Economic Sustainability Essay Example

a short-termist, profit-and-sales oriented straightjacket they have been stuffed into, and into a more strategic environment that enables steady growth of economic value-added, a planned accumulation and distribution of increasingly intangible assets, and prudent management of risks and opportunities. The key findings are: 1. Most existing ‘sustainability’ management tools and systems are mainly written by environmentalists and social scientists.Some do refer to economic sustainability but are so sketchy that they would be inadequate for actually managing a real business (“Look, this should be taken really seriously, okay, it’s got financial stuff in it, and everything”). 2. Fortunately, though, they are not really aimed at economic sustainability managers (ESMs), who instead have a relatively well-known (if limited and creaky) set of financial indicators to rely on.

These are historical and focus mainly on turnover, profit, and for PLCs, market capitalisation and earnings per share (“It’s accurate, alright, but it’s pretty misleading”). . Unfortunately, in a harsh climate where corporate actions and investor expectations are at an all-time high, companies that manage financial performance using only these narrow indicators risk premature death (“or even worse, a copy-cat hostile takeover”). 4. No amount of excellent social and environmental performance will prolong the life of a company that is economically unsustainable, nor are green and community values necessarily good gauges for longevity (“The Sinclair C5 was a lean, green machine; it’s so unfair”); A broader perspective on how to manage economic performance is emerging, based around the brand, intangible assets, reputation, full cost accounting, ability to add value and manage knowledge (“It’s not just about giving ourselves a weird new name – though that might help too”).

It is still early

days for the developers and promoters of workable management techniques, with technical, commercial confidentiality, and political obstacles to overcome (“We could tell you how we do it, but then we’d have to kill you”). 7. Most approaches are still considered to be dark art, not hard science, and surprisingly few companies even value their brand.

Forget the old adage “you can’t manage what you can’t measure”. This is more “How could we ever manage to measure that? ”). 8. The strategic import of environmental and social sustainability activities are sometimes not well enough explained to economic decision-makers or the City (“You’ll never get the finance director along - there’s no business case”).

Nor is it always easy for sustainability managers to influence the full strategic commercial realities in which they are operating (“Gerald, can you just quickly sign off this new recycling policy before you talk to the press about quality? ”).  Probably as a result of this, there is quite a lot of enthusiasm for more guidelines on economic sustainability, almost as much as there is scepticism about whether that will be possible. (“! Management guidelines? Fat chance! But let me have a look at what you’ve got anyway…”) To assist in the development of useful guidelines, the following tentative recommendations can be offered for what the guidelines could cover: A. Enabling ESMs to address the need for broader financial and economic measures beyond the P&L and balance sheet, and the interdependence of the organization with its local, national and global economies;

Ensuring that organisational design actively promotes cross-learning and joint-working among various sustainability teams; C. Encouraging ESMs to have a first go, crudely if necessary, at

measuring intangible assets, full cost accounting or even an economic sustainability index. D. Then discouraging them from passively waiting to see what happens to the assets over time, but getting them to the attention of all decision-makers.

The authors thank Mark Watson, Mark Bartell, Sara Murphy and Mike Pierce, Linda Bishop, Paul Monaghan, Mike Barry, Jayn Harding, James Farrar, and all Sigma project partners on both the research and corporate sides, plus attendees at various workshops, and colleagues and former colleagues at NEF. Also thanks to Alison Reed, Mike Crompton, and the other finance people who gave us their time even though they really weren’t sure what this was all about. All errors are our own, though.

Introduction Economics is a tricky science as well as a dismal one. For every theory about economics, there is another theory that counters it. Although economics is largely about how we allocate resources to meet human welfare needs, economists rarely agree with one another regarding how to achieve the most optimal use of scarce resources. Many contribute to the practice of ensuring economics remains a complicated science - making things somewhat obscure for the average person, from the use of language and jargon to omplicated econometrics modeling. And still, with many great minds applied to the science, we have yet to arrive at a full understanding of how to tackle global poverty and ensure growth at the same time. To further complicate the matter, we are now trying to achieve economic growth while protecting the environment at the same time.

In recent years, there has been a convergence of opinion around the globe within business and government circles that the market

is the best way to manage economies whereby financial success (narrowly defined as profit), continues to be the single most important motivator. This paper is partially about understanding how businesses can reconcile the need to be environmentally and socially sustainable with the demands of a market-based system, whose key measurements of success are growth and profit. The patron saint of economics, Adam Smith, once asked the question: “how does a market society prevent self-interested, profit-hungry individuals from holding up their fellow citizens for ransom? Smith’s theory assumed that perfect balance would arrive between supply and demand, and that the pressures of the marketplace would inexorably direct the selfish activities of individuals by an “invisible hand”, resulting in producing only those goods that society needs. Simple? If only.

Smith was writing some three hundred years ago, and he had no idea of the challenges that were to come. The natural system that Smith would have assumed as infinite would become severely at risk. Smith’s perfect market society would now be holding the environment and our social systems for ransom. Unfortunately, in spite of the change of context, we still more or less manage the economy as he had foreseen. And the problem with sustainability, it seems, is that it turns the traditional idea of economics on its head.

