Ethics, Governance and Sustainability - Study Guide

Introduction:

In topic 5, we looked at some of the social and ecological challenges society is facing and then explored what it means for humanity to live sustainably and what the world might need to look like to see this outcome achieved.

Topic 6 looks specifically at the business setting and considers what it means for a business to be a sustainable business, and how sustainability principles can be incorporated into organisational strategy.

Learning objectives:

1. Understand what it means for a business to be a sustainable business.
2. Identify the four levels of business strategy and how sustainable business principles can be incorporated into each of these strategy levels.

Discussion:

Sustainable business:

Both the reformist and transformational sustainable world approaches see the business sector as a (or the) major cause of ecological harms at local, regional and global scales and, as a consequence, this sector needs to play a key role in solving these problems (WCED 1987; Bruno & Karliner 2002). But what are the characteristics of an organisation that would see it make a positive contribution to achieving a sustainable world outcome? To gain some clarity on this, the phases model of Dunphy et al. (2003) can be helpful. The phases model, which is discussed in the Dunphy et al reading for this topic, provides a framework whereby an organisation’s approach to a sustainable world can be assessed depending on how it aligns with various sustainability strategies based on human and environmental practices and performance. The ideal phase, Dunphy et al. argue, is the sustaining corporation phase, where a corporation:

“[provides] an excellent return to investors…[but where its] fundamental commitment is to facilitate the emergence of a society that supports the ecological viability of the planet and its species and contribute to just, equitable social practices and human fulfilment “ (p. 16).

For Dunphy et al., a sustaining corporation is not only committed to making a positive contribution to human and ecological wellbeing in its own internal operations, but also actively advocates for change in the broader social context. The sustaining corporation is therefore one that also seeks to:

“exert influence on the key participants in the industry and in society in general to pursue human welfare, equitable and just social practices and the fulfilment of human potential of all…[It] tries to assist society to be ecologically sustainable and uses its entire range of products and services to this end,…[and] is prepared to use its influence to promote positive sustainability policies on the part of governments, the restructuring of markets and the development of community values to facilitate the emergence of a sustainable society” (p. 26).

A sustaining corporation is therefore committed to progressing the wellbeing+justice sustainable world principles we spoke about earlier, and to do so both within its internal operations and in the broader social context: it is to these ends that its various activities are directed. Whether the sustainable world approach that business should be advocating is one based on the reformist approach or the transformational approach discussed above is a separate question, but one that we cannot shy away from.

The sustaining corporation terminology of Dunphy et al. highlights two main ways in which the terms sustainability and the corporation are connected:

• The first is where the focus is on the corporation itself continuing as a going concern: what is sustained is the corporation.
• The second sees the focus of what is to be sustained in terms of the wellbeing+justice sustainable world principles, and the issue of interest is the role of the corporation in contributing to the achievement of these sustainable world goals.

Some authors see these two concepts as necessarily linked in that unless a corporation is actively progressing to sustaining corporation status, it will itself cease to be viable (Dunphy et al tend to this view). Others are somewhat sceptical of this linkage, pointing to various inconsistencies between corporate goals and sustainable world goals. Examples of these claimed inconsistencies include return on capital objectives which are often framed around net present value calculations over time frames that can be far removed from those appropriate to sustainable world considerations, and the continued financial prosperity of some corporations even where the products and/or services they produce are fundamentally at odds with sustainable world objectives (Van De Ven & Jeurissen 2005).

Here is an example of how the time frames we confront on a daily basis in the business sector, and the financial modelling tools we use in business to make decisions, can be at odds with sustainable world principles. In the quote shown below, we can substitute whales for any natural resource – forests, soils, water supplies – and the same principles apply:

"I was told by a Japanese newspaperman how the Japanese economists justify the continued wiping out of whale stocks by the whaling industry. I had said that I could not understand why the whaling industry would want to drive itself to extinction. He said "You are thinking of the whaling industry as an organisation that is interested in maintaining whales; actually, the whaling industry is better viewed as a huge quantity of capital attempting to earn the highest possible return. If it can exterminate whales in ten years and make 15 percent profit, but it could only make 10 percent with a sustainable harvest, then it will exterminate in 10 years. After that, the money will be moved to exterminating some other resource" (Ehrlich 1985, p. 63).

