This is the fourth of a series of interviews intended to help our IDN members grapple with the ESG topic.
In this episode, we delve into the experiences of a seasoned industry executive-turned-INED, and explore the insights he has gained in the course of his career.
Bengt Enström was senior executive at Whirlpool (Global VP Microwave Ovens, Europe VP Manufacturing &Technology, EVP Whirlpool Corporation) and President Whirlpool Europe. After moving home to Sweden, he was CEO of Duni AB and Nordic CEO of Fujitsu.
In recent years, he has worked as an advisor, board member and investor in both large and small companies. His assignments include: Chairman of the board of Nordic Flanges AB, Qleanair AB, Qlosr AB, and IFG Duroc. Board member of Polygiene AB, Scanfil Oy, Real Holding AB, Scandinavian Chemotech AB and KTH Executive School AB.
In your view: What is the relevance of ESG for overall company governance and success?
The up front value is to drive change, which is vital. The entire society needs to shift direction, with businesses playing a crucial role in driving this change. However, this transformation must occur within the framework of business operations, which is crucial. I’m somewhat apprehensive about past experiences where new regulations were introduced without adequate oversight thereeafter. Many individual companies failed to comply without facing consequences. This penalized those who adhered to the rules from the outset, as it imposed certain costs that could initially only be offset by raising prices. This situation could put compliant businesses at a competitive disadvantage. I’m therefore sceptical that adherence to regulations will necessarily result in a marketing advantage. While in some areas, sustainability efforts currently offers an edge, especially among investors and larger companies, which are beginning to cascade requirements down to suppliers, this advantage may diminish as regulations become more stringent. Ultimately, this raises questions about the viability of compliance strategies. So, it’s a complex issue with no simple answer.
What do you see as the added value of ESG beyond compliance and risk management? And: What is your perception of the cultural differences between companies successful in implementing sustainability initiatives and those facing challenges?
If I may draw a parallel: When ISO came into play initially, it was merely about filling out forms and getting them stamped. It was a box-ticking exercise. But over time, it evolved into a management tool. Similarly, when the concept of quality management emerged, it was seen as an added cost. However, it eventually transformed into a means of enhancing and rationalizing business operations.
And indeed, taking again quality management as an example: It did take some time before it became apparent that there were other underlying issues that needed to be addressed to operationalize it. For instance, everyone desired Zero Defects, but achieving this required intervening at multiple levels, providing assistance, training, and continually reinforcing expectations.
Contrasting approaches between the white goods and automotive industries were evident.
While the latter imposed demands on suppliers, we in the white goods industry proactively supported our suppliers.
I recall one supplier who prioritized car production over us, only to realize later our significant role in their development. This underscores the importance of a demanding yet supportive customer base.
In industries with narrower margins, the responsibility extends further back due to less room for error. The disparity in productivity between low and high-margin businesses is considerable. Despite advancements, the cost of washing machines has decreased over time (the opposite is true for cars), and reveal hence differences in marketing approach. But not in engineering prowess.
What does it need? I am Swedish, so I take Swedish examples. For instance, Atlas Copco exemplifies successful decentralization, with P&L responsibility cascading down the organization. This fosters a culture of financial literacy and leadership, enabling seamless transitions to other companies. Conversely, a centralized structure delays exposure to P&L accountability until senior levels, resulting in leadership challenges when individuals transition. Companies that neglect holistic financial understanding often struggle to thrive. Jack Welch’s approach at GE, pushing responsibility downwards, yielded remarkable leadership proliferation. Conversely, increased centralization tends to stifle success.
Hence, the key lies in empowering individuals with accountability and comprehension When responsibility is distributed and ESG principles ingrained in daily operations, success naturally follows.
Until ESG principles become ingrained in everyday business practices, they’ll remain burdensome rather than beneficial. It’s about more than just ticking boxes; it’s about using these initiatives to drive real improvements in efficiency and sustainability, in business processes and business ethics. An overly simplistic example: considering energy conservation measures from the outset rather than as an afterthought.
What are the critical areas for bridging ESG alignment gaps between executive leaders and non-executive boards? Also, which domains are crucial for board members to further educate themselves on?
