Organisational Sustainability
Meredith Doig. Presented at a Working Links seminar held in November 1999 at the University of South Australia, Adelaide
Introduction
Theres a real sense of unease for many who work in Business these days. Organisations in the Western world have been downsized and outsourced, endured multiple mergers and acquisitions, and suffered endless rounds of transformational and paradigmatic change. The people who are supposed to be an organisations greatest asset have been treated like any other resource, to be counted and discounted rather than recognised as individual human beings to be respected and valued. And yet, despite the fact that many are simply overwhelmed by these changes and despite the fashion for post-modernist nihilism, there is reason to be optimistic about the future for Business.
One day last year, handing out how to vote cards for the Australian Republican Movements Yes Campaign, I fell to chatting with a fellow Campaign worker, in his mid 40s, articulate, genuine and well-informed. We ended up talking about the role of businesspeople in the campaign and in politics generally, and he expressed the view that businesspeople are simply exploitative, greedy and mean. Anyone who works in Business is just a money-grubbing capitalist!
This is not an isolated opinion. It is shared by thousands of ordinary people who see only more downsizings, more breathtaking executive salaries, and more double talk from corporate sector leaders. Another 3,000 to go from Westpac; BHP to sell off its steel business; executive salaries up by an average of 22%; endless talk of flexibility, which really means forcing people to work anywhere, anytime.
And yet, there are corporate managers who are genuinely concerned about the welfare of their employees, people who are embarrassed about the bad press Business gets.
Having worked in large corporate companies for over 15 years, I know there are good guys and bad guys in Business. Alongside my professional career, Ive also spent over 20 years doing honorary work in a variety of community organisations such as Victorias People Together Project, and members of my family work in government-based industries like teaching and medicine.
People in these non-corporate organisations tend to have a very jaundiced view of anyone who works in Business. I try to explain to them - Its like any organisation. Some people are driven by greed, and some by fear fear of losing their job, particularly men with family responsibilities who have grown up with the idea that its not socially acceptable to leave and do something else, or fear of not being considered a team player. Other people in business have fundamentally good social values, and given a choice, would choose to benefit society rather than harm it. Its as if there are factions in corporations, wet factions and dry factions. And theres a struggle for power between the factions, a struggle for allocation of resources and allocation of position. If you are concerned about decent community values, its short-sighted to condemn all people in Business. You need to find out who are the good guys and support them in their internal struggle.
But often it seems Business is its own worst enemy. Since the days of Thatcher and Reagan, Milton Friedmans idea that the business of Business is business has dominated economic philosophies in both politics and academia. This is the philosophy that says the only thing that matters is improving share price, and the cost to people, be they employees or the local community or customers or society-in-general, is just an unfortunate side-effect of the pursuit of global competitiveness.
Purpose of a Company
Over the last 20 years or so, business organisations in the Western world have undergone enormous changes, driven by the need to improve competitiveness and respond to technological, social and economic trends in the external environment. These changes have been variously structural (eg, downsizing and outsourcing), cultural (attempting to change employees attitudes, values and behaviours), and/or process-focussed (optimising the technical aspects of workflow). Of recent times however, there have been questions about the costs of all these organisational changes.
For example, a study of 1,000 companies by the Wyatt Company, a US remuneration consulting firm, found that only one in five reported a satisfactory increase in shareholder returns. Another more intensive study of 16 extensively restructured companies found that, while their share price increased at first, it actually dropped significantly relative to comparable companies after only two years. Another study of 200 Fortune 500 companies found that their productivity levels were worse off relative to their industry norm after downsizing.
Theres a number of theories about why this might be so. One of them points to the phenomenon of survivor syndrome, where those who survive repeated downsizings lose motivation and early gains in company productivity are reversed. Apart from the direct financial consequences of reduced productivity, companies can lose employee morale, customer loyalty, and community goodwill.
If the costs of organisational change outweigh the benefits for long enough, an organisation eventually becomes unsustainable.
Which raises the question, what makes an organisation sustainable?
Talk about sustainability is starting to become the latest management fashion, though the fruit has taken over 10 years to grow from its original seed. That seed was planted in 1987 with publication of the UN World Commission report on Environment and Development. The Commission, led perhaps significantly by a woman, the former Prime Minister of Norway Gro Harlem Brundtland, introduced the concept of sustainable development economic development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
From a different perspective, another seed was planted in 1990 when Charles Handy, newly installed as chair of the Royal Society for Arts, Manufactures and Commerce (RSA), used his inaugural speech to ask the fundamental question, Whats a company for? The answer took four years and resulted in a report called Living Tomorrows Company (Goyder, 1998). The RSA asserted that Business has an obligation to maintain its licence to operate, a privilege accorded by society through invention of the law of limited liability, and should respond to constituencies beyond its market-based partners, fulfilling a corporate social responsibility.
