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April 2, 2016 (updated)
According to The Economist, there has long been a debate about whether companies should maximize shareholder value, or pursue the social and environmental goals of sustainability. But this doesn’t have to be a debate at all: Companies that recognize the contribution of people and the environment to business success are more profitable in the long term.
Companies play a more expansive role in the communities they are a part than simply providing a product or a service. Businesses provide jobs, they are a part of the physical landscape with their offices, retail stores, and production facilities; they have relationships with other businesses, including vendors and distributors, and the local government; and their managers and employees are a part of and participate in community life. This web of relationships means that businesses have a reputation to maintain. That reputation is built by providing quality products and services at a reasonable price, paying workers fairly and looking after their health and on-the-job safety, and not breaking the law. Provided there is a demand for what they are selling, and they can manage their costs, such businesses should profit.
Managing costs means using resources wisely, reducing inefficiency and waste, and having a reliable, productive labor force. The focus should not be on keeping labor costs down. There is a lower limit to what workers should be paid; when workers are paid below this limit, it can damage a company’s reputation and bottom line, as a result of internal and external criticism and increased employee dissatisfaction and turnover. It is easier and ultimately cheaper to keep a good employee by paying them fairly, than to pay subsistence-level wages or below, and have to rehire a series of unhappy, unproductive employees. This is Sustainability 101 that many employers fail to grasp at their own cost.
In the years since the Great Recession of 2007, employers in America have been able to keep wages stagnant, and in some cases reduce wages, as a result of job scarcity. Now that the unemployment rate is down, companies in America are feeling the pressure to increase pay in order to fill empty positions, many of them in the low-paid service sector. They are also facing pressure by city and state governments who are drafting living wage laws. Cities such as San Francisco, California; Santa Fe and Albuquerque, New Mexico; and Washington D.C. already have living wage laws and more cities are following their example. As The Economist states in an article on pay raises in America:
“Rising paybills need not be bad news for shareholders, however. In labor-intensive industries the American way of low pay, low staff retention and low motivation may be a false economy. Perhaps a third of Walmart’s staff are reckoned to quit in any given year, which could be one reason why it scores so poorly for customer service. In 2014 it said inept shelf-stocking cost it $3 billion a year. (“Serfs Up.” The Economist. March 28th 2015).
The Economist also cites and provides a chart of the Bureau of Labor Statistic U.S. retail job monthly turnover rates from 2001 to 2015, which shows that roughly half as many employees quit as are hired at any given time.
Social sustainability in business means providing the optimal environment for workers to succeed, including fair pay, health and safety, and other benefits; providing quality products and services at a reasonable price to customers; and contributing to the well-being and prosperity of the community. Social sustainability is not about doing good in order to talk about it, nor is it about random acts of kindness; in other words, it should not be confused with social marketing, a mistake companies often make. For example, many of us may have heard or seen the Honda ads where self-proclaimed “helpful” Honda dealers go around gifting people things including groceries, wedding presents, and even a guitar. There are several problems with this ad campaign. First, by informing us it is helpful, Honda ceases to be sincere, because goodness for its own sake can only remain so if it is undeclared. Second, the gifts from “helpful” Honda dealers are given to random people for no apparent reason. Finally, giving someone a gift of material goods is not the same as helping them.
Now Honda may argue that everyone is a potential owner, and that documenting their (Honda’s) random generosity will increase sales. While Honda may sell a few cars from such an ad gimmick, in the long run the company is better-off talking about its cars in its commercials, explaining and/or showing what benefits they will provide to potential buyers, in terms of price, performance, design, financing, etc. Otherwise, the money spent for the helpful Honda dealer ads would be better invested in producing safer, more affordable, environmentally friendly cars; improving environmental health and worker well-being in its operations; providing scholarships, factory internships, or building schools in communities with Honda production plants, or contributing to programs to reduce CO2 emissions. Commercials about these practical efforts would be more effective in promoting Honda’s social ethos.
Sound environmental management is also crucial to business success. All businesses use resources, such as energy and water; and produce waste. Managing resources wisely and reducing inefficiency and waste means developing policies and goals to that end, installing the necessary systems and infrastructure, and educating management, staff and customers about the value of sustainability in order to change their behavior. This is what is meant by “environment” in triple bottom line management. The problem for many corporations is that they continue to pursue a profit maximization model while trying to create an environmental ethos through greenwashing, or making false environmental claims through “green” company logos, product taglines, and marking materials. Putting a tree or bird in a company logo, calling a product “natural” this or that, or including the word “sustainability” in a vision statement while having no sustainable policies to implement that vision are all examples of greenwashing.
Because greenwashing is a superficial marketing strategy, and not an internal and structural process of environment management and improvement, it provides no real environmental benefits to customers, employees, or the company itself. In particular, it provides no cost-savings through reduced resource use, better waste management, or improved efficiency, and comes off as insincere to customers, who may come to see the company as dishonest, unreliable, or out of touch, and take their business elsewhere.
The problem with profit maximization for its own sake is that it leads companies to cut corners, go for the low hanging fruit, and think only in the short term. Indeed, several companies collapsed after breaking the law in pursuit of short term profit, among them Enron, Arthur Anderson, and WorldCom. As these examples indicate, profit maximization can be a slippery moral and ethical slope. Even when such short-term business strategies and practices are legal, as with take-overs and mergers, employees may lose their jobs as a result. While merging companies provides the benefit of scale, the resulting company may be no more innovative or productive than before, may not have any new products or services to offer, and the quality of its existing products and services may decline. The Economist notes that while shareholders can pressure a company to provide them with increased returns on their investment, company directors do have the discretion to act in the long-term interests of the company. Also, shareholders are not a homogenous group: some may be speculative short-term traders, while others may hold shares for the long term (“The Business of Business.” The Economist. March 21st 2015).
For companies to move beyond the tyranny of the quarterly business cycle, to avoid cannibalizing each other for easy growth and market share, and to continue to be competitive in the long term, CEOs need to get better at making a case to shareholders on the importance of social and environmental sustainability to business profitability and success. Shareholders, for their part, must forego short-term profit maximization strategies and tactics, and relinquish some measure of control, in order to allow management to make business decisions in favor of long-term sustainable growth, while also judging performance and providing salary incentives accordingly. Now that’s good triple bottom line management.