Look Out For The Triple Bottom Line

By David McEwen

Monday 7th May 2001

Who comes first, shareholders, customers or communities?

Almost all listed companies argue that their primary job is to maximise the return on shareholders' capital. Most also say they cannot achieve that without attracting customers, which means delivering the best quality, prices and service around. Many also strive to be good corporate citizens by contributing to charities or their local communities.

People who have battled the police outside economic forums around the world, protesting against globalisation and free trade, commonly use the phrase 'people before profits'.

It is easy to say but impossible to achieve. Companies that don't make a profit can't help anybody. That's not to say 'profits before people' is a better way and that viewpoint is gradually dying out in developed countries.

One reflection of corporate awareness of the co-existence of business, people and the environment is shown in the increasing popularity of "triple bottom line" reporting.

This refers to companies that measure their success not just on how much money they make, but on their contributions to the environment and society.

Here's how they break down:

(a) Economic bottom line
This refers not only to profit but to the philosophies behind a company's strategy or behaviour, the sustainability of its businesses and its 'human capital'.

(b) Environmental bottom line
The impact of its products or operations on the environment, plus the nature of its emissions and waste and how it is dealing with them.

(c) Social bottom line
How it approaches ethnic and gender diversity, working hours and wages, staff security and its contribution to community services or facilities.

Investors will have noticed that these days companies are less likely to refer solely to their shareholders and prefer the term 'stakeholders'. This reflects awareness that businesses are not insulated from the rest of the world. Their actions affect many more groups than their shareholders and these people therefore have a valid interest in them. Stakeholder groups can include employees, customers, local communities, lobby groups and regulatory authorities.

Such an approach does not have to mean that other people benefit at the expense of shareholders. Research has found that companies that try to meet the needs of all stakeholders generally perform better and for longer than those who try to make money by polluting their environment or exploiting their workers.

That's one of the findings by a book called "When Good Companies Do Bad Things: Responsibility and Risk in an Age of Globalisation". It says social responsibility is proving essential to the long-term success of companies. This is partly because people are demanding higher standards of corporate behaviour but also because it makes good business sense in the long-term.

Triple bottom line reporting is taking off in Britain and the US, where around half the Fortune 500 list of major corporations now use it. Such reporting has not been adopted with such alacrity in New Zealand but there is a definite trend towards measuring a company's economic, environmental and social impacts.

Shareholders should look out for this and encourage the companies in which they invest to report in this way. A company that benefits its shareholders and its community without damaging the economy is more likely to have a promising future.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. He is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. He can be reached by email at davidm@mcewen.co.nz.

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