Building social good – lessons from an Asian giant

Hans-Paul Bürkner – As BCG’s chairman, I have promoted extending the positive impact the firm has through its clients, and on wider society. We have done that by helping our clients expand the positive societal impact they create through their products, services and how they operate as a business; and, as a firm, through decade-long global partnerships with organizations such as the World Food Programme, Save the Children and hundreds of local groups.

We also identify and learn from our clients around the world on leading practices in societal impact. Right now I see tremendous innovation for social good driven by companies and institutional investors, not just in Europe and the Americas, but also in Asia.

That is one reason why SK Group and Chairman Chey Tae-Won are so interesting. The Asian business context matters. An organization like SK Group brings the lessons of building a business into how it thinks about the role of the company in society.

Could you describe where the commitment to societal good originates in the history of SK Group and why you, as its Chairman, have been so public about the importance of SK Group contributing to society and being a leader on this in Asia?

Chey Tae-Won – As you know, corporate responsibility is becoming ubiquitous and companies will do just about anything to cut through the noise and be recognized in this space. But, as you mentioned, SK’s commitment to social good is long-standing. This is because historically it has emerged as an expression of our corporate culture and a commitment that binds us to our stakeholders.

Ever since our beginning as a textile company in 1953, our group has been contending with the threat of fragmentation. Our growth model has been driven by mergers and acquisitions.

We were forced to internationalize in the wake of the Asian Financial Crisis. At home there has been relentless pressure to give more autonomy to our affiliate firms. Our corporate culture is the glue that binds us together as a single firm and gives us a shared future. And this corporate culture has from the very beginning been cast as a pledge to collective happiness and wellbeing.

I think this is first and foremost an acknowledgement of our responsibility in Korea. Today, SK is branching out in a growing number of sectors –from energy production and infrastructure, to microchips and healthcare. Our value chains are woven deep into the fabric of Korean society, and our corporate culture therefore responds to the legitimate expectations from our stakeholders and wider community.

Of course there is an element of branding here, or at the very least of sensible risk mitigation. But our commitment to social good has also emerged as an engine of growth in itself. If you take a long-term perspective, economic value and social value are mutually re-enforcing. It makes perfect economic sense to cater to the wellbeing of the environment in which our group is embedded.

Hans-Paul Bürkner – BCG believes that companies can increase the basis of their competitive advantage and longevity at the same time that they increase their total impact on society. And this is accomplished in strategy, operations, across the value chain, in the full value created by their products and services and how they use their position and influence.

Of course, companies can also have specific initiatives that align to their purpose and seek very high impact. At BCG, such dedicated initiatives include our global partnerships with social mission organizations and more than 350 social impact projects per year with 250 organizations.

But we believe the most sustainable contributions come through embedding a societal perspective deep into our clients’ core businesses in ways that also create competitive advantage and drive value.

It seems to me Chairman Chey that you share this perspective and have determined that your businesses and some complementary initiatives can deliver more total impact on society than taking a business-only view.

Could you describe this further: what are some examples of key activities and the initiatives SK Group has undertaken and the societal and business value that they have created?

Chey Tae-Won – Yes, the size of our CSR programme and our growing influence in Korea and abroad have led us to rethink how we go about sponsoring, generating and accounting for social value. Our recent initiatives reflect this growing self-awareness, and we are experimenting with new approaches and models to be more effective.

We are, for example, in the midst of implementing our ‘Double Bottom Line’ (DBL) initiative, whereby we plan to report all of our 17 SK affiliates’ contribution to social value alongside their operational profits on our income statement.

The DBL incorporates a host of non-financial indicators pertaining to the environment and social wellbeing. These metrics are truly fascinating and provide a snapshot of the impact that our affiliates have on their environment.

As a management tool, DBL accounting allows our managers to assess the social costs and benefits of their business operations and provides useful context to the financial returns reaped. This may lead us to reconsider our strategy in some instances, and to think about the overall value that we provide to our stakeholders. We have also found that ascribing a dollar value to social goods can enhance our ability to drive investment decisions. We can often push projects over the line by building consensus with our stakeholders over expected social value returns.

In short, I believe it is time for social value to become a “key financial” and that it be reported on a regular basis. I would invite all our friends and our competitors to do the same, and we aim to release our DBL financials for the first time at some point in 2019.

Aside from DBL, some of our recent initiatives aim to maximize the social value of our tangible and intangible assets through the creation of new collaborative frameworks. For example, we have launched our first shared infrastructure initiative, where we will be opening up our domestic network of petrol filling-stations for access to other companies and organizations.

Filling stations are, of course, primarily designed to sell petrol and ancillary services and products for drivers and vehicles. However, we at SK take a slightly different view. Our experience tells us the stations can have many other applications given their proximity to residential and commercial areas, the technical skillsets of station staff, and the often underused physical space within their facilities.

Far exceeding our expectations, our initiative has already received more than a thousand proposals for how to use the shared-space. Our competitors have also joined our scheme. On top of our 3,600 SK-operated facilities, GS Group and Korea Post have contributed another 2,500 and 3,500 facilities respectively.

