The Current Business Environment

Leadership in the contemporary world, in the context of business, demands a completely new set of skills and potentials that was not required some decades ago. Business leaders can no longer depend on just the financial success to ensure sustainability of the organization they run. The essay aims to analyze critically the role of business leaders today and the steps they need to take to ensure overall success of the organization.

The current business environment is facing turbulence owing to the numerous changes that have taken and are taking place in the world. The globalization phenomenon that began dictating the way businesses should be done, posed new challenges for the organizations. It meant that these organizations now have to deal with not just finance but also cultural integration. Apart from globalization, the terrorist attacks in different parts of the world have also changed the dynamics of business. To tackle these issues, organizations lay increased emphasis on the decision-making process and the leaders take on the responsibility to bring about positive change. The success of the leader is now measured not just by the financial metrics but also by his or her performance on environmental, social and governance (ESG) issues.  

The essay will discuss the ways to evaluate success of the CEOs, the challenges faced when focusing just on financial metrics and challenges faced by leaders to balance financial and ESG metrics. In doing so, the essay will provide both theoretical and practical analyses of the leaders.

The Scientific Management theory, proposed by Frederick Taylor back in the 1900s demonstrates the meaning of success focusing only on profit. As per his theory, CEOs need to equally divide work amongst their employees and utilize monetary incentives as a way to lure them. The workers, according to this theory, are like lab rats that would perform to achieve the cheese. The evaluation of success of a CEO based on financial metrics indicates affinity to this theory. In today’s world however, following this notion often leads to disastrous results.

As Zacharias et al. (2015) observe, a CEO holds key to creating an organization that contributes to the entire society and thus, evaluating his or her success on the parameters of finance only would not even be considered success.

Jack Ma, the cofounder and executive chairperson of the giant multinational technology company Alibaba based in China, presents a good example of CEOs heavily focused on financial success. With humble beginnings as an English translator, Ma went on to become one of the most powerful business leaders of the century. He asserts a kind of leadership that could aligned to military leadership because of the strict discipline with which he leads the business. Prior to founding the company, Ma was rejected for job at KFC and in various other companies but he did not give up. The sheer passion with which Ma continued his struggle led to the formation of Alibaba. Under his leadership, the company became one of the top ten highest earning companies in the world. The current market capitalization of Alibaba is around 460 billion dollars as listed in the New York Stock Exchange, which shows the kind of success Ma had brought to his company. However, it is evident that the success of the organization is measured mostly by its financial achievements. The strategies used by Jack Ma to ensure the company retains its top position within the Chinese market did not align with any of the ESG strategies. The organization was ranked 48 in the list of top companies with highest ESG ratings. It shows that the leader’s prime focus was financial success. In terms of governance, which is the third and crucial element of ESG, the Alibaba group under Jack Ma presents high risk to public shareholders. This is largely due to the lack of independent board representation and shareholder rights. Ma has been involved in controlling various units of the company without informing other shareholders of Alibaba. The CSR rating of the company has declined and stayed low as well over the years. During the period of 2016 to 2018, the ratings did not even touch cross the 50-point mark. These facts reveal that success cannot be defined only through financial metrics, but all factors have to be considered. Alibaba Company caters well to the needs of its customers but it must give equal importance to other elements such as the shareholders.

Evaluating Success of CEOs

It is evident from the above discussion that success cannot be defined merely in terms of financial success but also must include other factors such as the environment, social and governance (ESG). As Rezaee, Zhen and Ha (2017) put it, “the dimensions of sustainability including economic, governance, social, ethical and environmental, collectively play an important role in the overall long-term success of business organizations”. The authors are not wrong in stating this because the Corporate Social Responsibility (CSR) trend today is one of the most significant aspects of any business. Success thus should be defined from the perspective of the shareholders, the stakeholders, the environmental and social factors. 

Success of an organization especially in the contemporary competitive world is depended on numerous variables. Strong financial performance is one of the most important parameters of success for businesses but focusing on just this aspect makes it challenging organizations to sustain.  

