Some Sustainability Myths

 

 

Sustainability is about being an environmental activist or about philanthropy and I can’t afford to give away all the profit of my business.  While philanthropy can be an important and effective component of the sustainability puzzle, it is just one piece and focusing too much on philanthropy can lead to ineffective business programs that fail to achieve very dramatic benefits for the community or the company.

The sustainable option is going to be more expensive than the alternatives.  It is true that certain environmental policies, such as investing in renewable energy, can be expensive, many responsible business decisions and activities actually cost little or nothing and even larger investments will ultimately pay for themselves through substantial and ongoing cost savings.  Focusing on employee engagement and satisfaction, customer service and community involvement are all examples of sustainability programs that usually require surprisingly small amounts of cash and other resources.  In addition, simple programs aimed at reducing overall consumption of energy and other natural resources (e.g., green commuting options and recycling) can generate savings without impairing productivity.

Sustainability is about re-cycling materials, therefore other than installing recycling bins into our offices, sustainability doesn’t affect my business.  Recycling is part of the sustainability puzzle; however, all companies, including those not engaged in manufacturing of products which can be recycled or which do not use recyclable materials in their operations, can find other areas to implement sustainability: employee engagement; suppliers and supply chain management; operational efficiency; resource consumption and waste; packaging and facility design; volunteerism; governance; ethics and customer service.

If we use green-colored packaging and the words ‘eco’ or ‘organic’ in our product, then we can sell our product as being ‘green’.  Many companies have appeared to underestimate their customers’ critical thinking skills and ability to smell “Greenwash”.  They understand that just because products come in recycled packaging or are marketed with the latest buzzwords does not make those products, or the company itself, any more environmentally or socially responsible.

We are already doing as much as we can in our company, but it is not making a difference to sales.  Customers have a limited amount of time and resources to research and understand sustainability initiatives can companies need to proactively market and thoughtfully explain their legitimate initiatives so that customers and other stakeholders understand how the business and products of the company are adding value.

Sustainability seems so complex and hard to measure, how can we hope to manage it?  In order to manage anything, including sustainability, you need to measure it; however, many managers have complained that it is just too difficult and costly to measure environmental and social impact.  Fortunately, a number of tools have been developed to help even the smallest businesses measure sustainability, often by applying relatively simple processes and habits.  It will remain difficult to compare the value of one type of sustainability impact, such as reducing pollution, with another, such as providing educational opportunities to members of the local community; however, improvements in specifically identified dimensions can be tracked.

Source: “Sustainable Entrepreneurship: A Guide for Sustainable Entrepreneurs” (A Sustainable Entrepreneurship Project publication), based on Sustainable Business: A Handbook for Starting a Business (New Zealand Trade and Enterprise).

Alan Gutterman is the Founding Director of the Sustainable Entrepreneurship Project, which engages in and promotes research, education and training activities relating to entrepreneurial ventures launched with the aspiration to create sustainable enterprises that achieve significant growth in scale and value creation through the development of innovative products or services which form the basis for a successful international business.  Visit the Project’s Library of Resources for Sustainable Entrepreneurs to download handbooks, guides, articles and other materials relating to sustainable entrepreneurship and keep up with the Project’s activities by following Alan on LinkedInTwitter and Facebook.

 

 

Measuring Your Sustainable Business Practices

Organizations must have a method for measuring the sustainability of its business practices.  Companies are used to measuring financial results; however, it is only recently that focus has turned toward the development of tools for non-financial measurement of sustainability.  Larger organizations with sufficient resources are able to apply the sophisticated and comprehensive Global Reporting Initiative (“GRI”) Standards for sustainability reporting developed by GRI; however, startups may find this to be too much trouble and instead may create their own systems that include the following common areas for measurement:

 Environmental Results

  • Energy use
  • Materials use
  • Energy efficiency results
  • Carbon emissions
  • Emissions and waste (e.g. carbon emissions, water discharged, waste by type and disposal methods)
  • Water use
  • Product improvements to minimize environmental impact
  • Results of initiatives to mitigate negative environmental impacts 

Economic Results

  • Standard entry level wage compared to minimum wage
  • Spending on locally based suppliers
  • Financial implications for the organization’s activities due to climate change

Social Results (including ethical and cultural)

