Sustainability Reporting Today

Sustainability Reporting Today:

 With the advent of sustainability reporting, various indicators and standards have been developed to measure and evaluate sustainability and to anchor it in corporate reporting on value creation. A sustainable commitment to stakeholder relations on an economic, social and ecological level has a proven positive impact on value creation and ultimately also on the strategic success of a company. To make this transparent, the following principles for an integrated sustainability reporting - which are to a certain degree also part of standards such as the Global Reporting Initiative, Integrated Reporting and the European Foundation for Quality Management (EFQM) - can lead the way:

 

-         Strategic Focus: Sustainability should be embedded in a company’s purpose, in its derived vision and in its strategic objectives. This forms an essential basis for a periodic corporate sustainability reporting at a strategic level.

-         Embeddedness: Not only singular projects, but the entire strategy development and revision should be communicated comprehensively to make the company’s attractiveness visible for current and future partners. It is deliberately not about retaining information to calm down stakeholders and to secure competitive advantages over competitors, but about gaining strategic stakeholders for a mutual corporate value creation process.

-         Inclusion: When different stakeholders contribute to value creation, it is crucial to also recognize these stakeholders as owners of their contributed values. This is based on an extended understanding of ownership. Here, the concept of ownership refers not only to material goods or financial resources, but also to intangible issues such as knowledge and experience. With their knowledge and experience, stakeholders provide property for a company in a broader sense. Like the financial owners, they have therefore the right to be adequately involved in processes regarding their property and to be informed accordingly.

-         Commitment: In a purely economic view, profit distribution (residual profit) primarily targets shareholders. This is also predominantly reported on. Especially because the management has to make discretionary decisions about the shareholders’ compensations, e.g. how much of the profit is being distributed and how much is being retained (pay-out-ratio). When other stakeholders, in the sense of a broader concept of ownership, contribute significantly to the corporate value creation process, these stakeholders should also be a compulsory part of the distribution of tangible and intangible values as well as receive information accordingly.

 A sustainability reporting based on these principles suggests that companies can create more values with and for stakeholders.

 Sybille Sachs

 

Looking back

While clearing up my library recently, I came upon a book by K.R. Andrews, "The Concept of Corporate Strategy" (1971). Looking through the text over 40 years later, I am amazed how current Andrews’ considerations are. Andrews was Professor for Strategic Management at the Harvard Business School. He became well known for a number of things, among them a case study on the Swiss watch industry. In this study he demonstrated how a small firm can compete with larger ones strategically, sustainably and successfully.

In his Concept of Strategy, Andrews argued on the basis of the SWOT analysis - which is his “invention" by the way - that a firm always needs to seek an economic strategy that is aligned to the moral concepts of its leaders (p.38): "Personal values, aspirations, and ideals do, and in our judgment quite properly should, influence the final choice of purpose". In this way the manager’s sense of responsibility as human being and not as homo oeconomicus is addressed ("his own standards of right and wrong") (p.118). For Andrews, strategy is always "a human construction; it must be responsive to human needs" (p.117). Andrews goes even further and argues in the spirit of modern Stakeholder Theory that strategic decisions also need to always have the well being of society as a whole in mind. He writes: "By ‘social responsibility’ we mean the intelligent and objective concern for the welfare of society that restrains individual and corporate behavior from ultimately destructive activities, no matter how immediately profitable, and leads in the direction of positive contributions to human betterment, variously as the latter may be defined." (p. 120) Unfortunately this thinking, on Strategy Theory and the practice of strategic action, was completely buried in the 80s by narrow and inflexible economic thinking. Ironically, his colleagues Porter and Jensen, also at the Harvard Business School, were forceful promoters of the economic model. Decisive factors were Shareholder Value as the primary goal and hard competition; homo oeconomicus determined practices. This led to unreal abstractions with dangerous consequences. For these reasons, the “ultimately destructive activities” that Andrews addresses in the above quote came about in the financial crisis of 2008. And the subsequent debt crisis confirms his warning: "Business cannot remain healthy in a sick community; ultimately no corporation is an island."

Today scientific work in Strategic Theory places great emphasis on the latest literature. However, sometimes it would also be good to refer to old classics; they often challenge “modern” theories and accepted practice! In any case, Andrews can be regarded as a forerunner of a stakeholder-oriented view of strategy.

 Edwin Rühli

 

 

 

The human factor

Last week I was invited to a networking meeting of top-management to present our book to leaders of different industries. The focus of the event was the success factors of strategic management, in the time after the financial crisis and in Europe’s critical economic situation. The participants agreed on one dominant factor for success: human beings. After a long period of narrowing down corporate value creation to a purely financial dimension, which can be measured and negotiated in impersonal markets, the longing for a human dimension has become dramatically noticeable.

The success stories the participants presented are examples of actively motivated individuals, who are inspired to contribute in a meaningful way to value creation. The successful management strategy in these examples depends on the way human beings are willing to contribute. And they emphasize that human beings are motivated, when they are respected and appreciated in their engagement. Confronted with challenging times, and the growing lack of trust in leadership, the relief is seen to be in the hands of human beings.

The participants of the meeting then asked how this crisis of confidence could be overcome. One leader emphasized that successful mangers are also courageous individuals. Leaders have to stand up and advocate sustainable value creation that contributes to the quality of human life, and not to quick short-term profits. They have to support their own people, and respect the experience and knowledge of the people with whom they do business. These kinds of human narratives contrast greatly with the greedy behavior that brought us to the deep crisis of trust in which we find ourselves. Or to quote one manager: “Every company has the employees it deserves. If a company is interested in short-term profitability and it sets the corresponding incentives, it will automatically have selfish and extrinsically motivated people. Companies are what they do (not what they say!).”

Successful business is moving away from the idea of the controlled and defensive management of relations toward a constructive and partnership exchange between leaders of firms and stakeholders. In the late seventies, Chandler was already calling for the visible hands of the leaders (Chandler, A. D. (1977). The Visible Hand: The Managerial Revolution in American Business. Cambridge, MA: The Belknap Press of Harvard University Press). We recall Chandler’s notion of the "visible hand," because value today is not being primarily created by the invisible hand of the market, but by the active shaping of leaders (see chapter 9 of our book). Not the invisible hand of the market leads to an overall increase in the welfare of society, but the visible hands of the leaders of the firm and its stakeholders. The human factor, not the inhuman factory, matters in rebuilding trust and achieving sustainable value creation.

Sybille Sachs