Post on 15-May-2023
Beyond Bounded Instrumentality in Corporate Sustainability
1
Beyond the Bounded Instrumentality in Current Corporate Sustainability Research:
Toward an Inclusive Notion of Profitability
Tobias HahnKEDGE Business School, Domaine de Luminy – BP 921, 13288 Marseille Cedex 9, France
tobias.hahn@kedgebs.com
Frank FiggeKEDGE Business School, Domaine de Luminy – BP 921, 13288 Marseille Cedex 9, France
frank.figge@kedgebs.com
Published as:Hahn, T. & Figge, F. 2011. 'Beyond the Bounded Instrumentality in Current Corporate
Sustainability Research: Toward an Inclusive Notion of Profitability.' Journal of Business Ethics,104(3), 325-45, doi: 10.1007/s10551-011-0911-0.
ABSTRACT
We argue that the majority of the current approaches in research on corporate sustainability
are inconsistent with the notion of sustainable development. By defining the notion of instrumen-
tality in the context of corporate sustainability through three conceptual principles we show that
current approaches are rooted in a bounded notion of instrumentality which establishes a
systematic a priori predominance of economic organizational outcomes over environmental and
social aspects. We propose an inclusive notion of profitability that reflects the return on all forms
of environmental, social, economic capital used by a firm. This inclusive notion of corporate
profitability helps to redefine corporate profitability as if sustainability matters in that it over-
comes the bounded instrumentality that impairs current research on corporate sustainability. We
apply this notion to different car manufacturers and develop conceptual implications for future
research on corporate sustainability.
Beyond Bounded Instrumentality in Corporate Sustainability
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Keywords: Corporate sustainability, Corporate objective function, Instrumentality, Profitability,
Car industry
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INTRODUCTION
In the traditional view the ultimate goal of companies is to use resources efficiently and to
maximize risk-adjusted return on capital (Jensen and Meckling, 1976). It is the role of public
policy to set an adequate regulatory framework that ensures that the profit-maximizing behavior
of private firms is inline with overarching societal objectives, leaving private business with the
imperative to maximize shareholder returns while respecting legal obligations (Friedman, 1970).
This view has been challenged by many management scholars who argue that companies have a
wider responsibility that goes beyond profit maximization. In this context, the concept of
sustainable development has gained increasing attention and relevance in the last decade.
Sustainable development originates from the macroeconomic level (Hanley, 2000) and is
grounded in the three principles environmental integrity, economic prosperity, and social equity
which are commonly referred to as the three pillars of sustainability (Barbier, 1987; Elliott,
2005). The business sector has been more and more confronted with sustainable development
(Bansal, 2002, 2005; Dyllick and Hockerts, 2002; Etzion, 2007; Figge and Hahn, 2005; Gladwin
et al., 1995a; Goodall, 2008; Shrivastava, 1995; Springett, 2003; Westley and Vredenburg, 1996).
It is now generally accepted that without corporate support, society will not achieve sustainable
development, as firms represent the productive resources of the economy (Bansal, 2002).
Indeed, most of the literature on corporate sustainability, corporate social responsibility and
environmental management follows the idea that companies depend on environmental and social
resources that are scarce and thus have to be taken into account in corporate decision making
(Hart, 1995). While the debate on corporate sustainability has its roots in the field of
organizations and environment (Bansal and Gao, 2006; Etzion, 2007; Kallio and Nordberg,
2006), there is also a rich body of research that addresses social issues in management such as
Beyond Bounded Instrumentality in Corporate Sustainability
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research on corporate social responsibility (Lockett et al., 2006) and corporate social
performance (Clarkson, 1995; Mitnick, 2000). The ultimate challenge of research on corporate
sustainability, however, is the integration of the three pillars of sustainable development from a
corporate perspective (Gladwin et al., 1995a). In order to conceptualize and assess corporate
sustainability economic, environmental and social aspects have to be considered (Bansal, 2005)
and trade-offs between the three pillars (Hahn et al., 2010) have to be solved without any
systematic a priori predominance of any of the three dimensions. In this paper, we argue that
research on corporate sustainability to date does not measure up to this imperative as it
systematically subordinates environmental and social issues under economic outcomes as it is
still rooted in the conventional notion of corporate profitability and bounded instrumentality. In
our view, this is the main reason why the environmental and social dimension “remained more or
less an appendage” (Kallio and Nordberg, 2006, p. 452) to conventional management concepts.
In seeking to elaborate this argument, this paper makes three contributions. First, we contri-
bute to clarifying the ambiguous notion of corporate sustainability by defining the notion of
instrumentality in the context of corporate sustainability through three conceptual principles.
Namely, we contend that a sound conceptualization of corporate sustainability needs to explicate
its instrumental finality, provide a teleological integration of economic, environmental and social
aspects and offer corporate decision makers reliable guidance toward more sustainable business
practice. Second, we review the existing literature on corporate sustainability in the light of these
principles. We identify a systematic misconception, namely bounded instrumentality, in current
research on corporate sustainability which leads to misguiding signals for corporate practice. As
a response, and third, this research develops an inclusive notion of corporate profitability that
provides an instrumental notion of corporate sustainability that is not economically biased. By
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doing so, we readjust the notion of profitability to address all different forms of capital –
economic, environmental and social – without any systematic a priori predominance of any of
the capital forms. The practicability of the proposed inclusive notion of profitability is
demonstrated by an analysis of different car manufacturers’ sustainability performance.
Ultimately, our line of argument suggests, that there may be a systematic lopsidedness in the
research on corporate sustainability. In this paper, in order to overcome this bias we propose to
reconceptualize the fundamental notion of profitability as if sustainability matters.
BACKGROUND: SUSTAINABLE DEVELOPMENT AND THE FIRM
The Concept of Sustainable Development
In general the term sustainable development is defined as a “development that meets the needs of
the present without compromising the ability of future generations to meet their own needs”
(WCED, 1987, p. 43). Sustainable development as a societal concept is grounded in the three
principles environmental integrity, economic prosperity, and social equity. According to this
three pillar approach to be sustainable any development has to take into account not only
economic but also environmental and social scarcities.
Intergenerational equity is one of the key aspects of sustainable development. Sustainable
development therefore aims to increase or at least stabilize per capita well-being or utility over
time without leaving present or future generations worse off (Elliott, 2005; Hicks, 1946). Many
economists have modeled sustainable development using the so-called capital approach (Harte,
1995; Stern, 1997). The underlying assumption of the capital approach to sustainability is that
the development of a society depends on the capital that it has at its disposal and that the amount
of capital is limited. The constant capital rule calls for a development that leaves the capital stock
at least unchanged (Costanza and Daly, 1992; Solow, 1986). It is crucial to note in this context
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that there is not only human-made capital but also natural and social capital. There are two
fundamental positions in the interpretation of the constant capital rule: Proponents of weak
sustainability posit that all forms of capital are substitutable by each other so that any loss in one
kind of capital can be substituted by a surplus in other forms of capital (Cabeza Gutés, 1996;
Pearce and Atkinson, 1993). Critics point out that this assumption is erroneous because different
capital forms are – at least to some degree – complements and propose the concept of strong
sustainability (Daly, 1992; Farmer and Randall, 1998).
The constant capital rule – both in its weak and its strong form – does not require or prescribe
equal weights between the different forms of capital. Rather the assessment and integration of
different forms of capital must refer to the ultimate goal to which capital use should contribute
to. In other words, the assessment and integration must be teleological, i.e. follow from the
importance of a form of capital for achieving sustainable development.
Sustainable Development from the Firm Perspective
Despite the numerous attempts to stringently define sustainable development as a societal
concept there is no consensus yet on such a definition (Gladwin et al., 1995a). This holds even
more for the definition of sustainable development from the perspective of the firm (Bansal,
2005; Bansal and Gao, 2006; Dyllick and Hockerts, 2002; Kallio and Nordberg, 2006; Young
and Tilley, 2006). Whereas the label corporate sustainability is being more frequently used in
both academic and practitioner literature (Salzmann et al., 2005; Sharma and Starik, 2002), very
few authors attempt to provide a stringent and conceptually sound definition of corporate
sustainability (Bansal, 2005; Dyllick and Hockerts, 2002). However, there seems to be some
implicit pragmatic consensus that corporate sustainability refers to some composite and multi-
faceted construct that entails environmental, social and economic organizational outcomes.
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While the dust of early paradigmatic debates on the meaning of greening and the fundamental
implications of sustainable development for management research (Gladwin, 1993; Gladwin et
al., 1995a; Purser et al., 1995; Shrivastava, 1995) has settled, a more sophisticated conceptual
notion of corporate sustainability has not yet been reached.
