Social and Environmental, and Financial Sustainability - Essay Example

Social and Environmental, and Financial Sustainability Introduction The global business firms are often faced with challenges where they need to balance between the social and environmental concerns and their financial goals. On one hand, the firms need to achieve their financial objectives and meet the stakeholders’ interests by generating sufficient revenue generation and profit, while on the other hand the organization also needs to fulfil its obligations towards the environment and the social welfare (Garsten and Hernes, 2008). Several companies pursue their business activities with a myopic sight of financial sustainability only and they overlook the need for taking care of the social and environmental sustainability. This paper is focused on how the social and environmental sustainability differ from the financial sustainability and its impact on the way a company operates. It covers the challenges faced by the corporate firms to resolve the differences and the future implications of the reconciliation. The paper covers the details of the topic of discussion with real life example of corporate firms and it also discusses the theoretical framework in which the models of sustainability are based on. Social and Environmental Sustainability The social and environmental sustainability is to ensure that the society and its environment are not being affected by the business operations of the organizations. In order to achieve social and environmental sustainability, the company needs to make sure that all of its operations are following the required environmental standards and are adding value for the society. According to the reports of Colantonio (2009), there should be equal priority given to the social, environmental and economic sustainability. It has been mentioned that the social sustainability is one of the emerging issues of the contemporary business environment. With the increase in competitiveness in the business market along with the rise in population and decreasing natural resources, it has become imperative for the organizations to deal with certain sociological issues. Widok (2009) have mentioned that apart from the social and environmental sustainability challenges faced by the firms, they also face challenges on the grounds of reporting on sustainability. It has been mentioned in his studies that reporting on sustainability activities has always been superficial in nature. Even though several organizations report that they conform to the standardized norms of the globally accepted sustainability practices, but the lack of detailed reporting has made them more lenient in its implementation. Moreover, the sustainability report does not reflect much information regarding the health of the company or how it will act in the near future. This is one of the reasons that the sustainability report in most cases are overlooked and overshadowed by the financial reports. The firms have often faced with certain ethical issues that encompass the need to quantify the organizational performance and fear of abuse (McKenzie, 2004). The advent of information technology and globalization has created a single unified global economy which has brought the business firms closer and has made business operations easier. It has also created collision among different concepts of culture and society. In order to ensure that the global business firms and the society can coexist harmoniously, the firms must reinforce on sustainability activities (Salazar, Espinosa and Walker, 2011). Furthermore, in the increasingly competitive business market the initiatives regarding the social and environmental issues are often postponed and considered to be cost extensive for the firms. In order to make sure that the operations of the firms are complementing the social welfare, they need to accurately trace the progress of sustainability. This will help the firms to identify the working concepts and isolate the non working ones. On the other hand, quantifying the social and ethical values may result in anxiety thereby reducing the capability of the firm to enforce detailed concepts. Moreover, what may otherwise seem to be a solution for the existing sustainability issues may not prove to be useful in the near future. This as a result has created a problem which is dynamic in nature, thus there is no fixed definition of sustainability and how to attain it (Sarkis, Helms and Hervani, 2010). The Agency Theory The agency theory dictates the relationship between two parties- one party that determines the work and the other party that does the work. Following this theory the “principal” appoints an “agent” who performs the work allocated to him. In an organizational perspective, the shareholders can be considered as the “principals” and the management of the company are the “agents”. The theory suggests that both the principal and the agent are driven by self interest. If the agency acts against the interest of the principal, then it is termed as the agency loss. Agency loss is zero when they act according to the interest of the principal (Sevenpillars, 2014). Legitimacy Theory The legitimacy theory states that the organization always tries to operate within a social contract, which dictates the bounds and norms of the society. By following the legitimacy theory the organization will voluntarily report its socially responsible activities or any other activities that which are expected by the community. The theory is dependent on the concept of social contract that exists between the organization and the society. It determines on a broad perspective on how the organization should conduct its activities and it also states that the success of the organization will be threatened if the organizational activity is perceived to be unfavourable for the society and the environment (Guthrie, 2006). Stakeholder Theory The stakeholder theory can be considered as a modified version of the legitimacy theory. It describes the relationship between the organization and all the bodies and entities that it is directly and indirectly associated with. The stakeholders are the ones those are influenced positively or negatively by the organizational activities. It includes the