Evaluating and Improving Sustainability Management

While organizational performance is a much discussed topic, the reality is that there is a good deal of confusion and argument regarding how it should be defined, conceptualized and measured.  Traditionally, performance measurement systems relied almost exclusively on management and cost accounting principles, often resulting in an emphasis on short-term results and efficient management of tangible resources (i.e., fixed assets and inventory), which were easier to measure using financial metrics, and a lack of appropriate attention to non-financial intangible activities (e.g., nurturing of customer relationships, development of innovative products and services and implementation of high-quality and responsive operating processes), that contributed to the creation of long-term value for the organization.[1]  These “old school” measurement systems were also useful tools in complying with regulatory and accounting reporting requirements. 

As time went by, however, a consensus developed that traditional performance measures had become outdated and that managers needed a performance measurement system designed to present managers with financial and non-financial measures covering different perspectives which, in combination, provided a way of translating strategy into a coherent set of performance measures.[2]   For example, Griffin described organizational performance as the extent to which the organization is able to meet the needs of its stakeholders and its own needs for survival.[3]  This formulation broadened the concept of organizational performance beyond strictly market-focused measures such as profit margin, market share or product quality, all of which are important to certain stakeholders and overall organizational survival, to include a number of other non-financial indicators of organizational performance and success including job satisfaction, organizational commitment and employee turnover.[4] 

At the same time, researchers interested in measuring corporate social responsibility (CSR) and corporate sustainability began to develop variables to measure environmental and social performance including ethics policy, philanthropic contributions, stakeholder interests and relationships (i.e., investors, shareholders, customers, suppliers, employees, and the community), governmental relationships, urban development, minority support programs, health and safety initiatives, community involvement and development, conserving natural resources, employee eco-initiatives, voluntary environmental restoration, eco-design practices and systematically reducing waste and emissions from operations.[5]

The “Balanced Scorecard” Framework and Sustainability

The “balanced scorecard”, or “BSC”, perspective, first advanced by Kaplan in the 1980s, is based on the premise that measurement of organizational performance should take into factors that are not purely financial in nature since many of the financial indicators that are generally used are based on operational performance.[6]  The balanced scorecard framework is a multi-disciplinary view of organizational performance that includes measures such as market share, changes in intangible assets such as patents or human resources skills and abilities, customer satisfaction, product innovation, productivity, quality, and stakeholder performance.[7] 

Proponents of the balanced scorecard approach point to the introduction of a broad array of non-financial indicators that can be used to improve decision making and selection and implementation of strategies.  According to the Balanced Scorecard Institute, business and industry, government, and nonprofit organizations worldwide have embraced the balanced scorecard, with studies by the Gartner Group and others suggesting that more than half of major companies in the US, Europe, and Asia are using the scorecard and that use in growing in those areas as well as in the Middle East and Africa.[8]  A global study conducted by Bain & Co placed the scorecard fifth on a list of the top ten most widely used management tools around the world—strategic planning was first—and the scorecard has also been recognized by the editors of the Harvard Business Review as being one of the most influential business ideas of the past 75 years.

Crawford and Scaletta argued that the balanced scorecard is well suited to sustainability and CSR given that the scorecard framework explicitly incorporates and balances shareholder, customer and employee perspectives.[9] They recommended that organizations should adapt or introduce a balanced scorecard that specifically included and integrated key market forces driving CSR and the indicators of sustainability performance and impact taken from the Global Reporting Initiative (GRI) Standards.  The market forces would be “objectives” in the balanced scorecard framework and success or failure toward achieving the specified targets (i.e., the level of performance or rate of improvement required) would be tracked through measures taken from the GRI Standards.  Examples provided by Crawford and Scaletta across all four of the balanced scorecard’s perspectives included the following:

