Practices Make Perfect: 5 Aspects of Sustainable Management

10th in a series of excerpts from the book The HIP Investor (John Wiley & Sons, 2010). See other articles in the series here.

From our series so far, you should understand how human needs can be solved for profit, and the range of human impacts to measure numerically. Now, you want to ensure that the companies in your portfolio embed HIP (Human Impact and Profit) management practices.

As founder of carpet maker Interface (Nasdaq: IFSIA ), the late Ray Anderson empowered staff to design a plan to respond to customer feedback it received early in the 1990s from architects and designers concerned about Interface’s environmental impacts.

In the mid-1990s, Interface set a goal of having a zero carbon footprint by the year 2020, something that is now called Mission Zero. After 2020, as the Paul Hawken book Ecology of Commerce details, Interface Inc. is seeking to be “restorative,” or having only positive impacts and no net negative impacts on the environment. Over the past 15 years, Interface’s management systems have yielded cumulative avoided costs of more than $400 million, and kept the company alive in a very difficult industry.

How do leading, well-managed companies consistently deliver top performance and seek ever higher human impact and profit? Five elements of their management systems provide a solid foundation of how a very HIP organization operates:

1. Paints a compelling business Vision that integrates sustainability, complete with deadlines and quantifiable success.

2. Manages performance with a balanced scorecard of five to 10 Measures, including human impact.

3. Aligns all impact measures to the Financial implications and reporting.

4. Establishes Accountability and rewards with successes for sustainable, profitable growth.

5. Embeds HIP criteria into corporate Decision-Making systems.

The HIP Quiz, at the www.HIPinvestor.com website, provides multiple choice answers to these five questions, rated on a five-point scale. The most HIP practices total a top score of 25; the least HIP, a mere 5 (of 25 maximum points). Let’s examine how leading companies implement these management practices.

1. Vision

It takes vision to see the future, and it was Interface’s previously mentioned sustainable foresight that has driven its survival and progress. One example of how Interface Inc.’s vision to be “100 percent environmentally sustainable by 2020” and “environmentally restorative” starting in 2021 channelled action came when one of the engineers at Interface’s LaGrange, Georgia facility designed a system for recapturing methane emissions (which are 21 times more destructive to the environment than carbon) and using them as an energy source, thereby lowering both pollution and energy costs. In addition, this methane-capture energy-reuse facility is a public-private partnership with the local municipality, which has a positive financial return both for Interface and the city.

Once you understand how HIP a company’s vision blends both business and sustainability, then you can evaluate how a corporation applies a “balanced scorecard” of metrics that incorporate both Human Impact and Profit.

2. Metrics

Every business measures profits, but that is a lagging indicator. To be predictive, you need to look at leading indicators. What measures might be predictive of financial success?

Bonnie Nixon, the former Director of Environmental Sustainability, told me everyone at Hewlett Packard (NYSE: HPQ) says: “If you want to change something here at HP, get a scorecard.” Engineers love to quantify changes in their world, and a consistent way to track that is through numerical counts of impacts and profit.

Scorecards show how HP is consolidating 85 data centers to six, and going from 6000 technology application systems to 1500. HP also indicated that 80 percent of all enterprise customer Requests For Proposal (RFPs) now have eco-factors in them, and that 79 percent of consumers would choose more eco-efficient products if all other aspects are the same.

A HIP company seeks to implement a manageable set of performance measures that are quantitative leading indicators, covering both Human Impact and Profit, which can be rolled out from the front-line to the Board of Directors. While the HIP Scorecard for investors can track 20 or more metrics, leading companies select the most meaningful measures to track, typically a handful of five. With accountability, this small handful can drive increasing business value based on positive impact.

3. Financial Alignment

Businesses that reframe their market share, customer segmentation and managerial accounting systems in terms that go beyond mere financials can better understand how drivers of human impact link to financial value. In PepsiCo’s (NYSE: PEP) case, products are classified as “good for you,” “better for you,” and “fun for you.” While 70 percent of products today are fun like Doritos, the good and better categories were estimated in 2009 to have risen to 30 percent of revenue, and and the company plans to move that figure to 50 percent.

Companies focusing on aligning their financials with human impact metrics (in this case, health) have seen global trends boost sales. This connection between human impact and profit makes it easy to see how HIP creates shareholder value.

4. Accountability

Ensuring that accountability takes place across the entire enterprise requires multiple teams, sponsors, and networks. At Walmart (NYSE: WMT), teams working on topics like reducing packaging are composed of representatives from inside staff, linkages to suppliers, and external experts, like academics and environmental nonprofits. These “sustainable value networks” are lead by “network captains,” who are directors or VPs who help break down barriers to success. A higher level “executive network sponsor” and an enterprise-wide “sustainability team” oversee multiple teams and help provide alignment among multiple goals. On a quarterly basis, the entire company’s staff is connected through a videoconference update to review progress toward goals, and celebrate the success of the past three months.

Firms seeking to drive profit with this HIP approach set up the corporate infrastructure that provides checks and balances for their Vision. By demanding responsibility, these companies become reach their goals as leaders socially and financially.

5. Decision-Making

This systematic approach of reviewing criteria beyond pure financials is also used by Kraft Foods (NYSE: KFT) for its product designs and capital spending reviews. At Kraft, the package developers must evaluate every new design according to an eco-calculator, says Steve Yucknut, the VP of Sustainability. Numeric values assess the product-to-package ratio, the number of layers of packaging, and the impact on landfills. For larger projects, energy costs are tested for a range of scenarios. While low-energy inflation makes some sustainable projects less obvious compared to Kraft’s traditional 14 percent ROI hurdle rate, if energy prices jump as they did in 2008, return on investment can jump to more than 25 percent. Yucknut says, “We tend to be open-minded and generous if sustainability is included in the project.”

This decision-making can be seen as risk management, engaging future markets, or responsible business. Regardless of the title, integrating this type of analysis into daily business decisions aligns long term financial goals, with their aspirations for a better world.

In Conclusion

Evaluating management practices shows how companies can ensure a more HIP approach over time, and embed a higher intention towards financial outperformance. As a HIP investor, you can evaluate companies by researching and interviewing them. Leading companies, like Interface and Walmart, are becoming more transparent about how they make decisions. Encourage other companies to follow their lead—because as you now know, it could also benefit their bottom line.

In the next feature, we delve into the first Management Practice, Vision, in more detail, where we will see how long term thinking can translate into reduced risk, long term revenue, and a better future.

Photo by Alan Cleaver/flickr/Creative Commons

To navigate this series, please use this table of contents.

***

HIP Investor supports Spring of Sustainability.  For three months, the Spring of Sustainability will feature 100 “stars” of sustainability, from Jane Goodall to Bill McKibben to Van Jones, in free interactive teleseminars throughout the spring of 2012. Live events will also be held in cities across the globe.

***

R. Paul Herman is CEO and founder of HIP Investor Inc. Herman is the author of “The HIP Investor: Make Bigger Profits by Building a Better World,”  published by John Wiley & Sons in 2010. Herman is a registered representative of HIP Investor Inc., an investment adviser registered in California, Washington and Illinois.

NOTE: This feature, excerpted and adapted from the HIP book, is not an offer of securities nor a solicitation. The information presented is for information and education purposes, and is not an investment recommendation. Past performance is not indicative of future results. All investing risks losing your principal. The author may invest in the companies mentioned above, and several are included in the HIP 100 Index portfolio. Details and full disclosures are at www.HIPinvestor.com

Follow on Twitter @HIPInvestor