MICHAEL ELLIOTT: Welcome to this morning's meeting at the -- at the council. This is part of our "CEO Speaker Series." And of course, as you all know, we are delighted to have with us the chairman of Nestle, Peter Brabeck. Great, great pleasure to welcome you again to New York and with -- in New York's premier breakfast venue with New York's premier breakfasters ready to listen to you and quiz you.
Could I just ask everyone, please, to completely turn off -- don't just put on "stun" -- your cellphones, your BlackBerrys, all those devices to avoid interference with the -- with the sound system. And I'd just like to remind all members that this morning's session is on the record. This is not one of our off-the-record occasions.
So I'm joined on the stage by Peter Brabeck, the chairman of Nestle, the world's leading food, nutrition, wellness company, with, what, 281,000 or so employees in how many different countries, Peter?
PETER BRABECK-LETMATHE: Well, basically, we are present in every country of the world. And sometimes this provokes quite some issues, as -- (audio break) -- imagine, because when sometimes America decides that some countries are an "axis of evil," and you have some factories over there, you get into problems or -- so that's --
ELLIOTT: So you're everywhere.
BRABECK-LETMATHE: Basically everywhere, including -- we even have a representative in North Korea.
ELLIOTT: Aha. (Acknowledgement.)
BRABECK-LETMATHE: And the reason is very simple. The reason is that we have products coming in there from -- basically from China but not only from China. And we have to delegate one person in order to ensure that the quality of the product is right.
So it's -- normally it's always in order to ensure the quality of the product.
BRABECK-LETMATHE: Basically in every country in the world, you will find somebody from Nestle.
ELLIOTT: And speaking of the product, I hope everyone's managed to take some Nespresso coffee down in the back there. Little better than the -- no, it's not -- (inaudible) -- to say that. (Laughter.)
Have you --
ELLIOTT: Different. Have you -- you haven't brought George Clooney with you today, have you?
BRABECK-LETMATHE: No, because for one reason or the other, he just doesn't want to be in the United States --
ELLIOTT: I know.
BRABECK-LETMATHE: -- for a campaign. He is -- he agrees to be our ambassador all over the world with the exception of the U.S.
ELLIOTT: If -- those of you -- and I'm sure most of you do -- who travel to Europe to frequently will see in virtually every airport in Europe --
BRABECK-LETMATHE: George Clooney.
ELLIOTT: -- Glowing pictures of George Clooney with Peter's Nespresso's products. But as you say, you never see them over here.
Now, in the last -- in the last few years, Nestle has been at the forefront of this extremely interesting and I suspect important development in corporate management that Michael Porter wrote about in the Harvard Business Review -- just a few weeks ago actually -- on shared value. And you and he, I know, have worked together for some years on this.
So tell us about shared value, and tell us how you came up with the idea of shared value as a -- as a driving motor force for what Nestle does.
BRABECK-LETMATHE: Well, the story is relatively simple. And I know some of you were even present when this happened. It was up in Davos. Charles Schwab in the World Economic Forum in Davos, he had put forward as a main subject, corporate social responsibility. And he invited at that time Angelina Jolie and Sharon Stone and Bono and a lot of more -- people a little bit more (media-friendly ?) people than normally asked. And within, I would say, hours, the 1,500 entrepreneurs who are still the core of Davos started to talk about we have to give back to society. And there was not one who would not follow (him ?), and for five days basically we were discussing how we have to give back to society.
And it was in the closing plenary that I stood up and I said, look, I've heard you now for five years; (I will tell ?) something. Nestle and myself, I don't feel that we have to give back to society, because we have not been stealing from society; because if I have to give back something, it is because I have appropriated myself something which doesn't belong to me. Otherwise, I don't have to give back.
So -- and this provoked, of course, a big shockwave, and I left Davos with a -- with a question in my mind. I mean, this concept of corporate social responsibility, which in its initial stage was very close to philanthropy, that this was a problem for the CEO of any public company, because I personally believe that no CEO of a public company should be allowed to make philanthropy. I know this is shocking for the American environment, but I think anybody who does philanthropy should do it with his own money and not the money of the shareholders.
I can understand very well that Bill Gates makes money -- his money, and makes the biggest foundation, and this is great, and Warren Buffett makes his. But this is always their money. It's not the money of the companies.
So out of this conviction that on the one hand, we cannot make really philanthropy, but also from a second conviction that this -- which is also sometimes not really understood -- that a company can only act if it has two things, it gets a license from the society it is working in -- and this is many times just forgotten. It's given.
I mean, in the U.S., it's normal that you're allowed to have private -- (inaudible) -- activity. Well, if they go just not even 90 miles to the south and you go to Cuba, this same authority is not given. And if you go to Venezuela, it's not given, and in many countries of this world, it was not given. So we should not forget that as a company, we receive a license to be able to do our work from society. And the second thing you need of course is the money, which you get from the shareholder.
So out of this came the consideration that it is not enough for a company just to create value for the shareholder, because you are covering one aspect of yours -- of the licenses you receive; you also have to create value for the society at large which allows you to act.
So out of this -- then I read the article from Michael Porter, his first one --
ELLIOTT: Yeah, that's very -- (inaudible).
BRABECK-LETMATHE: -- which was corporate social responsibility and competitivity. So I read this article, and he had already in this part -- this saying that corporate social responsibility can be a competitive enhancer; it doesn't have to be a confrontation, which it was being seen many times in the past.
ELLIOTT: Or just a pure cost, indeed, yeah, right.
