SOLVING THE SUSTAINABILITY IMPLEMENTATION CHALLENGE

Marc J. Epstein

Jones Graduate School of Management, Rice University

6100 Main Street, Houston, Texas, U.S.A

Phone: +1 713 348 6140

[email protected]

Adriana Rejc Buhovac

Faculty of Economics, University of Ljubljana

Kardeljeva ploščad 17, 1000 Ljubljana, Slovenia

Phone: +386 1 5892 555

[email protected]
 Executive Summary

Developing sustainability strategies is an important

challenge for senior executives, but implementing these

strategies successfully is even more challenging. This paper

provides a framework and performance measures to more

effectively measure, manage, and report the value created

through improved sustainability performance. With a careful

and a measurement of those drivers, companies can better

manage the broad set of impacts that are caused by both core

corporate activities as well as corporate sustainability

programs. These tools enable better integration of social

and environmental impacts into the day-to-day operational

decisions and traditional investment models thus making

social and environmental concerns part of the organization.

With appropriate formal and informal management systems,

corporations are able to reap the benefits associated with

sustainability performance.

On April 20, 2010 the explosion of the Deepwater Horizon

drilling rig in the Gulf of Mexico killed 11 platform

workers and injured 17 others. It caused the Deepwater

Horizon to burn, and started a massive ongoing offshore oil

spill that has become the worst environmental disaster in

U.S. history. British Petroleum has been criticized

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extensively and held responsible for the disaster, but also

for the actions that preceded it. Much of the criticism

focused on the management control systems in place to

prevent the disaster and the lack of preparation for an

effective response. This also follows other recent BP

disasters including the Texas City Refinery explosion in

Texas City (March 23, 2005) when 15 people died and the

Prudhoe Bay oil spill in Alaska (March 2, 2006) when over

212,000 US gallons were spilled.

While British Petroleum often attempted to position itself

externally as an environmental leader, questions persisted

regarding its environmental performance. And the recurring

events raised questions as to whether these were one-time

events or systemic and whether sustainability was really a

critical part of the fabric and operations of the company.

To effectively implement sustainability strategies,

companies must have the formal (hard) and informal (soft)

systems in place. Too often they do not. Companies need the

processes, performance measurement, and reward systems

(formal systems) to measure success and to provide internal

and external accountability. But they also need the

leadership, culture, and people (informal systems) to

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support sustainability implementation. An alignment among

the formal and informal systems along with the

organizational structure is critical for success.

THE CHALLENGES OF IMPLEMENTING SUSTAINABILITY

For years, some company managers were charged with the

responsibility of addressing the social and environmental

impacts of company operations. Even when there was little

buy-in from senior management, a need was seen to respond to

community and other pressures to be good corporate citizens.

Corporate social responsibility (CSR) or "sustainability" as

it is now often termed was seen as something that often was

necessary even if not desired or included in the corporate

strategy. CSR managers would often go to business unit heads

and top management to do more in this area with a plea that

"it is the right thing to do". And, even when it was done,

it was never long lasting. A new CEO would arrive and

eliminate these activities that were not seen as core.

Those days are long gone. Sustainability is a critical part

of most major corporations today. Whether the motivation is

concern for society and the environment, government

regulation, stakeholder pressures, or economic profit, most

managers recognize the importance of developing

sustainability strategies and activities. Sustainability is

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discussed inside most organizations as a "business case" in

addition to being the right thing to do. This is the only

way it can be long lasting. Most CEOs acknowledge its

importance, but the challenges of implementing

sustainability are still quite significant.

Setting clear and measureable goals. These challenges exist,

in part, because implementing sustainability is

fundamentally different from implementing other strategies

in an organization. For operating goals, for example, the

direct link to profit is usually clear. For innovation,

though long-term and also often difficult to predict,

measure, and manage, the intermediate goal is new products

and processes, and the ultimate goal is increased profit.

For sustainability, however, the goal is to achieve

excellence in social, environmental, and financial

performance simultaneously. The social and environmental

impacts of corporate activities have effects that are often

longer-term and more difficult to measure than most of the

impacts managers typically confront.

Financial incentive pressures. The issue of integrating

corporate sustainability into day-to-day management

decisions is further complicated as managers at all levels

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have significant incentive pressures to increase short-term

earnings. When actions improve both social and financial

performance simultaneously, such as when energy consumption,

waste, or toxics are reduced, this is simpler than when

there is a significant financial cost associated with

improving social or environmental performance. In such

situations, managers are faced with a dilemma of how to make

the choices and which actions to take.

