Jayashree Sadri and Sorab SadriBUSINESS SUSTAINABILITYProfessor Jayashree SadriAndDr Sorab Sadri
Jayashree Sadri and Sorab SadriBasis This presentation is based on the followingworks: Sadri, Jayashree and Ajgaonkar (2002) Jayashree, Sadri and Dastoor (2008) Sadri and Jayashree (2009) Sadri and Guha (2009)
Jayashree Sadri and Sorab SadriThe Logical Culmination We have argued that Business Ethics andCorporate Governance combine to create theconditions for Organizational Excellence. Organizational Excellence is not a finite pointbut more like a horizon we move towards. To make this horizon meaningful andmeasurable we argue that it convertsOrganizational Excellence into BusinessSustainability
Jayashree Sadri and Sorab SadriSOME ISSUES TO BE CONSIDERED1. What is sustainability?2. Is sustainability compatible with maximizing long-run financial performance?3. Corporate strategies and multiple long-runobjectives.4. The balanced scorecard and multiple long-runobjectives.5. The relationship between reporting on sustainabilityand investing in sustainability?
Jayashree Sadri and Sorab SadriDEFINING SUSTAINABILITY One of the most often-cited definitions ofsustainability is the one created by theBrundtland Commission, led by the formerNorwegian Prime Minister Gro HarlemBrundtland. The Commission definedsustainable development as developmentthat meets the needs of the present withoutcompromising the ability of future generationsto meet their own needs.
Jayashree Sadri and Sorab SadriThe Scope Of Sustainability Sustainability relates to the continuity ofeconomic, social, institutional andenvironmental aspects of human society, aswell as the non-human environment. Sustainability can be defined bothqualitatively in words, and quantitatively as apair of compound exponentials—the risingone being the life of a system, the decliningone leading to death if the final tipping pointfor intervention is irreversibly past.
Jayashree Sadri and Sorab SadriWHY SUSTAINABILITY? Organizational Excellence is definitely a goalto be desired but it is not a finite point; ratherit is like a horizon you move towards. This movement is within an environment thatis marked by dynamic dis-equilibria and anattendant uncertainty. So it is prudent to use excellence such thatbusiness remains sustainable.
Jayashree Sadri and Sorab SadriEthics GovernanceExcellenceTHE ORGANIZATIONAL TRIAD
Jayashree Sadri and Sorab SadriBASIS OF THE TRIAD The three aspects of sustainability areinextricably founded on sound businessethics and good corporate governance thatcombine companies to pursue excellence. This is enabled by a corporate culture thatpromotes creativity and innovation byadopting a learning environment.
Why Sustainability“We do not inherit the earth from ourancestors. We borrow it from our children.”Sustainable development “meets the needsof the present without compromising theability of future generations to meet theirown needs.”- 1987, World Commission on Environment andDevelopment (a.k.a the Brundtland Commission)
SustainabilityWe desperately need to recognize that we are the guestsnot the masters of nature and adopt a new paradigm fordevelopment, based on the costs and benefits to all people,and bound by the limits of nature herself rather than thelimits of technology and consumerism. - Mikhail Gorbachev- President of Green Cross International
Jayashree Sadri and Sorab SadriQuestions about Sustainability1. What is sustainability?2. Is the goal of sustainability compatible with maximizing long-run financial performance?3. Can corporate strategies accommodate multiple long-run objectives?4. Does the balanced scorecard accommodate multiple long-run objectives?5. What is the relationship between reporting on sustainability and investing in sustainability?
Jayashree Sadri and Sorab SadriIs sustainability compatible with maximizinglong-run financial performance?The business case for sustainability investment isgaining momentum so as to avoid inertiaThe positive correlation between sustainabilityand financial performance will provide anenormous boost to the sustainable investmentsector, said Markus Knisel, Director of MorganStanley Private Wealth Management.
