Chapter 1. Business And Sustainability Sept 2024 PDF

1 UNIT 1: BUSINESS AND SUSTAINABILITY Chapter 1: BUSINESS AND SUSTAINABILITY BUSINESS&SUSTAINABILITY  Index 2 1. Business and the Business Environment 2. Sustainability in Business 3 1. Business and the Business Environment 1.a...

1 UNIT 1: BUSINESS AND SUSTAINABILITY Chapter 1: BUSINESS AND SUSTAINABILITY BUSINESS&SUSTAINABILITY  Index 2 1. Business and the Business Environment 2. Sustainability in Business 3 1. Business and the Business Environment 1.a. Understanding the business concept 1.b. Understanding the business environment  Let’s get started… 4 What is business?  1. Business and the Business Environment 1.a. Understanding the business concept 7 Definition of Organisation A group of people with the necessary and appropriate means that relate to each other and function to achieve a specific purpose, which can be either for profit or not-for- profit (Bueno Campos, 2007). Definition of Business (=Company) Institution in which a group of people transform various resources into goods and/or services to satisfy human needs, with the aim of obtaining benefits to distribute among their owners (Iborra et al., 2014).  1. Business and the business environment 1.a. Understanding the business concept 8 Tangible resources: physical and financial Products BUSINESS/ COMPANY Transformation Intangible resources process Services Human resources INPUTS OUTPUTS  1. Business and the business environment 1.a. Understanding the business concept 9 Extra mile: Purpose Mission Vision Values  1. Business and the business environment 1.a. Understanding the business concept 10 Extra mile: Social Economy and Social Enterprises Spain: Social economy organisations are those operating on the basis of the following guiding principles: a) Primacy of people and the social purpose over capital, b) Application of the results to the work contributed by the members or to the social purpose of the entity, c) Promotion of internal solidarity and solidarity with society (commitment to local development, equal opportunities, stable and quality employment, the reconciliation of personal, family and working life and sustainability) and, d) Independence from the public authorities. Law 5/2011, of 29 March, on Social Economy (arts. 4-6) https://www.boe.es/buscar/act.php?id=BOE-A-2011-5708  1. Business and the business environment 1.a. Understanding the business concept 11 Extra mile: Social Economy and Social Enterprises Spain: Recognition of Benefit and Common Interest Companies. The figure of Benefit and Common Interest Companies is recognised as those capital companies which, voluntarily, decide to include in their articles of association: - Its commitment to explicitly generating positive social and environmental impact through its activity. - Their submission to higher levels of transparency and accountability in the performance of the aforementioned social and environmental objectives, and the consideration of relevant stakeholders in their decisions. Law 18/2022 of 28 September on the creation and growth of companies. https://www.boe.es/buscar/act.php?id=BOE-A-2022-15818  1. Business and the business environment 1.a. Understanding the business concept 12 Extra mile: Social Economy and Social Enterprises EU: The social economy encompasses a variety of businesses, organisations and different legal entities. They share the objective of systematically putting people first, producing a positive impact on local communities and pursuing a social cause. Social enterprises are commonly defined as "hybrid organisations built on an explicit social objective that strives to create social value while securing profits and doing so in an entrepreneurial/innovative way" (Saebi, Foss, & Linder, 2019, p. 73). Regulation (EU) No 1296/2013 of the European Parliament and of the Council of 11 December 2013 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32013R1296  1. Business and the business environment 1.a. Understanding the business concept 13 Thus, they may set: S Economic Goals M Social Goals A R Environmental Goals T  1. Business and the business environment 1.a. Understanding the business concept 14 And, since organisations/businesses employ and combine factors to produce and sell products or services in order to satisfy a societal need, they have: An economic function/impact A social function/impact A environmental function/impact  1. Business and the business environment 1.a. Understanding the business concept 15 Tangible resources: physical and financial Products BUSINESS/ COMPANY Transformation Intangible resources process Services Human resources Added value = Value of outputs - Value of inputs Distribution/ Value Exchange INPUTS OUTPUTS Value Captured Market Logic / Exchange of Value / Business Aim + Societal Needs  1. Business and the business environment 1.a. Understanding the business concept 16 Goals vs. Impacts Examples Definition of Business (=Company) Institution in which a group of people transform various resources into goods and/or services to satisfy human needs, with the aim of obtaining benefits to distribute among their owners (Iborra et al., 2014).  