1.4 Economic, Social, and Environmental Performance
Learning Objectives
Define economic, social, and environmental performance.
Understand how economic performance is related to social and environmental performance.
A stakeholder approach to management focuses on the desire to satisfy multiple, often competing, constituents who have a claim on an organization’s actions and outcomes. Economic performance is a very important outcome to a firm’s stakeholdersIndividuals and organizations who are actively involved in the organization or whose interests may be positively or negatively affected as a result of what the organization does., such as investors or owners, because this performance eventually provides them with a return on their investment. Other stakeholders, like the firm’s employees and society at large, are also deemed to benefit from such performance. Increasingly, noneconomic accomplishments, such as reducing waste and pollution, are also viewed as critical performance targets that managers must meet to satisfy stakeholders. The notion of the triple bottom line refers to the measurement of business performance along social, environmental, and economic dimensions. We discuss economic, social, and environmental performance in the following section and conclude it with a brief discussion of the interdependence of economic performance with other forms of performance.
Figure 1.12
The triple bottom line emphasizes the three Ps: people (social concerns), planet (environmental concerns), and profits (economic concerns).
Source: Reproduced with permission from Short, J., Bauer, T., Ketchen, D., & Simon, L. (2010). Atlas Black: Managing to succeed. Irvington, NY: Flat World Knowledge.
Economic Performance
Traditionally, economic performance of a firm is a function of its success in producing benefits for its owners in particular, accomplished through the efficient use of resources to produce some form of profit. Simply put, an 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. 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
Corporate social responsibility (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. Such actions result in the corporate social performance of an organization.
Three notable companies in terms of CSR are Ben & Jerry’s, S. C. Johnson, and Target Corporation. Their statements about why they do this, summarized in Figure 1.13, capture many of the facets just described.
Integrating Economic, Social, and Environmental Performance
Figure 1.14
The use of socially responsible practices has been a key to the success of The Body Shop.
Source: TungCheung / Shutterstock.com
Managing a firm’s actions to achieve a triple bottom line in a way that actually builds up all three facets of performance—economic, social, and environmental—is challenging. Advocates of CSR argue that achieving success in each type of performance is possible, and consideration of all stakeholders should be the way all firms are evaluated. Increasingly, evidence is mounting that attention to a triple bottom line is more than being “responsible”; instead, it’s just good business. Critics argue that CSR detracts from the fundamental economic role of businesses; still, others argue that it is an attempt to preempt the role of government as a watchdog over powerful multinational corporations.
Figure 1.15
TOMS shoes exemplifies a venture based on social goals by donating a pair of shoes to a child in need for every pair of shoes purchased.
A 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. 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.”
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. 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. 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 products from The Body Shop, ostensibly because they believe that it simply costs more to provide goods and services that are environmentally friendly. The Body Shop has been very successful with this strategy.
StarKist, too, adopted a CSR approach when it decided to purchase and exclusively sell 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 against 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.”
Whole Foods is a company that has recently received mixed media attention with regard to their CSR and other organizational practices. Noted for their use of natural and organic products, Whole Foods has been recently highlighted as one of the most socially responsible companies in the United States. Despite their enviable reputation, sales slowed recently amidst recent allegations from the New York City Department of Consumer Affairs, which reported that Whole Foods overcharged customers by listing incorrect weights on some prepackaged food items. Only time will tell how consumers ultimately value the efforts of Whole Foods despite conflicting media reports.
Key Takeaway
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.