Research in the field has been criticized for representing not much more than a slight
modification of conventional management theories (Kallio and Nordberg, 2006). Despite the
plea for a “management theory as if sustainability matters” (Gladwin et al., 1995a, p. 896) the
teleology of corporate sustainability still remains unclear. In this context, one can distinguish
between at least two fundamental perspectives: societal and organizational. If corporate
sustainability is perceived in terms of corporate contributions to sustainable development at a
societal level (Atkinson, 2000), long-term survival of the individual firm does not represent the
finality of corporate sustainability. Rather, from this perspective firms should only continue to
exist and grow if and to the degree to which they contribute to environmental integrity, economic
prosperity and social equity at the societal level. Consequently, firms that do not measure up to
this imperative should eventually cease to exist as they are detrimental to sustainable develop-
ment. However, if corporate sustainability is understood as the sustainable development of the
firm as an individual organization, long-term firm survival and prosperity represents an end in
itself. From this perspective environmental and social aspects represent scarcities that are
instrumental to sustained organizational prosperity. In this case, societal sustainable development
thus only enters the equation if and to the degree that environmental and social aspects constitute
a constraint or an opportunity for business success.
Corporate Sustainability and Instrumentality
This brings up the question of instrumentality. Sustainable development is a normative and
Beyond Bounded Instrumentality in Corporate Sustainability
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paradigmatic but anthropocentric construct in that it favors “a safe, healthy, high quality of life
for current and future generations” (U.S. President's Council on Sustainable Development, 1994,
p. 1) and explicitly refers to human needs (WCED, 1987). Thus unlike ecocentric notions and
deep green views, sustainable development is per definition an instrumental concept that is
meant to serve long-term human well-being. However, it acknowledges and incorporates the in-
trinsic value of ecological and social systems that need to be preserved in order to achieve such a
development. In other words and unlike the technocentric view, sustainable development posits
that there should not be any a priori economic predominance in the conception of corporate
sustainability.
However, the question of instrumentality is more complex as sustainable development is a
multifaceted construct. This becomes particularly evident if we fall back on the capital approach
to sustainability and apply it to the corporate level (Reinhardt, 2000b). Proponents of the capital
approach posit that different kinds of capital are necessary for achieving sustainable development
and that these are – at least to a certain degree – complements as defined by the constant capital
rule (Costanza and Daly, 1992; Solow, 1986). It follows that there is a clear instrumentality in
the use of a bundle of different forms of capital – namely achieving benign and robust human
development. However, and as pointed out above, an integrated assessment of this bundle of
different forms of capital should follow from a teleological viewpoint, i.e. according to the
requirements that follow from sustainability in a specific situation. Any integration of the three
different dimensions of corporate sustainability needs to take this into account.
Finally, if sustainable development is to materialize for meeting the needs of present and
future generations, any notion of corporate sustainability needs to be practical for corporate
decision making (Boron and Murray, 2004). It has been stressed that sustainable development
Beyond Bounded Instrumentality in Corporate Sustainability
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will hardly be reached without the support of the private sector (Bansal, 2002). Therefore, many
scholars have called for the development of practicable measures, guidelines and management
tools that guide managers towards more sustainable corporate decision making (Gladwin et al.,
1995a; Roome, 1998).
Overall, we can identify three conceptual principles that define the notion of instrumentality
in corporate sustainability; instrumental finality, teleological integration and practicability.
Instrumental finality. Any notion of corporate sustainability should be explicit on the
ultimate goal it refers to. Does corporate sustainability refer to the longevity of the firm as an
organization by taking into account environmental and social dependencies (organizational target
level)? Or does corporate sustainability require a reference to some wider societal development
to which the firm should contribute (societal target level)? Given the still juvenile stage (Kallio
and Nordberg, 2006) and the complex nature (Bansal, 2005) of the notion of corporate sustain-
ability, we may not expect an established comprehensive and unambiguous definition and
conceptualization of corporate sustainability. However, there are clearly some core questions that
group around the question of instrumentality that may help to clarify the notoriously vague
concept of corporate sustainability.
Teleological integration. The notion of corporate sustainability takes into account the multi-
faceted nature of sustainable development that comprises environmental, social and economic
aspects. However, multidimensional conceptions of corporate sustainability have been criticized
for sending ambiguous signals to corporate decision makers and creating leeway for moral
hazard in managerial decision making (Jensen, 2001). The task of integration can thus be
specified in at least two respects. First, integration should result in a composite and/or unified
organizational outcome that reflects progress in corporate sustainability. Second and most
Beyond Bounded Instrumentality in Corporate Sustainability
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importantly, any notion of corporate sustainability needs to be conceptually able to solve trade-
offs and conflicting relations between environmental, social, and economic organizational targets
and outcomes. Any integration must thus address the relationship of the different sustainability
aspects among each others. As discussed above and in order to be compatible with the
fundamental notion of sustainable development, the integration of the different sustainability
aspects needs to follow from the ultimate sustainability objective by referring to the teleology of
corporate sustainability.
Practicability. Corporate sustainability bears a strong pragmatic dimension as it puts
forward an imperative to organizations to “apply these principles to their products, policies, and
practices in order to express sustainable development” (Bansal, 2005, p. 199). Accordingly, any
notion of corporate sustainability should inform and guide corporate decision makers towards
more sustainable business practice. In this context, many authors argue that sustainability needs
to be translated into the language and concepts that are widely accepted and understood by
managers today (Epstein and Roy, 2001, 2003; Reinhardt, 2000a). However, corporate
management of environmental and social aspects often requires novel kind of information and
data that is mostly not readily available in companies today. The principle of practicability thus
requires that any notion of corporate sustainability must not only be conceptually sound but also
viable in corporate practice.
BOUNDED INSTRUMENTALITY IN CURRENT RESEARCH ON CORPORATE
SUSTAINABILITY
In the following we address the literature on corporate sustainability in the light of these three
principles. In this context, we concentrate on conceptual approaches to corporate sustainability,
on measurement approaches and empirical studies on corporate sustainability performance. By
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appraising the existing research in the field against the principles identified above we find that
much of the existing research suffers from a bounded notion of instrumentality.
Conceptual Approaches to Corporate Sustainability
There is a growing literature on conceptual approaches to corporate sustainability that is
based on different parent disciplines. Given the inherent instrumentality of sustainable
development according to which environmental and social resources should be preserved due to
their services to human needs, we focus on instrumental approaches to corporate sustainability.
In this context, it is often argued that companies will only contribute to sustainable development
if they perceive an incentive to do so (Epstein and Roy, 2001, 2003; Husted and de Jesus Salazar,
2006; Reinhardt, 1999; Rowley and Berman, 2000). Many instrumentalists thus posit that
environmental management and corporate social responsibility pay off (Burke and Logsdon,
1996; Elkington, 1994; Salzmann et al., 2005) and try to explain when and how environmental
and/or social performance can enhance financial performance (Aragón-Correa and Rubio-López,
2007; Burke and Logsdon, 1996; Reinhardt, 1999; Rowley and Berman, 2000).
One can organize the existing approaches according to the parent concepts they are based on
(Kallio and Nordberg, 2006). Some scholars link sustainability issues to conventional notions of
corporate financial performance. Consequently, environmental and social issues are recognized
as possible drivers of corporate value and risk-adjusted free cash flows (e.g. Epstein and Young,
1998; Figge, 2005; Romero Castro and Piñeiro Chousa, 2006). Another stream of papers is based
on the resource-based view (Barney, 1991) and argues that high levels of corporate sustainability
constitute sustained competitive advantages and abnormal rents (Hart, 1995; Klassen and
Whybark, 1999; Litz, 1996; Russo and Fouts, 1997; Sharma and Vredenburg, 1998). Yet other
scholars posit that sound stakeholder management helps to decrease transaction costs
Beyond Bounded Instrumentality in Corporate Sustainability
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(Williamson, 1981) and thus enhances corporate efficiency (Jones, 1995).
All these conceptual approaches have in common that they conceptualize corporate environ-
mental and social strategies as a means to enhance financial outcomes. Not all companies will
benefit from proactive environmental and social behavior and firms should choose strategically
which environmental and/or social strategies they pursue or abandon (Aragón-Correa and Rubio-
López, 2007; Aragón-Correa and Sharma, 2003; Husted and de Jesus Salazar, 2006). Due to this
communality these approaches are often referred to as the business case for sustainability
(Barnett, 2007; Burke and Logsdon, 1996; Dyllick and Hockerts, 2002; Epstein and Roy, 2003;
Reinhardt, 2000a; Salzmann et al., 2005).
Measurement Approaches
Another stream in the literature on corporate sustainability has focused more on the measure-
ment of corporate sustainability performance. In this context we distinguish between three main
groups: Scholars seeking to correct existing measures of economic outcomes by taking into
account external environmental and/or social effects, measures of corporate eco- and/or social
efficiency, and multidimensional measures of corporate sustainability performance.
Correcting for externalities. From the viewpoint of sustainable development it is argued
that companies should take into account the full environmental and social costs of the impacts
they cause (Crouch, 2006). From this perspective, a company only contributes to sustainability,
if the benefits exceed the sum of internal and external costs (Reinhardt, 2000b). Corporate
economic performance is adjusted for external environmental and social costs caused by the
company’s economic activity (Atkinson, 2000; Huizing and Dekker, 1992). These approaches
require that the damage associated with the use of environmental and social resources can be
monetarized. Monetarizing environmental and social external effects is still heavily disputed and
Beyond Bounded Instrumentality in Corporate Sustainability
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has proven problematic for their practical use in management (Herbohn, 2005; Tol, 2005).
