It’s Not Just About the Money
Over the next 50 years, responsible companies are going to be forced to embrace the triple bottom line, or 3P, and consider not just profit, but also the value of their people and the value of our planet
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A responsible company owes a return not only to stockholders but to something that has come to be called stakeholders, entities dependent on or beholden to the company, but also on which the company depends. In addition to stockholders, there are four key stakeholders: employees, customers, communities, and nature.
Stockholders still get first dibs and last, but their return relies on the cooperative productivity of the other groups.
The responsible company owes its employees light-handed, attentive management; openness about the numbers; encouragement to co-operate, across divisional lines when necessary, and to continuously improve processes; freedom to organize workflow with minimal delays or interference from higher-ups; and a penalty-free whistle to blow against wrongdoing.
The responsible company owes its customers safe, high-quality products and services; this applies to both basic and high-end goods. Goods should be well-made, durable, and easily repaired. Whatever comes to the end of its useful life needs to be recycled or repurposed into something new. Marketing claims, especially those of health and environmental benefits, should be made responsibly.
The community includes suppliers, who have now become critical to reducing the social and environmental impacts of products. It is challenging for companies, with subcontracting so prevalent, to know, much less understand, their supply chain and its workings. But to know who does what and where enables a company to work with its suppliers more intelligently and productively—and to improve the working conditions and environmental stewardship that underlie its products.
Community also includes, of course, locality. Your company needs to take responsibility for wherever your people gather for work, including satellite locations where you have stores, warehouses, or factories. Obligation to the community includes paying a fair share of taxes and a healthy dose of philanthropy, in money and in-kind contributions of products or services. Many companies now allow their local units a say in local giving.
Community also includes trade associations, non-governmental organizations (NGOs), standards-setting organizations, non-profits, and other citizens' organizations that may have an interest or something to say about what your company does. Advocacy groups like Greenpeace and PETA may confront you about your practices, as may individual citizen activists through social media like Facebook and Twitter. Friendly or not, those who engage with you are part of your community in its broadest sense and deserve your attention.
Nature decides our fate but has no voice of her own, or not one that we can hear. We can't sit with her at the table and ask her what she needs to get her work done or what she cares about most. In the face of nature's silence, we have to honor the Precautionary Principle, now embedded into law in the European Union and other countries, that in the absence of scientific certainty, the burden of proof that a new product or technology is safe now falls on business. The Precautionary Principle requires us to reverse our habit, prevalent since the Industrial Revolution, to act now and deal with the consequences later.
Here are the key issues that face the responsible company in relation to its stakeholders during the next 50 years.
Stockholders: Accounting will become more complex. As ever, companies will do whatever they have to do to maintain financial health, cut the owners their checks, and meet payroll. Increasingly, however, companies will also have to measure and assign value to our social and environmental impacts or face the cruel surprise of a sudden rise in the price of carbon or drop in the availability of fresh water. The Nature Conservancy is working with Dow Chemicals to assign value to what ecosystems contribute to the economy. In 2011, moreover, Puma commissioned PriceWaterhouseCoopers to help develop an “Environmental Profit and Loss” statement to account for the full impact of the brand on ecosystems. The consultancy firm hopes to create a model robust enough to be adopted by other companies.
Governments are also changing what they count. The United Nations has endorsed the principles of the “triple bottom line,” or 3P (profit, people, planet), for government accounting. In 2010, Robert Zoellick, president of the World Bank, announced a major project to work with emerging and developing countries to quantify their natural capital, roughly estimated at a value of $44 trillion worldwide.
Public companies that work hard and effectively to improve their social and environmental performance will need to be protected by new laws that forbid attack by minority stockholders, who in more jurisdictions have the right to sue a company for investing in social and environmental performance at the short-term expense of stock value. At present, environmental and social improvements may be scrapped easily when a company, public or private, is sold or inherited. Several states, including California, have created a new legal class called the “benefit corporation” that allows companies to have a social or environmental mission written into their charter. Benefit-corporation status also gives a company the legal right to pursue high social and environmental standards that can benefit the company in the long term but reduce short-term earnings. An organization called B Labs grants “B Corporation” accreditation to companies that meet its standards as well as works to expand legal recognition.
Exployees: There has been a 50-year trend toward automation, moving jobs offshore, improvement in wages in developing countries, and a flattening of wages in advanced countries. The next 50 years will be marked by pressure to restore the living wage. It was assumed as late as the 1960s that the annual pay of one wage earner (usually male) should support his family. The new, more modest, goal has a worker paid one-half of what it takes to support a family of four.