BRABECK-LETMATHE: Yeah. As a matter of fact, I mean, in -- five years ago still, corporate social responsibility, by this we have to give back to society, was an additional cost.
BRABECK-LETMATHE: It was an -- it was an add-on, yeah? And it was in a balance sheet under the cost item, frankly speaking.
So I got in contact with Michael and we started to discuss my idea about this -- I don't have to give any back to society and him talking about competitive corporate social responsibility, and we started to evaluate. And I asked him to make an independent analysis of the value chain of Nestle in Latin America. He went, together with Mark Kramer, his associate in this -- in this thing. They analyzed our value chain in Latin America, came back, and we've produced a public report, which became public, on what is the impact on society of a company like Nestle in the whole continent.
And from there onwards, we then started to create the (word ?) Creating Shared Value as this new concept of corporate social responsibility. Out of that, I created an Creating Shared Value Advisory Board, where certain of the most famous NGOs are present. Michael is also a partner there, but I mean, sustainability, a lot (of birds ?). There -- a lot of people are there which helping me constantly in order to refine this concept. And finally, he published in January the new Harvard business article, Creating Shared Value, where he gives the more I would say scientific --
BRABECK-LETMATHE: -- background to this idea, which, in our case, it's of course more a pragmatic one. It's a business proposition.
ELLIOTT: And as both Michael Porter wrote in a wonderful piece in the Harvard Business Review and as you've been saying for the (last years ?) the distinction here is not as an add-on function to corporate objectives but rather a key corporate, internalized, strategic objective.
BRABECK-LETMATHE: Yeah, I think this is a big difference. What it does, it integrates the corporate social responsibility of the company into the strategic thinking and decision-making of the organization.
If I can give you a very sort of (flawed ?) example on how it can happen and it can be positive for both. If we built a factory -- we made an analysis -- value analysis. If we built a factory, for example, close to a city in Europe or we built a factory somewhere in a developing country, the fact that we built it somewhere in a developing country, in a rural area has an enormous impact of value creation for society in this country, because, in most cases, the people are not there. So before we even start with building the factory, we have already to train people. We need mechanics. We need electricians. We need -- these small places many times doesn't have wastewater treatment.
BRABECK-LETMATHE: So we built the wastewater treatment for our factories, and we allowed the whole village to put the wastewater and do the same. So the value that you create is absolutely stunning when you start to (valuize ?) this.
Now, you can ask, but where is your shareholder?
BRABECK-LETMATHE: Well, the shareholder is -- because it also happens that if you are in this rural environment, the land is much cheaper, the labor is much cheaper and so that basically --
ELLIOTT: The supply chain is shorter.
BRABECK-LETMATHE: The supply chain is shorter.
ELLIOTT: Right. Right.
BRABECK-LETMATHE: But basically the value creation for the shareholder is not in conflict with the value creation for society, and on the contrary, it can even be for both of them very possible.
ELLIOTT: I've been interested in the amount of work you've done in this context on cocoa and particularly in Cote d'Ivoire. (Our nation ?) is -- of course, is sadly in the news at the moment. But the whole cocoa initiative has always struck me as very interesting.
BRABECK-LETMATHE: Yeah, I mean, there -- first of all, we have been working on the cocoa initiative for many years. We have -- as a matter of fact, we never had plantations.
BRABECK-LETMATHE: I mean -- (inaudible) -- a difference to some other multinational companies who come from a different background. But of course, we truly never had the colonies so, therefore, we never had this past. So we never had plantations. But what we did and what we are still doing is working very closely with the small farmers all over the world. We are working today with more than 600,000 farmers directly.
BRABECK-LETMATHE: And we are going to increase this substantially, cocoa being one. We are one of the biggest cocoa users of the world, of course. Cocoa had a part of the normal agricultural challenges which has to do with the quality and the hybridization and, therefore, not getting the same yield or not getting the same quality. So there are those issues which we can help.
But cocoa has another very bad issue, which is basically child labor and slave labor in some African markets. And this was a challenge which is not very easy to tackle. We started to launch some programs. But if you ask me today in some areas and without mentioning any country, this has not been resolved --
ELLIOTT: There's still work to do.
BRABECK-LETMATHE: There's still work to do. Because it's -- on the one hand, there is a very fine edge, which is difficult, and this is, of course, child labor in agricultural environment. It's almost natural. I mean, I always say the same thing. You go into Switzerland. We are in a wine-growing area for example. Well, still today, in the month of September, schools have one-week holidays so that the children can help in the wine harvesting. Yeah? Now, in Switzerland, this is absolutely correct.
So in those developing countries, this also happens. So you cannot only say you -- no child who -- they will be working the rural environment, because this is almost impossible. So you have to look at it differently. What you have to assure is -- what we try to ensure is -- that those children have access to schooling. So we are not anymore saying, you know, to the parents, you are not allowed -- that your child helps you in harvesting coffee, which is ridiculous. But what we are saying is we will help you that your child has access for schooling.
BRABECK-LETMATHE: OK? So we pay a premium if they can prove the children goes to school, for example.
ELLIOTT: Now, rural development as a whole is one of the three, I suppose, kind of big areas under which you've tried to develop shared-value programs: rural development, water -- you had an op-ed in the Wall Street Journal Yesterday -- and nutrition.
Actually, tell us a little bit about the piece that you had in the Wall Street Journal yesterday on the fair pricing of water, because I think a lot of -- lot of people who don't know the economics of water would look at that and say, well, Nestle or the chairman of Nestle is calling for privatization of water supplies, which is not actually your point, was it?
