To celebrate the release of the 10th edition of Pictet Report, we are republishing a selection of articles taken from our archives dating back to 2009. Today, INSEAD professor of strategy and management Subramanian Rangan explains that, in a new era of sustainable performance in business, companies must embody considerations of justice, diversity and integrity, as well as efficiency.
At the enterprise level there has been a shift from the broad view that performance means profitable growth, the mantra of the 1980s and 1990s, to a broader definition of sustainable profitable growth. Sustainability is very hard to nail down, but it reflects a sense that we really care about the future. Five “Rs” come to mind in trying to define it.Business performance can be analysed on two levels – the enterprise level and the leadership or management level. At both levels, what we mean by performance has changed over the last decade and a half, reflecting changes in the global environment. This requires us to re-examine and reconceptualise performance in these new circumstances.
Risk: profitable growth does not quite get at how the balance sheet looks. Past performance is not a predictor of future performance, because the actions that seem to deliver current performance may engender risk for the future. This is analogous to the farmer who is eating his seeds until he has no more left for replanting.
Reputation: intuitively, my sense is that reputational capital is important, as it is when countries or companies try to sell bonds. The premium they have to pay over prevailing rates gives us a sense of both risk and reputation – a speculation or forecast about the future. Reputation is an asset that gives an organisation credibility and means it can be trusted.
Resilience: stuff happens – an oil spill, a product recall, a safety accident that leads to injury or death. The question is how rapidly the organisation can bounce back. Has it built in resilience, or is it a fragile tall structure that has become way out of proportion to its foundations?
Respect: there is fear and there is respect, and respect is a higher order sentiment, something that others endow you with. The Dalai Lama is respected; some other religious leaders might be feared. Certain enterprises perform in such a way that they elicit the respect of society – in India, Tata is one such enterprise. Because respect is a cumulative type of sentiment, it is not based on just a single outcome but on a durable record.
Recognition: when people acknowledge and attribute certain deeply valued characteristics to the enterprise. It may have started the quality movement or be recognised for its professionalism. Apple is recognised for having led a renaissance of design.
These are the five Rs I think about when defining the substance of sustainability.
There is much more, of course, including traditional factors such as profit, people and planet. But Risk, Reputation, Resilience, Respect and Recognition are terms that signify the broadening definition of performance – factors that organisations are now grappling with in many sectors. Thus profitable growth has been broadened for enterprises to sustainable profitable growth. For management, the evolution has been slower, but it is also happening: a high-performing executive used to be someone who delivered the results, but is now increasingly seen as someone who makes a contribution beyond the current results. What are the contributions that leaders are making that eventually feed into the resilience, recognition, respect and so on of the enterprise? Here are some examples:
• Endowing the enterprise with new capabilities that allow it to make innovations and to deliver performance.
• Re-architecting the system to leave the firm in a vastly different condition, rather than just optimising it to deliver slightly better results. For example, this could involve bringing in new technology, or leveraging technology in a different way.
• Creating a method, rather than just making superficial changes. That again can lead to recognition, resilience and a reduction of risk, because without methods you do not create scalability, you will not have a future.
• Transforming the team – bringing in new human capital to strengthen the team and put it on a completely different trajectory.
• Raising the enterprise’s aspirations by setting out ambitions that had not previously been contemplated by the resource allocators.
• Transforming the culture. When you upgrade the culture, you make a durable contribution, because culture embodies the memory of the organisation.
To read the entire interview, download the corresponding Pictet Report.