SUSTAINABLE DEVELOPMENT

THE NEW BOARD AGENDA

The future of mankind on this planet depends on the sustainability of a complex system involving three interdependent, highly fragile sub-systems – the natural environment, the social/political system and the global economy. It is axiomatic that the collapse of any one of these would result in the collapse of the others. Catastrophic failure could arise, either regionally or globally, as a result of a massive environmental disaster, the breakdown of law and order and social cohesion or the meltdown of the world’s financial markets.

The organizations that potentially have the power and resources to take action to prevent breakdown in any one of these areas are national governments, acting particularly through international alliances, and business organizations, particularly the huge global corporations.

Individuals inevitably feel powerless in the face of such dreadful possibilities. For example, while increasingly anxious about global warming and its consequences, most people continue to use their cars on every possible occasion on the grounds that one person alone conserving energy can make little difference.

In recent years the term Sustainable Development has come into use as a means of pointing to a viable way forward for mankind. It is usually defined as:

Meeting the needs of the current generation without compromising the ability of future generations to meet their needs.

A more realistic but more challenging definition is:

Meeting the rising expectations of current and future generations.

In the 1980s and early 1990s this concept was applied almost exclusively to the impact of man’s activities on the physical and ecological environment. More recently the term is used in a wider sense and includes their impact on society and the global economy.

Rachel Carson’s Silent Spring (1962) sparked the ‘environmental revolution’. She drew public attention to the massive destruction of wildlife caused by the use of chemical insecticides and other biocides. Organizations such as Friends of the Earth and Greenpeace were founded; support for such bodies as the World Wildlife Fund grew rapidly.

In 1970 a book by a Yale professor of law appeared and topped the US best sellers list for thirteen weeks - The Greening of America (Reich 1970). The opening sentence grabs attention with its stark message ‘America is dealing death, not only to people in other lands, but to its own people.’ Reich went on to assert:

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There is a revolution coming. It will not be like revolutions of the past. It will originate with the individual and with culture, and it will change the political structure only as its final act. It will not require violence to succeed, and it cannot be successfully resisted by violence. It is now spreading with amazing rapidity, and already our laws, institutions and social structure are changing in consequence.

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Reich’s optimism proved to be premature. Enthusiasm for conservation waxed and waned over the next 30 years. In fact there were three waves. The first lasted from the time of Reich’s book, saw the publication of the report of the Club of Rome, Limits to Growth (1972), and fizzled out with the OPEC action to raise the price of oil in 1973. The ensuing world recession saw the environment relegated to the bottom of the agenda. The following years saw the Bhopal disaster in India, the discovery of the hole on the ozone layer in the Antarctic, Chernobyl and the pollution of the Rhine.

In 1987 another influential publication helped trigger a new wave of concern. This was Our Common Future produced by the World Commission on Environment and Development, under the leadership of Gro Harlem Brundtland, Prime Minister of Norway. This report brought the concept of sustainable development to the attention of a world-wide audience.

This second wave of concern from 1987 to 1990 was signalled by the adoption of policies for environmental protection by world politicians, by the emergence of a ‘green’ consumer movement and by public outrage at the Exxon Valdez disaster. Once again, however, economic recession pushed such matters into the background. Despite the publicity accorded the UN summit in Rio in 1992, little progress was made. The major focus of attention by activists during this period was Shell and its actions in Nigeria as well as the controversy over the Brent Spar oilrig.

A third wave of concern and activity is now gaining strength. It is marked by a more balanced approach to sustainable development in that the social and economic dimensions of sustainability are being given equal weight alongside the environmental dimension. An important aspect is the extent to which co-operation is beginning to replace conflict and hostility in the relationship between large companies and NGOs and pressure groups. Sustainable development is now part of the Board agenda in an increasing number of the world’s most powerful and influential companies. To maintain this through the current downturn in the world economy is a major challenge for the future.

WHY ATTITUDES ARE CHANGING

The reasons for changing attitudes to sustainability are to be found in a number of trends:

Increasing affluence
Firstly, the increasing affluence of Western society has generated a fundamental shift in values, away from traditional ones which support the struggle for survival in conditions of scarcity and in favour of ones which relate more to the quality of life than to material factors.

