Owing to the demand for sustainability, companies are accountable for creating value and for environmental performance
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For what is a company accountable? The answer to that has grown bigger with every passing decade because companies have become accountable for more than reporting satisfactory performance. They have become accountable for reporting ever greater performance, year after year.
Ever greater performance is a tall order. Especially tall because it applies not just to value delivered to shareholders and customers, but value created for employees, communities and people affected by companies the world over. Accountability for ever greater value is the basic challenge of corporate sustainability.
Executives once invoked the name of Milton Friedman to argue their responsibility was to create greater value only for shareholders. Friedman’s classic 1970 New York Times Magazine article was titled “The Social Responsibility of Business is to Increase its Profits.” Friedman, however, never suggested shortchanging customers, employees and communities as a means to create value for shareholders.
Often lost in the discussion of sustainability is accountability for value delivered to customers
Instead, he said executives should act in the shareholders’ self-interest in the long run. Today that long-run self interest demands solving a more complex equation than in 1970. The solution demands accountability to multiple constituencies, as good results depend on satisfied customers, motivated employees and supportive communities. You would expect chief financial officers, if any group, to be the final holdouts in taking a hard-line interpretation of Friedman’s doctrine. But many see the world differently.
Counting What Counts
Curt Pullen, CFO of Herman Miller, the Zeeland, Mich.-based office furniture maker, says he uses a sharp pencil to evaluate financial returns of new projects, but he heeds less quantifiable and long-run business opportunities, as well. “My counsel is not to overwork the specifics,” Pullen says. “The financial piece of this is important, [but] I believe we get to the ultimate financial answer when, in between, we think about the nonfinancial things that also matter.”
How else could Herman Miller justify designing and making an office chair – the Mirra – that is 93 percent disassembleable and 83 percent recyclable? Its efforts are helped, of course, by a market today that awards a premium to green products. Indeed, 5 percent of RFPs (requests for proposals) received by Herman Miller make environmental performance the determining factor in the purchase decision.
Assembling a report card on corporate performance today requires executives to grade themselves on more factors than ever before. In the same way that the three Rs are no longer enough to evaluate students with skills for a sustainable future, the three key financials (revenues, profits, returns) are no longer enough to evaluate the performance of executives who foster sustainability.
No Trade Offs
Executives have no choice but to expand their focus to create value by integrating multiple goals. They once argued they had to trade off cost and quality, or cost and green performance. They said they could not meet both (or all three) goals. Now they know better.
Companies that sustain success crack the hard strategic and operational nut of how to align goals of several varieties. Author William Marquard (among others) calls this finding the “and” because executives need to find strategies that produce value for shareholders and customers and employees and communities. How does a sustainable company give an accounting of this broader kind of performance? It measures and publicly reports on value creation relevant to four constituencies. Let us take the four in turn, based on a model I fleshed out with Marc Epstein and most recently reprised in Epstein’s Making Sustainability Work (Berrett-Koehler, 2008).
1. Accountability to Shareholders
To activists alarmed by a lack of sustainable corporate environmental or social performance, it seems a surprise that companies still struggle to be financially accountable. A good report on the three key financials is hard to pull off year in and year out. Even if a company does, a focus on traditional financials allows executives to dodge accountability for the single factor shareholders should most care about: the productive use of capital. That is because the three basic financials do not factor in the full cost of capital: debt and equity. To be fully accountable, sustainable companies have to measure and report financial performance using metrics such as economic value added, which enables shareholders to see if an executive team is growing company capital or eroding it.
2. Accountability to Customers
The gold standard today is the Global Reporting Initiative's guidelines.
Often lost in the discussion of sustainability is accountability for value delivered to customers. Measurements of that value – in terms of quality, reliability, customer satisfaction – may make a company reveal data once entirely proprietary. But companies owe it to their constituencies to measure that value and release some of the data. Ever greater value for the people who account for a company’s revenue obviously underpins financial sustainability.
3. Accountability to Employees
Companies have gotten much better in demonstrating their ability to create greater value for employees. Here again, some of the related data may be proprietary, but many measures can be reported: employee turnover, costs of benefits, lost workdays, workforce diversity and employee satisfaction. Shareholders care deeply about the quality of a company’s management and workforce, and a sustainable company reports on that quality.
4. Accountability to Communities
Companies that desire a license to operate in free societies cannot operate for long under the radar. Outsiders want to vet and track them. Depending on a company’s effect on outsiders, managers should measure and report charitable, environmental and other relevant elements of social performance. Accountability to communities for environmental and social performance is what most think of as accounting for sustainability. But the healthy enterprise is accountable to all four constituencies for creating value across the board. As a guide to actual reporting, the gold standard today is the Global Reporting Initiative’s guidelines. A thorough GRI report paired with a firm’s annual financial report give a relevant accounting of company performance.
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This broader view is in keeping with even the evolving thinking of financial executives. In a survey of corporate chief financial officers in spring 2008, CFO magazine’s research affiliate found that the commitment to sustainability by financial executives is ramping up. Asked whether environmentally sustainable business practices were more or less important to their stakeholders than five years ago, 69 percent said they were either more important or much more important to senior management. Moreover, 83 percent said they expected pressure to adopt sustainable practices would increase somewhat or increase dramatically in the next five years.
Executives can now be confident in the once risky notion that they should embrace accountability for creating value for shareholders, customers, employees and communities at all levels.
One of the most remarkable signs of leadership in the last year was Wal-Mart CEO Lee Scott’s comments at his company’s annual meeting; he offered to partner with government to solve social problems.
Critics ridiculed Scott for acting only after browbeating by activists. Scott admitted the company had been “playing catch-up,” but said Wal-Mart never wanted to do so again. As the leader of a company famous for a Friedman-like laser focus on profits, Scott was taking a step few people would have believed just a few years ago. He was redefining the value the company would create to realize sustainable profits for the future.
