Skip to main content

11. Shifting Ethics, Rising Bars

Published onApr 08, 2020
11. Shifting Ethics, Rising Bars

A single indelible image, such as that of a very young Pakistani boy sewing a Nike soccer ball for reportedly six cents an hour,1 can change public sentiment overnight. The 1996 image on the cover of Life magazine led to a “Boycott Nike” campaign, and the company lost more than half its market capitalization in the ensuing year. It took the company six years of demonstrated corporate social responsibility efforts to regain the lost value. Nor is Nike’s case unique. For example, when insurance company Aon introduced its company’s reputational risk coverage, CEO, Greg Case, said, “Eighty percent of Aon’s business clients will suffer an event that will cause them to lose more than twenty percent of their value every five years.”2

Warren Buffett said, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”3 Much of the value of modern multinational companies is tied to their brands. In 2002, BusinessWeek estimated that more than 50 percent of the market capitalization of companies such as Coca Cola, Disney, and McDonald’s is contributed by their brand, leading to multi-billion-dollar estimates of the brand value.4 Many of these companies believe internally that the figure is much higher.

A company’s reputation can affect consumer demand, the supply of job applicants, and investor sentiment.5 Reputational risks can also create direct financial risks. A spate of suicides at Foxconn forced the company to raise wages, which led to the stock losing half its value.6 And, in April 2010, Goldman Sachs lost 12.6 percent of its market value when the Securities and Exchange Commission (SEC) announced a fraud investigation that month. (The investigation was dropped in 2012 when the SEC concluded that “there is no viable basis” for the prosecution7—but the reputational damage was done.)

In the wake of the BP Horizon drill rig disaster in April 2010—which was being managed by a BP contractor—BP lost $53 billion in market capitalization. Three years later, the stock was still 30 percent lower than its value on April 2010, just before the disaster, even though its profit margins were higher, demonstrating that it still suffered from brand degradation.

Many potential reputational risks lurk in global supply chains. These risks include labor and sourcing practices of suppliers, the natural resources footprint of the supply chain (energy, carbon, water, mineral, emissions, etc.), and the perceptions of product safety that are often due to product ingredients used by suppliers, as well as suppliers’ material sourcing and manufacturing methods. More often than not, NGOs and the media will attack Western brand owners, especially those that sell to consumers, owing to their greater vulnerability to corporate social responsibility (CSR) charges—even if they have no knowledge or direct control over deep-tier suppliers. Consequently, beyond ensuring their own CSR practices, many companies spend significant effort to enforce a code of conduct on their suppliers.

Of Sweatshops and Death Traps

On April 24, 2013, horrific images saturated news outlets as over 1,100 bodies were pulled from the collapsed eight-story Rana Plaza garment factory in Bangladesh.8 Muhammad Yunus, the Bangladeshi Nobel laureate, wrote that the disaster was “a symbol of our failure as a nation.”9 Rana Plaza wasn’t an isolated incident. Six months before the Rana Plaza disaster, a fire at a different Bangladeshi garment factory, Tazreen Fashions, killed 112.10 Events in Bangladesh put a tragic human face on repugnant conditions deep within some companies’ global supply chains.

Paralleling the gruesome search for bodies under the rubble of Rana Plaza was the search for the Western companies behind the orders for the garments made in the collapsed factory. Most companies denied using the suppliers who were operating in the structurally unsound building where employees were forced to work despite large cracks appearing in the walls on the previous day. Ultimately, name-brand companies such as Benetton, Mango, BonMarche, Primark, and The Children’s Place acknowledged their current or past use of the suppliers operating in the collapsed structure.11 Nor was worker safety the only social concern in Bangladesh. When Pope Francis learned that Bangladesh’s minimum wage was only $40 per month, he said, “This is called slave labor.”12

Many companies simply didn’t know which suppliers they were using, given the murky web of brokers, contractors, and subcontractors operating in countries like Bangladesh. For example, when the Tazreen Fashions factory burned, Walmart firmly believed it was not involved. More than a year prior to the fire, Walmart had banned Tazreen Fashions from its approved supplier list after auditors hired by Walmart inspected the factory and declared Tazreen to be “high risk.” But one of Walmart’s other authorized suppliers subcontracted with another authorized supplier and then that subcontractor shifted the work to Tazreen.13

Revelations of substandard working conditions can disrupt a company’s operations in at least three ways: consumer revulsion disrupts demand, worker unrest disrupts supply, and regulatory changes can affect costs. “Companies feel tremendous pressure now,” said Scott Nova, the executive director of the Worker Rights Consortium, a factory-monitoring group based in Washington, DC.14 And he added, “The apparel brands and retailers face a greater level of reputation risk of being associated with abusive and dangerous conditions in Bangladesh than ever before.”15 “Worker safety and worker welfare have now been brought into the forefront,” declared a top adviser to Bangladesh’s prime minister.16

Worker Safety

After years of unsafe automobile wheel hub polishing practices, a massive dust explosion killed 75 workers and injured another 185 at Kunshan Zhongrong Metal Production Company on August 2, 2014. Chinese officials blamed the chairman of the factory and local regulators for the severe safety lapses.17 Yet China Labor Watch, an NGO dedicated to workers’ causes, also blamed GM, because the car maker used car wheel maker Citic Dicastal Wheel Manufacturing Co., the world’s biggest aluminum alloy wheel hub producer, and Citic Dicastal used Zhongrong.

In response to the accident, GM president Dan Ammann offered his condolences but also said, “Our tier-one suppliers on a global basis are required to make sure that they are sourcing from suppliers that are implementing the right safety standards.”18 China Labor Watch took issue with GM’s efforts to distance itself from unsafe deep-tier suppliers, saying that GM “has a duty to ensure safe production in its supply chain, and it shares responsibility for this deadly explosion.”19

In addition to the criticism, the event created physical disruptions in GM’s supply chain. GM had to find alternative suppliers and incurred significant added expenses as a result of unconsolidated purchases from multiple alternative suppliers as well as expediting shipments to avoid disrupted production of cars. Deliveries were further threatened when Chinese authorities closed some 268 factories without warning as part of a crackdown on dust-related safety lapses.20

The challenge GM faced was familiar to many other companies—a failure by a small, deep-tier supplier in a distant developing country can tarnish the OEM’s global brand. To outward appearances, Citic Dicastal has been a good Tier 1 supplier to GM since 2003.21 Citic Dicastal had even won a supplier of the year award from GM in 2010.22 “Citic Dicastal’s own factories are clean and well-organized,” said a middleman who had done business with Citic Dicastal but who also noted, “their external suppliers are small businesses with awful working conditions.”23 Zhongrong had been inspected by the government, but Liu Fuwen, a worker at Zhongrong, said, “If government officials came to inspect the factory, management would ask the workers to clean the dust before they arrived.”24

