What Really Goes On When Boards Talk Sustainability

Christoph Lueneburger, head of the sustainability practice at Egon Zehnder

The way Christoph Lueneburger sees it, “the CEOs who are most advanced in their thinking are people who are quite young in their view of the world.”

What he means, he says, is that “they have a much more intuitive appreciation for the idea of what a stakeholder is, how rapidly the world is changing, and how much they depend on others in their organizations to innovate and lead the way on sustainability.”

Lueneburger founded the sustainability practice at Egon Zehnder three and a half years ago, after a career in private equity, running a fund focused on water investments. In that work, he says, he realized it’s very difficult to articulate an investment hypothesis in water without seeing the social and environmental issues that surround it. “Everything we do, everything, requires water. So if that’s your business, you’re in the business of everything.”

It was from that work, he says, that he became interested in sustainability as a corporate theme, how it was becoming embedded in the way that we think about business. Egon Zehnder had him start the sustainability practice with a vote of confidence: “They said, listen, if you think this is a board-level dialogue, well, board-level dialogue is what we do.”

Lueneburger spoke with MIT Sloan Management Review’s Michael S. Hopkins about what he’s learned after reviewing 25,000 assessments of leaders and why the smartest executives are now searching out “horse whisperers,” people who will send them signals about how their businesses are really being received.

I lead the sustainability practice at Egon Zehnder, which is a firm dedicated to aligning human capital and strategy. I was in private equity. I ran a fund focused on water investments. I realized it’s very difficult to articulate an investment hypothesis in water without seeing the social and environmental issues. I was very interested in sustainability as a theme, as a corporate theme of, how is this becoming embedded in the way that we think about business. Egon Zehnder said “Listen, if you think this is a board level dialogue, well board level access is what we are.” I founded the practice three and a half years ago.

When you first began, was it easy to have that conversation at the board level? What was the push and what was the pull?

These conversations were already happening at the board level. They were often not happening with the word “sustainability.” We just concluded a board director search, for example, for a major metals mining company, and this board director is all about sustainability, but the dialogue was entirely framed in the context of human rights. If you go to another company it may be framed in the context of child labor and the supply chain, or ground water mediation or responsible sourcing.

And our clients didn’t think of us as partners for those kinds of dialogues. What began happening is that it was no longer “we need to find a sustainability executive,” but rather “we need management talent that understands this as one of the arrows in their quiver; that they just need to have it, they need to know it.” That broadened the field significantly, so now all of a sudden you’re talking about board members, about CEOs, about leadership.

What happened next is we invested quite a bit of time interviewing a bunch of people who were leaders in this space, and some who had not done as well as they had hoped to with sustainability, and in doing that, we ranked them. We have competency scales ranking people, for example, on “results orientation.” What we were interested in is, when you look at the very best executives that have driven sustainability and embedded it deeply in the organization, what is true about them? How are they different from others at their level?

What did you discover? Did you find that there is something special about a great executive if he or she is going to be good at driving a company that has sustainability as a core competitive position?

There were a couple of things that surprised us, although looking back, maybe they shouldn’t have. But they surprised me.

The first one was that most successful executives were ideology ambivalent. And when they truly were able to completely divorce themselves from any narrative to do with global warming or any topic that would be, let’s say, only of marginal impact to the immediate quarterly income statement, they were able to entirely frame the dialogue in a way that was commercially minded. Number two, they were effective in bringing into the fold the biggest movers and shakers in the company, irrespective of what those people’s belief systems were.

Meanwhile, there were some people who had fantastic subject matter expertise, but whose approach to the topic was a bit more purist. They became hobbled, sort of stuck on an island in these organizations. They didn’t have the network to really drive the change that they were hoping to drive, because they were so in pursuit of an ideal or of a pure vision.

