Sustainable Value Creation

David Chandler

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000066869
• Edition: 2
• Topic: Economics
• Subtopic: Sustainable Development
• Index: Economics

The goal of this book is to define Sustainable Value Creation in terms of a set of principles that differentiate it from existing definitions of CSR, and from related concepts such as sustainability and business ethics. To internalize these ten principles is to understand how the firm can respond to stakeholder needs to optimize value creation over the medium to long term.

Ultimately, this second edition book aims to reform both business practice and business education. By building a theory that redefines CSR as central to the value creation process, the ten principles of Sustainable Value Creation redefine how firms approach each of their operational functions, but also how these subjects should be taught in universities worldwide. As such, this book will hopefully be of value to instructors as a complement to their teaching, students as a guide in their education, and managers as a framework to help them respond to the complex, dynamic context that they are expected to navigate every day.

This book is a manifesto for success in today's complex, dynamic business environment. The book is designed as an easy-to-digest, critical introductory text to CSR. With supporting online teaching resources, it is aimed primarily at the MBA and Executive MBA market, and for CSR, sustainability, and business ethics courses taught by instructors skeptical of existing definitions and organizing principles of CSR, sustainability, or business ethics.

Principle 1

Business is social progress

Key takeaway: There is a direct correlation between the amount of business in a society and the extent of progress enjoyed by that society. For-profit firms are the most effective means of achieving that progress.

Principle 1 states that business is progress. In other words, as a general rule, the more business that exists within a community, the greater the economic and social progress that community will experience. Central to the delivery of that progress is the for-profit firm, which has long been one of the most effective means for humans to channel their innovation and creativity. As Micklethwait and Wooldridge note in their history of the company:

Today, the number of private-sector companies that a country boasts … is a better guide to its status than the number of battleships it can muster. It is also not a bad guide to its political freedom.¹

In short, society is stronger when capital flows freely and business is incentivized to innovate and compete. This may seem intuitive when we stop and write it down, but the point is not made often enough. And, in its rush to improve an economic system that has already delivered phenomenal social progress, many in the CSR community overlook this fundamental aspect of capitalism. This does not mean that improvements should not be made and certainly does not mean that the government does not have a role to play, but keeping this starting point in mind anchors the framework underpinning Sustainable Value Creation (SVC).

For-profit firms

Broadly speaking, there are three types of organizations: for-profit, not-for-profit, and governmental. There are also hybrid mixes of these three forms, such as social businesses, government-backed enterprises, and benefit corporations.² Of the basic forms, however, only the for-profit firm is consistently able to combine scarce and valuable resources efficiently and on the scale necessary to improve meaningfully our society and standard of living. This unique position of for-profit firms in our society is enhanced when we consider the challenges we face, the timeframe in which substantive action is required, and the complexity inherent in what the former CEO of Unilever, Paul Polman, calls today’s “vuca world; volatile, uncertain, complex and ambiguous.”³

In general, there are two sides to the debate as to how firms should navigate this dynamic environment. On the one hand, for-profit firms receive much from society that is essential for them to operate – a stable legal system, an educated workforce, a modern infrastructure, and so on. As such, many CSR advocates argue that firms have a broader responsibility to recognize (and appreciate) that they externalize many of the costs that are associated with these benefits. Some of these costs are implicit in the social contract and are a universal good (such as an educated workforce); some of these costs, however, have harmful societal consequences (such as pollution). Either way, firms rely on society to thrive – they “receive a social sanction from society that requires that they, in return, contribute to the growth and development of that society.”⁴

On the other hand, however, society receives much from strong, for-profit firms that operate within a vibrant, market-based economy. Look around you. Virtually everything you can see was made by a for-profit firm. It is for-profit firms that are responsible either for much of the innovation that allows society to progress or for converting the innovations made by others (e.g., scientists, artists, and academics) into products that make our lives better. More important than the value added by for-profit organizations through innovation, however, is the efficient means by which they are able to convert valuable and scarce resources into usable products, and distribute those products to those who demand them at the price those individuals are willing to pay. The details of this process (what for-profit firms do and how they do it) defines our quality of life and our level of social progress. The recognition of this leads supporters to claim that:

The most important organization in the world is the company: the basis of the prosperity of the West and the best hope for the future of the rest of the world.⁵

In other words, while firms benefit greatly from a stable and enlightened society, society also benefits greatly from a vigorous, competitive set of for-profit firms. In considering these tradeoffs and tensions, however, it is important to remind ourselves that juxtaposing firms and society in this way, as many in the CSR community continue to do, suggests that firms and society are independent of each other. In reality, of course, they are inseparable. Firms exist as part of society in the same way that society is made up of many functioning parts, an important component of which is for-profit firms. Equally, managers, board directors, employees, and shareholders each have additional roles elsewhere in society (as consumers, activists, volunteers, community members, etc.), as well as working together at the same for-profit firm.

In essence, therefore, business and society are interwoven – their interests are aligned and business has as much to gain from a strong and healthy society as society has to lose from a constrained and ineffective business sector. The question, therefore, is not What do firms owe society? or What does society owe firms? but, instead, is the more nuanced debate about What role do firms play in society? While social progress over centuries demonstrates the inescapable value of for-profit firms within a market-based system, each firm should be routinely assessed to determine whether their individual contribution is net positive or net negative. Where it is net positive, we need to ask Is that contribution as good as it can be? Alternatively, where it is net negative, we should inquire How can we introduce incentives to improve performance? But, each firm’s interest lies not in waiting for this evaluation to be imposed externally, but initiating it to ensure its operations meet the ever-shifting expectations placed upon it. Paul Polman understands this iterative dynamic better than most:

Business simply can’t be a bystander in a system that gives it life in the first place. We have to take responsibility, and that requires more long-term thinking about our business model.⁶

Addressing these questions and providing constructive answers, I believe, is the most important challenge our society faces today.

Business is ethical and moral

It is impossible to separate ethics and morals from any aspect of human behavior. Everything we do involves ethical and moral components and, more often than not, tradeoffs among ideals. These same tensions and pressures exist in business. All aspects of a firm’s operations, to some degree, have moral, ethical, or value-laden elements.⁷ While we may agree or disagree about whether an employee should be paid a living wage or a minimum wage, for example, there is no doubt that the decision is consequential for the firm, the employee, and for the society in which both exist. As a result, there is an ethical and moral perspective from which the problem can be addressed, and about which we can agree or disagree. These same considerations and conflicts extend to all aspects of operations:

When a businessman decides whether or not to produce a new product or service, he is helping to decide the range of products available to customers. When he decides whether or not to purchase new plant and equipment, he is helping to determine the rate of economic progress and is influencing the level of employment and prices. When he decides to close down a plant or to move it to another location, he may be affecting the economic future. When he decides to build up or reduce inventories, he may be contributing to inflation or accelerating recession. When he changes his wage policy or dividend policy, he may be influencing both the level of employment and the degree of justice achieved in our distribution of income. When he uses the newspaper, radio, and television for advertising or public relations, he may be influencing moral and cultural standards. When he introduces new personnel policies, he may be contributing toward cooperation and understanding between labor and management or he may be reinforcing existing tensions and frictions. When he transacts business in foreign lands, he may be contributing to international tensions or to international understanding.⁸

Because the relationship between firms and the societies in which they operate is symbiotic, because firms are able to combine resources on a scale and with an efficiency that no other human-invented entity can match, and because there is an ethical and moral component to all aspects of business/human decisions, it is vital to understand the role of for-profit firms in society. The behavior of firms (how they do what they do) affects not only our material wellbeing, but all other aspects of our quality of life and, by a large margin, they are the dominant predictor of that outcome – from our experiences at work, to the products we buy, to the air that we breathe; corporations define the lives that we live.