Disney may be one of the most reputation-sensitive companies in the world, with a corporate unit devoted to brand management that is responsible for both brand development and its protection. Disney products and services are synonymous with happy families, the innocence of childhood, and wholesomeness. That image must extend to Disney’s supply chain as well. “Our goal is to have a supply chain that mirrors Disney’s own desire to operate as a responsible business,” said John Lund, Disney’s senior vice president, integrated supply chain management.25 “We must rely more heavily upon our licensees and vendors to help ensure working conditions that are consistent with Disney’s standards,” added Josh Silverman, executive vice president for global licensing for Disney Consumer Products.26

Nearly two months before the Rana Plaza collapse, Disney ordered an end of sourcing from Bangladesh and four other countries (Pakistan, Belarus, Ecuador, and Venezuela) based on audits and personal visits by senior executives. The company told the affected licensees that it would pursue “a responsible transition that mitigates the impact to affected workers and business.” It implemented a year-long transitional period to phase out production by March 31, 2014.27

Others may follow Disney’s departure from Bangladesh. If that happens on a large scale, it will severely damage the country’s social and economic fabric. Garment manufacturing employs 3.6 million workers in Bangladesh. The United Nations Research Institute for Social Development said that, for many women, “working in garments, for all its many problems, was a better way to make money than what one had done in the past.”28 Well-intentioned actions can have unintended consequences.

Blood in the Supply Chain

In April 2009, John Prendergast, a human rights activist who had worked for the Clinton White House, the State Department, and UNICEF prior to founding the Enough Project,29 sent a letter to leading electronics firms, including Intel, HP, Motorola, and AT&T.30 The letter warned these companies that four metals (gold, tantalum, tin, and tungsten) used in electronic products may have been mined under conditions of coercion and violence in the eastern region of the Democratic Republic of Congo (DRC). These minerals were conflict minerals, akin to blood diamonds. That is, militants and terrorists were forcing citizens through violence, rape, and other atrocities to mine the ore to help finance wars. The Enough Project sought to cut off indirect Western funding of the conflict by convincing companies not to buy conflict minerals. The reputational threat to the companies receiving the letter was clear.

Springing to Action At Intel, the letter first arrived on Gary Niekerk’s desk. Niekerk, Intel’s director of global citizenship, called an internal meeting with the VP of Intel’s Materials Group. The first question was, “Are we actually using these conflict minerals?”31 No one at Intel knew, because Intel itself didn’t buy these metals directly; the minerals are merely raw ingredients used in parts Intel bought from other companies.

Next, Intel asked its suppliers, such as suppliers of capacitors, about the sources of their metals. “About 30–40% of suppliers responded that they didn’t know,” Niekerk said. “A similar percentage said ‘we don’t do that’ but had no supporting evidence for that statement, and the rest didn’t respond at all.”32 The minerals entered Intel’s supply chain somewhere, many layers deep in the complex web of suppliers that ultimately leads to an Intel processor.

Niekerk saw that determining the provenance of the minerals would be difficult. The team presented its findings to Intel’s Chief Operating Officer. “He went ballistic,” Niekerk recalled, “saying this was unacceptable. He wanted to see a roadmap tracing the source for every metal.” What’s more, the COO put a stake in the ground. “I want to know by when we can say we are ‘conflict free,’” Niekerk said, quoting the COO.33 The team faced a daunting task, having to go many levels deep into its supply chain to identify the exact sources of these minerals.

Given the enormity of the task, the team decided to focus first on the roadmap for one metal, tantalum. The electronics industry consumes 60 percent of the world’s tantalum supplies, but only 36 percent of the world’s tin, and a mere 9 percent of the world’s gold. Intel mapped the flow of tantalum from mines to smelters to customs agencies to supplier to supplier to supplier, downstream in the chain and finally to Intel. The mapping effort helped the company see that the relatively small number of smelters could be the logical focal point for controlling the source of ore. Smelters are also the last stage in the supply chain where the source of the ore could be identified. “Once it’s turned into a bar of something, you can’t trace the source,” Niekerk said. “But as an ore, you can trace it. So we focused on smelters.”34

Identifying smelters of tantalum was one thing, but getting their cooperation in identifying their ore supply sources and then convincing them not to purchase conflict minerals was another. The logical strategy for controlling conflict minerals was to create a pool of certified smelters who ensured the provenance of the ores they bought. Two issues made this difficult. First, it required certifying smelters around the world, including those outside the conflict-affected region. Second, these smelters sat six or seven layers deep in Intel’s supply chain, which is far outside the usual span of business relationships and the normal influences that buyers have on their suppliers. Why would a Brazilian tantalum smelter care about Congolese ore or about an American chip-maker that’s not the smelter’s customer?

Between a Rock and Hard Place Worse, there were early unintended consequences in trying to block conflict minerals. Some smelters’ initial response was to simply cease buying all minerals from Congo, but such a broad-brush approach was neither ethical nor effective. “We got letters from the Congo and NGOs saying that there are 100,000 artisan miners in the Congo trying to earn money to eat,” Niekerk said, pointing out that not all of the miners work for the militants.35 In the DRC in particular, mining is one of the two primary sources of income available (farming being the other.) “Putting a de facto ban on materials out of the Congo means that good people might starve,” said Niekerk. Damaging the legitimate economy of the country would only fuel further unrest.

So the problem became much more complicated. “I went back to the NGO, saying we’re doing what we can, but is it better or worse?” Niekerk said. With atrocities on one hand and starvation on the other, “doing the right thing” became much harder.

To be even more precise about the origin of the ore, Intel mapped over 90 percent of its microprocessor supply chain, identifying 130 unique smelters. Intel employees toured mines with NGOs and followed the journey of the minerals. As of May 2012, Intel employees had conducted more than 50 on-the-ground smelter reviews, visiting 13 countries in person to gain a firsthand understanding of the issues. These reviews helped Intel understand the unique operating characteristics of each smelter and determine the current gaps in their abilities to trace the source of ore from specific mines and countries. For example, some smelters had documentation indicating the country from which a mineral was shipped, but not documentation on the actual country from which the ore was originally mined. This is a critical issue because metals (especially gold) can be smuggled into other countries. “Just because it shipped from Rwanda doesn’t mean it didn’t originate in the Congo,” Niekerk said.