BRABECK-LETMATHE: No, absolutely not. But let me perhaps just put it in the --
BRABECK-LETMATHE: -- in the frame. You see, just to finish creating shared value -- one thing that one has to understand, that creating shared value is not hanging alone in the -- in the air.
BRABECK-LETMATHE: For me, the first and fundamental thing of -- before you get to creating shared value is, of course, compliance. I mean, that's a -- that's the bottom of the pyramid, of the value pyramid, to create the corporate social responsibility. The first a company has to do is to comply; to comply with the laws of the society they're working in; it has to comply with its own codes and regulations; and it has to comply, also very importantly, with your own set of values that you have -- that you have established for your company. And this is fundamental.
Once you have complied, there comes a second point, which is most important before you get to creating shared value. And this is the sustainability aspect. If we want to have our company that is going to celebrate the 150th (anniversary ?) very soon -- if we want it to protect another 150 years, we need to be using the resources that we need in such a manner that we are not only getting the resource today but that we are assuring today that we will have resources in 150 years.
So there's a sustainability aspect, part of corporate code of responsibility. And only then can you think about creating shared value. And we have been creating shared value -- it is my belief that every company has to really analyze its situation where it can optimize this common value creation.
Now, in the case of Nestle -- and this was a work together with Michael Porter. And we decided that the biggest opportunities we had were in the area of nutrition because we're the leader nutrition and wellness company, in the area of water, and in the area of rural development.
But as much as creating shared value is a concept that is absolutely open for everybody and we're trying and we have -- I'm very happy to say that already several of my competitors have embraced this idea -- each one has to make its own decision and its own analysis where they can really optimize in creating shared value.
So this brings me back now to the three area, why the three areas? Water was one of them. And water was one of them because it's another five years, more or less, that -- I approached in Davos again, I approached this subject of water. And as a matter of fact, there were eight people, 10 people in the room, who were interested in the subject of water because it was basically thought that this was not really important.
Well, it turned out that if you really look into the -- (inaudible) -- we are going to run out water much before we are going to run out of oil or of energy or something like this or long before we are going to have an impact of climate change. I mean, we are talking in climate change 100 years. We're talking on the energy side, the U.S. has today proven reserves for the next 200 years if you take oil and gas together.
I mean, so, yes, it is an issue in the long term, but the problem of water is the issue of today. We are already today overusing over the last couple of years more than 300 cubic kilometer of water, which is about 10 percent -- 8 to 10 percent of total water withdrawal, which is overused.
And who pays for this? The one who pays for it is the environment, huh, because these misuses that we have of water -- and we are misusing water in the most incredible manner -- is being paid by the one area that needs water, which is environment.
So you have -- give an example there -- five of the biggest rivers are not bringing water anymore to the sea for more than four or five, six months, okay? You have the Aral Lake, with -- 25 years ago, cities which were port cities today are 120 kilometer away from the water -- in 25 years, okay, basically because we are overusing -- we are overusing water.
Now, who is overusing water? The biggest water consumer is of course agriculture. Ninety-two percent of total freshwater consumption goes into agriculture. It's very interesting. Most people talk about the water we are drinking. Well, let's suppose we are drinking 5 liters of liquid of water-based, which -- for our hydration. What people don't understand: that we are eating every single day in the U.S., I would say, in the East Coast, perhaps 4,500 liters of water. When you go Texas, you (are at ?) 6,500 liters of water, because you need 1 liter of water for any calorie that you eat if it comes from a plant and you need 10 liters of water for any calorie that you eat when it comes from the meat. So it has a multiplying effect of 10 between plant and meat. Therefore, the Texans need a little bit more water, (eat ?) a little bit more water, (steaks ?). So that's the first thing.
The second is then of course industry. And in the industry side, it is mainly and very much so for energy production, so there is a nexus between energy, water and food.
And the last part and the minimum one is really for what most people talk about and which I also talked in this one op-ed which was published yesterday, which was in the household consumption. And in the household consumption, the water that we really drink is about 1.5 percent of the total freshwater withdrawal, okay? The rest of it, 9.9 percent, basically goes into toilet, showers, car washing, garden thing and things like this, okay? So those are the issues.
Now, in the -- in the -- in the household one, we have unfortunately a situation, just talking about waste, where in the developed countries, about 30 to 35 percent of all water is being lost due to leakage, basically --
BRABECK-LETMATHE: -- not sufficient infrastructure. And in the developing countries, it's up to 70 percent of the water is just being lost because there's not sufficient infrastructure.
We need in principle at -- a budget of about 500 billion U.S. dollars worldwide in order to get -- to get this infrastructure in place, but unfortunately this is not the first priority for nobody. And again, I was -- I had thought that when this infrastructure project would be launched, for example, in the U.S., that water would get a priority. It didn't get any.
ELLIOTT: Right. Right.
BRABECK-LETMATHE: As a matter of fact, Washington, D.C., okay, made the decision -- which is on the Internet; I saw it on the Internet -- not to spend $124 million to renovate its water infrastructure and allows today to have the old pipings full of (plomb ?) --
BRABECK-LETMATHE: -- which are basically poisoning us. And the argument was, on the Internet, that this food -- that this water poisoning was not so important to justify 124 million of dollars in Washington, D.C., to put this infrastructure into place, okay?
So you see with -- what value we give to water. Basically for us, water has no value at all.
ELLIOTT: Right. Whereas in fact it's a scarce resource, and so should -- right.
