Peter Brabeck-Letmathe
Chairman and CEO, Nestlé, S.A.
This speech is accompanied by a presentation that can be here
Good Afternoon, Ladies and Gentlemen, and thank you very much for the opportunity to talk to you about "Creating Shareholder Value and Corporate Responsibility".
Let me say first of all that our primary responsibility is to our shareholders – those hundreds of thousands of people who have entrusted their life savings to us – either as individual shareholders, or as members of institutional pension funds that own the majority of our stock. Should we fail as a business, it is their retirement savings which are destroyed, so they're the primary stakeholders of our company.
But I also believe that in order to create long-term shareholder value, you have to create a company which gains the long-term trust of the public. And in order to create that trust, it is necessary to build corporate social responsibility into the company strategy, and follow that strategy over a very long period of time.
What do we mean by social responsibility, and how is it built in to company strategy?
As shown in this diagram (slide 2, 3-level pyramid), we organize our thinking in 3 basic levels which form, for us, a kind of hierarchy of corporate social responsibility.
The first, and the basic foundation of corporate social responsibility, is to stay within accepted norms of behaviour – to comply with laws, codes, and business principles so as not to do harm. And it's necessary to monitor compliance with those business principles, through internal auditing, outside verification, and having an internal structure in place, including a designated corporate compliance officer.
On this foundation is built a more ambitious goal - sustainability. That is, to act in a way that not only does no harm today, but also protects the earth for future generations as well. I'll get into some measures of that later.
Having achieved these two fundamentals, to me the highest level of corporate social responsibility is creating value for society – in the case of a food company, creating value for farmers, for our employees, and for our consumers. As stewards of large amounts of capital, both monetary and human, the unique role of business – and what no other institution can duplicate – is to create social, economic, and environmental value for the countries where we operate.
But this most challenging goal – of creating value for society – can only be successful in the long run if it has a relationship to creating shareholder value. If creating social value doesn't make sense from a business strategy point of view, it will either be done on a very limited basis, or will not be sustained over the years. If Corporate Social Responsibility depends on the good will or personal ideas of the CEO, it is a very fragile foundation. But if decisions about how to impact society are made as a part of an overall, well thought-out business strategy, their effects both on the company and on society will last for decades.
Let me illustrate what that means for a food company. (Slide 3, Shared value creation analysis). Here we see the 3 basic steps of the value chain: sourcing agricultural raw materials; manufacturing & distribution; and producing products for customers.
Within each of the 3 stages, there are potential actions which can either negatively or positively impact the business, as well as society.
In Agricultural sourcing, we need a reliable source of high quality raw materials. A company can either simply buy the best that is available on the market, or it can identify key raw materials, and help farmers to produce better, thus ensuring a more reliable supply for the company long term. It can either help farmers to be environmentally responsible or it can let them destroy the land which is the source of our raw materials. So it is in our enlightened self-interest to promote Sustainable Agriculture.
In purchasing practices, a company can either use the market as it is, or attempt to create greater efficiencies in purchasing structure, such as direct purchasing, where inefficient markets exists. This gives the farmer a higher price and avoids extra costs due to market inefficiencies. In this area, Nestlé is the world's largest direct purchaser of coffee.
In manufacturing, a company can either run factories in as cheap a way as possible, skimping on environmental protection and safety, outsourcing to the cheapest manufacturer, or it can invest in the future by spending what is necessary to bring a factory up to recognized standards of worker safety, cleanliness, and work environment. . At Nestlé, we choose the latter approach, at a time when some of our competitors are moving toward outsourcing of production to low cost suppliers, and we use the same food safety standards globally as we have in Switzerland. This, by the way, sometimes produces surprising results. The minister of development of the Punjab in India once told me that she takes groups of hospital administrators on tours of our milk factory, to give them an idea of what a hospital should look like.
With employees, you can either rely on the skill level you find in the local labour pool, or you can develop these skills, so that you have a more reliable and loyal employee base that's more skilled than that of the competition.
In products, you can either save money by skimping on nutrition quality in order to sell at lowest possible cost, or you can develop a reputation for high quality, nutritionally superior products.