Kim et al. (2016) are of the view that organizations should focus on financial performance because it is the most fundamental aspect of any business. They argue that organizations cannot address ESG issues without a strong financial base and hence, it has to be the focal point. Lins, Servaes and Tamayo (2017) however contrast this view stating that the test of true leadership could be witnessed when organizations succeed on all fronts.  The authors argue that businesses cannot survive in this competitive environment if they focus only on one metric.

The one metric principle simply refers to the commitment a leader should make, or a goal he or she should set for one day, or a month or even a year. This could be financial, environmental, social or even governance. Nonetheless, following this principle is challenging largely because of the unpredictability in business. As Bedoui (2015) notes, factors like natural calamities, change in governments and policies are something that cannot be predicted but that can affect the business greatly. In contrast to this, the systems thinking approach has interconnectedness as the prime force behind decision-making and other processes in business.

The mental models that are formed in the minds of the leaders cause them to think one dimensionally and that is where they go wrong. Cox (2015) argues that leaders must choose as fewer metrics as they could as it would lessen their scope of chase. By this, the author meant that the less metrics there are, the more focused a leader will be regarding the goals of the organization. The author further argues that choosing one metric for success does not mean that the leader should ignore other metrics.

Jack Ma and Alibaba – Focusing on Financial Success

The case of Amazon and its CEO Jeff Bezos is a great example showing challenges related to focusing just on financial metrics.  Listening to or reading the success mantras of Bezos reveal that he has dedicated most of his efforts to make the company financially stable and strong. In a recent lecture on running a business, Bezos suggests that people should focus on the future to succeed. He advises that people should have the capability to look on all corners to be able to succeed. Nonetheless, his leadership has faced the heat of controversy regarding the workplace culture in particular.  Many have criticized the harsh workplace culture promoted by Bezos in his organizations just to beat others in the numbers game. Due to the unforgiving nature of work at Amazon, many employees fail to survive even for a year. the reasons behind such a harsh work life at Amazon is the challenges that the leader faces focusing on financial metrics solely to stay ahead in the competition on long-term basis.

Bezos was listed number one in Forbes’ list of “best-performing CEOs” in terms of finance. However, when it came to best-performing CEOs in terms of ESG, his ranking slipped to 87 (Business-standard.com, 2018). His company scored quite low in the ESG metrics with just 48.68, which to decline in the overall rankings for Bezos.  However, it must be argued that despite such a low score in ESG, the company is still amongst the top performers in the world. One reason for this could be the strong relationship management concerning the stakeholders. Amazon has been successful in satisfying its customers, the prime stakeholders by offering services and products that are unmatchable.

The answer to the inherent questions whether to focus on financial metrics or on ESG performance is to balance between the financial and ESG performance metrics. Socially responsible strategies, which are distinct from both a geographic and sector standpoint, are proving influential for businesses. In 2017, 86 percent millennial demonstrated importance to sustainable investing, as the Morgan Stanley report suggested (Money.usnews.com, 2018). It was a huge jump compared to 2015, when 29 percent millennial expressed the same view (Money.usnews.com, 2018). It must however be stated that following the ESG performance metrics has been and is still challenging for organizations. The main challenge that confronts the organizations is the perception of sustainable investment or socially responsible investment amongst clients and customers. A CEO has to prepare for lower returns if he or she decides to invest in social cause, the critics further argue. On the other hand, Albahar (2015) has found that companies with high ESG scores have performed exceptionally well in the financial metric. The companies have outperformed in the financial metric by investing in ESG.

Success Defined from the Perspective of Shareholders, the Stakeholders, the Environmental and Social Factors

It can be argued that it is still a challenge for leaders to address the challenges relating to finance and ESG metrics. At times, leaders find themselves in a dilemma whether to fulfill the shareholders’ needs or those of the stakeholders. In a study conducted by Baron and Parent (2015), it was found that integrating ESG into the business structure is important in order to sustain it for longer period. The study drew references from the past researches on risk management and found that more openness of expression relating to core issues and challenges are effective in addressing ESG metrics issues. Hussain, Rigoni and Orij (2018) found in their study that the main challenge for leaders today is to “measure ethics, social and sustainable financial performances and the challenge of quantifying ethics”. They further found that several instruments have been developed to measure ethical performance of businesses such as the European Sustainable Investment Forum (ESIF). Another challenging factor the leaders face is to lead, not control the followers. Further challenges include the cross-cultural management, which often causes conflicts within the organization. Multinational organizations in particular have the uphill challenge to manage a diverse workforce while at the same time maintaining the success.

