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MAKING SUSTAINABILITY WORK
Best Practices in Managing and Measuring Corporate Social, Environmental, and Economic Impacts
By Marc J. Epstein, Adriana Rejc Buhovac
Berrett-Koehler Publishers, Inc.Copyright © 2014 Greenleaf Publishing Limited
All rights reserved.
A new framework for implementing corporate sustainability
With growing sensitivity toward social, environmental, and economic issues and shareholder concerns, companies are increasingly striving to become better corporate citizens. Executives recognize that long-term economic growth is not possible unless that growth is socially and environmentally sustainable. A balance between economic progress, social responsibility, and environmental protection, sometimes referred to as the triple bottom line, can lead to competitive advantage. Through an examination of processes and products, companies can more broadly assess their impact on the environment, society, and economy, and find the intersection between improving sustainability impacts and increased long-term financial performance. To aid executives in achieving sustainability, this chapter will:
* Define the principles of sustainability
* Identify important stakeholder relationships
* Introduce a framework—the Corporate Sustainability Model—to guide managers in measuring and managing sustainability performance. This framework will be the basis for the remainder of the book and provides a tool for the implementation of corporate sustainability and the evaluation of corporate impacts
The evaluation of social, economic, and environmental impacts of organizational actions is necessary to make effective operational and capital investment decisions that positively impact organizational objectives and satisfy the objectives of multiple stakeholders. In many cases, reducing these impacts increases long-term corporate profitability through higher production yields and improved product quality. Novo Nordisk, the global Danish-based healthcare company specializing in diabetes care, strives to conduct its business in a financially responsible (profitable for the long-term), socially responsible (patients first), and environmentally responsible (doing more with less) way. The aim is to ensure long-term profitability by minimizing any negative impacts from business activities and maximizing the positive footprint from its global operations: improved health, employment, economic prosperity, and social equity (see Fig. 1.1).
There is growing interest among the business community in the development and implementation of sound, proactive sustainability strategies, including significantly increased stakeholder engagement. The financial payoff of a proactive sustainability strategy can be substantial. By addressing the nonfinancial aspects of business, companies can improve the bottom line and earn superior returns. The Dow Chemical Company, a global diversified chemical company, focuses on manufacturing efficiency inside the company while maximizing the contributions of Dow products to improve efficiency and expand affordable alternatives. Dow's manufacturing energy intensity has improved more than 40% since 1990, saving the company a cumulative US$24 billion. Dow is committed to bringing solutions to the challenge of climate change by producing products that help others reduce greenhouse gas emissions, such as lightweight plastics for automobiles and insulation for energy efficient homes and appliances.
Henkel International, a German-based manufacturer of laundry and homecare products, beauty care, and adhesive technologies, has developed a sustainability strategy to create more value for its customers and consumers, for the communities it operates in, and for the company—at a reduced ecological footprint. Henkel concentrates its activities along the value chain on six focal areas that ref lect the challenges of sustainable development as they relate to Henkel's operations. Figure 1.2 presents Henkel's six focal areas with five-year targets for 2015. Focal areas are subdivided into two dimensions—"more value" and "reduced footprint". To accomplish these, the company uses innovations, products, and technologies, but recognizes that these dimensions must be ever-present in the minds and day-to-day actions of around 47,000 employees.
To become a leader in sustainability, it is important to articulate what sustainability is, develop processes to promote sustainability throughout the corporation, measure performance on sustainability, and ultimately link this to corporate financial performance. Corporate citizenship is an important driver for building trust, attracting and retaining employees, and obtaining a "license to operate" within communities. However, corporate citizenship is much more than charitable donations and public relations—it's the way the company integrates sustainability principles with everyday business operations and policies, and then translates it all into bottom-line results.
For sustainability to be long-lasting and useful, it must be representative of and integrated into day-to-day corporate activities and corporate performance. If it is seen only as an attempt to provide effective public relations, it does not create long-term value and can even be a value destroyer. The key is integrating sustainability into business decisions, and identifying, measuring, and reporting (both internally and externally) the present and future impacts of products, services, processes, and activities. In fact, this book is all about the integration of sustainability into corporate operations to simultaneously achieve increases in social, environmental, economic, and financial performance.
What is sustainability?
