Case Study "Timberland - Accounting for Sustainability" & DB WK 7

Case: Accounting for Sustainability: How Does Timberland Do It and Why?

Sustainability reporting is about being radically transparent. That means talking

about the bad just as much as the good…we want to be transparent and get feedback

from others on how we’re doing, or how we could be doing better. And our hope is to

have a dialogue on how we can scale good solutions for our industry and then even

broader beyond that.

Betsy Blaisdell, Timberland manager of environmental stewardship

Introduction

The purpose of this case is to introduce students to the current state of sustainability

reporting in business. Timberland provides a leading example of the different ways that

sustainability reporting can be performed. The case also discusses what sustainability

means to Timberland and how sustainability reporting supports its environmental and

social goals and progress.

11.1 Sustainability Reporting at Timberland

How Did Timberland Get Started on Sustainability Reporting?

As a publicly traded company, Timberland was required to report on its financial

performance and make disclosures about the business regularly to shareholders and the

general public. However, this type of reporting traditionally does little to communicate

to stakeholders the sustainability actions that the company undertakes.

Through its efforts in support of employee service and on other areas related to the

social responsibility, Timberland developed a strong reputation and following in the

national and global corporate social responsibility (CSR) leadership communities. This

attracted the attention of the NGO Ceres, which was leading a national coalition of

investors, environmental organizations, and other public interest groups working with

companies to address sustainability challenges. Ceres’s mission is to “integrate

sustainability into business practices for the health of the planet and its people.”

Ceres was one of the first organizations to formally introduce and advocate for the

concept of sustainability reporting. Ceres believed that Timberland was a good

candidate for publicly disclosing sustainability-related information specifically because

of their unique employee service program. In addition to reporting metrics on employee

service, the “beyond the traditional reporting” for Ceres also included the compliance

area. This included reporting on the Timberland workplace and at the factories of their

suppliers around the world, including issues such as child labor and unfair working

conditions.

In 2001, Timberland released its first annual corporate social responsibility report. The

nineteen-page report focused heavily on service related activities of the organization,

including City Year. The following year, a second annual corporate social responsibility

report was released. This was a more comprehensive thirty-eight-page report that

included a more detailed discussion on environmental and social activities.

Starting in 2004, the annual CSR reports from Timberland began to feature the Global

Reporting Initiative (GRI) sustainability reporting guidelines and featured sustainable

performance indicators (SPIs). (See details on GRI and sustainability reporting

in Chapter 5 "Entrepreneurship, Innovation, and Sustainable Business".) Sustainability

reporting helped the company become a recognized industry leader on sustainability

efforts, and this helped to strengthen the brand’s name, recognition, and value.

Beginning in 2008, Timberland started reporting on key CSR performance indicators on

a quarterly basis. The main report is presented in a dashboard format, which contains

SPIs in each of the four CSR strategy categories.

Sidebar

Sustainability Reporting

Sustainability reporting is a statement to stakeholders and the general public about an

organization’s environmental and social impact and what the organization is doing to

improve its impact. It is about being accountable for the ecological and social impacts

that an entity has and also the solutions the entity develops around sustainability.

What Does Timberland’s Sustainability Reporting Include?

Timberland’s reporting and communications for sustainability includes the following:

• Full CSR reports released every other year that summarize their efforts in

sustainability for the previous twenty-four months; their CSR reports are

reported on their website.

• Quarterly key CSR performance indicator reports and quarterly CSR dialogues

• Stakeholder engagement forums called Voices of Challenge

on http://community.timberland.com, a web 2.0 platform that allows all types of

stakeholders to interact with Timberland

Timberland also shares its social and environmental values and product attributes with

consumers through retail messaging and product information. Their Green Index rating

is intended to give consumers clear and easy to understand information about the

impact their footwear choices have on the environment.

Source: Image courtesy of the authors.

Quarterly Reporting

Timberland Quarterly Sustainable Performance Indicators

The quarterly dashboard is organized around the four Timberland CSR pillar areas:

energy, product, workplace, and service. For example, average grams of volatile organic

compounds per pair of footwear is a sustainable performance indicator in their product

category. In each pillar area, there are three category measures and three to six total

indicators reported. All together there are fifteen indicators measured between 2007

through the present.

