselves via their buying choices. One survey found almost a third of Generation Z consumers globally have refused to do business with a brand they regarded as unsustainable, while in the United States over 90 percent of millennials would leave brands that didn’t advocate for a cause for ones that did.³⁴ Over three-quarters of Americans indicated they would express their displeasure with a brand whose stances clashed with their beliefs by boycotting the brand.³⁵

These shifts translate into actual business results. When Indra Nooyi took over as PepsiCo’s CEO in 2006, the company and its peers were facing consumer concerns around the health effects of carbonated beverages, rising demands for a “soda tax” by activists, and questions around the sustainability of its production processes (including its water usage). Determined to reinvent the company and deliver positive benefits to all stakeholders, Nooyi in 2006 introduced a new vision for the company called Performance with Purpose (PwP), which integrated sustainability and purpose into the company’s core operations. As Nooyi remarked, the strategy reflected a recognition that “our success—and the success of the communities we serve and the wider world—are inextricably bound together.”³⁶