PAUL GILDING

Paul Gilding at the Sydney Mining Club

I want to take you through some general ideas about what I think is happening in the broader economy - and try and take you outside the mining industry for a while. I will then come back and talk about what that means in terms of your particular industry.

The main thing I am noticing in our work is that there has been a really significant shift in the attitudes towards sustainability - across industry and across the world - in the last 12 months. Sustainability has shifted in many ways from being a rather interesting obscure outside question with a few directly relevant components, like environment regulation, and has become a much more profound issue of business strategy.

For our company, our work is providing business strategy advice to corporations on what sustainability means to business. that means that our work has shifted from trying to explain what is sustainability to companies to working out what to do about it. That is a profound shift, because once companies start to act on these sorts of issues, we will see change accelerate significantly and shift significant volumes of capital and value around the economy.

In many ways I can sum it up by saying that our work as a company is about 'How do you feel about shareholder value and sustainability?' So the first question is 'What is sustainability?', and the second question becomes 'What do we do about it?' And what do we do in a business sense means how you feel about value. What does this means in terms of generating greater shareholder wealth - and I would argue also generating greater societal and environmental health.

What this is all about is a shift in the economy - an economy effectively in transition, an economy shifting away from an industrial economy and a much greater shift towards a knowledge economy. I will explore that in more detail later.

First, let me explain what I think the function of business is in society. It is important if we are talking about an issue like this, which is how a major change in our business life is conducted, to think about what businesses do. In my view, the function of business is to deliver wants and needs. But to do so in the context of values and beliefs. So it is not just about doing what we think will sell; it is doing that in line with society's values and beliefs. Of course, both those things change. Most businesses understand that wants and needs change all the time, but fail to understand how profoundly values and beliefs have shifted in the last decade or so.

There are some major change drivers changing the way the economy functions - I will list several of them today. it is partly about our values and beliefs. I think it is only possible to understand sustainability in that context.

First, and perhaps the most obvious is the issue of environmentalism. This is a victory of ideas over changes in behaviour. But the victory of environmentalism is that certainly everyone in this room and in most places of leadership around the world in virtually every country in the world would agree with the basic idea that the environment is a good thing. We live in it; we should look after it, and if we don't, it will come back and bite us. So it means that we believe that the environment is an important aspect of our lives and should therefore be treated seriously.

The second and parallel trend which I think is equally profound is the victory of capitalism. Democratic capitalism - I don't count capitalism unless it is democratic because it doesn't work properly - is the system of choice for those who are normally given a choice. For an old Lefty, this is sometimes hard to swallow, but I need to do that, because the reality is the evidence is all in. Virtually every country, every people, given a democratic choice, will choose some version of western liberal democratic capitalism over any other alternative.

But it is not profound in just economic systems. There is about how we organise our society, about how we apply our market principles, thinking about customers, thinking about value. This is a significant shift in the way we organise our society. But also, therefore, a significant shift in the way change occurs. And that is what we are here to talk about today.

A parallel shift is the retreating or the changing role of government. Government has always and will always be with us, but the role of government and the retreat of government from active intervention in the economy is a profound shift. It means, for example, that when we seek to achieve a change, like we are currently doing on climate change, then we tend to apply a market context and system to that change, as opposed to the assumption that will apply taxes. But we will still apply taxes; there will always be government; there will always need to be regulation. But the role of government has shifted quite profoundly. And that again is a choice. It is not a conspiracy by big business to be given more freedom to pollute, control and dominate society, as some would argue. The retreat of government is a choice that we are making at the ballot box to achieve the task of governments that are taking up those sorts of policies.

Fortunately, in that sort of situation we have the strengthening of civil society. There is now a grouping of society - some call it the third society, or civil society, or the NGO society. There is a whole bunch of people out there organised into a grouping, which I would call civil society - which is not government and is not business. It therefore virtually covers everything else. It does not just include environmental NGOs. We are talking about a great grouping of society organising into units with a civil agenda applied to a commercial or government agenda. There has been an explosion in the power of civil society in the last few decades. There is now a larger and permanent force in moulding society - in influencing government policy, in influencing corporate behaviour. It is an entity which needs to be seen in that market context.

