Strategy and Sustainability

A Hardnosed and Clear-Eyed Approach to Environmental Sustainability For Business

Mike Rosenberg

• Publisher: Palgrave Macmillan
• Year: 2016
• Print ISBN: 9781137501738
• eBook ISBN: 9781137501752
• Topic: Business
• Subtopic: Business Ethics
• Index: Business

Business and environmental sustainability are not natural bedfellows. Business is about making money; sustainability is about protecting the planet. Business is measured in months and quarters; sustainability often requires significant short term costs to secure a sometimes uncertain long-term benefit. To some activists, all executives are exploitative, selfish "1 percenters". To some executives, all activists are irresponsible, unyielding extremists.

And yet engaging with the issue isn't optional – all businesses must have a strategy to deal with sustainability and, like any strategy, this involves making choices.

Strategy and Sustainability encourages its readers to filter out the noise and make those choices in a hard-nosed and clear-eyed way. Rosenberg's nuanced and fact-based point of view recognizes the complexity of the issues at hand and the strategic choices businesses must make. He blends the work of some of the leading academic thinkers in the field with practical examples from a variety of business sectors and geographies and offers a framework with which Senior Management might engage with the topic, not (just) to save the planet but to fulfil their short, medium, and long-term responsibilities to shareholders and other stakeholders.<

chapter 1

The Logic of Business: Governance and the Environment

Companies are run by people and, in my experience, the overwhelming majority of people want to do the right thing. The challenge is, of course, to figure out what the “right thing” is in a specific moment in time and when making a specific decision.

In 1966, Garret Hardin, a biology professor at the University of California, Santa Barbara, published an article titled “The Tragedy of the Commons,”¹ which went on to have an enormous impact on how people think about what is in fact the right thing to do in terms of the natural environment. Hardin wrote that “morality is system-sensitive,” meaning that people are embedded in a specific context and that what might be considered proper behavior in one time and place, may be considered very differently in another.

In addition to the moral judgments of individuals, which depend on their upbringing, religious views, and place in society, companies also act in a contextual framework that guides the actions of the people in the organization.

Governance is the term that refers to how such decisions are made and who makes them.

In the private sector, firms are run by managers who typically report to some type of body or board of directors, which represents the interest of the owners of the company or some part of its shareholders. The structures and procedures that make up how these bodies are organized and interact with each other are commonly referred to as corporate governance. While the purpose of this book is not to focus on that issue – as this is done extremely well in a variety of other sources – an understanding of governance is critical in thinking about the way that companies interact with the natural environment, and is thus the starting place for this book.

Roles and Responsibilities

The exact relationship between a CEO and the board of a particular company depends on where it is based, the moment in the life of the organization, the industries and regions within which it operates, and the personalities of the people involved. It is, however, possible to generalize for the limited purpose of setting the stage for later discussion.

There is also numerous academic, legal, and practitioner-oriented material on this topic, which explores the nuances already mentioned. One such set of recommendations was made by a Task Force, put together by the Conference Board in 2013,² which talks about three key activities of a board.

In the first place while the “ultimate goals of a public corporation are to maximize shareholder value,” the board should take all of a firm’s stakeholders’ interest into account so that value is sustainable over time. An organization is, of course, affected by the stakeholders around it, such as its customers and suppliers, and the communities in which it operates, but it also has an impact on its stakeholders. This issue of stakeholders and the relationship between a firm and those around it will be explored in more depth in Chapter 3.

The second task of the board is to manage itself such that it provides the proper oversight for the company and faithfully represents the interests of the shareholders as a whole. As part of their self-management, boards typically have a series of by-laws and committees that divide responsibility for key functions, such as audit, nominations, and so on.

Beyond this, the job of the board is to appoint and monitor the performance of the CEO, determine compensation for its members and the CEO, assure that corporate accounts are in compliance with legislation, provide input to the company strategy, and manage critical mergers and acquisitions, which fundamentally affect the nature of the company itself. The board can also terminate the CEOs contract if, at some point in time, it feels that to do so would be in the company’s best interest.

The CEO then has the role of appointing the management team of the company, managing the company on a day-to-day basis, and reporting back to the board at regular intervals.

Members of a firm’s management team, such as vice presidents of different regions, functions, or business groups, often have an enormous influence on policy. However, the degree of their influence is dependent on the company culture, their particular function, level of expertise, relations with the CEO and the board, and even personality.

For that reason, this book focuses on the CEO and the members of the board and will refer to them as “senior management” understanding that the term might include a number of additional people in any specific company and that ownership structures and governance varies around the world (see Box 1.1).

BOX 1.1 DIFFERENT APPROACHES TO GOVERNANCE

There are very different approaches to corporate governance in different parts of the world and also very different structures in different industries and even in the same industries.

In the United States, the body representing the shareholders is called the board of directors and the most senior manager in the firm is called the chief executive officer (CEO). He or she answers to the board, which in turn has its own organizational structure such as the chairman and secretary.

Members of the board represent the shareholders who collectively own the company: In the United States and the United Kingdom it is quite common for the firm to be widely held with thousands of shareholders with limited concentration of any particular person, company, or financial institution.

In 2007, the National Bureau of Economic Research published A History of Corporate Governance around the World,³ which stresses the exceptional character of the widely held model.

