Why less bad doesn’t equal good
It’s no longer enough for organisations to simply reduce the harm they do, writes
WHY does a company exist?
If you’d asked executives this in the 1970s, the most common answer would have been “to make money”. Consumers, employees and the natural environment didn’t really figure in their business strategies. Profitability was king.
Fast-forward a few decades and that narrow concept is being challenged. General Electric chief executive Jack Welch said in 2009: “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy. Your main constituencies are your employees, your customers and your products.
“Managers and investors should not have share price increases as an overarching goal. Short-term profits should be allied with an increase in the long-term value of a company.”
The thinking has evolved, but in practice, organisations are taking a while to catch up. Many are still guided by the bottom line, which is not a smart way of dealing with the challenges of the 21st century. Now businesses must deal with resource scarcity, food security, climate change and the urgent need for an energy transition to survive the long term.
These challenges therefore have an impact on the way we do business.
Companies need to think “forward and outward”. “Thinking forward” means planning business models and strategies according to global trends. “Thinking outward” is about managing internal and external actors, and issues that affect business, consumers and society in general.
Over the past 25 years, as society’s sustainability challenges have increased in urgency, many organisations have adopted a triple bottom-line approach, measuring their performance along economic, social, and environmental criteria. This focuses on minimising harm, while generating maximum profits.
But today, reducing your footprint is not enough. Less harmful does not equal good. What does “good” mean? This question raises further dilemmas. What does “good” look like? And “good” for whom? The answer lies in stakeholder value creation. Organisations must focus on creating value not only for shareholders but for stakeholders too. And that includes the biggest, most silent stakeholder of all – the natural environment.
Some organisations are starting to shift their focus from “less bad” to “good” and their journey generally follows four stages. Take, for example, a household goods manufacturer: Stage 1: Survival The focus of the company is to foster innovation to create quality consumer goods at affordable prices with fair return for investors. The critical stake- holders here are customers and investors. Stage 2: Environmentalism The priority is now to create environmentally friendly products, while meeting the needs of the customer. Here the company focuses beyond its boundaries and tries to influence the behaviour of its supply chain. Stage 3: Social responsibility Now the company tries to promote healthy homes and happy communities through a restorative economic system. The organisation begins to move towards the stakeholder system perspective, viewing itself as part of a broader ecosystem. Stage 4: Sustainability The focus has shifted to improving the lives of all its stakeholders, the health of their environments and quality of communities through transformative household solutions. In this stage, rather than surviving or maintaining the status quo, the organisation strives to improve society and the natural environment.
Some companies are a long way along this journey. The household goods company Seventh Generation, for example, co-founded by Jeffrey Hollender in 1988, started in stage two. Its founding mission was “to provide high-quality, environmentally responsible products that work as well or better than traditional brands”.
During the 2000s, however, the company made a profound change to its mission, moving from selling all-natural cleaning products to creating healthy homes – a shift from stage two to stage three. The organisation launched an internal thinking process to answer the questions: “What is a healthy home?”, “How can we contribute to build one?” and “Who should be our partner in this endeavour?”
Then there’s the carpet company, Interface. By 2016, it was the one of the largest carpet manufacturers in the world, with net sales of almost $1 billion. Now the company is striving towards what its late founder Ray Anderson called “mission zero”.
This involves a commitment to eliminate all waste generated by their products and maximising the company’s positive impact on consumers, society, the government and future generations. Anderson did not decide to simply reduce waste by a certain percentage; he instead decided to solve 100 percent of the problem and design products that would create value for shareholders and all stakeholders – including the environment.
Sustainable innovation is at the heart of value creation. We’ll talk more about this in a future article.
Francisco Szekely is adjunct professor of leadership and sustainability at IMD.