The website GreenBiz has an interesting posting about the triple bottom line. (“Why the Triple Bottom Line Matters More Than Ever“).
First, what is the triple bottom line:
The conventional way to measure the success of a business is the bottom line. But the concept of a triple bottom line, where social and environmental factors are considered along with economic ones, is also getting a lot of attention… Triple bottom line thinking holds that a company should combine standard metrics of financial success with those that measure environmental stewardship and social justice. It is sometimes called the 3P approach — People, Planet and Profits. In each case it requires thinking in three dimensions, not one.
The idea dates back to the beginning of the 90’s when managers started thinking about measuring the impact of social activities of their firms. One has to distinguish between two things here: measuring metrics and managing according to these metrics. The fact that firms track three measures of success does not mean that all of these are treated equally. The question is, when there is a conflict, which one governs the decisions:
Jim Rogers, CEO of Duke Energy, uses something he calls the “Grandparent Test.” He runs one of the biggest utilities in the country and has a lot of people counting on him. His customers expect there to be power at the flick of a switch and his investors expect profits every quarter. But he’s focused on what his grandchildren will say to their grandchildren 50 years from now. Will they say he ran the dirtiest utility in the world or that he was the first utility executive to commit to going carbon free?
Wouldn’t it be great if all CEO use the Grandparent Test when it comes to running sustainable businesses? But why stop here: wouldn’t it be great if all the executives in Wall-Street use a similar test when it comes to their bonuses and ask “Will they (i.e. the grandchildren) say we got the most outrageous bonuses in the world”, and wouldn’t it be great if the executives of Enron had used a similar test when it comes to their firm and “Will they (i.e. the grandchildren) say we were the most fraudulent firm in the world”.
While I want to believe more firms would use the triple bottom line (or use only ethical and moral practices), I am not sure the incentives are there. When the incentives are there – there is no need for the triple bottom line. Patagonia, for example, converts its interest in sustainable models into a competitive advantage and their customers are willing to pay a higher price for it (and for the image of buying from a sustainable firm). The same can be said about a firm such a Starbucks – its interest in its employees paid off in allowing them to build the “third place”. In these cases, the incentives are there and whether firms use a triple bottom line or just NPV – it does not matter since these are aligned.
I am in interested in cases where the incentives are misaligned and increasing sustainability clearly hurts the firm in terms of its NPV, yet the firm is doing it due to the “Grandparent Test”. I would like to open it to discussion and would be happy to hear comments from readers about it.