The Developing Business, Essay Example

Social, Environmental and financial Sustainability

Sustainability is a concept that has become synonymous with the 21^st century business environment. As corporates look to ensure growth and increase profits, there is an inherent need to ensure that growth and profits are sustainable over extended periods. Business are designed to maximize profit, and this entails minimizing the cost of conducting business operations. In doing so, businesses use the resources it requires to develop the goods and services it intends to offer.

Environmental sustainability is ability of an economy to preserve the level and rate of harvesting renewable resources, depleting non-renewable resources and creating pollution in an indefinite manner. This means that economies that employ best practices in environmental sustainability are able to experience a constant level and amount of resources indefinitely. However, the environmental pillar of sustainability is the most ignored by most businesses and corporates. This pillar is by far the most affected by the other two pillars of sustainability.

The environmental sustainability pillar is the most vital pillar for sustainability. This is because the social and financial (economic) aspects of a nation exist and function within the environment. As such, in order for business operations to be guaranteed, there is an integral need to ensure that environmental sustainability is given priority.

Social sustainability is the ability of a social system to realize consistent well-being. As such, all components of a social system are expected to operate and function in a manner that ensures social stability is achieved at all times. This is realized through eradication and/or mitigation of social problems such as poverty, insecurity and infringement if human rights. However, social sustainability is a concept that is voluntary to all businesses.

Financial (economic) sustainability is the ability to indefinitely maintain and realize a defined level of financial production. This is by far the most important aspect of any given profit-making business. As businesses are designed and developed to maximize profit, they tend to minimize the costs of operations. This entails employing the cheapest possible production procedures while ensuring maximum output.

Financial sustainability largely differs from social and environmental sustainability as per the going concern assumption held by accountants. This assumption states that businesses are presumed to exist long enough to realize the set goals, objectives and commitments undertaken by the business. As such, profit-oriented businesses would seek to maximize output, mitigate costs and maximize profits. The going concern notion is founded on a business’s ability to remain profitable in the long-run. Therefore, this notion ensures that production is kept at maximum levels (Kahn and Kotchen). This fails to take into consideration the rate at which businesses deplete non-renewable resources as well as the rate at which renewable resources are harvested. In a bid to mitigate costs, profit-oriented businesses may offer no obligation to the communities within which it conducts operations. The accountant’s going concern assumption ensures that business mitigate costs, thereby ignoring any responsibility to society.

During business cycles, specifically during economic downturns, the financial performance if businesses is considerably affected owing to the negative economic conditions. At this stage, economies tend to neglect the need for environmental sustainability as priority is given to economic development. The environment is pilfered for resources required for development (Kahn and Kotchen). The going concern of businesses, as well as the economy, assumes priority and environmental and social commitments experience cutbacks. As businesses are strained by the unfavorable economic conditions, they minimize costs by reducing their financial commitments to social and economic sustainability.

A salient example would be the United States economy during the 2008 Global Recession. As the impacts of the depression were imposed on the economy between 2008 and 2009, GDP took a negative growth trend and unemployment doubled. During this time, research depicts a general disregard and erosion in involvement and concern over the environment. During this time, the Pew Research Center shows the number of Americans who thought global warming was in effect dropped from 71% to 57%. There was also a 9% decline in the number of people who believed climate change was a problem that requires immediate attention. This is depicted in figure 1. One of the most affected states, California, experienced a considerable decline in the perception of the policy priorities. The state’s policies on environment had a mean score of 0.017, while economic policies had a mean rating score of 0.325.

Impact on Business Operations and Reporting

The differences between the concepts of social and environmental sustainability and financial stability have considerable implications in the way businesses operate and report on their activities. The differences between the three pillars of sustainability affects businesses on two fronts; (1) the operational principles employed; and (2) the strategic principles employed.

Operational Principles

The underlying difference between the theories has considerably affected the manner in which businesses conduct operations. Operational principles are mainly concerned on the kind of businesses a corporation engages on a daily basis and the manner in which such activities are executed. As most businesses are profit-oriented, they tend to avert additional costs to the operation process.

These operational principles vary from one company to the other depending on the business model the company has adopted (Zott, Amit and Massa). An example is the low-cost carrier business model. Most prominent in the air transport industry, low-cost carriers have been developed to provide the cheapest services available to customers by eliminating the need for additional services with the flights services. . EasyJet is a famous UK low cost-carrier (LCC). It is ranked as the largest LCC in UK by the number of people it carries every year. In a bid to fight the fluctuating global fuel prices, the company has opted to maintain its customer proposition transparent and streamlined (Barbot). This is obviously against the market trend where most airlines choose to eliminate perks and increase restrictions and fees. By selling one-way fares, the airline manages to mitigate costs as complex fare structures are costly to maintain. Furthermore, the one-way fare structure convinces travellers that they are receiving value for money.

