Sustaining an Emotional Business

Georges Kern, chief executive officer of IWC Schaffhausen, shares how his company’s green move electrified consumers and employees.

Georges Kern, chief executive of IWC Schaffhausen

Image courtesy of swissworld.org

Georges Kern was born in 1965 to a renowned jeweler family. He has worked in the watch industry since 1992 (starting at TAG Heuer), and has served as chief executive of the venerable watchmaker IWC Schaffhausen since 2002.

In an interview with MIT Sloan Management Review editor-in-chief Michael S. Hopkins, Kern discusses how he runs his business with a long-term view, how the current financial crisis is different from the last one, and how to make sustainability a source of competitive advantage. He also considers which partnerships are right for a company bent on sustainability — and which aren't.

How would you define sustainability?

I'd say it means taking the long-term view, building value for all your stakeholders over the long term.

Do you think that's a definition generally shared by people when they talk about sustainability?

To be honest, I don't know. But I do know that the issue of sustainability will be an extremely important one in the years ahead. We saw the starting point of sustainability, of taking the long-term view, ethically and morally, after September 11. I think recent events, such as the financial crisis and the bad repute the banking sector has got itself into, will encourage consumers to think about what companies actually stand for. I'm convinced of that.

Watches are an emotional business. People who buy our products are driven by their emotions. Nobody buys a watch simply to know what time it is. We are selling emotion. In the case of products like these, I believe consumers are going to do a lot more thinking during the purchasing process. I'm convinced this will be a key element in the years ahead.

Some people might think that a business predicated on an emotional response is tougher to run in difficult times. Are people going to be making different kinds of emotional decisions?

I really don't know if emotional products will be more difficult to sell than non-emotional products in the near future. But I would say that for both types of companies or products, your behavior, your long-term view, your ethics, your sense of social responsibility: all these aspects are key elements of the consumer's choice.

These days, when people buy things — and here I'm talking business to consumer — they tend to think about it a lot more than before. You no longer have the guy who's just made a good deal on the stock exchange walking into a shop and buying something for $10,000 or $20,000. That's all over. So people are thinking about what they buy. They think about the product. They think about the brand. They think about many elements.

Any company has to bear these issues in mind because everything today is wide open. There's public pressure on us. Thanks to the Internet, everything is in real time. All the journalists are out there, on the alert. If you make a mistake - it is all over the world in two minutes.

Do you think this period of financial crisis represents a moment of opportunity for people who want to think more in the long term? Or is it going to make it harder?

It's an opportunity. There's going to be a mind shift, because society is going through a mind shift. It's funny. I'm a member of the Young Global Leaders, which is part of the World Economic Forum. And Klaus Schwab [founder and executive chairman of the World Economic Forum] asked all of us to send memos giving our ideas. We had to write essays. I wrote exactly what I've just said. He told me that 90 percent of the group - there are 600 of us in all - wrote about ethics and morals. And I'm talking about business guys. They're all in top positions. Perhaps it's also a question of generation. Maybe our generation, people who were born in the 1960s and 70s, have a different attitude towards many things from previous generations, because we have much bigger problems with climate change, AIDS, epidemic diseases etc.

A very good friend of mine is in the board of directors at a Swiss Bank. We often talk about how the biggest philanthropists in the world are new money, not old money. Who's providing the money for foundations? It's new money, not old money. There is also the generation issue. But in this respect there will be a natural process of change.

Things like that also happened right after September 11. If people had been asked to write essays the way you described, you might have found the same result: 90 percent of them writing about ethics and morals. But we're where we are now. How long-lasting is the effect you're talking about?

The difference is that we are now in a huge economic crisis. September 11 was a devastating act by fanatics that rocked our concept of what is morally acceptable to its foundations, but what we face now is an existential economic destabilization, which directly effects everybody.

People are fed up. What are the successful brands today, in the crisis we're going through? Number one, brands with values, with content, with history: brands that offer reassurance. And second, brands that are not showy. People are cocooning. When you look at the figures for home decoration, you see that investments here are on the increase. Why? Because people are staying at home. Society is changing. Education is changing. I see what my kids are learning at school: Who turned the light off? Who turned the water off?

