Public Companies and Sustainability

This post is in response to Liz Paxton’s article dealing with the case for a blue chip company acquiring a smaller company with a strong sustainable brand.  Before I say anything, I’d just like to mention that I thought the article was great, and I hope to see many more like it on the Kenan Flagler blog.  Liz’s article outlined the business case from a company’s perspective as well as positive and negative implications for such an acquisition on consumers.  Her conclusion was conditional; she states that the synergies achievable by merging a sustainable brand and a blue chip can be dramatic, and as such these mergers, when done correctly, can make a positive sustainability contribution.

I do not disagree with this assessment; rather, I think that it fails to make a statement that can be disagreed with.  Reduced, I read her point as: a wide range of possibilities exist when one company acquires another.  More specifically, she states that sometimes the merger will work well from a sustainability standpoint and sometimes it won’t, and consumers need to keep themselves informed in make appropriate purchasing decisions.  I accept this ipso facto, and would like to go a little further.

I think that organizational and ownership structure is very important with regard to sustainable enterprises.  Organizations reflect both their management structure and their ownership structure, which, among other things, is why boardroom diversity is so important.  This is a huge topic which is explored in much more detail in Peter Barnes’ Capitalism 3.0.  In short, for all the talk of the triple bottom line, directors of public companies have a legal responsibility to make decisions based solely on financial critieria.  This is known as their fiduciary duty, as in “we beleive that Yahoo’s board is neglecting its fiduciary duty to its shareholders by refusing this offer”.  Boards’ fiduciary duty is enshrined in law.  As such, shareholder activists may sue a board whenever a decision does not maximize their financial reward. 

In making decisions based on financial inputs alone, social and environmental activities may only be taken into account when they have a positive impact on the financials of a company.  And, as the corporate green movement doesn’t like to admit, financial, environmental, and social goals are not always aligned.  If this point is not self-evident, just realize that often the most environmentally responsible thing a company could do would be to sell fewer things; clearly that suggestion is not going to raise revenues.  This intersection between firms’ legal operational environment and their business decisions as related to sustainability is one of many examples wherein we, as students of sustainable enterprise, need to have a very wide lense for looking at the world.  I believe that my understanding of politics, economics, science, history, and law are every bit as important in this field as are accounting and finance.

All that being said, I believe that in order to be a truly sustainable company, decision makers need to be free from the constraint to maximize financial returns.  If a company can be very sustainable and return modest profits, is that better or worse than a company that is moderately sustainable and returns strong profits?  If that company is private, this is a critical question for the owner(s) to consider.  If that company is public, it is a lawsuit waiting to happen.

Another quick note:  while doing research for this article, I came across an interesting tidbit.  It seems that people are beginning to think about this a little bit more, and I wonder if that will go anywhere.  This will certainly not change our short-term reality, but it’s definitely a trend to keep on the radar.  Read for yourself. 

Update on 9 Jun 2010 by Lee Coker

This is one area where Tristan and I disagree.  I think for a company, blue chip or not, that can embed sustainability across it's business can actually become more profitable.