Good News 4 – Rethinking the Bottom Line
Now and then I read a headline that manages to capture attention on a topic in just a few words, while I take four pages of laborious prose to make a similar point. How about this example, ‘Every whale is worth $2 million.’ This was the introduction to an article by Rachel Koning Beals in Market Watch in early October. Her point was that whales “lead long lives sequestering carbon dioxide in their bodies. At death the creatures sink to the bottom of the ocean, still holding that absorbed gas. Ultimately just one of those mammals is responsible on average for pulling 33 tons of heat-trapping CO2 out of the atmosphere for centuries. The estimated economic value of this service to slow climate change? A tidy $2 million per individual whale”. Brilliant, and a far more attractive contribution than the blustery rhetoric from Australia’s Prime Minister at the recent COP26 meeting. We’ve got whales; all he had was the promise of a technology yet to be invented!
You might think that I am pessimistic about addressing global warming in the aftermath of watered-down resolutions from Glasgow, but I’m not. Rather, and despite the fitful attempts by world leaders to craft shared policies, slowly but surely there are some changes taking place that will have a major impact. This is a story about businesses. It has been an uncertain and frustrating journey, but I can discern signs of real progress. At its core, I am confident there is a growing recognition among businesses and business leaders that they should see their role as trustees, rather than exploiters. To explain this further, I need to go back a little, to 1970, although the issues at stake had first been debated many years before.
I have selected 1970, because this year was important in the post-employment career of Robert K Greenleaf. Greenleaf began working for AT&T back in 1926, and slowly worked his way up in the business, eventually moving from operations to become Director of Management Development. He was an innovator, with initiatives ranging from developing new ways of assessing staff potential by introducing the world’s first corporate assessment centre, through to promoting diversity, as well as running a program to expose up-and-coming leaders to the humanities, and even bringing in theologians and psychologists to help the men and women at AT&T understand the wider implications of corporate decisions. He retired in 1964 and immediately started a new career as a writer, consultant, and teacher.
I have frequently wondered what the executive leadership of AT&T must have thought when Greenleaf published The Servant as Leader in 1970. In it, he proposed that the best leaders were servants first, and the key tools for a servant-leader included listening, persuasion, access to intuition and foresight and the careful use of language. In the next four years, he published two more essays, exploring the view that organisations and society more broadly could embrace servant leadership, and suggesting that trustees should act as servants. In that first paper, opening with a commentary on a story by Herman Hesse, Greenleaf explained “The servant-leader is servant first … It begins with the natural feeling that one wants to serve, to serve first. Then conscious choice brings one to aspire to lead. That person is sharply different from one who is leader first, perhaps because of the need to assuage an unusual power drive or to acquire material possessions. For such it will be a later choice to serve – after leadership is established. The leader-first and the servant-first are two extreme types. … The difference manifests itself in the care taken by the servant-first to make sure that other people’s highest priority needs are being served. The best test, and difficult to administer, is: Do those served grow as persons? Do they, while being served, become healthier, wiser, freer, more autonomous, more likely themselves to become servants? And what is the effect on the least privileged in society; will they benefit, or, at least, not be further deprived?” [All the emphases are in the original]
By upending our perception of leadership, Greenleaf also shifted how he wanted us to see senior executives. For him, they had been entrusted to look after the organisation, and that position of entailed a responsibility to ensure the organisation was contributing to society in ways more than the view expressed by people like Milton Freidman that ‘the business of business is business’, i.e., making profits for investors. At the time, of course, Friedman and his colleagues were in the ascendant, and Greenleaf’s impact was slight. Rather like a single termite nibbling away at a joist in a house, it turns out his ideas have slowly worked their way into views about companies and their purposes: fifty years later, the house built on shareholder primacy is clearly undermined, and there are signs it could be collapsing.
