Rolling toward responsible capitalism

It is odd, perhaps, that Jean-Dominique Senard is not already a household name among global business leaders. But that is likely to change this year. On May 17, Senard, who is 66, retires from a role he has held for seven years, as chief executive of Compagnie Générale des Établissements Michelin. In January, he was elected chair of Renault; in March, he became board chair of the Renault–Nissan–Mitsubishi alliance, the industry leader in auto sales (and a top producer of electronic vehicles). The alliance has been in visible turmoil since its former chair and CEO, Carlos Ghosn, was arrested in Japan in November 2018, on charges related to appropriation of funds.

Senard’s new role reflects his accomplishments at Michelin, including a doubling of shareholder value during his tenure. This was an especially noteworthy feat for a 130-year-old premium tire company — the world’s second-largest by revenue, after Bridgestone — in a highly competitive, discount-oriented business. Senard also led the company through a digital transformation, fueled by a series of shrewd acquisitions, establishing it as a proficient innovator in materials, tire design, and analytics. For example, Michelin has uncorked a new revenue stream from advanced technology for trucking and logistics, using cloud-based networks of sensors to monitor vehicle performance, shipment locations, and transport conditions around the world.

Just as Senard steps into his new role at Renault–Nissan–Mitsubishi, his other signature issue — a high-minded, passionately held perspective on the purpose of corporations — will be tested in a separate context. In April 2019, the French parliament approved a corporate governance framework called PACTE (Plan d’action pour la croissance et la transformation des entreprises). This framework was partly inspired by a report coauthored in early 2018 by Senard and Nicole Notat, the president of Vigeo Eiris, a French not-for-profit agency that rates corporate practices on nonfinancial measures. The report focused on the role of corporations in relation to the common good, encouraging them to take on social and environmental responsibilities alongside their commitments to profits and shareholder returns.

Senard recognizes that if his approach to corporate governance catches on more broadly, it could change the way companies define their raison d’être. Responsible capitalism, as he sees it, is a necessary remedy for the kind of corporate overreach that has led to nationalist, populist, and anti-globalist movements. Without a more earnest effort by major companies and investors to broaden prosperity and quality of life, Senard warns, there will be more backlash against free enterprise, more authoritarian governments, more arbitrary regulation of companies and markets, and ever more stringent restrictions on free trade.

In April, Senard sat down with strategy+business at Michelin’s offices in a suburb of Paris. He talked about his vision of capitalism, the report, the future of the auto industry (including the Renault–Nissan–Mitsubishi alliance), his own approach to management and leadership, and the changing attitudes of his fellow business leaders.

S+B: How did the PACTE project come about?
SENARD:
In 2017, the French parliament was trying to settle a debate among its members about corporate governance: how to define the duties of companies to their investors, versus their responsibility to workers and external stakeholders. One faction wanted to create laws specifying a tremendous number of social and environmental responsibilities for companies. This would have created a real difficulty for them. Another faction was afraid of any reform at all; they felt that business leaders would be unfairly attacked by the judiciary and NGOs, and this would stifle innovation and economic growth. The government asked Nicole Notat and me to try to find a way to solve this issue.

We released our report in April 2018. I think it came at just the right time. Since the financial crisis of 2008, a question has been in the minds of many people, including many young people: What is the purpose of capitalism? There have been many debates about this in France, not just in parliament, and the debates were becoming bitter, because the answer was not clear.

If there is a continent where the search for an answer is particularly intensive right now, and where it makes sense to find an answer, that’s Europe.

S+B: Why Europe, and why now?
SENARD:
Because there are two forms of capitalism fighting each other in Europe right now, and neither of them exactly fits the European culture. The first is the Anglo-Saxon tenet of fiduciary duty, particularly prominent in the United States; it says that the purpose of a company is mainly profit, immediate profit, the strongest possible profit, and that’s it. According to this perspective, the rest of societal value is not a matter for the corporation — maybe the state or the community, but not the corporation.

This view has shaped how many companies operate, and as a result, businesses have not done what they need to do to help people absorb the impact of globalization. Many people have been left behind. Business leaders have acted as though this is not their problem, which is nonsense.