To help understand what sustainability is in the context of corporate responsibility, we have broken it down into nine principles (see Table 1.1). These principles have three attributes:
1. They make the definition of sustainability more precise
2. They can be integrated into day-to-day management decision processes and into operational and capital investment decision-making
3. They can be quantified and monetized
These nine principles of sustainability will be used as a foundation throughout this book. They highlight what is important in managing stakeholder impacts (i.e. the impact of company products, services, processes, and other activities on corporate stakeholders).
Although we are presenting in Table 1.1 a broad definition of sustainability, this book focuses on the criteria that are usually included in sustainability discussions, analyses, measurements, and reports—social, environmental, and economic. So, though the principles of ethics and governance, for example, are important aspects of sustainability, they are not the focus of most corporate applications of corporate social responsibility or sustainability. But the discussion of systems, structures, performance measures, culture, and so forth necessary for implementation can be easily adapted to improve performance on all nine principles. Further, the formal and informal organizational processes described in this book should be applied to all of these principles.
Ethical companies establish, promote, monitor, and maintain fair and honest standards and practices in dealings with all of the company stakeholders and encourage the same from all other stakeholders, including business partners, distributors, and suppliers. To follow this principle, a company needs to place particular emphasis on human rights and diversity to ensure that workers are treated fairly. This means that, although a company has to adhere to local laws, its ethical practices will often necessitate standards far in excess of industry, international, national, and local guidelines or regulations.
Ethical companies set high standards of behavior for all employees and agents, and have in place effective systems for monitoring, evaluating, and reporting on how the company does business. The reporting of ethical violations to appropriate authorities is also actively promoted.
Ethical companies create codes of conduct, develop ethics education programs, and honor internationally recognized human rights programs.
The governance principle is a commitment to manage all resources conscientiously and effectively, recognizing the fiduciary duty of corporate boards and managers to focus on the interests of all company stakeholders. This duty is of primary importance and is superior to the interests of management. The company follows practices of fair process and seeks to enhance both financial and human capital while balancing the interests of all of its stakeholders.
The company encourages the achievement of its mission while being sensitive to the needs of its various stakeholders. Its mission must be clearly stated and widely understood, and must recognize the interests of multiple stakeholders. The company must have a strategy and performance metrics that are consistent with its mission. The mission, strategy, policies, practices, and procedures are communicated openly and clearly to employees. Decision-making processes are engrained within this principle as performance is directly related to a particular course of action taken by the company.
Companies that value governance evaluate the CEO and senior management on financial and nonfinancial performance and have a board structure that represents a wide range of stakeholder views.
While the governance principle relates to internal management issues, the transparency principle is about disclosure of information to company stakeholders. Transparent companies provide full disclosure to existing and potential investors and lenders of fair and open communication related to the past, present, and likely future financial performance of the company.
Transparent companies broadly identify their stakeholders. Indeed, companies embracing this principle recognize that they are accountable to internal and external stakeholders, understanding both their informational needs and their concerns about the company's effects on their lives.
4. Business relationships
Companies must encourage reciprocity in their relationships with suppliers, by treating them as valued long-term partners in enterprise, enlisting their talents, loyalty, and ideas. Companies endorse long-term stable relationships with suppliers in return for quality, performance, and competitiveness. Companies select their suppliers, distributors, joint-venture partners, licensees, and other business partners not only on the basis of price and quality but also on social, ethical, and environmental performance.
Companies that embrace this principle set specific targets for utilizing indigenous, disadvantaged, or minority-owned businesses and use their purchasing power to encourage suppliers to improve their own social, environmental, and economic practices.
5. Financial returns to investors and lenders
The company compensates providers of capital with a competitive return on investment and the protection of company assets. Company strategies promote growth and enhance long-term shareholder value. The interests of investors and lenders must be explicitly recognized and companies must develop formal mechanisms to foster an ongoing dialogue with their investors. However, though improved financial results are a natural product of creating value for customers, employees, and other stakeholders, the company is committed to balancing the interests of all stakeholders.
6. Community involvement and economic development
Increasingly, companies recognize that it is in the best long-term interest of both the company and the community to improve the community, community resources, and the lives of its members. Thus, the company fosters a mutually beneficial relationship between the corporation and the community in which it is sensitive to the culture, context, and needs of the community. The company plays a proactive and cooperative role in making the community a better place to live and conduct business.
