ESSAM (Elective) - Sustainability and Competitive Advantage (2014)

ATTAINING SUSTAINABILITY AND COMPETITIVE ADVANTAGE

IN A GLOBALISING SECTOR

1. INTRODUCTION

First and foremost, I would like to highlight my appreciation for your attendance to this

“Attaining Sustainability and Competitive Advantage in a Globalising Sector”

conference. For your information, this conference is held annually by my organisation, the

Securities Commission of Malaysia, as part of our efforts to promote the sustainability culture

among our regulatees, the attendees in this conference today, the public-listed palm oil

producers in Malaysia.

I would like to take this opportunity to highlight that palm oil sector is a globalising sector. While

most of the palm oil plantation businesses are centralised in the South East Asia and certain

countries in Central and West Africa as well as Central America, I believe that it is appropriate

to say that this sector is a globalising sector due to its importance to the world. In addition, we

are in view that palm oil sector is a strategic sector to Malaysia due to its significant financial,

environmental and societal impact to the country. United States Department of Agriculture

reported that Malaysia is the second biggest palm oil producers in the world which produces

20.4 million MT or about 23% of global production, implying the importance of the country’s

production to the world.

In order to reflect how serious Securities Commission is with the sustainable development

vision, this conference invites only the Chief Sustainability Officer (CSO) of public listed

corporations. In the event of inexistence or unavailability of CSO, the replacement shall be

taken only by the Chief Executive Officer (CEO) of the listed corporation and not less.

Such selectivity is meant to indicate to the market that the concept of sustainability

development is a top level issue that must be planned strategically by the corporation’s

leaders. Strategic approach, in my opinion, is a condition that must be fulfilled for a sustainable

development plan to create competitive advantage for a corporation.

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2. INTRODUCTION TO SUSTAINABLE DEVELOPMENT AND COMPETITIVE

ADVANTAGE

Ladies and gentlemen,

As you all are fully aware, competitive advantage, which is an aspect that distinguishes a

corporation from their competitors, provides positive economic benefits and not readily

duplicated (Pfeffer, 1994), is an important aspect in strategic management. It is not a secret

that it is an enabler for a corporation to be a leading player in market.

Sustainability has increasingly become a mantra for the 21st century (Dyllick & Hockerts, 2002)

and the competitive advantage for corporations (Lash & Wellington, 2007). The concept

started to becomes popular globally after the launch of an important document on sustainable

development called Brundtland Report in 1987 by the Brundtland Commission of the United

Nations. The report empowers sustainability at the global level and highlights that sustainable

development should be made to meet the needs of the present stakeholders, including the

world’s poor, without neglecting the need of future stakeholders (The World Commission on

Environment and Development, 1987). Since then, the issue of environmental sustainability

has become an important aspects among the policymakers, academician, corporations and

consumers worldwide.

Nevertheless, it is interesting to note that relatively, there are not many corporations that

managed to fully convert sustainable development achievements as the means to gain

competitive advantage for a corporation.

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3. THE IMPORTANCE OF SUSTAINABLE DEVELOPMENT


Why sustainable development is important for palm oil plantation sector?

It is important to this sector because the sector derives most of its resources from the

environment and society. For example, in order to expand the area for the palm oil plantation

activities, the clearing of rain forests are undertaken and this can create negative

environmental impact to the country such as the increased carbon emission, where the carbon

emission from deforestation activities constitute about 10% of man-made carbon emissions

(Bloomberg Surveillance, 2012).

So, sustainable development is an important issue to the sector because the long term impact

such as climate change can directly affect the plantation activities. In addition, the other

environmental impacts include the disruption to the country’s flora and fauna as well as water

pollution. In other words, lands and forests are among the sector’s valuable resources.

In other words, it can be argued that while a corporation should not ignore the importance of

environmental and societal sustainability. We sources our inputs from these two factors and

hence it is a must for us to ensure continuous supply from these sources. These factors are

thus important to the corporations’ very existence.


As I mentioned earlier, for a sustainable development programme to be successful, it has to

be implemented strategically and should be spearheaded from higher level or strategic level

of the corporation. In addition, a conducive and supportive corporate governance is essential

to it be strategically implemented. When we are talking about corporate governance, it is useful

for us to clarify on what is the corporate governance and how it affects the corporate objective

of a business.