In Germany, for example, the board is typically made up of the key senior managers of the company, but it, in turn, reports to a supervisory board in which the shareholders, union officials, and government also have representation.

In many countries, powerful families own or control much of the economy. In Asia and parts of Europe elaborate pyramid structures and cross holdings are used to give family-controlled investment companies a controlling interest in industrial firms, banks, and other types of companies, which then control still others.

In such firms the relationship between the family members and the professional managers who run specific businesses is very different than in a widely held firm where, in many cases, the CEO has a tremendous influence in the membership of the board and the direction of its deliberations and decisions.

Companies that are controlled by a particular family often have a parallel family council, which meets separately from the board but makes critical decisions about the long-term nature of family ownership and overall strategic direction of the firm. The Henkel family in Germany still owns 59 per cent of the ordinary shares with voting rights of their company and has insisted that Henkel’s senior management make the firm’s environmental performance a priority for the last 50 years.

In other countries large banks tend to own or have controlling interest in important parts of the economy and in a number of countries such as China, ownership of large firms is heavily intertwined with the government itself through state-owned enterprises, government banks, or companies owned by specific ministries such as the armed services. In some countries much of the economy is owned by close associates, relatives of political leaders, or even, as in the case of Saudi Arabia, the royal family.

Six Fundamental Differences

Many CEOs and board members appear to be a bit disengaged from the issues of environmental sustainability despite the tremendous progress that has been made over the past 60 years to raise awareness, legislate minimum levels of clean air and water, and develop a more accountable civil society.

In many companies, environmental compliance is an issue for corporate affairs, engineering, and operations teams and is about making sure the organization operates within the limits of the law. Large firms also engage lobbyists or participate in industry groups, which are involved in the public debate and work on shaping the legal environment itself.

Marketing concerns itself with looking at the degree to which consumers are interested in the issue and works with research & development (R&D) to come up with products that are, or are perceived to be, more environmentally friendly.

Finally, the corporate communications function is tasked with publishing annual sustainability reports. These show where the company is and how much progress it is making.

In this context, only those businesses that are directly connected to some of the key issues involved, or are “in the game”– such as energy exploration, water management, electricity production, and clean tech – have sustainability high on their strategic agenda.

The reason for this disconnect is that there are six critical differences between the fundamental logic of business and that of activists and legislators. These differences make it difficult for senior management to get their heads around the issues involved and/or make significant progress. Table 1.1 shows the six differences, which are explored in depth in the subsections that follow.

TABLE 1.1 Six Fundamental Differences

Challenge	Business Logic	Environmental Logic
1. Starting Point	Business has built the modern world and we owe our wellbeing to its incredible advances	The negative impacts of some businesses are unacceptable regardless of their importance
2. Time	With some exceptions, 3-5 years is a relevant planning horizon and many decisions are even shorter term	Pollution, and climate change will impact future generations and must be managed over decades or longer
3. Focus	A major focus of Senior Management is the financial health of the firm and its financial reporting obligations	Environmental issues can not be measured in economic terms as the issues are social, scientific and moral rather than economic
4. Risk	Risk is unavoidable and can be managed by evaluating its probability	Catastrophic risk is unacceptable and should be eliminated
5. Role of Government	The Government is the embodiment of the will of the people and sets the rules for business through the political process	The political process is heavily influenced by business and government and can not be trusted to protect the environment
6. Purpose	The purpose of business is to make money for its shareholders	The purpose of human activity is to be in harmony with the natural environment

The purpose of calling out the differences is not to excuse senior management from looking at the environment, or even to challenge the basic logic and assumptions from which the differences spring, but to encourage a deeper understanding of them. Bringing about this deeper understanding is key to moving forward and is, to a large degree, the overall purpose of this book.

The starting point

The starting point for most business people is the belief that business is a force for good in the world and that our modern society has been created by the entrepreneurs and companies that built it. This basic belief in the power of business is well exemplified in the novels of Ayn Rand and the business legends from different times who have built our modern world.

For many, the industrial revolution was the jumping-off point for our modern way of life and James Watt’s improvement to Thomas Newcomen’s steam engine was a critical first step in building our modern world. Industrialization went hand in hand with the production of energy, electric lights, steel, railways, and the increasing opening up of the world.

Industrialists such as Carnegie, Rockefeller, Vanderbilt, Huntington, and so on are, in this world view, heroes as well as robber barons who built the world with their vision, money, hard work, and perhaps ruthless business practices.

Henry Ford is probably one of the most pivotal examples. Ford and his firm not only made tremendous strides in developing automotive technology and industrial processes to produce cars, but also raised wages and built a partnership with the labor force that would last to the current day.

In later years, Bill Hewlett and David Packard were considered to be heroes who, after studying radio science under Professor Frederick Termin at Stanford, went on to build HP. They also started what has become Silicon Valley, where generation after generation of entrepreneurs are able to raise capital to build the next wave of products and services of the digital age we currently enjoy.

In India, people such as Lakshmi Mittal and Ratan Tata hold a similar place in the country’s business imagination, ha...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures, Tables, and Boxes
• Introduction
• 1 The Logic of Business: Governance and the Environment
• 2 Modes of Response
• 3 Strategic Issues
• 4 Strategic Options
• 5 Environmental Interest Groups
• 6 Industry Examples
• 7 Regional Differences
• 8 What to Do?
• Notes
• Index