Discussion Questions:

1. What is the difference between local and corporate decision making, and what is the significance of the difference for sustainability?

2. Study the Corporate Sustainability Model in Figure 1. Based on this study, do you think sustainability should be managed by means of a cost center, profit center, the balanced scorecard, or some other method, and why?

3. Identify two of the leading companies in the area of sustainability and explain why you think each of these companies has chosen to take a leadership role in sustainability.

4. Review Exhibit 18.4 in the text. Do you think sustainability is best managed as part of an informal or a formal type of management control system? Briefly explain your answer.

5. Explain briefly the role of leadership in sustainability management.

6. Explain briefly the role of organization culture in sustainability management.

Page awe Implementing Sustainability: The Role of Leadership and Organizational Culture By Mark J. Epstein, Adriana Rejc Buhovac, and Kristi Yuthas Executives recognize the imponance of social and envi. ronmental responsibilitycorporate sustainabilitybut they seldom implement it successfully. The challenge lies in how to actually integrate sustainability into operational and capital investment decision-making and implement it successfully in large, complex. for-prot organizations. The nancial executive plays a vital role. Top management typically cascades these management decisions down be- cause sustainability impacts are often local, so usually only a small number of these decisions are made at corporate headquarters. As individual managers at the business units, geographical units, and facilities make these decisions, they also must make the appropriate tradeoffs regarding social and environmental impacts vs. nancial ones. Typically. the vice president of sustainability, who reports to the CEO, requests improved sustainability performance, while the CEO and CFO demand improved nancial performance. At the same time, a company provides little guidance and sup- port to senior and middle-level operations managers to aid in the decision-making and tradeo's. How can they manage this challenge successfully? Field Study Brings New Findings in the January 2008 issue of Strategic Finance, Marc J. Epstein presented the Corporate Sustainability Model, a comprehensive approach for examining. measuring, and managing the drivers of corporate sustainability. The model can help managers incorporate a sustainability strategy into daily operations and link that strategy to specic actions that improve both sustainability and nancial performance. Epstein argues that, to improve the sustainability strategy implementation process, managers should carefully identify and measure key performance drivers included among the various inputs and processes. The drivers of the model in- elude: - Extemal context (regulatory and geographical), J3 - lntemal context (mission, corporate strategy, cor- porate organizational structure, organizational cul- ture, and systems), 0 Business context (industry sector, customers, and products), and a Human and nancial resources. The inputs guide leaders in making decisions so they can develop an appropriate sustainability strategy; set up aligned structures, systems, and programs; and take action. The managerial actions lead to positive or negative sustain- ability perfom'tance and stakeholder reactions, ultimately affecting long-term corporate nancial performance. This model should help managers better analyze and manage these drivers as well as pursue social and environmental impacts more effectively. Figure I illustrates the Corporate Sustainability Model. Recently. the Foundation for Applied Research (FAR) of the Institute of Management Accountants (lMA) spon- sored a research study to examine how leading corporations integrate economic, social, and environmental impacts into day-today management decision making. The research focused on four companies: 0 Nike, the world's leading designer, marketer, and distributor of athletic products and clothing; - Procter & Gamble (P&G), one of the world's leading branded consumer products companies; a The Home Depot, the world's largest home im- provement specialty retailer, and 0 Nissan North America, a unit of Nissan Motor C0,, a leading global auto manufacturer. These companies have reputations for leading practices in managing sustainability and have high Iatings on various indexes on sustainability performance. We conducted open- ended, semi-structured interviews with senior managers, business unit and facility managers. geographical unit man- agers, tnctional managers, and sustainability managers. The study investigated how managers currently make tradeoffs and simultaneously manage social, environmental, and nancial performance. We also looked at systems and performance measures that they use to facilitate these deci- O ZOOM + Page of ZOOM + Figure 1: The Corporate Sustainability Model Organizational Culture (Internal Context), Leadership, and People as Critical Drivers of Sustainability Success INPUTS PROCESSES OUTPUTS OUTCOMES External Sustainability Strategy Sustainability Internal Performance Context Sustainability Structure Leadership Corporate Finsocial Business Performance Context Sustainableity Systems Programs, and Actions Human and Corporate Costs/Benefits of Actions Financial Resources Feedback Loop There are three major sets of impacts. Source: Mare J. Ipster, Mining Sexually Work Corporate Financial Costs/Beasts of Actions Siri Practices in Managing and Measuring Corporate Social Aerowents' and Eccname impact Grechief Social Impact Publishing Lor tex, Shefel, England, and Bereit 3 Financial Impact through Sustainable Performance Kcent: Publishers, Fe, Sar Karaxo, Call, 208 sions and at the characteristics of organizations performance measurement systems with some social and environments, their formal and informal support systems environmental metrics. But leadership and organizationa and processes (including performance evaluation, rewards, culture are the most crucial determinants in successfully organizational culture, leadership, etc.), and initiatives that managing the various trade-offs that middle managers face facilitate managing social, environmental, and financial when they try to manage social, environmental, and finan- performance simultaneously. The study also attempted to cial performance simultaneously. The Corporate Sustaina- better understand the role of hard or soft implementation bility Model highlights the following drivers: the internal systems. Hard systems are the formal systems that include context with the organizational culture, leadership, and hu- structure, performance evaluation, and incentive systems man resources. that motivate employee behavior. Soft systems are the in- formal systems such as organizational culture, leadership, We'll describe how Nike, Procter & Gamble, The Home and people. Depot, and Nissan North America are using leadership and organizational culture to encourage employees to pursue