Lecture at bosch on 23.04.2014

BUSINESS SUSTAINABILITY through the pursuit of

Ethics, Governance and Excellence

DR SORAB SADRI JECRC UNIVERSITY

JAIPUR

Founding Argument

• On the basis of research carried out between 2001 and 2013

the following positions were taken:

• 1. Managerial Ethics without Good Governance becomes

wishful thinking and sermonizing.

• Corporate Governance without ethics becomes ritualistic

and compliance driven.

Invited Expert Lecture at the Annual Day Celebrations of IIMM in Jaipur 23.04.14

Development Agenda

• 3. If Corporate Governance has to be an instrument for

inclusive developmental growth it has to be founded on

ethics. This makes the exercise both value based and value

driven : i.e. value centered.

• 4. Hence the relationship between ethics and governance is

mutual and symbiotic.


Future Goals

• 5. Sound ethics and good governance help to create a work

culture that promotes an environment of trust teamwork

and transparency.

• 6. This work culture allows creativity and innovation to

thrive.

• 7. In so doing the organization moves towards excellence.


The Logical Culmination

• We have argued that Business Ethics and Corporate

Governance combine to create the conditions for

Organizational Excellence.

• Organizational Excellence is not a finite point but more like

a horizon we move towards.

• To make this horizon meaningful and measurable we argue

that it converts Organizational Excellence into Business

Sustainability


Basis

• This presentation is based on the following research based

published works wherein the above argument was

propounded and explained:

• Sadri, Jayashree and Ajgaonkar (2002)

• Jayashree, Sadri and Dastoor (2008)

• Sadri and Jayashree (2011)

• Sadri and Jayashree (2014)Invited Expert Lecture at the Annual Day Celebrations of IIMM in Jaipur 23.04.14

SOME ISSUES TO CONSIDER

1. What is sustainability?

2. Is sustainability compatible with maximizing long-run financial

performance?

3. Corporate strategies and multiple long-run objectives.

4. The balanced scorecard and multiple long-run objectives.

5. The relationship between reporting on sustainability and investing

in sustainability?


DEFINING SUSTAINABILITY

• One of the most often-cited definitions of sustainability is

the one created by the Brundtland Commission, led by the

former Norwegian Prime Minister Gro Harlem Brundtland.

The Commission defined sustainable development as

development that meets the needs of the present without

compromising the ability of future generations to meet their

own needs.


The Scope Of Sustainability

• Sustainability relates to the continuity of economic, social, institutional and environmental aspects of human society, as well as the non-human environment.

• Sustainability can be defined both qualitatively in words, and quantitatively as a pair of compound exponentials—the rising one being the life of a system, the declining one leading to death if the final tipping point for intervention is irreversibly past.


WHY SUSTAINABILITY?

• Organizational Excellence is definitely a goal to be desired

but it is not a finite point; rather it is like a horizon you

move towards.

• This movement is within an environment that is marked by

dynamic dis-equilibria and an attendant uncertainty.

• So it is prudent to use excellence such that business remains

sustainable.



Ethics Governance

Excellence

THE ORGANIZATIONAL TRIAD

BASIS OF THE TRIAD

• The three aspects of sustainability are inextricably founded

on sound business ethics and good corporate governance

that combine companies to pursue excellence.

• This is enabled by a corporate culture that promotes

creativity and innovation by adopting a learning

environment.


Why Sustainability

“We do not inherit the earth from our ancestors. We

borrow it from our children.”

Sustainable development “meets the needs of the

present without compromising the ability of future

generations to meet their own needs.”

- 1987, World Commission on Environment and

Development (a.k.a the Brundtland Commission)Invited Expert Lecture at the Annual Day Celebrations of IIMM in Jaipur 23.04.14

Need for Sustainability

We desperately need to recognize that we are the guests not the masters of nature and adopt a new paradigm for development, based on the costs and benefits to all people, and bound by the limits of nature herself rather than the limits of technology and consumerism.

