Duncan McLaren puts the concept of a 'sustainable company' into a political context.
For several decades in the latter half of the last century, the public image of companies largely reflected political discourse. To some they were the defenders of the free world against the communist threat, to others the evil agents of the CIA. A lot has changed in the last decade or so. With the fall of the Berlin wall, the capitalist economic model, and its shock troops - multinational corporations - seemed invincible.
But that was a brief delusion. Capitalism on the eastern frontier proved to have an ugly face - racketeering and corruption. Neither the prescriptions of global institutions nor of private consultancies has yet managed to stop the rot. More widely, as Sir Geoffrey Chandler, formerly a senior Shell executive, puts it: ". so long as the inefficiencies of central economic planning were visible for comparison, the economic superiority of the market obscured its social defects"(1).
At the same time, some corporations realised that they were exposed on their southern flank, with increasing public concern there over environmental pollution, child labour and other human rights abuses - such concern extending into the northern heartlands of capitalism. Shell suffered not only in Nigeria, but also in the North Sea; Nike's own 'Asian crisis' over working conditions became a brand-image problem in that most brand sensitive of markets, the USA; and Monsanto's arrogance that it knew better than European consumers, saw it bruised and battered by the stock market. Global brands have become potential global liabilities, as consumers have begun to demand that companies help deliver sustainable development.
The last decade has seen an astonishing proliferation of corporate codes of conduct, often with linked reporting initiatives. In summer 2000, the OECD catalogued over 230 codes of conduct, ranging in scale from single-company codes to the Global Compact between the UN and some leading multinationals, covering everything from baby-milk to bathwater(2). Some of these codes represent genuine progress - the Forest Stewardship Council, for example, verifies timber sourcing from sustainable forests for discerning consumers. Others fall more into the category of 'greenwash' - public relations smokescreens designed to delay or deter regulatory measures. For example, after six years of the Chemical Industries Association's 'Responsible Care' scheme, KPMG found only a handful of signatories providing meaningful public reporting(3).
Sadly, greenwash is not the most pernicious of corporate responses to growing exposure and attack by NGOs and citizens. As Andy Rowell documents eloquently in 'Green Backlash'(4) , more than a few have resorted to heavy-handed tactics, typified by the 'SLAPP' suit - the acronym stands for 'strategic lawsuit against public participation' - used to deter critics by threatening expensive libel trials. These have, perhaps, become less popular since McDonalds lost the PR battle of the 'McLibel' trial - but have not been abandoned.
Those campaigners who - however erroneously - see these actions as typical of the corporate sector, are sustained in their beliefs by the failure of the majority of companies to speak out against such cowboy behaviour. Away from the 'wild west' and the 'coders', there is still a large group keeping a low profile - as evidenced by the failure of over 100 of the 350 top FTSE companies to make any reference to environmental issues in their 1998-99 annual reports(5). These almost certainly reflect a much larger proportion of smaller companies taking the same strategy ... keeping their heads down, trying not to draw attention to themselves, letting the market set the pace, and, at best, trying to adopt ISO standards for management quality - which bear, at most, a tangential relationship to sustainability.
Still, there are a few progressive, or at least enlightened companies which have set out to exploit profitable premium-value niche markets by adopting - despite intense scrutiny from the public and the market - a successful ethical or environmental profile. Examples include, in the UK, the Co-operative Bank and the organic food company Duchy Originals and, internationally, the Body Shop. Many more companies are struggling to follow these trailblazers, and finding it difficult largely because there are only a few profitable niche markets of this nature: not every company can distinguish itself from its competitors by becoming 'socially or environmentally responsible'. And because, in the short-term, shareholder value can still be easily enhanced by shifting as much as possible of the costs of production off the company and onto the environment and society. Whatever some NGOs might say, the company executives that adopt such strategies are not completely devoid of moral sense; they are simply following rational, but out-of-date, rules for achieving successful corporate financial performance. The expectations of today's affluent society are different, and it doesn't matter whether these new expectations are the product of cultural changes, or simply of wealth: they are real.
These expectations are shown starkly with respect to multinational corporations. According to a recent MORI poll, 90% of the UK public believe that, when a conflict of interest arises between the interests of environmental protection and multinational companies, environmental protection should come first. Only 1% explicitly disagree. Similar levels apply to health and employment interests(6). Much as the public espouse the values of sustainable development, such polls are little guide to those companies which want to transform themselves into sustainable companies. What should their goal be? What might a 'sustainable company' look like - if it is not a mythical beast?
It might appear that citizens as stakeholders are demanding multiple objectives - which might be contradictory. And clearly a single objective of 'being profitable' or 'increasing shareholder value' is no longer acceptable. The new demands can easily be summed up in one objective too: 'contribute to a sustainable society'. What this means in terms of outcomes relevant to the company needs to be unpacked - in the same way as the elements contributing to shareholder value need to be unpacked. Pricewaterhouse Coopers summarise the latter in terms of 'value drivers': innovation, brands, customer value, supply chain efficiency, people value and corporate reputation(7).
