The Sustainable Company: How to Create Lasting Value through Social and Environmental Performance

By Chris Laszlo

The Sustainable Company shows how to create value for shareholders while balancing responsibilities to society and the environment. Its step-by-step approach and tool-kit for managers make this book the solutions manual for the twenty-first-century manager.

• Language: English
• Publisher: Island Press
• Release date: Apr 10, 2013
• ISBN: 9781597266291

Book preview

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ABOUT ISLAND PRESS

Island Press is the only nonprofit organization in the United States whose principal purpose is the publication of books on environmental issues and natural resource management. We provide solutions-oriented information to professionals, public officials, business and community leaders, and concerned citizens who are shaping responses to environmental problems.

In 2003, Island Press celebrates its nineteenth anniversary as the leading provider of timely and practical books that take a multidisciplinary approach to critical environmental concerns. Our growing list of titles reflects our commitment to bringing the best of an expanding body of literature to the environmental community throughout North America and the world.

Support for Island Press is provided by The Nathan Cummings Foundation, Geraldine R. Dodge Foundation, Doris Duke Charitable Foundation, Educational Foundation of America, The Charles Engelhard Foundation, The Ford Foundation, The George Gund Foundation, The Vira I. Heinz Endowment, The William and Flora Hewlett Foundation, Henry Luce Foundation, The John D. and Catherine T. MacArthur Foundation, The Andrew W. Mellon Foundation, The Moriah Fund, The Curtis and Edith Munson Foundation, National Fish and Wildlife Foundation, The New-Land Foundation, Oak Foundation, The Overbrook Foundation, The David and Lucile Packard Foundation, The Pew Charitable Trusts, The Rockefeller Foundation, The Winslow Foundation, and other generous donors.

The opinions expressed in this book are those of the author(s) and do not necessarily reflect the views of these foundations.

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Copyright © 2003 Chris Laszlo

All rights reserved under International and Pan-American Copyright

Conventions. No part of this book may be reproduced in any form or by any means without permission in writing from the publisher: Island Press, 1718 Connecticut Avenue, N.W., Suite 300, Washington, DC 20009.

Published in cooperation with the Sustainable Value Foundation

ISLAND PRESS is a trademark of The Center for Resource Economics.

LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA

Laszlo, Christopher.

The sustainable company : how to create lasting value through social and environmental performance / Chris Laszlo. p. cm.

Includes bibliographical references and index.

9781597266291

1. Industrial management. 2. Business ethics. 3. Industrial management—Environmental aspects. 4. Social responsibility of business. 5. Industrial management—Case studies. I. Title.

HD31.L31568 2003

658.4′08—dc21

2003011301

British Cataloguing-in-Publication Data available

Printed on recycled, acid-free paper e9781597266291_i0002.jpg

Manufactured in the United States of America

09 08 07 06 05 04 03 10 9 8 7 6 5 4 3 2 1

TO MY DAUGHTERS JENNA AND ISHANA

Table of Contents

ABOUT ISLAND PRESS

Title Page

Copyright Page

Dedication

FOREWORD

FOREWORD

PREFACE

ACKNOWLEDGMENTS

PART I - The Leap to Sustainable Value

INTRODUCTION

CHAPTER ONE - Toward an Integrated Bottom Line

CHAPTER TWO - The New Ethics in Business

CHAPTER THREE - What Gets Measured Gets Managed

CHAPTER FOUR - Shareholder Value and Corporate Responsibility

CHAPTER FIVE - The Stakeholder Mind-Set and Culture

PART II - Companies Creating Sustainable Value

CHAPTER SIX - Patagonia, Inc.

CHAPTER SEVEN - The Atlantic Richfield Corporation (ARCO)

CHAPTER EIGHT - The Co-operative Bank

CHAPTER NINE - Bulmers Limited

PART III - The Value Creation Tool Kit

CHAPTER TEN - Introduction to the Tool Kit

CHAPTER ELEVEN - The Eight Disciplines

CHAPTER TWELVE - Putting It All Together

CHAPTER THIRTEEN - Surveys of Multinational Companies

POSTSCRIPT - Leadership Skills and the Sustainable Firm

APPENDIX

NOTES

FURTHER READING

ABOUT THE AUTHOR

INDEX

ISLAND PRESS BOARD OF DIRECTORS

FOREWORD

In August 2002, the Johannesburg World Summit on Sustainable Development celebrated the tenth anniversary of the Rio conference. A number of heads of state attended, but after the United States refused to ratify the Kyoto Protocol—and after the events of September 11, 2001, with the threat of terrorism and the difficult issues of poverty and war in so many places—few expected much from the intergovernmental conference. It may have come as a surprise to some observers, but business was more present and more forceful in its determination to push ahead. One of the highlights of the gathering was an unlikely joint declaration by Greenpeace and the World Business Council for Sustainable Development (WBCSD), an organization of more than 100 international companies, about the need for coordinated international action against global warming.