Why? Because preserving the environment in a sustainable way doesn’t necessarily gel with the profit incentives that the market has to offer. Consequently, many companies succeed by doing nothing at all to manage their environment or social activities; others even survive by doing harm. There are some moves to try and prove otherwise: this effort is centred on developing the

“business case” to sustainability. Many argue that good environmental management will save money; that managing stakeholder accountability will ensure you’re more in tune with your business; and that implementing positive social programs, from community development activities to better labour standards for workers mean that your company will see benefits to the bottom line. But is this assumption accurate? In fact, the jury is still out.

Some of the pressures of short-term survival, demanded by the City (and even from Grant-making institutions or public funders for other sectors) may mean that all the good from sustainability programmes never even come to fruition.Sustainability is about long-term survival; environmentally, socially and economically. Sustainability managers need to understand more thoroughly what makes business survive; what finance directors need to know and what other things they need to consider so that when a company sees things failing, sustainability programmes don’t fall by the wayside. This paper looks at the economic sustainability of organisations in the context of sustainability management. It aims to put forward an understanding of how business ticks and what business contributes to the wider economy, if challenged to do so.Sustainability, for the time being, is only one option for most organisations – it is not imperative for short-term organisational survival.

But it may just be the key to long-term staying power. Those organisations that opt for the sustainability route may in fact be the ones that are best positioned to survive, both for their own benefit, and for the well-being of society as a whole. Background and objectives The SIGMA Project aims are “to build the capacity of organisations to meet their business and other institutional objectives by more

effectively addressing social, environmental and economic dilemmas, threats and pportunities. ” The project hopes to achieve this by developing integrated guidelines for managing this ‘triple bottom line’ or indeed ‘sustainability’. Phase I of the SIGMA project was completed in Spring 2000 and identified six themes for further research in a second phase.

These themes were identified as:

1. linkages and integration;
2.  economic sustainability;
3. environmental sustainability;
4.  social sustainability;
5. supply chain management and evaluation; and
6.  innovation, learning, and culture change.

Phase II aimed to undertake practical research into each of these components, as the basis for developing a fully integrated system to help organizations understand and manage sustainability. The New Economics Foundation was commissioned by the SIGMA project to address theme two – economic sustainability. The aim of the research was: “to explore the economic aspects of sustainability, to come to a more thorough understanding of its implications for sustainability as a whole, and to identify ways to capture these within a management system framework. ”Methodology The research involved the following activities, completed between Autumn and Winter 2000/2001:

• Literature review of existing approaches to economic sustainability •Survey of SIGMA organisational partners
• Interviews with organisational partners •R&D workshops with other research teams and organisational partners
• Analysis of the findings and recommendations
• Peer review process Assumptions Some assumptions have been made as part of the research project:
• Economic sustainability is best considered in the wider context of environmental or ocial sustainability, but it means something in its own right and can be defined;
• Most companies are concerned not only with their immediate financial performance, but with their ability to continue long into the future being a player able to make positive contributions
  

to their local community, broader society, and planet as a whole;

This research paper is concerned with economic sustainability – which at its simplest can be interpreted as how companies stay in business. It is clearly important to situate this within the general framework for sustainability, though. Sustainability refers to the notion that anything that can go on being done on an indefinite basis is sustainable; anything that cannot is unsustainable. By common consensus, sustainability is thought to have an economic, a social, and an environmental component.

All three overlap, and they interact. This paper assumes that economic sustainability is integrally linked to the environmental and social outcomes an organization achieves. And while good financial and broader economic performance might mean that companies survive in the short-term, it doesn’t necessarily secure

a long-term economic future, nor does it guarantee positive environmental or social outcomes. If the predictions about sustainable development are accurate, neglecting the environment and social issues may be a barrier to long-term survival at both the micro or macro level.

Consequently, those companies that can effectively manage their environment and the social will also help make themselves economically sustainable. The working definition for the SIGMA project sees “sustainable development as a dynamic process that enables all people to realise their potential and to improve their quality of life in ways that simultaneously protect and enhance the Earth’s life support systems. ” This definition is underpinned by several principles outlined in the Natural Step, whereby: In a sustainable society nature is not subject to systematically increasing: •concentrations of substances extracted from the earth’s crust; •concentrations of substances produced by society; •degradation by physical means, and that in society, human needs are met worldwide. The social conditions for sustainability are: Organisations practice stakeholder dialogue and accountability, recognising the needs and values of stakeholders, and •acceptable social, economic and environmental impacts are stakeholder defined and equitable. But economics is traditionally about how we allocate scarce resources.

Economic sustainability, then, might be better described as the process of allocating and protecting scarce resources, while ensuring positive social and environmental outcomes. The remainder of this paper will aim to expand on the understanding of what economic sustainability means, why it is important and how it should be considered as part of an overall management system tool for sustainability. What is Economic Sustainability? Box: Definitions of economic sustainability Tomorrow’s Company uses its stated purpose and values, and its understanding of the importance

of each relationship, to generate its own success model from which it can generate a meaningful framework of performance measurement” RSA Inquiry Tomorrow’s Company “The business of business is business” Milton Friedman “Economic growth can and should occur without damaging the social fabric of a community or harming the environment”. US President’s Council on Sustainable Development “The criteria by how a pound of profit is made is a building block in the creation of a just capitalism; progressive profitability must replace simple financial profitability as the sole yardstick of business success”. Will Hutton, Putting Back the P in PLC, January 2001 “A brand is sustainable when your customers are going to increase in number or spend more.