1. Business and the business environment 1.a. Understanding the business concept 17 Extra mile: B-Corp? Homework (Extra mile). What do you know about the B Corp movement? Do you know/recognise any B-Corp around you? What is your opinion regarding this movement/these companies?  1. Business and the business environment. 1.a. Understanding the business concept 20 Who do they impact? The Stakeholder’s concept Stakeholder: People, groups or organisations that has interest or concern in an organisation. People, groups or organisations with interests that can affect or be affected by the organisation's activity. Some examples of key stakeholders are business partners, civil society organisations, consumers, customers, employees and other workers, governments, local communities, non- governmental organisations, shareholders and other investors, suppliers, trade unions, and vulnerable groups. Stake: (Non only financial) interest  1. Business and the business environment 1.a. Understanding the business concept 21 Which are the main stakeholders of your company? Relate them to the previous impacts  1. Business and the business environment 1.a. Understanding the business concept 22 Organisations: A Diverse reality → Importance of categorisation/ taxonomies & FIT Primary According to sector of activity Secondary Tertiary Micro Quaternary Economic Depending on the Small dimension Medium Large (Possible) National Depending on the field of Classification International action criteria State-owned According to capital ownership Private Legal Individuals For-Profit Depending on the legal Companies Organisations form Cooperatives Mutuals Non-Profit Foundations Organisations Adapted from: Iborra et al. (2014) *** New comer! Benefit and Common Interest Companies  1. Business and the business environment 1.a. Understanding the business concept 25 Classify your company using the taxonomy in the previous slide  1. Business and the business environment. 1.a. Understanding the business concept 26 Organisations/Business: A Diverse reality & Three driving forces Use/combination of factors Specific purpose (Economic, Social, Environmental) Market-oriented/Long-term Viability  1. Business and the business environment. 1.a. Understanding the business concept 27 Recap on Business Objectives & Taxonomy  1. Business and the business environment. 1.a. Understanding the business concept 28 Recap on Business Objectives & Taxonomy  1. Business and the business environment 1.a. Understanding the business concept 33 This is a business/company, but... What is a manager? What is a businessperson? What is an entrepreneur? Iborra et al. (2014)  1. Business and the business environment. 1.a. Understanding the business concept 34 OWNERSHIP corresponds to the person or people who own the company. They contribute: money, resources or both. MANAGEMENT is exercised by people with formal authority to: Set objectives and make the necessary decisions to achieve them. Directing and coordinating the work of others. Owners Businesspeople Managers Iborra et al. (2014)  1. Business and the business environment. 1.a. Understanding the business concept 35 BUSINESSPERSON: Owns AND manages a business ENTREPRENEUR: Sets up a business that, frequently, involves new products/services, uses for existing ones, processes, forms of management,... Businessperson Owner Manager Entrepreneur Iborra et al. (2014)  1. Business and the business environment. 1.a. Understanding the business concept 36 Agency Problem OWNERSHIP CONFLICT OF INTEREST MANAGEMENT OWNERSHIP AND COMPANY MANAGEMENT OWNERSHIP MANAGEMENT COMPANY Iborra et al. (2014)  1. Business and the business environment. 1.a. Understanding the business concept 37 + the additional “problem”: Stakeholders vs. Shareholders Share/Stock: Financial interest/part Shareholder or Stockholder: People, groups or organisations who owns shares/stocks in a company. Stake: (Non only financial) interest Stakeholder: Any group impacted by or being able to impact the activity/performance of a company  1. Business and the business environment. 1.a. Understanding the business concept 38 Corporate governance (OCDE, 2007) Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. A governance structure outlines the governing body's roles, responsibilities, and relationships in an organization.  1. Business and the business environment. 1.a. Understanding the business concept 40 OWNERSHIP (General Meeting of Shareholders) Legal representatives of the property ADMINISTRATORS (Board of Directors) Corporate CHIEF EXECUTIVE OFFICER (CEO) COMPANY Managers Employees  1. Business and the business environment. 