The fifth trend I would like to explore is broad-based globalisation. The mining industry understands globalisation as an issue has an impact on the economy. But it's much more than free trade. Broad-based globalisation is very much about thinking differently about how to organise our society. It means that we think on a more planetary scale. It means that we tend to have more aligned values, if not different cultures. It also means that we have access to a whole variety of information and cultures that we didn't have previously.

Globalisation is much more than the globalisation of capital and the globalisation of the economy. It is a profound change in the way we think.

The sixth trend I refer to is technology developments. We can go through many of those, but I think the most significant one is the Internet, obviously - that is well understood. There are many other technology shifts, but we are getting technology development which no longer just produces new products. We are getting technology shifts that are changing the nature of the economy, changing the nature of our lives, changing our democracies, changing the way we organise our society. This is technology on a significantly new scale, on a much faster scale.

Finally, I list the communications revolution as an enabling revolution in a sense of all the other changes we are seeing. The reason we are seeing globalisation and values is because of the communications revolution. The reason why it is so powerful is because it is the vehicle through which we can communicate. It means that an activist group in the Philippines with a $3,000 camera can take broadcast quality video photos of someone's mine site and communicate with that video via the Internet. Access to information, access to media, access to get your message out is certainly a very powerful and relatively cheap opportunity.

This means a lot. These are profound changes. There is no time in this forum to go through them all and explore them in great detail. However, I should like to draw a few conclusions on what I think the profound impacts are of these seven drivers.

The first is the change in the nature of the role of business in society and the way business interacts within society. I have referred to the old economy and the new economy in my examples, but let's just for now generalise and call the old economy the industrial economy, and the new economy the knowledge economy.

In the old economy it was about command and control. It was about business being an entity in its own right, communicating or interacting with external drivers. So governments, the NGO community, other communities were things that were out there, away from the company. There was a force on the company to reply and respond and to interact with these things. But these things were all outside the business. The company was the business, and in that economy which is the reality presently for most companies, these things are outside and things which we must react to, as opposed to integrate. It assumes that other players are external but influential, and it creates an assumption of attention.

What we are shifting towards now, in a new economy, is a sense where the business is fundamentally the interaction of those players as opposed to the company. I would describe it in terms of integrating the business into society - taking the business from where it is and saying that it becomes part of a society, and again thinking in terms of knowledge economies and so on. This means that players such as civil society, government, etc. become part of your business. The interaction with those players is effectively negotiating a business strategy with people who deliver value. So, as opposed to this NGO being the enemy who must be destroyed, this is simply another player in your business system. It is a system of how your business works, and therefore interacting with those players is part of doing your business as opposed to dealing with an external problem that must be dealt with. And like your business, it assumes that you are negotiating to add value, as opposed to negotiating to be allowed to conduct your business. So, working with external players previously has become negotiating business arrangements with partners in your business. So, it is a different way of thinking about the interactions.

This is fundamentally a different economy. This about how do you work with people on a much faster timescale, how do you respond to market shifts that are happening at a much more competitive and global rate. It's about the nature of value and requirements for success, moving away from products and transactions and increasingly towards services and relationships. So the relationships in many ways become the business. For a mining company, for example, lowest costs are always an imperative, but the capacity to deliver that product may be a result of relationships with the NGO community, about relationships with governments, about creating an image in the community in order to get mines approved, in order to get projects up with lower risk and therefore higher return.

It therefore means that strongest reputation and knowledge becomes a core competency of that business and a core competitive strength. It means that shareholder value is increasingly created as a result of reputation, relationships and knowledge. Reputation have always been important, but what I am saying is that the proportion of value thus created in those areas is now much greater.

