Sustainable Business Transformation

This is the fifth in a series of 6 posts on our perspective on sustainability. Our first post focused on our definition of sustainability and the second explained what we mean by ’social relevance’, ‘environmental responsiveness’ and ‘economic viability’. The third dealt with the notion of ‘Common Good’ in contrast to ‘Self-Interest’, and why the pursuit of the Common Good leads to better sustainability. The fourth post discussed the challenges along the path to sustainability in a competitive situation and also elaborates upon the key areas of difference between partnerships and competitive relationships.

This post looks at the sustainability theme from an investor’s perspective and explores how it plays out for the shareholders of an enterprise that embarks on a sustainable business transformation journey.

Shareholders are interested in two things, generally speaking: earnings or dividend per share, and appreciation of the share price in the stock market. How can corporations meet shareholder demands if they pursue Sustainable Business Transformation the way you define it? Why would shareholders invest in or care about social relevance or environmental responsiveness?

Let me ask you this – as a shareholder, which of these two alternative scenarios would you prefer: (a) get higher returns in the short-term but remain uncertain about future returns, or (b) get moderate returns in the short-term but be confident that such returns will continue to accrue over a longer duration? Which scenario represents more value to you? Clearly, a majority of the population would prefer the latter. (Note that this excludes short-term speculators, who are an exception to the rule since they have different financial goals and risk appetites.)

Sustainability Tilts The Balance

The mandate to business therefore is to focus more on the promise of sustainability of profit in the long run, rather than on maximizing gains in the short run at the risk of uncertainty about the future. (Unfortunately, the practice of quarterly reporting of results tends to encourage focus on the short-term in terms of the company’s approach to performance as well as investor outlook.) The challenge to businesses on a Sustainable Business Transformation journey is to move their investors from scenario (a) to scenario (b). It is imperative that businesses educate their shareholders and inspire confidence in them, to believe that they will sustain a certain level of returns in the long run. A lot depends on the quantum of shareholder trust earned and enjoyed by the business. Businesses that haven’t worked on generating the kind of credibility which is a pre-requisite for that kind of trust may not be successful in building investor confidence along these lines.

The problem today is that the number of players with short-term interests is rapidly increasing, to become a considerable force in the financial markets. This is happening because of the combination of two factors: perceptions of scarcity and uncertainty about the future on the one hand and temptations to make a quick buck in markets that have become too complex to regulate effectively on the other. And this in turn is leading to the devolution of the principle of common good into its primitive version of instinctive self-interest. Such trends erode (as opposed to support) sustainability and must be arrested and reversed. It’s like traffic rules: what might happen if more people break rules just because a few guys broke them and got ahead.

This is one of the biggest challenges faced by the Sustainable Business Transformation journey and can only be addressed by increasing awareness and educating investors relentlessly. We are not saying it is easy — on the contrary, it is an uphill task, but we have to start somewhere, otherwise the logical extension and spread of such trends will result in anarchy. Hopefully some of the regulatory reform in the wake of the global financial crisis will plug gaps that could be exploited to make a quick buck and discourage reckless opportunism, at least to an extent.

There are already several organizations that focus on Socially Responsible Investing (SRI). Their purpose is to educate, encourage and enable investors to develop investment strategies aimed at the more holistic view of sustainability. Similarly there are other trends that are gaining momentum of late: social enterprise and social entrepreneurship, which essentially deal with the application of the principles and disciplines of enterprise and entrepreneurship to socially and/ or environmentally focused work. Historically, this has usually been the domain of non-profit charities funded out of philanthropic or ethical considerations. The new social entrepreneurship movement is changing that paradigm, by proving that social/ environmental projects can run just like any other business, except that its customers (and possibly also its core stakeholders) belong to different types of communities compared to traditional businesses.

This brings us to a very interesting observation: as traditional profit-oriented businesses become more socially and environmentally focused (either due to SRI or other pressures or arising out of their own realization), social development organizations will become more like regular businesses, with a sharp focus on efficiency and returns. These worlds will soon start resembling each other so much that they will finally merge into a single approach to all business, focused on the triple bottom line.

Our next and final post in this series will deal with the urgency of the need for businesses to embrace sustainability.