Where the sustainability objective differs is that companies must seek to provide value for all stakeholders, not just shareholders. In addition, critically, the different interests of different stakeholders must be met together, not traded off against each other. If stakeholder value could be treated as a commodity in this way, then 'shareholder value' (defined simply in terms of maximising financial returns for investors) would be an adequate surrogate for it. But shareholder value is a poor indicator of a sustainable company in much the same way that GDP growth is a poor indicator of a sustainable economy - because it is a limited measure. GDP values only what is bought and sold on the market, and not environmental conservation, social cohesion or any other intangible contribution to our quality of life. Similarly, shareholder value measures only the company's cash flows and capital costs. It is not just that these values have got out of balance, but valuing only the financially measurable has created a situation where the global economy is breaching environmental limits, exacerbating inequalities - and failing to consistently improve quality of life. We cannot afford to trade off climate stability for shareholder profits, nor even for greater employment levels - a sustainable society, by definition, needs to satisfy all these things together.
As the UK Government puts it in its sustainable development strategy(8), economic goals need to be met at the same time as environmental protection, resource conservation and social inclusion if the outcome is to be a high quality of life for all. Various tools and approaches are emerging to help companies contribute to this set of goals. The 'triple-bottom line' demands that companies measure and maximise environmental and social as well as financial value. The DTI-sponsored Sigma Project(9) aims to develop a sustainability management standard which addresses all these aspects, including issues such as reputation management, eco-efficiency and social accountability.
Like the Global Reporting Initiative(10) (GRI), Sigma is reaching into the spaces which link social, environmental and economic concerns, looking for the holy grail of integrated management standards and indicators, as well as encouraging robust reporting on all three concerns. These initiatives stand at the forefront of the transition from continuous environmental improvement - which has motivated many changes in companies in the past decade - to the ecologically and socially sustainable enterprise.
Business thinkers such as Paul Hawken(11) and Thomas Gladwin(12) have made valuable contributions to sketching out what such a company might look like - in terms of both processes and outcomes. Both offer a radical view of a company that respects environmental limits (by, for example, reducing non-renewable resource depletion to within the rate of development of renewable substitutes) and is supportive of social inclusion (by, for example, providing employment and developing human capital). Both also begin to engage with the fundamental question of 'sufficiency' - asking, when it comes to the development and marketing of new products, 'how much is enough?'
Radical as these initiatives might appear, they are still not adequate. Although, they provide a good model for the progressive company which can find a profitable market niche, they have less to say about how the mass of firms will change practices and behaviour. This is because they largely fail to address the political context for change, and the current political power of companies, which is only rarely directed towards the goal of sustainability. Friends of the Earth has identified three themes for companies seeking to make the sustainability transformation: eco-innovation, social accountability and political responsibility. Table 1 elaborates on these, suggesting seven areas for action. Collective, responsible, transparent political activity is the make-or-break factor.
Getting companies to support 'sufficiency' is radical and presents a major challenge. It suggests that companies should try to reduce material consumption - something that might appear to run counter to profit maximisation. So this might appear a bigger challenge. But if companies think not just 'out of the box' but 'out of the room', opportunities to make profits by marketing completely new services which directly improve quality of life can be found. Energy service companies which sell energy conservation rather than power are starting on this route. But such companies have found it difficult to profit from their principles without a supportive regulatory framework. Again, we come back to politics.
Politics is the fourth - and hopefully final, frontier of sustainability.
It is perhaps the arena in which companies are distrusted most, and
with most reason. Public concern about the complicity of multinational
enterprises in inter-governmental initiatives which appeared only to
swell corporate profits at the cost of environmental and social standards,
and sustainable development for poorer countries - such as the Multilateral
Agreement on Investment and the World Trade Organisation's 'Millennium
Round' - was a fundamental factor stimulating the public outcry and
protest which reached the streets of Seattle last December with such
dramatic impact. Whether or not the campaigners were right to oppose
these agreements, they were right to oppose the opaque, unaccountable
and unbalanced processes which were set up to deliver them. And since
Seattle, corporate influence on national politics has threatened to
become a key issue for the coming US Presidential Election.
1. Innovate for Sustainability - seek out new practices, new products and services, and new technologies that meet peoples' needs and improve quality of life on minimal material and energy use. This means improving product efficiency and durability, taking responsibility for products over their full life-cycle, and finding ways to replace products with locally-delivered services.
2. Prioritise Resource Productivity - make 'bottom-line' savings by turning management attention, research and development from labour saving to resource saving through waste avoidance, recycling, reuse and adopting the principles of industrial ecology. Set targets in line with environmental space limits or factor-ten objectives.(13)
3. Spread Best Practice through Supply-chains - ensure that suppliers and sub-contractors adopt the same high environmental and social standards as the company - to help spread good practice to small and medium-sized enterprises.