To motivate smelter cooperation with the certification program, Intel realized it would need to work with other companies in the electronics industry. As large as Intel might be, it represents a minuscule fraction of the demand of conflict minerals, especially tin, tungsten, and gold. As such, Intel, by itself, couldn’t drive change. To create a critical mass of material buyers, Intel helped found the Electronic Industry Citizenship Coalition (EICC). As of May 2015, the EICC consisted of some 102 member companies, including chip-making equipment suppliers, chip-makers, contract manufacturers, and electronics OEMs.36 EICC works to promote social, ethical, and environmental responsibility in the electronics supply chain.

Creating the EICC had additional benefits, such as avoiding problems that the apparel industry had faced with its suppliers in developing nations. “What happened in the apparel industry was that Nike was doing one thing, another company was doing something else—suppliers had many different [social responsibility] codes they had to meet. So we in the electronics industry came together through EICC to develop one code,” Niekerk said.

As part of an effort to help artisan miners in the DRC, Intel worked with the US Department of State and the US Agency for International Development to establish and fund the Public-Private Alliance (PPA) for Responsible Minerals Trade. This PPA has three objectives, as outlined in an Intel internal May 2012 white paper titled Intel’s Efforts to Achieve “Conflict-Free” Supply Chain:37

• to assist with the development of pilot supply chain systems that will allow businesses to source minerals from mines that have been audited and certified to be “conflict-free”

• to provide a platform for coordination among government, industry, and civil society actors seeking to support conflict-free sourcing from the DRC

• to establish a website designed to serve as a resource for companies seeking information regarding how to responsibly source minerals from the DRC.

Intel also learned that smelters were reluctant to participate in the smelter certification program (abbreviated CFS, for conflict-free smelter) owing to its costs. To address that issue, Intel worked to simplify and standardize the process to reduce the smelters’ costs of participation. It also established a modest fund ($150,000) to help defray validation costs and bring more smelters into the program. When a smelter successfully completes the CFS audit, the fund reimburses the smelter for half of the initial audit costs, up to $5,000. Intel partnered with HP and GE Foundation to engage RESOLVE, a Washington, DC-based independent NGO, to implement and manage this fund.

The advantage of focusing on smelters as the linchpin in stopping conflict minerals is that if the smelters do their jobs, then the downstream users of the minerals don’t need to change anything as long as they use a certified smelter. The aforementioned Intel white paper set a 2013 goal to eliminate conflict-sourced tantalum in all its microprocessors. Next, Intel tackled gold, tin, and tungsten. These conflict minerals involve even broader coalitions. For gold, for example, Intel started talking with multinational gold mining and refining companies, large and small jewelry manufacturers, and retail chains, as well as the World Gold Council, bullion exchange markets, and the Chinese government. Intel is working on these issues proactively, to fix problems before they become a brand or PR issue. In January 2014, Intel announced that its entire 2014 line of microprocessors would be free of all four conflict minerals.38

Rising Awareness Leads to Regulation At the time Intel began its efforts to understand and cut down on conflict mineral use, the US government had also begun considering the issue. In August 2012, the US Securities and Exchange Commission implemented rules outlined in the 2010 Wall Street Reform and Consumer Protection Act (aka Dodd–Frank) to require public companies to disclose whether they use conflict minerals.39 The issue became a matter of regulatory compliance, rather than CSR. Public companies began tracking conflict mineral compliance and surveying suppliers to get conflict-free certified sources of these metals. The regulations also spurred numerous third-party software, service, and consulting firms to offer products and services.

Ethical Manufacturing and Sourcing

Marks & Spencer’s “Ethical Model Factories” program used three training activities to improve workers’ lives, pay, and productivity. Marks & Spencer focused on productivity because that is what enables the retailer to pay higher wages and address corporate social responsibility issues without losing competitiveness. In less than six months, M&S trained over 6,000 Bangladeshi workers on employee rights. The company also trained 130 supervisors and middle managers on HR policies and procedures, industrial relations, and behavioral skills. The company is replicating this training across other factories in Bangladesh, India, and Sri Lanka.40 As with the conflict minerals issue, apparel companies face a trade-off between using suppliers with unacceptable working conditions versus leaving the region, thereby creating severe job losses. In the conflict minerals case, the solution was an effort to identify the offending mines, so that smelters could keep socially responsible mines in business. For apparel companies, the solution was training workers and managers, as well as working with local governments to improve working conditions, safety, and pay.

Although Disney left Bangladesh and four other countries, it continued production in Haiti and Cambodia, but only in factories cooperating with the Better Work program.41 This program, created by a partnership of two NGOs, works with government officials, factory owners, and labor groups to ensure safe and decent workplace conditions. “Disney has sent a strong message to the excluded countries that if they’re willing to take responsibility for labor standards, Disney will take another look at them in the future,” said Dan Rees, director of Better Work.42 Other companies, including Cadbury, Office Depot, Mars, and PepsiCo, are working with Europe-based Supplier Ethical Data Exchange (Sedex)43 to create consistent labor standards and efficiencies throughout global production sites.

The “fair trade” movement arose from concerns that smallholder farmers don’t receive a fair price for their goods, which led to the development of a fair trade label and certification.44 Fair trade covers 16 product categories, such as bananas, coffee, cocoa, cotton, fresh fruit, spices, tea, and wine, as well as sports balls and gold.45 Fair trade goes beyond factory workers to include self-employed producers, such as farmers and crafts-workers. The certification has been shown to improve retail sales among well-to-do consumers.46 Most studies demonstrate that the majority of consumers, however, are not willing to pay more for products manufactured in socially responsible conditions, but CSR failures can be punished in the market place.

Benefits to the Brand and Bottom Line

As of 2015, the main benefit of these ethical working conditions programs is brand protection. These efforts ensure that companies are “doing the right things” and therefore are not likely to be targets of NGO attacks or negative media coverage. In addition, companies have claimed to gain other tangible benefits from their efforts—mainly in employee relationships and pride. Marks & Spencer, for example, reported an 85 percent reduction in absenteeism in its suppliers’ factories and a 65 percent reduction in factory staff turnover six months after implementing its Ethical Model Factories program. When Coca-Cola worked with its bottlers, co-packers, and suppliers on its Workplace Rights Policy (WRP), it found that 86 percent of sites reduced overtime, 36 percent improved quality, and 18 percent had lower staff turnover.47 “A company that cheats on overtime and on the age of its labor, that dumps its scraps and its chemicals in our rivers, that does not pay its taxes or honor its contracts, will ultimately cheat on the quality of its products,” declared Walmart’s then-CEO, Lee Scott, in 2008 to suppliers in Beijing.48

Trampled by Footprints: Sustainable Supply

Companies face CSR risks that are due to their own environmental footprints as well as to those of their suppliers and service providers. Even when the problem is with a supplier buried in the deepest tiers of the supply chain, the brand owner is the one vulnerable to reputational and brand diminution. Concerns about carbon footprint (greenhouse gases), water stress, and the stripping of natural resources ranging from fish to trees present both reputational risks and operational risks of supply disruptions.

