Global and Responsible
11 January 2011:
With subsidiaries in more than 75 different countries throughout the world and about 50,000 employees, Henkel is a truly global organisation - more than 40% of its total business comes from the emerging markets, with Asia and China, in particular, contributing significantly.
The number of Henkel employees in Asia increased to almost 10,000 with the acquisition of National Starch in 2008, and this expansion reflects the critical role Asia plays for Henkel's future growth. Today, about 18% of the company's employees are based in the region. While Asia is a prosperous market for Henkel, it is also present in more than 30 Central Eastern European countries, and has almost 10,000 employees based in the Americas, contributing around 25% of total business.
Over the past ten years, as sustainability has begun to emerge as a watchword for modern business, there has been a subtle but powerful change in attitude among many of the world's multinational corporations.
At first there were concerns about the potential costs of improving a company's environmental performance and implementing comprehensive CSR programmes. Now, there is a growing acceptance that sustainability need not counteract the drive to make a profit.
This trend is exemplified by the large companies that score highly on the sustainability indices that have become the yardsticks for business performance.
A good example is Henkel, a broad-ranging product company headquartered in Germany, which this year continued to garner praise for its business practices. In March, Henkel was once again included among the leading ethical companies in a ranking prepared by the US's Ethisphere Institute, which acknowledges companies from all over the world for their ethical approach to corporate governance and commitment to sustainable development. The businesses included in the ranking do far more than pay lip service to their corporate social responsibility agenda.
Furthermore, in September, Henkel was included as a sector leader in the Dow Jones Sustainability World Index (DJSI World). It was awarded first place in the Nondurable Household Products category and is the only company in its sector to be included in the DJSI World and DJSI Europe indices.
Although Henkel has been awarded these accolades for several years, its commitment to sustainability goes back much further. Its long-term view of ethical and sustainable business practices is not, however, merely altruistic. It is very much about good business.
"It's important to integrate the different elements of people, planet and profit to have a holistic approach," says Lothar Steinebach, Henkel's CFO. "Sustainability is the key factor in Henkel being one of the world's most ethical companies, and we leverage our role as an employer to contribute to social progress.
"Our foundation as a family business is an important part of that, especially in regard to sustainability and operating in the long term."
A holistic view
Founded in 1876, Henkel's worldwide operations span three core business areas: laundry and home care, cosmetics and toiletries, and adhesive technologies. Its leading position in certain consumer and industrial markets is based on many well-known brands, including Persil, Schwarzkopf, Dial, Purex and Loctite.
The company prides itself on the fact that CSR issues, particularly sustainability, are part of its DNA, and its ethical practices run right through the value chain, from the sourcing of raw materials, through production and logistics, to the use and disposal of its products.
"When we talk about the planet, we mean having an innovative pipeline of products and a holistic view of the value chain," says Steinebach. "There is always room for progress on sustainability, particularly in the production and delivery of our products. But we must also talk about profit. We can combine profit and sustainability. Indeed, without profit you can't run a sustainable business because you can't invest in the future.
"It is also important to note that we don't do it to be recognised. We think sustainability is necessary for long-term success, as well as an ethical duty. It is, however, rewarding to have our efforts recognised, as happened in September."
Sustainability is, therefore, not a recent add-on for Henkel, neither is it greenwash, nor a marketing exercise. For Steinebach, there would be little use in approaching sustainability in this way because it would do nothing for the business and, ultimately, would be discredited by its customers. "It is important that sustainability is a main driver. We recently reissued our core values, and sustainability is still as much of a priority as ever," Steinebach says.
"It is part of our heritage; it influences our day-to-day decisions and defines how we react to new challenges. We look at it in detail, not just at a high level, and we have a good system for grouping our activities around our five focal areas, which are a specific embodiment of our approach to sustainability."
Moreover, while the company looks at key issues such as energy usage, wastewater and health and safety on an internal basis, it also extends these priorities to its supplier community.
All together now
Steinebach is clear that no business can operate in isolation, and that its performance against any ethical or sustainable measure depends on the activities of its suppliers.
"We have a company-wide purchasing strategy," he says. "We can't only look at our own operations. We source a significant amount of materials from around the world, so we must extend our standards to our suppliers. Those purchasing standards include our approach to sustainability and they influence our supplier selection process."
