Framework of Sustainability for SMEs

Framework of Sustainability for SMEs Sustainability: Integrating the Literature to Develop a Framework for SMEs Abstract Business today is called to consider sustainability or corporate social responsibility. Is this call meaningful or relevant to SMEs? Using the taxonomy of Garriga and Mele the literature on the broad spectrum of work related to sustainability and CSR is reviewed to develop a framework for SMEs, structured around the simple concepts of why, when, what, how and where. Further work with the framework will answer two questions; the circumstances of how SMEs engage in sustainability and what are the unique aspects of this sustainability for SMEs. Introduction Over recent times there has been a growing demand for business to consider corporate sustainability. Most large public companies are engaging with the concept in some way as evidenced by the production of Sustainability or Corporate Social Responsibility Reports (Bartells, 2008). Small and medium sized businesses (SMEs) are less likely to be engaged and some would argue they are not even sure what the concept means or whether it is relevant (Redmond, Walker, Wang, 2008; Spence, Jeurissen, Rutherfoord, 2000; Vives, 2006). There is a large body of literature on the aligned concepts of sustainability, corporate social responsibility, corporate social performance, global responsibility and corporate citizenship, with a variety of perspectives, definitions and assumptions. There is no integrated theory or framework broadly adopted by scholars and in fact there have been only a few attempts at this (Garriga Melà ©, 2004; Jones, 1983; Montiel, 2008; Wood, 1991). Within the SME literature there have been calls for research to develop a theoretical framework to understand CSR and SMEs (Jenkins, 2006; Thompson Smith, 1991). Whilst there is a growing body of literature focused on SMEs it is often merely descriptive and uses a single theoretical lens. A broader model encompassing a wider range of theoretical perspectives may have more utility. The utility and practicability of the framework as a tool for small business will be tested as part of a lager project to develop, from case study research and the literature, a useful integrative framework, to assist SMEs to engage with sustainability in the most appropriate and relevant way for their business. The normative approach frequently used in studies of large organisations whilst ideal may not be the most pertinent to SMEs. This paper aims to develop a practical theoretical framework unifying the spectrum of theoretical and empirical approaches and focussing in particular on the needs of SMEs. The paper starts with an outline of the concept of sustainability and a review of the unique aspects of SMEs. It then moves into a review of the literature using a taxonomy based on Garriga (Garriga Melà ©, 2004), considering both theory development and empirical studies. From this the most relevant elements are drawn together to develop a number of propositions regarding both the circumstances of how SMEs engage in sustainability and what are the unique aspects of this sustainability for SMEs. To add to the practicality of the framework it will be structured around 5 dimensions; Why, when, what, where and how? What is Sustainability At the outset a normative definition with regard to sustainability is required to anchor this work. Corporate sustainability is an umbrella concept (Gond Crane, 2008) which integrates the social, environmental and economic dimensions into business operation. Within these three categories, there are a range of elements which are comprehensively detailed in the Global Reporting Initiative (GRI, 2006). Corporate Social Responsibility (CSR) is often used interchangeably with sustainability in the business world and large companies may have either a CSR or sustainability report with little notion of the long theoretical tradition behind each of the terms. In the academic literature there are quite different origins of the two. It is worth digressing to briefly explore the history and overlaps of the terms. CSR as defined by Carroll encompassed four elements, economic, ethical, legal and philanthropic (Carroll, 1979). This was later refined to three with philanthropic being incorporated into the economic or ethical space depending on the logic (Schwartz Carroll, 2003). Until Woods work in 1991 there was no mention of the natural environment within the CSR literature (Wood, 1991). In parallel, during the late 80s ecological modernisation implored business to consider its environmental impact and look for solutions to environmental problems (Mol Sonnenfeld, 2000). Also in the 80s, as a response to the UN movement on sustainable development, business or corporate sustainability was developed, focusing not only on profit, but on the social and environmental impacts of business. Thus there were three independent movements CSR (predominantly social/ethical), ecological sustainability (predominantly environmental) and sustainability (economic, social and environmental). This differentiation still exists in scholarship. When one considers the divisions within the Academy of Management there exists both Social Issues in Management (SIM) the natural home of the CSR scholars and Organisation for the Natural Environment (ONE) the natural home of the environmentalists. Those who chose the sustainability path exist in both divisions and are not completely at home in eith er. The concepts of CSR and sustainability are becoming closer. Some scholars now argue that environmental issues are an