customers, employees, shareholders, society, government, etc. The theory uses the normative or the ethical concerens and the positive or the managerial concerns of the organization. The normative approach suggests an ethical treatment of the stakeholders by taking care of the long term interest of the society. The positive approach or the managerial approach allows the firm to give highest priority to the most powerful stakeholders (Donaldson and Preston, 1995). Four Pillars In order to ensure financial sustainability, the company needs to generate a steady cash flow from unhindered operational activities. The cash flow generation can be from either diversified business units or from internal income generation. In either case, the company has to focus on both of them. However, it has been evidenced that even after ensuring a steady cash flow, the companies have failed to maintain their sustainability. The determinant of financial sustainability can be discussed by the four fundamental pillars of financial sustainability which are financial and strategic planning, diversification of income, a sound infrastructure and finance and generation of own income (León, 2001). Financial and Strategic Planning The financial planning involves devising a strategic plan on how much the company needs to earn and by when they need to earn it. Every organization thrives to earn the highest possible revenue at the shortest possible time. However, while that may not be possible for most of them, the firms need to ascertain the minimum revenue generation that will help the company to achieve its desired goals and cover its administrative and operational costs. Over time an orgazanitions takes on a lot of activities which can distract the firm from its long term financial objectives. Therefore, the companies needs a strategic planning and have to ensure that all of its activities are aligned to that plan (León, 2001). Diversification of Income This pillar of financial sustainability suggests that the company needs to secure more than one income sources and should not be dependent on one particular source even if it is providing the necessary cash flow. It has been mentioned that at least 60 percent of the revenue generation of the company should come from five different sources (León, 2001). The diversified income portfolio reduces the risk of bankruptcy, because if one of the income sources performs poorly then the rest of them will compensate for the poor performance of that particular source (CTB, 2014). Sound Administrative infrastructure and finance Having sufficient resource is not enough, the company also needs to learn how to manage those resources properly and generate return from them. The company needs to employ efficient procedures to properly run the administration and the finances by devising institutional policies that will help it to extract the maximum value from the resources. Apart from that, the company also needs to ensure transparency in its financial management. Transparency is quite important in terms of gaining the investors trust. Since, the judgments of the investors are solely dependent on the financial statement of the company so the investors will prefer to have a complete disclosure of the financial activities of the firm (León, 2001). Own Income Generation The own income generation is from sources which are completely under the control of the company and it can choose to spend it in anyway. To put it simply, it consists of all the sources of income apart from that of the shareholders’ investment. It includes income generated from the sale of goods and services, income from public contributions, income from operational activities and financial management (IGA, 2012). These four pillars assure a company that it is financially stable and is capable to sustain its business for a long period of time. Thus it can be stated that in order for a company to survive and to ensure a steady cash flow, the four pillars need to be strengthened. From the point of view of organizational benefit, it is apparent that the financial sustainability is more important than the social sustainability. The theory of organizational goal proposed by Friedman (1970) states that the sole responsibility of a company is to earn more profit. Being a “free enterprise” a firm should not worry about social responsibilities and should only focus on what it has been build for, that is to generate cash for the owners and shareholders. This theory is quite old and it is quite natural that the global business environment has changed drastically since the time it was proposed. The competitiveness in the industries has increased many folds and the demand of the customers has also changed. The advent of relationship selling or building relationship with the customers has brought them closer to the company. Therefore, the customers are now-a-days interested in every organizational activities of the firm and how the operations are affecting the society around it. The changing global business environment has changed the way the firms conduct their business. Previously, the businesses were solely product or manufacturing oriented but now it has evolved to customer oriented and need based marketing. This as a result makes it imperative for the company to take care of the society and the environment as well (Reeves, 2012). Importance of Social and Environmental Sustainability However, despite of the clear definition of the importance of the environmental and social sustainability, the companies often lose their sight and only focus on their financial objectives. The firms often perceive that taking care of the financial sustainability is for the welfare of the firm and taking care of the social and environmental sustainability is only for the welfare of the society and does not give any direct financial return to the company. This as a result can hinder the long term sustainability of the firms (Borzaga and Becchetti, 2010). It may apparently seem that the long term sustainability of the company is only dependent on its financial stability but on closer review it can be stated that the society and the environment is also responsible for it. Ignoring the social responsibility can result in negative impact on the brand image of the firm, which in turn may get