A new paradigm is emerging surrounding how a business should respect the stakeholders that are essential to its long-term prosperity
Most companies desire to stay in business over the long run. This requires a sound business strategy, including sharp focus on the right target customers, an unbeatable value proposition, and a product or service that can be delivered to the targeted customers at a consistent profit. This wealth-creating strategy and function has been the generally accepted sole purpose of business for generations.
Today, however, there are converging forces that recognize that while businesses are in the business of making money, their economic activities require greater scrutiny – and accountability.
More specifically, stakeholder demands, the activity of non-governmental organizations, and regulatory reforms – an issue that mortgage brokers are all too familiar with – are increasingly placing pressure on firms to take into account the environmental and social implications of their economic activities. ‘Sustainability’ is an emerging business paradigm that recognises that businesses – and their economic activities – are inescapably reliant upon environment and social systems for long-term survival.
For example, businesses rely on natural resources and ecosystem services for energy, operations, and production. They rely on governments and communities for infrastructure and support. They rely on employee skills and knowledge for competitiveness and growth.
The sustainability paradigm clearly recognizes that economic growth and wealth creation are only viable if access to this natural, human, physical, and social capital continues. Sustainability recognizes the following three corporate objectives:
• economic viability
• environmental integrity
• social responsiveness
WHERE DOES BUSINESS FIT IN?
Private business acts as the engine of economic progress in society and represents the productive resources of the economy. In this economic role, competitive, market, and regulatory forces place considerable pressure on firms to sustain their wealth-creating contributions. To remain economically viable, firms can:
• plan strategically
• invest in research and development activities
• lower costs and realize production efficiencies
• innovate to meet customer needs
However, sustainable companies focus attention not only on their economic role but also on their environmental integrity and social responsiveness. The economic activity of firms can impact on:
• natural resource depletion
• environmental degradation
• disruption of communities
• worker displacement
• worker health and safety
While some of these negative externalities are dealt with through the pricing/allocation mechanism of the market (eg carbon emission trading) and others through regulation (eg worker health and safety), many are unpriced or exploitations of the commons (eg loss of natural habitat, disruption of communities, worker displacement).
TAKING ACTION
Given the many potential unpriced externalities of firms’ economic activities, sustainable companies move beyond market mechanisms and regulatory compliance to address environmental integrity and social responsiveness voluntarily and proactively.
These two dimensions are intrinsically tied to ongoing sustainable economic activity. In the sustainability paradigm, economic viability is achieved not by indiscriminately externalizing costs onto legitimate stakeholders but rather by treating the maintenance of natural or environmental capital and the delivery of social improvements as a necessary complement to economic activity.
There is ample evidence to suggest that companies that proactively address environmental integrity and social responsiveness actually enjoy higher economic performance. However, maximising economic, environmental, and social performance is no easy task.
Ideally, sustainable companies are those that seek to maximise the utility of all stakeholders by maximizing economic outcomes while simultaneously maximizing environmental and social outcomes. But optimizing across all three dimensions is virtually impossible because the pursuit of sustainability requires trade-offs, and cost.
In trade-off situations it is difficult to achieve two or more desirable objectives simultaneously. For example, a company might accept a lower rate of return on a major strategic initiative in order to protect the natural environment. Or, when economic interests take precedence, certain environmental investments may not proceed, or a program promoting social progress might have to be postponed.
On the other hand, sustainability-focused companies might experience a higher cost structure by, for example:
• paying their employees above-market wages
• engaging in mitigation effects regarding environmental externalities over and above what is required by regulation
• not reducing headcount rapidly in times of economic austerity
• passing up valuable investment opportunities that are not consistent with their values
• earning lower margins on products or services due to more expensive sourcing decisions to appease NGOs
• losing customers to competitors by charging a higher price for sustainability-focused features that some customers are not willing to pay for
CHASING SUSTAINABILITY
Pursuing the sustainability paradigm largely comes down to a few key aspects, ie the degree to which – more or less – a company takes the following actions:
• emphasizes the long term versus the short term
• cares more or less about the impact of their operations on other stakeholders and the environment
• focuses more or less on the ethical grounds of their decisions
• places relatively more or less importance on shareholders compared to other stakeholders
Each of these aspects ultimately places considerable tension on decision-making and begs the question that every company must ask: “What is our strategy?”
This is a slightly amended version of an article written by Jeremy Galbreath, associate professor at the Curtin Graduate School of Business. It has been shortened to make it suitable for web publishing.