In judging potential suppliers, Henkel looks at their processes for self-assessment and how their operations match up to its own code. It insists that suppliers share its core values.
"The big, global suppliers understand and support us in this, but we also use many local suppliers," Steinebach explains. "Around 80% of our material comes from OECD countries, where we express the demands of our purchasing standards, and where we expect suppliers in every state to comply. But no matter where a supplier is located, we are not willing to make any compromise. After all, in the United Nations Global Compact, as in other international standards, there is no room for compromise.
"We also require compliance, because credibility is very important for our approach to sustainability. That credibility is affected by how we source and produce our goods. So, we must have a complete view of the value chain, and we must view sustainability as a long-term issue."
With established metrics in place to manage global suppliers, with some regional variations, Henkel is willing to help them move towards a more sustainable position. It is willing to invest time and effort in building sustainable partnerships for the long term. This credo is being put to the test, given the repercussions of the international financial crisis for the supplier community.
"Some customers have been hit hard by the global downturn, but the most noticeable thing we have seen this year is that capacity has been reduced at some suppliers," notes Steinebach. "Some of them are finding it difficult to fill demand. Some are even working 24/7. But we have not seen any suppliers disappear, we've just seen a reduction in capacity and some scarcity issues."
Increased pressure
Henkel remained robust throughout the financial crisis, but Steinebach does not deny that the company has had to respond to many pressures over the past two years.
"Volatility and uncertainty in the market are still at unprecedented levels, so we have developed tools to look at scenario planning. That was an immediate reaction to the crisis. You can't have a firm set of parameters in place," he says.
"The pressure in the market is growing, especially in the industrial sector. We have therefore adapted our structures to maintain our cash position and limit the decrease in profits. There is also pressure in consumer markets and we expect, and have seen, increasing competitive pressure. A focus on cost and cash management is part of our strategy. The crisis did not trigger the cost focus but has intensified the pressure on it."
Finding a successful response to the pressures of the downturn depended largely on responding swiftly to the changing macro-economic environment. Steinebach believes an early focus on cost has allowed Henkel to maintain its debt position. He also stresses, however, that one should not be too hasty in calling for an end to the financial crisis.
"It is important to continue having a strong cost focus, because the volatility in the market will no doubt continue," he says. "I have heard it said that we are not in year one after the crisis, but in year three of the crisis. I agree that it is important we see it that way."
New challenges
That view may also help many companies deal with the concurrent pressure of globalisation, which, along with the financial crisis, is fuelling and accelerating the process of business transformation. For Henkel, this consists largely of the integration of the adhesives and electronic materials business of National Starch, which it bought for €3.7bn in early 2008. Yielding synergies of up to €250m a year, the acquisition required Henkel to reorganise its manufacturing footprint.
Alongside this major project, there are additional transformation programmes, including the enhancement of shared service centres in Manila, the Philippines, and Bratislava, Slovakia.
"Improving our structure is an ongoing process, and business transformation requires an investment of time, effort and people," observes Steinebach.
"To manage a transformation well you need a clear project organisation. You need to assign the right people for the job, and you need early and candid communication of the goals and timelines. Speed is also important. Management must enforce business transformation as an important part of people's day-to-day job, not something to put in the past once completed.
"And lines of communication are vital. From the big management meetings we cascade the messages throughout the organisation so that people understand what we are doing. Everyone gets the message in their own language, whether they are in finance, IT or operations."
Change is also a theme for the finance function, reflecting new pressures on the role of CFO. Yet this change is an intrinsic part of the company's efforts to stay true to its long-term core values.
"The role of the CFO has changed a lot in the past ten years, more than ever before. I have been CFO for seven years, and it has been a period of constant change," remarks Steinebach. "There are increasing demands and challenges every year, not least because of the growing volume and complexity of data available.
"I see a rolling cost view of our worldwide operations, finance, IT and so forth. With that data, the CFO is more closely involved in strategy. I evaluate the portfolio and implement the findings of that evaluation as part of an ongoing dialogue with the business.
"So, there is a strong new element of strategy to the role and it is more important for the CFO to look ahead over the next five or ten years in terms of the value drivers of the business, and to have intense dialogue with business divisions and the CEO."
Source: Finance Director Europe, First published on 16/11/10