Stakeholder reactions. Adding to the challenge is

uncertainty about how different stakeholders will respond to

various sustainability actions and performance through time.

Corporate and societal priorities often change as do the

costs of implementing sustainability. All these issues make

the decision-making associated with sustainability

implementation particularly challenging.

One of the key ingredients to making sustainability work

within any organization is to put in place formal systems

that support the sustainability strategy. Formal (or “hard”)

systems typically include the management control,

performance measurement, and reward systems that are used to

steer employee behavior toward strategic goals. New tools

for managing and measuring corporate sustainability such as

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The Corporate Sustainability Model (see Exhibit 1, drawn

from the Epstein’s book (2008)) and its associated

measurements aid in implementing sustainability strategies.

The Corporate Sustainability Model provides a comprehensive

approach for examining, measuring, and managing the drivers

of corporate sustainability. It has been extensively tested

and revised in both academic and managerial studies and

implementations. Using it leads to a clear understanding of

the impacts of past, pending, and future corporate decisions

on the society, the environment, and corporate financial

performance. Along with performance measures, closely tied

to the various elements in the model, these tools help align

organizations, coordinate activities, motivate employees,

and quantify the impacts of corporate activities on social

and environmental performance.

THE CORPORATE SUSTAINABILITY MODEL

The Corporate Sustainability Model was developed to help

managers measure and manage their success in implementing

sustainability strategies. More specifically, the model

enhances the understanding of:

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 - the role of various drivers (inputs and processes) in

sustainability;

- the causal relationships among the various actions

that can be taken;

- the impact of these actions on sustainability

performance;

- the likely reactions of the corporation’s various

stakeholders; and

- the potential and actual impacts on financial

performance.

Insert Exhibit 1 around here

This model can be used to more successfully implement

sustainability strategies and achieve superior

sustainability performance.

At the core of the model is the leadership function. The

role of committed leadership can never be overstated.

Management commitment to sustainability as a core value and

management recognition that sustainability can create

financial value for the organization through enhanced

revenues and/or lower costs are critically important.

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Jeffrey Immelt, CEO of GE, for example, has publicly

committed his company to sustainability. His combination of

words and actions is leading change at GE and moved the

company to the top of many global sustainability rankings

and indices. Leaders are responsible for the identification

and analysis of the inputs and, accordingly, for designing

processes (sustainability strategy, sustainability

structure, and sustainability systems) needed to accomplish

the desired sustainability outputs and outcomes. Vice

presidents of sustainability, in particular, take the lead

in considering inputs, developing a sustainability strategy,

and using the formal and informal systems to make

sustainability strategy work well.

Inputs include the external context (regulatory and

geographical), the internal context (company mission,

strategy, structure, and systems), the business context

(industry sector, customers, and products), and the human

and financial resources available to the corporation for

sustainability purposes.

The local and global external contexts significantly affect

the choices a corporation makes regarding the formulation

and implementation of sustainability actions. Additional

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important considerations are industry sector, and customer

and product characteristics. For example, manufacturing

companies may focus more on environmental and health issues,

while service-oriented companies may emphasize the social

aspects of sustainability. Current internal context with the

corporate and business unit strategies, organizational

structure, and systems will also impact issues such as

environmental protection and employee rights. Another

important input is the resources constraint of the

corporation. The amount of financial and human resources

allocated to sustainability will significantly impact the

ability to implement sustainability programs.

After carefully evaluating the inputs and their likely

effects on sustainability and financial performance, leaders

develop the appropriate processes to improve sustainability.

These include sustainability strategy, structure, systems,

programs, and actions.

Many companies go beyond a minimum-compliance sustainability

strategy. For example, prior to any industry standards, toy

manufacturer Mattel established its own Global Manufacturing

Principles for company-owned, contracted, and licensed

facilities. These principles provide a framework for its

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worldwide manufacturing practices requiring fair treatment

of employees and protection of the environment.

Structurally, best-practice companies leverage

sustainability concerns throughout the organization. For

example, at UPS, a global shipping company, health and

safety managers are placed in each business unit to

implement strategic safety initiatives.