  • Employee time donated to voluntary causes
  • Donations and in-kind support to community groups
  • Breaches of ethical behavior
  • Breaches of regulatory and/or legal compliance
  • Customer labeling
  • Customer health and safety
  • Stakeholder trust
  • Staff perception of the organization as a good citizen (i.e., an organization that behaves ethically and acts in an environmentally and socially responsible manner)
  • Specific engagement with indigenous peoples about matters of cultural significance to them
  • Results of initiatives to mitigate negative social impacts
  • Partnerships within the organization’s supply chain that are designed to improve industry environmental and/or social outcomes

It is important for organizations to carefully assess their operations in order to identify activities that have potential sustainability impacts.  Obviously, courier drivers produce carbon emissions from their vehicles and cheap, poorly designed products are like to increase natural resource waste due to their short life cycle; however, these are rarely the only sustainability impacts for an organization.  Other prompts for identifying key impacts that can and should be the targets for the organization’s sustainability initiatives include the following:

  • Significance to key stakeholders, including representative of future generations such as children of employees living in the community in which the company operates
  • Technical information, including environmental reviews and social impact reports
  • Review of current and potential sustainable development issues and trends that are of importance or potential importance to civil society, both from a risk and opportunity perspective (e.g., changing attitudes toward climate change that have created both new costs, including taxes and expenses associated with regulatory requirements, and opportunities to commercialize new product solutions)
  • Review of international good practice and consideration of issues that are being addressed by industry leaders in sustainable development and the organization’s peers
  • Impacts and issues that are identified in standards such as the Global Reporting Initiative, SA8000 and the UN Global Compact

Source: “Sustainable Entrepreneurship: A Guide for Sustainable Entrepreneurs”, based on Sustainable Business: A Handbook for Starting a Business (New Zealand Trade and Enterprise).

Alan Gutterman is the Founding Director of the Sustainable Entrepreneurship Project, which engages in and promotes research, education and training activities relating to entrepreneurial ventures launched with the aspiration to create sustainable enterprises that achieve significant growth in scale and value creation through the development of innovative products or services which form the basis for a successful international business.  Visit the Project’s Library of Resources for Sustainable Entrepreneurs to download handbooks, guides, articles and other materials relating to sustainable entrepreneurship and keep up with the Project’s activities by following Alan on LinkedInTwitter and Facebook.

 

Better Than a Napkin: The Lightweight Business Plan

 

The traditional “business plan”, which generally ran anywhere from 40 to 60 pages, has been criticized as a waste of time and effort when trying to raise capital from investors.  Many have argued for an emphasis on describing the steps taken to identify and execute the company’s “business model” in order to demonstrate that the founders and other members of the management team have validated knowledge of their customers, markets and products and the value proposition that the company seeks to offer.  Others have argued that all that companies need is a relative short executive summary accompanied by a “pitch deck” of no more than 20 to 25 slides that serves as a “lightweight startup plan”.  Recommended sections for such a plan include the following:

The Team:  This section should highlight not only the people who are involved in the day-to-day running of the company, but also the advisers and the mentors around the team.  The section should cover the background and experience of current team members and should also identify the roles that will need to be filled in the future.

The Problem:  This section should describe the problem that the company is trying to solve and provide evidence, based on validated learning, of actual demand for the solution and willingness to pay for the solution.  The company must be able to demonstrate that it understands what the problem is, has a clear plan to go about solving it, and has a thorough and detailed knowledge of the target customer segments.

The Product:  While the finished product may not yet be available, the plan must include, at a minimum, a prototype that makes it easily visualized—even if it’s just wireframes, mockups, or a 3-D printed version of the future product (i.e., a “minimum viable product”).  This section should also a timeline for product creation and any key milestones that may be coming up toward initial product delivery (and key activities that need to be completed for the initial product to be ready), as well as discuss future products that might be applicable to the target market and services you can provide as an add-on or up-sell to increase the company’s average revenue per customer and strengthen the long-term customer relationship.  If the company will need to develop or acquire any intellectual property, the plan should describe how this will be accomplished.

The Market:  In the section on market, the company should describe the external environment in which it will be operating and marketing and selling its products and services.  The size, evolution and current state of development of the target market should be described along with information on actual and potential competitors, suppliers, barriers to entry, role of technology and intellectual property and other key partners (e.g., distributors) that the company needs to find in order to provide solutions to customers.  Just like it’s important for the company to “know its customer”, “knowing the market” is also critical to success.

Customer Development:  While somewhat duplicative of information in other sections, the company should include an identifiable discussion of its plans for implementing the customer development methodology associated with the “lean startup” process including customer discovery, validation and creation.  This ensures that the plan will address key questions such as channel selection and development, pricing tactics etc. and will demonstrate how the company has validated customer interest and established a foundation for building customer relationships.  Efforts to gain traction in the marketplace prior to completion of the final version of the first product should also be discussed.