The Tide Against Carbon Dioxide

The burning of fossil fuels for transportation, power, and heat is a source of greenhouse gas emissions, which is thought to be the main contributor to global climate change. Reducing energy consumption has been the focus of many companies’ CSR activities because such eco-efficiency initiatives also lead to cost reductions. These CSR actions are considered to be “low hanging fruit” for companies to act upon because they reduce environmental impacts while cutting costs.

Some energy-saving innovations require minimal upfront investment. UPS’s routing software, for example, shaved 20.4 million miles from its routes in 2010 while delivering 350,000 more packages than the previous year. It also reduced annual CO2 emissions by 20,000 metric tons.49 Office supply retailer Staples implemented speed limiters on its delivery vehicles, restricting their top speed to 60 mph. The fuel savings paid for itself in only 1.5 days and saves $3 million annually.50 It cost the company only $7 to reprogram each truck, and the time lost to lower speeds was offset by the time gained from fewer fuel stops.51

Brand protection and environmental sustainability issues drove Coca-Cola to develop bottles that include 30 percent plant-derived resins and recycled plastic rather than being 100 percent oil-based.52 The same considerations also drove detergent manufacturers Procter & Gamble and Unilever to develop concentrated detergent formulas that use smaller containers, thereby saving on material and energy involved in packaging, transportation, handling, and storage.53

To focus their efforts and create accountability, companies set targets and metrics for carbon footprint reductions. Staples, for example, committed to a 50 percent reduction in total carbon footprint from its 2010 levels by 202054 through efforts in transportation, buildings management, energy sourcing, and product sourcing.

Water, Water Everywhere, but Not a Drop to Drink

“Water is to Coca-Cola as clean energy is to BP.… We need to manage this issue or it will manage us,” said Jeff Seabright, vice president of environmental and water resources, Coca-Cola Corporation.55 Protests at Coca-Cola’s 2007 shareholder’s meeting—regarding bottlers’ depleting and polluting of drinking water resources—persuaded several colleges and universities in the United States not to renew contracts to buy Coke.56 According to the World Economic Forum’s Council on Water Security, nearly 800 million people lack access to safe drinking water, and 1.7 million people die every year as a result of unsafe water.57 These economic, social, and environmental problems lead to intense environmental scrutiny of companies that use water in products or for industrial processes.

The paradox of water is that it is priceless in both senses of the term: being essential to life and yet often considered an unpriced resource in that users can legally pump or divert unlimited amounts of water from lakes, rivers, and aquifers. The Coca-Cola Company and other soft drink makers faced accusations and lawsuits in India over perceived monopolization of this life-giving resource. “While we are not even close to being one of the largest users of water, we are certainly one of the most visible, and have been subject to criticism that we are depleting groundwater aquifers in the State of Kerala,” said Coca-Cola’s chief executive officer E. Neville Isdell in a May 2007 address to the Nature Conservancy.58

Water is unlike many other commodities because of the subtle difference between consumption and use. Whereas most commodities are consumed and thus, by and large, removed from sources of supply, many applications for water only “borrow” the material. Applications such as washing and sanitation merely borrow water for a time and then return it for treatment and reuse. AB InBev said this crucial difference can create perceived problems for companies that seem to be heavy water consumers but are only using and then recycling large amounts of water, thereby having little real impact on the total water supply.59 In announcing Coca-Cola’s worldwide initiative to conserve water resources, CEO Isdell said, “Essentially the pledge is to return every drop we use back to nature.”60 The company plans to be water-neutral by 2020.61

Growing populations, urbanization, and climate change threaten water supplies even more. Water-related issues are likely to change companies’ decisions on manufacturing locations and supply chain networks. “If the communities around ... our bottling plants do not flourish and are not sustainable, our business will not be sustainable in the future,” said Coca-Cola’s CEO.62

Sustainable Harvest: “No Fish, No Fishsticks”

A significant risk is that unsustainable practices will lead to a collapse of ecological and economic systems. “If there aren’t fundamental changes in agriculture and fishing, then we won’t have a business worth being in within one to two decades,” said Antony Brugmans, former chairman of Unilever. “No fish, no fishsticks,” he said.63

Clear-cutting forests is another example of short-term overharvesting of a resource that is not renewable unless performed with special care and renewable methods. When Dogwood Alliance and ForestEthics, two NGOs, wanted to promote sustainable forestry, they looked at the forestry products supply chain and chose the target for their protests carefully. They didn’t go after the harvesters who cut down the trees. They didn’t go after the various makers of forestry products, such as lumber companies or paper makers. These upstream companies lie hidden to most consumers.

Instead, the NGOs targeted Staples, a $25 billion retailer of office products. The NGOs called Staples the “Tree Cutter Team” and created a “Stop Staples” campaign.64 Although Staples didn’t control harvesting practices directly, the NGOs wanted Staples to use its buying power to influence suppliers’ practices. Staples provided a highly visible leverage point for the NGOs. Although Staples and its suppliers adhered to every official law, the law wasn’t good enough for activists. In response, Staples decided to buy products only from NGO-approved suppliers, such as those certified by the Forest Stewardship Council.

Similarly, IKEA works to ensure that its 1,600 suppliers in 55 countries only use wood from legally harvested sources and not from protected forests. One of the main foci of IKEA’s code of conduct, known as IWAY, includes sustainable forestry practices, in addition to quality, safety, and social standards that are a prerequisite for being a supplier to IKEA.65

Recycling: From Rubbish to Resource

Reusing, recovering, and recycling of materials offers obvious strategies for reducing environmental impacts. Interface Inc., which designs, manufactures, and sells carpets, redesigned both its carpet and its carpet supply chain so that it could create “the industry’s first completely closed loop carpet recycling system.”66 The company designed its carpets to be made of interchangeable square tiles with randomized patterns, so the tiles could be installed in any orientation and so an old carpet could be refreshed simply by replacing a few worn squares. In addition, the carpets are made from recycled material and are designed to be easily recyclable. To that end, the company changed its business model from selling the carpets outright to a lease plus maintenance contract model that includes replacing and recycling worn carpet squares.67 Each square of recovered Interface carpet is taken to a specialized facility where it is recycled into new carpet squares. Old carpet fibers become new carpet fibers. Old carpet backing becomes new carpet backing.68

As another example, Staples provides convenient recycling drop-off bins for toner and ink cartridges in its stores, resulting in a 73 percent rate of recycling. Overall, the United States recycles about 60 percent of office paper, yet Japan recycles 80 percent.69 As mentioned in chapter 10, recycling can also create an alternative source of supply, thereby mitigating scarcity and price risks.

