Paul Holmes 10 Sep 2006 // 11:00PM GMT
When Andrew Savitz, a lead partner in the sustainability business services department at management consulting firm PricewaterhouseCoopers, states early in his introduction to The Triple Bottom Line that the “centerpiece of this book is the concept of sustainability,” my initial reaction was disappointment.
The title of the book—co-authored with Karl Weber—is derived from the idea proposed by John Elkington, founder of the consulting firm SustainAbility, that businesses need to measure their success not only by the traditional bottom line of financial performance, but also by their impact on the broader economy, the environment, and the society in which they operate. Companies use financial resources, environmental resources, and social resources, and should measure their consumption and production of each if we are to measure their value accurately.
I don’t really like the term sustainability, which is much more common in Europe than it is in North America, and which has always been closely associated with the environmental movement. I have always considered sustainability—in the environmental sense of protecting natural resources—to be only a small part of what genuine social responsibility is about, but Savitz attempts a broader definition, defining the sustainable corporation as one “that creates profit for its shareholders while protecting the environment and improving the lives of those with whom it interacts.”
I’m not sure I’d put the environment first—I’m much more interested in how companies affect the lives of people than how they affect the lives of trees—but at least it’s a broader definition than the one I’m used to.
“Sustainable organizations and societies generate and live off interest rather than depleting their capital,” says Savitz. “Capital, in this context, includes natural resources such as water, air, sources of energy, and foodstuffs. It also includes human and social assets—from worked commitment to community support—as well as economic resources, such as a license to operate, a receptive marketplace, and legal and economic infrastructure.
“A company can spend down its capital for a while, but generally not for long. A firm that honors the principles of sustainability, by contrast, is built to last.”
He even goes on to make the case that sustainability is preferable, as a description, to corporate social responsibility, because “responsibility emphasizes the benefits to social groups outside the business, whereas sustainability gives equal importance to the benefits enjoyed by the corporation itself.”
And Savitz hits on a key difference between the U.S. approach to responsibility—built around charitable donations—and the more holistic European model when he says that sSustainability is not about philanthropy.
“There’s nothing wrong with corporate charity, but the sustainable company conducts its business so that benefits flow naturally to all stakeholders, including employees, customers, business partners, communities and of course shareholders. It could be said that the truly sustainable company would have no need to write checks to charity or ‘give back’ to the local community because the company’s daily operations wouldn’t deprive the community but would enrich it.”
In other words, the whole notion of giving back becomes redundant if the company doesn’t take anything to begin with.
Savitz argues that companies are taking sustainability more seriously today because of what he calls the “Age of Accountability. They are increasingly being held responsible not only for their own activities, but for those of their suppliers, the communities where they are located, and the people who use their products.
“They are being called to account not only by investors and shareholders but by politicians, whistleblowers, the media, employees, community groups, prosecutors, class-action lawyers, environmentalists, human rights advocates, public health organizations and customers. These stakeholders come from every corner of the world, armed with both the traditional media and that global megaphone called the Internet.”
To illustrate his argument, Savitz points to the nightmare endured by the Hershey Corporation three years ago after the board of the Hershey Trust announced plans to sell the company to the highest bidder. It was, as Savitz writes, “a cataclysmic decision,” one that sparked fury by Hershey employees, unions, community leaders and regulators, including the attorney general of the state of Pennsylvania, who went to court to block the sale.
Executives at the company and the trust were stunned by the reaction and bewildered by the avalanche of bad press. They refused to comment when besieged by newspaper and TV reporters and decline to provide spokespeople to explain their decision at public meetings. In fact, there was little communication from the company until it reversed its decision—despite the fact that it has a $12.5 billion offer from the William Wrigley Jr. Company on the table.
Hershey stock fell nearly 12 percent when that announcement was made, and two months later 10 members of the board of trustees were ousted. Two months after that, Business Week named Hershey Trust one of the 10 worst managers of 2002.
And yet, from a financial point of view, the trust had been doing what it believed was the right thing, seeking to maximize value for its owners.
The first lesson of the trust’s experience, says Savitz, is that “focusing on profit alone can backfire. The managers who made the decision to sell Hershey Foods were doing the right thing by purely financial yardsticks. They were trying to maximize returns to the trust. But in today’s business world, the financial bottom line is not the only or even the most important measure of success. Executives almost must consider the social, economic and environmental impacts on anyone with a stake in the outcome.”
A second lesson is that businesses are accountable to more people than they may realize. “Hershey management acted as if their fiduciary duty was the only interest that mattered. They forgot about other crucial individuals and organizations—stakeholders—with a vested interest in their actions,” despite the fact that some of those stakeholders—including employees and residents—had obvious connections and entirely predictable concerns.
“To a doctrinaire advocate of the free market, the fact that business leaders must consider the political impact of their decisions may be abhorrent,” Savitz acknowledges. “But it’s a reality. Hershey’s lack of political judgment and skills was a direct cause of the company’s misfortune.”
He also quotes management guru Henry Mintzberg: “The argument that Milton Friedman and others use is that business has no business dealing with social issues—let them stick to business. It’s a nice position for a conceptual ostrich who doesn’t know what’s going on in the world and is enamored with economic theory. Show me an economist who will argue that social decisions have no economic consequences. No economist will argue that. So how can anyone argue that economic decisions have no social consequences?”