This distinction between the two ways in which the sustaining corporation/sustainable business term is used is important to recognise. The confusion in use is often used deliberately in greenwash (we discuss greenwash below) and policy debates. Some care is needed in identifying exactly what is meant when you hear or use terms such as sustainable business or sustaining corporation; ask yourself “so what is it that is really being sustained here?”

The sustaining corporation as described by Dunphy et al is however one that is seen to successfully combine corporate continuity and sustainable world objectives: it contributes positively to a sustainable world whilst sustaining itself in the process. In this course, when we talk of the idea of sustainable business, we are really referring to the idea of the sustaining corporation as we have discussed here. We will use the sustainable business term from hereon.

One other point is worth considering before we move on to talk of sustainable business strategy.

Is it possible for any business to be sustainable in its own right? This is part of a broader question of whether sustainability can only meaningfully be considered at a global level, or whether it does make sense to talk of a sustainable business, a sustainable industry, a sustainable nation, and so on. One way to think about this in the business sector is in relation to a set of ‘rules’ the ecological economist Herman Daly has presented as being necessary to adhere to if society is to live sustainably in ecological terms (for the sake of this exercise, we will not extend this discussion to the social justice dimensions of a sustainable world, although you may want also to think of how these Daly rules might have social justice implications).

Daly (1999) focuses on the base of natural capital: that is, the capital base of natural resources humanity needs to ensure long term wellbeing over an indefinite time frame, such as productive soils, fish stocks, forests, water, biodiversity, carbon cycles, and so on. He then proposes that the following rules need to be adhered to:

• Output rule

(a) Waste outputs must be kept within the natural absorptive capacities of the environment (that is, non-depletion of waste-sink services of natural capital such that wastes do not accumulate in the environment).

• Input rules

(b) Harvest rates of renewable natural resources should not exceed regeneration rates (that is, non-depletion of the source services of natural capital).

(c) For non-renewable natural resources, the rate of use must be paired to the rate of investment in renewable alternatives such that renewable alternatives are readily available once the non-renewable resource is depleted.

The idea here is that if every generation adhered to these rules, then the generations that follow would have a natural resource base that remains intact and able to provide the needed resources for continued wellbeing: like maintaining a level of capital in the bank and living only off the interest – the capital base is not depleted so the interest can keep funding a lifestyle effectively forever.

Can any one business meet the demands implied by these rules? For example, take the output rule. It might be possible for a business to reduce its carbon emissions, or its output of other pollutants to what might seem to be an incidental level and one that is a model for other businesses to follow. But whether the wastes that are still discharged meet Daly’s output rule depends on what every other business is doing: it is the collective result that matters. It is this issue that brings some authors to conclude that the concept of sustainability can only make sense when looked at from a global perspective, as the positive actions by any one person, business, community, or nation can easily be countered by others (Lamming, Faruk & Cousins 1999; Alcott 2008). Further, even apparently small ecological impacts of one firm can, when added to those of all other firms, add up to a collective major and unsustainable impact. This is particularly evident in the small business sector where any one business may see its own ecological impacts as minor and not worthy of attention. When all small business impacts are added however, the impact can be quite significant.

Some authors have put forward the idea of a generalisation principle to help think about whether any one unit of analysis (a business, a household, a community etc) can be seen as sustainable. The generalisation principle proposes that human behaviour at any sub-global societal level is inconsistent with a sustainable world if it is one that cannot be realistically attained by the rest of humankind (WCED 1987; Naess 1988; Daly 1996). The reason this is important for the strategy issues we address in this topic is that, without the broader global picture in mind, actions within any one business to pursue a sustainable business agenda might do little more than give a feeling of achievement that, in the big scheme of things, fails to address the core issues society needs to confront.