1.a. Understanding the business concept 41 Extra mile: Evolution of Corporate Governance Codes Year Evolution of Corporate Governance Codes 1996 Code of the Employers' Circle 1998 Report of the Special Commission for the study of a code of ethics for company directors (Olivencia Commission) 2003 Report of the Special Committee for the promotion of transparency and security in the markets and listed companies (Aldama Committee) 2006 Unified Code of Good Governance of Listed Companies (Unified Code or Conthe Code) 2007 Principles of Corporate Governance (OECD) 2013 Unified Code of Good Governance for Listed Companies (Update) 2015 Good Governance Code of listed companies 2020 Good Governance Code of Listed Companies (revised version) www.cnmv.es  1. Business and the business environment. 1.a. Understanding the business concept 42 OWNERSHIP (General Meeting of Shareholders) ADMINISTRATORS (Board of Directors) CHIEF EXECUTIVE OFFICER (CEO) COMPANY Managers Employees  1. Business and the business environment. 1.a. Understanding the business concept 43 Depict the governance structure of your company  1. Business and the business environment. 1.b. Understanding the business environment 44 ENVIRONMENT ENVIRONMENT COMPANY CORPORATE STRATEGY (WHERE) COMPETITIVE STRATEGY (HOW) Objectives and values - Resources and capacities Company Competitive General Source: Iborra et al (2014)  1. Business and the business environment. 1.b. Understanding the business environment 45 ENVIRONMENT General environment: ENVIRONMENT common to all companies COMPANY working in a common social, Com economic, political and CORPORATE STRATEGY (WHERE) pany COMPETITIVE STRATEGY (HOW) technological environment. It Objectives and values - Resources and is usually associated with a Competitive capacities country context where there General are the same economic expectations, share a similar PESTEL analysis: institutional, political and Political factors, legislative framework, social Economic factors, and cultural changes and Social factors, technological infrastructure. Technological factors, Ecological or environmental factors, Legal factors Source: Iborra et al (2014)  1. Business and the business environment. 1.b. Understanding the business environment 46 ENVIRONMENT ENVIRONMENT Competitive environment: COMPANY different for each business activity Com CORPORATE STRATEGY (WHERE) or business, covering the same pany COMPETITIVE STRATEGY (HOW) need. Objectives and values - Resources and capabilities Competitive General Porter's Five Forces Analysis Stable versus turbulent environments Customer bargaining power complexity, dynamism, uncertainty Degree of Rivalry Stable environment Bargaining power of suppliers environment Turbulent Available response time Threat of New Entrants + - Threat of substitute products - Required response time + https://www.youtube.com/watch?v=XCWHSeDU-zk Source: Iborra et al (2014)  1. Business and the business environment. 1.b. Understanding the business environment 47 How would a PESTEL and 5 Porter Force’s analysis of your company look like?  Index 48 1. Business and the Business Environment 2. Sustainability in Business 49 2. Sustainability in Business 2.a. Sustainability 2.b. Business Sustainability https://youtu.be/oJJGuIZVfLM https://www.youtube.com/watch?v=VbDnPj0G0wY  2. Sustainability in Business 2.a. Sustainability 50  2. Sustainability in Business 2.a. Sustainability 51 The 10 Principles of the UN Global Compact (2000/2003) (derived from: Universal Declaration of Human Rights (1948), Rio Declaration on Environment and Development (1992), ILO Declaration on Fundamental Principles and Rights at Work (1998) and UN Convention Against Corruption (2003)) Human Rights ◻Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and ◻Principle 2: make sure that they are not complicit in human rights abuses Labour ◻Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; ◻Principle 4: the elimination of all forms of forced and compulsory labour; ◻Principle 5: the effective abolition of child labour; and ◻Principle 6: the elimination of discrimination in respect of employment and occupation Environment ◻Principle 7: Businesses should support a precautionary approach to environmental challenges; ◻Principle 8: undertake initiatives to promote greater environmental responsibility; and ◻Principle 9: encourage the development and diffusion of environmentally friendly technologies Anticorruption ◻Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery  2. Sustainability in Business 2.a. Sustainability 52 1972: UN Conference on the Human Environment: industrialized and developing nations delineate together the "rights" of the human family to a healthy and productive environment. A string of such meetings followed on the rights of people to: Adequate food Sound housing Safe water Access to means of choosing the size of their families  2. Sustainability in Business 2.a. Sustainability 53 53 1983: the General Assembly of the United Nations asked the World Commission on Environment and Development to formulate "A global agenda for change" Gro Harlem Brundtland- former prime minister of Norway  2. Sustainability in Business 2.a. Sustainability 54 1987: Definition of Sustainable Development “development that meets the needs of the present, without compromising the ability of future generations to meet their own needs.” Brundtland Report – Our Common Future, 1987 Broken into 3 pillars/ dimensions FRAMEWORKS TRIPLE BOTTOM LINE. TBL Environmental Social Economic (Elkington, 1997) TRIPLE P-3Ps Planet People Profit (Elkington, 1997) ESG (UN, 2005) Environmental Social Governance  2. Sustainability in Business 2.a. Sustainability 55 Sustainable Development Goals (SDGs)- UN  2. Sustainability in Business 2.b. Business Sustainability 56 What is the purpose of business?  