explicit subset of CSR (Agle, Mitchell, Sonnenfeld, 1999; Waddock, 2008) . Montiel claims that both CSR and sustainability now include the economic, social and environmental elements, with sustainability more integrated and with different questions asked by researchers in each paradigm (Montiel, 2008). The difficulty remains in the implicit versus explicit definitions. CSR literature often includes the environment implicitly. The risk is that what is implicit can be overlooked, and so CSR could exist without considering the environment, but in sustainability the environment is explicit, although not exclusive. Social and economic considerations are also explicit in sustainability. This is one reason sustainability is more appropriate then CSR as the focus this work. There is another subtle difference between the two with CSR being more concerned with an ethical perspective, and a requirement that involvement must be voluntary and beyond any legal requirements. This last concept is not considered in sustainability. Research on CSR often reflects on individual activities tagging philanthropy and volunteering as evidence of CSR (Jenkins, 2006; Porter Kramer, 2002) . Corporate sustainability is focused more on the long term and has no relative measure against any legal requirements. Two key concepts are clearly defined in sustainability and less explicit within the CSR literature, particularly earlier papers. These are upstream social impacts in the supply chain and the expanded concept of product stewardship. Product stewardship refers to the environmental or social impact of the product from raw material, through manufacture and its useful life to disposal impacts. The supply chain factors include the social impacts on employees and communities u pstream in the supply chain. As a final clarification, sustainability in some work focuses only on the environmental case (Bansal Roth, 2000; Tilley, 2000), however in this paper the term sustainability refers to the wholesome integration and consideration of the dimensions of economic performance and social and environmental impact into a business, and is very much aligned with the approach that has been described as Corporate Sustainable Development (Bansal, 2005). In an ideal world sustainability is a normative concept with business understanding that it has a wider responsibility than simply an economic outcome and must consider its impact on the social and ecological environment it operates in now and for future generations. The major focus of the larger project, of which this paper forms a part, is to determine if this is real and meaningful for SMEs or if there is a more appropriate definition and framework for SMEs. SMEs There are a few definitions of SMEs in the literature. For this exercise we will adopt a definition of businesses between 10 and 200 employees (the Australian Bureau of Statistics definition of SMEs). They tend to be owner operated. There is much evidence that SMEs are different to large firms and hence behave in different ways. Generally they are independent, multi-tasking and cash strapped (Jenkins, 2004; Williamson, Lynch-Wood, Ramsay, 2006) more flexible and less formalised (Aragà ³n-Correa, Hurtado-Torres, Sharma, Garcà ­a-Morales, 2008; Lefebvre, Lefebvre, Talbot, 2003), have a shortage of management skills (Luetkenhorst, 2004), are unlikely to use costly professional advice (Spence, Schmidpeter, Habisch, 2003), and manage stakeholders with whom they have personal relationships (Jenkins, 2006). When the economy is tough SMEs have to focus on short term survival as they generally do not have the depth of resources of larger firms (Luetkenhorst, 2004). This suggests a resource constraint in adopting new approaches to work wether focused on sustainability or strategic management. This is explicitly stated as an inhibitor for SMEs to adopt CSR (Kuhndt, Volker, Herrndorf, 2004). A contrasting view suggests a shared vision, proactively driven by the founder, combined with the innovativeness and flexibility, will actually encourage adoption of better practices in SMEs and in the case of one study, better approaches to environmental management (Aragà ³n-Correa et al., 2008). There is a comprehensive body of work on SMEs and sustainability, which tends to show evidence of attention to some of the elements of sustainability within SMEs almost accidently (Lawrence, Collins, Pavlovich, Arunachalam, 2006; Roberts, Lawson, Nicholls, 2006), very little affiliation with CSR (Jenkins, 2006) or environmental impact (Petts, 2000; Redmond et al., 2008) and a general disengagement with sustainability (Vives, 2006). All papers argue the importance of looking at small business because of its aggregated size and impact and its difference to large business where a much more substantial body of work has been undertaken. In the review of the theoretical approaches relevant empirical or descriptive work from the SME literature will be considered. Taxonomy of the literature There are a number of articles which detail the history of scholarly endeavours into CSR, sustainability and aligned concepts (Bansal, 2005; Carroll, 1999). Suffice to say that after 50 years no single theory or integrative framework exists which brings together the disparate views of corporate sustainability, stakeholder theory, natural capitalism, resource based views of the firm, corporate social responsibility, global responsibility, sustainable leadership and corporate citizenship, into a framework beneficial to business operators and not just academics. From an empirical approach, the Sustainable Leadership model of Avery