Efficiency approaches. Other scholars propose to measure corporate sustainability in terms
of efficiency. For this purpose the value that is created by an economic activity is related to the
environmental and/or social burden that is associated with it. At the corporate level the notion of
eco-efficiency has gained considerable attention over the last 15 years (DeSimone and Popoff,
1998; Schmidheiny, 1992). Proponents of eco-efficiency posit that companies contribute to sus-
tainable development when they generate more value per unit of environmental or social burden.
However, critics point to the rebound-effect: Gains in eco-efficiency can be over-compensated
by growth so that overall more environmental and/or social harm is caused (Berkhout et al.,
2000; Dyllick and Hockerts, 2002).
Multidimensional approaches. As sustainable development is a multi-faceted concept
comprising numerous economic, environmental and social aspects, many scholars have focused
on multidimensional or composite measures of corporate sustainability (Clarkson, 1995;
Gladwin et al., 1995b; Ruf et al., 1998). When multidimensional measures are aggregated into
one indicator there occurs the problem of weighting the different aspects of corporate
sustainability (Figge and Hahn, 2004b). Aggregation can either be based on monetarization, on
socio-political or socioeconomic preferences or on natural sciences (Schaltegger and Burritt,
2000). Moreover, critics object that multidimensional approaches are unsuitable for corporate
decision making as they induce agency loss and undermine the accountability of managers
(Jensen, 2001).
Empirical Studies on Corporate Sustainability Performance
There is voluminous empirical research on the relationship between corporate environmental
or social performance and corporate financial performance (Margolis and Walsh, 2003; Orlitzky
Beyond Bounded Instrumentality in Corporate Sustainability
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et al., 2003). Many of these studies try to establish empirical evidence for the business case for
sustainability (Barnett, 2007; Peloza, 2009). The vast body of literature in this field has,
however, produced mixed evidence with different studies proposing a negative (Griffin and
Mahon, 1997), neutral (McWilliams and Siegel, 2000) or positive relationship (Orlitzky et al.,
2003) of corporate environmental and/or social performance with financial performance. Empiri-
cal studies have been criticized for lacking theoretical foundation (Ullmann, 1985) and for
seeking categorical instead of contingent answers to the question if corporate sustainability pays
off (Barnett, 2007; Griffin and Mahon, 1997; Rowley and Berman, 2000).
In the context of this paper it is particularly interesting to address the direction of the
analysis. This shows the underlying notion of instrumentality, i.e. whether the analysis intends to
show if social and/or environmental outcomes drive financial performance (financial per-
formance as the dependent variable) or the effect of financial performance on corporate social
and/or environmental performance (social and/or environmental performance as the dependent
variable). Margolis and Walsh (2003) find that only 22 out of 127 studies (17%) used social
outcomes as the dependent variable. Thus, the prime concern of the majority of empirical studies
is to establish whether “a one-dollar investment in social initiatives returns more or less than one
dollar in benefit to the shareholder” (Barnett, 2007, p. 794).
Appraising Existing Approaches in Research on Corporate Sustainability
In the following we appraise these existing approaches in research on corporate sustainability
against the three principles of instrumental finality, teleological integration and practicability de-
fined above. This leads us to identify a bounded instrumentality of the existing research.
Instrumental finality. The principle of instrumental finality as defined above requires that
research on corporate sustainability explicates its teleological reference. As sustainable develop-
Beyond Bounded Instrumentality in Corporate Sustainability
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ment is an instrumental concept, any concept of corporate sustainability should be clear on
whose needs it refers to (target stakeholders) and whose development should be sustained
(organizational vs. societal target level).
The conceptual approaches discussed above refer mainly to the organization as the target
level and often have a narrow focus on shareholders as the ultimate target stakeholders of
corporate sustainability. Other stakeholders’ needs are only considered to the degree to which
this eventually enhances financial outcomes. Thus, the vast majority of conceptual approaches
relate corporate sustainability to profitability and long-term survival of the firm as an individual
organization from a shareholder point of view. This is clearly illustrated by scholars who define
corporate sustainability “as a business approach that creates long-term shareholder value by
embracing opportunities and managing risk from three dimensions: economic, environmental
and social dimensions” (Lo and Sheu, 2007, p. 346).
Measurement approaches provide a more diverse picture with respect to the principle of
instrumental finality. Approaches that correct for externalities adopt a societal level notion of
sustainable development. At the same time, they establish a clear instrumentality as the need to
preserve environmental and social resources is based on the services these resources provide to
society (Atkinson, 2000; Reinhardt, 2000b). Efficiency approaches do not establish explicit
instrumental relations between environmental, social and economic aspects. However, concep-
tually most of these approaches are based on the win-win paradigm in that they want companies
“creating more value with less impact” (WBCSD, 2000). Therefore, efficiency approaches tend
to refer to the sustainability of the individual firm as their instrumental finality. The instrumenta-
lity of most multidimensional approaches remains unclear at best. Many of these approaches,
however, posit that environmental and social aspects should be regarded as an end in their own.
Beyond Bounded Instrumentality in Corporate Sustainability
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As can be seen above, empirical studies on corporate sustainability performance have a
clearly established instrumentality by mostly referring to financial performance as a dependent
variable. Only a minority of the empirical studies use environmental and social performance as a
dependent variable. Environmental and social aspects are only considered as means to enhance
the financial success of the firm as an individual organization.
Teleological integration. The principle of teleological integration has been defined above as
the need to integrate environmental, social, economic aspects according to their specific
relevance for achieving sustainable development.
With most of the conceptual approaches to corporate sustainability environmental and social
aspects are subjacent to economic outcomes. Consequently, environmental and social concerns
are only taken into account to the degree to which they contribute to superior financial outcomes.
Environmental and social aspects will be discarded as soon as they are in conflict with the
dominant profitability target (Aragón-Correa and Rubio-López, 2007; Epstein and Roy, 2003)
and trade-offs are only considered with regard to the question under which conditions it pays off
for companies to commit to proactive environmental and social business practices (Barnett,
2007; Reinhardt, 1999; Rowley and Berman, 2000). Environmental and social concerns
(Aguilera et al., 2007; Kallio and Nordberg, 2006) or a natural or societal case for corporate
sustainability (Dyllick and Hockerts, 2002; Young and Tilley, 2006), i.e. the sacrifice of some
economic outcome in support of enhanced environmental or social outcomes, are virtually absent
from this literature. Consequently, the integration and weight of environmental and social aspects
do not follow from their relevance for sustainable development but solely from their relevance
and contribution to economic efficiency in terms of return on capital. Thus, the vast majority of
the conceptual approaches on corporate sustainability do not meet the principle of teleological
Beyond Bounded Instrumentality in Corporate Sustainability
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integration.
Measurement approaches correcting for externalities allow a teleological integration of
environmental, social and economic aspects. All environmental and social effects of business ac-
tivities are considered and valued at their full social cost irrespective of whether environmental
or social issues contribute to enhanced financial outcomes (Atkinson, 2000; Huizing and Dekker,
1992). Rather, the weights of the different aspects depend on their relative harmfulness to
society. In contrast, efficiency approaches and multidimensional approaches do not provide clear
guidance on integrating different environmental and social aspects with economic targets.
Rather, they mostly address different aspects separately so that corporate sustainability is repre-
sented in some mosaic or patchwork style, e.g. when eco-efficiency is expressed in different
separate aspects like waste efficiency or energy efficiency. As a consequence, trade-offs between
different aspects of corporate sustainability cannot be addressed. Likewise, many
multidimensional approaches do not integrate the different aspects into a composite measure
(Clarkson, 1995). With those that do provide composite measures integration is often based on
scoring models that are value-laden and establish some normative weighting between different
aspects that is not derived from the teleological level (Ruf et al., 1998; Schepers and Sethi,
2003).
Practicability. The principle of practicability has been defined above as the need to inform
and guide managers on more sustainable corporate policies and practices.
There is a growing practitioner literature that provides guidance on strategies which are based
on conceptual approaches that favor the business case for sustainability. Many of these
publications propose tools for developing so-called win-win strategies (Aragón-Correa and
Rubio-López, 2007; Burke and Logsdon, 1996; Epstein and Roy, 2001, 2003; Maxwell et al.,
Beyond Bounded Instrumentality in Corporate Sustainability
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1997; Peloza, 2009) or provide guidance on how to translate environmental and social aspects
into business terms, such as cost savings (Epstein and Roy, 1997; Florida, 1996) or competitive
advantages (Reinhardt, 1998). However, practical approaches have been criticized for remaining
within the economic growth paradigm and falling short of a integrating environmental and social
aspects as ends in themselves (Prasad and Elmes, 2005). Overall, it seems fair to assume that
conceptual approaches that focus on the business case for sustainability have some practical
impact in corporate decision making.