Like most books in this genre, The Triple Bottom Line takes care to quote from hard-nosed financial types who see the value in a more responsible approach. Savitz quotes a report from Goldman Sachs, Deutsche Bank, Credit Suisse and 15 other global banks: “We are convinced that in a more globalized, interconnected and competitive world the way that environmental, social and corporate governance issues are managed is part of companies’ overall management quality needed to compete successfully.
“Companies that perform better with regard to these issues can increase shareholder value by, for example, properly managing risks, anticipating regulatory action, or accessing new markets, while at the same time contributing to the sustainable development of societies in which they operate. Moreover, these issues can have a strong impact on reputation and brand, an increasingly important part of company value.”
When the book advances beyond the theory of sustainability, it offers some practical advice for executives looking to ensure that their companies are prepared to do business in the modern world. He suggests starting with a sustainability audit designed to look at the company’s strengths and weaknesses, opportunities and risks. He suggests looking at four areas of activity:
• What your company says: it’s reported policies and performance in regard to the environment, labor, health and safety and other sustainability issues.
• How your company operates: environmental and social impacts up and down the supply chain and in communities where the company does business.
• The nature of your company’s business: the impact of the products and services the company offers and its business and profit models.
• How sustainability applies to your industry: the particular performance and reporting issues your industry is dealing with.
The company can then develop a sustainability strategy, and Savitz suggests looking at issues in terms of minimization and optimization.
Minimization, he says, means “reducing the size of your footprint in terms of the adverse environmental, social, and economic impacts of your activities. Minimization is aimed at reducing ecological damage, reducing employee accidents, and decreasing harm to the community.” Minimization means “being less bad.”
Optimization, by contrast, means “being more good…. [It] can take you far beyond minimization. Optimization aims not just to reduce pollution but to restore the environment; not just to eliminate employee accidents but create a happier, healthier workforce; not just to decrease harm to the community, but to revitalize it.”
Savitz also recommends stakeholder mapping, a technique for identifying and prioritizing a company’s stakeholders. A mapping exercise can help companies understand their position in relation to interest groups, community organizations, government agencies and others, asking a series of questions about each relationship:
• How do we communicate with this stakeholder?
• Who is responsible for the relationship with this stakeholder?
• What are the stakeholders concerns and how are we addressing them?
• What are the major conflicts between the needs of the stakeholder and those of the company and how can we move toward a sweet spot?
Another approach involves prioritizing stakeholders by tracking their position on two dimensions: one measures a stakeholder’s ability to help or harm (in ways ranging from lobbying to boycotts to attacks in the media); the other measures the likelihood of such an action.
Finally, companies can create an influence grid that plots the position stakeholders on two axes: support and influence and then applying a different strategy to each group depending on which quadrant they occupy. So stakeholders with high levels of support but low influence should be empowered; those with low support and low influence should be monitored; those with high support and high influence should be recruited as partners; and those with low support and high influence should be engaged.
“Getting to know the interests, objectives and motivations of stakeholders who are active in and around your industry can give you important advance notice of the issues that are likely to explode next,” says Savitz. “And the most effective way of hearing about and understanding those stakeholders is by engaging in continual, open dialogue with them. Adroitly managed, stakeholder engagement is like having radar that other companies don’t, which can enable you to be prepared to tomorrow’s crises today.”
Savitz is also an advocate of social and environmental reporting, as long as companies are prepared to be both open and honest.
“One of the best ways to improve your company’s image and its credibility among activist stakeholders and the public is to publicize your mistakes and failures—along with the corrective steps and failures, of course. Don’t report only your environmental or diversity awards or the fact that you’ve been named a Best Company to Work For. You should also report that you fired a dozen employees for taking bribes, shut down a plant because of its terrible pollution record, and are working to improve the monitoring of your suppliers’ unsatisfactory labor practices.”
Sustainability, he says, flourishes in organizations that have four critical characteristics: vision, honest self-awareness, strong leadership, and long-term thinking.
Finally, to operationalize sustainability, it has to be integrated into operations. “Like quality, sustainability must be built in, not added on,” Savitz insists. “Sustainability can be the specialized province of a handful of experts, but it’s far more effective to educate your operating managers about sustainability and let them apply this knowledge to their own goals and strategies.”
One interesting strategy he suggests is to create a “virtual sustainability department. This means linking together many employees from various departments to share ideas, insights, and tools related to sustainability. It also involves permitting managers to seek additional support from outside sources—consultants, NGOs, business partners, suppliers, customers, and others who can contribute to the effort.”
The role of public relations professionals in building these teams, facilitating communication between team members and engaging with external team members should be obvious.
Finally, Savitz calls for a rethink of business priorities.
“Sustainability does not necessarily require companies to de-emphasize profit or accept diminished financial results. But it will eventually demand that businesspeople abandon a short-term, single-minded focus on maximizing shareholder value and recognize that corporations exist to serve other stakeholders as well.”
I’m not sure that The Triple Bottom Line breaks any dramatic new ground, but it does add to the growing body of literature on a subject that ought to be central to corporate public relations thinking right now, and it is full of useful examples of companies that have at least started to move in the right, long-term direction.