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About the Authors
Scott C. Hammond, PhD
Scott C. Hammond is a clinical professor of management in the Jon M. Huntsman School of Business at Utah State University and a research fellow for the Shingo Institute. His award-winning research on lost person behavior, cross-cultural organizational behavior, and highly reliable teams has been featured in national media, including Fast Company, U.S. News & World Report, and the Hugh Hewitt Show. He is also a volunteer search and rescue worker in the Rocky Mountains and author of Lessons of the Lost: Finding Hope and Resilience in Work, Life, and the Wilderness.
Dr. Hammond is also an adviser to the Mfantseman Institute of Technology in Ghana.
Lisa Jones Christensen, PhD
Lisa Jones Christensen researches and teaches social entrepreneurship, sustainability strategies, leadership, and corporate social responsibility at University of North Carolina. Her work focuses on how business can play a role in poverty alleviation and creating positive social change. For over 15 years, Dr. Jones Christensen has been active in issues of social �inance and social innovation. Both her academic and nonpro�it work emphasize adoption of safe drinking water behaviors and related public health innovations.
She received her PhD in organizational behavior from UNC Kenan–Flagler; her MBA from the Marriott School and MA in international development from the David Kennedy School, both at Brigham Young University; and her BA from the University of California–Berkeley.
Acknowledgments The authors would like to acknowledge the people who made signi�icant contributions to the development of this text. Special thanks are due to Cheryl Cechvala, sponsoring editor; Carrie Brandt, associate sponsoring editor; Kristle Maglunob, assistant editor; Hannah Wertheimer, editorial assistant; Catherine Morris and Julie Mashburn, production editors; cover designer, Nicole Sanchez-Sullivan; and LSF Editorial for copy editing and test banks. We want to give special acknowledgment to Barbara Hammond at Utah State University for copy editing and to Carol Hee, PhD, at the University of North Carolina–Chapel Hill for content suggestions. We also want to acknowledge Barbara Hammond and Tanner Christensen for moral support during the writing process.
The authors would also like to thank the following reviewers, as well as other anonymous reviewers, for their valuable feedback and insight:
Dr. P. J. Forrest, Alcorn State University Amy M. Gof�inet, MA, Ashford University Dr. Katherine Hyatt, Reinhardt University Barbara J. Limbach, PhD, Chadron State College Steven L. Lovett, JD, Emporia State University Farrell K. Martin, Ashford University Lora Reed, PhD, Ashford University Alan R. Swank, PhD, Ashford University Elizabeth A. Zambrano, MBA, Ashford University
Preface Corporate and Social Responsibility: Road Map for a Sustainable Future highlights the social and environmental importance of corporate actions. The book outlines how corporate social responsibility and sustainability ideas can create �irm value, foster competitive advantage, and be an organizing framework for leaders—while also improving working and living conditions around the globe. Each chapter provides real-world examples of businesses making progress toward social responsibility and sustainability. The text also offers practical tools for ways to sustain the �irm, the people inside �irms, and the natural environment.
To enhance student learning, Corporate and Social Responsibility: Road Map for a Sustainable Future includes the following features:
CSR and Sustainability in Action offers real-world application cases studies of businesses making socially responsible and sustainable decisions using the practical tools discussed in the text.
Apply Your Knowledge encourages students to think critically by applying concepts such as life cycle assessment, greenwashing, and stock screening to businesses that interests them.
Closer Look interactive elements provide engaging visuals and scenarios for students to review and apply content knowledge.
Learning Objectives lists what students can achieve after reading each chapter.
Figures visually enhance important models and processes discussed in the text.
Pretest and Posttest Questions allow students to evaluate their knowledge before and after they read each chapter.
Videos provide real-world application and enhance concepts in the text.
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1 Social Responsibility and Sustainability: Similarities and Differences
After reading this chapter, you should be able to:
De�ine corporate social responsibility and sustainable business and describe how these relate to the triple bottom line. Analyze systems theory and complexity theory and discuss how both relate to sustainability. Describe how continuous improvement can promote sustainability. Evaluate the types of waste that reduce �inancial viability or increase social and economic impact. Summarize the elements of sustainable business practices.
Introduction This book advocates a better way to do business, build organizations, and bene�it society. We argue for a holistic and sustainable approach to business because we believe business is not, nor can it be, disconnected from society, communities, the environment, government, or individuals. This chapter lays the foundation for this perspective by introducing the idea of socially responsible and sustainable �irms and by describing a leadership mind-set for both. The sustainability mind-set described here moves leaders from a reactive stance to a proactive one. When they adopt such a mind-set, leaders move away from reacting to consumers, trends, and activists and toward being proactive and strategic about the opportunities and interconnections in business. The sustainability mind-set also helps guide leaders and managers regarding when, why, and how to enact socially responsible behaviors. We introduce foundational theories that support a social responsibility and sustainability perspective. General theories such as complexity theory and systems theory, among others, provide the background for lean management and continuous improvement, practices that reduce waste and open opportunities for innovation. Thus, this book alternates between (a) sharing the theoretical and historical underpinnings of key sustainability ideas and (b) sharing best practices and examples from a wide range of industries. The �irst task, however, requires us to further de�ine and characterize the ideals of corporate social responsibility and corporate sustainability.
1.1 Corporate Social Responsibility and Sustainability De�ining the relationship between the means of production (business) and society (employees, customers, suppliers) has a long history, one that has usually featured discussions about the purpose of business. Historical musings about modern capitalism usually included attempts to understand the proper role of business in society and thus formed the foundation for modern discussions of corporate citizenship, which is a loose term used to describe the relationship between a corporation and its society (Barkemeyer, Holt, Figge, & Napolitano, 2009). The following section de�ines these concepts and covers the evolution of key terms.
De�ining Corporate Social Responsibility and Sustainability
Corporate social responsibility (CSR) refers to voluntary actions taken by �irms that are designed to improve social or environmental conditions (Mackey, Mackey, & Barney, 2007; McWilliams & Siegel, 2001). More speci�ically, CSR refers to the “continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families, as well as of the community and society at large” (as quoted in World Business Council on Sustainable Development, 2015). Originally, the CSR paradigm simply re�lected the fact that some corporations were aware of their immediate business context and generous only to the people within that context (primarily employees and customers).
Most heavily discussed by business leaders and consumers in the 1970s, early CSR efforts primarily focused on compliance with legal commitments to shareholders or appeasing and supporting local communities—the earliest efforts and discussion of CSR largely focused on corporate philanthropy and workers’ rights. Early CSR by the Dow Chemical Company, for example, included donations to the local museum and sponsoring �lower gardens along the main streets in the headquarter’s town of Midland, Michigan. CSR at Dow today is a much more comprehensive practice that includes innovation and decisions that pertain to new product development.
Since the 1970s CSR has expanded to focus less on compliance, philanthropy, and donations and has become a more strategic, inclusive, and global concept. Accordingly, the topic has moved from being discussed primarily in ethical terms to both ethical and strategic ones; the word sustainability now also accompanies or replaces the term CSR in some discussions (Jones Christensen, Peirce, Hartman, Hoffman, & Carrier, 2007). Business sustainability refers to how an enterprise manages the triple bottom line—a process by which companies manage �inancial, social, and environmental risks, obligations, and opportunities (often referred to as pro�its, people, and planet) (“De�inition,” 2015). This de�inition of sustainability is partially rooted in the environmental movement and implies that in order to increase sustainability, a corporation must reduce its negative environmental and social impacts and increase its stewardship of resources. Thus, for some, sustainability includes CSR behaviors while also extending and building on historically CSR activities. This book advocates the idea that corporate sustainability includes typical CSR activities and adds more strategic environmental and social elements to the concept. Authors writing for the Harvard Business Review suggest that sustainable business practices can be the norm in the future. Chouinard and colleagues (2011) say, “Instead of asking either ‘how can we turn a pro�it?’ or ‘how can we minimize impact?’ managers [of the future] will see those as two sides of the same coin. Sustainability will simply be how business is done” (para. 6). This book attempts to capture both what it means to be socially responsible and sustainable and how to achieve such results.
The choices made by Merck & Co.’s management—from philanthropy to drug development and then in-kind donations for low-income communities—provide an example of a �irm that has run a solid and effective CSR and sustainability campaign.
CSR and Sustainability in Action: Merck & Co.
In 1668 Jacob Friedrich Merck purchased a drugstore in Darmstadt, Germany, and his family operated it for several generations. In 1891, when George Merck immigrated to the United States, he established Merck & Co. (now Merck & Co., Inc.) in New Jersey. Today Merck is one of the world’s seven largest pharmaceutical companies. It is also a generous one. The Merck Foundation, which is funded by the corporation, gives away as much as $500 million in products, services, and cash every year.
Merck’s research and development has led the U.S. Food and Drug Administration to approve more of its drugs than any other company (Merck & Co., 2015). These include groundbreaking drugs that help treat diabetes, high cholesterol, autoimmune disorders such as arthritis, and cancer. Merck scientist Maurice Hilleman developed the �irst vaccines for mumps, rubella, and chicken pox. Merck scientists also developed the �irst statin class drug and the �irst effective treatment for tuberculosis.
In 1987 Merck & Co. partnered with the United Nations (UN) to develop a drug to donate to those who suffered from river blindness in Africa. Estimates suggest that at that time, the cost of developing such a drug averaged 12 years and $200 million (Hanson, & Weiss, 1991). The decision to support drug development when the �irm might never recoup the costs was a major one that Merck executives ultimately supported. There are now regions in which river blindness has been eradicated, in large part because of the �inancial and social support from Merck. Merck’s actions continue to be widely known and publicly commended.
The reputational bene�its and free marketing Merck has received from its charitable actions has helped it in social and �inancial ways equal to or beyond what it could have gained by taking a for-pro�it approach. This book addresses how to identify, evaluate, and intelligently lead �irms to make such choices. More importantly, it is about how to think beyond narrow philanthropy-only versions of social responsibility and toward the wider and strategic goal of corporate sustainability. This �irst chapter sets the stage for this goal, while the �inal chapter (Chapter 10) expands on a series of challenges that future leaders face in building sustainable and socially responsible corporations. By the time readers reach Chapter 10, such goals should seem both understandable and attainable.
Sustainability: Long-Term Accountability
The de�inition of sustainability has its roots in environmental science and has since been integrated into economics and business. In the language of business, a sustainable corporation mitigates harm and increases social and environmental good over the long term while remaining pro�itable and providing valued products and jobs. At a minimum such a corporation does not harm the social or ecological environment, nor does it deplete national or human resources. All of these activities explicitly support long-term viability (McWilliams & Siegel, 2001).
One of the most widely applied de�initions of sustainable development in business comes from a 1987 document that grew out of the UN-mandated World Commission on Environment and Development, which set up a diverse group to de�ine sustainable development. Headed by the former prime minister of
Norway, Gro Harlem Brundtland, the results took years to achieve and were published in a report called Our Common Future. This document came to be called the “Brundtland Report” or the “Brundtland de�inition” (even though the entire commission worked to achieve it) and included the following key text:
The environment is where we live; and development is what we do in attempting to improve our lot within that abode. The two are inseparable. Sustainable development meets the needs of the present without compromising the ability of future generations to meet their own needs. (World Commission on Environment and Development, 1987, Part I)
The establishment of this de�inition became a landmark event for sustainable development. It was notable because it took a long-term view in its mention of future generations. It also stood out at a time when the majority of the business community was operating under a very short-term and isolationist or nationalist mind-set. With its focus on long-term accountability to future generations, it gave policy makers, businesspeople, and governments a starting point from which to evaluate actions and choices. Over time, the de�inition was honored for these accomplishments but also criticized for mentioning “needs,” as needs are hard to de�ine and harder still to agree upon for large numbers of people. Despite that issue, this de�inition of sustainability continues to dominate the literature and popular press on the topic.
Interface Carpet represents an early example of how a business used sustainability principles to become innovative and pro�itable while attempting to restore society and the environment. Ray Anderson, the company’s founder, admits that for the company’s �irst 30 years of operation he focused solely on pro�its. He did not consider his own consumption of raw materials as impacting the environment or future generations. As Anderson learned more about the relationship between ecology and commerce, he pushed the �irm to take responsibility for its products, from the extraction of raw materials to the disposal of used product.
CSR and Sustainability in Action: Interface Carpet, Part 1
In 1973 Ray Anderson founded Interface Carpet to provide modular �loor coverings to corporate and institutional clients. He ultimately built a billion- dollar company, but in 1994 Anderson realized the company lacked an environmental policy. As Anderson worked to create one, he was inspired by Paul Hawken’s book, The Ecology of Commerce. It discusses many principles, but especially how to reframe business toward a goal of zero waste (Anderson, 1998).
Anderson was distressed to learn that it took 800 million pounds of nonrenewable material extracted from the earth to generate $802 million of product (Anderson, 1998). Inspired by Hawken, he felt that business and industry were the only institutions large and powerful enough to lead society out of the environmental problems that industry had helped cause. Anderson decided to immediately change how he ran his business.
Interface Carpet maintained or improved market strength while also investing in renewable energy, recycling aggressively, and empowering all employees to drive change and create products that are safe for them to handle and for consumers to use. Interface Carpet now bene�its its local community, broader society, the environment, and shareholders as a normal part of running its business.
Given sustainability’s high potential value to �irms and society, how can it be developed, measured, and turned into a business goal? What trade-offs must be considered to keep it from being unattainable in the short term? The next section attempts to answer these questions by describing a form of accountability and a classi�ication of measurements (the triple bottom line) that allows users to describe and discuss how an organization progresses toward sustainability.
More Than One Bottom Line
A simple way to identify a sustainable business is to determine whether it formally accounts for (or even considers) a “double or triple bottom line.” This phrase builds on the concept of the single bottom line—the term for �inancial pro�it. The idea of a triple bottom line references an analysis or accounting tool that evaluates environmental costs (or liabilities) and bene�its (or assets) along with the costs and bene�its of social and �inancial decisions.. If a �irm considers two of the three categories, it uses double bottom line thinking; when a �irm considers all three categories, it serves and measures the triple bottom line. Some groups refer to these categories as the Three Ps: pro�it, people, and planet.
The Economic Bottom Line: Pro�it A basic economic truth about business implies that without some form of outside subsidy or similar intervention, companies need a steady �inancial pro�it or they ultimately cease to exist. When the cost of running the business exceeds the �irm’s �inancial pro�it, it must seek a subsidy or stop operating. Financial pro�its pay salaries; support research and development; fund investments in property, supplies, and equipment; contribute to the tax base; and otherwise drive operations. In standard accounting practice, �inancial results enable comparisons to be made between �irms, which offer investors and other stakeholders clear signals about viability and value. For many, the �inancial bottom line represents the most basic type of sustainability—the kind where the company is “sustained” to operate and thus able to provide employees and communities with jobs and products. Without pro�its, there is no business. The argument for additional types of bottom lines stems from the belief that money is just one type of resource needed to run a �irm; however, �irms may operate better, last longer, and innovate more if management also considers and calculates human and environmental resources.
The Social Bottom Line: People Organizations differ widely in how they treat employees, customers, suppliers, and even competitors. The term human resources typically describes an organizational department that handles employee-related issues such as hiring, �iring, promotion, health and wellness, bene�its, and legal rights. The very term for describing the department implies that people are a resource, just like money. Organizational managers with advanced human resource practices signal to workers and future employees—as well as the community—that the company invests in the very people who sustain the business. Organizations where management purposefully supports, nurtures, and protects employees often do so as an expression of CSR. The underlying logic and motivation can run from ethics (valuing people is the right thing to do) to �inances. When employees are happy, secure, and healthy, there is less turnover, higher productivity, and fewer training and replacement costs (Weber, 2008). Whatever the motivation behind pro-people behaviors, the outcomes remain similar: higher retention rates, higher satisfaction rates, fewer errors, lower health care costs, and other related savings and bene�its. Cutting-edge CSR and sustainability practices go beyond employees to include suppliers, community members, government, and others (Weber, 2008).
A sustainable �irm may also take a long-term approach to developing people inside and outside the company. Managers in such a company may give employees growth and promotion opportunities, focus on diversity and inclusion, or take an expansive view of work–life balance. Such managers also tend to create an environment where innovation is rewarded, as innovation by de�inition moves everyone forward. Part of supporting innovation relates to remaining loyal to people when they experiment; it also means giving people the resources and freedom to develop ideas, build prototypes, and test the �inal product. Merck & Co.
offers one example of how investing in employees by providing resources and support for innovation can result in social bene�its (more health) and corporate bene�its (more pro�its) (“Key facts,” 2015).
Investments in people are often called social investments, which can take the form of money spent on training, fair or above-market wages, motivational programs, bene�its packages, and more. Social investments not only acknowledge that employees make a valuable contribution, they also highlight the value of the lives of people outside the company. An excellent example of this is the mission statement (purposefully called a “credo”) of Johnson & Johnson, a drug and consumer products company similar to Merck in some product categories. Johnson & Johnson’s credo highlights its priorities. The �irst line reads: “We believe our �irst responsibility is to the doctors, nurses and patients, to the mothers and fathers, and all others who use our products and services” (Johnson & Johnson, 2016).
This important statement guides corporate leaders and employees in their daily decision making because it tells them to put the user of the product �irst, not the owner of the company or its shareholders. Such a clear sense of focus can help decision making and priority setting, and it likely plays a large role in Johnson & Johnson’s success since the 1860s. That said, Johnson & Johnson’s credo does not ignore the business aspects of the pharmaceutical enterprise. Its credo says later in the �irst paragraph: “Our suppliers and distributors must have an opportunity to make a fair pro�it.” The second paragraph states that the employees must have a “sense of security in their jobs” (Johnson & Johnson, 2016).
This last point is evident in Johnson & Johnson’s on-site career center. There employees who leave the company can take advantage of the career center’s resources. Johnson & Johnson employees have a right to access the career center for the rest of their professional lives. While commitment to employees is a common CSR practice, a lifelong commitment is more unusual and sets an example for others to model and adapt. Bene�its from such practices include employee loyalty, improved rankings as preferred places of employment, reputational bene�its that enhance recruiting opportunities (Weber, 2008), and other bene�its discussed in future chapters.
The Environmental Bottom Line: Planet The �inal bottom line involves measuring the costs and bene�its of environmental elements used by the �irm. At its most basic, this metric simply means calculating and understanding the cost of physical waste or the cost and extent of pollution. At its most complex, such a metric means attempting to account for the cost of clean/dirty air, clean/dirty water, sourcing materials, and the waste that occurs because of a product. Regarding the most basic level, most companies do not want to be viewed as polluters. Most don’t want to pollute, but some industries inherently operate with more blatant pollution and environmental disruption. For example, mining companies by de�inition dig and disrupt the earth. The work results in waste streams that may have some level of toxicity. Pulp and paper �irms and those in the lumber industry must harvest trees and alter the natural landscape (even on company property). Firms in the extractive industry have long received public attention because mining is dangerous and results in obvious pollution. However, there remain many other and less obvious ways to consider the environmental impacts of operating a business. The Environmental Defense Fund (EDF) reports that 1 in 3 Fortune 500 companies uses interns and advisors from the EDF to help reduce their corporate carbon footprint (EDF, 2015). Such support results in simple initiatives such as carpooling or allowing “work from home days” to reduce air pollution generated by employees, as well as more complex initiatives related to changing packaging material, altering chemical composition of products, relocating factories, and so on.
Companies that adopt a CSR and sustainability mind-set no longer see themselves as isolated in the market or society, or outside of environmental concerns. They see themselves as part of the larger system. This mind-set may stem from the increased global connectivity that has developed over the past 20 years, as well as from an increased appreciation for systems theory concepts, which have been re�ined and expanded over the past 60 years. The following sections introduce systems theory and complexity theory and examine the impacts of both on the CSR and sustainability movement.
1.2 Theories Related to Sustainability The newer approach to CSR takes a systems theory perspective, which means that responsibility is related to interconnectedness and includes a wide range of actors. By discussing theories that underpin CSR and sustainability, this book moves from describing the goals of CSR to describing tactics for achieving them.
Before detailing the bene�its of building a sustainable business or organization, or how sustainability feeds and motivates CSR, we discuss the roots of some CSR and sustainability ideas. Most great ideas emerge dependently, with roots in other disciplines. Similarly, many believe that corporate sustainability stems from a mind-set called systems theory.
Systems Theory: A Foundation for CSR and Sustainability
Systems theory or general systems theory operates on the fundamental idea that all phenomena exist as a network of relationships among elements in a system. Also, all systems, whether social or biological, have common patterns. These theories therefore involve identifying and considering connections between different groups, such as ecological systems, social systems, and biological systems. Elements of systems theory relate to classical philosophy. Today biologist Ludwig von Bertalanffy is probably the best and most noted systems theorist. He published Perspectives on General Systems Theory in 1975. In it, he argues that all systems share certain characteristics. Common elements include inputs (such as raw material), throughputs (such as shaping the raw material), and outputs (a �inal product ready to be sold). A system can be de�ined by what it takes in, what it changes, and what it puts out. For example, a lumber company takes in rough-cut trees (input); then employees dry, saw, and plane the wood (process); after these processes, the �irm offers a �inal product in the form of lumber (output). For a less tangible example, consider a communication system. There are inputs (words and signals); throughputs (listening to or recording the words and signals); and outputs (additional words and signals that are ideally related to and link with the inputs).
As mentioned, systems theory operates on the fundamental idea that all phenomena have a network of relationships with common patterns. The notion of patterns leads us to the second set of ideas in the family of systems theory that we call complexity theory. While the ideas seem closely related to biology and life sciences, business advisors such as Peter Senge (1990) and Margaret Wheatley (1992) have written a great deal about the importance of systems theory in business thinking and planning. To understand the relationship, we �irst need to describe complexity theory.
Complexity Theory: Another Precursor to Sustainability Complexity theory refers to a general theory of systems that describes how corporations, or any changeable structures, adapt to their environment and cope with conditions of uncertainty (Gleick, 1987). This theory helps us understand why sustainability is such a precious and fragile commodity in business. Complexity theory provides a lens through which to view all systems, including organizational ones such as corporations. Complexity theory stems from observing nature; its central tenet is the idea that all systems are organic and emergent (or that they constantly grow and change). Someone who notices patterns in a business organization within a dynamic market and says, “This organization has a life of its own” is knowingly or unknowingly recognizing a key theme of complexity theory (Hammond, 1997).
How does such a seemingly vague idea relate to business and CSR? An organization that builds cars or creates chemical compounds (or any product or service) operates in ways bounded by resources, talent, and market opportunity. Owners and managers can change somewhat over time, but the paths for change are limited—a car manufacturer cannot keep its core resources, talents, and market opportunities and become a real estate �irm. While �irms can change, we cannot predict which path an organization will take. Each managerial decision, each corporate action leads to a new set of complex realities.
Consider how Ray Anderson turned Interface Carpet from a waste-producing organization to one with almost zero waste. Doing so required a change in his mentality and awareness. He took an unpredictable path and gained an outcome not foreseen by his employees or his competitors. Thus, the ideas of complexity theory and systems theory come together to suggest that it is possible to move business from the typical unsustainable behaviors commonly practiced today and move toward the sustainable and restorative practices of the future. Systems theory and complexity theory provide a bridge for understanding how the past need not determine the future of business. Consider the following description of complexity theory:
At each level of complexity, entirely new properties appear. [And] at each stage, entirely new laws, concepts, and generalizations are necessary, requiring inspiration and creativity to just as great a degree as the previous one. Psychology is not applied biology, nor is biology chemistry. (Waldrop, 1992, p. 82)
The idea that a system is nonpredictive (meaning it is not possible to know how something will turn out before it is tried) is an essential characteristic of complexity theory—it also provides the motivation to innovate. Systems that are predictive are not dynamic, because by de�inition predictive means knowing what will happen, so there is no surprise or dynamism. Such predictive systems cannot change for the better or for the worse. More speci�ically, Nobel Prize– winning physicist Ilya Prigogine (Prigogine & Stengers, 1984) showed that disequilibrium is a necessary condition for a system. Prigogine called changeable systems dissipative structures. These are structures that are resilient rather than stable, and order comes from within through self-organization. These phrases and ideas further relate to business, because acknowledging that all markets, corporations, and systems are self-organizing re�lects sustainability—corporations must continually adapt. Sustainability and CSR directly relate to a corporation’s ability to adapt. When a person in a �irm sees that action and change are necessary, applying these theories can help individuals and �irms can take action toward change. Again, these theories represent both the motivation and the bridge to move from past behaviors to future practices.
As de�ined by complexity theory, a �inal characteristic of any dynamic system, including business, is that systems must be seen holistically, or as a whole and not just in parts. This idea represents another point at which the principles of complexity theory and the notion of sustainability merge. A system cannot be sustainable without someone accounting for as many variables as possible in as much detail as possible. Sustainability and CSR require that leaders take a wide account of the source of any problem and any possible solutions. This idea brings us back to triple bottom lines and systems thinking, where future leaders step back from a decision or from measuring only the dominant bottom line to see how a larger view and measuring additional bottom lines can lead to positive change. Later chapters in this book discuss how to achieve such changes.
The central argument is that in order to create a sustainable organization, one needs to expect and account for the dynamic aspects of all organizations. One needs to look at the points at which the organization connects with others, markets, social groups and societies, politics, the environment, and all other dynamic systems within the organization’s operations. Note that this implies that organizations, like people and ecosystems, are in some way alive. If they are not alive, they are at least dynamic to the point that they behave very much like living things. In order to sustain a living thing, one needs to continuously improve.
When leaders and managers embrace this idea, it becomes natural to attempt continuous improvement in work processes, too. It becomes second nature to put rules in place to measure the current state of things and to set goals to continuously reach for a dynamic future state. Continuous improvement represents one tactical way that leaders can help move companies toward more socially responsible, pro�itable, and environmentally sustainable behaviors.
1.3 Continuous Improvement There are essentially two choices when managing a business—one can either stay the same and gradually decay over time or purposely enact a cycle where the business gradually or dramatically improves. To strategically decide to analyze all processes with the intent to understand and improve them is to commit to continuous improvement in business. In this case, improve means to adapt to the changing environment and become more ef�icient and innovative with the business’s inputs and throughputs. Simply put, dynamic organizations that prevail in the market continuously improve. Consider, for example, how if a company wins awards one year, those award-winning behaviors become expected and status quo the next year; to win the next award, the company must do something more than before.
Operations management classes teach a number of speci�ic processes that �irms adopt to formally enact continuous improvement. Two examples of such programs are the Shingo model and Six Sigma. These programs emphasize ongoing adaptation as the only way an organization can adjust to a changing environment and the only way to sustain �inancial stability, customer loyalty, employee dedication, and lower environmental impact (Shingo, 1986, 1987).
At the core of such continuous improvement is a concept called kaizen, which means “change good” or “change for good” in Japanese. Kaizen became famous in the United States from Masaaki Imai’s 1986 book, Kaizen: The Key to Japan’s Competitive Success. Continuous improvement concepts are similar to those described previously that relate to general systems theory. That is, they are focused on continuously adapting inputs, processes, and output to reduce waste and improve sustainability.
The Shingo Model
The Shingo model represents one of the more useful and successful change management or kaizen systems. Based on the work of Dr. Shigeo Shingo, who brought the Toyota Motor Corporation to manufacturing prominence in the 1970s and 1980s, the model takes a speci�ic approach to operations and continuous improvement. It is based on 10 principles that begin with the social and human side of business. The Shingo model differs from other kaizen systems in that it starts with the human dimension, while still including economic and environmental dimensions, in order to help organizations �ind long-term ways to become sustainable. The 10 Shingo principles fall into four overarching categories. The categories and principles build on and reinforce each other—the cultural enablers and human emphasis form the model’s basis, and all additional principles build on that foundation (see Figure 1.1; Shingo, 1986, 1987).
Figure 1.1: The Shingo Model
Source: Shingo Institute—shingo.org (http://www.shingo.org/) . Reprinted with permission.
Respect Every Individual The �irst principle in the Shingo model involves respecting every individual (Shingo, 1986, 1987). When people feel respected, they willingly dedicate effort, mind share, and loyalty to organizational efforts, which typically increases effectiveness. Individuals are respected when organizations nourish employee potential (by offering them training and development, good leadership, advancement options, and fair and transparent procedures). Respect is also evident when companies invest in employee health, safety, diversity, and co-ownership. This can range from simple processes to cutting-edge activities that lead in social responsibility and corporate sustainability (or at least the social side of both).
Lead With Humility The second Shingo principle involves leading with humility. Leaders, including senior management, need to continuously learn and listen to people within their organization. As an active listener, a good leader acknowledges that he or she does not and cannot know everything. Leaders who embrace humility tend to take a more open and learning-orientated approach to each conversation and interaction with coworkers—and this applies to coworkers at every level of the organization. A possible result of doing so is generating better solutions that include a wide range of ideas; another is bene�iting from more engaged and involved employees who each feel they can make a substantive contribution because leaders listen and care about new input.
Aim for Perfection The third Shingo principle involves seeking perfection. Of course, this introduces a duality because such a goal is unattainable, as systems are dynamic. However, while the goal remains lofty, seeking perfection requires a leader to continually improve to bring the organization closer to sustainability. Many companies have expanded the perspective on what is possible; as they continually focus on perfection, they �ind new opportunities, technologies, and ideas that lead them forward. Expanding goals can also help achieve new heights.
Focus on Process
The fourth Shingo principle calls for a focus on process (Shingo, 1986, 1987). Many organizations that do not use Shingo or similar principles primarily focus on output and fail to fully analyze or consider how employees arrived at that output. However, a more responsible and sustainable company continually evaluates internal processes in order to control the use and �low of inputs and outputs. Focusing on the process means studying the value and consequence of each step in any manufacturing or service-creation process. Focusing on process also means breaking operations into steps and dependencies in order to evaluate which steps (if any) can be eliminated, simpli�ied, improved, or otherwise changed. Companies with a focus on process tend to be more humane places to work, because managers do not blame people when outputs fall short; rather, they consider how the process forced a lessthan-optimal outcome. When there is less blame, a culture of effort and safety can �lourish (Liker, 2004).
Embrace Scienti�ic Thinking Organizational leaders seeking to be socially and environmentally responsible by applying Shingo (or similar) principles learn enough about themselves and the organization to gain insight into what is really going on at work, as is illustrated by the �ifth Shingo principle, which revolves around embracing scienti�ic thinking. In management, scienti�ic thinking means using data and clear measurements to verify assumptions. It involves forming hypotheses, creating tests, gathering data, creating new hypotheses, and making direct observations. A key part of the kaizen process involves going to the genba. In Japanese, this means going to “the place where things are happening.” Applying the idea of the genba to CSR and sustainability means that more sustainable choices come from frontline employees who are doing the work, rather than from some manager who is far removed from day-to-day activities and processes. More generally, the idea applies to CSR and sustainability because it suggests that people must analyze the heart of all processes to better understand why they exist, what purpose they serve, and how they might change.
Consider Flow and Pull Value The sixth principle in the Shingo process relates to waste. The principle of waste deserves its own discussion (see next section) because the topic of waste, or eliminating it, drives most initial CSR and sustainability behaviors. The sixth Shingo principle does not use the word waste. Rather, the associated phrase is �low and pull value, which indicates that companies strive to maximize value for customers. Companies create value in response to real demand in a continuous and uninterrupted process of products and services. Waste is considered anything that disrupts the pull and �low of products and services, and thus the topic of waste is implied rather than explicitly stated. We discuss types of waste in greater detail later in this chapter.
Strive For Quality at the Source The seventh concept of continuous improvement in the Shingo model relates to the others because its focus is to assure quality at the source. Perfection can only be achieved if every element of the work is done right. This means that quality is measured from the source or the supplier, all the way through the process, to delivery. Managers who encourage coworkers to ensure quality inputs, throughputs, and outputs and to focus on goals emphasize quality at every part of the process, not just at the outcome.
Think Systemically The eighth Shingo principle moves into the area of enterprise alignment and encourages all leaders and employees to think systemically (another nod to systems thinking). It is essential to thoroughly understand the relationship within and between different parts of the organization, in order to make better decisions and improve. In the Shingo model all levels of the organization are encouraged to know about the interrelationships of all the other levels of the organization. Typically, sustainable organizations are not congested hierarchies, but rather �lat structures that require less administration, bureaucracy, and communication.
Create Constancy of Purpose The ninth principle in the Shingo model relates to creating a constancy of purpose. The goal of this principle is to create unwavering clarity about why the organization exists, its direction, and its purpose, as well as the role and value of all those involved. The underlying idea relates to the concept of unity—that is, in order to create a consistency of purpose, people need to innovate, adapt, and take risks together.
Foster Value for Customers The tenth and �inal principle in the Shingo model stipulates that employees must create value for customers. The customer represents the systemic connection to the market. Ultimately, the customer de�ines the value created and demonstrates that belief by purchasing or otherwise interacting meaningfully with the product or service. Thus, all organizational members bene�it from trying to adopt the customer’s perspective. Organizations that fail to effectively and ef�iciently deliver on what is most important to the customer typically fail.
Of course, the Shingo model represents just one of many methods companies can employ to keep continuous improvement central to the organization. Some companies choose deliberately from the available options, while others may utilize some key principles without adopting all of them. Companies that formally embrace and train employees on continuous improvement methods tend to experience more consistent market success and gains.
An early and excellent example of a sustainable manufacturing organization in the United States is New United Motor Manufacturing, Inc. (NUMMI) in Fremont, California. NUMMI was originally the site of the General Motors (GM) Fremont assembly plant; it was closed down until GM and Toyota launched a joint venture to manufacture vehicles marketed by both brands. GM considered the venture an opportunity to learn from Toyota about how to manufacture high-quality smaller cars, while Toyota sought its �irst North American manufacturing base and the opportunity to deploy the Shingo model in production with American workers. When the NUMMI plant reopened in 1984, 70% of the hires came from the laid-off GM workforce. Many of the former GM employees were sent to Japan to learn the Toyota Production System that embodies the Shingo principles. Within weeks of opening, the NUMMI factory produced cars with fewer defects per 100 vehicles than those produced in Japan (Imai, 1986). Employees reduced waste and were happy, and product quality was high. Plant owners and the workers’ union engaged in joint activities that bene�ited the community, showing that the new system had implications beyond the factory boundaries (O’Reilly, 1998).
One important lesson from the NUMMI plant experience relates to continuous improvement principles, which can lead to higher sustainability and corporate responsibility. These principles are not culturally embodied in Japanese, Chinese, Korean, German, or any other culture. Anyone willing and motivated to learn the principles can apply them to multiple areas. Some United Automobile Workers Union members who worked for GM in the previous plant almost destroyed the plant with a lack of productivity, acts of sabotage, and poor behavior. Yet those same employees, inspired by a system of listening, empowerment, and improvement without con�lict, created one of the most successful manufacturing sites in history (O’Reilly, 1998).
Continuous improvement, coupled with and informed by ideas from systems thinking, creates a drive to be eco-friendly, humane, and connected to other entities (such as government or industry groups) in ways that bene�it all parties. It also creates a passionate drive to reduce waste and re�ine processes. As stated earlier, one of the �irst (and easiest) goals related to moving toward more sustainability and greater responsibility regarding resources is to manage waste.
1.4 De�ining Waste Simply de�ined, waste refers to a product that has zero value. Waste takes the form of pollution to the environment, unful�illed human potential, or missed market opportunities. Waste represents activity with no bene�it. The more waste an organization creates, the further it moves from sustainability and responsibility. Also, waste is usually costly for the �irm and sometimes for society at large. Creating waste can be viewed as irresponsible and even unethical. Learning to avoid waste or turning it into something of value is a key principle in CSR and sustainability.
Architect, designer, and sustainability expert William “Bill” McDonough educates people about the concept of zero waste using the phrase “waste = food.” This means that waste in one part of the organization could become input (or food) for another part of the organization or sold to another �irm to use as an input. Through this concept, waste becomes a potential resource for other systems or organizations. Waste can be an asset that can be sold or reused, rather than a liability and a cost. This is the foundational principle of materials recycling; when applied to more systems, processes, and products, however, it can mean more than recycling paper, glass, and plastic—it can lead to positive change, signi�icant savings, and cutting-edge innovation.
The easiest way to identify waste is to attend to the waste disposal system. For example, consider an electronic components factory in which many cable stubs were noticed in the wastebaskets near each workstation. Employees indicated the waste came from trimming cables within the electronic component. Employees were taking wires off a spool using a rough measurement (or by “eyeballing” the length) and distributing them to each workstation. They then measured accurately, trimmed the wires to length, and installed them on the component.
This process resulted in three kinds of waste. First, measuring the cable twice was a waste of time. It also was a waste of energy, because employees were trimming wires that had already been cut from the spool. Third, the process wasted materials, as each long strand of cable had segments trimmed off each end.
After realizing these levels of waste, the factory workers and managers worked together to change their processes. They started taking an accurate measurement when wire was �irst cut from the spool. This change allowed each worker to increase his or her daily output. It not only allowed the �irm to save money on materials, it put less waste in the land�ill.
Firms seeking to be sustainable and to take social and environmental responsibility for their operations pay vigorous attention to systems that help identify where, when, and how to eliminate waste. A useful example of such a system is the total quality improvement program called Six Sigma.
Waste and Six Sigma
Six Sigma refers to a disciplined, data-driven methodology for eliminating defects in any process, from manufacturing to service. It follows formal steps, often requires speci�ic training and certi�ication, and can be applied throughout a company or in a single department. The Six Sigma process identi�ies eight different kinds of waste found in organizations. We also discuss two additional types not always included in standard Six Sigma descriptions.
Defects The �irst kind of waste involves defects. Defects occur when manufacturers create products that do not meet minimum manufacturing or customer standards or when the service fails to produce the desired results. Most defects result in a loss for the company and the consumer.
Almost everyone has experienced a defect in service. An example of a defect in service is when you miss a meeting because an airline overbooked a �light. You paid to get to the meeting but did not receive the bene�it of attending the meeting. Similarly, if you purchase a car that does not work, you incur the cost of buying and maintaining the car without the bene�it of using it. Defects in service or products frustrate customers as well as the people who make the product or provide the service. Requesting and granting defect-related refunds costs money and represents the waste of having made a product or provided a service without generating actual bene�it. Defects increase the price of manufacturing, and the cost can be passed on to the consumer by increasing the cost of the product or service.
Overproduction Overproduction represents a second kind of common waste. Overproduction occurs when manufacturers create too much of any particular good or service. A common practice that leads to overproduction is when companies utilize the batch system, which means they manufacture something in predetermined amounts regardless of how many customers order. When a customer requests a certain product, a factory may produce more than the customer requested. The factory does this assuming some other customer will want the same product.
However, when the �irm must store excess product and the product exists as unsold inventory, it takes up space, ties up resources, and wastes money. Many consider overproduction to be one of the worst types of waste because it includes other waste. For example, overproduction wastes time, resources, effort, raw materials, transport, and storage, and it creates land�ill.
Waiting The third kind of waste relates to waiting. We have all experienced the waste of waiting in line, for example. When we are forced to wait for a late train or plane, a response from a company representative, or receipt of a good or service, we experience waiting waste. The time spent waiting is generally time that is not value added; in fact, the principle of the “time value of money” implies that time spent waiting has a cost, because we could have used that time doing something that could have earned money.
Similarly, if a product sits on a shelf in inventory, it is not generating income for a company but rather incurring storage and security costs. For this reason, the best manufacturing companies are those that have relatively few items in storage. Such �irms bring in supplies and convert them to product to immediately ship, without wasting time getting it to the customer or wasting resources in storage.
As �irm managers increasingly understand the costs associated with storing inventory, managers increasingly compare storage costs with shipping costs. In fact, they often choose to use shipping services rather than store products. For example, consider a company that uses a warehouse to hold products before shipping them to customers. After applying the Shingo principle of scienti�ic thinking and analyzing data, the company realizes that most customers request 5-day shipping to save money. However, keeping the product for several days costs the company money because storing it requires a facility that must be air conditioned and heated and must have security to keep warehoused goods from being stolen. However, if the company ships the product using 1-day shipping, the �irm eliminates the need for any storage or warehouse facility. By offering customers free 1-day shipping, the company eliminates warehouse costs, lowers customer wait time, and improves customer service.
Skills and Underemployment Underutilized talent represents a fourth form of waste. When managers do not see or utilize the talents and expertise of employees, the latter become less energized and engaged with their work. Distracted employees who use work time and resources to �ind other jobs, complain to other employees, or listlessly
accomplish tasks can waste the money paid to them in salary, create a culture of negativity, and/or make mistakes and errors that create waste and rework expenses. In addition, employees in such positions feel the pain and expense of wasted potential and may feel like a misused human asset—a feeling that can generate negative emotions and even have negative health impacts (iSixSigma, 2016). Many people have had the experience of receiving services from people who are disengaged, which can stem from many sources, including employees being underutilized or incorrectly assigned to a position. Managers have several options to mitigate such problems: First, they can accurately screen candidates and take advantage of job-matching services, which can help place people properly at the outset of an operation. Secondly, they can undertake employee satisfaction surveys and run employee engagement activities, which can increase the connection people feel with work, or at least with the workplace and coworkers. Finally, in jobs where all parties understand that the work feels menial and repetitive, managers can offer compensatory bene�its and/or frequent job rotations, which provides a way to support and invest in employees even when managers cannot change the nature of the tasks. People may come to enjoy or at least accept working a menial job because they feel engaged by interesting training programs, good bene�its, or valuable on-site facilities.
Transportation Transportation, or unnecessary movement, represents a �ifth kind of waste. Of course, all products need to be moved to reach customers, but with each move, the company risks products being damaged, lost, or delayed. A good example of a lean company that pays close attention to transportation costs is the 7-Eleven company in Japan. Transportation costs in Japan are particularly high because of the country’s narrow roads and high fuel prices, so 7-Eleven never opens a store that is more than 1 mile from another store. This allows stores to cluster close to each other and reduces transportation costs related to stocking products. 7-Eleven stores in Japan also employ a particularly innovative inventory-control system that requires daily deliveries to each store. As customer needs are anticipated and product restocked quickly, transportation savings dominate stocking and logistical decision making.
In most parts of the United States, buying local products has become a way to reduce the transportation costs associated with manufactured goods and agriculture. Buying locally and reducing or eliminating transportation costs can reduce people’s and companies’ carbon footprint. Services have transportation costs as well, particularly when consultants travel extensively to reach destinations and stay in hotels while making site visits. Technology helps mitigate transportation service costs, as teleconferencing and videoconferencing enable people to achieve face-to-face communication in real time without travel and other transportation expenses.
Inventory Inventory is a sixth form of waste and relates to the overproduction waste discussed earlier. It may seem strange to claim inventory as a form of waste, but inventory in the form of materials, works in progress, or un�inished goods represents an investment in raw materials that has yet to translate into a sale or shipment to a paying consumer. For example, retail businesses have sales to move inventory when the cost of storing goods becomes too high. Phrases like “going out of business” and “everything must go” trigger assumptions that the retailer is offering signi�icant savings (or selling at prices lower than the cost of manufacture); often this sale occurs because the company needs to reduce the cost of holding inventory.
In service industries, inventory excess is when people are hired to provide a particular service but are not needed. A restaurant without customers is not only losing product by attrition, but employees are being paid and sitting idle waiting for patrons. When �irms can use technology and marketing to better manage customer �low and match service delivery to customer needs, they can signi�icantly limit service inventory waste.
Motion The seventh type of waste involves physical motion. This type of waste differs from transportation, which refers to product damage and transportation costs. Motion refers to the damage the production process in�licts on the person or machine creating the product or service. Having too complicated a mechanical process—such as when a process uses a lot of parts that must be cleaned, serviced, and tuned—adds to the cost of creating a product. Similarly, workers who use too many motions or move inef�iciently also add to a product’s cost, especially when they suffer repetitive motion injuries or spend too much time manufacturing too few products. In the service industry, consultants who spend too much time and energy on unnecessary research or conduct unnecessary meetings can cause multiple people to waste motion. Think of all the movement required to stop what you are doing to move to another place to attend an unnecessary meeting.
Increased motion on the part of employees (and to a lesser extent, on the part of machines) also introduces the possibility for accident and diminished work safety. While safety is a principal concern for many manufacturing and service organizations, the most common impact that work has on our bodies is related to long-term motion or lack of motion. For example, some work environments feature prolonged sitting or cause problems related to eye strain and computer work. Many companies have taken steps to offset these impacts by adding standing desks to work areas and building exercise rooms in their of�ice space.
Overprocessing The eighth kind of waste involves overprocessing, which occurs when employees or machines perform work not requested by the customer. This can include adding components and features that were not requested or making the product too precise, more complex, or of higher quality than expected or paid for. For example, much of today’s technology is overprocessed. There are too many features in particular software or too many capabilities on a phone or a laptop computer; typical customers do not need most of these features. This makes the product excessively complex and adds to its cost.
In the service industry, overproduction means providing customers with something they did not want or need. Airlines, for example, have stopped providing services such as in�light hot food or luggage transportation for customers who do not want those services. In addition, the same �irms charge customers a per- service fee when they want such services. Implementing pay-for-service fees can reduce wasted resources and direct resources exactly where they are needed; this can reduce wasted motion and can lower costs for airlines and consumers.
In addition to the eight types of waste commonly covered by the Six Sigma process and taught by Six Sigma certi�ication programs, two other types of waste result from providing a product or service. The �irst relates to environmental pollution, and the second to overregulation.
Overregulation Waste occurs when regulations create work�low and operational changes that misuse, reroute, or otherwise direct resources to activities that do not create value or revenue. Regulations exist to prevent corporations from damaging the environment, causing harm to employees or customers, or breaking the law. Yet even regulatory authorities can lose sight of a regulation’s original intentions. For some companies, regulations that require excessive documentation, one-off routines to demonstrate compliance, or the purchase of non-value-added products can over time result in wasted resources (time, money, effort) that ultimately slow business.
Klean Kanteen is an organization that strives to reduce waste by promoting reusable water bottles.
Reed Saxon/Associated Press
Every time we put something in the air, in a land�ill, or in the ocean, we not only degrade the value of the air, land, and water, we create health problems or potential health problems for animal and plant life. Environmental pollution differs from the other types of waste because such pollution can come from manufacturing processes or the end-of-life fate of goods. Recycling offers to recover what was once waste into something that adds value. Chapter 2 offers an in-depth discussion of the responsibility that businesses have toward the environment and describes the environment as a stakeholder in the business.
Starbucks CEO Howard Schultz discusses what drives Starbucks in its corporate social responsibility initiatives. After listening to Schultz, what are some things your employers could do to improve their CSR efforts? What are some things your employer is already doing?
Starbucks From Title: The Responsibility Revolution
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1.5 Characteristics of Sustainable Corporations What constitutes a socially responsible and sustainable company? Some people think these terms are too broad and therefore lack meaning. But characteristics of sustainable companies can form a starting point to give the terms meaning. The remainder of this section will discuss the seven characteristics of sustainable corporations.
First, a sustainable company has a long-term time horizon. Second, such a �irm conceptualizes its relationship with people, including employees, expansively. Sustainable businesses are more likely to pay employees a living wage, provide health care bene�its, engage in philanthropic activities, and reward productivity. They provide growth opportunities for employees, including tuition reimbursement, health bene�its, training, and promotion opportunities. As part of the relationship element, such �irms support social causes. They do not abuse relationships nor manipulate unions and other communities.
An example of such a company is Google, which has long been seen as a top place to work—it has made the top of Fortune magazine’s “best company to work for” list 4 years in a row. Famous for offering catered meals and clean work environments, Google carefully monitors all aspects of worker well-being. In doing so, it noticed that the attrition rate among female employees was higher than that among male ones and set out to understand why. Google found that women who had recently given birth were leaving at twice Google’s average departure rate. Therefore, instead of offering an industry-standard 12-week maternity leave, new mothers are now offered 5 months off with full pay and all bene�its. Such a change was designed to attract and retain female workers. While the long-term results of such a policy remain unknown, the analysis and resulting policy changes re�lect how a CSR, sustainability, and pro�it mind-set can work in concert.
Thirdly, managers in such �irms regard the environment as something to be valued and often take what is called a full cost or a true cost approach to accounting. Instead of considering natural inputs as free goods, this approach tries to re�lect the actual costs of air, land, and water used by the �irm. Thus, sustainable businesses conceptualize the relationship with the natural environment differently than traditional businesses. They take proactive positions on reducing their carbon footprint. They see the environment not as a resource to be exploited, but as a gift to be carefully stewarded and restored whenever possible. They not only engage in practices that protect the environment, but also encourage employees to reduce packaging and other waste.
Fourth, sustainable �irms may have a different kind of relationship with the government, both by accepting appropriate regulation and opposing overregulation. While they accept appropriate government regulation in areas that protect the environment and employee rights or ensure honesty and fair business practices, they also resist attempts by government to overregulate and cause waste.
Fifth, sustainable businesses attempt to adapt, regenerate, and reinvent themselves. In other words, they have a higher capacity for change because they see change as essential. Change means continuously improving and setting aspirational goals. Returning to the story of chief executive of�icer (CEO) Ray Anderson at Interface, he set an aspirational goal for his �irm: to become a restorative company that leaves communities and the earth better than before the �irm’s involvement. Goals such as these create the opportunity for sustainability and CSR to overlap and complement each other.
Sixth, sustainable businesses have a unique relationship with suppliers and customers. They try to move the product from a supplier, through the business, and on to the customer with maximum ef�iciency. This means less time or waste in warehouses; it also means meeting customer expectations so that the relationship with the customer persists over time. Sustainable businesses may spend less money on marketing because keeping consumers can be less costly than acquiring new ones. Some sustainability practices also garner free press, which can be more valuable than paid press and can further reduce sales and marketing expenses.
Finally, sustainable businesses have a higher capacity for change. They seek to become more ef�icient, effective, and innovative, and in the process they may reduce costs and capture new and improved forms of value. This sometimes means that they are able to dramatically reduce a product’s cost. Sustainable businesses follow new technologies, change, and adapt, and managers help partners and customers change and adapt. Owners and managers see business as a way to create wealth not just for themselves, but also for employees and suppliers. They take pride in adding value for customers and serving customers in a way that exceeds their expectations.
Apply Your Knowledge: Sustainability Analysis
Objective: Apply the principles of a sustainable business to a real business.
Instructions: Select a business to which you have access. It might be a place where you work, a place you can visit and ask questions, or a business with extensive media coverage. Answer the following questions regarding the business. Based on your �indings, conclude if the company is sustainable and in what areas it could improve. (Note that these questions are based on the principles of a sustainable business discussed in this chapter. Students may focus on one or all of the questions.)
Does the organization take time to develop people, learn, create a strategy, create increases in quality assurance, and reduce waste? How? What evidence do you see of this being done? Conversely, does the organization do things in a rush? Are there excessive waiting, delay, or communication problems? Do e-mails go unanswered? Do questions go unasked or unanswered?
Does the organization value each person and offer promotion, development, and training opportunities? Do leaders lead with humility? If so, what is your evidence? If not, what is lacking? Conversely, are people seen as resources to be exploited? Does the organization focus on con�lict, con�lict resolution, and con�lict management?
Does the corporation pay attention to its impact on the natural environment? Do managers encourage employees to behave responsibly toward the environment? Does the corporation take steps to reduce its carbon footprint and recycle waste? If so, how? If not, how do you know? Conversely, is the corporation in con�lict with sound environmental management principles? Does it resist reducing waste? Does it challenge criticism to improve? What evidence supports your claim?
Does the corporation accept appropriate government regulation and question overregulation? Conversely, is the corporation in con�lict with regulatory entities, involved in lawsuits, or lobbying for exceptions? How can you tell? Explain your �indings.
Suppliers and customers
Does the corporation have long and sustained relationships with suppliers and customers? Does it see suppliers and customers as partners? Does it respond to needs and requests? How do you know? Conversely, does the corporation constantly change suppliers? Is it in con�lict with its customers over quality issues, including service quality? Support your �indings.
Do corporate documents—such as a vision, strategy, or mission statement—re�lect a broader set of corporate stakeholders? Do such documents mention or otherwise include employees, customers, the community, the environment, and government? Share the evidence supporting your �indings.
Conversely, does the corporation focus primarily on creating value for shareholders? Explain your reasoning.
Does the corporation see change as incremental and ongoing? What steps does it take to continually improve quality, increase employee satisfaction, and embrace new technology?
Conversely, does the corporation undergo change processes in order to “get it right” and then leave it alone? What evidence supports your conclusions?
Chapter Summary The beginning of this chapter introduced two closely related concepts as the foundation for this book. The �irst concept, corporate social responsibility, represents an important lens through which to view business behaviors. The second concept, corporate sustainability, includes all of the concepts associated with CSR and adds a more strategic and environmental element to the mix. Sustainability typically incorporates many CSR principles and can be measured by the triple bottom line and better understood through the lens of complexity and general systems theory.
Chapter 2 introduces the concept of stakeholders, or all of the people and organizations that affect and are affected by operations. Stakeholders are not just shareholders or owners, but include the employees, the environment, the government, the social community, future generations, suppliers, end users, and others. Chapter 3 looks inside the corporation and examines employees, suppliers, and investors as speci�ic stakeholders with unique drivers and interests. Chapter 4 expands the analysis of people as stakeholders and examines the role of local and global communities. Chapter 5 discusses the corporation as a steward of ecological resources in order to help them last longer and bene�it more people over time. Chapter 6 examines the corporation as a force for reversing harm done to the planet. Chapter 7 examines socially responsible corporate behavior as a complement to, or a substitute for, some governmental functions. It also covers how to individually enact CSR and sustainability. Chapter 8 examines greenwashing—a term that suggests a �irm is pretending to be responsible or sustainable but is actually using one positive or seemingly positive behavior to cover up more negative or harmful ones. In contrast, we look at best practices worth emulating. Chapter 9 describes speci�ic reporting standards, because once leaders make responsible and sustainable choices, reporting them creates a road map that others can follow. Finally, Chapter 10 explores the individual leadership challenges and general opportunities for building a business enterprise that is both sustainable and pro�itable. Together, these chapters describe the business landscape for CSR and sustainability and suggest speci�ic opportunities for individuals and �irms interested in advancing both topics.
1. Using the basic concepts of systems theory and complexity, how is a corporation like an ecosystem? 2. Considering the Shingo principles explored in this chapter, which are most likely to produce a sustainable corporation? Do the value of the principles
change by industry? 3. Identify the different types of waste that are present in a speci�ic business or educational institution. How could waste be eliminated? Remember to
think beyond physical waste. 4. How might your career in a CSR/sustainable company differ from the career of someone at a similar company in a previous generation? 5. What is the Brundtland de�inition of sustainable development? How does it relate to CSR? What problems are there with the de�inition? Can you �ind one
you like better? Why is it better? 6. How do sustainable corporations view the following topics differently than traditional corporations? Can you think of other categories that should be
added to the list? Time People The environment Government Suppliers and customers Their own corporation Change
To learn more about how Google changed its maternity leave policy to meet the needs of employees, visit: http://www.slate.com/articles/technology/technology/2013/01/google_people_operations_the_secrets _of_the_world_s_most_scienti�ic_human.html (http://www.slate.com/articles/technology/technology/2013/01/google_people_operations_the_secrets_of_the_world_s_most_scienti�ic_human.html)
Read more about how to improve supplier relationships: http://www.vantagepartners.com/uploadedFiles/Consulting/Research_And_Publications/Smart_Form_Content/ Publications/Articles/Maxmizing_the_Value_of_SRM.pdf (http://www.vantagepartners.com/uploadedFiles/Consulting/Research_And_Publications/Smart_Form_Content/Publications/Articles/Maxmizing_the_Value_of_SRM.pdf)
Click on each key term to see the de�inition.
complexity theory (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A general theory of systems that describes how corporations or any changeable structures adapt to their environment and cope with conditions of uncertainty.
corporate citizenship (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A term that describes the relationship between a corporate entity and its membered social environment.
corporate social responsibility (CSR) (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A �irm’s voluntary actions that are designed to improve social or environmental conditions.
Shingo model (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A model for change management organized around the 10 principles of excellent manufacturing, developed by Dr. Shigeo Shingo.
Six Sigma (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A methodology used to improve business processes by utilizing the scienti�ic method and statistical analysis to reduce error rates and waste in systems.
social investment (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Investment by businesses in people; it can take the form of training and development, fair or abovemarket wages, motivational programs, or bene�its packages.