There have been so many contributions I’ve read on rethinking what companies are intended to achieve since 1970, and I can only refer to a few. For me, an address by Charles Handy in 1990 on ‘What is a Company For?’ was particularly important. After reflecting on his time working for Shell, Handy observed: “The principal purpose of a company is not to make a profit – full stop. It is to make a profit in order to continue to do things or make things, and to do so even better and more abundantly. … Let us be clear, profits and good profits are always essential, and not just in business. But the myth dies hard, the myth that profit is the purpose. … “Profits is the principal yardstick,” said the Watkinson Committee, but yardstick of what for what, and how can a yardstick be a purpose? It is like saying that you play cricket to get a good batting average. It’s the wrong way round. You need a good average to keep on playing cricket in the first team.”
If Charles Handy was another termite, helping to get rid of an unnecessary building to allow use to see more clearly, so he also ran the risk of being another commentator who’s seen as merely thoughtful. Surely he knew provocative thoughts could be ignored. However, the address was to a venerable London-based organisation, The Royal Society for the Arts, Manufacture and Commerce, usually abbreviated to the RSA. The RSA took his ideas seriously, and discussions resulted in a major project, on Tomorrow’s Company, which eventually grew into the independent Centre for Tomorrow’s Company. As has been the case with so many of Handy’s observations, he was in the vanguard of what is now called the ‘triple bottom line’ approach to business purpose. Perhaps the time was right, but the issue of rethinking how a company was performing was clearly in the air. Within a few years Peter Block published Stewardship, and John Elkington’s book Cannibals with Forks had appeared.
Peter Block had given his 1993 book Stewardship a sub-title: Choosing Service Over Self-Interest. Like Greenleaf and Handy, he wanted to shift business thinking away from its preoccupation with profitability as the sole reason for the organisation and its operations. He focussed on the people inside the organisation, asking them to think like stewards, emphasising service over self-interest at every point . He wanted leaders to re-examine the notion of power in the workplace and argued the current business model, which has self-interest, control and a demand for dependency as its foundation, should be replaced with an ethic that values of responsibility, partnership, and service.
Momentum must have been building, because a year later John Elkington proposed the idea of the ‘triple bottom line’, and this became the central topic in his 1997 book, Cannibals With Forks. Drawing on the use of the term ‘bottom line’ to refer to the financial performance of a business, Elkington suggested there should be three distinct and separately measured financial, social and environmental ‘bottom lines’ (the 3 Ps) measuring an organisation’s financial results, its ‘people account’, assessing its social contribution, and its ‘planet account’, measuring its environmental performance. Bottom line metrics were needed to demonstrate improvement in the 3 Ps of Profits, People and the Planet. His focus wasn’t internal, but on outcomes, addressing Handy’s question about purpose, and giving it a solid set of parameters.
It is hard to know if Elkington’s work would have had much impact were it not for the fact it was adopted by the Royal Dutch Shell Group. Shell had been under scrutiny for social and environmental gaffes, including sinking an oil platform in the North Sea rather than bringing it to shore and dismantling it, and poor practice in Nigeria. Shell committed to measuring itself against a ‘triple bottom line’ of financial, social and environmental factors, and published its environmental and social accounting in ‘The Shell Report 1998,’ a companion to its conventional annual report. It was a remarkable step, setting out the company’s ‘Statement of General Principles,’ supporting both sustainable development and social responsibility. Remarkable? Well, it had published this report despite criticism from the Association of Certified Chartered Accountants stating that without meaningful guidelines there would be no reliable method for companies to assess their performance, or for auditors to verify environmental information. Shell responded that its report was a ‘hybrid’, still to be fully developed, and that it could become the main corporate report in the future.
Stewardship, accountability, the triple bottom line. As the end of the millennium approached, it seemed changes in business purpose were gaining momentum. Then suddenly they slowed, as businesses worried first about the impact of the Y2K ‘bug’, and soon after that about the 2007 Global Financial Crisis. Attention shifted to recovery, and profitability above all else.