BRABECK-LETMATHE: And it is -- it is the most valuable thing that we have in the world --
BRABECK-LETMATHE: -- and yet we don't give him a value. That was basically the idea about the article. It was not really tackling the most important one. I did another one with Klaus Schwab -- (inaudible) -- which were more talking about the whole water situation. This was one was really trying to give value to the -- to -- and a price to the water, frankly speaking.
ELLIOTT: Here in New York, I have to say, we regard ourselves as having the best water in the whole of North America. And we are, as I speak, building a massive infrastructure project to --
BRABECK-LETMATHE: Yeah, which is -- which is good, but 64 million of Americans don't have access -- 64 millions of Americans don't have access --
BRABECK-LETMATHE: -- to good water.
BRABECK-LETMATHE: That's quite a lot of people. It's quite a lot of people.
ELLIOTT: Let's get some questions in for Peter Brabeck while he's visiting this morning. While you're thinking of questions, let me just -- your latest report on shared value is about rural development. Tell us -- tell us some of the -- some of the work that you're doing there. You've touched on what you do on education, things like that.
BRABECK-LETMATHE: Well, you mentioned at the beginning we have 281,000 working directly for us. We have 600,000 farmers which are working exclusively for us. And we have about 3 million of people who have their income --
ELLIOTT: Depending on you.
BRABECK-LETMATHE: Depending on us. So I mean, it's quite -- it's quite a big -- a big responsibility that we have behind. So if you look at the -- at the social challenge, you will see that the hungry people of this world are the farmers. This is another -- at least for me, was quite eye-opening, because we believe that when food prices are going up, raw-material prices are going up, that this is good for the farmers.
BRABECK-LETMATHE: The truth is, this is for the small farmers one of the worst things. So you have in the rural population 90 percent of the poorest of this world in the rural part of -- in the -- in the rural population. And therefore, we have said it is good for us and it's good for society and for our shareholders if we help this poorest part and give priority to them.
People in cities -- normally politicians take care of them because they fear them, okay, because they are a very concentrated vote and they fear them. And what happens in the Middle East, I think, is a good sign. If we look why most of the Middle East upheaval came was an increase of food prices, okay, in the urban area. But frankly speaking, very few people care about the small farmers. Most politicians care about the big farmers. All subsidies -- if you look at subsidy -- I mean, the amount of subsidies which is (going ?), most of those subsidies goes to the big farmers because all the subsidies are volume related.
BRABECK-LETMATHE: And who produces big -- it's the same.
So the enormous amount of small farmers basically have no real voice, and they're the ones who are suffering most. And that is why we decided that we wanted to work with them. And in order to help them get of this misery, which allows us fruitful -- to get an assured supplier, to get the quota that we need. And secondly, it also allows us, if they have more access, they become automatically our best consumers, so our best customers.
So again, it helps us. Every farmer that has more income will afterwards buy Nescafe or will buy Nesquik for the children or something like this. They also become good customers of ours. So it helps both sides very well. So that's the reason why we're concentrating on this area.
ELLIOTT: (Inaudible) -- tons of questions. Yes, gentleman over here first. Please identify yourselves when you ask a question. Here and then the lady there, and then over there.
QUESTIONER: David Vidal from the Conference Board. There was another article in the HBR recently -- or maybe a couple of months ago -- by Dominic Barton. I don't know if you've guys have seen that one -- which -- where he addresses, I think, one of the main questions in this whole idea of shared value in terms of how it can actually happen.
What Barton was saying is that there's so many structural impediments in the ways that equity markets handle the arbitration of whether or not you're creating real value because they have such tremendous short-term buyers, that really doing shared value requires a longer-term horizon than the incentives of the market permit.
How do you propose to overcome, maybe through another project, these structural impediments that really keep most companies, which is the large majority -- you guys are a leader -- from doing anything like shared value because the markets just won't let them?
ELLIOTT: Thank you.
BRABECK-LETMATHE: Well, that's a very, very, very interesting question. You see, we have -- from the beginning, one of these set of values that we have, which we call the "Nestle Management and Leadership Principle" (of ?) the Nestle corporate principles, we have anchored into them that we are a long-term thinking company. And it is three years now again that I proposed to the shareholders that we should change the articles of constitution of our company and we should put in there that we are committed to the long-term sustainable shareholder value creation. And 99 percent of our shareholders approved that.
Now this of course gives the management enormous power, because we withdrew from any stock market where we were demanded to have quarterly profit interest -- profits results. We do not publish it.
Now because I know very well that the moment you publish it, there is no way that your management is not going to be short-term oriented, okay, and that's about the worst they can be, if you believe in the concept that I said. So you have to be consequent, and this was the reason why we went to our shareholders in the general assembly, we presented them Creating Shared Value, and we changed the article of association, in order to be coherent.
Now this is not -- this is good news for those shareholders who really have an interest in the company in the long term. It's a little bit less good news for the very short-term shareholders, hedge funds and (central banks ?). Now they still have -- there's still sufficient volatility coming from the outside, okay, so that they still have a place to play it, but of course it's not the same thing that if you have a company that will constantly work on short-term results, which is quarterly results. You will not get this from us.
ELLIOTT: I can see a number of people in the room listening every carefully to that one. Lady just -- yes.
QUESTIONER: Patricia Rosenfield, Carnegie Corporation. And I want to thank you very much for what you've done. And I was at the World Health Organization and followed closely the really innovative work that Nestle took on many years ago, and I want to thank you and the company for that.
BRABECK-LETMATHE: Thank you.