The way in which companies manage �inancial, social, and environmental risks, obligations, and opportunities with a focus on management and improvement.
sustainable development (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Managerial behaviors that meet the needs of the present without compromising the ability of future generations to meet their own needs.
systems theory (or general systems theory) (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
The theory that no complex system can exist independent of other systems; all systems are directly or indirectly connected.
Three Ps (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Pro�it, people, and planet; another way of referring to the triple bottom line.
triple bottom line (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
The environmental, social, and �inancial costs and bene�its(or assets and liabilities) associated with corporate behavior and pro�it and loss calculations.
A corporate activity with cost but no bene�it.
2 Stakeholders and Stakeholder Analysis
After reading this chapter, you should be able to:
Explain the idea of corporate stakeholders. Analyze social and stakeholder networks. Apply a stakeholder analysis to a corporate environment and apply the steps to initiate stakeholder dialogue. Describe the signi�icance of deontological ethics and utilitarian ethics corporate collaborations.
Introduction Chapter 1 discussed the importance of building sustainable corporations. Running a socially responsible organization requires multiple people in the organization to work toward this goal. The word corps means a body of people engaged in a collective action. But who constitutes the “corps” in corporation? Achieving sustainability involves understanding the “who” of corporations—the human beings who work within them and help determine their work culture and behavior patterns.
Achieving corporate sustainability also requires identifying opportunities and problems and turning to corporate actors (and outsiders) to help address them. Most corporate systems are incredibly large and complex, and they involve a lot of people. Reasonable boundaries are needed to delineate the responsibilities of leaders, managers, and employees. We need to de�ine who is closest to an issue and who is responsible for generating solutions to problems. In order to understand the corporate system and its characteristics, one must �irst de�ine the system. Social network theory helps categorize people in and around a corporate system (the stakeholders of the �irm) and how they relate to each other and the organization.
This chapter discusses categories and types of stakeholders and social network theory. In the modern context, businesses use electronic media to create social networks of people who are connected in some way to the �irm and its employees. This chapter also explores how individuals can map more personal social networks. Networks can help people achieve goals, which makes them powerful and gives those who direct and control them power, too. With that in mind, this chapter also explores the idea of power and the difference between individual and emergent power. Understanding social networks involves understanding where power and responsibility rest—as well as where socially responsible actions can have the greatest impact. The �inal section of the chapter examines how to run a formal stakeholder analysis and create mutually bene�icial dialogue with stakeholders.
2.1 Identifying Stakeholders This chapter builds on the earlier discussion of systems theory and proposes taking a systems view of stakeholders, or the people and �irms that interact with and are affected by corporate operations. One way corporations can act in a sustainable and socially responsible way involves considering and accounting for all entities who are affected by their actions. This means managers need to understand how to identify these entities. One way to do so is to use social networks and develop appropriate communication strategies that allow corporations to both reach and learn from all parties affected by corporate behavior.
In any publicly traded corporation, the shareholders (or stockholders) are those who have paid money to own part of the company. An older view of corporations suggests that stakeholders and shareholders are the same group of people. From such a vantage point, owners are the primary ones who matter. People who hold this view believe that only those who have a �inancial interest in the company should provide input on the company’s strategy. More recently, stakeholder theory introduced the idea that shareholders represent just one of many people who have a legitimate and viable right to impact corporate strategy.
A stakeholder, then, is a person or organization that has something to gain or lose through the outcomes of corporate planning, processes, or projects; or because of the corporation’s ongoing function. Prudent leaders know how to identify stakeholders, inform them, solicit their input, learn from them, and engage them in creating an appropriate direction for the company. For example, leaders need the support of at least a subgroup of stakeholders for every leadership decision: Employees must enact new plans, customers need to buy new designs or services, regulators need to approve new construction or new product launches, activists need to approve or stop disapproving of corporate changes, and so on. Thus, all organizations need to have a clear understanding of who their stakeholders are, which stakeholder interests matter, and how to involve stakeholders in creating a common and pro�itable future. For new and perhaps unusual or controversial social responsibility and sustainability goals, leaders need a very sharp understanding of which stakeholders might agree with new ideas and which ones may not. The next sections introduce categories of stakeholders that are present in the modern corporation, including their characteristics and relationships to the corporate social network.
Market and Nonmarket Stakeholders
Two broad categories of relationships exist between companies and corporate stakeholders. The �irst is between companies and market stakeholders, a term that includes employees, stockholders/shareholders, customers, suppliers, retail wholesalers or dealers, and possibly creditors. What market stakeholders have in common relates to the role each stakeholder plays in getting a product or service to the market or to consumers. Each one has a particular kind of interest (usually �inancial) in the corporation’s well-being.
The second relationship exists between a company and nonmarket stakeholders (sometimes called “secondary stakeholders”). A nonmarket stakeholder has no direct �inancial relationship to the corporation but has indirect social, environmental, and possibly �inancial relationships with it. This category includes communities, nongovernmental organizations, the media and media organizations, business support groups such as trade associations, the government, competitors, and even the general public.
An example of how an organizational issue can involve a number of stakeholders comes from the Hyundai Motor Company. Since 2014 Hyundai has recalled millions of cars for various reasons. Engines have failed in thousands of Hyundai cars, resulting in class action lawsuits and settlements. Other factory recalls include malfunctions with braking, electrical, and suspension systems, according to the documents posted to the website of the National Highway Traf�ic Safety Administration (2015).
Who are the stakeholders in this problem? The easy answer is the owners of the company. Yet the owners reside in Korea and for some period of time may have been largely unaware of the particular problems that affect what is in reality a small percentage of Hyundai vehicles. Customers certainly represent stakeholders because they invest in the safety of a particular vehicle. Hyundai customers’ behavior may impact Hyundai employees’ behavior, since consumer reactions relate to employee options (more customers equal more work and employment, fewer customers might mean layoffs or reassignments). Customer complaints regarding problems could impact employees or lawyers on a daily basis. The issue also impacts the marketing efforts, as other employees are trying to continue to sell Hyundai cars in the United States. Furthermore, the issue impacts the media, which chooses whether to report the issue and what to report, and it also affects those within the company who deal with the problem’s public relations aspects. Of course, government regulators also become involved, as do people in the legal system who may be involved in the lawsuits that evolve from the matter. Moving outward, other Korean manufacturers become involved too, when they worry if negative press surrounding Hyundai will hurt other Korean brands. In total, there are several thousand stakeholders in this issue that pertains to a select number of cars. It thus becomes very dif�icult for corporate leaders to identity all the competing and con�licting stakeholder interests and account for them in their corporate stewardship.
Stakeholder Interests Market stakeholders primarily have �inancially motivated interests in a corporation. Employees enter into a contract with the corporation to provide time and talent in exchange for money. They want a stable relationship with appropriate compensation and a safe working environment. Stockholders offer capital to the corporation and expect an appropriate return on their investment. Consumers hope for product satisfaction. They want an appropriate service or product in exchange for cash.
Suppliers typically see the corporation as a customer. They supply certain products and services to it in exchange for a fair pro�it or payment and possibly for the opportunity to advance a company or mission they admire. Suppliers hope for a stable relationship with the corporation and expect fair and prompt payment for products or services in this business-to-business relationship. Similarly, retailers at the other end of the corporate system want to buy products or franchise services from the corporation and pass them along to a smaller portion of the marketplace. Finally, creditors in the form of banks expect business loan repayment, which is associated with collecting the loan through legal means.
Analysts �ind it more dif�icult to identify nonmarket stakeholders, because such stakeholders can be any person or entity that has an indirect relationship with the corporation. These stakeholders include communities in which the corporation may have of�ices, plants, or other properties. In the case of an extractive mining company, for example, nonmarket stakeholders include people local to the area, those downstream from any waste or disposal sites, and people who may breathe air or use water possibly polluted by the mine. Nonmarket stakeholders can even include future generations who can or cannot continue to live at or near the site. If such people choose not to or cannot speak for themselves, or if activists in another part of the world take an interest in that population, then activists in distant locations also become nonmarket stakeholders. Nonmarket stakeholders also include the people who use the product extracted from the mine or use products in which the mined resource is an ingredient. Think of the materials in most cell phones—everyone with a particular cell phone constitutes a market or nonmarket stakeholder in relation to any chemicals or precious metals that are common across the brand.
Nongovernmental organizations (NGOs) also have a stake in the corporation’s well-being because they monitor corporate actions and ensure they conform to legal and ethical standards to protect public safety. In other words, NGOs want to protect other stakeholder groups. Regarding the previous example of a mining company, NGOs interested in indigenous rights, historical preservation, or environmental safety become nonmarket stakeholders too. Similarly, media, government organizations, and regulators might be nonmarket stakeholders. Competitors are also impacted by corporate decisions such as changes in price or
ingredients, additional or removed features, or new service offerings, so they too become stakeholders. The list of stakeholders seems extensive and can be overwhelming.
As the web of stakeholders within and around a corporation grows and becomes more complex, the analysis expands from market stakeholders to nonmarket stakeholders. Corporate leaders cannot give all stakeholders the same weight. Thus, good leaders need methods to identify, weigh, engage, or disregard stakeholders. Some options for doing so are outlined in the following section.
Albrecht’s Eight Strategic Radar Screens
Karl Albrecht, Canadian futurist and coauthor of Service America: Doing Business in the New Economy, categorizes stakeholders in a more complicated typology than market and nonmarket. He places stakeholders into categories associated with various issues. For example, customers have particular issues with corporations that differ from those they have with the government. Albrecht claims that leaders draw issues from eight distinct strategic radar screens, or categories. Thoughtful leaders, according to Albrecht, should categorize issues, people, and organizations using these dimensions (Albrecht, & Zemke, 2008). These eight areas include consumer, competitor, economic, technological, social, political, legal, and geophysical environments (see Figure 2.1).
Figure 2.1: Types of market stakeholder relationships in the corporate environment
Source: Adapted from Corporate Radar: Tracking Forces That Are Shaping Your Forces That Are Shaping Your Business, by K. Albrecht, 2000, New York: American Management Association.
Consumer Environment Speci�ically, the consumer environment includes consumers with various demographics and characteristics. Consumers vary by gender, age, marital status, and income, among other factors, and these variations give them certain buying characteristics. For example, social media sites typically feature advertising that targets a younger audience. In contrast, traditional forms of media, such as newspapers and television, feature advertising that targets older consumers. These choices re�lect the corporation’s understanding that there are multiple constituents in the consumer environment and that marketing attempts try to match products and messages with consumer type.
Competitor Environment The competitor environment includes organizational competitors; analysis is required to consider their strengths and weaknesses. Competitors help determine how much market share the corporation can attain and how much the �irm can expand in a particular marketplace. If a competitor is collaborative, �irms can gain valuable insight and technology from common-ground collaborations or af�iliations in trade associations. There are many examples of competitors that de�ine a particular corporation’s strategic approach. For example, small businesses competing in a small town may change their strategy and become more customer- service oriented or offer specialty products if a large box retail competitor enters the market and changes the competitive and business landscape.
Economic Environment The economic environment includes information about cost, international trade, and other factors. The availability of investment capital, interest rates, and the willingness of loan agencies such as banks to provide capital all have a signi�icant impact on the ability of the corporation to do business. In previous generations, many businesses assumed they were isolated from global economic issues. But recent years illustrate that all nations, economies, and the corporations within them remain directly or indirectly connected through an economic web. For example, at the outset of 2016, global oil prices dropped to a 16- year low (CNBC, 2016).
While many companies bene�ited from the resulting decrease in transportation costs, others closely related to energy laid off workers in anticipation of lost business.
Technological Environment The technological environment includes the development of new technologies and software, as well as the way information �lows within corporations. For example, new processes such as cloud-based Internet services allow custom manufacturing companies and service companies to take orders, ship products, or deliver services in a dramatically reduced time frame. This speed allows some companies to be much more competitive. Companies that fail to adopt technologies that enable such customer responsiveness risk losing market share. Technology can also allow the consumer to share thoughts and reactions to products, or even play a role in customizing and producing a product.
The social environment represents a mixture of many different voices and in�luences. This category includes culture, values, beliefs, and social trends that arise among employees and the communities in which corporations reside. For example, when the gaming industry wants to open a hotel and casino on tribal land, social organizations that oppose gambling move to �ight the project. When the tobacco industry develops a vapor electronic cigarette, social organizations that advocate for health take public stands in opposition to the product and propose regulation. In both examples, there are also advocates for gaming and for vapor products that also organize. Almost all corporate activity has at least some social implication, though not all corporate activity creates organized social opposition.
Political Environment The political environment remains a critical factor for �irms to consider, and political considerations represent another type of stakeholder. Political environmental considerations include actions that can be taken by all levels of government to regulate both the import and output of a particular business. Corporations must often respond to political issues and trends at the local, state, provincial, national, and international level. There are many examples of unsuspecting corporations being thrust into the international limelight when a particular trend or issue emerges. For example, when former US secretary of state Hillary Clinton revealed in late 2015 that a small company in Colorado managed her e-mail service when she served as secretary of state, the small 24- person �irm suddenly had to respond to multiple media inquiries about its relationship with the Clinton family.
Legal Environment The legal environment describes the regulations and laws that a corporation operates within. Legal situations vary immensely from country to country, providing an extremely complex situation for companies that sell highly regulated products such as pharmaceuticals in multiple countries. A drug that is not legally registered or regulated in one country can require years of formalized testing and approvals in another.
Geophysical Environment Finally, the geophysical environment includes a relationship with the physical environment in which the corporation resides. This involves the corporation’s physical location and may deal with issues of waste, transportation, pollution, the extraction of minerals, water, land, and air. Environmental regulations initiated by governments through the legal system exhibit the interrelationship between these different kinds of issues. For example, the Rhine River �lows through the heart of Europe and for years was a dumping place for toxic waste that impacted every country downstream. An eventual multination agreement to clean up polluting practices also impacted all nations along the Rhine.
Section 2.2 introduces social network theory as another way to consider and identify key stakeholders. The method works well when distinct categories or types are hard to identify. It also helps clarify stakeholder identities and power.
2.2 Social Network Theory Each of Albrecht’s strategic radar screens to categorize stakeholders represents a point of view, actual people, or proxies who advocate for a particular perspective and behaviors from the corporation. Each is also part of the web that we call a social network. For example, when considering the geophysical or legal environment, neither the law nor the environment can speak. People represent those categories and speak about those issues. It is important to understand that an organization’s social network includes these direct and indirect voices. The social network represents a social structure consisting of interpersonal connections between individuals. These connections involve people within an organization who usually communicate with other individuals, thus creating and maintaining relationships with the people who both give and take valuable information.
Characteristics of Social Networks
Social networks have certain characteristics. First, they are emergent. This means that social networks are organic and change in response to the need for information or resources. Relationships also change over time and are thus dynamic and emergent. Social networks have patterns that are emergent. For example, suppose a celebrity is seen on a YouTube video wearing a certain pair of shoes. The video is shared virally on the web, creating an emergent demand for the shoes that was unforeseen. The purchasing pattern of those who want to buy this model of shoe is observable but not always predictable. Over time, certain parts of social networks are predictable because patterns repeat so consistently. Finally, social networks are nonlinear. People don’t always exchange information equally. If you mapped information exchanges, you would see they are more like three-dimensional nets or webs that emerge through the relationships that differ in the type and amount of exchange of goods, services, information, and goodwill.
Your friend group represents a social network. Your family represents a social network. An institution has a social network, if it consists of more than one person. The corporation is primarily a social network. All of the eight categories of people and issues described by Albrecht interrelate through different social networks. Once you understand that everyone has a social network around them, you can learn to map that network, analyze it, attempt to enter into it, or offer to exchange information with members.
An example of a social network that became a business is Butcher’s Bunches, a small company in the western United States started by the mother of a young boy who could not eat sugar. When she made sugar-free homemade jams for her son and posted the idea on Facebook, her friends and family began asking for samples. Before long, she was making a batch every day and selling enough to buy a commercial kitchen. Her Facebook following grew until she had regular orders, some from retail institutions. Today she has 10 employees but does almost no marketing, because her social network, which is the modern-day version of word of mouth, brings more business than she can handle (Butcher’s Bunches, 2013).
Social networks have become particularly visible over the past 20 years because of the emergence of media-based programs that facilitate social interaction and social network mapping. Facebook, Instagram, LinkedIn, and other such software facilitate the visualization of a social network.
Bene�its of a Social Network
In order to understand social networks, attempt to build a map of your own. Several online tools can help you do this, but one of the better (and free) software products is called E-Net. A simpler but effective way to visually see and effectively map your social networks involves taking a piece of paper and writing your name in the middle of it. Because people in your social network exchange information and/or resources with you, the next step is to identify and list people who have recently given you an important piece of information or resource. Write those names down and for each one, draw a line between your name and the names of the other people. It is rare to have all your contacts equally important and close to you. You can group together the people who give you the most information and resources. Next, to the extent that you can, begin connecting people in your network who know each other by drawing lines between them. Connect those people until the web is a fairly accurate representation of how you get your information and resources.
Whether you draw your social network or create it on a website, you should end up with something that reveals its size and extent. As you think through this, you may see that social networks provide social support. This means that the network empathizes with you, advises you, and may physically support you in times of need. The network, or certain people within it, represents a place where you can complain, gain sympathy, and receive emotional aid. Social support also provides information. All of us need important information about how to get things done. Imagine your �irst day at work, for example. How did you get information about where to get supplies, park your car, or eat lunch? Usually, using your social network or adding new people to it helps you thrive in a new environment. Additionally, social networks provide sense-making information, which helps you interpret the world. The people and organizations within the network help you see what is important and where to go for assistance. Finally, a social network provides access to resources. It can help you get in touch with people who have something that you need, whether it be a loan, a tool for a task, or help �inding a job.
Quality of Social Networks
People often assume the strongest social networks consist of people who are most like them. But that is not always the case. People who are the same age, sex, or race or who have the same political views are not always as interesting to us as people who are different. People who are too similar to us cannot always provide new information that can lead to a breakthrough, an innovation, or access to a new set of resources. In social network analysis, this phenomenon maps to the idea of strong versus weak ties (Granovetter, 1983).
Strong ties refer to our connections with the people who are closest to us, who give us the most information, and to whom we talk most frequently. Weak ties refer to people and connections who know little about us but whom we can access because of someone else in our network (the phrase “friend of a friend” typically refers to a weak tie). Interestingly, research shows that weak ties are particularly important to moving a person or agenda forward. For example, research by Granovetter (1983) indicates that weak ties provide novel information, such as job opportunities. Strong ties most often tell you something you already know. Many people make the mistake of building only strong ties, depriving themselves of important information and opportunities.
These concepts of social networks, network mapping, and types of ties all directly relate to sustainability and CSR because they enable you to know yourself, your company, and your competitors from a social network perspective. Once you map your position and that of others, you can then craft plans or make strategic choices to include the right stakeholders who will help you achieve your goals in your social network. More importantly, you can take an issue or idea and attempt to map out the network of possible supporters, detractors, and bystanders. Once you create such maps, you may also become strategic about when and where you provide information, since you know with con�idence how information travels through various networks. You can take this concept from the individual level to the organizational level and map connections between stakeholder groups as well. In order to do so, you need to be able to move past identifying networks and understand how much power individuals, organizations, and networks actually have. Next, we discuss how to conceptualize and measure different kinds of individual and organizational power.
Individual Power in Organizations
A common model of individual power comes from French and Raven (1959), who described �ive types of organizational power—legitimate, reward, expert, referent, and coercive. These types of power commonly exist in all organizations and provide another lens by which to analyze a social network. After you collect the names of entities in an issue network, for example, you can then note what kind and how much power each entity may have vis-à-vis the issue in question. Social network mapping becomes much more than a list of names and connections once you can attach information about power that essentially acts as a modi�ier or multiplier for certain names and entities. Some people in your network will have one kind of power and not another. Others will have an abundance of several kinds of power. The main job of any network analyst is to identify and categorize the people and power data in order to make better strategic plans. Such mapping can help when leaders wish to suggest a strategic change, but it can also be useful when introducing new socially responsible or sustainable ideas.
Legitimate Power The �irst source is legitimate power. This power comes from the belief that a person within an organization has the formal right to make decisions, command others, and gain compliance from them. This formal right can come from a job title or organizational authority. Presidents and CEOs often have legitimate power because of their title and the formal decision-making role their title signi�ies.
Reward Power The second kind of power is reward power. This type of power assumes the leader has the ability to reward another person’s performance. When a manager has this power, he or she can gain long-term compliance by giving out short-term rewards that might include praise, money, status, promotions, or other bene�its.
Expert Power The third type of power is expert power. This power derives from a person’s superior judgment, skill, or knowledge. It tends to be earned over time and accrue due to accomplishments. For example, in a technology-based work environment, the experts who purchase, install, and maintain computer systems have exceptional power to control and in�luence work �low.
Referent Power The fourth kind of power is referent power. It comes from the social connections a person may have that can protect them from harm or provide them with in�luence. If you know someone who is important, you have referent power. When people “name-drop,” they are referring to a powerful person and attempting to share in that person’s referent power. You might not know the president of the university, but suppose you know a professor and that professor knows the president. The professor’s access to a person with legitimate power gives him or her referent power.
Coercive Power The �ifth and �inal kind of power is coercive power, which stems from the belief that a leader or person could punish you if you don’t comply with what he or she requests. The ability to punish also creates resentment, so coercive power—which involves threats—can rarely be used repeatedly. For example, your manager likely has the power to �ile disciplinary action if you are late to work.
2.3 Stakeholder Analysis and Dialogue All models of power assume that people and entities have connections with others in a social network. Power emerges in the social network circuits without revealing its source. In order to move ideas through the network, analysts need to know which stakeholders in the system to reach, communicate with, persuade, and gain information from. This leads to the issue of more speci�ic stakeholder analysis.
Inexperienced managers commonly make the mistake of thinking they can easily identify all of the stakeholders around a particular issue. Just as with any dynamic system, understanding those who are in�luenced by the system is highly problematic. It requires a systematic thought process and includes an element of randomness. The process of identifying the connections, networks, and power of the connections between a �irm and its social network is called stakeholder analysis.
Stakeholder analysis identi�ies those vested in a business issue. It helps people understand who is in the network of in�luence or power, as well as who is in the network of interest. Any network of in�luence is usually smaller than the network of interest. There are generally more people interested in an issue than people who can in�luence an issue. Knowing who is in the network of interest is extremely important because it allows us to gauge the potential risks and bene�its of a particular action. When we add stakeholder in�luence to a map of our social network, we can identify people who should be informed and involved in different phases of a project.
Steps in Stakeholder Analysis
Conducting a stakeholder analysis involves the following steps:
1. Identify: This step starts with making a list of who the stakeholders are. What are their interests and commitments? What risks do each of them pose? 2. Prioritize: This step attempts to label and quantify power, as well as note that power differs by issue. Who is most affected? Who has power and
in�luence? Who feels urgency? 3. Map: This step involves considering the known relationships between and among actors by exploring the relationships between stakeholders. Some
elements of relationships are random or private, but it is good practice to attempt to map all known relationships. 4. Engage: Brainstorm how stakeholders can be engaged. What media should we use? This requires some research about different types of stakeholders
and their preferences and biases. 5. Monitor and review: Identify how the stakeholder relationships are changing. How can we continue to communicate? What new issues are surfacing?
This step requires monitoring and remapping as issues move from launch phase to execution or closure.
Each of these steps will be discussed in more detail in the following sections.
Identify and Map Stakeholders The best stakeholder analysis processes are highly visual. Analysis begins by developing a list of members in the community of stakeholders. Once the list is complete, assign characteristics to each one of the stakeholders. For example, it is common to assign data about how much money, power, or in�luence any one person or group exhibits in relation to a particular issue. That type of weighting illuminates the high-priority stakeholders—they may not be the people or groups you expect. The list of potential stakeholders, even on a small issue, becomes very long. But analysts have to make priority-based decisions regarding who to engage in conversation.
To assist with stakeholder analysis, there are a number of online mapping tools that allow users to sort stakeholders into categories. Once the stakeholders have been listed, building a map of them is important for visualizing the network of in�luence and power that will facilitate moving forward with a particular issue. There are numerous ways to visualize a web of stakeholders for an issue. Visualization allows multiple people to come to a common understanding of different stakeholders’ relationships. Bourne (2015) advocates a type of visualization called Stakeholder Circle, in which some stakeholders remain very close to the center or central part of the issue. Others belong further away. However, some who are far away also have the power to end the project. Some stakeholders who are very close to the center have the power to in�luence the project but do not control suf�icient resources to terminate it. Good managers understand these types of power issues and consider them when they make decisions regarding how to lead and manage or otherwise engage relevant people.
Prioritize Stakeholders Once the list of stakeholders is made, it is important to rank them in priority order. Consider the following:
Impact: Who will be most impacted by the decision? Power: Who has the power to in�luence the decision? Need: Who needs or wants to be involved in the discussion? Support: Who can offer the support required to be successful?
Figure 2.2 re�lects a stakeholder categorization model proposed by Mitchell, Agle, and Wood (1997), who classify stakeholders based on their power to in�luence the decision or issue and on the interest and urgency of the stakeholder’s claim on the issue or decision. This type of analysis allows a manager who is operating with limited resources to assess which types of stakeholders to track and which types to potentially ignore or pay less attention to. Also, since this type of analysis includes advice on how to engage or interact with different stakeholders, this model helps move from the identi�ication and mapping steps toward the prioritizing and engaging steps.
Figure 2.2: Stakeholder classi�ication model
Source: Figure (https://mosaicprojects.wordpress.com/2015/04/04/for-stakeholders-2×2-is-not- enough/) by Lynda Bourne / CC BY (http://creativecommons.org/licenses/by/3.0/)
Leaders often manage issues under signi�icant resource constraints, as no �irm has unlimited �inancial and human resources. In addition, most businesses and leaders face more issues than a single person—or even a single team—can manage. Therefore, leaders must choose which issues to address. To help them prioritize, urgency or issue importance comes into play. General Dwight D. Eisenhower, the head of Allied forces in World War II, used a particular model known as the urgent versus important decision model to sort issues. He continued to use this tool as a decision-making and time-management model when he became president of the United States (see Figure 2.3).
Figure 2.3: Urgent versus Important Decision Model
Source: Adapted from The Decision Book: 50 Models for Strategic Thinking by Mikael Krogerus and Roman Tschäppeler, 2012.
The model suggests sorting issues around importance and urgency. Important things that are not urgent can be done later, or be scheduled and dealt with at the appropriate time. Unimportant things that are not urgent can be delegated to someone else or even ignored. Important things that are urgent must take the �irst priority. The skill lies in deciding what and who is important or urgent—such decisions may require collaboration within an organization and good communication. Communicating within social networks dominates the �inal portion of this chapter.
Stakeholder Communication and Engagement There are four common approaches for engaging with stakeholders. The �irst is an inactive approach, which means taking no action. In studying corporate citizenship, Professor Sandra Waddock (2006) researched various ways corporations engage stakeholders. Surprisingly, data indicates that most �irms do not deal with stakeholders in any systematic fashion. Research suggests that most companies wrongly believe that inaction will help the issue go away. Or managers
An expert offers her tips for engaging with stakeholders and improving a company’s connection to the community. Do you think reaching out to the community is a good idea, even if it does not immediately improve the pro�itability of a business?
Tips for Corporate Social Responsibility
Corporate Social Responsibility
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believe that giving an issue attention by dealing with it openly serves to worsen the problem (Waddock, 2006). In other words, while an issue might be important and urgent for one person or group, the same issue may be unimportant and not urgent to another. Usually these differences of perception lead to internal dif�iculties and external implications that only exacerbate stakeholder problems (Waddock, 2006).
A second common approach to corporate issues involves becoming reactive, or taking action after an issue arises. News outlets often report stories of companies that react to an organizational issue only after the fact by defending themselves in court against liability or by campaigning for public trust. Corporate actors caught in the reactive paradigm tend to listen to stakeholders only after being criticized in the media or some other form of public crisis triggers a belated reaction.
The third type of approach is to be proactive. Proactive companies represent the opposite of both prior reactions; such �irms try to anticipate stakeholder concerns and needs. These kinds of �irms use environmental scanning practices, databases, and skilled public outreach to identify stakeholders’ concerns and engage them around a particular issue. Such �irms also engage in the kind of stakeholder mapping discussed earlier, which helps managers anticipate how changes in current events, power dynamics, funding, and market forces might impact the �irm.
Monitor and Review Stakeholders According to Waddock (2006), the best strategy for engagement is the interactive approach. This means that companies actively engage with stakeholders in an ongoing relationship. Ways to achieve this kind of relationship include hosting stakeholders in corporate meetings, appointing them to governing boards, creating industry associations together, and otherwise nurturing an ongoing relationship (Waddock, 2006). Good communication within a �irm is not enough to make an organization more responsible and sustainable; enacting good communication practices outside of the �irm is equally important. In the next section, we describe how to engage stakeholders using dialogue.
Deciding and enforcing the appropriate type and scope of communication within a corporation remains an age-old problem. Almost every culture, society, and corporation has its own norms for dealing with complex problems involving stakeholders. Different norms and customs related to dialogue (verbal and nonverbal) reveal how each community or subculture develops an agreed-upon, culturally endorsed, and near communal way of facing problems, knowing evidence, and determining the best course of action.
The power of dialogue involves more than sharing information already known to individuals; it is also about combining that information and using it to view problems and solutions in a different way. It means using the information—and even the act of convening people—to develop new and creative approaches. Ideally, dialogue handled and facilitated well leads to new, more creative, and better approaches than what any one person could develop alone (Hammond & Sanders, 2003). Dialogue is thus one major tool for solving complex problems, especially problems bigger than one individual.
The following case study illustrates the power of dialogue in stakeholder relationships and shows how keeping stakeholders informed—even when there is bad news—can have long-term positive effects on a company.
CSR and Sustainability in Action: The Environmental Problem of Nike Air
When Tom Hartge was product manager in the running shoe division of Nike Incorporated, he focused the bulk of his early career on perfecting the Nike Air product—the lightweight plastic air pocket embedded in the heel of a running shoe. He learned that a German environmental group was singling out all companies that used an environmentally harmful chemical called sulfur hexa�luoride, or SF6. This was a problem for Hartge, because the air pocket in the Nike running shoes contained air and SF6. The German group targeted Nike for using SF6 and accused it of contributing to pollution. Trying a new stakeholder approach, Nike chose to work side by side with all stakeholders to �ind a solution.
It took Nike years and millions of dollars to overcome the SF6 problem. The delay came from the fact that SF6 kept shoes high performing and lightweight, so the design team did not want to compromise shoe performance (or economic bene�its from shoes sales) by changing components. However, Nike showed it was open to dialogue and learning from a variety of stakeholders, and the company sought out activist groups for advice. During the research and development period, the team of stakeholders continued to work together despite many potentially derailing disagreements. Nike was able to maintain good relations with the stakeholder groups, in part because it kept dialogue open about efforts, procedures, and reasons for the delays. The stakeholders could see the effort, if not the results. Because of the trust established during the process, the stakeholders worked together and did not create bad press for Nike when deadlines passed; relations remained strong during the multiyear process.
In the end, Nike was able to develop a new technology that uses nitrogen instead of SF6. The solution involved a new technique called thermoforming. Thermoforming produced a tighter seal than the previous technique, so Nike could make a pocket that could hold up across a shoe’s entire surface (and be good for the environment). The result was a new product, the Air Max 360, a light shoe with higher performance. The new technology led to increased sales and manufacturing savings.
This case study illustrates the power of stakeholders to drive a sustainability and CSR agenda that can be good for the environment, customers, and companies. In addition to supporting the value of stakeholder dialogue, it illustrates how sustainability and CSR pressures can drive performance increases and �inancial bene�its. Source: From “Nike Goes for the Green,” by S. Holmes, 2006 (http://www.bloomberg.com/bw/stories/2006-09-24/nike-goes-for-the-green (http://www.bloomberg.com/bw/stories/2006- 09-24/nike-goes-for-the-green) ).
Dialogue forces managers to choose to whom they will listen and to whom they will not. Whenever a dialogue occurs, some voices, parts of the social network, or members of stakeholder group are invited into the room, while others are excluded (either intentionally or unintentionally). Thus, in setting up a formal dialogue, the leader or manager must make choices. Earlier we described stakeholder relationships and argued that the best corporations have an interactive relationship with stakeholders. But all relationships require resources, time, energy, and commitment to resolving issues. Deciding which issues to face and which to put aside is a critical decision for all managers.
Stakeholder analysis is an external process of identifying who should be involved in the dialogue process. When managers and leaders choose which stakeholders to include in the dialogue, they make a series of dif�icult decisions. They have to select which issues to address. They must decide who will be involved in the dialogue related to that issue. They must decide who is to be included in the discussion, what information will be brought to the table, and who will be excluded. During the dialogue process, they must decide whose voice (of those present) will be given weight and whose voice might be ignored or not heard. Once managers reach the implementation phase, they have to decide who will be responsible for executing collective decision. This means assigning action steps to different groups. Finally, leaders and managers have to decide who will be given resources to implement solutions, and how much to ask for or allow. This is particularly critical, as the allocation of resources often determines which parts of a solution succeed and which will not.
The following list summarizes the types of questions leaders typically ask when they attempt to bring stakeholders together. As you consider using dialogue to work toward a more sustainable or socially responsible future, you can ask these questions (or suggest your colleagues ask them):
Issue identi�ication: What issues and concerns do we address? Inclusion: Who is included in the dialogue about the organization’s direction? Who is excluded? Weight: Whose voice is given weight in the dialogue, and whose voice is not heard? Implementation: Who is responsible for executing the �inal decisions? Who is excluded? Resources: Who is given access to resources to implement solutions or take action? Who is not? Bene�it: Who bene�its, and who does not? Why? Is this what we want, or is this happening as a side effect of another choice?
Dialogue Versus Dialectic Dialogue is such an important tool that it is worth better understanding when and why it works, as well as when and why it may not. True dialogic communication does not assume a right or wrong answer (although it can be dif�icult to remember this during conversations in which you have strong opinions). Rather, it refers to a process where parties attempt to identify the best answer for the time and context with the information available.
What is the difference between having dialogue and being dialectic? Dialectic communication is used for persuasion. It is used by professors in lectures, politicians in debates, marketers in their appeal to purchase, and lawyers in courts or public meetings. It is mandated in some civic meetings where participants use formal and mandated rules for speaking, voting, and recording minutes. Dialectic communication processes assume that two people arguing opposing points will create truth somewhere in the middle. A prosecutor and a defense or an advocate and a detractor are dialectic roles that pit conservative against liberal, left against right, or one party against another. In dialectic communication, there are winners and losers. But in dialogic communication, participants are creative. They �ind common ground and then work to discover a solution that is mutually bene�icial.
Dialogue that is undertaken in a formal and nondialectic way is often called a peace-making, innovation, strategic-planning, or community-engagement process. All of these labels represent forms of dialogue that engage stakeholders in communal knowledge and action.
Research suggests that successful dialogue must have the following preconditions. First, the group must be diverse along multiple dimensions so that information re�lects the complexity of the problem and different views are considered. Diversity drives dialogue because it requires groups to �ind common ground before demanding resources or imposing solutions. Diversity must be cultivated and can include cultural, organizational, social, and educational dimensions. Ideally, the group must include people who represent every subculture of key stakeholders, as a microcosm of the organization. The group must also include voices from each of the organization’s strategic perspectives and levels, so all parts of the organization are represented. Administration, accounting, human resources, line workers, sales, and so on must all come to the table. In addition, to be successful, the dialogue must include individuals who are willing to be re�lective and let go of strong cultural identities in order to form group cohesion. The group must also have a signi�icant content issue on which to work, one that is compelling and engaging enough to be worth the time and effort it takes to gather and work. Finally, all parties in the dialogue need suf�icient time to form a new group identity, so that the solution can stem from the new relationships rather than from previous and less diverse thinking (Hammond, Cissna, & Anderson, 2003).
Many people seek to avoid this kind of complex and intimate problem solving, choosing a more hierarchical and dialectic method instead. To promote dialogue, avoid the following behaviors:
Equivocal language: Using jargon and language others do not understand Information control/withholding: Keeping secrets Excessive self-disclosure: Flooding the room with emotional needs and unnecessary information Inadequate self-disclosure: Shocking people with details or remaining cryptic Process imposition: Requiring others to unnecessarily follow your communication practices Process equivocation: Failing to clarify the dialogue process Recontextualizing: Changing subjects so it is impossible to focus on the key issue
The National Park Service uses a particular form of dialogue to plan all park updates and changes, and it is worth studying.
CSR and Sustainability in Action: Dialogue at the National Park Service
In 1994 the National Park Service (NPS) conducted an intentional dialogue for parties to focus on reducing the amount of time it takes to plan national parks. The �irst step involved creating a data �ile of the stakeholders, who were identi�ied using a stakeholder analysis tool. The dialogue included previous park organizers and park superintendents. Those not directly affected by the park-planning process were also included so the NPS could consider a diversity of voices and viewpoints. These additional and more indirect stakeholders included public of�icials and citizens from nearby communities. It also included several people who are passionate visitors to national parks.
Once relevant stakeholders were identi�ied, the group came together and built a common account of history. The group examined how parks had been planned in the past, what worked, and what did not. Each group member had a voice, and the inclusive process ensured that all parties contributed. Secondly, group members created a list of issues within the NPS, the U.S. Department of Agriculture, and the federal government. In this part of the dialogue, they expanded the problem and perspective, and they examined the regulatory environment facing the national parks. The team also considered the relationship between the parks and the federal government.
In the next section of the dialogue, group members looked at which social groups used the parks and which provided political and economic support. Finally, they considered what would be an ideal future park-planning process. The group set standards for what it wanted to accomplish through park planning and listed steps toward the ideal future. Some steps had not existed in the park-planning process before the group formed.
The NPS example shows how parties in conversation can discover things as a collective that no individual could discover on his or her own. Indeed, the ultimate objective of dialogue is transcendence or innovation. Transcendence refers to the ability to �ind new ways of doing things. You may come to a conversation with your way in mind, and another person may come to the same conversation with his or her way; but dialogue, when managed properly, provides an opportunity for parties to �ind a third way.
Apply Your Knowledge: Stakeholder Analysis and Dialogue Planning
Issue identi�ication: Identify a key issue facing an organization. It might be an issue of environmental or social impact. Describe the issue from a social and organizational perspective.
Stakeholder analysis: List the market and nonmarket stakeholders in the organization. Create a stakeholder analysis using the stakeholder method proposed in this chapter.
Design a dialogue: Create an invitation list for a dialogue. Who should be involved in an ongoing discussion about the issue? Who should be excluded, and why?
2.4 Stakeholder Engagement and Ethics Previous discussions reveal that when leaders and stakeholders gather to solve problems using dialogue, the �irst key issue revolves around who should be part of the discussion. However, once the group is assembled and key questions and assumptions are made using the dialogue process, there remains one area to address: Leaders need to be aware of their ethical orientation, problem-solving, and dialogic preferences. They also need to be transparent with others about these facts. With that in mind, this section will discuss the role of ethics in promoting CSR.
Business Ethics and CSR
Most professional standards or codes of conduct in business stem from what are called normative ethics. These describe a standard of behavior that is immovable and promotes a certain standard, without deviation. For example, speed limit signs provide a speci�ic number that de�ines the boundary between legal speeds and illegal speeds. Once passed into law, a speed limit represents a normative statement—an immovable standard about safe driving speeds. Similarly, normative ethics dominate business accounting practices, risk management, operations, human resources, and many other aspects of corporate organizational life. Government regulations often set normative standards for environmental impacts or tax regulations. Such regulations essentially attempt to de�ine and prescribe the boundaries of “normal” behavior.
For many years, business students studied ethics from a normative perspective. They memorized codes of conduct and regulations. What was legal was considered ethical. Students were not required to think about going beyond “normal” to proactive ethical positions. With the emergence of corporate social responsibility, however, came the concomitant idea that not all ethical issues can be anticipated. For example, once managers consider more than shareholders who typically want high returns, they begin to consider less predictable voices—such as villagers who resist local development or families who demand improved services. Leaders, managers, and employees should be empowered to take proactive anticipatory positions on ethical matters. This fact often puts corporate citizens in a bind because they have a duty to a corporate community, a social community, and an environmental community. The approach to sustainability and CSR advocated here suggests that leaders must �ind ways to comply with norms to ful�ill their duties and create the greatest good for the greatest number of people. Essentially, two major ethical traditions dominate the options for any individual: deontological and utilitarian.
Deontological Ethics Leaders who operate under deontological ethics tend to focus on roles and responsibilities. A deontological ethic refers to a position that evaluates morality based on the action’s adherence to a rule. Such leaders want to follow the “right way” and care deeply about what norms are already in place. They ask who has responsibility to the corporation, broader society, the political system, and the environment. It is also likely that any duty a corporate of�icer has to these entities will at some point con�lict with duties he or she may feel to other entities. The situation becomes more complicated when the demands of various stakeholders come into play.
In addition to a focus on duties, the deontological approach prescribes a normative (or single) approach to communicating between stakeholders, one that is dialectic. It is conceivable, and perhaps even common, for a deontological mind-set to result in a strong centralized approach that keeps corporate decisions within a particular group and communicates dialectically to other stakeholders about duties and responsibilities. At its extreme, this kind of organization resembles an old-style military hierarchy, wherein information is rationed on a need-to-know basis and resources are guarded.
Deontology can also be expressed in the opposite manner, wherein a leader shares openly with a variety of stakeholders. He or she will listen to their input and make democratic decisions using a dialogic process. In this kind of organization, a deontologically minded leader generally privileges ongoing work processes over outcomes or deliverables and supports stakeholders’ extensive involvement.
While the deontological mind-set offers one option for driving engagement with stakeholders, the other option is a utilitarian mind-set.
Utilitarian Ethics When a mind-set of utilitarian ethics dominates, the focus moves from duty and toward creating the best outcome for the most people. A utilitarian ethic essentially evaluates the rightness or wrongness of an action by considering its consequences. Utilitarian ethics suggest that the ultimate goal should be to enable the greatest good for the greatest number of people. If the greatest number of people dwells inside the stakeholder network, then satisfying those needs is the most ethical course of action.
The dialogical approach to building a sustainable corporation is most common among those who support utilitarian ethics because in order to do the greatest good for the greatest number of people, one needs to understand the needs of others. Utilitarian leaders tend to argue that “being heard” is critical to good decision making. At the core of the utilitarian dialogic approach is inclusion, as more voices have more potential to identify the solution that will serve the most people. As you might imagine, this inclusion requires strong meeting-management skills, as dialogue tends to become more complex as the number of participants rises.
Put in simple terms, in the deontological tradition of ethical decision making, one would ask, “Where is the highest duty?” In the utilitarian system, one would ask, “Who receives the greatest good?” As you consider how to lead stakeholder discussions, you will need to consider where you stand along the deontological– utilitarian continuum. Or you need to �ind where your leader stands, and you may want to speak up for a different viewpoint to ensure that diverse opinions emerge. Understanding the mind-set and ethical bias of different stakeholders allows people to run better meetings and �ind more ideal solutions.
A basic discussion of ethical traditions introduces the value of understanding what point of view and mind-set a stakeholder has adopted. Understanding how an ethical position informs action helps leaders conduct a more inclusive and deliberate dialogue. In addition, many people justify and motivate CSR actions and sustainability choices on ethical grounds; others justify and motivate them using economic arguments. No leader can engage in discussions about CSR options without considering how his or her own ethics and the ethical mind-sets of every stakeholder do or do not overlap. Thus, the discussion of ethical traditions is designed to help you think through your own mind-set and provide questions you can ask others—particularly when discussing CSR and sustainability.
Chapter Summary This chapter began by de�ining corporate stakeholders and looked at the many complicated levels of power and in�luence various stakeholders have in and around an organization. The chapter described the difference between a shareholder and a stakeholder and examined market and nonmarket stakeholders. It also examined the stakeholder networks as a form of social networks and proposed dialogue as a communication practice for managing many of the complex problems that arise in a corporation. The �inal section examined normative ethics, duty-based or deontological ethics, and utilitarian ethics and argued that future business leaders who want to be socially responsible must anticipate ethical issues if they are to build a sustainable corporation.
1. Make a list of all the market and nonmarket stakeholders in a particular business or educational institution. What types of power does each stakeholder have? How can a stakeholder’s power be used to in�luence the organization’s decisions?
2. Draw a picture of your current social network then discuss how it changes and evolves. What forces cause your network to expand and contract? Who are your strong and weak ties? How can a strong tie become weak and a weak tie become strong?
3. What kind of power do you hold as a student? What kind of power does the instructor hold? What kind of power does a company’s information technology director hold? Or its CEO?
4. Identify times when duty-based ethics (or deontology) con�licts with utilitarian ethics (or the greatest good for the greatest number of people). With which ethical view do you most agree? Why?
5. Discuss whether dialogue is more dif�icult than dialectic communication. What are the advantages of dialogue in complex systems?
Social network mapping software includes:
Hashkat, aka “#k@”: http://hashkat.org/ (http://hashkat.org/)
AllegroGraph: http://allegrograph.com/allegrograph/?gclid=Cj0KEQjwj7q6BRDcxfG4pNTQ2NoBEiQAzUpuWxT9eT7D06Tlmi8_5HaDTWIMke- DDxIWjRRKf6deyrYaApr-8P8HAQ (http://allegrograph.com/allegrograph/?gclid=Cj0KEQjwj7q6BRDcxfG4pNTQ2NoBEiQAzUpuWxT9eT7D06Tlmi8_5HaDTWIMke- DDxIWjRRKf6deyrYaApr-8P8HAQ)
Automap: http://www.casos.cs.cmu.edu/projects/automap/ (http://www.casos.cs.cmu.edu/projects/automap/)
EgoNet: https://sourceforge.net/projects/egonet/ (https://sourceforge.net/projects/egonet/)
NetMiner 4.2.2: http://www.netminer.com/main/main-read.do (http://www.netminer.com/main/main-read.do)
NetworkX: https://networkx.github.io/ (https://networkx.github.io/)
Social Network Visualizer: http://socnetv.sourceforge.net/ (http://socnetv.sourceforge.net/)
Learn more about utilitarianism: http://www.utilitarianism.com/utilitarianism.html (http://www.utilitarianism.com/utilitarianism.html)
Learn more about deontological ethics: http://www.philosophybasics.com/branch_deontology.html (http://www.philosophybasics.com/branch_deontology.html)
Click on each key term to see the de�inition.
coercive power (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Power that comes from the ability to create fear, punish, or remove resources.
deontological ethics (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
The ethics of duty usually associated with professional norms.
expert power (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Power that comes with a person’s superior judgment, skill, or knowledge.
legitimate power (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Formal authority granted to people in organizations based on their position or role.
market stakeholders (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Those who have a direct �inancial interest in the corporation, such as a shareholder or an employee.
nonmarket stakeholders (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Those who lack a direct �inancial interest in the corporation but who might be impacted by corporate actions.
normative ethics (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A standard of behavior that is immovable and promotes a certain ideal without deviation.
referent power (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Power that comes from having people with in�luence in one’s social network.
reward power (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Power that comes from the ability to give resources.
social network (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
The web of social connections between individuals and between individuals and the corporation.
shareholders (or stockholders) (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Those who have paid money to have partial ownership of a company.
stakeholder analysis (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A process that identi�ies the vested interests in a given business issue.
People and �irms with a vested interest in a corporation.
stakeholder theory (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
The operational concept that there are many types of people who are vested in the corporation, and in many ways.
utilitarian ethics (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A code that stresses the importance of doing the greatest good for the greatest number of people.
3 Looking Inward: Employees, Suppliers, Investors
After reading this chapter, you should be able to:
Understand the three ways to become “vested” in a company and differentiate between the three kinds of stakeholders. Analyze employee types, strategies to motivate employees, and employees’ rights as described by international agreement and U.S. law. Describe the various kinds of suppliers, ways to motivate suppliers, and suppliers’ rights. Summarize the types of investors, ways to motivate investors, and the rights of shareholders and owners. Summarize shareholder activism.
Introduction Chapters 1 and 2 introduced the idea of stakeholders and stakeholder analysis and showed how corporate social responsibility can originate from or spread through social networks. This chapter examines stakeholders who are internal to the corporation. Speci�ically, it focuses on three different kinds of stakeholders: employees, suppliers, and owners/market stockholders. To re�lect the complex nature of business, the chapter also addresses how the lines blur between different types of stakeholders who are �inancially or emotionally connected to the modern corporation. For example, some employees are also owners, and some owners are also suppliers. These arrangements can create complex governing problems for the corporation. Such complexity increases when owners and employees have certain legal rights. To illustrate how CSR includes—and sometimes begins with—taking care of internal stakeholders, the chapter examines how various regulations and laws currently protect both owners and employees. In order to deal with the complexities of corporate governance and the desire for many corporate stakeholders to create more than just wealth, we also examine different corporate offerings. Speci�ically, we look at programs such as employee stock ownership plans that enable employee-owned �irms, and we investigate bene�it corporations as a new form of corporation. These two options alter the corporate governance scene and the way that �irms relate to communities and stakeholders. Taken together, the information in the chapter begins to de�ine the current context for CSR and sustainability efforts and reveals key CSR and sustainability opportunities for leaders and managers.
3.1 Vesting and Corporate Ownership What does it mean to “vest” in a company or to “have a vested interest”? A vested interest refers to having personal stake or involvement in a �irm. Often, having a personal stake means being or becoming an owner or part owner. Of course, anyone working with or for a �irm can have a vested interest if the person has a chance to bene�it when the �irm succeeds. For example, employees and suppliers can have a vested interest in a company because they receive payment or another bene�it from the company. However, to be vested in a �irm has an additional meaning that is typically associated with purchasing stock. Most large companies are publicly traded—meaning that small pieces of company ownership in the form of stock can be exchanged in return for cash. In such cases the many and varied individuals and institutions that own shares in the company actually own the company together.
Before the rise in new employee incentives related to stock ownership, there were only two kinds of stakeholders vested in corporations: �inancial investors and owners. Now, in the age of globalization and with an increase in �irms where managers reward employees with a mixture of wages plus the promise of staged future ownership with stock options, there are at least three categories of people vested in corporations: employees, owners/investors, and suppliers (see Figure 3.1).
Figure 3.1: Three types of corporate ownership
Such ownership distinctions matter in a book on sustainability and CSR for several reasons. First, by de�inition, people vested in a �irm tend to care more deeply about how it behaves. Secondly, people who are vested in a �irm become partially responsible (legally and morally) for how it behaves. Some people (typically employees) have a vested interest in the �irm even if they do not technically own the �irm outright or have stock or stock options. Finally, people vested in a �irm also comprise key stakeholders (see Chapter 2 (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/sec2.1#h2market) ), so considering their voice is part of running a sustainable and socially responsible business. The following sections describe different types of vested stakeholders.
Employees constitute the �irst type of people vested in a corporation. One way employees vest in the corporation is by bringing talent, skills, labor, time, and in the best cases, loyalty and commitment to the workplace. Another way employees vest in a corporation is by purchasing stock, a topic discussed later in this chapter. Most companies pay employees every 2 weeks or monthly, with bonuses paid out quarterly, annually, or semiannually. The anticipation of future bene�its (�inancial, social, reputational, learning, or other) allows employees to commit to giving their time and talent to a commercial enterprise.
Suppliers represent another type of entity that can become vested in a company. A supplier is another company or corporation that provides the company with the appropriate parts, inventory, and/or service inputs required for the company to create its products and services. It may sound surprising to suggest that a supplier would be vested in a client, but this is certainly the case if you follow the �inancial logic. The supplier vests in the future of a client’s company in anticipation of ongoing �inancial reward in the form of continued sales, increased sales, or sales referrals. Suppliers (or the parent companies that own and manage supplier companies) can purchase a formal stake in the future of the companies they serve by buying large amounts of stock or by forming legally binding partnerships. Thus, suppliers have a range of options in terms of their degree of vested interest; but by de�inition, any supplier to a �irm has a vested interest in it.
Vested Owners or Investors
Another way individuals develop a vested interest in a company relates to investing money as owners, part owners, or nonequity investors (investors with no ownership rights but with other rights as negotiated at the time of investment). Investors provide a business or project with funding or other resources, and in return they expect a �inancial bene�it. An owner of a company invests in the company for a variety of reasons, but the most common relates to securing rights to future �inancial bene�its in the form of increased stock price. Investors and owners provide capital, absorb risk, and over time expect a return on that investment. Investors also provide resources because they believe in the company’s mission or vision or its product or service, and they want to see the venture succeed— not every investor is focused solely on �inancial returns.
One de�ining feature of CSR and corporate sustainability relates to how both topics expand the idea of “value” and “responsibility” to spheres beyond the �inancial. As mentioned, investors, employees, and suppliers invest in, work for, or supply a �irm for �inancial reasons, or for non�inancial reasons such as believing in the mission, the management, or the technology or service. In many businesses, owners and investors work in the business, or at the very least
actively advise the �irm. A typical image of an investor is a Wall Street tycoon, distant from the place where work is done. However, most businesses in the United States are small businesses, and owners and investors often work alongside employees to enhance the business’s product or service.
Each category of person possibly vested in a corporation differs in relationship to the company, and perhaps in terms of the amount invested or the ease of access to speak with and in�luence management. In the following sections, we look at the unique relationships each group has with the corporation; the relationships differ by category, and thus the opportunity and best ways to engage each one differs too.
Figure 3.2: Types of Employee Stakeholders and Typical Engagement Levels
3.2 Employees In the 21st century, corporate managers view workers differently than they typically did in the past. Also, employees increasingly have different types of commitments to �irms. For example, in technology �irms and many new nontechnical startups, employees are seen as family, essential members of a work community. Employees often feel the same way about the �irm (AFL-CIO, 2015). Modern companies show more commitment to employees than they did in previous decades, in part because there are fewer choices for substitutes—at least in sectors that employ skilled workers. Many technological problems require speci�ic technical expertise that is rare or unavailable in the broader market.
Consider the skills of computer programmers, coders, and systems engineers—these skills are specialized and not evenly distributed among the job-seeking population. Other industries face similar situations: Medical personnel have technical training and are currently in high demand by employers. Over time, speci�ic industries create specialists and subspecialists, and employees and employers in these industries develop new interdependencies—one worker can no longer be easily substituted for another. Employees in such situations also persist in working for the company’s success, because the employee’s �inancial future depends on it—especially when his or her specialization is so speci�ic that the employee cannot �ind other work without signi�icant retraining. The employer needs the relationship to persist because �irms cannot easily or inexpensively �ind a replacement in the labor market. For example, many software companies and medical service �irms continually adjust to market needs by training current employees on anticipated future needs and providing employees with incentives to stay at the company.
Types of Employees
Most �irms categorize employees in ways that relate to federal employment regulations. In most �irms there are four basic categories of employees: full-time, part-time, independent contractors, and informal employees.
Full-Time Employees Full-time employees work either hourly or on a salary. Hourly employees in the United States are typically required by law to spend 30 to 40 hours a week performing their work duties. Salaried full-time employees differ from hourly full-time employees in that they have a contractually de�ined responsibility. They must manage that responsibility and complete associated tasks in exchange for a monthly paycheck no matter how many hours they work—sometimes they might be able to complete requirements in under 30 to 40 hours a week, and at other times they may work more than this amount. Unlike hourly employees, salaried employees generally do not track work time in any formal way and typically cannot earn more by working more hours. Another difference between the two relates to the fact that full-time salaried employees generally receive health, retirement, and other bene�its paid for or partially subsidized by the company.
Part-Time Employees The second kind of employee is a part-time employee; he or she is generally paid by the hour. Part-time employees generally work less than 30 hours per week and do not receive company-provided or company-subsidized bene�its, although there are some exceptions. For example, the Starbucks Corporation has received signi�icant press coverage for its decision to offer health bene�its and tuition reimbursement to part-time employees. Part-time employees have a variety of reasons for choosing to work part time, including preferring the work arrangement and the �lexibility or wanting to sample work environments at different places. Employers who take better care of part-time (and full-time) employees can become employers of choice and can likely select from a large applicant pool.