Financial Model:  This section should describe and demonstrate a thorough understand of the proposed revenue model for the company and also describe key assumptions regarding company growth (i.e., people, facilities and other tangible assets), customer growth, revenues, costs and other expenses and profits.  The financial model should be based on key milestones in the company’s development and provide readers with a sense of how much money will be need in order to get to each of the milestones, particularly “cash flow break even”.

In addition to each of the sections above, the plan should address topics specific to the particular company such as any potential encumbrances on the company’s “freedom to operation” (i.e., licenses to use intellectual property owned by others and/or talent shortages); barriers to entry; market adoption; regulations and exit strategy.

Source: R. Allis, How to Build a Startup Plan.

Alan Gutterman is the Founding Director of the Sustainable Entrepreneurship Project, which engages in and promotes research, education and training activities relating to entrepreneurial ventures launched with the aspiration to create sustainable enterprises that achieve significant growth in scale and value creation through the development of innovative products or services which form the basis for a successful international business.  Visit the Project’s Library of Resources for Sustainable Entrepreneurs to download handbooks, guides, articles and other materials relating to sustainable entrepreneurship and keep up with the Project’s activities by following Alan on LinkedInTwitter and Facebook.

 

 

 

A New Leader’s Guide to Diagnosing the Business

In their 2008 article in the Harvard Business Review, Gottfredson et. al. noted that from 1999 to 2006 the average tenure of departing chief executive officers in the United States declined from about 10 years to slightly more than eight.  A 2006 survey by the outplacement firm Challenger, Gray & Christmas found that 40% of the CEOs who left their jobs that year had been in office for an average of just 1.8 years.  Data like this not only highlights the difficulties and risks associated with being a CEO, it also makes it clear that a new CEO has a very limited window, often no more than a few months, from the time she or he assumes the position to identify challenges, threats and opportunities and begin executing plans for the key tasks in front of them, which may include boosting profitability, increasing market share and/or overtaking competitors.

In order to have the best chance for getting off on the right foot, the new CEO must have a simple diagnostic tool to identify the company’s distinctive strengths and weaknesses and unique combination of threats and opportunities and determine what goals are reasonable and where the CEO and the rest of the management team should focus their performance-improvement efforts.  Gottfredson et. al., relying on collective decades of experience Bain and Company working with new CEOs, argued for a systematic diagnostic template that reflected an understanding of the fundamentals of business performance (i.e., the basic constraints under which any company must operate), was both comprehensive and focused (i.e., covering all the critical bases of the business, but only those bases, without requiring any waste of time or resources on less important matters), and lent itself to easy communication and action.  The recommended template, as presented in detail in the article, was built on the following four principles that defined any successful performance improvement program and certain questions associated with each of the principles:

First Principle: Costs and prices almost always decline.

  • How does your cost slope compare with your competitors’?
  • What is the slope of price change in your industry right now, and how does your cost curve compare?
  • What are your costs compared with competitors’?
  • Who is most efficient and effective in priority areas?
  • Where can you improve most, relative to others?
  • Which of your products or services are making money (or not) and why?

Second Principle: Your competitive position determines your options.

  • How do you and your competitors compare in terms of returns on assets and relative market share?
  • How are the leaders making money, and what is their approach?
  • What is the full potential of your business position?
  • How big is your market?
  • Which parts are growing fastest?
  • Where are you gaining or losing share?
  • What capabilities are creating a competitive advantage for you?
  • Which ones need to be strengthened or acquired?

Third Principle: Customers and profit pools don’t stand still.

  • Which are the biggest, fastest-growing, and most profitable customer segments?
  • How well do you meet customer needs relative to competitors and substitutes?
  • What proportion of customers are you retaining?
  • How does your Net Promoter Score track against competitors’?
  • How much of the profit pool do you have today?
  • How is the pool likely to change in the future?
  • What are the opportunities and threats?

Fourth Principle: Simplicity gets results.

  • How complex are your product or service offerings, and what is that degree of complexity costing you?
  • Where is your innovation fulcrum?
  • What are the few critical ways your products stand out in customers’ minds?
  • How complex is your decision making and organization relative to competitors’?
  • What is the impact of this complexity?
  • Where does complexity reside in your processes?
  • What is that costing you?

