In a little more than a decade, terms such as sustainability, corporate social responsibility, and corporate citizenship have become widely common in managerial parlance, and today affect operations as well as influence strategic decision-making in several corporations. Consider, for instance, Wal-Mart’s shift toward environmental sustainability: CEO Lee Scott now wants to turn the world’s largest retailer into a champion of green efficiency. Or think about General Electric’s Ecoimagination program, aimed at capturing the billion-dollar market for low-carbon energy technologies. In some cases, corporations are ahead of governments. It’s the case of many US corporations who have decided to endorse the Kyoto Protocol, while the Bush administration has refused to ratify it.
But we are still a long way from achieving something approaching sustainable growth. In fact, international agencies point to a global worsening of environmental, and in many cases social, indicators. Although there are many explanations for this, the theory of the firm has never interrogated itself on the reasons for failing to meet these socially desirable targets.
Management science has adapted the mainstream model to accommodate sustainability, by reconciling environmental and social issues with the overarching profit motive. This means that it’s the sustainability of the firm – its capacity to generate and distribute value over time – that has been put at the center of the analysis, not the sustainability of the overall system.
This implicitly disregards two basic concepts associated with the notion of sustainable development, namely the non-substitutability of natural with technological capital, and the notion of absolute limits and carrying capacity of a given ecosystem. Management theory suggests that reconciling the three dimensions of sustainability (environmental, social, economic) can lead to short-term compensations among objectives, which contravenes a basic tenet of sustainable development.
Moreover, while macroeconomic systems have accepted ecological constraints to their growth (such is the logic of the Kyoto Protocol), corporations will not forgo possibilities for expanding markets, even this means exceeding the carrying capacity of an ecosystem. A profound theoretical revision is needed to include the notion of absolute physical limit.
Therefore, it is safe to say there exists a trade-off between sustainable development and the bottom line of firms. At the level of the individual firm, winning strategies can implemented that satisfy stockholders and stakeholders alike, by differentiating brands and products, improving relations, and promoting productivity. But from a systemic point of view, these strategies can be woefully inadequate to achieve overall sustainable development.
A complex and fascinating challenge thus awaits contemporary management theory: how to internalize environmental macro-imperatives in the theory of business decisions.
by Stefano Pogutz,
Assistant Professor of Corporate Management, Università Bocconi