The Sustainable Company

How to Create Lasting Value Through Social and Environmental Performance

By Chris Laszlo

ISLAND PRESS

Copyright © 2003 Chris Laszlo
All rights reserved.
ISBN: 978-1-59726-018-3

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,

CHAPTER 1

Toward an Integrated Bottom Line

IN 1963, a young and newly appointed chief executive officer (CEO), Michael Watts, is reflecting on the mission and purpose of his business. From the executive suite, he looks out into the courtyard of his company’s main production facility and sees an orderly scheduling of work. Employees are arriving at an early hour and fulfilling their daily jobs in specialized roles. Suppliers deliver parts and settle invoices with scant further contact with the company’s employees. Retail customers have no contact at all with this facility—they order monthly from the company’s salesmen, based on projected retail inventories that reflect consumer preferences that Michael Watts knows only from occasional focus groups. The entire company is organized around four functions: general management, production, sales, and finance.

Michael’s main focus is financial results. He regularly tracks returns on invested capital, operating profit, debt issuance, and projected dividends to the company’s shareholders. Luckily for him, his departments are highly autonomous and keep all the activity going efficiently with a minimum of intervention—for the moment. Innovations in technology, competitor pressures, and profound shifts in consumer values and preferences will soon force the company to make major changes.

Fast-forward 30 years to 1993. Much of the company’s effort has been spent tearing down the walls between departments and functions. Computer integrated manufacturing (CIM) and integrated software platforms connect each production facility to its customers and ultimately to the consumer in real time. Operational measures of customer satisfaction, internal processes, and the organization’s innovative activities complement financial measures. A balanced scorecard offers all executives a fast but comprehensive view of the business.

Still 10 years away from retirement, Michael now feels a deep satisfaction at having built an integrated value chain. No one can speak about the existence of “silos” in his organization. His one source of concern is a manufacturing safety function renamed, in the late 1980s, environment, health, and safety (EH&S). A former site engineer with a legal background now heads it, yet Michael simply can’t seem to settle this function into his management team. Waste-permitting, site remediation, resource depletion targets, pollution prevention, and environmental product design parameters are things that his business unit heads don’t want to hear about. As long as the company is complying with government regulations, EH&S would serve the team best by sticking to its legal and technical area of expertise.

Then one morning Susan Aldrin, Michael’s chosen successor, walks into his office and begins talking about the need for the company’s environmental policies to become more integrated into business operations. Susan speaks of the need to be proactive on safety measures in the plant and to reduce workplace accidents to zero through better training and new safe manufacturing processes. She outlines a plan for implementing an Environmental Management System (EMS) that would help the company move toward closed-loop production, reducing waste and pollution. “I want each business unit to track the full impact of its activities on the environment,” says Susan. A few days later, Michael talks to his EH&S manager, who responds enthusiastically to what they both agree is an opportunity to begin “tearing down the Green Wall”: removing the great divide between environmental performance and business performance. Business managers need to see environmental managers as equals and work together better on shared objectives. A new campaign begins to integrate strategic environmental management into the business, and in the process EH&S is invited to the table as a full partner.

With only a year to go before retirement, Michael is pleased to learn that his company has been awarded a prize for environmental excellence. His managers regularly speak about the double bottom line and, increasingly, about the triple bottom line. A United Way campaign reaches a statewide high for employee participation, and a patronage-of-the-arts program earns the company additional prestige. Although it is costing his company 0.5 percent of profits, the sense of satisfaction derived from contributing to society is evident and is shared within the executive group.

Then one morning, the CEO’s phone rings on his private line. It is his daughter, Gretchen, who is calling from Port-au-Prince; she and her husband have decided to adopt a little Haitian girl and urgently need him to come to Haiti to help convince the local authorities to file for expedited adoption. He departs that afternoon, leaving Susan in charge, with the admonition to “make sure everyone understands what we need to do to meet next quarter’s Earnings-per-share (EPS) targets.”

Arriving in Port-au-Prince, Michael’s plane emerges from a cloud bank to reveal a vista of shantytowns, poverty, dirt, and overcrowding the likes of which he has never seen before. A feeling of repulsion is replaced with a desire to use his executive skills to resolve the adoption situation in his daughter’s favor. At the Ministry of the Interior, he soon finds himself signing papers, giving officials “dash” where needed to expedite the process, and no longer feeling concerned about his unpleasant surroundings. That evening he checks into a hotel, ready to complete formalities the next day and return home. This turns out to be far less simple than he could ever have imagined.