- Mikhail Gorbachev- President of Green Cross International


Questions about Sustainability

1. What is sustainability?

2. Is the goal of sustainability compatible with maximizing long-run financial performance?

3. Can corporate strategies accommodate multiple long-run objectives?

4. Does the balanced scorecard accommodate multiple long-run objectives?

5. What is the relationship between reporting on sustainability and investing in sustainability?


Sustainability and Performance


Is sustainability compatible with maximizing long-run financial performance? The business case for sustainability investment is gaining momentum so as to avoid inertia

The positive correlation between sustainability and financial performance will provide an enormous boost to the sustainable investment sector, said Markus Knisel, Director of Morgan Stanley Private Wealth Management.

The case of Nike


Can one suggest that Nike would have benefited financially from requiring its suppliers to meet higher standards at the inception of its then-novel overseas manufacturing program in the 1960s. Insistence on adult workers (no children), safe working conditions, and reasonable hours and pay would have cost Nike real dollars and cents. [The Traditional – Paternalistic View]

Is sustainability compatible with maximizing long-run financial performance?


“Prior to the 1990’s, when workers and consumers in industrialized countries awakened to the conditions of workers overseas, it would have been difficult to cite even minimal reputational benefits from such a stance.”

Compatiblity of sustainability withmaximizing long-run financial performance


“By the 1980s, Nike already had a glowing reputation and spectacular earnings. Far from being a cause for embarrassment, its strategy of outsourcing production to cheap Asian labor was praised as an innovative way to drive down costs, beat the competition, and create shareholder value.”

- Lynn Sharp Paine, 2000 Harvard Business School

Corporate Finance

“Success is usually judged by value: Shareholders are

made better off by any decision which increases the

value of their stake in the firm.”

- Brealey and Myers,

Principles of Corporate Finance (1988)


Economics

Most Positive Economists will agree that

When we model the behavior of firms, we will want to

describe the objective as profit maximization and the

constraints as technological constraints and market

constraints.”


Corporate Mission Statements

“Do a great job for our customers, employees, and stockholders by being the preeminent building block supplier to the worldwide digital economy.”

- Intel

Hence even CSR seems to be moving towards meeting stakeholders interests rather than remain at a “do social good level.

Mohanty Sadri and Dange


Corporate Mission Statements That Recognize Stakeholder Interests

We will become the world's most valued company to patients, customers,

colleagues, investors, business partners, and the communities where we work

and live.

- Pfizer

GM’s vision is to be the world leader in transportation products and related

services. We will earn our customers’ enthusiasm through continuous

improvement driven by the integrity, teamwork and innovation of GM people.

- General Motors Invited Expert Lecture at the Annual Day Celebrations of IIMM in Jaipur 23.04.14

Corporate Mission Statements

“Nike’s corporate responsibility (CR) mission is simple and straightforward. It is clear acknowledgement that CR work should not be separate from the business – but should instead be fully integrated into it. Our CR mission:

We must help the company achieve profitable and sustainable growth.

We must protect and enhance the brand and company.”

- Nike


Motivation for Adopting Sustainable Practices [ PwC 2002 Survey]

Source: PriceWaterhouseCoopers,2002 Sustainability Report. August 2002.

Accounting: The Spinal Column of Corporate Governance

The search for new and better means of meeting economic problems has resulted in the development of various kinds of institutions … aimed at improving the allocation of resources and the application of human effort toward the satisfaction of human wants. Accounting is one of these institutions.

- William Vatter (1950) Hence the importance of Corporate Governance and its

guardians [ CAs] will only increase with time.


Accounting

“Accounting reports serve a great number of purposes … . For example, there are accounting reports that serve to tally valuables entrusted to custodians against the stewardship expected of them. … Thus, accounting is not necessarily confined to the situation of measuring gains and losses; it is basically a means of meeting the requirement that custody and management of property carries with it an obligation to account for it.”

“ Of course, the accounting reports of business enterprises serve many other uses. The information presented in financial statements may be used by present or prospective investors … ..”

- William Vatter (1950)


Accounting

Financial reporting should provide information that is useful to present and potential investors and creditors. … The primary focus of financial reporting is information about earnings and its components.

FASB (Statement of Financial Accounting Concept #1)

The Right to Information Act in India is thus a step in the right direction making public bodies accountable and transparent.


Stewardship

• A working definition: the responsibility for taking

good care of resources entrusted to one.

