The Sustainable Company about island press Island Press is the only nonprofit organization in the United States whose principal pur- pose is the publication of books on environmental issues and natural resource management. We provide solutions-oriented information to professionals, public officials, business and community leaders, and concerned citizens who are shaping responses to environmental problems. In 2003, Island Press celebrates its nineteenth anniversary as the leading provider of timely and practical books that take a multidisciplinary approach to critical environ- mental concerns. Our growing list of titles reflects our commitment to bringing the best of an expanding body of literature to the environmental community throughout North America and the world. Support for Island Press is provided by The Nathan Cummings Foundation, Geral- dine R. Dodge Foundation, Doris Duke Charitable Foundation, Educational Foun- dation of America, The Charles Engelhard Foundation, The Ford Foundation, The George Gund Foundation, The Vira I. Heinz Endowment, The William and Flora Hewlett Foundation, Henry Luce Foundation, The John D. and Catherine T. Mac- Arthur Foundation, The Andrew W. Mellon Foundation, The Moriah Fund, The Curtis and Edith Munson Foundation, National Fish and Wildlife Foundation, The New-Land Foundation, Oak Foundation, The Overbrook Foundation, The David and Lucile Packard Foundation, The Pew Charitable Trusts, The Rockefeller Foundation, The Winslow Foundation, and other generous donors. The opinions expressed in this book are those of the author(s) and do not necessarily reflect the views of these foundations. THE SUSTAINABLE COMPANY How to Create Lasting Value Through Social and Environmental Performance CHRIS LASZLO island press washington covelo london Copyright © 2003 Chris Laszlo All rights reserved under International and Pan-American Copyright Conventions. No part of this book may be reproduced in any form or by any means without permission in writing from the publisher: Island Press, 1718 Connecticut Avenue, N.W., Suite 300, Washington, DC 20009. Published in cooperation with the Sustainable Value Foundation ISLAND PRESS is a trademark of The Center for Resource Economics. Library of Congress Cataloging-in-Publication Data Laszlo, Christopher. The sustainable company : how to create lasting value through social and environmental performance / Chris Laszlo. p. cm. Includes bibliographical references and index. ISBN 1-55963-836-2 (cloth : alk. paper) 1. Industrial management. 2. Business ethics. 3. Industrial management—Environmental aspects. 4. Social responsibility of business. 5. Industrial management—Case studies. I. Title. HD31.L31568 2003 658.4′08—dc21 2003011301 British Cataloguing-in-Publication Data available Printed on recycled, acid-free paper Manufactured in the United States of America 09 08 07 06 05 04 03 10 9 8 7 6 5 4 3 2 1 to my daughters jenna and ishana contents Foreword ix Bertrand Collomb Chairman and CEO, Lafarge S.A. Foreword xiii Steve Percy Former Chairman and CEO, BP Americas Preface xvii part i The Leap to Sustainable Value 1 Introduction 3 one Toward an Integrated Bottom Line 9 two The New Ethics in Business 17 three What Gets Measured Gets Managed 29 four Shareholder Value and Corporate Responsibility 35 five The Stakeholder Mind-Set and Culture 45 part ii Companies Creating Sustainable Value 55 six Patagonia, Inc. 57 seven The Atlantic Richfield Corporation (ARCO) 65 eight The Co-operative Bank 75 nine Bulmers Limited 89 part iii The Value Creation Tool Kit 105 ten Introduction to the Tool Kit 107 eleven The Eight Disciplines 121 twelve Putting It All Together 163 thirteen Surveys of Multinational Companies 171 Postscript: Leadership Skills and the Sustainable Firm 175 Dr. Bruce Piasecki Appendix 181 Notes 203 Further Reading 207 About the Author 209 Index 210 foreword In August 2002, the Johannesburg World Summit on Sustainable Development celebrated the tenth anniversary of the Rio conference. A number of heads of state attended, but after the United States refused to ratify the Kyoto Protocol—and after the events of September 11, 2001, with the threat of terrorism and the difficult issues of poverty and war in so many places—few expected much from the intergovernmental conference. It may have come as a surprise to some observers, but busi- ness was more present and more forceful in its determination to push ahead. One of the highlights of the gathering was an unlikely joint dec- laration by Greenpeace and the World Business Council for Sustainable Development (WBCSD), an organization of more than 100 interna- tional companies, about the need for coordinated international action against global warming. The skeptics will say—and have said—that it was all marketing and communication. Companies, admittedly, do know how to use com- munication tools to their advantage. But I believe that real change is taking place. Unlike governments, large international companies have been following a steady course, recognizing more and more the strate- gic importance of sustainability in the world’s future and in their own futures. After