What is a sustainable business – what does it mean in a business context?
What does the average person understand when a business executive talks about the sustainability of his company? Does he refer to profitability? Market share perhaps? Understanding all the risks the business faces? Adequate interaction with the community in which it operates perhaps? Dominant market share? It’s carbon footprint?
Perhaps all of these.
The truth is that most shareholders of a company have only a vague idea as to what the term “sustainable business” means in the context of a business operation. I believe that a consensus view is that it should generate a profit. Such a statement is actually not at all wrong. We all know that a company cannot remain sustainable in the long term if it continues to make losses each year.
However, it can also go under due to massive losses unexpectedly incurred in a single year.
A more balanced view of business sustainability reflects the social, environmental and economic demands which are considered the three pillars of sustainability. This is referred to as the triple bottom line.
However, I want to approach the concept from a different angle, namely the management of enterprise risks:
1. Banking crisis
Remember what happened to most of the large global banks in 2008/9? Most governments had to step in and bail out these banks in order to avoid a global financial collapse and a depression potentially far worse than 1927.
The excellent article “The origins of the financial crisis” published by the Economist in 2013 is a must read.
No doubt each of these banks’ executives at the time thought that they have identified, addressed and mitigated for all possible risks. After all, each of these banking operations were profitable and operating as a sustainable business by all accounts.
2. Power outages
Remember also what happened in May 2008 – and during February thru April 2015 – in South Africa when the entire country suddenly suffered national power outages? Interruptions which continued for months on end?
Read “The real reasons for power blackouts in South Africa” by Chris Yelland.
It caught veryone by surprise and severely impacted on FMCG suppliers, particularly those operating in the perishable goods segment. Losses ran into millions. The mining industry was, and still is, the worst affected. As a sector they represent the biggest consumers of electricity.
These corporate executives probably thought that they have covered all the risk bases. Few, if any, at that time would have considered the non-availability of electricity supply as a business risk. Perhaps they will now be more careful and also consider other external risks.
3. Local authorities and water
One such type is the real risk associated with the collapse of the local authority infrastructure in all but the largest municipalities in South Africa.
They should also pay attention to the longer term threat to the supply of potable water.
A company’s overview of its sustainability as reported in its integrated report is usually based on the view of its management and executives. How qualified and experienced are they to undertake this task?
4. Independent assurance
Does the company annually make use of the services of an independent assurance provider who is able to assess the work done by management? Are they independent from the auditors? Are they experienced business people who can ask the tough questions and will independently test the statements contained in the report? Are they able to bring out a truly independent opinion?
5. Independent directors
Perhaps the strongest safeguard for a shareholder is to ensure that wise and experienced individuals serve as independent non-executive directors of the company. People who question management on their views. Who require that the audit committee of the board appoints experienced assurance providers to provide an independent opinion.