developed using a grounded theory methodology (Avery, 2005), contains many elements from most of these theories as does Stubbs Sustainability Business Model (Stubbs Cocklin, 2008) and will be reviewed later. Garriga and Mele published a taxonomy of the CSR field in 2004 based on the work of Parsons who identifies four problems in any dynamic system; that of building and distributing resources; the economic aspect, that of allocating and prioritising resources; the political aspect, that of maintaining social relationships; the social aspect and that of ensuring actors display the right values; the ethical aspect. Using these dimensions, theories based on the prime organisational goal of wealth creation Garriga identifies as instrumental theories, those based on the responsible use of the social power of organisations are defined as political theories, those based on integrating social demands to satisfy todays stakeholders are integrative theories and those based on normative values unbounded by time and environment, they term ethical theories. The authors add that most theories will have elements of all four aspects with a strong focus on one area, used as the basis for segmentation (Ga rriga Melà ©, 2004). A limitation of the review is that it focuses on predominantly American literature and ignores salient literature such as global responsibility (GR) developed in other geographies. Considering the context of the business system or the surrounding institutions (Luetkenhorst, 2004; Matten Moon, 2008), focusing on a single geography gives the narrow focus of a single business system. A second limitation is that the theories considered are all firm centric and so papers that look at how external institutions can impact CSR activities are not considered. Finally the work does not include the literatures outside of the traditional CSR space so ecological modernisation and business sustainability are excluded. The following will include a review of the broader literature omitted from Garrigas paper. The taxonomy chosen is relevant given the empirical evidence of its elements in the CSR activities and motivations of large companies (Whitehouse, 2006) To develop an integrated framework for SMEs, this paper must cover off a broader range of literature which includes institutions that may impact on SMEs involvement with sustainability. With this and the limitations of the Garriga taxonomy in mind, expansion of the concept of political theories to look at external as well as firm centric theories is appropriate. This group will be called institutional theories after Powell and Di Maggio (DiMaggio Powell, 1983). In the following sections each of these four groups, ethical, instrumental, integrative and institutional is explored in more detail, considering the main theories within each group, any supporting empirical or SME research. Finally the most relevant questions and implications for SMEs are extracted to develop propositions which form the bones of the integrated framework. Ethical theories Within this group are considered theories that are predominantly ethical arguing that it is the responsibility of business to look beyond the financial bottom line to the wider context and impact of business on the societies in which it operates, in a relatively unbounded manner, because it is the right thing to do. All strategic management theories have some moral or ethical underpinning (Phillips, Freeman, Wicks, 2003) however they are only included in this group when this is the primary focus of the theory. Under review will be CSR, normative stakeholder theory and global responsibility followed by a review of relevant empirical or SME work. Corporate Social Responsibility in its original form was an ethical theory. Developed in the USA as early as the 1950s it was unabashedly normative, â€Å"the social responsibility of business encompass the economic, legal, ethical and discretionary expectations that society has of organizations at a given point in time† (Carroll, 1979, p. 500). The normative version of stakeholder theory is also ethical; â€Å"Stakeholder theory begins with the assumption that values are necessarily and explicitly a part of doing business† (Freeman, Wicks, Parmar, 2004, p. 364). Normative stakeholder theory is differentiated from the applied or integrative use of stakeholder theory in that it generalises on which stakeholder interests should be considered and admonishes managers that these stakeholders must be considered in decision making (Phillips et al., 2003). In the last few years a new â€Å"global responsibility† literature has developed in Europe. The concept has its origins in CSR however the new label is proposed on the basis there are greater pressures from technological progress and globalization, moving so fast, that neither ethics nor legal frameworks can keep up. Thus it is up to business owners to fill this ethical vacuum and develop a new business model based not on making profit but on making progress. De Woot states: â€Å"In a global economy the raison dà ªtre of the firm is to ensure economic and technical progress that furthers human progress and facilitates the type of society we wish to have† (de Woot, 2005, p. 113). The corporation is viewed as a source of energy and creativity which has led to massive global development. DeWoot seeks to change the focus of this energy towards progress, not just profit, and to fill the gaps in global governance. Global Responsibility supersedes CSR, claiming that both corporate and social are too narrow (Antal Sobczak, 2004). Perez defines global responsibility in more detail, identifying