Jayashree Sadri and Sorab SadriSustainability and maximizing long-runfinancial performance: the case of NikeCan one suggest that Nike would have benefitedfinancially from requiring its suppliers to meethigher standards at the inception of its then-novel overseas manufacturing program in the1960s. Insistence on adult workers (no children),safe working conditions, and reasonable hoursand pay would have cost Nike real dollars andcents. [The Traditional –Paternalistic View]
Jayashree Sadri and Sorab SadriIs sustainability compatible with maximizinglong-run financial performance?“Prior to the 1990’s, when workers andconsumers in industrialized countries awakenedto the conditions of workers overseas, it wouldhave been difficult to cite even minimalreputational benefits from such a stance.”
Jayashree Sadri and Sorab SadriIs sustainability compatible with maximizinglong-run financial performance?“By the 1980s, Nike already had a glowingreputation and spectacular earnings. Far frombeing a cause for embarrassment, its strategy ofoutsourcing production to cheap Asian labor waspraised as an innovative way to drive down costs,beat the competition, and create shareholdervalue.”- Lynn Sharp Paine, 2000 Harvard Business School
Corporate Finance“Success is usually judged by value:Shareholders are made better off by anydecision which increases the value of theirstake in the firm.”- Brealey and Myers,Principles of Corporate Finance (1988)
EconomicsMost Positive Economists will agree thatWhen we model the behavior of firms, we willwant to describe the objective as profitmaximization and the constraints astechnological constraints and marketconstraints.”
Corporate Mission Statements“Do a great job for our customers, employees, andstockholders by being the preeminent building blocksupplier to the worldwide digital economy.”- IntelHence even CSR seems to be moving towardsmeeting stakeholders interests rather than remainat a “do social good level.Mohanty Sadri and Dange
Corporate Mission Statements ThatRecognize Stakeholder InterestsWe will become the worlds most valued company to patients,customers, colleagues, investors, business partners, and thecommunities where we work and live.- PfizerGM’s vision is to be the world leader in transportation productsand related services. We will earn our customers’ enthusiasmthrough continuous improvement driven by the integrity,teamwork and innovation of GM people.- General Motors
Corporate Mission Statements“Nike’s corporate responsibility (CR) mission is simple andstraightforward. It is clear acknowledgement that CR workshould not be separate from the business – but should insteadbe fully integrated into it. Our CR mission: We must help the company achieve profitable andsustainable growth. We must protect and enhance the brand and company.”- Nike
Motivation for Adopting SustainablePracticesPwC 2002 SurveySource: PriceWaterhouseCoopers,2002 Sustainability Report. August 2002.
Accounting: The Spinal Column of CorporateGovernanceThe search for new and better means ofmeeting economic problems has resulted in thedevelopment of various kinds of institutions …aimed at improving the allocation of resourcesand the application of human effort toward thesatisfaction of human wants. Accounting is oneof these institutions.- William Vatter (1950)Hence the importance of Corporate Governance will onlyincrease with time.
Accounting“Accounting reports serve a great number of purposes… . For example, there are accounting reports thatserve to tally valuables entrusted to custodians againstthe stewardship expected of them. … Thus, accountingis not necessarily confined to the situation of measuringgains and losses; it is basically a means of meeting therequirement that custody and management of propertycarries with it an obligation to account for it.”“ Of course, the accounting reports of businessenterprises serve many other uses. The informationpresented in financial statements may be used bypresent or prospective investors … ..”- William Vatter (1950)
AccountingFinancial reporting should provide informationthat is useful to present and potential investorsand creditors. … The primary focus of financialreporting is information about earnings and itscomponents.FASB (Statement of FinancialAccounting Concept #1)The Right to Information Act in India is thus a stepin the right direction making public bodiesaccountable and transparent.
