Why Sustainability is Now Vital to the Success of Business

This was a first year Business Administration academic essay on sustainability. Feel free to cite me but please don’t plagiarise.

 

Discuss and analyse the importance of sustainability in business, using case study examples to illustrate and support your arguments.

“There is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” (Friedman, 1970)

This essay will briefly look at the history of sustainability, it shall outline sustainability’s relationship to corporate social responsibility, and some of the benefits to a firm of being socially responsible, in addition it will consider and analyse three prominent views that express the importance of sustainability in business: Carroll’s four-part model of CSR, Milton Friedman’s shareholder view and Edward Freeman’s stakeholder theory, whilst relating these views to case studies.

In order to comprehend the concept of sustainability in relation to a business, one must understand the management concept; corporate social responsibility, abbreviated to CSR. Sustainability is almost synonymous with CSR, though specifically, it places a focus on the future of the business (Salt Communications, 2012). The whole concept is about being responsible for more than the business is legally obliged to, either propelled by the intention of increasing the performance of the business or because of a profound moral duty felt by decision-makers in the company. The concept exists because businesses do not operate on their own, their operations will affect their many stakeholders; such as their customers, employees, suppliers, government and local communities, through CSR the business aims to please their stakeholders. This is important because without the support of their stakeholders a company cannot be prosperous and survive in the long term (McWilliams, Siegel and Wright, 2006). In 2008, the publication The Economist created a survey and found that over 50% of global business leaders believe the main benefit for their business of utilising CSR in their strategy is ‘having a better brand reputation’ (The Economist, 2008). This means that these businesses are operating with a business model that incorporates corporate social responsibility in order to please their stakeholders. The benefits of this can be seen with their most obvious stakeholder; the customer, a bad brand reputation may cause up to 40% of customers to avoid purchasing their products (Bruell, 2013). However other stakeholders must also be considered. A good brand reputation can also attract skilled employees (Greening and Turban, 2000), the business may find this an important reason to be sustainable as it is suggested that a skilled workforce has become increasingly important to a business’s success; as previously important factors, such as access to finance and gaining economies of scale become less critical (Greening and Turban, 2000). This idea is reiterated by The Economists report, considering the firm to be more attractive to potential and current employees as another important benefit of CSR in business.

The concept of sustainability appears to have been propelled by the Santa Barbara oil spill on January 28th, 1969. Which according to the Earth Day Network, was the driver for US Senator, Gaylord Nelson creating the international event; World Earth Day (Earthday.org, n.d.). This highlighted the need for the US to have a government department concerned with the welfare of the environment, the Environmental Protection Agency; who created laws that systematised with the concept of sustainability; most importantly, the clean air act extension of 1970, the clean water act of 1972 and the endangered species act of 1973 (Earthday.org, n.d.). The concept of sustainability on a global level came around in 1972, where at the United Nations Conference on the Human Environment it was discovered that there was a link between quality of life and the condition of the environment. It wasn’t until the United Nations publication; Our Common Future, also known as the Brundtland Report, that the concept of sustainability had a generally accepted definition. It was defined as managing resources in a way that meets our current needs, whilst ensuring the use of the materials for future generations isn’t compromised (United Nations World Commission on Environment and Development, 1987). In the present there are still big issues related to sustainability, one instance of this is the ‘Deepwater Horizon’ oil spill of 2010, where BP, caused a spillover of negative externalities on wildlife and local industries such as fishing, due to the distress this caused the general public, BP’s brand has become ‘synonymous with everything that is dangerous about oil exploration’ (Mervin, 2011). The history of sustainability is a vast topic, too large to go into much detail in this essay, however this brief history of sustainability certainly shows that society hold concern over sustainability.