The practicability of measurement approaches is mixed. Approaches that correct for exter-
nalities suffer severely from the ambiguity and the lack of estimates of full costs of environmen-
tal and social impacts (Herbohn, 2005; Tol, 2005). Moreover, managers are neither used nor
trained to gauge social costs and externalities. The overall practicability of these approaches is
thus rather low. In contrast, the corporate sector seems to be quite receptive to efficiency
approaches. In particular, the notion of eco-efficiency has developed into one of the most
prominent catchphrases in the corporate sustainability management arena (DeSimone and
Popoff, 1998; WBCSD, 2000). At the same time efficiency approaches provide little guidance on
solving trade-offs between different aspects of corporate sustainability so that the practicability
of efficiency approaches is mixed. Multidimensional measures are quite often used in corporate
environmental, social and sustainability reporting (Kolk, 2008). Given their complex and ambi-
guous nature it has been doubted that multidimensional measures are suitable to play a major
role in corporate decision making (Jensen, 2001). However, several studies find that environ-
mental and social aspects influence managerial perceptions and decision making at the individual
level (Banerjee, 2001; Fineman, 1996). Overall, we estimate that multidimensional approaches
have a medium level of practicability.
Beyond Bounded Instrumentality in Corporate Sustainability
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Empirical studies on corporate sustainability performance are not primarily designed to
inform and guide decision making at the corporate level. In addition, most empirical studies have
been criticized to seek for categorical rather than contingent answers to the question whether
proactive environmental and social business practices pay off so that their overall practicability
remains low.
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Insert Table 1 about here
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Table 1 summarizes the findings and illustrates that none of the existing approaches meets all
the principles for a sound conceptualization of instrumentality in corporate sustainability.
Bounded Instrumentality
As defined above, it is at the core of corporate sustainability that companies should pursue
environmental, social and economic goals alike in order to achieve long-term prosperity of the
firm (organizational target level) or to contribute to the long-term prosperity of society and
humankind (societal target level). This means that environmental, social, and economic targets
are instrumental for corporate sustainability. Environmental, social and economic aspects are all
means to the end of sustainable development and should thus be integrated depending on their
relevance for corporate sustainability. Trade-offs between environmental, social and economic
aspects must be solved without any systematic predominance of any of the dimensions of
sustainability. Figure 1a illustrates such a teleological integration of environmental, social, and
economic aspects.
Our analysis above shows that most of the existing approaches in the field fall short of
measuring up to this core notion of corporate sustainability. Some of the approaches discussed
Beyond Bounded Instrumentality in Corporate Sustainability
20
do not establish any clear instrumentality (multidimensional approaches). And most of the
approaches that do establish some kind of instrumentality have a narrow focus on profitability.
As a consequence the integration of environmental, social, and economic aspects is biased
towards economic performance. We refer to this deficiency as bounded instrumentality (see
Figure 1b). It is bounded in two respects: First, it refers to the conventional notion of profitability
in terms of return on economic capital in order to operationalize instrumental finality of
corporate sustainability. Consequently and second, it establishes a systematic a priori economic
predominance in the integration of economic, environmental, and social aspects.
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Insert Figure 1 about here
--------------------------------------------
The conceptual misspecification that goes along with the bounded instrumentality of most of
the approaches to corporate sustainability results in environmental and social aspects being
subjacent to economic aspects. Corporate sustainability is subject to driving profitability and en-
vironmental and social aspects that are in conflict with enhanced financial performance are dis-
carded. Unlike the assertion of many proponents of the business case (Epstein and Roy, 2003;
Reinhardt, 2000a; Romero Castro and Piñeiro Chousa, 2006), this does not represent an
integration of sustainability into corporate management, rather it boils down to nothing more
than business as usual (Kallio and Nordberg, 2006).
This bounded instrumentality leads to misguided signals for sustainable corporate decisions
making because its inherent focus on win-win cases does not guarantee that the most sustainable
strategy options are identified. Rather, this can result in situations where options that are overall
more sustainable are discarded in favor of less sustainable options that provide some financial
Beyond Bounded Instrumentality in Corporate Sustainability
21
benefit to the firm.
--------------------------------------------
Insert Figure 2 about here
--------------------------------------------
Figure 2 provides a schematic picture of different possible performance trends of a sample
company. Let 0 denote the status quo. Any improvements in economic performance reside in
quadrants III and IV while improvements of environmental and/or social performance will be
found in fields I and IV. Obviously, the win-win solution favored by the business case is situated
in quadrant IV (e.g. performance trends A and A*) whereas quadrant II clearly defines
developments towards less sustainability. Fields I and III represent situations in which there is a
trade-off between environmental and/or social performance and economic performance.
Consider a case where a company has to choose between strategies B and C. Bounded
instrumentality will always favor strategy C over strategy B as C entails an improvement in
profitability whereas B does not. This is despite the facts that (1) the loss in environmental
and/or social performance in case C is higher than the gain in economic performance (line 0c >
line cC) and (2) the improvement in environmental and/social performance with strategy B
outweighs the slight loss in economic performance (line 0b > line bB). In other words, there is a
positive net sustainability effect with strategy B and a net negative effect with strategy C.
As another case to exemplify misguidance of bounded instrumentality consider a situation in
which a company will have to choose between strategies A* and B. Note that strategy A* is a
win-win strategy which will thus be preferred by current approaches. However, from a
sustainability viewpoint one may argue that strategy B should be preferred to strategy A* as the
net improvement with strategy B might outweigh the overall improvement with strategy A* (line
Beyond Bounded Instrumentality in Corporate Sustainability
22
0b – line bB > line 0a’ + line 0a”).
Overall, and as a result of our analysis we believe that the dominance of the conventional
notion of profitability in terms of return on economic capital is not compatible with the concept
of corporate sustainability. This holds both in conceptual and practical terms. As a consequence,
conceptions of corporate sustainability should not be built on the conventional notion of
profitability. In the next section we propose a more inclusive notion of corporate profitability
that is more compatible with the concept of sustainable development.
TOWARD AN INCLUSIVE NOTION OF CORPORATE PROFITABILITY
Shrivastava (1995) calls for rethinking the basic concepts of organizations like economic
performance and profitability. We heed this call by redefining the notion of corporate profita-
bility in the light of sustainable development or “as if sustainability matters” (Gladwin et al.,
1995a, p. 896). As shown above, the use of conventional notion of profitability in terms of (risk-
adjusted) return on economic capital as a conceptual basis for corporate sustainability leads to
bounded instrumentality. In the following, we propose an inclusive notion of corporate
profitability that overcomes bounded instrumentality by establishing a clear instrumental finality,
allowing teleological integration and avoiding practical misguidance.
Conceptual foundations. Already in the late 19th century David I. Green has proposed to apply
opportunity cost thinking to the management and valuation of natural resources:
But, when we once recognize the sacrifice of opportunity as an element in the
cost of production, we find that the principle bas a very wide application. Not only
time and strength, but commodities, capital, and many of the free gifts of nature,
such as mineral deposits and the use of fruitful land, must be economized if we are
to act reasonably. Before devoting any one of these resources to a particular use, we
must consider the other uses from which it will be withheld by our action; and the
most advantageous opportunity which we deliberately forego constitutes a sacrifice
Beyond Bounded Instrumentality in Corporate Sustainability
23
for which we must expect at least an equivalent return (Green, 1894: 224).
Recently, this proposition has been adopted in approaches to natural resource validation
(Lawrence and Morell, 1995; Lovett, 2001) and to corporate sustainability (Figge, 2001; Figge
and Hahn, 2004a, 2005). We build on this research to develop our inclusive notion of corporate
profitability. Opportunity costs have been used in financial economics for a long time in order to
determine the cost of economic capital (Huang, 1933; Souter, 1932). Opportunity costs represent
the foregone return that could have been created by an alternative use of capital. It is standard
practice in financial economics to determine the opportunity cost of capital by the market yield
of an investment with a similar risk (Feibel, 2003; Modigliani and Miller, 1958). In financial
management, based on the notion of opportunity cost a number of so-called value-based
management and measurement approaches such as shareholder value (Rappaport, 1986) or
Economic Value Added (Stewart, 1991) have been developed.
From this viewpoint a company creates economic value whenever its return on capital
exceeds the risk-adjusted market return, i.e. the opportunity cost. Corporate performance and
profitability is thus expressed as the excess capital efficiency:
Economic value created =
Amount of capital usedCompany · (Capital efficiencyCompany – Capital efficiencyMarket)
From this point of view the use of capital in a company is profitable and value-creating if it
yields more return than in other companies, i.e. on the market. In other words, only companies
that use economic capital more efficiently than the market create economic value. The capital
efficiency of the market thus determines the opportunity cost of capital and the hurdle rate a
company has to reach to justify the use of capital. This conventional, value-based approach to
corporate profitability represents the current mainstream in financial management.