reflected in the revenue generation of the company. Moreover, unethical practices to achieve financial activities can also lead to financial downfall, as the company may get penalized by the government (Hartman and Werhane, 2009). It has been found in several cases that the activities of the firms and what they report to the stakeholders are quite different. The company often dictates its social responsibility in their sustainability report but in practice they avoid most of their promises and resort to unethical practices to achieve their financial objectives (Aras and Crowther, 2012). For an example the company Enron faced severe financial crisis due to its unethical activities. The company decided to manipulate their financial figures to make it look lucrative for the shareholders. Eventually, the company faced drastic financial downturn when their practices were revealed and the company was completely bankrupt. This as a result led to thousands to employee layoffs and the investors lost their capital. From this example, it can be stated that the operational activities not only affect the company but also affects the society as well (Silverstein, 2013). Another example can be sighted which is of Apple Inc. The company has mentioned strict regulations inters of protecting the rights of the workers by providing them with decent working conditions and justified work load. Apple’s suppliers’ code of conduct states that the workers in the supplier companies must not be forced to work for more than 60 hours a week and that they are given all the necessary privileges and proper working condition. However, in real practice it is quite different. In 2010, the several workers committed suicide from the office building of Foxconn, one of the manufacturing companies of Apple, in China due to extremely high work load (BBC, 2014). After this incident, Apple had promised that it will take strict action to ensure that the working conditions are improved immediately. Even after the promises made by the company on the working condition, it has been revealed in 2014 by BBC that the working condition is still the same. A sting operation conducted by BBC have revealed the working condition of Pegatron, another manufacturing company of Apple, is severely poor where the workers are forced to work for more than 12 hours a day, which is clearly a violation of the regulations set by Apple (BBC, 2014). Revealing these unethical activities in the general public has affected the brand image of the company and it can be stated that if such incidents keeps on occurring in the near future then even well established firms like Apple may face unfavourable consequences. Thus from these examples it can be stated that the implications of social and environmental sustainability is as important as the financial goals of the firms for their long term sustainability. It has also been evidenced that the financial and social sustainability are prioritized differently and the firms often become short sighted and overlook the social responsibilities. Reconciliation of the differences The differential perception of the social and environmental sustainability and financial sustainability needs to be reconciled by the firms to ensure that the firm can sustain its business for a long period of time. The firms should give equal importance to both the social and financial sustainability. This can be achieved by focusing on the interest of the stakeholders and not only on the shareholders. This way the company will be able to ensure that it is adding value to all the entities around it, that are directly or indirectly related to the company. The stakeholders consist of the customers, shareholders, government, society, etc. Taking care of their interests will help the company to maintain a strong brand image (Bendixen and Abratt, 2011). Moreover, several resources used by the firms come from the environment itself. This as a result makes it imperative for the firms to take care for the environmental sustainability so as to ensure a steady flow of those resources. The government intervention is also quite important to ensure that the firms are operating ethically and following all the social and environmental standards. The primary hurdles faced by the company while reconciling the differences is to change the perceptions of all the members of the company. It may occur that a certain group of members are convinced of the equal importance of social sustainability while another group may not. Giving equal importance to both the sustainability factors require deep rooted change in the organizational vision statement and in order to do that all the members must support it. The shareholder may find it waste of time and money and may think that the company is not well utilizing their investments. However, it is the responsibility of the company to convince them that this approach will ensure the long term sustainability of the company. Future Implications In the near future if these contrasting views are reconciled then the firms will be able to sustain for a longer period of time. Taking care of the society and the environment will also allow the companies to make better mutual collaborations and they will be able to coexist harmoniously. In the increasingly competitive global business environment, the firms will look for new ways to achieve sustainability (Dillard and Dujon, 2008). Therefore, if these views are not reconciled then it will be difficult for them to continue their business in the changing market environment. Since, the customers are getting more and more brand conscious it is vital for the firm to increase their brand equity by creating a good corporate image; otherwise it is most likely that they will either go bankrupt or face brand rejection from the customers. Conclusion The study made in this paper highlights the fact in order for a firm to ensure long term sustenance of its operation; it needs to focus on both the social and the financial sustainability. It has been evidenced that the organizations are often conduct a myopic approach towards the financial goals as it ensure short term profitability. However, they also need to focus on the long term perspective of the firm’s sustainability. 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