Management Systems for Sustainability
Main purpose: Comprehend the role of management systems to link the policy with performance.
Objectives: After reading this chapter, you should be able to do the following:
- • Describe major parts of a model for organizational sustainability with the policy and objectives as inputs and performance as the output, eventually leading to the sustainability report.
• Assess governance structure for ensuring actions on sustainability.
• Identify procedures and approaches to instill commitment and develop capability.
- • Distinguish between systems that motivate compliance versus innovation.
Sustainability is ingrained in every action we take across our business.
—Andrew Mackenzie, BHP CEO 2018, p. 3
A Systems Approach
To move from the policy to actual performance requires management systems to ensure that all the employees and contractors of the organization are moving in the same direction (Figure 4.1 illustrates the role of the systems). Once a strategy is formulated to implement the policy, systems (with many parts working together) are essential to fulfill the objectives and to meet targets. Often planning occurs at the top levels of management, but employees at all levels are part of the system, especially those out in the field or working at the operational level of the organization, who ultimately determine if the policy is carried out properly.
Figure 4.1 Management systems for sustainability
Source: Based on Zenisek 1979
A system has many components or parts that work together to accomplish some outcome. These components might consist of structures, schemes, procedures, techniques, and methods that interact in harmony to achieve results. Regulations and laws also affect the development of a system. Regarding sustainability, we have economic systems, environmental/ecological systems, and social systems. The idea of sustainability is that these three systems will be synchronized to work together to accomplish objectives that are congruent. BHP, a global resources company, illustrates its system components and how they work together (BHP 2018) (Figure 4.2).
Figure 4.2 BHP’s managing sustainability
Source: BHP 2018
Standards for Sustainability Management Systems
The International Organization for Standardization, commonly called International Standards Organization (ISO), develops standards used worldwide to provide consistency in products, services, and processes between countries and regions. ISO uses a multi-stakeholder approach by including many countries and organizations in the process. Likely, the ISO 14000 series of standards are the most widely used for environmental management systems (EMS) and related tools to help organizations in their decision making. ISO14001 defines an EMS as part of an overall management system that includes the organizational structure, planning activities, responsibilities, practices, procedures, processes, developing resources, and implementing, achieving, reviewing, and maintaining the environmental policy (ISO 14001, 2015). ISO 26000 provides guidance on the social responsibility of all organizations and covers both environmental and social aspects. Table 4.1 lists a few of the many ISO standards and other standards that are helpful to develop sustainability management systems.
Table 4.1 Guidelines/standards for management systems
|
Standard |
Title |
|
ISO 14001 |
Environmental management systems—Requirements with guidance for use |
|
ISO 14004 |
Environmental management systems—General guidelines on implementation |
|
ISO 14006 |
Environmental management systems—Guidelines for incorporating eco-design |
|
ISO 14040 |
Environmental management systems—Life cycle assessment—Principles and framework |
|
ISO 14044 |
Environmental management systems—Life cycle assessment—Requirements and guidelines |
|
ISO 14063 |
Environmental management—Environmental communication—Guidelines and examples |
|
ISO 14064 |
Greenhouse case emissions |
|
ISO 14065 |
Greenhouse gas emissions—Requirements for greenhouse gas validation and verification bodies for use in accreditation for other forms of recognition |
|
ISO 26000 |
Guidance on social responsibility |
|
OHSAS 18001 |
Standards for occupational safety and health management systems |
|
SA 8000 |
Social certification standard for fair treatment of workers |
Formal and Informal Systems
We might think of most of the components of management systems as formal systems that are effective in reducing uncertainty in employees’ behavior. However, these components of the formal systems will be ineffective if the informal system does not support them. Components of the informal system, sometimes referred to as corporate culture, consist of shared values, beliefs, cultural traditions, trust, ethical climate, passion, motivation, and leadership, to name a few. Even though formal systems are necessary, a company will be more successful in achieving its objectives if the formal and informal systems are in harmony. If employees do not believe that a certain sustainability objective is important, it likely will not be accomplished (Figure 4.3).
