Most corporations base their business models on the foundations of increasing profitability — driven of course by the shortsightedness of avaricious shareholders who have confused increasing profitability as a measure for success and who give little thought to the aspirations of the other stakeholders (viz. customers, employees, suppliers and society) in the business and to the sustainability of the “increasing profitability” model.
Global experience is witness to the fact that long standing, responsible corporations are able to deliver their “value added” promise to society only when their business philosophy and strategy takes a balanced view that benefits all the stakeholders, not just the shareholders, and deploys tactics that can be sustained over a period of time.
A mere look at the statistics of companies in the developed countries like the UK, US and Australia tell their own story. In 2004, the FTSE 100 Index celebrated its 20th year in existence and of the original 100 companies that this index started out with, only 23 are still in existence i.e. a mere 23 percent could sustain themselves. The S&P 500 of the United States, in operation since 1957, has a poorer sustainability level of 15 percent while the Australians fare slightly better at 25 percent. It is evident that, in the long run, the market is the best leveler, and unsustainable underperformers are mercilessly weeded out.
Sustainability for a corporation is not easy and given the advent of a borderless world with its attendant impacts and the WTO guidelines at the gate, it is time that leaders of corporations in Saudi Arabia geared themselves up to understand and plan on the basis of “sustainability”. The temptation to ride the short-term wave of “economic booms” should be tempered with the rationale that all booms come to an end finally — hence the need for long-term views. CEOs today have to ask these questions: How can we build a sustainable economic future for our enterprises? What do we mean by “corporate responsibility”? And what is the role of companies in society?
Companies need to focus on long-term growth and sustainability and avoid the pressure to over deliver today at the expense of tomorrow. There is fundamentally no inconsistency between the pursuit of sustainable growth and the commitments to stakeholders, as therein sits part of the corporation’s long-term competitive advantage.
The role of corporations in society is now coming under intense debate and the global consensus appears to converge on the fact that “responsible corporations” are net contributors, not only for their shareholders (in terms of incremental wealth creation) but also for those who work for them (the employees and business partners) as well as society and that such “contributions” must be made in a manner that is sustainable. The main challenges facing corporations today are essentially survival, creating wealth for shareholders and sustaining an enterprise that would continue to deliver value over the long term.
The economic rationale behind the philosophy of sustainable growth is not too difficult to understand. Successful corporations, over time, will not be those who maximize short-term results but those who invest for superior returns in the future. Herein a dilemma exists — in order to survive, the future corporations nevertheless need to generate reasonable results today, while pursuing their longer-run ambitions. Accommodating both perspectives radically changes the agenda of corporations because the factors that contribute to today’s results are not necessarily the key success factors that will build the long-term competitive advantage of the enterprise and competitive advantage, as we all know, is about longer-term uniqueness that differentiates the corporation from its competitors. Building competitive advantage demands investment, which in turn, dilutes short-term returns. In other words, corporations have to dilute present profits for future prosperity. To offset the erosion of advantage, corporations need to invest in a manner that extends their competitive advantage and the sustainability of returns. In this context, maximizing short-term returns cannot be a solid philosophy for managing an enterprise — doing so would inevitably subdue investment, and would accelerate the long-term demise of the enterprise.
A broader focus on the responsibilities of corporations to all stakeholders — customers, employees, community (including the government), business partners, as well as shareholders — is not inconsistent with sustainable long-term results for shareholders, as it requires directors and management to focus on the right things for the long run.
Abdul Latif Jameel Co. (ALJ) is a glowing and visionary example of the “balanced, sustainable growth” model in the Kingdom and a case study that is worthy of attention.
ALJ is one of the leading, diversified conglomerates in the Kingdom that is focused on the import, distribution and retailing of automobiles (it is the world’s largest independent dealer for Toyota vehicles) and allied services, Real Estate Development and Consumer Financing. ALJ has been in the market for over five decades, endured the idiosyncrasies of the ups and downs of the market as well as attacks from competitors and has yet been able to determinedly march forward, year on year, in terms of growth and profits. How did ALJ manage to sustain its growth for such a long time and how is it ensuring that this drive for growth will continue? The answer lies in the business philosophy and principles that are followed at ALJ — from the top to the bottom of the organization.
At ALJ, profit is considered a “byproduct” and not a measure of success. The company’s Vision and Mission statement makes interesting reading. ALJ’s Vision statement states “To sustainably grow in harmony with the aspirations of our stakeholders (i.e. customers, associates, business partners, community and shareholders)” and the Mission statement reads as follows: “to fulfill the aspirations of our stakeholders (i.e. customers, associates, business partners, community and shareholder) through full empowerment of all Associates”. Note that the terms “profit” and “automobile” are conspicuous by their absence in the Vision and Mission statements as also the emphasis on growth in “harmony” with all stakeholders.
At ALJ, selling cars and related services and making profits is a means and not the end. This is part of the ALJ DNA — from the president right down to their frontline associates. Every business must have a solid reason for its existence and then it must choose the best means to fulfill it. ALJ’s reason for existence is growth and their processes, systems and culture is all geared to help them achieve this by doing what they know to do best — that is by providing the best vehicle ownership experience to all their customers and in a manner that helps them gain the customer’s loyalty forever while fulfilling the aspirations of their other stakeholders — at ALJ, profit is considered a natural consequence of such endeavors. So ALJ aims for “sustainable growth in harmony with the aspirations of their stakeholders” — not profit. Profit, in this context, becomes a natural byproduct and not an end by itself. This is the reason why the words “automobiles” or “profits” are missing from the Vision and Mission statements.
“Growth” is a core issue with ALJ. Growth is a sign of life — stagnation, on the other hand, is devoid of life. With growth comes energy, creativity, dynamism and all the other vital signs of life — it makes the work challenging and interesting and gives the employees (at ALJ employees are called “associates”) a chance to progress individually and constantly upgrade themselves and the business.
“Sustainably”, on the other hand, is a condition for growth. ALJ does not want to grow in short bursts of enthusiasm and then lie down quietly to catch their breath while the world whizzes past them. The ALJ credo drives them toward growth on the basis of sustainability — this means that ALJ would grow in a manner so that their momentum is maintained. The other condition on growth is the need to grow in harmony with the aspirations of all their stakeholders and here the word “harmony” needs some elaboration.
ALJ does not want to embark on a growth path at the expense of one or more of its stakeholders. For example, ALJ would not like to fulfill the growth aspirations of its shareholders at the expense of its associates.
It is time for corporations in Saudi Arabia to emulate the ALJ example and embark on the path of “sustainable growth”, as any responsible corporate citizen should, in the spirit of nation building. There are no statutory or regulatory requirements (at least not as yet) for companies in the Kingdom to comply with internationally accepted “sustainability” norms — but the day is not far when “sustainability” codes and practices would become a mandatory requirement.
(Dr. Saad A. Al-Ghamdi is executive vice president at Abdul Latif Jameel Company.)
