Published on: Jul 13, 2012
Two Tomorrows associate Charlie Curtis wants companies to recognise the significant long-term value of corporate sustainability
In 1976, Milton Freidman argued that the responsibility of corporate executives is, within the bounds of the law, to make as much money for their stockholders as possible. This argument may be criticised as being over-simplified, capitalist and outdated, but the growth of social enterprises apart, most businesses leaders are still primarily driven, measured and rewarded by this singular goal.
If they don’t enhance the commercial value of the business in some way, environmental and social activities add overhead, thus losing competitive advantage and potentially market share. Put more simply, business sustainability without commercial value is unsustainable.
The good news is that there are many ways that good environmental and social stewardship can add commercial value to a business, and more of these are being understood.
The financial markets value businesses firstly based on their current profits and secondly on their predicted future growth. Business managers need to hit quarterly and annual profit targets as well as showing that they can continue to do so, and more, for the foreseeable future. Sustainability measures to increase net profit or prevent profit erosion (i.e. risk management) are increasingly well understood, but those measures designed with long-term growth in mind are less prevalent.
This is partly due to uncertainty and longer timeframe. Businesses prefer to make decisions based on certainties and probabilities, rather than possibilities. Working out the payback and writing the business case for operational improvements such as cutting energy, water use or waste management costs is straightforward; the costs and savings are predictable. For example, Cisco has saved $800 million over the last five years by using its own telepresence technology to replace internal travel.
However, putting in place a set of measures with a less obvious impact on current profits, such as removing all child slave labour from the supply chain, or improving a company’s human rights record, has a less clear business case.
Opportunity for visionary companies: The example of cocoa
The UN estimates there are 15,000 children working in West African cocoa farms. The developed world brands buying this cocoa would rather their products were not exploiting children but, at first sight, there is a commercial disincentive to be the first company to invest in eliminating child labour. It is hugely complex to trace cocoa through the supply chain, expensive to administer and police labour conditions, and adds PR risk if it is seen that some farms slip through the net. Most importantly in the current environment, it is unlikely that many consumers will pay a premium for the child labour-free product so a proactively responsible company would have to reduce its margin or put up its prices and lose market share.
But more visionary companies can use the issue to do the right thing and create competitive advantage. If a few larger players get their houses in order and eliminate child slave labour from all their brands, as is starting to happen, they can then lobby for legislation and labelling, join forces with NGOs giving them the budgets needed to really make a difference, and drive the publicity agenda to virtually wipe out their non-compliant competition.
This provides an example of action on a social issue to defend a revenue stream against a timebomb issue. Although an obvious strategy from a moral point of view, it does take a certain leap of faith for the commercials to work, and like all strategies the success will be in the delivery.
In order to grow, a business needs both the opportunity for growth in terms of new or enhanced products and new markets, and also the capacity and capability for growth. In order to deliver the best and most sustainable products and services, companies need the infrastructure, technology, processes and most importantly the people to make it happen. A company’s CR credentials are becoming significant in employee engagement and productivity.
Sustainability and employee engagement
A Hewitt and Associates study of 230 workplaces showed a strong correlation between companies active in social and environmental issues and high employee engagement. It’s not a big logical step to take to understand that people will feel better about working for a company that is doing good, and even more so if their own job is directly linked to a positive society impact.
Recruits are also factoring in corporate responsibility when choosing their future companies. A 2008 Hill and Knowlton report suggested that 73% of MBA graduates rated CSR as an “extremely” or “very” important company reputation measure and a Stanford University study found that MBA graduates would sacrifice an average of $13,700 in salary to work for a socially responsible company, and a bad corporate reputation can turn off the recruitment tap. Although they deny an actual reduction in applications, fear over losing recruitment numbers was a key factor in Shell reversing its decision on the decommissioning of the Brent Spar platform in 1995.
There is a lesson here for all companies. The next generation is being taught about sustainability. They are going to be affected by many of the issues looming over the horizon - and they care. In order to keep delivering profit and retain the ability to grow, companies need this talent, and that alone is almost enough to justify the sustainable way forward.
Creating long-term value through sustainability
Many companies are focusing their sustainability plans on operational improvement and brand measures, perhaps energy reduction and a couple of nice PR stories in the national press. But there is significantly more long-term commercial value in initiatives that help to create the future sustainable business that is capable, robust and shock proof.
As sustainability professionals, our role is to help business leaders understand the key trends in sustainability, and most importantly the commercial impacts of those trends on specific industries and companies - a subject we focus on in depth in our training courses. With the right knowledge, tools and techniques, we can help today’s business leaders plan and enact programmes to create truly sustainable business models, all while maximising returns to shareholders – true to Friedman's argument.
This article first appeared on The Guardian Sustainable Business website