Closing the loop in the supply chain to enable more recycled materials in consumer products involves improving the fraction of municipal waste streams that are recycled. A consortium of nine companies including Walmart, P&G, and Goldman Sachs created the Closed Loop Fund. The Fund offers zero-interest rate loans to municipalities and private entities to develop more recycling infrastructure and services. These loans would help waste stream collectors and processors to reduce landfill fees and add revenues from the sale of recycled raw materials. At the same time, the resultant increased supply of recycled raw material would enable companies to offer more products with more recycled content.70

Material Benefits: Lower Footprint = Lower Costs

P&G’s redesign of liquid laundry detergent to a 2X concentrated formula reduced packaging by 22 to 43 percent, which amounted to a savings of 70 million pounds of plastics and corrugate. The smaller bottles also saved the company 60,000 truckloads and 5 million gallons of diesel fuel per year.71 Marks & Spencer, for its part, has improved energy efficiency (25%), and cut waste (34%) through a comprehensive portfolio of sustainability activities that they call Plan A72 “because there is no Plan B for the one planet we have.”73

Eliminating non-value-adding activities not only improves manufacturing but also reduces resource consumption, carbon footprint, and waste-stream emissions. CNH Global NV, Fiat’s agricultural and construction equipment subsidiary, described a massive effort at the company to create world-class manufacturing. The effort helped everyone across the Fiat Group. It brought standardized processes to chaotic craft-driven Italian manufacturing plants and brought efficient automobile manufacturing processes to CNH’s agricultural and construction equipment manufacturing lines. Along the way, the company eliminated the equivalent of 10 warehouses of inventory, minimized material handling, and reduced trucking—all with strong environmental sustainability benefits as well as cost reductions.74

(Mis)Perceived Risks of Products

More and more companies are facing social concerns and activism over the potential safety of legally saleable products. This issue goes beyond the long-running campaigns against products like tobacco, alcohol, and firearms. Many are products like fast food, snacks, or soft drinks that can be safely enjoyed in moderation but are too often overconsumed. Others are foods containing potentially controversial ingredients such as genetically modified organisms, trans fats, or artificial colors. Some include products that use very small, legal amounts of known toxins, such as mercury in light bulbs and batteries. Another set of concerns revolves around how the raw materials are produced, such as (the above-mentioned) conflict minerals, dolphin-safe tuna, or cruelty-free cosmetics. A PwC survey of consumer and retail supply chain executives found that product safety topped their list of concerns about supply chain integrity.75

Reducing Waists: The War on Obesity

When independent film-maker Morgan Spurlock wanted to tackle the issue of obesity, he picked McDonald’s as the villain in his award-winning 2004 movie, Super-Size Me.76 The company has been a lightning rod for nutrition activists and consumer watchdogs. It did not help that in December 2013 it was revealed that McDonald’s own employee website labeled McDonald’s food as unhealthy.77 Groups such as Corporate Accountability International have long-running campaigns attacking the Ronald McDonald clown mascot, restaurant playgrounds, and Happy Meals as predatory marketing to children.78,79 The Center for Science in the Public Interest (CSPI) sued McDonald’s over toys in Happy Meals, saying, “In time, the practice of using toys to market junk food will seem as inappropriate and anachronistic as lead paint, child labor, and asbestos.”80 McDonald’s also faced a multiyear class-action lawsuit alleging the company made people fat.

Over the years, McDonald’s has improved both its menu and consumer education. The company reduced the portion of fries in the Happy Meal and added sliced apples to trim the number of calories by 20 percent. McDonald’s also added fat-free chocolate milk and low-fat 1 percent milk in September 2011.81 In addition, it is working to reduce sodium by 15 percent by 2015. “We’re proud of the changes we’ve made to our menu,” said retiring chief executive Jim Skinner. “We’ve done more than anybody in the industry around fruits and vegetables and variety and choice.”82 The company also began posting calorie counts on all its menus, saying, “We recognize customers want to know more about the nutrition content of the food and beverages they order.”83

To prove that McDonald’s food is not intrinsically fattening, a science teacher in Iowa ran a test. He repeated Spurlock’s approach and ate only food from McDonalds for 90 days. The only difference was that he had his students design a balanced meal plan with 2,000 calories per day and recommended allowances for protein, carbohydrates, cholesterol, and several other nutritional guidelines. The result: his cholesterol dropped and he slimmed down by 37 pounds. His mission was to show students that it’s how you eat—not what or where you eat—that matters most.84

These steps toward a healthier menu85 face a gulf between consumer preferences and nutritionist recommendations. Only 11 percent of parents chose apples over French fries for their kid’s Happy Meals in a study by Yale University’s Rudd Center for Food Policy and Obesity.86 And when McDonald’s experimented with eliminating French fries from Happy Meals, parents complained. “That’s what we’ve really felt all along, that ultimately, it’s a parent decision to make about their child’s well-being,” said Danya Proud, a spokeswoman for the company.87

Similarly, prominent sellers of soft drinks have attracted negative attention in the wake of rising rates of obesity and diabetes. Added to the negative publicity about sugary drinks was a controversy over whether high-fructose corn syrup—often used in drinks—created higher risks of metabolic disorders than other types of sugar.88 As with many health and social issues, the attention also spurs politicians and activists to shift the line of regulation with new prohibitions or taxes, such as New York City’s proposed ban on large cups and bottles of sugary drinks89 or a penny-an-ounce tax on soda.90

Fear of the Unknown

Whereas many examples of attacks on companies’ behaviors involve incontrovertible cases of waste, environmental damage, or risk to human life, some may be driven more by fears rather than evidence. That’s especially true of GMOs (genetically modified organisms), also known as “frankenfoods” by their detractors. GMOs include crops such as nutritious varieties of rice,91 corn that reduces the need for pesticides,92 herbicide-resistant soybeans that enable farmers to reduce productivity losses from aggressive weeds,93 and drought-resistant corn.94 These GMOs are beneficial to farmers and consumers because they are designed to “resist insecticides and herbicides, add nutritional benefits, and improve crop yields to increase the global food supply.”95 Americans have been consuming genetically modified food for decades, yet despite lack of any scientific proof, many consumers, NGOs, and governments claim that GMO foods have unknown negative effects on public health and the environment.

