The Sustainable Company

How to Create Lasting Value through Social and Environmental Performance

Chris Laszlo

• Publisher: Island Press
• Year: 2013
• ISBN:
  9781597266291
• Topic: Business
• Subtopic: Business General
• Index: Business

The Sustainable Company shows how to create value for shareholders while balancing responsibilities to society and the environment. Its step-by-step approach and tool-kit for managers make this book the solutions manual for the twenty-first-century manager.

PART I

The Leap to Sustainable Value

INTRODUCTION

HIGH-PROFILE CORPORATE SCANDALS such as Philip Morris, Bridgestone/Firestone, the Exxon Valdez, Union Carbide in Bhopal, Rio Tinto at Freeport, Shell at Brent Spar, Nike’s shoe factories in Vietnam, Archer Daniel Midland’s indictment on 2,300 counts of price fixing—and, most recently, Enron, Vivendi, Arthur Anderson, Global Crossings, Merrill Lynch, Tyco, and WorldCom—have raised market awareness of corporate responsibility. So has the bankruptcy of K-Mart, rated last of the Standard and Poor 500 (S&P 500) companies in 2001 in terms of corporate responsibility by a leading U.S. ethical investment ratings agency. In the first quarter of 2002, the U.S. Securities and Exchange Commission (SEC) opened 64 financial reporting cases—more than twice the number in the 2001 first quarter—as part of its crackdown on corporate crime, targeting such large well-known companies as Arthur Anderson (also under federal indictment), Computer Associates, Qwest, and Xerox, among others.

These dramatic cases are generally recognized to be only the tip of the iceberg. They are not the whole story, and they do not reflect the business benefits and sources of value creation presented in this book. Moreover, the crisis of corporate responsibility in the developed world overlooks the tremendous benefits that could be gained in the developing world simply from improving the lot of 4 billion people currently living on the margins of the global market system (see, for example, C. K. Prahalad and Stuart Hart’s “The Fortune at the Bottom of the Pyramid”). George Carpenter, the head of Procter & Gamble’s (P&G’s) corporate sustainability department, recently stated that his goal is now $1 billion in additional revenues from “sustainability” products and services. P&G already has such products aimed at “doing well and doing good” in the developing world, ranging from Actonel^® (reduces the risk of hip fracture in elderly women with osteoporosis) to Nutra Star^® (a nutritional drink that provides Vitamin A, iodine, and iron). The company is investing to bring clean drinking water to Sub-Saharan Africa. Why? Because so many of its products require clean drinking water, and until African villages have it, P&G’s market on that continent will be limited.

A growing segment of consumers, investors, employees, communities and nongovernmental organizations (NGOs) are defining what constitutes sustainable business conduct and demanding such conduct. These constituents are collectively developing a new class of sustainability performance indicators. In effect, companies are finding that sustainability performance is a source of differentiation that helps to create (or destroy) shareholder value and to manage risks.

In the past, a combination of environmental experts armed with technical scientific knowledge, legal experts representing regulatory requirements, and political parties forced executives to adopt more ethical business practices. Internal values and principles reflecting top management’s personal commitment to bettering society were another influence for greater stakeholder responsibility. Only since 1995 has a market-driven “logic of sustainability” emerged based on meeting expectations of stakeholder performance. The “five logics of sustainability” shown below make a compelling case for a more mainstream transformation from short-term profit focus to stakeholder management.

1. Scientific, such as evidence of human-induced global climate change
2. Regulatory, such as title I of the Clean Air Act (amended 1990) in the United States
3. Political, such as the Green Parties’ agenda in Europe
4. Moral, based on values and principles
5. Market, focusing on the shareholder value implications of stakeholder value

These five logics are converging into a coherent story that business ignores at its peril. In a strongly interacting and highly interdependent global economic system, the interests of the shareholders are increasingly coinciding with the interests of society and the environment.