Food retailing company, February 2001 “Economic systems support sustainable social and environmental outcomes, where economics is the process through which humans create social and environmental outcomes. ” Adding Values, Chris Tuppen and Simon Zadek, 2001 “Optimum utilization of tangible and intangible assets” Transportation company, Sigma workshop participant, January 2001 “Maintaining high and stable levels of economic growth is one of the key objectives of sustainable development. Abandoning economic growth is not an option. But sustainable development is more than just economic growth.

The quality of growth matters as well as the quantity. UK Government Annual Report 2000, January 2001 “The value you add to the society you work in” Financial services company, Sigma workshop participant, January 2001 [Socio-economic development is] “the degree to which a company actively and constructively uses its resources to support the social and economic development of communities, through direct investments of cash, in-kind support or staff time, or through company policies that generate community capital, such

as local sourcing, hiring, partnerships and education” Buried Treasure, SustainAbility, 2001 Research into environmental and social sustainability is somewhat further along than research on economic sustainability. A literature review revealed few direct discussions on economic sustainability within the context of sustainable development, as highlighted above by the many definitions it is possible to glean. In fact, economic sustainability is the paradoxical golden child of sustainability: if organisations or countries understood perfectly well what it meant to be economically sustainable, there would be full employment, less poverty and no bankruptcies.

Unfortunately, that is not the case: economic sustainability is a complex picture, the nature of which cannot be fully understood without looking at both the internal and external environment in which organizations are operating. The UK Government’s stated sustainability policy is “high and stable levels of economic growth”, with a target measured by GDP growth of 2. 25-2. 5% a year. But beyond this headline indicator, a sustainable economy is better understood through a wide range of well-known indicators, such as investment, interest rates, productivity, housing starts, mortgage lending activity and labour market and employment statistics. The interactions between these are supposed to tell us how well things are going and point to whether or not current levels of economic activity are “sustainable”.

If the economy heats up too much, a government or central bank might increase interests rates; or do just the opposite to kick-start something that is slow moving. The generally accepted premise is that there is a careful balance of actions that must be taken in order to manage the economy: from adjusting interest rates or monitoring expenditure on social programs to changing rates of

taxation. Precisely what that balance is, on the other hand, is fiercely contested. At the organizational level, things can also look pretty straightforward.

A major industrial company with a turnover of ? 100 billion a year might say the City demands that it grow sales at 5% a year (twice the speed on the UK economy). If its main market is fairly static, it might be looking for half a dozen new business ideas each capable of delivering ? 1 billion in sales.If it can do this profitably year on year, it can stay in business - and so is sustaining itself. In practice, there are numerous other measures that point to a successful organisation. Investors look not only at the bottom line but at the management systems, risk profile, intellectual property or future potential as a way to measure and value corporate performance. The financial bottom line is the obvious indicator: the others are not quite as clear or refined.

“The economic and financial are simply not equivalent”, say Chris Tuppen and Simon Zadek. “The financial concerns the market valuation of transactions that pass through a company’s books.The economic, on the other hand, extends beyond the boundaries of the single organisation and takes into account activities in, and outcomes for, societies at large”. In the literature, there are two ways to approach economic sustainability.

The first starts with how organisations stay in business and approaches the issue from the inside. The second looks first at the economic impacts an organisation has on society – the outside or stakeholder view. Economic sustainability forces us to look on the internal and external implications of sustainability management. This means that

managing economic sustainability must consider: •the financial performance of a company; •how the company manages intangible assets; its influence on the wider economy; and •how it influences and manages social and environmental impacts. The next section explores, in greater depth, the two approaches.

The inside view looks at the issues of corporate turnover and brand reputation and considers these to be at the heart of economic sustainability. It doesn’t necessarily tell the whole story – but it does tell an important part of it – an issue now lacking in most sustainability management tools. Later we deal with the wider economic impacts a company has on society and how that, too, is important for a company to remain in business and for managing sustainability as a whole.Here today, gone tomorrow: the sustainable company seen from the inside Why is economic sustainability important? For social and environmental purists, the only companies worth having around are the “goodies” - those who manage the environment responsibly and those that provide positive socio-economic benefits to the communities in which they’re operating. In a sustainable economy, only the best should and will survive. They’re the companies who put social and environmental sustainability at the centre, while still remaining profitable.

The others can go to the wall for all the ‘deep green’ movement cares, especially if they are a much-demonised multinational.At the same time, the modern corporate form is also coming under harsh criticism from radical business writers like Ralph Nader and David Korten in the US, and Will Hutton and Roger Cowe in the UK , calling for stakeholding by regulation and dissatisfied with the modest scope and speed of the Company

Law Reform and its equivalents. Such writers are responding to a public which seemingly cannot get enough stories of blundering mismanagement, super-normal profits, fat-cattery and branch-closing callousness. In fact, the business case for excelling in social and environmental performance is still not compelling enough for many businesses, and companies as we currently know them will be around for some time yet, as major employers and economic mainstays.Sustainability is about managing a company in such a way as to ensure it stays around for future generations with social and environmental programs firmly in tact.