Opportunity cost-based assessment of corporate sustainability. As shown above, this
Beyond Bounded Instrumentality in Corporate Sustainability
24
conventional notion of profitability is not compatible with the notion of corporate sustainability.
However, we argue that following the example of financial management and assessing
environmental and corporate aspects via opportunity costs provides a sound foundation to
reconceptualize the notion of corporate profitability as if sustainability matters.
For this purpose we fall back on the capital approach to sustainability and apply it to the firm
level (Reinhardt, 2000b). Following the capital approach sustainable development depends on
the efficient use and the preservation of critical stocks of economic, natural and social capital. At
the same time, companies depend on the use of different forms of economic, natural and social
resources. While the conventional notion of profitability acts as if only economic capital
mattered, from a sustainability perspective the creation of profits depends on the use of an entire
bundle of environmental, social and economic resources. To assess corporate profitability and in
strong analogy to standard practice in financial management, we propose to determine the oppor-
tunity cost of economic, environmental, and social capital, rather than addressing only economic
capital. Economic value is created when a company exceeds the market return on economic
capital (Feibel, 2003). Analogously environmental and social resources create value when they
are used more efficiently than the market on average. We can express this excess return or value
contribution for each form of capital based on opportunity cost thinking as follows:
Value contributioni =
Resource useiCompany · (Resource efficiencyi
Company – Resource efficiencyiMarket),
with capital i being any form of economic, natural, or social capital. In principle, such an
assessment can be done for every form of natural and social capital that can be quantified. As
soon as the use of a resource in a company exceeds its opportunity costs, this resource is being
used profitably. The value contribution provides a monetary measure of the excess profit for
Beyond Bounded Instrumentality in Corporate Sustainability
25
each aspect that is considered.
Extending opportunity cost thinking to other resources next to economic capital represents
the first step towards a more inclusive notion of corporate profitability. However, as companies
depend on a set of different forms of capital, profitability should integrate the use of the entire
bundle of different forms of capital to create profits. This brings up the question of how the
different resources relate to each other. As stated above, in financial management the capital
efficiency of the market represents the hurdle rate that a company has to reach to justify the use
of capital. This also holds for the opportunity cost of environmental and social resources so that
the market efficiency of the different resources defines the minimum return rate that has to be
achieved in order to justify the use of environmental and social resources. The question whether
a resource is used in a value-creating way is therefore defined at the market level. As long as
only one resource is considered, the question of how to integrate different resources is irrelevant
and the respective resource efficiency of the market can be used to assess profitability. As from a
sustainability perspective the entire bundle of resources must be used profitably, the question of
integration becomes relevant. An integrated assessment needs to ascertain the opportunity cost of
a bundle of different resources rather than the opportunity cost of just one resource. As the
opportunity cost of each resource is defined by the respective resource efficiency of the market,
the integration of different resources in an opportunity cost-based assessment depends on the
relation between the market efficiencies of the different resources within a resource bundle.
The market return on a resource, i.e. the resource efficiency of the market, is defined by the
profit the market achieves per resource unit on average. As the different resources are
complements for the creation of profits, the relation between the different resource efficiencies
shows the relation of the different resources within the resource bundle. Consider a situation
Beyond Bounded Instrumentality in Corporate Sustainability
26
where the market on average generates 8% return on capital (capital efficiency of 8%) and at the
same time € 2 of profit per ton of CO2-emissions. In other words, to create €1 of profits the
market requires € 12.50 of economic capital and 0.5 tons of CO2-emissions. Overall, let the
capital use in the market be € 12.5 million and the overall CO2-emissions 500,000 tons, which
corresponds to an overall profit of the market of €1 million.
MarketMarket
Market
MarketMarket
2 Market2
Profit €1,000,000Capital efficiency 8%
Capital use €12,500,000Profit €1,000,000 €2
CO -efficiencyCO -emissions 500,000t 1t
In order to determine the relation between the use of economic capital and CO2-emissions in
the market we can express the CO2-efficiency of the market as a function of the capital efficiency
of the market.
Market MarketMarket
2 Market Market2
Profit Capital use €12,500,000 €2CO -efficiency 8%
Capital use CO -emissions 500,000t 1t
It is noteworthy that the relation between the CO2-efficiency of the market and the capital
efficiency of the market is determined by the relative proportion of the use of economic capital
and CO2 in the market. This means that the market efficiency of any resource can be expressed in
relation to the capital efficiency of the market using the ratio of that resource relative to capital.
As a consequence and because the market efficiency of a resource determines the opportunity
cost of a resource, the latter can be expressed as the product of the capital efficiency of the
market and relative proportion of a resources use relative to the capital use on the market. In
other words, the ratio between the amount of a resource and the amount of capital used by the
market represents the weight of this resource relative to the capital use at the market level and
thus the relative weight of the different resources used in the market. This also means that the
higher the market efficiency of a resource the higher the weight of this resource in the resource
Beyond Bounded Instrumentality in Corporate Sustainability
27
bundle at the market level (Figge and Hahn, 2004b). The opportunity cost of any resource i can
thus be expressed as a function of its relative weight in the resource bundle of the market. The
opportunity cost of a resource i depends on the amount of the resource i used in the company, a
constant (capital efficiency of the market) and the relative proportion of resource i compared to
the capital use at the market level which determines the weight of the resource.
MarketCompany Company Market
Market
Company Company
Value contribution of resource
Capital useResource use Resource efficiency Capital efficiency
Resource use
Profit Resource use Capital efficien
i
i ii
i
Market
MarketMarket
Capital usecy
Resource use
Opportunity costi
i
An inclusive notion of profitability needs to take into account the entire bundle of resources
that is required to make a profit. To integrate the use of several different forms of capital the
opportunity cost of the bundle of different forms of capital used needs to be taken into account.
As could be seen above, the relation between and weight of different resources is determined by
the relative proportion of their use at the market level. Recall that the value contribution
discussed above expresses the excess profit that is obtained after the opportunity cost of the use
of a resource is taken into account but that it only reflects the use of one resource and implicitly
assumes that the entire profit is created through the use of this very resource.1 For an integrated
assessment of the profitability of the use of an entire bundle of resources it is thus not sufficient
to simply sum up the different value contributions as this would overestimate the profit by a
factor of n, i.e. the number of resources considered. To prevent this, the sum of all value
contributions needs to be divided by n. This ensures that the different forms of capital are taken
1 It is noteworthy that the conventional notion of economic value creation is based on this assumption as it only
takes into account economic capital in the assessment of corporate profitability.
Beyond Bounded Instrumentality in Corporate Sustainability
28
into account as a bundle of complements and that the opportunity cost of this bundle of resources
is not overestimated by a factor of n.
1
1
Company Company Market1
1
Company Company Ma1
Sustainable value Value contribution
Resource use Resource efficiency Resource efficiency
Resource use Resource efficiency Capital efficiency
n
ini
n
i i ini
i in
Market
rketMarket
1
MarketCompany Company Market1
Market1
Capital use
Resource use
Capital useProfit Resource use Capital efficiency
Resource use
Opportunity cost of resource bundle
n
i i
n
ini i
The resulting indicator of excess profitability has been referred to as sustainable value (Figge
and Hahn, 2005). It represents an integrated measure that shows the profitability of the use of all
forms of capital in a company. A positive (negative) sustainable value indicates how much more
(less) profitable a company uses its bundle of economic, natural, and social capital in comparison
to the market on average. In other words, it expresses the excess profitability of a company’s use
of a bundle of different forms of capital. It broadens the application of opportunity cost thinking
to go beyond the narrow focus on economic capital.
With regard to the integration of different resources, it becomes clear that the weight of each
resource within the resource bundle is determined by the relative proportion of its use at the
market level as can be seen from the way the overall opportunity cost of a bundle of resources is
calculated. The logic of the integration thus strictly follows from the relative weight of the
different resources at the market level. In other words, the integration of different resources is
based on the relative importance of a resource for the overall opportunity cost of a resource
bundle.
Consider the following simple example to illustrate the logic of this inclusive notion of
Beyond Bounded Instrumentality in Corporate Sustainability
29
profitability and the underlying integration of different resources. Table 2 shows the performance
data of a sample company and the corresponding market (resource use and resource efficiencies)
with regard to capital use, CO2-emissions, water use and work accidents. The example provides a
mixed picture with regard to the company’s performance relative to the market with some areas
where the company exceeds market efficiency (capital use, CO2-emissions, and work accidents)
and one area of under-performance (water use).
--------------------------------------------
Insert Table 2 about here
--------------------------------------------
Table 3 provides the assessment results for the inclusive profitability of the sample company.
As developed above and shown in Table 3, the weights of each resource in the integrated
assessment is determined by the relative proportion of the use of the resources at the market
level. The overall profitability of the use of the resource bundle in this example follows from the
division of the sum of the value contributions by 4 (to avoid double counting as explained above)
and results in € 7,500, This means that the company achieves € 7,500 more profit than the market
would have achieved with the same set of resources. It is noteworthy that this integration logic
also holds in the case of equivocal cases in which corporate performance provides a mixed
picture of under- and over-performance compared to market performance in different areas.