The skeptics will say—and have said—that it was all marketing and communication. Companies, admittedly, do know how to use communication tools to their advantage. But I believe that real change is taking place. Unlike governments, large international companies have been following a steady course, recognizing more and more the strategic importance of sustainability in the world’s future and in their own futures. After reading Chris Laszlo’s book, one will understand better the depth and significance of this change of attitude.

Companies that depend greatly on natural resources—including energy—for the development of their business, such as Lafarge in the building materials industry, had never shared the pessimism of the Club of Rome doomsayers. They tend to believe strongly that technological progress can stretch the limits of possible performance, provided it is harnessed in the right direction. But they know that long-term efforts cannot always be spurred by short-term market signals, that a global conceptual framework is needed for long-term progress, and that recognizing issues and problems is the first step toward finding solutions.

So, for them, the concept of sustainable development, which looks at the long-term consequences of our current actions, is naturally attractive. Looking ahead for ways to conserve natural resources, mitigate global warming, or contribute to social development is the best way to avoid surprises and crises, inevitably followed by emergencies and emotional reactions, most of which are likely to have enormous economic costs and consequences.

The forward-looking international company is not concerned only about the long-term environmental future of the planet. It is working in an increasingly global marketplace, but one in which hostile feelings have sometimes developed. This global world is still a place where violence, poverty, inequality, prejudice, illiteracy, and racial and religious hatred exist. Many people see international companies as the villains, who not only benefit from, but also sometimes even contribute to, these ills. On the contrary, many international companies know that we cannot solve the world’s problems, but we also know that we are contributing a positive influence. We bring jobs, increased standards of living, education, and training. We bring together people from different backgrounds and different origins, allowing them to communicate, to travel, to learn about each other; and we bring the world a little bit closer to the global village advertised too early. Our positive contribution must be recognized if we want to continue to be free to develop and if a market economy is to remain widely accepted.

For a company to commit to sustainable development makes good business sense. An approach that pays attention to all of a firm’s stakeholders, however, will appear to some to be a deviation from the only worthwhile and legitimate objective of a company: the maximization of shareholder value. This book will show them that there need not be any contradiction between the two objectives. Actually, after the end of the 2000–2001 period, when the myths of instantaneous and limitless value creation often led to greedy and unethical behavior, it should not be difficult to recognize that real sustainable value creation for shareholders also requires attention to a company’s other stakeholders.

The most encouraging development in favor of the sustainable company has been the behavior of the shareholders themselves. Business executives were sometimes worried to see a large part of the financial world adopting a narrow and myopic view of business and management objectives. It comforts them to observe the recent growth of ethical funds for shareholders who want to invest only in companies that will respect sustainable development criteria.

This is precisely where long-term self-interest and moral imperatives converge. Here managers and shareholders, who are also people with a conscience, can together shape a new business environment and, to quote Davos’s motto, contribute to a better world.

Bertrand Collomb

Chairman and CEO, Lafarge S.A.

FOREWORD

Some may find my message surprising, but I observe that many leading corporations are no longer seeing environmental stewardship (or responsibilities to stakeholders other than shareholders) as a cost—a necessary evil, if you will. They are seeing these responsibilities as opportunities, a potential source of competitive advantage. Although this is not yet true for the vast majority of smaller firms, to the extent that leading companies change and set the terms of engagement and proactively address their social impacts to reduce costs and risks, win customers, and build reputation, the smaller firms will have to follow in order to stay in the game.

This is a change in view, even for the leaders. I must stress, however, that this change is based on self-interest, not altruism, and this fact is good not only for shareholders but also for the environment and those who care about it. If corporate efforts are born of self-interest, they are more real and sustainable and less susceptible to the business cycle. This change in orientation may be coming in the nick of time, or maybe it is just that the times are demanding the change.

The key challenge of our time is to provide the economic growth needed by the world’s poor while leaving the local, regional, and global environment in a state that will provide sustenance and benefits in the future. The signs of stress in this equation are all around us. The economic needs are clear: those living in abject poverty number in the billions, and their number is likely to double over the next 50 years unless there is change. This poverty threatens everyone. Its symptoms include congestion, unemployment, undereducation, despair, unrest, terrorism, and disease. The disparity between rich and poor is evidence of this problem. The richest 15 percent consume 75 percent of the world’s resources, and the average American consumes 300 times the amount consumed by those at the other end of the economic scale. The gap is growing, and so is the aspiration for greater equity. So the alleviation of poverty on a massive scale is absolutely necessary.

Can our natural systems support the economic growth that will be necessary to lift up the growing numbers of poor? Our stocks of renewable resources (such as fish, forests, water, and soil) are falling. Waste accumulations (CO2 and toxics) are rising. Biodiversity is being lost as humans sequester a greater share of the earth’s photosynthesis. To bring the current world population to a Western standard of living would require material flow to increase 20 times.

Can our natural world handle this? Some would say it is doubtful. Nevertheless, can we deny the world’s poor a decent way of life and some sense of equity? Not if we are to live in a safe and free world!