Leaders can also focus the organization on sustainability

through various management systems, such as life-cycle

costing, full cost accounting, risk-integrated capital

budgeting, comprehensive performance measurement systems,

and incentive systems, as well as through specific programs

and actions.

Sony, for example, uses an intranet-based data system to

collect sustainability information from its sites worldwide.

Managers at each site input data on energy, water, waste,

and other environmental costs, which allows Sony to track

its impact on the environment. Corporate incentive and

reward systems sometimes tie individual performance reviews

and compensation explicitly to sustainability performance to

align the interests of the corporation, senior managers, and

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all employees. Wal-Mart, following in the path of many large

U.S. companies, has linked executive bonuses to diversity in

its hiring practices. Bonuses will be reduced by as much as

15% if the company does not promote women and minorities in

proportion to the number that apply for management

positions.

The managerial actions taken lead to sustainability

performance and further to stakeholder reactions that can be

either positive or negative. These are the intermediate

results called outputs that ultimately affect long-term

corporate financial performance (outcomes).

In recent years, many companies have substantially increased

the quality and quantity of interactions they have with

various stakeholder groups on a regular basis. The purpose

is to better understand stakeholders, their needs, and their

likely reactions to sustainability performance, but also to

build trust. As informed managers make better decisions and

improve sustainability performance, that has many positive

impacts as stakeholders decide what products to buy and what

companies to work for, and as legislators make decisions

about regulations.

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Dow Chemical has established community advisory panels (CAP)

in most of the communities in which it has facilities. The

goal was initially to build trust, cooperate, and gain

mutual respect. But CAPs actually led to a number of efforts

such as emergency response education for residents,

community projects, and local hiring that significantly

improved company reputation. GlaxoSmithKline, the global

pharmaceutical company, is involved in a stakeholder network

to improve hospice care in Canada. The company held a forum,

which included caregivers, physicians, nurses, the clergy,

media, activists, and other associations, to share

information and develop strategies to better address hospice

care.

The Corporate Sustainability Model also includes the

feedback process that generates timely information on actual

and potential social and environmental impacts, stakeholder

reactions, and their effects on financial performance. This

process often challenges assumptions and modifies future

sustainability strategy formulation and implementation.

For example, based on feedback information on sustainability

performance and stakeholder reactions, Nike redesigned shoes

that contained a greenhouse gas (sulfur hexafluoride or

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SF6). In 2006, Nike developed a technology that uses

nitrogen instead of SF6 to create the air pocket in its Nike

Air sneakers. The nitrogen breaks up more easily and is not

harmful to the environment. The feedback process can also

help companies find new ways to meet customer needs by

rethinking their markets.

Interface, the leading carpet manufacturer, on the other

hand, changed its strategy with a shift from selling

products to selling services. The company traditionally sold

its carpets to clients who would then need to purchase new

carpet when replacement was required. Now, Interface leases

carpets and monthly inspections detect worn carpet tiles and

the company replaces them as needed. This method is better

for the environment, saves Interface money, and saves its

customers money, too.

Managers can customize the Corporate Sustainability Model to

reflect their specific concerns and interests in

sustainability performance. The critical question then

becomes: how can managers design and use formal systems,

such as performance measurement systems, to align employees

and improve the implementation of corporate sustainability?

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ALIGNING MANAGEMENT, MEASUREMENT, AND PERFORMANCE

The Corporate Sustainability Model can guide the development

of metrics to better measure and manage sustainability

success. To design a comprehensive control system, every

component of the framework should be associated with

specific performance indicators (see Exhibits 2 through 5

for sample metrics).

Performance measures of inputs are primarily used to help

the leaders assess the impact that the four inputs might

have on sustainability processes. Knowing the external

requirements, expectations, and industry standards, as well

as what resources are available internally for

sustainability processes, is necessary to design appropriate

sustainability strategies, structures, and systems.

Indicators, such as dollars available for employee training,

are examples of metrics that permit corporate and functional

leadership to assess the resources available and tailor

sustainability actions accordingly. Moreover, performance

measures on inputs enable a more objective ex-post

evaluation of the actual social, environmental, and

financial achievements.

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 Insert Exhibit 2 around here

Performance measures on processes and outputs

(sustainability performance and stakeholder reactions), on

the other hand, are primarily used to measure the efforts of

sustainability actions (e.g., strategy development,

reorganization, investments in new technologies, employee

training, additional products inspections, certifications).