--------------------------------------------
Insert Table 3 about here
--------------------------------------------
Practical application. In the following, we apply the proposed concept of an inclusive
Beyond Bounded Instrumentality in Corporate Sustainability
30
notion of profitability in two different settings. This illustrates the rationale behind our argument
and demonstrates its feasibility. In the first setting, we analyze the economic and environmental
performance of the four car manufacturing companies BMW, Daihatsu, Renault and GM for the
period of 2001-2005. In this setting, we illustrate that an integrated assessment with our inclusive
notion of profitability captures the sustainability of firm performance more comprehensively
than the conventional, solely capital-focus notion of profitability. In the second setting and using
the example of the car manufacturer DaimlerChrysler, we add more resources to the analysis in
order to demonstrate the feasibility of the approach under more realistic conditions.
In the first setting, capital efficiency (in terms of EBIT from ordinary business activities per
total assets) and CO2-efficiency (in terms of EBIT from ordinary business activities per sum of
direct and indirect CO2-emissions from operations) are used as examples for financial and
environmental performance, respectively. For the sake of simplicity we restrict the example to
these two forms of capital in the first setting. Following the rationale described above the value
contributions for total assets and CO2-emissions are determined. For both indicators, opportunity
cost is defined by the average capital efficiency and CO2-efficiency of the car manufacturing
sector worldwide, respectively. In order to control for short-term fluctuations, sector averages
are determined by the 5-year averages of 16 major car manufacturers based on corporate data on
total assets, EBIT from ordinary operations and total CO2-emissions. To ensure data reliability
and comparability the consistency of the scope and the definition of the data have been checked
and corrected where necessary.
Beyond Bounded Instrumentality in Corporate Sustainability
31
--------------------------------------------
Insert Table 4 about here
--------------------------------------------
Table 4 shows the results of the assessment for four car manufacturers. For instance in the
period between 2001 and 2005 on average, the return on total assets of BMW exceeded the
market efficiency by 2.84% (5.81% – 2.97%). With an overall amount of € 62.09bn of total
assets this results in an economic value contribution of about € 1.76bn. Likewise on average,
BMW created € 2,208 more EBIT per ton of CO2 emitted than the car manufacturing sector
(€ 2,992 per ton of CO2 – € 783 per ton of CO2), which results in a CO2-value contribution of
about € 2.67bn (1,209,115 tons of CO2-emissions · € 2,208 per ton of CO2). It can be seen that
the company yields both an above sector average capital efficiency and an above sector average
CO2-efficiency. Put differently, in the period between 2001 and 2005 BMW earned its
opportunity costs for both economic capital and CO2-emissions und thus provided positive value
contributions for both aspects. The overall excess profitability taking into account economic
capital and CO2-emissions of BMW (compared to the car manufacturing sector) was about
€ 2.22bn.
The four companies cover four distinct cases. While BMW covers opportunity costs in both
performance areas, GM shows strong underperformance in both economic and environmental
terms. Obviously, Daihatsu and Renault are the most interesting cases. While Daihatsu earns its
economic opportunity cost Renault falls short of doing so. From a conventional perspective,
including the business case for sustainability, Daihatsu would thus be preferred over Renault.
However, Renault achieves clearly higher levels of CO2-efficiency compared to the other car
manufacturers while Daihatsu ranges below sector-average in that respect. This effect is that
Beyond Bounded Instrumentality in Corporate Sustainability
32
pronounced that overall, i.e. when profitability takes into account both, capital efficiency and
CO2-efficiency, Renault yields an above sector-average performance while Daihatsu slightly
falls short of doing so.
This application clearly shows that using our notion of inclusive profitability, economic and
environmental aspects are integrated into an aggregated profitability measure without
establishing an a priori predominance of environmental or economic aspects. In other words and
unlike the business case, environmental aspects (here CO2-performance) are not reduced to their
contribution to enhancing return on economic capital.
In the second setting we analyze the performance of the car-maker DaimlerChrysler. Like in
the first setting this analysis covers the period between 2001 and 2005 in order to avoid the effect
of short term fluctuations. However, this setting includes the use of overall nine different
resources by the company and assesses the profitability of the use of this resource bundle by
DaimlerChrysler in comparison to the car manufacturing sector. The respective resource
efficiencies are defined as the ratio between the EBIT from ordinary operations and the amount
of the respective resource used. Table 5 shows the results of the assessment.
--------------------------------------------
Insert Table 5 about here
--------------------------------------------
Two aspects of this application are particularly noteworthy. First, this application shows that
an opportunity cost-based assessment of corporate sustainability is feasible for a larger set of
different economic, environmental and social aspects. Following the opportunity cost-based logic
of the integration developed above, different aspects of different magnitude and direction can be
taken into account in order to come up with an aggregated assessment of corporate profitability
Beyond Bounded Instrumentality in Corporate Sustainability
33
that includes a set of resources rather than just economic capital. Second, the application to the
case of DaimlerChrysler reveals that a conventional assessment based on capital efficiency only
does not capture the overall positive sustainability performance of the company. The capital
efficiency of DaimlerChrysler resides below the market efficiency which results in a negative
economic value of -€ 0.70bn. Such a conventional profitability assessment entirely ignores the
fact that the overall excess profitability of DaimlerChrysler is positive as the company achieves
€ 1.12bn more profit compared to the market when the entire bundle of nine different resources
is taken into account in the assessment. This clearly demonstrates the difference between the
conventional notion of profitability and our more inclusive approach that includes economic
capital alongside other resources rather than considering economic capital as the only resource
that is relevant for assessing corporate profitability.
Toward an inclusive notion of corporate profitability. In its core, the proposed inclusive
notion of corporate profitability is characterized by going beyond economic efficiency as the
instrumental focus. Rather, it readjusts profitability to address all different forms of capital –
economic, environmental and social – without any systematic a priori predominance of any of
the capital forms. The validity of the proposed notion of profitability becomes particularly
evident by appraising it against the three conceptual principles of corporate sustainability
identified above.
With regard to instrumental finality the inclusive notion of profitability goes beyond the
organizational target level as it links the use of environmental, social, and economic capital at the
corporate level to the use at the market level. Eventually, this shows an individual firm’s
contribution to enhancing the efficient use of environmental, social, economic capital at the
market level. For this purpose, it considers environmental, social, and economic aspects irrespec-
Beyond Bounded Instrumentality in Corporate Sustainability
34
tive of if they pay-off for the individual firm in terms of enhanced financial outcomes. By doing
so, it establishes an explicit instrumentality as environmental, social, and economic aspects are
instrumental to enhance the overall excess return on the bundle of different forms of capital used.
One of the main characteristics of our notion of inclusive profitability is that it provides a
teleological integration of environmental, social, and economic aspects. Unlike approaches fol-
lowing the paradigm of the business case, it does not assess environmental and social aspects
through the lens of an enhanced return on economic capital. As shown above and based on the
notion of opportunity costs, it integrates environmental, social and economic aspects according
to their contribution to value creation. The logic and weights for the integration are derived from
the teleology that the different form of capital should be used as least as efficiently as the market
on average in order to contribute to more sustainability through a more efficient use of
environmental, social and economic forms of capital. Opportunity costs and the efficiency of use
of resources at the market level serve as the teleological criterion for the integration of different
forms of capital in order to assess the profitability of a company from the perspective of
sustainable development.
Furthermore, as shown in the practical examples, trade-off situations between different
aspects of corporate sustainability can be solved without a systematic subordination of
environmental and social issues under economic outcomes as with the business case paradigm.
This enhances the practicability of the proposed notion of inclusive profitability. With an
inclusive conceptualization of profitability, practical misguidance on trade-off cases in the quest
toward more sustainable corporate practice is avoided. Furthermore, as it is based on the widely
accepted concept of opportunity costs, our notion of inclusive profitability is compatible with
managerial thinking and decision making. Rather than rejecting the orientation of firms on
Beyond Bounded Instrumentality in Corporate Sustainability
35
profitability and efficiency we embrace and further develop the notion of profitability to enable
corporate decision making for more sustainable business practices. At the same time, the
inclusive notion of profitability requires environmental, social and economic aspects to be
quantifiable and data must be available (see discussion of limitations below). While there is
some data that is already available in the market today – as could be shown by the application to
car manufacturers – these requirements limit the practicability of the approach presented in this
paper.
Overall, we propose a reconceptualized inclusive notion of corporate profitability to help
overcome the bounded instrumentality that impairs current research on corporate sustainability.
In the following section we discuss the main conceptual implications and provide some starting
points for future research.
DISCUSSION AND IMPLICATIONS FOR RESEARCH
Since the early paradigmatic debate that bore strong pleas for adopting sustainable develop-
ment in mainstream management and organization research (Gladwin et al., 1995a; Purser et al.,
1995; Shrivastava, 1995) the field has seen substantial development in terms of quality, quantity
and overall acceptance (Bansal and Gao, 2006). However, skeptical voices express some doubt if
the field has gone beyond legitimizing business as usual (Kallio and Nordberg, 2006; Prasad and
Elmes, 2005; Springett, 2003) and have argued that environmental and social aspects are
virtually absent from much of the research on corporate sustainability (Aguilera et al., 2007;
Kallio and Nordberg, 2006).