Balanced Scorecard Perspective	Market Forces (Objective)	GRI Measure	Target
Financial	“Green” consumers	Energy consumption footprint (i.e., annualized lifetime energy requirements) of major products	Annual reduction in energy consumption footprint for new products
Financial	Energy crunch	Direct energy sue segmented by source	100% renewable energy
Financial	Financial	Increase/decrease in retained earnings at the end of period	Percentage
Internal	Pollution and health	Standard injury, lost day and absentee rates and number of work-related fatalities (including subcontractors)	0 lost-time injuries and fatalities, or long-term illnesses
Internal	Climate change	Total greenhouse gas emissions	Annualized reduction
Internal	Governments and regulators	Incidents and fines for non-compliance with all laws and regulations	0 incidents or fines
People and Knowledge	Civil society/NGOs	Policies, guidelines and procedures to address needs of Indigenous people	Number of Indigenous employees
People and Knowledge	Activist shareholders	Business units currently operating or planning operations in or around protected or sensitive areas	Number of employees trained in environmental management practices
Customer	Erosion of trust and push for transparency	Policy to exclude all child labor	No child labor
Customer	Globalization backlash	Supplier performance related to environmental commitments	Use of 100% organic cotton or coffee

Evaluating and Improving Organizational Sustainability Performance

Performance measurement, coupled with verification and reporting, is important in its own right; however, the implementation and operation of the performance measurement system should also be seen as the catalyst for careful evaluation of the effectiveness and scope of the organization’s sustainability and CSR initiatives and generation of ideas for modifying and improving those initiatives.  Hohnen and Potts admonished organizations to use the results from their verification process, including information gathered from engaging stakeholders, to determine what is working well, why and how to ensure that it continues to do so; investigate what is not working well and why not, to explore the barriers to success and what can be changed to overcome the barriers; assess what competitors and others in the sector are doing and have achieved; and revisit original goals and make new ones as necessary.[10] 

Another resource and framework for evaluating and improving social responsibility initiatives is provided by ISO 26000 ISO 26000 Guidance on Social Responsibility, developed and released by the International Organization for Standardization (ISO).[11]  Section 7.7.3 of ISO 26000 calls on organizations to carry out reviews at appropriate intervals to determine how it is performing against its targets and objectives for social responsibility and to identify needed changes in the programs and procedures.  Reviews not only look at progress against targets and indicators established at the beginning of a particular reporting period, but also involve comparisons against results from earlier reviews to assess overall progress.  The review process is also a good way to focus attention on important intangibles relating to the sustainability and CSR program—things that are admittedly difficult to measure—such as changes in attitudes relating to CSR throughout the organization and how well sustainability and CSR is being implemented and integrated.  Among the review questions suggested by ISO 26000 were the following[12]:

• Were objectives and targets achieved as envisioned?
• Did the strategies and processes suit the objectives?
• What worked and why? What did not work and why?
• Were the objectives appropriate?
• What could have been done better?
• Are all relevant persons involved?

An effort should be made to gather information from a variety of perspectives regarding these review questions including external stakeholders.  The process should be documented and described in the organization’s sustainability reporting and communications and stakeholders should be informed about how the results of the review were used to make changes in sustainability-related strategies and programs to improve performance.

Certifications and Ratings Systems

Another way that organizations can measure and demonstrate their commitment to social and environmental responsibility is through participation in ratings agencies and ratings systems that have been created in order to give external stakeholders a means by which they can assess the social and environmental impact of the organization’s activities.  In order to participate in these systems, some of which actually offer opportunities for certification, organizations must be prepared to adjust their internal structures in order to comply with the requirements of the system and ensure that the information necessary for measurement can be collected, analyzed and properly reported.  While there are similarities among the most popular systems, there is still no universal standard and many of the systems operate without extensive efforts to verify or audit the information provided by organizations, although organizations should expect that they will be required to submit to site visits and renew their certifications on a regular basis.[13]

Perhaps the most well-known certification program is overseen by B Lab Company (B Lab), a Pennsylvania non-profit corporation that administers certification as a Certified B Corp., which offers access to the Certified B Corporation logo often seen as being a “Good Housekeeping Seal of Approval” for sustainable businesses.  In order to become “certified” a company must achieve a minimum verified score on a “B Impact Assessment” that assesses the overall impact of the company on its stakeholders taking into account various factors such as number of employees, sector and location of the company’s primary operations.  Companies that complete the B Impact Assessment will receive a B Impact Report that contains an overall score based on performance in three key impact areas (i.e., workers, community and the environment) and will move on an assessment review and submission of supporting documentation.  At this point, the focus will be on the operations of the company and demonstration of practice relating to the company’s social and environmental impact.  Additional steps in the assessment process include completion of a disclosure questionnaire, which allows companies to confidentially disclose to B Lab any sensitive practices, fines and sanctions related to the company and its partners, and background checks by B Lab staff which include a review of public records, news sources, and search engines for company names, brands, executives/founders, and other relevant topics.