Ideally, most of these measures will be converted into

monetary terms to enable a summarized calculation of the

financial impacts (costs and benefits) of sustainability

performance.

Each element of sustainability processes must be translated

into a metric to monitor and assess the value of these

sustainability actions. For example, leadership commitment

to sustainability may be measured through a clearly

articulated vision around sustainability issues or through

the number of hours of management time for volunteer work.

Measures of performance around strategy, structure,

management systems, programs, and actions should also be

monitored. Percentage of suppliers certified or number of

functions with sustainability responsibilities are examples

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of metrics that permit managers to assess or predict the

impact of these initiatives on sustainability performance.

Insert Exhibit 3 around here

As companies implement new initiatives or invest in new

technologies to improve their sustainability performance,

they should measure actual performance. Investments made in

recycling equipment are expected to lead to a decrease in

hazardous waste. Actual change in the volume of hazardous

waste reflects sustainability performance; when converted

into monetary terms, it links directly to improving

profitability. Similarly, volume and cost of energy use,

vehicle fuel use, and packaging volume, are examples of

indicators of sustainability performance that are clearly

linked to financial performance.

Alternatively, companies may have goals of improving society

or the environment with no direct link to corporate

financial performance. Percent and number of women and

minorities in managerial positions may be an example of a

measure reflecting such a goal. For such goals, stakeholder

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reactions typically significantly affect short-term revenues

and costs and long-term corporate performance.

For example, percent of women and minorities in managerial

positions (sustainability performance) may lead to favorable

press mentions (stakeholder reaction), which, in turn,

impacts on company reputation (stakeholder reaction) and its

stock price (financial performance). Similarly, the volume

of company’s emissions to air and water (sustainability

performance) may lead to community complaints (stakeholder

reaction) that may affect unfavorable press mentions

(stakeholder reaction) or even lead to fines thus affecting

financial performance.

Stakeholders’ reactions to sustainability performance

constitute an integral part of the Corporate Sustainability

Model. Among the important stakeholder groups are employees

who choose whether to work for the company, customers who

choose whether to buy the products, investors who choose

whether to invest in the company, or government officials

who choose whether to increase or decrease regulation and

enforcement.

Insert Exhibit 4 around here

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Corporate financial performance can therefore be an outcome

of sustainability performance directly or a result of

stakeholder reactions to sustainability performance. In

either case, costs and benefits associated with

sustainability strategy must be measured and incorporated

into management decisions. Benefits of sustainability

actions often come from cost reductions related to new

manufacturing technologies, ‘green’ products, reduced

material storage and handling costs, reduced waste disposal,

decreased employee turnover, etc. In addition, benefits can

be related to positive and improved relations with

stakeholders. For example, favorable press mentions or

cause-related marketing may contribute positively to a

company’s reputation for excellent sustainability

performance and send a positive message to customers,

financial analysts and investors. Examples of costs are the

cost of compliance with legislation, investment costs, and

various operating costs related to sustainability actions.

Insert Exhibit 5 around here

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Baseline information forms the basis for all subsequent

measurements so that the system can measure improvement from

the starting point on the various elements of the framework.

Collecting initial baseline information may be hard work,

especially for those elements that have not been previously

measured (such as measuring the impact of a company on

society). But such initial efforts are critical to the

success of sustainability initiatives.

Fortunately, various tools and techniques are available to

measure the different aspects of sustainability performance.

For example, available measurements including the cost-of-

control approach and the damage-costing approach can help

monetize social and environmental externalities. The cost-

of-control approach is the cost of reducing or avoiding

damage before it occurs, while damage-costing focuses on

attempting to assess actual cost incurred from social and

environmental damage. The market-pricing approach directly

measures the market value of resources damaged or lost as a

result of social and environmental impacts.

Other methods are also available. Customer surveys are

powerful tools that help companies better understand the

benefit of sustainability investments for increasing revenue

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or decreasing costs related to their customers. They provide

valuable information regarding opportunities to improve

overall profitability. Internally, surveys, focus groups,

and other techniques are increasingly being used to measure

and monitor employee and other stakeholder reactions and

provide feedback.

APPLYING PERFORMANCE MEASURES

Performance measures can be used for various purposes in

sustainability implementation including:

- costing and capital investment decisions,

- risk management systems,

- performance evaluations and reward systems,

- measurement systems,

- feedback systems, and

- reporting and verification systems.