The dashboard provides a consistent and cohesive way to engage internal and external

stakeholders on CSR. It enables Timberland to be accountable for progress against

stated goals. Internally, it also allows for prioritization of resource allocation against key

sustainability initiatives.

Green Index

In 2006, Timberland introduced an industry-first “nutrition label” on all of its footwear

boxes in an effort to provide consumers with greater transparency about the company’s

environmental and community footprint and the environmental impact of the specific

Timberland products consumers are purchasing.

The Green Index program is the company’s primary mechanism for pursuing “cradle to

cradle” product design. This index measures and communicates critical aspects of

environmental performance in a format that allows Timberland to guide product design

and help consumer choice. The Green Index measures three areas of product impact:

• Climate impact—greenhouse gases produced in making raw materials and during

footwear production that contribute to climate change. Timberland’s climate

impact rating measures the emissions of greenhouse gases from the production of

each material through the manufacturing of the final product.

• Chemical used—chemicals used in material and footwear production.

• Resource consumption—the score decreases as Timberland uses materials that

require less land and water and fewer chemicals to produce.

The data are compiled to give a product an index score from ten to zero, with ten being a

high impact and zero being no impact at all.

The Timberland CSR Team

Timberland has a team of employees dedicated to CSR in the company. It consists of a

vice president of CSR, four managers, a team of fourteen code-of-conduct employees,

and two community service employees. The CSR team works closely with senior

management, including the CEO.

In December 2006, the company created a formal CSR committee within its board of

directors. This group consists of four board members who are responsible for guiding all

CSR strategy development. To accomplish this task, the committee meets regularly with

the CSR leadership team to help set the strategic agenda and hold the team accountable

for their actions.

Two members of the current CSR team are Beth Holzman, the company’s CSR strategy

and reporting manager, and Betsy Blaisdell, the manager of environmental stewardship.

Beth Holzman was a manager at Ceres before joining Timberland and interacted with

Timberland in that capacity. Betsy Blaisdell had previous experience working in the New

Hampshire state government and performing environmental research at the University

of New Hampshire.

The CSR team’s responsibilities include developing the metrics to report and

standardizing the reporting. It also includes collecting information, preparing reports,

communicating information to senior management, and interacting with stakeholders.

A key objective is to ensure that the sustainability reports are used and integrated into

the other departments at Timberland. As Betsy Blaisdell describes it, “Everybody wants

to do the right thing at Timberland. And so for us, it’s taking something that can be a

really complex environmental metric, like kilograms of CO2 for a pair of shoelaces, and

translating it into: this is the best choice, this is a good choice, and we really discourage

you from using this approach.”

Another key objective is to standardize the reporting method and information in order

to make reporting easier and more cost effective within Timberland but also within the

industry. The goal is to create standardized sustainability metrics and standardized

measures of environmental performance for Timberland’s products. The goal of

standardization being that instead of Timberland collecting the information through

their own business systems, suppliers would provide the information into a registry that

Timberland and other companies could access.

Driving Forces behind Sustainability Reporting

In many respects, former CEO Jeffrey Swartz was the leader on CSR reporting efforts

and a driving principle of the company’s sustainability reporting efforts has been radical

transparency. For Timberland, radical transparency is about talking about the bad as

much as the good. It is about being provocative, sharing information with the intent of

receiving a reaction and response from stakeholders. It includes communicating things

that are material and important to the company.

For example, Jeffrey Swartz was the champion of Timberland’s “nutrition” labeling for

shoes. His view was that if consumers could go into a supermarket and look at a couple

different boxes of cereal and know what’s good or bad for them, why couldn’t they do

that going into a footwear store or going into a large retailer and see similar information

reported?

On their website “Voices of Challenge,” Timberland managers share very difficult

challenges and concerns related to sustainability and ask for candid feedback through

blogs and social media. And consumers and NGO organizations have asked challenging

questions to Timberland through this resource.

As Betsy Blaisdell describes it, “I think we’re always pushed further ahead by external

stakeholders. And I’d say we’re largely influenced by requests that we get externally for

improving or shifting our reporting. We had a major issue with Greenpeace a couple

years ago. It had to do with transparency in our leather supply chain in Brazil and it

really pushed us to have an industry dialogue about how can we take our protocol for

assessing the environmental performance of our tanneries, and push that further back

down the supply chain. That led to more transparency. And that was purely an external

push from Greenpeace that led to that.”