We have effectively created a new market predicated on shared-space facilities that now spans the country and will come to generate significant value for SK, our competitors, start-ups and social enterprises.

What I like the most about this initiative is that new business models and value will be generated organically – and, as more stakeholders join the scheme, this will in turn generate more social value for all.

Hans-Paul Bürkner – I hear you have been running a pilot for social enterprises. Could you tell us a bit more about the background of this, and if there are any results?

Chey Tae-Won – Our combined CSR commitment over the last five years was more than $1.5 billion. At that level of investment, I think questions around efficiency and outputs come into play. We have, therefore, shifted our CSR approach to promote social enterprises. This is to recognize their significant value-add as hybrid, non-profit commercial structures.

Social enterprises are close to the ground and often have a grass-roots level of access to the problems they seek to solve. Their flexibility and size means they are often able to address complexity with highly innovative approaches and business models.

Over the last five years, I have worked hard with our affiliate firms and academics to better understand the ecology of social enterprises. How can we allow these promising entities to thrive and grow? How can we allow them to monetize the social good that they bring about? What particular support can we put in place to maximize their survival rate and the significant social value they unlock?

To shed some light on these questions, we created an exciting test-bed for social enterprises. Over the last three years we have run a pilot that delivers support to over 180 social enterprises in the form of cash incentives. This effort saw the introduction of the Social Progress Credit (SPC), which we designed to reward enterprises as a function of the social value that they produce. The idea is to allow them to monetize their significant value-add and, as such, to overcome the notorious funding gap that continues to bedevil the impact industry.

As part of the pilot scheme, we tested different approaches and flexed the SPC to achieve a target 4-5% in operating profit, which is close to that of your average Korean SME.

Interestingly, we noticed that participating enterprises experienced a rise in social value but also in financial returns. We also noted that their ability to generate value rose over and beyond the support they received in the form of SPCs. The total social value unlocked by our effort was around $62 million, which makes a strong case for supporting social enterprises as conduits of value.

Hans-Paul Bürkner – At BCG we have spent many years extending our insight on corporate performance: first, by understanding what specifically drives total shareholder returns, as we report annually in our Value Creators Report; and, more recently, on our research on corporate vitality in our joint work with Fortune Magazine on the Future 50.

We now talk about the things CEOs need to do to deliver a great company, a great stock, and a great legacy. Given that our latest research demonstrates that companies that perform well on environmental and social factors also earn premiums in valuation and margins, we should probably add great social impact to that list.

Many of the factors affecting corporate longevity and societal impact are often “non-financial” and must be measured outside of the financial statements. And that poses a challenge for management teams: how to select the right measures and incentivize the right management behaviour to deliver performance on both financial and nonfinancial metrics?

I find SK Group’s approach interesting. Chairman Chey, can you describe how you have addressed the measurement challenge and how you have put incentives in place to keep management paying attention to both side of performance?

Chey Tae-Won – Measurement is more than a challenge; it’s the biggest stumbling block in the social impact industry. I just don’t think it is possible for firms to make a meaningful contribution to society if they are unable or unwilling to measure their social impact. But that is easier said than done.

As you know, over the last 40 years, a variety of metrics and methodologies have emerged, ranging from cost-benefit analyses to so-called “social returns on investment” (SROI) and “public value assessments”.

The thing about these measurement approaches is that they tend to respond to the needs of whoever commissioned them. As such, they will invariably land on different valuations. Some approaches purport to be more scientific and sound, and apply discount rates, for example. But it is doubtful whether they are more reliable than more qualitative assessments, or whether discount rates should be applied in the first place.

At SK, we do not purport to provide an authoritative answer to the measurement question and I think this is actually a key strength, and not a weakness.

Our starting point is a simple value-add methodology which we have laid as a foundation and are refining slowly over time. We are more interested in building a flexible and heuristic framework. As such, we have structured a series of key principles that measure utility at the point of consumption.

We would rather approach the measurement problem from an accounting perspective, than the standpoint of economic purity and rigour. When you think about it, accounting slowly standardized over time. Its only value and legitimacy as a framework is that it is built on convention and practice. And I believe there will be a point in time where social value accounting will also be grounded on generally accepted concepts and methodologies.

This is why I am particularly keen to deliver the DBL initiative. Reporting our social value contributions in our income statement, and encouraging our friends and peers to do the same, will be a first step to building familiarity and consensus on social value accounting.

The measurement of social value is also the fundamental building block of our SPC pilot, in so far as it seeks to create a symmetry between cash rewards and the social value that has been unlocked.

Adopting an effective accounting methodology for social value is also key to guiding our capital allocation decisions. Measurement is the common methodological yardstick that allows us set key investment hurdle rates and to pool our cash where it will be put to best use.

Hans-Paul Bürkner – BCG anchors all of its work in the ideas of creating and sustaining competitive advantage, taking a strategic perspective on things. That is very much how I see “societal impact”, as a lens for rethinking strategy and discovering new value. But where to start?