Costing and capital investment decisions. Companies can use

available techniques to tie measurement and reporting of

social and environmental impacts into day-to-day management

decisions. These impacts should be measured and reported in

financial terms and then integrated into traditional

investment models.

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A number of companies have begun the transition to improved

social and environmental cost accounting by clarifying the

understanding of internal social and environmental costs

through activity-based costing, and placing a value on

significant external costs through life-cycle costing or

other approaches. Other companies have chosen to use full

cost accounting to include a broader set of external costs

along with future costs into management decision-making.

While life-cycle costing translates social and environmental

performance into financial currency, full cost accounting

integrates these values into the framework of accounting.

For example, Baxter International calculates and reports its

positive and negative sustainability impacts as subsets of

traditional accounts, allowing sustainability items to be

easily identified. The combination enables managers to

integrate sustainability impacts into decisions, such as

product costing, product pricing, and capital investments.

At Canon, each department bears the financial burden of its

own waste processing through a fee for the waste it

produces, which improves the cost accounting of social and

environmental impacts.

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An evaluation of the cash flows associated with the costs,

benefits, and risks related to alternative investment

decisions from the perspective of sustainability performance

is also required. The capital investment decision-making

process is more complete with measures on sustainability

since the full range of social, environmental, and economic

costs, benefits, and risks is considered.

For example, a company should inventory its natural

resources and environmental assets including all the land

and water owned, and the pollution or other environmental

impacts for which it is responsible. It should determine the

goods and services potentially available with these assets,

and then specify the potential value of these environmental

assets. It also should be examining the effect on cash flows

of the social and environmental impacts of all current and

projected operating and capital investments. Often the cash

flow effects come from manufacturing processes, but

increasingly they arise from the customers’ use of the

company’s products and services. In some companies, large

capital investment decisions are reviewed and are often

subject to approval by sustainability managers before a

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final decision is reached to ensure that the sustainability

performance effects on cash flows are included.

Risk management systems. Performance measures on

sustainability processes, outputs, and outcomes can also be

used for integrating social, political, and environmental

risks into the evaluation of product, process, and project

decisions.

Before investing in a new location, Royal Dutch Shell

employs a human rights institute to conduct Country Risk

Assessments, highlighting any human rights managers should

consider when making a decision as to whether to enter the

country. The assessments compare over 80 human rights

treaties with the laws and regulations of the country.

Managers are then able to proactively develop actions to

reduce the likelihood of human rights or other violations

that could potentially lead to fines and reputation damage.

Measurement systems. The identification and measurement of

the costs and benefits from corporate sustainability

activities are critical to the evaluation of projects within

the company and externally.

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Nike has an advanced system for measuring the company’s

footprint. Nike’s Considered Index is a tool for evaluating

the predicted environmental footprint of a product prior to

commercialization. This system examines solvent use, waste,

materials, and innovation for footwear. Apparel products are

evaluated on waste, materials, garment treatments, and

innovation. Products are assigned a ‘Considered’ score using

the Index framework based on Nike's known footprint in these

areas. Nike has also developed a Material Analysis Tool

(MAT) based on lifecycle thinking to quantitatively evaluate

and rank material choices, giving definition to Nike

environmentally preferred materials (EPM's).

Numerous other companies have designed performance

measurement systems that permit measuring and managing

sustainability performance.

Linking to accountability. Importantly, systems that measure

performance and provide feedback on corporate sustainability

improve social, environmental, and financial performance by

holding employees accountable for their contribution to the

sustainability strategy. Measuring and reporting

sustainability performance gets employees into the

discussion of its importance and their role in its

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improvement. Even when measurements are not precise, it is

clear that the measurements and impacts are relevant. They

are usually directionally correct and they get people

focused and aligned on an important element in

organizational performance.

In P&G, for example, managers have performance measures on

conservation and environmental protection on their personal

scorecards. Though not tied to the reward system, this

technical review and report on sustainability progress holds

employees accountable for their actions.