Independent Contractors The third kind of employee is an independent contractor. An independent contractor works when contacted for a speci�ic skill or project. He or she works for a speci�ic amount of time and for a speci�ied salary or hourly wage; there is typically no expectation that the employment arrangement will extend past the life of the project or speci�ied time.
Note that when someone builds a house or other structure with a speci�ic builder, the builder then contracts (or subcontracts) with skilled people (or many different ones) to complete the various specialized tasks related to building the structure within a speci�ied time frame and quality level. In most cases, no builder can possibly perform all required tasks with equal skill, speed, and precision as what can be accomplished by various specialists hired for the tasks. The same logic applies to building a corporation or other organization, and the reasons a corporation might seek contract employees are the same: Some people have a speci�ic skill set for doing a certain job, and they should be paid to perform that job but not remain associated with the company once the job is complete. A contract employee is not considered an employee in current U.S. legal terms, but in modern (nonconstruction) �irms, contract employees may provide accounting, payroll, janitorial, marketing, consulting, or other specialized services. An independent contractor might also be someone who works seasonally.
Informal Employees The fourth and �inal kind of employee is the informal consenting employee. This person might be a friend, spouse, intern, or volunteer. Regardless of the relationship, the informal employee also comes to the corporation to help complete a task. Informal employees are not legally considered employees, and thus have fewer rights and protections than formal employees. Note that informal employees are not the same as illegal ones. Illegal employees are those who do not have legal documentation to work in the United States or the country of interest. Therefore, any �irm that accepts, demands, or pays for such labor is breaking the law. Often, informal employees with legal documentation do not receive wages (such as in the case of unpaid internships, where people work in exchange for experience rather than money), or they receive minimal wages. Informal employees may receive nonwage bene�its such as insurance coverage (as is the case with volunteer �ire�ighters in most U.S. states) or bene�its such as experience and industry exposure or positive personal references (common bene�its of unpaid internships).
Every type of employee has a different relationship with the corporation, and the working assumption is that the closer and more �inancially direct the relationship with the employee, the deeper the engagement. It can generally be assumed that the full-time employee has a deeper engagement with the corporation and that a part-time, informal, or contract worker has less of a commitment to the corporation’s future. Full-time employees tend to stay longer, be paid more, and have �inancial and promotion futures more directly tied to the future of the corporation.
A long-term employee of DPR Construction talks about the bene�its of employee ownership, both for the company and for the employees. Do you think this type of system should be in place in every company, or does it only work to motivate and engage employees in certain situations?
DPR Construction Employee Ownership From Title: We the Owners: Employees Expanding the America…
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Figure 3.2 shows the range of relationships that corporations have with the types of employee stakeholders vested in the corporation. As the �igure indicates, many different options exist. An employee might be a partial owner. A contract employee might also be a supplier. A part- time employee might have a spouse or partner who is employed full-time at the same place. It is important people understand the wide number of options that now exist in the modern work environment. Anyone interested in CSR and sustainability, particularly regarding employees and employee rights, needs to keep a close eye on the many different ways �irms de�ine the concept of “employee” and “owner.”
Corporate managers understand the importance of motivating their highest quality workers to have a long-term commitment to the �irm. The costs to attain new talent vary by job and industry type, but the costs associated with turnover can be avoided when committed people stay with the �irm. Similarly, many workers prefer a stable, reliable, and involved connection with a �irm. In some ways, many corporate actions that fall into the category of being socially responsible or sustainable stem from this mutual desire to increase the quality, reliability, and longevity of the connection between employee and employer. One innovation that results from this mutual interest relates to experiments and innovations with employee ownership.
Employee Stock Ownership Plan In 1956 the owners of Peninsula Newspapers wanted to exit from ownership of the company; at the same time, the employees wanted to become owners themselves to be more tightly coupled to the organization. Political economist Louis Kelso enabled the employees to purchase the company by creating a legal category known as an employee stock ownership plan (ESOP). As the idea of the ESOP emerged, it required authorization through legislation and tax code changes. In the United States an ESOP is a quali�ied pension plan (another way of saying it offers a type of retirement bene�it). Because of this designation, employees do not need to pay taxes or any contribution to the �irm until they “cash in” on their vested amount when they leave the company. When employees cash in, they can also roll over any ownership shares into an individual retirement account if they qualify (Doucouliagos, 1995). In reference to stock options, vesting is the amount of time employees must wait to exercise or fully own their stock options (which is known as being fully vested). Stock options usually come with terms that provide more ownership or more stock the longer an employee stays with a �irm. Usually, the terms include milestones related to time. For example, if an employee stays 5 years, he or she can be 25% vested in the amount of stock in question; in 7 years he or she can be 50% vested in the amount of stock in question; and so on (the exact time and percentages vary by company and industry).
Over time, employees with vested interest in their company can become fully vested as part owners. Initially, employees’ small compensation in stock won’t give them much say in the company’s operations. However, over time, employees with options could amass considerable in�luence in its future and governance.
The philosophy behind an ESOP includes at least three parts: broaden ownership of capital, create �inancial security and incentives, and urge better employee productivity. The California- based National Center for Employee Ownership (2016) claims that 13 million employees in the United States work in places where they are encouraged to participate in ESOPs. In some cases, employees own and manage these companies, and there are no external investors. In other cases, employees own a smaller portion of the corporate stock shares, and external nonemployee investors have greater control. ESOPs are common in the service industry but can be found in many other industries too. Several high-pro�ile companies that have ESOPs include United Airlines and W. L. Gore and Associates (Gimein, Lavelle, Barrett, & Foust, 2006; Paton, 1989).
Why do companies go through so much trouble to create a plan that allows employees to become owners? Scholars have studied this idea extensively, and their conclusions are not always clear. Some studies suggest that ESOP programs make the company more pro�itable and competitive because employees are more dedicated and have a stronger sense of commitment to it (Gates, 1999; Blais, Kruse, & Freeman, 2010). Other studies show that ESOP companies are in fact more successful than comparable �irms and offer more competitive salaries (Hoffmire, 2015). Perhaps ESOP companies attract a higher quality of worker because the bene�its are better.
However, there are some potential downsides to ESOPs. The �irst is that employees tend to have a large portion of their retirement tied to a single company. This is contrary to the long accepted principle of investment diversi�ication. If an employee has most of his or her net worth tied up in a single company, he or she is vulnerable if that company fails, performs poorly, or is at a low value when the employee needs to sell the stock. One study showed that ESOP participants generally had about 60% of their retirement savings invested in a single employer (Rosen, Case
& Staubus, 2005; Cornforth, Thomas, Spear, & Lewis, 1998).
Another criticism of ESOPs is that they are excessively ideological, whereas the marketplace is more practical. For example, companies that are forced to downsize because of changes in the marketplace often lay off workers—such decisions make �inancial sense and help the organization survive for the remaining employees and customers. However, if through an ESOP an employee participates in the company’s management, then he or she is put in a position to protect employee jobs, making it less likely the company will take the cost-cutting/job-cutting steps that are sometimes needed to survive. Managing ESOP companies can thus occasionally become problematic (Stumpff & Stein, 2009; McDonnell, 2000).
Other Stock-Related Options
The ability to work from home is one example of a bene�it that companies can offer to increase employee engagement.
In the United States there are other ways that companies can reap the advantages of ESOPs without completely changing the company’s legal structure. One way is to offer stock to employees under very speci�ic conditions. While these are mostly found in highly competitive sectors, it is also true that progressively minded companies such as Starbucks use stock options to bene�it employees. In such companies workers do not have management control associated with the highest levels and type of stock ownership (there are various levels), but they do have a long-term �inancial tie to the company created by the option to purchase stock at a �ixed price.
Other companies allow employees to directly purchase shares in the company on their own. In some countries, including the United States, tax-quali�ied plans allow employees to buy stock at a discount or with matching contributions from the company, which means that employees can purchase stock at an employee price that is set below the normal market price. The employee can make the purchase with cash or with money the company provides that can only be used for stock purchases.
Non-Stock-Related Options Non-stock-related bene�its offer another way for corporations to engage their employees in a bene�it under the company umbrella. For example, most life sciences companies (such as Procter & Gamble, Nike, and Johnson & Johnson) and many fast- moving consumer goods manufacturing companies operate company stores where employees can buy products created by that company at a deeply discounted price. Other companies extend travel discounts to employees or allow them to use company facilities for exercise or social service. All of these bene�its are designed to enhance the employee’s life and deepen his or her commitment to the corporation. Some �irms motivate and retain employees by offering �lexible hours, work-from-home telecommuting options, and unlimited no-questions-asked time off and sick leave.
Many employees work for the promise of future income and bonuses, but many people select employers based on non�inancial criteria too. Employers of choice tend to be places where the culture supports learning, work–life balance, health and wellness, �lexibility, growth, a supportive work environment, safety, and a sense of purpose or meaning (Dill, 2015). Thus, a �irm’s employment policies and the general way it treats its workers (its human resource policies and practices) in�luence employee engagement and become a point of consideration when candidates apply for jobs and when �irm managers build or rebuild policies and practices.
Thus far, we have discussed employees and some options provided to those employees fortunate enough to quality for certain bene�its. This section examines the rights and protections that government regulations and social standards provide for all employees. While employee rights vary, there is general agreement on the basic rights of workers, despite the fact that enforcing these rights differs by region and industry. The most basic rights include safety, freedom of participation, collective bargaining, free speech, protection from honesty tests, and protection and privacy of information.
The Right to Safety The �irst right covers basic workplace safety while acknowledging that different industries have different safety concerns. Certainly, almost all work has a reasonable risk associated with it. For example, �lying in an airplane is generally safe, but there are occasions when accidents occur. Likewise, truck drivers, taxi drivers, emergency services workers, factory workers, farmers, and many others absorb a certain amount of risk when they enter the workplace. All workers should ask themselves what level of risk they are willing to absorb, and every manager and owner should determine whether they are providing the safest possible work environment. All safety issues are associated with a cost–bene�it analysis, and it is understood that perfect safety can rarely be achieved. There are always limited resources within which companies operate that affect the amount they can spend on safety procedures. But worker safety is and should always be an overriding question and pursuit in any workplace. Workers, labor unions, managers, leaders, owners, and investors should ask if all reasonable risk is being illuminated and properly managed. An important law that protects worker safety is the Occupational Safety and Health Act of 1970, which regulates the safety and health conditions of the majority of industries. This act and its associated department, the Occupational Safety and Health Administration (OSHA), protect workers from unsafe conditions—OSHA violations are expensive and can result in a �irm’s closure.
The Right to Participate in Work The second basic right is related to participation in the workplace. Issues related to these rights include the age at which it is appropriate for people to begin or stop working; what constitutes child labor or taking advantage of the elderly; and how can everyone be treated fairly in the workplace. Broadly framed, these are issues that all stakeholders in the workplace should consider. There is not necessarily a right answer, but work conditions are generally better when all parties engage in an ongoing dialogue about them. In other words, these questions will likely not ever be settled, but should rather produce an ongoing discussion. Part of the job of an informed employee and a socially responsible leader is to ensure that such conversations take place and that all interested and affected parties are aware of the conversations and are included in them. Some signi�icant laws related to protecting employees’ rights to participate in the workplace include the following:
The Federal Employees’ Compensation Act, which offers workers a compensation program that pays for a federal employee’s disability or death if it occurred while performing work duties. This act indirectly protects workers because some of the expense for workplace injuries become the responsibility of the employer. It also provides workers with a sense of security; if they are hurt while doing work, they have options to seek health care and will not lose their job if they cannot work while recovering. The Employee Retirement Income Security Act of 1974, which ensures that pensions or welfare bene�it plans offered to employees meet �inancial, disclosure, and reporting requirements. In large part, this act protects employees’ retirement money more than it protects their physical safety. The act also includes requirements for the Consolidated Omnibus Budget Reconciliation Act of 1985 and the Health Insurance Portability and Accountability Act of 1996. These acts keep employee health information private so that employers cannot discriminate based on it; these acts also provide ways for employees to continue to obtain health insurance after they are no longer employed. The Family and Medical Leave Act of 1993, which allows eligible employees to take up to 12 weeks of unpaid leave after the birth or adoption of a child or for a severely ill child, spouse, or parent. This act protects employees from losing their job during this time. The Davis–Bacon Act of 1931, which protects government subcontractors from being underpaid and attempts to set a minimum bar for other �irms and industries to follow. Several other acts similarly protect government employees.
The Migrant and Seasonal Agricultural Workers Protection Act of 1983, which exists to protect migrant workers, farm labor contractors, and seasonal workers by regulating hiring and employment practices.
The Right to Organize and Collectively Bargain The third basic right relates to gathering in unions or other groups and then participating in collective bargaining. It is assumed in most modern societies that workers have a right to organize labor unions that will bargain collectively on their behalf. Governments do not have the right to suppress these unions, nor do owners have the right to ignore them. Western society has long struggled for workers to gain recognition and have the right to collectively bargain. However, this does not mean that labor unions have the right to control access to work. In the United States, right-to-work laws protect workers who do not want to participate in labor unions. Such laws allow everyone to participate in the labor force without being compelled to join unions. For example, the Fair Labor Standards Act (FLSA) of 1938 offers a more extensive mandate that examines worker safety, fair compensation, and worker rights in U.S. �irms. The FLSA includes the right of organized labor to collectively bargain and the right of some workers to opt out of the collective bargaining system. The FLSA also provides standards for the federal minimum wage and overtime pay.
Each of the rights discussed indicates how some cultural norms about fair and safe work practices have been translated into law. Firm managers and owners interested in enacting socially responsible and sustainable activities must start by evaluating where the �irm stands in terms of compliance with current laws and norms. However, compliance represents no more than following the minimum standards. Thus, once compliant, �irms with CSR ambitions can work with stakeholders and analysts to move beyond the minimum and toward a more responsible and sustainable state.
The Right to Free Speech and Protection After Whistle-Blowing The term whistle-blowing refers to the act of reporting illegal or unethical behavior. Whistle-blowing usually refers to when an employee notices an illegal or unethical behavior at work and alerts management or outside agencies about the violation. Some �irms are noncompliant by accident and some by choice; laws exist to help move such �irms toward compliance and beyond. In the United States constitutional rights protect free speech, and speaking out against internal �irm practices is one type of free speech. Governments and other entities such as corporations cannot restrict the right of an individual to speak except in very exceptional circumstances. Of course, corporations and individuals within them also have some degree of right to privacy.
Research suggests that whistle-blowing in the workplace can be very risky. There are many examples of whistle-blowers who revealed wrongdoing by managers and leaders and were subsequently shunned, demoted, abused, and �ired, even though laws exist to protect them (Tsahuridu, 2011). Whistle-blowers are protected by two bills. The Sarbanes–Oxley Bill, passed in 2002, makes it illegal for employers to initiate retaliation against whistle-blowers. The Dodd–Frank Bill, passed in 2010, also prohibits unions or former employees from retaliating against employees. Such protections for whistle-blowers remain important elements of the corporate operating environment, because whistle-blowers do society a service when they signal wrongdoing and help initiate change. In some ways, whistle-blowers provide data about how and when corporate practices fail, as the information about one violation can be used to help entire industries become more responsible and sustainable (Hilzenrath, 2011). The Internal Revenue Service offers a multimillion-dollar reward for whistle-blowers who provide credible and actionable information—but experts suggest that unemployment also tends to follow the winners of the high-paying prizes (Sullivan, 2012).
Protection from Honesty Tests There are also occasions when the employer becomes the victim of dishonesty and abuse. Many businesses, especially retail operations, deal regularly with employee theft or damage of company property by negligent employees. Research suggests that about half of all theft that occurs in retail organizations is done by employees (Matos & Galinsky, 2012). Theft can include shoplifting, vendor fraud, or accounting malpractice. The total value of goods stolen by employees in the United States is estimated to be more than $17 billion a year (Matos & Galinsky, 2012). Historically, many companies used lie detector tests to investigate suspected employee theft, but in 1988 passage of the Employee Polygraph Protection Act stopped this practice. This law severely limits the use of polygraphs in the workplace, in part because they are largely seen as unreliable. While not illegal, honesty tests may also generate unreliable false positives. They are ill advised for effective organizations, because simply asking employees to take the test can breed distrust and offense. Interestingly, some companies reduce theft and associated losses by taking a more fair, inclusive, sustainable, and holistic approach to managing employees. In return, these �irms see employees “return the favor” by being more responsible and watchful of company property (Lindon, 2010).
The Right to Privacy Companies must identify the line or time of day where formal work ends and personal life begins. This can introduce questions about privacy and the boundaries of private time. For example, should an employee be reachable at any time of the day? How do companies measure productivity when people log less face time (time at the of�ice in front of others) but more computer time? There is also the ongoing question of whether romance is appropriate in a work setting. Can two consenting adults agree to have a relationship if they work together, especially if one supervises the other? Organizations take different approaches to this issue, and the options range from asking employees to notify the human resources department to obtain of�icial permission to engage in a relationship, to �iring employees for inappropriate behavior. For instance, in 2016 the CEO of Priceline, Darren Huston, lost his job and his severance package because he had a relationship with an employee (Fitzgerald & Lublin, 2016).
Another area where this balance comes into question is in the area of substance abuse or addiction. Alcohol abuse causes twice as many problems in the workplace as drug addiction. About 9% of all employees identify themselves as heavy drinkers, meaning they drink �ive or more drinks on �ive or more occasions a month. Studies show that up to 40% of all industrial fatalities are linked to alcohol (Zezima & Goodnough, 2010; Wogan, J. B., 2011). Currently, in states where marijuana has been legalized, U.S. companies are wrestling with the problem of marijuana use by employees not only during work hours, but also the effects of marijuana use outside the workplace (Zezima & Goodnough, 2010; Wogan, 2011).
Many companies require mandatory drug testing to help with initial employee screening; still others provide con�idential and subsidized access to addiction counseling as part of employee support programs. Leaders and managers interested in advancing social responsibility and sustainability need to consider the strength and supportiveness of the internal workplace as part of the effort; keeping the workplace safe and developmental is a long-term goal rather than a one- time achievement.
International Declaration for Worker Rights In 1988, after years of debate and deliberation, the International Labour Organization (ILO), a United Nations organization, adopted the Declaration on Fundamental Principles and Rights at Work. This document is intended to protect all workers in all nations from abusive work environments. The rights provided in that document are similar to the rights of U.S. workers. There are four components to the declaration. The �irst eliminates all forms of forced or compulsory labor. This means that workers can refuse to work or do something they think is unsafe, and they cannot lose their job because of exercising this right. The second right abolishes child labor, or the practice of employing children to do adult jobs. This right suggests that younger children should not work in order to support a family, although the document states an exception whereby adolescents may work in certain circumstances. The third right described by the ILO is the elimination of discrimination in respect to employment and occupation. This means that hiring and managerial practices should not discriminate
based on race, gender, tribe, religious af�iliation, or any other factor. In delineating this right, the ILO hopes that people will be hired, promoted, and rewarded based on their contributions and not on their identity or af�iliation.
The �inal right afforded by the document is the freedom of association and effective recognition of the right to collectively bargain. This right suggests that all workers can ban together in labor unions and demand changes in work conditions, improvements in safety, and increases in bene�its and pay (ILO, 2016). Given the scope of this book, discussing employee rights and ongoing debates helps set the stage for �inding and developing opportunities. We argue that people cannot improve upon the current work situation until they understand it fully, and when people design a new plan for workers, they should not remove the basic rights that employees deserve. Thus, opportunities to create more socially responsible �irms may be found in enforcing employees’ rights. In the following section, we expand the de�inition of who is impacted by �irm behaviors to include the suppliers.
3.3 Suppliers To maintain �low through any business, the corporation depends on any number of supplier entities to accomplish tasks. Needs may include raw materials, specialized parts, skilled labor (such as design or marketing support or programmers), and transportation. Once a product is made or a service is provided, the corporation may need transportation, communication, marketing research, customer service, repair, and any number of other supplier services. Data suggests that the largest businesses in the United States do not sell directly to any consumer, but instead sell to other businesses (Demery, 2014). This relationship is called business-to-business sales and marketing.
Types of Suppliers
Like in the case of employees, there are different types of suppliers. Recall that suppliers are increasingly seen as stakeholders and that sometimes, suppliers can also own stock in the �irms they supply. As more �irms offer products and services both regionally and internationally, it becomes even more essential for �irms to understand and map all the types of supplier relations that exist with the �irm. The following section de�ines the four types of suppliers, which include manufacturers, distributers, independent craftspeople, and import sources.
Manufacturers Manufacturers provide a �inal product of some type; it may be just one component among many used in another company’s product (consider that air bag manufacturers supply a �inished product, but it is just one of many products supplied to car manufacturers). Most retailers or resellers buy through a manufacturing company’s sales team or through independent representatives who offer products from multiple and even competing manufacturers (suppliers). Prices from manufacturers’ representatives are usually lowest, unless the retailer’s location makes shipping costly.
Distributors Also known as wholesalers, brokers, or jobbers, distributors buy in quantity from several manufacturers and warehouse the goods to sell to retailers or service providers. Although prices are usually higher than a manufacturer’s, distributors can supply retailers and service providers with small orders from a variety of manufacturers. Lower transportation costs and quick delivery time often compensate for the higher per-item cost from distributors.
Independent Craftspeople Exclusive distribution of unique goods is frequently offered by independent craftspeople, who sell their products through representatives or directly at trade shows (industry events where people gather in one location and multiple vendors display wares and try to win business) or via Internet sites. The goods from independent craftspeople are often one-of-a-kind or come in smaller batches; sometimes they are made in international locations. Types of goods range from handmade jewelry to custom vehicles. Thus, the costs of goods from independent craftspeople can vary greatly—if components are inexpensive and if labor is inexpensive at the manufacturing site, then the products may be low cost. However, if the components are expensive, if the labor costs are high, or if transportation costs are high, then goods supplied from independent craftspeople can be costly.
Import Sources Many retailers buy foreign goods from a domestic importer, which is someone who charges a fee to get products out of one country and into another and thus operates much like a domestic wholesaler. Sometimes import sources directly supply products to a �irm; other times a supplier such as an independent craftsperson uses an import agent to supply his or her goods to other �irms.
Suppliers have their own motivations for selling to and engaging with client companies; some of their motivations are �inancial and some are not. Suppliers often share the same motivations as employees, meaning that they may prefer one customer over another because one �irm has a better �inal product, a more compelling mission or vision, and/or a more attractive price. Suppliers may also bene�it when their components are used in popular and well-received products and services. Suppliers can rightfully see themselves as part of another company’s success if they supply components to it. Supplier motivation relates to CSR and sustainability because success and good (or bad) press for one company’s products can also bring success and publicity to the companies that supply inputs for the product.
As a general rule, suppliers do not have basic rights like employees or investors do. Instead, they have invested in the corporation by virtue of their relationship in supplying parts or skills. Their relationship with the corporation is generally determined by contract and practice rather than a description of rights. Further, suppliers may have more options than do full-time employees for severing a tie with any particular company, since product suppliers can simply �ind another customer and send goods to the new customer. In contrast, employees may not be able to leave one job and �ind a similar job in the same regional area. Supplier rights are not as formal as employee rights, and there are fewer laws and regulations that speci�ically protect suppliers.
3.4 Investors Small companies are usually owned by one person, while large companies are typically owned by more people. This situation is often (but not always) correlated with company size, as small �irms are started by enterprising individuals who own the business. As these individuals need more money to expand their business, they reach out to others and sometimes offer partial ownership in return for funds. People can offer others an ownership stake even without formally offering stock or selling shares of stock via the stock market. Whether funders became owners via the stock market or a private arrangement, these funders are stockholders or shareholders; they are also investors because they have invested money. Investors can also provide money or other resources to an organization without receiving stock in return—in such cases they are called simply “investors” because such people do not own public or private stock. According to Bloomberg, almost $60 trillion worth of stock is owned worldwide (Gimein et al., 2006). But who are the stockholders?
Types of Stockholders
Two kinds of stockholders own shares of corporations. One type refers to institutional shareholders and the other to individual shareholders. The main reason that individuals and institutions invest in stocks is to obtain a return on their investment. Many people believe it is better to buy stocks than to put money in the bank to accrue interest. The value of stocks rises and falls over time, but on average the stock market goes up at a faster rate than other kinds of investments and thus attracts a lot of people to invest in such opportunities.
Institutional and Individual Stockholders One kind of stockholder is known as an institutional stockholder. When institutions purchase shares, the shares are not held by one individual or family; instead, the shares are purchased and held on behalf of specialized groups. Examples include pensions, mutual funds, insurance companies, and university endowments. These institutions are the intermediaries of investment; they often pool the money of the people they represent and then buy large amounts of stock. The returns, if any are accrued, are often shared among the people whose money created the original pool of money. Thus, institutional stockholders are similar to companies that buy stock on behalf of others.
The other kind of stockholder is known as an individual stockholder, meaning that a single individual or family directly buy shares that are issued by the company through stock market websites or from a stockbroker (U.S. Census Bureau, 2011).
Historically, people are motivated to buy stock for �inancial reasons—they believe that the company that issues the stock will be successful, and the investor wants to play a role in enabling that success by investing money and receiving money in return. Of course, not all stock shares appreciate, or increase, in value.
Another reason people invest is because they hope to in�luence a company’s decisions. In today’s society, such in�luence is dif�icult to achieve, as one investor cannot usually afford to buy enough shares of stock to make demands of company leaders. Another reason people invest in �irms is to show support for the mission or the product.
In the following sections, we discuss stockholders’ legal rights and investment safeguards that enable markets for stock and other forms of ownership to function. We examine the role of government and discuss corporate governance (how companies manage themselves), as well as shareholders’ activism in protecting their interests.
Government Protection In the United States the Securities and Exchange Commission (SEC) is a federal agency that is generally responsible for protecting stockholder interests. The SEC was established in 1934, just after the stock market crash that led to the Great Depression. The SEC consists of �ive presidentially-appointed commissioners that have staggered 5-year terms. For equal representation, the SEC cannot have more than three commissioners from the same political party. The responsibilities of the SEC include issuing and enforcing federal securities laws.
In 2008 the SEC and the Federal Communications Commission, along with other federal investigators, unveiled one of the largest ever tax frauds in U.S. history. The name of Bernie Madoff exists in the annals of crime as being associated with one of the largest thefts in history. Estimates suggest that Madoff, through his investment �irm, stole as much as $65 billion from prominent university charities, cultural institutions, and individual investors. SEC chair Christopher Cox admitted to Congress that his agency had failed to see the patterns of deceit coming from Madoff’s �irm, which dated back to 1999. But his admission provided little consolation for the many people who lost their retirement funds, pensions, life savings, and charitable contributions in a scheme that was far reaching and very personal. Many people think the bene�it of the Madoff scandal is that it “woke up” the SEC, and as a result the SEC now more aggressively watches banking transactions and �inancial managers for all types of fraud, including insider trading.
Insider trading is the illegal practice of manipulating or deceiving the public in stock trading. In other words, it is illegal to manipulate the stock to create an arti�icial value (people do this by creating false news reports, hiding information, or generating false information). It is also illegal to use nonpublic information to trade the stock. For example, if an employee knows about an upcoming change that will dramatically affect the value of shares, the employee cannot buy or sell more shares of the company without being investigated for possible insider trading. The public is entitled to transparency and openness related to stock value, and people who have hidden information have an unfair advantage—thus, insider trading laws aim to prevent that from happening. It is the SEC’s responsibility to ensure that stockholders have the same company information as corporate of�icers. Stockholders should be able to make a fully informed decision before making an investment. Stockholders have the right to know about the company’s management and the challenges it faces in the marketplace. They especially have rights to �inancial information. While most of this information is provided at annual meetings and in the form of an annual report, it is also made public through press releases in the media and direct conversations with research analysts from important brokerage houses.
All parties must comply with insider trading rules. In addition, company leaders and owners must minimally conduct themselves, and business, in full compliance. When leaders and owners (those who “govern” the organization at its highest levels) seek to be more socially and environmentally responsible and sustainable, they have several options because of their positional power from their position. CSR activities and sustainable decisions and products must usually be approved and supported by top management. The way that �irms choose to treat employees, invest corporate pro�its, and direct employee efforts stems directly from the governance decisions made by the top management team.
3.5 Corporate Governance Corporate governance refers to the structure and relationships that determine corporate direction and performance; the term describes both the act of governing and the way in which an organization makes and follows its own rules. If corporate leaders enact rules and regulations that encourage CSR, then the entire �irm must comply with the rules, and CSR and sustainability have a higher chance of success. On the �lip side, if corporate leaders create rules and regulations that discourage or deter CSR and sustainability, then CSR and sustainability will be more dif�icult to enact. The idea behind corporate governance is that corporations must comply with certain leader-prescribed regulations and use transparent processes while operating. The assurance that leaders are in compliance with government and internal regulations (meaning they are enacting good corporate governance) allows investors to make judgments about the quality of investments. This fact also allows some �irms to stand out as exemplars of sustainable and responsible governance (while others stand out for horrendous violations). Here, we argue that understanding these extremes can help leaders and investors decide how to improve �irms’ sustainability and social responsibility.
Board of Directors
The board of directors is the group of people who typically govern an organization. As a result, it has power and oversight over company behaviors and leaders. A board is an elected group that has a legal duty to oversee the establishment of corporate objectives and to select leadership to carry out these objectives. The board regularly reviews the company’s performance and oversees stockholder interests. Boards generally meet four to six times a year. Corporate boards vary in size and composition, but most large companies try to keep the number of board members to around 12. Usually 10 or 11 of these members, or 90%, are from outside of the company. The New York Stock Exchange, for example, requires listed companies to have at least a majority of their board members from outside the company. Other board members from the inside may include chief executives, presidents, founders or major stockholders, and �inancial of�icers from within the company. In Europe board composition is different. Most European companies have two different boards. The �irst is an executive board made up of members of the company. The second is an external board that supervises the executive board and represents the interests of shareholders, stockholders, and even employees.
One of the most important things a board can do is conduct an audit, or contract someone else to do so. The audit committee on a U.S. board of directors must annually examine the company’s �inancial well-being. It is thus required that board members be �inancially literate and able to make the judgments required of high-end accounting and �inance.
Challenges for Corporate Boards Boards often struggle with transparency in terms of what information to release to the media, employees, and the public. Board meetings are con�idential, which leaves a considerable amount of confusion and hidden or partially hidden information in terms of how they operate and manage.
Another important corporate governance issue relates to salary and wages, particularly salary and wage differentials between management and employees. Publicly held corporations are generally run not by their owners, founders, or boards, but by hired professional executives. This creates what is known as the agency problem. Executives in corporations act as agents for the founders or owners (stockholders), and while such executives are mandated (and paid) to look after corporate interests, there is little to prevent them from looking after their own interests instead. In some ways, salaries play a role in mitigating the agency problem, since higher pay can incentivize the executives to do what is best for the owners who, in essence, pay the salary. Yet because boards meet a few times a year while executives work at �irms daily, executives have more opportunities to take actions that may not bene�it corporate leadership. Large corporations typically pay board members a high salary for their work; companies may pay in cash, stock, or stock option rights. Some critics believe board compensation sometimes taints the ability of a corporate board to oversee leadership and appropriately represent stockholders (Twaronite, 2013).
Regarding salary and compensation, many people feel that board member and executive pay is excessive, particularly in the United States. Corporate senior leadership in the United States receives almost twice the salary as an equivalent position in France, Belgium, and Sweden. In the United States, CEOs typically make 325 times more than the average worker. Since 1990 the ratio of average executive to average worker pay has increased every year (Statista, 2016). Executive compensation has been the subject of some government regulations. For example, a provision in the 2010 Dodd–Frank Act required major corporations to disclose executive compensation to the public; companies must reveal compensation packages for at least the top �ive executives. Firms must also report all of the �inancial and non�inancial bene�its received. These bene�its might include access to a corporate aircraft, gifts received from clients, or tickets to sporting or cultural events. In addition, con�licts over executive compensation are common in boards. One view holds that corporate leaders have such an important in�luence on the success of the company (and the talent pool for top executives is so small) that high compensation is warranted. Those in favor of high compensation for executives also argue that overall, the amount given to a corporate executive represents a small percentage of the overall corporate value. The other side points out that such high wages are extreme, unwarranted by the workload, and possibly in�lammatory to employees and the public. Others in favor of more restrained executive compensation argue that high executive compensation creates a corporate culture of greed and short-term decision making and undermines transparency. They also argue that providing a living wage to all employees is a moral obligation, though de�ining this can be problematic. Essentially, the issue of compensation remains an area in which �irms have considerable discretion; the compensation choices �irms make send signals about their commitment to social responsibility and sustainability (Gerstein, Connelly, Lightdale, & Rowen, 2015).
Wages and executive compensation have been a social responsibility issue for decades, but Ben & Jerry’s in Vermont made the issue famous when, upon founding their company, CEOs Ben Cohen and Jerry Green�ield committed to keep the ratio between executive wages and the lowest paid employee no higher than 5 to 1. The company adjusted the ratio in a transparent way over the years, moving it to 7 to 1 and then 17 to 1 when it could not attract talented management without the increase. When the company was purchased by a large corporation in 2000, the salary information was no longer made public (Weiss, 2013). The topic of salaries represents just one of the dif�icult and controversial decisions that boards and executives must address; CSR and sustainability represent other topics that often require board-level action. When boards and executives remain unresponsive to such issues, shareholders sometimes attempt to encourage change through behaviors known as shareholder activism.
Frustrations with executive compensation, environmental concerns, and other issues related to corporate strategy cause many shareholders to become more active in corporate governance. Shareholders need not rely on the board of directors to make changes in corporate direction, as institutional and individual shareholders have the option to work together to protect their interests.
Shareholder activism is a strategy for shareholders to in�luence the decisions of the corporate board and other leaders of the �irm. Shareholder actions may include lawsuits or negative media campaigns that are intended to in�luence corporate leaders. Shareholder campaigns often cause the stock price to decline, making owners and managers more willing to bargain with the activists or comply with the shareholders’ demand. In addition, corporate boards typically work with shareholders to avoid going to court and paying related expenses. Choosing to consistently make socially responsible and sustainable decisions is one way �irms can avoid shareholder activism. When leaders decide to pay fair wages, treat employees and suppliers fairly, manage water and electricity use with a
stewardship mind-set, and follow other pro-CSR and sustainability behaviors, then pro-CSR shareholders have fewer reasons to complain and less incentive or need to turn to activism.
Stock Screening Another way stockholders try to exert in�luence over corporate governance is through stock screening. Socially responsible investing (SRI) describes investors who choose stocks based on environmental or social issues. SRI allows investors to reward �irms that sell products they admire (environmentally conscious investors might be attracted to solar start-ups, for example) or punish �irms that sell products of which they disapprove (so-called sin stocks traditionally include alcohol producers, gun manufacturers, and tobacco companies). A growing number of professionally managed funds also have social �ilters to help select companies that deserve investment. A socially responsible investment fund might screen out companies that have an excessive impact on the environment, overpay executives, or have a history of discriminating against employees. Socially responsible investors can be as varied as the number of fund managers and the causes they espouse, but estimates suggest that when screening and selection strategies are considered, more than 1 of every 9 dollars under investment is invested in an SRI fund; the total size of the SRI market is in excess of $4 trillion (Forum for Sustainable and Responsible Investment, 2016). This fact means that social responsibility concerns have become mainstream enough to affect Wall Street; it also means that socially responsible and sustainable �irms looking to attract capital can identify themselves with the SRI movement.
Stock screening is a kind of social activism that has an indirect impact on board decisions, but it may have a direct impact on a stock’s price and value. Many companies have initiated social responsibility resolutions to guide corporate decisions in the hopes that such moves will increase the value of shares to certain investors.
Apply Your Knowledge: Stock Screening
Develop a list of �ive criteria for activist stock screening. These might include social, political, or environmental issues that are meaningful to you, such as child labor, solar energy, or compliance with certain government regulations.
Then, list 20 commonly traded stocks from the New York Stock Exchange: https://www.nyse.com/index (https://www.nyse.com/index) . Research event information for each stock, paying close attention to their products, or management processes, and how they do business. Rank the stocks based on their compliance with the stock screening criteria developed.
Based on your activist portfolio, select which of the stocks you would purchase. Then determine what portion of your portfolio each selected stock should constitute. For example, you may choose one particularly positive stock to be 50% of your portfolio while some mix of other stocks will represent the other 50%.
Bene�it Corporations (B Corporations) In response to the call for �irms to behave in more socially responsible ways, a small group of innovators created a new corporate form intended to break the paradigm that corporate managers have a binding duty to put shareholder interests above all other decisions. This new form is called a bene�it corporation (B corporation). A B corporation is a for-pro�it corporate entity with one signi�icant difference from a traditional corporation: It has a legally binding mandate to positively impact society and the environment, in addition to making a pro�it. A B corporation’s board of directors makes the same decisions as leaders in a traditional corporation but goes one step further by considering the impact that decisions have on society and the environment. According to the B Corporation (2016), about 1,600 B corporations exist in 43 different countries.
An example of a certi�ied B corporation is Patagonia, the outdoor clothing manufacturer. The corporate website describes in detail how it tries to be different from other companies:
We learned how to make �leece jackets from recycled plastic bottles and then how to make �leece jackets from �leece jackets. We examined our use of paper in catalogs, the sources of our electricity, the amount of oil we consumed driving to work. We continued to support employees with medical insurance, maternity and paternity leave, subsidized child-care and paid internships with non-pro�it environmental groups. As we have for many years, we gave one percent of sales to grassroots activists. This one percent commitment isn’t typical philanthropy. Rather, it’s part of the cost of doing business, part of our effort to balance (however imperfectly) the impact we have on natural systems—and to protect the world on which our business, employees, and customers rely. (Patagonia, n.d.)
Bene�it corporations expand directors’ duties to include consideration of non�inancial and social interests. It is often hard to assess the actual impact of a B corporation on the community, environment, or other social environment. In cases where �irms are not ready to become a B corporation, there is also the option to become B certi�ied. Such certi�ication is a way for standard corporations to signal they are on the move toward social responsibility and sustainability.
Chapter Summary This chapter investigated those stakeholders who are closest to a �irm, such as employees, and those who are immediately and directly connected, such as suppliers and investors. It examined the differences between shareholders, employees, and suppliers in terms of vesting, motivations, and opportunities for increased social responsibility and sustainability. Each of the discussions built the foundation for an increased understanding of why business runs as it does today, as well as how business norms and practices can improve and innovate toward a more responsible and sustainable future. Upcoming chapters further illustrate how different stakeholders relate, behave, and innovate.
1. What is the difference between an employee and a shareholder? Why has the line blurred? 2. What are the advantages and disadvantages of an ESOP? 3. Why are whistle-blowers frequently punished for such potentially positive actions? What are additional steps government and companies can take to
prevent whistle-blowers from being punished? 4. What rights do shareholders have to control administrative action in a corporation? 5. Why should corporations maintain good relationships with suppliers? 6. If a person uses substances such as drugs or alcohol that impact work performance, does the employer have the right to hold the person accountable? If
drug use impacts employee performance, what is the employer’s obligation to help the employee overcome the disease of addiction? What do you think is the �irm’s obligation to protect investors and other employees from potential safety hazards posed by their employees’ choices?
7. If you were building a stock portfolio that was socially active, in which kinds of stocks would you actively invest? Which kinds of stocks would you avoid? Explain your reasoning.
For more information on the size and composition of the socially responsible investing market, visit: http://www.ussif.org/sribasics (http://www.ussif.org/sribasics)
Additional information on the Family and Medical Leave Act can be found here: https://www.dol.gov/whd/fmla/ (https://www.dol.gov/whd/fmla/)
Additional information on the Employee Retirement Income Security Act can be found here: https://www.dol.gov/general/topic/health-plans/erisa (https://www.dol.gov/general/topic/health-plans/erisa)
Additional information on the Federal Employees’ Compensation Act can be found here: https://www.dol.gov/owcp/regs/compliance/ca_feca.htm (https://www.dol.gov/owcp/regs/compliance/ca_feca.htm)
Click on each key term to see the de�inition.
bene�it corporation (B corporation) (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
An organization that is for-pro�it but has legally protected social and environmental goals.
Sales that take place between two businesses.
corporate governance (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Both the structure of a corporation and the act of oversight and control.
employee stock ownership plan (ESOP) (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A program that compensates employees in the form of corporate stock and gives them a voice in governance according to their proportion of ownership.
insider trading (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Illegal stock trading motivated by con�idential information.
People who contribute money or other items of value to a corporation.
Securities and Exchange Commission (SEC) (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
The government body that regulates the acquisition and sale of investments such as corporate stocks.
A strategy by which shareholders can in�luence the decisions of corporate boards and other leaders of �irms.
shareholder activism (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A strategy by which shareholders can in�luence the decisions of corporate boards and other leaders of �irms.
socially responsible investing (SRI) (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
The act of choosing investments based on environmental or social issues; often refers to screening out some types of �irms while purposefully selecting others.
A company that sells speci�ic parts, services, or raw materials to a corporation.
vested interest (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Having a stake or involvement in a �irm, especially of a �inancial nature.
The legal right to a future bene�it.
The act of reporting illegal or unethical behavior.
4 Expanding Outward: Local and Global Communities
After reading this chapter, you should be able to:
De�ine community, analyze community connections, and evaluate different types of communities, including communities of identity, communities of geography, and organizational communities. Understand the value of transcending differences. Apply the six cultural dimensions to different business situations. Summarize guidelines for successful cross-cultural communication.
Introduction Consider that people who live side-by-side in the same geographic area may not describe themselves as part of the same community, whereas people separated by continents may feel deeply a part of the same community. Indeed, the word community has many interpretations that transcend geography. This chapter offers different de�initions of community and examines speci�ic types, including communities of identity, communities of geography, and organizational communities. Leaders interested in creating more sustainable and socially responsible organizations bene�it from understanding how people form communities and how members from certain communities typically feel about and react to sustainability and CSR issues. These same leaders bene�it from learning how to acknowledge and engage with communities. Doing so helps with the stakeholder analyses discussed in Chapter 2. Such efforts can also advance the CSR and sustainability missions of individuals and companies.
All corporations are part of at least one community. The concept of systems theory, as covered in Chapter 1.2 (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/sec1.2#h2systems) , suggests that corporations exist as part of larger systems. The other members of such systems constitute a “community.”
After investigating the topic of community, this chapter discusses the value of transcending (or rising above) typical cultural differences. In this text, culture is de�ined and characterized by speci�ic cultural dimensions. While there are an almost in�inite number of dimensions associated with culture, identity, agreement, status, time, focus, and emotions help managers understand why in a global environment, business relationships require signi�icant interpersonal effort.
An introduction to the Tour de Fat, an event organized by New Belgium Brewing Company that partners with local nonpro�its to raise money and give back to communities. What bene�its might a company gain from sponsoring charitable events in its community?
Tour de Fat
Tour de Fat From Title: We the Owners: Employees Expanding the America…
0:00 / 0:36 1x © I f b All Ri ht R d L th 00 35
4.1 Corporations as Communities A community can refer to a group of people who share a common physical location; it can also describe a social network infused with common interests (“Community,” 2016). While this two-part de�inition seems straightforward, it indicates that corporations inhabit at least two kinds of communities. The �irst part of the de�inition refers to being “in the same place,” while the second refers to “having particular characteristics in common.” Communities that exist in the same place share geographically-de�ined boundaries and are easy to determine using maps, coordinates, landmarks, and the physical senses. Communities with characteristics in common usually include elements people cannot see and which are not always physically bound (such as in the case of sporting communities, innovation communities, learning communities, or relationship communities).
For example, the community of Nottingham, United Kingdom, is de�ined on a map by geography, but it is also de�ined by government using laws, the limits of public service, and transportation systems. In contrast, in the same country, the Labour Party is de�ined by common political and social interests rather than by lines on a map. Of course, the UK Labour Party community also has geographic limitations, as it does not exist outside the United Kingdom.
Given that this book covers how people relate within and around corporations, particularly in regard to social responsibility and sustainability, this chapter moves beyond physical communities to cover those de�ined by ideas, discussions, preferences, and actions. People can have associations that lack physical boundaries—they can share a community with those who have the same interests and ideas, whether that means they found each other online or elsewhere. This chapter also covers the topic of communication, as communication creates community—consider, for example, someone who shares information and convinces you to join a political party (Canuto & Yaeger, 2000). What this means for business purposes is that when people are in a community, they seek or receive common bene�its through their associations with each other. These ideas relate to CSR in that some communities share and reinforce speci�ic messages, purposes, and ideals, including those related to sustainability and social responsibility.
Tying the two-part de�inition of community to sustainability requires considering both elements of the de�inition. By taking an approach that considers “lines on map” or “common place” associations, �irms and governments can build a planned sustainable community de�ined by transportation hubs and community centers that are located in close proximity to each other and to housing and shops. Such physical assets and sustainable infrastructure serve to increase human connection and interaction. This connection promotes sustainable growth and maintainable societies, as community members save time, money, and other resources because they have easy access to products and services they need. Firms can do the same thing with innovative work spaces that build community (within the existing company walls). Of course, another way to promote sustainability involves helping people identify the interests they have in common when they work.
The process by which communities grow is often called socialization. Socialization is the process of communal learning in which patterns of behavior emerge; these patterns prescribe values and roles. Most social scientists agree that socialization begins very early, as children become part of a family community, a local community, a school community, a regional community, a religious or nonreligious community, and eventually a global community. Socialization also entrenches us in communities as adults, as we continually change to adapt and expand our in�luence. People who know how to successfully socialize are more able to help themselves and others adjust to new jobs, practices, and behaviors that are more sustainable and responsible (Hegmon, 2002).
Types of Communities
The previous section introduced communities of place and interest. Scholar Gerhard Delaney (2003) takes the concept of community one step further. He describes three different types of communities—geographic, identity, and organizational—and suggests that all three combine to describe reality (see Figure 4.1).
Figure 4.1: Three types of communities
Geography-Based Communities The �irst type of community relates to geography. Geography-based communities share a common physical location and can usually be mapped. Corporations— which may begin in a single neighborhood—can expand into a suburb, a village, and perhaps a city or multiple cities. Consider how the Dow Chemical Company is associated with nearly the entire city of Midland, Michigan; or how the Walmart corporation is associated with Bentonville, Arkansas. Firms may open branch of�ices in a region and expand nationally or even internationally. For example, both Dow Chemical and Walmart started in a neighborhood, expanded to de�ine whole cities, and now have national and international reach. In each geographic area, corporate leaders build a connection to the regional, local, and maybe even international social system. This means that for a large global corporation, community relations tend to be extremely complex.
Take, for example, a large life sciences company that produces more than 1,000 different products that range from weight-loss treatments to hand lotions and detergents. Its product portfolio also contains numerous vitamins and nutritional supplements. Some of the world’s communities consider the vitamins and nutrients to be medicines, while other communities consider them to be only supplements. This means that products that are not regulated by some governments might be highly regulated by other governments—as highly regulated and monitored as are prescription drugs in the United States, in fact.
Employees at the life science �irm therefore need to behave differently when selling products from country to country. The different traditions and mind-sets that exist in different social systems mean that employees need to understand and conform to different local conditions and traditions. They likely need to meet with local experts to learn local customs, attitudes, assumptions, and norms; depending on the market penetration of the company’s products, company representatives may need to do this all around the world.
Corporate social complexities must therefore take into account how work regulations, traditions, and ethics vary from community to community. Work practices that originate in one community may not apply to another. What constitutes a “best practice” in the United States may actually be illegal in another community or country. For example, network and multilevel marketing systems that commonly thrive in the United States and Japan (such as door-to-door or peer-to-peer sales models, such as Avon for cosmetics) remain illegal in parts of Europe and China. As a less extreme example, consider how performance appraisal systems that focus on individual contributions remain common practice in U.S. corporations, but managers prefer to emphasize team-based behaviors in China and Japan.
Identity-Based Communities Delaney (2003) describes the second type of community as identity based. Identity communities are united by something other than simple location on a map (though location can help create an ethnic identity, as we describe later). Ethnic groups, tribes, religious groups, and other culturally de�ined groups are examples of identity communities—they may have geography in common, but they also share ideas, traditions, and philosophies. One example of an identity- based community is a national and genealogical af�iliation, such as being Irish. While there are approximately 9 million people who live in Northern Ireland and the Republic of Ireland, almost 70 million people worldwide identify as Irish (Monagan, 2012). On Saint Patrick’s Day, Irish cultural celebrations are held in every major city in the United States. This does not mean that North American–born people of Irish descent want to be Irish citizens. However, it illustrates how many people cling to national and genealogical associations of heritage, values, and traditions.
Identity-based communities tend to be particularly dif�icult for corporate cultures to navigate because they are complex, subjective, and �luid. For example, suppose a business in the United States begins serving pork in its corporate cafeteria, in order to support local farmers. The company’s Muslim employees immediately register complaints about the menu—Muslims abstain from eating pork, and orthodox Muslims will not use any plate or service utensil that has touched pork. The company’s human resources director assigned to deal with the issue does not want to segregate workers into “pork” and “nonpork” parts of the cafeteria, so she decides to refrain from offering pork in the cafeteria and instead donates to the farm association.
Organizationally-Based Communities The third kind of community de�ined by Delaney (2003) is organizationally based. To understand this type of community, consider that families constitute organizations, as do alumni associations, professional organizations, and industry associations. Membership, association, selection, or other distinguishing and shared factors unite organizationally-based communities. Note that most organizations require individuals to opt for membership, but some claim members who would prefer not to be included if asked (such as graduates who do not want to be contacted by their alumni associations or people who prefer not to associate with their family members).
Virtual Communities Of course, Delaney’s (2003) de�inition of community leaves some very important things out. Most notably it does not account for virtual communities that emerge online. The rise of Internet-based social networks and social media has been very dif�icult for corporations to understand and navigate. Given the fact that people all over the world have Facebook accounts, online and social media advertisements and endorsements reach more than 1 billion people (Smith, Segall, & Cowley, 2012). Thus, it is safe to assume that most employees of modern corporations interact in one way or another on social media. Employees may
regularly use social media to discuss a corporation and its products, work practices, and community participation efforts. Social media can have a tremendous impact on a corporation, and for good or bad. Most corporations take extensive steps to manage their public image on Facebook, Instagram, Twitter, LinkedIn, Pinterest, and other social media sites. Most employ a social media manager internally or hire an external consultant to protect their image in the virtual community (Reputation Management Consultants, 2015). Given that many different types of communities exist and that most use technology to expand beyond geographic borders, it makes sense to discuss communities and business-community linkages on a global scale.
4.2 Globalization Globalization typically refers to the economic forces that build interdependency across the world. Others regard globalization as a social force by which common values come together. In contrast to these relatively positive associations, some people consider globalization to be a destructive force that results in job loss, depressed wages, and economic and social decline. Still others see globalization as tied to world political organizations such as the United Nations.
The common thread among all these perspectives is that our world is increasingly interconnected by technology, comparative ease of travel, and treaties and trade agreements that increase the �low of goods and services across national and international boundaries. Regardless of how different leaders and consumers feel about this fact, an increased connection exists and can further complicate a corporation’s efforts to make ties with the various communities across the globe (Robinson, 2007). Globalization relates to CSR and sustainability because almost all of its de�initions suggest that the communities in which corporations operate continue to geographically widen. With such growth, consumers, employees, and managers must concomitantly expand analyses, planning, and inclusion. Speci�ically, as the world becomes more connected, even �irms with a primarily regional focus might have an Internet page that international audiences read. Firms can source ideas from around the world more easily when the world is closely connected, but �irms can also have their ideas and inventions copied or modi�ied by other people thousands of miles away. The more our world connects, the more managers need to analyze and plan for what happens as a result of such connections.
Working in a Globalized World and the Need for Transcendence
Working in a globalized world presents problems and opportunities for corporations at individual, team, divisional, and senior leadership levels. The imperative to cope with globalization has both strategic and personal implications. Individuals must learn to work with people who are culturally different (even if the two parties only interact over the phone). Corporations must learn to comply with different political and social systems (Hammond, Anderson, & Cissna, 2003). The following sections discuss some strategies for approaching globalization challenges.
Assimilation Historically, many powerful corporations tended to ignore the issues of globalization because leaders adopted an assimilation strategy. This strategy suggests that a powerful entity or community makes and imposes the rules that a smaller or less powerful entity or community must enact. Eventually, the larger entity absorbs and overtakes the smaller community by force or by slowly changing and recon�iguring it. Assimilation worked in the past because the corporation’s overall reach was limited, and the power of certain corporations was high and less diffuse. In recent years, however, corporate leaders have been increasingly exposed to an alternative way. A transcendent approach is not only less costly than the more dominating assimilation style, it can also provide important competitive advantages and create a clear pathway toward sustainability and social responsibility (in part because it is much less forceful and respects human choice and agency).
Transcendence Transcendence relates to the concept of building a “third way,” a new position that is somewhere between “my way” and “your way.” It suggests that one needs to be aware of one’s own cultural characteristics, understand the cultural characteristics of others, and then work together to create a third way that appreciates and honors both cultures. Of course, this is a very dif�icult process, but one that can yield important results. Without going into detail, it can be argued that all peacemaking processes—whether personal or global in scale—relate to some form of transcendence. People who work on cultural, religious, educational, environmental, or other types of transcendence do not abandon their own cultural beliefs in the process, nor do they ask another person to do so. Rather, they work with others so all parties can move forward (Ritchie & Hammond, 2011). Transcendence represents an ideal way to incorporate the views of many while still working toward a solution. It can be useful in communities as small as two people and in those as complicated as multinational companies that have operations on every continent. For many leaders, working to achieve transcendence represents a way to increase buy-in, support, and inclusion and to achieve better results from related action plans.
Avoidance People often �ind reasons to avoid cultural transcendence, especially when it seems dif�icult and requires a lot of emotional energy. Strategies to avoid cultural transcendence include denial, rejection, minimization, diversion, and super�iciality (Hammond, Lieckty, & Damron, in press). An example of denial is when people say there are no real differences between cultures and that all people are basically the same. In denying the complexity of culture, we give ourselves permission to avoid the work and progress that might ensue from addressing it. Another common strategy to delay or avoid cultural transcendence involves rejecting another culture. For example, one might use language to suggest that one culture is superior and “normal” while another is inferior; such language avoids the opportunity to achieve cultural transcendence and instead devalues entire groups of people. Consider, for example, when history books refer primarily to the achievements of White males and ignore or downplay the contributions of women and non-Caucasians (Rothman, 2014). Another way to avoid the complicated work of achieving transcendence is by minimizing differences; when one party oversimpli�ies the views and opinions of other parties, true transcendence is impossible. People who minimize others may do so inadvertently when they assume that having good intentions is enough. Minimization causes people to avoid the dif�icult work of deeply understanding another culture.
Yet another way to avoid cultural transcendence is to distract people or divert effort by focusing attention on a shared goal for a short time—such a tactic works temporarily but does not result in unity or transcendence. This distraction occurs, for example, when people assume that getting all parties to focus on earning a pro�it will nullify cultural differences among and between the parties. This avoidance strategy can result in short-term gain but long-term alienation, when people are no longer distracted and realize they have not come together in a meaningful way.
Relatedly, a super�icial avoidance strategy suggests that one only need learn another culture’s appropriate customs and manners, such as when to kiss, bow, or shake hands. This simpli�ied strategy allows people to ignore the deeply ingrained values that trigger, explain, and support the external actions and norms around customs and manners. When people are willing to engage in self-re�lection and consider ways they may be either purposefully or inadvertently obstructing the work of transcendence, such work is more likely to succeed.
In addition to self-re�lection, there are other tools for understanding and analyzing culture. The next section discusses widely used cultural dimensions that can help employees and managers categorize and understand national cultural differences that can impact people’s actions and priorities at work and in relation to CSR and sustainability. Considering the speci�ic topics of sustainability and social responsibility introduces additional dimensions of culture. The skill of learning to identify and use these dimensions to increase understanding and decrease con�lict applies to topics of national culture and to those of CSR and sustainability, as the next sections illustrate.
4.3 Cultural Dimensions: Understanding Global Behaviors Using simpli�ied categories to discuss complicated issues of culture enables people to explore the complexity of others—and to gain a deeper understanding of themselves and others to �ind a third way. In other words, the goal of understanding cultural issues is transcendence—the ability to move beyond limitations and contradictions (Lewis, 2006). Using simpli�ied categories to describe culture also helps students, employees, managers, and others use a common language so that conversations can feature categories and dimensions instead of individual habits and behaviors.