• However much delegation of power is desired one

must recall that:

Delegation without accountability creates tyrants

Accountability without delegation creates slaves


Reporting Tools Of Sustainability

• Given that top management is increasingly concerned with converting organizational excellence into business sustainability, how will the latter be measured?

• The Triple Bottom Line• The Balanced Scorecard• Third Party reporting and criteria


1. The Triple Bottom Line

• Disclosure (reporting) is a key part of doing sustainable business.

• Sustainability reporting is broader in scope than traditional financial reporting.

• The Triple Bottom Line (TBL) is one way to report on sustainable business activity.

• TBL defines sustainability in terms of three separate elements: economic, environmental, and social perspectives of operations.


First Element of the Triple Bottom Line

Economy – reflects activities related to shaping demand for

products and services, employee compensation, community

contributions, local procurement policies, and other

monetary issues related to company activities. This is often

referred to as Profit


Second Element of the Triple Bottom Line

Society - reflects activities in shaping local, national

and international public policy, equality, treatment of

minorities, employee issues and public concern. That

is, organizational citizenship and is often referred to as

People.


Third Element of the Triple Bottom Line

Environment – reflects the impact made through processes, products

or services that affect the environment. These may include air, water,

land, natural resources, flora, fauna and human health. This is often

referred to as Planet


2. The Balanced Scorecard

• A performance measurement tool and a performance

management system.

• Created in 1992 by Robert Kaplan and David Norton.

• Emphasizes financial measurement, but adds non-financial

measures.


Components Of The Balanced Scorecard

• Four components of the balanced scorecard:

The Learning and Growth Perspective

The Internal Business Process Perspective

The Customer Perspective

The Financial Perspective

• Each component would ideally have specific performance

measures associated with it.


3. The Balanced Scorecard

• The Sustainability Balanced Scorecard adds sustainability

issues into the Balanced Scorecard.

• This gives business sustainability a rightful place within

overall management strategy.

• The adoption of this tool is increasing globally.


THIRD PARTY REPORTING AND CRITERIA ON SUSTAINABILITY

• Reporting on sustainability is not synonymous with engaging in activities that promote sustainability.Neither is reporting on profitability synonymous with being

profitable.

• No “GAAP” for reporting on sustainability.• Guidelines have been issued by governmental entities

and other groups. The Environmental Protection Agency (EPA)The Global Reporting Initiative (GRI)ISO 14000

• Independent reporting agencies have emerged.


Global Reporting Initiative

• The Global Reporting Initiative (GRI) has emerged as a prominent source of guidance for reporting under the Triple Bottom Line.

• The GRI is a collaborating center of the United Nations Environment Program.

• The GRI incorporates participation of representatives from business, accountancy, investment, environmental, human rights, research and labor organizations from around the world.


International Organization for Standardization

• Organization de Standards International (ISO) is an important management practice standard setting body.Founded in 1947 in Amsterdam.Sets a variety of standards for various products and

production processes.A network of the national standards institutes from 148

countries. Conformance with ISO standards is a contractual

requirement by some customers.

• ISO 14000: provides a framework for measuring environmental performance.


Motivation to Report on Sustainability

• Sustainability reporting is largely voluntary

Exceptions: France and Japan

• Motivations to disclose sustainability information

The desire to avoid added complex and costly government

regulation or negative attention from the government.

• For example, GAO 2004 study

The desire to improve public relations and company image.

• For example, CalPERS Invited Expert Lecture at the Annual Day Celebrations of IIMM in Jaipur 23.04.14

Sustainability and TBL Concepts

• Because sustainability reporting is largely voluntary, the attitudes of business leaders towards sustainability is important.

• Such an attitude reflects a high sense of values and ethics on the one hand and good corporate governance practices on the other.

• It is more likely to find a place in companies that pursue organizational excellence.


CONCLUSION

• Business Ethics and Corporate Governance combine to create conditions for Organizational Excellence.

• Organizational Excellence needs a value centered corporate culture for stability.

• Excellence has to be translated into sustainability.• Three measures of sustainability are Triple Bottom

Line, Balanced score Card and Third Party Reporting.


• Thank you very much for your time

and patience.

• Good evening.