4. Promote Sustainable Consumption - use product development, marketing and advertising strategies to support 'sufficiency'- rather than encouraging over-consumption, and the spread of products that replace sustainable practices such as breast-feeding.
5. Invest in People - adopt high, non-discriminatory labour standards and family friendly working practices, and invest in the knowledge and skills of the workforce, to enhance their quality of life and their productivity.(13)
6. Account to all stakeholders - report comprehensively and transparently on environmental and social impacts - with independent verification. Respond accountably to the demands and interests of employees, customers, communities and other stakeholders - not just to investors.
7. Play Fair in Politics - use lobbying power and influence transparently, in favour of a high level playing field for fair competition with high environmental and social standards. Support green tax reform and effective regulation for environmental protection and corporate accountability, including legal and criminal liability for defaulting companies and their directors.
Does this emphasis on responsible politics mean that we should see companies as citizens? Not if it means valuing companies as much as people - in other words, seeing every one of them as worthy of nurturing and protecting for their own sake. In reality we need new or radically transformed companies to deliver sustainability - and that means that some of the old dinosaurs must disappear. The emphasis on politics means instead that companies must exert their political influence responsibly, openly and accountably to their stakeholders - supporting regulation where it is needed for sustainability.
However if regulation comes with a financial cost, how can we expect companies to support it - especially if they have the option of moving production to another country? Part of the answer is to design intelligent regulation, using market instruments, disclosure standards and liability regimes which offer as many chances for profit as loss. In addition companies can, working collectively, support changes that they wouldn't make alone. Such co-operative thinking might come hard to some, but it offers hitherto unexplored routes to sustainable societies and therefore sustainable profits. Even the leading progressive companies will not find their market niches invaded, but extended, as an intelligent regulatory floor creates more space for competition that does not rely on unsustainable methods.
So how do we get there from here? Reinventing corporate reporting - whether in the style of Pricewaterhouse, the GRI or the Operating and Financial Review being proposed by the UK company law review is no more than a step in the right direction. The next step is independent verification, to meet the needs of all stakeholders - and that means that global accountancy firms will need to reinvent themselves if they are to undertake such a task! After that must come the true accountability measures - based on mandatory reporting, stakeholder accountability mechanisms which provide the opportunities for stakeholders to legally challenge directors' decisions, and criminal liability. In this respect the UK company law review is a real missed opportunity, and one that 'New Labour' might live to regret with an election coming up, and public concern about corporate activities growing. These incentive measures need to be supported by legislation, to ensure that companies pay a fair level of taxes in the countries where they operate and to prevent unfair competition, nationally and globally.
Such measures will 'sort the sheep from the goats'. The stubborn, independent minded companies will be the first to start helping NGOs deliver such regulation - bringing the woolly-minded along behind. And the outcomes might finally begin to approach the sort of sustainable companies envisaged by Hawken and Gladwin.
1. Chandler, G. 1999. 'Do the Right Thing' Green Futures, March, pp22-23.
2.OECD Trade Directorate, 1999. Codes of Corporate Conduct: an inventory. Paris: OECD.
3.KPMG, 1994. UK Environment Reporting Survey.
4.Rowell, A. 1996. Green Backlash: Global Subversion of the Environmental Movement. London: Routledge.
5.PIRC surveys - see http://www.pirc.co.uk/pubs/env99.htm
6. MORI, www.mori.com/polls/2000/ecolgist.shtml
7. Nally, D. 2000 Reinventing Corporate Reporting. PWC.
8. Her Majesty's Government, 1999. A Better Quality of Life. London: The Stationery Office.
9. Sustainability: Integrated Guidelines for Management.
10. Global Reporting Initiative, 2000. Sustainability reporting guidelines. http://www.globalreporting.org
11. Hawken, P., Lovins, A. and Lovins, L.H. 1999. Natural Capitalism: Creating the Next Industrial Revolution, London: Earthscan.
12. See Richards, D.J. and Gladwin, T.N. 1999. 'Sustainability Metrics for the Business Enterprise' in Environmental Quality Management, Spring.
13. Environmental space and Factor Ten are methods
used to quantify the changes in environmental resource use necessary
to deliver sustainability. Both suggest that overall use of materials
and energy in economies like those of the USA and Europe needs to be
cut by up to 90%. See McLaren, DP S Bullock and N Yousuf (1998) Tomorrow's
World: Britain's Share in a Sustainable Future. Earthscan: London;
and see also Hawken et al (Note 11 supra).
Contact details:
Friends of the Earth
26-28 Underwood St.
LONDON
N1 7JQ
Tel: 020 7490 1555
Fax: 020 7490 0881
Email: info@foe.co.uk
Website: www.foe.co.uk
October 2000
Policy and Research Unit
Last modified: 23 July 2000
