The Problem
Sustainability, as a topic, can be confusing to business leaders.
The idea that mankind affects its environment and that many of those effects are negative has, I believe, been accepted by many business leaders and members of the Board of Directors of firms, especially in Western Europe and the United States. To get from that general acceptance to a clear idea of what a particular firm ought to do, however, is much more complicated and far from clear. For business, sustainability is usually taken to mean adding the impact a firm has on the physical environment and social reality to the economic impact that is normally the core of its existence. This idea of reporting a “triple bottom line” has become common place.
Firms also pursue a variety of initiatives to reduce consumption of raw materials, water, and energy and to produce less waste from their processes and products as well as reduce carbon emissions but, in my experience, many of these initiatives come from an idea that the firm “ought to do something” to protect the firm’s reputation or brand, rather than a clearly defined strategy over the medium term.
At the same time that corporate activity is increasing, the global effort to stop, or at least slow down, Global Warming or Climate Change, seems to be slowing down due to the economic crisis and political stalemate both at the international level and within many countries. Examples of this inability are the very slow progress on creating carbon trading schemes at the regional or global level and the reduction of subsidies for alternative energy across much of the European Union.
To make the potential for confusion complete, there are a number of contrarian analysts such as Denmark’s Bjørn Lomborg who questions whether we, as a society, are actually focused on the right things. Lomborg’s thesis is that the claims of most special interest groups about the increasingly negative situation simply do not bear up rigorous statistical scrutiny.
The problem, as I see it, is that with politics in many countries being deeply divided, the Board of Directors of a firm is left without a stable and clear reference point from which to base policy with respect to sustainability.
The Solution
Boards appear to take one of three paths to deal with the ambiguity described above. In some boards, there is a major shareholder or group of shareholders who are convinced of the perceived problems facing the planet and ready to put their money where their mouth is. Such a Board then instructs management to go beyond compliance with the idea that the business case will possibly emerge over the goodness of time but that in any event, the direction is the ‘right thing to do’. Since at the end of the day, the majority shareholder is playing with their own money and convictions I find this idea to be “sustainable” from a governance point of view.
A second approach is to obey the law in each of the countries or jurisdictions a firm operates in and perhaps set up a complex, but normally understaffed, compliance function to be able to prove it. Complete assurance that a large multinational and all of its suppliers and partners are perfectly complying with all environmental and social laws, is of course, impossible but it does create a blizzard of paperwork and allows the CEO to say that the firm is doing all it can.
The third approach, which I believe is the most common, falls somewhere in between. In this scenario, the board instructs management to do things like sign the UN Global Compact and to improve performance across a number of metrics as long as shareholder value does not suffer as a result. The challenge with this approach is that there is often little or no empirical evidence to connect specific initiatives with medium term performance or competitive advantage, and studies which show that consumers’ willingness to pay increases with environmental or social performance are tenuous at best.
In my view, Governments will continue to give mixed signals to companies and even shareholders do not know what they want the firms they invest in to do. Boards, and the people who sit on them, will have no choice but to make their own best guess as to the course to set for Management.
For me the way to do this is to think through the long term strategic goals of a firm and think through the implications that some of the key driving forces of the future will have on the firm over 10 or even 20 years. In this kind of time frame, what might appear as trade offs in the short term, can be re-framed to truly align the long term viability of the firm with making significant improvements in the sustainability of its products and services.
Some firms such as Toyota, Unilever and Henkel articulated a vision for the future based on fact based analysis that is able to group their disparate activities in the sustainability area under a clear strategy which adds value to shareholders and the planet over the medium term.
Toyota began their drive towards becoming more sustainable with the publication of the Toyota Earth Charter in 1992 and since then has consistently invested in alternatives to internal combustion engines in order to make their product, cars and light trucks, more sustainable and thus more attractive to an increasingly large group of potential customers around the world. The runaway success of the the Toyotsa Prius and its leadership on the issue in recent times is, in my view, simply the result of this steadfast commitment which is firmly grounded in long term strategic thinking.
Uilever’s Sustainable Living Plan is made up of 60 time bound targets which are firmly grounded in Unilever’s history and also firmly linked to its long term strategic vision. One example, which in my view illustrates this approach, is to promote hand washing across many underdeveloped regions of the world as a way to combat disease and also to sell soap!
Henkel also links performance with sustainability and takes a 20 year view of the challenge (http://sustainabilityreport.henkel.com/strategy.html). Henkel’s idea is to increase by a factor of three the equation of value including impact on people and economic profit over inputs. While the new strategy comes after many years during which sustainability has been a priority at Henkel, what is different is the very clear alignment between improving business and environmental performance.
This kind of thinking, long term and creative, i for me, is the role of the Board of Directors in general and in terms of sustainability, it allows the Board to act regardless of the political and regulatory environment of the moment.