2. Sustainability in Business 2.b. Business Sustainability 57 “The “Cannibals “The Wealth of Road of “The New with Nations” Serdom” Industrial Forks” Works Main State” “Strategic “Shared “The General “Capitalism Management: Value” Theory of Employment, and A Stakeholder Interest and Money” Freedom” Approach” Authors Adam Smith Keynes Hayek Friedman Galbraith Freeman Elkington Porter 1759 1936 1944 1962 1967 1984 1997 &Kram er 2011 Economi c Period Industrial Industrial Revolution Post-war period Globalizatio Financial Revolution 1870-1914 1945-1973 n Crisis 1760-1850 1980-… 2008 Watt Steam Engine Fuel Engine World War I World War II Cold War From Agro & Taylor Transport 1914-1918 1939-1945 1947-1991 Historial to Industrial/Mechanic Communications Events Key Rural to Urban Stock Exchanges 29 Crash 1801-1831… 1929  2. Sustainability in Business 2.b. Business Sustainability 58 The evolution of business management theories and their perspectives on business objectives Evolution of the Objectives of the Company... From the Monistic or Financial Model or "Shareholder view"... ▪ Creating economic value for shareholders.... to the Pluralistic Model or "Stakeholder view". ▪ Creation of economic, social and environmental value for all stakeholders (interest groups or social participants) and in a sustained manner over time.  2. Sustainability in Business 2.b. Business Sustainability 59 The evolution of Business Management Theories and their views around Business Goals Monist Theory / Shareholder view Adam Smith. “The Wealth of Nations”, 1776. Propounded the idea of the invisible hand... ▪ that makes all economic factors seek maximum benefit, indirectly contributing to the interest of all ▪ Self-interest, leading to common good: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.” (The Wealth of Nations, 1776, p.16) ▪ But… is the market perfect?  2. Sustainability in Business 2.b. Business Sustainability 60 The evolution of Business Management Theories and their views around Business Goals Monist Theory / Shareholder view Friedrich von Hayek. “The Road to Serfdom”, 1944. Companies should focus only on shareholders profit… ▪ they are the ones permanently related to the company ▪ management may not be capable of meeting other social demands efficiently ▪ this may result in an undesirable increase in the power of companies But within the established legal and moral framework ▪ “…this that not mean that in the pursuit of this end they ought not be restrained by general legal and moral rules.” (The corporation in a democratic society: in whose interest ought it and will it be run?, 1960, p. 301)  2. Sustainability in Business 2.b. Business Sustainability 61 The evolution of Business Management Theories and their views around Business Goals Monist Theory / Shareholder view Milton Friedman. “The Social Responsibility of Business is to Increase its Profits”, 1970 The only social responsibility of private companies is to maximise shareholders’ profit within the legal and ethical standards of the country where they operate. ▪ A company is an economic actor (but not only) ▪ Economics is about obtaining the best (economic) results with limited resources available ▪ The social function of the company should therefore be limited to operating as effectively and efficiently (results>resources) as possible “Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. This is a fundamentally subversive doctrine. If businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is? Can self-selected private individuals decide what the social interest is?” (Capitalism and Freedom,1962, p.133):  2. Sustainability in Business 2.b. Business Sustainability 62 The evolution of Business Management Theories and their views around Business Goals Pluralist Theories / Stakeholder View John Kenneth Galbraith. “The New Industrial State”, 1967. He presents the notion of “technostructure”: technicians and professionals (i.e. agents) running a company that they do not own. ▪ The technostructure may have its own goals, distinct from those of the shareholders. However, once these are attained, “secondary goals” exist. ▪ The existence of a technostructure gives rise to a potential “agency problem” where conflicted interests may appear between company managers (agents) and company owners (shareholders). ▪ The agency problem is at the core of the theories about the purpose of the company.  