GMO foods have the added potential to reduce world hunger by increasing yields and crop resilience to variable weather conditions.96 In fact, the Chinese government has been pushing genetically modified food in an effort to increase food resources in that country.97 Yet many countries, especially in Europe, ban them entirely. US researchers argue that the GMO ban represents one of the biggest science communications failures in history, allowing what is essentially an unfounded conspiracy theory to spread worldwide,98 leading to dire consequences for both food security and environmental sustainability. Companies like Monsanto have to navigate not only the various regulatory regimes around the world but also the array of rumors, political agendas, and cultural biases in every country where they conduct business.

Traceability and Trace Ingredients

Many other risks associated with social and health trends have motivated companies to tighten control of their supply chains and demand better transparency from ingredient suppliers. The 50 percent rise in the percentage of children with food allergies between 1997 and 2011 motivated heightened concern about ingredients.99 It also spurred a change in food labeling laws in 2004 to include explicit listings of allergens.100 The labeling laws forced companies to document not only allergens in all the primary ingredients (e.g., diary in milk chocolate) but also all the potential trace ingredients introduced in facilities that make multiple products (e.g., a milk chocolate bar made in a facility that also makes candy with peanuts). The ability to document trace ingredients and factory handling practices can have a beneficial side—companies can use it to serve niche diet markets such as vegan, kosher, and halal foods.

Managing CSR Risks

Environmental and sustainability problems can endanger a company’s “social license to operate”—that is, the ongoing approval and support of the local community, stakeholders, and customers—if the company is seen utilizing unfavorable practices. Avoiding CSR pitfalls may be particularly tricky as a result of the capricious nature of the “court of public opinion” and the nature of CSR.

The Moving Line of Risks

In an ideal world, companies and people would know exactly what is expected of them. Most laws define a so-called bright line between legality and illegality, making the requirements relatively clear. Each government sets minimum legal standards for a multitude of supply-chain-related practices such as product safety, natural resource usage, labor conditions, minimum wages, factory emissions, and waste disposal.

The sensibilities of civil society, however, ride on the more capricious winds of public opinion. Changing public sentiment, social activists, and gotcha-journalists can strike without warning, magnified by viral social media, and following no legislative calendar or judicial due processes. The court of public opinion is far less predictable than the court of law. Over time, various issues such as child labor, pollution, fair trade, emissions, and forestry practices can quickly surface into the public’s awareness; raise the bar of tacit expectations, and damage companies who are found retroactively guilty of not living up to citizens’ moving line of sensibilities.

Nike became a case study in worker mistreatment despite having invested in local factories in Pakistan, bringing much-needed jobs to a region that did not have many, and paying prevailing wages. Yet, it offended the sensibilities of Western consumers.

And the line never stops shifting. “After many of the world’s leading electronics companies rose to the challenge of phasing out their worst hazardous substances, we are now challenging them to improve their sourcing of minerals and better managing the energy used throughout the supply chain,” said Greenpeace campaigner Tom Dowall.101 Furthermore, a company’s own capabilities and CSR activities create a moving line of expectations, too. Walmart’s highly acclaimed post-Katrina response set the expectation that Walmart will mount the same or better response in future natural disasters. Similarly, Coca-Cola faces pressures from African AIDS/HIV groups to help distribute AIDS/HIV medications owing to the efficiency of Coke’s soda distribution operations throughout the continent.

The Nature of the Beast

From the standpoint of procurement and supply chains, CSR attributes may be among the hardest to measure. Consumers make purchasing decisions based on four categories of attributes in a product.102 The first category is search attributes—obvious tangible properties like size, color, leather seats, and price—which consumers can search for and personally evaluate without ever buying or using the product. The second category is experience attributes that can only be judged by the consumer after buying the product—qualities like seat comfort, ease-of-use, and friendly after-sale support. The third category of attributes is intrinsic credence attributes,103 which are inherent to the final product but which cannot be readily evaluated by the average consumer, even after buying and using a product. Intrinsic credence attributes include the chemical content of the paint on a toy or the nutrition content of a food item; evaluating them requires specialized equipment and capabilities not widely available. The fourth category is hidden credence attributes arising from the history or provenance of the product but which are not inherent or detectable in the final product. These include many important CSR-related attributes such as carbon footprint, fair trade, suppliers’ environmental records, child labor, animal cruelty, and sustainable agriculture. Consumers have little ability to evaluate such attributes because they are not part of the products.

The problem of verifying hidden credence attributes is not only faced by consumers; companies grapple with it as well. Such attributes are difficult to measure because the underlying processes often take place outside the boundaries of the company and no test on inbound or outbound material can detect them. In many cases, it is NGOs, social activists, or investigative journalists who trace the output of a sweatshop forward to a major brand owner. The reason is that these groups are on the ground in developing countries, are trusted by many local groups, and can get the data and evidence more readily than the brand owner who has to trace inbound materials back to all the many suppliers that might be involved.

Uncovering the processes behind a product can be a Herculean task, as Intel’s search for conflict minerals described above shows. In fact, the use of SigNature DNA described in chapter 7 is an example of the defense industry turning a hidden credence attribute (supplier authenticity) into an intrinsic attribute (DNA code). Similarly, carbon labels or fair trade labels on products turn hidden credence attributes into search attributes for consumers.

Managing risks linked to hidden credence CSR attributes implies controlling the behavior of suppliers, suppliers’ suppliers, and deeper tier suppliers. Companies impose codes-of-conduct on their supply chain and use certification processes to ensure the integrity of their suppliers. Auditing and field-visits ensure that suppliers have adhered to the code of conduct.

Partnering with the Canary in the Coal Mine

In a major initiative launched in July 2011, Greenpeace targeted leading apparel brands over issues of water pollution with its “Detox” campaign. For example, in targeting retailer H&M, Greenpeace protestors in 12 countries spent a week plastering huge “Detox our future!” and “Detox our water!” stickers on the chain’s shop windows. They also targeted H&M on social media channels such as Twitter and Facebook. As a result, H&M agreed to eliminate toxins and publicize information about chemicals being released from its suppliers’ factories.104

Greenpeace and other NGOs play several roles in CSR risks. They are often the primary agitators for social and environmental change. They police the actions of companies or their suppliers and attack perceived transgressors with bad press, boycotts, and protests. They are also on the ground in many developing countries and are the first to detect CSR problems. As a result, some companies seek to partner with NGOs who can provide local insights, advice on sustainability priorities, and possible solutions based on what other companies are doing. Such partnerships also provide a level of authenticity to the company’s efforts, helping it deflect criticisms. Some NGOs, such as the Forest Stewardship Council, also oversee certifications that can affect a company’s products or supply chain activities (e.g., packaging).

