- Date: July 21, 2021
- Hosts: Research Institute of Economy, Trade and Industry (RIETI), European Corporate Governance Institute (ECGI), Waseda University Institute for Business and Finance (WBF)
The relationship between the company and society
I took the role of NEC's CEO and President one year after the Lehman shock. The environment at the time was so difficult that I decided to remove three of our major businesses, with sales totaling 20 out of 50 billion dollars. There was a huge impact on our business investors and employees. To rebuild NEC, I was required to visualize our new role in this human being society, focusing on establishing a new culture of value creation.
Based on those experiences, I will share my thoughts regarding our company's role in value creation and the key points to watch out for in some NEC activities for purpose-driven management.
First is the relationship between the company and human being society, as well as the company's important role. The most important thing for human being society is sustainability. The most important thing for a company is continuity, and the continuity of the company has two factors. One is its continuous capability of value creation. The other is continuous provision of opportunities for people to create value. Companies create value and provide solutions to problems in society, and when those solutions are evaluated as valuable in terms of sustainability, a payment occurs. Therefore, sustainability in human being society and continuity in companies are indispensable to each other.
To maintain continuity, the company must create value considering the sustainability of human being society. To create this value to a satisfactory level in the long-term, the company must deeply understand human nature and essential human desires. The 17 Sustainable Development Goals (SDGs) seem to align with Maslow's hierarchy of needs, which are said to equate to these essential human desires. Therefore, SDG activities require companies to recognize those essential desires, and through that deep understanding, companies can create value. However, achieving a long-term vision requires technological innovations which may take several decades. For a company to show a stepwise interim solution, a careful review on what and when technology will be available is important.
The desire for communication
The essential human desire for communication includes three aspects: "whenever," "wherever" and "whomever." In the 1960s, landline phone networks were deployed and covered Japan, and they satisfied the "whenever" and "whomever," but "wherever" was not available. It took 30 years to implement the "wherever" with advanced technology such as large capacity lightweight batteries.
Low power-consumption LCDs and high-density semiconductors led to a digital mobile phone. In just five years, the number of subscribers of the mobile network exceeded that of landline network phones. The mobile phone transcended barriers of age, sex, and country. It was an innovative solution that satisfied an essential requirement of human being society.
Understanding the system of human desire is also key from the viewpoint of innovation. Companies provide a solution to society, and if society deems it valuable, then that solution will stay within the market and become a need. The way to observe these needs is through market surveys, and if we can collect those needs, we may be able to understand the essential desires of human beings. Then, if we can understand these essential desires, we can provide a more satisfactory solution, which will be an innovation.
Good for society
In Japan, there is a philosophy: "good for the seller, good for the buyer, good for society." The first two are enough to make a business, but a Japanese businessperson adds the third. Action for society is important to create a long-term vision, and to encourage the continuity of the company. Japan has many long-lived companies. This is proof that long-term vision creation based on essential human desires helps the continuity of the company. When pursuing a purpose, we need to think about that. For the management and governance of a company, it is also important to seek out these essential human desires. From a purpose-driven management point of view, the company culture, employees' engagement with value creation, and leadership to accelerate those activities are all necessary.
Many issues in society today will not be solved by partial optimization, so optimizing all related elements is necessary. Energy, mobility, healthcare, provisions [of food], education, and global environments are the typical areas that require total optimization, and those equate to the essential human desires. Therefore, a totally optimized solution requires two new processes that are different from the previous partial solution. One is to set a high-quality goal using a Key Goal Indicator (KGI). The second is building high consensus towards the KGI among most of the people who will receive value from it. Low consensus will end up yielding low value, even with high-level technology.
Furthermore, companies will need to bring together multiple elements of a totally optimal solution. Therefore, a company must have the capability to provide superior value to be selected as a totally optimized solution creator.
We created our corporate message of "Orchestrating a brighter world" in 2014. Our message came from our need to fully understand human being society and essential human needs through close communication and deep discussions. We then wish to harmonize with society through value-creation based on this understanding. NEC is an ICT company, focused on three components: networks, computing power, and software solutions. With these, we can create important features that are real-time, dynamic, and remote, and provide value to society in the forms of safety, security, fairness, and efficiency.
In the 25 years since mobile phones were digitalized in 1995, ICT has evolved dramatically, seeing massive gains in processing power and network speed. The evolution of hardware has also led to software evolution, enabling AI, which can generate value in real-time. This rapid evolution has led to the shift from Society 4.0, a value-creating society based on information generated from individual data to Society 5.0, a data-driven society where the source of value has moved from information to data. In Society 4.0, information is generated from a subset of data, and much data is discarded, making a partially optimized solution. Now, thanks to technological innovation it is possible for society to obtain totally optimized data solutions.