Friedman (2007) asserted that the sole objective of a business, or even the social

responsibility of a business, is to increase its profits while conforming to the minimum rules of

the society. This is generally what are desired by the shareholders. Nevertheless, with the

emerging of theoretical perspectives that lead to the prioritisation of sustainability and

corporate social responsibility such as the stakeholder theory and the legitimacy theory, the

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corporate objective has expanded from traditionally to strive for only economic prosperity to

also include the achievement of social equity as well as environment quality.

Allow me to share with the audience here on the concept of satisficing, which is the hybrid of

the word satisfy and suffice as coined by Herman Simon, a Nobel Prize winning economist.

Satisficing means satisfying the interest of all stakeholders sufficiently, although not fully. This

is in contrary to the conventional ways a corporation try to achieve the corporate objective, i.e.

maximising the return to the shareholders, as the only stakeholder whose interest that a

corporation should fulfil. It is argued that maximising a shareholders as the sole stakeholder

is risky because it means focusing on satisfying a stakeholder that are the most short-term,

opportunistic, undiversified and asocial (Jacobs et al., 2010).

In other words, I would like to highlight to the audience here that a corporation has a bigger

role than just making money. There are stakeholders other than shareholders and satisfying

the need and want of all stakeholders can ensure the business sustainability.

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4. APPROACH TO TURNING SUSTAINABLE DEVELOPMENT INTO COMPETITIVE

ADVANTAGE


I would like to share that a corporation interprets and adopts sustainability differently. Hubbard

(2009) identified and generally categorised the interpretation and adoption into five categories.

First, a prospect for corporation’s competitive advantage. Second, creation of economic and

financial value to ensure business survival. Third, equates sustainability to environment

sustainability alone. Fourth, a set of compliance requirements and lastly, an unavoidable cost

that need to be minimised.

Based on these types of interpretation and adoptions, I believe that a corporation should deem

sustainability as a means for competitive advantage which ultimately can be translated into

the creation of good economic and financial value. Of course we cannot rule out that

sustainability means more works to the corporation, which means higher operational cost, but

the main key idea that I want to highlight here is for corporation to view sustainable

development as a business opportunity and not merely business responsibility. Business

opportunity can be understood as the opportunity to gain competitive advantage, reduce cost

of doing business, enhance productivity, be more accepted by customers and other

stakeholders and many more. All of these opportunities can be translated into profitability and

ultimately maximise return to the shareholders.


One of the strategic sustainability approaches that can be undertaken by a corporation is by

switching sustainability from the defensive measure to offensive measure to ensure its

effectiveness and acceptance by the relevant stakeholders, as in the legitimacy theory

approach.

Sustainability programmes that are offensive in nature can be made through partnering with

stakeholders like government, non-governmental organisations (NGOs) or even competitors

to tackle social or environmental issues. This can create a game-changing efforts which would

give reputational benefit to the company (and its partnering competitors). In addition, such

proactive approach would enable the business leaders to influence or persuade (lobbying) the

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regulators to set the business environment that can give the deemed ‘first mover advantage’

to their companies as compared to their competitors.

On the other hand, defensive sustainability programmes tend to be viewed negatively by the

affected stakeholders. For example, any societal sustainability programmes undertaken by

Malaysia Airlines after all unfortunate ‘missing plane’ disaster, would be most likely be

considered as defensive or compensatory sustainability programmes, as it will be most likely

be viewed as fully voluntary, despite that is not actually the case. This would reduce the

potential positive impact of the programme and ultimately may not be able to grant the

corporation the intended competitive advantage.

Another real corporate example of implementation of sustainability programme as defensive

measure is in the case of several high impact corporations as revealed by E. Porter & R.

Kramer (2006) such as Nike and Shell Oil which started to accept the environmental and

societal sensitivity only after being pressured by the consumers through the extensive boycott

and environmentalists through protests.