One model that suggests there is importance placed on sustainability in a company is Archie Carroll’s ‘four-part model of corporate social responsibility’ (Carroll, 1991), which was originally introduced in 1979, and refined in 1991. Carroll’s model states that a business has four responsibilities in their operations; economic, legal, ethical and philanthropic. Carroll’s model states that for a business to meet their corporate responsibility they must meet each consecutively. The economic responsibility is the foundation of Carroll’s pyramid model, the economic responsibilities of a company are required by society, without them the business will cease to exist. The primary responsibility of a business is to fully functioning participant in the economy, the business does this by offering adequate quality products at a fair price to their customers. Next they are compelled to produce a reasonable return on the investment made by their shareholders and offer fair pay with job security for their employees. Secondly the company has a legal responsibility that society deems mandatory, this requires firms to abide by the laws that reflect the morals of society, along with the economic responsibilities these make up the compulsory factors. Thirdly and specifically relevant to sustainability, are the ethical responsibilities of the business that are expected by society but are not compulsory for a business to operate. These responsibilities include everything sustainability is about; leaving enough resources for future generations, and leaving those resources in a suitable condition. It is important to note that, although according to Carroll’s model, the ethical responsibilities are not necessary for a business to operate, this does not mean it’s not important for a business to fulfil these responsibilities. There are also philanthropic responsibilities that are desired by society but not required, these include things that the business does to for the welfare of society in general, philanthropic responsibilities are less crucial than the other three aspects and hold little relevancy to sustainability. Therefore under Carroll’s model, it can be argued that a business can survive without being sustainable, unless it is required through legislation, however for a business to thrive, it should be sustainable as long as the costs of being sustainable do not outweigh the benefits. However it should be mentioned that Carroll’s model was created in 1979 and could be considered out-of-date as it appears society has recently placed more importance on sustainability and where a company could get away with being unsustainable in the past, it’s impossible in the present, this can be seen in the case of BP whose actions caused their stock to fall by almost 6% (The Guardian, 2014). Another argument in favour of sustainability in business is Edward Freeman’s stakeholder theory, which states that a business is not only responsible to their shareholders, but they have a responsibility to all of their shareholders, including the environment. According to Freeman’s theory, as well as abiding by law, businesses must abide by ethics (cited by Harrison, 2014). Freeman’s theory lacks guidance on whose ethics these are, whether they are those of the decision-makers or those of society in general. This theory is identified with Apple later in this essay.

The view that sustainability is unimportant in business is an unpopular one, however there is one view that essentially disregards the importance of sustainability, that of economist Milton Friedman, who argued that the only social responsibility of a business is to increase profits for its shareholders, the other stakeholders do not matter, including the indirect stakeholder, the natural environment. He came to this conclusion by identifying decision-makers who implement a strategy that intends to be social responsibility whilst sacrificing profitability as not acting on behalf of the shareholders interests and therefore is part of the principal-agent problem (Friedman, 1970). It is important to note that in some companies sustainability might be in the best interests of the shareholders, such as in a social enterprises, but it is assumed that the vast majority of businesses main aim is profit maximisation. However this view does not mean that sustainability is always unimportant, when a business generates a higher profit through a sustainable business model then the interests of the shareholders are fulfilled. Later in this essay the Cisco case study will show how this works in the real world.

Apple is a company that over the past 14 years has made a significant effort to decrease their negative impact on the environment, they have embraced the concept of sustainability, not only are they reporting the data on their own carbon footprint, but they are also including the impact of their supply chain (Apple.com, n.d.). Because of the size of Apple, they are under a great deal of pressure from their stakeholders to set high standards of sustainability in their industry, the environmental group GreenPeace produced a report that gave Apple data-centres a very low clean-energy-index of 15.3% in 2012 (Cook, 2012). In 2014, after Apple made their data-centres run 100% on renewable energy GreenPeace applauded them and gave them a clean-energy-index of 100% (Cook, 2014), this removed the negative pressure from one of their stakeholders, reducing their negative impact on Apple’s brand image, and therefore their impact on Apple’s profits. Apple has set a target of using renewable energy sources to power all of their offices, data-centres and retail stores, between 2010 and 2013 Apple increased the usage of renewable energy in their corporate facilities by 169% from 35% in 2010 to 94% in 2013 (Apple.com, n.d.).

