Earning License to Lead

Good morning ladies and gentlemen. Id like to thank the Diederich College of Communications, Dean Lori Bergen, and the Arthur Page Society for inviting me to the inaugural Marquette Corporate Communications Summit. The topic of corporate behavior continues to be headline news around the world, as it has been since fall 2008. Its an historic crisis for capitalism. This morning Im going to address the crisis and its ramifications in three parts. First, what is the meaning of the crisis and the magnitude of the collapse of Trust in institutions? Second, how can business restore Trust? Third, how can the Chief Communications Officer lead the transformation of corporations? Lets begin with trust in the private sector, which collapsed in the period following the recession of 2008-9. Many companies central to the global economy went bankrupt. Hat in hand, GM, Citigroup, AIG, RBS, Chrysler and a host of others went to government seeking bailouts. Other top multinationals were ensnared by operating failures Toyota and the brake scandal, BP and the Gulf oil spill. This was acutely felt in the U.S. trust data. According to the Edelman Trust Barometer, business in the U.S. reached its peak trust level in 2007 at more than 50 percent. By 2009, the trust level for business was in the mid-30s. Trust in financial services was 70 percent in 2007; it was 28 percent in 2012, from third place among all industries to dead last. CEOs were the fourth most trusted source of information in 2007 now theyre second from the bottom of ten. The current embodiment of these negative trends is Goldman Sachs. By traditional measures revenues, profit and market share Goldman is tremendously successful. But the firm is under intense scrutiny and experiencing a profound culture crisis. A generation ago Goldman was respected as much for its values as for its business acumen. Its cochairmen then, John Whitehead and John Weinberg, articulated a clear set of behavioral principles that defined the firms standards and conduct. Its a very different Goldman Sachs today. When the firms current president Gary Cohn tells the World Economic Forum It is now no longer what we can do, it is what we should do, his remarks have no credibility. Goldman has been called out repeatedly for playing both sides of a deal most recently in the El Paso-Kinder Morgan merger. Senior manager Greg Smith resigned via an explosive editorial in The New York Times, accusing his firm of placing short-term gain ahead of client interests. The collapse of Trust in business initially led to a new reliance on government. Congress passed legislation such as Dodd-Frank to rein in financial services companies. Government bailouts proved successful, particularly in the car business. Then government became paralyzed and beset by its own crises. The events of last summer were surreal -- the near default of the United States followed by a credit rating downgrade, the near bankruptcy of Greece and Portugal followed by the EUs inability to produce a stability package. 1|Page

When government does act in periods of instability like today, it often behaves unpredictably. Examples of this are President Obamas blocking of the Keystone pipeline; Prime Minister Angela Merkel banning nuclear power in Germany a week after the Fukushima disaster; and Argentinas President Christina Fernandez de Kirchner nationalizing the Repsol YPF business. According to the 2012 data, government is now ranked as the least trusted institution in the U.S. for the first time. Government officials are the least trusted spokespeople. More than half of Americans believe government officials incapable of telling the truth on difficult issues. The gap between expectation and performance for government in the U.S. is 50 points. Thats true across the world; in 17 of the 25 countries surveyed, government is the least-trusted institution. Despite this cynicism, however, half of Trust respondents in the U.S. still want government to regulate business more closely, as protection against unethical behavior. In effect this is whats happened: The keys to the car were taken away from business after the crises of 2008. Then the designated driver, in this case government, took the wheel and crashed the car. The passengers may have survived, but theyre in intensive care. All of these weaknesses are exemplified by the communications imbroglio following the nuclear disaster in Japan. Fukushima is a watershed the end of an era. All traditional institutions failed at once. First, the owners of the nuclear reactor, TEPCO and the Japanese Government, initially assured local residents and the world beyond that all was well. Japanese media dutifully reported this line, often quoting Japans mainstream NGOs. Japan Inc. made its stand. Then reports began surfacing in social media, especially on Facebook and Twitter, calling into question the safety of the area. One person truth squads such as Man from Chernobyl emerged as more credible than institutions based on first-person testimony. Global media accused the government of a cover-up. Late last year, Japans official agencies finally acknowledged that damage at the Daiichi reactor was much worse than first reported six months after international experts made the same assessment. A collective failure to tell the truth was exposed, enabled by a system that has as its central premise the need to maintain control, even at the risk of loss of credibility. The result? Japan in over one year fell to the second-lowest ranked country in Trust in the world, ahead only of Russia, a remarkable reversal from the prior decade. Today, the expectation of change is everywhere most notably in the Occupy Wall Street movement. As just happened this week, shareholders at Citigroups annual meeting rejected CEO Vikram Pandits $15 million pay package. The rise of the Pirate Party in Germany, now the third most popular at 13 percent of total voters, is based on its demand for nothing more than transparency in government Were seeing an unparalleled dispersion of authority, enabled by new technologies, and reinforced by the conviction that peers are more likely to tell you the truth than traditional information sources. The longstanding pyramid of authority is being upended. The top of the pyramid classic elites such as Wall Street, government officials and CEOs is least trusted. The bottom is now on top. Evidence of this is everywhere from the protests on Facebook against Bank of Americas debit card fees to the Arab Spring.