In 1999, Unilever, which has long been committed to CSR, sought out Oxfam International and created a strategic partnership to research Third World poverty in Unilever’s supply chain.105 Oxfam is known for its attacks on multinational corporations, and Unilever is a €40 billion multinational giant in the food and consumer goods industry. The collaborative efforts focused on Unilever’s supply chain in specific countries.106 For example, a joint study released in January 2013 regarding Unilever’s workers in Vietnam highlighted both Unilever’s commitment to workers’ rights and its failings in guarding those rights. It gave the company a roadmap for improving the situation. Both the frankness of the report and the roadmap have probably averted an NGO attack and have given Unilever time to improve the situation.

In some cases, companies and NGOs form joint organizations. For example, Carbon Canopy is a group comprising both companies (including Staples, Home Depot, Domtar, and Columbia Forest Products) and NGOs (including Dogwood Alliance, Rainforest Alliance, Environmental Defense Fund, and the Forest Stewardship Council) that is working to improve forestry practices among the large numbers of small landowners in the southern United States, thereby helping the corporate participants with their environmental sustainability efforts.107

Changing Metrics for a Changing Climate

Rising awareness of climate change is motivating some companies, who are committed to cutting their carbon footprint, to use environmental impact metrics. Walmart is measuring and managing its greenhouse gas (GHG) emissions with a goal of cutting 20 million metric tons of emissions from its global supply chain by the end of 2015.108 To achieve environmental goals, companies use an array of environmental KPIs (key performance indicators), including fleet fuel efficiency, percentage of recycled materials, and water use. For example, AB InBev and Coca-Cola measure water use efficiency—the liters of water needed to make a liter of beer109 or soda,110 respectively. Effective KPIs are defined at multiple levels, such that at each level a set of metrics corresponds to what management at that level can influence. Each level can then be aggregated upward, leading to the metrics that reflect the organizations’ goals.

Baxter Inc., the medical products and medicines giant, began measuring greenhouse gas emissions in 1997. Baxter assigned its GHG emissions to the scope 1, scope 2, and scope 3 designations defined by the Greenhouse Gas Protocol,111 which is the most widely used international accounting tool for measuring emissions.112 In this framework, scope 1 emissions come from the organization’s directly owned and controlled internal operations; scope 2 comes from indirect emissions caused by purchasing electricity, energy, and heat for internal operations; and scope 3 are all indirect emissions caused by suppliers, service providers, and the use of products sold.

Baxter divided the total emissions into three categories of sources: upstream (scope 3), Baxter internal (scopes 1 and 2), and downstream activities (scope 3). In turn, each of the three categories included between two and eight subcategories that could be separately measured and managed. For example, the upstream category included everything Baxter buys from suppliers. This category had eight subcategories: purchased goods and services, capital goods, fuel and energy-related activities, upstream transportation and distribution, waste treatment, employee business travel, employee commuting, and upstream leased assets. Each of these categories was measured using relevant KPIs that the managers in charge of these categories could control. In total, the company manages its GHG emissions across 15 subcategories.113 By including scope 3 emissions created by both suppliers’ production of materials and customers’ use of Baxter’s products, Baxter acknowledges that it has some indirect influence on those emissions through the company’s product design and supply chain management decisions.

To implement a comprehensive change, many organizations resort to triple bottom line goals—financial, social and environmental—instituting new performance metrics for managers. A well-formed environmental goal includes some dimension of sustainability (e.g., carbon footprint), a target value (e.g., 20 percent reduction), and a timeframe (e.g., from 2015 to 2020). A fleet manager might be measured on empty-miles percentage, a factory manager might be measured on raw material scrap rates, and a retail network manager might be measured on the balance of low-footprint (ocean) versus high-footprint (air) replenishment orders.

Mapping: Tracing the Footprints

“We know we cannot raise the bar on social, environmental and economic rights among suppliers if we have incomplete knowledge … and have therefore made significant investment in the traceability of our products and our ability to collect performance data,” said a spokesperson for Marks & Spencer.114 As mentioned before, it is difficult for most companies to know who their deep-tier suppliers are, and even if they do, the companies have little influence over them. For example, when the environmentalist group Forest Ethics was pressuring Target Stores to avoid fuels derived from Canadian tar sands, the retailer noted that it doesn’t buy fuel; it doesn’t even own trucks. In contracting with outside carriers, the retailer has limited visibility and limited control over the fuels used.115

In 2013, Starbucks bought coffee from about 120,000 coffee farms. To ensure that it buys ethically-grown coffee, Starbucks subscribes to C.A.F.E (coffee and farmer equity) practices, developed jointly with Conservation International.116 Starbucks ensures that farmers meet its standards by gathering information on each farmer, including the geocoding of every plot, the identities of owners and workers, and information about the farming practices, including landscaping and biodiversity.117 According to Kelly Goodejohn, Starbucks’s director of ethical sourcing, the company employs 25 audit and verification organizations to visit and collect information regarding each farm. SES Global Services, out of Oakland, California, manages the quality and the integrity of the verification process. “They act as a second party to us that has oversight over the third parties,” added Goodejohn.118 The information is stored in a continuously updated database that is used for benchmarking across the farms, developing metrics, and improving farm practices.

The Complete Picture

Accounting for environmental impact can be complicated and counterintuitive. Consider, for example, the “eat local” mantra, based on the fact that local sourcing reduces the carbon footprint of food transportation. But transportation is, in many cases, only a small fraction of the total carbon footprint for food production and delivery. An analysis of the CO2 emissions from US milk production found that only about one-quarter (27 percent) of the carbon footprint comes from transportation. Factors such as inefficient production could make local milk less sustainable than milk transported from more efficient but distant producers.119

In some cases, the complex realities of resource use in different geographies create counterintuitive recommendations. Consider a seemingly simple choice for a UK company of buying either local UK-made recycled paper or imported Swedish-made virgin paper. Local recycled paper clearly saves on transportation and trees. Yet the carbon footprint of virgin Swedish paper is actually lower than the UK recycled paper, owing to the UK’s reliance on coal-fired power plants vs. Sweden’s use of nuclear and hydroelectric power to manufacture paper.120 Similarly, oranges grown in Brazil might have a higher water footprint than oranges grown in Spain, but Brazilian oranges may have a lower environmental impact on water stress owing to the rainy climate and abundance of water in the citrus regions of Brazil.121

Only a full life cycle assessment (LCA) can account for the entire impact of a product or a process. But an LCA requires a significant amount of data and effort. In January 2006, Tesco CEO Sir Terry Leahy announced that the supermarket chain would find or devise “a universally accepted and commonly understood measure of the carbon footprint”122 for every product Tesco sells. The company would assess each product’s complete lifecycle, from production to consumption, and label each product it carries with its total carbon footprint. Unfortunately, Tesco found that the LCA required so much work that the grocer could create only 125 labels per year, out of the approximately 50,000 SKUs it carried. By 2011, Tesco’s carbon label program was quietly unwound. A full LCA for each product proved too difficult to complete.