Gottfredson et. al. argued that use of the template should result in the identification of three to five critical change initiatives that should be at the core of the new leader’s actions toward improving performance.  The template is designed to help companies understand exactly where they are starting from and exactly where and how the business can be improved.  However, time is a scarce resource for the new leader and a lot of data must be gathered and analyzed quickly, which means that the she or he must be able to rely on other senior leaders of the company to form and manage teams that can address and answer as many of the questions posed above as possible and distill their findings down into short, focused presentations that highlight the main threats and opportunities and allow the CEO and other senior managers to quickly understand the decisions that must be made in the areas that are of the most immediate importance.

Getting the first change initiatives right is obviously important to a successful tenure for a new CEO; however, the work does not stop there.  As noted by Bower, the CEO must also have the the ability to judge where the world and the company’s markets are headed, and frame a vision of how the company should reposition itself; the ability to identify (and if needed recruit) the talent that can turn this vision into reality; an understanding, in a deep and substantive way, of the problems the company faces; and comprehensive knowledge of how the company really works, including being fully embedded into the firm’s administrative inheritance and deep and trusting relationships with key players.   Answering the questions above are a step toward competence in each of these areas.  For example, understanding the organization, and the problems faced by the company, begins with assessing the complexity of decision making and organization.  Insider CEOs, leaders who have grown up inside the organization, should already have a sense of the answers to each of the questions posed above; however, they must be prepared to bring an outsider’s cool objectivity to the process and make tough decisions that may disrupt the traditional way of doing things.  Hopefully, the deep relationships that insider CEOs have developed over the years will serve them well in convincing entrenched internal interests of the need for change.

The original source for this article is M. Gottfredson, S. Schaubert and H. Saenz, “A New Leader’s Guide to Diagnosing the Business”, Harvard Business Review, February 2008, 63; and J. Bower, “Solve the Succession Crisis by Growing Inside-Outside Leaders”, Harvard Business Review, 85(11) (November 2007).

This article appears in  “Corporate Governance: A Handbook for Sustainable Entrepreneurs”, which is prepared and distributed by the Sustainable Entrepreneurship Project and can be accessed and download here.   Keep up with the activities of the Project by connecting with Alan Gutterman, the Project’s Founding Director, on LinkedIn and following him on Twitter and on Facebook.

Benefit Corporations: An Interesting Alternative for Sustainable Entrepreneurship

A White Paper issued in 2013 by the Corporate Laws Committee (the “Committee”) of the Business Law Section of the American Bar Association (the “ABA White Paper”) reported that since 2010 a number of US jurisdictions had adopted provisions “allowing corporations to opt in to a legal structure that expressly expands the purpose of the corporation beyond advancing the pecuniary interests of its shareholders” and “allow or require directors to consider environmental, societal, or other impacts of corporate activity, even at the expense of shareholder value”.  Corporations adopting these provisions are generally known as “benefit corporations” and the ABA White Paper explained that benefit corporations could be thought of as opting out of the “property” model of corporation law exemplified by the Ford Motor case described above, which established the proposition that solvent corporations are vehicles with the sole purpose of maximizing shareholder wealth.  The property model has had its challengers, notably the “entity model” which viewed the corporation as a vehicle that can simultaneously serve the interests of multiple constituencies and thus was “tinged with a public purpose”, but since the 1980s commentators and judges have generally confirmed the ascendency of the property model.

The ABA White Paper noted that the first benefit corporation statutes were typically based on, or heavily influenced by, the Model Benefit Corporation Legislation (“MBCL”) drafted for B Lab Company (“B Lab”), a Pennsylvania nonprofit corporation that has been described as “the driving force behind the adoption of benefit corporation legislation across the country”.  The drafters of the MBCL, sometimes referred to herein as the “B Lab model”, emphasized their intent to authorize the organization of a form of business corporation that offers entrepreneurs and investors the option to build, and invest in, a business that operates with a corporate purpose broader than maximizing shareholder value and that consciously undertakes a responsibility to maximize the benefits of its operations for all stakeholders, not just shareholders. Rather than relying on governmental oversight to enforce that purpose and responsibility, the MBCL relies upon innovative provisions relating to transparency and accountability.