Before introducing commonly described cultural dimensions, a word of caution is in order. First, these categories derive from research in which scholars surveyed a cross-section of an entire culture, and thus generalizations are not based on any one individual’s behavior (Hofstede, Pederson, & Hofstede, 2002). That is to say, exceptions to each example exist. Given the methodology, the following dimensions help people understand a culture but not necessarily individual behavior.
Second, culture, like an ocean, is always shifting. Wave patterns and water temperature are �luid and change over time, and so does culture. Third, radicals at either end of any cultural dimension typically represent dysfunctional choices. For example, the Nazis during World War II were radical collectivists (one of the dimensions). Bernie Madoff, the perpetrator of the largest business crime in the U.S. history, was a radical individualist (another dimension). Rarely can people �ind examples of ethical behavior in the radical extremes of the cultural dimensions. This book does not purport to elevate one cultural style over another. The goal is to use the dimensions to illustrate that cultural differences must be navigated as people consider the inner and outer boundaries of any �irm that attempts to advance business (especially socially responsible and sustainable business) in the globalized world.
These cultural categories were �irst introduced in the work of Hofstede and colleagues (2002, 2010), which put forth six dimensions of national culture. These include power distance, individualism versus collectivism, uncertainty avoidance, masculinity versus femininity, long-term orientation versus short-term orientation, and indulgence versus restraint. Subsequent work by other scholars incorporated the work of Hofstede and added other elements or described them differently (Hammond et al., in press). Key dimensions are summarized and described more fully in the following sections.
All of the following cultural dimensions relate to the construction of identity or one’s self-concept. All of us do various things every day to construct an image of ourselves for others that we hope remains consistent with the image we have or want to have of ourselves. Artifacts and behaviors that help construct and reinforce identity include how we dress, our hairstyle, what we drive, how we talk, what we talk about, how we spend our money and our leisure time, and even our work styles. Whether we know it or not, or whether we use the following terms, research suggests we relate and construct identity in ways that re�lect these categories below.
Individualism In an individualistic culture, people form identities that are separate from the identities of others; individual performance is more rewarded than group or team performance, in terms of what self and others value. For example, most students write a resume as part of the process of looking for a job. A resume (or its more individualistic counterpart, the curriculum vitae (CV)) is an artifact of an individualist culture, since resumes and CVs typically list individual accomplishments.
An individualist identity typically centers on the self. Individual performance, such as grades received for schoolwork, are very important. An individual may work on a team, but sometimes the motivation for doing so is to enhance one’s own performance. Most individualists choose to be recognized as an individual rather than as part of a team. In fact, when teams receive recognition, some individualists feel slighted.
Individualists are generally unconcerned about the range of rewards for low and high performers, particularly if they see themselves as high performing—this is because their main focus is winning and accumulating individual rewards, accolades, and honors. The most important thing in an individualistic culture is having a chance to shine and be recognized.
At the most general level, the United States is an individualist country. Written history (U.S. and other), often dedicates much time or book space to individual political heroes such as Thomas Jefferson or George Washington. People in the United States typically build monuments that honor individual contributors, and they put political heroes on currency and name streets and holidays after them in recognition of their individual performance. Most U.S. universities (and some businesses) recognize donors by putting their names on buildings and classrooms. In sporting events, Americans make it a point to identify and recognize a team’s most valuable player.
An individualistic manager believes that change stems from individual achievement and creativity. Such a manager wants people to stand out, achieve personal goals, and be individually recognized. Thus, individualistic managers are more likely to be hierarchical and take charge. The organization’s hierarchy is important to an individualist because it gives him or her a chance to be recognized by position. The extreme contrast to individualist is known as collectivist.
Collectivism Collectivists identify �irst with a group or association and secondarily, if at all, as an individual contributor. They typically prefer to bring honor and attention to the group, team, or organization as a whole. For collectivists in work and sporting environments, team performance is more important than individual performance. Japan is a common example of a collectivist culture, though research suggests it is becoming more individualistic with each generation (Hammond et al., in press). In Japan, team sports are played in a completely different way than in the United States. For example, making opponents look bad by signi�icantly outscoring them re�lects badly on an athlete and is considered to be poor sportsmanship. Sporting events rarely recognize individual performance or single players. Instead, the focus is on teams and team success. Even in business, individuals rarely seek or receive recognition for success. It is common to describe the accomplishments of the �irm without speaking directly about the accomplishments of any one employee. For example, collectivist Japanese companies do not always recognize innovators who create new technologies, even if the breakthrough seems signi�icant and receives a patent. Historically, collectivist Japanese CEOs and corporate leaders generally receive higher pay than nonexecutive workers, but not signi�icantly more. In contrast, the salary differential is signi�icant in individualist cultures (Statista, 2016).
How can managers from an individualist culture work with managers from a collectivist one to �ind a third way in which both cultures are honored and privileged? That is the challenge for the global manager. The same skills a manager needs to work with people from different global cultures are needed to work with people who operate from different mental models or have different attitudes about social responsibility and sustainability. Transcendence helps people from different “worlds” work together. This requires fully understanding the types and sources of difference, as well as the strengths and bene�its of all dimensions. The following sections outline other cultural dimensions to consider.
The problem of setting and maintaining agreements in a globalized world is certainly a pressing one, as it remains useful for every negotiation—from peacekeeping efforts to settling parking disputes. It is common for American managers to visit a potential collaborator in China, the Philippines, or different countries on the African continent and come away with what they think is an agreement, only to �ind out later that an agreement in those cultures is not the same as an agreement in U.S. culture. The cultural dimension of universalism versus particularism helps people understand why agreements between individuals or between companies are regarded differently around the world.
Universalism In universalist societies, laws are expected to be upheld and followed by everyone. Universalists believe agreements are part of the rule of law. Children in universalist societies grow up in school systems that prioritize rules and rule followers. Children learn at an early age to obey the teacher, follow the rules, and line up.
Most universalist cultures are rooted in religious practices that support adherence to rules. For example, Islam features very speci�ic rules, including ones about diet, prayer time, and hospitality. Even Muslims who do not practice their religion on a daily basis live by a culturally embedded norm that stresses the importance of “embracing the stranger.” In early Islam’s nomadic desert culture, if a person did not take strangers in and give them water and food, they would likely die. The norm was highly functional for society and thus became tradition. Even today many Muslims are extremely generous with their food and hospitality, and their larger cultural context supports and reinforces this approach. Many universalist cultures in Europe and the West remain rooted in a different religious tradition of Judeo–Christianity. In both traditions (and in derivative religions), rules of honesty, integrity, truth telling, and other practices trace back to early religious practices. Even individuals who are not religious often advocate similar values as an essential part of being a good person.
Universalists often claim “the rules are the rules, and no variance is allowed.” They trust the system to enforce a contract or an agreement. There are often objective measures that determine whether a contract or agreement has been ful�illed. Universalists often want to get down to business quickly and write a contract that de�ines a relationship. They often say things like “trust the numbers,” “trust the process,” “there is one right way to do this,” or “adhere to the rule of law.” The “rule of law” means that individuals have certain rights that cannot be taken away or applied unequally. In the United States, for example, while those at different income levels pay different tax rates, all individuals are required to follow the law to pay taxes. Similarly, the speed limit is the same for everyone.
Particularism Conversely, people from a particularist society generally do not privilege rules in the way that universalists do. In a particularist society, people emphasize relationships over rules. China, which was ruled by either an emperor or a dictator for most of its history, has emerged as a particularist society in many respects. The Chinese concept of guanxi is the establishment of a trusted social network. People who practice extensive social networking and have strong local rules for doing so may be called particularist because they believe that their relationships with others are of utmost importance.
In the United States some researchers have measured individualism and particularism by region. Overall, the United States appears to be a universalist country, but research suggests some regions are more particularist than others. The southern, central, and western parts of the United States, where church attendance is higher, tend to be more particularist (Hammond & Glenn, 2004).
Particularists differ from universalists in that they believe rules can be modi�ied based on changing situations. Their argument is to trust relationships and cherish contacts. There are no objective measures, only relative ones. Work for particularists never clearly begins and never ends. A person’s work is in the community; he or she works to gain trust, protect people, and de�ine relationships, and spends a lot of time getting to know people before bringing them in as business associates. Thus, it may take a long time and many social activities before a particularist connects and initiates business (Trompenaars & Hampden- Turner, 1998).
Issues pertaining to time are some of the most obvious differences between cultures in a globalized work environment. Certainly, technology has played a key role in this issue, as global corporations increasingly work between time zones. To illustrate this point, pretend that you are a North American manager attending a meeting in a different culture. As you leave the airport to go to a place of business, you see the time schedules of �lights posted in the airport. Your �light arrives on time, as most do. There is an orderly line in front of the taxi stand at the airport. Fares for the buses and schedules are published and posted on signs. You arrive 5 minutes early because this is a �irst meeting. You expect there will be an agenda for the meeting, and you expect that the items you agreed to discuss will be on it. However, as you enter the meeting, you �ind something quite different. There are several people already meeting with your new business contact. They are already discussing the issue that you traveled from afar to discuss. They are also bringing up other factors that are not relevant to your business issues. Depending on a monochronic or polychronic cultural viewpoint, the meeting might appear either chaotic and disorganized or productive.
Monochronic Someone from a culture where being on time is important and where meetings typically focus on a single issue is from a monochronic culture. Monochronic means “one at a time.” Mono-chronic cultures (like the United States and Germany) have strict unwritten rules about doing things in order, completing a task, and then moving on. Typically, people in monochronic cultures prefer schedules. They come to work every day at the same time and regard deadlines as important. They have speci�ic expectations for work and engage in performance evaluations and other tools that measure progress toward a goal. They are more likely to have a common process for tasks and to assess progress toward these tasks on a regular incremental basis. They may assess progress using tools such as agendas and to-do lists that dictate and describe forward (linear) motion (Hammond et al., in press).
Polychronic Polychronic cultures are in sharp contrast to monochronic ones. Polychronic views of time involve many things happening at once. Polychronic cultures function more like a marketplace, where lots of things happen simultaneously, rather than like a train schedule where one thing happens according to a strict schedule. Polychronic cultures embrace simultaneous events, as well as the protection and preservation of relationships, because many people are included in the concurrent activity. While such cultures can appear chaotic to people from monochronic cultures, from the perspective of polychronic cultures, concurrent activity is creative and effective (Hammond et al., in press).
People in a polychronic culture typically prefer free-�lowing and less structured meetings. They like creativity and �lexible work. They are not concerned with coming and leaving work at a certain time, but rather care deeply about what kind of new and creative ideas emerge while they are at work. For polychronic workers, deadlines and speci�ic outcomes feel �lexible. Polychronic people prefer trying different methods of operating and can be less concerned with processing on a regular basis. In other words, they like to see the whole �irst before they get down to speci�ics.
One way to measure status is by recognizing individual achievements, such as winning an award for being an outstanding employee.
Understanding how people view status can illuminate their values, preferences, and ideal rewards. Understanding status orientations can also help people in conversation understand how to motivate each other. Some people will be motivated to earn status through achievement, while others may feel that status cannot be changed or should be measured in alternate ways.
Consider a scenario that involves a young student from the Middle East who comes to the United States to study. Over the course of 4 years, this student does exceptionally well and is granted a prestigious scholarship to do graduate work at a major university. Again the student performs exceptionally well, and he returns to his country with recognition and a prestigious degree. Yet when he applies for a job in his home country, he is disappointed to �ind that other, less quali�ied candidates receive consideration that he does not. As he looks into the situation, he realizes that his heritage is working against him.
Ascription-Based Cultures Ascription relates to how heritage affects social status. Returning to the above scenario, the student’s heritage was considered a more de�ining characteristic than his achievements. His relatives do not hold important political leadership positions, nor do they have any religious or social prominence. Thus, in an ascription-oriented culture that values social status that stems from family and historical connections over status from personal achievement, he cannot succeed. Ultimately, he returns to the United States, where he �inds work from an organization that values him for his achievements and knowledge.
This scenario is a reality in many ascription-oriented societies. In these, individual achievements are less important compared to family, religious, community, or tribal af�iliations. The student in the story was from the “wrong” family and the “wrong” tribe and thus was ineligible to achieve high status and preferential treatment in his society.
Achievement-Based Cultures Achievement relates to the way in which educational certi�icates, work experience, training, and other (often visible) rites of passage are accomplishments that contribute to one’s social status. Unlike ascription, where people are born into status, status is earned in achievement-oriented cultures. Awards, merit badges, diplomas, certi�ications, and titles are symbols that determine a person’s status. For example, a surgeon’s age or tribal af�iliation is not a concern for patients; only that he or she is board certi�ied and has a high success rate.
Focus relates to the way attention is managed, directed, and aligned. When communicating, there are cultural differences regarding how direct and de�ined people choose to be when they speak or write; focus relates to these differences. There are many examples of speci�ic versus diffuse languages and cultures. People from a predominantly speci�ic culture tend to focus on a text’s factual accuracy, while people from more diffuse cultures focus on the context in which something is written or said. For example, suppose a young student from an extremely diffuse Asian culture comes to study in the United States, which is a more speci�ic culture. On the �irst day of school, to avoid confusion, the principal calls the young student into his of�ice and gives her careful instructions on how to walk to school, where to put things, how to pay for lunch, and how to get her parents to attend parent–teacher night. Instead of thanking the principal for her help, the young student runs home crying. Later in the day, her father appears in the principal’s of�ice to ask why his daughter was in trouble and why she was shamed on the �irst day of school. The story illustrates how trying to be helpful and direct according to one point of view can be construed as being critical and shaming from an alternate point of view.
Diffuse Focus In diffuse cultures, context is created and the speci�ics of behavior are assumed. Referring back to the young Asian student’s culture, other students (not the principal) would be the ideal people to advise her about the school’s rules. Authority �igures only intervene when there has been a serious indiscretion (Chen & Starosta, 2000).
In diffuse cultures, leaders rarely give direct instructions. Instead, a manager or leader describes a long-term goal and discusses its overall objectives. In such a context, individuals are expected to identify a place to insert themselves if they are to participate in the process. If someone violates a norm or boundary, a peer with a similar cultural background is likely to intervene. In a diffuse culture, workers can “cover” for each other. Individual specialties are less common, and work continues until it is completed. A leader primarily asks for opinions and sets the vision. Standards may vary from project to project because there are many right ways to do things. Deadlines must be �lexible, and change happens often.
Speci�ic Focus Consider a different scenario that illustrates another way to approach time and human behavior. Suppose a human resource specialist attends a meeting in a German division of her company. She plans to work with others to come up with a way to introduce a new policy to the division. Prior to arriving, the local plant manager lays out the decision-making process in a grid on the wall, with a step-by-step guide designed to help the human resource specialist’s team make decisions. “Now all we have to do is �ill in the blanks,” he proudly tells her. The German manager exempli�ies someone who comes from a speci�ic culture; someone who wants the process laid out clearly before the content comes into play. People from speci�ic cultures want to know the starting point of every action.
People in speci�ic cultures tend to prefer instructions that are direct and to the point (Trompenaars & Hampden-Turner, 1998). They prefer a starting point that is narrow and �ixed, where they can focus on one part of a project. In contrast, people from diffuse cultures tend to prefer specialties, and jobs are often segmented. People in speci�ic cultures work a de�ined set of hours and hope to be measured against a clari�ied and predetermined set of standards. It is generally assumed there is one right or best way to do things. There are clear deadlines, and change is rare.
There is great variety in how people around the world use and display emotions. For example, many cultures, such as Japan, discourage the public display of emotion, especially for men. Displaying anger, affection, or disappointment is seen as weakness. Yet people from other cultures, such as Latin American ones
(such as Brazil, Mexico, or Spain), display emotions more openly. This is because various cultures feature either affective or neutral emotional styles of expression.
Affective Emotional Expression Imagine a Chinese market in which a vegetable stand is next to a �ish stand. The owner of the vegetable stand yells at the �ishmonger, “The smell of your �ish keeps people from buying my vegetables!” The �ishmonger yells back, shaking his �ist and stomping around. In some cultures, this exchange represents a con�lict to be resolved, but in the Chinese marketplace this kind of exchange is quite normal. What may seem like high-stress, highly emotional con�lict-oriented communication to some is actually normal communication to others.
Affective cultures are highly emotional. People openly display emotion and do so quite expressively, using bodies, hands, and dramatic facial expressions to emphasize verbal language. In an affective culture, it is common to embrace or hug a colleague. Personal space is almost a nonexistent concept. Latino cultures are good examples of affective cultures because emotion is openly demonstrated. Polynesian cultures are also affective cultures because they are high touch. It is common to embrace people, to touch them, and to communicate nonverbally.
Neutral Emotional Expression In neutral cultures, or places where people contain expressions of emotion, physical contact is typically limited to those with whom you have an intimate and personal relationship. Although Chinese culture is affective in communication, it is physically neutral. In neutral cultures there is a great deal of protection against physical contact. Handshakes are common because they are over quickly and de�ine personal space. Rationality is preferred, and silence between ideas is important. Typically speaking, conversation in Asian cultures is subtle and respectful, and exchanges move at a deliberately slow pace. In such cultures, people are expected to be cool and self-possessed as a way to project cultural norms of competence, with expressions that are not easily read. It is important to understand that people raised in a more neutral culture are not without emotions. But the neutral cultural tradition teaches people to store emotions and display them away from public places. Thus, anger, shame, and even love are reserved for private places (Hammond et al., in press).
Apply Your Knowledge: Six Cultural Questions
The following questions align with different and often contrasting cultural dimensions. These questions allow a leader or manager to explore his or her behaviors to identify what core cultural assumptions he or she makes about what is “right” and “normal.” Pose these questions to yourself and think about how you, your family, close friends, or colleagues might answer. The words in parentheses describe the cultural dimensions. Review your answers. Which cultural dimensions most align with your responses?
1. How do we see our identity? (collectivist or individualist) Is individual or team performance valued? What is the range of rewards between low and high performers? What happens when individuals “stick out?”
2. How do we make or break agreements? (universalist or particularist) Do you follow the rules or follow your friends? How important is the rule of law? How important is it to sustain relationships?
3. How do we deal with time differently? (polychronic or monochronic) How past-, present-, or future-oriented is our culture? How do we conduct meetings? What do we consider to be a deadline? How do we hold each other accountable?
4. How do we deal with organizational status or structure differently? (achievement or ascription) How is status granted? How is status earned? What is the difference between high-status and low-status individuals?
5. What is the focus or starting point? (speci�ic or diffused) Do we start with the context or a speci�ic point? Do we view the project from a wide angle or a close-up lens? Do we value the specialist or the generalist?
6. What is our emotional style? (neutral or affective) How are emotions displayed? What is the value of rationalism? How are different ideas given weight?
Source: Hammond et al., in press.
Understanding different cultural dimensions promotes transcendence and can improve work relationships. The next section offers ways to improve cross- cultural communication to accomplish transcendence.
4.4 Communication in a Globalized World Different types of communities were introduced earlier in this chapter. Some are based on geography, some on identity, and some on organizational af�iliation. Each of the cultural dimensions can be found in each one. For example, in the same geography you might �ind individualists and collectivists, or universalists and particularists, each of which are de�ined by and behave according to their cultural identities.
Globalized corporations that grow across the boundaries of identity, organization, and geography must confront those differences, but cultural confrontations are always, in the end, more personal experiences. They arise from communication between individuals. Future leaders who master the ability to transcend, communicate, and work across cultural boundaries, and who prove themselves capable of building collaborative ventures in communities that are geographically separate, will have a signi�icant advantage over those who minimalize cultural differences. As previously mentioned, the assimilation strategy (in which one culture is overpowered by another) may have some short-term bene�its, but the long-term bene�its always go to those who patiently build good business relationships outside their comfort zone.
Guidelines for Cross-Cultural Conversations
The goal for successful globalization is to learn as much as possible about the orientations, expectations, and cultural norms of the people with whom you are trying to work. Taking the following advice from Hammond et al. (in press) should help all parties move away from focusing on differences and adopt a more open and re�lective stance.
Listen �irst. Ask nonjudgmental questions to keep the other person talking. Acknowledge your own ignorance. Tell others that you do not understand the cultural implications. State your values in a nonmoralist tone. Don’t say, “These are universal values.” Say, “These are my values.” Suspend judgment and action until the consequences are known. Be clear about mutual outcomes and the importance of the relationship.
Chapter Summary This chapter opened by introducing community. It next examined the ideal of cultural transcendence and how and why transcendence is such an important skill for leaders—especially those who hope to build sustainable and socially responsible corporations. The chapter next examined cultural dimensions. Individualist cultures are tied to individual success, while collectivist cultures focus on group success. Universalist cultures believe in one right way and the rule of law, while particularist cultures tend more toward maintaining relationships no matter the cost. People from monochronic cultures tend to want time and activities to be incremental, while people from polychronic cultures expect many things to be going on simultaneously. Achievement-oriented cultures reward individual achievements regardless of social connection, while ascription-oriented cultures ascribe status to people who are in certain groups, regardless of their accomplishments. People from neutral cultures are harder to read because they communicate their emotions subtly. People from speci�ic cultures are precise with information and project execution, while those from diffuse cultures may prefer multiple starting points and more �lexibility or ambiguity. People from affective cultures tend to offer big, loud, and obvious emotional expression, while people from neutral cultures are typically more reserved in expressing emotion.
Mastering these ideas and navigating the ever-changing nature of culture is a lifelong project. The chapter concluded with ways to promote transcendence and positive cross-cultural relationships. Doing so remains an essential skill in a globalized business community where international connections abound and where responsible managers conduct business in ways that respect and encourage people from a wide range of cultural backgrounds. The same tactics can be useful in navigating conversations about social responsibility and sustainability—especially because people from different cultures and communities tend to have varying views on both subjects.
1. What differences exist between the types of communities? How does creating such categories help us understand communities? How does categorization improve business management?
2. How would a universalist approach an agreement, compared to a particularist? 3. How would you negotiate a business deal with an individualist? How about with a collectivist? 4. Why would it be dif�icult for a person from a neutral culture to conduct a business negotiation via videoconferencing? Why would it be dif�icult for a
person from an affective culture to conduct a business negotiation using only e-mail? 5. What have been your positive and negative experiences in trying to resolve cultural differences? 6. What role does identity play in your cultural values?
Learn more about the nature of cultural differences and related research: http://geerthofstede.com/ (http://geerthofstede.com/)
To visualize Hofstede’s cultural dimensions on a map, see: https://www.youtube.com/watch?v=U-XdlbgFxZo (https://www.youtube.com/watch?v=U-XdlbgFxZo)
For more information on guanxi, see: For more see: http://chinese-school.net�irms.com/guanxi.html (http://chinese-school.net�irms.com/guanxi.html)
Click on each key term to see the de�inition.
A cultural dimension that values expressive, open emotions that are both verbal and nonverbal.
A group of people de�ined by a common place and/or social network infused with similar interests.
Members of a cultural dimension in which group identity precedes individual identity.
A cultural dimension in which communication relies heavily on context.
A term with many de�initions; refers to the increasingly interconnected network and �low of goods and services across national and international boundaries.
A cultural dimension in which individual identity precedes group identity.
A cultural dimension in which people do one thing at a time in order.
A cultural dimension that values low-intensity emotional expression, self-control, and containment.
A cultural dimension in which people focus on relationships over the rule of law.
A cultural dimension in which people do many things at the same time in no particular order.
The process of communal learning by which patterns of behavior emerge that proscribe values and roles.
A cultural dimension in which speci�ic instructions and order are directly communicated.
A cultural dimension that features universal law or one “right” way.
5 Environmental and Corporate Challenges
After reading this chapter, you should be able to:
Describe global warming, suspected causes of global warming, and the environmental challenges of air and water pollution and ozone depletion. Compare and contrast environmental management systems and the ISO 14001 standards and describe how both foster organizational ef�iciency, reduce waste, and reduce environmental impact. Explain how processes such as cradle-to-cradle design, biomimicry, and net zero construction provide tools to innovate, mitigate risk, gain organizational ef�iciency, reduce waste, and reduce environmental impact.
Introduction In 2006, environmentalist and author Bill McKibben published a book titled The End of Nature, which received signi�icant attention from management scholars. McKibben does not argue that the end of nature equals the end of the world; rather, he argues that the ecosystem may be experiencing the end of the “self- healing” period. McKibben argues that as humans have developed products like the pesticide DDT—which killed 40% of the birds in the United States—their footprint has been so large and so ominous that the only way for the natural world to persist is for humans to manage it. He says people can no longer wait for nature to heal itself; nor can we ignore the signi�icant environmental problems we collectively face. McKibben’s book was another urgent warning about the impact humans have on the ecosystem and the precarious future we face if we do not change.
This chapter clari�ies that no employee, corporation, citizen, or government stands outside of nature, the ecosystem, and the environment. It argues that the impact of human activity on water, air, the protective ozone layer, and global warming are not reversible. It then examines new conceptualizations that allow corporations to see the environmental impact of their operations, and work to mitigate damage. It introduces new conceptual tools such as environmental management systems (EMSs), ISO 14001, cradle-to-cradle, and the ideal of net zero construction as ways corporations can turn the tide of environmental degradation. Essentially, it discusses the need for humans to manage the earth’s ecosystems, with the corporation playing a signi�icant role.
This chapter �its neatly with Chapter 6, which discusses the emerging efforts of governments and other advocacy groups to regulate and reduce environmental impact. In this discussion we begin to see that government and self-regulation can have a positive impact on the environment—a key goal of social responsibility.
5.1 Environmental Issues This chapter uses the term environment to refer to the natural ecosystems that include air, water, land, and the life forms in, on, around, and dependent on them. One problem with environmental issues is that they manifest themselves on varying scales for different living organisms. For example, suppose Jim fails to maintain his car’s engine. It will become less ef�icient, use more gas, emit more pollution, and cost more to run each month. Perhaps the global impact from Jim’s car is negligible. However, if Jim’s car is one of 100,000 cars in the community that have similar problems, then air pollution in his area might worsen. Over time, residents’ health might be affected, and there may be impacts on wildlife, water quality, and tourism. Less ef�icient engines mean more fuel will be consumed, which in turn means that fewer fossil fuels are available in aggregate. More pollution impacts the neighborhood’s plant growth. If these behaviors are practiced by communities around the world, the ozone layer will be depleted and there will be an increase in global temperatures due to the greenhouse effect. Thus, one individual’s behavior, negligible on a personal level, has a potential cumulative effect when multiplied by the rest of the planet’s population.
The same issues apply to corporations, which have both the disadvantage and advantage of size. The disadvantage relates to how negative corporate actions are more likely to have a larger, more measurable, and more signi�icant impact on the environment. On the other hand, responsible corporate behavior can also make a signi�icant difference in the community and the larger ecosystem. This section covers the primary environmental issues, which include global warming, climate change, water pollution, and air pollution.
Global Warming and Climate Change
One view of environmental health suggests that the world’s climate is changing, and even major oil companies agree that carbon dioxide emission is the primary cause. The Royal Dutch Shell (2016) website says: “Our lives depend on energy wherever we live. But in order to prosper while tackling climate change, society needs to provide much more energy for a growing global population while �inding ways to emit much less CO2 [carbon dioxide]” (para. 1).
Carbon dioxide released by burning fossil fuels is one of the major likely causes of the buildup of gases that caused the greenhouse effect and led to global warming. The greenhouse effect occurs when carbon dioxide and other gases trap the earth’s heat and keep it from dissipating.
While politicians and others argue about the cause of the change, there is less debate that the planet is heating up—a phenomenon known as global warming. Global warming refers to the fact that the earth has warmed between 0.6 and 0.9°C over the last century, or about 1.8°F. The Intergovernmental Panel on Climate Change claims the increase is most likely due to human-generated greenhouse gases (Intergovernmental Panel on Climate Change, 2016).
One of the deadliest types of pollution, and the other major source of greenhouse gases contributing to global warming, is black carbon. Black carbon is partially combusted black smoke created by diesel engine and wild�ires, and it is full of particulate matter (pollution). The majority of people in developing nations create black carbon because they, for a variety of reasons, rely on inef�icient fuel sources to heat their living spaces and cook their food (Dons et al., 2011). For example, in China the vast majority of low-income workers use large charcoal bricks to provide heat and as a cooking source. In much of India and Africa, people burn charcoal or use dangerous kerosene stoves. As a result, many of the cities in these places are too smoggy to see the sky (in fact, some athletes refused to participate in the 2008 Beijing Olympics due to pollution concerns). The smoke, and the effect of the smoke on health, is overwhelmingly negative for humans and the planet (Dons et al., 2011).
Another possible cause of global warming comes from deforestation. Half of all the original forests on earth have been cut, burned, and turned into farmland (Malhi et al., 2008). Burning forests releases carbon into the atmosphere in the form of smoke. It also eliminates the forest as one of the atmosphere’s natural air �ilters. Deforestation efforts have multiple short-term economic bene�its that can be dif�icult for developing nations to resist. Trees are cut to burn as fuel (sometimes to make the charcoal that creates black carbon) or lumber. But instead of adopting a reforestation program, land is cleared as pasture for livestock or for plantations and farms. Cutting trees without growing them back causes erosion, a loss of biodiversity, and increased atmospheric carbon dioxide (Angelsen & Kaimowitz, 1999; Malhi et al., 2008).
Sometimes deforested areas are cleared to raise cattle and produce beef. This is another probable source of increased atmospheric carbon dioxide and global warming. Methane, which is a by-product of digestion from animals such as cows, is a signi�icant greenhouse gas. The average cow produces from 100 to 250 pounds (70 to 120 kg) of methane gas every year. According to the Food and Agriculture Organization of the United Nations, methane produced by cows contributes to almost 18% of all greenhouse gases (Time for Change, n.d.).
With these and other sources of carbon continuing unchecked in parts of the world, some predict the earth will warm by as much as 6.4°C, or 11.5°F, by the year 2100. The World Bank (2016) says developing nations will be hardest hit because populations in those countries have less resiliency to cope with the multitude of changes that such an increase will herald.
Some political organizations that oppose environmental regulations concede that the climate is changing, but they argue it is not necessarily because of human activity. Despite this, U.S. government agencies, governments of many coastal cities, the United Nations, the World Bank, and the vast majority of scientists, including those from energy companies, believe that the major cause of climate change is human activity. This relates to CSR because more executives now consider climate change to be a corporate risk and use CSR budgets and initiatives to measure and address climate-related activities. Some climate-related risks relate to pollution, waste, and water supplies and use.
Water Pollution and the Scarcity of Clean Water
In the late 1990s, just prior to the terrorist attacks of September, 11, 2001, the National Security Study Group made two dire predictions. The �irst was that the United States was vulnerable to a large-scale terrorist attack. The second prediction, which went largely unnoticed, stated that future geopolitical con�licts would not be fought over land, riches, or oil, but rather fresh water supplies and rights (U.S. Commission on National Security, 1999).
While water covers the vast majority of the world, fresh water that can be used for drinking and to irrigate crops is becoming increasingly scarce. Only about 1.5% of the water on earth is fresh, and much of that is locked in icy glaciers in the North and South Poles (U.S. Environmental Protection Agency [EPA], 2016d). In other regions of the world, fresh drinkable (potable) water is becoming increasingly dif�icult to �ind because of both organic and chemical pollution. It is estimated that over 500 people die every day in India from water pollution–related illnesses (United Nations Children’s Emergency Fund, 2013). China reports that 90% of the water in its cities is polluted, leaving half a billion Chinese with no access to safe drinking water (“China Announces,” 2015). However, the problem of safe drinking water and polluted water supplies is not limited to just developing countries. In the United States about 45% of all streams and lakes are polluted. Consider the 2016 crisis in the city of Flint, Michigan, where numerous citizens became sick due to the local municipality’s failure to ensure safe drinking water supplies for the city (CNN Library, 2016).
The Organisation for Economic Co-operation and Development (OECD) predicts that by 2030, 780 million people will lack access to safe drinking water (OECD, 2012). Such numbers represent almost half of the world’s population. The same report says that corporations and factories now use three times more water than they did 50 years ago. Certainly, human and economic development remain curtailed when clean water is scarce or unavailable, as mortality rates, illness, and disease (as well as malnutrition and death) result. Also, many industrial processes and agricultural activities rely on water for viability; less water means less viable crops and a more fragile food supply.
Pollution is compromising clean water sources throughout the world.
Pollution affects more than just municipal and freshwater sources; oceans are also affected by pollution. The UN estimates that 87% of all marine �isheries in the world are over�ished. The Nature Conservancy estimates that at the current rate, 70% of all coral reefs in the world will be gone in the next 50 years. The effect of global warming is also being felt in the delicate ocean ecosystem. Seawater is absorbing carbon dioxide, which then becomes acid, and acid-sensitive species are dying out (Food and Agriculture Organization, 2012). It is not just the water’s pollution that causes concern. As polar ice caps melt, there is an increase in sea levels, too. Oceans are rising, making life dif�icult in coastal areas such as New Orleans and the Netherlands, where people live at or below the current sea level. Rising oceans also threaten entire countries, such as the island nation of Kiribati (McGrath, 2015).
Water pollution poses threats to individual countries and communities, but it also threatens global safety, health, and business (some businesses use water as an input, such as beverage industries, while others use water to clean facilities or cool equipment, such as electronic component manufacturers). Thus, water pollution and continued access to clean water and sanitation are CSR issues that overlap with strategy and public health. Whether �irms are motivated to focus on water use and pollution out of concerns for safety, CSR, community engagement, or sustainability (or another reason), the topic overlaps with CSR and sustainability at many levels.
Like other sources of pollution, air pollution stems from both natural and human-made activities. Exposure to polluted air indoors or outdoors can cause serious health problems. All populations, but particularly children, pregnant women, and the elderly, can develop diseases from being exposed to air pollution. Daily and prolonged exposure to air pollution also reduces people’s ability to be active and exercise, and it increases their susceptibility to infection (National Institute of Environment Health Sciences, n.d.).
All nations deal with air pollution, though some cities have geographic features to help—for example, some nations have mountains that trap bad air, while others may be on the coast where prevailing winds push polluted air away. In the United States, the Centers for Disease Control and Prevention (CDC) claims that air pollution has generally been declining since about 1990. This is largely due to pollution controls on cars and stricter regulations for factories. Still, the CDC (2016) cautions that air pollution can account for increased cancer rates, birth defects, and even heart disease. This data relates to CSR in two ways: It reinforces the value of past CSR efforts (and past legislation regarding factory emissions) and also suggests that �irm managers need to continue to monitor emissions and other possible contributions to pollution.
The ozone is a thin layer of gas that �loats in the stratosphere between 9 and 28 miles above the planet. Although mildly poisonous to humans, it is critical to life on earth because it absorbs ultraviolet light from the sun. Excessive ultraviolet light causes skin cancer, damages the eyes, and reduces our ability to resist disease. Historically, chloro�luorocarbons, or CFCs, formerly used in refrigerants, solvents, and propellants, were impacting the upper atmosphere and depleting the ozone layer over the earth. In 1987 world leaders negotiated the Montreal Protocol, a multinational treaty that banned CFCs and other ozone-depleting chemicals from being manufactured and sold. Countries have until 2030 to phase out all CFCs. Still, the existing and prior damage to the ozone remains. Scientists believe it will take until the middle of the 22nd century for the ozone layer to completely recover (United Nations Environment Programme [UNEP], 2014).
Regarding air pollution, data indicates that worldwide, the combination of government regulation and corporate care (self-regulation) helps reduce pollution. For example, in 2014 the UN under-secretary-general and United Nations Environment Programme (UNEP) executive director Achim Steiner announced progress had been made in terms of the ozone layer’s recovery. (UNEP, 2014). The Montreal Protocol is the world’s most successful environmental treaty. It provided signi�icant protections for the stratospheric ozone layer that kept unhealthy levels of ultraviolet radiation from reaching the earth’s surface. But Steiner also says, “The challenges we face are still huge. The success of the Montreal Protocol should encourage further action not only on the protection and recovery of the ozone layer but also on climate” (as cited in UNEP, 2014, p. 1).
The topics of air pollution, ozone layer damage, and water pollution (including a discussion of carbon dioxide and methane) relate to CSR because businesses and communities rely on access to water for basic operations. Ensuring the viability of people and communities, as well as ensuring continued access to basic services, is thus both a CSR and a strategic issue.
5.2 Finding Solutions Solutions to environmental issues require considering and cooperating with stakeholders, and achieving CSR and sustainability comes with challenges. For example, in the past 10 years, the state of California has considered building a high-speed rail system between Los Angeles and San Francisco. Such a system would reduce the congested traf�ic on the freeway between the two giant cities and also make each trip between the cities have less of a carbon footprint. However, farmers from the San Joaquin and Hanford parts of California took a not-in-my-back-yard (NIMBY) approach to the issue, which is when local residents oppose a project that will likely hurt their community. Residents oppose the rail system on the grounds that it will take too much farmland out of production and pollute their neighborhoods (California High Speed Rail Authority, 2012). As with many large projects developed for greater ef�iciency, a negative impact on some can have a positive impact on many.
For these and myriad other reasons, environmental issues remain complicated. The changing and improved science and the debates around causes, complications, and impacts of different types of pollution cause disagreement in governments, consumers, regulatory bodies, and between corporate stakeholders. The questions of scale associated with environmental issues add another complicated dimension to their consideration. These include: Can a single country make a difference if leaders and businesses within that country change their behavior? Can a single corporation or single industry impact a global environment? Can individual behaviors make any difference at all?
Recall how business leader Ray Anderson of Interface Carpet (described in Chapter 1 (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/sec1.1#h4CSR) ), suggested that only individual action can make a signi�icant difference. As CEO of his company, he realized that he needed to take local action in order to make global impact.
CSR and Sustainability in Action: Interface Carpet, Part 2
When Ray Anderson reinvented himself, his company, and his industry, the carpet business was one of the most polluting industries on the planet. Most carpet was made using chemicals created from petroleum. Old carpet was dumped in land�ills. The industry was known for its high impact on the environment. But Anderson saw a different way to conduct business. He said:
Distancing ourselves from the wellhead requires that we reimagine the antiquated, linear, take-make-waste industrial system of which we are all a part; it requires us instead, to become part of a thoughtful, cooperative, cyclical system that mimics nature in the way that we design, source, manufacture, sell, install—and eventually reclaim and recycle—our products. This ambitious undertaking requires new technology, new inputs, and new thinking. (as cited in Anderson & White, 2009, p. i)
Interface adopted a sustainable design approach that opened the company to innovation and creativity and made it more pro�itable. Interface’s accomplishments since 1994 are impressive. In terms of waste and pollution, Interface has taken the following steps:
Cut greenhouse gas emissions by 94 percent Cut fossil fuel consumption by 60 percent Cut waste by 80 percent Cut water use by 80 percent Invented and patented new machines, materials, and manufacturing processes Increased sales by 66 percent, doubled earnings, and raised pro�it margins. (Interface, 2016, para. 3)
The creation of an Interface European plant has been even more impressive. A recent press release reports, “As of January, the plant is operating with 100% renewable energy, using virtually zero water in manufacturing processes and has attained zero waste to land�ill” (Interface, 2016).
Interface Carpet’s environmental achievements does not mean it was always easy for Anderson or his company. Interface spent some years “in the red” (meaning it was �inancially unpro�itable) and faced years of change and internal organizational issues. The Interface story showcases how being a green company comes with challenges as well as distinct bene�its. In most years, the bottom line grew and the company’s pro�ile changed for the better. The company is now recognized as an environmental leader.
The journey of Interface Carpet, Ray Anderson, and similar companies was even more impressive because of the era in which it took place. When Ray Anderson started his environmental journey in the early 1990s, the tools were not in place to do what he wanted. By his own admission, Anderson spent a great deal of time inventing and creating processes. He discovered that all around him, new tools were emerging from companies and organizations facing the same challenge.
Today most companies can identify, understand, and manage their environmental footprint by using an EMS to track the impact an organization has on natural systems. An EMS offers a basis for understanding waste and pollution generation, as well as for �inding ways to increase ef�iciency and be intelligent about resource �lows. The sections that follow discuss the bene�its of an EMS and examine the ISO 14001 EMS standards. These standards form the foundation of the life cycle assessment detailed in Chapter 6. An extension of such tools is the net zero ideal, which refers to the goal of eliminating all wasted energy and materials.
Environmental Management Systems
An environmental management system (EMS) is the set of systems and routines that �irms use to identify and manage waste and pollution and to understand how natural resources are used and allocated. With an EMS, a corporation does not just manage the manufacture of product or service; it systematically manages its total environmental impact, including waste, carbon footprint, transportation costs, and product disposal. An EMS can range from informal and simplistic to formal and extremely complex. A system can be managed in-house or assigned to an outside vendor. In some �irms, staff members may already be managing purchasing activities, maintenance work, or other key functions with an eye toward stewarding resources, but they may not call the system they use for this work a formal EMS. Thus, in some �irms, formalizing the process simply requires giving current activities a name and more structure. In other �irms, starting an EMS requires building new systems and structures.
The U.S. Environmental Protection Agency (EPA) offers a clear de�inition and a set of processes to develop an EMS for businesses of any size, including local, state, and federal agencies.
An EMS provides a systematic way of managing an organization’s environmental impact in a manner that can be regularly reported and tracked. Sometimes an EMS results in an extensive document that re�lects analysis and results from an external third-party organization—such a document serves as a benchmark to make improvements and reduce waste.
Other times the EMS is done internally, and results may or may not be made public, depending on what company managers want. A good EMS becomes both a tool and a process, not just a means to publishing a one-time report. A good EMS assigns accountability and gives responsibility to speci�ic people for speci�ic outcomes. It sets a framework for training in goal achievement. It gives consistency and order to operations and goals and describes how they will build on each other year after year. An EMS encourages contractors and suppliers to establish their own EMS and to integrate better with the focal organization (Florida & Davison, 2001).
Some organizations interested in implementing an EMS struggle with getting buy-in from management, unions, and/or employees. People often resist change, even when the changes seem well intentioned and focused on reducing environmental impact and increasing operational ef�iciency. Outdated thinking suggests that spending money to mitigate environmental impact increases an organization’s costs without providing suf�icient compensatory �inancial or other bene�it. Yet with the EMS and other new tools available to organizations, evidence increasingly suggests that reducing a �irm’s environmental footprint also increases its bottom line. Pioneers like Ray Anderson are examples of business leaders who grew business by making the corporation a steward of the environment.
EPA studies indicate that organizations in which managers take the environmental management process seriously incur signi�icant bene�its above and beyond any costs incurred in launching and re�ining an EMS. While internally managing an EMS takes time and requires training (and sometimes hiring an external consultant), the potential bene�its are signi�icant. According to the EPA (2016a), such bene�its include:
Improved environmental performance Enhanced compliance [reduces costs due to fewer/lower fees] Pollution prevention Resource conservation New customers/markets Increased ef�iciency/reduced costs Enhanced employee morale Enhanced image with public, regulators, lenders, investors Employee awareness of environmental issues and responsibilities
Overall, the vast majority of organizations committed to an EMS say it is an outstanding management tool because it allows managers to take both a broad focus and a strategic and tactical view of the organization on a regular basis.
The ISO 14001 EMS Standards A more speci�ic EMS process designed for businesses is the ISO 14001 protocols and standards (International Organization for Standardization [ISO], n.d.a), which relate to EMS analyses. The ISO 14001, established in 1996 and updated in 2015, uses a “plan, do, check, act” process to encourage continuous improvement. Deploying an EMS using these standards is consistent with systems theory because it takes a holistic approach. It is also consistent with the Shingo model because it follows the ideas of continuous improvement. It also aligns with the sustainable business practices detailed in previous chapters.
The ISO 14001 process is outlined in Figure 5.1. Its approach suggests that if all stakeholders, including top management, fail to commit to environmental improvement, then success will not be as pervasive. Once stakeholders are committed, planning begins. The ISO 14001 protocols show the speci�ics of planning are important because they identify, prioritize, and assign measurement tasks to each environmental issue within the corporation. As corporations follow the ISO 14001 processes, they �ind that the necessary costs—including training, equipment, and new personnel—become evident as they move from planning to implementation. Stakeholders need more commitment when the process requires �inancial resources. Over time, and as the new system works, new communication networks can emerge because people tend to discuss what the process reveals. The bene�its of less waste and less effort become evident as people share successes and setbacks. Through the evaluation process, the company becomes more re�lective and makes improvements. In the review phase, management reviews the results and starts the process again to achieve continuous improvement.
Figure 5.1 Key elements in ISO 14001 deployment
Source: Adapted from “Learn About Environmental Management Systems,” by U.S. Environmental Protection Agency, 2016b (https://www.epa.gov/ems/learn-about-environmental- management-systems#costs (https://www.epa.gov/ems/learn-about-environmental-management- systems#cost) ).
The ISO 14001 standards may seem daunting for many companies, as they require being committed to reducing environmental impact and systematically measuring results. However, �irms that comply with the standards and become certi�ied often receive priority as service providers. Also, early certi�ication efforts can save money over time, given that compliant �irms avoid �ines and expensive delays as they catch up with regulations. While the ISO 14001 and EMSs are now widely used, many companies in the United States and Europe do not formally adopt conventional environmental management standards to evaluate their environmental footprint. One reason the statistic seems low is because many �irms adopt informal systems but do not pay consultants or of�icially report �indings using the ISO standards in CSR and sustainability reports.
The EMS and ISO 14001 are tools for continuous improvement, so a one-time adoption does less to advance a company than a long-term commitment to using the standards and processes. Both tools also assume that the problem of environmental damage is permanent and without a �inal answer. Rather, environmental management occurs through ongoing and continuous resolution that damage can be mitigated but never eliminated. Still, there are many compelling environmental success stories of companies from various industries implementing the EMS and ISO 14001.
For example, Walmart (among many other companies) has published extensive accounts of savings that resulted from deploying EMS tools at headquarters and beyond. The implications suggest that EMSs are useful across industry boundaries; they offer a valuable tool that employees and leaders can use to monitor and advance operational impacts.
CSR and Sustainability in Action: Wisconsin Energy Corporation
The Wisconsin Energy Corporation (WEC) began to use an EMS in 2002. Doing so led to signi�icant changes at one of its power plants, the Pleasant Prairie power plant, which took an innovative approach to address the side effects of fuel use and creation. Under normal operations, the coal-burning power plant emits a signi�icant amount of air and land�ill pollution. The plant burned virgin coal to create energy, resulting in �ly ash, which is similar to the soot that is left over in a �ireplace. Using the EMS, WEC engineers looked at old land�ills and noticed that the ash they were dumping was much darker in the new �ills. The darker ash contained unburned coal, which represented a signi�icant amount of waste and inef�iciency. The �irst step the engineers took was to reburn much of the land�ill coal and �ly ash mixture, which extracted the energy and saved on the purchase of new coal. This created new and more concentrated �ly ash that had cement-like characteristics and became a valuable component of concrete. The WEC found that it could sell this concentrated �ly ash to cement manufacturers and eliminate the land�ill altogether. In a year’s time, this step saved over $12 million in land�ill costs, plus reduced the amount of virgin coal purchases by $3 million (Wisconsin Energy, 2013).
Net Zero Construction
Another way some corporations can address environmental issues is to use net zero construction. These standards have broad implications for all industries. Note that an estimated 40% of the total fossil fuel consumption in the United States and European Union (EU) go toward heating and cooling large buildings (UNEP, 2009). This poses a signi�icant cost to businesses and creates a tremendous amount of greenhouse gas. The net zero consumption principle proposes that carbon emissions and energy bills can be signi�icantly (and sometimes entirely) reduced, and dependency on fossil fuels eliminated, if people construct buildings that conserve and reduce energy usage. Thus, the term net zero refers to the fact that buildings designed and built with such goals could potentially require no net inputs of energy other than solar and geothermal (naturally occurring sources of energy). In some cases such buildings can even generate a net gain of energy; the energy surplus can then be stored or sold to energy companies (Baden, Fairey, Waide, de T’serclaes, & Lausten, 2006).
A zero energy building (alternately referred to as a zero net energy building, net zero energy building, or net zero building) consumes an average of no net energy from government or private sources or from any source other than the building itself. Thus, the net zero model means the total amount of energy used by the building each year is roughly equal to the amount of renewable energy the building creates.
Depending on the activities of a net zero building’s tenants, such buildings may have periods of the day that require excessive heating or cooling, but on an annual basis they produce as much (or more) energy as the tenants consume. Consequently, they do not increase the amount of greenhouse gas in the atmosphere. According to the U.S. Department of Energy (DOE), most net zero energy buildings get half or more of their energy from local power suppliers, but they return the same amount at other times (DOE, 2015).
In the United States and Europe, net zero or near net zero is now a requirement for new government buildings. Advocates see this requirement as a cost savings move that also allows participating agencies to advocate a reduced carbon footprint and market themselves as examples of low-emitting �irms with quality CSR and sustainability programs. The net zero movement has also migrated to the housing market and changed the way homes are built in the United States. While some contractors �ind it dif�icult to change old habits, many �ind a market demand for energy ef�icient homes that are either net zero or close to net zero (Torcellini, Pless, Deru, & Crawley, 2006).
The Green Acres housing development in New Paltz, New York, located 80 miles north of New York City, is considered to be the �irst net zero housing development in the United States. The homes are built of insulated concrete forms with spray foam insulated rafters and triple-pane casement windows (all of these choices eliminate heating or cooling losses). To make the homes even more energy ef�icient, they are also heated and cooled by a geothermal system (meaning that the heat source comes from the earth). Greenhill Contracting began construction on Green Acres in the summer of 2008, and after a year of occupancy the solar panels of the �irst occupied home in Green Acres generated 1,490 kilowatt hours (kWh, a measure of how energy is bought and sold) more energy than the home consumed. The second occupied home has also achieved zero net energy use. The development serves as an example to consumers and other contracting �irms of how buildings can be constructed with sustainability and cost savings over the structure’s life.
A company in Amsterdam has made the �irst cradle-to- cradle vacuum cleaner. What changes in business and manufacturing do you think are necessary to bring cradle- to-cradle engineering to the U.S.?
Better Vacuum Cleaner
Better Vacuum Cleaner From Title: Mission Possible: Cradle-to-Cradle Design
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One of the leading �igures in biomimicry, Janine Benyus, talks about a trip she took with some engineers who were inspired by seashells to discover a way to stop scaling in their pipes. Can you think of other problems in design or technology that have been solved by taking inspiration from nature?
Biomimicry in Industry
5.3 Cradle-to-Cradle Design and Analysis As issues related to the environment become increasingly important to stakeholders, these individuals search for methods, processes, and frameworks to guide their action. The design philosophy known as “cradle-to-cradle design thinking” exempli�ies one such framework. Cradle-to-cradle design asks adherents to model business and industry on natural processes so that the outputs from one process become the inputs for another and no resources are wasted. Consider, for example, how the leaves that fall from a tree become the compost that fuel the tree’s growth. (This book expands on this concept in Chapter 6, which discusses how corporations use cradle-to-cradle design to reduce environmental footprints.)
The term cradle-to-cradle (sometimes called Cradle2Cradle) is a registered trademark of McDonough Braungart Design Chemistry and embodies the same philosophy as regenerative design. Walter R. Stahel originally developed the basic principles in the 1970s, but in 2002 Michael Braungart and William McDonough published a book called Cradle to Cradle: Remaking the Way We Make Things. This book has become an important work in the design industry, and many companies and organizations around the world implement its tenets as part of their CSR and sustainability journey (McDonough & Braungart, 2002).
The core principle of cradle-to-cradle plays on the common phrase “cradle-to-grave” (more on this in Chapter 6). The cradle-to-cradle model suggests that any product or design should be considerate of life and future generations and should minimize waste. Waste represents a form of death, but recycling and creatively reusing products keeps resources alive for many generations. Cradle-to-cradle design represents an advanced systems theory model because it compels people to look holistically at an entire life cycle, from the inputs, throughputs, and outputs of the product, business, or system.
The Cradle-to-Cradle Process
The cradle-to-cradle process involves four basic steps. The �irst involves looking at material health and identifying the composition of the materials used in the manufacturing process. This forces the designer to ask if he or she is using hazardous materials, pigments, or compounds that might persist in the environment and cause harm. It also forces the designer to consider the upstream source of products and whether that source is sustainably raised, harvested, extracted, or otherwise procured.
The second step is to look at material reutilization and ask how much of the material used to make a product can be recovered or recycled at the end of the product’s life. Again, the cradle- to-cradle process suggests that every product should be recyclable and convertible into a new product. There are increasing examples of this practice in current industry, such as manufacturing recyclable cars or outdoor deck material created from recycled milk bottles.
The third step involves assessing the amount and source of energy required for production. In this step, for example, designers consider using at least 50% renewable energy to make any part or subassembly for the product.
The �inal step in this process involves considering any actual waste created, such as water pollution, wasted paper, water used in manufacture, scrap material or clippings, or air pollution. In this step, designers and manufacturers look at the social implications of waste and the ways people use and discard products, to ensure social responsibility once the products leave the factories (Sacks, 2009).
The cradle-to-cradle design is part of a family of ideas that suggest nature and evolution can inspire human effort and innovation. Over time, natural environments have adapted in ways that provide “answers” to human problems, but answers that humans have historically overlooked.
When designers and engineers (and others in manufacturing and procurement) deliberately turn to nature for examples of how to address design problems, the results are sometimes referred to as biomimicry. Biomimicry is when products imitate nature. Examples of this practice include Ford Motor Company designers who studied how geckos stick to walls and ceilings to invent and test nontoxic adhesion alternatives. The following are additional products that re�lect ways in which nature can inspire industry:
Deformable glass, which mimics the strength found in seashells through something called hierarchical ordering. Biodegradable adhesives, which are based on waterproof adhesives from mussels. Self-cleaning paint, which is inspired from the waxy bumps found in lotus leaves that carry water and dirt away from the plant. Anti-fouling (prevents growth of organisms)and wicking (pulls moisture away) surfaces, which uses ridges like that of a pitcher plant to get water and have slick leaves. Antibacterial surfaces, which are inspired by shark scales. Products such as packaging foam, bricks, and leather grown from bacteria, which use little energy (Terrapin Bright Green, 2016).
The biomimicry movement has grown nationally and internationally. Biomimicry has its own institute, a research community, and many advocates, including leaders and designers in large companies. One of the foremost practitioners is Amory Lovins, an American physicist, writer, environmental scientist, and chair/chief scientist of the Rocky Mountain Institute, which uses principles of biomimicry (and other scienti�ic principles) to advance its mission to support the
Biomimicry in Industry From Title: TEDTalks: Janine Benyus—12 Sustainable Design …
0:00 / 3:15 1x © I f b All Ri ht R d L th 03 15
An example of how biomimicry can contribute to innovation is found in the Sharp Corporation’s use of butter�ly wing movement to design an electric fan propeller.
ef�icient and restorative use of resources. Everyone associated with the institute works toward a vision of sustainability (Rocky Mountain Institute, 2016).
These examples of biomimicry reveal how CSR and sustainability goals can help companies innovate. For some, biomimicry represents an advanced way to approach innovation. For others, it offers an exciting way to fully “walk the talk” in terms of learning from nature, improving because of nature, and honoring nature while running a business.
Apply Your Knowledge: Solutions to Environmental Issues
Select a community with which you or your group are familiar. Then do the following:
List the three most signi�icant environmental issues facing the community. For example, the city might be outgrowing its water source or experience temperature inversions during the winter caused by air pollution.
Then, list how each of these issues impacts your health. For example, are you exposed to cancer-causing chemicals, and does the community have a higher-than-average cancer rate? Is air pollution a problem that leads to a higher-than-average rate of lung disease?
Review the list and detail the major causes of these problems. Are these caused by factories? Traf�ic?
Provide several signi�icant steps that could be taken at a corporate level to reduce the impact of the environmental problem.
Think of several signi�icant personal steps that could be taken to reduce the impact of the environmental problem.
Chapter Summary This chapter discussed how there are renewed interest and bene�its in connecting to and restoring the natural environment, rather than depleting it. In other words, many corporations use business principles and the motivation to save money in the long term to enact behaviors that restore or cause less damage to nature.