In the midst of these changes, do you think it's important to establish a common definition of corporate sustainability?

It could be interesting. To come back to Davos for a second, Klaus Schwab suggested that businessmen swear some sort of Hippocratic oath for sustainable management. I thought it was a very interesting idea, even though many people wouldn't follow it. But having a kind of agenda of this kind could be interesting. It's very difficult to establish, I guess, because businesses are so different. But there are nevertheless a few principles that could be established.

When you consider all the sustainability issues that affect us, which ones do you think will most affect management's strategic decision-making?

We can divide this issue into three areas. First, there's how you behave within the company, how you treat your people, how you build your corporate culture, how you involve your employees. We all want to retain our best people. We want them to stay and prosper with us. I think the spirit in the company is very important.

The way you do business is also very important. What kind of products, what kind of daily decisions do you take? Are these short-term decisions, designed to make short-term profits? Or will they help build up the company?

Finally, you have to watch your behavior towards external stakeholders, your shareholders or the town or the country you're based in, or the issues that might interest the general public, like climate change.

You mentioned climate change as one of the areas of concern you have to address responsibly because of pressure from stakeholders. Do stakeholders have other concerns that you think are going to push you as a leader in new directions?

I'm convinced that climate change will dominate the debate for the next 10, 20, 30 years, especially in Europe, the United States and a few emerging markets. Of course you can talk about education, health, war, all these matters. But what is the issue that really concerns us, the one where we really do have an influence? I believe climate change and preserving the natural world will be the dominant debate. The next one will probably be water, which is linked to climate change. I think the change to the climate will be dramatic and it’s already happening. Look at the changes in the automobile industry, for example: within 18 months its strategy has undergone a complete about-face.

How do you account for that?

Public pressure, the price of oil, changes in consumer behavior. This is what's happened to the American car industry. At any rate — and this is the approach that's also been adopted by the Young Global Leaders — I believe that if there's no economic incentive for companies to change their behavior, they won't do it. You have to show companies that they can make money and be good corporate citizens at the same time. And this — the idea that you can be successful as well as being a good corporate citizen - is the point we're trying to get across.

I've talked to the CEO of Timberland, which is a very green company. Timberland launched a boot made of recycled material, which has been a huge success. But Jeffrey Swartz told me it’s a huge success because it's a cool product, not because it's a green product. It's cool and it’s green. And this is the added value, which is great. But if it had been a bad product, it wouldn't have sold.

You talk about how you build your corporate culture and deal with people inside the business. Have you seen or felt different kinds of demands from them to change your culture, to behave differently?

No pressure. But we have a climate program. IWC is the first watch company in the world to hold certified carbon-neutral status. I’ve been here for seven-and-a-half years. When we launched the program two years ago, I had more positive response than when we were paying unusually high bonuses to all the staff. People were queuing up in front of my office. It was unbelievable.

You got better results from that program than you did from paying bonuses?

Yes, in terms of emotional response. People still like to get their bonuses. But the emotional response was much higher.

But if you've got limited resources and you're trying to figure out how to allocate them, do you think you're better off taking "X" dollars and applying them to bonuses or the kinds of measures that you just described to help advance on the sustainability front?

I'm 100 percent convinced that having these programs, having this reputation, is helping us attract and retain talent, even if we might pay less. We're paying the same amount as the others. But what we have is a huge competitive advantage and it helps us retain talent.

It was a purely top-down initiative. You can't implement these kinds of programs from the bottom up if you have the CEO blocking it. I've talked to many of them in our search for sponsors. All the cases I know from companies being involved in climate change or on these kinds of projects, it's always top-down, because it's such a cultural change. You cannot do it organically. Somebody has to take the lead, and I don't know one single example where it came from the bottom up.

Amid all the strategic agenda items that CEOs face today, how do you prioritize sustainability?

That’s a very difficult question because at the end of the day you need to make your profit, your cash flow, etc. So let's be pragmatic. People always have to do their duty. But when you talk to CEOs in Davos or in other organizations, sustainability is definitely on the agenda. But, again, let's not be naive. It is on the agenda, at least partly, as a result of public pressure.