I believe that creating social value is an inherent part of a business strategy, which aims at creating greatest value for long-term investors, rather than meeting demands of short-term stock traders interested only in quarterly results.
(Slide 4) In summary, the business objective is to create improved business conditions, in terms of reliable, high quality sourcing, improved regulatory and government functioning, a skilled and loyal workforce, and superior products which consumers prefer over our competitors'. The result for society (Slide 5) is improved earnings by suppliers, improved skills, wages, and job stability of employees, and a higher quality of life by consumers. It also results in greater stability, economic and social development by the whole society.
Does this sound like some kind of utopian thinking of how private enterprise should work but rarely does? I don't believe that Nestlé has a reputation for utopian thinking but, rather, for Swiss pragmatism and long-term business development. The first edition of our Management and Leadership Principles, issued in 1997, stated as one of our first principles that "Our investments must be good both for the country and for the company".
Nestlé was not always the world's largest food and beverage company, but as we celebrate 140 years of Nestlé this year, I believe that this approach to Corporate Social Responsibility and Sustainability has been a key factor in our growth and in providing consistent and outstanding results to our shareholders. And this is particularly true in the developing world. I believe that if you look, as well, at other companies which have built sustainable businesses over decades, you will find a similar philosophy.
Nestlé products were exported around the world from almost the first year of the company's existence, but our first factory in the developing world was built in 1921 in Brazil, and the supply of milk was poor, and the farmers even poorer. (Slide 6) We took with us the Swiss milk district system of organizing milk collection, building roads and cooling stations, giving free technical support to the farmers to improve their livestock, and promising to buy their milk come rain or shine. Today, our milk district in Brazil is larger than the country of Switzerland, and outside experts have estimated that hundreds of thousands of small farmers have climbed out of poverty as a result.
This model has been taken to many countries around the world –(Slide 7) including India, Pakistan, Philippines, China, and today we have about 800 technical advisors currently serving about 400,000 farmers. Again, we did this not because we had a social goal, but rather a long-term business plan where we needed reliable business conditions.
Part of this approach to creating shared value also means that a company looks beyond short-term business needs of key producers. (Slide 8) For instance, in every village where we collect milk in India, we have built a protected village well, and trained the local community, whose responsibility it is to maintain it. We build them next to the school, so that the children have access to clean water.
One of the privileges of being CEO of Nestlé is that I am sometimes invited to attend the inauguration of these projects, and I was in India not too long ago for the opening of this village well. (Slide 9 – PBL in India) We get to share in the enthusiasm and joy of the villagers who supply our milk when, for the first time, they have access to a reliable source of clean water for them and their children. How do you think this impacts the loyalty of our suppliers in India?
One part of building a successful business in food is having local production based on local tastes, and having as our managers local people who understand the local culture. (Slide 10) About half our factories are based in developing countries, and we have relatively few expatriates working in them. About 2/3 of our employees receive formal training every year. This gives us an edge on the competition, and gives our employees opportunities for a better life. Here is one of our former factory workers who is now a safety manager in South Africa (Slide 11) a laboratory technician who became a factory manager in Kenya (Slide 12) and our factory workers in South Africa receiving free education on how to read and write (Slide 13). Now we know that some of our employees will be recruited by our competitors once we train them, but we have an employee turnover of less than 5%, because of the loyalty that this builds with employees. As a result, the average years of service at retirement in Nestlé is 27 years. We also develop distributors (Slide 14), particularly investing in those at the bottom of the pyramid, like these Nescafe street vendors in the Ivory Coast.
Creating shared value is also a key strategy for our products. Here in the North, Nestlé is often thought of as a coffee and chocolate company, but in the developing world we are thought of first as a milk company. (Slide 15) In reality, we have a very broad range of food and nutrition products, particularly in soups, calorie controlled frozen food, bottled water, ice cream, with well-known brands like Maggi, Stouffers, San Pellegrino, and Perrier. In public attitude surveys in the developing world, we see that the most important factor associated with the Nestle name is high quality products you can trust with high nutritional value. Nestlé is the world's largest fortifier of foods with vitamins and minerals, particularly in the developing world, through milk products, bouillons, and soups. (Slide 16) For instance, this Sopa Crescimiento soup for children in Latin America, and the iodine-fortified Maggi bullion cube and Nido milk with probiotics and vitamins which are sold throughout the world.
