chase the value

March 25, 2016 0 comments

Sustainability is one of the most difficult and troubling—but at the same time most important—concepts in business today. On the one hand, the word ‘sustainability’ has been so grossly overused and misused that many, including some proponents of sustainable management and development, are now shying away from it; to them, ‘sustainability’ has joined other degraded concepts such as ‘corporate social responsibility’ and ‘human resources’ in the scrap-bin of management jargon. Others argue that even if the term is overused, the principles behind it are important and need to be examined and discussed, and put into practice.

616-1It is nearly twenty years since the Brundtland Commission’s report on sustainable development first brought the issue of sustainability to center stage, and about the same length of time since John Elkington’s Cannibals with Forks introduced us to the concept of the triple bottom line. Since then, reams of print and terabytes of web space have been devoted to both. There has been much talk about introducing sustainability into business and management practice.

But how far have we really come? Again, there is no consensus. Cynics say nothing has changed—companies and societies continue to consume resources at a reckless rate, environmental degradation is largely unchecked, the seas and air continue to warm, and social disintegration in many parts of the world continues apace. Others argue that progress is being made. In The Necessary Revolution, Peter Senge and his co-authors provided numerous case studies of companies that are taking sustainability seriously and cleaning up their act. My colleagues Fu Jia and Jonathan Gosling and myself described in Sustainable Champions how global companies in China are taking big steps forward in sustainability there. In fact, both sides are right. Companies ‘are’ doing some creative and interesting things in sustainability, and yet the global problems continue.

Why is this so? Are sustainability practitioners and advocates just beating their heads against a wall? Or is there hope that things will change? If so, what needs to be done?

we are both the problem and the solution

Perhaps the first step in understanding sustainability and its related issues is to reject the common mantra that the problem is entirely new. This is not so. Mankind has been degrading the environment and creating unsustainable societies since the beginning of civilization, and probably even before that.

There are plenty of examples of peasant societies that do live in harmony with their natural environment, and early farming techniques such as crop rotation show that we did indeed understand natural forces. Some of these early societies were also marvelously self-reinforcing and sustaining. Cistercian monks, for example, practiced self-sufficiency and recycled and reused goods and tools, an early example, if you like, of the circular economy.

But those same Cistercian monks settled on land which had until then been wild—cut down forests, drained swamps, dammed rivers, and generally terraformed their environment until it suited their needs. Practiced on a large scale, these efforts changed landscapes. The hills around the Mediterranean Sea and those of the Korean peninsula were once densely forested. By 1000 CE, they no longer were; the trees of the Mediterranean had been harvested for shipbuilding, while those of Korea for charcoal. Deforestation in the foothills of the Himalayas had begun by this time too. This deforestation changed drainage patterns, vegetation, and river flows.

Rising populations led to social change as well. Cities began to grow in size. The flight from the land, the phenomenon whereby peasant populations leave their fields and migrate to cities, had begun in China, India, and Turkey long before the Industrial Revolution. Factory technology and steam power, the cornerstones of the Industrial Revolution, increased the pace of change, but arguably even more important were the improvements in public health that led, initially in Europe, to an end to epidemics and dramatically lowered child mortality. More people lived longer, and populations shot up faster than food production could keep pace. Arguably the only thing that saved Europe from a Malthusian crisis in the late nineteenth century was the availability of land in the Americas. Emigration was a safety valve that bled off excess population and enabled European societies to remain sustainable–just.

What has changed in the past fifty years or so is scale, and that too is largely due to population growth. More of us are consuming more things, and the environmental and social impacts of both production and consumption are rising steeply. We have tried various measures to reduce these impacts, some of which such as recycling seem to work, but others of which such as energy conservation seem to have made matters worse.

Jevons Paradox, the notion that the efficiency with which we use a resource determines the rate of increase of its usage, is clear all around us. We use oil as a source of energy far more efficiently than we did twenty years ago, but global per capita consumption of oil has increased year on year, even when oil prices were over $100 a barrel. Studies in the United States have shown that increases in the energy efficiency of air-conditioning units have largely been cancelled out by increases in numbers of units sold. One reason why the units are so popular is that their better energy efficiency makes them cheaper to run. There is
the paradox.

One of the problems with sustainability is that it is always someone else’s problem. Society blames companies for inefficient practices and overproduction, yet society consumes the products companies make, and continues to demand more. If we as consumers were more intelligent in our buying—not buying in excess of need, buying products and services that are produced responsibly, boycotting companies that behave irresponsibly—then we might have some real impact. By and large, though, we do not. Similarly, companies blame government for not enacting legislation that will result in genuine social and environmental change. But managers and business leaders do not need to wait for government to tell them what to do. They can take the lead and bring in their own programs for sustainability. Nothing is stopping them.

the shareholder trap

Or is it? The argument I hear over and over is that companies cannot undertake genuine moves towards greater sustainability because the shareholders, the owners of the company, will not permit it. The shareholders demand greater and greater profits, high share prices and dividends, and everything else must be subordinate to this.