You had the IPCC report two or three years ago and then the Stern report. Those reports on climate change were all over the press. Then the consumers reacted. You would be a very bad businessman if you didn't consider the sustainability issue. We get reactions from the public and consumers on this all the time. People are waking up in a dramatic way. It’s a new element of management — but you still have to deliver your profit.

You said two things that are really very interesting if we take them together. One, you'd have to be a naive businessman not to respond to the emerging pressure and awareness out there. And two, you describe how you get an enormous competitive advantage attracting and retaining talent by making the investments you do. Given both those things, how do you explain why other companies don't follow suit?

Some people simply don't believe it. You can't expect everybody to see things the same way at the same time. Some people say it's all nonsense, unnecessary panic. But I'm convinced that companies that incorporate all these aspects into their operations will ultimately be more successful than others. But it's like everything in life: some people believe in it and others don't.

So you view acting on sustainability challenges as a source of competitive advantage?

A hundred percent, yes. There are two ways of doing it: in your behavior as a corporate citizen and how you spend your marketing dollar. We have clear strategies. Companies spend a total of $750 billion a year on marketing. What we try to do is to spend our part of it in a meaningful way. You won't find our logo on a Formula 1 helmet. Never. We support projects that are sexy but also meaningful.

For example, there is an unbelievable expedition called the Plastiki Adventure from David de Rothschild. He will set sail in May in a one-of-a-kind 60-foot catamaran built of post-consumer plastic bottles and recycled material. The crew will navigate more than 100 days and over 10,000 nautical miles from San Francisco to Sydney via a number of ecologically threatened regions, which will include the Great Pacific Garbage Patch, a huge ocean waste dump in the North Pacific Ocean as big as Texas. Using the Plastiki as a platform for rethinking waste as a resource the expedition will not only raise awareness on the issues but will showcase smart solutions to beat waste. David de Rothschild is a remarkable personality and extremely smart; his adventures and messages are very captivating and will no doubt inspire individuals to act more responsibly. This is the kind of smart project we support. It's a different way of approaching marketing, and this is where we want to spend our money.

So it's not just about how to manage the company but also how we spend our marketing dollar in a meaningful way. I think this will also be much more of an issue for corporations in future. They'll have to ask themselves questions like: Do we want to invest in Formula 1? Does it make sense to put our logo on a soccer team shirt? Or shouldn't I invest a little bit in this project, which makes sense, or in this project, which also makes sense? How can you guide the $750 billion spent annually on marketing in the right direction?

What are the obstacles or difficulties that face your organization when you're attempting to meet sustainability challenges or adopting the kinds of initiatives that you've described?

In the company I'm in charge of, there are no difficulties, because I'm the boss and I just do it. Thank goodness I have the strong support of our employees and of Richemont, the shareholder.

Let me stop you for a second...

Oh, people are skeptical, sure. If you want to build credibility when you're doing the kind of things I've mentioned, there has to be a thread running through it all. As I've already pointed out, we have a clear way of spending our money. We've been doing it for many years. So we are not greenwashing ourselves with one little project. It is part of our culture, and we have established this over the years.

What capabilities do you believe your business needs to have in place or develop in order to meet sustainability challenges or make more effective use of the opportunities that arise?

We are really talking about soft factors here. It's all about having the right take on what is going on around you and adapting to it. Of course we have people who are specialists in the environment, but acting and thinking in a sustainable way is something you can learn by yourself. It's very much a question of attitude and the willingness to accept responsibility. You need to stay alert and interested to keep your horizons wide open. I would say it's much more soft factors than hard factors, which you might need to develop in your business.

Let me go back all the way to the start of our discussion and your notion of the long-term view. Is it hard for some companies to embrace this ideal?

Of course.

So how would you advise them? What would you suggest a company does to get from where it is now to thinking in the longer term?

There’s the huge problem of corporate governance. We need proper control mechanisms. The management needs to be effectively controlled by the board. One way or another, there must be new rules for corporate governance.

Secondly, while I am convinced that we need to work towards further economic prosperity, we must avoid the kind of excesses we have seen in the past if we are not to jeopardize systemic balance, whether be it natural, economic or social. Ultimately it's all about equilibrium of systems in life.