Preventing Disruptions to the Brand

While many companies engage in CSR activities out of the sincere belief that it is “the right thing to do,” one of the justifications vis-à-vis shareholders is that these activities can help protect the brand against would-be detractors and negative publicity. In other words, they help the company lower the likelihood of disruption from these kinds of threats.

Listening for the Negative Buzz (and Responding)

“Social media has shrunk the timelines,” which “are now much faster and more global,” said Dr. Deborah Pretty, a principal at Oxford Metrica, a UK-based research firm that analyzed reputation risk events. A company can either “be a winner, or a loser,” she said.123 Since reputational danger can lurk deep in the supply chain, anywhere around the globe, and because social sensibilities are not well defined, companies need to be constantly vigilant. It behooves them to “listen” to the social media “buzz” to detect problems. Coca-Cola, Cisco, Dell, and many other companies monitor sites like Facebook, Twitter, and many blogs in order to stay ahead of developing issues.124

Other companies use social media more actively. Zurich Insurance Company’s Linda Conrad mentioned the positive side of social media, which enables companies to not only detect emerging brand risks but also to address them before they grow.125 For example, one airline monitors Twitter for negative mentions of its name, and if the person tweeting is a frequent flyer on the airline, it intervenes to solve the problem or make amends, thus hoping to turn the negative sentiment into a positive one and retain an important customer. Similarly, a hotel chain cross-references a person’s social media Klout126 score upon check-in. Customers with a high Klout rating get free upgrades. Finally, a consumer products company tracks comments on social media to drive product innovation. For example, upon hearing of complaints about reading in bed, the company designed a backlight product. Chapter 8 discussed how companies monitor real-time and emerging risks.127

Bridging the Economy and Earth’s Ecology

The Chicago school of economics argues that companies have one goal—profit—and only one fiduciary responsibility—to their shareholders. This view permeates judicial interpretations of directors’, officers’, and companies’ obligations to shareholders, although companies retain some breadth of discretion to achieve nonfinancial goals without legal repercussions. When a conservative shareholder group attacked Apple’s spending on renewable energy and demanded Apple invest only in measures that were profitable, CEO Tim Cook responded angrily: “When we work on making our devices accessible by the blind, I don’t consider the bloody ROI.” Cook added that the same goes for environmental, health, and safety issues. “If you want me to do things only for ROI reasons, you should get out of this stock,” he said. Apple shareholders voted down the conservative group’s resolution to force Apple to disclose the costs of its investments in tackling climate change.128

As mentioned earlier, some CSR activities can align with financial goals of increasing profits and shareholder value. These activities primarily include energy-saving actions, material conservation, and recycling. They also include optimizing delivery routes (recall the UPS example in the section “The Tide Against Carbon Dioxide,” above), installation of renewable energy sources where it makes sense, and a myriad of other “small” eco-efficiency efforts that can lead to reductions in carbon footprint and save money. For example, Marks & Spencer reported that a collection of sustainability efforts delivered £70 million in net benefits in 2010 and 2011 alone.129

But many companies are looking beyond the short-term financial bottom line in managing their operations, in response to social pressure or adverse media coverage. For these companies, sustainability involves a stakeholder-focused, long-term approach to managing a corporation. Although diverting attention from the financial bottom line would seem to threaten profits and shareholders, limited MIT research suggests that, in some cases, the opposite may be true in the long term. Comparing GM vs. Toyota, United Airlines vs. Southwest Airlines, and Boeing vs. Airbus reveals an interesting pattern. In each of these three pairs of companies, the first company of the pair espoused short-term financial goals thought to be aligned with shareholders and the second company espoused longer-term goals more aligned with multiple stakeholders. And yet, the shareholder-focused companies returned only 3 percent annually to their shareholders, while stakeholder-focused companies returned nearly 14 percent to shareholders over almost three decades (1981–2009).130 While far from conclusive owing to the small number of companies analyzed, the pair comparison was deep and detailed. A broader study of 275 Fortune 1000 firms found that the top 50 on sustainability measures delivered 38 percent higher shareholder returns over five years than did the bottom 50.131

This research suggests that companies may actually be more valuable in the long term with a broader view than if the financial bottom line is their only concern. This paradox seems to arise because satisfied customers, employees, suppliers, and communities may be more likely to have more productive relationships with a stakeholder-focused company, which, in turn, leads to higher profits and more satisfied shareholders. Kevin Wrenn, vice president of PC business and operations at Fujitsu Computer Systems Corp., referred to the balance of sustainability and financial performance as the task of “bringing economy and ecology in harmony.”132

Puma, the German sportswear company, initiated a comprehensive approach to balancing environmental sustainability and financial performance. It published an environmental profit and loss statement (EP&L) in 2012. The report estimates the costs to the planet by accounting for the ecosystem services that a business depends on and the cost of direct and indirect environmental impacts to the business and its suppliers. The EP&L allows for year-over-year comparison in terms of a single metric. Puma’s 2010 report detailed a total environmental impact of €145 million. Interestingly, only 6 percent of the impact was attributed to Puma’s operations; the rest came from its supply chain partners (the analysis went as deep as Tier 4 suppliers).

Finally, several jurisdictions recognize and permit a form of incorporation that has both financial and social goals. These include benefit corporations (B Corp) and low-profit limited liability companies (L3C) in the United States, and community interest companies (CIC) in the United Kingdom.133 Such companies formally declare that their goals are broader than just shareholders’ financial returns and that the company considers society and the environment in its decision making. These companies are then free from the legal fiduciary responsibilities to only maximize shareholders’ value. Instead, they can also include social responsibilities in decisions and can attract funding from socially conscious investors.

Copyright © 2015 Massachusetts Institute of Technology. (All rights reserved.)

No comments here