Directors' duties
As in other areas of life, many things taken for granted in Business. One of these is the idea that shareholders should be protected from having to pay the totality of a companys debts should it fail. Yet the law of limited liability is not even 150 years old. During the first half of the 19th century, many investors seeking to take advantage of the British Empire lost their money when ships went down or ventures otherwise failed. The instability this caused led to political pressure to protect investors. Eventually the English parliament passed the Limited Liability Act in 1855. This legally separated shareholders from the company in which they invested and absolved them of the liability for the totality of company debts. Through its legislators, society protects company shareholders, and in return, society has the right to expect that companies will act in societys best interests.
There are other misconceptions about the laws of Business. One of these is about the fiduciary duties of a companys directors. Interviewing company directors in the course of their investigations, the RSA noted a gap between the rhetoric of their claimed values and goals and the reality of the decisions they made. Directors recognise the importance of long term co-operative relationships with the full range of groups that have a stake in the companys success, yet few do anything about it. Why? The RSA suggested the reasons lay in a combination of habit, oversimplification about the bottom line, and a misunderstanding about their duties as directors.
Most people assume the fiduciary duty of directors is to act in the best interests of shareholders. Legally this is true, but there is nothing in law to say that is has to be the best interests of present shareholders. Directors duty is to the general body of shareholders from time to time. This makes common sense because it often takes years for important corporate decisions to take effect, and the paper ownership of shares is changing all the time. Further, the RSAs legal advice confirmed there is nothing in law to prevent directors having regard to other interests (other than shareholders interests) if they genuinely believe that to do so is good for the welfare of the company. So, for example, dissatisfied customers or an aggrieved public are unlikely to be conducive to a companys future prosperity and directors should not only have regard to these things but would be wise to act to ameliorate such damaging situations. In other words, in having regard to the interests of shareholders, directors need balance the interests of shareholders and other stakeholders. This does not exclude pursuit of a reasonable financial return but nor does it compel directors to maximise short term returns for the present body of shareholders. Rather, directors duty is owed to the company as a whole and they should take a longer-term view of maximising value on a sustainable basis.
Organisational Sustainability
Returning to the idea of corporate social responsibility, the RSA suggested that Business as an institution has an obligation to maintain its licence to operate and that individual businesses should respond to constituencies beyond customers and employees. This means there are expectations on a corporation beyond immediate participants in its economic activities. Combining this idea with the idea of intergenerational responsibility introduced by the Brundtland Report, we might say that organisational sustainability could be defined as managing a business so as to meet present expectations without compromising the ability of a future generation of management to meet future expectations.
In 1999, this concept was intensively investigated by asking an Expert Panel of 30 highly prominent Australians, drawn from key stakeholder groups and futurists, what they think companies need to do to achieve organisational sustainability. The results are instructive.
According to the Expert Panel, the most important actions for corporations to take to assure their own organisational sustainability include: (i) keeping up with technological change, (ii) cherishing the people who make up a company, and (iii) being flexible enough to change markets and change products as and when necessary. Sustainability will also require avoiding deadening bureaucracy, purposeful communication rather than information drivel, and a stronger focus on implementation rather than continual assertions of lofty aspirations.
Pursuit of any goal will be supported by helpful forces and restrained by obstructive forces. The Panel saw the application of science and technology to business processes as the strongest force contributing to organisational sustainability; there was a strong faith that information and communications technology will produce a smarter next generation of employees, more creative in their diversity. Another major supportive force is the emergence of new and different markets for Business as governments withdraw from operational economic activities, and as third world countries pursue Western standards of health, education and wealth.
However, the Panel saw obsession with short term results as a significant impediment to organisational sustainability, and also inertia sluggishness to change. The relentless chase for short term financial returns may lead to instability and even serious economic crises. As the managing director of an investment firm said, Im very much a believer in the free enterprise system but Ive argued for some years now that you cant afford to allow free movement of capital 100%, because theres too much volatility. Too much volatility results in social unrest, and eventually revolution. The managing director of a management consulting firm was even more pessimistic If I were a punter, and an historian, I would say theres probably going to be some massive confrontation, with continued guerrilla harassment by someone like Saddam. I think theres kind of bubbling ethnocentrism and a distrust of the West.
The Panel saw government action as necessary to avert the potential of damaging instability in the economic environment Without a sufficiently robust regulatory framework for ameliorating the excesses of the capital system, the economic instability that arises would be a significant impediment (head, government department).
While recognising that people will struggle to cope with the sheer rate and scope of technological change, the Panel also tended to believe science and technology would provide the answers Technology will be a major part of the solution. Dematerialisation of the economy will be critical. Were going to move to cleaner types of energy generation, solar and photovoltaic, renewables generally; transformation of the coal industry to gas; and other types of energy we havent thought of so far. I suspect this will happen quicker than people think. (head, employer organisation).
