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Calling on Businesses to Place Sustainability on Par with Profits

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Frank Werner, Ph.D., says that corporations will be successful if they make sustainability as important as profits.
Photo by Gina Vergel

In the world of finance, as in many disciplines, success comes to those who know how to capitalize on emerging trends in the field, according to Frank Werner, Ph.D., associate professor of finance.

In the late 1980s, Werner and his colleague Jim Stoner, Ph.D., professor of management systems, were at the forefront of research that pierced the symbiotic relationship between management and finance. The textbook that grew out of their partnership, Modern Financial Managing: Continuity and Change(Freeload Press, 2007), is now in its third edition.

Today, Werner sees the business world changing again, and a new book is in the works. The Amazing Journey of Adam Smith is a novel that espouses Werner’s ideas about the responsibility of corporations to the environment.

“I started thinking a lot about environmental responsibility on the individual level. Then I transferred that to sustainability as it relates to the goals of a firm,” he said. “If the goal of a firm remains maximizing shareholder value, does that permit a firm to motivate its people to act in sustainable ways?

“The answer starts out as ‘maybe,’ then it goes to ‘yes’ in some cases and ‘no’ in others,” he said. “The ‘yes’ part is that we are starting to discover environmentally friendly products and services that are quite profitable. The ‘no’ part is that when faced with the choice of making money or helping the environment, making money will win out almost every time.”

The balance between profit and sustainability explains why new buildings tend to be certified gold or silver by the Leadership in Energy and Environmental Design (LEED) Green Building Rating System, but rarely platinum, which is the rating system’s highest standard, and also its most expensive.

“We’re seeing things like wind and solar power in businesses that are trying to become more energy efficient. Automobile companies are moving toward more environmentally friendly propulsion systems and moving away from fossil fuels,” Werner said.

“In the airline industry, General Electric is developing more environmentally friendly airplane engines that use less carbon-based fuel. But you are also seeing industries saying, ‘We’re going to go out of business if we have to follow those standards.’”

Werner said it is time for businesses to place environmental and social justice concerns on par with profits.

“I have made presentations on whether finance theory is valid today if it makes economic sense but doesn’t make social or environmental sense,” he said. “We need to enter a new paradigm for businesses that moves away from solely a financial focus to a much broader focus on the needs of the world.”

Werner said he opted to express his ideas in a novel instead of a research paper because finance research journals still are oriented to the existing economic-value-only paradigm.

“The theme of the book is based on how the goals of a firm need to change to be consistent with sustainability,” he said.

In The Amazing Journey of Adam Smith, the title character is the revered 18th-century economist who is considered the father of capitalism.

“Smith believed that when a individual pursues his self-interest, he promotes the good of society more than if he intends to benefit society,” Werner said. “He was talking about the emerging Industrial Revolution companies, and the benefit to society he was talking about was economic. He was absolutely right about that in his environment—in his world.”

Today, Werner said, while the economics of a business matter, a firm will only thrive in the long term if it focuses on aspects beyond a favorable profit and loss statement.

“The business of the future must contribute in three arenas. One is economic, another is environmental and the third is the social justice dimension,” he said. “There are three billion people around the world living in poverty. We can’t live in a world of the ‘haves’ and ‘have-nots’ where, thanks to the Internet and satellite television, the two groups can see how the other is doing.

“Some argue that this phenomenon has contributed to terrorism,” Werner continued. “Religious fanaticism plays a role, but when you have part of the world living as Americans do, and poor people in Third World countries can see that, it does cause anger.”

Today, Werner said, the financial paradigm is to increase shareholder value, and perhaps contribute to ecological and social issues to the extent it doesn’t impair that value.

“I see finance as having to adapt to this new world, or businesses won’t survive,” Werner said. “Look at the American automobile industry. It used to be that you bought American because that was your only choice. Then foreign manufacturers, particularly the Japanese companies, discovered quality management and the American companies found themselves scrambling to catch up.

“Now the game has changed again. Consumers are demandingenvironmentally friendly cars, like the Toyota Prius,” he said. “The survivors in the industry will be those companies that learn to compete and be profitable by making environmentally friendly vehicles.”

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