Companies that value community involvement and economic development collaborate with community members who promote rigorous standards of health, education, safety, and economic development.
7. Value of products and services
This principle requires companies to specify their relation and obligations to their customers. A proactive stance on this principle requires the company to respect the needs, desires, and rights of its customers and ultimate consumers, and to provide the highest levels of product and service values, including a strong commitment to integrity, customer satisfaction, and safety.
Companies create explicit programs to assess the impacts on their stakeholders of the products and services they provide.
8. Employment practices
Companies must decide on the type of management practices they want to engage in. Adopting this principle means that companies engage in management practices that promote personal and professional employee development, diversity, and empowerment. Companies regard employees as valued partners in the business, respecting their right to fair labor practices, competitive wages and benefits, and a safe, family-friendly work environment.
Indeed, companies adopting this principle recognize that concern for and investing in employees is in the best long-term interests of the employees, the community, and the company. Thus, companies strive to increase and maintain high levels of employee satisfaction and respect international and industry standards for human rights. To do this they offer programs such as tuition reimbursement, family leave time, day care, and career development opportunities.
9. Protection of the environment
To follow this principle, companies must define their commitment to the natural environment. For proactive companies, it means striving to protect and restore the environment and promoting sustainable development with products, processes, services, and other activities. Companies must be committed to minimizing the use of energy and natural resources, and decreasing waste and emissions. At a minimum, the company fully complies with all existing international, national, and local regulations and industry standards regarding emissions and waste. It strives for continuous improvement in the efficiency with which it uses all forms of energy, in reducing its consumption of water and other natural resources, and its emissions into air, water, and land of hazardous substances. It also entails a commitment to maximize the use and production of recycled and recyclable materials, the durability of products, and to minimize packaging.
Increasingly, companies have recognized that sustainability values and principles are important for long-term corporate profitability and are using them to define their sustainability strategies. Alcatel-Lucent, a French-based global communications industry leader, focuses on three core sustainability priorities: extreme green innovation; employees; and digital inclusion. A core element of Alcatel-Lucent sustainability strategy and day-to-day businesses are the following three values:
* "We take a zero tolerance stance on compliance violations and reinforce full integrity in every business action from every employee, treating each other with respect and empathy
* We collaborate and do business only with partners, suppliers, contractors and subcontractors who share and support our values. We commit to regularly and thoroughly assessing their performance and partnering to ensure improvement
* "We commit to engaging with pride and passion as citizens of the communities where we do business around the globe"
However, identifying the values or dimensions of sustainability in a theoretical way is only the first step in improving corporate accountability and long-term profitability. The values of the company need to align with the values of its important stakeholders; so stakeholder identification is the next step.
Identify your stakeholders
In managing sustainability, stakeholder value (a significantly broader concept than shareholder value) is critical. How an organization chooses to define its stakeholders is an important determinant of how stakeholder relations are considered in sustainability decision-making and how stakeholder reactions are managed. Some definitions cover those individuals who can either be affected by or affect the organization, while others require that a stakeholder be in a position to both influence and be influenced by organizational activities. Additionally, there are core stakeholders and fringe stakeholders. Core stakeholders are those that are visible and are able to impact corporate decisions due to their power or legitimacy. Fringe stakeholders, on the other hand, are disconnected from the company because they are remote, weak, or currently disinterested. Typical stakeholders include shareholders, customers, suppliers, employees, regulators, and communities.
Few companies have advanced their stakeholder engagement on sustainability as quickly and effectively as Dell, an American multinational computer technology corporation. The company realized long ago that engaging with stakeholders adds enormous value to their sustainability efforts. In addition to the usual groups such as suppliers, NGOs (nongovernmental organizations) and industry consortiums, Dell has benefited enormously from the perspectives of peers and competitors, government agencies, investment groups, academics, faith-based groups, and customers. However, the company has found that about 10–12 different organizations is the optimum number of participating stakeholders on any particular issue. Beyond that, some stakeholders feel their opinions are not being heard or considered.
Excerpted from MAKING SUSTAINABILITY WORK by Marc J. Epstein, Adriana Rejc Buhovac. Copyright © 2014 Greenleaf Publishing Limited. Excerpted by permission of Berrett-Koehler Publishers, Inc..
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