Figure 4.3 System components: formal and informal
Management System Components: Commitment and Capability
Even though management systems comprise many components, we will discuss two overarching components that are essential for reaching sustainability objectives and fulfilling the company’s policy. These two components are commitment and capability. Commitment and capability must run up and down all levels of the organization. Not only does an organization need strong motivation at the highest level of governance, but it also needs committed and capable employees throughout the various levels of management (COSO 2018; CICA n.d.) (Figure 4.4).
Figure 4.4 Organizational commitment and capability
For example, top management might create a waste diversion policy, which the board of directors approved (strategic commitment and capability). Consequently, the mid- to low-level managers create a plan for carrying out the policy (tactical commitment). They will need a budget for waste bins to separate waste and a method to communicate the plan to employees (tactical capability). They might also create a plan for incentives or rewards to recognize outstanding waste diverters (tactical commitment). In the field and in the office employees need to be aware of which items can be recycled to be able to sort the garbage into the proper waste bins (operational capability). Furthermore, the maintenance people must be motivated to ensure that the recyclable waste goes in the proper container for pick up (operational commitment). Without employees’ commitments and capabilities to carry through on the recycling process at all levels, targets might not be accomplished. To ensure commitment and develop capability, managers and supervisors should integrate responsibility and accountability for various aspects of the sustainability policy/plan into the job duties of subordinates. Providing budget support and training is essential. Rewarding employees on their sustainability accomplishments also develops commitment. For a summary of these concepts, see Table 4.2.
Table 4.2 Commitment and capability at all organizational levels
|
Organizational Level |
How Long Is the Involvement? |
Who Is Involved? |
How Are They Involved? |
|
Strategic |
Long-term plan (2–10 years) |
Board of directors and top management team |
Develop a vision, mission, strategy, and long-term objectives |
|
Tactical |
Short term (1-year goals and objectives) |
Mid- and low-level managers and supervisor |
Create a plan for each year, assigning responsibility, preparing a budget, hiring personnel, and providing incentives |
|
Operational |
Day-to-day activities (today, tomorrow, and month after month) |
Employees in offices and in the field |
Carry out the plan and monitor on a daily basis |
Commitment
At the strategic level, the appropriate structure and composition of the board can create conduits for assimilation of different viewpoints. Some organizations have a separate committee of the board to ensure that sustainability issues get sufficient emphasis and to show commitment at the highest levels of the company. As the board members are instrumental in setting the strategic direction, they should reflect diverse experiences, genders, points of view, and channels for information flow to prevent myopic thought. The commitment and capabilities of the board members determine if the organization’s definition of sustainability will be broad or narrow. At the highest level, the board members will monitor if the company’s sustainable direction as expressed in its policy is reflected in corporate actions. Some organizations want to lead their sectors in the sustainability movement. Others just want to ensure that they are complying with all the laws and not incurring exceedances or infractions. Those decisions are made at the board level.
With strong “tone at the top,” through a special board committee, the likelihood of accomplishing the objectives is greater. These committees carry various names, such as Public Affairs, Corporate Citizenship, and Environment, Health, and Safety. Other companies prefer to have a leadership committee with members from the top management team. Some have committees at both levels. As top management has to ensure implementation, responsibility lies with them. A leadership committee might consist of the Chief Executive Officer (CEO), various chief officers, various vice presidents, and a vice president in charge of sustainability. Wells Fargo’s committee is at the board level and is titled Corporate Responsibility Committee. Nike has two committees: one at the board level and one at the top management team level.
Sustainability in Action: Board and Management Level Committees
Wells Fargo & Company’s board level Corporate Responsibility Committee comprises four members who carry out the following responsibilities (edited):
• oversee the Company’s policies, programs, and strategies, including community development and reinvestment activities and performance, fair and responsible lending, government relations, support of charitable organizations, and environmental issues;
• monitor the Company’s relationships with external stakeholders and the Company’s reputation with its stakeholders;
• advise the Board of Directors and management on strategies that affect and enhance the Company’s role and reputation among its stakeholders.