The second form of capitalism is related to the radical reaction known as populism. It is a backlash against the first form. And as it gets stronger, the European Union is drifting apart — drifting toward a continent of walls and a more authoritarian way of life. This could lead to a more state-managed view of capitalism, like that of many Asian countries, where economic tools are used in the most aggressive way at the service of institutions that are not necessarily democratic.

If we don’t create a framework for a third way, a reasonable, sustainable capitalism, then we are heading toward one of these first two futures. We run the risk of seeing our culture disappear in a sort of no-man’s-land without any purpose.

S+B: You are trying to save capitalism from itself?
SENARD:
Exactly. Because I think capitalism is the only system that we have experienced that can increase the well-being of people and societies. All the other systems have not been successful.

The third-way approach, which many people still believe in, will need a political decision. Only an entity like the French parliament or the European Commission can create a framework for this.

Enterprises with a mission

S+B: The French government has just established a law based on your recommendations. What, in your view, are its central elements?
SENARD:
Companies must orient their business models differently. They must of course consider financial performance, but their purpose must also take into consideration the social and environmental impact of their activities. To emphasize this point, we started our report with a statement attributed to Henry Ford: “The business has to make a profit, otherwise it will die. But if you try to run a business solely on profit, then it will also die because it will not have any reason to be.”

But corporations have to define their purpose themselves. Their approach to social and environmental responsibility cannot be imposed on them. That is the task of each company’s board. Once they articulate it, they have to share it with employees, apply it to their business strategies, and also apply it to their day-to-day actions.

At the same time, some basic protections and principles must be generalized in the broader political system. We cannot say to a company, “Well, just adopt a broader purpose on your own.” Many business leaders and investors are striving to move in that direction already. But they’re legitimately scared about the fact that they could be punished unfairly if they have to make some major investment that raises fiduciary concerns, or if they have a soft quarter. They need a legal framework that protects them.

We also need this legal framework to counter the rules put in place by the European Commission in 2009, after the financial crisis. Those rules limited the risks that financial institutions could take, and had an unintended consequence: They triggered a tremendous shrinking of investment [by responsible financial institutions] in shares of responsible companies in Europe. And guess who replaced them? Less responsible investors. We have to change this. You have to enable sustainable investors if you want sustainable capitalism. If not, then sustainability is just a word.

We thus recommended the creation of what we call “l’entreprise à mission” provisions in the corporate charter. Companies can, if they wish, state that their purpose includes fulfilling specific long-term social or environmental initiatives. This provides companies with security that they can focus on a mission without fear of legal repercussions from their investors or any other outside parties.

Once you have that framework, you can redirect the companies that assess other companies: the Standard & Poor’s and Moody’s of the world. And their ratings can then be linked more closely to sustainable practices.

We proposed that this approach be written into the French civil code, which had not been changed since 1807. It said that companies should be run for the benefit of their investors and similar associates and no other purpose. It was obsolete. In the end, the civil code was brought up to date.

S+B: How would these principles be turned into everyday practice?
SENARD:
In our report, we suggested a few basic ideas. For example, employees should have a larger share in the decision-making process. It is good, for many reasons, to have employee representatives sitting on your board.

We also suggested that companies establish a separate stakeholder board, which cannot be linked to the management board directly — and which includes customers, suppliers, NGOs, international workers’ unions, and that sort of thing. This is to embed in the company’s leadership a greater awareness of the external impact of their decisions.

Debating responsible capitalism

S+B: This approach to corporate governance seems like a fairly radical change. What did your peers among business leaders say about it?
SENARD:
There was a fierce debate. A number of corporate leaders reacted angrily. They were concerned that they would be increasing their risk of being attacked by the public — for example, by NGOs. Honestly, it’s true that in surveys of the public, confidence in big companies today is extremely low.

But I responded that we don’t need a new law to be attacked by NGOs. That happens anyway. And our current laws are also problematic for companies, but in a more hidden way. For example, after the December 1999 Erika tanker spill, which occurred in international waters off Brittany and thus had not broken any French laws, a judge fined the French oil company Total anyway, on the grounds that the company had breached its own internal rule. Under current rules, if there is no established law or precedent, judges can keep looking [for grounds to convict]. If we could craft an appropriate law around environmental responsibility, it would protect the companies as much as anyone. It was very difficult for me to get that message across at first.