Corporations in which leaders and employees use some or all of the environmental innovations described in this chapter work to be sustainable over time in all incarnations of the de�inition. Such �irms have the potential to be pro�itable over the longer term, making them less susceptible to negative market forces than companies whose leaders eschew such practices. Leaders who focus on CSR and sustainability, and turn that focus into sustained actions, have a competitive advantage because they are likely to be more innovative, cost-effective, and spend less money on waste disposal.
However, the question of how to build a sustainable business that has a restorative impact on the environment remains. As mentioned, EMSs, net zero construction, and biomimicry offer tools for understanding why protecting the natural environment is important and how people can tackle environmental initiatives. In his book The Web of Life, author Fritjof Capra discusses the cultural context in which the scienti�ic revolution of environmentalism is unfolding. Capra (1996) argues we are discovering that we cannot understand the major problems of our time in isolation, because these problems are interconnected and interdependent. For example, he argues that population growth is tied to poverty and that the extinction of plant and animal species is linked to developing country growth and indebtedness. Speci�ically, he states:
Ultimately these problems must be seen as just different facets of one single crisis, which is largely a crisis of perception. It derives from the fact that most of us, and especially our large social institutions, subscribe to the concepts of an outdated worldview, a perception of reality inadequate for dealing with our overpopulated, globally interconnected world. (Capra, 1996)
This chapter suggested that leaders and individuals can do more than simply consider nature; people and �irms can use speci�ic frameworks and principles to preserve, protect, and even restore the natural world in which we all work, play, build, and consume. Such exemplars can inspire others to do the same, and their work (and mistakes) helps �irms and industries �ind competitive advantage without creating environmental damage.
1. How has or how might global warming impact you or your community? How will it impact various economic sectors, such as tourism? Agriculture? Transportation?
2. Do you think corporations can really be restorative to the natural environment? Are the innovations described in this chapter short-term fads or do they have “staying power?” Why or why not?
3. Perform a quick EMS of your classroom, educational institution, or work environment. What recommendations do you have for its carbon footprint? 4. How might our lives be different if most buildings were constructed according to green building codes? 5. Research and select a product that mimics nature. How does it reduce waste and reduce the impact on the natural environment? How can the design or
concept of this product be applied to other products or industries? 6. What are three things you could do in your life right now to reduce your impact on the natural environment?
The island country of Kiribati faces a large migration due to climate change: http://www.bbc.com/news/world-asia-paci�ic-34967633 (http://www.bbc.com/news/world-asia-paci�ic-34967633)
BBC environment correspondent Matt McGrath assesses why a 2°C increase in global average temperatures is seen as the gateway to dangerous warming: http://www.bbc.com/news/science-environment-34920941 (http://www.bbc.com/news/science-environment-34920941)
Learn more about the International Organization for Standardization’s standards: http://www.iso.org/iso/home.htm (http://www.iso.org/iso/home.htm)
A video on the ISO 14001 can be found here: https://www.youtube.com/embed/_hs54V3x1VQ?fs=1&autoplay=1&rel=0 (https://www.youtube.com/embed/_hs54V3x1VQ?fs=1&autoplay=1&rel=0)
Video-based information on Interface Carpet, CSR, and developing countries: https://www.youtube.com/watch?v=Tu6wzHp7aEk (https://www.youtube.com/watch?v=Tu6wzHp7aEk)
Review the Sustainable Development Goals 2030 at the website found here: https://sustainabledevelopment.un.org/post2015/transformingourworld (https://sustainabledevelopment.un.org/post2015/transformingourworld)
Review the �indings of the Intergovernmental Panel on Climate Change here: http://www.ipcc.ch/ (http://www.ipcc.ch/)
Click on each key term to see the de�inition.
The creation of arti�icial products that mimic natural products and have a less negative impact on the environment.
The study of a product’s or process’s life cycle that follows it from birth to disposal and attempts to use the outputs of one system to become inputs for another.
environmental management system (EMS) (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A system used to study the impact of corporate activity on the environment and identify ways to reduce negative impacts; can be formal or informal.
global warming (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
The slow warming of the earth’s surface temperature, likely caused by the greenhouse effect.
greenhouse effect (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
The effect of carbon dioxide and other gases that cause heat to be trapped in the earth’s atmosphere, similar to a greenhouse that traps heat.
ISO 14001 (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
An International Organization for Standardization process to identify and measure a company’s environmental impact.
net zero (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A building construction method that allows a building to generate as much energy as it uses (or more).
A natural gas that forms a protective layer around the earth that screens harmful light and radiation.
6 The Corporation as Steward
After reading this chapter, you should be able to:
Compare and contrast the responsibilities of �iduciaries and corporate stewards. Assess the impact on the environment and how a life cycle assessment can identify a product’s, process’s, or service’s true cost to society. Describe government regulatory agencies in the United States, the European Union, and the global environmental movement.
Introduction In this chapter, we examine the notion of �inancial and non�inancial stewardship and examine how the corporation can be a steward of people, pro�its, and the environment while managing and even repairing environmental impact and damage. Firms interact with (and sometimes extract from and pollute) the natural environment in multiple ways. Buildings use wood and metal from forests and mines; companies require electricity (from coal, wind, solar, nuclear, or other sources of energy); and computers use components from mines and fabrication plants. Firm employees who drive to work use energy and likely create pollution in the process. Manufacturing companies use natural and human-made inputs to create new products for sale.
This chapter examines the relationship between the natural environment and the corporation. It addresses the environmental issues introduced in Chapter 5 and explores the true social, environmental, and �inancial cost of certain corporate activities. Part of addressing how companies relate to the environment includes discussing how they comply with legal regulations, best practices prescribed by nongovernmental agencies, and international organizations (such as the United Nations). This chapter describes analytical tools that allow people to identify risks, rewards, and impacts related to creating, using, and disposing products and services. These tools also provide data for companies that want to create less damaging or more restorative products. The discussion then turns to communitarianism, the green movement, and the formation of environmental regulatory agencies in the United States and European Union. It closes with a short discussion of how strategic concerns about risk management and human welfare issues related to water rights and water supplies may dominate corporate conversations going forward.
6.1 Corporate Fiduciary Stewardship Building on the environmental issues described in Chapter 5, this chapter examines the role and responsibilities of a corporate leader. Central to this discussion is a pressing dilemma of con�licting incentives that leaders in most publicly held corporations face. By de�inition, a publicly held corporation has multiple partial owners who likely invested to gain a maximum return on their investment. Return on investment (ROI) is a tangible, objective measure of an investment’s quality. ROI measures the amount of return relative to cost. To calculate ROI, divide the return or bene�it of an investment by its cost. The result is a ratio that allows investors to compare different types of opportunities so they can evaluate the ef�iciency and effectiveness of each choice and select the most pro�itable (or otherwise ideal) option. Most publicly held corporations are expected to deliver a high ROI; otherwise, investors will take their money elsewhere. By law, corporate leaders in public �irms have a legal responsibility to provide a return on investment in both the short and long term. This means corporate leaders are required to manage trade-offs. Speci�ically, leaders of public �irms manage the trade-off between protecting and restoring the environment (which can have costs that reduce ROI in the short term) and using the environment with less care in order to improve ROI for owners in the near term.
A �iduciary refers to a person who holds a legal relationship of trust with one or more parties (such as shareholders). Typically, a corporate �iduciary prudently takes care of money or other assets. Corporate leaders by default become �iduciaries, or people with a special duty to owners/shareholders to protect and keep assets safe but also ef�iciently and effectively use assets. By law, a corporate leader cannot pro�it at the expense of corporate shareholders; he or she can also be �ired for not managing funds to maximize pro�its. In other words, leaders are morally and legally bound to seek pro�it on behalf of owners (Inc., n.d.). Thus, �iduciaries are stewards, or caretakers, of the �inancial side of business. However, seeking pro�it for shareholders is not the only aspect of the complex notion of stewardship.
Peter Block is a thought leader in the world of business who spent the past 40 years advocating for an expanded notion of corporate stewardship; one that goes beyond �iduciary concerns. Rather than just representing the interests of shareholders, Block (2013) advocates that corporations should adopt a stewardship model of management whereby they treat people and natural resources as assets to be cared for, nurtured, preserved, and respected. Stewardship commonly refers to the responsible care and management of an asset over time that allows for sustainability and growth. Some argue that stewards are caretakers who balance all interests in the hopes of sustaining the life and value of an asset (Inc., n.d.). For Block, stewardship is a mind-set that changes the fundamental way corporate managers and leaders behave. Block suggests that not only are managers and leaders stewards of what happens within the corporation, they are also stewards of the corporation’s social and environmental impacts.
Block (2013) says that corporate leaders are responsible for ethical communication and for providing a quality good or service. He challenges corporate leaders to tend to environmental issues while simultaneously being �iduciaries of the �inancial bottom line. Block makes a compelling argument that most corporations act in immediate self-interest and do not have the capacity to balance long-term environmental needs with demands for short-term pro�it. Stewardship involves listening and weighing multiple interests, including long-term �inancial, social, and environmental interests, in addition to short-term �inancial ones.
Religious, social, and environmental movements have long advocated the notion of stewardship over resources, which suggests that human and natural resources have intrinsic and long-term value and thus should be viewed with a long-term mind-set. But Block’s version of environmental stewardship suggests going one step further—to restore environments. Such restorative behaviors include removing trash, planting trees, leaving nature as you found it, and actively caring for people and places. Stewards have a wide range of choices in how to act and may often feel squeezed between the short-term wants of people and the longer term needs of future generations and place or the environment.
According to Block (2013), good stewardship often means choosing service over self-interest and creating long-term value over short-term gain. He suggests that stewardship can protect the earth from harm by making people accountable for the outcomes of an act or institution, without forcing, controlling, or taking unwanted charge of others.
In other words, good corporate stewards commit to the long-term well-being of their region, society, and environment. They also recognize the interdependencies between four spheres:
1. Economy 2. Livable community 3. Social inclusion 4. Governance
Regarding economy, a good steward attempts to take into account �inancial factors previously discussed, such as shareholder investments, expectations, and pro�its. But these interests can best be sustained within a livable community, one that is capable of providing well-trained and empowered employees who are able to lead healthy and productive lives. This means that good stewards attempt to practice inclusion by involving all stakeholders in communication, and they practice, submit to, and attempt to exemplify appropriate governance.
In order to embody this view, good stewards consider and work across boundaries of jurisdiction, sector, and discipline to connect these four spheres and create opportunity for the region.
It should be noted that people who are not necessarily corporate leaders are also considered stewards. For example, educators and students exercise important stewardship over society, the environment, and future generations when they study the world’s various interconnections. Society also entrusts politicians and civil servants to be stewards of regions, resources, and people’s well-being. Citizens can remove these privileges (by vote or impeachment) if government leaders do not practice stewardship. Owners can also remove corporate stewards (managers) if they are not acting in the corporation’s best interests.
In some way, we all have stewardship roles. To be sure, corporate leaders have macro stewardship responsibilities, but employees at all levels are accountable for many of the same issues. People who work for �irms come face-to-face with stewardship issues if they waste resources, are asked to dispose of toxic waste inappropriately, take safety shortcuts, or lie on a �inancial report. Stewardship is a shared responsibility. To better understand our own stewardship responsibilities, it is critical to discuss the concepts of ownership and responsibility.
Types of Ownership and Responsibility
There are many different conceptualizations of ownership, and different kinds of owners feel different levels of stewardship vis-à-vis the organization. The concept of private and transferable ownership lies at the core of most functioning capitalist societies. People in functioning capitalist societies typically understand that a person or entity who owns something can transfer that property to another person through a sale or through inheritance. A person who owns a piece of property (or a company) also has a stewardship over that property or �irm; such stewardship can be formally transferred to another person. Essentially, ownership carries with it the opportunity to be a steward.
In a totalitarian state, ownership of private property is disallowed or carefully controlled—this makes it harder to be an effective steward because owners usually have more power than other stakeholders. In Communist states, such as the former Soviet Union and contemporary North Korea, the concept of ownership is totalitarian, and the state owns most businesses and other factors of production. In contrast, the United States and European democracies conceive of ownership as a state in which assets can be held privately or by different government entities, including on national, state, and local levels. For example, governments may own transportation systems, such as Amtrak in the United States or British Rail in the United Kingdom. Many of the older European airlines,
Amtrak is an example of state ownership.
Frank Duenzl/picture-alliance/dpa/AP Images
such as Air France, KLM, and Swissair, began as government-owned businesses. They have since been privatized or are semiprivate, which means they are jointly owned by government entities and private companies.
Partial ownership creates stewardship and legal challenges; it is dif�icult to determine who is responsible for performance when both shareholders and elected governments own part of a corporation. This state of affairs is further complicated when an owner needs to be held responsible by a court of law. When legal entities hold someone responsible for environmental damage, for example, it is dif�icult to prosecute or defend owners when the owner is the same government that manages the regulatory agency.
Extending Ownership and Responsibility
When a corporate stakeholder sees a poorly calculated decision or one that has a negative environmental impact, it may not be easy for him or her to signal concern; nor are such warnings necessarily welcomed. It is clearly documented, for example, that engineers from the Morton Thiokol corporation foresaw the failure of the space shuttle Challenger and tried unsuccessfully to block its launch (Atkinson, 2012). When the Challenger exploded on January 28, 1986, all seven astronauts on board were killed.
The �irst person to convincingly sound the alarm about social and environmental concerns (also known as a whistle-blower) serves as an early warning system for the larger community. While many people think of themselves in the role of steward, many others believe they are powerless to change systems and organizations. However, this is not necessarily true, as many important voices have pointed out. Among them is former Czech Republic president Vaclav Havel, who was a political organizer during the Soviet occupation of his country during the 1980s. In 1985 he wrote a compelling essay about the powers of the seemingly weak. In it, Havel (1985) argues that even those in the most oppressive situations have power and responsibility to change the system for the better. Similarly, Margaret Wheatley (1996, 2003), a thought leader in the world of business and an expert on complexity theory and leadership, believes that stewardship resides in everyone, regardless of the social and leadership environment in which they live.
This stance illustrates how some people, such as Wheatley, consider individual workers and actors to be quite powerful. Such a mind-set suggests that one need not wait to have a leadership position or be deeply experienced and highly credible to guide an organization to sustainability. Everyone has the capacity to be a good steward and advance the interests of the organization and the greater good.
How can stewards at all levels of an organization take appropriate stances on critical concerns? By respecting, encouraging, and considering multiple voices.
Extending the ideas of Havel and Wheatley, Max De Pree, the longtime leader of the Herman Miller corporation (manufacturers of of�ice furniture), publicly fostered the idea of an inclusive corporation, or one in which all voices are heard and given credence. He wanted to create a caring organization that was also �inancially successful. Because of that belief, he opposed business ideas that only bene�ited senior management. He suggested that good leaders and stewards are open to communication. But most of all, he was known for talking and listening to anyone and considering and enacting ideas from all levels of the company (De Pree, 1987). Unlike Wheatley and Block, who are consultants and idea leaders, De Pree was a manager and corporate actor. His ideas focused less on what a steward is and more on what he or she does.
This oil spill is an example of the wide-reaching consequences that can occur when safety and stewardship is compromised to save money. This seems to have been an easily avoidable occurrence. How do you think business executives make mistakes like this? How can they be avoided in the future?
Alaska Oil Spill Explained
Alaska Oil Spill Explained From Title: The Spill (https://fod.infobase.com/PortalPlaylists.aspx?
© I f b All Ri ht R d L th 02 04
6.2 The Cost of Failed Stewardship Up to this point, stewardship has been described as both a mind-set and a set of behaviors that can be distributed or enacted from inside or outside an organization. Equally important to cover are stewardship failures; indeed, examining failures creates another way to motivate action. Most instances of failed corporate stewardship go far beyond harming �inancial stakeholders. Such failures impact the social community, the environment, employees, the legal system, and the banking system (Clarke, 2004). For example, the potential failure of the U.S. auto industry in the 2008 recession triggered Congress to offer massive �inancial aid to top manufacturing companies. The subsequent �inancial “bailout” was justi�ied for a variety of reasons, including to preserve jobs and national security. However, the same bailout cost taxpayers; cost the �irms in reputational capital; and cost citizens and investors stress, in terms of uncertainty and fear.
What are the additional costs when stewardship fails? These can be seen in the blunder by Atlas Minerals, a now closed industrial site near the entrance of the Arches National Park in Moab, Utah. Driven by a demanding client and a perceived threat, members of management did not consider the longer term environmental impacts when they decided how to mine and store uranium. Atlas Minerals was not considering sustainability, which involves meeting the needs of the current generation without compromising the needs of future ones.
Arches National Park is a tourist destination for visitors from all over the world; they come to see beautiful red rocks that have been hollowed by wind erosion. But in contrast to these natural wonders sits Atlas Minerals. When Atlas operated between 1960 and 1990, it stored large piles of tailings, or leftovers from the extraction process from the region’s uranium mines, at the edge of the Colorado River. The Atlas Minerals mine and industrial site primarily provided fuel for the nation’s nuclear reactors and helped create fuel for nuclear weapons used to defend the United States. As the need for uranium dwindled, however, scientists and the general public learned more about the toxicity of the uranium tailings. Not only was the dust from the tailings contaminating the population near Moab, but water seeping through the tailings was also �lowing into the Colorado River, Lake Powell, and the Grand Canyon. What was once thought of as an acceptable risk and normal by-product of manufacturing was �inally seen as an environmental disaster. With such discoveries and related changes, Atlas Minerals entered Chapter 11 bankruptcy, and in so doing dodged liability for undertaking a massive cleanup that cost many times more than the company was worth. Since then, the DOE has taken over the site (Grand County Utah, 2016) and is now tasked with cleaning up all such sites that contributed to pollution related to the creation of nuclear weapons (Yahoo! Finance, 2016).
After the DOE assumed ownership of the land, it set up a trust to fund the site’s cleanup. As of 2016, only 50% of the tailings had been removed. Trainloads of radioactive tailings are continuously removed from the site—about 5,000 tons each week. The tailings are taken approximately 40 miles away to a location considered less environmentally sensitive because it is not at the edge of the Colorado River (Yahoo! Finance, 2016). The project will cost taxpayers many times the amount that Atlas Minerals made in pro�it during its years in production. In fairness, corporate leaders who in the 1950s endorsed the plan to build a uranium mill and store tailings near the Colorado River did so with the approval of, and even encouragement from, government agencies. They operated using the best science of the time, although there were environmental engineers, local workers, and others who could see the folly of putting a radioactive tailings pile so close to the Colorado River. However, their concerns were dismissed, ignored, or discounted.
For the sake of short-term cost savings and expediency, and due to a narrow de�inition of impact, a river was polluted, the life expectancy of nearby humans and animals was reduced, and the cost of conducting a massive cleanup was passed on to taxpayers. In contrast, corporate leaders of today and the future, especially those who take a stewardship mind-set, research the
impacts of location, sourcing, and product ingredients on current and future generations before making decisions.
If we agree with Havel, Wheatley, and De Pree, then most (but not all) of the blame goes to those who own the corporation. The bad planning, failed science, poor execution, and bankruptcy are not just the failure of corporate leaders, but also of regulatory agencies, government, and even local citizens and employees. We all share in the blame for poor stewardship if we are connected to a community. But as problems get larger and involve more stakeholders, it becomes increasingly dif�icult to reach agreement and take collective action.
In addition, it may seem dif�icult to foresee the impacts of large-scale corporate activities on future generations. However, several tools can help assess the environmental impact of a product, process, plant, or any other activity in which an organization may engage. One is the life cycle assessment (LCA), which provides a way to measure a corporation’s environmental impact and includes energy costs and material usage information. An LCA describes the process of evaluating the social and environmental implications associated with creating, consuming, and disposing of a product, process, or activity (American Center for Life Cycle Assessment, 2016).
The LCA allows corporations to examine waste, reduce costs, and innovate products and services. In other words, it can lead to both short-term and long-term �iscal and environmental bene�its if �irms utilize its data to innovate.
It is often assumed that LCA projections are approximate and should be adjusted when more exact information becomes available. However, leaders should not avoid LCAs or leave them half �inished due to lack of perfect information—instead, leaders should make solid assumptions, state what these are, and continue with the LCA process.
LCAs can be extensive, comprehensive, and therefore costly, depending on their level of detail and accuracy. But they can also be enlightening, even in their simpler and less expensive forms. Whether extensive or simplistic, such analyses evaluate energy inputs, environmental emissions, and the social implications of business operations. In contrast, the cost of not doing an LCA can also be extensive, as seen in the Atlas Minerals case; it can result in �irms mistreating stakeholders, wasting resources, incurring internal expenses, or receiving bad publicity. Running an LCA would help managers identify and address weak spots and risky areas.
When managers do not assess impacts, they may fail to see risks as well as opportunities to evolve products to mitigate environmental and social impacts. For example, after performing an LCA, Levi Strauss & Company implemented changes to mitigate the environmental impact of its jeans.
CSR and Sustainability in Action: Levi Strauss & Company
An LCA done by Levi Strauss & Company in 2016 showed that approximately 1,003 gallons of water are used to make a single pair of jeans. Producing the material accounts for 680 gallons, and the washing and cleaning of machines and manufacturing facilities account for the rest. Almost 70 pounds of carbon dioxide are produced to create each pair of jeans, mostly during fabric production. The LCA, which follows the product from birth to end of use, also found that Americans wash jeans, on average, after wearing them 2 times. Europeans wear them 2.5 times, while Chinese wear them 4 times before washing. The LCA suggested that if consumers wear their jeans 10 times before washing them, they could reduce the environmental impact of jeans by 77%. Using cold water and air-drying them would further reduce jeans’ environmental footprint (Levi Strauss & Co., 2016).
Using these �indings, Levi Strauss implemented the Project WET Foundation to train employees to save water and educate others on ways to conserve water. The company also used the LCA results to partner with Goodwill and implement a special tag on Levi’s products encouraging consumers to consider the planet before washing the item. The tag also suggested which washing settings to use to reduce environmental impact and encouraged those who buy jeans to donate clothes rather than throwing them out. Because of the LCA �indings, Levi Strauss found innovative ways to reduce its product’s environmental impact and to encourage others to become stewards of the environment.
The LCA Process
While there are several different approaches to undertaking an LCA, the cradle-to-grave assessment (the approach used by Levi Strauss) offers comprehensive data and is most accurate, because it looks at the complete process of making a product. Cradle-to-grave is a term that refers to the time from initial manufacture or “birth” of a product or service to its disposal or “death.” The cradle period for a car, for example, involves the extraction of metals, chemicals, and minerals for car parts and electronic components, and the extraction of petroleum for plastics and the gasoline or electricity that will power the car. Performing an LCA for a car also means considering its end-of-life destination, which for many cars is either a junkyard, a land�ill, or a recycling facility, where some or all of the parts are extracted and reused. As another example, consider the cradle-to-grave LCA of a newspaper. Harvesting and grounding trees into pulp is an energy- intensive process. Paper is produced from the pulp; the paper is shipped to suppliers and then sent on to printing facilities that print ink on it. The same facilities fold and prepare the paper to ship to vendors. The paper is then delivered to homes and of�ices in cars and trucks that produce pollution and are powered by fossil fuels. At this point, the paper has left the cradle stage and is now moving through the life stage, where it is consumed (read). It is then disposed of and heads toward the grave stage. Newspapers (those that still exist in this digital age) can be burned, used as wrapping or protective cover, be recycled, or thrown away to decompose in land�ills. The impacts of each grave can also be analyzed. If papers are recycled, one possible outcome is to create cellulose insulation, which can be installed in homes and of�ices. It is also possible to calculate the fossil fuel savings from the insulation, along with the effects of most other steps in the life cycle. Conversely, if the papers are burned, then the release of carbon can also be measured and assigned to the product LCA measurement tally.
When recycling costs and bene�its enter the picture, some people suggest that the LCA becomes a cradle-to-cradle analysis. Cradle-to-cradle was discussed in Chapter 5.3 (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/sec5.3#sec5.3) ; the term was coined by design advocate Bill McDonough, who suggested that when the output of one cycle can be the input for another cycle, then materials need never enter land�ill or junkyard “graves.” When the process of making and using a newspaper ends with land�ill expenses and impacts, then the analysis is a cradle-to-grave analysis. If, however, the analysis includes data on recycling and �inding alternative uses for the product, then it begins to resemble a cradle-to-cradle analysis (McDonough & Braungart, 1998).
Note that there is an entire industry of �irms and practitioners interested in conducting LCAs. As these needs have increased, so has the need to standardize and develop processes that enable comparisons and ensure accuracy. There are widely accepted standards in place that are managed by the International Organization for Standardization (ISO). Speci�ically, standards such as ISO 14040 and 14044 explain how to conduct LCAs. Both sets of standards recommend that the process include four distinct phases (as illustrated in Figure 6.1). These phases, or steps, are interdependent, which adds to the complexity of the analysis. Further complicating matters is the back-and-forth nature of this process, where, for example, changes in goal and scope impact inventory analysis, and changes in inventory analysis impact goal and scope.
Figure 6.1: Major components of a life cycle assessment
Phase 1: Goal and Scope An LCA begins with the statement of scope and a goal for the study. The statement establishes the context for the study and explains what added value to expect from the project—it gives the project a framework, purpose, and context. Some managers might want to do an LCA to understand carbon-related issues, while others might want to understand labor, land�ill, or water-use concerns. Thus, all parties need to agree on the scope and purpose of the LCA at the outset. The goal is both general and speci�ic. It is general because it lays out the study’s boundaries. It is also speci�ic because it includes the technical details that guide the subsequent work. The goal and scope statement describes the functional units being studied, the system boundaries, the study’s system limitations, and the impact categories that have been chosen. System boundaries comprise the limitations of the study, and the boundaries different managers choose can vary from company to company or product to product. For instance, in the Levi Strauss example, the company de�ined the “system” by looking only at production of the 501 model of jeans, thus limiting the study to one style. That study’s impact categories are also clear. Analysts looked at water usage and carbon footprint but did not look at other impacts such as hazardous waste.
Phase 2: Inventory The next phase of an LCA involves creating an inventory of all relevant inputs, processes, and outputs related to a good or service. For example, an LCA can apply to a cup of coffee, a sweater, or a consulting assignment. Inputs may include energy, water, materials, and labor. They might also include required plants, factories, and equipment, including land. This part of the study examines all of the things that go into making a product (or providing a service or creating a process). The inventory also includes outputs, and analyzing these involves answering questions such as, “What speci�ic products or services are provided?” “What waste is created?” “What pollution is created?” “What secondary bene�its—such as recycled newspapers becoming insulation—are created?” “What is the value added when this product comes into existence?” All of these data are needed to create an illustrative �lowchart of the entire production process and the relevant supply chain.
If done correctly, inventory analysis yields a complete list of all activities within the system boundary, including the supply chain, the inputs, and the outputs. The inventory analysis also provides a complete map of all the activities in the production system boundary, giving a clear picture of what data can be presented to analyze the production and distribution system. The LCA shows how inventory �lows into the system, how it is changed, how it leaves the production system, and what value is added (or destroyed) along the way.
Phase 3: Impact Studies An impact study searches out data to quantify the expense and impact of each step in the LCA. This phase of the LCA is designed to evaluate the signi�icance of social and environmental impacts based on the system �low (how a product or service moves through its life cycle). If you are going to complete an LCA, begin with the following questions:
What are the impact categories (water usage, carbon footprint, land�ill space and cost, mining activities, human toll of mining, fossil fuel use, and so on)? What model will you use to measure impact (cradle-to-cradle or cradle-to-grave)? How will you classify each stage of production? Where and how are the inventory parameters sorted and assigned to speci�ic impact categories? What is the impact measurement? Will it be in dollars, carbon output or usage, or some other unit of measure? What is the overall impact category total? What assumptions are included in that number?
Data validity is an ongoing concern for LCAs because processes change regularly, as does the environment. Data must be accurate and current. Common metrics must be used so that data between systems is fair, accurate, and comparable. There are two types of LCA data. The �irst is unit process data, which is determined from direct surveys of companies or plants that produce the product of interest, and is carried out at a unit process level and de�ined by the study’s system boundaries. Unit process data is the actual cost of producing a single unit—not just its monetary cost, but its cost in gallons of water or carbon consumption, for example. The second type of data is environmental input–output data, which is based on national economic input–output data rather than data directly from company sources and instruments. Sometimes an analyst will need to use mixed sources; if this is the case, it must be stated in the report. Of course, it is ideal to gather all data from the same type of source; however, at times it is better to use mixed-source data than to ignore or omit data.
Phase 4: Interpretation The interpretation stage of the LCA is important and represents the most subjective stage. In this stage, the analyst, or team of analysts, assess and decide whether some impacts are “good” or “bad,” value adding or wasteful, and then determine how to compare such results to baseline or competitive data. In this step, analysts return to the study’s goals and consider the intended users of the results. They then make reporting and summary decisions accordingly. As with the entire process, the best way to protect the integrity of the process and its results is to state assumptions in footnotes or the body of the report. Consumers of the report can decide for themselves whether they want to rerun the report (or parts of it) based on different assumptions, or whether the assumptions hold as more data become available.
The Value of the LCA
With sustainability and social responsibility as goals, stakeholders are looking for ways to understand how our collective activity impacts the course of humans and nature. The reports and assessments relate to CSR because they represent concrete ways to analyze the actual resource-level impacts of a company or a product. LCAs offer those interested in CSR a tool to analyze, compare, investigate, and measure corporate behaviors. LCA reports conducted over time and based on raw data also allow those interested in CSR the opportunity to analyze long-term improvement or decline in a more objective manner than is offered by assessments based on public opinion. An LCA is an excellent conceptual tool that is used both nationally and internationally to study the impact human systems have on natural systems—in this way, an LCA is both an environmental and social CSR tool. An LCA offers a narrow view of how one set of activities impacts one part of nature. Organizations such as the American Center for Life Cycle Assessment have created larger databases that offer a more complete picture of the life cycle costs of various processes. As people continue to conduct LCAs and contribute to databases, the impact, trade-offs, and valid (or invalid) assumptions will grow increasingly clear and useful for CSR and sustainability practitioners.
The value of pursuing an LCA lies in the fact that considering linkages and impacts enables managers to see connections and possible risks in time to take action. An LCA provides stakeholders with data on how some aspects of the company impact the environment. It also provides government and regulatory agencies with data they can use to create or avoid legislation. An LCA can reveal where �irms can expect problems and reveal places to focus on in terms of innovation, resiliency, or alternatives. For instance, in the Levi Strauss example, the manufacturer recommends washing jeans less often to reduce water usage and thus minimize the product’s carbon footprint.
As another example, consider an LCA that Procter & Gamble (P&G) scientists performed on Tide laundry detergent. In so doing, they learned that the greatest impact on the environment was not from the manufacturing process or the product’s chemicals. It was also not from shipping and disposing heavy plastic bottles and paper boxes around the country. Rather, the heaviest environmental impact came from customers using hot water to use the product. Depending on the cost of fuel and energy, the environmental impact of using electricity or natural gas to heat water can be quite high. P&G could have given up on the goal of
After performing an LCA, Procter & Gamble offered consumers cold- water laundry detergent to help reduce the environmental impact of heating water.
stewardship and sustainability by pointing out that the greatest impact of laundry soap came from user behaviors, which is not under the company’s control. Instead, however, P&G chose a more innovative path. The company reformulated the detergent to be effective in cold water and found that doing so increased market share and pro�its while decreasing the product’s environmental impact (Procter & Gamble, 2008).
The example of P&G working with LCA data to create a better and less damaging product re�lects how LCA relates to resiliency and social responsibility.
Resiliency The concept of resiliency is typically treated as an individual quality. It is often regarded as a personal and psychological characteristic of a strong person who can “bounce back” after setbacks and dif�iculties. But resiliency is also an important characteristic of strong communities and of sustainable systems.
In nature, resiliency describes an ecosystem’s capacity to absorb a disturbance and still maintain its basic structure and viability. The system theory makes resiliency more dif�icult to attain because it suggests that in an open system we cannot control nor see all of the aspects that impact an area of stewardship. That said, resiliency remains a valuable characteristic in an open system because a more resilient (open) system is more able to adapt to change without catastrophic impact. For example, in 1988 a wild�ire burned 36% of the trees in the Yellowstone National Park ecosystem. U.S. Forest Service policy demanded that workers quickly put out the �ires, and news
coverage suggested that Yellowstone might be destroyed. However, �ire is part of any forest’s life cycle, and thus wild�ires are part of its longer term and resiliency story. The resilient forest sprouted millions of new trees in the next season (trees that could only sprout under intense heat), and 25 years later those trees form the habitat for many resurging species of birds and small animals (Schullery & Despain, 1989).
Just as maintaining a forest requires accepting natural periods of stress (wild�ires) that result in a stronger and more resilient ecosystem, humans and organizations can also build resiliency. In building a sustainable organization that has a strong relationship with social, governmental, and environmental partners, resiliency is the desired characteristic. One of the most extensive discussions of resiliency in the history of mankind pertains to global warming. The notion of sustainability combined with the idea of resilience forces a discussion about how much our human systems, including corporations, governments, militaries, and agricultural practices, can impact planetary ecological systems. The threat from global warming raises many questions, including, “How much of an assault on resources can our planet take?” “What is the impact of human activity on global water and air temperatures, and thus on climate, water levels, weather patterns and long-term survival?” “How much do human-constructed systems impact natural ecosystems?” “How can policy makers, government, and international organizations impact human behavior in order to reduce the footprint on the natural environment?”
The answers to these questions are still under investigation, and exploring the available data is outside the scope of this text. In terms of social responsibility and sustainability, current and future leaders (and consumers) need to know that these questions matter at the highest levels of management. The search for answers continues, but as data emerges, the implications vary for different industries. Thus, leaders must train themselves to ask the questions, request the data, and analyze it to enable action—whether that means innovating (like P&G), taking responsibility, ceasing or transferring activities (like Atlas Minerals) or cocreating solutions with communities and stakeholders (like Levi Strauss).
Being resilient can also drive business opportunities. The Honest Company, the ecofriendly consumer products manufacturer founded by actress and entrepreneur Jessica Alba, is valued at $1.7 billion (Howell, 2015a). Alba suffered asthma-related allergies that af�licted her in childhood, and she worried that her baby would suffer the same plight. She therefore launched the Honest Company to create products free of toxic chemicals and arti�icial ingredients. Alba has been on the cover of Vanity Fair as “Founder of the Year” and has been listed by Forbes as one of “America’s Richest Self-Made Women” (her estimated net worth is $200 million; Howell, 2015a). This success shows how the quest for sustainable business and resiliency in both humans and corporations can be good for the environment, consumers, and the �irm. It also underscores how understanding and cultivating resiliency for both economic and natural systems is one of the single most important questions—and sources of opportunity—for upcoming generations. Alba wanted children to be healthy (a form of resilience), and she wanted her �irm to stand for health and sustainability.
Apply Your Knowledge: Perform an LCA
Draw a map that represents the LCA of a common product. Include all inputs, processes, and outputs. Consider the outcomes of the LCA. What are some suggestions you could make to reduce the product’s environmental impact?
Establishing Yellowstone National Park to preserve nature is an example of the green movement’s work.
6.3 The Cooperative Culture There is at least one philosophical school that attempts to explain the relationship between humans, their social systems, and nature—communitarianism. As the name implies, communitarianism describes a philosophy that emphasizes community, or the association and af�iliation of entities at individual, social, and ecological levels. As a philosophy, communitarianism forces us to look at our relationship with others. It requires knowing how individual behaviors affect others, including families, neighborhoods, communities, and countries.
Particularly when applied to corporations, a communitarian philosophy constitutes yet another element of sustainability. In order to become stewards of sustainability, we must see and understand our impact on others, the environment, and the government. One route to creating a more sustainable world is for corporate actors to adopt the mind-set of communitarianism. Communitarianism poses questions about how we relate to each other and makes us inquisitive about the relationship between the �irm and other people, groups, cultures, and the environment. In the communitarian world, resiliency is achieved when individuals, corporations, and other entities can absorb a disturbance and still maintain basic structure and viability. In some ways, communitarian ideals sparked the green movement in the United States and internationally.
The Green Movement in America
The early environmental movement in the United States embodied many tenets from communitarian ethics. Literary �igures from the 19th century such as Ralph Waldo Emerson and Henry David Thoreau often wrote about the value of wilderness, nature, and the environment in laudatory and venerating terms. They suggested that these natural creations were gifts; they were even a means by which humans could access the divine (Atkinson, 2000; Thoreau, 1995). These ideas were a form of practical communitarianism that emphasized resilience and sustainability. Many people were in�luenced by these ideals, and thus it became popular to believe that humans need nature for a variety of reasons. As these ideas took hold of the national consciousness in the 19th century, the eastern United States was being rapidly dominated by human consumption. The Industrial Revolution pushed nonagrarian businesses further west, eliminating the wilderness. As a result of these and other in�luences, the United States created the National Park Service to preserve and protect the natural environment.
For example, Yellowstone National Park was created in 1872 to preserve that unique ecosystem from the exploitation underway in other parts of the West. Later, other national parks, such as Yosemite, Grand Teton, and the Grand Canyon, were created. Visionary leaders like John Muir and Theodore Roosevelt were associated with this movement. These people gave voice to the wilderness, nature, trees, and the ecosystem. Treating nature and green space as valuable and worth preserving for future generations is a key hallmark of what is called the green movement. A key goal of this movement is to preserve parks, and other goals stem from that premise.
The green movement has not been without controversy. There are some political groups that claim environmentalism is tied to a political party; others want to repudiate it because of this very association. However, environmentalism is an issue shared by multiple political parties and people of different races, genders, and socioeconomic status, and it has taken various forms over generations (Whittaker, Segura, & Bowler, 2005).
Whether environmental issues are politicized or not, they affect many people at a deep and visceral level; when people care deeply about preserving nature and the environment, they often formally organize in favor of some kind of change (or against change, in some cases). The next sections of this chapter look at organizations and activism within communities at the local, national, and global levels.
Organizing in and for Local Communities
Communities usually face environmental issues that are unique to an area’s geographical and ecological composition. While national and state governments seek to regulate corporations and mitigate impact on the environment, local communities in which businesses operate often live with the consequences of those regulations (consider again the example of Atlas Minerals). For example, environmental regulations may inhibit local economic growth, such as when a protected species inhabits land that farmers traditionally cultivate or loggers desire to harvest. Irresponsible behavior by local corporations may also negatively affect the local population’s health, damage property values, and reduce the economic viability of a particular area. The Atlas Minerals example describes a major environmental problem at the Grand Canyon, one of the most attractive tourist destinations in the United States. Local leaders initially denied the problem and then tried to blame it on the corporation; eventually, they were grateful that the federal government stepped in to mitigate the situation. However, such intervention is not always possible or viable. Certainly, some environmental problems have multiple causes and broader effects that require multisectoral (even international) commitment to address.
The International Council for Local Environmental Initiatives Many local governments have become frustrated by the inability of state and national governments to quickly and appropriately address local environmental issues. One way to cope with such frustration involves organizing and partnering with others in similar situations. In 1990 the International Council for Local Environmental Initiatives (ICLEI) was founded as an international organization of local governments committed to sustainable environmental practices, including sustainable community development. The membership focuses on education and advocacy to encourage corporations to implement sustainable practices into their corporate culture. Today more than 1,000 towns, cities, counties, and regions make up the ICLEI’s growing membership (ICLEI, 2016).
The ICLEI advocates that local governments work through international performance-based, results-oriented campaigns and programs, such as the LCA described earlier in this chapter. Yet the ICLEI does not work directly with corporations. Instead, members network with and support local governments in solving environmental problems through consulting and education. In other words, the ICLEI encourages local governments to form collaborative relationships with corporations to mitigate the economic effects of government environmental regulation while protecting the health of the environment and the population.
The ICLEI is an excellent example of how the environmental movement has promoted the idea of thinking globally but acting locally. The existence of such an organization underscores the importance of corporations having an environmentally themed dialogue with the communities in which they operate. Corporations that operate manufacturing plants and factories leave the largest impact in the communities in which they operate. Ignoring these impacts and the resulting behavior is no longer acceptable, nor is it advocated by corporate leaders who are themselves often environmentalists (Heaps, 2010).
National Organizations and Activism
Environmental problems are often dif�icult to see without scienti�ic investigation and especially dif�icult to address without support from industry, corporations, nonpro�it advocacy groups, and citizens in partnership. Most nations have empowered a government agency to oversee and enforce environmental regulations. While the strength of such agencies varies from sovereignty to sovereignty, it is clear that with each passing generation, environmental regulators are increasingly stronger advocates for environmental causes. In the United States one such advocate is the Environmental Protection Agency, or EPA.
Environmental Protection Agency The EPA was established in 1970 following a series of environmental problems in the United States and in response to the federal government’s inability to regulate environmental impacts. President Richard Nixon established the EPA as a regulatory body to enforce environmental policy. In a message sent to the U.S. House of Representatives and Senate, Nixon outlined that the EPA was established to develop and enforce environmental protection standards consistent with national goals. In addition, the EPA was to conduct research that was both general and speci�ic. For example, in the case of pollution, general research would investigate the adverse effects of pollution, while speci�ic research would investigate the impact of a speci�ic polluter on a speci�ic population in a speci�ic city. Thus, the EPA is both an enforcement agency and a research agency (EPA, 2016c).
The EPA’s current strategic plan includes �ive goals:
Goal 1: Address climate change and improve air quality Goal 2: Protect America’s waters Goal 3: Clean up communities and advance sustainable development Goal 4: Ensure the safety of chemicals and preventing pollution Goal 5: Protect human health and the environment by enforcing laws and assuring compliance (EPA, 2016c)
Note the difference between the EPA’s approach, which involves regulation, and the ICLEI’s approach, which involves collaboration. The EPA has a long list of regulations for corporations and operates on the premise that compliance with legal regulations requires oversight, �ines, and sometimes enforced compliance. In contrast, the ICLEI approach is more in line with the communitarian philosophy of working together to build resilient communities.
Both the ICLEI and the EPA have been the focus of criticism about the value and appropriate limits of government regulation. Criticism has come from moderates and extremists, depending on the issue. While some have described the ICLEI as a toothless tiger, unable to enforce anything, others have accused the EPA of mission creep and overreach. Criticism from the National Review and similar entities suggests the EPA has strayed from its original mission (Hildebrand, 1993). As one critic has put it:
Over most of its 40-year history, the EPA has strengthened environmental standards in a relatively incremental manner, allowing some measure of balance between environmental and economic needs. Using this strategy, the agency has effected much genuine environmental improvement. But for today’s EPA, no economic impact is too onerous. The agency is issuing edicts of unprecedented scope at breakneck speed, and with little justi�ication and few identi�ied bene�its (White, 2010, para. 5).
An example of possible EPA overreach may be activities like the Partnership for Sustainable Communities. This is a collaboration between the U.S. Department of Housing and Urban Development, the U.S. Department of Transportation, and the EPA. The three agencies collaborate with the goal of supporting environmental justice and equitable development in neighborhoods and regions. Some critics fear that three government agencies collaborating will curtail private sector efforts to make a pro�it in the housing and real estate marketplace. While the goals of such an effort might be noble, the application of policy and regulation toward those goals might indeed be overly economically limiting to communities and corporations (EPA, 2016c).
While different stakeholders may disagree about the appropriate scope and reach of such agencies, the fact remains that the agency’s mandates must be taken into account when managers consider environmental and other CSR issues.
European Union Environmental Policy Following the formation of the EPA in 1970, the European Economic Community began holding summit meetings in Paris that resulted in a declaration on environmental and consumer protection. At the time, European nations were independent in terms of currency, regulations, and lawmaking; as such, most were notorious for not working together despite the relatively small size and close proximity of European nations. However, European countries were also experiencing rapid expanse of industry and growing concern over the impact of environmental pollution. Among the various countries of Europe, there were vastly different standards for vehicle emissions, the lead content of gasoline, and the use of pesticides. In addition, political movements such as the Green Party in Germany pointed out that pollution does not stay within human-made borders, and some activists threatened political action if one country’s pollution spread to another country without reparations or other compensatory action (Johnson & Corcelle, 1989).
As a result, the EU inherited signi�icant environmental regulation and enforcement abilities from the constituent countries that had strong regulations when they were independent. The EU is considered to have some of the most extensive environmental laws of any government. For some, this fact indicates positive progress for CSR goals; for others, it makes the EU a less appealing place to establish new businesses. The EU’s environmental policies are intertwined with the international and national environmental policies in its member nations and have had signi�icant effects on its member states. The EU’s environmental legislation addresses core issues that include acid rain, the ozone layer, air quality, noise pollution, waste, and water pollution. The Institute for European Environmental Policy estimates the body of EU environmental law amounts to well over 500 directives, regulations, and decisions (Jordan & Adelle, 2012).
For example, the EU has taken dramatic steps to reduce waste in all member countries. This includes regulating recycling, prohibiting the discharge of wastewater, and regulating production processes so they do not produce waste. The Waste Framework Directive (WFD) is a regulation passed by the EU in June 2008 that hopes to turn the EU into a recycling society. One of the unique and compelling features of the WFD is the European Waste Hierarchy, which classi�ies the waste production and disposal system as follows:
Step 1. Prevention—preventing and reducing waste generation.
Step 2. Reuse and preparation for reuse—giving the products a second life before they become waste.
Step 3. Recycle—any recovery operation by which waste materials are reprocessed into products, materials or substances whether for the original or other purposes. It includes composting and it does not include incineration.
Step 4. Recovery—some waste incineration (burning) ; ideally in a situation that works to eliminate or replace less inef�icient incinerators.
Step 5. Disposal—processes to dispose of waste including land�illing, incineration, pyrolysis, gasi�ication and other �inalist solutions. (European Commission, 2016)
The European Waste Hierarchy suggests that prevention is the most important step because it prevents waste in the �irst place. Therefore, this step investigates and helps determine the market need for a product in order to ascertain whether it should be made and which resources should be used in the process. The hierarchy then suggests that if the product is made, the manufacturing processes should be lean and result in as little waste as possible. The hierarchy further suggests that waste, once generated, should be reused or prepared for reuse. If that is not obtainable, it should be recycled. However, some waste cannot be recycled or reused, and so it is incinerated. This is de�ined as recovery. The least desirable step is the �ifth step in the hierarchy, which is to dispose of waste in a land�ill (Johnson & Corcelle, 1989).
International Organizations and Nongovernmental Organizations
The previous sections described the creation of government regulatory bodies that enforce environmental regulations. Before the creation of the ICLEI, the EPA, and the European environmental regulations, the Sierra Club—formed in 1882—represented one of the �irst collectives created explicitly to advocate for environmental preservation. The Sierra Club is an example of a nongovernmental organization (NGO), which is an organization that is not part of a government nor funded by governments, foundations, schools, or businesses. Since the formation of the Sierra Club, other NGOs with similar focuses have emerged, and each organization differs in the level of political and social extremism it espouses. Organizations such as Earth First!, Greenpeace, the Audubon Society, and many others exert differential levels of local and international in�luence.
Green Party The world’s �irst political parties to adopt environmental platforms were the Tasmania Group in Tasmania, Australia (1972), and the Values Party of New Zealand (1972). The Popular Movement for the Environment, founded by the Green Party in Europe in 1972, has captured voter attention since its inception (Bevan, 2001). The �irst national green party in Europe was founded in Britain and called the Ecology Party, which later became formally known as the Green Party. In India the Chipko movement, formed by Mohandas Gandhi, featured the act of hugging trees to protest deforestation (which led to the term tree huggers). Peaceful methods of protest and the slogan “ecology is permanent economy” were very in�luential in India and elsewhere thereafter (Dann, 2011).
This list of organizations indicates the wide geographic range of environmental issues and emphasizes their long-standing historical and political roots. Contemporary leaders and consumers can use this knowledge to jump-start conversations around the environment. As a result, business leaders can become better informed about the contexts in which they make decisions as they work for a more sustainable future.
Environmentalism and CSR In 2015 a haze settled over the western part of the United States. It came from wild�ires in Asia, speci�ically Indonesia (Plait, 2015). Indeed, the United States routinely absorbs pollution from China; it has also experienced moderate increases in radioactivity following nuclear weapons testing or nuclear reactor accidents, such as the one that followed a 2011 earthquake in Japan and a 1986 reactor meltdown in the former Soviet Union (Plait, 2015). Global warming, the ozone layer, air pollution, and other large-scale environmental issues may cause international social and military con�lict in the future, as people come to realize that we are all part of one global community. Such reports illustrate how pollution does not stop at national borders.
However, it is most likely that future environmental con�lict will not be centered on these issues, but rather on the problem of water. The Organisation for Economic Co-operation and Development (OECD) reports that at least 30 nations will be water scarce by 2025, up from 20 in 1990 (OECD, 2008). Eighteen of the 30 are in the Middle East and North Africa, including Egypt, Israel, Somalia, Libya, and Yemen (OECD, 2008).
As an example of how and why water issues relate to food security and national security, consider the fact that some political analysts see the con�lict between Palestinians and Israelis as partially a �ight over water and water resources, as well as a cultural or religious war. Adel Darwish, journalist and coauthor of Water Wars: Coming Con�licts in the Middle East, suggests that modern history has already seen such wars. “I have [former Israeli prime minister] Ariel Sharon speaking on record saying the reason for going to war [against Arab armies] in 1967 was for water” (Bulloch & Darwish, 1993). The OECD (2008) further supports the idea that water shortages enhance the impact of climate change and other kinds of pollution. “Fundamentally, these are issues of poverty and inequality, man- made problems” (Arsenault, 2012, para 8).
These �indings suggest that environmental issues are critical strategic concerns for consumers, citizens, governments, communities, and corporations. Achieving a balance between corporate activity and environmental impact poses an ongoing question for all communities and generations. The “right policy” may never exist or achieve perfect balance; yet failing to consider or create policy certainly offers a nonviable path. Leaders interested in sustainability and CSR can address environmental concerns by actively creating and inviting others to participate in ongoing conversations and strategy sessions. Doing so can have positive outcomes on the present, lay the foundation for longer term impacts, and in many cases contribute to a strong personal legacy.
For example, consider how at the mouth of a granite canyon in Yosemite National Park, one can �ind a bust of Steven Mather, the founder of the National Park Service. The monument depicts a simple likeness of his face, with his name and life span, and memorable words about the impact of his work, which involved protecting unique natural wonders found in the United States. Under the statue it simply says, “The good he has done will never die.” With strategic intent and active policies that unite or at least include constituents from many sectors, the same can be said for responsible corporate leaders who avoid taking environmental shortcuts. Indeed, history will remember those who carefully examine processes, products, waste, and other factors required to create a sustainable organization in the context of a sustainable environment.
Chapter Summary This chapter examined the role of a corporate �iduciary and contrasted the role with that of a steward who accepts responsibility for sustainability (�inancial and otherwise). Stewardship involves listening and weighing multiple interests beyond short-term �inancial ones. The case of Atlas Minerals was discussed to highlight how ultimate organizational failure on stewardship results in government bailouts and irreversible damage to the environment and human health. Leaders can use several tools to combat negative outcomes, including the cradle-tograve, cradle-to-cradle, and LCA approaches. When individuals and �irms use analysis tools to widen the conversation about sustainability and social responsibility, they can achieve goals that are more closely aligned with those of the green movement. Creating a cooperative culture can help address environmental concerns, provide resources, and preserve nature for future generations.
1. How does the idea of stewardship change or challenge your ideas about leadership in contemporary corporations? Where have you seen good examples of stewardship?
2. Is it possible to have environmental regulations that enhance economic opportunity, rather than limit it? Provide examples that support your response. 3. What are some of the environmental impacts you might �ind if you did an LCA of:
a. The oil used in your car engine b. A plastic soda bottle c. A printed newspaper
4. The U.S. Environmental Protection Agency was formed to regulate and control pollution and prevent environmental harm. What are some of the challenges the EPA faces when it works within states? What about within the global environment? What strategies might you suggest to address these challenges?
5. Consider your personal behaviors and list some that you might change to positively impact the environment. What are some challenges you might face in changing these behaviors? How would you encourage others to adopt similar behaviors?
6. Consider current events and discuss how local and global water issues relate to CSR and/or security concerns.
LCA of industrial packaging for chemicals: http://www.dantes.info/Publications/Publication-doc/Packaging-public.pdf (http://www.dantes.info/Publications/Publication-doc/Packaging-public.pdf)
LCA of wood-based ethanol-diesel blends (e-diesel): http://www.dantes.info/Publications/Publication-doc/LCA%20of%20E-Diesel-public.pdf (http://www.dantes.info/Publications/Publication- doc/LCA%20of%20E-Diesel-public.pdf)
For information on national and international NGOs, including controversy that surrounds some of them, see the following: http://www.yaleclimateconnections.org/2009/08/ngos-media-moles-or-moguls/ (http://www.yaleclimateconnections.org/2009/08/ngos-media-moles-or- moguls/) http://www.eco-usa.net/orgs/ (http://www.eco-usa.net/orgs/%5b%5b$)
For more information on the Green Party and the green movement, see this site: http://www.gp.org/ (http://www.gp.org/)
Click on each key term to see the de�inition.
A philosophical school of thought that emphasizes the creation of community in harmony with a natural environment.
A process that allows a product’s birth, life, and end of use to be examined.
A person who agrees to accept temporary legal responsibility and control of an asset owned by someone else and who has a duty to maintain and expand the asset’s value.
inclusive corporation (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
The type of corporation advocated by Max De Pree that advocates �lat, open communication that supports stewardship for all.
life cycle assessment (LCA) (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A formal process that allows a corporation to examine the environmental impact of any process or product.
nongovernmental organization (NGO) (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
An entity that is neither a part of a government nor funded by governments, foundations, schools, businesses, or private citizens.
Refers to the management and care of an asset in such a way that it maintains and even increases in value over time.
Waste Framework Directive (WFD) (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A regulation passed in June 2008 by the European Union regarding waste prevention, waste disposal, and recycling.
7 Equity, Ethics, and the Role of Government in CSR
After reading this chapter, you should be able to:
Explain the debate between competition and collaboration, including its impact on sustainability issues. Summarize the political, philosophical, economic, and psychological roots of equity. Summarize the rights of corporations. Identify how discrimination based on race, gender, age, sexual orientation, and disabilities persists and discuss ways to address these biases.
Introduction This chapter discusses the concept of equity and addresses how equity drives and results from CSR and sustainability efforts. We describe two different worldviews on the topic, both of which are frequently used to frame the issue of equity in most political, social, and economic discussions. Speci�ically, the topics of competition and collaboration describe the rift between those who favor gaining advantage and those who favor gaining equity.
As evidenced by the pervasiveness of advertisements, there is stiff competition among organizations to capture a market.
Kathy Willens/AP Images
7.1 Competition or Collaboration: Framing the Debate We live in a world where both competition and collaboration drive behavior. Most of us are sympathetic to ideas from both sides of the seemingly endless debate about which approach should dominate. The �irst view sees humans as inherently competitive. According to this view, humans have always had to compete with other people—and the environment—for sustenance. By extension, organizations compete with each other for market dominance. In the modern world, competition motivates us to excel by pitting ourselves and our organizations against each other. We win the competition by doing and amassing more than others. Firms win when they amass more customers or market share than their competition.
An alternate view of human motivation sees humans as collaborative. Basic human behavior teaches us that we can do more by leveraging group members’ various talents and abilities. While people must redirect some energy toward sustaining the group and managing relationships, ultimately it is collaboration that helps them reach the utilitarian ethical goal of doing the greatest good for the greatest number of people (Kant, 1781/1998). This view suggests that long-lasting survival results from collaboration, which motivates individuals and corporations to help each other serve common causes. By extension, organizations that collaborate may expand industries, accelerate innovation, and create networks that sustain the people and businesses within them.
When taken to their extreme, these approaches describe polar opposites: One view focuses on winning as evidenced by gaining something before someone else; the other focuses on winning by achieving a state of fairness and equity, where no entity stands out considerably more than another. The debate between these worldviews manifests itself in political, social, and economic discussions in almost all cultures. Most political systems embody some form of this debate. Gaining even a simpli�ied understanding of how these worldviews collide and inform government allows us to see how different groups conceptualize CSR, sustainability, environmental responsibility, and other key ideas discussed in this book.