An understanding of what makes companies survive will help sustainability managers embed their programmes more effectively. If they are not concerned with whether or not their company can stay in business, all the good green and community work could disappear at the whim of the market. “Some companies, like the recently privatised utilities, the oil companies or those who value their reputation with consumers, will often find that behaving well proves to be a win/win outcome”, writes Will Hutton. But others will want the markets to rate their shares as highly as possible so they are the predators rather than the victims in the great game of takeover – and that means a relentless and unambiguous quest for shareholder value that social and environmental responsibility cannot be allowed to obstruct.

For them exhortation and the new Operating and Financial Review (OFR) will be little more than good intentions to which they genuflect with little commitment; the real business remains as it was. ” Survival of the fittest One of the government’s key sustainability and quality of life indicators for the UK is average life

expectancy. Allied to this is the concept of ‘healthy life expectancy’ – the number of years out of the total average life that are free from debilitating illness. In the UK, for both men and women, life expectancy is still increasing modestly after some dramatic increases over the last century.

The next challenge is to increase the healthiness of that long life. But what if any is the appropriate life expectancy for a company? Few business analysts these days are sentimental about the demise of companies established in the 19th century, and we have also become used to dotcoms crashing after just a few months of glory. So on the basis of the evidence, what can usefully be said about organisational sustainability? Analysis of the London Stock Exchange over 30 years shows that the total number of listed companies has fallen steadily from 3,400 to under 2,000, and that ‘churn’ – the number of new entrants and deletions from the exchange - has risen steadily (see chart below).Running through the list of the original constituents of the FTSE 100 index, launched on 3 January 1984, suggests that only 30% of those companies are still trading in recognizable form in the top 100 today (see appendix).

Of the 11 companies named as Britain’s most profitable by Management Today between 1979 and 1990, four subsequently collapsed. Business life expectancy, like human life expectancy, may be partly cultural: German and Japanese stakeholders arguably prefer their corporations longer-lived, while the US may be even less sentimental than the UK. After mergers, acquisitions, and bankruptcies, almost 40% of a selection of US companies dubbed “built to last” in a 1994 survey were

not around five years later.But there is a growing feeling in most countries that life expectancy is decreasing.

The chart below shows that this feeling, in the UK at least, is accurate. Source: NEF analysis of LSE statistics This churn is driven by the rapid pace of company ‘actions’ (mergers, acquisitions, demergers, bankruptcies, delisting and share price collapses). And the pace seems to be accelerating. Mark Makepeace, chief executive at FTSE, confirms the view that things are getting tougher: “FTSE indices, including the FTSE 100, have seen an unprecedented number of constituent changes throughout 2000. This volatility is simply a reflection of the underlying market activity. ” There is nothing inherently unsustainable about ‘churn’.

On the contrary, low churn can be a clear indication of economic stagnation and the development of potential monopolies. But high levels of churn may indicate that companies are dying prematurely. The serious negative impacts on society of sudden mass lay-offs and overnight collapse of tangible and intangible assets are well-documented. Controversy has surrounded recent plant closures by Rover at Longbridge, Ford in Dagenham, and Corus in South Wales. In general, it is hard to argue against the fact that reasonable longevity is desirable: very few organisations in private, public or charitable sectors voluntarily put themselves out of business. Competition creates turbulence”, says business author David Korten, “Turbulence is embraced as opportunity by speculators, but for those who manage productive enterprises, the resulting uncertainty makes investment planning inherently difficult, disrupts the orderly function of the firm, and can result in serious economic inefficiency.

” And not just economic inefficiency. Environmental and social innovations are sometimes the baby that gets thrown out with the bath

water in a merger, as some observers of the NatWest/Royal Bank of Scotland action accused. Even when no M&A activity is likely to take place, perceived shortcomings in financial performance can lead to inefficient knee-jerk retrenchments. “Short term business pressures,” says Jayn Harding, J Sainsbury plc’s environment manager, “can hugely dilute long term efforts. ”This harsh environment explains why investors are sceptical about historical information in traditional annual reports and why managers insist on seeing a robust business case for any aspect of sustainability other than short-term survival. “When a business person is already over-stretched in meeting the challenges of the complex and highly competitive corporate environment”, write John Weiser and Simon Zadek, “it is critical to demonstrate that corporate engagement improves their ability to meet existing objectives.

The key is to show not only that it can generate black on the bottom line, but that it does so in strategically important areas of business performance”.The media tends to focus on high-profile corporate actions among the 2,000 listed companies and especially the jockeying for position to get into and stay in the FTSE100. But premature death is also common among SMEs, where inability to access timely and affordable finance is one of the most common cause of death for the UK’s 485,000 business failures each year (NEF, 1999). The early years are the most dangerous: government data show that the proportion of VAT registered businesses surviving for three years was 52% in 1994, rising modestly to 61% in 1998.

This is a substantial mortality rate. So what is the appropriate life expectancy for a mature business? 116 years, like Coca-Cola? 5 years, like European humans? 25 years,

like Microsoft? There is probably no single ‘ripe old age’ for businesses, after which they can ‘go peacefully in their sleep’. Nor is there likely to be an ideal level of corporate actions on the stock exchange. Even so, there is good evidence for the widespread complaint, even among successful businesses, that life expectancy has become, potentially at least, to quote Thomas Hobbes, “nasty, brutish and short”. This explains the attention given to radical ideas like ‘A Corp’: the US plan of tax breaks for outstanding social and ethical performance, and Roger Cowe’s proposals for a mandatory stakeholder council for the FTSE 350.Such councils could make hostile takeovers – one of the least pleasant forms of corporate premature death - extremely difficult.