A simple example of this problem is the motor vehicle industry. Much is made these days of the drive for more environmentally friendly vehicles (electric, hybrid, bio-fuel, and so on) however, coupled with this attention to vehicle design is a marketing effort by auto firms to sell more cards globally – the China and India markets are often identified as areas for major vehicle sales growth. But we need to ask if an auto firm trying to make its vehicles more environmentally friendly in design will address core sustainability issues if, at the same time, the quest is to increase total vehicle numbers in the global space (and all this entails – more roads, increased sprawl, fragmented natural habitat, and so on). Is a sustainable business approach for an auto firm that focuses on product design really going to see a positive contribution to a sustainable world if, at the same time, the firm’s objective is sales growth to see car ownership as it is experienced in the highly industrialised nations replicated across the globe? Is ownership of a (claimed) ‘environmentally friendly’ car by say, 500 million people generalisable to all people on the Earth? If we answer ‘no’, then we have some serious questions to ask about the merits of a sustainable business strategy within an auto firm, and the industry as a collective, that fails to address this problem of the overall scale of vehicle use.

Sustainable business strategy:

How is the concept of sustainable business embedded into organisational strategy? In this section, we look at this question in terms of the four generic levels of strategy and then turn to a more detailed analysis in topics 7 & 8.

Organisational strategy is generally considered as applying at four levels (Banerjee 2001a, b; Moore 2001):

1. Enterprise strategy: This is the highest strategy level and has to do with a firm’s purpose for existing. Decisions made at this level deal with the role a firm plays in society and the parties for whose benefit the firm exists. Evident at this strategy level are statements of a firm’s vision, mission, and values.
   From a sustainable business perspective, we would expect to see sustainable world principles taking a prominent position in an organisation’s statement of purpose, and as a core element of it values, its vision, its mission, and its core objectives. There is however more to this than simply building sustainability wording into written statements, or displaying sustainability principles on an organisation’s web site. These high level purpose claims need to translate into action, whereby sustainability principles frame an organisation’s culture and are reflected in decision making throughout the other three levels of strategy (Banerjee 2001a; Bonn & Fisher 2011).
   Within an organisation, it is normally the Board of Directors that plays a key role in the formulation of enterprise strategy (Moore 2001), although the implementation is mostly delegated to the CEO. From a sustainable business perspective, this is important to acknowledge as without the needed skills set on the Board to allow the Board to effectively confront and deal with sustainability issues, then it may be challenging to gain traction within the organisation to steer it down the sustainable business path. This role of the Board is important in the discussions on corporate governance we cover in topics 9 & 10.

2. Corporate strategy: This has to do with the business lines a firm should participate in to meet its enterprise strategy goals. Decisions made at this level include: 

• Business portfolio makeup: the businesses the firm should be in, and how it enters and exits those businesses (such as a new start-up, merger, acquisition, alliance etc).
• How diversified the firm should be and how the firm can maximise value from its diversification activities.
• The geographic regions in which a firm operates.
• Financial structure: the firm’s debt-equity mix and how this structure is operationalised.

In looking at the corporate strategy level from a sustainable business perspective, we would expect to see an organisation addressing sustainable business issues in the types of businesses it participates in. Bonn & Fisher (2011) suggest that some of the questions that need to be asked at this strategy level include:

“1. Should we initiate changes to improve the sustainability of existing businesses or should we divest unsustainable businesses?

2. Should we add new sustainable businesses to our portfolio and, if so, should we develop these businesses or acquire them?

3. Should we establish strategic alliances to jointly build innovative businesses that focus on sustainable product and service development?” (pp. 9-10).

3. Business strategy: This is principally concerned with how a business competes in its particular business areas (for a diversified firm, it is concerned with how each business line competes in its market, or for a firm operating in only one market, how it competes in that market space). Decisions made at this level include which specific product lines to offer, market development, product distribution, manufacturing systems design, R&D, staffing, and finance.
   Looking at business strategy from a sustainable business perspective, Bonn & Fisher (2011) suggest that organizations need to focus on their actual products/services to either make them more sustainable, or to develop new products/services that satisfy sustainability criteria. Of particular importance in achieving a more sustainable product/service range are the technologies used in manufacture and delivery, and the design characteristics of the products/services themselves. It is the design and production technology decisions that influence issues such as the types of raw materials that might be used, the pollution and wastes that are produced, the durability of the products themselves, and the capacity to recycle products in an effective way. An important component of this focus on products/services is the use of Life Cycle Analysis (LCA) which looks throughout the entire value chain to address ecological and social wellbeing impacts. LCA starts at the point of original resource extraction of any inputs used in the product/services being offered, and continues through the production, packaging and distribution process, right through to the end-of-life point and recycling. Such an analysis might reveal many opportunities for improvement in sustainability practices, including a change in resource extraction processes to reduce and ultimately eliminate environmental and social harms, the elimination of harmful substances from the product/service design, the use of labour policies that provide fair pay and safe working conditions regardless of where in the value chain those workers are found, and the elimination of waste and pollutant discharge by designing these out of the product/service production and delivery process.