Meanwhile, from social sustainability perspective, the strategic way of implementing it is

through focusing on the social issues that really provide competitive advantage to the

company, and not any just social issues. Porter & Kramer (2006) also highlighted that the

best social issues to be addressed by a corporation is social issues that significantly affect the

underlying drivers of company’s competitiveness in the location where it operates, for

instance, the social issue like AIDS pandemic in Africa that may affect the supply of domestic

workers to Anglo American that rely heavily for its operations.

I would also like to bring another strategic sustainable development programme undertaken

by Malaysian corporate, namely HSBC Bank Malaysia Berhad. The programme called HSBC

Young Entrepreneur Challenge is an entrepreneurship challenge among undergraduate

students in Malaysia. Such competition can benefits the bank in the form of better visibility

among the future graduates which is considered as very profitable segments in retail market

in Malaysia. It is considered as a real a game-changing factors in the local retail banking

business.

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5. RELATIONSHIP BETWEEN SUSTAINABILITY AND FINANCIAL PERFORMANCE


Most empirical research works undertaken to establish the relationship have suggested that

the relationship between financial and societal as well as environmental objectives is positive

in nature (Hahn et al., 2010). There are, however, research findings that take critical stance

towards the direct positive relationship between these two objectives.

Firstly, Young & Tilley (2006) argued that the positive relationship is not straightforward, where

several conditions such as futurity and inter-generational equity must be fulfilled before the

real benefits from the sustainability initiatives can be materialised. Secondly, it is argued that

the relationship is not absolute and depending on the industry and the methods chosen to

implement the sustainability programme (King & Lenox, 2002). Thirdly, based on the study on

780 announcements made by companies on their environmental achievements

(implementation of environmental initiatives or environmental awards by the third party), it is

concluded that the market is selective in reacting to these announcements. For example,

emission reductions are associated with negative market reaction and several other category

in environmental initiatives are associated with positive market reaction. (Jacobs et al., 2010).

Positive reaction can be translated into better financial performance and vice versa. The same

contrasting reaction effect of several specific type of sustainability initiatives such as those

related to labour relations and community relations, can also be observed in the social

sustainability initiatives (Barnett & Salomon, 2006).

In brief, it can be established that there is a positive relationship, although not straightforward

and not always true, between the two competing objectives. Motivated by this fact, business

leaders should set their positive perspective on the sustainability, i.e. to see it as a business

opportunity that can lead to economic and financial values to the company. Nevertheless, to

gain such benefits, the programmes must be implemented selectively and strategically based

on the findings made by researchers.


Many studies have suggested that corporate environmental sustainability programme, for

example the emission reduction schemes, can provide significant cost saving to the company

at the early stage of the programme implementation. At this stage, such initiatives normally

are easy or inexpensive to be implemented, thus dubbed as low-hanging fruit, where dramatic

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emission reduction can be achieved with relatively minimum cost be incurred by the company

(Hart & Ahuja, 1996). The minimal cost, however, would not be enjoyed by the company

forever since it would increase in the later stages in the sustainability programme.

Hence, based on this observation, it is recommended for corporation to strive in balancing the

objective of maximising the shareholder wealth by fully maximising the potential financial

benefits that can be brought by the low-hanging fruit sustainability initiatives.

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6. EXAMPLES OF SUSTAINABILITY INITIATIVES BY LOCAL AND GLOBAL

CORPORATION


Social sustainability initiatives normally aim at fulfilling society’s need and values. The

society’s needs and values are numerous, including accessibility to nutritious food, health

treatment, education, strong family institution, safe environment, financial health and many

others. All of these social values, created through properly planned social sustainability

programme, can yield economic value to the company. Assisted by strong business acumen,

business leaders can cleverly implement their company’s social sustainability initiatives to

become one of the contributors to higher profit generation, the endgame adored by the

shareholders.

There are many real corporate examples of strategic social sustainability initiatives, divided

into internal and external initiatives, which have successfully increased productivity or

increased profits to the corporation. Internal social sustainability initiatives can be understood

as programmes directed to the present employees. For example, workplace wellness

programme can promote healthy lifestyle among the employees and their families. Healthier

and happier employees and families means reduced absentees among employees, reduced

healthcare cost to employers and these would be translated into higher productivity and cost

saving to the employers. These results potentially maximise the company’s profitability and

hence shareholders’ wealth. For example, by investing in employee wellness programs,

Johnson & Johnson has saved a cumulative amount of USD250 million in healthcare costs

(Berry et al., 2010).

