Linking shareholder value with sustainability  

9 October 2007:

However, by fully integrating corporate social responsibility into the way a company does business it can sustainably enhance shareholder value. Long-term sustainable business development requires a paradigm shift towards creating shared value to the society, economy and environment in which corporations operate.

This is according to Jayne Mammatt, senior manager, Governance & Sustainability at Ernst & Young, who says that although the primary responsibility of a company is to its shareholders, it still has to ensure that it is addressing the needs of all stakeholders, including employees and customers, otherwise shareholder expectations will never be realised. “To create long-term shareholder value, corporations need to create long-term trust with all stakeholders. To create this trust, it is necessary to build corporate social responsibility into the company strategy and follow that strategy over en extended period of time”.

The basics of business management requires legal and regulatory compliance and internal management system controls and once this is achieved corporate social responsibility can be built into the company strategy. On this foundation is built a more ambitious goal of sustainability. “Our Common Future, a report from the United Nations World Commission on Environment and Development (WCED), defines sustainability as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. A clear understanding of this concept entrenched into business leadership and management allows companies to capitalise on the true benefits of corporate social responsibility”.

“These benefits can be achieved by creating shared value to the environment and society in which the company operates. However, this will only be successful if it has a direct relationship to creating shareholder value. If creating environmental or social value does not make sense from a business perspective, it will be either done on a limited basis, or not be sustainable over the years,” says Mammatt. “If these decisions are strategically aligned to the company’s business objectives the initiatives will be more sustainable. Part of the approach to creating shared value also means that a company looks beyond short-term business needs of key suppliers and contractors and looks towards sustainable growth”.

She stresses that it is in a company’s enlightened self-interest to promote sustainability with their suppliers, contractors and staff. “Therefore, if a company creates shared value with their employees, such as continuous education and training, staff will see this action as a motivator for long-term commitment. In a competitive employment market, people want to work for a company with a strong reputation, based on a decent set of values and behaviours. A clear public commitment to and differentiation around corporate responsibility is a source of competitive advantage. Similarly an external stakeholder or customer may also perceive actions that create shared value to society as a motivation for prolonged customer loyalty. If a company is able to minimise staff turnover and maximise customer loyalty it will be more sustainable in the long-run,” she adds.

“Sustainability is inherently linked to a company’s brand or reputation. If a company is perceived in a positive light, such as being environmentally conscious or socially aware, it can be viewed as an attractive business partner. Company’s often view initiatives such as using recycled paper as an expense instead of seeing it as a reputational investment. Obviously multiple initiatives, linked to a business need, are required to influence a brand or reputation,” says Mammatt.

The practise and public communication of good corporate responsibility can increase transparency and therefore accountability. It can also demonstrate good corporate governance and sound risk management and will boost investor confidence,” he says. The sustainable business is a more efficient business that pre-empts the cost and reputational impacts of remedial programs, legal action and media exposure.

Mammatt concludes: “To achieve sustainable profit growth, companies must strive to improve business conditions by means of reliable and efficient contractors, improved industry standards, skilled and loyal workforce, and products or services which clients prefer over their competitors. Trust and value creation with stakeholders, linked with a business requirement, can lead to long-term sustainable shareholder value.

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