Impact on Reporting

Social accounting is an integral and vital aspect of business in the 21^st century market. Businesses are increasingly finding it important to honour their social obligations by reporting on the nature of their activities and the impacts these activities have on the environment and society. Corporate social disclosure is mainly defined by the manner in which organizations engage in disclosing information pertinent to the society.

Voluntary Disclosures

Corporate social disclosures are predominantly voluntary in nature. Businesses which operate within society and have considerable influence on the state of society, as pertains to social and environmental stability, find it increasingly important o report on the nature of their activities within society. This concept of voluntary corporate social disclosure is embodied within the Legitimacy Theory.

The legitimacy theory is a generalized notion that the activities of a given entity are desired, proper or appropriate within the bounds of a socially developed system of definitions, beliefs, values and norms. As this definition suggests, corporate social disclosures are voluntary in nature and takes into account the heterogeneous stake holder groups that are in essence competing for influence and to protect their own interests. Owing to the fact that this theory is largely voluntary, organizations that practice corporate social disclosure mainly apply this concept on an abstract level. This is because perceptions about corporate responsibility to the societal and environmental stability is predominantly shaped by these characteristic of the theory.

The franchise business model is a unique model that affords the business owner the bargaining power of a corporation within a partnership framework. Local businesses may look to franchise for a number of reasons. Regardless of the reasons for implementation, franchising afford the business numerous economic advantages. The Franchise business model that mainly entails adopting another company’s successful business model on other related companies most commonly adopt voluntary corporate disclosures. This is because businesses under this model are highly dependent on the concept or idea of the image or brand of the franchise. The franchisor’s business model is conceptualized and applied across a number of businesses, requiring that the franchise remain solid through activity by franchise members. Voluntary socials disclosure has been adopted by companies such as Costco have adopted the strategic principle of releasing its sustainability report after it has released its financial reports.

The stakeholder theory provides insight into a business’ accountability to its stakeholders. The stakeholder theory is much like the corporate social responsibility concept. This model attempts to identify all parties that affect or are affected by the activities of a given business within a given geographic area. This theoretical concept looks at all parties that are affected by the activities of the company, their viable claims (stake) from the company, and the responsibilities that they can enforce on the company. This theory is the solicited corporate social disclosure as stakeholders demand to have information on the social and environmental impact that the organization in question and its activities have (van der Laan).

The stakeholder theory is particularly evident in the minerals and processing industry. The energy industry is one of the most controversial industries owing to the direct implications that the industry has on the environment and the society. Corruption is a plague in the energy business that is seen on a daily basis. The most common is in the oil mining industry where oil spills are covered up and in the event of a public oil spill, officials bribe their way out incurring liability for the environmental damage caused.

There are a number of companies that have been seen to handle social and ethical issues in the best way are also the ones that observe the CoBE within the energy sector. The best company in 2013 is Aleyska Pipeline Service Company that deals in oil (USA), Enmax Corporation of electricity (Canada), Encana Corporation of natural gas (Canada) and EDP energias de Portugal of electricity (Portugal). These companies have been listed in Forbes’ 2013 and 2014 most ethical companies due to their ability and mission to observe transparency and a good sense of corporate social responsibility.

Reconciliation of Theoretical Differences

The theoretical difference between two of the most dominant theories of corporate social disclosures lead to the implementation of diverse approaches towards corporate social responsibility and the need to ensure sustainability. Sustainability is only achievable at the point where all three pillars of sustainability are taken into consideration by corporates, and government agencies. It is important to note that while the legitimacy and stakeholder theories have a number of differences, they both take into consideration the operations of a given business or organization and its functional environment.

The theoretical differences embodied in both theories of corporate social disclosures can be reconciled by viewing these theories as overlapping theories that all drive towards a common goal, but employs different approaches. The creation of a hybrid theory that takes into consideration all the cores aspects of corporate social disclosure is important. Implementing the varied aspects of these theories, both solicited and voluntary corporate social disclosure complements the strengths and weaknesses of one theory with the other. Developing institutions with required standards of both solicited and voluntary corporate social disclosures would bridge the differences between theoretical concepts.

Obstacles to Reconciliation of Theoretical Differences

Privacy or Sensitivity of Information

Corporate social disclosures have always been deemed to be private in nature. This is regardless of the fact that it may be voluntary or solicited (van der Laan). Bridging the gap between these theoretical approaches is considerably difficult and is hindered by a number of factors. The most prominent s the aspect of all disclosures being private in nature. Traditional corporate social disclosures have always favoured particular stakeholders with information on sustainability of the business in question. Information pertaining to the sustainability of businesses operating under certain business models has been found to be particularly sensitive and private in nature. A salient example is the financial sector.

Investment funds have a responsibility to disclose the social and environmental impacts of their activities. However, information pertaining to sustainability measures may reveal financial secrets about the investment fund. As such, this information is limited to the privileged stakeholders, as well as the institutions requesting for such disclosures in the case of solicited disclosures.