The following morning, he and Gretchen take a taxi 50 miles west of the capital to the shantytown of Fond Verrettes. A ministry official takes them to the local adoption center, where Michael comes face to face with one of his own company’s chemical suppliers. A local guide points to the cloudy brownish water coming from the town’s fountain and describes how toxic runoff from this supplier’s facility has poisoned the town’s drinking water. Impoverished farmers had moved their families close to the factory in the hope of earning a meager wage of $1 a day. In the course of their work, they often stand barefoot for hours at a time in vats polluted with chemical residue, and they now suffer from a range of respiratory ailments and skin conditions. No school or hospital exists in this town, nor have the foreign-owned factories offered to contribute to building any.

Across the street, Michael’s practiced eye sees obvious signs that his company’s chemical supplier has no health and safety plan for its employees. Most of the manual workers here are exhausted, and some appear deprived of basic dignities. A supervisor appears to strike a woman who is visibly slowing down in unpacking a truck container of 50-kilogram bags. The youngest workers here are no more than about 12 years old.

The air is thick with fumes—Michael recognizes the telltale signs of SOx and NOx emissions. A quick look westward tells Michael that the richly biodiverse forests in this part of Haiti have been razed to make way for storage depots and truck repair shops. The scene is desolate indeed.

Three hours after his arrival in Fond Verrettes, Michael’s newly adopted granddaughter runs smiling into his arms. With tears in his eyes, Michael begins to comprehend the difference between what is important and what is essential in his life. Making money, succeeding in business, and winning are important. His daughter and granddaughter and their future well-being are essential. In that moment of clarity, Michael begins to see that he and his company do lots of good but also do some unintentional damage—for example, allowing suppliers to treat employees and local communities badly, ignoring human rights violations in some countries, and disregarding the impact of wastes on the environment. There are many other harmful aspects of his business that he has been overlooking uncomfortably for some time. Michael had recently been hearing about emerging ethics standards for business conduct. He knows that his company is increasingly evaluated on its social and environmental performance. What now crystallizes for Michael is the possibility of succeeding in business without doing harm to the company’s stakeholders around the world.

That afternoon, Michael makes a silent commitment to modify his company’s mission to include better care for people and for the flora, fauna, and living systems that made up the planet. And he resolves to do this without sacrificing business performance—in fact, he envisions succeeding better than ever before.

When he returns to work the following Monday, Michael calls an executive committee meeting and shares his vision of an integrated sustainability strategy. Henceforth the primary purpose of the business will be to create value for shareholders and stakeholders together, in what Michael refers to assustainable value—in other words, lasting value based on economic, social, and environmental performance. It will now be unacceptable for any business unit manager not to know the impact of his or her unit on a broad set of stakeholders, including employees, local communities, and nature. It will be unacceptable to create shareholder value by transferring a portion of that value from another stakeholder group. The heart of the issue, Michael tells his team, is that this is a business proposition. If we continue to operate in Haiti the way we have, we will incur growing liabilities with the people, with the government, and with watchdog groups representing the environment of that country. Such conduct represents a business risk that no longer makes sense in today’s world of instant and transparent reporting, emerging green consumers, and socially responsible investors.

His team has never heard him speak like this before. With heart and spirit, he shares his commitment to have the company succeed economically while bettering the lot of all its stakeholders. As a starting point, he organizes staggered trips for every employee to visit at least one of the company’s sourcing sites in the developing world. Afterward, there are in-house retreats to reflect on the future course of the business.

At this point, a detailed analysis of value creation begins. Stakeholder value and impact are assessed along with traditional sources of shareholder value. The strategic planning processes in both the business units and the financial accounts gradually integrate stakeholder value and impact along the entire value chain. Exactly how business value is created from social and environmental responsibility is made clear to each key operations manager. A new era begins in which the company seeks competitive advantage not just in the world but for the world.

Three years later, under Susan Aldrin’s leadership, the company has a vendor code of conduct with all 800 of its suppliers, along with training and development programs to help them adhere to it. Guidelines are developed to assess and determine action for ethical violations, particularly in poorer developing countries. Business unit heads find that it is good business practice to offer preferential status to suppliers who respect universal ethical standards by treating people with dignity. Supplier loyalty is up and turnover down. By redesigning selected product lines to take into account life-cycle impacts, from raw materials to end-of-life product disposal, and by tracking resources used as well as outputs and environmental impacts, the company has come up with entirely new market offerings. This approach has allowed it to expand into underserved markets and grow its business overall. Innovation and ecoefficiency projects have reduced costs in unexpected ways, contributing to improved profit margins. Several NGOs have contributed technical knowledge to the innovation process. Best of all, a small core group of loyal consumers is beginning to buy the company’s products simply because it is living up to environmental and social values. In a highly competitive market, this “sustainable value edge” is making a significant difference.