More far-reaching policy to extend corporate lifecycles will depend on companies themselves educating the public, shareholders and each other that full economic benefits can only be shared in a stable environment where planned long-term investments stand a chance of coming to maturity. Short attention spans versus glacial change If there is some consensus that the hourly timescale of City investors is too short-term for business sustainability planning, there is much less agreement on the correct decision-making timescale in a business. Sustainability is a dialogue where the clocks of each stakeholder are seldom synchronised. “We used to look at fashions over a 4-6 month cycle,” says Mike Barry of Marks and Spencer.

“Now we are facing the issue of the loss of all fish stocks in 20 years”. The received wisdom is that The City has a very short attention span and that the company has a longer one. The reality is much more complex, as

the table below suggests. Table: Illustrative decision-making timescales for business StakeholderDecision-making timescaleFactors Shareholders3 months – 3 yearsDepends on portfolio & risk aversion. Many individuals content with ISAs, index trackers or annual whinge at AGM.

Only a quarter of private shareholders read annual report. Investors/The City1 hour-1 yearUltra-rapid reactions to share price & general need to keep portfolio ‘fresh’ vs. institutional loyalties and innate conservatism of some investors such as pension funds. Venture capitalists can take longer term view, as may ethical pension funds.

Regulators/ watchdogs/ campaigners2 – 4 yearsFocus on administrative & govt. cycles. Little in Whitehall happens in less than 2-3 years (eg Company Law Review). Regulators move on every 3-5 years. Campaigns typically last 2-3 years. Investor relations / brand managers 1 day – 3 yearsDaily contact with key investors.

Takes years to build a brand, 50 seconds to lose it (eg a failed TV advert). Finance departmentMonthly – quarterly – annualPart driven by regulatory reporting timescales & financial year. 3 years seen as absolute maximum acceptable investment pay-back time. Sustainability managers5 years – 15 yearsMany projects cannot pay off inside 5-15 years. “If we went sustainable tomorrow, it would take 10-15 years to make money from it”: sustainability manager of a major retailer. But managers have to justify their jobs & some quicker hits may be available (eg waste minimisation; Coop Bank’s ethical brand).

Board 1 –10 yearsDepends on average length of service. Typically 3-5 years.Staff2/3 – 10/15 yearsDepends on career aspirations in sector. Average job duration for managers 2-3 years; with one company 3-5 years. Other stakeholders1 month to 15 yearsSuppliers want payment within 30 days; community projects need funding over years; environmental projects can

take 10 years or more to reach fruition. Source: NEF Working with differing timescales is a fact of life for the economic sustainability manager (ESM).

The task is to manage diverse expectations of performance in periods ranging from an1 hour (imagine a green protest at the agm) to 10 years (justifying an investment in a new range of energy-efficient chiller units). Brand & reputation management “Machines wear out. Cars rust. People die”, said Hector Liang, former chairman of United Biscuits. “But what lives on are the brands”.

Despite the importance of business-to-business (B2B) commerce, there is no doubting the overall economic importance of brands: the consultancy firm Interbrand estimate that a quarter of the world’s financial wealth is tied up in brands, with the top 75 brands worth a combined US$912 billion in 2000. Yet reputation – usually epitomised as a brand – is not inherently enduring. It needs careful management. “This takes many years to build up”, says Chris Tuppen, Head of Sustainable Development and Corporate Accountability at BT, “but can be dramatically lost overnight”.There are many examples of this happening, Ratners being just the most dramatic.

Reputation assurance is sometimes said to be a synonym for spin, but its genuine importance is affirmed by Dr John Browne of PricewaterhouseCoopers. Research “consistently shows that corporate reputation occupies a central position on the strategy radar screens of senior management,” according to Browne. “Our experience of working with company boards to meet the good practice guidelines of Turnbull is that boards are at least as concerned with those risks that can damage the business (or even their own personal) reputation as they are with risks that can cause immediate

financial loss”.Dr Craig Mackenzie, director of the ethics unit at asset management house Friends Ivory & Sime, emphasises the sensitivity of investors to the risks companies face: “After all, it is their capital that is at stake if things go wrong… At present, however, few companies or investors do much systematically to understand this kind of risk”. Many big companies now have a risk manager, although one retailer we spoke to warned that it was not that easy for such a post to integrate itself into the existing decision-making apparatus.

“Conventional measurement, management, and quality assurance tools are largely inadequate for assessing and managing risk associated with emerging social nd environmental factors that can affect financial performance”, says Dr Simon Zadek, chair of the Institute of Social and Ethical AccountAbility. This is why companies are actively “seeking new tools”. These tools tend to be either dialogue based, or measurement based (or, more rarely, both). One type of tool, identified by Zadek, is based on effective stakeholder dialogue, and is covered in detail by the Sigma research paper on social sustainability. Another type of tool begins with measurement and focuses on intangible assets (brand valuation, reputational value added, intellectual capital, etc.