For Timberland consumers are always the most important stakeholder group to reach,

but the reality, at least for now, is that very few consumers actually read, understand,

and act on the sustainability reports.

According to Betsy Blaisdell, “There is evidence that significant numbers of consumers

do read the nutrition label on the footwear. But very few probably fully understand what

it means…it’s hard for them to really use it because it’s not relative to anything. It’s not

like they can compare a Timberland product with a Nike product right now and say, OK,

price, performance, and aesthetics alike, I’ll take this shoe over this shoe. So I think it’s

nice to do for consumers, but it’s not necessarily impacting their purchasing decisions,

which is where we would love to take it.”

Other stakeholder groups that are leading Timberland to expand its sustainability

reporting are the investor community, peer businesses, and other companies, including

stores and retail outlets that Timberland sells its product to.

Outside the United States, there is more governmental involvement around

sustainability reporting. For example, in France the government is moving to pass

legislation that would require the nation’s companies to begin measuring the

environmental life cycle impacts of their products. France is leveraging what some

industry groups in Europe have already developed. The French government recognizes

that businesses have been ahead of government on sustainability reporting, and this is

the case of Timberland in the United States.

11.2 Business Value of Sustainability Reporting

Benefits

Timberland has a goal of being the reference brand for sustainability and sustainability

reporting, and they do not limit that to within their own industry. The company wants to

be a leader, the brand that’s pushing the edge on transparency and reporting.

There is evidence that the efforts on sustainability and branding around sustainability

reporting are affecting Timberland profitability, market share, and customer loyalty.

Timberland’s highest-margin products—contributing the most on a dollar of sales basis

to profitability—are the company’s Earthkeepers products and this is suggestive that

consumers are willing to pay a premium for a low environmental impact product.

There is also anecdotal evidence of sustainability reporting contributing to Timberland’s

market performance; however, the company has struggled to put a hard dollar value on

this. Timberland’s marketing managers and public relations professional report that

sustainability efforts and the various sustainability reports Timberland have released

over the last several years has resulted in an increased number of positive media

impressions. Timberland receives other kinds of anecdotal evidence in market research

and focus groups with consumers that sustainability initiatives generate brand heat.

Brand heat is a marketing term to describe the positive feelings when exposed to a

brand name. There is even less evidence that brand heat actually leads to a purchase. A

challenge for Timberland is quantifying and linking sustainability to the financial

bottom line.

Challenges

One of the hardest challenges for Timberland was determining the right metrics to

report on. Timberland, in part, used the indicators from the Global Reporting Initiative

(GRI) as a starting point. However, the GRI has many performance indicators and many

were not relevant to Timberland’s stakeholders or material to Timberland.

For Timberland the most important areas to report on, measure, and act on are those

that are material to the company. Timberland’s areas of focus for materiality are the

environment, consumers, and other stakeholders, including government. Timberland

prioritizes measurement and action on the areas that are at the intersection of these

three dimensions of materiality.

Dimensions of materiality at Timberland.

For example, Leather and rubber use is highly material to Timberland’s business

operations. These two inputs have significantly more impact on the environment than

any other inputs because of the volume of leather and rubber used in the manufacturing

process and by the very nature of the materials. These manufacturing inputs are

material to the environment, to customers, and to stakeholders and as a result are areas

of focus and reporting for Timberland.

This strategy helps the company focus on the areas that have the greatest impact. For

example, customers might think Timberland should focus on packaging, such as

footwear boxes, because it is one of the aspects of the product that they most interact

with. The environmental impact of their use of leather and rubber is much

more material (significant) to the company’s ecological and social impact than its use of

cardboard for shoeboxes, as the boxes come from recycled sources and also can be easily

recycled.

Another major challenge for Timberland is the constant tension between measuring

more metrics due to demands from different stakeholder groups and the resources

required by Timberland to provide those metrics. This was a lesson learned by

Timberland as the company started its sustainability reporting efforts. At the beginning,

Timberland struggled with trying to provide more and more sustainable performance

indicators due to stakeholder requests. The company expended significant resources to

collect and report on the different disclosure requests that they received, which

distracted the company from undertaking the activities necessary to lead to substantive

improvements in its environmental and social impact.

