The common thread linking sustainability, economic growth and shareholder value is efficiency itself. Take the case of certain corporations in the energy sector.

In their own words, they often pursue a 'parallel path' approach, because while producing hydrocarbon fuels to meet today's needs, they often end up supporting the development of renewable energy for the future.

For companies to be in a position to sustain and encourage economic growth it is important that they first get their priorities right.

Companies that generate revenue growth but do not deliver growth in economic profit not only often produce disappointing results but are frequently ill placed to meet such dual objectives as fostering both shareholder value and sustainable economic growth.

It is not a question of taking a negative or pessimistic attitude, but more the case of risking creating a situation whereby the companies concerned will be hindering value growth or even destroying their value from the very outset.

This could happen in cases where customer acquisition goals are pursued regardless of the underlying economic profit margins of the business sector or product line concerned. This observation is being made in the foreknowledge that such goals can wreak havoc if new customers are targeted indiscriminately without giving due attention or showing sufficient concern for the costs of acquiring them. This also applies to cases relating to their retention and servicing.

Target setting

This brings into focus the whole issue of target setting. Companies' ultimate objective should be that of stimulating and sustaining their growth in economic profit terms.

Without in any way reducing the importance of competitive benchmarking or best practice sharing, one must bear in mind that, taken in isolation, such measures could prove to be inappropriate for a corporation's overall strategy development.

When a corporation seeks to develop capabilities and strategic assets that might have led others to achieve success, in relying on such copying methods they could be engaging their assets in a manner that can end up proving to be hard to match.

This brings to the fore the important notion that companies and corporations should be selective about allocating resources when endeavouring to achieve shareholder value.

Unless a company's strategy development and investment processes are fully integrated, disappointment is likely to follow.

Companies have to be judicious in allocating resources because unless they are prepared to turn down resource requests they could end up allocating their assets to low return segments of their business, trade or industry.

A company must always ask itself whether certain pivotal corporate decisions will ultimately promote value creation and competitive advantage.

To achieve this aim overall total creation must be highly concentrated in selecting core business activities. Positive shareholder returns will ensue in a longer lasting manner once consistently superior economic profit performance is achieved.

CRM and sustainability

Which brings us to the area of CRM - customers relationship management. Any efforts in this direction must endeavour to achieve long term sustainability.

Economic growth prospects will follow when established and reputable companies and corporations develop a systematic manner of generating strategic choices that create value for both shareholders and customers.

All this can result only if a company resorts to a disciplined style of management. A group, corporation or company must learn to build on its strengths, primarily by identifying where it is best advantaged and where the best opportunities to compete would serve it best.

One does not only need to identify market opportunities but also the highest value opportunities across a complexity of segments, be they products, customers and consumers.

While economic growth will in itself promote sustainability, one has to constantly bear in mind that sustainable economic development, particularly as envisaged when the Bruntland process began decades ago, consists of meeting the needs of the present without compromising the future.

Unless a corporation bears this notion in mind, there is bound to be some form of conflict or incompatibility between the pursuit of shareholder value and the sustainability of economic growth.

All those who still consider sustainable economic development to strictly concern putting boundaries around economic growth will be merely shooting themselves in the foot by missing the wood for the trees.

CSR and success

A corporation cannot succeed in such endeavours unless it develops a sense of CSR - corporate social responsibility. An EU Green Paper defined CSR as "a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis", as they are increasingly aware that responsible behaviour leads to sustainable business success.

In presenting such a Green Paper, the European Commission stated that CSR is also about managing change at company level in a socially responsible manner. This happens when a company seeks to set the trade-offs between the requirements and the needs of the various stakeholders into a balance, which is acceptable to all parties.

If companies succeed to manage change in a socially responsible manner, this will have a positive impact at the macro-economic level. One important lesson to be learnt when appraising CSR is that there exist no 'one-size-fits-all' solutions.

In most cases social partners - primarily trade unions and civil society organisations - argue that voluntary initiatives alone might not be sufficient to protect worker and citizen rights. For this reason they invariably advocate a regulatory framework establishing minimum standards and ensuring a level playing field.

CSR practices are developed best when effective mechanisms are sought to ensure a company's accountability for its social and environmental impact.

On their part investors are known to have stressed the need to improve disclosure and transparency of companies' practices, rating agencies' methodology and investment management of SRI (socially responsible investment) funds and pension funds.

Creating value

When setting out a European Action Framework for CSR the EU stated categorically that the main function of an enterprise is to create value through producing goods and services that society demands, thereby generating profit for its owners and shareholders as well as welfare for society, particularly through an ongoing process of job creation.