In the United Kingdom the differences between the Labour Party and the Conservative Party could be distinguished by their emphasis on competition or on collaboration. In the United States the differences between conservative and liberal viewpoints, or Republicans and Democrats, similarly revolve around their stance on these issues. Socially, individualism and collectivism offer another manifestation of the competitive or collaborative worldview. Individualists want efforts to be fully rewarded, while collectivists want rewards to be distributed so they sustain the community.
This chapter is about managing the space between these polar opposites. It considers the following questions:
When is it best to collaborate, and when is it best to compete? Which paradigm, in what situations, is more likely to lead to more CSR and sustainability? Which paradigm is more ethical?
Collaboration and Competition
Adam Smith is often regarded as the original economist (Smith, 1976). Throughout his writings, which were published in the 1700s, Smith argues that there is an “invisible hand” or competitive self-interest that guides economic behavior. Each of us acts in our own self-interest, directly competing with others to survive. For Smith, competition is a positive force that drives humanity to higher levels of productivity, despite the price that some pay when they lose in any given competition (Smith, 1976).
According to Smith, anything that might interfere with competition in the marketplace—such as regulation or monopolization—reduces competition and ultimately production (Kennedy, 2009). But unrestricted competition in practice has a high casualty rate and may also not be as productive as tempered competition that spreads risk through collaboration.
Rosen (2009) notes that collaboration improves when highly competitive environments eschew a command-and-control organizational structure. In other words, competition is not necessarily bad when it forces us to look for opportunities to connect with others and be more creative and productive. Research shows that collaboration leads to higher achievement and increased productivity. Research in multiple contexts supports the idea that collective actions signi�icantly boost corporate aspirations, motivational investment, morale, and resilience (Poquérusse, n.d.).
Corporate social responsibility implies that corporate actors have not only an ethical obligation to advocate for the corporation’s self-interest, as Smith would suggest, but that they also have a responsibility to those outside the corporation. Research on collaboration suggests that people and corporations can further their self-interest by strategically collaborating, while at the same time ful�illing a responsibility to the community and the greater good.
Collaboration Typically Promotes CSR and Sustainability
In a highly active marketplace with frequent social and business transactions, an individual will at some point be disadvantaged. Eventually, all people will face a problem they cannot solve or miss an opportunity, thus causing them to lose a competition of some kind. For some, this failure will exclude them from participating in the marketplace. For others, the inability to compete in a particular market competition will be economically fatal.
Collaboration allows individuals and organizations to hedge risk; particularly the risk of having a fatal market experience. The basic idea of reciprocity, or “I’ll watch your back if you watch mine,” helps humans learn to moderate competition in order to share risk and success with others. In 1944 Oskar Morgenstern began to mathematically measure the power gained through collaboration using a process known as game theory. According to Myerson (1991), game theory is “the study of mathematical models of con�lict and cooperation between intelligent rational decision-makers” (p. 1). Game theory research shows that while individuals might win in competition in the short term, in the long term collaboration creates more eloquent and sustainable solutions in complex systems.
Collaboration bonds humanity and creates advantage by creating a safety net for the temporarily unlucky or permanently vulnerable. This net reduces waste and increases risk tolerance. Collaboration may also allow society to integrate talent and resources, which, when people and �irms pool resources toward common goals, drives innovation, creativity, and individual and collective success. Advocates of a collaborative approach to society might argue that CSR and sustainability result from combined efforts to help and assist, to coexist; the search for more equity (rather than to win at someone’s expense) drives CSR efforts and endeavors (Rosen, 2009).
Collaboration Promotes Ethical Outcomes
One question in this debate asks: Is a less competitive and more collaborative environment more ethical? We answer that it certainly meets the utilitarian standard of the “greatest good for the greatest number of people.” Research and experience show that excessively competitive environments have excessive casualties that are avoidable (Gar�ield & Edelglass, 2011).
The complex challenges faced by most corporations are beyond the comprehension of a single individual. The simple act of complying with environmental regulations requires expertise that goes beyond the average executive. Collaboration allows for the creation of corporate communities that give voice, privilege, and value to the expert while fostering interdependence, which reduces con�lict (Rosen, 2009). In order to collaborate in competitive work environments, most people need to feel like they will be treated fairly. The sense of fairness required to produce this result can be described as equity, which we de�ine and discuss in the next section.
7.2 Equity Equity theory describes the idea that we all have the ability and propensity to determine whether resources are fairly distributed within a partnership, group, or society. People measure equity by comparing the costs of collaboration with the bene�its or rewards received. Equity theory suggests that we are unlikely to enter into a collaborative relationship if we do not perceive a return on our investment (Guerrero, Anderson, & A�i�i, 2014). Behavioral psychologist J. Stacy Adams (1965) was the �irst to articulate equity theory by explaining that in a workplace, employees seek to maintain equity between their contributions and the rewards they receive. Adams argued that people value fair treatment; it motivates them to maintain a fair system and nurture mutually bene�icial relationships with coworkers and the organization. We argue that equity theory goes well beyond the workplace and has broader implications for political and economic relationships. In this way equity also has a philosophical and psychological aspect. Later sections will also cover environmental and individual equity.
Political equality (or political equity) means that everyone receives the same treatment in the political sphere. This suggests, for example, that everyone has the same status and is treated equally under the law—such an ideal underscores the practice of entitling everyone to legal representation or letting every eligible citizen vote.
The most proli�ic author on political equity may have been John Locke, an English philosopher born in 1632. Locke believed that humans were born into a state of nature that was insuf�icient to establish a civil society. To him, equity was ideal but unobtainable; inequity was inherent. In order to resolve the inherent con�licts created in human beings’ inequitable interactions, humans created government (Locke, 1690). In other words, in Locke’s view, government regulates interaction in order to create equity. Locke (1690) believed that individuals are justi�ied in overthrowing a government that fails to provide the kind of equitable civil society they expect. His ideas profoundly in�luenced the U.S. Constitution as well as the Declaration of Independence.
Locke’s Second Treatise of Government had a profound in�luence on a French philosopher named Jean-Jacques Rousseau, who argued that it is absurd for humans to surrender freedom for bondage. He said that all humans have the right to choose the laws under which they live; he suggested that they create a social contract with each other to safeguard and regulate property ownership and create practical equity (Rousseau, 1762). In other words, one of the responsibilities of a democratic government is to regulate property ownership with as much equity as possible. The social contract proposed by Rousseau makes the modern corporation possible because it suggests it is the role of government to legitimize property claims and authorize the exchange of property and goods (Rousseau, 1762).
In addition, both Locke (1690) and Rousseau (1762) in�luenced the documents that created American democracy. For example, their ideas are evident in The Federalist Papers, which are a collection of 85 articles and essays on the nature of governance that Alexander Hamilton, James Madison, and John Jay wrote prior to the rati�ication of the U.S. Constitution. Hamilton makes the case for a bill of rights in Federalist 84 and suggests again that individuals have certain rights that cannot be taken away by a government or a commercial entity. In other words, individuals, rich and poor, bond and free, male and female, have rights that make them equal to all other individuals.
The ideas of both philosophers relate to CSR in that they explain the purpose and role of government and offer justi�ications for the pursuit of equity. In addition, the ideas of Locke and Rousseau help de�ine the limits and purposes of government mandates. By de�inition, CSR involves voluntary behaviors—CSR exists where mandates do not or where they fail to accomplish key goals.
These ideals also relate to modern CSR in that political equity is the foundation of human rights work. As stated earlier, some people de�ine CSR work in social terms. For many, CSR means ensuring and improving the rights of workers, suppliers, consumers, and other stakeholders. As such, many CSR efforts relate to equal access, health and safety, job security, and wages. Over time, the concept that all humans deserve “equal protection under the law” has become a stated goal for American democracy and a key measuring stick for human rights advocates (Jackson, 1995). The idea of equal access and options has spread from politics to the realm of work and personal relationships.
Regarding human rights, the United Nations General Assembly adopted the Universal Declaration of Human Rights (UDHR) in 1948. In doing so, it offered the �irst global expression of rights to which all human beings are inherently entitled. The UDHR establishes that individuals have inalienable rights of conscience; to practice religion; and to expect a rule of law that includes free political expression. This is the �irst foundational concept in the broader notion that society is more sustainable when democracy rules and equity abounds. However, the UDHR makes no actual mention of corporations, commercial entities, or any rights that such entities may possess. This will be important when we later discuss the emergence of corporations as entities that possess rights similar to humans.
Some �ind it dif�icult to separate political equity from economic equity, particularly in a capitalist economic system. People with equal voting rights often exercise that right to secure others, such as equal access to education, capital, or political opportunity. Economic equityrefers to people’s ability to equally access factors of production (things that enable pro�it) such as money, advice, natural resources, and education. People who lack economic equity may want governments or companies to create more economic equity; such desires also inform and inspire some CSR efforts, which in turn produce such equity.
Karl Marx (1818–1883) was a German philosopher and revolutionary socialist who argued that the fundamental role of government is to enforce equity in all institutions, including government, the marketplace, and corporations. Marx wanted society to achieve a more level economic playing �ield. He noted that employees often contributed as much or more to the corporation—through their physical and mental labor—than did managers and agents who provided the capital for the business. He believed that situation should be more balanced (Mehring, 2003).
Marx’s ideas are found in the American concepts of equity, in terms of access to goods and services. His ideas continue to echo in the sentiments of some leaders and certain corporate and social practices, including some CSR policies. For example, goals of pay equity, equal access to work and promotion, and the existence of labor councils to manage con�lict between employees and managers have some roots in Marxism’s practical and philosophical aspects (Oakley, 1983). To some extent, the pursuit of greater economic equity enabled more sustainable and humane work practices, even when that pursuit has not necessarily improved or equalized workers’ take-home pay.
Born in 1724, Immanuel Kant was a Prussian philosopher who expressed concerns about philosophical equity even prior to Marx. In 1781 he published the Critique of Pure Reason, which outlined a concept known as the categorical imperative. The categorical imperative suggests morality stems from rationality (thinking and being logical) and that moral judgments have rational support. Kant introduced the idea of deontological (duty-based) ethics, or behaviors that are rooted in the concept that all citizens have equal responsibility. In other words, all people who want a moral society have an equal duty to act morally. Kant notes that some behaviors are universally attractive or repulsive; for these, he suggests that choosing action is simple—what is right is right and what is wrong is wrong. This can be best understood by considering the most basic taboos that exist across many societies; for example, murder is categorically wrong, and
caring for the helpless is categorically right. Kant suggests that all human beings who claim to be moral have a duty to unconditionally follow this imperative. People cannot stand aside and claim that certain issues are “not my problem.”
Kant’s maxim is profoundly simple, despite being delivered in the language of a 17th-century philosopher. He makes clear the impact of individual action on the whole and argues we are all equally accountable to a universal law. He advocates that before we act, we should ask ourselves a simple question: “What would happen if everyone did what I’m going to do?” In Kant’s view, a moral society relies on morality applying equally to everyone (Kant, 1781/1998).
Kant’s categorical imperative and corresponding question can also apply to corporations. Philosophical equity—more speci�ically, the idea that people generally abide by the categorical imperative to do what is right—relates to CSR in that it holds organizations and people accountable for addressing environmental and social concerns. The business landscape would look very different if leaders of �irms that pollute or use large amounts of natural resources (such as water) were to ask themselves what would happen if every company behaved like theirs.
In addition to political, economic, and philosophical equity, Adams’s theory of psychological equity also informs CSR behaviors. Adams (1965) argued that employees seek to maintain equity between the inputs they bring to a job (such as effort, concentration, and time) and the outputs they receive from the work (such as money, title, prestige, and promotions). As shown in Figure 7.1, if people believe they are treated fairly, they stay motivated to maintain the organization’s structures. If they believe they are treated unfairly, they will take steps to balance the relationship. Typical balancing behaviors when employees believe they are being treated unfairly include stealing small amounts of a work product or of�ice supplies, slacking while being paid to work, or undermining change efforts. Typical balancing behaviors when employees feel overly rewarded include staying late, helping others at work, volunteering to take on additional work, and otherwise supporting employer needs and requests.
Figure 7.1: Basic principles of psychological equity
Source: Adapted from “A New Perspective on Equity Theory: The Equity Sensitivity Construct,” by R. C. Huseman, J. D. Hat�ield, and E. W. Miles, 1987, Academy of Management Review, 12(2), 222–234.
Equity theory helps explain why pay and conditions alone do not determine employee motivation (Adams, 1965). The theory also explains why giving one person a promotion or pay raise can have a demotivating effect on others. When people feel fairly or advantageously treated, they respond with positive feelings and motivation; when they feel unfairly treated, they tend to feel disaffected, demotivated, and sometimes retaliatory.
Employees seek to maintain equity between the inputs they bring to a job (“inputs” can also mean “effort”) and the outcomes they receive from it; they do this both in isolation (that is, by considering only their own situation) and in comparison to the perceived inputs and outcomes of others. According to equity theory, managers who want to enjoy maximum output from employees need to attend to the perceptions of fairness in the work environment to maintain the balance.
Adams believes that humans have a basic understanding of what fair treatment is, and in their workplace, family, or social environment, they act to maintain balanced and equitable relationships. When those relationships become unbalanced, people take steps to restore balance.
Equity theory and equity-related work behaviors relate to CSR and sustainability in many ways. For example, when �irms start or expand CSR efforts, many employees understand and value the attention to equity that is implied. If the work of CSR and sustainability projects is unfairly distributed or unevenly discussed (either overly praised or criticized), employees may treat the effort the same way they treat anything they perceive as inequitable—by avoiding, ignoring, or undermining it. If CSR efforts are handled equitably and work to build equity, employees will be more likely to support and advance the work.
Equity theory relates to CSR and sustainability in that it helps explain when and how employees react to changes within and outside the �irm. It can also help motivate people to restore balance and equity to those currently not enjoying fair treatment.
It is important to understand that equity has at least four different meanings. Each type of equity has a different de�inition that focuses on some aspect of individual political rights, economic access, philosophical duties, or psychological need. Most concepts of equity suggest that the individual is the locus of equity. In the next section, we move from considering the individual to considering the organization by examining what legal, political, economic, and psychological rights corporations have.
An expert discusses the impact of the Citizens United court decision. Do you think that corporations should be able to donate unlimited sums of money as a form of protected free speech?
Citizens United From Title: Dollars and Votes: 2012 Election
© I f b All Ri ht R d L th 00 47
7.3 The Rights of Corporations Following the U.S. Civil War and the abolition of slavery, the Constitution was amended to include a prohibition against depriving any person of life, liberty, or property without due process of law (the 14th Amendment). In other words, all citizens of the United States were afforded equal protection under the law.
While the language of the 14th Amendment makes no reference to the concept of corporate personhood, in 2010 the U.S. Supreme Court ruled that corporations have some of the same rights afforded to individuals. The change had signi�icant implications for CSR and sustainability efforts, in part because it made it easier for �irms to do what people do, but on a larger scale.
The U.S. Supreme Court’s ruling in the case of Citizens United v. Federal Election Commission upheld the rights of corporations to make political expenditures, including purchasing political ads and voicing political views. The court essentially ruled that corporations have the same rights as people when it comes to expressing interests and supporting political speech (Smith, 2009).
Citizens United, the plaintiff in the case, is a political action committee (PAC) founded by a political consultant but funded by the Koch brothers, industrialists who own the second largest privately owned company in the United States. The PAC was formed to promote the interest of corporations and to further speci�ic political causes. Citizens United brought suit in 2009 against the Federal Election Commission for restricting the amount of money it could spend on political advertising, arguing that this limit was tantamount to restricting free speech. The court ruled in the group’s favor; the justices argued that collective speech from corporations should be protected under the First Amendment, just as is citizens’ individual speech.
The justices concluded that the First Amendment protects a person’s right to speak, as well as the act of speech itself. From this perspective, the First Amendment thus protects the speech of corporations and unions. In addition, the court asserted that spending limits prevent the public from exercising its right to access all available information.
The 2010 ruling remains controversial. Groups that oppose the decision argue that corporations should not enjoy the constitutional rights that protect individuals. They also argue the decision undermines equity and the pursuit of CSR and sustainability because �irms have more money than individuals, and many �irms (and �irm managers) would rather pursue commerce at the expense of the environment or some stakeholders—such people can use �irm assets to gain privilege that individuals cannot.
Corporate Accountability and CSR
Given the relatively recent timing of the ruling, the concept of corporate rights is new, and there has not been enough time to see how the implications of the ruling play out in the legal system. Corporations are held responsible for complying with regulations, just as individuals are required to obey laws. Corporations pay taxes, as do individuals. Corporations can be sued when corporate of�icers or employees are negligent, just as individuals can be sued for negligent behavior. The idea that corporations have the same rights as individuals relates to sustainability and CSR in that corporations have more power and freedom as a result of Citizens United. This means that the reach of CSR efforts might be stronger and that the implications of negative corporate behavior might equally be broader.
Chapters 5 and 6 described individual, corporate, and governmental efforts to improve the environment. Chapter 5.2 (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/sec5.2#sec5.2) outlines the NIMBY attitude, illustrating the dif�iculty of equitably spreading environmental impacts. In any system organized around ef�iciency, some locations will be more impacted than others when it comes to resource extraction and allocation. Environmental equity refers to the development, implementation, and enforcement of environmental policies to ensure that no group or community bears a disproportionate share of pollution or other environmental hazard because it lacks economic or social power (Environmental Equity, n.d.).
Perhaps one of the largest efforts to improve equity in environmental justice issues was the Paris Agreement.
Paris Agreement On December 12, 2015, 200 nations signed an agreement to reduce carbon emissions in order to mitigate global warming. Carbon emissions in economically developed nations are signi�icantly higher than in less developed nations, and there are global problems with environmental pollution, including clean water and clean air. Named for the city in which it was signed, the Paris Agreement holds developed and developing nations accountable for carbon emissions in an attempt to ensure that everyone in the world lives in an equally healthy environment (United Nations, 2015).
The implications of the Paris Agreement will unfold for years, even decades. Some analysts suggest that entire industries will have to adjust in order to respond to its measures, because the effects of climate change are spreading across the planet, costing trillions of dollars. These same analysts suggest that in some industries, the cost of not responding to climate change has now exceeded the cost of responding (Doyle & Lewis, 2015). The Paris Agreement also sent a signi�icant signal to investors worldwide that it can be less risky to invest in sustainable and greener practices than in fossil fuels.
The Paris Agreement may create more level ground for companies that must focus on their carbon footprint. It may no longer be pro�itable to move high-impact activities to locations where environmental regulations are more relaxed, as countries whose leaders signed the agreement may not be able to welcome high polluters. Equally, the events in Paris signal a small step toward a value system that privileges the right to live in an environment free from pollution-related health hazards, which in turn may drive corporate decisions. Furthermore, this ideal shares similarities to those expressed in the 1947 UDHR, stating that all human beings should be afforded basic human rights. The agreement creates both the incentive and the support system for innovations in CSR and sustainability, as entire countries have now made bold public statements and set aggressive public goals.
7.4 Individual Rights, Equity, and Inequity The search for more equity is both a motivator for CSR and sustainability efforts and an outcome of them. Usually, equity is experienced on an individual level. The rest of this chapter examines the history of inequality within countries, cultures, and organizations and includes a discussion of the systematic victimization of certain groups. Such inequity has led governments to adopt policies that protect certain classes or groups of people. Future CSR efforts must comply with existing regulations but can also work to further address and eliminate such inequalities. In this section, we look at protected classes and the effort to bring equality into the workplace.
Discrimination as a Sustainability Issue
Popular media often highlights current problems with equity, discrimination, and bigotry as a plague of modern times. However, the issue is long-standing and therefore a prime topic for change and improvement—CSR efforts can help make headway in this area. The topic relates to CSR and sustainability in several ways. First, unequal treatment of certain groups discounts and undermines all of society and directs human and environmental systems away from sustainability. Second, CSR efforts must have a direction, a purpose, and clear objectives. Increasing the richness, variety, and equity in human systems can provide these markers. Third, socially responsible and sustainable systems are healthy, robust, thriving systems. Underappreciating, underemploying, and underutilizing people wastes opportunities for collaboration, innovation, and talent development—and, as we have already discussed, waste in human and environmental systems threatens sustainability and true thriving. Thus, understanding and eliminating discrimination remains a key goal of CSR and sustainability work. A complete history of discrimination and bigotry is beyond the scope of this book, but this chapter discusses a few historical situations to introduce the topic and explores the range of implications heralded by this behavior.
Historical Overview of Discrimination Throughout history, classes of people deemed different from the politically powerful and dominant are subject to either overt violence or covert discrimination. Discrimination, or bigotry, does not just have roots in race, gender, or sexual orientation; society’s layers of discrimination also stem from religious discrimination.
Common in many societies is discrimination against people who are not orthodox believers in the dominant religion. This discrimination is part of the history of Christianity, Islam, Buddhism, and many other religions. In times of extreme theological and political turmoil, bigotry against people who hold different beliefs has created con�lict that results in violence, the con�iscation of property, or the denial of political and social rights.
When discrimination has not been based on orthodoxy, it has been steeped in biases and divisions related to property ownership. Most civilizations prior to the 1800s gave privilege to people who owned property. People who did not own property were considered serfs or peasants, or they became indentured servants who worked for those who did own property. Landless people did not have the right to vote in some communities. In other places they were not allowed to attend school. Property ownership often went along with status and privilege; access to property was often a closed system that operated on the basis of inheritance.
Another form of discrimination or bigotry emerged out of the identity of being either a slave or free man (women had separate issues, regardless of race). While most Americans think of slavery as an institution that was abolished during the Civil War and perhaps limited to the southern states, various forms of slavery existed throughout history and continued well past 1865. Many of the early pilgrims and settlers, for example, came to the United States as indentured servants. In order to pay for passage from Europe to the United States, they had to give 5 years’ labor to someone who owned them. Africans were captured and sold to slave traders, who frequently sold them to plantation owners in the southern United States. These slaves were not considered fully human and were traded as property—the accompanying biases based on skin color linger today.
Relatedly, another form of inequality in the United States stems from discrimination based on national origin. Economic hardship in parts of western Europe and Asia forced people to migrate to the New World. For example, in 1847 the potato famine forced the migration of more than a third of Ireland’s population. Many of the Irish who stayed behind starved to death, and today the population of Ireland remains lower than what it was prior to 1847 (Ranelagh, 1994). Yet when the Irish began migrating to American cities, the immigrants who had arrived before them were not welcoming; they did not want the additional competition for limited jobs and resources. For example, some shop owners posted help-wanted signs that read, “Irish need not apply.” Discrimination was not just reserved for the Irish, however. In the 1880s it was the Irish working in the coal mines of central Wyoming who rioted against the in�lux of Chinese workers; many actively campaigned to drive the Chinese out of town (Hammond, 2014).
Different forms and manifestations of these con�licts are present in almost every other nation. For example, the migration of Muslims into Europe since 2000 has caused social and political tension in England, France, Germany, and all the Scandinavian countries. Each of these countries, as well as the United States, has laws to regulate immigration and also attempt to achieve equity and punish discrimination. But all also continue to experience tension around race, gender, religion, and other forms of difference.
Discrimination and inequity of any kind impose a moral and a practical cost, one that is hard to measure but easy to see and feel on a personal level. It erodes our con�idence and sense of justice when we see others treated as less. In addition, human capital is wasted when people are not allowed to develop and work to their highest potential. This waste is evident when classes of people are denied employment or treated differently in the workplace. The next sections focus on improving and rectifying the problems and costs of bias.
Programs to Address Workplace Bias
Lawmakers, courts, corporations, and educational institutions have historically turned to some form of af�irmative action to address the issue of discrimination by using policy. Af�irmative action is a mandatory policy intended to break the pattern of discrimination and bigotry and create an equal playing �ield for people outside of the dominant workplace group. Proponents of policy-based solutions feel it is not enough to say, for example, “We welcome diverse people into our neighborhood” or “into our workplace” or “into our schools.” Af�irmative action policies turn such words into mandated targets and goals.
The notion of af�irmative action stems from a legal and moral perspective put forth in a famous U.S. Supreme Court case. On May 17, 1954, the Supreme Court ruled to end racially segregated schools in its decision on a case known as Brown v. Board of Education.
Brown v. Board of Education opened a series of legal cases, bills, and executive orders that extended voting rights, ownership rights, access to education, access to jobs, and general protections not only to people of all races, but also to people of all genders, religions, and sexual orientations and those with disabilities. For example, one executive order reads:
It is the policy of the government of the United States to provide equal opportunity in federal employment for all persons, to prohibit discrimination in employment because of race, color, religion, sex, national origin, handicap, age, sexual orientation or status as a parent, and to promote the full realization of equal employment opportunity through a continuing af�irmative program in each executive department and agency. This policy of equal
opportunity applies to and must be an integral part of every aspect of personnel policy and practice in the employment, development, advancement, and treatment of civilian employees of the federal government, to the extent permitted by law. (Executive Order No. 11478, 1969, p. 34)
The remaining sections of this text provide an overview of current American workplace practices that aim to bring equity and protection to speci�ic groups who are legally deemed to be in a protected class. Corporations and the managers within them must consider these issues when it comes to making hiring, �iring, headquartering, and site location decisions.
Racial Bias Most developed nations and speci�ically the United States outlaw racial discrimination inthe workplace. The 14th Amendment of the U.S. Constitution was insuf�icient in guaranteeing equal protection under the law; thus, under Title VII of the Civil Rights Act of 1964, itbecame illegal to not hire or promote someone because of their race. The act also makes itillegal to �ire, discipline, or offer fewer bene�its to employees based on race. These provisions made most modern organizations very sensitive to providing ample growth and equalopportunity for people of all races. The act’s �inal provision makes it illegal to classify orsegregate employees or applicants based on race. This means the ideal goal is for people ofall races to work the same shift, in the same place, with the same bene�its and opportunitiesas everyone else.
Passing laws is not enough to completely eliminate discrimination and inequity. Overt discrimination that is intentional is fairly easy to identify. The perpetrator acknowledges intent and acts in ways that are designed to discriminate against a particular person or group. But covert discrimination is harder to see. People are often unaware of their own racist intent or behavior. They may rely on others to point out these biases. That skill requires self-awareness and ongoing effort. Such trainings can be part of organizational CSR efforts, and CSR will have advanced signi�icantly when such trainings become less necessary.
Many studies and accounts of people’s lived experiences indicate that racial discriminationremains alive and well in many workplaces. For example, the National Bureau of EconomicResearch conducted a unique �ield study in Chicago and Boston. It found help-wanted adsand responded with résumés that were identical in every way except for the fact that somehad African American names and some featured Caucasian-sounding names. Researchersthen tracked the number of callbacks each résumé received. They found that the averageWhite résumé got about 1 callback for every 10 résumés, while those with African American names had to send out 15 résumés to get 1 callback (Bertrand & Melainathan, 2004).The �indings suggest that even after decades of employee enlightenment, af�irmative actionpolicies, and legal efforts to create a level playing �ield for people of all races in the workplace, a covert bias against people of color continues to exist. This problem remains a keyelement of CSR efforts, and such efforts therefore often include work on diversity, workplace bullying, workplace safety, workers’ rights, and other issues related to employeehealth and well-being. If an employee cannot reach his or her full potential at work for theseor other reasons, then potential is wasted and performance and productivity suffer. Thus,tackling all forms of bias and discrimination remains a core value of social sustainabilityand CSR efforts.
Gender Bias A friendly work environment is where people make contributions without fearing any form of discrimination, including gender discrimination or sexual harassment (which can affect all genders). Female employees’ struggle for equality has grown to include measures that ensure women have equal consideration for promotion and hiring. In the United States and most developed nations, it is illegal to deny a job or a promotion based on gender. These efforts, while extensive, have not resulted in a gender-neutral environment in which performance determines success. Data suggest that slow progress is being made in the United States. The Bureau of Labor Statistics (2014) indicates that in 1970 women contributed 27% of total family income. That number grew to 37% in 2011 but is still far from the equity goal of 50%. Moreover, when women are competitive, equally educated, and similarly trained as male colleagues, data from the Bureau of Labor Statistics (2013) found that American women receive only $0.77 for every dollar that men earn for equivalent work.
Commentators on the issue suggest there are many possible explanations besides (or in addition to) discrimination for why some women are paid less. One is that women may have less work experience if they took time off to raise children or pursued a less competitive career path in exchange for �lexibility for domestic or other lifestyle reasons (Bureau of Labor Statistics, 2014). However, many counter that women face discrimination before they exercise these options, or early enough to affect their long-term career choices and training.
There is also a signi�icant de�iciency of women in positions of power, of leadership, and on corporate boards. In addition, women have different expectations for workplace equity; they typically want more help with family matters such as child care and health care, more �lexibility in work hours to accommodate child care, and more �lexibility in career paths (Bureau of Labor Statistics, 2013).
Internationally, gender equity varies immensely between developed and developing nations. For a variety of reasons, some developed nations have dif�iculty integrating women into the workforce. The ILO has made strong efforts to promote gender equality, with four key conventions that argue for equal pay, equal opportunity in the workplace, access to family and family responsibilities, and maternity protection. The ILO’s goal is to promote equal opportunities for men and women to obtain decent work and earn fair wages under conditions of freedom, equality, security, and human dignity.
Age Bias Kenichi Sato worked for 20 years in his Japanese factory before being promoted to a managerial position. In his culture, it is not unusual to wait that long for a promotion. In the Japanese “job-for-life” culture, promotions are reserved for older employees who have earned the respect of younger employees. Junior employees are expected to work hard and “pay their dues” over a long period. Performance is as important as loyalty, which is measured by time; commitment is also rewarded in traditional Japanese culture (“Sayonara,” 2008).
The situation is not as clearly delineated in the United States, and given US culture’s emphasis on valuing youth, American employers and employees are less likely than their Japanese counterparts to value the contributions of older workers. The United States has laws to protect employees over age 40 from inequity. In some states, the age for protection is lower. The federal government argues that age discrimination involves treating an employee or an applicant unfavorably because of his or her age. The law covers all aspects of employment, including hiring, �iring, pay, assignments, bene�its, and issues related to the work environment. The latter means that a coworker, supervisor, customer, or client cannot persistently harass an older person and create an unfriendly work environment (U.S. Equal Employment Opportunity Commission, n.d.).
It is dif�icult to determine how pervasive age discrimination is in the United States because victims are often unwilling to report it. However, data suggest that hiring practices in the United States either deliberately or inadvertently discriminate against age. A 2015 study by three economists measured the callbacks received after mailing in résumés to companies with open positions. Applicants in the 29- to 31-year-old age range received almost 20% more callbacks then those in the 64- to 66-year-old age range, even though their quali�ications were exactly the same. Those in the 49- to 51-year-old age range suffered a 10% lower callback rate than applicants who were in the 29- to 31-year-old range. The study did not identify what motivates this discrimination, but the sample size and results show it can be more dif�icult for older people to secure employment than younger people (Matthews, 2015). Organizations interested in addressing this bias can educate human resource recruiters about the advantages of hiring older workers, as well as openly discuss the issue to keep it at the forefront of their agenda.
Today’s workplace is very different compared to the one 25 years ago, not just in terms of gender and racial composition but regarding how people with disabilities are hired, treated, and supported in commerce (ADA.gov, n.d.). Prior to the 1990 Americans With Disabilities Act (ADA), there were no mandated parking places reserved for those with disabilities, nor wheelchair ramps going into public buildings. Disabled workers were accommodated on an individual basis, if at all. The ADA not only changed the composition of the workplace but also made a profound statement about equality in the workplace.
The ADA prohibits discrimination against persons with disabilities in the workplace, as well as in procuring state and local government services, public accommodations, commercial facilities, and transportation (ADA.gov, n.d.). There are some exceptions, as it is understood that people with some disabilities cannot do certain jobs, but reasonable accommodations could be made for almost everyone. For example, the ADA mandates that telecommunications devices for the deaf and telephone relay services be established, requires all public restrooms to be accessible to people with disabilities, and mandates that public transportation accommodate people with disabilities (ADA.gov, n.d.).
As a result of ADA legislation and corporate compliance, the U.S. Department of Labor claims there has been a steady increase in the number of people with disabilities entering the workforce. This is a win–win–win situation. Companies win by hiring talented people regardless of physical ability. Individuals win because they can enjoy a ful�illing life and career along with the fact that they have a disability. Society wins because taxpayers no longer need to provide social services to people with disabilities who previously lacked self-suf�iciency because they were not employed. However, as Figure 7.2 illustrates, the workforce participation rate for people with disabilities is well below that of people without disabilities. While the low rate may be due to the fact that some people with disabilities do not have the con�idence or ability to participate in the workforce, it is also true that discrimination against people with disabilities likely persists (National Council on Disability, 2007).
Figure 7.2: Percentage of people with and without a disability in the workforce, 2013
Source: From “Employment of People With Disabilities in 2013,” by Bureau of Labor Statistics, 2014 (http://www.bls.gov/opub/ted/2014/ted_20140626.htm (http://www.bls.gov/opub/ted/2014/ted_20140626.htm) )
The chart reveals a greater number of people with disabilities are in the workforce as a result of the ADA and other legislation and suggests there are increased opportunities for people interested in advancing the CSR and sustainability agenda in this category. One way to address inclusion in the workplace is to educate employers and colleagues about different types of disabilities and acknowledge that many disabilities do not affect work product. Also, employers can evaluate whether there are certain positions that can be �illed by people with disabilities and can recruit and train workers accordingly.
The ADA extends to disabled veterans in the United States. For example, Hire Heroes USA (https://www.hireheroesusa.org/ (https://www.hireheroesusa.org/) ) is one of many organizations that help recovering disabled veterans �ind meaningful work. To date, it has placed nearly 5,000 veterans in jobs by helping them improve their job search and résumé writing skills and by creating a work environment that takes into account each veteran’s unique disability. The organization’s website claims to place nearly 120 disabled veterans in jobs every week.
Sexual Orientation Bias Varying federal and state labor laws exist to protect against discrimination based on sexual orientation, including harassment or differential treatment based on someone’s perceived or actual gay, lesbian, bisexual, or heterosexual orientation (Lambda Legal, 2016). Sexual orientation discrimination includes denial of a promotion, wrongful termination, unfair discipline, and negative treatment based on sexual orientation and not work performance. Examples of the latter include comments and name-calling regarding sexual orientation.
In 2015 the U.S. Supreme Court ruled that gay couples have the same rights to marry as heterosexual couples. Same-sex marriage is now allowed in all states. Human Resource departments in most large companies had already anticipated this development and extended spousal bene�its to gay couples. While same-sex couples may experience inequity and discrimination in some social circles, same-sex discrimination in the workplace is a form of sexual discrimination and bears the same penalties. In cases where a workplace’s social situation does not synchronize with laws and policies, CSR and sustainability interventions related to training and education can improve the situation and begin to reduce the inequity.
Apply Your Knowledge: Creating Equity in the Workplace
Suppose you are a corporate manager. Considering equity and regulations, discuss and resolve the following situations and identify what questions you would ask and what actions you would take.
There are two employees in a branch of�ice, but business issues require downsizing. One of the employees must be terminated, and both perform equally. One is a 35-year-old woman, and the other is a 63 -year-old man. Neither will accept voluntary termination. How would you decide?
A 44-year-old woman comes to you and says she is experiencing gender discrimination in the workplace. Her 10-year performance evaluations are below average. She has been passed over for promotion several times. Her immediate supervisor has placed her on warning on two occasions in 10 years. How would you approach this situation?
Your business serves a community whose residents are 45% African American, yet only 10% of your workforce is African American. You are currently hiring for three new positions. The hiring committee ranked the candidates based on quali�ications, and the Black candidates were at the bottom of the list. What is your next step?
Chapter Summary This chapter began by discussing dominant themes that motivate people and businesses and the pressures related to competition and collaboration. Both topics can motivate CSR and sustainability. Collaboration also introduces the idea of equity. This chapter clari�ied that the topic of equity crosses many boundaries, including political, philosophical, economic, and psychological. When equity is discussed in the workplace, it introduces moral and legal issues that are related to access and fair treatment as well as hiring and promoting. It explained that discrimination and bias can cause human talent to be underutilized, which is a CSR and sustainability issue related to waste.
Speaking from a purely economic perspective, bias equates to underdevelopment and under-use (waste) of talent, skill, and resources. It affects the whole system. Social, political, and economic systems that actively promote equity also move toward stability when fewer members are underutilized, are marginalized, or have their talent wasted. To some extent, history supports the notion that equity creates stability and sustainability. Inequity and the search to eliminate it drives the search for justice, fuels ambitions to improve work and social situations, and provides reasons to innovate. Leaders and managers who assess and address their own biases can set a positive example and enact policies that create supportive and high-functioning workplaces.
1. Do you think it’s possible to eradicate all discriminatory behavior? Why or why not? 2. Explore possible sources of bias. How can they be eliminated or changed? Why, from a business perspective, is it important to do so? 3. The Paris Agreement acknowledged that developed nations have different abilities to monitor, regulate, and control air pollution than developing
nations. Thus, the standards for developed and developing nations are different. Do you agree or disagree with the idea that standards and policies should be different for developed countries? What information do you need to be more informed? Where would you �ind the information?
4. How far should the concept of equal protection under the law extend in business? For example, should individuals whose religious beliefs oppose gay marriage be required by law to hire a gay person in their business? To provide service to gay customers? How is this a sustainability issue?
5. To what extent should governments and pseudogovernments (like the United Nations) become involved in enforcing environmental equity? Economic equity? Political equity? Individual equity? Why?
6. Have there been times in your life when you bene�ited from inequity? Have you been motivated to accomplish things you otherwise would not have in a completely equitable environment?
7. What are additional regulations or business practices that can prevent inequity in the workplace?
Consider the following document about viewing corporations as individuals or separate entities: https://www.hofstra.edu/pdf/academics/colleges/HCLAS/CLD/cld_rlr_bansal_spr06.pdf (https://www.hofstra.edu/pdf/academics/colleges/HCLAS/CLD/cld_rlr_bansal_spr06.pdf)
For more information on the impact of gender equity on a global scale, visit: http://www.mckinsey.com/global-themes/employment-and-growth/how-advancing-womens-equality-can-add-12-trillion-to-global-growth (http://www.mckinsey.com/global-themes/employment-and-growth/how-advancing-womens-equality-can-add-12-trillion-to-global-growth)
For information on the rights of disabled veterans, visit: http://explore.va.gov/disability-compensation?utm_source=SEM&utm_medium=TEXT&utm_campaign=SEM-DISABILITY (http://explore.va.gov/disability-compensation?utm_source=SEM&utm_medium=TEXT&utm_campaign=SEM-DISABILITY)
For information on the Americans With Disabilities Act, visit: https://www.dol.gov/odep/topics/ADA.htm (https://www.dol.gov/odep/topics/ADA.htm)
Click on each key term to see the de�inition.
A paradigm or worldview that suggests that inequity should be mitigated to foster human interaction and collective problem solving.
A paradigm or worldview that suggests that inequity is inherent and the search for more bene�its and rewards motivates people to act and pursue excellence.
economic equity (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Equal economic opportunity and economic bene�it, including regarding access to opportunity.
environmental equity (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Equal exposure to environmental hazard and risk; also relates to treating the environment as fairly as humans treat people.
equity theory (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Assumes that humans assess fairness and assume reward for their investment in a collaborative relationship.
game theory (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Shows the mathematical advantage of collaboration.
philosophical equity (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A philosophical position that all humans have equal value.
political equality (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
(or political equity) Abelief that all people should enjoy equal protection and equal rights under the law.
protected class (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A group of people who have experienced historic discrimination and are protected by law; tends to include women, elderly, people of color, and children.
psychological equity (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Psychological ideas that suggest equity promotes social stability.
rights of corporations (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Pseudohuman rights of free speech granted to corporations under the Supreme Court ruling in Citizens United.
social contract (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A concept proposed by Jean-Jacques Rousseau whereby people create rules to safeguard and regulate property ownership and create practical equity.
8 Green Marketing and Greenwashing
After reading this chapter, you should be able to:
Explain the concept and different types of greenwashing. Discuss how greenwashing creates barriers to CSR and sustainability. Summarize the ways that companies, industries, and stakeholders can prevent greenwashing.
Introduction Chapter 7 discussed how governments enact laws to help eliminate bias and discrimination—CSR, sustainability, and organizations thrive when employees can safely exercise their talent and creativity. One way to improve CSR and sustainability is to comply with all laws; another way is to enact policies that go beyond compliance. As more �irms see the value of CSR (especially beyond mere compliance), and as more stakeholders reward �irms with strong CSR pro�iles, many �irm leaders work to get consumers to pay attention to their organization’s CSR efforts. Stakeholders typically rely on advertisements and company claims to decide whether a �irm or product embodies CSR and sustainability principles. This chapter addresses greenwashing, or cases in which �irms overreach, overstate, or even outright mislead stakeholders about their sustainability and CSR efforts. Greenwashing represents a major threat to the success of CSR and sustainability, as fraudulent and misleading CSR claims often receive negative publicity. Currently, there is no legislation or single enforcement body to protect stakeholders from greenwashing; the only protection is awareness and stakeholder activism. This chapter introduces multiple types of greenwashing, in part so that future leaders can identify these inside and outside of �irms. The chapter also discusses how associations, eco-labeling, and stakeholder activism help protect everyone from greenwashing’s negative effects.
8.1 Greenwashing: An Overview The term greenwashing is a play on whitewashing, which refers to using bright white paint to gloss over or cover something up—usually something bad such as a vice, crime, or scandal. Whitewashing can also refer to when a person or entity is exonerated after a super�icial investigation or by using biased data. The relationship between whitewashing and greenwashing signi�icantly overlaps and is largely a play on words; the only difference is the fact that green refers to claims regarding the environment. Thus, greenwashing refers to covering up environmentally problematic practices or making unsubstantiated claims about positive impacts—or some mixture of the two. Note that the term is also used when critics feel that a super�icial investigation led to an environmental (or other kind of) claim. The Swiffer controversy, discussed in detail below, more closely relates to this second de�inition.
Many people are familiar with the household cleaning product Swiffer, which is manufactured and sold by P&G. Created as an alternative to the standard mop, the Swiffer is shaped like a mop but uses disposable pads that attach to the head of the device. In 2007 Gianfranco Zaccai, president and CEO of the design �irm that created Swiffer, wrote a column in BusinessWeek in which he claimed the device was environmentally friendly because it could prevent millions of homes from wasting hot water and dumping detergent down drains, as they would otherwise do with a traditional mop (Fehrenbacher, 2007). Almost immediately after the article was published, however, there was an intense outcry against Zaccai’s claims. Opponents said that the Swiffer was not an example of sustainable design and that such a claim was based on faulty information and erroneous thinking.
Those who called greenwashing on Swiffer attacked the “disposable, plastic-wrapped, chemical-soaked pieces of paper that go straight from your �loor to land�ill, where the chemicals leach into the ground” and argued that “the Swiffer requires continual purchase of toxic chemical sheets that wind up in a land�ill” (Fehrenbacher, 2007, para 3). Critics also suggested that not all people heat mop water, and thus the Swiffer did not necessarily replace or prevent heated water from being used. Furthermore, critics claimed that extracting petroleum products to create plastic Swiffers, the plastic sprayers that accompany some models, and the boxes for the disposable pads has a more negative impact on the environment than heating or using water for standard mopping (Van der Meer, 2007).
The ongoing debate about Swiffer illustrates the concept of greenwashing. The next section covers green marketing and the main types of greenwashing.
As discussed, greenwashing refers to false environmental advertising, and the practice has garnered signi�icant attention from the media and legal and regulatory entities. Greenwashing remains dif�icult and somewhat subjective to prove. In part this is because it is dif�icult to ascertain a company’s motives or pinpoint exactly when a company changed behaviors; it is also dif�icult to evaluate proprietary data. In many cases time and the consistency with which the accused �irm maintains or increases environmentally friendly practices can indicate whether a decision or behavior was greenwashing. That said, leaders and consumers should avoid greenwashing and would bene�it from asking some basic questions to detect its presence.
However, greenwashing should not discourage manufacturers and marketers from pursuing the commercial opportunities inherent in green marketing. Green marketing is the act of describing and publicizing an organization’s environmental and social activities, efforts, and results. When green marketing is steeped in truth, it strengthens the case for CSR and sustainability and can encourage new types of consumers to adopt a product. Greenwashing should not discourage accurate green marketing; rather, it should enable marketers and consumers to be more discerning and honest about their environmental activities. In fact, knowing how the public is primed and ready to protect consumers should encourage marketers to improve their claims so that (a) truly greener products succeed, (b) competitive pressure from illegitimate green claims is diminished, (c) consumers do not become jaded and cynical about all claims, and (d) marketers engender an honest and open dialogue with consumers (Terra-Choice, 2010). Later in this chapter, we discuss strategies that companies and industries can use to pursue green marketing but avoid greenwashing.
Types of Greenwashing
TerraChoice Environmental Marketing Incorporated, now known as Underwriters Laboratories, was the �irst independent organization to investigate how green marketing gave rise to greenwashing. In 2007 TerraChoice surveyed six major retailers and identi�ied 1,108 consumer products bearing 1,753 environmental claims. The company found that all but one retailer made claims that were demonstrably false or risked misleading audiences. Instead of simply listing the problems it found, however, the organization identi�ied patterns in the marketing claims. TerraChoice called these the Six Sins of Greenwashing (TerraChoice, 2010). Since the organization’s �irst report on the issue, the list has been republished (in 2010 and 2012) and now includes seven types of greenwashing. Other researchers have added three more. All types are described in the following sections.
Hidden Tradeoffs TerraChoice calls the �irst type of greenwashing the hidden tradeoff. This occurs when an organization uses narrow attributes to suggest a product is green without considering or mentioning other environmental concerns related to the product’s other attributes (Terra-Choice, 2010). Such claims are not usually false, but they can make an item seem greener than a complete analysis would actually support. An example would be a paper product that features recycled content, when in reality the recycled material is present only in small quantities or is advertised without equal attention paid to manufacturing or harvesting impacts such as air emissions, water emissions, or transport and global warming impacts. Another example of a hidden tradeoff would be of�ice technology such as a printer. A marketer might promote a printer’s energy ef�iciency without considering or mentioning related hazardous material content, degradation of indoor air quality, or compatibility with recycled or remanufactured cartridges. In TerraChoice’s original study, this hidden tradeoff problem was the most common sin and was present in 57% of all environmental claims (TerraChoice, 2010). If consumers trust the claims of marketers who commit this sin, they might purchase a product believing it bene�its the environment more than it actually does.
No Proof Having no proof occurs when an environmental claim is not supported by available information or when it comes from biased sources. Shampoos and conditioners are examples of products that often fall victim to this sin. Marketers of these common personal products may claim the manufacturer does not participate in animal testing, but marketers either do not or cannot provide evidence to support such claims. Additionally, when this type of greenwashing occurs, marketers do not provide information about where interested parties might obtain such information.
Vagueness Vagueness occurs when a claim is described so obscurely it becomes dif�icult or impossible for consumers to understand. The original TerraChoice report found recurring incidences of products and services that were marketed with vague claims, such as “chemical free,” “nontoxic,” “all natural,” “recyclable,” “eco-friendly,” “earth friendly,” “green,” “low energy,” and “recycled content.”
The problem with these phrases is that they are not speci�ic; thus, they can mislead or inappropriately entice consumers. Consider that nothing is totally free of chemicals—even water is a chemical! Moreover, everything is toxic in suf�icient doses. In addition, harmful substances such as arsenic, uranium, mercury, and
A vague label that does not provide the amount of recycled content in the product can confuse and mislead consumers.
formaldehyde are all naturally occurring—these could therefore be called “natural,” though none would �it the de�inition of natural that most consumers expect. Thus, products must clarify their green claims with detail. For example, consider how the phrase sulfate free is more detailed and speci�ic than nontoxic. Such detail allows consumers to make informed choices and avoid being misled. Consider when a product such as wax paper for a household kitchen claims to have “recycled content”—but no quantity of such content is mentioned. Consumers should ask: “How much of the content is recycled?” “Does something as small as 0.1% deserve to count?” “Does such a number justify making this claim?” Finally, this problem occurs when companies make claims about being green but provide no supporting data or act in ways that contradict each other.
False Labels False labeling occurs when a claim, communicated through words or images, gives the impression that a third party has endorsed or veri�ied the product, when in actuality no such endorsement exists. The most common case of this occurs when marketers put graphics on packaging that look like a special label, endorsement, or approval but are actually meaningless. False labels can often be found on shelf-stable foods and cosmetics; they may make it appear as though an outside agency has rated the product as “all natural” or “chemical free,” but no follow-up information or data on the rating agency or award is included on the package.
Irrelevance Irrelevance occurs when a company makes an environmental claim that may be truthful but is not important or relevant to consumers. The claim may be interesting and compelling, but its irrelevance can distract consumers from selecting a product that might be a greener choice. A common example is found in products such as insecticides, shaving gels, window cleaners, and oven cleaners that are labeled as free of CFCs, which contribute to ozone depletion. This claim is duplicitous because CFCs have been banned for more than 35 years, so products are no longer allowed to be manufactured with this compound. Thus, when companies tout the fact that their products are free of CFCs, they are essentially emphasizing that they are following the law; such claims are an attempt by these companies to make themselves seem virtuous for doing what they are legally required to do. Claims like these are true but irrelevant and are designed to impress a relatively uninformed consumer.
The Lesser of Two Evils This marketing tactic is when �irms make claims that may be true within the product category, but such claims distract consumers from the greater environmental impact of the category as a whole. Examples of this behavior include touting the virtue of having an “organic” cigarette, or selling a “green” insecticide or herbicide for purposes other than growing food. These products might be “greener” alternatives, but they are still harmful to humans and animals.
Fibbing Fibbing or outright lying represents the least prevalent type of greenwashing. It occurs when �irms make overtly false environmental claims. Most cases of this behavior relate to misuse or misrepresentation of certi�ication by an independent authority, such as when a shampoo claims to be “certi�ied organic” but researchers can �ind no evidence of such certi�ication. This problem represents a combination of greenwashing types, as it represents both vagueness and false labels.
Additional Types of Greenwashing As a follow-up to the original greenwashing classi�ications, author Ed Gillespie identi�ied 10 signs of greenwashing that are similar to the types TerraChoice identi�ied but include three additional indicators. These involve marketers using images in a misleading way (which is different from using labels in a misleading way); making outrageous claims (related to the lesser of two evils problem described earlier); and using jargon to confuse stakeholders. Gillespie (2008) describes the three additional problems like so:
1. Suggestive pictures: when marketers use images that suggest a baseless green impact, such as �lowers coming from a car’s exhaust pipe or �lowers coming from the spray of a toxic household cleaner
2. Low credibility: when marketers make unsupported claims that dangerous products such as cigarettes or some cleaning products have green qualities 3. Gobbledygook: when marketers use words or phrases that are dif�icult for people to understand
Examples of Greenwashing
In an article titled “Little Green Lies—How Companies Erect an Eco-Facade,” author Eric Hagerman describes companies that have committed one or more acts of greenwashing. He discusses how the cable operator Comcast launched its push for paperless billing with the slogan “PaperLESSisMORE.” However, the company failed to follow its own policy by continuing to send prospective customers paper brochures and �liers—which undermined its claim that the company cared about not wasting paper (Hagerman, 2008). This problem relates to vagueness and offering no proof.
Hagerman (2008) also noted that Poland Spring’s slogan suggests that drinking bottled water is natural and bene�icial. However, it distracts from the fact that 8 out of 10 empty water bottles end up in land�ill, and producing and shipping the 32 billion liters of water sold every year in the United States requires 17 million barrels of oil. The Poland Spring case is an example of failing to emphasize the hidden tradeoff and the lesser of two (or more) evils.
Another group frequently accused of greenwashing is diaper manufacturers. For example, Kimberly–Clark sells what it claims are “pure and natural” diapers in green packaging. The product uses organic cotton on the outside but retains the same petrochemical gel on the inside as regular diapers (Hagerman, 2008). The most environmentally problematic part of any diaper comes from that gel, as it is a petroleum product that does not biodegrade (or naturally break down) in land�ills.
Similarly, Pampers, owned by P&G, claimed that its Dry Max diapers reduce land�ill waste because of the reduced amount of paper �luff in the diaper. However, the diaper still used a plastic shell, which does not biodegrade. Furthermore, the company tried to market the diaper as bene�icial to consumers because it reduces land�ill space, but in reality the product bene�ited the company, which saved money on materials, shipping, and manufacturing the revamped diaper
The claim that certain diapers are “pure and natural” can be deceiving if they use a manufactured petrochemical gel.
AP Photo/David Goldman
A reporter investigates Fiji water’s claims of environmental responsibility. Does Fiji have the right to market its product as carbon negative, even though the company has currently planted less than 1.4 square miles of forest?
Fiji Water From Title: Conservation’s Dirty Secrets
© I f b All Ri ht R d L th 02 48
(Hagerman, 2008). Here the greenwashing technique the company employed relates to �ibbing and irrelevance.
Food products also tend to feature greenwashing. Many food companies market their products as “natural,” “wholesome,” or “all natural.” Tyson Foods was accused of greenwashing when it labeled its chicken “all natural” and “raised without antibiotics,” despite the fact that its chickens were treated with antibiotics and fed genetically modi�ied corn. Reports indicate that Tyson injected the chickens with antibiotics before they hatched, in order to claim that they were “raised without antibiotics” (Gutierrez, 2008). This example re�lects �ibbing, irrelevance, hidden tradeoffs, and vagueness.
CSR and sustainability advocates often discuss various issues related to food manufacturers, in that food security, food availability, and nutrition relate to resource use (water, seeds, clear-cutting
forests for farms and cattle, and so on). Furthermore, some people feel that food corporations that use �illers, arti�icial sweeteners, and other controversial ingredients have the opportunity to improve CSR by increasing or decreasing the health of their products.
Relatedly, the soft drink industry has a long history of clashing with environmental activists. In 2014 PepsiCo introduced a new mid-calorie soda called Pepsi True. Coca-Cola launched a similar product called Coca-Cola Life. Both products come in a green can to help promote the image that the product is a healthy alternative to full-calorie sodas. Both have about 60 calories and are sweetened with a mixture of sugar and stevia. Critics suggest that reducing to 10 teaspoons of sugar in a 600-milliliter bottle makes little difference in terms of health impacts (Han, 2015). Furthermore, the main environmental issue with producing soda drinks is the amount of water used in the manufacturing process, as the water used along with �lavoring is not the only water involved in the process. Factory �loors are washed down, all products are washed and rinsed, and water is used to cool factory machines and grow ingredients such as sugar and corn (for syrup). As much as 132 gallons of water can go into making a 2-liter bottle of soda (Alter, 2009). Thus, the related greenwashing concerns include irrelevance, false claims, and hidden tradeoffs.
In sum, the fact that beverage companies attempt to market soda drinks and other beverages as good for health or the environment has caused a large number of organizations to call out these �irms for greenwashing.
8.2 Remedies to Greenwashing The argument against greenwashing suggests it is bad for the environment because false and unsubstantiated claims (when acted upon) can encourage consumers to do the opposite of what is good for the environment. When people purchase a product or develop a habit based on unsupported or false claims, they could end up hurting the environment. At the very least, this practice leads to corporate sales that stem from duping and fooling consumers. At its worst, it degrades the planet, as harmful products disguised as “good” get used and discarded.
According to a report published by TerraChoice (2010), there are at least three problems with greenwashing. First, well-intentioned consumers, misled into making purchases that do not deliver on claims, squander the potential to protect or bene�it the environment. Second, competition from loud, convincing, but illegitimate environmental claims steal market share from legitimate products that offer viable bene�its, thus slowing the growth of real environmental innovation in the marketplace. Third, greenwashing may create confusion and cynicism about claims from all vendors (even ones not engaged in greenwashing). This can lower consumer-driven progress to improve the environment and rob vendors of the �inancial incentive to create truly green products. According to TerraChoice, such an outcome causes committed environmental advocates to think that government regulation is the most likely way to create change (TerraChoice, 2010). The next sections expand on this and other remedies to greenwashing, including how consumers can avoid products that have been greenwashed.
