Corporations, Sustainability, and Innovation: Early Results a Mixed Bag
Robert G. Eccles, Professor of Management Practice, Harvard Business School | March 10, 2015 | 2
I have spoken and written extensively on the role of the modern corporation in society, reflecting on the reality that expectations from society on the role and responsibilities of corporations are rapidly changing. Society is increasingly expecting corporations to take responsibility for a broader range of sustainability issues, such as social and environmental aspects that will ultimately affect financial performance and the company’s ability to create value over time.
My research with Ioannis Ioannou and George Serafeim, “The Impact of Corporate Sustainability on Organizational Processes and Performance,“ published in the November 2014 issue of Management Science, highlights how “high-sustainability” companies dramatically outperformed a matched set of “low-sustainability” companies in both stock market and accounting measures over an 18-year period. [A similar article by the author, “The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance,” is available online. – ed.] This superior performance is a result of very different behavior on the part of the high-sustainability group in terms of corporate governance, incentives for top management, internal performance measurement, external performance reporting, and stakeholder engagement.
The ultimate responsibility for the purpose of the corporation lies with a company’s board of directors, since their fiduciary duty is to the corporation itself not any particular group, including shareholders. We are seeing more companies embrace a broader purpose in the way they direct and manage their strategies and operations, which are increasingly reflected in their corporate reporting and communications.
A good example is Dow Chemical, which I documented with Kathy Miller and Mark Weick in the Journal of Applied Corporate Finance, “Sustainability at Dow Chemical” (volume 24, issue 2, 2012). Dow's leaders understand their obligation to continue investing in the health and well-being of their employees, their communities, and the environment while still creating value for their shareholders.
However, many corporations are not embracing the practices that will result in more sustainable corporations. A recently published report, “Joining Forces: Collaboration and Leadership for Sustainability,” published in the January 2015 MIT Sloan Management Review (SMR), is the sixth annual global survey of sustainability practices that SMR has done in collaboration with the Boston Consulting Group (BCG). This year they were joined by the UN Global Compact. The survey results are based on 2,587 responses from commercial enterprises.
There were two main themes for this survey: 1) collaboration and 2) the role of the board of directors. The results are very interesting and, in some cases, rather disappointing. While I encourage you to read the entire report, a few findings of interest to me include:
90% of respondents agreed that collaborations are needed for sustainability, yet only 47% said they engaged in them; of those who did, 61% reported their efforts as successful. The primary types of collaborations were strategic or transformational rather than philanthropic or opportunistic and ad hoc. Some of the most important reasons for collaboration were to increase reputation and brand building and product and service innovation; foster market transformation toward sustainability; and risk management. As with many things in life, experience improves outcomes. The more collaborations a company was engaged in, the more likely it was that each one was successful.
Boards of directors
Similarly mixed results were found regarding the role of the board of directors. Whereas 86% of the respondents agreed that the board should play a strong role in sustainability, only 42% felt that their company’s board did so. This finding was noted in a recent article in The Guardian, which cited other findings regarding the lack of interest of many company boards in sustainability. There are a number of reasons for this, including a common misunderstanding about the fiduciary duty of the board (an issue I explore in my new book, with Mike Krzus and Sydney Ribot, The Integrated Reporting Movement: Meaning, Momentum, Motives, and Materiality). Equally sobering findings from the SMR-BCG-UN Global Compact study were a four-year downward trend in strong CEO commitment to sustainability (-9%) and linking sustainability performance with financial incentives (-2%). On the flip side, the number of companies that have sustainability as a top management agenda item increased from 46% in 2010 to 65% in 2014. In those four years the percentage of companies that have not created a business case for sustainability dropped from 42% to 23%.
Developing a sustainable strategy is admittedly a complex undertaking. Here the UN Global Compact has played an important role in a number of ways, such as its Guide to Corporate Sustainability. It also announced in November the launch of its Global Board Programme, which it developed in collaboration with BCG and DLA Piper, a global law firm. The purpose of the program is “to support Boards of Directors to effectively oversee and help drive their company’s sustainability strategy, with a view to protect and support financial value creation.” Two other recent Global Compact publications of interest are Communication on Progress: 2014 Key Facts and Executive Director Georg Kell’s annual letter to Global Compact participants. In it, he discusses trends, opportunities, concerns, and what the business community can to do in the support of sustainable development.
If you have any questions about the survey report or thoughts on the challenges for corporations innovating in sustainability, please share them below.