I have heard someone recently refer this as rather being a licence to operate, this is about the licence to grow. But the licence to operate has always been issued within a regulatory framework or perhaps through community pressure. The licence to grow, especially in the resource sector, is about how fast can you grow in an extremely competitive local industry. The point about relationships is about access to land, support from governments and support from the community. There is now different set of relationships that need to be developed.

In this context, sustainability becomes crucial. Sustainability can be best understood in the business context by saying that it is about society's expectation that business adds economic and social value to society. All the debates about sustainable development are very interesting and important. It is not primarily a business question. It is a societal question that business can be involved in. The way to think about sustainability is that people expect new things of companies. They expect the company will add value - economically, of course - but also add value socially and environmentally.

If you are damaging the environment, you are taking away value. If you are damaging the social infrastructure of a developing country, you are taking away value. If you are building up the social infrastructure, you are adding value. So the framework of thinking about it should be in adding value to society.

In the old economy view, we saw these things as external impacts. The way we should see it - and this is an idea I developed with Gavin Murray from - is to see sustainability not as being an external thing that must be integrated into your business, but seeing it as the society and the marketplace and you need to integrate your business into that society. This particularly applies in the mining industry, perhaps one of the most isolated groupings within society, in terms of approach to issues like sustainability. It's about moving the company into the reality of sustainability being a fundamental way that society thinks and believes.

Let's go through some examples of what this means for industry generally, and then I'll specify some examples in the mining industry.

First, as I said, it means relationships. Reputation and relationships are about how do you do business, or how do you conduct yourselves in a society, in a community to ensure you have the relationships you need to minimise the risks and to maximise the value. It means that risk calculation changes, that rapid changes in the marketplace, rapid changes due to globalisation mean that things move a lot faster. In a regulatory environment you had plenty of notice about change, because regulation is proposed, argued about and then implemented. In a market-driven economy, change occurs much more quickly. Examples like Monsanto genetically food in Europe, where in six to nine months the company went from being the absolute darling of the stock market on Wall Street with extraordinary growth potential, to being a decimated stock, and the share price down 30 to 40 percent and reputation shattered across Europe. Regulation hadn't shifted, but what had shifted was that civil society had punished the company for being out of step with their values. There are many more examples like that.

In this economy, agility becomes crucial. In the face of rapid change and uncertainty, agility is the one thing you can rely upon as being crucial to success. It means that performance becomes much more important than reputation, but reputation becomes linked with performance. In an information-rich economy, you can no longer get away with having a good PR positioning based strategy; it must be based on actual performance because people will hold you accountable and know what you're doing and make sure your performance is communicated widely.

It means different schools and competencies. It is important not to throw out the baby with the bath water in this sense. Business has many strengths which have made business a very successful way of organising our society. But there is no question that the strengths that are required in a 'sustainability world' and a knowledge economy world which are not the core strengths of most of our industrial age companies. Monumental mistakes can be made and change can occur - as BHP learned - fairly rapidly.

An economist from Austria Joseph Schumpeter in the 1920s referred to capitalism as the basis for creative destruction. The reason capitalism works is because it destroys those parts that don't work. The system is fine because it simply goes on and recreates itself. So the parts that don't work become the companies that don't reform and therefore they are the parts that are destroyed. That isn't a problem for society because society will make new companies and people will have jobs and the economy will go on. But whole sectors can be written off. Of the Fortune 500, 50 per cent of them who were there 20 years ago are no longer there. They are off the list - they have merged or are no longer in business.

This is a powerful process, and society can rest easy on that because the system will work very well. But if you are one of the companies that gets destroyed in the process, that's not so good. If it's your job or your company that is on the line, that's a different equation.

