Responsible Business

The ten principles of the U.N. Global Compact, formed in 2000, sought to realign business as a force for good. They include compliance and support for human rights; upholding good labour practices and eliminating discriminatory and forced labour; taking up proactive environmental stewardship; and fighting corruption.

Several institutions across the planet joined the Compact, including large corporations, SMEs, universities and think-tanks. These principles are now starting to inform corporate, business, and operational level actions and strategies. In some cases, these principles are considered at every stage and improved responsible practices have been introduced.

Broadly, ‘responsible businesses’ that embed sustainable practices take a number of different initiatives. These can firstly be classified under actions that do not harm people or the planet while making profit; secondly, those that focus on their ESG (environmental, social, governance) investments.

In order to make a larger impact on society and the environment, businesses can work on improving the lives of the people they impact. e.g. by creating green services, and making value chains more sustainable and inclusive.

This could also come about through investments that promote and support social sustainability. Also, firms in any given sector may consider choosing to work with ‘responsible businesses’ who are their partners, investors, and suppliers. So, in the end, it is not only about the firm in question, but also its partners and wider associates, who share similar values and goals.

Businesses caring about their wider stakeholder groups and not simply shareholder wealth, has led to increasing recognition and action around people-planet-profit, or The Triple Bottom Line. Some of the largest corporations, including Amazon, IBM, and TESLA have all set net-zero targets and micro-level reduction of carbon footprints. In addition to this, business goals such as using only ethically sourced materials, becoming more energy efficient, streamlining logistics practices, and applying the components of industry 4.0, offer the prospect of ‘win-win’ situations.

People-Planet-Profit

Empirically, high shareholder value is considered an indicator of success. Today, however, more than ever, it’s about scoring highly on indices such as sustainability, managing employees responsibly, supporting (instead of exploiting) other stakeholders in the supply chain, and looking after the well-being of community members.

Values-driven business tends to have better public perception and P.R. images than traditional ones with a narrow focus on profit. These are important variables that feed into success today.

In 2017, a sustainability survey by Cox Conserves, revealed that 88% of small and midsize businesses, across various sectors have already implemented sustainable activities. It can be argued that the triple bottom line needs to be a part of every company’s culture and values to be successful in the long run, and to manifest responsible practices in various forms.

Broadly, ‘The triple bottom line’ can be defined as a sustainability framework that examines a company’s social, environmental, and economic impact. The following definitions in this context might prove useful.

People: the positive and negative impact an organisation has on its most important stakeholders.

Planet: the positive and negative impact an organisation has on its natural environment (reducing its carbon footprint, responsible usage of natural resources, etc).

Profit: the positive and negative impact an organisation has on the local, national and international economy (includes creating employment, generating innovation, and paying taxes, amongst others). It is important to remember that organisations need to remain solvent in order to do good! Hence ‘profit’ remains integral to success.

Managing the paradox…

The question, therefore remains: how can the Triple Bottom Line [“3BL”] be a lucrative and long-term strategy?

Well, for starters, having 3BL raises transparency that mitigates shareholders’ concerns about concealed information. In fact, it helps fulfil one of the pillars of corporate governance too – transparency. Moreover, it involves accountability around organisations’ actions, while delivering growth and improved economic situations/opportunities for a business

It also lines up a business to be a part of ‘world betterment’. At a local level this should translate into boosting community development through better practice. Finally, 3BL improves a company’s competitive advantage vis-à-vis its peers.

For most businesses implementing reforms come at a cost, thereby creating a paradoxical scenario. There are paradox theories that identify such conflicting situations and which argue that organisational tensions remain latent until environmental factors of scarcity, plurality, and change demonstrate the contradictory nature of the tensions, making them salient to organisational actors.

Conditions of scarcity refer to limitations on the resources available to the organisation, such as factors of production and finances. Plurality represents conditions of uncertainty as to organisational goals and the strategies necessary to achieve them. For example, as mentioned earlier in the article – the 3BL need to become part of the values, culture, and strategy of an organisation to function effectively in most markets. Finally, change signifies shifts in contextual conditions, which leads organisations to adapt and adopt new practices.