Addressing these issues are very complex considering the multidimensional aspects of these issues. In such situations, leaders must adopt and utilize influence as well as power to supervise stakeholders’ relationships and achieve goals. Power could be soft and hard depending on the personality of the leader. Hard power involves skills such as inducement, coercion, political skill and organizational capacity. Hiring, bullying, buying and bargaining are some tools of hard power possessed by the leaders. In research, it has been found that the leaders who demonstrate a loss of temper at times are useful for organizations at times because it “shakes people out of complacency and provides an adrenaline rush” (Awan, Ahmed & Zulqarnain, 2015). On the other hand, leaders with political skills such as negotiation, manipulation and intimidation could also incur positive outcomes for the organization. Communication and inherent leadership qualities are the two chief elements of soft power. Vision and emotional intelligence are the other two very important tools of soft power demonstrated by the leaders. Persuading people and communicating effectively across cultures could help leaders in addressing the challenges related to balancing between finance and ESG metrics. Further, leaders with the inherent capability to inspire people could also utilize their skills to encourage employees in adopting ESG metrics. Persuasion and motivation could be used by leaders to empower the workforce in believing and complying with the decisions made by the leader. Using these skills and powers, leaders could be able to manage conflict and strike a balance between financial and ESG performance metrics.

Focusing on One Metric vs Embracing Systems Thinking Approach

In dealing with the challenge of balancing between financial metrics and ESG metrics, Microsoft, a multinational technology conglomerate based in the U.S. could be given as a perfect example. The company‘s total weighted score is 74.1 in the RepTrak CSR list (Forbes.com, 2018). The CEO Satya Nadella, believes that reenergizing the leadership and the employees plays an important role in facing such challenges.  One of the key factors that help the company succeed is its core business approach. It lets its stakeholders see the real metrics that include periods, objectives and progress reports. Nadella has always been a strong supporter of businesses being socially and environmentally more responsible. He has been able to deal with the challenge by being humble and simple, as many of his acquaintances share. Nadella is more about being mindful and empathetic rather than being bashful. This allows him to deal with issues of ESG more calmly than other leaders. Under Nadella’s leadership, Microsoft was able to regain its lost market in terms of the PC business and rank second in Best CSR Reputation companies. In addition, his thrust for cultural shift and hiring people who are good learners rather than those who know more is another reason that allows him to deal with the challenge. The effectiveness of Nadella’s leadership is evident from the success of Microsoft after he took over in 2014. In terms of exercising power, as it is evident, Nadella balances between soft and hard power with more inclination towards soft power.

Conclusion:

The chief agenda, as found from the analysis above is thus revealed as the need to maintain a balance between finance and ESG metrics. The analysis revealed that although having a strong financial performance is vital for an organization, the ESG parameters are crucial in sustaining the financial performance. The discussion provided instances from the real business world where CEOs apply different techniques to achieve success. The analysis found that most CEOs give due prominence to the ESG metrics but some also focus only on financial performance. Amazon CEO Jeff Bezos was found to be driven more towards financial performance rather than ESG performance. Chuck Robbins, CEO of Cisco Systems, on the other hand employed CSR practices in order to achieve ESG performance. Further, the former CEO of Volkswagen, Martin Winkerton was absolutely focused on finance even at the cost of breaking stakeholders’ trust.  Arguments concerning the efficiency of one metric or integration of ESG in the financial metric were also put forward. While some scholars argue in favor of one metric, others propagated multidimensional approach. Systems thinking as an effective approach for addressing the challenge of integrating ESG metrics into financial performance.  The discussion also focused on the challenges leaders face while attempting to balance between financial and ESG performance. To address this issue, it was found that possessing hard and soft leadership power was very effective. In the end, the effective ways to address these issues were recommended. Employee empowerment and strengthening stakeholder relationship were the main driving forces behind successful leadership.

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