Sustainability is a good idea, right? The noble notion of ensuring that current generations meet their needs without compromising the ability of future generations to meet theirs seems fair, farsighted and just. An ethical thing to do.
But is that the relevant definition of sustainability in the modern business world? And does it reflect both personal ethics, sometimes called virtue ethics, and organizational ethics? “Organizational ethics addresses risks in the marketplace and organization,” noted O.C. Ferrell, director of Harbert’s Center for Ethical Organizational Cultures.
There can be conflict, real or perceived, between the two. Personal ethical differences may exist even in a roomful of people all trying to do the right thing. Personal ethics are influenced by ethnic backgrounds, upbringing, religious faith or lack thereof, and other factors not necessarily related to business concerns.
Organizational ethics guide the organization and must be adhered to by the members of the organization in order to move forward under an accepted corporate ethical culture, Ferrell said. Personal ethics is important in a part of all ethical decision making; however, it is inadequate for addressing complex and intertwined risks and decision making within an organization.
“Most organizational decisions require a foundation of strong personal ethics and an understanding of the ethical requirements in organizational decision making,” Ferrell said.
A prospective investor or, increasingly, a prospective employee may need the business equivalent of an ethics and sustainability compass to help guide decisions on buying stock in or going to work for a company. There is, after all, more than one way to look at sustainability.
In their 2020 textbook “Corporate Sustainability Leadership,” Harbert faculty members Sarah Stanwick (accounting) and Peter Stanwick (management) define corporate sustainability as “the ability of firms to integrate social and environmental issues into their operations through interaction with stakeholders on a voluntary basis.”
In a recent interview, they noted that sustainability was once viewed as “primarily related to the natural environment,” but society and businesses now largely see it as “part of a corporate ecosystem in which all relationships are interrelated between firms and stakeholders.”
That dovetails with the rise in the phenomenon called ESG — environmental, social and governance — which broadly influences business decisions in investing, marketing and a host of other areas. ESG gets a great deal of attention and while it is not the only gauge of a company’s performance in sustainability, Ferrell argues that ESG is a better means of measurement. It can be that compass.
ESG measures these aspects of corporate performance:
Environmental — issues such as climate change, recycling, use of natural resources, pollution and ecosystem sustainability.
Social — issues involving treatment of stakeholders such as diversity, human capital, product impact and quality of life.
Governance — issues of corporate governance, ethics and social responsibility, regulatory compliance and conduct such as bribery, anti-trust violations and corruption.
Writing in AMS Review, a publication of the Academy of Marketing Science, Ferrell observed that unlike other corporate measurements, ESG does not have financial or profit terms or implications in its name, but instead focuses on “being responsible to society.”
That doesn’t mean that money doesn’t matter. A company has to be financially viable or it will cease to exist, making any sustainability efforts or ideas moot. But strong ESG performance often translates to strong financial performance.
“In fact, the most ethical and socially responsible firms have been found to be the most profitable,” Ferrell wrote. “Ethisphere’s list of most ethical companies consistently outperforms a comparable index of large cap companies. This is because they have been found to have an ethical corporate culture with a strong ethics and compliance program that shows concern for all stakeholders.”
In a time when society “demands and expects accountability and transparency” from companies, Peter Stanwick and Sarah Stanwick believe a commitment to sustainability provides three critical benefits to the organization:
Positive engagement with stakeholders, creating a “positive reputational halo” that enhances the image of the company.
Greater ability to recruit and retain motivated employees who want to work in such an environment.
A competitive advantage over other companies and greater differentiation from competitors.
Investors, both individual and institutional, increasingly consider sustainability issues, particularly ESG performance, in making investment decisions. Several aspects of ESG can enhance the value or potential value of a company, Ferrell noted in AMS Review. Companies with strong ESG performance may enjoy better community and governmental relations and attract more customers with sustainable products. These companies typically have lower energy consumption and reduced water use and may be able to avoid environmental issues that concern investors.