The journey from 1963 to the present tells a composite story that reflects the multiple realities companies experience as they transform their value delivery to embrace social and environmental responsibility. This book profiles some of the companies from which this composite is drawn. Transformations driven by visionary leaders such as Yvon Chouinard and Michael Crooke (Patagonia) and Ray Anderson (Interface) and the company-wide strategies of Toyota, Lafarge, Shell, and The Co-operative Bank are becoming part of the new business landscape.

The pattern is increasingly clear. Michael Watts began his role as CEO at a time when the company’s focus was exclusively on economic results and its departments operated without much interaction with one another (the bottom left square of Figure 1-1). In the decades that followed, the company moved to a more integrated value chain by introducing new processes to improve quality, reduce defects, and raise customer satisfaction. In the 1990s, the company began integrating environmental performance into business performance (“breaking down the Green Wall”). Social performance targets were added in 2000.

Until the CEO’s epiphany brought about by his personal journey, the company’s journey was about incremental change. The final step (from the top left square to the top right square in Figure 1-1) to a sustainable value strategy represents a paradigm shift. This theme of transformation, explored further in Chapter 5, is one of the core messages of the book. Corporations as an institution are facing the prospect of an evolutionary leap to sustainable value—or irrelevance and extinction. Making this leap successfully will require both a shift in mind-set and practical initiatives integrated into operations.

CHAPTER 2

The New Ethics in Business

THE EMERGENCE of a new ethics in business is rapidly changing what we mean by the term corporate responsibility. The new ethics is market-driven but values-based. It originates with changing social expectations as expressed by consumers, employees, investors, business partners, local communities, and environmental activists. It is not political in the sense of attempting to impose the beliefs of one group on another group; it is not moralistic because it does not exhort companies to adopt one or another moral ideology. By market-driven, we mean that the underlying logic is “if you want your business to succeed, here is a new set of measurable performance standards you have to meet.”

We call the new ethics “planetary” because it expands the code of business conduct to the globe. It encompasses a company’s responsibility for society and the environment, and it shifts the moral basis of action from abstract questions of right and wrong (such as “don’t lie to your boss”) to a consideration of whether a company is operating sustainably. Businesses now face a constellation of interests: market, social, and environmental. These interests call for companies to integrate stakeholder objectives as part of the way they do business.

In this sense, the new ethics can be thought of as a dynamic standard for pursuing profitability that allows future generations an equal opportunity to do so. It echoes the Brundtland Commission’s definition of sustainability: “the ability to meet today’s global economic, environmental and social needs without compromising the opportunity for future generations to meet theirs.”

Planetary ethics calls for operating within the earth’s social and physical limits (hence its name). Although science and technology continually redefine these limits, the fact is that we no longer operate in a world where human growth and the physical capacities of nature appear endless and unbounded. “Throughout history,” says author Ross Gelbspan, “it has been philosophers, religious leaders, and revolutionaries who have asked us to reexamine our values, our relationships, our purposes, and the way we live. Now we are being asked by the oceans.”

To the distress of those who advocate unbounded consumerism, planetary ethics will likely involve restraint, particularly in countries such as the United States, where the per capita use of resources would require several planet earths if everyone in the world chose to live at U.S. standards. Gandhi once said, “Live simply so that others may simply live.” With a growing world population of 6 billion, the ecological stress of everyone’s trying to achieve the material lifestyle of America quickly becomes untenable.

But as William McDonough and Michael Braungart point out in their bestseller, Cradle-to-Cradle, reducing the impact of our species is not only about making do with less. It is also about redesigning our products and processes so that human industry becomes a source of nourishment rather than waste. McDonough and Braungart vividly contrast the old design paradigm with the new one. Here is how they describe the existing industrial system:

• Puts billions of pounds of toxic material into the air, water, and soil every year

• Produces some materials so dangerous they will require constant vigilance by future generations

• Results in gigantic amounts of waste

• Puts valuable materials in holes all over the planet, where they can never be retrieved

• Requires thousands of complex regulations to keep people and natural systems from being poisoned too quickly

• Measures productivity by how few people are working

• Creates prosperity by digging up or cutting down natural resources and then burying or burning them

• Erodes the diversity of species and cultural practices

(Continues…)Excerpted from The Sustainable Company by Chris Laszlo. Copyright © 2003 Chris Laszlo. Excerpted by permission of ISLAND PRESS.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.