4. Functional strategy: This deals with the maximising of resource productivity to support the achievement of a firm’s higher-level strategies: it delivers the grass roots activity for effective execution of a firm’s business strategy. Decisions made at this level include operational procedures of, and coordination between, different functions such as marketing and research and includes issues such as pricing, promotion, production scheduling, stock control, and staff and labour policies.
   From a sustainable business perspective, we would expect to find sustainability principles embedded in each of the functional activities. Examples of how this might be achieved include:

• Human resources:
  Recruiting: building sustainable business competencies into recruitment criteria to build organisational skill sets and to ensure the value base of employees matches the firm’s sustainable business focus.
  Training: Providing ongoing training for all employees on sustainable business issues.
  Appraisal: Including sustainable business objectives in employee performance appraisal.
  Reward systems: Linking reward systems to criteria that embrace sustainable business objectives as opposed to basing rewards only on financial results. One approach might be to include ecological, social, and financial performance hurdles in reward structures.
• Marketing:
  Marketing initiatives need to support the organisation’s sustainability objectives and honestly promote the organisation’s products and services in ways consistent with the wellbeing+justice sustainable world principles we have discussed above.
• Finance and accounting:
  Finance and accounting systems play an important role in helping managers obtain the needed information to understand the magnitude of the sustainable business issues a firm may be confronting, plus provide data on how the firm is progressing in achieving its goals. Building sustainable business objectives into a firm’s management accounting systems plays a key role in collecting this data and providing the output to management and to other parties including regulators and the general public via a firm’s sustainability report (for more on sustainability reporting, see the Global Reporting Initiate web site at http://www.globalreporting.org/Home)

When talking of sustainable business strategy, one important issue to bring to front-of-mind awareness is that of greenwash and its colleagues deep greenwash and bluewash. The following example might help highlight the issue.
In December 2000, an article was published on the Corp Watch web site (the full article is available at http://www.corpwatch.org/article.php?id=219 ) commenting on the corporate image change of BP (British Petroleum) and the ‘beyond petroleum’ tag BP promotes. The article comments:

“Recently BP, the world's second largest oil company and one of the world's largest corporations, advertised its new identity as a leader in moving the world "Beyond Petroleum." Such leadership would benefit the world's climate and many of its communities immensely, according to British Petroleum. Sound too good to be true? Let's see.

BP says Beyond Petroleum means "being a global leader in producing the cleanest burning fossil fuel: Natural Gas." It's true that natural gas is not petroleum, but is it true that gas is a radical improvement over oil for our climate? In theory, natural gas emits somewhat less carbon dioxide than oil for the same energy produced. But when fugitive emissions, or leaks, are counted, the difference is slim to none. For the climate, natural gas is at best an incremental improvement over oil, and at worst a distraction from the real challenge of moving our societies away from fossil fuels.

That challenge is what is meant by "moving beyond petroleum" when used by environmental groups. Rainforest Action Network, for example, says their Beyond Oil campaign works to "move our societies out of our devastating dependence on fossil fuels and into renewable energy options..." BP's re-branding as the "Beyond Petroleum" company is perhaps the ultimate co-optation of environmentalists' language and message. Even apart from the twisting of language, BP's suggestion that producing more natural gas is somehow akin to global leadership is preposterous. Make that Beyond Preposterous.

BP's claim to be "the largest producer of solar energy in the world" is a little more serious. But being #1 for BP is so easy. It was achieved by spending $45 million to buy the Solarex solar energy corporation. That's a tiny fraction of the $26.5 billion it spent to buy ARCO in order to increase BP's production capacity for...oil. BP will spend $5 billion over five years for oil exploration in Alaska alone. And, according to one group of BP shareholders, BP spent more on their new eco-friendly logo last year than on renewable energy.