). It is the latter that is discussed in more detail in the sections below. Economic dynamo or bull in a china shop? the sustainable company seen from the outsideThe second approach to economic sustainability involves looking at the external economic impacts an organisation has on society – and in turn, seeking to understand how these external impacts might affect the sustainability of the organisation itself. Business remains the wealth-generating mainstay of developed economies. The question for

this paper is: how do organisations individually contribute to a sustainable economy and what factors, signals and actions can help manage this process? Zadek and Tuppen’s discussion paper Adding Values explores this idea.

“The economic and financial are simply not equivalent. The financial concerns the market valuation of transactions that pass through a company’s books. The economic, on the other hand, extends beyond the boundaries of the single organisation and takes into account activities in, and outcomes for, societies at large. ”Economic impacts might include everything from employment and the obvious benefits that this provides to the payment and economic impacts of suppliers or even the production of certain types of goods and services which have an added ‘public good’ value: public transport for example. Most organisations are aware that these are benefits for organisations and society at large, but what is the added value in measuring or managing these? And furthermore, what is the contribution to sustainability? Aside from any altruistic reasons, there are clearly some ways in which an organisation can see direct business benefits by considering its operations in the context of society as a whole. This might include ensuring that there is a sustainable skilled workforce; a continued supply of customers who have sufficient incomes (and trust); and a productive and healthy community in which to continue to do business.

Most of these will produce long-term rather than immediate short-term benefits. Businesses who don’t look at these issues will be less likely to sustain themselves into the future. It also might help organisations understand contradictions inherent within current practices. For example, by reporting on public policy as part of economic sustainability management, obvious

conflicts may arise. BP found this in the U.

Outsourcing and procurement; (Suppliers)Financial spend on out-sourcing and procurementA companies’ direct spend on its supply chain has a great influence on economic development and sustainability; the way in which a company does this (i. e. especting human rights or environment) can have even greater spin-off effects Goods and Services (Products and Services)Externalised economic effectsContributions to the wider economySome goods and services are more sustainable than others and produce positive benefits: i. e. a public transportation service not only helps people with community, it contributes to reduced traffic congestion and, in turn, less environmental harm Public Policy Financial contributions to political partiesMethods of influencing public policyWays in which organisations lobby government can have positive or negative economic affects, for example through privatised utilities; or who bears the cost of climate change Source: Tuppen & Zadek, 2000 Zadek and Tuppen’s paper has gone down quite well as a constructive and semi-operational (the indicators are not fully worked up) attempt to map the confusing terrain.Their perspective on economic sustainability helps organisations understand their contribution to the wider economy and the impacts that business decisions have on it – even though some will dispute their judgement that some of the above areas are economic rather than social (a grey area as we have said, but not necessarily the priority to resolve).

Failure to consider these factors in business decision-making – whether they are considered economic or social - can lead to increases in risk to reputation, as Corus has found in South Wales; Vauxhall Motors at Luton; as M&S discovered in moving to overseas producers; and as several banks have found over

large scale branch closures. Economic sustainability is integrally linked with decisions that go well beyond a traditional understanding of the financial bottom line. In some ways, this is an extension of the Centre for Tomorrow’s Company vision of a ‘license to operate’.As their initial 1995 report says, “Tomorrow’s Company recognises its interdependence with the community in which it operates … furthermore] it recognises that its long-term future is enhanced by a supportive operating environment and acts, with others where necessary, to strengthen its licence to operate.

” Despite the short-term approach the City is accused of taking, investors are more and more also looking at long-term ‘shareholder value’. After a brief infatuation with dot. com mania, many investors are returning to stable ‘blue-chip’ companies - those seen to be there for the long run and which provide reliable added-value to the economy. This approach, then, can complement the perspective gained by looking at the organisation from the inside.Building reputation and brand value is partially about how the customer or investor perceives you: if companies are seen to be good corporate citizens and contributing to the wider economy, if they remain competitive at the same time, they’ll be more likely to be trusted and, as a result, to stay in business.

New Economics Foundation research for ACCA also shows that effective ‘social capital’ is made up of two equally important types of network: bonding networks within organisations, and bridging networks between organisations. Too much internal bonding without enough external bridging means morale is high but can make a company insular and unresponsive – something the Post Office has been criticised for. Too little bonding but too much bridging

– typical among airline pilots and in Silicon Valley - means that professional loyalties come before corporate ones and leads to high staff turnover.Relevance to public sector, SMEs, and b2bs There will be a clear distinction between how public sector and private sector partners manage economic sustainability.

Public sector partners, such as South-West Regional Development Agency (RDA), report that they had difficulty coming to grips with the standard approaches to economic sustainability: most indicators were either not completely relevant, especially profit or brand value, and needed almost to be turned on their head. For example, labour productivity or the number of employees in the RDA are far less relevant than the number of jobs created in the community directly through its activities.It should also be noted that the language of brand and reputation is confusing if not alienating to some public sector organisations, as well as small businesses and even large ones involved in business-to-business activities where there is no obvious consumer. Eight hundred business cases We have already referred to Weiser and Zadek’s effort to provide a definitive answer to the question: is there a business case for sustainability, drawn primarily from the US data and giving cautious and patchy confirmation that the case can sometimes be very strong.