Globalization
The second major influence is the very success achieved by many business organizations, which has made them both large and extremely powerful. Of the 100 largest economies in the world, 50 are corporations. General Motors’ sales are approximately equivalent to the GDP of Denmark and the largest 200 companies’ combined sales make up approximately one quarter of the world’s total economic activity. Through mergers and acquisitions their size continues to grow. Vodafone has merged with Mannesheim, SmithKline Beecham with GlaxoWellcome, AOL with Time Warner and Hewlett Packard with Compaq.

Recent riots against ‘global capitalism’ are an example of the growing concern about the way this immense power is wielded. The very large corporations are de facto wielding political as well as economic power. Increasingly the legitimacy of this situation is being challenged and companies are realising that to maintain a ‘licence to operate’ they have to do much more than simply stay within the law.

New technology
A third source of changing attitudes arises from the close link between business growth and technological developments. While people understand the role of technology in human progress they are also mistrustful of it. Already there is an international boycott on genetically modified foods and growing concern about the health issues associated with intense use of mobile telecommunications equipment.

At the same time the development of the Internet has made possible the rapid sharing of information about what companies are doing, for good or ill.

Increasing litigation
Particularly in the United States, but also elsewhere, individuals and communities are resorting to litigation in response to what are seen as damaging actions on the part of corporations. The awards made by the courts are reaching sums sufficient to threaten the financial stability of even major companies.

Specific environmental issues
People are now really beginning to worry about the impact of economic growth on the environment. Most people now believe that global warming is taking place; local incidents of pollution impact heavily on particular communities, while recurring oil spillages continue to damage sea and bird life as well as holiday makers’ beaches. The recent report of the Intergovernmental Panel on Climate Change is the latest in a whole series of wake-up calls.

Education
For some years now children’s education in many countries has alerted a growing generation of young people to the issues of sustainability -–or at least its environmental aspects. This process has been supplemented for older groups by such things as powerful television documentaries and the publicity given to particular environmental disasters.

TWO KINDS OF PRESSURE

Business leaders are under pressure from two quite different sources. On the one hand there are the competitive pressures of the marketplace, coupled with pressures from shareholders and their representatives. On the other hand there are the pressures from NGOs and other pressure groups calling for greater corporate social responsibility.

Until relatively recently the task of management was less complex. The clear aim was to make a profit; this was achieved by the exercise of commercial judgement, organising ability and what used to be called ‘man-management’ skills. In making decisions the manager had to observe a few simple rules of the game. Today it is not just that the rules of the game have become much more complex, it is a whole new game demanding different skills, particularly leadership skills and such a range of issues to be taken into consideration that, increasingly, the ‘stoppages’ take up more time and energy than the ’play’. The decision-maker is faced with a whole series of regulations and a wide range of representations from consumer groups, pressure groups to do with the environment, media attention, government agencies etc. The decision-making process involves genuine dilemmas where it is far from clear where the best course of action lies. This was famously so in the case of Shell and the problem of the disposal of the Brent Spar oil platform.

The Dow Jones Sustainability Index
The Dow Jones Sustainability Index, which was established in 1998, consists of 236 global companies selected for their sustainability. In this context sustainability is defined as 'a business approach that creates long term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments.' Companies are selected not on ethical or social responsibility criteria but on the grounds that they are well managed businesses in which a longer-term view of success is taken. Some companies began undertaking a reassessment of their sustainability programs as a direct result of the assessment process that is the basis of selecting the components of the index. (Each company in the index receives information showing how it scored in each part of the assessment and how it compares to others in the same industry.) Thus, the index itself is acting as a stimulus to the sustainability movement.

The constituent companies in the Sustainability Index are picked for the quality of their management and the expectation that this will deliver above-average performance. But in this context above average commercial performance does not always mean stock-market performance, at least not in the short term. Three measures that securities analysts frequently use to assess quality of management are return on equity, return on investment and return on assets. The 236 companies represented in the Dow Jones Sustainability Group Index had significantly outperformed the average of the Global Index on these criteria over the five years to up to December 2000.