2. Sustainability in Business 2.b. Business Sustainability 63 The evolution of Business Management Theories and their views around Business Goals Pluralist Theories / Stakeholder View Edward Freeman. “Strategic management: A stakeholder approach” (1984) ▪ Propounded the Stakeholder theory ▪ Companies should not only seek to maximise shareholder value (short term view) ▪ The company must respond to the objectives of all the stakeholders, including shareholders, providers of capital debt, employees, suppliers, public administration, society... (long-term view) “Every business creates, and sometimes destroys, value for customers, suppliers, employees, communities and financiers. The idea that business is about maximizing profits for shareholders is outdated and doesn’t work very well, as the recent global financial crisis has taught us. The 21st Century is one of “Managing for Stakeholders.” The task of executives is to create as much value as possible for stakeholders. Great companies endure because they manage to get stakeholder interests aligned in the same direction.” Strategies for Managing Stakeholder Relationships-Freeman (https://redwardfreeman.com/stakeholder-management/)  2. Sustainability in Business 2.b. Business Sustainability 64 64 The evolution of Business Management Theories and their views around Business Goals Pluralist Theories / Stakeholder View Michael Porter & Mark Kramer. “Creating Shared Value” (2011) ▪ Companies must create economic and social value simultaneously to be sustainable in the long run ▪ It is a “a more sophisticated form of capitalism, one imbued with a social purpose”. (Porter&Kramer, p.17) “This is not the same as CSR or philanthropy but addressing societal problems with business models. CSR programs focus mostly on reputation and have only a limited connection to (…). In contrast, Shared Value is integral to a company’s profitability and competitive position. It leverages the unique resources and expertise of the company to create economic value by creating social value” (Creating Shared Value, Porter&Kramer, 2011, p.16) https://www.ted.com/talks/michael_porter_why_business_can_be_good_at_solving_social_problems  2. Sustainability in Business 2.b. Business Sustainability 65 65 The evolution of Business Management Theories and their views around Business Goals Pluralist Theories / Stakeholder View Circular Economy (1966 / 2002) The Economics of the Coming Spaceship (Boulding,1966) is the seminal text of this current, and it is striking how this document establishes most of the ideas on circular economy. These ideas took decades to take hold. William McDonough (2002): Cradle to Cradle: Remaking the Way We Make Things. Three main principles: o Everything is a resource for something else o Use clean and renewable energy o Celebrate diversity "The circular economy is one that has a low environmental impact and makes good use of natural resources, through high resource efficiency and waste prevention, especially in the manufacturing sector, and minimal disposal of materials at the end of their useful life" (Ekins et al, 2019). Circular Economy - The Ellen MacArthur Foundation: Main works: Towards the circular economy (2013) https://www.ted.com/talks/william_mcdonough_cradle_to_cradle_design https://youtu.be/ooIxHVXgLbc?si=YUFrwAYjtCKxz76v  2. Sustainability in Business 2.b. Business Sustainability 66 The evolution of Business Management Theories and their views around 66 Business Goals In the business management field, Sustainable development is generally operationalized through Elkington’s triple-bottom line (TBL) concept (Elkington, 1998): the convergent area of three dimensions – economic, environmental and social–, where none of which is compromised for the benefit of the others. Economic value has to be one of the various outcomes that companies strive to obtain, but it must be balanced against other social and environmental factors Elkington, 1997 John Elkington’s main works: - “Cannibals with Forks: The Triple Bottom Line of 21st Century Business” (1997) - “Green Swans: The Coming Boom in Regenerative Capitalism” (2020)  2. Sustainability in Business 2.b. Business Sustainability 67 67 “Is it progress if a cannibal uses a fork?” ― Stanislaw Jerzy Lec From “Cannibals with Forks: The Triple Bottom Line of 21st Century Business” (Elkington, 1997)  2. Sustainability in Business 2.b. Business Sustainability 69 Business = “Institution in which a group of people transform various resources into goods and/or services that satisfy human needs, with the aim of obtaining benefits to distribute among their owners” GOALS vs. IMPACTS (economic) (social) (environmental) Goals and Impacts’ logic for both For-Profit Organizacions & Non-Profit Organisations  2. Sustainability in Business 2.b. Business Sustainability 70 A sustainable business is one that is able to viably satisfy a need that exists in the market while causing a positive (or neutral) impact in the environmental and societal dimensions.