UK consultancy SustainAbility has developed a complex and rather beautiful ‘Sustainable Business Value Matrix’ in a colourful attempt to map ten measures of business success against ten financial drivers and performance measures, to see which have negative and positive impacts on each other.The maths is simple: there are 100 relationships, and for each, eight results are possible, from weak evidence of negative impacts to strong evidence of

strong positive impacts. This means the research team’s results take a while to penetrate. The most conclusive business case was the benefits provided by sustainability activities to brand reputation and management; human and intellectual capital was a close second. All in all, the researchers conclude that “the jury is in – overall, corporate sustainable development performance has a positive impact on business success”.

Table: Standard financial measures Net Profit MarginNet profit margin is calculated by net income/sales. Return On InvestmentThe latest 12 months' net income divided by the total assets from the most recent quarter, more commonly, return on investment (ROI). Return on EquityThe latest 12 months' net income divided by the most recent quarter common stock equity. Pay-out RatioThe pay-out ratio measures the proportion of earnings that is paid out as dividends. DividendsThe cash dividends already paid out, or proposed to be paid out, of the current year’s profit attributable to the shareholders.

Dividend YieldThe stock’s dividend yield is simply the expected dividend as a proportion of the stock price. Intangible Fixed Assets The types of intangibles measured and reported most frequently, are: goodwill, patents, licenses, and trade marks, development expenditure, publishing rights and titles, and brands Tangible Fixed AssetsPhysical assets, which are held for long-term within the business including items such as land and buildings (both freehold and leasehold), plant and machinery, motor vehicles, fixtures and fittings. Current AssetsAssets that are either cash or readily convertible into cash. Current liabilities include bank overdrafts, proposed dividends, and taxation payable within one year, as well as amounts owed to suppliers.Long-term LiabilitiesLong-term liabilities are divided into (1) creditors (amounts falling due after more than one year), and (2)

provisions for liabilities and charges. Market CapitalisationThe number of shares in existence multiplied by the share price.

Book ValueA company’s book value is its assets minus its liabilities. Source: NEF, 2001 The predominantly backward-looking, profit-and-dividend-focused, bury-the-bad-news financial indicators in most annual reports mean that less than half of UK investors say they expect to learn anything useful about assets, strategic direction, management capabilities or prospects for future direction from annual reports. And off-the-record, many investors will admit to setting no store at all by the mainstream financial indicators reported by companies – they are (usually) accurate but unenlightening, if not misleading. According to Simon Zadek and Chris Tuppen, “there are no contemporary examples of companies adopting a systematic approach to accounting for, and reporting, their economic performance, let alone building it explicitly into transparent decision-making processes…”.

Strong words, not likely to flatter the many finance directors who believe they are doing just that. One crucial paradox in the development of high quality management and measurement systems for economic sustainability is commercial confidentiality. Beyond MBA textbooks, amateurish attempts by campaigning groups, and airport ‘management’ page-turners, anyone who had developed an effective management system, it is argued, would sell it to the highest bidding company or, more likely, enter into partnership with a corporate raider. “If anyone really knew the answer, they’d be George Soros.

” Yet efforts in ‘the public interest to make any meaningful system mandatory across sectors or countries would immediately reveal the secrets of success of participating firms. This has led some opponents to argue that “the only good management system is a useless one”. But is that right? Do management systems cover economic sustainability? The

first point to look at how this is all done in the context of sustainability would be the sustainability management system.Our research finds that sustainability management systems are fairly weak on economic sustainability and most only pay a modest reference to the idea. Of the ones that do more, they only acknowledge the external impacts of how companies should do business in the communities in which they’re operating; few if any pay any attention to the issues of trust and brand value. The Global Sullivan Principles, for example, refers to two principles that relate explicitly to aspects of economic sustainability: 1.

“We will compensate our employees and enable them to meet at least their basic needs and provide the opportunity to improve their skill and capability in order to raise their social and economic opportunities” 2. We will work with governments and communities in which we do business to improve the quality of life in those communities – their educational, cultural, economic, and social well-being – and seek to provide training and opportunities for workers from disadvantaged backgrounds. ” The UN’s Global Compact, while not explicitly referring to economic sustainability understands that business must operate in a manner that respects human rights, labour and the environment. The latter three components are outlined in the nine key principles, whereas financial sustainability is assumed as imperative. Existing Management Systems/Codes & Economic SustainabilityGlobal Sullivan PrinciplesBroad set of principles referring to how government should conduct their business; two short references to livelihoods and economic impacts of business on the local community Global CompactHigh level principles generally referring to human rights and environmental standards.

Vague link to economic sustainability. Balanced Score CardNo

explicit reference to sustainability, but focus on profitability of a company in relation to other corporate objectives. The Natural StepEconomic sustainability is part of the fourth system condition. Places environment at the centre and economics as secondary.

Global Reporting InitiativeSet of indicators explicitly on economic sustainability. Similar to “Adding Values” approach, but focus specifically on reporting. Other more detailed sustainability standards only touch on the matter of economic sustainability.The Natural Step, used as an environmental management tool does have a system condition referring to economics. The condition, “we must be fair and efficient in meeting human needs” defines economic conditions for sustainability as: •Scarce resources are used efficiently; •Levels of economic activity are stable; •Scare resources are effectively used at all scales – from local to global The Natural Step’s approach places the understanding and management of economic sustainability as having an impact on the way we manage the environment, rather than the other way around, ignoring the fact that organisations still have to stay in business to survive.