Stewardship A working definition: the responsibility fortaking good care of resources entrusted toone. However much delegation of power is desiredone must recall that:Delegation without accountability createstyrantsAccountability without delegation createsslaves
Jayashree Sadri and Sorab SadriReporting Tools Of Sustainability Given that top management isincreasingly concerned with convertingorganizational excellence into businesssustainability, how will the latter bemeasured? The Triple Bottom Line The Balanced Scorecard Third Party reporting and criteria
1. The Triple Bottom Line Disclosure (reporting) is a key part of doingsustainable business. Sustainability reporting is broader in scope thantraditional financial reporting. The Triple Bottom Line (TBL) is one way toreport on sustainable business activity. TBL defines sustainability in terms of threeseparate elements: economic, environmental,and social perspectives of operations.
Three Elements of theTriple Bottom LineEconomy – reflects activities related to shapingdemand for products and services, employeecompensation, community contributions, localprocurement policies, and other monetary issuesrelated to company activities. This is often referred toas Profit
Three Elements of theTriple Bottom LineSociety - reflects activities in shaping local, nationaland international public policy, equality, treatment ofminorities, employee issues and public concern. Thatis, organizational citizenship and is often referred to asPeople.
Three Elements of theTriple Bottom LineEnvironment – reflects the impact made through processes,products or services that affect the environment. These mayinclude air, water, land, natural resources, flora, fauna andhuman health. This is often referred to as Planet
Jayashree Sadri and Sorab Sadri2. The Balanced Scorecard A performance measurement tool and aperformance management system. Created in 1992 by Robert Kaplan and DavidNorton. Emphasizes financial measurement, but addsnon-financial measures.
Jayashree Sadri and Sorab SadriThe Balanced Scorecard Four components of the balanced scorecard: The Learning and Growth Perspective The Internal Business Process Perspective The Customer Perspective The Financial Perspective Each component would ideally have specificperformance measures associated with it.
Jayashree Sadri and Sorab Sadri3. The Balanced Scorecard The Sustainability Balanced Scorecard addssustainability issues into the BalancedScorecard. This gives business sustainability a rightfulplace within overall management strategy. The adoption of this tool is increasingglobally.
THIRD PARTY REPORTING ANDCRITERIA ON SUSTAINABILITY Reporting on sustainability is not synonymous withengaging in activities that promote sustainability. Neither is reporting on profitability synonymous withbeing profitable. No “GAAP” for reporting on sustainability. Guidelines have been issued by governmental entitiesand other groups. The Environmental Protection Agency (EPA) The Global Reporting Initiative (GRI) ISO 14000 Independent reporting agencies have emerged.
Global Reporting Initiative The Global Reporting Initiative (GRI) has emerged as aprominent source of guidance for reporting under theTriple Bottom Line. The GRI is a collaborating center of the United NationsEnvironment Program. The GRI incorporates participation of representativesfrom business, accountancy, investment,environmental, human rights, research and labororganizations from around the world.
International Organization forStandardization Organization de Standards International (ISO) is animportant management practice standard setting body. Founded in 1947 in Amsterdam. Sets a variety of standards for various products andproduction processes. A network of the national standards institutes from 148countries. Conformance with ISO standards is a contractualrequirement by some customers. ISO 14000: provides a framework for measuringenvironmental performance.
Motivation to Report onSustainability Sustainability reporting is largely voluntary Exceptions: France and Japan Motivations to disclose sustainability information The desire to avoid added complex and costlygovernment regulation or negative attention from thegovernment. For example, GAO 2004 study The desire to improve public relations and companyimage. For example, CalPERS
Sustainability and TBL Concepts Because sustainability reporting is largely voluntary,the attitudes of business leaders towards sustainabilityis important. Such an attitude reflects a high sense of values andethics on the one hand and good corporategovernance practices on the other. It is more likely to find a place in companies thatpursue organizational excellence.
Jayashree Sadri and Sorab SadriCONCLUSION Business Ethics and Corporate Governancecombine to create conditions forOrganizational Excellence. Organizational Excellence needs a valuecentered corporate culture for stability. Excellence has to be translated intosustainability. Three measures of sustainability are TripleBottom Line, Balanced score Card and ThirdParty Reporting.