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Transforming your company into a sustainable enterprise – part 2

By IMD Professor Francisco Szekely and Zahir Dossa - October 2014

While almost all companies today advocate sustainability, their practices and attitudes vary greatly. What exactly does sustainability mean and what does it look like?

In the first article of this series, we explored the origins of the sustainability movement, including debates regarding long-term survival and technology (stage 1 of sustainability) and the environmental movement (stage 2). In this article, we assess the third and fourth stages—those that move beyond the environmental domain to address broader, societal aspects of sustainability.  

Stage 3: The socially responsible enterprise 

The main emphasis in this stage is on corporate social responsibility, and this is where best practices are at the moment. Here, businesses are primarily concerned with maximizing profitability while at the same time reducing harm. 

Proponents of responsible business highlight the "business case for sustainability" achieved through cost savings in the short and long terms. For example, a reduction in energy use, materials and waste can lower short-term costs while the availability of resources can help sustain the long-term viability of a business. In addition, companies can avoid costly smear campaigns by being more proactive about their impacts on the environment.  

However, the "business case for sustainability" often sounds very like Milton Friedman's famous New York Times article in 1970: The Social Responsibility of Business [to shareholders] is to Increase its Profits. While there is a "business case for social responsibility," we believe that the "business case for sustainability" is a much harder concept to pin down.  

The notion of "sustainable development" began to emerge in the late 1980s, when the United Nations asked the World Commission on Environment and Development (WCED) to discuss the ideal path for development. After a 900-day international exercise involving leading scientists, politicians, research institutes, non-governmental organizations and the general public, the Commission (chaired by Gro Harlem Brundtland) issued a report entitled "Our Common Future."  

In it, the WCED combined economic development with a long-term horizon and coined the idea of "sustainable development." The Commission defined this as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs." The report recommended that all social actors, businesses included, promote a growth strategy that is sustainable in the long term. 

In addition to its effect on the environment, businesses also have an impact on the long term. Stakeholder theory, developed by R. Edward Freeman in 1984, is a pivotal contribution to management theory and practice. Freeman defines a stakeholder as "any group or individual who can affect or is affected by the achievement of the firm's objectives." He therefore argues that firms have a social responsibility to cater to the needs of stakeholders, who, in addition to shareholders, also include employees, customers, the broader community and "silent stakeholders" such as future generations and the environment. The figure below, which has been adapted from Freeman's original 1984 diagram, illustrates the stakeholder view of the firm. In this framework, stakeholders are not external to an organization but are considered an extension of it. 

Building upon the stakeholder view of the firm, John Elkington proposed the notion of a "Triple Bottom Line" (TBL) in 1999, according to which companies should measure not only their economic bottom line but also their environmental and social ones. The Global Reporting Initiative (GRI) provides guidelines, or key performance indicators, to help measure these.  

But while nearly every large organization has adopted the TBL approach and the GRI framework, there are very few meaningful and relevant indicators on social impact. It is also difficult to capture the overall impact of an organization's practices and products on the environment. In earlier articles we have described the shortcomings of the TBL/GRI approach and presented alternative strategies for measuring and communicating sustainability performance.  

Stage 4: The sustainable enterprise 

Rather than maximizing profitability while reducing harm, the primary objective of a sustainable enterprise is to maximize social and environmental well-being through a viable business model. Environmentalism (stage 2) and corporate social responsibility (stage 3) focus on minimizing the negative externalities of organizations on the environment and stakeholders, respectively. But companies in these stages do not spend much time focusing on how they improve and develop society. It is this transformational shift to stage 4 that organizations have a much harder time grappling with—because the business case for sustainability becomes less obvious.  

To enter stage 4, organizations should instead focus on a business model for sustainability and adopt new frameworks and strategies. Some innovative business models in the fourth stage have begun to emerge from the positive organizational ethics field. The focus here is on how organizations can achieve their highest potential rather than remaining entrenched in solving problems and filling deficits, which characterized previous stages of sustainability. John Ehrefeld offers a positive definition of sustainability as "the possibility that human and other life will flourish on the planet forever." This is the polar opposite of the focus in stage 1 on enabling humans to achieve long-term survival.  

Taking the leap 

To remain innovators and pioneers, organizations need to shift toward the fourth stage of sustainability. In the new business model we propose, we argue that organizations need to: 

shift their missions around new business models that address social needs and the improvement of our life-supporting systems;

  • adopt long-term stances;  
  • promote leadership that is committed to balancing profitability with the pursuit of a social mission; 
  • include stakeholders–both external and internal–into business models;  
  • engage employees, shareholders, and customers around sustainable agendas;
  • measure their sustainability performance in an effective way;  
  • become accountable to stakeholders through complete transparency;  
  • scale in a way that is in line with their mission;
  • promote sustainability innovation and continuously iterate on their business model.

If companies can work toward these nine points, we will be a long way from the gloomy outlook of Thomas Malthus in 1798. 

Francisco Szekely is Sandoz Family Professor of leadership and sustainability and Director of the IMD Global Center for Sustainability Leadership (CSL). He directs Sustainability Leadership in Action (SLA), a talent development initiative targeted at leaders committed to discovering new ways to increase their performance and deliver exceptional results.   

Zahir Dossa is a postdoctoral fellow at the CSL.

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