We realized that oftentimes the leaders in what we call phase one — the early stage of advancing sustainability as a commercial theme inside organizations — were different from successful leaders of phase two. You might remember this from the piece we did for MIT SMR with Dan Goleman [“The Change Leadership Sustainability Demands“]. Leaders of phase one can be these fantastically, almost annoyingly, stubborn, like weeble-wobbles. You push them, but they come right back. They will just not pipe down. But in phase two, they assume this relatively high gravitas, as totally credible business leaders, because at this point they have to embed this in the organization. They have to go to high-level partners and say, “Listen, you can do things differently, and here’s why — here’s the business case, here’s what we learned, here are some bullet wounds we collected along the way.”

The best leaders, and the example we gave in the article was Frank O’Brien-Bernini at Owens Corning, are people who have the ability to transition from one type of dialogue to a completely different one. From saying, “Okay, I pushed the boulder up the hill, but now it’s up there. Now I need to actually do something entirely different.”

And that was unusual among executives. There are not many who could do multiple phases. That meant that oftentimes, when a leader went through one phase, the company would come to us and say, “We seem to be stuck. We need a new leader.”

Part of being good at phase two is being able to craft the business case. This is bubbling up more and more. Take Peter Bakker at TNT, the express mail delivery company. What makes him so powerful, the reason why he succeeded in so deeply embedding sustainability at TNT, is that he doesn’t just build the business case in terms of gas mileage for his trucks, or the amount of paper used for packaging. He can build a business case in terms of the benefit of retaining people whose values attract them to TNT. Sustainability, to him, has become a way to tie people to what he’s doing. It’s a cultural thing.

So they have this ability to craft a business narrative, one that doesn’t just relate to bottom line, the margins or the way that the cost structure is impacted, but rather to every single thing they do.

Wouldn’t you argue that in your experience, the great executives are going to be ideology ambivalent no matter what when it comes to framing every part of the dialogue in their company in commercial terms? Wouldn’t you say that they’re also going to be good at enlisting other players, even if their particular ideologies may be in opposition?

It’s a great point, even if sustainability is more fundamentally imbued with ideology than, say, TQM. The reason we spend so much time on the analysis of the competencies is because we try to say, are they, in fact, outliers? We have done 25,000 of these assessments of people, where we actually ranked them.

The process we use is something called behavioral interviewing, drawing people out to talk about something specific that they have done. Not something that they would do or how they think it should be done, but rather exactly how they did it. We get very granular detail for what was the situation, what was your task in the situation, what action did you take and what was the result? For example, strategic orientation as a competence goes from one through seven. Seven would be like Jack Welch or Steve Jobs, someone who would be industry defining. It’s very rare to find a seven. Most CEOs will be a five, maybe a six.

In each of the phases, what we found is that there are a couple of competencies that turn out to be outliers. That is, among the most successful leaders of those phases, there were a couple of things where they were statistically different from other leaders of like stature, of like seniority and level and influence.

So these outlier competencies: If we think in a large way about how sustainability and all the pressures and opportunities and threats are going to change what management competencies are required in the future, can you generalize about what is going to be needed?

I’ll preface this by saying that I don’t have the data to back this up, I’m telling you what I believe is true.

There are indeed highly industry specific trends. That is, there are going to be some things that are true for mining that wouldn’t possibly be relevant to apparel. But there are a few things that I think really stand out and that are becoming more and more part of the DNA of the leader of the future.

The first is that people will stop to think of sustainability as something distinct. When an organization is in phase three, sustainability is fully embedded. That means if you worked for that company you could walk into any product planning meeting in some remote branch in any geography and sustainability will be part of the dialogue, just because people are thinking about it the way they’re thinking about return on capital invested or quality assurance. It is simply part of what you do.

And in concert with that will be leadership that recognizes and embraces sustainability as part of its mandate. In my view, those CEOs that are most advanced in their thinking are people who are quite young in their view of the world. And what I mean by that is that they have a much more intuitive appreciation for the idea of what a stakeholder is, how rapidly the world is changing, and how much they depend on others in their organizations to innovate and lead the way on sustainability.