Despite mounting tensions caused by increasing population pressure and major demographic changes, the Panel was essentially optimistic about the resilience of human nature. As a former union head put it, I take the Barbra Streisand view that as awful as human beings are, when its very clear to enough people that theres a problem, we co-operate to solve that problem.
Perhaps ominously for Australia, the least prominent but most contentious area identified by the Panel is the response of Business to exponentially increasing damage to the biosphere and its ecosystems. On the one hand, some Panel members believe the pressure for short term results will outstrip efforts to rectify environmental damage I dont think we should ever underestimate peoples greed and self-interest, and disinclination to act in a way that is other-interested (head, consumer advocacy organisation). Others take an optimistic line Therell be much more awareness in the next generation and the generation after that of consumption and re-usability and recyclability. Therell be technology to help guide communities to a more ecological existence The best way to make it work is through education, information and driving through commercial value. (CEO, global corporation).
Short-sightedness of current corporate strategy
The Royal Society for the Arts, Commerce and Manufactures claims that societies will become intolerant of the business community where it appears to put too large a gap between the creation of shareholder value and the creation of social value, but is this a realistic picture and would society act beyond a certain level of intolerance? The widespread deterioration of communities in Australia, particularly in rural and regional areas, would argue against such a view.
In the political sphere, citizens do have the power through their vote to express the limit of their tolerance. In throwing the Kennett Government out of office in 1999, the Victorian people re-emphasised their view that, despite Victorias strong economic performance, social impact does matter and deteriorating social conditions are unacceptable. In the corporate sphere, accountability through democratic elections seems unlikely, yet shareholder activism is increasing and reputation assurance is a growing part of the big accountancy firms consulting services.
In the long term, the imperative for Business to maintain its so-called licence to operate may become a mainstream economic value. The RSA suggests that to secure long-term prosperity, company directors must not only have regard to shareholders interests, both present and future, but must be accountable for their stewardship of companys assets, assets which include employee satisfaction, supplier goodwill and community approval.
Role of the investment industry
Over the last 20 years, corporations have weathered a number of management fads. The late 1960s and early 1970s saw huge social change in Western countries, with the rise of the environment movement, the consumer movement and the second wave of the womens movement. Many of their demands for were translated into legislation in the late 70s and early 1980s.
Then in the 1980s, Europe and the US began to feel the heat of competition from a resurgent Japanese industry, and the TQM bandwagon was started to roll. In the 1990s, consultants held out the lure of extraordinary leaps in productivity through Business Process Re-engineering, which in fact generally meant simply replacing people with machines or outsourcing whole departments to get them off the company books.
In addition to these major waves of organisational change, there has been increasing pressure by the investment industry for improvements to corporate efficiency and increased return to shareholders. It could be assumed therefore that investment industry is one of the biggest bad guys around, and yet this may be where the pressure will come from for companies to become more aware of the issue of sustainability.
In September 1999, the Dow Jones group launched the worlds first global sharemarket index that tracks the performance of sustainability-driven companies. Sustainability-driven performance is measured by a combination of equally weighted environmental, social and financial criteria. The index assesses corporations exploitation of sustainability opportunities as well as avoidance of sustainability risks, and includes assessment of the long term effective use of natural resources and of human resources, and corporate contribution to lasting social well-being.
Dow Jones suggests we are now seeing the effects of increasing awareness of the environment, and increasing awareness of the social impact of Business. On the environmental side, there are opportunities for cost savings through eco-efficiency measures and opportunities to optimise positioning on mechanisms, like carbon credits, currently being developed to reprice natural resources. On the social side, the development of global media like CNN and the internet mean company mistakes and disasters are exposed more quickly and more widely than ever before, and can have a significant impact on the share price.
Noting that major investors like the big pension funds are beginning to take note of these issues, Dow Jones realised a benchmark would be needed that tracked superior sustainability performance and favourable risk/return profiles. This led to the development of their new index, which is currently outperforming the mainstream Dow Jones World Index.
Conclusion
Institutionalisation of the concepts of Total Quality Management took over a decade to achieve (more if you consider the beginning of the movement to have started just after the Second World War). With the influence of the internet, it is likely institutionalisation of the concept of organisational sustainability will take much less time. Already, the idea of business pursuing a triple bottom line of economic viability, environmental quality and social equity is spreading like wildfire, led by huge global companies like Shell and BP. The challenge now, for managers and academics alike, is to translate this appealing concept into organisational systems and practices, so that all companies operate to meet present expectations without jeopardising a future generation of the company to meet future expectations.