In this book, we will touch on all five drivers of stakeholder management while giving particular attention to the fifth category: the market drivers of sustainability. This emphasis reflects the belief that to engage the business community, we need to do so on its own terms: we need to make a business case for it.

The ethical argument for stakeholder management extends well beyond religious or abstract moral principles. Globalization is giving rise to a “naturalistic” ethics based on the fact that the health and well-being of business, society, and nature have become inextricably entwined. As Ryuzaburo Kabu, honorary chairman of Canon, Inc., said,

Global corporations rely on educated workers, consumers with money to spend, a healthy natural environment, and peaceful existence between nations and ethnic groups.... At this watershed period in history, it is in the interests of the world’s most powerful corporations to work for the advancement of global peace and prosperity. To put it simply, global companies have no future if the earth has no future.

If companies are to make the evolutionary leap in business purpose that globalization is calling for, they need to replace an exclusive focus on shareholders with a strategy in which stakeholder value is pursued as a part of the core business purpose. Stakeholder strategy takes into account the impact and consequences of a company’s operations on everyone who is affected by them. Dr. Deborah Anderson, president of Farsight Associates Inc. and former vice president for environmental quality worldwide at Procter & Gamble, defines stakeholders as anyone who can help or hurt a business. By this definition, stakeholders include not just shareholders but also customers, employees, and business partners; local communities; government; worldwide public opinion; NGOs; and activists who represent the natural environment.

Throughout this book, the terms corporate responsibility and sustainability are used interchangeably. To some extent, this usage reflects the lack of consensus about what these terms mean in the business world. Some executives prefer the term corporate responsibility and consider sustainability to be a vague and ill-defined concept, whereas others prefer the opposite. For both terms as used in the book, the central idea is caring for stakeholders and assessing the impact of products, services, and the conduct of companies on the well-being of these stakeholders.

In 1987, at a groundbreaking symposium of international governments, the World Commission on Environment and Development (the so-called Brundtland Commission) was the first to define sustainability: “the ability to meet today’s global economic, environmental and social needs without compromising the opportunity for future generations to meet theirs.” This definition continues to be widely used today. The Dow Jones Sustainability Group Index (DJSGI) gives another useful definition: “a business approach to creating long-term shareholder value by embracing opportunities and risks deriving from economic, environmental, and social developments.” The “New Ethics in Business” (Chapter 2) includes additional definitions, as well as a discussion of the mind-set, behaviors, and practices associated with sustainable value.

Extending consideration to stakeholders is not a charitable adjunct to a successful business strategy but an intrinsic element of it. Integrating economic, social, and environmental objectives into a single bottom line can be a significant source of innovation and top-line growth. Companies that make the transition from focusing exclusively on shareholders to managing for stakeholder satisfaction will survive consolidation and attrition in today’s marketplace and become leading actors in the global world of the twenty-first century.

It will become evident to the reader early on that sustainability leadership is not coming primarily from the Global 100 companies: the Exxon Mobils, Wal-Marts, and General Electrics. The world’s largest public companies are perhaps under too much pressure from the capital markets, and those that heavily adopt the practice of granting stock options to their senior executives are further reinforcing the logic of near-term profitability. Many of the large, publicly held companies might also fear that they will open themselves to stockholder lawsuits (even if unmerited) if they try to pioneer the sustainability route.

Instead, sustainability leadership is coming from a growing number of companies with sales ranging from $100 million to $2 billion, often ones with private or semiprivate ownership (or recently reverted to private ownership, such as Levi-Strauss). Such companies often show a strong founder’s influence and are looking for a unique source of differentiation to escape the technology innovation rat race that their bigger competitors are increasingly likely to win. Living their values and branding their identity in terms of social and environmental responsibility is becoming a way to survive in the marketplace. Two of the companies discussed in this book—Patagonia and The Co-operative Bank—are examples of this strategic differentiation. Bulmers is listed on the London Stock Exchange but has just over half its ownership under family control. Atlantic Richfield Corporation was acquired by BP Amoco in 2000.