When I think about the most powerful CEOs that we now see engaging and grappling seriously with the topic, they’re ensuring that much broader questions are being asked. At Nike, they’re asking questions about, how do we make sure that the sub-sub-subcontractor in Indonesia, who we’ve never met, behaves in a way that’s aligned with our values? How do we make sure that the little brother of the kid who bought our sneakers and gets them as hand-me-downs knows how to recycle the stuff so we get it back? How do we close that big loop?

And they’re asking questions that have to do with social networking, with Twitter, with really getting together a bunch of stakeholders that previously would have been seen with a very cautious or perhaps indifferent eye. These leaders will begin to think of those stakeholders who interact with them through social media as real assets, sort of the horse whisperer who will tell them when they’re going astray before it’s plastered across the front page of the Financial Times.

What do you see as the biggest misunderstanding about sustainability?

The biggest misconception about sustainability is the opposite of the thinking I just described, that sustainability is somehow external. People will say, “It’s important. It’s really important, I get it’s important and I’ve got to do it, but it’s not really part of me; me personally; my organization and the company.” I am surprised by how ubiquitous that point of view is. It reminds me of a sign by the side of the road that reads: “You are not stuck in traffic. You are traffic.”

How do you help people as they start to think through all this and pursue it in their companies?

We do something we call the Pulse Check. What we noticed is that when we check in with leaders six months into their new roles and ask, What’s up? How are you doing? What we’ll often hear is, “Gosh, I’m really struggling with X,” and X, almost invariably, is something internal. It’s not some NGO chaining themselves to the smokestacks, but it’s Joe, that pesky VP of operations just seems to be pushing back on everything we do.

For instance, there will often be an eye-opening dialogue at the board level. The same board that’s been together for eight years can vary on some very basic questions, like, “Are you phase one, two or three?” One person will say, “Well, we’re just emerging from phase one,” while another will say, “No, no, we’re very advanced.” And that’s just in answer to the question “Where are you today?” Never mind the question of “Where do you want to go?”

The Sustainability Pulse Check allows us to map out where an organization is, determine the gap to where it wants to go and where competitors stand. It’s a tool that shows the fault lines inside the company where the narrative mutates, where incentives don’t match aspirations, where passion to advance is artificially encumbered. And in so doing it uncovers untapped commercial opportunities.

Not just hiring somebody and seeing if they can figure it out on their own, but rather mapping out the landscape to help them navigate and hit the ground running has been a tremendously powerful way for us to engage in the strategic dialogue. It really helps people figure out what the question is that they’re asking and what the question is that they ought to be asking. Only then can they start to think about how to drive cultural change, whether it’s through one person, or through a broader, more distributive way.

What about smaller companies — are there any you’d call a leader? Companies or people who are doing something really interesting?

I think Patagonia is a leader. I had a conversation with Rick Ridgeway the other day, who leads sustainability at the company, and he said something fascinating. They were doing their Christmas catalogue, and Rick was down there, looking at the always-beautiful pictures and so forth. And Yvon Chouinard, the founder, says in the meeting, “That’s a nice catalogue, but tell me how it is that we’re not just incenting people to buy more stuff they don’t need?” Wow — that is an enormously ballsy question to ask when you’re sitting atop a company. It’s inspirational.

The companies that most inspire me are private. Like Patagonia, they are not saying “growth is our aim.” They’re companies that say, in fact, “It is not growth that will ensure our sustainability, but values.” That’s a very hard thing to say.

You can only say it if you’re private.

That’s right. Today, you can only say it when you’re private.

Do you think that will change?

I can imagine stock that would be almost like a preferred, if you will, that says, look, we’re going to give you dividend. We may not grow, but we’re sustainable. Our business model is sustainable, and the probability of getting that dividend is going to be very high.

Right — we’re going take growth out, but we’re also going to take risk out.

Are we there? No. But I think there’s going to be a segment of the market that finds that appealing from a pure economic perspective, never mind the fact that they think that’s actually a good thing to do.