Living on the Other Side of the Looking Glass

“The sound principle of a topsy-turvy lifestyle in the framework of an upside-down world order has stood every test.” Karl Kraus

lookinng g;lass

As part of my New Year’s work, I read the latest Sloan Management/BCG report on the status of corporate sustainability. The 2013 report is the fifth in this annual series.

The 2013 survey included more than 5,300 executive and manager respondents from 118 countries. This report is based on a smaller subsample of 1,847 respondents from commercial enterprises. To focus on business, we excluded responses from academic, consulting, governmental and nonprofit organizations. Respondent organizations are located around the world and represent a wide variety of industries. The sample was drawn from a number of sources, including BCG and MIT alumni, MIT Sloan Management Review subscribers, BCG clients and other interested parties.

I found the report profoundly depressing. I often write that business has got sustainability all wrong, and this report reinforces my arguments. I was mildly hopeful when I came across the term, materiel sustainability, in the text. I immediately thought that firms has come to realize that their material inputs extracted from the environment were becoming threatened, and, conversely, were harming the environment. Finally, I thought maybe the corporate world is recognizing threats posed by a deteriorating world. No, I was wrong. Here is how they had defined “material sustainability.”

What is Material Sustainability?
The focus of this report is, in large part, on the most significant sustainability issues: what they are, how they are addressed, and which companies are addressing them. This research examines a growing global expectation that companies assess and address the sustainability issues that are material to their existence over time. Material sustainability issues, in this sense, are those issues most relevant to the company’s continued ability to function. Thus, what counts as “material” may vary considerably depending, for example, on which industry you look at, or even on the business model of individual companies in the same industry… The expectation that companies should be addressing these material sustainability issues is reflected in a variety of new standards and practices. In the United States, for example, the Sustainability Accounting and Standards Board, accredited by the American National Standards Institute, is developing disclosure standards for 88 industries to provide investors with transparency into the significant sustainability risks of the companies in which they invest

The word, materiality, has particular significance to companies. It refers to all risks that might impair a firm’s profitability in the future or affect the analyses of interested parties. GAAP defines it as “Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement.” In a word it is a factor to be used in judging the “sustainability (existence or health) of the firm. It focuses attention on the interior dimensions of the corporate body.

This focus on the inside of firms could not be farther from the language and sense of the original Brundtland definition of sustainability (as sustainable development) which referred to the state of the world, a macro concept—the converse of the micro-sense of corporate sustainability. This sense is intensified by the factors being used to assess corporate sustainability. The SMR/BCG report lists five:

  • Creating a sustainability strategy
  • Making sustainability a top management agenda item
  • Developing sustainability business cases
  • Measuring progress on corporate sustainability performance
  • Changing business models as a result of significant sustainability issues

Concern about sustainability arose out of a concern that the world was deteriorating and that well-being was severely maldistributed globally. It is difficult to find a link between corporate concerns about sustainability and this sense. I think part of the issue arises out of the financial models that are paramount in corporate management. Neo-classical models simply aggregate the profits of all firms into a term directly related to the overall health of the private sector and indirectly related to the well-being of the populace. No such direct correlation exists for those impacts on the environmental and social worlds. Each firms exerts a unknowable impact on these complex worlds. The idea that an aggregate index measuring the total amount of recycling can be directly tied to the state of the world is simply wrong. More recycling is, of course, better than less, but improvements cannot be related to the health of the oceans, for example.

The idea of a business case for sustainability is, at best, laughable. The firm exists within a real world. The appropriate business case should be based on some sort of P&L that combines the income of the firm and the costs to the world of its operations. The idea that there is only internal profit involved completely distorts reality. Then, the case for sustainability would be similar to the general case for any strategy. It would not be necessary to separate sustainability from this general strategy, and like other central strategic issues it would naturally be a top concern of management. Since it is a material concern, the results of the business’s operations would be part of the general P&L and balance sheet. Last, changes due to whatever is classified as ? “material sustainability issues” would be handled within the routine responses of the firm.

Bottom-line (I use this metaphor on purpose) the Earth and the people that occupy it are not likely to benefit significantly from the sustainability strategies and practices of the corporate world. And even if they were, in theory, the commitment of companies to anything outside of the private financial aspects of the firm is shaky or non-existent. The gist of the report revolves around the idea binning firms into three classes: “talkers, walkers, and on-the-road” The gap between the talkers and the walkers is large.

1113sustain09.jpg

If firms reported the same sort of numbers referring to their attention to profits. Wall Street would quickly sort out the laggards.

I could go on for quite a while but let me end with these thoughts. The whole idea of sustainability in the corporate mind is wrong. It doesn’t gibe with the way this concept is held by many others nor with the way the world actually works. At minimum, the language used should be changed to alleviate the misunderstandings and bring expectations in line with actuality. There is something terribly wrong with the social dimension as it is completely oblivious to the deteriorating state of workers in the US. The materiality of specific social and environmental factors appears to be lower than that of conventional economic factors. And, most fundamentally, the situation will not change “materially” until the firm internalizes its externalities in every aspect of measuring and planning.

|