While the specific language in the statutes of the various jurisdictions might differ, these provisions typically (1) required that a benefit corporation consider general public welfare before acting, (2) permitted that more specific interests be considered as well, and (3) required that the corporation’s compliance be measured against a standard imposed by an independent third party.  The ABA White Paper went on to describe B Lab-based legislation as follows:

“In general, the legislation requires that a benefit corporation’s charter confirm that it is obligated to pursue a general public benefit, creating a positive impact on society and the environment as a whole, as assessed against a third party standard. The legislation also permits the creation of specific public benefits in addition to the general benefit requirement. In making decisions, directors must consider the constituencies relevant to the general public benefit. In addition, the model legislation allows charter provisions that permit consideration of additional constituencies; however, the model legislation allows the board to prioritize those constituencies’ interests, as long as it considers all of them.

The model legislation also requires that the corporation publish a “benefit report” to be made available to its shareholders each year. The report must measure the corporation’s benefit performance against a third party standard. The definition of third party standard is very detailed. The B Lab Model also includes a specific rule for a “benefit director” who must opine as to the success of the corporation in acting in accordance with its general public purpose and specific public purposes. The legislation authorizes the shareholders to pursue “benefit enforcement proceedings,” which are suits over whether a corporation is pursuing or creating the intended general public or specific public benefits. The B Lab Model legislation does not permit charter provisions that are inconsistent with the B Lab provisions.”

Maryland was the first state to adopt legislation recognizing a “benefit corporation”, which the statute described as a corporation formed to create a material positive impact on society; consider how decisions affect employees, community and the environment; and publicly report their social and environmental performance using established third-party standards.”  In Maryland, a benefit corporation must create a “general public benefit”, which was defined as a material, positive impact on society and the environment, as measured by a third-party standard, through activities that promote a combination of specific public benefits including providing individuals or communities with beneficial products or services; promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; preserving the environment; improving human health; promoting the arts, sciences, or advancement of knowledge; and/or increasing the flow of capital to entities with a public benefit purpose.

While it is conceivable that a traditional for-profit corporation could pursue many of the “public benefit” activities mentioned above, the actions of the directors would be hamstrung by above-described case law that has clearly and continuously proclaimed that the directors’ duty of good faith to the corporation requires that they carry on the business of the corporation so as to maximize the profits of the stockholders.  The statutes creating benefit corporations allow directors to consider the interests of stakeholders other than the stockholders.  For example, while the Maryland statute did not create a separate duty of the director to the beneficiaries of the public benefit purposes of the corporation, it did mandate that directors must consider the effects of any action or decision not to act not only on the stockholders but also on the employees and workforce of the benefit corporation and the subsidiaries and suppliers of the corporation; the interests of customers as beneficiaries of the general or specific public benefit purposes of the benefit corporation; community and societal considerations, including those of any community in which offices or facilities of the corporation or the subsidiaries or suppliers of the benefit corporation are located, and the local and global environment.

When Delaware, the recognized leader in statutory and case law innovations in the area of corporate law, passed its statute in 2013 recognizing “public benefit corporations”, the Governor made the following observations:

“Delaware public benefit corporations will function like and enjoy all the same benefits as traditional Delaware corporations and they will have three unique features that make them potential game changers. These three features concern corporate purpose, accountability, and transparency.

Corporate Purpose: Delaware public benefit corporations will have a corporate purpose ‘to operate in a responsible and sustainable manner’. In addition, to provide directors, stockholders, and ultimately the courts, some direction, they are also required to identify in their certificate of incorporation a specific public benefit purpose the corporation is obligated to pursue. The overarching language helps ensure that a public benefit corporation serves the best long term interests of society while it creates value for its stockholders. The requirement to identify a specific public benefit purpose gives managers, directors, stockholders, and the courts, important guidance to ensure accountability, while preserving flexibility for business leaders and their investors to choose the specific public benefit purpose they feel will drive the greatest total value creation.

Accountability: Unlike in traditional corporations, whose directors have the sole fiduciary duty to maximize stockholder value, directors of public benefit corporations are required to meet a tri-partite balancing requirement consistent with its public benefit purpose. Directors are required to balance ‘the pecuniary interest of stockholders, the best interests of those materially affected by the corporation’s conduct, and the identified specific public benefit purpose.’

Transparency: Delaware public benefit corporations are required to report on their overall social and environmental performance, giving stockholders important information that, particularly when reported against a third party standard, can mitigate risk and reduce transaction costs. Given the trend in public equity markets toward integrated ESG (Environmental, Social and Governance) reporting and the growing private equity market for direct impact investing, this increased transparency can help investors to aggregate capital more easily as they are able to communicate more effectively the impact, and not just the return, of their investments.”