We also doubt that corporate sustainability is only assumed at the intersection of the
environmental, social, and economic aspects (Bansal, 2005). The number of conceptual, practical
and empirical articles that try to establish or prove that environmental and/or social pro-active-
Beyond Bounded Instrumentality in Corporate Sustainability
36
ness pays off financially is legion. To the detriment of the notion of sustainable development,
this results in a situation where environmental and social aspects are only integrated to the
degree to which they enhance financial performance – and thus profitability in conventional
business as usual terms. As a consequence, we find that the conventional notion of profitability is
not a suitable foundation for corporate sustainability but leads to bounded instrumentality. Any
notion of corporate sustainability that is rooted in such bounded instrumentality still “tacitly
encourage[s] organizations to behave in ways that ultimately destroy their natural and social life-
support systems” (Gladwin et al., 1995a, p. 896).
The three conceptual principles defined in this paper demonstrate that instrumentality and the
quest for profitability as the fundamental forces that drive business do not have to be rejected in
order to establish and operationalize the notion of corporate sustainability. By doing so, we
follow Shrivastava (1995) who does not argue to abandon basic business principles but calls for
an integration of sustainability into the logic of corporations and a rethinking of basic concepts
like economic performance and profitability. Without sound embodiment in fundamental
business principles, moralistic and prosaic accounts of sustainable profitability (Cramer, 2002;
Soppe, 2004) remain on shaky foundations.
In this paper, we have developed and clarified the notion of instrumentality in corporate
sustainability as well as an inclusive notion of corporate profitability from a conceptual point of
view. In this context, some limitations of the proposed notion of inclusive profitability need to be
addressed. As already mentioned, to be included in the proposed notion of profitability social and
environmental aspects must be quantifiable. This brings up at least two fundamental concerns
with regard to covering corporate sustainability using this approach, namely (a) the treatment of
qualitative sustainability aspects and (b) the quality and suitability of quantitative data. Purely
Beyond Bounded Instrumentality in Corporate Sustainability
37
qualitative aspects of corporate sustainability cannot be covered by the approach proposed in this
paper. We believe that it is very unlikely that there will ever exist a single approach that will
cover all aspects of a complex and multifaceted notion such as sustainable development.
Furthermore, there is no generally accepted set of aspects that determine (corporate)
sustainability. While this certainly limits the scope of the approach presented in this paper we
believe that incorporating a range of quantifiable sustainability aspects under a more inclusive
notion of corporate profitability already represents a major progress compared to a situation
where profitability is based exclusively on one single aspect – economic capital. While we
probably do not know all environmental or social aspects that are scarce, we argue that
environmental and social scarcities should be integrated in any assessment of corporate
sustainability as and when they become known.
With regard to quantitative sustainability aspects, the availability of reliable and comparable
environmental and social corporate data is limited, given that corporate environmental and social
reporting and accounting is still at a juvenile stage and requires more standardization and more
wide spread use (Gray, 2001). This limitation is particularly virulent with regard to social aspects
that are notoriously underrepresented and neglected both in corporate practice and in the
literature (Gladwin et al., 1995b). However, we believe that it will be only through the thorough
use of quantitative sustainability data as well as the ongoing standardization efforts (ISO, 1999)
that the availability and quality of such data will improve over time. In addition to availability,
one may question the suitability of quantitative environmental and social indicators for an
integrated assessment in particular with regard to the compatibility of such measures with
financial performance data. While financial performance data is obviously highly standardized
and accepted, environmental and social performance measurement still lacks behind in terms of
Beyond Bounded Instrumentality in Corporate Sustainability
38
acceptance and use. However, for a conceptual argument as presented in this article it is more
critical that financial, environmental and social measures are conceptually compatible. By
bringing together the capital approach to sustainability and the financial performance assessment,
our inclusive notion of profitability extends the range of different resources that companies
require to generate profits beyond a single focus on economic capital. For measurement purposes
this means that the analysis requires data not just on the amount of economic capital used but
also on the amount of environmental and social resources used. Such physical measures have
been discussed and defined extensively in the fields of environmental and social accounting
(Bennett and James, 1999; Jasch, 2000; Rubenstein, 1994). Conceptually, such quantitative
physical measures of environmental and social performance represent the equivalent information
to financial data on the use of economic capital in standard financial analysis. Hence the
conceptual fit of environmental and social indicators represents less of a limitation to our
approach compared to the actual availability and quality of reliable performance data in the
market today.
A further limitation is related to the aggregation of different environmental, social and
economic aspects into one single indicator as proposed by our inclusive notion of profitability. In
all such integrations information on details is lost. However, we believe that it is important to
provide highly aggregated indicators as multidimensional indicators establish no unanimous
objective function for management (Jensen, 2001). If more detailed information is needed the
indicator proposed in this paper can be broken down into the value contributions of each form of
capital considered.
The development of the inclusive notion of profitability proposed in this paper has some far
reaching implications. First, the argument in this paper ultimately touches upon the objective
Beyond Bounded Instrumentality in Corporate Sustainability
39
function and purpose of the firm. Conventional wisdom suggests, that firms should ultimately
maximize shareholder wealth under a given market and regulatory framework. The responsibility
of a firm in such a setting is thus reduced to maximizing shareholder return while respecting the
law (Friedman, 1970). In this context it is argued that managing capital use via opportunity cost
thinking will increase capital efficiency in the market over time (Nielsen, 1976). From this
dynamic point of view, the argument goes that companies that fail to earn their opportunity costs
of capital will be driven out of the market because investors withdraw their capital. Such
companies will eventually cease to exist and be replaced by more efficient companies. Our
inclusive notion of profitability adopts this dynamic logic and extends it to cover environmental
and social aspects next to economic capital. We argue that in order to provide positive
contributions to sustainable development a company should maximize the return on the bundle
of different forms of capital it employs. Analogously to present financial market dynamics,
opportunity costs of the different forms of capital thus provide the key to allocating these forms
of capital efficiently. From this perspective, the objective function of the firm is not restricted to
shareholder value maximization but is extended to sustainable value maximization, i.e. the
maximization of the return on a bundle of different forms of capital. Hence, the allocation of this
bundle of different forms of capital according to the opportunity cost logic will increase overall
efficiency of the different forms of capital at the market level over time. Companies that fail to
cover the opportunity cost of the bundle of different forms of capital they use will be crowded
out and replaced by more efficient ones. Following this logic, there might exist cases where
companies deliberately forego some return on economic capital in favor of greater gains in
environmental or social efficiency. What will be considered irrational from the traditional
definition of profitability turns out rational from an inclusive notion of profitability.
Beyond Bounded Instrumentality in Corporate Sustainability
40
Today market dynamics and incentive systems still favor a narrow focus on return on
economic capital. Our paper offers a conceptual proposition for a more inclusive notion of profi-
tability that provides a suitable foundation for corporate sustainability. The implementation of
such a notion will most probably require different market and incentive structures. This brings up
the question how companies and markets can move from a biased and narrow notion of
profitability towards a more inclusive notion that is more compatible with sustainability. Such a
change of market and incentive structures corresponds to an alteration of currently dominant
institutions. Such institutions – partly codified through regulation – stabilize, frame and constrain
corporate behavior, these institutions are not imposing restrictions that actors have to comply
with passively. Rather actors have the possibility to influence, shape and modify institutional
settings and logics along their interests through institutional work (Lawrence and Suddaby,
2006) and institutional entrepreneurship (Garud et al., 2007; Maguire et al., 2004). Especially
actors that control key strategic resources or other forms of power have significant impacts on
the evolution of institutions (Greenwood et al., 2002; Lawrence and Suddaby, 2006).
As Phillips et al. (2004) argue, institutions are shaped and enacted through discourses. Actors
can actively participate in such discourses to influence “the nature and structure of discourses
and, in turn, affect […] the institutions that are supported by those discourses” (2004, p. 648) in a
self-interested way for instance through technical and market leadership or lobbying for
regulatory change. For instance, Ahmadjian and Robinson (2001) and Fiss and Zajac (2004,
2006) provide empirical accounts of successful institutional change through corporate discursive
action in the context of deinstitutionalizing hiring practices in Japan and institutionalizing
shareholder value-oriented governance modes in Germany against the more stakeholder-oriented
traditional German governance model, respectively.