Efforts at Standardization and Integration

Initiating sustainability reporting and developing the appropriate communication

methods has been a significant undertaking for the company over the past decade.

Sustainability reporting had to be done largely outside of Timberland’s regular business

units and systems. A separate reporting software system was developed for storing

sustainability performance indicators (SPIs), but, at the time, it was too complex for the

corporate social responsibility (CSR) reporting system to be integrated with the

company’s accounting and finance system tools or product design systems. They were all

developed on different software platforms and did not communicate.

The other reporting and management systems were not designed to include

sustainability measures, as it was not part of standard business practice. For example, in

designing a new product, there was limited product design reporting system ability to

take into consideration the sustainability impacts of different designs, as they were not

developed for environmental reporting.

Just recently (2011), business decision software systems companies, such as SAP, and

the designers of product life cycle management systems are developing systems software

that have environmental modules. This means that what were two or three separate

systems before can now become more of one integrated system to include

environmental and, eventually, social impact along with product design and financial

analysis.

Timberland is moving toward being able to upload CSR metrics into their financial

information and product design systems. Their environmental and financial information

systems are starting to “talk” to one another. Timberland can take into consideration

reductions in energy or material usage reductions from both an environmental and

financial perspective.

The benefits include not only being able to better tie environmental efforts with bottom

line considerations but also enabling the CSR team to reach and impact key decision

makers in finance and product design who were outside the Timberland CSR reporting

system. The sharing of information and reporting systems integration allows different

business units and functional areas to begin to speak a more common language and take

a more systems and full-cost and benefit perspective in their decision making about

financial, product design, and sustainability actions.

Timberland is focusing its sustainability reporting efforts increasingly on this integrated

systems perspective, using a core set of metrics to help identify problems and then

identifying root causes and finding the best solutions. The company can then link the

problem and solution to the financial performance of the firm.

As Betsy Blaisdell describes it,

The environment will be embedded in the financial statement. I think we are

experiencing the merging of the two right now. I think 20 years from now, the business

value will have been demonstrated and that environmental metrics will become a part of

the financial statement, the links will have been created, in that CSR will be a part of

everybody’s role, versus a distinct stand-alone department.

My hope is that in 20 years, this is just a part of the business—the normal business

school program. It’s a part of the normal business acumen. And that folks are educated

and have a carve-out, or have distinct responsibilities within their regular business job

to make sure that the commerce and the justice piece go hand in hand, versus living in

different parts.

11.3 Looking Forward: New Corporate Parent and New Corporate Social Responsibility Leader

On June 13, 2011, V. F. Corporation (http://www.vfc.com/about) announced the

purchase of Timberland for over $2.2 billion. V. F. already owned and operated several

well-known apparel brands such as the North Face, Wrangler, and Lee. In announcing

the purchase V. F. CEO Eric Wiseman commented, “The Timberland brand is

synonymous with high-quality outdoor footwear and apparel. We believe the unique

rugged outdoor positioning of Timberland will perfectly complement the premium,

technical positioning of The North Face brand. This acquisition will continue the

transformation of VF’s portfolio, propelling VF’s outdoor and action sports businesses to

50% of total revenue.”

V. F. offered $43 for each Timberland share, a premium of 43 percent to Timberland’s

closing price the day before the offer. On the announcement day, Timberland shares

climbed $13.21, or 44 percent, to $43.20. Timberland stock had traded between $15.07

and $45.72 from June 10, 2010, to June 10, 2011, and was at $30 before the offer. The

owners of about three quarters of Timberland’s stock, including Chairman Sidney

Swartz and CEO Jeffrey Swartz, entered into a voting agreement and gave written

consent for the deal on July 26.

V. F.’s shares rose by 10 percent after the deal was announced, which added about $1

billion to the V. F.’s market capitalization. This was atypical as shares in the buying

company usually fall due to stockholders expectations that most acquisitions end up

destroying value. V. F. says it intends to both grow Timberland’s sales and increase

Timberland’s sales efficiency. In 2010, Timberland’s operating margin was 9 percent,

which was considerably lower than V. F.’s operating margin of 20 percent.Marc

Gunther, “Timberland’s Jeff Swartz: ‘This Is Hard,’” Marc Gunther (blog), June 14,

2011, http://www.marcgunther.com/2011/06/14/timberlands-jeff-swartz-this-is-hard.