Under NEC's purpose management initiative, the most important thing for our company is to have a culture where each employee has the ability to proactively do things on their own. For three years, NEC has been focusing on people and organizational transformation.
We are implementing a variety of initiatives to establish career ownership as a part of the NEC Group DNA. The core of our culture and the NEC way, which clearly define the stance of the company and its employees, consists of purpose, principle, a code of value and a code of conduct. This is a common set of values that form the basis of how the entire NEC Group conducts itself.
We are promoting cultural transformation with various key drivers to achieve purpose management. We have an initiative called Project RISE that includes the transformation of the business strategy, people and organization processes, and ways of working. We are currently implementing a corporate culture transformation by changing the HR system and work style. The new corporate culture will allow employees to take the initiative and show more creativity, speed up decision making, clarify ownership, and reform the evaluation and compensation systems to encourage changes in behavior.
We are making a particular effort in bottom-up activities such as our new system of "Change Agents." This is a cross-functional initiative in which future leaders proactively nominate themselves, and work beyond the boundaries of their division and affiliate companies. They work to implement projects solving NEC Group's management issues, and also act as cultural change evangelists in their own organization. NEC's internal job-posting system is a typical example of how the HR department and "Change Agent" worked together to design more effective systems. Referral hiring is our system for hiring talented people, and it requires employees who sympathize with the purpose and values of NEC. Therefore, the involvement of young employees, along with top management's support, is key to engagement and a successful cultural transformation.
We are also working on our Leadership Development Program. A highlight of this program is that selected management candidates are required to spend several days in a place where life is less easy. This first-hand experience allows for direct interactions and deeper insight into the essential issues of society. One example that embodies the purpose of contributing social value on a global scale is the effort to create a child-fingerprint solution. To help raise vaccination rates in developing countries, NEC, Gavi, and Simprints are working to develop the world's first practical solution of infant fingerprint recognition. NEC will contribute to the world by providing a place where each employee can play an active role, to become a company that is chosen by customers and that continues to participate in the individual creation cycle.
Implementing purpose in organizations
The core issue is how purpose should be implemented in organizations. Purpose is core to a business and core to its strategy and should thus be integrated into the corporate governance of a company. In Oxford, we have been developing a framework, called SCORE, to help the boards of companies across the world implement purpose. S is to simplify and clarify the purpose. C is for connect, to connect the purpose of the company with its strategy. This includes connecting the business with any other relevant parties to work towards solutions. O is for ownership—ownership of the company's purpose. This relates to the formal owners, shareholders, but also the ownership that extends throughout all members of an organization. R is for reward, to ensure that the reward system in a company is aligned with delivery of the company's purpose. E is for exemplify, to exemplify the purpose. It is important to have authentic narratives that talk about the success of a company delivering its purpose, but also failures to learn from.
Ensuring a clear definition of purpose and engaging people in the process of determining that purpose will give them a real sense of ownership and belief in the company's purpose. The board of the company must also demonstrate the credibility of the purpose. Another challenge is aligning and measuring the incentives of the organization. Building up a reporting system on the purpose and being able to demonstrate the extent to which the company is fulfilling its purpose is important for both those within the organization and outsiders.
In our definition of purpose, there should be no trade-off at all between purpose and profits. There is mounting empirical evidence of a positive relationship between the purpose of companies and their profitability and value creation. There is a one-to-one relationship between profit and social benefit.
Distinguishing purpose from other business concepts
The notion of shareholder primacy says that a business simply exists to create profits. The new notion of profit differs from that of the Milton Friedman doctrine on two schools. First, in terms of the notion of causation. Second, in terms of the definition of profit. It recognizes that in contrast to the Friedman doctrine, the pursuit of profit is legitimate because it is a derivative of solving problems. However, it also differs from some other notions of business which are sometimes associated with the idea of stakeholder theory—that the business is there to promote the interests of all of its stakeholders. To promote the stakeholder theory, one needs multiple measures of the performance of a firm, not just profit. This is sometimes described as a triple bottom line determination of the performance of a company. That introduces many complications in terms of how to balance the various measures, but related to purpose, the only necessary measure is profit that derives from producing solutions.
Examples of purposeful firms
There are now five trillion-dollar companies in the world, and those five companies account for 50% of the total value of U.S. stock markets. The companies are Apple, Amazon, Microsoft, Alphabet, and Facebook. The feature of these trillion-dollar companies is that they are highly driven and purposeful businesses. They have or have had extremely purposeful leaders.