Yet even with a compass, the ethics and sustainability journey can be tricky to navigate. For example, activist organizations often pressure companies, university endowments, state pension plans and other large managers of money to sell holdings in industries deemed “dirty” or otherwise undesirable in a political/pollution context, such as coal mines and oil wells. There may be some gratification in that for the activists and even a higher ESG rating for the entity, but there are limits to the actual impact.
As longtime financial columnist James Mackintosh wrote in the Wall Street Journal, “Selling off assets or shares by itself does nothing to save the planet because somebody bought them.” Those things don’t disappear just because the previous holder sold them. As Mackintosh observed, “…less environmentally minded investors buying those shares, oil wells or power plants are not going to shut them down unless they stop being profitable.”
Along those lines, some might claim an ethical conflict when a company appears to play both sides of the sustainability fence, such as an automobile manufacturer touting its sustainability efforts even as it pays lobbyists to work against mandated increases in overall fuel economy. The real picture isn’t quite so clear. As Ferrell noted in a recent interview, the lobbying that may be perceived as an ethical conflict actually stems from “a total misunderstanding among politicians about how business works.”
If would-be regulators don’t understand business, the consequences of their regulatory actions may spread far beyond any concern they seek to address. Thus the need for lobbying and the lobbyists who are often scorned for doing it.
“There’s so much misunderstanding among legislators on how business operates,” Ferrell said. “If they don’t do it, they may get regulation that damages not only the company, but also the economy and the country. Companies need some pressure, but they have a right to communicate with those who would regulate them.”
So where should the compass needle point? Prospective employees and individual investors doubtless will see their views of a company filtered to some extent by their personal ethics, even when acknowledging that organizational ethics are a different matter. Personal ethics and organizational ethics, when functioning properly, work in support of one another and the absence of one cannot make up for the other, Ferrell said.
For conscientious individuals, that may make measurements such as ESG a particularly valuable tool.
—Jim Earnhardt
Excluding Companies May Make Problems More Difficult To Solve
The role of business in addressing social issues is often debated. Milton Friedman suggested that the social responsibility of a business is to create profits and addressing social issues is the responsibility of government. Governmental efforts in social responsibility were to be supported by taxation of businesses and individuals.
This 60-year-old philosophy is being challenged today. The practical framework of the triple bottom line approach measures social, financial and environmental factors that have an impact on all stakeholders.
More recently environmental, social and governance (ESG) has been embraced by investors, firms and society as the most effective way to address social responsibility. Environmental considerations relate to climate change, natural resources and pollution. Social considerations include diversity, inclusion and quality of life. Governance relates to ethics, compliance and regulatory issues.
ESG drives investment decisions. Firms such as Vanguard have developed ESG index funds. The 2022 Edelman Trust Barometer survey found that 88% of institutional investors use ESG as operational and financial considerations. Academic research finds a strong relationship between ESG scores and profitability, challenging Friedman’s belief that a focus on social responsibilities comes at the expense of profits.
In addition, the Edelman survey found business is the most trusted institution with 61% trust, compared to government at 52% and the media at 50%. Business is now viewed as able and expected to solve social problems (55%). They are expected to take a strategic leadership role in determining the most important issues, with key stakeholders in mind, and attempting intervention and resolution.
Business is seen as crucial in resolving social issues. However, firms have varying approaches to ESG based on risk and opportunities in the industry in which they operate. For example, most ESG funds exclude oil, gas and mining because of their history of environmental damage. If business leaders are going to address and resolve social issues, these extractive industries must have the opportunity to play a role.
Adweek reports a debate over whether advertising agencies should create advertising for oil and gas companies. Since only 3% of cars on the road are electric, it appears premature to think that oil and gas firms could be eliminated.
These companies have contributed to global climate change problems, but also are working to help develop solutions. Chevron supports the Paris Agreement, for example, and Shell promises to be net-zero carbon by 2050. While ESG is a positive movement, it is questionable to condemn firms trying to participate in resolving the global climate crisis. The evidence that all have an important role in addressing social issues is compelling.
O.C. Ferrell
Director
Center for Ethical Organizational Cultures