V. F. has not been a recognized leader on corporate social responsibility (CSR) or

sustainability. The company is at an early stage of addressing climate change and other

issues related to climate change. According to the Climate Counts Company Scorecard

on V. F. (http://www.climatecounts.org/scorecard_score.php?co=58), the corporation

has started to measure its company-wide impact it has on global warming (i.e., its

greenhouse gas emissions or climate footprint) and has made some efforts to reduce its

impact on global warming (i.e., its greenhouse gas emissions or climate footprint)

through the North Face. It has, however, shown minimal public information that it

supports public policy that addresses climate change and provides limited information

on its company-wide efforts to address climate change.

On June 28, 2011, after the announcement of V. F.’s purchase of Timberland, the

company hired a new vice president for corporate social responsibility, former Dell

executive Mark Newton. Newton is joining Timberland following eight years with Dell,

most recently as executive director of global sustainability, where he was responsible for

balancing the company’s growth strategy to minimize impacts on natural and human

resources across the value chain. During his tenure with Dell, he directed global policy

development, stakeholder engagements, and corporate strategies on environmental and

social issues. Prior to joining Dell, Newton led environmental technology programs at

Apple and Motorola. He sits on the advisory boards of Clean Production Action and

Carbonfund.org.

Newton will lead the CSR global team.“Timberland Hires CSR Vice President,”

Environmental Leader, http://www.environmentalleader.com/2011/06/28/timberland-

creates-role-of-csr-vice-president. He will report to Timberland’s CFO Carrie Teffner

and be responsible for the following:

• Overseeing Timberland’s effort to demonstrate environmental leadership and

reduce the company’s environmental impact as a global brand

• Ensuring that the human rights standards set forth by the company’s code of

conduct are adhered to and enforced by all Timberland vendors and suppliers

worldwide

• Creating a global standard for community service through innovation, regional

relevance, and employee engagement

• Executing against Timberland’s commitment to transparency and reporting by

engaging a diverse set of stakeholders

Jeff Swartz’s last day as CEO of Timberland was September 13, 2011. In his final blog

post he wrote the following:

Recently, I listened to the acquirer’s CEO addressing Timberland employees, in an open

air town hall meeting (we take the 10 minutes of New England summer time seriously

here, and so when we can meet outdoors, we do). It tore my guts out, to sit in the

community gathering as a listener, watching my colleagues watching the new boss,

wondering what changes are in store for our brand, our business, our community…an

environmental activist in our ranks rose, way in the back, to ask the new guy, the Boss to

Be, about sustainability.

“Tell us, please, why sustainability is important to you.”

And the man with whom I negotiated hard and long for the best possible deal for

shareholders stood his ground, and answered, authentically and naturally. “The answer

is simple—we believe that sustainability is good for the business and good for the world

environmentally.”

He went on; the answer got more detailed and more concrete. But I had stopped

listening.

For 30 years, we’ve been trying, fighting, struggling, to choreograph the intricate

interaction between shareholder value, consumer demand, and social accountability. I

have the scars, and the long list of failed efforts, incomplete outcomes, unrealized

dreams and frustrated ambitions before my eyes all the time that reflect this passionate

effort. And yet in this poignant moment of transition, from a business run by my family

for three generations to a business to be run by relative strangers—here is the CEO of a

10B$ powerhouse, talking about sustainability simply and easily—good for business,

good for the earth. And he means what he says. And it strikes me, hard, as I sit there—

30 years later, a vitally important conversation has shifted. Maybe, there comes a time

to say, “my job here is finished.”Jeff Swartz, “Endings and Beginnings,” The Bootmakers

Blog, September 13, 2011, http://blog.timberland.com/jeff-swartz/endings-and-

beginnings.

Table 11.1 Timberland Timeline

Year Key Events

Sustainable

Performance

Indicators

Economic Ecological Social

Revenue / Net

Income (in

Millions of

Dollars)

Stock Price

(First of

Year and

Adjusted

for Splits)

GHG

Emissions

Inventory

(Metric

Tons)

Employees

Community

Service

Hours

1955

Nathan Swartz bought

the remaining interest in

Abington Shoe

Company and welcomed

his sons into the

company, manufacturing

private label shoes for

leading brand

manufacturers for almost

10 years.