Consumers ultimately drive the behavior of �irms and marketers, because �irms react to how consumers spend money. Consumer choice—demonstrated through spending—essentially rewards certain companies while denying competitors the pro�its from a purchase. Consumer purchasing behavior sends a strong message; when consumers show an interest in increased health, safety, and community engagement from the companies and brands they patronize, sustainability goals become corporate goals. Through their purchases (or lack thereof), consumers can incentivize businesses to stop greenwashing. When consumers punish offenders by choosing a different product and leaving the offending one on the shelf, manufacturers may improve their products or change untrustworthy behaviors.
Until companies automatically and consistently make sustainable and socially responsible choices, consumers have a responsibility to protect themselves; they also have an opportunity to impact corporate behavior. To proactively protect themselves from greenwashed claims, consumers can become aware of the most frequently used greenwashing tactics and ask certain questions about the products and claims that surround them. These include:
Is the green claim focused on one or a small set of environmental concerns? Does the claim help consumers �ind more information or evidence? Is the environmental and scienti�ic meaning of the claim speci�ic and self-evident? Could the same claim be made by all of the other products in this category? Is the claim or outside support or award veri�iable, or is it implied in the imagery? Does the product category have questionable environmental bene�its? (Bloch, 2012).
Not all consumers will take the time to ask each of these questions about every purchase, but consumers who make themselves aware of the issues and protect their interests will be in a position of greater power. Informed consumers are less likely to be duped by attempts to greenwash products and services.
Underwriters Laboratories continues to investigate the state of greenwashing. Its most recent report suggests that consumers are helping improve the green product industry. There is an increase in the number of green products, less greenwashing than in the past, and evidence that companies and retailers are changing (TerraChoice, 2010). These �indings suggest that consumer-driven efforts and demands are beginning to make a difference in corporations’ environmental sustainability and responsibility practices. But aside from the powerful force of market behaviors—such as buying or not buying products—what other options do consumers and corporate activists have?
One way stakeholders can stimulate corporations to change their behavior is to collaborate with other stakeholders. Some watchdog groups and activists want to see legal action taken against companies that engage in misleading advertising. Indeed, the Federal Trade Commission (FTC) has the ability to prosecute false and misleading advertising claims, and with this in mind it created the Green Guide.
Green Guide In 1992 the FTC issued its �irst Green Guide aimed at �ighting greenwashing in public advertising and other areas (O’Connor, 2014). This guide was overhauled and relaunched in 2012 (Neff, 2012) and continues to serve as a viable tool for marketers, activists, and consumers. The updated guide regards use of the words green and eco-friendly in advertising as overly broad and general unless they are quali�ied with speci�ic and veri�iable claims. Thus, advertisers must be aware of the rules and be speci�ic with their advertising as they seek to comply with such standards.
The Green Guide also states the following:
1. Marketers must verify claims before claiming an item to be “recyclable” if recycling facilities are not available to at least 60% of the U.S. population. 2. Products should not claim “made with renewable energy” unless all or the majority of the manufacturing processes were powered with renewable
energy. The claim can also be made if the company purchased renewable energy certi�icates. 3. Companies should not make environmental claims that do not make a signi�icant impact. 4. Substantiated claims (such as “uses less plastic than before”) should be veri�ied by at least completing a partial life cycle assessment to prove the claim
Despite these standards, corporate compliance with FTC guidelines remains voluntary and cannot be enforced in courts. However, due to the rise of Internet communication and consumers’ use of social media, upset stakeholders can call out advertisers for greenwashing without taking them to court. One example of how consumer communities have come together for this purpose is the creation of the Greenwashing Index.
The Greenwashing Index The Greenwashing Index is a list compiled by a watchdog group that works to publicly identify and encourage organizations to alter misleading claims and practices. The creators and managers of the Greenwashing Index belong to the University of Oregon School of Journalism and Communication and/or work for the EnviroMedia Social Marketing group. The index attempts to educate and aggregate readers in rating and commenting on ads that may mislead consumers (Greenwashing Index, 2016). It encourages consumers to investigate and report ads with misleading words and visuals, claims that are vague or unprovable, or
exaggerations about the extent of a product or company’s green attribute. These criteria are based on the list of greenwashing types discussed earlier; respondents rate advertisers on whether they use one or more of the techniques. Users give each advertisement an overall score and can add comments. A high score represents a very misleading company and is highly undesirable from an advertiser’s point of view (Greenwashing Index, 2016).
Tools like the Greenwashing Index have allowed stakeholders to become increasingly active and effective. Many attempts to impact advertisers and corporate leaders are direct and public. For example, consumers complain or applaud company behavior by leaving comments on company Facebook pages. They also tweet and retweet company actions. In this way, consumers engage in a direct relationship with companies and others via their online social network.
The Greenwash Academy Awards and Climate Greenwash In addition to using social media, consumers also occasionally employ marketing techniques to raise awareness of CSR and sustainability. For example, in 2002, during the World Summit on Sustainable Development in Johannesburg, South Africa, the Greenwashing Academy hosted the tongue-in-cheek Greenwash Academy Awards. The ceremony awarded extractive companies such as BP and ExxonMobil, as well as the U.S. government, for elaborate greenwashed advertisements. Also in 2009, prior to the World Business Summit on Climate Change, the organization known as Climate Greenwash attempted to have consumers rate which company in the extractive (oil and gas) industry made the most inaccurate green claim. (Climate Greenwash Awards 2009, n.d.). These events are examples of stakeholders collaborating and using marketing tactics to pressure �irms to change their behavior. As social media continues to evolve, companies may �ind additional ways to greenwash their products and messaging, but stakeholders will also �ind new ways to use media and activism to challenge �irms that do so, or encourage and reward those that don’t.
The Sustainable Apparel Coalition is an organization that aims to make clothing producers adopt sustainable practices and improve corporate social responsibility.
Ton Koene/picture-alliance/dpa/AP Images
8.3 Company and Industry Responses to Greenwashed Claims Greenwashing can be detrimental to �irms if and when consumers learn they have been duped—the ensuing outrage, loss of trust, and tarnished reputation can result in bad press, lowered stock prices, declines in sales, and the lost opportunity to innovate toward true sustainability. One way �irm leaders can respond to consumer activism (or avoid it in the �irst place) is to join industry associations. Self-regulation at the �irm or industry-association level also has the potential to mitigate greenwashing.
Industry associations are usually voluntary groupings of companies that have one or more products in the same consumer or manufacturing sector. Association members meet to uphold standards or advance an agenda for that speci�ic industry. Good reasons to join industry associations include the desire to help shape policy, build awareness of what consumers and activists want, ef�iciently exchange information between organizations, share expenses and risk related to innovation, and construct a more uni�ied and signi�icant force for change. However, some organizations may join for less noble reasons, such as to gain competitive information, create the appearance of caring, or bene�it from the work of others without doing an equal share of work in return.
When voluntary associations require transparency, �inancial dues, and other investments from constituent �irms, they actually build in practices that prevent greenwashing. In particular, when industry organizations organize audits and verify member claims, member organizations gain credibility from belonging to such associations.
Industry associations also promote self-regulation. This occurs when companies decide to monitor themselves and engage in corrective actions before issues become public or stakeholders make speci�ic demands that they change. In particular, several industry associations attempt to improve the image and practices of their member �irms by actively promoting membership and meaningful change—essentially, the industry associations try to convince �irms to change before consumers do. The Sustainability Consortium and the Sustainable Apparel Coalition (SAC) are examples of industry-wide voluntary membership organizations that speci�ically promote sustainability and CSR.
The Sustainability Consortium Some voluntary associations focus on topics that affect multiple industries. For example, the Sustainability Consortium is a global nonpro�it organization with an ever-changing membership base. It offers members access to industry-wide contacts and updates on scienti�ic and technological advances that are industry relevant (Sustainability Consortium, 2015). It collects and disseminates CSR and sustainability-related information to a wide range of constituents—its goals relate to sustainability in general rather than one industry in particular.
Association members and partners include retailers, manufacturers, suppliers, service providers, nongovernment organizations, civil society organizations, governmental agencies, and academics. When �irms band together in an association, they are often more effective because their diversity of members can circulate different ideas, information, and incentives.
In addition, managers from member companies may �ind it easier to take advice from association members than from other stakeholders—because association members are united in their knowledge of some aspect of the industry. Also, when associations seem to promote a CSR and sustainability agenda, outside stakeholders may leave individual companies alone and focus instead on the association. For example, people against the inhumane treatment of animals and workers in animal processing plants can focus on changing pork or chicken industry associations rather than isolating individual �irms for corrective action.
The Sustainable Apparel Coalition The SAC is another voluntary organization, but it is more focused on a particular industry (apparel) than on a cause (general sustainability). Apparel �irms have a long history of problems related to labor issues, sourcing, and materials. Clothing manufacturing is typically outsourced to contract manufacturers in developing countries, which gives the retailer less control over the manufacturing process, treatment of employees, and management of raw materials and waste. To address these and other issues, the SAC appeals to apparel, footwear, and home textile producers.
The story of the SAC’s formation reveals how individuals, albeit very powerful ones, can move from suggesting change at a company level to instituting it at an industry level. The SAC was founded in 2010 after John Fleming, then chief merchandising of�icer at Walmart Corporation, sent a letter to Yvon Chouinard, the founder of Patagonia. The letter suggested that they invite the chief executives of some of the world’s biggest clothing companies—people who were typically competitors—to join forces to create an index to measure products’ environmental impact. Chouinard agreed to the idea, and the organization was created; its membership now accounts for more than one third of the global apparel and footwear industry (Gunther, n.d.). In addition to Patagonia and Walmart, founding members include Nike, Target, Gap, H&M, Hanes, Timberland, Marks & Spencer, Levi Strauss, JCPenney, Esquel, Li & Fung, Otto Group, Kohl’s, the EPA, the EDF, and the nonpro�it labor-rights group Verité (Gunther, n.d.).
The SAC’s success suggests that when participating organizations agree to measure sustainability performance and widely share such data, the entire industry can address inef�iciencies, resolve damaging practices, and achieve environmental and social transparency. One speci�ic way the SAC accomplished these goals was by promoting the Higg Index, which it created to provide consumers with comparable, reliable, and detailed data on material usage and labor practices (Gunther, n.d.).
The Higg Index is still being altered and perfected so that �irms and consumers will �ind it useful. Comparable and accurate data on labor practices, material costs, and environmental impacts is hard to gather and compare, both across and between
products and companies. Thus, member �irms are using versions of the Higg Index in private and only sharing the �indings within the SAC. Companies use the Higg Index internally to do self-assessments and to re�ine the index before it is unveiled to consumers. The SAC leadership hopes that working this way will encourage �irms to attempt new behaviors without waiting for all efforts to be perfect and to participate without fear that consumers will use early data to punish them for mistakes (Gunther, n.d.).
Energy Star labels can help consumers make informed decisions when they purchase energy-ef�icient products.
Paul Sakuma/AP Images
Eco-labeling represents another way �irm managers can signal sustainability and CSR efforts to stakeholders. It also offers a way to respond to claims that �irms are greenwashing. Recall that one type of greenwashing relates to mislabeling or misleading claims. Thus, the easiest response (or defense) is for �irms to use certi�ied labels to earn and keep consumer trust. According to the Global Ecolabelling Network (Global Ecolabelling Network, 2016b), an eco-label is a mark or insignia that identi�ies a product or service as having a proven positive environmental impact.
Eco-labeling relates more closely to a �irm’s environmental performance. It helps consumers take into account environmental concerns when comparing products or services. Some labels quantify pollution or consumption factors, while others convey compliance with third-party standards such as ISO 14024.
ISO 14024 Different classes of labels correspond to speci�ic labeling standards described and endorsed by the ISO. In contrast to vague green symbols or claim statements touted by advertisers, credible labels are based on life cycle considerations. They are awarded by an impartial third party and meet transparent environmental leadership criteria (Global Ecolabelling Network, 2016a).
In terms of eco-labels, ISO 14024 standards apply worldwide. They describe three types of labels (I, II, and III), each of which has increasing levels of speci�icity and dif�iculty to obtain. The three types differ in strength and authority, yet the ISO identi�ies each as sharing a common goal:
To communicate veri�iable and accurate information that is not misleading on environmental aspects of products and services, to encourage the demand for and supply of those products and services that cause less stress on the environment, thereby stimulating the potential for market-driven continuous environmental improvement. (Global Ecolabelling Network, 2016b)
The value of certain labels tends to vary by industry or stakeholder group. A food manufacturer may value one type, whereas a fabric manufacturer may value another—this is because one sells a product people ingest, while the other sells a product people only put against their skin. Yet another �irm may not value any label unless consumers signal that they want such certi�ications. Thus, �irm leaders may want to explore the options, which vary by cost, dif�iculty, and viability. Labels that exist in addition to the ISO labels are outlined in the following sections.
Certi�ied Natural In the cosmetics and beauty product category, one of the more common certi�ications is the certi�ied natural seal. This label signi�ies that products use natural raw materials—which include plant oils, fats and waxes, herbal extracts, essential oils, and aromatic materials—from controlled sources. Appropriately veri�ied by a third party, such a label assures consumers that they are not ingesting or applying arti�icial (nonbiologic) ingredients.
Energy Star In the U.S. consumer goods and electronics category, the Energy Star label re�lects a government- backed voluntary program to help individuals protect the environment by using energy ef�iciently. The EPA and the DOE created the label to indicate whether devices such as computers, kitchen appliances, buildings, and other products generally use 20% to 30% less energy than legally required by federal standards. The label indicates that a third party has veri�ied the item in question (which can range from a single electronic product to an entire building) actually consumes signi�icantly less electricity than its non–Energy Star competitors. The label can also indicate whether the item was designed so its lifetime operating costs will be lower than its non–Energy Star competitors. The Energy Star label is the symbol for energy ef�iciency; it allows people to easily identify high-quality, energy-ef�icient products, homes, and commercial and industrial buildings.
Fair Trade For some consumer goods (typically fabrics and handicrafts) and some food items (typically chocolate, coffee, tea, and sugar), stakeholders value a different label. A fair trade certi�ication signi�ies that a product is veri�iably associated with fair trade practices, which involve a speci�ic, market-based approach to addressing poverty by improving lives and reducing environmental impact. It also involves paying higher and fair wages and to utilizing farming and harvesting practices that are safe for farmers and nurturing to the environment. The fair trade label lets consumers know that a product was grown with the environment, farmers, and workers in mind. Trade standards and fair trade certi�ication insist on safe working conditions, protecting the environment, and providing opportunities to empower and improve worker communities.
Consumers often pay a premium for fair trade products, but the fair trade certi�ication label lets consumers trust that the extra money they pay bene�its farmer communities directly through higher and more fair wages. As with the other such labels, third parties perform audits and offer consulting services to any organization interested in obtaining the fair trade certi�ication.
Chain of Custody Certi�ication The Forest Stewardship Council (FSC) promotes the sustainable management of forests in ways that are environmentally appropriate, bene�it society, and are economically feasible. Regarding paper products or products with signi�icant paper material content, the most applicable label certi�ies that the FSC veri�ies that the paper came from sustainably managed forests. More speci�ically, the FSC chain of custody certi�ication signi�ies that the wood or paper used in the product or service has been tracked throughout its production and distribution process. Tracking veri�ies that raw materials are either recycled or come from forests where trees are actively managed for sustainable outcomes. The label veri�ies that the trees came from sustainably managed forests where companies monitor resource use, maintain native species, and avoid clear-cutting and other environmentally damaging harvesting practices. Only FSC-certi�ied operations are allowed to label products with the FSC trademarks (Ecolabel Index, 2016b).
Previous sections explored how labels and certi�ications are one way to convey �irms’ values and sustainable behaviors. Such labels vary in terms of related expense, relative ease of acquisition, and whether they actually apply to a particular product or service. It is important to mention that we have described just a
few of the many possible eco-labels that exist to help �irms and consumers signal CSR and sustainability goals. According to the Ecolabel Index organization, there are more than 400 eco-labels in more than 100 countries and 25 industry sectors (Ecolabel Index, 2016a). Interestingly, despite the variety in the number and type of label, one feature of eco-labeling unites all of them: the need for third-party veri�ication.
To thwart or mitigate greenwashing—or accusations of it—�irms can hire third-party organizations to verify claims or validate the use of certi�ications and labels that indicate credibility. Alternately, some labels cannot be earned or utilized without third-party veri�ication.
A robust and sizable industry exists to perform such validations, for a fee. For example, Underwriters Laboratories charges �irms to use their particular methods to validate environmental claims such as “recycled content,” “regional materials,” “rapidly renewable content,” “recyclability,” “volatile organic compound content,” and “energy-ef�iciency” (Underwriters Laboratories, 2016). In addition, most of the major consulting �irms, which have historically focused on verifying corporate accounting reports, now offer third-party veri�ication of environmental and sustainability-related reports. Chapter 9 focuses more speci�ically on sustainability reporting, what such reports entail, and what they look like once complete. Chapter 9 also addresses the practice of obtaining third-party veri�ication in more detail.
Apply Your Knowledge: Analyze a Company’s Green Marketing Program
Select a company that participates in green marketing. Then complete the following:
1. Describe any areas in which the company might be vulnerable to greenwashing claims based on its current behaviors. Provide suggestions to address these claims.
2. Discuss any green opportunities the company is currently missing; describe how and why the company might engage in more green marketing. 3. Take one or more of your ideas and describe how a watchdog group might fairly or unfairly accuse the company of greenwashing if it enacted
your marketing suggestions. How can the accusations be avoided or defended against? 4. What are the current and long-term bene�its the company could receive from green marketing?
Chapter Summary Proponents of CSR and corporate sustainability are in a position to advertise positive �irm behaviors or publicly criticize problematic ones. Some criticisms speci�ically relate to �irms that make false or misleading claims about environmental bene�its.
This chapter illustrated the concept of greenwashing and described different types. The point of discussing greenwashing in such detail is to help �irm leaders realize its dangers and identify cases of greenwashing so they can guide �irms toward actual sustainable behaviors. Discussing greenwashing to this extent also helps consumers guard against being misled. Finally, the social and political climate created by active watchdog groups and some government agencies incentivizes �irm leaders to avoid greenwashing and take steps toward true sustainability.
Given how dif�icult it can be to determine when publicized efforts are genuine or greenwashing, leaders with honest intentions may be unfairly accused of greenwashing. This chapter discussed some ways to protect against such accusations—namely, to use product-appropriate labels, obtain third-party veri�ication, and/or work with industry associations to stay abreast of issues and options. Such methods also help companies and consumers take a more proactive and positive approach to monitoring both green marketing claims and greenwashing.
The positive press generated by viable and legitimate advances in sustainability may continue to create an environment in which �irms are tempted to join the playing �ield. Thus, stakeholders may need to simultaneously scan for greenwashing while carefully elevating and highlighting the positive and credible developments in sustainability that have been achieved.
1. Identify a company that is moving toward CSR and sustainability. How is the company marketing its efforts? What suggestions would you make to help the company avoid being accused of greenwashing?
2. Do you think certain industries are unfairly targeted for greenwashing? Why or why not? 3. What are other remedies to greenwashing? How would you inform others about greenwashing and its impact on stakeholders? 4. Investigate what it takes to receive fair trade certi�ication (http://fairtradeusa.org (http://fairtradeusa.org) ). What do you think are some challenges to
obtaining such certi�ication? What challenges might be faced by, say, a company that seeks certi�ication for new noncoffee products? 5. Do you think consumers are ready to support fair trade products? Why or why not? 6. Fair trade products mostly include coffee, chocolate, sugar, and some textiles/fabric goods. Do you think there is something different about these
products that makes fair trade successful for them? What are some ways other products could bene�it from fair trade methods? 7. Do you consider one greenwashing resource to be more or less impartial than another? Do you feel that the topic of greenwashing offers value to the CSR
and sustainability debate? Why or why not? 8. Suppose a friend would like learn how to buy products (such as shampoo, food, and appliances) that have a positive impact on the environment. What
suggestions would you offer to help her make informed decisions as she shops?
For greenwashing updates, visit: http://greenwashingindex.com (http://greenwashingindex.com) http://sinsofgreenwashing.com (http://sinsofgreenwashing.com) http://www.stopgreenwash.org (http://www.stopgreenwash.org)
Learn more about companies that support fair trade policies and use fair trade certi�ication here: http://fairtradeusa.org (http://fairtradeusa.org)
Click on each key term to see the de�inition.
certi�ied natural (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A label that signi�ies a product uses natural raw materials.
An international certi�ication identifying products or services as compliant with environmental standards.
Energy Star (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A standard for energy-ef�icient consumer products.
fair trade certi�ication (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Certi�ication that veri�ies a product is manufactured using transparent processes, fair wages, and environmental preservation.
green marketing (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Publicizing environmental and social activities, efforts, and results.
Deceptive marketing that presents confusing, misleading, or incorrect information to present it or its products as environmentally responsible.
industry associations (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Organizations that offer opportunities for companies to join together to enjoy more in�luence than any single company.
9 CSR Reporting Standards and Practices
After reading this chapter, you should be able to:
Understand the history of CSR reporting and past attempts to standardize the process. Explain how to use Global Reporting Initiative standards to verify CSR and sustainability reports. Summarize the challenges and bene�its that organizations face in creating CSR reports.
Introduction Customers and other stakeholders (even employees) cannot usually become aware of socially responsible behaviors without some effort on the organization’s part. Thus, accurate and timely reporting of CSR efforts can engage stakeholders and provide concrete evidence of sustainability attempts and successes. However, not all �irms report the same way, and consumers are not always able to protect themselves from false or misleading reports. Also, some �irm managers still choose to only report �inancial returns and don’t discuss the social or environmental aspects of or contributions to those returns.
This chapter addresses types of �inancial and CSR reporting. It discusses reasons why companies make the effort to report and describe standards and general practices that, if adhered to, can help such reports be maximally useful to customers and other stakeholders.
In 1989 millions of gallons of oil spilled from the Exxon Valdez tanker, harming the surrounding water, coastline, and wildlife in Prince William Sound, Alaska.
John Gaps III/AP Images
9.1 Financial and CSR Reports Today the most common type of corporate reports are �inancial reports. Interestingly, companies can legally present investors with two types of �inancial reports: (a) those that strictly adhere to generally accepted accounting principles (GAAP) and (b) those that include some simpli�ications or leave out some facts from the main body of the report. The �irst type is well known to accountants; such reports follow a standardized format that make them easy to compare to reports from other companies that use the same standards. Thus, the GAAP format enables the �inancial situation of two or more companies to be compared. In contrast, non-GAAP reports feature adjusted �igures known as pro forma or non-GAAP numbers. Company leaders have signi�icant freedom in reporting such adjusted numbers, in part because there are no rules about what they can strip from the reporting. This allows executives to paint a simpli�ied or idealized picture of the corporate situation (Morgenson, 2015). Even within the same industry, companies can differ on what they include or exclude from the nonstandard report. For example, one company may exclude facts about how employees are compensated, while another company in the same industry may include such numbers. When these differences occur, it makes it challenging for investors or other stakeholders to compare companies’ performance.
The existence of such different types of reporting means that investors and reporters may pay more attention to the nonstandard and adjusted numbers when making investment decisions (probably because they are typically and purposefully easier to understand). This has ethical implications, should people invest money based on what could be misleading information.
For example, in the case of pharmaceutical company Valeant, there were dramatic differences between the company’s real earnings and its adjusted numbers (and these differences were more dramatic than differences in competitors’ reports). Under GAAP reporting, the company earned $912 million in 2014, but its other report showed “cash” earnings of $2.85 billion for the same year (Morgenson, 2015). Valeant stripped out many expense items from its non-GAAP revenue reports, including costs related to stock-based compensation, legal settlements, and costs associated with acquisitions. In fairness to the company, Valeant did present a list of excluded expenses, but not in a format that was accessible to many investors (Morgenson, 2015). In the last half of 2015, Valeant’s market value dropped by almost $60 billion, largely as a result of investor reactions to the discovery of the variance between the two versions of the report (Morgenson, 2015).
What are government and exchange regulators doing about this issue? In 2003, when pro forma or non-GAAP earnings �irst became popular, the SEC instituted Regulation G to help investors. Regulation G requires companies that use adjusted non-GAAP �igures in regulatory �ilings to present comparable numbers calculated using GAAP. However, the regulation does not cover news releases, a major source of information for investors.
According to many, this kind of market deception re�lects the need for transparency and standardization in reporting, not just for accounting measures (which are only one part of the triple bottom line), but also for CSR (Howell, 2015b). Transparency means being open, honest, and direct about a company’s past, present, and future. Standardization means using a common system that allows people to make fair comparisons between similar corporations. Transparency and standardization are a foundational element of sustainability because they allow companies to fairly measure and compare shareholder value, return on investment in �inance, and environmental impact and social contributions to CSR. CSR reports are a relatively new phenomenon, and making sure they are useful requires understanding the history of reports, the standards related to reporting, and cases of reporting use and abuse. Doing so also helps explain why some �irms continue to resist the practice and why so much variety exists in how and why �irms report. It also illustrates how one disaster indirectly led to the creation of a global movement.
History of CSR and Sustainability Reports
On March 24, 1989, an oil tanker named the Exxon Valdez, bound for Long Beach, California, ran aground in Prince William Sound, Alaska, spilling 15 million to 40 million gallons of crude oil into the ocean (Skinner & Reilly, 1989). Considered one of the most devastating human-caused environmental disasters in history, the spill eventually spread to cover 1,300 miles of coastline and 11,000 square miles of ocean. Prince William Sound is a remote location accessible only by helicopter, plane, or boat. This isolation made government and industry response efforts slow and expensive, which only further devastated local salmon, seals, and seabird populations (Skinner & Reilly, 1989). The �ishing industry in that part of Alaska still has not fully recovered from this disaster. The public’s outrage over the event grew as investigations and reports revealed that the crew was overworked and underrested, and that some safety monitoring equipment was broken and deemed too expensive to �ix (Skinner & Reilly, 1989).
The Exxon Valdez became a symbol of how the drive for pro�it can con�lict with environmental and social responsibility, with devastating results. The short-term media and social response was signi�icant, and public outrage and concern continued for years.
Some of the disaster’s long-term implications relate to corporate transparency. The spill instigated new pressures for �irms to report how they were (or were not) protecting workers and the environment. Groups of activists began to push for accountability through voluntary corporate reporting. One of the leading organizations responsible for demanding more corporate transparency was the Coalition for Environmentally Responsible Economies (Ceres), which was formed in response to the spill.
The Exxon Valdez
A look at the negligent business practices that were behind the Exxon Valdez oil spill. Could better reporting and more transparency on the part of Exxon have avoided this disaster?
The Exxon Valdez From Title: The Untold Story of the Exxon Valdez
© I f b All Ri ht R d L th 02 11
The Coalition for Environmentally Responsible Economies Ceres was formed by a small group of investors who believed that if �irms like Exxon had to publicly admit they were overworking people (a social CSR issue), were failing to invest in safe equipment (another social CSR issue), or lacked the policies to protect the environment in the event of an emergency, they might �ind reason to �ix such irresponsible and unsustainable behaviors. Essentially, the founders of Ceres believed that transparency could herald change.
Over the organization’s 25-year history, its mission has expanded. It has introduced reporting tools to help organizations weave environmental and social challenges into company and investor decision making. It has inspired a reevaluation of companies’ roles and responsibilities as stewards of the global environment when it published the Valdez Principles, later named the Ceres principles. These consist of 10 points of environmental conduct that Ceres encourages companies to publicly endorse (Lubber, 2014):
1. Protection of the biosphere: How well does the corporation protect the general biosphere, including by reducing greenhouse gases? 2. Sustainable use of natural resources: Does the corporation strive to use renewable resources and reduce the consumption of nonrenewable ones? 3. Reduction and disposal of wastes: Does the corporation practice lean manufacturing and seek to reduce or eliminate waste? 4. Energy conservation: Does the corporation conserve energy? 5. Risk reduction: Does the corporation have safety and accident-reduction programs in place? 6. Safe products and services: Does the corporation create products and packaging that are safe for consumers? Are consumers safe when they use the
product? 7. Environmental restoration: Does the corporation take steps to renew and restore the environment when damage is done? 8. Informing the public: Is the corporation transparent and open in decision making? Does the corporation alert the public to CSR progress and setbacks? 9. Management commitment: Is the corporation’s management and leadership knowledgeable and committed to sound Ceres practices? To general CSR
and sustainability principles? 10. Audits and reports: Does the corporation audit, report, and generate data on environmental compliance and CSR?
In 1993, after lengthy negotiations, Sunoco (an oil and gas company) became the �irst Fortune 500 company to publicly endorse the Ceres principles. Since then many others have signed similar agreements to follow the principles, and Ceres is now the largest environmental monitoring data service for companies (Ceres, 2014), although it is not used by all �irms. The creation of the principles and the requirement for supporters to publicly declare support ushered in renewed pressure to make public data on where companies stand in regard to CSR and sustainability. Ceres spearheaded a movement to get �irms to publicly report and state sustainability and CSR goals, progress, and setbacks.
Recent research suggests that 93% of the top global companies publish CSR or sustainability reports (KPMG, 2013). The statistic indicates how far sustainability and CSR reporting have come, but the journey was not easy. As Bob Massie, Ceres’s executive director from 1996 to 2002, stated in 2014:
The whole idea of having an environmental ethic, or measuring your performance above and beyond your legal requirements, was considered completely insane. Sustainability was considered to be a shockingly dif�icult thing that no company would ever take on as a goal. (Ceres, 2014)
As Ceres pushed reporting, it also spearheaded a worldwide effort to standardize and systematize disclosure on environmental, social, and human rights performance. In the late 1990s Ceres launched a separate entity known as the Global Reporting Initiative (GRI), the aim of which was to create a standardized and transparent accountability process that ensures compliant companies follow the Ceres principles (GRI, 2015).
The Global Reporting Initiative The GRI is the most widely adopted framework for sustainability reporting. It was originally created in 1997 to help leaders and managers navigate the process of reporting—there were no standards and very few examples to follow at that time. One of the �irst steps organizational leaders took was to expand the conversation and terminology so that more industries could participate in the effort. For example, GRI leaders broadened the focus beyond the environment to also include social, economic, and governance issues. The addition of more topics and keywords served to strengthen the relationship between GRI and basic CSR principles and enabled more organizations to participate. In 2000 the GRI published the �irst of�icial guidelines for corporate compliance reporting and created a framework for comprehensive sustainability reporting. The GRI team offered consulting services for those who needed advice on how to provide exemplary reports.
For the �irst 3 years, GRI kept track of which �irms used the guidelines and included links to examples of all types of reports on its website. Over time, enough �irms began offering reports that GRI stopped keeping track—a sign it had effectively helped launch a movement.
Companies such as Ben & Jerry’s, the Body Shop, and Shell Canada were among the �irst to conduct environmental reports.
Toby Talbot/AP Images
In response to the GRI guidelines, the leadership at Ceres decided to spin off the reporting efforts from the rest of the organization. Thus, GRI became a separate and independent nonpro�it institution in 2001. The organization moved to Amsterdam and became part of the United Nations under its environmental program (the UNEP). That same year, in 2002, the second generation of guidelines (G2) was unveiled at the World Summit on Sustainable Development in Johannesburg, South Africa. The summit was the most important international convention related to climate change, and being part of it was another sign of the organization’s value and prestige.
Over the next 4 years, demand for CSR reporting guidance grew dramatically, and the third generation of the guidelines (G3) was launched with the help of more than 3,000 experts from multiple sectors, including packaged goods, shipping, agribusiness, and more (GRI, 2015). However, it was not until 2007 that GRI created a product for mass consumption and utility—Pathways I. This publication provides a step-by-step procedure for report makers. To create a regional presence and learn how different regions responded to the document, GRI set up regional of�ices around the world, beginning with Brazil. Today it has of�ices in many countries.
To encourage the use and enforcement of the current guidelines (G4), GRI launched a 60-question multiple-choice exam that enables individuals to be accredited to use the G4 guidelines. The exam is available in more than 70 countries; successful participants receive a certi�icate and get their name published on the GRI website for 3 years. While this kind of recognition may seem narrow, it has signi�icant weight with environmentally and socially conscious investors who have come to expect transparent reporting and this kind of standard measurement. Also, certi�ied people can go into business for themselves (or be selected by employers) to help others create better CSR and sustainability reports—this provides a way for CSR and sustainability skills to be turned into �inancial bene�its. The more people who are accredited to the GRI standards, the more the GRI brand grows and the more the reporting movement gains momentum and standardization. GRI’s vision is for organizations to consider sustainability throughout their decision-making processes (GRI, 2015). Such a goal puts them in partnership with corporate leaders and individuals who are interested in increasing CSR and sustainability.
The emergence of Ceres and GRI illustrate how a small group of individuals can form a collective and ultimately drive major change. The ability of individuals to report, support reporting efforts, and engage with standardized guidelines has moved from nonexistent in 1992 to being the purview of a few experts to being readily accessible by almost all interested parties. What have companies done with this ability, and what are the consumer and competitive pressures to conform? As stated earlier, data suggests that each year, more companies report and that these reports are becoming more accessible, detailed, and useful to stakeholders. The following section highlights this progression.
The Progression of CSR Reports
The three historic phases of CSR reporting clearly show the gradual mainstreaming of environmental issues, which were once seen as the concern of only a few. Measuring and transparently reporting environmental impacts in a standardized way has become common practice. However, the journey to get to this point featured several phases, each of which is important because they illustrate how CSR efforts move in stages. This information can encourage people who want to start a movement related to a different CSR and sustainability issues. The phases are also important because they illustrate how people come to accept new CSR ideas—and some �irms or managers may still be stuck in a mind-set of an earlier phase. The ability to recognize how people and ideas mature can help future leaders and managers work with people of varied mind-sets.
Phase 1 In the earliest phase of CSR and sustainability reporting, corporations were more focused on public image in order to impress shareholders, who mostly expected annual �inancial reports. During the 1970s and 1980s, CSR messages (if they existed at all) were based on public relations goals more than truth or adherence to standards. One important breakthrough came in 1972, when a consulting �irm named Abt & Associates added an unexpected environmental report to its typical annual �inancial statements. This pioneering effort focused strictly on sharing data on air and water pollution by the company and its af�iliates. Abt & Associates’ �inancial auditor certi�ied the �inancial data. But since he was only trained to evaluate �inancial reports, he disclaimed any responsibility for the environmental data, since no standards existed for such audits. In response, John Tepper Marlin (1973) wrote an article for the Journal of Accountancy suggesting ways accountants could measure pollution; the article included a model environmental report, which was subsequently adopted by a few accounting and auditing �irms around the nation (Marlin & Marlin, 2003). Still, neither the practice of reporting nor the practice of having auditors measure environmental pollution gained much traction until the 1980s.
Phase 2 In the second phase of CSR reporting, Marlin continued to innovate and improve on his original ideas. He found an interested innovation partner in gourmet ice cream purveyor Ben & Jerry’s. In a groundbreaking deviation from standard practice, Ben & Jerry’s commissioned a social auditor to work with its staff on a report covering the previous year’s activities. This was unusual because most �irms only hired �inancial auditors, not auditors to evaluate social and environmental practices. For 2 weeks, the company’s founders gave the social auditor full access and permission to interview anyone in the company. The auditor visited not only the main ice cream factory but also the smaller facility where the company made special products, such as its Peace Pops. The auditor was encouraged to speak with dairy industry of�icials and public and private community representatives—essentially anyone in the supply chain or any stakeholders in the industry. In many ways, by commissioning the audit, Ben & Jerry’s leadership was requesting a fully transparent 360-degree view of the company, prior to the common usage of the term and practice.
The social auditor recommended the resulting document be titled Stakeholder Report. Scholars suggest that this may have been the �irst report directed to and for stakeholders, including �inancial shareholders as well as other stakeholders. That �irst stakeholder report was divided into categories that represented different audiences, including communities (outreach, philanthropic giving, environmental awareness, global awareness), employees, customers, suppliers, and investors (Marlin & Marlin, 2003). This was notable because it marked the �irst time that Ben & Jerry’s considered suppliers to be a stakeholder. The report was also a landmark because it
was commissioned by Marlin.
This report, as well as others from similarly progressive companies such as the Body Shop and Shell Canada, helped introduce a new model of corporate reporting—a precursor to the GRI standards. After the �irst social audit, Ben & Jerry’s continued to issue social reports, using different social auditors to re�ine
the concept and practice of CSR reporting. While these audits still lacked a set of generally accepted standards by which to measure CSR, they were transparent and offered a road map for improvement (and inspired others).
It is important to note that it was not just awareness and goodwill that led to the rise in CSR reporting during the 1980s. Legal issues were also at play in the United States. The open records and meeting laws passed in the 1970s as a result of the Watergate scandal increased the volume of environmental pollution emissions data that entered the public record. In 1987 “right to know” legislation was extended by Congress to establish the Toxic Release Inventory and the Pollution Prevention Act of 1990, which created a database that is used by investors to document environmental progress. It is also a standardized measurement that shows the history of compliance (or noncompliance) to environmental regulation (Katsoulakos, Koutsodimou, Matraga, & Williams, 2004).
Phase 3 In the third phase of CSR reporting, the need for third parties to verify reports emerged as a requirement (see Chapter 8). Veri�ication bodies such as Ceres and GRI accredit and certify organizations’ behaviors, products, and practices using transparent environmental and social standards, though these had to be created. This newer phase of CSR reporting makes the social auditor stronger and less idiosyncratic and independent, meaning that social auditing individuals and teams follow more standards and produce reports that are more consistent across and between industries.
The third phase introduced advances that continue to de�ine CSR reporting. Now, when social auditors identify a violation, they record the situation, and the facility has an opportunity to take corrective action. Violations range from small infractions such as a minor waste problem that does not endanger certi�ication, to egregious concerns that jeopardize the environment and the possibility of achieving report certi�ication. Auditors are generally solution oriented and tend to give the corporation time to address any violations before the problems affect certi�ication. Reporting in general, and the role of auditors in that process, has matured into an industry where auditors receive standardized training and follow speci�ic CSR standards before certifying a company and its reports.
Several agencies and organizations stand out as early leaders in the �inal phase of CSR reporting. Among them is Social Accountability International, which was founded in 1997 (Marlin & Marlin, 2003). Other auditing pioneers include the FSC, the International Foundation for Organic Agriculture, and the Fairtrade group. Together, these groups formed a larger organization called the International Social and Environmental Accreditation and Labelling, which sets reporting standards internationally and provides uniform training to thousands of social auditors. This group uses GRI standards as well as others that change by industry.
Such agencies help companies assess, measure, and certify CSR and environmental compliance. The very existence of such a wide number and variety of certifying organizations indicates how CSR and sustainability reporting has become an established feature of modern organizational life. Such reports provide customers, employees, competitors, governments, and other stakeholders the ability to evaluate whether �irms are moving toward CSR and sustainability or not. Reports provide a way for people to better understand and engage with the CSR journey. However, reports are only valuable if they represent the truth, and third-party certi�ication helps ensure such honesty.
9.2 CSR Reports and Audits Reporting and obtaining certi�ication via an audit is a complex process that requires support and expertise. For organizations interested in starting or dramatically improving sustainability reports, the GRI offers guidelines on how to start. As companies begin to create CSR reports—and as these become more accessible, valuable, and informative—new formats and publishing platforms emerge. For example, most reports are published on paper, but a company named Symantec published both a paper and an online CSR report in 2015.
A detailed outline of how to create and publish a viable CSR report is outside the scope of this chapter, but every employee and future leader will likely need a high-level understanding of the process (see Figure 9.1).
Figure 9.1: GRI outline for CSR reports
Source: Adapted from “How to De�ine What Is Material,” by G4 Online, 2013 (https://g4.globalreporting.org/how-you-should-report/how-to-de�ine-what-is- material/Pages/default.aspx (https://g4.globalreporting.org/how-you-should-report/how-to-de�ine- what-is-material/Pages/default.aspx) )
To begin, a publisher would focus on the steps of the process—identi�ication, prioritization, validation, and review—to determine the organization’s most signi�icant economic, environmental, and social impacts. The next task is to utilize four reporting principles that de�ine report content. These include the following:
1. Materiality: Information must relate to the �irm and its operations and cannot be unrelated or distracting. 2. Stakeholder inclusiveness: The report must not leave out key participants in the value chain or stakeholder set. 3. Sustainability context: Reports need to be clear about what is and is not included for evaluation. 4. Completeness: Report authors need to clarify how thoroughly they followed an issue or topic (GRI, 2015).
The principle of materiality refers to the data’s relevance to day-to-day operations. Think back to the discussion of greenwashing in Chapter 8—when reports offer interesting but noncentral data, companies end up reporting on nonmaterial aspects of the business that might be misleading. The principle of stakeholder inclusiveness is foundational to the process—recall how the early report from Ben & Jerry’s revealed to the company the then radical idea that suppliers were stakeholders. This type of awakening is possible in every industry as leaders �ine-tune the de�inition of stakeholder inclusiveness. The principle of sustainability context ensures that reports include how an organization’s performance in�luences sustainability in a wider context (locally to globally). Finally, completeness ensures the report’s topics are adequately covered to provide stakeholders with suf�icient information about the organization’s economic, environmental, and social performance. The report should also detail its own process and methodologies used, as well as mention any trade-offs or assumptions involved in creating the report. Once the report is ready, many companies ask a third-party agency to verify and validate it.
CSR Report Auditors
Earlier in this chapter, we discussed the way GAAP guidelines inform the �inancial audit of any publicly traded �irm. While corporate �inancial audits were and are a standard practice, CSR audits are less common—a fact that began to change in 2002. That year, two of the then major accounting �irms, PricewaterhouseCoopers and KPMG, jointly signed and veri�ied a CSR report from Shell Oil. This represented a landmark event for CSR and sustainability efforts because it marked the moment when mainstream �inancial auditors became willing and able to offer CSR audits, too.
It is important to note this change, because even GRI representatives cannot consult on the veri�ication of reports, as doing so would be a con�lict of interest and violate the GRI mandate to remain independent and impartial. Thus, GRI does not recommend or endorse any auditors or consultancies. However, it does suggest guidelines on where to �ind auditing agencies and how to engage with them. In selecting service providers, organizational managers should primarily consider the level of expertise and competency with sustainability disclosures. To ensure results are objective, managers should choose an external provider who is independent of the hiring organization.
External auditing �irms generally fall into three categories: accountancy, engineering, and sustainability services. There are different advantages to each type. Accounting �irms typically connect to global networks; they usually have a business focus and expertise in �inancial and non�inancial reporting. Engineering �irms, on the other hand, may be able to offer technical certi�ications and assurance, including the ability to conduct important tests and other scienti�ic and technical veri�ications related to, say, toxicity (or lack thereof) of ingredients. Furthermore, engineering �irms understand complex processes and are typically familiar with risk-based analyses. Finally, sustainability services �irms understand sustainability issues. They are typically smaller than the other two types of �irms and are often locally based and well versed in stakeholder management issues. Each type of provider has a different but compatible value proposition, and some �irms may need to hire more than one, depending on operational and manufacturing factors. This means that a technology �irm might employ both an engineering �irm and a sustainability services �irm to provide different stakeholders the assurances they desire.
According to the GRI Sustainability Disclosure Database, a large majority of GRI reports are assured by accounting �irms, less than a quarter are assured by sustainability services �irms, and slightly over 10% are assured by engineering �irms. While this breakdown illustrates that accounting �irms dominate the category, the fact is that all three types of providers have paying customers and an ongoing value proposition in the auditing and third-party validation space.
Veri�ication and Assurance Standards
One of the �irst decisions that leaders of any organization seeking to validate reports must make is which reporting standard to adopt. This decision can impact the type of report, the choice of assurance agency, and the focus of report-related research. (GRI, 2015). While there are multiple approaches, three international standards are the most widely used—ISAE 3000, AA1000AS, and ISO 26000.
ISAE 3000 The International Standard on Assurance Engagements (ISAE) standard known as ISAE 3000 offers guidelines for any assurance engagements other than �inancial audits or reviews of historic �inancial information. The standard came from the International Auditing and Assurance Standards Board of the International Federation of Accountants; it was formed in 2003. It emphasizes comprehensive procedures for evidence-gathering processes and assurer independence (GRI, 2015). Assurance reports in accordance with ISAE 3000 standards can only be issued by a certi�ied accountant, as they must also comply with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants. Non-accountants can use the assurance methodologies or combine elements of ISAE 3000 with other methodologies, but they cannot certify the results. There are related ISAE standards between 3000 and 3999, depending on the speci�icity of the topic (for example, ISAE 3410 relates to assurance of greenhouse gas emissions). Leaders in some industries will value that accountants have veri�ied and issued the company report; in other industries the extra effort to obtain this certi�ication may not matter. Different types of certi�ication exist because some �irms value one kind of certi�ication or assurance over another.
AA1000AS The AA1000AS certi�ication standard leans a bit more toward sustainability issues, as it relates to a document called the Accountability Principles Standard that many organizations use to guide their approach to sustainability. AccountAbility, an advisory �irm famous for being an early provider of certi�ication, published the 2008 version. In response to foundational concerns of AccountAbility principals, the AA1000AS standard focuses heavily on whether the organization and its sustainability reporting respond to stakeholder concerns. This certi�ication matters most to �irms that want to be associated with AccountAbility and its brand or to �irms that really want to signal they care about stakeholders.
ISO 26000 After 5 years of negotiations between multiple stakeholders around the world, the ISO launched ISO 26000:2010. While not widely used, it is an extension of EMSs. The resulting document provides guidance rather than requirements, so unlike most well-known ISO standards (such as the more famous quality standards known as ISO 9000), organizations cannot be certi�ied for being compliant. However, the guidelines clarify the concept of social responsibility, help translate key principles into effective action, and provide examples of best practices in CSR from around the world. The document also helps organize and unify activities and verbiage, which is helpful as more organizations adopt the principles and guidelines. ISO 26000 was developed by a working group of more than 500 experts (ISO, n.d.b). According to the ISO, the working group disbanded after the standard was published, but the leaders were retained to provide support and expertise for those who adopt the standards.
The United Kingdom’s Marks & Spencer provides an example of how a major retailer integrated ISO 26000 into its operational strategy.
CSR and Sustainability in Action: Marks & Spencer
In late 2015 Marks & Spencer introduced ISO 26000 standards to its largest suppliers. By voluntarily adopting ISO 26000, suppliers agree to conduct business in a more transparent and accountable manner, which helps them comply with the sustainability goals to which Marks & Spencer has publicly committed. In this way the standard helps Marks & Spencer nudge suppliers in a new direction and gives the suppliers a head start in meeting goals that Marks & Spencer has set. In particular, given the volume of clothing the retailer sells, the company uses ISO standards as part of its effort to track the supply chain and check the source of raw materials and labor conditions in supplier organizations. Although ISO 26000 is not an approved GRI standard, it still provides useful information for companies that want to improve CSR and sustainability. After voluntarily implementing the standard, the �irm garnered free publicity, gained additional industry attention, and learned where it was weak and strong in terms of CSR goals and progress. Since the �irm sells a wide range of product categories, the ISO 26000 data can be used to appease a wide range of stakeholders, which offers Marks & Spencer a strategic market advantage.
For managers deciding which reporting standards to follow, it is important to consider that GRI recommends using external third-party validation for sustainability reports. However, GRI does not require third parties to prepare reports in compliance with the G4 guidelines. This means that various reports approved by GRI associates may have a different look and feel. As a result, reports continue to differ widely, and there is likely to be continued variety in terms of what constitutes a “good” report—this is because even with third-party validation, subjectivity surrounds the issue. This means there is a real opportunity for different organizational leaders to help improve and standardize CSR reporting. If companies voluntarily follow GRI report guidelines and validate reports, they can make them easier to compare and understand. Essentially, those �irms that provide validated reports that stand out to stakeholders have a real opportunity to set the tone for multiple �irms and industries.
The next section discusses reasons leaders should validate reports with external auditors and use third-party veri�ication.
Bene�its of Veri�ied CSR Reports
Some leaders might argue that CSR reporting simply poses another cost, possibly one that lacks a clear bene�it. Additionally, adding CSR compliance to GAAP compliance can overwhelm management. Even though CSR reporting and standards are not universally accepted, they are widespread enough that scholars and practitioners are beginning to see the advantages of CSR compliance. This section documents reasons to create CSR reports that are certi�ied by auditing agencies.
The mere act of seeking external validation can increase a report’s recognition, trust, and credibility. Given that reports cost time, talent, and resources, it makes sense to follow the right process to get reliable results that can be benchmarked each year to chart improvement. Organizational stakeholders—including investors, employees, or neighboring communities—are more likely to have con�idence in an audited and validated report. In an era of increased cynicism toward business, veri�ication can prevent corporate claims from being dismissed or discounted. Also, seeking veri�ication indicates that the company believes its own story; it re�lects a seriousness about the topic that investors, customers, employees, and other stakeholders may value highly. Rating agencies and analysts increasingly look for audits and veri�ication when making investment and rating decisions (Corporate Register, 2008).
Reduced Risk and Increased Value The top international accounting and auditing �irm, KPMG (2011), reported that one third of the 250 largest global companies amended reports after auditors identi�ied errors in the company’s CSR compliance. This statistic feeds the cynicism that companies issue untrue or confusing data that they only correct once caught. Using a quali�ied third-party reviewer means there is a greater chance that the report re�lects the truth about a company’s efforts; auditing reduces data- quality risks. Given how quickly news can spread in our connected age, �irms can take extra steps to ensure that information is checked before going public. GRI documents also suggest that when �irms make the effort to produce robust, audited, and credible documents, the reliability and value of the entire reporting process increases (GRI, 2013).
Improved Board and C-suite Engagement Decision makers at all levels should evaluate choices based on the best available data. This fact about decision making holds for CSR and sustainability decisions as much as for other investment and personnel decisions. Thus, when top management teams must decide whether to enact or otherwise support CSR and sustainability efforts, they are more likely to consider data from competitors and others if that data is veri�ied as reliable. In particular, members of the company board of directors and top-level managers across the C-suite (the chief executive of�icer, or CEO; chief �inancial of�icer, or CFO; chief information of�icer, or CIO; and so on) are more likely to utilize audited documents to make CSR improvements to organizational strategy. The logic is that the higher the quality of decision- making inputs, the higher the quality of decisions that �low from those inputs. Audited and veri�ied documents have a high value for market stakeholders as well as nonmarket ones. If you want to convince upper management to enact a policy or product change, you may have an easier time doing so if you show evidence from the CSR and sustainability reports of other �irms that had success with the idea. Gathering, reading, and sharing the veri�ied CSR and sustainability reports of other companies is one strategy to help you and others make sound CSR-related comparisons.
Improved and Stronger Internal Reporting and Systems As an extension of the bene�it of improved board and C-suite engagement that stems from validated reports, such robust reporting systems can also help employees at all levels improve results. If the validation process includes feedback on errors, it can lead to learning, training, and improved behaviors. External validation can also con�irm the presence of good practices and processes, which further encourages and supports positive efforts. For these reasons, the process of reporting on CSR efforts and getting third parties to verify constituent data can offer a �irm many bene�its, even if it is in the early stages of enacting CSR and sustainability projects.
Improved Stakeholder Communication As mentioned before and as evidenced in the Ben & Jerry social audit, many (but not all) report validation processes involve the review (or inclusion) of stakeholder engagement efforts. Once such processes are examined, they can be complimented and broadcasted or criticized and improved upon. Publishing results allows others to copy good processes and practices, which can improve the status quo across multiple industries and organizations. Some organizations even use reporting processes as an entry point into conversations with stakeholders; the reporting process can be an icebreaker that helps start a conversation that may not otherwise take place. For example, if a �irm wanted to create its �irst CSR report, managers could contact key stakeholders and request a meeting to learn which CSR topics concern them. Managers could then use the information to tailor the reporting process.
Apply Your Knowledge: Plan a CSR Report
Suppose you have been named the CEO of a midsize company in a small community that manufactures automobile parts. The plant sits in what were once wetlands next to a large river. The company has 125 plant employees and 17 administrative and sales staff. All manufacturing processes take place in the plant, where raw materials are shipped in and product is shipped out. You were named CEO because of your willingness to accept responsibility for CSR reporting. No one in the plant has any experience with this, but the accounting department has �iled an annual report using GAAP principles. You are being required to launch CSR reporting by the owners of the plant. How do you begin?
Identify the following:
1. State what issues you will be addressing. 2. Describe how you will measure each of these issues. 3. Prioritize the issues.
4. Describe how you will get third-party veri�ication for each of the issues. 5. Identify any shortcomings or barriers to providing a complete report.
9.3 Using CSR Reports Thus far, this chapter has addressed the history of CSR reporting and introduced the concept and bene�its of third-party assurances for CSR and sustainability reports. What remains to be covered is how both the organization and the public can interpret and use CSR reports.
Organizations that create CSR and sustainability reports have the power to in�luence readers and stakeholders—and it is safe to assume that most people create CSR reports to garner stakeholder goodwill. However, reactions to reports can be positive or negative.
An example of positive publicity comes from a study done by Reputation Institute, a New York–based consulting �irm. In early 2015 the institute invited approximately 55,000 consumers to participate in a study that ranked the world’s 100 most reputable companies (“The 10 Companies,” 2015). It found that 41% of how people feel about a company is based on their perception of the �irm’s CSR. As a result of this �inding, Reputation Institute separately ranked the top 10 �irms with the best CSR—and it did this in part by focusing on CSR and sustainability reports.
This example also portrays how CSR rankings and reports remain vulnerable. After the rankings came out, at least two of the companies, Sony and Volkswagen, experienced dramatic events that called into question their ranking and that no doubt will result in lower rankings from future polls. Sony experienced a computer hacking incident that compromised con�idential data, including information about the company’s unfair hiring and salary practices (Phelan, 2015). Volkswagen faced reports of fraud, including how the �irm purposely misled consumers by cheating on emissions tests and lying about its vehicles’ fuel ef�iciency (Phelan, 2015). Consumers and leaders must work harder than ever to continuously monitor �irms as they progress in the pro-CSR and sustainability journey.
It is also common for companies to experience some negative publicity when they report early CSR efforts. Sometimes, early efforts seem small or insigni�icant, given the organization’s size, or early reports mention baseline numbers that draw criticism. Some stakeholders may interpret the report data negatively. In these situations, it is best to continue on the path toward CSR and sustainability, so that with time naysayers can come to realize that early efforts were real and part of a longer commitment to CSR and sustainability.
In other cases reports about CSR or sustainability efforts do not originate from companies themselves. Nongovernmental organizations also monitor corporate behavior and may report on �indings that bene�it larger society but that companies may prefer to downplay or ignore. Many organizations feel they have an ethical duty to reveal and advertise negative corporate activities as a way to motivate change. For example, the Business & Human Rights Resource Centre, a nonpro�it organization dedicated to advancing human rights in business, tracks more than 6,000 companies and works to help eradicate abusive corporate behavior. Part of the organization’s mission is to broadcast when companies fail to protect and advance sustainability. The organization creates an annual report titled “The Public Eye Awards,” an account of companies with the worst CSR records for the year. The following are the 2014 Public Eye Award “winners,” including the allegations against companies:
BASF, Bayer, Syngenta: Used pesticides to kill bees, which are vital for the environment, agriculture, and food production. Eskom: Negatively affected South Africa’s health and environment by using coal power stations. International Federation of Association Football: In preparation for the World Cup, forcefully evicted local communities in Brazil. Gap: Not being committed to effectively protecting the health and safety of workers in Bangladesh. Gazprom: Responsible for oil spills that negatively impact the environment. Glencore Xstrata: Negatively impacted the rights of local communities and indigenous groups. HSBC: Provided funding to companies that do not uphold CSR ideals, such as Sime Darby & Wilmar, a company accused of human rights abuses. Marine Harvest: Caused damage to the environment and negatively in�luenced the livelihoods of the indigenous people of Chile (Business & Human Rights Resource Centre, 2014).
Lists such as these can make the public more aware of problems and also bring negative public attention to offending companies. When this happens, managers and leaders may react more quickly or choose a more sustainable response than they might have without the reports and related negative press. In the long term, such reports can bene�it society. Changes that �irm leaders eventually enact have the potential to succeed in the future and avoid being criticized for poor CSR efforts.