Part of this is focusing on product development to serve consumers at the bottom of the pyramid. We approach this as a business opportunity, not as philanthropy, to be explored based on the needs and buying patterns of lower income segments. For instance, in northern Brazil, we are building a large factory specifically for such products to better meet the needs of the lower income populations of Brazil.
But we also go beyond this, (Slide 17) for instance, with this vitamin and mineral fortified cracker produced with the Colombian Institute of Family Welfare, which feeds about 600,000 elementary school children every day in Colombia.
In order to create value for society, it must be built on a foundation of sustainability, and particularly environmental sustainability. In our own operations, we monitor very carefully our environmental impact with the goal of continuous improvement in environmental performance. (Slide 18). Here are figures regarding our reduction in greenhouse emissions, water consumption, packaging, and other key performance indicators. For instance, we have reduced our use of water by 42 percent in the last 5 years. And our objective is to make continuous reductions in environmental impact over the long term.
Another major part of sustainability for a food company is agricultural sourcing, which is why we're a founding member of the Sustainable Agricultural initiative (Slide 19), laying out standards of sustainability for a range of agricultural raw materials. We are also participate in a range of sustainability programs run collectively by the World Cocoa Foundation, an are a founding member of the 4C – Common Code for the Coffee Community, which will progressively bring higher standards of sustainability into coffee growing. But before these initiatives were even conceived, (Slide 20), we've been helping coffee farmers through a range of programs for years, including our direct buying program. Fifteen percent of our coffee is bought directly from farmers for our Nescafe factories in the developing world. Also, about, 55% of Nescafe is manufactured in the developing world, which brings well-paying factory jobs to agricultural areas.
As I laid out in the first slide, (21) the foundation of our corporate social responsibility model is following our business principles, which includes respect for laws, relevant codes, and recognized norms of good corporate behaviour. Our Nestlé Corporate Business Principles detail this in 46 pages of what is expected from our managers in dealing with consumers, distributors, the retail trade, industrial suppliers, and employees. It means a zero tolerance for corruption and complete honesty.
We have a team of 55 auditors reporting to headquarters who are constantly auditing our companies, not only on financial matters, but checking for adherence to our corporate business principles. Additionally, we ask independent third party organizations to carry out so-called "social audits" using procedures verified by our outside auditors. We are far from perfect, but I am satisfied that we have a system of strong principles, compliance procedures, and a culture which supports proper behaviour.
And in particularly sensitive areas, such as infant food marketing, we have very specific audit procedures, and a detailed Quality Assurance System, as well as an Ombudsman system to allow whistle-blowers to report violations in a confidential way. We do discover violations of the WHO Code on marketing of infant foods, and those violations are brought to the attention not only of regional management, but each one is also sent to me personally. Where we find serious violations, we cancel bonuses, remove people from their positions, or terminate employees if they have deliberately violated the Code.
We've also commissioned outside social audits of our practices, where there were questions raised. Recently, a major Socially Responsibly Investment organization rated the largest infant food companies in implementing the Code, and they ranked Nestlé as the best in the industry. In this area, Nestlé wants strong national codes and enforcement, as we've found that where we have a level playing field with strong codes, it actually helps our business. You can imagine that after what Nestlé went though in the 1970's and 1980's in infant food marketing, we want to be doubly sure that we are getting it right.
You notice that I have not included philanthropy in our model of Corporate Social Responsibility, because I believe that a company's level of Corporate Responsibility has little to do with its level of philanthropic giving. (Slide 22) Nestlé does support many programs around the world which work toward the accomplishment of the UN Millennium Development Goals. But here I want to be clear that our philosophy is to support programs where we can bring expertise and knowledge, and which are an extension of our basic food and beverage expertise and interest. These are supported almost exclusively by our national companies. How does this fit into our corporate strategy? First of all, it isn't done to improve corporate image. We have been supporting such projects for decades, and it is only in the last few years that we've even communicated externally about them. The principal reason our companies support community programs is because it's a part of our strategy to become well integrated into the country where we're working. In most countries, people think that Nestlé is a national company, not a Swiss company. We don't hide the fact that we are Swiss, but our objective is to completely integrate the company into the culture and social fabric of the country, and a part of this is working with local non-governmental organizations and governments to improve the community. For instance, in Brazil, we've supported many nutrition programs, including President Lula's Zero Hunger Program, (Slide 23) and a nutrition education program called Nutrir, which reaches about 300,000 children to teach them and their families how they can improve their diets, eating more fruits and vegetables.
