We need new ways to measure business success
What makes a successful year for a business? The traditional way we define business success is through financials. With public companies, each quarter we receive an update, as well as an annual update. This tells us about revenues and profits as well as dividends payable to shareholders.
Increased revenues equal good. Increased profits also equal good. These things are black and white. Any divergence from the expectations of investors around these issues will cause the share price to fall. The only way to prevent share prices from falling is to increase profitability by either cutting costs or increasing revenues, or a combination of both.
All this is obvious, but it is worth pointing out that this has been the way of business pretty much since the dawn of publicly listed companies. Growth and profitability—these are the only benchmarks of success. In fact, if anything, the obsession with these two metrics is becoming more pronounced as market scrutiny increases—thanks to social media—and we all have better access to information.
There is a huge problem here, a nettle which none of us dare yet grasp. An obsession with growth is simply not compatible with sustainability. If we are all growing more, we are placing more pressure on the planet (and this even includes those using renewable energy and cleaner production techniques).
As a business owner, one is judged by growth and nothing else. Try running a major multi-national and telling shareholders you are going to stop targeting growth and instead focus on investing in sustainability for the next five years. For one, your share price would plummet, and investors would drop your business like a stone. In a dog-eat-dog corporate world, growth is the only solution. It's the only way to survive, and the cards are stacked completely in favour of those who go for growth at all costs.
Where does this leave sustainability? To be clear, major corporations are investing in sustainability, albeit to a greater or lesser degree. But their investments are in many cases a drop in the ocean in terms of where we need to be. And their investments always have an eye on how growth and profitability will be impacted. Even investments in sustainability projects are expected to have some kind of financial pay-off or ROI.
I repeat: businesses are still judged almost entirely on growth. They might receive some nice plaudits on social media and in the press for sustainability work, but the only thing investors are interested in is growth.
Attempts are being made to tackle this issue, with some investors suggesting they are monitoring their clients to see how they are tackling long term sustainability challenges. For instance, we are seeing the growth of Environmental, Social and Governance (ESG) and there is some evidence to suggest ESG factors, when integrated into investment analysis and portfolio construction, may offer investors potential long-term performance advantages.
The theory here is that we can have it both ways—that ESG strategies promote the greater good AND provide superior long-term financial performance.
In other words, we can have our cake and eat it.
I can see the truth in this argument, but only from a long-term perspective. There is a quote which goes something like this: "There can be no business on a planet left uninhabitable by climate change." So, yes, an ultra-long-term investment which focused on sustainable growth—zero growth, even—would probably be a successful one.
But we all know that's not how investments are made. One might more normally invest over a 20-30 year time-frame, often less. Over that time, one expects returns—and the only way to those returns is growth, if we are operating in the current business paradigm.
How can we shift the dynamics here? How can we make it so that it actually pays to grow slowly or not at all or to only grow responsibly (i.e. in a way that is completely carbon neutral, for instance)?
I've pondered this question many times, including with my own business.
I believe one way is through stronger regulation. The regulatory authorities globally need to get their creative hats on—and quickly. At the moment, it pays to grow quickly and recklessly, so why would any large business do otherwise?
Where are the financial incentives for those doing right by the planet? I hear a lot of brands are focusing on producing less clothing but making it more durable. The US denim brand, Levi's, recently said it would focus on slow fashion, for instance. Levi's itself actually admitted this was a difficult balancing act in an industry obsessed with growth. Could the regulators reward Levi's in some way? Tax breaks? Grants?
If a brand takes a stand in the way Levi's has, it should be incentivised and held up as champion, for Levi's approach is surely the only realistic way forward for the planet.
Likewise, regulators need to look at wanton growth and ask what can be done about it. Are huge mergers and acquisitions really the best way forward for the planet? They might lead to higher growth and profits but who else benefits apart from shareholders?
Businesses won't police themselves on this. At present, growth is the only metric that matters. Regulators must build a framework in which the targeting of other metrics is incentivised. If they cannot, it's hard to see businesses making the changes our planet so urgently needs.
Mostafiz Uddin is the Managing Director of Denim Expert Limited. He is also the Founder and CEO of Bangladesh Apparel Exchange (BAE) and Bangladesh Denim Expo.