In the past, sustainability programs often focused on presenting corporations in a favorable, "charitable" light. Today, however, corporate sustainability initiatives are an integral, strategic element of value creation. As such, they need active top management leadership and governance-level control.
Values create value
Assuming that a business is managed sustainably because it is behaving as "green" and socially responsible as possible in every respect is usually misleading. Business strategy expert and Harvard Business School Professor Michael Porter has found that the secret of successful business strategy is focus. Trying to be the cheapest and highest quality provider for all client segments at the same time rarely leads to success in the marketplace. Instead, it is better to choose a clear strategic position by asking questions such as: What types of clients do I want to serve? What mix of quality and price advantage is most attractive for them? Can I make my products or services unique? Can I provide them in a manner different from my competition, so that a marketplace advantage is created?
These key questions for overall business strategy also apply to corporate sustainability strategies. Prioritization and focus is just as important here: Which environmental and social benefits matter most to my customers? How can I offer them at moderate cost, or even realize savings at the same time? Can rethinking my products and services to accommodate customer demand regarding environmental and social issues also be a boost for innovation?
Daniel Esty and Andrew Winston have explored ideas on how tailor-made sustainability strategies create business value under the programmatic title "From Green to Gold." Companies such as Geberit, the leading provider of sanitary and piping systems—which we have been honored to work with for many years on sustainability issues and which is included in numerous sustainability stock indexes—have translated these ideas into reality. In the case of Geberit, this means a consistent market position on innovative and sustainable water management solutions that improve quality of life, and a clear alignment of all sustainability initiatives with this corporate positioning.
Relevance requires leadership
If value-based management is not just a noble end in itself but is directly relevant to the business by creating value for customers and ultimately investors, it needs to be well managed and controlled at all levels of the organization, as with any other strategic aspect of the business. This includes oversight of strategy by the Board, and execution of strategic priorities led by top management.
Corporate functions such as Facilities and Environment, Human Resources, and Corporate Communications have important roles to play in ensuring environmental and social responsibility, and maintaining open dialogues with all stakeholders. However, they can't develop and execute a meaningful sustainability strategy purely by themselves and from the bottom up. The company's top leaders in governance and executive management have to be engaged on sustainability and corporate responsibility and must provide a clear framework on these topics for others to make fruitful contributions. An annual review of the sustainability report by the Executive Management Committee, and its approval by the Board, is a useful step in this regard, but only a piece of the picture and not sufficient on its own.
The right mix of offensive and defensive
Where the leadership for sustainability initiatives, social responsibility, and the corresponding strategy and performance controls should be located within the company depends on the overall business strategy of the corporation and its market environment.
For example, many major banks such as Deutsche Bank consider environmental and social issues in the context of risk management, particularly the part of risk management that is focused on threats that can damage the bank's reputation. In this case, legal and reputational risks are then observed and assessed at the board level by the board's Integrity Committee. This is in line with the needs of an industry whose products are less tangible and more transactional in nature, and for which reputation is particularly central for business success (and currently not always problem free). On the other hand, while Nike also considered sustainability from a risk management perspective in the past, their approach has evolved into a strong integration of sustainability and innovation. Nike has a Vice President for Sustainable Business and Innovation, who reports directly to the CEO. This aligns perfectly with the needs of a company that wants to stand out by continuously developing product advantages in a dynamic market environment, and using sustainability product attributes to support this goal.
This illustrates that the best place for sustainability responsibilities in a company's org chart depends on the global strategic context. If the main motivation for sustainability is innovation and growth, the ultimate responsibility for these pursuits might be best vested in the CEO and the Chairman of the Board. If avoiding reputational damage and achieving savings is the focus for sustainability and corporate responsibility initiatives, then the CFO and the Board's Risk Management Committee might be better positioned to take charge on these topics. When our Sustainserv team works with companies that want to position or reposition themselves on sustainability and corporate responsibility, an integral part of our work is to crystallize the organization's key strategic thrust in this regard and use that as the basis for determining how corporate responsibility should be best organized up to the company's top level.
Governance as control for, and part of, sustainabilty
An entrepreneurial approach to sustainability therefore requires the company's corporate governance bodies to play a shaping and controlling role. At the same time, effective, clear, and credible corporate governance is itself an important aspect of corporate sustainability, particularly for shareholders. If sustainability is understood as fitness for future success, both of our society and of an individual company, well-functioning governance processes are essential to ensure this.
Sustainability-oriented investors therefore have an interest in how senior management and the board take responsibility for sustainability and accountability to the company's stakeholders. "Stranded assets" have been pointed out as one issue where such responsibility is key by Reto Ringger, who is the CEO of the sustainability-focused Globalance Bank and had been pivotal in the establishment of the Dow Jones Sustainability World Index as the first global sustainability stock benchmark. This term has been used to discuss fossil-fuel related assets held on balance sheets that may have to be adjusted downwards in value if climate policy regulation limits the ability to utilize them. Sustainability-oriented investors can protect or increase the value of their investments by demanding clear governance oversight for sustainability issues of that kind of strategic relevance, while at the same time promoting values that support sustainable development.
This also explains why governance is becoming a key issue in sustainability reporting. The most prominent example is the new "G4" version of the Sustainability Reporting Guidelines, published by the Global Reporting Initiative and used by companies around the world. When the latest guideline version was published, some corporate leaders were initially surprised that disclosures are expected not only for economic, environmental, and social performance, but also for how sustainability responsibilities are distributed at the top level of the company. At the same time, investors that consider social responsibility in their financial decisions have for a long time used the term ESG ("Environmental, Social, and Governance") issues for sustainability, clearly expressing the role governance plays in corporate responsibility.
Thus top corporate leaders taking a strong position on sustainability pays off in two respects: the company increases its long-term chances of success, and it is rewarded early on by forward-looking players in capital markets.
By Bernd Kasemir, Managing Partner
This article was a contribution to the 2014 Yearbook of the Swiss "Business magazine" - Issue on Corporate Governance