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This is “Economic, Social, and Environmental Performance”, section 1.5 from the book Management Principles (v. 1.1). For details on it (including licensing), click here.

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Table of Contents

Table of Contents

Figure 1.9

Environmentally Neutral

Design (END) designs

shoes with the goal of

eliminating the surplus

material needed to make

a shoe such that it costs

less to make and is

lighter than other

performance shoes on the

market.

Photo used with

permission of

Environmentally Neutral

Design (END).

1.5 Economic, Social, and Environmental Performance

L E A R N I N G O B J E C T I V E S

1. Be able to define economic, social, and environmental performance.

2. Understand how economic performance is related to social and environmental performance.

Webster’s dictionary defines performance as “the execution of an action” and “something

accomplished.”http://www.merriam-webster.com/dictionary/performance (accessed October 15,

2008). Principles of management help you better understand the inputs into critical organizational

outcomes like a firm’s economic performance. Economic performance is very important to a firm’s

stakeholders particularly its investors or owners, because this performance eventually provides them

with a return on their investment. Other stakeholders, like the firm’s employees and the society at large,

are also deemed to benefit from such performance, albeit less directly. Increasingly though, it seems

clear that noneconomic accomplishments, such as reducing waste and pollution, for example, are key

indicators of performance as well. Indeed, this is why the notion of the triple bottom line is gaining

so much attention in the business press. Essentially, the triple bottom line refers to The measurement

of business performance along social, environmental, and economic dimensions. We introduce you to

economic, social, and environmental performance and conclude the section with a brief discussion of

the interdependence of economic performance with other forms of performance.

Economic Performance

In a traditional sense, the economic performance of a firm is a function of its success in producing

benefits for its owners in particular, through product innovation and the efficient use of resources.

When you talk about this type of economic performance in a business context, people typically

understand you to be speaking about some form of profit.

The definition of economic profit is the difference between revenue and the opportunity cost of all

resources used to produce the items sold.W. P. Albrecht, Economics (Englewood Cliffs, NJ: Prentice

Hall, 1983). This definition includes implicit returns as costs. For our purposes, it may be simplest to

think of economic profit as a form of accounting profit where profits are achieved when revenues

exceed the accounting cost the firm “pays” for those inputs. In other words, your organization makes a

profit when its revenues are more than its costs in a given period of time, such as three months, six

months, or a year.

Before moving on to social and environmental performance, it is important to note that customers play

a big role in economic profits. Profits accrue to firms because customers are willing to pay a certain

price for a product or service, as opposed to a competitor’s product or service of a higher or lower price.

If customers are only willing to make purchases based on price, then a firm, at least in the face of

competition, will only be able to generate profit if it keeps its costs under control.

Social and Environmental Performance

You have learned a bit about economic performance and its determinants. For most organizations, you

saw that economic performance is associated with profits, and profits depend a great deal on how much

customers are willing to pay for a good or service.

With regard to social and environmental performance, it is similarly useful to think of them as forms of

profit—social and environmental profit to be exact. Increasingly, the topics of social and environmental

performance have garnered their own courses in school curricula; in the business world, they are

collectively referred to as corporate social responsibility (CSR)

CSR is a concept whereby organizations consider the interests of society by taking responsibility for the

impact of their activities on customers, suppliers, employees, shareholders, communities, and the

environment in all aspects of their operations. This obligation is seen to extend beyond the statutory

obligation to comply with legislation and sees organizations voluntarily taking further steps to improve

the quality of life for employees and their families, as well as for the local community and society at

large.

Two companies that have long blazed a trail in CSR are Ben & Jerry’s and S. C. Johnson. Their

statements about why they do this, summarized in Table 1.1 "Examples of leading firms with strong

CSR orientations", capture many of the facets just described.

Table 1.1 Examples of leading firms with strong CSR orientations

Why We Do It?

Ben & Jerry’s

“We’ve taken time each year since 1989 to compile this [Social Audit] report because we continue

to believe that it keeps us in touch with our Company’s stated Social Mission. By raising the profile

of social and environmental matters inside the Company and recording the impact of our work on

the community, this report aids us in our search for business decisions that support all three parts

of our Company Mission Statement: Economic, Product, and Social. In addition, the report is an

important source of information about the Company for students, journalists, prospective

employees, and other interested observers. In this way, it helps us in our quest to keep our values,

our actions, and public perceptions in

alignment.”http://www.benjerrys.com/our_company/about_us/social_mission/social_audits

(accessed October 15, 2008).

S. C. Johnson

“It’s nice to live next door to a family that cares about its neighbors, and at S. C. Johnson we are

committed to being a good neighbor and contributing to the well-being of the countries and the

communities where we conduct business. We have a wide variety of efforts to drive global

development and growth that benefit the people around us and the planet we all share. From

exceptional philanthropy and volunteerism to new business models that bring economic growth to

the world’s poorest communities, we’re helping to create stronger communities for families

around the globe.”http://www.scjohnson.com/community (accessed October 15, 2008).

Integrating Economic, Social, and Environmental

Performance

Is there really a way to achieve a triple bottom line in a way that actually

builds up all three facets of performance—economic, social, and

environmental? Advocates of CSR understandably argue that this is possible

and should be the way all firms are evaluated. Increasingly, evidence is

mounting that attention to a triple bottom line is more than being

“responsible” but instead just good business. Critics argue that CSR detracts

from the fundamental economic role of businesses; others argue that it is

nothing more than superficial window dressing; still, others argue that it is

an attempt to preempt the role of governments as a watchdog over powerful

multinational corporations.