Beyond Bounded Instrumentality in Corporate Sustainability
41
Different actors may have an interest to influence existing market institutions towards the
adoption of a more inclusive notion of profitability. From a public welfare perspective, state
regulators should have an interest in an efficient use of economic, environmental and social
resources in our societies. Hence, regulators may try to influence and alter market institutions to
go beyond a mere focus on traditional capital efficiency and move towards a more inclusive
notion of profitability. The role of regulators for a shift of institutions is particularly relevant due
to their formal authority (Phillips et al., 2004). Given the increasing importance of the
sustainability discourse for companies we may also expect that especially companies with a
proactive sustainability positioning will adopt a more inclusive notion of profitability to
communicate and demonstrate their sustainability performance. Companies that perform well
with regard to our inclusive notion of profitability may have a particular interest to work towards
establishing this notion of profitability in their institutional field in order to gain and maintain
legitimacy. This will enhance the diffusion of such a novel approach within industries and
institutional fields, especially if these proactive companies are industry leaders (as can be
observed in the car industry with industry leaders such as BMW or Toyota). A similar
enhancement of a shift towards a more inclusive notion of profitability can be expected if actors
with high legitimacy, power or centrality such as NGOs or professional associations participate
in a discourse towards a more inclusive notion of profitability with favorable and supportive
statements and recommendations (Greenwood et al., 2002; Phillips et al., 2004). Finally, the
effectiveness of such discourses toward altering institutions depends on their consistency and
compatibility with already existing and well-established institutions (Phillips et al., 2004). In this
respect, the conceptual and methodological proximity of our inclusive notion of profitability with
the well-established and strongly institutionalized notion of opportunity cost-based performance
Beyond Bounded Instrumentality in Corporate Sustainability
42
assessment in financial management may be beneficial.
Obviously, an institutional change obviously requires time, and there is no guarantee that a
more inclusive notion of corporate profitability will eventually replace the traditional notion.
This will depend on numerous factors as well as initiatives of different actors and/or exogenous
events. We may see for example situations where companies use both notions in parallel when
they speak to different audiences. However, even such a coexistence represents a first and
valuable step towards the diffusion of a more inclusive notion of corporate profitability.
While a more detailed discussion of institutional change trajectories for a more inclusive
notion of profitability goes beyond the scope of this paper, there follow some promising avenues
for future research. Future research could address the avenues for institutional entrepreneurship
to establish a more inclusive notion of profitability on markets. In this context, we expect a
pivotal role of companies with a proactive sustainability orientation, NGOs, socially responsible
investors and regulators as actors of change as these actors have an interest to alter market
institutions and regulatory frameworks that favor profitability in terms of return on a set of
different forms of capital rather than just return on economic capital. More at the micro level,
future research could be dedicated to the question of how governance structures within
companies need to be designed in order to orient managerial decision making toward a more
inclusive notion of profitability. In this context, incentive systems for corporate managers as well
as alternative performance measures that are based on an inclusive notion of profitability could
be developed. The latter could contribute to the development of meaningful and practical
measures of corporate sustainability which has been identified as one of the most crucial
challenges for research on corporate sustainability (Bansal, 2002; Gladwin et al., 1995a;
Shrivastava, 1995).
Beyond Bounded Instrumentality in Corporate Sustainability
43
Finally, future research should empirically test and apply the inclusive notion of profitability
proposed in this paper. Used as a dependant variable it could serve as a foundation of developing
empirical research on corporate sustainability performance beyond the bounded instrumentality
of studies that address the question if it pays to be green or socially responsible. In this context,
empirical research should in particular focus on the determinants and influence factors that affect
and drive overall above average returns on environmental, social, and economic forms of capital.
CONCLUSION
In this paper we argue that the conventional notion of profitability and the ubiquitous
business case do not measure up to the notion of sustainable development. However, much of the
current research on corporate sustainability is based on such a narrow focus on financial
performance. This leads to bounded instrumentality that inflicts a systematic a priori
predominance of financial performance over environmental and social organizational outcomes
and thus establishes economic hegemony and bias within the corporate sustainability discourse.
By taking up Gladwin et al.’s (1995a) call for reintegration we redefine corporate profitability as
if sustainability matters.
Conceptually, this paper sheds new light on the principles of corporate sustainability. While
unveiling the inadequacy of the prevailing notion of corporate sustainability as refurbished
business as usual, we do not go from one extreme to the other by sketching out a sustainable
heaven or calling for green utopia and the moral manager. In contrast, we accept that profitability
is one of the very drivers of corporate decision making in a market economy. By falling back on
the well established concept of opportunity costs we develop an inclusive notion of corporate
profitability that incorporates the business imperative for efficiency but broadens the
conventional perspective by integrating environmental, social, and economic forms of capital
Beyond Bounded Instrumentality in Corporate Sustainability
44
without any a priori predominance.
Hence, we do not agree that “only by making the ‘business case’ for social and environ-
mental performance can managers truly integrate social and environmental aspects into their
business strategies” (Epstein and Roy, 2003, p. 80). Rather, we argue that only by rethinking and
broadening the notion of corporate profitability beyond the narrow focus on return on economic
capital can the corporate word truly contribute to sustainable development.
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Beyond Bounded Instrumentality in Corporate Sustainability
51
TABLE 1
Assessment of Existing Approaches on Corporate Sustainability
Principles
Instrumental FinalityTeleological
IntegrationPracticability
Organizational
Target Level
Societal Target
Level
Conceptual Approaches Yes No No Medium
Measurement Approaches
Externalities No Yes Yes Low
Efficiency Yes No No Medium
Multidimensional Unclear Unclear No Medium
Empirical Studies Yes No No Low
TABLE 2
Data for Assessment Example
Amount Resource efficiency Amount Resource efficiency
Capital use € 500,000 12% € 12,500,000 8%
CO2-emissions 20,000 t € 3 per t 500,000 t € 2 per tWater use 250,000 m³ € 0.24 per m³ 2,500,000 m³ € 0.40 per m³Work accidents 120 € 500 per accident 4,000 € 250 per accidentProfit € 60,000 € 1,000,000
Company Market
Beyond Bounded Instrumentality in Corporate Sustainability
52
TABLE 3
Results of Assessment Example
ProfitAmount usedby company
Capitalefficiency
marketRelative weight
Valuecontribution
Capital use € 60,000 - € 500,000 × 8.00% × € 1 : € 1 = € 20,000CO2-emissions € 60,000 - 20,000 t × 8.00% × € 25 : 1 t = € 20,000Water use € 60,000 - 250,000 m³ × 8.00% × € 5 : 1 m³ = -€ 40,000Work accidents € 60,000 - 120 accidents × 8.00% × € 3,125 : 1 accident = € 30,000
Sustainable Value € 7,500
TABLE 4
Performance Assessment of Four Car Manufacturers (Years 2001-2005)
CompanyPerformance
aspectAmount
usedCorporateefficiency
Marketefficiency
Valuecontribution
BMW Total assets € 62.09bn 5.81% 2.97% € 1.76bnCO2-emissions 1,209,115 t € 2,992 per t € 783 per t € 2.67bn
Overall excess profitability € 2.22bn
Daihatsu Total assets € 6.08bn 3.69% 2.97% € 0.04bnCO2-emissions 363,600 t € 626 per t € 783 per t -€ 0.06bn
Overall excess profitability -€ 0.01bn
GM Total assets € 383.28bn 0.42% 2.97% -€ 9.79bnCO2-emissions 12,862,000 t € 111 per t € 783 per t -€ 8.64bn
Overall excess profitability -€ 9.21bn
Renault Total assets € 58.20bn 2.41% 2.97% -€ 0.33bnCO2-emissions 716,124 t € 1,950 per t € 783 per t € 0.84bn
Overall excess profitability € 0.25bn
Beyond Bounded Instrumentality in Corporate Sustainability
53
TABLE 5
Performance Assessment of DaimlerChrysler (Years 2001-2005)
Resource useDaimlerChrysler
Resource efficiencyDaimlerChrysler
Average resourceefficiency car sector
Valuecontribution
Total assets € 190.67bn 2.60% 2.97% -€ 0.70bnCO2-emissions 7,270,507 t € 669 per t € 783 per t -€ 0.83bnNOx-emissions 2,385 t € 2,045,029 per t € 1,369,538 per t € 1.61bnSOx-emissions 546 t € 9,157,512 per t € 2,038,840 per t € 3.89bnVOC-emissions 12,290 t € 400,795 per t € 176,404 per t € 2.76bnWaste generation 680,580 t € 7,253 per t € 3,297 per t € 2.69bnWater use 39,895,177 m³ € 126 per m³ € 118 per m³ € 0.33bnWork accidents 847 € 3,633,479 per acc. € 1,164,971 per acc. € 2.09bnEmployees 369,819 € 13,177 per empl. € 18,042 per empl. -€ 1.80bn
Sustainable Value € 1.12bn
Beyond Bounded Instrumentality in Corporate Sustainability
54
FIGURE 1
Corporate Sustainability and Instrumentality
(a) (b)
Inclusive Profitability Bounded Instrumentality
Economocentric Integration
EnvironmentalAspects
EconomicEfficiency
SocialAspects
Long-termProsperity
Inst
rum
enta
lFi
nalit
y
EconomicAspects
SocialAspects
EnvironmentalAspects
Long-termProsperity
Inst
rum
enta
lFi
nalit
y
Teleological Integration
InclusiveProfitability