S+B: How would this framework play out in real life? If the drive for profit is so ingrained, and a company follows a purpose with more social and environmental responsibility — and you’ve done this, I know, with Michelin — what happens if there is a down quarter or two and investors put pressure on the company?
SENARD:
That depends on the investors and the rules that each company applies to itself. If your shareholders are large institutions with a stake in the social and environmental impact of the company, then they will be quite interested in all the means of securing the future. Of course, profit must be a very large part of the investment mind-set. But it can be well complemented by the rest of your declared purpose. This is the only way to go beyond a quarter-to-quarter decision structure.

The current investment atmosphere is more often than not characterized by volatility in the markets, and that thwarts their rationale and logic. We need to move away from that kind of frenzied trading climate. If we are in a framework of sustainable capitalism, then people can make long-term investments. They can decide at any point whether they stay with a stock — but they can decide more effectively based on a broader set of criteria, not just profit.

S+B: A skeptical observer might say that responsible capitalism doesn’t pay off, even in the long run — at least not when compared with a pure profit strategy that isn’t concerned with environmental and social matters. What do you say to them?
SENARD:
If you consider that question solely in the context of short-term profits, they may be right. Some investments in R&D may be necessary for long-term growth and viability; they might affect, for example, the environmental impact of your future products and services. And they might involve short-term costs. But if companies are punished for that kind of investment, nobody is going to make it. Capitalism is going to fail.

If you have a purpose that includes a well-considered level of social and environmental responsibility, you’re going to increase your profits in the long run. There have been many examples by now. At Michelin, we have been investing massively in long-lasting performance for tires, environmentally friendly products made from improved materials, and reducing the CO2 emissions of everything we do. This involves a tremendous amount of research. It is expensive. And yet the economic performance of Michelin has improved year after year and without sacrificing our environmental track record. On the contrary, we insist on sustainability, because that’s how we create value.

If you have a purpose that includes a well-considered level of social and environmental responsibility, you’re going to increase your profits in the long run.”

The most visible illustration of this is our campaign that says that a Michelin tire at the end of its life is still very safe, even though it is worn. That’s very different from some other companies that sell less expensive tires. Everyone can make a tire that is perfect when it is new. But a few weeks later, if you measure the performance again, many of these tires are already worn down, and this can be dangerous. A company that makes tires of this sort will increase unit sales, but it has to produce many more tires, and use twice as much energy and raw material, for the same outcome for the tire customer.

Michelin chose instead to make tires that are roadworthy longer. We invested a lot of money in the innovation needed to produce tires that don’t wear out as quickly. The profits come from the valuation of that technology and the prices we can charge for our products. That in turn helps the environment. With decisions like this, you do good for the company, for your reputation, for the environment, for the customer, and for your workers. Last but not least, you encourage the whole industry to be better.

An alliance in turmoil

S+B: This year, you are going from being CEO of a company that is a model of a sustainable enterprise to becoming chair of Renault and of the Renault–Nissan–Mitsubishi alliance board — an enterprise in a very challenging situation, with one of the largest shareholders being the French government. How did you decide to make this move? Did President [Emmanuel] Macron ask you to consider the job?
SENARD:
Yes, along with other government and financial leaders, he did. At some point I said, OK, I can try. It is a way for me to serve the industry.

As we seek solutions to the alliance’s problems, we will try to reclaim the spirit that it had back when it was formed in the late 1990s. Renault had very strong national roots; it had started as a French state-owned company. The same was true of Nissan in Japan. The alliance was designed by Louis Schweitzer, then chairman and CEO of Renault, as a balanced organization where the French and Japanese felt respected by each other. You could not ignore the national pride on both sides. And yet neither side felt pushed around. They were both proud of their ability to bring their skills and cultural differences to the same teams, working together to build value. It was a unique enterprise, the only such alliance in the world. [Mitsubishi joined later, in 2016.]