Recently Apple has managed to run over 140 stores in the U.S. with renewable energy (Apple.com, n.d.), this is good because allowing consumers to see that Apple values sustainability bridges the gap between becoming sustainable, and making consumers aware of this, so that they can utilise this to in order to use this to increase profits for their shareholders. Apple bridges this gap at the point of sale, however this is little over half compared to their total of 255 stores in the U.S. (Cheng, 2014) whilst also considering in 2013 less than 15% of their iPhones, one of their flagship products were sold in Apple’s own retail stores (Appleinsider.com, 2013); Apple has not informed consumers of their sustainability business model prominently in any of their advertising to consumers using above-the-line methods. This creates doubts over the importance Apple places on sustainability as a means to increase the value of their products to consumers, and therefore enable them to increase value to shareholders through an increase in profit. However sustainability has clearly become of great importance to Apple, since Apple hasn’t used distinctly used this to influence consumers, this suggests Apple has incorporated sustainability into their business model from a stakeholder approach as introduced by Edward Freeman, acting on a responsibility for all of the businesses stakeholders as opposed to the shareholder value view, that intends to increase profits as expressed by Milton Friedman.

Cisco on the other hand, is a company similarly in the electronics industry but appears to have taken a different approach, using a sustainable business strategy to create extra value for their shareholders as shown by this quote:

“When IT companies make sustainability an integral part of technologies, products, and solutions, we better protect our planet while creating business value for our suppliers, our customers, and our own bottom line.” (Cisco.com, n.d.-A)

In essence this is an application of Milton Friedman’s shareholder view, which is demonstrated in Cisco’s product trade-in scheme, where unwanted Cisco products are resold, reused or recycled. In 2013 Cisco “reused or resold $300 million of returned equipment” (Cisco.com, n.d.-B) 25% of these were refurbished for resale. From this scheme Cisco is able to gain new revenue from selling refurbished goods, their impact on the environment is reduced as less of their products end up in landfill or harvested for valuable metals inside dangerous e-waste ‘mines’ in developing countries such as India and China (National Geographic, 2014). Additionally Cisco have managed to reduce business travel by 2/3 in 5 years because of the introduction of Cisco’s own collaborative tools they innovated as a means to replace business travel (Cisco.com, n.d.-A), these include: ‘Cisco TelePresence’, ‘Cisco Virtual Office’, ‘Cisco Connected Workplace’, these tools have allowed Cisco to be able to do collaborative work without all participants being in the same room and reduce the demand for large offices with virtual work environments, all of this has led to a reduction in greenhouse gas emissions whilst saving the firm $100 million each year. Cisco states that it has produced a “25% absolute reduction in greenhouse gas emissions over 5 years from Cisco operations as revenue increased by 30%.” (Cisco.com, n.d.-A) Cisco has managed to demonstrate how sustainability can not only be important for a business but actually bring along benefits to the company.

This is known as a positive sum gain, as everyone is benefited in this situation. It could be questioned whether the time managers put into become more sustainable could have used elsewhere to bring higher returns for shareholders, though it can be answered that the long term reduction in costs, and greater flexibility in Cisco facilities are invaluable.

In conclusion, sustainability has been identified as an important problem for the world to solve since the United Nations conference in 1972, however it has only been more recently that this importance has reached the business world, a prime example of this is the case of the Deepwater Horizon oil spill of 2010, that due to the damage they have caused have had their brand image ruined, costing them more than double the profit they made in the previous year and additionally to them losing so much because of unsustainable business practises, four years later and BP has not recovered, their share price fell from £639.70 just before the incident to where it is now at £431.80 (finance.yahoo.com, 2014), and are still under scrutiny by the media. The costs of being labelled unsustainable are too great, and the risks of that being publicised by the media are too high. This essay points to the conclusion that businesses in the future will likely find the incentives to being sustainable become stronger, and at some point, sustainability could likely become a requirement of society in order to operate as a business, similarly to the economic and legal parts of Carroll’s four-part model of social responsibility. There are different ways that a business can be sustainable, whether that be through a business strategy reflecting Friedman’s shareholder view that increases the profitability in the process of becoming sustainable, as demonstrated by Cisco, or by taking an approach similar to that introduced by Freeman, taking into account the effects upon all the businesses stakeholders because it is considered an ethical obligation, of which this can be seen in Apple.

 

References

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