As such, the for-profit firm is cause both for celebration and concern. It is true, for example, that, as a rule, societies that provide more freedom for their for-profit firms to operate will experience more innovation and progress than those societies that do not. It is also true that we should expect this relationship to hold consistently, all else being equal. Of course, however, all else is not equal, which is the reason for writing this book, and today many feel there is more reason than usual for concern:

Business is the cultural, organizational, and economic superforce in human development. And yet the current state of this social institution is fundamentally flawed: It falls short in its potential to serve our global society. Today’s predominant business models drive public companies, for instance, to focus on predictable, short-term shareholder returns that may be detrimental to employees, communities, or the broader social good. They also fail to motivate industries to reduce their environmental impact.⁹

As with many things in life, the relationship between economic freedom and societal progress is not linear. While the correlation is undoubtedly positive, there are limits to the value of untrammeled economic freedom. It does not necessarily hold, for example, that complete freedom for firms equals maximum societal progress. If we did not have controls on the use of toxic chemicals in consumer products, there is plenty of evidence to suggest that some firms would take advantage of consumer ignorance and use those chemicals, irrespective of the consequences for public health. Similarly, there is a reason why we place restrictions on the marketing and sales of products that are deemed to be socially harmful, such as alcohol and tobacco. There are good reasons why we allow firms to emit only certain levels of pollutants into the atmosphere or waste stream; there are also reasons why we pressure firms to curb their marketing to vulnerable segments of society, such as children, and so on, and so on.

Rampant, unrestrained capitalism is unlikely to maximize value, broadly defined. A capitalist system that is constrained through a series of checks and balances, however, promises outcomes that serve a broad set of interests. Firms have micro interests and societies have macro interests. A problem arises, therefore, when the interests of the firm and the interests of society conflict. When this happens, those societies with fewer controls over firms will still experience a large degree of innovation, but it will likely result in a reduction in overall value as firms innovate and bring those innovations to market in ways that suit their short-term interests, but work against the longer-term, competing interests of society. The optimal situation is to have the interests of the firm overlap with the interests of the broader society, with both parties working to generate constructive, mutually beneficial outcomes.

Self-interest and public interest

The mechanism by which the interests of the firm and the interests of society become aligned is through the interactions the firm has with its stakeholders – employees, consumers, suppliers, the government, the media, NGOs, and so on. For example, if I, as a consumer, decide that I want to shop at firms that do not outsource their manufacturing jobs overseas and I actively discriminate in favor of such firms (even if it costs me more to do so), then I am making a statement about the kind of firms that I want in my society. Similarly, if I, as an employee, decide to work for firms that have a diverse workforce and I actively apply for jobs only at such firms (and avoid applying for jobs at less diverse firms), then I am again making a statement about the kind of firms that I want in my society. Now, if I am alone in imposing those values on firms, it will not alter anything. If, however, many other people make the same decisions based on a similar set of values, then such values will quickly become standard operating procedure across the majority of firms. This means that, while there is no longer a differentiation advantage to be gained for firms that implement these practices, there is a significant disadvantage for firms that resist. So, standards evolve and society progresses (or regresses, depending on the nature and extent of the change).

These tradeoffs are resolved via values that are embedded in the decisions the firm and its stakeholders make as they interact. As these values are applied and enforced by stakeholders across the thousands of interactions each firm has with its various constituents on a day-to-day basis, the interests of the firm become more closely aligned with the values of the broader society. As long as the firm is willing to pay attention to the needs and demands of its stakeholders (both internal and external), and those stakeholders are willing to actively shape the society in which they want to live, then it is in the interests of the firm to advance that goal (and its own success) by altering its behavior to match the demands that are placed upon it.

In other words, over time, firms reflect the societies in which they operate (in the same way that politicians reflect the time and context in which they were elected). As organizations, they are not conscious actors so much as mirrors that respond to the values-based constraints placed upon them. If we loosen these constraints, those looser standards will quickly become apparent in the behavior they encourage. Equally, however, if we tighten these constraints, firms will respond quickly and efficiently – simply because it is in their interest to do so. But such an iterative relationship relies on our vigilance if it is to generate the outcomes we say we desire. Less vigilance is consequential, but is something over which we have control.

The logic behind building this argument of empowered actors and fluid checks and balances (which will be developed further over the remaining nine principles), and encouraging executives to adopt it as a managing philosophy, is that it should face less resistance than attempts to coerce for-profit firms to act in ways they perceive to be against their interests. As noted in the Introduction, a core unresolved debate within the CSR community is whether more socially responsible behavior is best encouraged via mandated or incentivized actions. The resolution around which ...