1973

The Swartz family

developed the

“Timberland” brand

name. Timberland

created its first

guaranteed waterproof

boot under the

Timberland name.

1975

Company produces

25,000 Timberland

brand boots and

approaches the $1

million mark in sales.

1978

The Swartz family

changed the name of the

company to the

Timberland Company.

1980

Timberland footwear

introduced into first

international market—

Italy.

1987

Timberland went public

on the American Stock

Exchange.

$1.80 (June

30, 1987)

Year Key Events

Sustainable

Performance

Indicators

Economic Ecological Social

Revenue / Net

Income (in

Millions of

Dollars)

Stock Price

(First of

Year and

Adjusted

for Splits)

GHG

Emissions

Inventory

(Metric

Tons)

Employees

Community

Service

Hours

1989

Timberland partnered

with City Year, Inc., the

Boston-based youth

“urban peace corps,” to

support community

service. Since then,

Timberland has provided

over $10 million to City

Year helping them to

expand their service

program to 13 cities

across the United States.

$156/$6 $1.84

1992

To sustain the

communities in which its

employees live and

work, Timberland

developed what later

became the Path of

Service program, a

progressive corporate

policy offering

employees 16 hours paid

leave to perform

community service.

Timberland launched its

“Give Racism the Boot”

awareness campaign

supporting diversity and

standing up against

oppression

internationally.

$291/$13 $1.14

1997

Timberland increased

the benefit of paid

employee volunteer time

to 40 hours. Timberland

introduced apparel for

kids.

$796/$47 $4.72 5,100 17,500

Year Key Events

Sustainable

Performance

Indicators

Economic Ecological Social

Revenue / Net

Income (in

Millions of

Dollars)

Stock Price

(First of

Year and

Adjusted

for Splits)

GHG

Emissions

Inventory

(Metric

Tons)

Employees

Community

Service

Hours

2000

The company was listed

as one of the “100 Best

Corporate Citizens” by

Business Ethics

Corporate Social

Responsibility Report.

Timberland issues its

first annual corporate

social responsibility

report.

$1,091/$124 $12.47 5,400 34,200

2006

The company set a new

standard for product

transparency and

increased its efforts to

minimize environmental

impact by introducing

new, more eco-conscious

packaging for its

footwear products and a

“nutritional label”—

product information

label that details aspects

of the company’s

environmental and

community footprint.

The company unveiled a

solar panel installation at

its distribution center in

Ontario, California. At

the time, the system was

one of the 50 largest in

the world, generated

60% of the power for the

distribution facility, and

reduced the facility’s

greenhouse gas

emissions by an

$1,568/$106 $32.92 25,599 6,300 80,600

Year Key Events

Sustainable

Performance

Indicators

Economic Ecological Social

Revenue / Net

Income (in

Millions of

Dollars)

Stock Price

(First of

Year and

Adjusted

for Splits)

GHG

Emissions

Inventory

(Metric

Tons)

Employees

Community

Service

Hours

estimated 218 metric

tons per year.

2009

Shrinks the carbon

footprint of its US stores

by an additional 11% by

switching 70% of its

North American stores to

LED lighting.

Timberland and

Soles4Souls launch

nationwide in-store shoe

donation program.

$1,286/$57 $11.68 16,273 5,700 82,300

2010

Timberland ranks #2 on

Climate Counts’ list of

companies making

aggressive strides in

fighting climate change.

$1,429/$97 $18.19 15,889 5,600 75,900

2011

Timberland stock

reaches highest price

ever at $45.72 on April

28. VF Corporation

announces purchases of

Timberland for $2.2

billion on June 13.

$24.79

Sources: “Our History,” Timberland, http://www.timberlandonline.co.uk/timberland-

corporate-timeline/about_timberland_corporate_timeline%2Cdefault%2Cpg.html;

“Home Page,”

Timberland, http://www.timberland.com/category/index.jsp?categoryId=4089424;

“About Timberland,” Timberland, http://www.timberlandonline.co.uk/timberland-

corporate-timeline/about_timberland_corporate_timeline%2Cdefault%2Cpg.html;

“About Us: Timeline,”

Timberland, http://www.timberland.com/category/index.jsp?categoryId=4089424.