The underlying purposes that have driven those businesses are centered on user-friendly innovations. That was the case of Apple's user-friendly iPhone. A strong focus on consumer benefit fueled innovations at Amazon. Google made the internet accessible to people around the world. Social connectivity is associated with Facebook and other social networking companies. However, these companies are also associated with both solving and creating problems. One can try to evaluate all the social and environmental costs compared with value, but it is very complex and difficult. Instead, a much better way is to define what "true profit" is, and then decide on what kinds of innovation should be the drivers of a business. We cannot simply rely on regulators to do that, because they are always behind the curve, especially in high-technology industries.
Tying together the lecture series
Once one has a correct definition of the true profit of a company, then the power of the purpose becomes clear in how it can derive benefits for companies, society, and the natural world. This is of particular relevance for Japan currently, because there is much concern about the Japanese economy. Many policy discussions regarding corporate governance reforms are attempting to address those concerns and place greater emphasis on the involvement of foreign investors alongside domestic investors. Simultaneously, there is a concern and desire to retain an emphasis that has long prevailed in Japanese business about the importance of social cohesion and values beyond financial value.
Purpose is a significantly powerful way to realize both of these ambitions. Focus on profit promotes efficiency, growth, innovation, and investment, but purpose aligns profit with social and environmental benefits so that there is a high degree of consistency between the objectives. Thus, it is relevant to Japan, and all countries seeking to promote societal and environmental benefits along with economic growth, innovation, and prosperity.
The role of boards of directors in adopting purpose
Companies have a responsibility to solve problems, but companies are drivers of some of those big problems. Government regulation is not always appropriate or effective for some problems. Therefore, how do helping companies and company governance account for all the direct and indirect impacts of their actions? The concept of purpose needs to be used to tackle the problems that companies are creating.
Corporate purpose: a framework
For both the boards of directors and senior management teams, there are at least six basic dimensions concerning corporate purpose. First, the purpose should identify a challenge that the company wants to offer a solution for. Purpose should also foster peoples' engagement. Due to the global pandemic, many began working from home, and now there is a problem where people do not wish to return. Does the board of directors try to engage its employees? The fourth dimension is that corporate purpose should be integrated deeply and coherently with the firm's strategy and business model. Purpose should also consider the relevant ESG dimensions for that company. Lastly is considering the impact of purpose, in terms of profit, and in a holistic, systemic way. Creating the potential to innovate to solve future problems is the type of overall impact that the board of directors should consider.
The example of Danone
Danone is a French consumer goods company in the food industry. They have been integrating a number of environmental and social dimensions into their strategy for many years. In 2014, Franck Riboud stepped down as CEO and Chairman of the Board. Emmanuel Faber, a 30-year veteran of Danone, was chosen as the new CEO and Chairman of the company. Fast-moving consumer goods have been changing quickly and consumer preferences are fragmenting, so local brands and local markets have become more important. E-commerce is also having major effects. They also needed to consider their environmental impact and social impact to adjust to changing market conditions. Yet, integrating purpose into the strategy and business model, and especially consumer needs, was somehow missing.
Part of the problem that Danone has faced, leading to the firing of Faber, can be addressed by adopting purpose in a coherent and sustainable way. Unilever adopted a formal notion of purpose back in 2010 when then-CEO Paul Polman worked on the Unilever Sustainable Living Plan. That became a holistic model starting with purpose, values, a vision, strategy, business model, and a comprehensive way of understanding how to measure the impact of the company. This was difficult, even leading to a hostile takeover in 2017. However, since their model of purpose had consistent integration within the company, Polman and his team of directors at Unilever were able to explain to key shareholders why their model was superior for creating long-term value for shareholders, society, consumers, and the planet.
Questions on the firm's purpose for the board of directors
Through my work with some of those companies, I will share key questions that emerged. The first question is whether the board of directors truly understands the firm's purpose and how to integrate it throughout the business model--whether the board of directors truly understands the specific customer needs. Boards of directors are often preoccupied with high-level tasks, so are they then able to truly understand their customers? In parallel with customers, the second implication of a good corporate purpose is how it motivates its employees. The board of directors must think about why talented people would want to work in their company.
The fourth question is how corporate strategies connect with purpose. If a company has a holistically integrated strategy and business model, then it becomes clear why investors would want to invest in the firm. Additionally, the board of directors can understand time horizons of investors and how they match those of the company.
The sixth question is what impact purpose has on hiring CEOs and senior management teams. How does purpose integrate with corporate values and culture to develop a type of corporate leadership that makes purpose sustainable?
The seventh question is what the impact of purpose is on other stakeholders. How deep does a company consider the integrated value chain from sourcing of raw materials, down to the impact of production and services?