Meanwhile, the external social sustainability initiatives refer to the programmes that provides

societal benefits to the external stakeholders. Thomson Reuters, for instance, introduced a

profitable SMS services to provide crop-related information to the underserved farming

community in India, where a farmer earn an average of USD2,000 yearly and research shows

that the SMS services has increased the farmers’ income by more than 60%. This is a good

example of strategic sustainability implementation that provides benefits to the underserved

or poor farmers in the form of valuable agricultural-related information to their daily life. It is

considered strategic as it capitalises on India’s high population of farmers and high mobile

penetration. The services comes with a fee of USD5 a quarter and subscribed by 2 million

farmers (Porter & Kramer, 2011) and this means an annual revenue of about USD40 million

to the provider.

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7. CONCLUSION


I think the revelation of revenue of USD40 million annually for a simple SMS services would

be an exciting way to end my speech. Before I actually end my speech, I would like to reiterate

the key takeaways from my speech. Firstly, sustainable development is important in palm oil

sector as the sector depends heavily on the supply of inputs from the environmental and

society. Secondly, there are many fundamental or long-term benefits that can be derived from

sustainable development programme. Finally, strategic approach in implementing sustainable

development plans is a must to ensure it can be really translated into the means to preserve

or develop fresh competitive advantage and ultimately be synthesised into the financial

strength for the palm oil producer. I hope each and every one of you here will bring these

takeaways to your respective companies and together we lead the country towards being a

regional leader in the sustainable development as well as to improve your respective

companies’ financial leadership in the market.

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REFERENCES

Barnett, M.L. & Salomon, R.M. (2006) Beyond Dichotomy: The Curvilinear Relationship between Social Responsibility and Financial Performance, Strategic Management Journal 27 (11): 1101–1122

Berry, L.L., Mirabito, A.M. & Baun, W.B. (2010) What’s the Hard Return on Employee Wellness Programs?, Harvard Business Review December

Bloomberg Surveillance (2012) Deforestation Emissions May Be a Third of Prior Estimates,

Dyllick, T. & Hockerts, K. (2002) Beyond the Business Case for Corporate Sustainability, 141: 130–141

Friedman, M. (2007) The Social Responsibility of Business Is to Increase Its Profits, Springer

Hahn, T., Figge, F., Pinkse, J. & Preuss, L. (2010) Trade-Offs in Corporate Sustainability: You Can’t Have Your Cake and Eat It, Business Strategy and the Environment 19 (4): 217–229

Hart, S.L. & Ahuja, G. (1996) Does It Pay to Be Green? An Empirical Examination of the Relationship between Emission Reduction and Firm Performance, Business Strategy and Environment 5: 30–37

Hubbard, G. (2009) Measuring Organizational Performance : Beyond the Triple Bottom Line, 191 (December 2006): 177–191

Jacobs, B.W., Singhal, V.R. & Subramanian, R. (2010) An Empirical Investigation of Environmental Performance and the Market Value of the Firm, Journal of Operations Management 28 (5): 430–441

King, A.A. & Lenox, M.J. (2002) Does It Really Pay to Be Green ? An Empirical Study of Firm Environmental and Financial Performance, 5 (1): 105–116

Lash, J. & Wellington, F. (2007) Competitive Advantage on A Warming Planet, Harvard Business Review March

Pfeffer, J. (1994) Competitive Advantage through People, Boston/Mass

Porter, M.E. & Kramer, M.R. (2006) Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility, Harvard Business Review (December)

Porter, M.E. & Kramer, M.R. (2011) Creating Shared Value, Harvard Business Review (February)

The World Commission on Environment and Development (1987) Our Common Future, Oxford University Press

Young, W. & Tilley, F. (2006) Can Businesses Move Beyond Efficiency? The Shift Toward Effectiveness and Equity in the Corporate Sustainability Debate, Business Strategy and the Environment 15 (6): 402–415

Documents

ESSAM (Elective) - Sustainability and Competitive Advantage (2014)