Eastman Kodak Company, a leading photography and imaging

company, has established 29 performance standards in four

categories: environmental, health, medical, and safety. To

provide accountability at all levels of management, health,

safety, and environmental (HSE) targets are included in

individual performance goals, and operating units establish

their own metrics to drive improvement appropriate to the

business objective. HSE performance is assessed against

Kodak’s HSE performance standards through the worldwide

corporate audit program. By using these performance

standards, Kodak has far exceeded all of its manufacturing-

focused HSE goals. When performance evaluation is supported

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by reward systems, employees often focus even more on what

they can do to improve sustainability.

Linking to reward systems. Implementing sustainability

strategies is particularly challenging as business unit and

facility managers are pressured to deliver profits and their

performance is typically measured based on sales and profit

goals. This significant incentive pressure can make it

difficult to obtain alignment of strategy, structure,

systems, performance measures, and rewards to facilitate

effective implementation. It is important for companies to

align their reward systems with their strategies.

Increasingly, companies are integrating sustainability

performance measurement and rewards into existing systems.

The systems are aimed at counterbalancing the incentive

pressures, helping employees make the required trade-offs,

and rewarding performance that is consistent with corporate

sustainability and profitability strategies.

Shell, for example, has a corporate incentive and reward

system where environmental and social aspects represent a

20-percent component of performance measurement and bonuses.

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Alcoa has also linked environmental accountability with

performance and compensation. Its Primary Metals Group links

compensation with reductions in emissions of

perfluorocarbon, a greenhouse gas. Swedish-based Scandic

Hotels initiated a program called Resource Hunt, which

rewards employees for improving resource efficiency. The

program encourages employees to reduce consumption of

energy, water, and waste. Employees at each hotel receive a

percentage of the savings. This program saves money for the

company and motivates employees to consider sustainability

in their day-to-day decisions.

THE IMPORTANCE OF INFORMAL SYSTEMS: LEADERSHIP, CULTURE,

AND PEOPLE

Formal systems are important for embedding the focus on

sustainability in the functioning of the organization. Yet,

many companies that are committed to improving

sustainability and have developed formal systems to support

their sustainability strategies have remained unsuccessful

in implementation. Why?

To answer this question, we have just completed new field

research in this area with four leading global companies

27
with superior sustainability performance. It turns out that

to implement sustainability successfully companies need the

informal (soft) systems in addition to the formal (hard)

systems. Formal systems are usually a part of a broader set

of systems aiming to motivate and coordinate employee

actions and corporate culture but are not enough. Informal

systems supplement the formal systems of the organization,

and our research finds that the informal systems are more

important than previously thought by either managers or

researchers.

Informal systems can include the mission, leadership,

culture, and people that are needed for organizational

success. A strong mission statement emphasizing the need for

sustainability can convey to employees the importance of

sustainability as a core corporate value. To integrate

sustainability into day-to-day decision-making, companies

must make sustainability a central tenet of their strategy

and then exercise leadership to reinforce these objectives

throughout the organization. Leaders can show their

commitment to sustainability by articulating trade-offs to

managers and by leading by example. Organizational culture

that builds on sustainable innovation, creativity,

entrepreneurship, and volunteerism can also be used to

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offset the pressures and drawbacks of incentive systems that

focus primarily on short-term financial performance. These

soft systems can be critical in supporting sustainability

implementation.

Recent research findings from four leading corporations.

Nike, P&G, The Home Depot, and Nissan, for example, are

successful in implementing their sustainability primarily

because of committed leadership, organizational culture, and

people. And, though sensitive to stakeholder concerns and

impacts, these leading companies are internally committed to

improve corporate sustainability performance. All four

companies incorporate sustainability issues in their

corporate strategies; they have specific sustainability

strategies and aligned organizational structures;

performance measurement systems with some social and

environmental metrics are also in place. But, leadership and

organizational culture have been found to be the critical

determinants of successful management of the various trade-

offs that middle managers face when they try to

simultaneously manage social, environmental, and financial

performance.

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In the four companies, for example, there is less conflict

for senior and middle managers in balancing social,

environmental, and financial performance because these

conflicts are resolved higher up in the organization and are

well integrated into the informal systems. Upper management

in these organizations has bought into the benefits relating

to sustainability. People are thus able to make certain

trade-offs because they know they will be supported by

leaders.

In P&G, for example, the leaders are responsible for

successful integration of sustainability into the rhythm of

P&G’s business. They aim to make sustainability something

the business units want to do because it helps build the

business. One senior manager said, “Once people understand

what the goal is, creativity and innovation follow

immediately.”