We encourage our clients to look at the United Nations’ Sustainable Development Goals (SDGs), formed under the leadership of your fellow countryman, Ban Ki-Moon, and identify where their businesses could make a difference, what strategies would allow them to fill a need and create a new business in the SDGs.

We have found the SDGs particularly valuable in challenging clients around their emerging markets strategy, the quality of the contributions that they can make through their business to helping a country’s government meet their 2030 agenda and prosper by doing so.

Could you comment on how you are steering SK Group and its many diverse businesses to contribute to the SDGs and how that factors into your strategy for expanding into new markets and doing new things?

Chey Tae-Won – I discussed this topic with former UN Secretary General Ban Ki-moon at the Global Engagement & Empowerment Forum on Sustainable Development in Seoul in February last year.

At the time, I told him that our efforts to promote social value at SK are in perfect alignment with the UN SDGs. The seventeen goals outlined by the UN blueprint have of course been categorized slightly differently and cast in terms of human development. Ours are a little more business-focused, but if you look at them holistically they point in the same direction.

A great example of where we have created new business in alignment with a UN SDG is our electric vehicle battery business. We see the emergence of a wider, eco-friendly paradigm of energy consumption and a continued growth in demand for electric vehicles that will continue to displace barrels of oil going forward.

The battery industry is a century old, but until fairly recently the economics of battery production precluded its widespread adoption and commercialization. Today the industry is undergoing profound change. Companies like Tesla have reimagined the possibilities for electric vehicles and are driving a surge in demand for batteries.

As such, the battery market has outperformed all market outlooks over the last five years, with, for example, the xEV battery market’s capacity growing to 61.6 GWh in 2018 from just 8.5GWh in 2014 (a compound annual growth rate of nearly 65%.) And there is huge upside momentum in the industry. Goldman Sachs forecasts battery sales to rise from under $10 billion in 2015 to $60 billion by 2030.

We at SK started our own research and development into lithium-ion batteries back in 1996 and founded our first fabrication plant in Seosan, Korea in 2010. Our first line of production had a capacity of about 200MWh. However, we will grow this to 54GWh by 2022.

We have established our global footprint by making key capacity investments in Hungary, China and the United States. We recently committed $1 billion to build a 9.8GWh manufacturing plant for vehicle batteries in Jackson County, Georgia. Our second phase would see capacity ramping up to 20GWh for a further $1.67 billion.

Our affiliate, SK Innovation, was a first-mover in the battery industry. Our decision to invest over a decade ago very carefully weighed the benefits to society of developing electric batteries and correctly predicted this would, with time, create a new market for our products and services.

This was a significant commitment as, financially speaking, we only expect the business to break even from next year. Had we not taken into account the social value and environmental benefits of investing in this industry, we would have lost an opportunity to partake in a new market that is fast emerging as an engine of growth for our group.

I cannot think of a better example that underscores the importance of shared value; the idea that, in the long term, economic and social value are intrinsically linked. Or, put more simply, that it makes financial sense to look after the environment in which our Firm is embedded.

Hans-Paul Bürkner – Our studies show one key to success for companies which successfully combine business value creation and societal impact is strong visionary leadership from the top – from the chairman and CEO. And that certainly seems true at SK Group.

I know that you are working to align your business leaders to your vision for the Group and its role in society and also driving innovation by launching new social enterprises. How do you go about mobilizing and engaging your workforce?

Chey Tae-Won – At SK, we have invested heavily in our people. My ambition is to spawn a generation of future leaders who will champion the case for shared value; a generation of individuals who will bring about the vision.

Within SK itself we have launched a number of leadership programs that are articulated around shared value best practice. I have also asked my teams to radically change the incentive structures around employee performance evaluations and reward. My objective is to increase the weighting of social value creation from 10% currently to 50% in year-end appraisals.

SK also engages heavily with external stakeholders. The SK Happiness Foundation and the Korea Advanced Institute of Science and Technology (KAIST), for example, are today jointly running a two-year MBA course on Social Entrepreneurship. The courses offer a specialized curriculum for budding entrepreneurs who will come to lead the social innovation ecosystem of tomorrow. The course offers guidance on starting a social enterprise, provides mentoring upon startup, and also delivers incubation programs.

Lastly, SK continues to support the Korea Foundation for Advanced Studies (KFAS), which we founded back in the early seventies, and which is geared at promoting social sciences for the advancement of Korean society.

We have opened 17 new research centres in China and across Asia to deepen international exchanges and arrive at a more balanced regional perspective. We have worked hand in hand with different talented individuals at the Foundation to strengthen the case for social value domestically and abroad.

The key message is, we need a sea-change in the way we approach social value and how we envisage the role of business and social enterprises. This is not just about committing capital or building elaborate frameworks and market mechanisms. This is also about shaping the mindset and setting the right incentives for those who will be leading tomorrow’s social value ecosystem.