Implementing Sustainability - Dobrodošli!

1 April 2010 ISTRATEGIC FINANCE41 FAR GRANTThis article is based on a study supported by IMA s Foundation for Applied Research (FAR).By Marc J. Epstein, Adriana Rejc Buhovac, and Kristi Yuthas Executives recognize the importance of social and environmentalresponsibility corporate Sustainability but they seldom implementit successfully. The challenge lies in how to actually integrate sustain-ability into operational and capital investment decision making andimplement it successfully in large, complex, for-profit financial executive plays a vital :THE ROLE OF LEADERSHIP AND ORGANIZATIONAL CULTUREI mplementingSustainability: Top management typically cascades these managementdecisions down because Sustainability impacts are oftenlocal, so usually only a small number of these decisionsare made at corporate headquarters.

2 As individual man-agers at the business units, geographical units, and facili-ties make these decisions, they also must make theappropriate tradeoffs regarding social and environmentalimpacts vs. financial ones. Typically, the vice president ofsustainability, who reports to the CEO, requests improvedsustainability performance, while the CEO and CFOdemand improved financial performance. At the sametime, a company provides little guidance and support tosenior- and middle-level operations managers to aid inthe decision making and tradeoffs. How can they managethis challenge successfully?Field Study Brings New FindingsIn the January 2008 issue ofStrategic Finance, Marc presented the Corporate Sustainability Model, acomprehensive approach for examining, measuring, andmanaging the drivers of corporate Sustainability .

3 Themodel can help managers incorporate a sustainabilitystrategy into daily operations and link that strategy tospecific actions that improve both Sustainability andfinancial argues that, to improve the Sustainability strat-egy implementation process, managers should carefullyidentify and measure key performance drivers includedamong the various inputs and processes. The drivers ofthe model include:uExternal context (regulatory and geographical),uInternal context (mission, corporate strategy, corpo-rate organizational structure, organizational culture,and systems),uBusiness context (industry sector, customers, andproducts), anduHuman and financial inputs guide leaders in making decisions so they42 STRATEGIC FINANCEIA pril 2010 FAR GRANTF igure 1:The Corporate Sustainability ModelOrganizational Culture (Internal Context), Leadership, and People as Critical Drivers of Sustainability SuccessSource: Marc J.

4 Epstein, Making Sustainability Work:Best Practices in Managing and Measuring CorporateSocial, Environmental, and Economic Impacts, GreenleafPublishing Limited, Sheffield, England, and Berrett-Koehler Publishers, Inc., San Francisco, Calif., 2008. can develop an appropriate Sustainability strategy; set upaligned structures, systems, and programs; and takeaction. The managerial actions lead to positive or nega-tive Sustainability performance and stakeholder reactions,ultimately affecting long-term corporate financial perfor-mance. This model should help managers better analyzeand manage these drivers as well as pursue social andenvironmental impacts more effectively.

5 Figure 1 illus-trates the Corporate Sustainability , the Foundation for Applied Research (FAR)of the Institute of Management Accountants (IMA )sponsored a research study to examine how leading cor-porations integrate economic, social, and environmentalimpacts into day-to-day management decision research focused on four companies:uNike, the world s leading designer, marketer, and dis-tributor of athletic products and clothing;uProcter & Gamble(P&G), one of the world s leadingbranded consumer products companies;uThe Home Depot, the world s largest home-improvement specialty retailer; anduNissan North America, a unit of Nissan Motor Co., aleading global auto companies have reputations for leading practicesin managing Sustainability and have high ratings on vari-ous indexes on Sustainability performance.

6 We conductedopen-ended, semi-structured interviews with senior man-agers, business unit and facility managers, geographicalunit managers, functional managers, and sustainabilitymanagers. The study investigated how managers currentlymake tradeoffs and simultaneously manage social, envi-ronmental, and financial performance. We also looked atsystems and performance measures that they use to facili-tate these decisions and at the characteristics of organiza-tions and their environments, their formal and informalsupport systems and processes (including performanceevaluation, rewards, organizational culture, leadership,etc.), and initiatives that facilitate managing social, envi-ronmental, and financial performance study also attempted to better understand the role ofhard or soft implementation systems.

7 Hard systems arethe formal systems that include structure, performanceevaluation, and incentive systems that motivate employeebehavior. Soft systems are the informal systems such asorganizational culture, leadership, and s these informal systems organizational culture,leadership, and people that nurture a company s drivefor Sustainability . Although sensitive to stakeholder con-cerns and impacts, these leading companies are commit-ted internally to improving corporate Sustainability per-formance. While generally considered a significant tool toimplement Sustainability and align the corporation sinterests, formal implementation systems have a sec-ondary role in Implementing Sustainability programs suc-cessfully.

8 All four companies incorporate sustainabilityissues in their corporate strategies, they have specific sus-tainability strategies and aligned organizational struc-tures, and they have in place performance measurementsystems with some social and environmental metrics. Butleadership and organizational culture are the most crucialdeterminants in successfully managing the various trade-offs that middle managers face when they try to managesocial, environmental, and financial performance simulta-neously. The Corporate Sustainability Model highlightsthe following drivers: the internal context with the orga-nizational culture, leadership, and human ll describe how Nike, Procter & Gamble, The HomeDepot, and Nissan North America are using leadershipand organizational culture to encourage employees topursue and drive organizational success in after a company uses these informal or soft systemscan it use the formal or hard systems of strategy, struc-ture,and programs to improve Social, Environmental,and Financial PerformanceSimultaneouslyHow to manage the paradox of improving social, envi-ronmental, and financial goals simultaneously is one of acompany s biggest challenges.

9 Integrating corporatesocial, environmental, and financial impacts into opera-tional and capital investment decisions comes with a lotoftension. While social and financial initiatives may ben-efit one another in the long term, they re often conflictingin their need for resources and agendas in the short , clear, measurable, short-term metrics apply tofinancial initiatives, whereas measurements of social per-formance are often uncertain and long term. Sometimesthere are win-win situations, such as when waste andemissions are reduced, that save both company costs andenvironmental damage. But often the decision alterna-tives are seen as tradeoffs, and managers throughout thebusiness units and facilities must struggle to evaluatesocial, environmental, and financial impacts.

10 At the endof the day, they make decisions while being accountablefor excellent performance in our study, however, managers told us they didn t seethe tradeoffs as difficult, either because they prioritizedApril 2010 ISTRATEGIC FINANCE43 financial performance or because their companies couldaccomplish both at the same time. The Home Depot, forexample, doesn t view the tradeoffs between sustainabilitygoals and business goals as problematic. They rarely see atradeoff as a win-lose situation; when this is the case,win-lose tradeoffs are typically resolved in favor of busi-ness goals. In most cases, there are win-win situations. Infact, whenever an environmental or social issue becomesimportant to the customer or the public, it becomesimportant to The Home Depot, and addressing itbecomes a win-win situation.