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Transcript: What makes a company ‘sustainable’?

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KARL MOORE – This is Karl Moore of the Desautels Faculty of Management at McGill University, talking management for The Globe and Mail. Today, I am delighted to speak to a colleague from the London Business School, [assistant professor of strategy and entrepreneurship]Ioannis Ioannou.

You have been looking at what is a sustainable company. What conclusions have you come to?

IOANNIS IOANNOU – You see Karl, there is a lot of work going around about sustainable companies – companies that have sustainability in their DNA – but we as academics try to engage with that question and try to understand, "Well, what does that mean? What is the DNA of the organization?"

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So that is one of the big questions that I am working on with two co-authors at [Harvard Business School], Bob Eccles and George Serafeim. So the question was let's open this black box of, "What is a sustainable company," and let's try to understand what are the performance implications in the long run.

So, in this work, we started thinking about, "Well, is a sustainable organization different in terms of its corporate governance? Is it different in terms of its stakeholder engagement? Is it different in terms of the time horizon the sustainable company adopts?

So you see, those are all small pieces of a mosaic that, we argue, basically constitute what is a new form of the modern corporation – what we call a "sustainable corporation."

All nine aspects, essentially, are different facets of the organization that bring it together. The interesting result, of course, is that once you define a sustainable organization across these dimensions – being different doesn't necessarily mean being better. You examine long-term performance implications, whether it's stock market or whether it's operational performance and so on, and compare them with, what we call, the traditional business model or the less-sustainable one, and you can see that sustainable companies significantly outperform.

As you know, the issue of whether sustainable organizations outperform in the long run has been the Holy Grail of all the work of what used to be CSR [corporate social responsibility], or social responsibility or corporate citizenship, or however you want to define it.

KARL MOORE – Ioannis, you mentioned nine characteristics. What are the top four of those nine characteristics?

IOANNIS IOANNOU – So there are categories, there are pillars, and the four primary pillars are: corporate governance, stakeholder engagement, reporting and external communications, as well as the adoption of a long-term versus short-term time horizon.

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So if you see there from the many differences, let's take governance for example, sustainable organizations have sustainability as a formal board responsibility, and they are also more likely to have a sustainability subcommittee at the board level.

If you see their stakeholder engagement practices, if you see a lot of practices one by one – do they train their managers, do they have a process through which to get the risks and the opportunities with their stakeholders together on the table, and so on – you will see that their stakeholder engagement is much deeper and is not a kind of ad hoc resolution of problems.

When you see time horizons you see, well, more long-term investors, in other words, investors that trade less often and have more focused portfolios, are actually more likely to own a sustainable company stock as opposed to a traditional business model.

In this work, we were actually able to have transcripts of how these companies speak with their analysts, essentially, and you will see there is a better balance between long-term and short-term discussion or between the financial and non-financial metric. This tells you that these companies integrate the financial issues, the economic performance, in addition to environmental and social performance. So there are not two peripheral, distinct issues, or issues that lie separately, essentially, but they are part of one and the same business model and, in fact, they function synergistically to each other.

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