Cost of Doing Business vs. License to Produce

Gary Liberson

By: Gary Liberson, Co-Founder, Water Resources Action Project
October 2010

Corporations need to grow to survive. If they just tread water, they either drown or are eaten by bigger fish. While the data on sustainability performance (i.e., social responsibility) vs. economic performance is at present a bit mixed, it is true that one is hard pressed to identify a large cap international company selling consumer products that does not have a sustainability program. So why do so many successful companies have sustainability programs and why does conventional wisdom associate successful programs as an indicator of a successful company?

From my perspective the answer is simple: profits and process. A great social profile equates to more profits. A poll by the Pew Research Center for People and the Press found that in the US as income increased so did the opinion that climate change was man-made. For households with income over $150,000, the percentage that attributed climate change to man was over 81%.

In the EU the attitudes are even more pronounced. A Eurobarometer special survey in late 2009 found that close to 70% of the population identified poverty, food, and drinking water as the largest problems facing the world with 47% picking climate change as number two. The global downturn ranked third at less than 40%.

Corporations are at their best when they make a profit. A corollary to this is that sustainability programs work only when they increase profits. If they do not, then the program is equivalent to giving charity: Why pick giving to the environment over the opera or cancer? Sustainability programs can increase market size, cut costs, ensure future raw materials for growth, and facilitate site licensing or myriad other activities that improve the bottom line now or in the future. Sustainability programs are the embodiment of a corporate philosophy that ensures a corporation’s “license to produce.”

A sustainability program indicates a “best in class” mentality. Regulatory compliance cannot happen without adherence to detail and process. So ultimately, a successful sustainability program indicates a company that can execute and is striving for “best in class.”

Sustainability programs have three legs – efficiency, largesse, and compliance. Efficiency covers reduced carbon footprint, less energy usage, less water (i.e., general cost savings and smaller footprint). Largesse includes donations to a wide range of NGOs and non-profits that advance the corporate image with their markets or with government agencies that control licensing (e.g., some say BP had an easy time acquiring Amoco because of BP’s pro climate change position in 1998). Compliance includes adherence and implementation of all government regulations and permits, as well as, sensitivity to the social, political and cultural characteristics of the local market. None of this works, of course, without a corporate dashboard that measures and reports performance to the company and is ultimately used as a public relations tool.

All of this is well known to almost any large international corporation with sales and manufacturing aspirations in Asia and the EU. However, for companies who are predominantly managed from a US perspective, this may seem a bit much. For these companies, compliance as the “cost of doing business” may be the dominant corporate perspective. The US has proven to be resistant to the market strength that NGOs possess in the EU or to strong government intervention as a barrier to entry that can be found in Asia.

Yet, US regulatory agencies are more and more taking actions that affect a company’s ability to manufacture and sell their product. Toyota, eggs, Massey mining, BP offshore drilling, and J&J pharmaceutical inspections have all happened this year. Each had a strong effect on its respective industry in sales and shareholder value.

Regulatory agencies have long memories. The actual specific failure that made the news is often out of the hands of the company. The historical compliance record is absolutely within the control of the company. The root causes of poor compliance are usually attributable to a small set of factors: rapid growth and cost.

  • Rapid Growth – Toyota wanted to be the largest auto manufacturer ahead of all other concerns. BP is perhaps the most aggressive oil leasing company in the world.
  • Cost – Two egg companies only cared about cost because they could reinvent themselves (as they had before) if they were closed down. Massey coal has a long reputation for its single focus on the bottom line. Unlike unionized mines, they have no independent safety net to raise real concerns. I attribute J&J’s problems to cost cutting (only time will identify the true culprit).

All of this may seem a little far afield of environmental compliance: It is not. There is no company that says let’s comply with OSHA and not EPA. BP was damned for their historical OSHA and EPA compliance as was Massey and the Iowa egg companies. When the big accident (event) occurs, a company is judged as much by its total corporate record as for the specific incident, regardless of the specific facts.

The next time you are developing your strategic plan and do the “vision thing,” remember that sustainability preserves a corporations “license to produce” and is not just the “cost of doing business.”

Gary Liberson is a management consultant and PhD statistician. He is a former Member of the Management Committee of PA Consulting, an international consulting firm headquartered in London, and past Head of the Environmental Practice. He writes a regular blog for Huffington Post. To learn more contact Gary at gliberson@gmail.com.

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