A paradoxical approach understands that long-term success requires continuous efforts to meet multiple demands, not by trading off or prioritising one goal over others, but by a dynamic process of splitting and synthesis, as explored in a study by Smith and Lewis in 2011. However, synthesis means that this short-term splitting process is repeated cyclically, with new priorities emerging in each cycle, and in the long run, a dynamic equilibrium emerges.

This involves “purposeful iterations between alternatives in order to ensure simultaneous attention to them over time”. In essence, this means that organisations can attend to the competing demands of the triple bottom line to varying degrees over time, thereby reaching a dynamic equilibrium to effectively manage all three objectives.

Doing so promotes “…a virtuous cycle of tension and resolution as the firm responds dynamically to the changing and competing demands of sustainability management”. This is one way to overcome the paradox, which is applicable in many circumstances.

Become a role model…

It pays to be good! A study surveying thirty thousand people in sixty countries conducted by Neilson explores the factors shaping consumer perception towards brands. One of the key findings of this work was that about two-thirds of the respondents would be willing to pay for sustainable products.

Particularly, the millennial groups are willing to pay between ten and twenty-five per cent more for sustainable products, and be grouped under ‘responsible consumers’. However, the results were not consistent in certain advanced economies, where some of the major social ills are less evident, such as income inequality, limited job opportunities, and a lack of safety at the workplace.

Good business practice builds a competitive advantage for firms. Selected large corporations address inter-connected global goals and improve their operations, some being more innovative and cost-efficient than others.

This is generally reflected in an improving share price over time. The competitive advantage arrives not only from how businesses are conducting their operations more responsibly but also from increased stakeholder engagement. Sustainable businesses, who tend to normally fall within the ‘responsible business’ category anyway, create value for all stakeholders, including employees, supply chain partners and wider associates, civil society, and the environment.

Michael Porter and Mark Kramer proposed the ‘shared value creation’ theory proposing exactly the above, i.e. that a business can be a force for good and simultaneously generate economic value by identifying and addressing social problems which intersect with their business.

The struggle is often to balance the trade-off which makes a few stakeholders better off at the cost of others. There is rarely a pure ‘win-win’ scenario. However, regular dialogue with stakeholders should lead to reduced conflicts and increased cooperation. Revising business practices and running new iterations gradually helps a company to be better positioned and maintain its niche competitive advantage, aligned with a core sustainability agenda.

Finally, another critical advantage to working closely with wider stakeholders on ESG issues helps build critical support mass over the long term. This also allows businesses to deal with external forces that assists with risk management strategies.

Besides a focus on planet welfare, alongside keeping shareholders content, consumer interest in sustainable products is another significant dimension. Consumers value transparency, fairness, and explore the global impact of brands they associate themselves with. This has become a matter of perception, in the sense that there is no real scorecard that is used to measure these impacts quantitatively.

However, the footprints of large corporations in particular is far easier to identify today than a generation ago. Several studies by Deloitte and Global Economic Forum demonstrate that consumers are more loyal to brands that have a positive ESG image. Another study shows that about two-thirds of consumers studied in six countries believe they “have a responsibility to purchase products that are good for the environment and society” — 82% in emerging markets and 42% in developed markets.

We await a reliable scorecard…

Moving forward with such sustainability and social strategies is a requirement for almost all businesses nowadays. Thus, organisations are creating newer forms of partnerships, and alliances with other actors such as governments, local agencies, and community groups to work together and contribute towards larger objectives.

It is advisable that companies do not over-promise on these wider societal goals, and instead focus on delivering on a small number of actionable ones that leave an obvious impact. This is largely, also, because the resources of any organisation are limited. Therefore, investing selected key resources aimed at a few high-impact goals will also maintain shareholder confidence.

Companies should consider re-framing their sustainability strategies in the current global economic environment, where the complexity of change is increasingly overwhelming. What is still missing, however, are more reliable scorecards that convince stakeholders and consumers. The challenge remains to quantify evidence of ‘where is the impact’.

Feature Image: The California Academy of Sciences, San Francisco, California, is a sustainable building designed by Renzo Piano.