Ask Eartha: Companies looking beyond the financial bottom line (column)
Special to the Daily
What does it mean when I hear people talk about “the bottom line”? — William, Blue River
Thank you for your inquiry! Once upon a time in the business world, there simply used to be the bottom line. But today, we’ve expanded our horizons and recognize there’s more to it than that. As an example, in the investment world, Socially responsible investing (SRI) and environmental social governance (ESG) recognize three main bottom lines: financial, social and environmental.
Let’s look at the history of the triple bottom line as explained by the Indiana Business Review. The phrase was first used in 1994 by John Elkington, founder of the British consultancy SustainAbility. He argued that companies should be looking at three very important yet different measures when evaluating the success of a business.
“One is the traditional measure of corporate profit — the ‘bottom line’ of the profit and loss account. The second is the bottom line of a company’s ‘people account’ — a measure in some shape or form of how socially responsible an organization has been throughout its operations. The third is the bottom line of the company’s ‘planet’ account — a measure of how environmentally responsible it has been.”
Today, you might hear people use the three Ps to refer to profit, people and planet. The goal is to measure the financial, social and environmental performance of the corporation over time. According to Elkington, only a company that produces a Triple Bottom Line is taking account of the full cost involved in doing business.
The confusion comes in actually measuring these bottom lines, especially within the people and planet areas. How are they measured, and what is the common unit of measurement across all three aspects?
It could be helpful to measure across a common index and, at the end, determine a score that is monetized, so that the profitability portion can be increased or decreased depending on the people and planet portion.
The issue of measurement continues to be a tricky subject but one that small- and medium-sized companies are starting to tackle with some regularity.
According to the Worldwatch Institute, “Echoing the growth in corporate social responsibility reporting, a growing number of mostly small- and medium-sized companies are taking environmental and social stewardship further and becoming benefit corporations — companies that are legally bound to have a positive effect on society.” Known as B-corporations, these companies are setting standards for socially and environmentally responsible ways of doing business.
There are currently about 200 benefit corporations in the US — none of which are publicly-traded companies at this point. The total gross revenues for all certified benefit corporations are about $6 billion annually, and, together, these businesses employ about 30,000 people.
Signs indicate that interest in becoming a benefit corporation is growing. B-Lab is a nonprofit advocate for B-corporations and provides online tools to help fledgling social enterprises. The number of companies annually using B Lab’s online assessment tool, which is a marker for broader interest in eventual B Corps certification, grew from 280 in 2007 to 2,406 in 2012. By the end of the first quarter of 2013, some 8,000 individual companies had used the tool. That number continues to grow as we see the success of many of these B-corporations.
Most benefit corporations to date are either small- or medium-sized businesses. But they include a few larger companies that are privately-held, such as the outdoor apparel and accessory firm Patagonia, which became a benefit corporation in early 2012. They posted annual sales of about $540 million for the fiscal year ending April 2012.
King Arthur Flour of Vermont is another large benefit corporation. The employee-owned, 223-year-old company reported sales of about $84 million in 2010.
Proponents of this new corporate form say it “bakes a triple bottom line into a company’s DNA” and frees companies from the fear of shareholder lawsuits if their decisions fail to maximize shareholder value because of some competing interest of other stakeholders, such as workers.
According to a 2013 article from Environmental Leader, benefit corporation status is intended to establish the directors’ fiduciary responsibility to consider the interests of all stakeholders.
The triple bottom line allows for a more robust analytical framework increasing facets in how companies are scrutinized. Over time, this will hopefully develop into a healthier form of capitalism.
In contrast, recent stories such as fraudulent actions by automaker Volkswagen show there is still egregious disregard for our environment by companies around the world. Ideally, benefit corporations will continue to see success and become a new model for doing business in a socially and environmentally conscious manner.
Ask Eartha Steward is written by the staff at the High Country Conservation Center, a nonprofit organization dedicated to waste reduction and resource conservation. Submit questions to Eartha at email@example.com.
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