Inducted and Deducted Information

While voluntary disclosure while stem from information inductance, solicited disclosure stems from information deductance. When disclosures are voluntary, information is readily analysed and an appropriate report is compiled based on the information that has been initiated. However, solicited corporate social disclosures are founded on information deductance (van der Laan). The business in question will deduce the requirements and standards as stipulated by the source of request and provide and appropriate response. The request from the given watch-dog entity will be analysed for the style, focus, scope and depth of the information required.

While inducted information provides an open-minded approach and view towards the corporate social disclosures, it may be found to be wanting and at times, failing to meet the required standards of CSD. On the other hand, deducted information may only provide just the required information but fail to be sufficient. This is because it may concentrate on the hard facts about social and environmental sustainability measures, and neglect the soft facts about the actual intrinsic effects that these measures have had on both the society and environment.

Future Implications of Reconciliation of Theories

Reconciling the theories of corporate social disclosures will have considerable implications for the operational and reporting futures of businesses. Bridging the differing views on CSD would have considerable operational implications businesses and industries.

Profitability

Sustainability dictates that the environmental pillar is the most important and vital component of any economic and social activity. As such, businesses and industries will have to contend with preserving the level and rate of harvesting renewable resources, depleting non-renewable resources and creating pollution in an indefinite manner. This would translate to mitigate profits and profit growth rates as operations would be limited to the confines of sustainable use and/or depletion of the environment.

Social Awareness

Bridging the difference between the different approaches to corporate social disclosures would translate to social awareness in conducting business operations. In order for businesses to effectively operate under the merged concept would have to take a different approach towards analyzing the impacts of their operations. Such analysis would be undertaken before commencing operations as opposed to the current analysis that is conducted after commencement of operations. Currently corporates only undertake corporate social disclosures after commencement of activities. This technique merely reports on the activities undertaken and their impact on the society and the environment. Under the new and bridged philosophy, such analysis would be undertaken before operations, creating a conservative approach towards economic operations undertaken by corporates. This raises social awareness in businesses and cross industries.

Increased Costs

Undertaking corporate social disclosures leads to businesses incurring additional operational costs. Such an endeavour usually requires funding to enable in-depth research and analysis on the implications that business operations have on the society and the environment. Costs associated with undertaking such an endeavour would have to be incurred by businesses.

Implications of Disregarding Reconciliation of Theories

The reconciliation of the different views on corporate social disclosures is crucial for the creation of sustainable national economies as well as the global economy. The reconciliation of the theories seeks to restructure the manner in which the three pillars of sustainability are perceived. By giving priority to the environment, all economic and social activity is guaranteed to be sustained over extended period of time. However, disregarding such an initiative would lead to the production of corporate social disclosures that meet the required minimum as opposed to the optimal possible state that can be realized.

Furthermore, operations would still be undertaken under the different theories, adopting reactionary measures as opposed to preventive and conservative measure. There is always the risk of businesses and corporates being too aggressive in harvesting renewable resources, depleting non-renewable resources and creating pollution, impeding the sustainability of the system in the long-run.

In conclusion, sustainability is a concept that has become synonymous with the 21^st century business environment. The differences between the concepts of social and environmental sustainability and financial stability have considerable implications in the way businesses operate and report on their activities. The theoretical difference between two of the most dominant theories of corporate social disclosures lead to the implementation of diverse approaches towards corporate social responsibility and the need to ensure sustainability.

References

Barbot, Cristina. Entry and Accomodation in Airline Markets: easyJet Caught in the Middle on the London-Grenoble Route. Porto: CETE, 2006.

Donovan, Robert J and Nadine Henley. Principles and practice of social marketing : an international perspective. Cambridge: Cambridge University Press, 2010.

Etzel, Michael J, Bruce J Walker and William J Stanton. How are Organizational and Consumer Markets Different? Boston: McGraw-Hill/Irwin, 2007.

Kahn, Matthew E and Matthew J Kotchen. “Environmental Concern and the Business Cycle: The Chilling Effect of the Recession.” WP-16241. Cambridge: National Bureau of Economic Research, July 2010. Electronic Source. 30 April 2015. <http://www.nber.org/papers/w16241>.

Singh, Satyendra. Handbook of business practices and growth in emerging markets. Singapore: World Scientific, 2010.

van der Laan, Sandra. “The Role of Theory in Explaining Motivation for The Role of Theory in Explaining Motivation for Disclosures vs ‘Solicited’ Disclosures.” Australian Acounting Business and Finance Journal 3.4 (2009): 15-29. ELectronic Source. 30 april 2015. <http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1062&context=aabfj>.

Zott, Christoph, Raphael Amit and Lorenzo Massa. “The Business Model: Theoretical Roots, Recent Developments, and Future Research.” Working Paper. IESE Business Cshool, June 2010. Electronic Source. 30 April 2015. <http://www.iese.edu/research/pdfs/DI-0862-E.pdf>.