Various product, safety and environmental certifications are available depending on the industry and activities of the organization.  For example, UL (www.ul.com) helps companies demonstrate safety, confirm compliance, enhance sustainability, manage transparency, deliver quality and performance, strengthen security, protect brand reputation, build workplace excellence, and advance societal wellbeing through a range of services including inspection, advisory services, education and training, testing, auditing and analytics, certification software solutions, and marketing claim verification.  UL’s Sustainability Quotient (SQ®) Program provides organizations with the opportunity to achieve third party sustainability certification for their whole enterprise, demonstrating clear market leadership and a commitment to environmental stewardship at every level of business operations.  The SQ® Program is a comprehensive system of assessing, rating and certifying the sustainability initiatives of corporations. With a focus on the environment, governance, workforce, customers/suppliers and community engagement/human rights, the SQ® Program promotes the adoption of a standardized language and rating platform for corporate sustainability. UL also tests and certifies products, processes and materials against current environmental standards and maintains a database of validated and certified products that can be accessed by industry professionals and consumers.

Costs to organizations for attempting to comply with certification programs and standards will vary and consideration should be given to fees that must be paid to the agency and the investments that must be made in order to fulfill the agency’s requirements.  Organizations must also consider the potential impact of participating in a particular rating or certification program, or complying with a formal reporting regime, on the organization’s governance or regulatory obligations depends on the program.  However, the costs and disruptions to traditional operating procedures must be balanced against the benefits of being able to provide potential investors and stakeholders with reliable information to accurately assess the social impact such companies make, thus making it easier for organizations to raise capital from investors seeking to support socially responsible ventures and attract employees and customers want to do business with companies that are having a positive social and environmental impact.[14]

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This article is an excerpt from the author’s forthcoming book on Sustainability Management, which will be published by Routledge in late 2020.  For further information, visit the following page on the author’s Sustainable Entrepreneurship Project website: https://alangutterman.com/topics/governance-management/

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About the Author

This article was written by Alan S. Gutterman, whose prolific output of practical guidance and tools for legal and financial professionals, managers, entrepreneurs and investors has made him one of the best-selling individual authors in the global legal publishing marketplace.  His cornerstone work, Business Transactions Solution, is an online-only product available and featured on Thomson Reuters’ Westlaw, the world’s largest legal content platform, which includes almost 200 book-length modules covering the entire lifecycle of a business.  Alan has also authored or edited over 90 books on sustainable entrepreneurship, leadership and management, business law and transactions, international law and business and technology management for a number of publishers including Thomson Reuters, Practical Law, Kluwer, Aspatore, Oxford, Quorum, ABA Press, Aspen, Sweet & Maxwell, Euromoney, Business Expert Press, Harvard Business Publishing, CCH and BNA.  Alan is currently a partner of GCA Law Partners LLP in Mountain View CA (www.gcalaw.com) and has extensive experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions, strategic business alliances, technology transfers and intellectual property, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company.  He has been an adjunct faculty member at several colleges and universities, including Berkeley Law, Golden Gate University, Hastings College of Law, Santa Clara University and the University of San Francisco, teaching classes on corporate finance, venture capital, corporate governance, Japanese business law and law and economic development.  He has also launched and oversees projects relating to sustainable entrepreneurship and ageism.  He received his A.B., M.B.A., and J.D. from the University of California at Berkeley, a D.B.A. from Golden Gate University, and a Ph. D. from the University of Cambridge.  For more information about Alan and his activities, and the services he provides through GCA Law Partners LLP, please contact him directly at alangutterman@gmail.com, follow him on LinkedIn (https://www.linkedin.com/in/alangutterman/) and visit his website at alangutterman.com.