Leading corporations such as BP, Shell, Dupont, Honda, GM, and many others see these overwhelming forces gathering and are drawing the following conclusions:

Action is required to preserve (and extend) open societies and markets that might be threatened by precipitous and calamitous environmental change.

Opportunities to help abound, in the form of new technologies that raise living standards while reducing the human footprint.

The private sector is well positioned with skills and the flexibility to answer the greatest needs.

Leading corporations see that change is coming and want to be sure they shape that change to their advantage. Therefore, they are going beyond compliance to seek out competitive advantage in the shaping of markets, the creation of new products and services, the formation of the right alliances, and the learning of the best practices for the new world that is coming.

The best example I have of this type of corporate behavior is what BP has done relative to the issue of global climate change. In the late 1990s, the global oil industry was in nearly complete denial of the importance of this issue. Climate change and its relationship to the use of fossil fuels called into question the basic value of this business to society. Nevertheless, BP broke ranks and began to address the issue head-on. It entered the policy debate; it announced emissions reductions in advance of any regulation; it began to learn about the future by instituting its own carbon trading scheme in partnership with Environmental Defense, sponsoring studies of future technology paths and joining rainforest protection schemes; and it pushed aggressively into the renewable energy realm through its photovoltaic business. It also started working in partnership with the auto companies on fuel-cell research that might eventually replace the internal combustion engine and its need for petroleum.

You might ask why BP would take such a radical and visible stance, given the potential loss of so much in its core business. BP is a big and complex company, and there are never simple answers to such questions. But it is clear to me that what many people saw as BP doing the right thing was actually a reflection of self-interest, and I believe that this has led to many good things for BP, including a newly defined and differentiated vision of its future captured in the term Beyond Petroleum. Because the business case has become real, I believe that BP’s efforts will be sustained, and that can only be good for the planet and the sustainability challenges we face.

There are many other examples of corporate transformation based on the ideas of sustainability and responsibility, and the list grows daily. The message of this book is that corporate responsibility is needed and corporations will be rewarded for providing it.

Richard Whately once said, A man is called selfish, not for pursing his own good, but for neglecting his neighbor’s. By that definition, corporations would be foolish to be selfish—because they would be missing so many good opportunities.

Steve Percy

Former Chairman and CEO, BP Americas

PREFACE

Since Enron, the way business is being conducted has come under intense scrutiny. Corporate responsibility has become a new watchword for skeptical investors; wary consumers; and employees, communities, and nature activists who fear exploitive business practices. Yet many executives still have a poor understanding of what is expected of them. Trust and transparency in financial reporting are only one piece of the puzzle. Social and environmental performance and stakeholder relations have become equally critical to business success.

This book attempts to bridge the gap between management thinking focused on shareholder value and new stakeholder expectations that call for greater corporate responsibility. It shows how a new business paradigm is emerging in which value is created for shareholders and stakeholders in an integrated bottom line. Case examples developed in collaboration with leading responsible companies demonstrate how greater corporate responsibility can also be a source of business advantage. A tool kit provides strategic frameworks and financial methods for organizations seeking practical solutions to creating shareholder value through corporate responsibility.

The Problem and the Challenge

There is a growing rift between short-term profit thinking in companies and social and environmental pressures from stakeholders. Globalization, ecological stresses, and terrorism are all facets of a new, more complex reality featuring multiple stakeholders and new corporate responsibilities. Yet business executives often view corporate responsibility as adding complexity and cost in an economic environment that can ill afford them. Inside corporations, financial executives don’t understand the roles of environment, health, and safety managers. Social and environmental goals are almost always developed apart from business strategy: different terminologies, different departments and managers, different measures, and different reporting tools. The triple bottom line is often exactly that: three distinct sets of performance measures. Now the challenge is to go beyond the triple bottom line to find a new, more integrated approach to measuring and managing business performance.

Origins of the Book

I first encountered the separate worlds of business, society, and the environment when I worked as director of strategy for Lafarge’s Southern U.S. Division in 1990. At that time, the environmental managers inside the company were technical and legal experts who provided specialized input to plant managers and senior executives with almost no interface with the rest of the business. Five years later, as a group vice president and general manager of a business unit, I saw a major leap forward in Lafarge’s environmental policy. The 1995 Environmental Policy Report, issued by chairman and chief executive officer Bertrand Collomb, states that caring for the Environment is an essential element of the Group’s long-term strategy. Programs and objectives, however, were still primarily environmental: reducing CO2 and NOx emissions; switching energy sources to waste-derived fuels; substituting by-products for natural resources; reusing fly ash, slag, and silica fume; and recultivating quarries and industrial sites. Since then, there has been significant progress in integrating social and environmental goals into business value objectives. But the struggle to close the gap between these worlds continues to this day.

As this book is being written, many forward-looking multinational companies are issuing their third or fourth sustainability reports, but with little internal buy-in from the operating managers who are accountable for financial results. In many cases, the