reading Chris Laszlo’s book, one will understand better the depth and significance of this change of attitude. Companies that depend greatly on natural resources—including energy—for the development of their business, such as Lafarge in the building materials industry, had never shared the pessimism of the Club of Rome doomsayers. They tend to believe strongly that tech- nological progress can stretch the limits of possible performance, provided it is harnessed in the right direction. But they know that long- term efforts cannot always be spurred by short-term market signals, that a global conceptual framework is needed for long-term progress, and that recognizing issues and problems is the first step toward finding solutions. ix x Foreword So, for them, the concept of sustainable development, which looks at the long-term consequences of our current actions, is naturally attrac- tive. Looking ahead for ways to conserve natural resources, mitigate global warming, or contribute to social development is the best way to avoid surprises and crises, inevitably followed by emergencies and emo- tional reactions, most of which are likely to have enormous economic costs and consequences. The forward-looking international company is not concerned only about the long-term environmental future of the planet. It is working in an increasingly global marketplace, but one in which hostile feelings have sometimes developed. This global world is still a place where vio- lence, poverty, inequality, prejudice, illiteracy, and racial and religious hatred exist. Many people see international companies as the villains, who not only benefit from, but also sometimes even contribute to, these ills. On the contrary, many international companies know that we can- not solve the world’s problems, but we also know that we are contribut- ing a positive influence. We bring jobs, increased standards of living, education, and training. We bring together people from different back- grounds and different origins, allowing them to communicate, to travel, to learn about each other; and we bring the world a little bit closer to the “global village” advertised too early. Our positive contribution must be recognized if we want to continue to be free to develop and if a mar- ket economy is to remain widely accepted. For a company to commit to sustainable development makes good business sense. An approach that pays attention to all of a firm’s stake- holders, however, will appear to some to be a deviation from the only worthwhile and legitimate objective of a company: the maximization of shareholder value. This book will show them that there need not be any contradiction between the two objectives. Actually, after the end of the 2000–2001 period, when the myths of instantaneous and limitless value creation often led to greedy and unethical behavior, it should not be difficult to recognize that real sustainable value creation for share- holders also requires attention to a company’s other stakeholders. The most encouraging development in favor of the sustainable com- pany has been the behavior of the shareholders themselves. Business Foreword xi executives were sometimes worried to see a large part of the financial world adopting a narrow and myopic view of business and management objectives. It comforts them to observe the recent growth of “ethical funds” for shareholders who want to invest only in companies that will respect sustainable development criteria. This is precisely where long-term self-interest and moral impera- tives converge. Here managers and shareholders, who are also people with a conscience, can together shape a new business environment and, to quote Davos’s motto, “contribute to a better world.” Bertrand Collomb Chairman and CEO, Lafarge S.A. foreword Some may find my message surprising, but I observe that many leading corporations are no longer seeing environmental stewardship (or respon- sibilities to stakeholders other than shareholders) as a cost—a necessary evil, if you will. They are seeing these responsibilities as opportunities, a potential source of competitive advantage. Although this is not yet true for the vast majority of smaller firms, to the extent that leading companies change and set the terms of engagement and proactively address their social impacts to reduce costs and risks, win customers, and build reputation, the smaller firms will have to follow in order to stay in the game. This is a change in view, even for the leaders. I must stress, however, that this change is based on self-interest, not altruism, and this fact is good not only for shareholders but also for the environment and those who care about it. If corporate efforts are born of self-interest, they are more real and sustainable and less susceptible to the business cycle. This change in orientation may be coming in the nick of time, or maybe it is just that the times are demanding the change. The key challenge of our time is to provide the economic growth needed by the world’s poor while leaving the local, regional, and global environment in a state that will provide sustenance and benefits in the future.