QUESTIONER: I want to ask -- I want to say that what you're actually doing is philanthropy as Andrew Carnegie a hundred years ago -- more than a hundred -- in 1889 proposed it in his "Gospel of Wealth." And you are following almost exactly the principles, so I'd be delighted to share that with you. A younger -- we're a younger organization, Nestle's, having been set up a hundred years ago, but it really is a kind of philanthropy that you're doing that is absolutely showing the linkages between private-public partnerships and I -- in the most exciting way. And so I really want to commend you for that. But it is philanthropy in the best sense of the word.
And along those lines, my question is, one of the things we've learned from those of us who have worked in international philanthropy over the years is that for true sustainability, we can't do it alone. We have to work in partnership. And it's -- and while you have the license from society, the most important partner, somewhat countervailing public opinion, is that we have to really figure out how to work with government and sometimes to shape government policy, to work with governments as they look at new policies.
So I wanted to ask you, as part of the shared value equation, how you look with -- and working with government beyond the licensing, which is very important as a first step, but as you invest in rural development, which is the really the bugbear of development initiatives, how you look to government as your partner to sustain the initiatives that you've created.
ELLIOTT: Good question.
BRABECK-LETMATHE: Yeah, thank you very much. I will abandon the question of whether it's philanthropy or not. I'm -- I have different opinion -- (laughter) -- but I mean, I respect of course yours.
But that -- the second part of the question -- I mean, it is very clear that the societal problems of today cannot be solved by anybody -- by anybody alone. Yeah? It doesn't matter how much money you have. It is -- you always need to have this in a partnership. So the public-private partnerships are certainly a very important part to that.
Let me just give you the example of water, what we did. As I mentioned, four or five years ago, I talked about water the first time because I had made the study and I was surprised to see what the real situation was and how acute the crisis was.
So I started to talk about this. I then started to talk to some of my colleagues, some of them of very important American companies, and they also understood how important this water issue has become and we created the coalition of five multinational companies, of which I took the leadership. We then invited the World Bank, the International Finance Company, and finally we engaged McKinsey, and we said let's get a fact-based document which really gives us an argument vis-a-vis governments that something has to be done.
We analyzed 154 water basins of the world in detail, because the problem is, with water, it's not -- you cannot -- you know, 1 liter of water in New York saved doesn't help you in the Sahel. One kilo of CO2 not being emitted in New York has an impact, but 1 liter of water not being used in New York doesn't have an impact on things.
So you have to go water basin by water basin by water basin. And we did the abatement curves of McKinsey. We looked what are the solutions for each one of the water -- of the water basins, what has to be done, what could be done and what are the costs.
That was financed by us. It was done through the IFC and McKinsey. And then, we went back to -- up to the -- (inaudible) -- and we presented this -- represented this. Now suddenly we were out -- we were about 400 people in the room, and had quite a lot of government.
And then, I went to the most important -- three of the most important countries which had an issue, and I talked basically to the president or to the minister that I could, or was available, and we engaged them.
And this year, we presented in the -- (inaudible) -- again, in a three-hour plenary session, we presented the results of the implementation that we have been doing with the Mexican government, Jordanian government and the Indian government. And now we have 14 governments lined up. As a matter of fact, I go from here then afterwards to South Africa. South Africa really has lined up. Then in June, we go to Mongolia. The Mongolian president came to (Weber ?). And this is now engaged. We have 14 governments who are now lining up.
There is one fundamental principle that I establish each time when we go into this thing. The first thing is, we are not going to write policy. We are going to help. We are going to give you tools which we have worked out. But we are not going to write policy. To write water policy is the responsibility and the only responsibility of government; should never be done by multinational companies. I mean, this would never -- and the second one is, those governments have to be involved. They have to pay. They have to financially participate in the cost of the project, because otherwise it's too easy. I mean, otherwise it's like in the good old time: you send them some money, and then they do whatever they want with it. No. They have to finance. They have to become a partner in the things. We give all the tools, we give the intellectual work to them. But the writing of strategies and policy is always in the hands of governments. So that's basically the way we manage that.
ELLIOTT: But just to pursue that a little while, your argument and Michael Porter's argument in the HBR would be that although there are distinct roles for government, for corporations like yourself, the civil society, what-have-you, all of you -- all of you in the shared value movement, if you like -- now agree that massive social problems cannot be solved by any one of you individually. So while you may have distinct roles, you have to work together, right?
BRABECK-LETMATHE: That's exactly what I'm saying. Yeah.
BRABECK-LETMATHE: But I think there is another -- I mean, a danger which I feel. There was a time when also under this corporate social responsibility argument private companies started to substitute part of the responsibility of governments. And I think this is something that we should not be doing, and we should be very clear about this. I mean, educational reforms or water policies or -- those things belong to government. And it's not for a private enterprise to substitute, even if the government isn't good enough. What you have to do is to help the government to establish its role. But to try to substitute I think is wrong.
The other aspect which is being criticized today, and I think there is also something, is when you are very -- when you have a very strong, say, financial background, that you start to put the priorities of development and development aid. And that's just happening now. I mean, there are some countries who start to be very, let's say, critical about when big foundations decide, you know, that the priority for Africa is the elimination of malaria, to say some, OK? And governments have a different one. I think you have to respect -- you have to work with governments in order either to convince them that this is the right priority, but not to impose that. So --
ELLIOTT: Right. Question down there, and then back here.
QUESTIONER: Hi. Stephen Foley, from The Independent Newspaper of the U.K. As the largest food company, you're on the front lines of food inflation at the -- at the moment.