Negative publicity is not the only risk faced by companies in creating CSR reports. A study undertaken by the accounting �irm Ernst & Young and the Center for Corporate Citizenship at Boston College offers some insight into why �irm managers might resist reporting. Survey respondents disclosed three primary challenges (Ernst & Young, 2013):
1. Availability of data: Sometimes the data that stakeholders want requires extra time or money to acquire. It may warrant new tests on chemical composition, worker welfare, or end-of-life product treatment,—information that may not be readily available.
2. Accuracy or completeness of data: Sometimes data is available but is insuf�icient, as it only covers some portion of the product or some aspect of use. In such cases �irms need to work harder to obtain more data, and this process can take time and money.
3. Internal buy-in: Sometimes people within a �irm do not understand or support the logic behind obtaining more information; in such cases people may resist data collection.
An added challenge for some larger organizations is to �ind subsidiaries and suppliers that are large enough to help them implement sustainable practices and support sustainability reporting.
Given that CSR reporting can be a challenge and, in some cases, be used against a �irm, what are the arguments in favor of it? The next section addresses this question.
Bene�its of Creating CSR Reports
The four primary motivations for reporting are:
1. Transparency: reports can improve investor con�idence, trust, and employee loyalty. 2. Competitive advantage: reports serve to differentiate the company from its competitors. 3. Risk management: reports allow managers to identify and address potential environmental and social risks. 4. Stakeholder pressure: reports can appease certain stakeholders or alert new ones to key �irm accomplishments or goals. (Ernst & Young, 2013)
Companies that prioritize CSR and sustainability can be pro�itable. For example, GE and Siemens create innovative products that are energy ef�icient.
Manuel Balce Ceneta/AP Images
Reporting CSR and sustainability efforts can also help recruit and retain employees. There is also a �inancial advantage to sharing CSR reports. Research shows that the most transparent companies tend to have higher cash �low (Margolis, Elfenbein, & Walsh, 2007).
In addition to the survey results, data from other sources suggest ways that CSR and sustainability reporting bene�it a �irm’s bottom line. GRI Chief Executive Ernst Ligteringen has seen companies change their practices as a result of increased reporting. General Electric (GE) and Siemens, for example, focused on increasing energy ef�iciency and lowering emissions, both of which have helped the company grow. GE’s “ecoimagination” initiative is a company-wide effort to use sustainability concepts to drive innovation. The initiative has brought more than $160 billion in revenue since 2005, while lowering greenhouse gas emissions 34%, reducing freshwater use 47%, and saving the company $300 million (Ceres, 2015).
Ceres (2015) �inds that sustainability reporting is becoming more mainstream in the United States and abroad. Further, some governments even require mandatory reporting—the European Union and India, for example, are in the process of adopting mandatory sustainability disclosure requirements. The integration of �inancial and sustainability data by many �irms creates an opportunity to enhance the data on CSR and sustainability practices (Ceres, 2014). It also can lead to more CSR behaviors by a greater number of organizations.
Chapter Summary This chapter discussed the history of CSR and sustainability reporting to clarify how the practice has changed over time. It also discussed the need for CSR and sustainability reporting and its bene�its. As more companies provide reports, scholars and practitioners learn more about how to report and how communities and shareholders bene�it. In particular, all stakeholders bene�it when reporting standards are fully developed and deployed. While the GRI standards have inspired many �irms’ reports, there remains to be one standard that is adopted by all �irms. Furthermore, CSR reporting remains a voluntary activity in the United States and most other countries, aside from India and some parts of the European Union. Accordingly, there are several common reporting standards used in different industries, and some fragmentation in how and even why �irms report.
Finally, this chapter described the value of third-party veri�ication and assurance of compliance to CSR standards and closed by describing a few uses for CSR reports.
1. Discuss the overall advantages of CSR reporting. When can transparency be a liability and expose a company to risk? 2. How is reporting CSR similar to a publically held corporation’s responsibility to report �inances using GAAP? How are they different? 3. What are the three kinds of CSR auditor, and what are the advantages and disadvantages of each? 4. Suppose a small company would like to create a CSR report. What are some suggestions you could make to the company regarding how to start the
report? What strategies would you recommend to ensure accuracy and prevent negative publicity? 5. What are some ways CSR reporting can become more standardized for all companies on a global scale? 6. What does the history of CSR and sustainability reporting illustrate about the power of a small group of individuals to instigate positive change? 7. What kinds of value does sustainability/CSR reporting create inside a �irm? What kinds of value does it potentially create outside a �irm? How might
your answer change based on a report’s content?
Learn more about GRI by visiting: https://www.globalreporting.org/Pages/default.aspx (https://www.globalreporting.org/Pages/default.aspx)
For an example of a Symantec CSR report, see: http://www.symantec.com/content/en/us/about/media/pdfs/2015-corporate-responsibility-report-en-us.pdf (http://www.symantec.com/content/en/us/about/media/pdfs/2015-corporate-responsibility-report-en-us.pdf)
Review the Public Eye Awards 2014 and corporate responses here: http://business-humanrights.org/en/documents/public-eye-awards-2014 (http://business-humanrights.org/en/documents/public-eye-awards-2014)
Click on each key term to see the de�inition.
CSR standards based on AccountAbility principles that focus heavily on whether the organization and its sustainability reporting respond to stakeholder concerns.
Coalition for Environmentally Responsible Economies (Ceres) (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
An organization that supports reporting tools that include environmental and social responsibility.
Exxon Valdez (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
An oil tanker that ran aground in Prince William Sound in Alaska in 1989, causing one of the worst environmental disasters in history.
generally accepted accounting principles (GAAP) (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Accounting standards and procedures de�ined by the accounting industry and adopted by nearly all publicly traded companies in the United States.
Global Reporting Initiative (GRI) (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A framework for sustainability reporting that was originally created to help leaders and managers start reporting.
ISAE 3000 (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
The ISAE standard for any assurance reporting that is not a �inancial audit or review of historic �inancial information.
ISO 26000 (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
The ISO standard that provides guidelines for corporate social responsibility.
social auditor (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
An external expert charged with certifying annual progress on social issues within a corporation.
Using a common system that allows for fair comparison between like corporations.
10 Leadership Challenges and Opportunities
After reading this chapter, you should be able to:
Identify how the concept of leadership has changed over time. Summarize the challenges regarding sustainability and CSR that future leaders face. Describe the characteristics of next-generation leaders as they relate to sustainability and CSR.
Introduction Every generation de�ines and rede�ines the concept of leadership as it faces the challenges of its era. Certainly, some time periods provide more material and opportunity for re�lection than others. For example, in 1862, as the fractured United States fought the Civil War, President Abraham Lincoln said, “The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with dif�iculty and we must rise with the occasion. As our case is new, so we must think anew and act anew” (as cited in Woolley & Peters, 2015).
Part of Lincoln’s legacy stemmed from his ability to “think and act anew.” While the issues facing our globalized world signi�icantly differ compared to the 1800s, some themes remain the same: When it comes to issues like CSR and sustainability, it seems necessary for brave people to think and act anew. This chapter examines how the next generation of leaders can begin this process. If society is to face new problems in a novel way, completing such tasks is not easy, but it is essential.
The �irst nine chapters of this text illustrated the dif�icult and speci�ic problems of building socially responsible and sustainable organizations. The opportunity to make the futuredramatically different from the past—and the present—presents unique leadership challenges that we address in this chapter. After reviewing the history of leadership, we describe CSR-relevant conditions facing leaders. Finally, we describe skills that leaders must master if they are to effectively lead in a global, environmentally stressed, and economically�luctuating world.
Despite sharing more leadership and power, Queen Elizabeth II and her family are an example of a monarchy.
10.1 Changing Concepts of Leadership This text has discussed critical concepts of sustainability and stewardship. Both are important terms closely related to leadership. However, the concept of leadership and our expectations for it have evolved over time, as all concepts do. In this section, we describe how concepts of leadership have changed. Students should note that this helps us appreciate history and lays the foundation for a deeper understanding of how leaders can be successful when they are held accountable for corporate social responsibility.
Leadership as Monarchy and Divine Right
Western cultural norms about leadership have strong roots in a patriarchal and monarchical social structure—a male-dominated social order in which royal families prevailed. In this property- and lineage-based mind-set, the fundamental assumption was that kings and queens (or other monarchs) were entitled to the positions they held (in some cases such positions were considered to be appointed, or at least approved, by a deity). Typically, in monarchies positions of power are transferred based on lineage. The average person has little access to the monarchs; rather, he or she has to contribute signi�icantly to the well-being of more powerful people. In monarchies, leadership historically came from “an outside source, the power of the original source of delegation or control—divine, delegated, hereditary, or raw force” (Miller, 2004, p.110). In other words, leadership came as a divine right but was often maintained by brute force.
In a world dominated by divine right, leadership was completely self-justi�ied. It was more about authority and control and less about collaboration and information. A king, queen, emperor, sultan, or shogun each had authority over the local world, and most sought to expand access to resources in competition against other kingdoms or principalities. In other words, it was the role of the monarch to obtain as many resources as possible and protect his or her people from other monarchs who also wanted to acquire more resources. This changed as leadership theory evolved and moved toward a CSR mind-set and generated an expectation of sustainability.
Great Man Theory
As a result of the historical dominance of certain families and monarchies, it is not surprising that the �irst management theories about leadership were called “great man theories.” These assume that a leader is both born in the right place and developed to protect against the chaos of nature and malevolent others. Also, despite exceptions such as Joan of Arc or Queen Elizabeth, as a cultural by-product of the times, it was typically assumed that all leaders would be men. In terms of how this relates to CSR, such thinking suggests that dominance and competition de�ine and characterize leaders. While leadership thinking has changed and matured, such a mind-set may still characterize lingering attitudes about nature and larger society.
Monarchies gave way to forms of democracy and capitalism, but conceptualizations of leadership did not really change at �irst. Great man theories of leadership replaced the idea that leaders were simply leaders by birthright, though they continued to imply that leaders were special people, and usually men, who developed leadership traits.
Scottish writer Thomas Carlyle (1840) popularized the great man theory in the 1840s, adding the belief that heroes in�luenced history through personal attributes and divine inspiration. This idea eventually gave way to other, less deterministic conceptualizations of leadership that are different from modern-day CSR and sustainability concerns. Still, many people tend to wait for someone powerful to emerge and lead the charge to a more socially and environmentally friendly future. When people groom themselves to stand out or wait for others to dominate, they echo the Western thinking that dominated the 19th century.
Research on the trait theory of leadership began in the early part of the 20th century. Trait theory describes personality traits and attributes of effective leaders. It stemmed from the hope that if one could understand what made great people great, one could screen, select, and even train others to have those traits. Some trait theories go so far as to suggest that good leaders have certain physical attributes, including male gender. In the trait theory of leadership, scholars sought to understand the physical and personal characteristics of leaders, but they were biased by the samples offered by the early 20th century’s social order—at the time almost all leaders were White males with access to property and sources of wealth.
In 1948 one of the �irst trait theorists, Ralph Stogdill, published an article in the Journal of Psychology titled “Personal Factors Associated With Leadership.” Stogdill’s research showed that leaders’ characteristics included capacity, achievement, responsibility, participation, and status. Other trait theories, whether based on research or not, argued that leaders must have subjective characteristics like charisma, be smart in speci�ic ways, and generally be male. Trait theory maintained that leaders are born but also suggested that leaders must develop certain traits to leverage their birth advantages into effective leadership. Trait theories led to the suggestion that leaders demonstrate consistent behaviors and tendencies in certain situations and popularized the idea that people can enhance their natural skills and abilities. Trait theories also opened the door to the democratization of talent and leadership. Scholars and philosophers began to argue that leadership traits could be learned and replicated by different people, perhaps even those who are different from the majority.
As leadership behaviors were identi�ied as a key factor of a �irm’s success, behavioral theory began to emerge in the 1950s as a way to promote corporate success. Rather than focusing on traits intrinsic to an individual, behavioral theories look outside the leader and focus on actions or behaviors. One behavioral theorist, Douglas McGregor (1960), offered a research-based concept called theory X and theory Y. Theory X leaders behave as if the workers they lead are cogs in a machine. They assume workers are lazy and need motivation from a powerful and in�luential leader. In contrast, theory Y leaders see workers as wanting to do a good job and as creative and innovative. McGregor (1960) emphasized that a leader’s behavior would vary depending on which view he or she adopted.
In 1967 Fieldler’s contingency theory separated the behaviors of leaders into either a task or a relational orientation. Fielder argued that some leaders emphasized “getting things done,” (task orientation) while others emphasized “having strong relationships” (relational orientation). Later, in the 1970s Hersey
and Blanchard proposed situational leadership, arguing that leaders employed either task or relational behaviors as the situation required. While helpful, these concepts of leadership are limited to individual behavior and not systems and sustainability.
As the �ield of leadership scholarship matured, academics and practitioners moved away from these male-dominated, trait-dominated, and command-and- control orientations toward process theories of leadership, which bring workplaces closer to the concept of sustainability and CSR.
The next leadership theory to emerge employed concepts related to sustainability. In 1991 scholar Margaret Wheatley wrote Leadership and the New Science. The book is a primer for systems theory and complexity theory in leadership, and it emphasizes a process theoryof leadership. This theory posits that leadership cannot simply be observed (think of traits or behaviors), nor does it �low in one direction, from leader to follower. Rather, leadership occurs when leaders apply knowledge and skills to their interactions with others. Importantly, process theories view leadership as bidirectional, where learning �lows between leader and follower; in fact, the very construct of “leader” and “follower” are less useful and thus downplayed in process theories. Wheatley (2006) postulates that leadership should be viewed through the lens of chaos theory to best understand how organizations really work—the result of using such a lens is that leaders will take a systems view of the organization and seek to involve as many stakeholders as possible in decision-making processes. Prior to Wheatley, other relationship-based mind-sets, including those put forth by scholars who discuss servant leadership (Greenleaf, 1977) or theory Z leadership (Ouchi, 1981), argued for a more holistic view of what leadership is and could be, which brings us closer to a sustain-ability and pro-CSR model.
A process theory of leadership remains central to those who embrace the concept of sustain-ability. It encompasses the idea of traits, in that all leaders must have certain traits or capacities that match the challenges they face. But process theory also encompasses a contingency theory of leadership because certain traits match certain environments, and no single trait ensures success in all environments. The process theory of leadership puts managers beyond the “win–lose” traditions of older theories and toward a more holistic approach that pays attention to important social and environmental relationships.
For example, research from author Jim Collins argues for what he calls level 5 leadership. Inhis best-selling book Good to Great, Collins (2001) shows why some companies remain simply functional and “good,” as opposed to becoming “great,” which tends to mean highly pro�itable and composed of engaged and loyal employees. Collins claims that level 5 leadership re�lects a general concern for a leader’s character and motivation and for all involved in the process. He proposes that everyone should be involved in the process of leadership, including shareholders, employees, suppliers, customers, and people in the community.
Process theories of leadership are potentially more compatible with the challenges of the future, which are likely to be entirely different from challenges of the past. The next sections address those challenges and discuss how leaders can prepare to face them with con�idence.
10.2 Challenges Facing Future Leaders The previous section described concepts of leadership developed in and for previous generations. These notions of leadership were adopted before people could fully see the importance of creating socially responsible and sustainable corporations that can improve gender and racial equality and other socially responsible behaviors. These older models of leadership, while exceptionally helpful, were also very limited. For example, they tended to be simplistic and linear and did not embrace complexity and systems. They tended to be oriented toward men and privileged classes and did not take into account the particular characteristics of women or other socioeconomic groups. The older models assumed the ever-present need for an organizational hierarchy and did not imagine new kinds of organic organizations that would be less hierarchical and perhaps less permanent. Despite these signi�icant drawbacks, theories from previous generations still have some validity. Vestiges of previous thinking also continue to dominate corporate and educational culture. However, older theories of leadership do not point society in the direction of embracing key contemporary ideas such as waste reduction, social equality, and environmental responsibility, all of which matter to many modern corporate leaders.
The rise of the corporation began about 250 years ago, when social interests led to the creation of hospitals, and political–business interests such as those of the British East India Company (Rao, 2011) or the Hudson’s Bay Company became tools for economic conquest. According to Rao, globalization created the corporation because large-scale enterprise was needed to dominate in a world where competition remained unchecked. In such corporate environments, leaders were expected to compete and dominate. Moderation, social responsibility, and waste reduction were not visible or important to governing boards or investors.
For example, the Hudson’s Bay Company, one of the oldest corporations in the world, was charted by the British to trade with North American natives and secure a steady supply of fur. It was also used to politically and economically dominate North America, at one time claiming more than 15% of the continent as its “territory.” But as hunting grounds in the east were depleted and fur became scarce, the trappers and traders working for the corporation moved west to �ind new territories. There was no leadership or discussion of topics such as conservation, waste reduction, care for the environment, or even care for the native people who supplied the fur (Carlos & Lewis, 1993). The Hudson’s Bay Company was essentially an instrument of political and social dominance in a political rivalry �irst between British and French factions and later between British and American factions. It represents an early and dominant in�luence on subsequent market behaviors of many American businesses.
Social equity was also not typically part of corporate values in early years. Corporations practiced protectionist policies that guarded equity owners at the expense of many groups, including Black and other Americans who were enslaved, as well as women and laborers.
Many US corporations (and some universities) still in business today bene�ited from supporting the slave trade. For example, Aetna Insurance has acknowledged paying life insurance to slave owners when a slave died. Like many responsible companies involved in behaviors now deemed atrocious, Aetna acknowledged its role and apologized. Still, this illustrates how corporations throughout history have often taken the wrong side on moral issues (“15 Major Corporations,” 2013).
While some might think the issue of slavery is a part of deep history, the issue remains alive today as corporations, particularly in global environments, grapple with how people, even children, are compelled to work. The question of social equity and work participation is a permanent challenge for corporations.
Similarly, labor relations and workers’ rights are permanent leadership challenges. Corporations have a long and deep history of challenging what is now regarded as workers’ right to organize in a labor union. In 1894 presidential candidate Eugene Debs worked to unionize the Pullman railroad car company in Chicago. The local workers were convinced to strike, and other rail workers’ unions also went on strike in support of their colleagues in Chicago. By summer, more than 125,000 workers were on strike, shutting down the ever-important rail system in the United States. There were riots, clashes, and an eventual resolution, but more than 60 people died and more than $80 million in damages was caused in an effort to deny workers the right to organize (Papke, 1999).
Gender inequity is another permanent leadership challenge. One hundred years ago, women did not generally participate as corporate employees. In World War II many women took over factory positions held by men who were called into combat. By the 1950s women were not just on the �loor of the factories but in their boardrooms. By the 1970s the wage equity debate was raging, and it continues today. Achieving gender equity and creating appropriate work environments for people of all gender identities are an ongoing challenge for corporate leaders.
Research has found that corporate leaders rate CSR and sustainability as important leadership concerns (Bonini & Gorner, 2011). However, it is extremely complex to manage each of these and also maintain the corporation’s many �inancial, social, and environmental issues. The leadership challenge is large, but newer models of leadership share the responsibility.
10.3 Next-Generation Leaders Each student of CSR and sustainability should ask themselves: What kind of leader will I be? What kind of leader will I work with? What kind of leader is ideal for the world I would like to live in? The following sections articulate a vision of a next-generation leader who builds and enhances a socially responsible and sustainable corporation. We argue that such a leader displays speci�ic aspects of leadership; each one is essential to building responsible and sustainable organizations of any size. Table 10.1 compares how a next-generation leader differs from older standards of leadership. Note that our model focuses on leadership actions, rather than on a leader’s characteristics or traits.
Table 10.1: The evolution of a next-generation leader
Old Leadership Style New Leadership Style
Leader as: Head, director Top of the hierarchy
Colleague, collaborator Systems thinker
Scale: Loyal to local Zoom in
Global citizen Zoom out
Critical skills: Expert Impose
Emotionally intelligent Empathy
Lead by: Control Sole problem solver
Collaboration Problem clari�ier; joint problem solver
Communication: Top down Dialectic
Ethics: Bigger is better Leaner is better
Environment: Exploit Polluter
Organize by: Hierarchy Geography
Information �low Virtual proximity
A prerequisite A luxury A cost
An ongoing process A necessity An investment
Source: Hammond, S. and Christensen, L. (2016). “The New Generation Leader [unpublished paper].” Reprinted with permission.
This entire text emphasizes the value of systems thinking. Here, we speci�ically emphasize that next-generation leaders cannot skip developing this mind-set. For decades, the opposite of systems thinking—a mind-set called scienti�ic reductionism—was considered the way leaders could solve most problems. Reductionism was based on the philosophy of René Descartes and Isaac Newton. It was popularized by other scientists as they explored an ever-smaller universe looking for miniscule molecules, atoms, or quarks to explain physics and life experiences. Scienti�ic reductionism requires the searcher to zoom in; to take a detailed and particular look at the physical world’s building blocks and events—or in business, a closer look at the building blocks of organizational successes or failures.
A systems thinking mind-set (as introduced in Chapter 2) offers a contrary view of the physical world. In systems thinking, the only way to understand a problem is to see its relationship to the whole. A systems thinker understands the interactions and linkages between the various elements that make up an entire system. In other words, if one is trying to understand what happens in an ecosystem, it does not make sense to zoom in on the microbiology of a single species; rather, one should look at all the elements in that system and their relationships to each another. In a physical ecosystem, one who takes a systems view looks at each species: the geography, the wetlands, and the interactions that occur between those elements. In an organizational system, one who takes a systems view looks at each department, along with customers, suppliers, partners, and potential partners. The dif�iculty with systems thinking usually relates to clarifying the boundaries of the system and how deep to investigate, inspect, and verify the connections.
As discussed in Chapter 2, systems thinkers view a business enterprise or corporation as part of a complex and dynamic whole. In a dynamic system, corporate actors interact with government, the environment, individuals, the community, and other entities under the principles of complex systems. Energy and materials �low into a complex system. These are processed and �low out of the system through boundaries that de�ine the system. However, those boundaries are always problematic. For example, it can be challenging for an employee to know the exact boundary between work and social life. For a company, it can be dif�icult to know the boundary between the corporation and the community. The truth is that our social lives are tied up at work and are part of a community. In other words, every system is part of a larger one, and it is often dif�icult to distinguish the boundaries between the two. Helping de�ine, protect, and clarify boundaries may be one job for future leaders who support colleagues in creating a socially responsible and sustainable world.
Features of systems thinking that next-generation leaders will need to consider include the following:
Systems function with lots of information. In business, raw materials are useless unless one knows how to turn the raw product into something more valuable. Accordingly, systems thinkers spend considerable time talking about learning organizations. New knowledge is essential to keep a system alive (Senge, 1990). Systems also seek equilibrium. Certain patterns are visible in the behavior of any system, but patterns are subject to interpretation and are often unclear. Also, some amount of randomness or chaos in�luences the behavior of every system. This makes challenges of leadership particularly dif�icult, because while the leader is trying to bring equilibrium to the system, he or she cannot fully take into account the patterns that in�luence it; nor can he or she or account for random events. Systems are composed of many parts. A leader who adopts a systems theory perspective understands that the system has many parts that interact through relationships. Corporate systems are nested inside other systems with which they overlap. Over time, systems change, as do inputs, processes, and the ability to provide a value-added output. Some of those changes are out of the leader’s control (Skyttner, 2006).
How does being a systems thinker make a next-generation leader different from the leaders of the past? Good advice has emerged from Colonel George E. Reed, the director of Command and Leadership Studies at the U.S. Army War College. When contemplating how tomorrow’s leaders can adopt and apply systems thinking, he suggests the following:
Focus on the purpose of the system. Identify patterns and use feedback loops to understand the dynamics of systems. Consider the whole rather than the components. Consider the present, but don’t focus too much on short-term achievements. Think of long-term goals (Reed, 2006).
Apply Your Knowledge: Systems Thinking Tools
This exercise can be done individually or in a group, in abbreviated form, or over a long period of time for greater insight. The objective is to see important relationships and processes and to identify how an organization adds value and relates to a larger community.
Step 1: Choose an organization to research. List all stakeholders in the company, including owners, employees, customers, suppliers, and so forth. Put the name of each on a 3-by-5-inch index card. For example: John Gross and Sons.
Step 2: Sort each type of stakeholder into a category. For example, John Doe and Sons—Supplier.
Step 3: List all of the corporation’s essential processes. These are generally areas where the corporation performs a service or adds value. For example, a hospital performs surgery (among other things).
Step 4: Create a way to visually represent the corporate system that could be shown to any of its stakeholders. Your map should show the following:
The types of key stakeholders. The relationship between key stakeholders. The relationship between key stakeholders and critical processes. Critical process in the form of inputs, processes, and outputs. The system’s relationship with the broader environment.
Step 5: List all critical relationships and processes. Ask:
How can the corporation’s leader better manage key relationships? How can critical processes improve? How is the corporation impacting the environment?
Becoming an active and effective systems thinker means considering factors beyond one’s own neighborhood, corporation, or immediate work environment. One has to look at the broader communities and ecosystems in which these elements reside. For most, this means becoming a global citizen. Doing so does not mean giving up citizenship in one’s own local community, nor does it mean abandoning any kind of nationalist or patriotic spirit. Being a global citizen means taking responsibility for problems that require local and potentially global solutions. A global citizen understands the needs of the whole and considers those when making personal decisions and directing groups, teams, and organizations.
This sometimes means considering linkages between problems far away and behaviors at home. A classic example comes from the apparel industry. Consider the deadliest garment factory disaster in history, which occurred in Bangladesh in 2013. More than 1,000 workers died and 2,500 were injured when owners pressured workers to assemble garments in a decrepit building that collapsed during peak hours (Butler, 2013). A global citizen takes the time to consider the connection between wealthy, developed countries creating demand for new and inexpensive apparel and the pressures placed on low-income garment factory workers who cannot relocate for better jobs. A global citizen and CSR-focused leader would also act once he or she realizes the connection. After the tragedy in Bangladesh, British retailers associated with the facility all signed a legally binding safety agreement backed by the international trade union (named IndustriALL) and the Bangladeshi government. The deal requires certain brands to contribute up to $500,000 per year toward safety inspections and �ire safety measures (Butler, 2013).
The UN de�ined what it means to be a global citizen by authoring and publishing the Declaration of Emerging Human Rights. Being a global citizen means taking both a critical and transformative perspective regarding corporations, society, and the environment. The document argues that a global citizen has both rights and responsibilities. Advocates of the Declaration of Human Rights elaborated on it, extending its reach to create a more harmonious world motivated by citizens unafraid of oppression and willing to adopt innovative thinking (O’Sullivan, 2008).
Authors Graham Pike and David Selby offer leaders a slight twist on the concept of global citizenship. They have developed the concept of world-mindedness, which involves understanding the world as one uni�ied system. Global citizens have a responsibility to advocate not only for their own interests, but for the interests of the whole planet. This holistic understanding attends to a broader set of human values and beliefs and encourages people to appreciate broader global systems and issues and to have better cross-cultural understandings (Pike & Selby, 2000).
Previous chapters described the elements of cross-cultural difference. What we term the “next-generation leader” will navigate cultural complexity, with all its nuances and dif�iculties. It would be inaccurate to assume there is a uni�ied culture anywhere. Many cultures are individualist, while others are collectivist. Some are universalist, while some remain particularist (see Chapter 4.3 (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/sec4.3#h2agreement) ). Next-generation leaders will have to navigate these differences and �ind a “third way” or viable path that can blend the virtues and vices of multiple cultures. The third way is one that does not violate any one cultural perspective. It is a cocreated option where people with uni�ied intentions but different cultural values come together to make progress despite cultural differences. The ability to search for and �ind a third way remains the ultimate task of a global citizen.
Older concepts of leadership regarded intelligence as having expertise in math, language, or an organizationally speci�ic technical skill. People of older mind-sets often assumed that the smartest person in the room would make the best leader. Author and scholar Daniel Goleman (Goleman, Boyatzis, & McKee, 2003;
Don Tapscott speaks about the importance of transparency for the future of business. Do you agree that transparency will lead to improved CSR overall?
Principle of Open World: Transparency
Goleman, 2004) provides a different perspective, speci�ically regarding the concept of emotional intelligence, which he says is an essential characteristic of effective leaders.
According to Goleman’s research, emotional intelligence primarily involves being self-aware, which is different from being globally aware (Goleman et al., 2003). That means having social skills that involve empathy and considering others’ feelings when making leadership decisions. It also means, on a personal level, that the leader has self-awareness and understands his or her own emotions, strengths, weaknesses, and motivations. Goleman (2004) argues that the ability to control and redirect disruptive impulses and moods is among a leader’s most signi�icant skills. Consider an angry CEO who kicks a trash can in front of his employees. He is relieved of his leadership position within a week—not because his actions physically harmed employees, but because his lack of emotional regulation indicated he was not in control of himself. Goleman (2004) tells us that our ability to control emotion and understand how it impacts others is critical. This also involves understanding what motivates us—and what might motivate others. Most emotionally intelligent leaders relish achievement for its own sake, but this goes beyond personal achievement; it involves the achievement of others and sustaining the corporation and a broader system.
Goleman advocates that the ability to empathize and understand people’s emotional makeup is another essential characteristic of an effective leader (Goleman et al., 2003). This implies it is critical to be able to work in different cultures with people who have different emotional drivers. It follows that the next generation of leaders will need to have social skills in addition to intellectual skills (Goleman, 2004).
Collaborative skills may be among a leader’s most critical as he or she works to create a sustainable corporation. Leaders must be able to seek, hear, and integrate the expertise of others to �ind optimal solutions to problems. In doing so, they often face task ambiguity, which describes situations that are constantly changing. Leaders often do not know which problems demand time, the signi�icance of these problems, or how to get past them to focus on more important matters. Sometimes the best way to emerge from such ambiguity requires collaboration.
Research by Gratton and Erickson (2007) found that collaboration improves when individuals’ and team members’ roles are clearly de�ined and well understood. In other words, collaboration improves when leaders create an environment where others’ expertise is known and valued. Without role clarity, team members are likely to waste time negotiating roles and protecting turf rather than focusing on the problems at hand. Gratton and Erickson (2007) also found that team members are more likely to want to collaborate in environments where there is some degree of ambiguity. In such situations, leaders do not de�ine the problem and simply tell others to tackle known solutions. Instead, ambiguous situations feature team members helping after leaders describe priorities. Through dialogue, the team creates solutions together. In this way, collaboration enables problem solving (Gratton & Erickson, 2007).
Historic models of leadership favored individuals who acted unilaterally, insider groups with little or no diversity, and leaders who adopted similar approaches to many problems. This explains why corporations of the past tended to gauge success by the single measure of pleasing shareholders with �inancial returns, rather than the complex measure of being socially responsible and building a sustainable organization that can both please shareholders and restore the environment.
Chapter 4 addressed global citizenship and the importance of including people from all cultures in corporate society. Not only will next-generation leaders need to be global citizens, they will need to welcome others into the complex corporate system and hear and value everyone’s contributions. They will need to collaborate with stakeholders, including government regulators. Chapter 6.3 (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/sec6.3#sec6.3) discussed government regulation and noted the increased role of regulators in corporate affairs. Next-generation leaders will need to establish productive and hopeful relationships with regulators and establish common ground via collaboration.
Next-generation leaders will also extensively use dialogue to solve complex problems. A complex problem is one that is more complicated than any one person can solve alone. Most problems that leaders face today require multiple experts to solve. In addition to �inding such experts, a leader must also motivate people to implement solutions. Research shows that people are more likely to embrace and successfully implement solutions when they are part of de�ining the problem and �inding its solution (Hammond, Cissna, & Anderson, 2003).
Working with others requires strong communication skills, and both parties must be open, honest, and transparent about their incentives, biases, and motivations. Corporations of the future face increased public scrutiny and government regulation, which requires greater transparency from the organization and all of its representatives. Transparency will also be an issue within corporations, in terms of how employees relate to each other and employee rights (discussed in Chapter 3)—particularly in corporations over which employees have some ownership. Partial owners expect to know more about how and why decisions are made; this trend will likely continue in the future. Relatedly, as discussed in Chapter 6, leaders have strong obligations to act as �iduciaries. When issues of equity (see Chapter 7) add to the complexities of �iduciary relationships, next-generation leaders face the additional challenge of balancing relationships with transparency while maintaining competitive standing in the marketplace.
Interestingly, people are conscious of what others are watching; transparency allows others to see and be seen making choices. For next-generation leaders it will be dif�icult but essential to create an environment that fosters values and practices transparency—and the best way to encourage such behavior is to personally model it.
Researchers Schnackenberg and Tomlinson (2014) suggest there are three kinds of important transparency: information disclosure, clarity, and accuracy. Information disclosure means that people within a system must have access to all other information generated by that system. Clarity refers to information that is clear, understandable, and usable. Accuracy means that information generated by the system is correct enough for consumers to make sound and informed decisions. While many corporations are concerned about keeping trade secrets and protecting intellectual property, some stakeholders encourage leaders and others to practice radical transparency. This is a leadership practice whereby the majority of decision making is public. In other words, documents, arguments in support or against a proposal, and �inal decisions are public and remain publicly archived (Schnackenberg & Tomlinson, 2014).
In a 2012 article published in the Harvard Business Review, Smith and Tabibnia claim that radical transparency could be good for business. As evidence, they cite the private research �irm Qualtrics, whose leaders make performance appraisal data on every employee available to everyone else in the company. By removing what is traditionally “secret,” Qualtrics hopes to absolve the distractions and fears typically associated with performance appraisal. The entire workforce has access to information made available on the quarterly objectives and results that each employee has achieved, including customer satisfaction targets. Weekly employee goals
Principle of Open World: Transparency From Title: TEDTalks: Don Tapscott—Four Principles for the…
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and up-to-the-minute performance reviews and bonuses are posted. Doing so has increased retention and employee satisfaction (Smith & Tabibnia, 2012).
Transparency proactively allows a system’s outsiders to see what is going on inside. Dialogue lets more people participate in multiple conversations, including those around corporate governance. Chapter 2.3 discussed the role and process of using dialogue to involve others in strategic planning, scenario planning, process mapping, continuous improvement, and other critical management functions. These principles hold and de�ine the skill sets of next- generation leaders.
There is a relationship between lean management principles and management ethics. While the overall stated goal of lean management is to create a more ef�icient company, the Six Sigma system and the Shingo model described in Chapter 1 articulate important principles that also re�lect deep ethical values about how people should treat each other.
Michael Ballé (2015), executive coach, author, and cofounder of Institut Lean France, identi�ies 10 practical choices that “lean” leaders often make. Each has an ethical or socially responsible principle at its core and an organization’s long-term sustainability as its goal.
The �irst practical choice of lean leadership is to put customer satisfaction over company interests. Always acting in the company’s self-interest instead of putting customers �irst can lead to unethical or socially irresponsible behaviors. Attending to the customers’ needs in the short term helps build a long-term relationship, which in turn ensures satisfaction and can lead to greater sustainability when �irms gain customer loyalty.
The second practical choice in lean leadership is that facts are preferred to data. Data are subject to interpretation, while facts are imbued with context and are thus capable of directing action. Employees are more likely to give input when they know they will be protected by a corporate culture that relies on facts rather than on the interpretation of data.
The third practical choice of lean leaders is to see problems as learning opportunities, rather than occasions for blame. Lean organizations place a high value on learning. When failure occurs, it is not necessarily the fault of the person closest to it, as it could be a signal or symptom of a system-wide problem. Using a problem or failure to improve the system turns a negative into a positive. The resulting bene�its can help workers, suppliers, customers, and coworkers learn from problems rather than equating them with con�lict and blame.
The fourth practical choice of lean leaders is to prefer shorter lead times, or the time it takes to provide a product or service to the customer. This is ef�icient because shorter lead times reduce waste and pollution and make companies more eco-friendly. This choice also relates to the �irst practical choice of lean leaders, as it makes reacting to customer demands central to how business managers pace production and ful�illment.
The �ifth practical choice is that leaders should value team effort over individual performance. Many organizations perform individual performance evaluations, yet most workers know that individual performance is usually based on the kind of team to which they belong. Ballé (2015) claims that acknowledging teams’ contributions is more important than focusing on contributions from individual members.
The sixth practical choice is to �ix problems when they occur and avoid succumbing to a cycle where people work �irst and �ix later. This allows employees and leaders to take responsibility for their part of the system. They need to understand how they are part of the system (systems theory) and how each part impacts other parts. Failing to �ix problems immediately can amplify an issue.
The seventh principle involves seeking continuous improvement instead of focusing on procedural stability. Managers should acknowledge that ongoing improvement is essential for a sustainable and socially responsible company.
Ballé’s (2015) eighth practical choice is that leaders should understand work details, instead of having a mere general overview. A detailed understanding of work acknowledges that a leader needs and values others’ expertise. It also acknowledges that all workers contribute important understanding to work processes. Leaders are more likely to handle ethical issues successfully when they are close to the work and to employees.
The ninth practical decision is to value instruction and improvement over command and control behaviors. Lean management systems value nonhierarchical organizational structures rather than the command and control often created by a hierarchy.
The tenth decision involves leaders focusing on value-adding employees rather than �inancial aspects. Ballé (2015) acknowledges that ideas from value-adding employees constitute an important asset of any corporation. This leads to treating employees more ethically and humanely and acknowledges their contribution. It may also lead to fairer compensation, including allowing them to share in the risk of venture. It essentially suggests that investing in individuals makes more sense than investing in big ideas without knowing who or how they help.
Ballé (2015) discusses the dif�iculty of imposing such ethics on any organization. He acknowledges that some employees and managers simply do not want to work in ways that adhere to these ideals. However, these choices suggest how management principles such as Six Sigma can guide the creation and manufacture of products, as well as leaders’ humane and ethical behavior (Ballé, 2015).
Steward for the Environment
Treating others with respect, leading with humility, reducing pollution and waste, and protecting the environment by minimizing impact make a business more ef�icient—but they also make it more ethical in terms of humans and the environment. Implementing these strategies as well as lean management principles indicates that one is oriented toward ethical behavior and focused on being a steward.
In Chapter 1.4 (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/sec1.4#h2waste) we discussed reducing waste, which led us to the more in- depth discussion in Chapter 5.1 (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/sec5.1#sec5.1) about environmental concerns and possible solutions. In Chapter 6.2 (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/sec6.2#h2LCA) we went into detail about LCAs and how responsible corporations use environmental management systems to reduce impact on the natural environment. These topics tie together to illustrate both best practices and actions that people can champion and even demand for the future. Next-generation leaders will need to understand the importance of such practices and apply lean management techniques; they will also need to implement continuous improvement to reduce risk, lower costs, improve quality, raise employee morale, and reduce operations’ environmental footprint.
In traditional and older views of leadership, a person was a leader if he or she was at the top of a hierarchy (a categorization of people ordered by power and privilege, with lower status at the bottom and higher status at the top). In such a framework, if other people worked for you, reported to you, or even desired to talk to you, you were considered a leader. Leaders were given a corresponding title. However, newer notions of leadership suggest that anyone from any part of the organizational hierarchy can be a leader if he or she acts on behalf of the organization and if he or she forwards the causes that matter to the majority within the organization. Under such a paradigm, the new leader could be you.
In this new model of leadership, leaders are not simply clustered at the top of the organization— they are dispersed throughout it. Communication �lows not just through a hierarchy but is based on need. Older models of leadership reinforced hierarchies that controlled and distributed information. For the most part, old models of leadership depended on singular individuals framed as heroes and saviors. Margaret Wheatley and Deborah Frieze (2011) discuss this issue in their article titled “Leadership in the Age of Complexity: From Hero to Host.” They argue that next-generation leaders who advocate for sustainable systems will more likely be hosts (people who gather others) rather than heroes (people who work in relative isolation). Wheatley and Frieze suggest that humans build hierarchies and organizations that are top heavy in order to glorify people above and pass responsibility on to them. The authors suggest that, in contrast to such a top-leaning bias, corporate responsibility is distributed among all stakeholders—no one should wait for a heroic leader to stand out. People should convene others or initiate change themselves.
Like many leadership scholars, Wheatley and Frieze (2011) see that the complexity of problems requires leadership at all levels of an organization. But it may also require fewer levels in each organization. No longer can we completely trust in the multilayered hierarchies built in the past. Hierarchies may block the appropriate �low of information and disconnect people who have solutions from the corresponding problems. Thus, people who want to encourage more sustainability and social responsibility can work to promote collaboration and integration and can eschew hierarchies in which people wait for permission to act.
In addition to reduced reliance on hierarchy, we argue that next-generation leaders will bescholars, habitual learners, and those who are always experimenting with new ideas—suchleaders will also encourage learning organizations (Ancona, Malone, Orlikowski, & Senge, 2007; Senge, 1990). Continuous learning is consistent with systems theory, because anysustainable system must constantly have new information to adapt to an ever-changingenvironment. Information tends to �low into the organization to and through leaders in theform of learning. Regarding the value of and interest in corporate-sponsored education, Training magazine reports that U.S. corporations now spend more than $60 billion per yearon training (“2014 Training Industry Report,” 2014). This number has steadily grown fordecades. In addition, the number of hours that employees spend in corporate-sponsoredlearning is also increasing. The average employee now spends more than 1 week per yearin company-sponsored training (“2014 Training Industry Report,” 2014). Next-generationleaders will likely continue to emphasize continuous learning for themselves and thosethey in�luence.
Leadership scholar J. B. Ritchie (Ritchie & Hammond, 2005) discusses the differences between students and scholars in the article “We (Still) Need a World of Scholar–Leaders.” He notes that many teaching practices use the downloading metaphor from computer science to describe the relationship between professor and student (Ritchie & Hammond, 2005). Interestingly, the downloading metaphor follows the outdated great man model of leadership, with the assumption that an employee takes direction from the leader and the leader expects employees to implement directions.
As an alternative, Ritchie and Hammond (2005) suggest that both managers and employeesadopt the purview of scholar by asking questions in anticipation of learning how to handlefuture problems. A scholar acts as if he or she owns the future and assumes responsibilityfor it (Ritchie & Hammond, 2005). This observation implies that the world needs more leaders who are scholars—versus leaders who want someone else’s approval. Followers whoare students are abundant, but leaders who assume responsibility for the behavior of thewhole system, who ask the right questions, and who explore the key issues—they are rareand precious.
Which one will you be? The answer matters greatly to our joint futures, because we cannot create a more sustainable and socially responsible future if we behave exactly as we have in the past. Thus, older leadership paradigms may not serve humanity. Some thought leaders suggest that people can lead from anywhere in the organization. This means that employees no longer need wait until they achieve positional power to begin moving �irms toward socially responsible and sustainable actions.
The story of Patagonia and former CEO Yvon Chouinard shows how some leaders can move past old paradigms of leadership and old habits of ignoring environmental issues. The story paves the way for next-generation leaders (Chouinard, 2005).
CSR and Sustainability in Action: Patagonia
In the 1970s CEO Yvon Chouinard founded Patagonia, an outdoor clothing manufacturing company. Long before becoming a B corporation (Chapter 7), the company was one of the earliest examples of pioneering CSR and sustainability. Such a focus was important because clothing manufacturing creates air and water pollution and generates human health concerns for workers. To learn about the extent of the problem at Patagonia, Chouinard commissioned LCAs (see Chapter 8) on 150 of its most popular products, which represent 80% of Patagonia’s sales (Chouinard & Stanley, 2012). For example, manufacturing a Patagonia polo shirt emits 21 pounds of carbon dioxide, which is emitted when product materials travel from a farm to a warehouse (Chouinard & Stanley, 2012). Using this information, Chouinard supported strategies to increase ef�iciency in the supply chain to reduce greenhouse gas emissions and land�ill space. Today Patagonia’s actions to increase CSR and sustainability include the following:
Using cotton, down insulation, and wool that can be traced back to its original source Promoting the idea that consumers should reuse and recycle Patagonia products by offering to repair used items Offering a living wage and good working conditions for factory workers Participating in fair trade growing and purchasing behaviors for raw materials (Patagonia, n.d.)
Patagonia’s success illustrates how a leader can turn passion for the environment into business practices that defy current norms, exemplify systems thinking, and re�lect modern-day leadership.
Chapter Summary In this chapter we examined traditional views of leadership and contrasted them with more modern ideas about distributed leadership. We described how such early theories can be inadequate in helping leaders meet the challenge of building socially responsible and environmentally sustainable corporations. Society may need new ideas about leadership in order to creatively lead for a different future.
Next-generation leaders will face a world with more connection and public accountability for some choices, so men and women who participate in the workforce will face some of the challenges described in this chapter. This chapter speci�ically addressed characteristics that may help those who consider themselves as having leadership potential and opportunities address ongoing challenges. While these qualities and considerations are not comprehensive, they do underscore the importance of systems thinking, collaboration, ethical behavior through environmental responsibility, global citizenship, and continuous learning. It is not an accident that both this chapter and book end on an appeal for continuous learning. In an ever-changing world, the only way to keep up with that change is to constantly learn and respond in collaboration with others.
1. Why were so many people so comfortable with the divine right theory of leadership for so many years? What historical forces do you think led to the reexamination of leadership theory and the development of new theories?
2. Are we moving toward a de�inition of leadership that suggests everyone can be a leader? If so, is that bad? Explain your reasoning. 3. Think about a leader you know. What are his or her positive traits? Positive behaviors? Is he or she a systems thinker? 4. In older theories of leadership, why were women excluded? How does including women change our de�inition of leadership? 5. Can you think of a leader who has exhibited emotional intelligence? What about one who has not? 6. What does a systems thinker leader see and do that is different from a leader who is not? 7. Why is continuous learning critical to leadership success? 8. Transparency can be considered a good and bad thing. What are the advantages and disadvantages of transparency?
Additional information on leadership theories can be found at: http://www.referenceforbusiness.com/management/Int-Loc/Leadership-Theories-and-Studies.html (http://www.referenceforbusiness.com/management/Int-Loc/Leadership-Theories-and-Studies.html)
Learn more about servant leadership here: https://www.greenleaf.org/what-is-servant-leadership (https://www.greenleaf.org/what-is-servant-leadership)
Learn more about emotional intelligence and effective leadership here: http://www.danielgoleman.info/effective-leaders-know-the-science-behind-their-behavior/ (http://www.danielgoleman.info/effective-leaders-know-the- science-behind-their-behavior/)
Click on each key term to see the de�inition.
behavioral theories (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Leadership theories based on behaviors that can largely be learned.
collaborative skills (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
Skills that allow one to work well with other people.
continuous learning (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A commitment to lifelong learning regardless of organizational position.
divine right (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
The assumption that leadersare made by right of birth and chosen by God.
emotional intelligence (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A leadership trait involving self-awareness and empathy.
global citizen (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A leader who accounts for his or her global and local relationships.
great man theory (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A theory of leadershipthat assumes that some elite men are born to be leaders.
lean management (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A continuous improvement management philosophy that focuses on waste reduction.
process theory (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A leadership theory thatassumes the role of good leaders is to manage the whole system.
systems thinker (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
A leader who can see both large- and small-scale relationships and connections.
trait theory (http://content.thuzelearning.com/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books/Hammond.2506.16.1/sections/cover/books
The theory of leadership thatassumes individual traits can be nurtured into leadership abilities.
The willingness to work in full view of all stakeholders or to provide all information to interested stakeholders.
Glossary AA1000AS CSR standards based on AccountAbility principles that focus heavily on whether the organization and its sustainability reporting respond to stakeholder concerns.
affective A cultural dimension that values expressive, open emotions that are both verbal and nonverbal.
behavioral theories Leadership theories based on behaviors that can largely be learned.
bene�it corporation (B corporation) An organization that is for-pro�it but has legally protected social and environmental goals.
biomimicry The creation of arti�icial products that mimic natural products and have a less negative impact on the environment.
business-to-business Sales that take place between two businesses.
certi�ied natural A label that signi�ies a product uses natural raw materials.
Coalition for Environmentally Responsible Economies (Ceres) An organization that supports reporting tools that include environmental and social responsibility.
coercive power Power that comes from the ability to create fear, punish, or remove resources.
collaboration A paradigm or worldview that suggests that inequity should be mitigated to foster human interaction and collective problem solving.
collaborative skills Skills that allow one to work well with other people.
collectivists Members of a cultural dimension in which group identity precedes individual identity.
communitarianism A philosophical school of thought that emphasizes the creation of community in harmony with a natural environment.
community A group of people de�ined by a common place and/or social network infused with similar interests.
competition A paradigm or worldview that suggests that inequity is inherent and the search for more bene�its and rewards motivates people to act and pursue excellence.
complexity theory A general theory of systems that describes how corporations or any changeable structures adapt to their environment and cope with conditions of uncertainty.
continuous learning A commitment to lifelong learning regardless of organizational position.
corporate citizenship A term that describes the relationship between a corporate entity and its membered social environment.
corporate governance Both the structure of a corporation and the act of oversight and control.
corporate social responsibility (CSR) A �irm’s voluntary actions that are designed to improve social or environmental conditions.
cradle-to-cradle The study of a product’s or process’s life cycle that follows it from birth to disposal and attempts to use the outputs of one system to become inputs for another.
cradle-to-grave A process that allows a product’s birth, life, and end of use to be examined.
deontological ethics The ethics of duty usually associated with professional norms.
diffuse A cultural dimension in which communication relies heavily on context.
divine right The assumption that leaders are made by right of birth and chosen by God.
eco-label An international certi�ication identi�ing products or services as compliant with environmental standards.
economic equity Equal economic opportunity and economic bene�it, including regarding access to opportunity.
emotional intelligence A leadership trait involving self-awareness and empathy.
employee stock ownership plan (ESOP) A program that compensates employees in the form of corporate stock and gives them a voice in governance according to their proportion of ownership.
Energy Star A standard for energy-ef�icient consumer products.
environmental equity Equal exposure to environmental hazard and risk; also relates to treating the environment as fairly as humans treat people.
environmental management system (EMS) A system used to study the impact of corporate activity on the environment and identify ways to reduce negative impacts; can be formal or informal.
equity theory Assumes that humans assess fairness and assume reward for their investment in a collaborative relationship.
expert power Power that comes with a person’s superior judgment, skill, or knowledge.
Exxon Valdez An oil tanker that ran aground in Prince William Sound in Alaska in 1989, causing one of the worst environmental disasters in history.
fair trade certi�ication Certi�ication that veri�ies a product is manufactured using transparent processes, fair wages, and environmental preservation.
�iduciary A person who agrees to accept temporary legal responsibility and control of an asset owned by someone else and who has a duty to maintain and expand the asset’s value.
game theory Shows the mathematical advantage of collaboration.
generally accepted accounting principles (GAAP) Accounting standards and procedures de�ined by the accounting industry and adopted by nearly all publicly traded companies in the United States.
global citizen A leader who accounts for his or her global and local relationships.
globalization A term with many de�initions; refers to the increasingly interconnected network and �low of goods and services across national and international boundaries.
Global Reporting Initiative (GRI) A framework for sustainability reporting that was originally created to help leaders and managers start reporting.
global warming The slow warming of the earth’s surface temperature, likely caused by the greenhouse effect.
great man theory A theory of leadership that assumes that some elite group of men are born to be leaders.
greenhouse effect The effect of carbon dioxide and other gases that cause heat to be trapped in the earth’s atmosphere, similar to a greenhouse that traps heat.
green marketing Publicizing environmental and social activities, efforts, and results.
greenwashing Deceptive marketing that presents confusing, misleading, or incorrect information to present it or its products as environmentally responsible.
inclusive corporation The type of corporation advocated by Max De Pree that advocates �lat, open communication that supports stewardship for all.
individualistic A cultural dimension in which individual identity precedes group identity.
industry associations Organizations that offer opportunities for companies to join together to enjoy more in�luence than any single company.
insider trading Illegal stock trading motivated by con�idential information.
investors People who contribute money or other items of value to a corporation.
ISAE 3000 The ISAE standard for any assurance reporting that is not a �inancial audit or review of historic �inancial information.
ISO 14001 An International Organization for Standardization process to identify and measure a company’s environmental impact.
ISO 26000 The ISO standard that provides guidelines for corporate social responsibility.
lean management A continuous improvement management philosophy that focuses on waste reduction.
legitimate power Formal authority granted to people in organizations based on their position or role.
life cycle assessment (LCA) A formal process that allows a corporation to examine the environmental impact of any process or product.
market stakeholders Those who have a direct �inancial interest in the corporation, such as a shareholder or an employee.
monochronic A cultural dimension in which people do one thing at a time in order.
net zero A building construction method that allows a building to generate as much energy as it uses (or more).
neutral A cultural dimension that values low-intensity emotional expression, selfcontrol, and containment.
nongovernmental organization (NGO) An entity that is neither a part of a government nor funded by governments, foundations, schools, businesses, or private citizens.
nonmarket stakeholders Those who lack a direct �inancial interest in the corporation but who might be impacted by corporate actions.
normative ethics A standard of behavior that is immovable and promotes a certain ideal without deviation.
ozone A natural gas that forms a protective layer around the earth that screens harmful light and radiation.
particularist A cultural dimension in which people focus on relationships over the rule of law.
philosophical equity A philosophical position that all humans have equal value.
political equity A belief that all people should enjoy equal protection and equal rights under the law.
polychronic A cultural dimension in which people do many things at the same time in no particular order.
process theory A leadership theory that assume the role of good leaders is to manage the whole system.
protected class A group of people who have experienced historic discrimination and are protected by law; tends to include women, elderly, people of color, and children.
psychological equity Psychological ideas that suggest equity promotes social stability.
referent power Power that comes from having people with in�luence in one’s social network.
reward power Power that comes from the ability to give resources.
rights of corporations Pseudohuman rights of free speech granted to corporations under the Supreme Court ruling in Citizens United.
Securities and Exchange Commission (SEC) The government body that regulates the acquisition and sale of investments such as corporate stocks.
shareholders (or stockholders) Those who have paid money to have partial ownership of a company.
Shingo model A model for change management organized around the 10 principles of excellent manufacturing, developed by Dr. Shigeo Shingo.
Six Sigma A methodology used to improve business processes by utilizing the scienti�ic method and statistical analysis to reduce error rates and waste in systems.
social auditor An external expert charged with certifying annual progress on social issues within a corporation.
social contract A concept proposed by Jean-Jacques Rousseau whereby people create rules to safeguard and regulate property ownership and create practical equity.
social investment Investment by businesses in people; it can take the form of training and development, fair or abovemarket wages, motivational programs, or bene�its packages.
socialization The process of communal learning by which patterns of behavior emerge that proscribe values and roles.
socially responsible investing (SRI) The act of choosing investments based on environmental or social issues; often refers to screening out some types of �irms while purposefully selecting others.
social network The web of social connections between individuals and between individuals and the corporation.
speci�ic A cultural dimension in which speci�ic instructions and order are directly communicated.
stakeholder analysis A process that identi�ies the vested interests in a given business issue.
stakeholders People or �irms that have a vested interest in a company, and can either affect or be affected by the company.
stakeholder theory The operational concept that there are many types of people who are vested in the corporation, and in many ways.
standardization Using a common system that allows for fair comparison between like corporations.
stewardship Refers to the management and care of an asset in such a way that it maintains and even increases in value over time.
supplier A company that sells speci�ic parts, services, or raw materials to a corporation.
sustainability The way in which companies manage �inancial, social, and environmental risks, obligations, and opportunities with a focus on management and improvement.
sustainable development Managerial behaviors that meet the needs of the present without compromising the ability of future generations to meet their own needs.
systems theory (or general systems theory) The theory that no complex system can exist independent of other systems; all systems are directly or indirectly connected.
systems thinker A leader who can see both large- and small-scale relationships and connections.
Three Ps People, planet, and pro�it; another way of referring to the triple bottom line.
trait theory The theory of leadership that assumes individual traits can be nurtured into leadership abilities.
transparency The willingness to work in full view of all stakeholders or to provide all information to interested stakeholders.
triple bottom line The environmental, social, and �inancial costs and bene�its (or assets and liabilities) associated with corporate behavior and pro�it and loss calculations.
universalist A cultural dimension that features universal law or one “right” way.
utilitarian ethics A code that stresses the importance of doing the greatest good for the greatest number of people.
vested interest Having a stake or involvement in a �irm, especially of a �inancial nature.
vesting The legal right to a future bene�it.
waste A corporate activity with cost but no bene�it.
Waste Framework Directive (WFD) A regulation passed in June 2008 by the European Union regarding waste prevention, waste disposal, and recycling.
whistle-blowing The act of reporting illegal or unethical behavior.
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