California is another state that has promoted the creation of benefit corporations. For many years that state has recognized consumer cooperative corporations, small business corporations and business and industrial corporations. Recently, however, the choices have been expanded to include two additional corporate entities: benefit corporations and social purpose corporations. In California, a “benefit corporation” may be formed for the purpose of creating general public benefit, defined as a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard that satisfies certain requirements. A benefit corporation may also identify one or more specific public benefits as an additional purpose of the corporation including, without limitation, providing low-income or underserved individuals or communities with beneficial products or services, promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business, preserving the environment and improving human health.

Directors of California benefit corporations are required to consider the impacts of any action or proposed action upon specified considerations including, among others, the shareholders and employees of the corporation, customers of the corporation who are beneficiaries of the general or specific public benefit purposes and the environment.  In addition, directors of benefit corporations are allowed to consider the impacts of those actions on, among other things, the resources, intent, and conduct of any person seeking to acquire control of the benefit corporation. California benefit corporations must prepare an annual benefit report which includes, among other things, a statement indicating whether, in the board’s opinion, the benefit corporation failed to pursue its general public benefit and any specific public benefit, a description of the ways in which the benefit corporation pursued those benefits, the extent to which those benefits were created and the process and rationale for selecting the third-party standard used to prepare the benefit reports.

The ABA White Paper reported that many of the states that have adopted benefit corporation legislation have included a new form of legal action, typically styled as a “benefit enforcement proceeding”, which may be initiated as a claim for the “(1) failure of a benefit corporation to pursue or create general public benefit or a specific public benefit purpose set forth in its articles; or (2) violation of any obligation, duty or standard of conduct” under the statute.  According to the ABA White Paper, one of the “obligations” specifically enforceable in many versions of these benefit enforcement proceedings is the obligation to prepare and circulate the annual benefit report.  The ABA White Paper observed that there were variations among the benefit corporation states regarding who may sue and be sued in a benefit enforcement proceeding (i.e., who the proper plaintiffs and defendants may be).  For example, the MBCL provides that a benefit enforcement proceeding may be in the form of a direct claim commenced or maintained by the benefit corporation itself, or it may be commenced or maintained derivatively by a shareholder, a director or the holders of 5% or more of the equity interests of a 50%-or-greater stockholder of the benefit corporation; however, many of the states adopting benefit corporation legislation have not provided that all directors or a 5% owner of a parent entity may pursue derivative benefit enforcement proceedings.  The ABA White Paper noted that many, but not all, of the states adopting benefit corporation legislation have provided that the corporation cannot be liable for monetary damages for failure to pursue or create a public benefit.

This article appears in  “Benefit Corporations: A Guide for Sustainable Entrepreneurs”, which is prepared and distributed by the Sustainable Entrepreneurship Project and can be accessed and download here.  Keep up with the activities of the Project by connecting with Alan Gutterman, the Project’s Founding Director, on LinkedIn and following him on Twitter and on Facebook.

Turn Your Board of Directors Into a Key Strategic Asset

Common practice has been for recruitment and selection of new board members to be left either to the CEO or to a small group of directors on a nominating committee who meet only during that period of the year when the bylaws require that directors be nominated and put before the shareholders for election.  While this approach seems easy and simple it actually substitutes convenience for the opportunity to establish an important competitive advantage.  Over the years it’s become clear to me that the board of directors can and should be a valuable part of the core competencies of the company and a significant contributor to the achievement of the company’s long-term goals and objectives.  The process of creating a board that is a key asset begins with making sure that you find the best people to join the board.  Failure to take this process seriously can result in problems relating to oversight of management activities, delays in decision making and legal action by outside shareholders that depend on the directors to look out for their interests.  In many instances, companies fail to pay sufficient attention to the board recruitment process and the result is a group of directors who are poorly trained and lacking the skills most needed for the specific company.

I strongly recommend to founders and other senior executives that they take the time to develop and implement guidelines that establish and maintain an orderly process for recruiting and selecting new members for its board of directors.  I outlined some specific suggestions in an article that appeared on Business Law Currents, a Thomson Reuters publication, on assisting companies in putting together a skilled and diverse board of directors.  As I mentioned in that article, the centerpiece any such initiative is creating a permanent committee committed to working year-round on board development including not only the traditional recruiting and selection activities but also mapping out a long-term strategy for the composition of the board and ensuring that current board members are informed about “best practices” for being knowledgeable and effective board members (e.g., orientation, training and assessment).

