If done effectively, social and environmental efforts are not necessarily taxes on businesses, but profit-building strategies that create win-win situations.
Problem: I recently was tasked with increasing and improving the effectiveness of my company's social and environmental responsibility. Most of the previously adopted initiatives hurt our bottom line. How can I help my company be more socially and environmentally responsible while also increasing our profit?
There is a longstanding belief throughout the business community that strategies that drive profits are independent from being socially or environmentally responsible. In other words, many business leaders believe there is an inherent trade-off; if you support a social or environmental cause, you are lowering your profit and essentially taxing your investors. It is time to debunk this myth.
If done effectively, social and environmental efforts are not necessarily taxes on businesses, but profit-building strategies that create win-win situations. In a 2011 Harvard Business Review article, "Creating Shared Value," Michael E. Porter and Mark R. Kramer discuss three ways that businesses may do this effectively:
"1. By reconceiving products and markets; 2. By redefining productivity in the value chain; 3. By enabling local cluster development." The ultimate goal is to create shared value; business leaders can increase profits while maximizing social impact.
On Porter and Kramer's first point, businesses can grow demand, as well as profits, by recognizing and developing solutions to pressing social issues. For example, companies such as Alphabet and Facebook are working to provide internet access to refugee camps and remote regions worldwide. Naturally, this solves an important social issue by helping individuals gain access to information and methods of communication that they otherwise would not have. In the long-term, these efforts likely will increase revenue for the companies by reconceiving and expanding their markets.
Second, businesses can increase efficiency and lower costs by redefining productivity in operations. For example, hotels around the world are installing key-card systems that only allow for the lights and temperature controls to be active when guests are in the room. These efforts have reduced hotels' carbon footprints while simultaneously lowering their operating costs - a win-win.
Finally, industry cluster development occurs by improving the local infrastructure, empowering partners and supporting institutions. As the local cluster becomes stronger, the potential to create economic value increases. For example, IKEA has a large network of global suppliers. They set high social and environmental standards for these suppliers and commit to training, supporting and auditing them. IKEA understands that there are natural efficiencies and quality enhancements associated with maintaining long-tenured, successful and reliable business partners. When suppliers treat employees well and provide sustainable inputs, it reflects positively on the IKEA brand and helps to increase productivity.
The reality is that businesses of all sizes are being held to higher standards. They are expected to be profitable while also being responsible to their consumers, employees, the environment and the wider global community.
These action steps provide guidance on how business leaders can create shared value, or bridge the gap between social responsibility and profitability.
- Choose strategic initiatives. Select causes or initiatives that closely align with your strategy, culture and mission. Instead of defaulting to giving a percentage of profits to a well-known charity that is tangential to your industry, take time to think about what will create a win-win. Your goal should be to invest in new partnerships, products or processes that can grow your market share or increase your productivity, while at the same time alleviating a social issue or increasing your sustainability. To identify the most strategic initiatives, it helps to have discussions with individuals from key stakeholder groups (e.g., employees, customers, suppliers).
- Start small, and think long-term. Every business can make minor changes to their business processes. For example, you can start by investing in LED lights, reducing your packaging and giving employees flextime once a week. See how these changes pay off, make adjustments, and then consider more major modifications. Whether investing in small or large ways, it is important to take a long-term perspective. For example, although investing in energy-efficient office space or employee wellness programs may cost more up front, reducing your energy consumption and lowering employee absenteeism will yield a positive return over time.
- Come up with a plan and report your progress. John Elkington coined the term "triple bottom line," which is a holistic approach to assessing the value created by businesses. It goes beyond evaluating financials and also takes into account social and environmental performance. In each of these areas, start by outlining what is important to you, where you are now and what your goals are in the short- and long-term. The Global Reporting Initiative and the UN Global Compact offer a range of principles and measures you can implement when tracking your triple bottom line performance. Analyze and report your goals and progress annually. Not only will this help to keep you on track, but if your business is doing good things, why not tell your stakeholders about it? Consumers, employees and investors increasingly value businesses that go beyond their economic responsibilities.
Kaitlyn DeGhetto, Ph.D., is an assistant professor of management in the College of Business at UCCS. She is also an executive education instructor through the College's Office of Professional & Executive Development (OPED). Prior to her academic career, Dr. DeGhetto worked in both the health care and wholesale/distribution industries. She is the author of research articles on business strategy, public policy and entrepreneurship. Contact: OPED@uccs.edu.