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Managing the triple bottom line
1. MANAGING THE TRIPLE BOTTOM
LINE
[GOING BEYOND CSR]
Professor Jayashree Sadri
and
Dr Sorab Sadri
2. WHY A TRIPLE BOTTOM LINE?
At any period in time, governance must
emphasize a particular subset of activities in
decision-making and resource allocation - the
dominant subset of these activities is called
the driving governance role.
Driving governance role must change with
shifts in the importance and nature of the
externalities that shape the agenda of various
stakeholders, particularly with respect to
maximizing the public good.
An existing set of activities is not abandoned
for another, rather a different subset of these
activities becomes dominant in decision
making and resource allocation.
3. OPERATING IN SITUATIONS WITH
SIGNIFICANT EXTERNALITIES
Private corporations have a fundamental fiduciary
responsibility of auditing financial performance to ensure
they are being run in the financial interests of their owners –
externalities are often relatively insignificant, although this is
changing due to increasing social and environmental
pressures1.
Public organizations must take into account a broader view
of their oversight and policy responsibilities – they must deal
with significant externalities ranging from social to economic,
environmental, ethical, cultural, political, and even religious
interests – many of which are complex and ambiguous.
Three types of patterns are commonly associated with the
emergence of new externalities – economic and political
cycles, industry and business-model shifts, and
organizational crisis.
4. SUSTAINABLE DEVELOPMENT
Faced with increasing pressures to consider sustainable
development, many organizations have revised their
business models, and these changes are often highlighted
in corporate sustainability reports and Web pages.
Dupont has publicly stated that, by 2010, it will reduce its
green house gas emissions by two-thirds while holding its
annual energy use to 1990 levels.
Suncor has pledged to make 12% of its workforce
indigenous, given that such populations dominate many
of the areas in which the company works.
TransAlta has stated that, with appropriate regulatory
systems in place, it could reduce its carbon dioxide
emissions to a net quantity of zero by 2024.
5. THE NEED FOR REPORTING
Because human beings are generally not adept at at self-
evaluation and monitoring, a recommended practice is for
annual reporting to describe how well these externalities are
being dealt with.
This need is more than disclosure – it is to determine whether
the action plans and investment of resources actually produce
the desired results.
A most difficult task is the one of measurement, particularly in a
culture that is dominated by financial reporting – this is where
an organization is most likely to benefit from the help of
outsiders.
6. MEASURING NON FINANCIAL
PERFORMANCE
Non-financial measures are equally, if not more,
susceptible to manipulation as financial
accounting – at least traditional accounting has
rules that govern it ( for example GAAP).
The misuse of non-financial measures may be even
more damaging because of the significant
opportunity costs incurred.
Can end up measuring too many things, trying to
fill every conceivable gap in the measuring system
resulting in a profusion of peripheral, trivial, or
irrelevant measures and data.
Must prove basic causality to determine the
relevance of the information being collected
7. Jayashree sadri and Sorab Sadri
The Three Ms
As with any research so too with every
strategy we need to be clear about the three
Ms if we are not to trip ourselves up.
MEANING: what we mean and why we mean
it.
METHOD: how do we go about achieving our
goals and what are our constraints.
MEASUREMENT: how do we calculate our
data to arrive at meaningful conclusions.
8. COMMON MISTAKES
1. Not linking measurement to strategy
Performance measures are intended to direct the
allocation of resources, to asses and communicate
progress toward objectives, or to evaluate performance.
Adopting a framework like the Balanced Scorecard or
some other off-the-shelf checklist can be characterized
as the “smorgasbord” or “bucket” approach – fill in
each box with something regardless of strategy or
objectives.
Require casual models that link performance measures
directly to the goals of the strategic plan.
9. COMMON MISTAKES
2. Not setting the right targets
Target setting is inherently difficult because it
always takes awhile for improvements resulting
from new initiatives to occur.
Organizations are prone to focus on the promise of
short-term results even though other initiatives may
have better long-term prospects for success.
10. COMMON MISTAKES
3. Measuring incorrectly
Difficult to find metrics that have statistical validity and
reliability.
“Validity” refers to the extent to which a metric
succeeds in capturing what it is supposed to capture.
“Reliability” refers to the degree to which measurement
techniques reveal actual performance changes and do
not introduce errors of their own.
11. CORRECTING THE ERRORS
The triple bottom line has no inherent value - it will offer
little guidance if the data is based on generic or
borrowed performance measurement frameworks and
managerial guesswork rather than a through enquiry
into the factors actually contributing to successful
outcomes for the particular organization.
Otherwise, having prospered as “flavour-of-the-month”,
such measures are likely to be abandoned in lean times,
along with the managers who promoted and justified
their existence.
Unless the measures are directly linked to the strategic
plan through some causal model, and regularly updated,
managers are prone to disagree on the merits of the
effort and on which performance measures are critical
to success.
12. THE SCORE CARD
Certainty - are all parties clear, every step of the way,
as to what they are committed to, through both formal
and informal arrangements?
Transparency - with due regard for confidentiality in
certain business transactions, is the public satisfied
that the process itself is open, fair and equitable?
Accountability - does the process ensure that
those who hold the public trust are accountable,
and to whom?
Governance (fiduciary responsibility)- is there a
clear process of governance that protects
shareholder interest?
13. Jayashree sadri and Sorab Sadri
SOME MUSTS
Clear understanding of the “value” of any real
property assets that is being considered
A valuation versus an appraisal process for these
assets that is clear, accountable, defensible, and
subject to independent audit and scrutiny
No right to expose the public interest to financial
liability beyond the “value” of its equity
contribution
14. Jayashree sadri and Sorab Sadri
SOME MORE MUSTS
Clear governance structure that meets rigid standards of
“best practices” in corporate governance
Clear risk management strategy in place that recognizes
financial, environmental, social, business, market, and
political risk
Clear disposition agreement or exit strategy for the
subsequent sale or conveyance of any assets
Clear performance measures against which the
achievement can be measured (gross versus net sale
proceeds)
15. RISK MANAGEMENT GUIDELINES
Governance
Conflict of interest and ethical conduct standards
Due diligence requirements
Debt structure requirement (leverage)
Record keeping and reporting
Approval authorizations
Adherence to public policies and procedures
Competitive bidding
Phasing (market risk)
Letters of credit and performance bonds
Insurance
Cost control
Independent scrutiny
16. “At the end of the day, the essence of a
company is not what they do - it is what
they know” .
Gary Hamel. “Innovation Now”, Fast
Company, December 2002
17. Jayashree sadri and Sorab Sadri
The Indian Trilogy
It is not just what you know that matters. Thomas
Hobbes writing in the Leviathan that knowledge
is power was wrong.
We opine that how you use the knowledge is
what gives you power.
Using the Indian ethos in management we must
move from gyan to buddhi and culminate at
vivek.
Thereby a collective consciousness emerges and
developmental growth is enabled.
18. Jayashree sadri and Sorab Sadri
If Not
We in management shall be behaving like a
patient suffering from Parkinson’s Disease:
all movement and no meaning.
Corporate Governance tells us what is the right
movement whereas Business Ethics gives us
its true meaning!