Mary Jacobs just returned from an unexpected meeting with her CEO where he invited Mary to take a new role as chief sustainability officer (CSO) of Exactibrate Corporation. Exactibrate, headquartered in Cleveland, Ohio, is a publicly held company that manufactures production, process, and testing equipment for semiconductor chip fabricators. Mary’s mandate from the CEO, to whom she will report, is to reconcile the company’s fragmented efforts around sustainability, with two goals: (1) develop an integrated sustainability program that creates positive economic returns for the company and benefits communities where it operates and (2) boost the company’s competitive position as a cutting-edge manufacturer.
Mary’s mandate includes creating economic value for Exactibrate’s shareholders and social value for its stakeholders. In accepting this, Mary adopted an important perspective that denies the existence of a “sustainability tax” — the idea that executives must choose between economic and social value or between shareholders and stakeholders.
This represents a critical evolution in the sustainability journey because abandoning sustainability tax thinking means that leaders only execute projects that create value for all: investors, customers, employees, suppliers, regulators, and the community. In this Advisor, we outline the ways that actions in the quadrants create value for all. Table 1 shows the sources of value for each quadrant.
Shareholder Value
Shareholder value arises from either the current (and potentially future) earnings stream of the business or the multiplier on those earnings that creates the valuation of the firm. We all learned in Accounting 101 that a firm’s earnings equal its revenues minus its costs. By keeping the business compliant with regulatory requirements and other legal obligations, red quadrant activities reduce costs: firms avoid fines and related legal expenses. Yellow quadrant activities also reduce costs, either directly from lower resource use and less waste or indirectly by improving productivity. Blue quadrant activities grow top-line revenue. Green quadrant activities may not impact current or future earnings, but they impact the multiplier by building a positive reputation for the firm and/or brand equity among various stakeholders.
As a company travels further in its sustainability journey, it focuses on activities in each quadrant that produce long-term gains, including lasting efficiencies, recurring revenues, and/or an institutionalized brand and reputation. Thoughtful and careful sustainability initiatives increase the economic value of the firm — shareholders win.
Stakeholder Value
Stakeholder value can be measured in monetary terms, such as when sustainability work reduces the prices customers pay for products or when those products help them solve specific problems. Suppliers win when they get paid sooner, employees benefit from higher wages, and communities benefit from cash or in-kind donations that fund their programs. This usually represents the lesser source of stakeholder value; stakeholders also benefit when the quality of their interactions with the business and their lives in general improve.
Red quadrant activities improve the lives of stakeholders through transparent information, which sends a signal of respect from the business toward them and allows them to make informed assessments of the quality of the firm. Yellow quadrant activities improve their suppliers by making those interactions more efficient and effective. Employees win through greater levels of engagement, which may come through participating in this sustainability work or through the reputational benefits of working for a cutting-edge company.
Blue quadrant activities improve the quality of customer interactions through increased respect and trust. Exactibrate’s customers openly asked the company to help solve their issues. When companies listen to their customers, they not only develop better products, they also exhibit respect for them. That respect engenders trust between the parties, which lays a foundation for a stream of products and services that meet real customer needs and earn solid returns for the business.
Green quadrant activities, when done thoughtfully and well, improve the quality of life for the community. Everyone benefits when firms contribute their knowledge and skill — not just their money — to solving or mitigating deep-seated community challenges and issues. Cleveland residents may find their lives less stressed due to Exactibrate’s targeted work that focuses on urban renewal in its hometown. Just as with shareholder value, the Sustainability Canvas shows stakeholders where tangible societal value lies, and stakeholders win.
Risk Reduction
The third row of Table 1 shows how sustainability efforts in each quadrant reduce risk. Reducing risk benefits both shareholders (through less volatile earnings) and stakeholders (through more predictable behavior by the business). Red quadrant activities mitigate the risk of social activist pressure on the firm, such as boycotts. They also allow those activists to better understand and predict why the firm does what it does. Yellow quadrant efforts reduce operational risks such as safety or supply chain disruptions from climate events. Shareholders appreciate a more stable earnings stream, and stakeholders such as employees and suppliers prize workflows with fewer potential interruptions. Blue quadrant activities reduce customer churn, which stabilizes revenue streams and lowers customer-acquisition costs. Customers win because they avoid product-related disruptions, and they do not incur the search costs associated with finding a new supplier. Finally, green quadrant activities reduce political risks for the firm as it and its leaders fulfill their roles as good corporate citizens. The general citizenry benefits as they have (and know they have) a stable, predictable partner dedicated to improving the quality of life for all.
Competitive Advantage
The second half of Mary’s mandate includes a charge to create an integrated sustainability program that helps build and secure a stronger competitive position. A generation ago, Michael Porter advanced a simple thesis about successful strategy: firms won in their markets through either cost leadership or creating a differentiated offering.
The logic of the Sustainability Canvas belies that notion. Yellow quadrant activities improve the firm’s cost position at the same time blue quadrant ones enhance competitive uniqueness. As firms become active in these two quadrants, they find themselves in the enviable position of beating competitors on both cost and differentiation. Green quadrant activities may contribute to dual advantage by lowering the firm’s political risk profile and associated costs while burnishing its reputation and raising social capital.
We don’t know who Mary’s competitors are, but as she uses the Sustainability Canvas to create an integrated sustainability program, Exactibrate will gain advantages over its rivals. As she integrates efforts across all four quadrants, the firm will develop routines to both codify and share important knowledge. As discussed above, a truly integrated program shares knowledge and best practices across quadrants. Firms that adopt a learning or growth mindset develop a culture of continuous learning, improvement, and innovation. That culture bestows significant advantages over rivals that fail to integrate their sustainability programs and related learning.
Mary Jacobs isn’t real; she represents a composite of several directors or C-suite sustainability leaders we’ve met. But the challenges we posed for her are very real.
[For more from the authors on this topic, see: “Sustainable Sustainability: How to Create an Enduring & Integrated Sustainability Program.”]