However, new social and market pressures are gradually leading to a change in the values and in the horizon of business activity. The EU has argued all along that companies are or at least should be aware that they can contribute to sustainable development by managing their operations in such a way as to enhance economic growth and increase competitiveness while ensuring environmental protection and promoting social responsibility, including consumer interests.

It is for this reason and against this background that an increasing number of corporations have been known to have embraced a culture of CSR.

For CSR to succeed one must realise that it is not a mere addition to standard business activities - but is strictly about the way and manner in which businesses themselves are managed.

Socially responsible initiatives by entrepreneurs can only succeed if it means adopting a business approach, which puts "stakeholder expectations and the principles of continuous improvement and innovation at the heart of business strategies".

The particular situation of an individual corporation or enterprise as well as the specific context within which it operates can play a pivotal role in determining CSR.

Globalisation

Globalisation has led to greater organisational complexity by serving as an "increasing extension of business activities abroad that have led to new responsibilities on a global scale, particularly in developing countries".

Financial stakeholders tend to ask for the disclosure of information that goes beyond traditional financial reporting so as to allow them to identify the success and risk factors inherent in a company better and its responsiveness to public opinion.

CSR today has assumed a global dimension. As businesses and enterprises develop their trade worldwide, they often find themselves best placed to take advantage of market liberalisation and trade integration often "by sourcing from subsidiaries and suppliers in developing countries".

When corporations - particularly multi-national corporations (MNCs) - abide by internationally accepted standards they show that they can contribute to ensure that international trade markets can and do often function in a more sustainable manner.

OECD guidelines

One of the most comprehensive and internationally endorsed set of rules governing the activities of such organisations are the OECD Guidelines for Multinational Enterprises.

Even core labour standards need to be addressed within the context of globalisation. For this reason MNCs should be encouraged to adhere to certain codes of conduct that integrate the International Labour Organisation's fundamental conventions.

Such initiatives should not only be taken on board at a late stage in a company's evolutionary process but also during early days, by ensuring that teaching and training about the role of CSR takes place, particularly in commercial and management schools - even more so where financing and part-funding by such organisations and corporations could be involved.

EU Trade Commissioner Pascal Lamy had claimed that as business is facing shifting socio-political and market demands, there is a growing perception that shareholder value cannot be achieved solely through maximising short-term profits, but instead through market-oriented yet responsible behaviour.

In his own words, the debate has moved beyond the issue of whether business should contribute to a more inclusive and equitable global market place, but how it can best support sustainable development, through, among other things, exercising corporate social responsibility.

He actually said that "new business models show that corporate profitability will happen if it married up to national development".

Profitability not enough

Society and industry have both come to learn that while profitability is necessary to generate sustainable shareholder value, it is not sufficient.

According to Joseph Fiksel, "the real purpose of profitability is continuity - enabling a company to survive, adapt, innovate and grow".

Financial analysts and investors are nowadays beginning to evaluate companies not just on the basis of projected financial performance but also on intangible value drivers, such as intellectual capital, customer relationships and reputation.

While it is common knowledge that certain companies are able to create sustainable value over the long run because of intangible strengths such as vision, creativity and dedication, these ingredients and qualities do not appear on any financial statements.

For this reason Fiksel argued that three perspectives - all non-financial - must be pursued.

These are primarily:

¤ the learning, growth perspective;

¤ the business process perspective; and

¤ the Customer perspective.

In this day and age non-financial value drivers can best be understood if we realise that they also constitute an enterprise's assets.

The same applies to capital. Looking beyond financial capital we also come across three other types of capital: human capital; structural capital; and relationship capital.

While leading corporations are working systematically to replace physical capital with intellectual capital in their endeavours to increase shareholder value - a logical development in the era of electronic commerce and communication - many industry analysts believe that knowledge-based assets rather than physical assets will become the basis of future competition.

As companies have began to rely increasingly on such intangibles, the statistical correlation between their strength and market value has become even more pronounced.

I sincerely hope that these views have gone to show that although a one-dimensional approach to the pursuit of shareholder value can result in conflict with sustainable economic growth, sustainable economic development, which has grown into an emerging strategic issue across global markets, shows - in practical terms - how prosperity can be achieved while enhancing quality of life - at shop floor level, management level, community level as well as at social partner level.

Society and industry have come to learn that they cannot operate separate from each other.

What is pushing them forward to assume such a particularly 'new' mindset is the realisation that sustainable development, which is often referred to as SD, will improve both enterprise resource productivity and stakeholder confidence.

The positive development of increased shareholder value will only follow naturally.

(concluded)

Leo Brincat is Shadow Minister for Foreign Affairs and IT and a former Minister of Commerce and Finance. E-mail: leo.brincat@gov.mt.

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