Why do I claim the ‘triple bottom line’ is good news? There is ample evidence that the swing to an exclusive emphasis on profits has slowed, and momentum towards broader issues has returned. It has returned because it is clear climate change is creating concern about the future, especially those bottom lines about people and planet. The Pew Research Center, which remains one of the most important sources of data about generational attitudes towards change, has identified that millennials, people born 1981-1996, are the generation most committed to implementing the UN’s Sustainable Development Goals, covering equality, climate change, peace, justice, poverty, and prosperity, with their tastes and preferences supporting equality for all and sustainability. The evidence is that Millennials are investing in and preferring to work for companies that have embraced visible sustainable practices. The Pew research suggests millennial employees are loyal to companies that care about their effect on society. They believe that corporate social responsibility is key to alleviating poverty and improving life outcomes. Many companies responding to these concerns have encouraged employees to donate their time to addressing these issues, and several donate 1% of their profits to charity.
A report in May 2021, noted Millennials, together with Gen Z (the youngest current generation), stand out against the other generations for climate change, activism, and social media engagement on these topics. Younger activists are often at the forefront of the climate debate, with voices such as those of Greta Thunberg and the Sunrise Movement – a youth-led political organization urging increased attention to climate change – among the most visible in global conversations advocating climate action. Compared with older adults, Gen Zers and Millennials are talking more about the need for action on climate change; they are seeing more climate change content online; and they are doing more to get involved with the issue through activities such as volunteering and attending rallies and protests.
Many are taking practical steps. 32% of Gen Zers and 28% of Millennials in the US have taken at least one of four actions (donating money, contacting elected officials, volunteering or attending a rally) to help address climate change in the last year, compared with smaller shares for everyone else. Their concerns are clear: when asked about engaging with climate change content online, Pew reports: “those in Gen Z are particularly likely to express anxiety about the future. Many young climate-engaged social media users report feeling angry that not enough is being done when encountering climate change content online; and they also say they feel motivated to learn more and confident in the ability to reduce the effects of climate change”. In a survey from Monster, 74% of Gen Z ranked purpose as more important than a paycheck at work, suggesting leaders should show employees the impact their company aims to have on the world, asking, “What gives your work meaning, on a large or small scale?”
How does this relate to the bottom line? There is evidence more and more enterprise executives are adopting a stronger stewardship approach, wanting to hand their company over in better shape than they inherited it, through the active and responsible management of its resources, physical, financial and social. This is not merely good governance. As one of the Centre for Tomorrow’s Company’s reports put it, “stewardship is the process through which shareholders, directors or others seek to influence companies in the direction of long-term, sustainable performance that derives from contributing to human progress and the well-being of the environment and society.”
In 2019, the US Business Roundtable issued a statement on the purpose of a corporation, affirming it is to promote ‘an Economy that serves all Americans’. It was a major shift. Since 1978, the Business Roundtable had regularly issued its Principles of Corporate Governance. Each version until 2019 had endorsed the principle of shareholder primacy – that corporations exist principally to serve shareholders. The 2019 statement took a step in a new direction, affirming the essential role corporations can play in improving our society “when CEOs are truly committed to meeting the needs of all stakeholders.” I think it is fair to say, despite evident reluctance in some cases, that the rules of business are changing significantly. The Aspen Institute’s Judy Samuelson, who directs its Business & Society Program, sees these shifts in attitudes and mindsets as redefining notions of what constitutes business success.
What is business success today, and what is it likely to be in the future? There are good reasons to believe that what had previously been seen as less hard-nosed factors such as reputation, trust, and loyalty are requiring new approaches: maximizing shareholder value has never been the sole objective of effective businesses, and the pernicious elevation of shareholder theory is crumbling. Those termites have been succeeding. Of course, business has always responded to the social and economic context, but today, profit maximization has lost its force as the purpose of an enterprise, and purpose is back under the microscope.
As I see it in 2021, two themes are coalescing. On the one hand, younger people are making it clear they want more from enterprises: they want them to engage with the social issues and challenges they see. Above all, climate change is driving changed expectations; in fact, this is increasingly the case for all age groups. On the other side, businesses are realising the bottom line is an inadequate measure and needs to be enhanced by adopting a triple bottom line framework to help them remain sustainable for the future; it is emerging as a central element of today’s business agenda. Progress has been slow and fitful over the past 50 years, but there has been real progress. Step by step old fashioned capitalism is being rethought, the triple bottom line is back on the agenda, and this is really good news.