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Consumers are creators of content, the new experts in a continuing conversation. Peer recommendation is the number one basis of purchase. The infinite capability of search makes us all deep experts in any narrow field at any given time. We are now in a stakeholder not a shareholder world. Brand and corporate reputations are inextricably linked. Skepticism is rampant the average person needs to hear, see or read a story in five different places to achieve belief. So, given this set of circumstances and new context this brings me to the second key point in my talk today how can we restore Trust in business? Historically, the objective of business has been the License to Operate, the freedom to pursue traditional goals of innovation, marketing products, and generating profit. License to Operate worked well for many decades, especially in the recent era of widespread deregulation. This world view was rewarded by Wall Street, enabled by smart lawyers, and reinforced by PR departments controlling information with conventional one-way, top-down communications. Then, in 2008, business failed at self-governance. License to Operate is no longer enough. Whats needed is a new business model Shared Value which was introduced by Professor Michael Porter in his 2011 essay in Harvard Business Review. Professor Porter wrote in 2011: Companies themselves remain trapped in an outdated approach to value creation. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. Companies must take the lead in bringing business and society back together. The recognition is there among sophisticated business and thought leaders, and promising elements of a new model are emerging. Today, business must move beyond License to Operate to a new approach the License to Lead. By License to Lead, I mean business must gain the informed consent of constituents, provide value beyond its traditional performance objectives, and be held accountable through a new level of transparency. License to Lead is, in fact, the opportunity to trust again but this time, its trust subject to verification. These are the four key principles for companies to earn License to Lead. First, business should substitute principles-based leadership for rules-based leadership. Rather than driving the car next to the guard rail, business needs to operate in the center of the lane to tune out the high-priced lawyers or brilliant financiers who advise hugging the guard rail to make a bit more money. Theres more to gain from a motivated workforce and confident customer base that far outweighs any benefit derived from operating at the edge. GE was a classic rules-based corporation that in its generational change in CEOs from Jack Welch to Jeff Immelt made the transition to a principles-based corporation. Its Ecomagination campaign, with its famous green equals green platform, has moved the pursuit of social responsibility from a feel-good CSR exercise to a sound management principle. GE executives credit Ecomagination with changing how the company even thinks of value creation. Today, seven 3|Page

years into the program, sales under the Eco brand are growing twice as fast as the rest of the company. Eco brands account for 25 percent of GEs total revenues. Second, companies must lead by taking on the issues of our time. By this I mean the issues that are central to business and its stakeholders, about which employees are passionate, that resonate with suppliers and partners, and that customers understand are important, too. The firestorm around fracking shows what can happen when business doesnt lead. There have been dozens of stories on pollution of sub-surface aquifers, even earthquakes attributed to fracking, leading to legislation banning fracking in many states and countries such as France. Apple was a similar case. For many years the company resisted pressure to be accountable for its supply chain until the suicides at Foxconns plants in China. When Apple released its supply chain audit on January 13, it may have been reacting to criticism, but it was a seminal event for many reasons most notably because even the worlds most highly-valued company cannot live in a bubble. Most important, Apples actions led to Foxconn paying its workers nearly twice their prior salary in China. Leadership on the issues fostered the beginnings of true organizational transformation. Third, business must embrace radical transparency. Radical transparency means going public with important benchmarks and reporting on them, warts and all. It requires relinquishing control of information and engaging in genuine two-way communication. Unilever is an example of a company thats embraced this agenda. The consumer goods giant is incorporating dozens of sustainability metrics into its business plans. Its committed to sourcing 100 percent of its agricultural raw materials with fully sustainable methodologies. It pledged to reduce its environmental footprint by 50 percent, while increasing sales by 50 percent. Its making this fundamental transformation in full view the company has identified 50 target goals for progress, each to be reported out every year. The fourth and last principle of License to Lead business has to prioritize its stakeholders differently. It has to invert the traditional power pyramid and let the voices of the regular people be properly heard. Business must recognize that employees should be the first, not the last, to get information. Employees in mid- to lower levels of the organization are more credible than the chief executive and they are out there communicating already. Progressive corporations can serve their own best interests by supporting the process, encouraging informed engagement with Twitter or Facebook because thats where discussions are taking place. As part of Starbucks transformation agenda, Howard Schultz since his return as CEO in 2008 took the unprecedented step of closing all U.S. stores for a three-and-a-half hour internal Espresso Excellence Training.