When a company spends more on advertising its environmental friendliness than on environmental actions, that's greenwash.”

The point to be made here is that a lot of what you might read and hear that is generated from corporate marketing and PR initiatives about what a firm is doing from a sustainable business perspective may give only part of the overall story about a firm's activities and strategic intent. These messages may instead be either greenwash, deep greenwash or bluewash, which refer to:

• Greenwash: This is the dissemination of misleading information by an organisation to conceal its abuse of the environment in order to present a positive public image. This is a common and well known problem in ‘green’ marketing (Beder 2002; Bruno & Karliner 2002; Parr 2009).
• Deep greenwash: This refers to the PR and lobbying activities of companies to influence the political and regulatory environment to favour corporate interests over those of the community and the environment. This is again a well known problem but one where the lobbying activities that give rise to the resulting public policy initiatives are mostly hidden from view (Bruno & Karliner 2002).
• Bluewash: This focuses on the human side of sustainability and refers to the misuse of the social and human rights legitimacy of the United Nations (UN) by corporations claiming to follow UN conventions, but where the corporations do not in fact adhere to the principles of these declarations. In effect, companies ‘wrap themselves in the UN blue flag’ to give credibility to their human rights pronouncements, without necessarily putting those pronouncements into practice (Bruno & Karliner 2002).

You can get a lot of information about greenwash and alternate perspectives on the otherwise positive images corporations present by simple doing an internet search <greenwash [company name]>. We will look further into these issues as the course progresses.

References

Alcott, B 2008, 'The Sufficiency Strategy: Would Rich-World Frugality Lower Environmental Impact?', Ecological Economics, vol. 64, no. 4, pp. 770-786.

Banerjee, SB 2001a, 'Corporate environmental strategies and actions', Management Decision, vol. 39, no. 1, pp. 36-44.

Banerjee, SB 2001b, 'Managerial Perceptions of Corporate Environmentalism; Interpretations from Industry and Strategic Implications for Organizations', Journal of Management Studies, vol. 38, no. 4, pp. 489-513.

Beder, S 2002, Global Spin: The Corporate Assault on Environmentalism, Green Books Ltd., Devon, UK.

Bonn, I & Fisher, J 2011, 'Sustainability: the missing ingredient in strategy', Journal of Business Strategy, vol. 32, no. 1, pp. 5-14.

Bruno, K & Karliner, J 2002, Earthsummit.biz: The Corporate Takeover of Sustainable Development, Food First Books, Oakland, California.

Daly, HE 1996, Beyond Growth: The Economics of Sustainable Development, Beacon Press, Boston.

Daly, HE 1999, Ecological Economics and the Ecology of Economics, Edward Elgar, Cheltenham, UK.

Dunphy, D, Griffiths, A & Benn, S 2003, Organizational Change for Corporate Sustainability, Rouledge, London.

Ehrlich, PR 1985, 'Extinctions and Ecosystem Functions: Implications for Humankind', in Animal Extinctions: What Everyone Should Know, ed. RJ Hoage, Smithsonian Institute Press, Washington DC, pp. 59-73.

Lamming, R, Faruk, A & Cousins, P 1999, 'Environmental soundness: a pragmatic alternative to expectations of sustainable development in business strategy.', Business Strategy & the Environment, vol. 8, no. 3, 1999/05, pp. 177-188.

Moore, JI 2001, Writers on Strategy and Strategic Management, Second edn, Penguin Books Ltd, London.

Naess, A 1988, 'Sustainable Development and the Deep Long-Range Ecology Movement', The Trumpeter, vol. 5, no. 4, pp. 138-142.

Parr, A 2009, Hijacking Sustainability, MIT Press, Cambridge, Massachusetts.

Van De Ven, B & Jeurissen, R 2005, 'Competing Responsibly', Business Ethics Quarterly, vol. 15, no. 2, April 2005, pp. 299-317.

WCED 1987, Our Common Future: World Commission on Environment and Development, Oxford University Press, Oxford.