Green Is Good: Sustainability, Profitability, and a New Paradigm for Corporate Governance

• Author: Judd F. Sneirson
• Position: Assistant Professor, University of Oregon School of Law
• Pages: 04

Assistant Professor, University of Oregon School of Law. J.D., University of Pennsylvania; B.A., Williams College. I thank Rob Illig, Jim Kennedy, Dick Roy, and participants at a Pace Law School faculty colloquium for their helpful comments; Ben Attanasio, Katherine Bosch, and Brad Hill for valuable research assistance; and the University of Oregon School of Law for generous summer research support.

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The point is, ladies and gentlemen, that green, for lack of a better word, is good. Green is right. Green works. Green clarifies, cuts through, and captures the essence of the evolutionary spirit. Green in all of its forms- green for life, for money, for love, knowledge-has marked the upward surge of mankind. And green, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A.

-As adapted from Wall Street ¹

Introduction

Gordon Gekko's virtuoso performance in the 1987 film Wall Street needs some updating. While greed still reigns supreme in many circles, green businesses and green business practices are becoming increasingly prevalent, promising, and profitable. Indeed, as both the current climate-change and energy crises deepen and demand immediate action,² green-in all its forms: green energy, green business practices, green products and services- may be just the thing to revitalize American business and save "that other malfunctioning corporation" Gekko mentioned.

The problem is that "green" or "sustainable" business practices can sometimes entail profit sacrifices, particularly in the short term.³ A conflict thus arises with the commonly held view that corporate directors and officers must strive to maximize shareholder wealth and affirmatively neglect other corporate constituencies like labor, creditors, suppliers, customers, the public, and the environment. This perceived duty to maximize shareholder profits lies at the heart of the conventional law-and-economics-laced view of corporate governance, thus imposing a formidable obstacle to corporations wishing to become more sustainable.⁴ Page 990

This Article seeks to overcome that obstacle and to reconcile sustainable business practices with corporate-governance law and theory. It proceeds in three Parts. Part I offers a brief overview of sustainability and the prevailing methods of putting sustainable business concepts into practice in business organizations. Part II dissects the shareholder-wealth-maximization view and its basis in law, as a consequence of the market, and as a product of prevailing social norms. For such an oft-repeated principle, its foundation is surprisingly thin. Part II also examines the theoretical arguments for shareholder-wealth maximization and finds them unpersuasive in the end. Part III then presents a new paradigm for sustainable businesses whereby firms voluntarily commit themselves to sustainability principles through pledges in their corporate charters. The increasing popularity of this trend may well foretell a new dawn of corporate-governance law, norms, and practice.

I A Sustainability Primer

Sustainability, according to its first and best-known definition, entails "meeting the needs of the present without compromising the ability of future generations to meet their own needs."⁵ The term reflected a concern "that nations [must] find ways to grow their economies without destroying the environment or sacrificing the well-being of future generations."⁶ In short, sustainability urges "economic growth, but in a new form."⁷ To be sustainable,

A . . . society needs to meet three conditions: its rates of use of renewable resources should not exceed their rates of regeneration; its rates of use of non-renewable resources should not exceed the rate at which sustainable renewable substitutes are developed; and its rates of pollution should not exceed the assimilative capacity of the environment.⁸

The concept of sustainability has since expanded beyond economic development into a more generally applicable principle that-as Page 991 governments, businesses, or individuals-our actions must not impinge on future generations' options.⁹ Sustainable businesses aspire to this standard by treading as lightly as possible on the earth and its natural resources and by developing products, services, and technologies that contribute to larger societal efforts to live more sustainably. This sort of business model may include behaviors-such as being more than minimally compliant with environmental regulations, being more than minimally generous towards employees, or paying more for goods and services that are sustainably harvested or humanely produced-that sacrifice profits in the short run. Studies have shown, however, that these practices on the whole pay for themselves and sometimes even enhance profitability.¹⁰ As many firms have shown and seem to believe, it is quite possible, and profitable, to "do well by doing good."¹¹

Two complementary ways of operationalizing sustainability in business have emerged in the management literature: one that applies a "triple bottom line" approach to measuring corporate performance and success, and a second method that calls for businesses to "gear up" through increasingly pervasive levels of sustainability.

A The Triple Bottom Line

The triple-bottom-line approach to sustainable business views corporate performance and success in three separate dimensions: "economic prosperity, environmental quality, and social justice."¹² That is, in addition to "the traditional bottom line of financial performance (most often expressed in terms of profits, return on investment (ROI), or shareholder value)," sustainable firms must also mind "their impact on the broader Page 992 economy, the environment, and on the society in which they operate."¹³ By using this approach in its accounting, a firm can measure its financial success as well as the extent to which it is "reducing (or increasing) the options available to future generations" during a particular reporting period.¹⁴

Triple-bottom-line adherents argue that a sustainable mindset not only helps the environment and society, it can also help firms' financial bottom lines. For example, efforts to reduce waste and pollution often result in greater efficiency and the discovery of innovative techniques and materials, all of which in turn can benefit the firm, its workforce, and the environment in both the short and the long runs.¹⁵ Such opportunities often lurk in the zones where business interests and stakeholder interests overlap, "where the pursuit of profit blends seamlessly with the pursuit of the common good."¹⁶Thus, an energy company's triple-bottom-line efforts might focus on renewable-energy sources, an automobile company's efforts might focus on fuel efficiency and hybrid and fuel-cell technologies, and a food company's efforts might focus on healthful options and reduced packaging.¹⁷ In each of these examples, a company can better its financial bottom line while also bettering its social and environmental bottom lines.¹⁸ Page 993

B Gearing Up

A second strategy for incorporating sustainability principles into a business is the "gearing up" framework.¹⁹ Like a manual transmission, the framework is designed to take a company from a level of bare compliance with applicable law to a place where sustainability is a systemic, integrated part of its strategy that transforms its business model and markets.²⁰ Viewed in this way, sustainability is not just a kinder, gentler way of conducting business; it is a "catalyst for growth and innovation" that can transform an entire industry, with committed, sustainable companies at the leading edge.²¹

The framework's first gear denotes compliance. In this first stage, a firm views the business case for sustainability with skepticism and, aside from generic corporate philanthropy, does little beyond comply with applicable labor and environmental regulations.²² In second gear, firms voluntarily move beyond mere compliance, view sustainability as legitimate though mostly a public-relations matter, and focus their efforts on "eco-efficiency" and "measuring, managing, and reducing" the direct impact of their operations.²³ Companies that shift into third gear are more proactive in their efforts, often partnering with the government as well as "suppliers, customers, and others in their industry" to innovate sustainable solutions together.²⁴ By fourth gear, a firm has integrated sustainability principles into its strategy and business processes (starting with product or service development), putting the firm at a competitive advantage in its sector and at the same time creating value for all of its stakeholder groups.²⁵ In the fifth Page 994 and highest gear,²⁶ companies redesign or "reengineer" their business models, financial institutions, and markets to root out underlying causes of nonsustainability at "macro" (planetary ecological limits), "meso" (human-consumption demands), and "micro" (industry and company) levels.²⁷ To be sure, "for many people, most of the time, four gears is enough, [b]ut there are times when it is necessary to shift into fifth gear, or overdrive."²⁸

Nike, the familiar sportswear and equipment company, explicitly follows the gearing-up framework.²⁹ According to a recent corporate-responsibility report, most of its current efforts lie in the fourth, or redesign, gear.³⁰ The company has deliberately rethought its entire design and production processes to reduce waste; to utilize improved, sustainable, and even reusable materials; and in some...