“We Learned How to Listen Better”

Tom Falk is basically a lifer at Kimberly-Clark, the global manufacturer of essential consumer products. He’s been with Kimberly-Clark for 29 years and was named CEO in 2002 and chairman in 2003.

Sustainability has become as interwoven into the company’s culture as safety, says Falk. “We have to operate with the same set of safety rules everywhere, and we have the same set of environmental rules and standards everywhere,” he says. The company is widely acknowledged to be a leading global manufacturer in terms of quality, efficiency and sustainability. The U.S. Environmental Protection Agency, for instance, gave Kimberly-Clark its ENERGY STAR Partner of the Year award for two years in a row for the company’s comprehensive approach to energy management.

Kimberly-Clark issues an annual sustainability report, and an interactive feature allows anyone to build a customized version of the report. According to its 2011 report, by the end of 2011 the company was sourcing 99.9 percent of its fiber from certified suppliers, was down to 21 percent of its waste sent to landfills (the goal is to reach zero waste by 2015) and was getting 13% of its net sales from environmentally innovative products. The company details its sustainability efforts and progress at its website.

In a conversation with MIT Sloan Management Review’s David Kiron, Falk talks about the company’s initial resistance to its own outside sustainability advisory board, how it learned to have constructive conversations with stakeholders who push for the company to act faster and Kimberly-Clark’s own shift toward “raising our gaze to a more aggressive set of goals.”

Over the past 10 years, what have been the big inflection points in your sustainability agenda?

The place to start is really in the mid ‘90s, when I first got involved in sustainability. That coincided with the Scott merger, which is when we became a much bigger tissue company.

At that point we set a series of five-year goals. We wanted to look out far enough, have some stretch objectives, set goals and then measure them in each of our facilities around the world every quarter. We said, “Let’s start with some obvious things for our business like water consumption, making sure we’re reducing our solid waste in the landfill, air emissions and energy consumption per unit of output. Let’s agree on measurements. Let’s measure it the same way everywhere around the world and start to track our progress.” Those were our Vision 2000 goals.

About 10 years ago, I gave a speech to one of our healthcare customers, who had asked me to come in and talk about sustainability. We very quickly learned that they had no idea what I was talking about. They thought I was coming to talk about the sustainability of a change initiative, and I actually talked about sustainability in the broad sense that we would know it today.

About five years ago, I was at one of our global consumer forums for a bunch of CPG [consumer packaged goods] manufacturers. None of the food guys knew what sustainability meant. All of us non-food guys knew what it was about, but I was talking to a guy who made baked beans for a living who had no clue what sustainability even was.

We thought we were doing a great job. We formed an outside sustainability advisory board. But they helped us recognize that we’ve eaten our own cooking for a long time, that we really didn’t have a clear view about what the rest of the world was doing, and that we should be raising our gaze to a more aggressive set of goals.

I meet with the board and my leadership team formally once a year to get feedback on where we should push harder, and maybe where we think we’re doing great, but we’re not quite best in class yet. There’s been some good, open dialogue with people who think very differently from us.

Presumably at some point they say, “You should push yourselves harder on this or that” and you say, “We’re not quite ready to make those kinds of steps.” Could you give us a sense of the flavor of those discussions?

I would say that in the first year it was very polite. We probably had our arms crossed. We were hearing but not listening, if you know what I mean. We really weren’t internalizing it.

As we got to know each other better, we had more of a give and take. Now when they make a suggestion, we’ll talk about the practical issues.

In the end, it always pushes us a bit. They may not get 100 percent of what they want or what they think we could do, but we move farther than we would have on our own volition.

So you must be collaborating differently with other organizations because of sustainability.

Absolutely. I’d say we used to be really very inwardly focused and thought we had all the answers and knew where we needed to go. We had a lot of smart folks working on sustainability. But when we opened up to bring in some of the NGOs [nongovernmental organizations] and our outside advisory board, we learned how to listen better.

We now have more of an ongoing dialogue with Greenpeace and World Wildlife Fund and other NGOs, and we’re members of lots more outside groups than we used to be. It used to be if you said the word “Greenpeace,” no one would want to go anywhere near them. I’ve now had dinner with some of the Greenpeace leaders and they are smart, well-intentioned folks. We don’t always agree on everything, but we can have a constructive conversation and work together. We’ve gotten a lot of benefit out of these relationships.