Source: Wells Fargo & Company (2019, 68, 69)
Nike, Inc. also has a board committee titled Corporate Responsibility and Sustainability Committee with responsibilities similar to Wells Fargo’s. Nike also has a Performance and Disclosure Committee at the top management level that “meets regularly to review sustainability targets, performance, and disclosures.” It includes the following members:
• Chief Administrative Officer & General Counsel
• Chief Communications Officer
• Chief Financial Officer
• Chief Operating Officer
• Chief Sustainability Officer & VP Innovation Accelerator
Source: Nike (2016/2017, p. 5)
Once a strategic direction is determined through multi-stakeholder input, the tactical and operational systems must have sufficient structure and detail to ensure that they are functioning suitably to motivate employees to implement the strategic direction. These systems inform decision making that capitalizes on opportunities, aids in resource allocation, provides direction on sustainability initiatives, and monitors progress. Organizations can support commitment with these activities:
- • Communicating the intended objectives throughout the organization to all levels of management and operations via newsletters, meetings, blogs, retreats, and other means.
• Assigning responsibility by having employees within various levels of management and operations who will champion and are responsible for fulfilling various objectives.
- • Rewarding employees throughout the organization with awards, compensation, or both.
Sustainability in Action: Creating Commitment in Microsoft and Intel
Microsoft uses a carbon fee to internalize the cost of carbon created externally through the use of energy, such as business travel. The business group that consumes the related energy is charged the carbon fee as a budgeted and actual income statement line item. If the manager wants to show higher profits, one option is to reduce the carbon consumption for the business group.
Source: DiCaprio (2013).
Intel links employee compensation to the annual bonus.
Since 2008, we have linked a portion of our executive and employee compensation to corporate responsibility factors in our Annual Performance Bonus (APB). In 2017, the operational goals component included metrics related to our diversity and inclusion objectives. Previous metrics have focused on areas such as carbon emissions and recycling.
Source: Intel (2017–2018, p. 12). (See 2018 Proxy Statement for more information)
Capability
Capability to implement sustainability actions can be developed through a number of ways. Just as with commitment, capability must exist not only at the highest levels of the board and management but also at every level of the organization: strategic, tactical, and operational. Capability includes having the knowledge and expertise to carry out sustainability objectives. Capabilities can be developed in training sessions, seminars, workshops, conferences, and formal education, both in-house and external. Organizations can also hire capable people to fill internal gaps in expertise. Creating communities of learning (both internal and external) can help transfer information across organizations and bring new expertise to an organization. Working with suppliers and customers helps to address sustainability concerns or issues. In addition to having the knowledge and expertise, it is also important to provide adequate investments and operating budgets to ensure sustainability objectives can be accomplished. In summary, capability is supported by these activities:
- • Allocating resources through budgets and investments;
• Hiring people with the required expertise;
• Building expertise internally through training; and
- • Providing opportunities to learn from others internally and externally.
Good management systems supported by committed and capable employees will also ensure better compliance with regulations, thus preventing infractions rather than paying the associated fines, penalties, and clean-up costs. Expensive court costs and legal fees also take precious time away from mainstream business activities. Intel, a technology company, provides several examples in its sustainability report of how it develops capabilities in its workers.
Sustainability in Action: Capability at Intel
Training: Each year, our CEO communicates with all employees and senior managers about the importance of ethics and legal compliance. This “tone from the top”—combined with our annual ethics and compliance training, regular communications throughout the year, and educational resources on our employee intranet site—help to create an ethical and legally compliant culture.
Communities of Learning: We have invested significant time and resources in collaborating with others to influence system-level, industry-wide improvements to protect and empower workers in the global electronics supply chain and reduce community impacts. For more information, see the Supply Chain Responsibility section of this report.
Budget/Investment: Reducing our energy use is a key component of our overall climate change strategy, and we have proactively invested in renewable energy purchasing and alternative energy installations.
Source: Intel (2017–2018, p. 13, 15, 27)
Comply Versus Innovate
Most of our discussion thus far has been regarding commitment and capability to get employees and suppliers to comply with the company’s policies to achieve sustainability objectives, such as complying with the waste diversion policy. However, another aspect of management systems that is critical for continuous improvement is to motivate employees to think critically about the systems that are currently operating and whether they could be improved. Employees can also innovate ways that sustainability might open opportunities for cost savings or new products that satisfy a changing demand. Employees can bring fresh ideas about improving the systems, such as innovative ways to avoid creating waste in the first place. Companies have systems that will motivate both compliance and innovation.
Sustainability in Action: Compliance and Innovate Systems at Johnson Matthey
Comply
Failure to comply with ethical and regulatory compliance standards leading to reputational damage, to civil or criminal legal exposure for the company or for individuals or to risk of contractual breach.