Finally, we must assess and measure the overall impact of purpose in all the ways in which the company can provide value. Since companies have the potential to grow in the future, and for society, it is necessary to think in the long-term, boards of directors need to think about companies in the long-term and in terms of sustainability and their true value. These questions are relevant to helping boards of directors adopt well-developed notions of purpose. This should be able to help develop companies that are sustainable financially, and also from a societal and innovation viewpoint.
Keidanren's initiatives for sustainable capitalism
The U.S. Business Roundtable declared a commitment to all stakeholders in 2019, and the World Economic Forum announced that cooperation should serve all stakeholders in 2020. This idea has been spreading rapidly around the world. Keidanren established Charter of Corporate Behavior back in 1991 and presented the idea that companies should be beneficial to society as a whole. Incorporating this idea of contributing to a sustainable society since 2004, the 2017 revision stated that the role of a corporation is to take the lead in the realization of a sustainable society. Since 2018, Keidanren has been advocating "Society 5.0 for SDGs", a concept that balances economic advancement with the resolution of social problems by making maximum use of innovative technologies. Society 5.0 for SDGs is a creative society that combines the imagination and creativity of diverse people with DX to solve problems and create value. Last year, Keidanren published ". The NEW Growth Strategy" to realize this concept and recommended actions toward value co-creation starting from five stakeholders: consumers, workers, local communities, the international community, and the natural environment. Japanese companies have long pursued the traditional business principle of "sanpo-yoshi", that business should benefit the buyer, seller, and society. Recognizing that capitalism is about to reach a significant turning point, Japan's business community must redefine and reaffirm this traditional business principle. Keidanren Chairman, Mr. Tokura himself presents the concept of "Social Point of View" and strongly promotes this New Growth Strategy. To realize sustainable growth, corporations are required to be aware of the changes in stakeholders' demands and need to address the gaps between those demands and the corporations' approaches.
Companies' actions to address SDGs have been spreading as priority issues for their corporate management. According to our survey last year, the highest growth rate from 2018 was observed in the response "Integrating SDGs into business policies and practices" (4.2 x), indicating that the integration of SDGs into management, as required by Article 10 of the Charter, has been progressing steadily in recent years.
Keidanren sees building a sustainable society through the realization of Society 5.0 as a major growth opportunity. Mr. Nakanishi, the late former Chairman of Keidanren stated, "In the past, 'businesses' came first. This was based on the idea that we must contribute to society, make donations, and protect the environment because businesses put a burden on society. But now this has changed. It is precisely because companies are useful to society that they can receive orders and generate sales." According to a trial calculation of joint research conducted with the University of Tokyo and GPIF (Japan's Government Pension Investment Fund), the realization of Society 5.0 has the effect of boosting Japan's GDP by 250 trillion yen as of 2030.
Japanese companies are also working to create innovations to build a sustainable society, such as next-generation healthcare and smart mobility, that is, sustainable innovations. Those can be found at Theater 5.0, Keidanren's platform for showcasing videos of companies' visions towards a sustainable society.
In order to achieve sustainable "goals", it is indispensable to have support by "Investment" for promoting "innovation." Keidanren, the University of Tokyo, and the GPIF are jointly advocating the creation of a flaw toward the realization of Society 5.0 and the achievement of SDGs through the evolution of ESG investment.
The next point is corporate governance reform in this context. Japanese Corporate Governance Code was established in 2015 as a part of Japan'ｓ Growth Strategy. Keidanren has promoted various corporate governance initiatives, based on the belief that each company should proactively establish its own corporate governance systems in line with its purpose. The revised Code is aimed at social development and increasing corporate value by promoting corporate initiatives on sustainability and diversity in human resources. Keidanren welcomes them as concurring with our sustainable capitalism approach. It is necessary to take this opportunity to promote governance reform with "substance" through constructive dialogue between investors and companies. Japanese companies are also proactively pursuing the optimal form for each company regarding the ideal form of the board of directors, such as improving the number and quality of independent directors.
Last year, Keidanren issued a proposal to promote constructive dialogue between companies and investors, setting out actions to promote effective dialogue from a medium- and long-term perspective. The proposal indicated that companies should voluntarily communicate their own information and ideas with awareness of materiality and priority, by presenting medium- and long-term visions and value creation stories. When a company can demonstrate or explain its purpose, which could be a guiding principle for its materiality and priority, it can acquire empathy and cooperation of investors and other stakeholders to enhance its medium- and long-term value. This can lead to an increase in return for investors, and we expect that realizing this virtuous cycle would contribute to sustainable economic growth in Japan and the world.