And I wondered how you weighted the different factors behind the rises of all these prices, whether you -- whether you see speculation and loose money being a factor, or whether it's purely a demand issue. And I wondered how large and how dangerous you saw the consequences that might play out across the world from these rising prices.
BRABECK-LETMATHE: Yeah, I mean, this is -- this is of course a very -- a very large subject.
First of all, I think you have to distinguish more clearly what are the fundamentals in this thing, what is temporary and what is, like somebody was saying, irrelevant. And unfortunately I would say today politicians are concentrating on the absolutely irrelevant one and are not even aware of the fundamentals. Now, give me -- allow me to give you just three examples of what is fundamental, what is temporary and what is irrelevant.
Fundamental is that, first of all, we have productivity growing in agriculture over the last 10 years, which is slower than the demographic growth. That's a fundamental. And this is new, because 20 years before, the productivity -- agricultural productivity was higher --
BRABECK-LETMATHE: -- than the demographic growth, OK? So that's the first fundamental. It's always the same. When you have demand which is -- which is higher than supply, well, normally --
BRABECK-LETMATHE: That's one thing.
The second fundamental is that we are running out of water -- I don't have to come back to this one -- and that we make some political decisions which are absolutely absurd. The fact is that you need 4,600 liters of water to produce 1 liter of pure ethanol. The fact is that you need 9,100 liters of water to produce 1 liter of biodiesel, OK?
Now, again, just a sign what value we give to water, because if water would have 1 cent of a value, we wouldn't do that (thing ?), OK? And yet you do.
So we are running out of water where we already have problems to have sufficient water for the production of food. Today 35 percent of U.S. corn goes into biofuel, which is, from an environmental point of view, absolutely nonsense. More nonsense is if -- when we are running out of food for the rest of the world, to put food into fuel. So therefore, fundamentally, there's only thing to be said: No food for fuel, OK?
I give you another fundamental of those things to stay with -- to stay with this. And that is, I had an interview just last week with children -- schoolchildren who came to interview me about environmental aspects. So I asked them -- I said: If you have a market that is 20 times bigger than the other market, and you want to substitute of the big market 20 percent with the small market, OK, how much does the smaller market have to grow so that you can substitute that?
I mean, they were about 8 to 10 years old. We were sitting down, and they came back and they said basically you have to triple the smaller market to substitute the 20 times bigger market 20 percent, which is absolutely right, OK? Not so difficult. Schoolchildren do that.
Now what is our politicians doing? Our politicians tells us that they want to substitute 20 percent of the energy market with the food market. Those markets are calorie, don't forget. It's the same thing. You need 2,500 calories daily in order to have your machine going, and the car needs the fuel, calories, in order to get the car going and the thing going.
So what we are saying -- what we have been saying before their first spike was, publicly, that 20 percent of the 20 times bigger market -- because the energy market is 20 times bigger in calories than the food market -- had to be replaced by the food market, which was a clear indication that the food production has to triple, to triple in order to be able to come up with a political -- (inaudible).
Now, what is the result? Well, the food prices are going up. I mean, frankly speaking, it's not very -- it's not very complicated, yeah? But at the same time, you have a problem with productivity when the same time you have a problem with the main resource you need in order to produce this food, when at the same time you have a population growing to 9 billion, when at the same time, as I mentioned before, the Chinese and the Indians for the first time also like not only to have a bowl of rice but a little bit of chicken and meat on top of it, with a multiplying effect on agricultural production, which I mentioned before. So those are some of the fundamentals, OK?
Now, the answer of the politicians -- since I had the privilege to be the representative for private enterprise at the last G-20 and I'm working with -- answer -- it's now -- this question is now number-one priority for the G-20 meeting in Nice. And the main reason is because we're going to fight against speculation. OK? That's an irrelevant part of it, because speculation, the only thing it can really do is increase the volatility. OK. Now, you can talk about volatility, but if you don't get the fundamentals in order, OK, speculation is irrelevant. But of course we are concentrating on the irrelevant in this thing. OK?
And the -- and the temporary part of this is what is happening, the droughts that there were, which is true. This had temporary effects. You had the floodings at the same time -- floodings in Pakistan, floodings in Canada; the droughts in Russia, the droughts in Argentina. Those are the temporary issues which have an impact on a -- on a -- on a yearly (base ?) but doesn't have really an impact on the long one.
Now, if some fundamentals come together with some temporary aspects, then, of course, you also have a higher level of the irrelevant, which is speculation. But you will not solve the problem if you're working on the irrelevant. You have to solve the problem when you're starting on the (big side ?). That's basically that.
ELLIOTT: Do you think -- do you think no food for fuel is a campaign that is starting to get traction, or do you think --
BRABECK-LETMATHE: Well, unfortunately -- and -- or let me say two things. In Europe, we have been successful in the sense --
BRABECK-LETMATHE: -- that the European parliament has now brought back the target of (20 to 5 ?) percent --
BRABECK-LETMATHE: -- which was a big step forward. OK? Because perhaps we were hurt more because (I will talk more in Europe ?) about it. In the U.S., it's just the contrary.
ELLIOTT: Yeah, I know.
BRABECK-LETMATHE: The secretary of agriculture just had made last week, I think, a statement which was absolutely flabbergasting. When they -- when he was asked about the question that now 35 percent of the maize goes on the -- (word inaudible) -- he said, we have sufficient maize for food, for fuel, for feed and for export, because the U.S. is now starting to export biofuel into -- outside of the U.S., not only trying to put it here but even start to export and he thinks he has no problem with this issue at all and this has no (problems ?). So I don't think that here we have got anything (close to it ?).