S+B: One factor in the breakdown may have been that the financial goals imposed on them, particularly on Nissan, were too hard to meet.
SENARD:
That did play a role, but a good leader must adapt to realities. A leader must present goals that are tough, but achievable — and help the teams solve issues to get there. If you don’t do that as a leader, at some point you may very well be challenged.

S+B: How will the leadership at the new alliance be organized?
SENARD:
There will be a very small management committee, including the CEOs of the alliance companies. It will be a balanced board, but small enough so that we can make decisions around the table.

S+B: In that context, your day-to-day leadership will be critical. Tell us about your own management style.
SENARD:
It’s rather pragmatic. I keep a few principles in mind. First, as a CEO, I try to make sure that I have people around me who are more talented than I am. This brings you strength. You may be the boss, but others have more expertise and knowledge in their domains.

The second principle is to empower people and make them accountable. That is easy to say. It’s definitely not easy to do, because it’s not the most natural thing. When you empower people, but don’t make them accountable, you can start drifting and lose control. I think the value of respect for people, and paying attention to the way they are treated, is essential. I also value respect for facts.

Finally, it’s essential to make sure that the strategy of the company is related to its purpose. This is totally congruent with the report I wrote with Nicole Notat. The role of the CEO is first and foremost to validate the link between a company’s strategy and its purpose. I tried to do this at Michelin, and I expect to follow the same approach in the alliance, because I think this alliance needs to articulate its purpose.

S+B: What do you think the purpose of the alliance should be?
SENARD:
It’s only been two months since I agreed to take the role. If I said anything now, it wouldn’t make sense. At Michelin, defining our purpose took two years of internal debate: What are we here for, what should we do, et cetera.

Of course, we will consider sustainable mobility, environmental sustainability, the well-being of customers, and the well-being of employees. But it takes time, and deep involvement in a company, to be able to answer these questions.

The future of the industry

S+B: What about the auto industry in general? Do you think the purpose of every auto company should be oriented toward the environment, quality of life for employees, and broader prosperity in general?
SENARD:
In general, it should be oriented that way. But the realities vary from one company to the next. In general, automakers have had to cope with incredible pressure in the market, in the form of lower prices and overcapacity. This has created turmoil, sometimes with social consequences.

As for the environmental sustainability part, honestly, the auto industry worldwide is probably doing better than most people realize. In terms of sustainable mobility, there is much to be done. The optimal technology is not there yet, and it will need a huge amount of investment before we get there. Nobody really knows if the targets that have been set are achievable. And that creates tough questions.

When you’re a CEO, you can launch a research program. You can follow it. You can feed it. But if it doesn’t come out with results, you can’t force that. And nobody really knows what mobility is going to mean in five or 10 years.

S+B: One thing seems certain: The roster of leading automakers, and the structure of the industry, will not be the same.
SENARD:
You’re absolutely right. I was telling my Michelin team yesterday that in the future, there will be more ecosystems of companies than individual stand-alone enterprises. These ecosystems will link a Michelin company to a Renault company, to a train company, to an aircraft company, and it will all be about mobility, intermodality, connectivity, and the management of shared data.

It’s extremely difficult to assess in detail at this early stage, but we already know that the companies that will survive are those that are linked to ecosystems. So far, the main actors have been in the auto industry. But now they’re becoming the minority. Every year, Michelin conducts a major global mobility summit called Movin’On, and each year we have more people from other industries attending: insurance companies, banks, post offices, railroads, airlines. People are trying to understand the future, how to connect to it, how to form partnerships, and how to cooperate.

S+B: The major automakers are accustomed to being at the top of the mobility food chain.
SENARD:
But that probably won’t be the case in the future. Automakers can’t spend the money it would require to lead the pack in every aspect of mobility. It would be too expensive, and impossible to predict success. My duty at the alliance will be to make sure the companies work together, and that we make the right decisions about where we belong.

S+B: So if the alliance ends up, say, playing a more focused role than it does today — perhaps a larger role in electric vehicles but a smaller one in other vehicles and maybe supplying powertrains for a new public transit system…
SENARD:
If we can find the right place in the larger business ecosystem, then we have a chance for success.

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