Managing value added: risk and opportunityAt heart, these new economic management tools attempt to capture (some component of) potential future economic performance for shareholders and wider stakeholders, beyond the retrospective ‘no-brainers’ of profits and dividends. Broadly speaking, the tools tend to focus either on risk (following from Turnbull, using the language of liabilities and often the focus of questionnaires from ‘green’ investors) or on the opportunity (the preserve of entrepreneurial pundits, brand and knowledge managers, using the language of value-added and intellectual capital). According to accountants Philip Wright and Daniel Keegan, “While executives have always needed to forecast the company’s future cash flows, this future-orientated information reflecting the

financial management and nvestment policies of the company has not been subject to disclosure requirements, and most companies have chosen to keep such information internal … In the 1990s a new view of shareholder value is taking root … and a new type of reporting is emerging. We call it value reporting (VR). In essence, VR focuses on long-term cash – ie cash that will come through the door at some future date – and other types of performance information that impact shareholder wealth, the company’s prospects, and the financial markets’ assessment of the company. ” But not all companies do have sophisticated and reliable management systems to manage economic performance, even for internal management.

This does not just apply to SMEs. A manager from one major retailer described a typical ‘long-term growth strategy’ as “a four year line on a graph going up like this”.Strategic planning departments were trendy in the 1970s but many got axed in the retrenchments of the 1980s and 90s. So who is in charge of economic sustainability? Too many companies, according to a critical business press, lurch from crisis to crisis with no apparent strategy. And Simon Zadek and Chris Tuppen write in a recent discussion paper that “even leading edge companies which have publicly embraced the principle of ‘triple bottom line’ reporting have focused their economic reporting on an ad hoc bundle of performance measures covering profits and growth, dividends and shareholder return, tax, competition and investments. ” While these tools are no doubt important, say Zadek and Tuppen, they are incomplete, and “may at times even be misleading”.

Mark Goyder is not despondent, however: “What every company can do

now is to build on its existing operating and financial review to provide a clear picture of the components of the success jigsaw and to show more clearly, year by year, what are the predictive indicators – for example, market share, service levels, and product development. In time more sophisticated measures follow, like customer loyalty and training effectiveness. ” (Goyder, 1998). Box: Centre for Tomorrow’s Company Reporting Scorecard: success model as a basis for measurement

1. The report is simply a statement of financial results: there is no picture given of the components of the success jigsaw.
2. The report contains fragmentary references to the linkages between the ingredients of success and the financial results.
3. The report makes use of a clear model or recipe (whether based on the balanced business scorecard, or business excellence model or a model of its own) in demonstrating linkages between performance in each of its relationships and the financial results.
4. As above. Additionally, the design of the whole report reflects the underlying success model (for example the four quadrants of the Balanced Business Scorecard).
5. As above. Additionally, the report uses original and relevant new measures of success such as learning, knowledge management, supplier-relationship measurement, and so on.

Source: Centre for Tomorrow’s Company, 1998The Balanced Score Card is a measurement and feedback tool that enables organisations to measure business objectives across the whole company. Developed in the early 1990s by Drs. Robert Kaplan (Harvard Business School) and David Norton (Renaissance Solutions, Inc.

) the balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective. "The balanced scorecard retains traditional financial measures. But financial measures

tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success.These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.

" It does help organisations with priority setting and decision-making. Kevin Moxey of Vauxhall Motors says that the Balanced Score Card helps organisations identify their impact on the company’s objectives, from different levels in the organisation, and as a process it is extremely powerful. But the primary weakness of the Balanced Score Card is that it has not been designed around sustainability and only the most enlightened of organisations, with sustainable objectives in mind, will use the Balanced Score Card for such outcomes. The Global Reporting Initiative is probably the most thorough existing approach to economic sustainability.The October 2000 guidelines include a series of indicators specifically referring to these.

Both the GRI and Tuppen and Zadek’s Adding Values have similar approaches to what economic sustainability might be. The following table shows both of these approaches in comparison. FactorGRI Approach“Adding Values” (Zadek and Tuppen) Profit

• Net profit/earnings/income
• Earnings before interest and tax
• Gross margin
• Return on average capital employed
• Dividends
• Levels of profit
• Dividends paid
• Geographical location and distribution of profit Intangible Assets & Investments
• Ratio of market capitalisation to “book value”
• Human capital
• Research and development
• Other capital investment Debt/equity ratio
• Investment in training
• Breakdown of intangible assets
• Intellectual property rights and technology transfer
• Fixed capital investment •Investment in knowledge
• Acquisitions Wages and Benefits
• Total wage expense, by country

and some of the proposed indicators remain methodologically vague. One area where there has been considerable progress is in the treatment of intangible assets.

Valuing intangible assets The most widespread attempt to measure intangible assets is brand valuation. Though not yet that well established in UK business, brand valuation is becoming commonplace in the USA. Market leaders Interbrand have undertaken over 2,500 brand valuations in the 13 years since they developed their proprietary methodology. Interbrand starts with the economic profit generated by the brand to the underlying business, a similar concept to economic value added (EVA). The valuation process examines three areas: the future economic earnings the branded business is expected to generate, the role of the brand in generating those earnings, and

the risk profile of the brand’s expected earnings.

One limitation of this and similar external methodologies is th