To meet this goal will require further increases in productivity, most of which will come from automation, which further depresses employment rates. More workers will be better paid, yet more people will be out of work, unless there is a corresponding rise in labor-intensive, local jobs in agriculture and boutique, handicraft industries, or a shorter work week.
Finally, more companies are likely to follow entrepreneur Jack Stack's advice to offer equity to a broad base of employees to increase their engagement with their jobs.
Customers: As everything becomes more expensive, customers will become choosier and buy less. They will increasingly demand to know whether products qualify as healthy and humane. And broad, innovative applications of those 400-plus social and environmental indexes will help customers choose products made by companies that pay fairly and work to tangibly reduce their environmental damage.
Communities: As travel and shipping become more expensive over the next 50 years, we are likely to see at least the partial restoration of a company's sense of locality. This can help make local communities stronger and more resilient, and more active in the effort to attract and keep beneficial employers.
Responsible businesses will have to work more closely with NGOs and interest groups to reduce environmental harm and improve working conditions throughout the supply chain. Trade associations and third-party verification organizations will become more important as more companies benchmark their social and environmental standards, work to raise the bar, and have their efforts to meet them monitored and verified by independent parties. Above all, companies will have to work as true partners with their suppliers, in a climate of trust. Profit will come not from taking advantage of one another, but from efficiencies gained by understanding each other's problems and meeting each other's needs.
Nature: As customers learn more about the consequences of ravaging the natural world at our current pace, they will pressure companies to do far more, more quickly, to reduce the damage they cause. Rising cost will constitute its own pressure on companies to adopt more responsible practices. Expenses will rise for natural resources (especially energy and water) and for waste disposal. Companies, not individuals, generate 75 percent of the trash that reaches the landfill or incinerator. Packaging, for which the producer is responsible, is disposed of almost instantly by the consumer and comprises a third of all waste.
The need to use less energy and generate less waste will in turn require companies to conduct life cycle analyses (LCA) of their products. The LCA teaches a company how to reduce the environmental impact of its products from their origins as raw materials (derived from water, the soil, or underground) through their manufacture, useful life, and eventual disposal. Finally, companies will have to track environmental performance through all business reporting systems.
It is essential to decouple the definition of economic health from economic growth in the use of materials and energy. It is not pie in the sky to say so. Germany, Japan, and China, among other governments, have announced their intention to create “circular economies” that promote reduction, reuse, and recycling of materials. Japan passed a law in 2000 to increase resource productivity by 60 percent, increase recycling by 40 to 50 percent, and reduce waste disposal by 60 percent by 2010. As of 2008, it was on track, according to World Watch's 2011 report.
The U.S. needs to follow suit and create its own circular economy. This would require eliminating government subsidies and tax breaks for industrial agriculture, oil and gas production, and other non-renewable resources, so that prices would reflect true costs. The U.S. Treasury, for example, pays $2 billion a year to support the price of chemically intensive conventional cotton grown in California and Texas.
In a post-consumerist society, it's critical that we stop using the gross domestic product (GDP) as a barometer of social health. As economist Joseph Stiglitz puts it, we need to expand the idea of GDP to include non-economic factors. In October 2010, The U.K., following the lead of Bhutan, Canada, and France, adopted (with some nervousness on the part of its Conservative government) a “happiness index” that defines quality of life more broadly than does GDP. The U.K. index includes metrics on job satisfaction and economic security, satisfying relations with friends and relatives, having a say on local and national issues, health, education, environmental health, personal security, and volunteer activities.
Were we to grow less distracted by our consumerism and consumption, and to spend more time with friends and family, or work with people we want to help, or learn something we have always wanted to be able to do, wouldn't that make up for missing yet another sale at the mall? The pursuit of national wealth through trade of increasingly useless things has for a few decades kept us in more clothes than we need but has nothing to do with the pursuit of happiness. And it simply no longer works.
It is financially unsustainable for the world economy to require three percent annual growth, which corresponds to the three percent growth a company must now maintain to outpace inflation and prevent job loss. Yet the economy in advanced societies no longer creates sufficient well-paid jobs; the speed of automation outpaces that of job creation. All rich countries face high levels of debt because fewer well-paid workers pay the taxes to sustain outlays for health care, education, and the military.
Excerpted from Yvon Chouinard and Vincent Stanley's The Responsible Company: What We've Learned From Patagonia's First 40 Years (Patagonia Inc).