I perceive no significant disparity in mindset between executive management and the board. Both should prioritise driving improvements rather than mere oversight. This is akin to the distinction between accounting and control; it’s about utilising data to enhance competitiveness. Ultimately, fostering this proactive approach throughout the company is paramount for delivering better products and services to customers, especially in the industrial sector.
For board members, possessing a comprehensive understanding across various domains is essential. However, an inclusive skill set within the board is equally critical for effectiveness. This encompasses expertise in finance, ESG, sales, operations, and more. Recognising that no one individual can excel in every area underscores the necessity for a well-rounded team.
Further: while committees like audit or remuneration are commonplace, extending this approach to ESG preparation could streamline decision-making processes. Leveraging specific skill sets while fostering independence in each area is pivotal. It’s often a missed opportunity to witness topic-specialist committees addressing both operational and board-level concerns simultaneously.
Do you think the public sector can learn from corporate practices? If yes, how do you see this knowledge exchange happening?
It’s quite intriguing. My daughter works in the public sector, focusing on procurement. She’s attended numerous courses on avoiding failure and about rules and regulations, but not a single one on excelling. It’s all about avoiding mistakes rather than seeking improvement. This mentality is evident in hospitals too, where disposables are used excessively without consideration for sustainability. Yet, they continue to request more funding, a scenario unlikely in the private sector, which prioritizes efficiency.
This approach extends to ESG initiatives, where compliance takes precedence over innovation. Changing this mindset will take time, even in the private Med tech sector, where there’s potential for business growth by embracing sustainability. The public sector’s rigid adherence to rules often stifles progress and leads to recurring scandals. It’s a concerning trend.
There are areas where the public sector could well profit from considering ‘common place’ approaches from the private sector. Let’s just take one example that has received considerable attention lately: Apparel, and particularly the recycling of clothing. Interestingly: there are alternative approaches worth considering. Take, for instance, extending the lifespan of clothes through less frequent washing, which reduces material waste, and fibre shedding getting into water ways.
On the other hand: Metal recycling, especially aluminium, is well-established, and other sectors are finally catching up. At Whirlpool, we aimed to minimize water and electricity usage in dishwashers and washing machines, benefiting both the environment and customers. The industry has long been engaged in such efforts, but there’s room for more.
The fascinating thing is: the public sector lags behind due to a lack of incentives. It would be intriguing to explore its untapped potential, as everything holds value in industry, unlike the public sector. What if it were different?
On the shorter term, what are the biggest ESG-related challenges for non-exec boards? Why? And: what can companies do about that?
Certainly, implementation is crucial, but government oversight and enforcement are equally vital. Without effective monitoring, compliance falters, allowing criminal activity to thrive, as seen in recent scandals like illegal waste disposal in Sweden. Trust is valuable, but robust control mechanisms are indispensable to prevent abuse and maintain societal integrity. We must embrace ESG initiatives, integrating rigorous adherence to regulations as an opportunity for innovation rather than a mere cost to pass on to consumers.
Requiring annual reporting of improvements in the annual report is a step towards transparency, but without auditors verifying these improvements ‘hands on’, ensuring accountability becomes challenging. Transparency alone may not suffice, especially considering the risks of corruption. Therefore, a robust system of checks and balances is essential to uphold integrity and foster trust.
Oversight is essential, with larger companies monitoring smaller ones to prevent issues. However, expecting big companies to oversee multiple layers down the supply chain is challenging. Instances like H&M in Sweden illustrate this complexity. Relying solely on private companies to ensure compliance, especially in regions and geographies with limited governmental oversight, may not be feasible.
But: where there are challenges there are also solutions: I am therefore cautiously positive that we will manage to tackle this demanding lift successfully.
The interviewer:
Dr. Pamela Ravasio is the founder and managing director of Shirahime Advisory, a Corporate Responsibility Governance boutique consultancy. She serves as fractional Chief Sustainability Officer for companies and advises boards on ESG and governance. With a background in roles like Global Stakeholder Manager, she played a key role in making the European outdoor industry a leader in future-proofing.
She currently is a member of INSEAD’s International Directors Network.