A common overall organizational culture that builds on

sustainability can further help managers and other decision-

makers deal with the trade-offs that the simultaneous

management of social, environmental, and financial goals

often causes. At Nike, P&G, The Home Depot, and Nissan, the

corporate culture is broadly shared and emphasizes norms

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critical for innovation such as openness, autonomy,

initiative, and in many cases risk taking.

The Home Depot’s culture, for example, is marked by an

entrepreneurial high-spiritedness and a willingness to take

risks. It is so strong that it has been labeled as “orange

blood” [the color of The Home Depot’s stores] running

through associates’ (employees’) veins. When challenged to

meet more stringent regulatory or company-set environmental

or social standards would require additional costs, the

culture of openness and innovativeness helps employees work

together to identify areas where other costs could be

reduced or revenues could be increased by new approaches to

sustainability.

In addition, CSR or sustainability departments play an

important role in educating other business units about why

the company should engage in sustainability efforts through

educational and other efforts to influence the

organizational culture and values. These sustainability

managers influence how the company integrates sustainability

in decisions through both formal and informal systems.

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In Nike, one of the vice presidents stated, “I want to give

guidance to subordinates because I don’t want to have them

struggle with it [the trade-offs related to making social,

environmental, and financial decisions]. And, we need to

teach them because all these decisions cannot be done by me

alone.” This training takes place through information

sharing and collaboration. People learn as they are made

part of the process where leaders make decisions.

CONCLUSION

As we see, for improved sustainability performance,

sustainability strategy is only a minimum enabler. Companies

must support it with appropriate organizational structure,

develop systems for measuring and reporting, and exercise

leadership to reinforce these objectives throughout the

organization. In addition, for heightened awareness of

sustainability goals and performance and a long-lasting

focus on sustainability issues, companies must build an

organizational culture that motivates sustainable decision-

making and behavior.

Much of this is unclear at British Petroleum. The company

likely had a sustainability strategy. They were explicit

32
about their commitment to sustainability in extensive

communications. But, it does not appear to have been

successfully integrated throughout the fabric of the

company. It does not appear that the company built an

organizational culture that motivated decisions that were

appropriately sensitive to potential social and

environmental impacts. The lack of consideration and

integration of these potential impacts can clearly lead to

disaster.

Companies have progressed significantly in corporate

sustainability over the last decade. Most CEOs acknowledge

the importance of improving sustainability performance in

addition to financial performance. However, they often

struggle with the challenges of how to do this.

To integrate sustainability into day-to-day decision-making,

best-practice companies make sustainability a central

component of their strategy and exercise leadership to

reinforce these objectives throughout the organization.

Leaders show their commitment to sustainability by

articulating trade-offs to managers and aligning the

organization’s strategy, structure, systems, people, and

culture. The Corporate Sustainability Model and the

33
associated measurements can be used to help companies prove

the business case for sustainability and provide

accountability. Incentive systems that include a broader set

of performance metrics than financial performance alone will

further encourage employees to include sustainability in

their day-to-day decision-making. Thus, it is through a mix

of leadership, strategy, structure, as well as hard and soft

management systems, that sustainability can be implemented

and measured successfully.

SELECTED BIBLIOGRAPHY

For some recent books on implementing sustainability see

Marc J. Epstein, Making Sustainability Work: Best Practices

in Managing and Measuring Corporate Social, Environmental

and Economic Impacts (Greenleaf Publishing/Berrett-Koehler

Publishers, Inc., 2008); Daniel C. Esty and Andrew S.

Winston, Green to Gold (Yale University Press, 2006);

Michael V. Russo, Companies on a Mission: Entrepreneurial

Strategies for Growing Sustainably, Responsibly, and

Profitably, Stanford University Press, 2010); Chris Laszlo,

Sustainable Value, (Greenleaf Publishing Ltd./Stanford

University Press, 2008); Stuart L. Hart, Capitalism at the

Crossroads (Wharton School Publishing, 2007).

34
For selected works on the formal systems for implementing

sustainability, see Simon Bell and Stephen Morse, Measuring

Sustainability: Learning from Doing (Earthscan Publications,

2003); Marc J. Epstein, “Implementing Corporate

Sustainability: Measuring and Managing Social and

Environmental Impacts,” Strategic Finance, 2008, January,

25—31; Tamara Bekefi and Marc J. Epstein, “Measuring and

Managing Social and Political Risk,” Strategic Finance,

2008, February, 33—41; Tamara Bekefi and Marc J. Epstein,

“Transforming Social and Environmental Risks into

Opportunities,” Strategic Finance, 2008, March, 42—47.