responsibility for actions and their consequences in a global context which implies extensions to the societal, environmental and time dimensions in which we are used to operating. The responsibility is borne both by the organisation and its â€Å"social representatives†, with responsibility owed to shareholders, external authorities and other stakeholders (Perez, 2003). Beyond the strict definition of the words, the intent of both concepts is the same, for business to be motivated by more than the â€Å"single thought† (de Woot, 2005, p. 39) or profit motive and consider both a wider goal and a wider sphere of impact. A number of authors identify two opposing models of company orientation aligning one with a firm response to the ethics of global responsibility or CSR and the other with a sole focus on profit. The former has been called the Rhineland model (Albert, 1992; Avery, 2005) and is expressed by Perez; â€Å"The manager considers that his mission, and that of the enterprises he manages, is a multiple one: he must of course be competitive to do otherwise would be suicidal but also, as far as possible, be attentive to his internal and external partners, think about the environment and future generations, in short be globally responsible† (Perez, 2003, p. 82). The opposing perspective is the Anglo US model (Avery, 2005) and follows the ideology of the single thought (de Woot, 2005). It is this differentiation which leads to a contentious issue in the CSR literature. Much of the CSR literature talks about the need to go beyond legal requirements (Carroll, 1999) however once this is int erpreted through the lens of the national business system it can be seen why this has come about. The lack of regulation in the American corporate context, to address other than financial imperatives, requires that if a company is considering its social impact it must go beyond compliance. In the European context many of these requirements are bound up in institutional aspects of the local business model. Matten and Moon refer to this as implicit and explicit CSR (Matten Moon, 2008). This international context of the institutions, cultures and norms of the society in which firms are rooted needs to be considered in much of the discussion about CSR and sustainability, particularly when we talk of institutional literature. Much of the work stemming from United Nations initiatives around sustainable development such as the Brundtland Report and the Global Compact also stem from an ethical perspective. The argument is about the rights of the worlds peoples and hence the dual obligation on business to maintain the ecological environment for the benefit of future generations and to be responsible for the social impacts on society today. The common thread amongst the ethical arguments is that they are all focused on why these broader issues should be a responsibility of business. They do not venture into what or how: this will come from subsequent literature. There are relevant empirical studies which help to develop this â€Å"why† concept further particularly for SMEs, which will now be reviewed. Empirical work on ethical theories of sustainability, CSR or normative stakeholder theory is sparse (Berman, Phillips, Wicks, 2006). No research investigating global responsibility and business could be found, although there are a number of descriptive case studies of business which are used to show evidence of a global responsibility approach (Antal Sobczak, 2004; Zinkin, 2004). De Woot identifies that small business is unable to make the changes required alone and this will only happen through their professional associations (de Woot, 2005). Within the descriptive literature on SMEs and the adoption of CSR or sustainability there is considerable evidence that there is an ethical motive behind some business activities which could be considered a part of the CSR spectrum (Condon, 2004; Graafland, van de Ven, Stoffele, 2003; Spence et al., 2003). Jamalis work in Lebanon reached a conclusion that is typical of many studies: â€Å"there was a high level of convergence regarding a philanthropic conception of CSR that was characterized as an obligation parallel to the business rather than being integrated into it. All six SME managers (with no exception) equated CSR with philanthropy, which they considered as a necessary activity independent of mainstream business transactions.† (Jamali, Zanhour, Keshishian, 2009, p. 364) This is not unlike the early view of CSR, where the key issue was philanthropy as an activity of the firm somewhat separate from the firms business. Spence has looked deeply at the personal ethics of small business owners and how this impacts their business operation, to identify four orientations; profit maximisation, subsistence priority, enlightened self interest and social parity (Spence Rutherford, 2001). This frame gives us some insight into the utility of ethical theories of CSR. For those who have a social orientation, ie those exhibiting enlightened self interest or social priority an ethical theory may have utility in further integration of sustainability into the business beyond mere CSR activities. For those with a profit maximisation focus, however ethical theories are unlikely to entice operators to be involved. Which begs the question if ethical theories are only useful to those who are ethical then do they have any utility at all? And yet maybe they do and the focus needs to be to inculcate business to understand that if they claim to be ethical they need to take on De Woots call and use their energy to change t he way their business