Capitalism's ruthlessness and capacity to destroy things applies to itself as well. So it can destroy its own non-performance just as effectively. And it does so with alarming frequency. The issue here is a competitive global free market deregulated world, which is what the business has been arguing for for decades has now arrived and the first and most profound victims of that are going to be the fat, slow, lazy companies that don't respond fast enough. That is a new market reality. In many ways that is a great joy for social activists, because those that don't perform will be dispensed with. So, capitalism in that sense is a very effective system. But it only works when you combine those things in an interactive society in which those feedback links can be understood and applied. So, the point is that if you interact with your community, if you interact outside your own industry then you are interacting with your marketplace, you are interacting with a force that could destroy your companies.

I should like to conclude with a few comments about what this means specifically for the mining industry. First, it means getting more out of your assets. That means leverage, efficiency - all the things we have known what mining is about in recent years, about efficiency and getting tossed out. It means also getting costs down by having a better relationship with the community. It means getting projects approved more quickly, minimising risk, making sure that you are more competitive in a global marketplace and ready for growth when greater opportunities arise. It's about being the third partner in developing countries. This requires the industry to connect to the market. I talked earlier about the need to integrate the business into society. That means connecting to the market. It means ending the isolation - in many ways, the ideological view - which has dominated the mining industry for many decades, which sees the community in many ways as a problem.

Julian [Malnic] spoke to me earlier about the view historically, that 'the only thing wrong with the mining industry has been public opinion'. In many ways, I think that is funny. 'If only these idiots knew how good we were, it would all be okay.' But that was okay when it was a regulative, slow change-driven society. But those ignoramuses out there who don't understand the incredible value you create for society can now destroy their companies. I'm getting a bit sarcastic here, but, seriously, they are not stupid. They do know what their value is, they know what they want, they know what they believe in and will apply that through the market, and unless the industry takes itself out of the isolation - out of the Melbourne Club and into society - I think there is a rather dim future.

It means knowledge and skills that are necessary become part of the core business, so developing knowledge of how to engage state dollars, knowledge about how to reduce costs through environmental excellence, knowledge how to operate in a complex unstable developing country become core assets of the business. Not the sort of assets such as making copper, which can disappear overnight, but assets that have some sort of sustainability about them - assets about competency, knowledge, about the ability to interact and to make your business successful. So people will become an asset, much more so than plant and equipment, comparatively.

It also means - and this is at the top of the list here in Australia - transparency in reporting - catching up with the world in the sense that transparency is the way in which business is conducted in the international economy. This is an information rich society and your performance becomes part of the information richness of that society.

Where is the short-term value and the long-term value in all this? I think there are very few people here today who would not believe that sustainability is an important part of the long-term value of the mining industry. The question is, where is the short-term value, because unless you see the short-term value, you won't do anything about it.

The reason I am working in business, as a business strategist is because I believe we'll achieve more change in this way. But nonetheless there is short-term value and short-term profit generation as a result. Have no doubt that it is there. I am sure that there are many people in this room who could give many examples where performance and sustainability is definitely a short-term determinant of value.

There are many examples across many companies and many industries where profitable changes have resulted from environmentally driven objectives. So regulation-driven society-driven, people have been forced to make changes in their processing and waste systems and as a result end up saving money in the short-term. The idea of putting a price on waste, for example, has been generated - on holding line managers accountable for waste generated.

It's about gaining faster approvals for new projects, about minimising risks, about having more motivated employees, and about attracting and retaining the best employees.

My final comment is about leadership. I referred earlier to a client of ours - Placer Dome - and I declare that interest. Placer Dome has a world-acclaimed reputation for leadership on sustainability. Its leadership on sustainability is not because it is performing on a certain area. It is about saying that leadership is a core part of our business strategy. BP likewise on climate change - recognising that these sustainability type issues are driving the nature of the business to change. The question is simple. There is no question about change. The question is 'Will you lead the change, or will you be led into change?', because there is no doubt in my mind that this industry is in for a big shake-up in the coming decade. The question is 'Who controls and guides that shake-up. You or people outside your industry?'

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