But I think it is absolutely immoral to push hundreds of million(s) of people into hunger, into extreme poverty because of such a policy. And therefore I think -- I insist no food for fuel. It is as simple as that. This doesn't mean that you cannot use afterwards the stems of the maize or the -- (inaudible) -- biomasses or second generation. I personally believe very strongly, for example, the new technology of the algae --
BRABECK-LETMATHE: -- which is being produced in salt water -- salt water, we have enough. It uses CO2 as feed, which --
ELLIOTT: We have plenty of that.
BRABECK-LETMATHE: We have plenty of this. We can use that.
ELLIOTT: Right. Right.
BRABECK-LETMATHE: And algae produces excellent oil, by the way, both for the -- both for the -- for fuel and even for food. So there are ways of this. But what we are doing just now is absolutely nonacceptable, I'm sorry.
ELLIOTT: Very good.
Gentleman here. Identify who you are. And I think this gentleman back there.
QUESTIONER: Good morning. I'm Bill Abrams. I'm with Trickle Up, which is an NGO that works in rural development. And my question is, how do you propagate and institutionalize your philosophy within Nestle? It seems that it would fundamentally change financial systems, the way you keep score, incentive and reward systems, how you make investment decisions. So I'm curious how you build a permanent culture and permanent systems around these ideas.
ELLIOTT: Actually, let's take -- let's take the gentleman that has been trying to get my attention. Perhaps you'd take two questions at once. Yeah.
QUESTIONER: Good morning. My name is Jay Worenklein. I'm with Bingham McCutchen. My question to you is, it's very clear to me that you're focusing on some of the most basic issue, fundamental issues, such as how do you price water, no food for fuel, et cetera. So I understand that. I give you enormous credit because that could change so very much of the problems that we're facing.
But when you look at today the magnitude of the -- of the problem of access to water, both clean water and sanitation around the world, I'm wondering whether you've had any experience at Nestle in the ability for Nestle or other companies that you've partnered with to undertake the delivery of clean water or sanitation in some of the areas that you serve in a way that represents a partnership between Nestle and some of your colleagues in the business sector and governments to actually deliver through the private sector to execute. I mean, clearly the management's capability is execution, compared to government's capability, which is policy formulation.
I'm wondering if you had experiences in this type of sector.
ELLIOTT: Very good. Let's take how you internalize creation of shared value in your internal systems -- HR incentives, getting everyone to kind of think about it while they're doing their daily jobs -- I mean, that must be a huge job, right?
BRABECK-LETMATHE: Yeah, I mean, you're absolutely right. The most important thing, especially in a company like ours, which is highly decentralized, that people -- (inaudible) -- different steps understand and apply this strategy.
First of all, we do something new. And that is, we start to report about this, Creating Shared Value, the same way as we are reporting the value creation for our shareholders.
So if you take -- if you take, for example, today a shareholder report, you have basically three documents. You have a general document, which talks about what the year was. Then you have the financial reporting, which is according -- accounting rules and (total staff ?), which is -- and then we have Creating Shared Value report. And we have the same transparency. For example, if you take the one that comes out here, you will have about -- somewhere about 120 key-performance indicators that are there.
For example, in the area of nutrition, we would report how many products have last year been reformulated in order to improve the nutritional profile -- 6,872 I think it was last year, for example, okay -- or how much water have you saved? How much here too we have been using less? How much (this ?), how much (that ?), et cetera. It's a full report exactly like a financial report. And we have standards so that -- to the outside world, we are talking about Creating Shared Value. Well, this is Creating Shared Value for the shareholders. This is Creating Shared value for society.
Transparent, open, clear -- everybody can look at it, everybody can discuss with us what we have achieved. Sometimes we don't achieve all what we want. We also, as I mentioned before -- for example, I mean, I recognize that in the area of child labor and slave labor, I don't think we are where we would like to be. It's just today very difficult to do in Ivory Coast what we -- what we would like to do because we cannot get in there into this place. We are in Ivory Coast. We have still the factory running, but we don't get into the area where, for example, this child labor still exists.
So it's very transparent. And through that, our organization understands, as we are demanding -- because the (top ?) -- the (top ?) report is just an accumulation, a consolidation of all that comes in. So we are demanding the same reporting coming from the roots up, from every factory up, up, up, up, up, up. And this allows us also to establish in a -- in a -- (inaudible) -- system that the Creating Shared Value aspect is a part of the targets of management but even down to the local level of factory managers and factory people get a target on Creating Shared Value.
So it is -- it is a fully integrated, transparent, open-to-the-outside system, which allows it follow up and -- the same way that we have the financial reporting.
ELLIOTT: And then the gentleman's question on --
ELLIOTT: -- on water.
BRABECK-LETMATHE: Water delivery, the delivery. I mean, what you are really -- you're touching on another subject, which I normally avoid to be too concrete, because especially in Europe, they are being pushed into (ask ?) a lot: Are you for privatizing the household water supply?
BRABECK-LETMATHE: Now, the answer is in today's world, 3 percent of water supply in the world is privatized. Ninety-seven percent is in public hands. Unfortunately -- and I have to say -- that even there where it is privatized, the question about leakages and waste is no different to the area where it's not privatized.
And one of the best is not -- I think it is even the best system, water system, with the least leakage is -- at least for me it was the biggest surprise -- Phnom Penh in Cambodia. And it was one person, one man who transformed this water system, which was one of the worst corrupted in the world, transformed it into the most efficient one. There's only Singapore -- I think Singapore and -- (inaudible) -- are the leaders in the best water system.
