CIO Agenda

Firm of The Future: Sustainable Business Outperforms Traditional Business

February 9th, 2012 Giles Hutchins Posted in Sustainability, The Firm of the Future |

According to in-depth research from the Harvard Business Review, corporations with sustainability embedded into their culture (through social, environmental & economic awareness and ethics) consistently outperform traditional businesses focused solely on profit maximisation.

 

The Harvard Business Review researched (over a 17 year period from 1993 -2010) how ‘high sustainability’ businesses performed against ‘low sustainability’ traditional firms, and released its findings in November 2011 in a paper entitled ‘The Impact of a Corporate Culture of Sustainability on Corporate Behaviour & Performance’.

 

In assessing 90 sustainable businesses against 90 traditional businesses, it found that businesses which take environmental, social and economic factors seriously in their strategy, culture and operations consistently outperformed traditional firms in both stock market and accounting performance.

 

Some in business have long thought that an explicit focus on social and environmental factors diverts attention from core business activities and so negatively affect the company’s strategy and business model; such a sustainability focus can increase costs and reduce overall competitiveness bringing lower margins.

 

This ‘old paradigm’ thinking has now been proven incorrect.

 

Traditional firms (Firms of The Past) apply the traditional model of profit maximisation in which social and environmental issues are predominantly regarded as ‘externalities’ – outside the business interest and measure of performance. In contrast, sustainable firms (Firms of The Future) pay attention to externalities, through their relationships with a diverse stakeholder community (employees, customers, suppliers, NGOs, etc.). From the Board down, sustainability objectives, longer-term planning & stakeholder engagement is linked to performance and governance mechanisms like executives compensation.

 

Shifting from a tradition firm of the past to a sustainable firm of the future is a substantive change in business ethos, culture, processes and governance. Whilst the profit maximisation focus of the traditional firm creates short term value for shareholders it also results in a failing to make the necessary strategic investments in future profitability.  Such short term decision making can lead to negative externalities for other stakeholders e.g. the local community and environment, in turn damaging long term customer value, stakeholder relations and resource resilience.

 

It is this short-termism (the hall mark of a firm of the past) which is incompatible with extensive stakeholder engagement so vital to becoming a sustainable firm of the future.

 

The Harvard Business Review research found that sustainable businesses institute a reinforcing loop between the underlying organisational norms, values, policies, performance management and operating procedures all geared towards sustainability.   Sustainability becomes entrenched in the strategy and operations, fundamental in the value-creation approach of the business rather a ‘corporate responsibility’ approach tagged on as an after-thought.

 

In the words of Jeff Immelt (GE Global CEO): ‘sustainability is how we operate and how we innovate’.

 

Whilst sustainable firms of the future exhibit a high level of emphasis on employees, customers, products, the community and the environment as part of their strategy and approach to business, in contrast traditional firms of the past have an explicit focus on profit maximisation.

 

For example: Intel has linked environmental metrics to executive compensation since the mid-90s.  Since 2008, all of Intel’s employees bonuses are linked to environmental metrics (which include operations and product innovation).

 

Sustainable businesses take a longer term approach which is reflected in the types of investors they attract – dedicated ones rather than transient ones who prefer the short-termism of traditional firms.

 

For example: In 2010 Paul Polman, Global CEO of Unilever, said he would purge the shareholders of Unilever, letting go of short term investors whilst attracting one interested in the long term viability of the company.

 

Whilst sustainable businesses may face tighter self-imposed constraints on how they behave due to their ethical nature, rather than this contributing to lower business performance, it seems to improve business performance and longer term viability. when compared with traditional firms with fewer ethical constraints.

 

The Harvard Business Review points to the following reasons for this: attracting better human capital; establishing more reliable supply chains; avoiding costly controversies and conflicts; increased product and process innovation in order to adapt to the constraints; better morale; improved customer loyalty; etc.

 

For example, Siemens generate over 20bn euros in revenue from its environmental portfolio, which it is constantly innovating.

 

As these sustainable firms generate significantly higher profits and stock returns when compared with traditional firms, it suggests that developing a corporate culture of sustainability is a source of long term competitive advantage.

 

Good business sense prevails, with a more engaged workforce, better stakeholder relations, greater transparency, more secure licence to operate, a more loyal and satisfied customer base, a more collaborative partner community and better ability to innovate all leading to better long term performance.

 

Sustainable business really is good business sense.  Out with the old and in with the new.  Time to transform to a firm of the future.