Greenpeace really took Kimberly-Clark to task a while back —

Yeah, that was one that we thought we were right and they were wrong, and then they thought the opposite, and there was more talking and no listening. When we finally got to the point where we could actually listen to each other, we discovered we weren’t all that far apart.

We felt we had a best-in-class fiber policy; they had some areas they wanted someone to be a stronger leader, and we were unwilling to commit to anything we weren’t 100 percent sure we could actually do. So it was more just working through the details.

We came up with what we still believe is the best-in-class fiber policy, with a few areas where we were comfortable stretching ourselves. Greenpeace felt that was real progress that’s worked for the industry. Since then we’ve worked much more collaboratively with them on that and other issues.

The exciting thing, the inflection point if you will, is within the manufacturing arena. We’re trying to use fewer materials and reduce our own environmental footprint. We’re extending it into other areas of the business in terms of, can we get a competitive advantage with our products in the marketplace by making real claims that are differentiated and based on real science? And can we extend it into our impact on the community and measure the benefit that we provide, as opposed to just giving away a bunch of money? Those are areas that actually build greater meaning.

How would you describe the impact of sustainability on your business model?

One of the pieces of feedback we got from our sustainability advisory board is in our K-C professional business, a program called, “Reduce Today, Respect Tomorrow,” which is about using less of our products.

So for example, you can dry your hands in a public washroom with one towel, instead of two or three or more. That program is terrific in lots of ways. First, it’s got a great sustainability message, but second, it’s a cost-in-use message. It actually costs our customers less because they’re buying fewer cases. They haven’t seen many examples where a company actually advocates using less of their product.

We view it as a competitive advantage. If we can make a hand towel that’s good enough that you can dry your hands with one towel and we can sell it at a competitive price and still create value for you and do good things for the environment, that’s a big win.

Where is sustainability managed in your organization?

The strategy and goals are set at the center. I’ll sit down with my immediate leadership team and our head of sustainability, and we’ll agree on what the next five-year goals are going to be. It’s always a bit of top-down and bottom-up. We’ll talk with our outside advisory board about where we think we need to be five years out and what would be a stretch for us. We’ll then cascade that back into the organization and get some feedback on whether they find that’s aggressive enough or too aggressive in some areas. I have one person now who leads our continuous improvement and sustainability efforts.

We have a classic matrix [structure], but it’s owned by the P&L owner, who is accountable for implementing it. We produce a quarterly scorecard that my leadership teams see. Every business unit leader can see how they score in every quarter on those key goals. Each line executive has got to own it, and the central staff has to help us measure it and scorecard it and provide some resources to help out. If a team is behind on its energy goal or behind on its water goal, then the central staff can be a resource to help the team get back on track.

We set sustainability objectives in the same way we would any other goals, like market share goals or business unit goals. Sometimes there’s a tendency to say you’re going to do your strategic stuff to deliver results over here in one bucket, and then you’ve got sustainability in the other bucket. But it’s like looking at safety in our plants. You can’t run a plant and be really productive and think safety is something you do in your spare time. They have to be integrated as part of how you operate.

Have you developed any kinds of new organizational structures over the past decade to ensure that your sustainability initiative is on track?

Each business unit has a sustainability strategy coordinator who works on sustainability strategy with the central team. We’ve really tried to make sure we’ve got local ownership of their part of the strategy. We have consistent metrics — we’re measuring the same things everywhere around the world and tracking it.

As the definition of sustainability has become broader, we’ve also tried to include things like measuring the impact of corporate philanthropy, measuring corporate governance and things like that. We’ve brought more people into the sustainability conversation, and we’re trying to do a better job of linking our corporate philanthropy to output metrics.

How hard is it to communicate goals and metrics to managers within your organization who might be closer to the baked beans fellow’s perspective on sustainability?

Our people get our initiatives. They know that sending anything to a landfill is a bad idea, and if we can find alternative uses for some of our manufacturing waste, we not only avoid the landfill, but the cost of sending to the landfill. In some cases, we’ve actually generated revenue. I saw a report recently that so far this year, we’ve had nearly $20 million in scrap sales, where waste material is being used as a feed stock for things like cement plants. So we’re making a little money by repurposing and I think employees are turned on by that.