Our global company also has a global humanitarian partner, (Slide 24) the International Federation of the Red Cross/Red Crescent, working particularly in Africa to reduce HIV/AIDS among teenagers, and to improve access to clean drinking water and sanitation. We also respond strongly through our local presence to disasters, such as Hurricane Hugo in Central America, the recent earthquake in Pakistan, and of course the 2005 Tsunami. This helps us be integrated into the global community, and in these situations, all members of the community are expected to pull together. But I want to be clear that the impact that we can have through supporting such actions can't compare to the impact we can have as a food company on the health and welfare of the developing world.
Since we treat corporate social responsibility as a part of our overall brand strategy, we employ outside experts to measure the public's rating of Nestle on CSR.
(Slide 25). We use a company called Globescan, based in London and Canada, which is one of the most recognized CSR research organizations. They conduct a 21-country study every year, interviewing a random sample of over 21,000 adults in these countries.
Here are last year's results for Nestlé. (Slide 26) Overall, 41% of the people rated Nestlé positively, and 10% negatively, for a 31 percent net positive rating, or a 4 to 1 positive to negative ratio. In the developing world, Nestlé actually had a 56% positive to 7% negative rating, and 9 to 1 positive to negative ratio.
We compared our results to 4 other major multinationals, including 2 of our largest food and beverage competitors. (Slide 27) Nestlé's net positive was twice that of any of the other four companies rated. If we look at all the countries, (Slide 28) Nestlé was rated positively in 18 out of 21 countries, and slightly negatively only in the UK, Australia and Italy, with great strength in the developing world. Even in the three countries where we were rated slightly negatively, we were in the middle or ahead of the 4 other companies. This is because in these 3 countries, most companies were found to be rated negatively. (29) For instance in the UK, on a separate question asking about trust in companies and organizations, 13 out of 16 companies were rated negatively. Perhaps you have an explanation for this apparent anti-corporate climate in the UK, (30) when results from the developing world and the US are so much more positive. (31-repeat of 28) Globally, we conclude that our reputation on CSR, particularly in the developing world, helps make business easier and adds to the attractiveness of Nestlé branded products. I spent 17 years as a Nestlé manager and market head in Latin America, and we worked very hard to become a respected member of the community in each country where I worked. I'm convinced that it helped the overall brand and made doing business easier.
(Slide 32) In conclusion, we have defined for ourselves what corporate social responsibility is for Nestlé, and our next step moving forward is determining how we can best apply measures which allow us to assess strengths and weaknesses. We are now in this measurement assessment process.
I should also say that while we believe this model fits Nestlé, I am not sure that for all businesses, creating shared value represents the highest level of corporate social responsibility. For the petroleum industry, or transportation industry, or mining industry, their impact on sustainability, of preserving the environment, may be the most important contribution, rather than the creation of social value.
Whatever model best fits a company, I believe that the important thing is that the definition of CSR comes from a basic understanding of the long-term interests of the business, rather than short term thinking or external pressure on the issue of the day. If Corporate Social Responsibility is viewed primarily as a set of standards imposed by outside actors, the majority of businessmen will not, in the long run, embrace it. If it is viewed as philanthropy – of giving increasing amounts of shareholder returns to worthy causes, it will also fail.
But I think if businessmen can understand it as something which comes out of basic business strategy, where definitions and limits are placed on CSR as result of identifying a company's best long-term interests, then I think that Corporate Social Responsibility has a chance of becoming imbedded in business thinking, not only for the enlightened few, but for all businessmen who seek sustainable and outstanding long term results for their shareholders.
Thank you