One simple, but often neglected, step in board development is creating a description of the duties and responsibilities of directors.  It’s like a job description and should be written in a manner that informs candidates about the types of behaviors that will be expected of them.  Consider the following list as an example:

  • Attend regular meetings of the Company’s board of directors, which are held at least four times per year and which generally extend for approximately four to five hours in duration.
  • Be accessible for personal contact with other board members and Company officers in between board meetings.
  • Participate on, and provide leadership to, at least one of the committees of the board. Prepare in advance for active participation in board meetings and board decision making including thorough review of materials distributed in advance of meetings.
  • Participate in orientation and training activities for new and continuing directors and proactively seek out other self-education opportunities on issues and problems that are being considered by the board.
  • Responsibly review and act upon recommendations of board committees brought to the entire board of directors for discussion and action.
  • Participate in the annual self-review process required of all board members.
  • Participate in the annual development and planning retreat for the entire board, which is usually held in January of each year.
  • Understand and comply with the terms and conditions of all policies, procedures and agreement applicable to board members in general and to you specifically including fiduciary obligations imposed on board members under applicable laws.
  • In general, use your personal and professional skills, relationships, experiences and knowledge to advance the interests and prospects of the Company.

A description of director duties and responsibilities is obviously important during the recruitment, interviewing and selection process; however, it also can be used as a guide in the development of orientation and training programs and creating of an assessment framework to evaluate how well directors are fulfilling their obligations.

This article appears in “Board of Directors: A Guide for Sustainable Entrepreneurs”, which is prepared and distributed by the Sustainable Entrepreneurship Project.  Keep up with the activities of the Project by connecting with Alan Gutterman, the Project’s Founding Director, on LinkedIn and following him on Twitter and on Facebook.

Understanding What Sustainable Investors Look for in Startups

Sustainable investors are concerned not only with what companies are striving to accomplish, but also with the way in which those companies intend to operate and the values and methods that will be used by the principals of the companies.  Specifically, sustainable investors look for individuals and companies that value and exhibit transparency and honesty and candor in communications among stakeholders; define economic success by social and ecological impact, not just financial results; have an entrepreneurial spirit and culture that encourages and fosters innovation and continuous improvement; and which are truly pioneers in their areas interested in building the fields in which they operate through collaboration and “open sourcing” of methods and ideas.  Sustainable investors also tend to be particularly interested in developing and maintaining close, long-term relationships with their investees and providing them with appropriate support and resources throughout the investment period.  One way this is accomplished is by matching entrepreneurs with local investors from the same community to develop a sense of shared responsibility and facilitate face-to-face interaction.

Enterprises seeking financing from social venture capital funds and other sustainable investors need to understand the criteria that these types of investors use when evaluating potential portfolio companies.  A modest survey of the published investment criteria of various investors indicates that are looking for companies that:

  • Have a primary, clear objective to achieve significant social change and a business model in which generating social impact is an essential and necessary part.
  • Provide goods and services that meet human needs and have significant social impact (e.g., food, medicine, clothing, housing, heat and light, transportation, communication, recreation, renewable energy, and “green” products and services). These goods or services must be based on core technology that is economically better or create greater social impact than what is available currently through the market, aid, or charitable distribution.  Sustainable investors prefer and expect evidence of customer feedback on the utility of the proposed goods or services.
  • Have a clear business plan and model that demonstrates the potential for financial viability and sustainability within a five to seven year period, including the ability to cover operating expenses with operating revenues and generate a fair return for investors.
  • Have a strong and experienced management team with the skills, will, and vision to execute the business plan, an unwavering commitment to achieving the desired social impact in an ethical manner.
  • Demonstrate a clear path to scale for the number of end users over the anticipated investment period, and be positioned as one of the leaders in the market.
  • Provide positive leadership in the areas of business operations and overall activities that are material to improving societal outcomes, including those that will affect future generations.
  • Balance the needs of financial and non-financial stakeholders and demonstrate a commitment to the global commons as well as to the rights of individuals and communities.
  • Advance environmental sustainability and resource efficiency by reducing the negative impact of business operations on the environment, managing water scarcity and ensuring efficient and equitable access to clean sources, mitigating impact on all types of natural capital, diminishing climate-related risks and reducing carbon emissions, and driving sustainability innovation and resource efficiency through business operations and products and services. Red flags for sustainable investors would include a record of poor environmental performance and failure to comply with applicable laws and regulations, activities that contribute significantly to local or global environmental problems, and/or risks related to the operation of nuclear power facilities.
  • Establish an environmental management system with objectives and procedures for evaluating progress, minimizing negative impacts, training personnel and transferring best practices to customers, suppliers and other participants in the marketplace through trade associations and other collaborations.
  • Contribute to the quality of human and animal life. Sustainable investors will not invest in companies that abuse animals, cause unnecessary suffering and death of animals, or whose operations involve the exploitation or mistreatment of animals.
  • Contribute to the community through charitable giving, encouraging employee volunteering in the community, making products and services available free or at cost to community groups and supporting local suppliers and striving to hire locally.
  • Respect consumers by marketing products and services in a fair and ethical manner, maintaining integrity in customer relations and ensuring the security of sensitive consumer data.
  • Respect human rights, respect culture and tradition in local communities and economies and respect Indigenous Peoples’ Rights. Sustainable investors will not invest in companies that have exhibited a pattern and practice of human rights violations or have been directly complicit in human rights violations committed by governments or security forces.
  • Promote diversity and gender equity across workplaces, marketplaces and communities. Sustainable investors look for diversity throughout the organization, beginning with the board and senior management team, and will not invest in companies that discriminate on the basis of race, age, ethnicity, religion, gender, sexual orientation or perceived disability or support the discriminatory activities of others in their workplaces, marketplaces or communities.  Red flags include a record of consistent violations of workplace-related laws and regulations and failure to adopt and enforce explicit policies against discrimination in hiring, salary, promotion, training or termination of employment.
  • Demonstrate a commitment to employees by ensuring development, communication, appropriate economic opportunity and decent workplace standards. Sustainable investors will not invest in companies that have been singled out for serious labor-related actions or penalties by regulatory agencies or that have demonstrated a pattern of employing forced, compulsory or child labor.  Sustainable investors seek confirmation that companies have implemented and follow personnel policies that promote the welfare of their employees, adhere to internationally recognized labor standards, value employee welfare and safety, pay a living wage to its employees and maintain a reasonable ratio of CEO earnings to average employee earnings, maintain cordial and professional relations with labor unions and bargain fairly with their employees, and follow sustainable employment practices.
  • Save lives by guaranteeing product safety while promoting public health. Concerns for safety and public health caused sustainable investors to reject proposals from companies engaged in certain “prohibited business activities” such as the manufacture and/or sale of tobacco products; the manufacture of alcoholic beverages or gambling operations; the manufacture and/or sale firearms and/or ammunition; or he manufacture, design or sale of weapons or the critical components of weapons that violate international humanitarian law.
  • Provide responsible stewardship of capital in shareholders’ best interests.
  • Exhibit accountable governance and develop effective boards that reflect expertise and diversity of perspective and provide oversight of sustainability risk and opportunity. Sustainable investors will shun companies that have demonstrated poor governance, including failure to practice transparency in disclosures to shareholders or respond to shareholder communications or proposals, or engaged in harmful or unethical business practices.
  • Commit to an external code or standard or a set of business principles that provides a framework to measure the company’s progress on environmental and social issues.
  • Integrate environmental and social risks, impacts and performance in their material financial disclosures in order to inform shareholders, benefit stakeholders and seek their ideas and views and contribute to company strategy.
  • Lift ethical standards in all operations, including in dealings with customers, regulators and business partners. Sustainable investors require that the companies in which they invest adopt and rigorously follow codes of conduct that are based on recognized global best practices to guide their policies, programs and operations.
  • Demonstrate transparency and accountability in addressing adverse events and controversies while minimizing risks and building trust.

Given the nature of some of the requirements described above, it is not surprising that many sustainable investors are not interested in pure “startups” and are looking for companies that have advanced to the “early stage” of development and have identified a stable business model that has already achieved some minimum level of revenues.

The criteria identified and discussed in the text draws upon a review of published criteria of various social venture firms and investors including Calvert Group, Acumen Fund, City Light Capital and Root Capital.  Each investor has its own specific set of requirements based on its goals and objectives.  For links to information on other social venture capital firms, see Cause Capitalism “15 Social Venture Capital Funds That You Should Know About”.

This article appears in “Introduction to Financing Activities: A Guide for Sustainable Entrepreneurs”, which is part of a larger library of resources for sustainable entrepreneurs on Entrepreneurship available from the Sustainable Entrepreneurship Project here.   Keep up with the activities of the Project by connecting with Alan Gutterman, the Project’s Founding Director, on LinkedIn and following him on Twitter and on Facebook.