There have been issues where a plant in an international market really needs to install secondary treatment. It’s not required by the local regulation, but it’s required by whichever vision goals we were working on. We had lots of heart-wrenching discussions and said, “We’ve got to find the money to do this. We operate with one standard everywhere around the world.” It’s like saying, “Well, we’re not going to bother to work safely in that plant because they’re living in another country.” That’s not okay. We have to operate with the same set of safety rules everywhere, and we have the same set of environmental rules and standards everywhere.

Once you’ve worked through a few of those issues, and the team knows you’re serious about it, and you’re willing to invest behind it, they line up quicker.

Can you say a little bit more about your leadership in your industry and your organization around sustainability?

When Walmart was developing its sustainability strategy, we were one of a handful of suppliers who came in and talked to them about our sustainability journey. We shared our sustainability report as Lee Scott, who was then Walmart’s CEO, was just starting to move the company in the sustainability area. We had our executives who run that part of our business come in and talk with their folks.

Mike Duke, who runs Walmart today, told me that we helped them think through their approach to sustainability, as did other good suppliers that they had. I think that creates value with your relationship with your customers in a way that is important as well. They want to know that you’re operating in an ethical way and doing the right thing.

Our employees, who are very proud of our sustainable activity, have developed communities of practice for sharing ideas on how they save energy at home or how they save water at home. We’ve been doing a bike-to-work program that’s become a national program. In its first year as a national program, there were over 30,000 riders who logged over 12 million miles.

Is what you’re doing with sustainability perceived by others as an indicator of good management?

I’m starting to get questions from investors. But, in the 10 years I’ve been talking to investors as CEO, I haven’t gotten many. On a recent investor relations trip, I spoke with one of our large longtime shareholders, and for whatever reason that day, all we talked about was sustainability. At the end this analyst, who I have known for a long time, said, “Wow, you actually seem to understand this stuff. Other CEOs know there’s someone at the company who does this, but they don’t seem to have all the facts at hand.”

It does differentiate you if you know what you’re talking about and you’ve actually spent some time on it, if you’re thoughtful and involved.

What competitive advantages do you get from your sustainability efforts?

First and foremost, there are some big cost advantages. When you add up all the energy we’ve saved and all the water we’ve saved that we don’t have to buy from a municipal water utility, there’s tens of millions of dollars of savings that have come out of the sustainability initiatives over the years. So that’s key.

I think there are customer advantages. We talked about Walmart, but we also copy other customers on our sustainability report, so there are advantages that we’ve seen in our direct businesses, where we’re selling products to our B2B customers as well as our consumer customers.

And there’s a big recruiting advantage. There are people who choose to come to work for Kimberly-Clark because of the kind of company we are, and the way that we operate is very much a part of that. I tell our team, “I remember the day I decided to join Kimberly-Clark 29 years ago. I called my dad and told him about the company I was going to go to work for, and how proud he was that I was going to work for a great company.” I tell our teams today that I want that for each of them. I want them to be proud of the company they work for, and I want their families to be proud of us, and believe we’re doing the right thing every day. And while we are not perfect, we’re trying to get better every day. That’s, I think, important to getting the best talent.

What are you currently not doing that you’d really like to start doing with your sustainability agenda in the next few years?

Some of the feedback we get from the advisory board I take to heart. I still wish we could move the needle farther on sustainable renewable materials in our consumer businesses. We make disposable products and they use a lot of petroleum-based products, so we’re doing a lot of work on alternative materials. We haven’t had as much of a breakthrough there yet, so I think finding creative solutions that continue to reduce our environmental footprint and deliver on our consumer needs is still an opportunity area for us.

When we look at water and the access to water around the world, we still think there’s a big opportunity there. Today we recycle about 94 percent of our water, but that still means that about two billion gallons a year gets used. We’re trying to replace that equivalent amount of water in our communities through various fresh water programs.

The third area is that we publish our sustainability report to our key suppliers and hope that our good example will cause them to want to change their behavior. And I think we’re at a point now where we’re ready to be just a little bit more directive, to say, “we need you to work on this particular area because it’s the right thing to do.” We’ve actually given the speech to many of our key suppliers, that if your cost, your performance, everything else is equivalent, the sustainable supplier, the one who is really working on these sustainability issues, is going to get the business.

Some of our pulp suppliers have gotten FSC certification, which they probably wouldn’t have done if left to their own devices. We’re starting to work with suppliers around our Lean program, which will help them reduce waste and make progress in other areas. So driving this more deeply into our supply chain is definitely one area we’ll be working on.