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Schultz followed up this master stroke with three equally far-reaching initiatives: First, flying 10,000 employees to hurricane-stricken New Orleans for direct discussion on the companys strategy, and then participating in home-rebuilding projects; Second, taking the show on the road in 2011, with Schultz visiting more than 7,000 employees in 13 non-U.S. markets; And finally, launching My Starbucks Idea, which asks employees and customers for concepts that would improve service or the product. Three hundred ideas have already been implemented.

Now how can we actually achieve License to Lead? This brings me to my third and final point and a sharp focus on us, as communications professionals. Every revolution needs a visionary leader. License to Lead is a massive change in corporate behavior. I want to nominate the Chief Communications Officer as the right person to move this project forward. The CCO today oversees PR and marketing, and uses a different lens to assure the implementation of Shared Value. The CCO starts by being the conscience of the corporation our historic and essential function. He or she is uniquely engaged with the organizations constituents. From there, we need to recommend strategies that are about action and change to fundamental business policy and process, as much as they are about communications. Youre likely aware of the Arthur Page Societys most recent addition to its seminal work The Authentic Enterprise. In a supporting brief released last month, the Society describes the CCOs mandate well: The new models goal is not merely to shape the opinion, sentiment and perception of individuals, but to spur them to action, continuing behavior and advocacy. The CCO has the ability to initiate change across all necessary disciplines. Consider: Lead in developing policy. Be the creative force in marketing. Move the legislative process. Bind employees more closely to our organizations. Turn NGOs from foe to friend. Initiate communications across the entire media cloverleaf, from mainstream to hybrid to social to owned.

The Wal-Mart story incorporates all of this thinking. In Wal-Marts darkest hours when the company was relentlessly hammered on employee health care benefits and supply chain issues Leslie Dach, the EVP of Corporate Affairs, emerged as CEO Lee Scotts chief advisor. Dach helped to lead a transformation of the company from most-hated to most-admired enterprise in the U.S. 5|Page

Specifically, Wal-Mart markedly improved its employees health care benefits. Dach forged a partnership with the NGO Environmental Defense on supply chain standards in China. Wal-Mart has also partnered with Mrs. Obama and the White House on bringing good for you food to disadvantaged neighborhoods at an affordable price. Its my dream that the best of future students will set their ambitions on becoming Chief Communications Officers, foregoing the temptations of Wall Street, consulting and tech start-ups. Why? Because CCOs are the future of organizational transformation. Were the next-generation power brokers. In many ways, we are the best bet that responsible capitalism has, not just now in its time of need, but for the long haul, too. We should be, and we increasingly are, the ones that smart CEOs recognize as having the honest cold eye, the cool detached judgment and then the passion and the ability to change the course of their businesses so that they prosper for all their constituents into the future. Gone are the days when senior communications executives could lean toward their CEOs and whisper advice in their ears, then step aside, assured theyd done their job. No more counseling and stepping aside. The CCO must partner now with the CEO on both strategy and execution it needs to be the closest relationship in the corporation. The CEO ultimately leads of course but the CCO is essential now to achieving policy as well as advising on it. If those of us in PR fail to embrace our new model others will take our place, and invariably to our employers detriment. Like many I consider The Economist among the worlds finest business publications. However, I was stunned by an opinion piece it published earlier this month, advocating greater C-suite powers for the corporations Chief Legal Officer. The article argued that a companys lawyer-in-chief is more important now than ever, because of increasing pressures from the likes of Sarbanes-Oxley and DoddFrank. True enough but its the exact wrong meaning to take from the present situation. Sarb-Ox and Dodd-Frank happened because companies based their approach on License to Operate. Putting lawyers as chief advisor to the CEO simply perpetuates the negative cycle companies make policy and maximize profit based on narrow legalistic interpretations, which invites greater government scrutiny and consumer discontent. This is the road to oblivion. The new management discipline for the 21st Century should be public relations. Our profession provides the guidebook for business to earn License to Lead. Public Relations allows us to manage in a time of complexity and unpredictability. It offers the new skills needed to build allies and develop consensus. It acknowledges that all the answers cant reside in one company we need to harness the wisdom of communities. It is about conversation, listening to customers and critics alike. Indeed its a greater risk for companies to stay the course on License to Operate than to implement the new model of License of Lead. It is time for us to dare greatly. This is the way to restoring Trust in institutions. Thank you very much. 6|Page