These sustainability leaders, and others like them around the world, are pursuing a vision for betterment that is also in their self-interest. In doing so, they are returning business to its role as “builder of civilizations,” as envisioned by corporate chieftains such as IBM’s Thomas J. Watson, Sr., at the beginning of the twentieth century. This book is aimed at the corporate chieftains of the new century.

CHAPTER ONE

Toward an Integrated Bottom Line

IN 1963, a young and newly appointed chief executive officer (CEO), Michael Watts, is reflecting on the mission and purpose of his business. From the executive suite, he looks out into the courtyard of his company’s main production facility and sees an orderly scheduling of work. Employees are arriving at an early hour and fulfilling their daily jobs in specialized roles. Suppliers deliver parts and settle invoices with scant further contact with the company’s employees. Retail customers have no contact at all with this facility—they order monthly from the company’s salesmen, based on projected retail inventories that reflect consumer preferences that Michael Watts knows only from occasional focus groups. The entire company is organized around four functions: general management, production, sales, and finance.

Michael’s main focus is financial results. He regularly tracks returns on invested capital, operating profit, debt issuance, and projected dividends to the company’s shareholders. Luckily for him, his departments are highly autonomous and keep all the activity going efficiently with a minimum of intervention—for the moment. Innovations in technology, competitor pressures, and profound shifts in consumer values and preferences will soon force the company to make major changes.

Fast-forward 30 years to 1993. Much of the company’s effort has been spent tearing down the walls between departments and functions. Computer integrated manufacturing (CIM) and integrated software platforms connect each production facility to its customers and ultimately to the consumer in real time. Operational measures of customer satisfaction, internal processes, and the organization’s innovative activities complement financial measures. A balanced scorecard offers all executives a fast but comprehensive view of the business.

Still 10 years away from retirement, Michael now feels a deep satisfaction at having built an integrated value chain. No one can speak about the existence of “silos” in his organization. His one source of concern is a manufacturing safety function renamed, in the late 1980s, environment, health, and safety (EH&S). A former site engineer with a legal background now heads it, yet Michael simply can’t seem to settle this function into his management team. Waste-permitting, site remediation, resource depletion targets, pollution prevention, and environmental product design parameters are things that his business unit heads don’t want to hear about. As long as the company is complying with government regulations, EH&S would serve the team best by sticking to its legal and technical area of expertise.

Then one morning Susan Aldrin, Michael’s chosen successor, walks into his office and begins talking about the need for the company’s environmental policies to become more integrated into business operations. Susan speaks of the need to be proactive on safety measures in the plant and to reduce workplace accidents to zero through better training and new safe manufacturing processes. She outlines a plan for implementing an Environmental Management System (EMS) that would help the company move toward closed-loop production, reducing waste and pollution. “I want each business unit to track the full impact of its activities on the environment,” says Susan. A few days later, Michael talks to his EH&S manager, who responds enthusiastically to what they both agree is an opportunity to begin “tearing down the Green Wall”: removing the great divide between environmental performance and business performance. Business managers need to see environmental managers as equals and work together better on shared objectives. A new campaign begins to integrate strategic environmental management into the business, and in the process EH&S is invited to the table as a full partner.

With only a year to go before retirement, Michael is pleased to learn that his company has been awarded a prize for environmental excellence. His managers regularly speak about the double bottom line and, increasingly, about the triple bottom line. A United Way campaign reaches a statewide high for employee participation, and a patronage-of-the-arts program earns the company additional prestige. Although it is costing his company 0.5 percent of profits, the sense of satisfaction derived from contributing to society is evident and is shared within the executive group.

Then one morning, the CEO’s phone rings on his private line. It is his daughter, Gretchen, who is calling from Port-au-Prince; she and her husband have decided to adopt a little Haitian girl and urgently need him to come to Haiti to help convince the local authorities to file for expedited adoption. He departs that afternoon, leaving Susan in charge, with...