This is of course the argument of the Chicago School of economists, who following the late Milton Friedman, argued that a company’s primary—if not sole—responsibility was to generate profits for shareholders, and that anything else such as investment in communities or environmental programs was tantamount to socialism. It is astonishing to me that this argument continues to be taken seriously, for it is as full of holes as a Swiss cheese.

Shareholders in a limited company do not own the companies they invest in. They own the share capital, but they do not own and have no control over the company’s assets and people. Shareholders are stakeholders, and an important one; many others have a say in what the company does too. Shareholders can of course withdraw their share capital if they do not like the way the company is run, but that does not mean they should be allowed to dictate policy and strategy to the management.

There is no inherent contradiction between making good profits and paying dividends, and behaving in a socially and environmentally responsible manner. Indeed, research shows that companies that do behave in a socially and environmentally responsible manner are also among those with the best long-term financial performance, in terms of both profitability and share price. Investment in the environment and communities, as the Tata Group has convincingly demonstrated, is also an investment in brand value.

what is to be done?

Introducing sustainable practices into business does not require a revolution. We do not need to tear up our existing business models and overthrow the capitalist system. As Philip Kotler showed in his thoughtful and intelligent book Confronting Capitalism, we already have a ‘system’ that works. The problem lies in the purpose to which we put that system. It is our values, our morals, and our mental landscape that needs to change, not the system itself. We have the tools to hand; we need to change what we do with them.

That is not to say that there should be no innovation in business models. I am full of admiration for companies like Aurolab, who look at a problem and come up with a different way of doing things. But the Aurolab model would not work everywhere, all the time. Companies need to find the right business model for the time, the place, and the market. Far from being controversial and revolutionary as a concept, this is what all companies should be seeking to do, all the time. Forget about being a category killer or a disruptive innovator. Just find the model that works, right here, right now.

Nor should managers fall into the trap of assuming that social and environmental sustainability must take precedence over good business practice. Remember that the triple bottom line has three legs: to be environmentally and socially sustainable, a company must remain financially sustainable as well. As a Danish business journalist once said to me, “you can be as socially responsible as you like, but if your company is losing money, it’s still a basket case.” That means things like sound financial management and the profit motive must be part of the equation.

Nor should managers fall into the ‘other’ trap of assuming that sustainability and profit are opposed to each other, and that achieving the former requires sacrificing some of the latter. Sustainability projects should be treated like any other form of capital investment and costed according to the long-term benefit they will bring to the company—not just financial value, but also value in terms of things such as satisfied customers, community good will, and so on. In the long run, these things do have financial value, because they translate into brand equity; one of the most valuable assets any company can have.

The model for how to do this, in my view, is Tata. When I studied Tata’s brand a few years ago, it seemed plain to me that much of Tata’s brand value was derived directly from its socially responsible position. Here is how the value creation process works.

First, Tata starts with a very strong and widely diffused set of values, which are built into its culture and its ways of doing things. The company is committed to improving the lives and welfare of people, and to achieve this it invests large sums in healthcare, education, the environment, support for women entrepreneurs, and so on, both through the Tata Trusts and directly through the subsidiary companies (and these latter contribute both through social programs and through the goods and services they sell).This investment creates a positive image of the Group. It is perceived, by the majority at least, as a ‘good’ company. People trust the Group because they see the good that its various programs do. This makes Tata a popular place to work—employees are for the most part proud of their company and have a strong personal self-image and sense of self-worth. Because they are committed to their companies, deliver good quality service, and are innovative in product and process design.

Innovation and quality in turn result in higher levels of customer satisfaction. Customers are influenced in their buying decisions both by the quality of what they receive and the heritage of trust and service that attaches to the Tata brand. That brand satisfies self-esteem needs as well as lower-level ones for food, shelter, and so on. And because customers tend to be loyal to Tata, they create value for the brand—$15bn worth of value, according to Brand Finance.

I have seen other companies that know how to translate values into value—the John Lewis Group, Aurolab (as already mentioned), Interface, a few others. There are not enough of them yet, but if we can spread this idea of purposeful thinking and values into management more widely, then we might indeed see some real change. We do not need to do that much in order to make our companies more sustainable. We just have to stop and think about where the real value lies, and how to unlock it, and then put our thinking into action.

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