For selected works on the informal systems for implementing

sustainability, see Marc J. Epstein, Adriana Rejc Buhovac,

and Kristi Yuthas, “Implementing Sustainability: The Role of

Leadership and Organizational Culture,” Strategic Finance,

2010, April, 41—47; Jennifer A. Chatman and Sandra Eunyoung

Cha, “Leading by Leveraging Culture,” California Management

Review, 2003, 45(4), 20—34; Bob Doppelt, Leading Change

toward Sustainability: A Change-Management Guide for

Business, Government and Civil Society (Greenleaf

Publishing, 2003).

35
Marc J. Epstein, Ph.D., is Distinguished Research Professor

of Management at the Jones Graduate School of Business at

Rice University. Prior to joining Rice, Dr. Epstein was a

professor at Stanford Business School, Harvard Business

School, and INSEAD (European Institute of Business

Administration). He has written 20 books and over 100

articles including his most recent book Making

Sustainability Work: Best Practices in Managing and

Measuring Corporate Social, Environmental, and Economic

Impacts. Dr. Epstein has focused extensively on

sustainability and corporate social responsibility for most

of his career. In both academic research and managerial

practice, he is considered one of the global luminaries in

the areas of corporate sustainability, governance, and

accountability. You can reach him at [email protected].

Adriana Rejc Buhovac, Ph.D., is presently Assistant

Professor of Management at the Faculty of Economics at the

University of Ljubljana. As part of her academic career, she

focuses on the design and implementation of strategic

performance measurement and evaluation systems, as well as

on sustainability implementation. You can reach her at

[email protected].

36
37
Exhibit 2: Examples of Performance Measures for

Sustainability Success - Inputs

INPUTS Performance Measures

External - Pollution standards

context - Non-discrimination standards, etc.

- Existence of corporate code of conduct

Internal and management system

context - Environmental/social benchmarking of

competitors, etc.

Business - Competitive position within industry

context - Geographic diversity of production,

etc.

Human and - $ available for employee training

financial - $ committed for R&D on more effective

resources energy conservation efforts, etc.

38
Exhibit 3: Examples of Performance Measures for

Sustainability Success - Processes

PROCESSES Performance Measures

- Clearly articulated vision around

Leadership sustainability issues

- Number of hours of management time for

volunteer work, etc.

- % of suppliers certified for

sustainability standards

Strategy - % of overall budget set aside for

sustainability initiatives, etc.

- Number of levels of management with

Structure specific environmental responsibilities

- Number of functions with sustainability

responsibilities, etc.

Systems - Social performance evaluation systems

programs, and in place (number of facilities)

actions - Number of hours of ethics training per

employee, etc.

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Exhibit 4: Examples of Performance Measures for

Sustainability Performance and Stakeholder Reactions

OUTPUTS Performance Measures

- % change in volume of hazardous waste

- % change in volume and cost of energy

use

- % of a product’s content that can be

reused or recycled
Sustainability - Money contributed through philanthropy
performance and cause-related marketing

- Percent and number of women and

minorities in senior positions

- Number of human rights and labor

violations

- Number of local jobs created, etc.

- Number of community complaints

- Employee turnover

Stakeholder - % of favorable versus unfavorable press

- % of return customers

- Improved image (survey score), etc.

40
Exhibit 5: Examples of Performance Measures for Corporate

Financial Performance

OUTCOMES Performance Measures

- % of sales from ‘green’ products

- Revenue from recycled waste materials

Long-term - Revenue from cause-related marketing

reduction

- Reduced cost of environmental cleanup

- Reduced cost of fines/penalties

- ROI on sustainability projects, etc.

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 Exhibit 1: The Epstein Corporate Sustainability Model

INPUTS PROCESSES OUTPUTS OUTCOMES

External
context

Sustainability
strategy
Sustainability
performance Long-term
Internal Sustainability corporate
context Stakeholder
structure (may be both reactions financial
an output and performance
Leadership outcome)
Sustainability
systems,
programs, and
Business actions
context

Human and
financial
resources

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