To mitigate the risk the company uses a code of ethics, tone from senior leaders, subject matter experts, legal compliance policies and procedures, a hotline, and an Ethics Panel.
Innovate
Innovation is realising value from knowledge . . . We do not innovate in isolation and it’s our strength of understanding across the value chain that accelerates our progress.
To motivate innovation, the company identifies customer needs (economic, environmental, or social) and the value of that need, works with universities worldwide, sponsors PhDs, and combines core capabilities in science and technology with smart manufacturing.
Source: Johnson Matthey (2018, p. 80, 28)
It is easy for an organization to say that it is innovating for sustainability. However, it will not happen unless a management system is designed to motivate creative and innovative thinking. Similar to a management system with a compliance objective, a management system with an innovation objective must have commitment and capability to develop innovation in sustainability. An organization needs to clearly define innovation. Without a clear definition, employees will not know the expectations. Recall from Chapter 1 that Beinhocker and Hanauer (2014) redefined capitalism, suggesting that prosperity or wealth for society is created by finding solutions to human problems. Finding solutions most likely would require finding a new approach or a change to the existing product, process, or procedure. If the current approach were working, then there would be no problems to solve. We have problems; therefore, change is required.
Porter and Kramer (2011) wrote an article entitled “Creating Shared Value” suggesting that companies can create economic value and social value simultaneously. They also suggest revisiting the characteristics of capitalism by “reconceiving products and markets,” “redefining productivity in the value chain,” and “enabling local cluster development.” To be able to find solutions to human problems or create shared value, an innovation objective must be communicated to employees, responsibility for innovation should appear in employees’ position descriptions, and employees must be rewarded for their innovations. Innovation will not happen unless capable people are hired with experience in innovation, and training is provided for employees. The organization structure needs to accommodate functional areas working together internally. Organizational alliances must also be developed externally with suppliers and customers to address innovative solutions to problems.
Companies might set up a dedicated budget for sustainability innovation in research and development (R&D) to signal their seriousness about addressing sustainability problems, but innovation does not have to occur just in R&D. Because sustainability is concerned with getting more out of each unit of resource (or simply put, becoming more efficient) and thereby reducing the impact on our planet, any change that creates efficiency would be innovative. Efficiency can occur by using less energy, consuming less water, or creating less waste in any of the following ways:
- • redesigning processes used in the office, in production, in delivery, purchasing, or any number of steps in the value chain;
• retrofitting buildings;
• redesigning products or services offered to use fewer resources;
• turning waste materials into reusable materials; and
- • working with suppliers, customers, and other stakeholders jointly to find solutions to new, less impacting products and a better world in which to live.
As companies look for opportunities for efficiency, they create cost savings that make them more competitive or develop new products for different markets.
Reflection: Innovation at Starbucks
Starbucks provides a Goals Summary in its Global Social Impact Performance Report including the goals, progress on the goals, and commentary. Are the goals solving society’s problems and creating both social and economic value?
Area of Impact: Sourcing
Goal: 100 percent ethically sourced tea by 2020
Progress: 72 percent
Area of Impact: Greener Stores
Goal: Build and operate 10,000 greener stores globally by 2025
Progress: 1400 stores
Area of Impact: Foodshare
Goal: Rescue 100 percent of food available to donate by 2020 in U.S. company-owned stores
Progress: £3.5 million
Starbucks (2017, p. 21)
Key Takeaways
- • A well-designed management system will connect an organization’s policy (what it says it will do) with its performance (what it actually does).
• To fulfill sustainability objectives, governance is necessary at all levels of the organization including strategic (long-term), tactical (one year), and operational (day to day).
• A management system consists of both formal and informal elements working together.
• Commitment and capability must occur at all organizational levels of the management systems.
• To develop commitment, an organization communicates what is important, assigns responsibility for what is important, and rewards what is important.
• To develop capability, an organization provides resources, hires experienced people, trains internal employees, and creates opportunities for continuous learning.
- • Management systems are designed for both compliance and innovation.
Innovation: Today’s world is changing, and it’s changing fast. At Air France-KLM, innovation and technology are two strong pillars in the integration of sustainability in the customer experience.
—Air France KLM (2017, p. 60)