So it doesn't have to do really whether it is privatized or not privatized. It's an -- it's an aspect of management, management capability and willingness to (give a price ?) to water.
ELLIOTT: In fact, I think in that -- in that Wall Street Journal piece you wrote yesterday, you pointed out that the system in Cambodia wastes only a fourth of the amount of the Thames Valley system in the U.K., the biggest system in the U.K., which is privatized.
BRABECK-LETMATHE: Which is privatized. That's why I'm saying. So it's not a question about privatization. It's really a question about management.
ELLIOTT: Peter, you come from Carinthia, a beautiful, absolutely beautiful part of Austria. And you've been climbing mountains and trekking in high country all your life. And I think you should tell people where you're going when you leave here, seeing as how I was green with envy when you told me what you were going to do next.
BRABECK-LETMATHE: Oh, I'm going to Alaska, back to Alaska. I like Alaska a lot. I think it's one of the most beautiful (countries there are ?). And I hope I will have a good week of skiing up there.
ELLIOTT: Very good.
Tell me -- tell me what you've -- what you've got out of mountains. I mean, you've climbed -- you've been climbing mountains since you were a student. You -- I know you tried and very nearly got to the top of Aconcagua, the largest -- the tallest mountain in the Americas. I'm a great mountain trekker myself. I'm not a technical climber like you are.
What do you -- what do you -- what do you get out of being in the mountains?
BRABECK-LETMATHE: Well, it is true that mountains have been always part of my life. As a matter of fact, I mean, with 2-1/2 years, I was on a pair of skis with my parents, and with 10 years, we were climbing on a rope, because my parents already took me up. And from then onwards, it has been an -- it has been part of my life. So I don't make a separation between my life and the mountains; it's just one thing.
BRABECK-LETMATHE: But I think there are several things I have learned which I have taken over for my values and the way I behave. One is that -- a very simple one. I have learned that the most dangerous thing is to come to the top of a mountain and having given 100 percent of your efforts. It's almost a condemnation for death. That's -- most of the accidents in the mountains are happening when you are going down.
BRABECK-LETMATHE: That means that you have to be conscious enough. The summit is important, but the only successful mountain climber is the one who comes back to the valley healthy. Otherwise, you might have been to the summit; if you are dead by the time you are down, that was not very successful. (Laughter.)
BRABECK-LETMATHE: And I think this is a little bit in business the same thing.
BRABECK-LETMATHE: I have seen too many people who are trying to give everything, everything, just to get on top of this thing. And then afterwards they fail miserably.
So that was one of the learnings.
BRABECK-LETMATHE: I mean, don't -- if you need to give more than what you really have to get on the top, don't --
ELLIOTT: Don't do it.
BRABECK-LETMATHE: Don't do it. Don't go to to the top. I mean, you can still have a happy life if you don't go to the top, frankly speaking. (Laughter.) Having been on the top
And the other thing, of course, is before you get to the top, prepare the way down, so they are not taken by surprise at suddenly you're now on the top and then suddenly you come to the thing; well, there's a huge void in front of you because you never have thought that one day you have to go down from this thing. Okay? Think when you go up what you are going to do when you go down, and prepare (the pathway ?).
BRABECK-LETMATHE: Again, so very simple things in this sense, okay?
The other thing is -- and this I got from -- (name inaudible) -- who was one of the most important mountain climbers. There are two different types of mountain climbers. There are this more famous one, which is this lonely, lonely (tiger ?) --
ELLIOTT: Like Reinhold Messner.
BRABECK-LETMATHE: Reinhold Messner, for example. Yeah, he was one of them. But there are many other of those, whose only thing is they do it alone, they do it very fast, they do it -- and (to have ?) another thing.
And then you have -- you have another type. Those are the people who can bring a group of 10, 12, 15 people on the high summit of the world -- (name inaudible).
BRABECK-LETMATHE: And I admired him. I spent with him a lot of time because there you can learn how you're using people in different stages of an expedition. And as an -- as an expedition leader, you will celebrate that you bring two or three on the top. But you will only get them up there if all the others do their job well.
And I thought this was very interesting also for your professional career. If you learn how to really take advantage of the strength of each one of your team -- and every person has strengths, but they don't have the same strengths for everything, yeah? So some people, for example, are extremely good on the mountain in order to prepare the first -- building up with the first two camps. You wouldn't use a guy whom you are going to use for the final --
ELLIOTT: Right, to do that, yeah.
BRABECK-LETMATHE: To do that, okay? Some other people have other capabilities. They are good meteorologists. They can help you to make -- to make the right decision, when you go and things like this.
And the same thing is in a company. If you analyze your people, where do they have the strengths, and put them afterwards in a position where they can optimize their strengths in the organization, I think you make people very happy because you let them know and you build on their strengths. And you will be more successful through a team.
So that's another thing which came out from the mountain experiences.
ELLIOTT: The next session in the CEO series here, breakfast here at the council, will be Randall Stephenson from AT&T. Now there's a man in the news. You could ask him what is going to happen to your mobile phone bill over the next six months -- go up, I suspect.
Our friends from Nestle have got copies of a book on Peter, which I have read, and you'll hear some of these stories about mountaineering and so on -- I suppose back in the lobby back there, Helen (sp), is that right?
It's been absolutely fabulous. Please join me in thanking Peter Brabeck. (Applause.)
BRABECK-LETMATHE: Thank you.
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