While there is no systematic evidence supporting such a claim, a recent

review of nearly 170 research studies on the relationship between CSR and

firm performance reported that there appeared to be no negative

shareholder effects of such practices. In fact, this report showed that there

was a small positive relationship between CSR and shareholder returns.J.

Margolis and Hillary H. Elfenbein, “Doing well by Doing Good? Don’t Count

on It,” Harvard Business Review 86 (2008): 1–2. Similarly, companies that

pay good wages and offer good benefits to attract and retain high-caliber

employees “are not just being socially responsible; they are merely practicing good management.”R.

Reich, Supercapitalism: The Transformation of Business, Democracy, and Everyday Life (New York:

Knopf, 2007).

The financial benefits of social or environmental CSR initiatives vary by context. For example,

environment-friendly strategies are much more complicated in the consumer products and services

market. For example, cosmetics retailer The Body Shop and StarKist Seafood Company, a strategic

business unit of Heinz Food, both undertook environmental strategies but only the former succeeded.

The Body Shop goes to great lengths to ensure that its business is ecologically

sustainable.http://www.bodyshop.com (accessed October 15, 2008). It actively campaigns against

human rights abuses and for animal and environmental protection and is one of the most respected

firms in the world, despite its small size. Consumers pay premium prices for Body Shop products,

ostensibly because they believe that it simply costs more to provide goods and services that are

environmentally friendly. The Body Shop has been wildly successful.

StarKist, too, adopted a CSR approach, when, in 1990, it decided to purchase and sell exclusively

dolphin-safe tuna. At the time, biologists thought that the dolphin population decline was a result of the

thousands killed in the course of tuna harvests. However, consumers were unwilling to pay higher

prices for StarKist’s environmental product attributes. Moreover, since tuna were bought from

commercial fishermen, this particular practice afforded the firm no protection from imitation by

competitors. Finally, in terms of credibility, the members of the tuna industry had launched numerous

unsuccessful campaigns in the past touting their interest in the environment, particularly the world’s

oceans. Thus, consumers did not perceive StarKist’s efforts as sincerely “green.”

You might argue that The Body Shop’s customers are unusually price insensitive, hence the success of

its environment-based strategy. However, individuals are willing to pay more for organic produce, so

why not dolphin-safe tuna? One difference is that while the environment is a public good, organic

produce produces both public and private benefits. For example, organic farming is better for the

environment and pesticide-free produce is believed to be better for the health of the consumer.

Dolphin-free tuna only has the public environmental benefits (i.e., preserve the dolphin population and

oceans’ ecosystems), not the private ones like personal health. It is true that personal satisfaction and

benevolence are private benefits, too. However, consumers did not believe they were getting their

money’s worth in this regard for StarKist tuna, whereas they do with The Body Shop’s products.

Somewhere in our dialogue on CSR lies the idea of making the solution of an environmental or social

problem the primary purpose of the organization. Cascade Asset Management (CAM), is a case in

point.http://www.cascade-assets.com (accessed October 15, 2008). CAM was created in April 1999, in

Madison, Wisconsin, and traces its beginnings to the University of Wisconsin’s Entrepreneurship

program where the owners collaborated on developing and financing the initial business plan. CAM is a

private, for-profit enterprise established to provide for the environmentally responsible disposition of

computers and other electronics generated by businesses and institutions in Wisconsin. With their

experience and relationships in surplus asset disposition and computer hardware maintenance, the

founders were able to apply their skills and education to this new and developing industry.

Firms are willing to pay for CAM’s services because the disposal of surplus personal computers (PCs) is

recognized as risky and highly regulated, given the many toxic materials embedded in most

components. CAM’s story is also credible (whereas StarKist had trouble selling its CSR story). The

company was one of the original signers of the “Electronic Recyclers Pledge of True

Stewardship.”http://www.computertakeback.com/the_solutions/recycler_s_pledge.cfm (accessed

October 15, 2008). Signers of the pledge are committed to the highest standards of environmental and

economic sustainability in their industry and are expected to live out this commitment through their

operations and partnerships. The basic principles of the pledge are as follows: no export of untested

whole products or hazardous components or commodities (CRTs, circuit boards) to developing

countries, no use of prison labor, adherence to an environmental and worker safety management

system, provision of regular testing and audits to ensure compliance, and support efforts to encourage

producers to make their products less toxic. CAM has grown rapidly and now serves over 500 business

and institutional customers from across the country. While it is recognized as one of the national

leaders in responsible, one-stop information technology (IT) asset disposal, its success is attracting new

entrants such as IBM, which view PC recycling as another profitable service they can offer their existing

client base.Search on “asset disposal solutions” at http://www.ibm.com/ibm/environment/ (accessed

October 15, 2008).

K E Y TA K E AWAY

Organizational performance can be viewed along three dimensions—financial, social, and

environmental—collectively referred to as the triple bottom line, where the latter two dimensions

are included in the definition of CSR. While there remains debate about whether organizations

should consider environmental and social impacts when making business decisions, there is

increasing pressure to include such CSR activities in what constitutes good principles of

management. This pressure is based on arguments that range from CSR helps attract and

retain the best and brightest employees, to showing that the firm is being responsive to market

demands, to observations about how some environmental and social needs represent great

entrepreneurial business opportunities in and of themselves.

E X E R C I S E S

1. Why is financial performance important for organizations?

2. What are some examples of financial performance metrics?

3. What dimensions of performance beyond financial are included in the triple bottom line?

4. How does CSR relate to the triple bottom line?

5. How are financial performance and CSR related?