Earlier this week I had the opportunity to hear about a compelling new study that shows that sustainability practices DO, in fact, pay off for business. This study is the same one that was recently recapped by a colleague of mine, Louise Macdonald (www.louisemacdonald.ca), for the Toronto Sustainability Speakers Series. What follows is Louise’s recap of the working paper.
The working paper is called “The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance”, by Robert G. Eccles and George Serafeim of the Harvard Business School, and Ioannis Ioannou of the London Business School. It is not exactly light bedtime reading, especially if you get into the elements of scientific inquiry that are detailed throughout, but it is compelling in that it provides evidence that creating a culture of sustainability leads to improved corporate financial performance in the long-term. Perhaps those of us who are passionate about sustainability knew that already, but here is a study spanning 18 years and involving 180 companies that clinches it, or at least provides more food for discussion about the cost-benefit equation of shifting the corporate mindset.
The authors took a matched sample of 180 companies in 1993, which means they found two sets of 90 companies in 29 different industry sectors with similarities along 5 different financial dimensions: Total assets, Return on Assets, Return on Equity, and their definitions of Leverage and Turnover, and Market price-to-Book value ratio of the shares. The first group of 90 companies were selected because they were considered by the authors to be High Sustainability companies, who had adopted environmental and social policies and integrated them into their culture long before the sustainability movement had taken off, and the other 90 were chosen because they were traditional or Low Sustainability companies, who had adopted almost none of these policies over the period studied. The researchers wanted to chart differences in behaviour and performance over time between the two types of companies.
The article highlights major differences between the two sets of 90 companies in 4 areas: governance structure, the extent of stakeholder engagement, the extent of long-term orientation and the measurement and disclosure of non-financial information and metrics. They found that the high sustainability companies were more likely to assign board responsibility to issues of sustainability, and to make executive compensation a function of stakeholder perceptions along environmental and social metrics. The needs, perceptions and level of engagement of key stakeholder groups in these firms were integrated into strategic thinking and measurement of performance. The authors also analyzed corporate and investor communications to identify words associated with long-term orientation for both sets of companies, and they found that the high sustainability companies were more likely to use words demonstrating their commitment to creating value over time; they were also more likely to measure and disclose performance along non-financial metrics, representing their commitment to a culture of sustainability.
Most interestingly, the authors also tracked corporate performance over 18 years in terms of both stock market and accounting measures of return, and found that the sustainable firms outperformed the traditional firms on all measures. Their concluding comments reflect their enthusiasm for more research in this area, while acknowledging that more and more firms will adopt a culture of sustainability because of changing societal expectations, and that tradeoffs and choices will be made in favour of sustainability that will build the value of these corporations over the long-term.
This study confirms for me that for corporations today, the question is no longer whether to make the shift toward creating a high sustainability culture, but when and where to start. To my mind, the focus in this study on building strong relationships over time with all stakeholders is a fundamental place to start. How can we best involve them in the future of our organization? What do we as leaders need to learn about creating a company that provides for a sustainable future for customers, employees, suppliers, communities, suppliers and partners as well as investors? And most critically, how does the way we are leading now unwittingly send a different message?
A copy of the working paper can be found at www.ecoopportunity.net
Louise Macdonald, is a transformational Leadership Consultant who works at the level of assumptions and mindsets to help her clients create engagement toward a Sustainability strategy, among other change opportunities affecting their business.