It's these informal systems-organizational culture, leader- and drive organizational success in sustainability. Only ship, and people-that nurture a company's drive for sus- after a company uses these informal or soft systems can it tainability. Although sensitive to stakeholder concerns and use the formal or hard systems of strategy, structure, and impacts, these leading companies are committed internally programs to improve success. to improving corporate sustainability performance. While generally considered a significant tool to implement sus- tainability and align the corporation's interests, formal im- plementation systems have a secondary role in implement- ing sustainability programs successfully. All four compa- Managing Social, Environmental, and Financial Per- nies incorporate sustainability issues in their corporate formance Simultaneously strategies, they have specific sustainability strategies and aligned organizational structures, and they have in placePage of 6 ZOOM + How to manage the paradox of improving social, environ- benefits beyond a particular issue or cost. They strive to mental, and financial goals simultaneously is one of a com- create products that enable consumers to be more environ- pany's biggest challenges. Integrating corporate social, en- mentally sustainable. Improving efficiency of the entire vironmental, and financial impacts into operational and product life cycle from cradle to grave is a major focus of capital investment decisions comes with a lot of tension. P&G's sustainability efforts. As one senior executive stat- While social and financial initiatives may benefit one an- ed, "We're values-based, innovation-driven, and we see the other in the long term, they're often conflicting in their business value of sustainability." P&G thus attempts to ac- need for resources and agendas in the short run. Also, clear, complish both environmental and financial goals and per- measurable, short-term metrics apply to financial initiatives, formance simultaneously. For Nissan North America, the whereas measurements of social performance are often un- evaluation of environmental and financial impacts typically certain and long term. Sometimes there are win-win situa- doesn't present a tradeoff because of the company's de tions, such as when waste and emissions are reduced, that clared focus on energy-usage reduction for Nissan and its save both company costs and environmental damage. But customers. This is usually a win-win scenario. often the decision alternatives are seen as tradeoffs, and managers throughout the business units and facilities must Social and environmental considerations are deeply embed- struggle to evaluate social, environmental, and financial ded in decision making at Nike, Procter & Gamble, The impacts. At the end of the day, they make decisions while Home Depot, and Nissan North America. Nike, for exam- being accountable for excellent performance in both. ple, developed a strategic approach to corporate responsibil ity (CR) that emphasized value creation, collaboration with In our study, however, managers told us they didn't see the business units, and proactive strategic planning. This is why tradeoffs as difficult, either because they prioritized finan- managers believe that they aren't typically making tradeoff cial performance or because their companies could accom- and are more often recognizing win-win situations. Envi- plish both at the same time. The Home Depot, for example, ronmental win-wins (decisions that simultaneously benefit doesn't view the tradeoffs between sustainability goals and the environment and corporate profits) are often more no- business goals as problematic. They rarely see a tradeoff as ticeable than social win-wins. This may be because of more a win-lose situation; when this is the case, win-lose measurement and evaluation techniques as well as perfor- tradeoffs are typically resolved in favor of business goals. mance measures in place for corporate environmental im- In most cases, there are win-win situations. In fact, when- pacts than for most of the social impacts managers typically ever an environmental or social issue becomes important to confront. But these leading companies have made many he customer or the public, it becomes important to The tradeoffs spontaneously because they've incorporated the Home Depot, and addressing it becomes a win-win situa- concerns for social and environmental impacts into the cul- tion. Essentially, the belief is that "We do the right thing, ture. The role of leadership in accomplishing this is crucial. and it is good for business as well." When meeting a more stringent regulatory or company-set environmental or social The Role of Leadership standard would require additional costs, managers would work together to identify areas where they could reduce in all four companies, there are fewer conflicts for senior other costs. and middle managers in balancing social, environmental, and financial performance because these conflicts are re- At Nike, tradeoffs are only in the short term. For example, solved higher up in the organization and are well integrated using environmentally preferred materials may increase into the informal systems. Upper management has bought some manufacturing costs, but, by reducing waste, the in to the benefits relating to sustainability. Thus people are company decreases costs. A company can reduce costs us- able to make certain tradeoffs because they know their ing Considered Design, which is Nike's program to im- leaders will be supportive. prove product sustainability by focusing on design. Nike's goal is to fuel constant improvements in its design and pro- Corporate responsibility is one of Nike's nine strategic pri- duction processes that lessen its impact on the environment orities. The CEO and other company leaders support CR and society, using sustainability as a source of innovation. intensively and consider it an enhancing element in reach- Nike designers successfully innovate in how they use vari- ing strategic goals. In fact, leadership engagement is num- ous materials. The choice of design and materials has pro- ber one. "Making a sustainable decision that negatively duced dramatic decreases in footwear and packaging waste, impacts margins is not so wrong, but they have to inform which means a reduction in the use of potentially harmful me because we can offset this somewhere else," one vice chemicals while increasing the performance of the product. president explained. "I want to give guidance to subordi nates because I don't want to have them struggle with it P&G, too, sees innovation as the solution to the sustainabil [the tradeoffs related to making social, environmental, and ity challenge. P&G managers have widened their organiza- financial decisions]. And we need to teach them because all tional perspective to see the broader picture and capture these decisions cannot be done by me alone." This trainingtakes place through information sharing and collaboration. People learn as they become part of the process where lead