About the Project

The Sustainable Entrepreneurship Project (www.seproject.org) was launched by Alan Gutterman to teach and support individuals and companies, both startups and mature firms, seeking to create and build sustainable businesses based on purpose, innovation, shared value and respect for people and planet.  The Project is a California nonprofit public benefit corporation with tax exempt status under section 501(c)(3) of the Internal Revenue Code dedicated to furthering and promoting sustainable entrepreneurship through education and awareness and supporting entrepreneurs in their efforts to launch and scale innovative sustainable enterprises that will have a material positive environmental or social impact on society as a whole. 

Copyright Matters and Permitted Uses of Work

Copyright © 2020 by Alan S. Gutterman.  All the rights of a copyright owner in this Work are reserved and retained by Alan S. Gutterman; however, the copyright owner grants the public the non-exclusive right to copy, distribute, or display the Work under a Creative Commons Attribution-NonCommercial-ShareAlike (CC BY-NC-SA) 4.0 License, as more fully described at http://creativecommons.org/licenses/by-nc-sa/4.0/legalcode.

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[1] R. Kaplan, and D. Norton, The Strategy-focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (Boston, MA: Harvard Business School Press, 2001).

[2] I. Abu-Jarad, N. Yusof and D. Nikbin, “A Review Paper on Organizational Culture and Organizational Performance”, International Journal of Business and Social Science, 1(3) (December 2010), 26, 31 (citing R. Chenhall, “Integrative Strategic Performance Measurement System, Strategic Alignment of Manufacturing, Learning and Strategic outcomes: an exploratory study”, Accounting, Organizations and Society, 30(5) (2005), 395).

[3] M. Griffin, Organizational performance model (2003), available at: http://griffin-oc.com/GOC

[4] R. Mayer and F. Schoorman, “Prediction Participation and Production Outcomes through a Two-Dimensional Model of Organizational Commitment”, Academy of Management Review, 20 (1992), 709; and R. Mowday, L. Porter and R. Steers, Employee-organization Linkages: The Psychology of Commitment, Absenteeism and Turnover (New York: Academic Press, 1982).

[5] I. Montiel, “Corporate Social Responsibility and Corporate Sustainability: Separate Pasts, Common Futures”, Organization and Environment, 21(3) (September 2008), 245, 260.

[6] R. Kaplan, “Yesterday’s accounting undermines production”, Harvard Business Review, (July/August, 1984), 95.  See also R. Kaplan and D. Norton, “The balanced scorecard – Measures that drive performance”, Harvard Business Review, (Jan-Feb, 1992), 71.

[7] R. Carton, Measuring Organizational Performance: An Exploratory Study (Athens, GA: University of Georgia Doctoral Dissertation, 2004), 48.

[8] http://www.balancedscorecard.org/BSC-Basics/About-the-Balanced-Scorecard (accessed May 4, 2020)

[9] D. Crawford and T. Scaletta, “The Balanced Scorecard and Corporate Social Responsibility: Aligning Values for Profit”, CMA Management (October 2005).

[10] P. Hohnen (Author) and J. Potts (Editor), Corporate Social Responsibility: An Implementation Guide for Business (Winnipeg CAN: International Institute for Sustainable Development, 2007), 73-74.

[11] ISO 26000 Guidance on Social Responsibility: Discovering ISO 26000 (International Organization for Standardization, 2014) and Handbook for Implementers of ISO 26000, Global Guidance Standard on Social Responsibility by Small and Medium Sized Businesses (Middlebury VT: ECOLOGIA, 2011).  ISO 26000 is available for purchase from ISO webstore at the ISO website (www.iso.org) and general information about ISO 26000 can be obtained at www.iso.org/sr.

[12] Id. at 82.

[13] While Legal Structure is Right for My Social Enterprise?: A Guide to Establishing a Social Enterprise in the United States (Thomson Reuters Foundation and Morrison & Foerster, September 2016), 111-112.

[14] While Legal Structure is Right for My Social Enterprise?: A Guide to Establishing a Social Enterprise in the United States (Thomson Reuters Foundation and Morrison & Foerster, September 2016), 114-115.