However, as five-year averages, these figures do not necessarily counter the short-term factors in the stock market. A high-performing company's stock is not necessarily attractive to investors all the time. If the market has fully priced a great company's foreseeable results, that moment is unlikely to be the best time to buy that stock. If something happens to reduce the likelihood that those foreseeable results will materialise - such as economic recession - the share price will fall. This may explain why DJSGI shares fell more than the overall market in 2000/2001. These stocks were perhaps vulnerable when conditions changed.

THE LICENCE TO OPERATE

All organisations have licences to operate. Not in the formal sense of pieces of paper or certificates, although these are issued in certain cases (such as the airline industry or the operator of the National Lottery), but in the informal sense of whether people are willing to accept and deal with the organisation. Anyone who chooses to deal with an organisation is, in effect, implicitly granting that organisation a licence to operate, just as anyone who elects not to deal with a particular organisation is denying that organisation's licence to operate, At a practical level this means that all organisations are granted licences to operate by several different parties (regulators, employees, customers, investors, suppliers and Local communities), and that each of these parties can seek to revoke the organisation's licence to operate at any time. (If companies were to behave more like responsible citizens they would avoid the embarrassment of running an expensive advertisement at the same time a receiving some adverse publicity due to some irresponsible act. This frequent occurrence is known in the world of advertising as 'Combined Inactivity', the paid-for publicity being cancelled out by the negative impact of the company's actions.

Research by Columbia University indicates that about one third of shareholder value in many sectors of industry is accounted for by company reputation. A study by Ernst and Young estimates that the intangible assets of skills, knowledge, relationships and reputation account for two thirds of market valuation for companies focused on knowledge creation.

When major issues reputational arise, company responses fall into the following broad categories.

1. Denial. These companies treat the issue as a matter for the public relations function to handle, comforting themselves with the belief that sooner or later media attention will switch to other issues and other companies. Top management keeps a low profile and refuses requests to meet the media.

2. Defence. These companies take the issue seriously but attempt to defend and justify the company’s position. Top management becomes involved. Lawsuits are defended.

3. Initial defence followed by acceptance of the need to change. In such cases it becomes clear to top management in the course of conducting a defence that the weight of public opinion is overwhelmingly strong. Also it is sometimes the case that as top managers are briefed they come to appreciate the full extent of the impact of the companies activities.

4. Openness, dialogue and jointly developed action programmes. In these cases top management gives clear leadership. Once rare, this response is becoming more common and will one day become the norm. More and more companies, before responding to an issue, take advice not from the traditional PR agency, but from one of the many specialist consultancy firms which have sprung up in the field of social responsibility.

Ideally, of course, companies should not be in the position of being taken by surprise when an issue surfaces in the public domain. The strategic planning process should involve scanning the horizon for such potential problems, asking such questions such as ‘What could happen that could seriously damage our reputation?’ or ‘What could happen that could put us out of business?’ Even more important, ‘What could happen that could implicate this company and its officers in the death and serious injury of human beings?’

THE KEY ROLE OF LEADERSHIP

To meet the changing expectations of society will call for radical changes in attitudes and behaviour on the part of Boards of Directors of businesses large and small and the investment community. This is particularly true in respect of people’s expectations in respect of sustainable development. Companies will need the co-operation of all their stakeholders in this process. The changes that will be involved will affect people in their various roles as consumers, savers and investors, employees and citizens. If significant progress is to be made in such areas as climate change and the conservation of non-renewable resources the scale of change will be huge. Such massive changes can only come about as a result of large-scale movements initiated by visionary leadership of the same quality that changed the political climate of South Africa or brought down the Berlin Wall. We shall need hundreds, even thousands, of leaders at all levels of society to articulate the case for sustainability and to demonstrate by their own actions what it is possible to achieve.‘

. It is vitally important, therefore, that the education and training of our future business leaders should ensure that they are fully aware of sustainable development issues and that personal values and understanding of the social context of business should be treated as more important than the exercise of so-called leadership skills.

Philip Sadler

July 2003

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