Is Maximizing Shareholder Value Inherently Incompatible with Sustainability?

Managing the tension between maximizing shareholder value and integrating sustainability into corporate strategy requires adaptive leadership at the Board level.
From: Antioch University New England Alumnus
April 15th, 2013 | 1 Comment

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Managing the tension between maximizing shareholder value and integrating sustainability into corporate strategy requires adaptive leadership at the Board level.

What is the purpose of a publicly traded company?  Are maximizing profits and share price synonymous with maximizing shareholder value?  How do shareholders who may have diverse goals, interests and motives define value?  Answers to fundamental questions like these, along with the underlying assumptions behind them, are being surfaced and re-examined as concepts like sustainability, corporate social responsibility (CSR), and the triple bottom line have become part of common business nomenclature.

While social enterprises like benefit corporations are leading a structural shift toward a more generative and less extractive economic system, publicly traded companies still wield the greatest influence over the economy’s design and function since they account for the vast majority of global G.D.P.

While public companies cater to Wall Street expectations, they must also be responsive to market forces and trends. And consumers are increasingly considering sustainability criteria in their purchasing decisions, while institutional investors like CalPERS include a company’s environmental, social and governance (ESG) performance when deciding where to invest financial capital.  Initially treated as distinct initiatives or housed in separate departments, boards of directors are increasingly including sustainability as part of their strategy and risk oversight responsibilities.

The National Association of Corporate Directors (NACD), with over 13,000 director members, recently published a cover story for it’s NACD Directorship magazine entitled “Sustainability Rising.” The article is an ambitious attempt at offering directors a comprehensive and multi-faceted overview of sustainability and its growing importance as a governance issue.

Noting that corporate sustainability can be an enigmatic term, the article cites The Dow Jones World Sustainability Index’s definition of it as being “an approach to creating long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental, and social trends and challenges.”

This ambiguous definition seems to suggest that sustainability is just another possible means to the desired end of creating long-term shareholder value.  But is creating long-term shareholder value the only desired end of a corporation?  Could social and environmental measures of value also be desired ends alongside economic value?  Isn’t this what triple bottom line means?

Maximizing Shareholder Value:  Legal Requirement or Managerial Choice?

In her insightful book “The Shareholder Value Myth,” Cornell Law School Professor Lynn Stout explains how, contrary to popular belief, corporate law does not require boards of directors to maximize shareholder value.  Lynn argues that stakeholder statutes and the business judgment rule give directors the latitude necessary to consider the interests of other stakeholders, such as employees and the environmental impacts on communities, in establishing corporate goals and strategy – even at the expense of short-term profits or share price.

She also illustrates how a myopic focus on share price paradoxically ends up harming shareholders and other stakeholders over the long-term, since such a one-dimensional approach induces and rewards behavior that is at odds with natural laws that govern all complex systems.

 Corporate Sustainability Through the Lens of Complex Systems

Individual companies, industries and our overall economic system are interconnected with, and nested within, larger social and environmental systems.  Based on this truth, it follows that a business can only be sustainable when the systems upon which it depends are sustainable.

The degree to which a company can be considered to be sustainable is a function of how its products, services and business practices impact the overall wellbeing and resilience of the social and environmental capital upon which it depends. Much of this is a function of a company’s business model and to what degree it externalizes costs and risks.

It’s less of a challenge for Whole Foods to reconcile triple bottom line tensions than it is for a company like Exxon Mobil whose core business contributes to destabilizing the climate.  While Exxon Mobil espouses its commitment to corporate citizenship, much of the company’s political spending is aimed at avoiding the responsibility of internalizing the enormous cost of its carbon pollution while also maintaining the public subsidies it receives in the form of tax breaks.

Replacing an Unsustainable Paradigm with a New Ethos

The prevailing shareholder primacy paradigm that is invoked as the justification for increasing share price by externalizing costs and risk is not only inconsistent with sustainability, it is largely responsible for our current unsustainable economic path.

A company’s purpose, its financial and non-financial goals, and the parameters within which it will operate to achieve them is a management decision, as is the decision to embark on the difficult transition from a single bottom line to a triple bottom line model.  Navigating through the myriad ethical and organizational challenges along the path toward sustainability is far bigger than any one department or isolated initiative, making board-level leadership and oversight an imperative.

Accordingly, it calls less for technical expertise in the boardroom and more for the type of adaptive leadership that is willing and able to rethink such fundamentals as the purpose of a business, how it creates value, and how that value should be distributed based on who and what helps to create it.  One decisive step forward on this path is to explicitly include sustainability as part of the board’s fiduciary duty by amending the company’s charter as Intel did in 2010.

Corporate sustainability needs to be reframed so that shareholder value is repositioned as a goal that is managed in symbiotic relationship with social and environmental goals.  Authentic corporate sustainability requires board leadership in which triple bottom line values become part of the company’s ethos, or defining character, and are thoughtfully integrated into corporate governance practices and strategy.

Learn more about Antioch University New England’s MBAin Sustainability.

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Richard Lawton is Founder & Principal of Triple Ethos, LLC, www.tripleethos.com a consultancy that works with organizations to integrate sustainability values into board governance and strategy.  He earned his MBA in Sustainability from Antioch University New England in 2012, and is a Governance Fellow with the National Association of Corporate Directors.