operates and strategically incorporate the new paradigm into their daily operations. It may be that it is the inability to gain traction with ethical arguments that led truly committed individuals such as Elkington and Hawken to develop their work as instrumental theories and encourage business buy in this way. In summary the research shows that for SMEs an ethical intent of the owner may lead to adoption of sustainability or at least elements of CSR. This will be considered further as propositions are developed to build the framework. Instrumental theories Within the taxonomy, instrumental theories are defined as those that argue that CSR can be adopted as a means to achieve an economic end. In other contexts they are termed the Business Case (Dyllick Hockerts, 2002; Epstein Roy, 2003). Garriga includes Friedmans shareholder maximisation theory, the work of Porter on social investments in a competitive context, Prahlad on the bottom of the pyramid, Harts natural resource view of the firm, and work on cause related marketing. To this can be added Natural Capitalism and the triple bottom line. Harts Natural Resource Based view seeks to engage business to maintain and protect the environment by exhorting a firm to consider a wider view of the resources available to it, and extend from the traditional consideration of capital and labour as the only constrained resources to include the natural resources it uses. In particular it asks a firm to consider pollution prevention, product stewardship and sustainable development. The theory is instrumental because it argues that over time the adoption of this strategy will lead to competitive advantage, which in the current business paradigm equates to more profit (Hart, 1995). The theory is extended to a model for how to integrate sustainability through the sustainable value framework a somewhat integrative model however clearly focussed on creating shareholder value, which may be a broader construct then profit alone (Hart Milstein, 2003). One concept clearly articulated in this framework and absent in many others is that this i s a strategic choice and should be part of the strategic decision making framework of the firm. Patagonia is held up as a company whose successful growth and green reputation is based on successfully integrating the elements of natural resource based theory into its strategy (Fowler Hope, 2007). Porter weighed in on the environment debate in the 90s arguing that to be green would lead to long term competitive advantage albeit at a potential short term cost (Porter Linde, 1995). This is very much an instrumental or profit oriented approach. He came late to consideration of CSR and unsurprisingly has also taken an instrumental approach. The profit motive is explicit in his comment; â€Å"The essential test that should guide CSR is not whether a cause is worthy but whether it presents an opportunity to create shared value that is, a meaningful benefit for society that is also valuable to the business† (Porter Kramer, 2006, p. 84). Prahalads plea for multinationals to engage in developing products appropriate for, and taking their business to, developing countries, whilst altruistic, is again instrumental. The focus is that business can make money with the approach (Prahalad, 2002). Since this is a call to multinational corporations this is unlikely to be relevant for the SME framework, except potentially to the extent of product development. The Triple Bottom line is another instrumental approach. Elkington comes from a personal conviction that the world must change (Elkington, 1999), with an argument that is not unlike DeWoots global responsibility argument. This is his personal motive for raising awareness. However in developing his theory and identifying the seven pillars of a sustainable future and thus calling others to action he relies on a business case and clearly states that the reason is not about ethics or religion (Elkington, 1999) He avoids the argument for a paradigm shift and reverts to a business case argument almost as if he were trying to seduce business to accept his ideas and unwittingly do the right thing by the environment. The theory of Natural Capitalism has a similar thread. It is again easy to confuse the theory with the ethics of the creator. The four pillars are increased resource productivity, waste elimination through closed loop material circuits, an economic shift to a solutions based business model and investment in natural capital. However as the proponents states: â€Å"that enable business to behave responsibly towards both nature and people while increasing profits, inspiring their workforce and gaining competitive advantage† (Lovins Lovins, 2001, p. 99). They are profit focused and thus instrumental and move from the â€Å"what† typical of most instrumental theories and extend it in to a â€Å"how† which we typically see in Garrigas integrative theories. As a generalisation instrumental theories tell us what to look at to achieve competitive advantage or profit. There is a focus on material usage, waste and physical resources (Hart, 1995; Lovins Lovins, 2001), product stewardship (Hart Milstein, 2003), symbiotic partnerships (Elkington, 1999), relevant social issues (Porter Kramer, 2006) and on marketing and business models (Elkington, 1999; Lovins Lovins, 2001). From a theoretical perspective we now have why, what and a little on how. The following paragraphs review the empirical work on SMEs and instrumental theory to further inform the framework. There is significant empirical work testing the validity of the business case argument. Orlitzkys meta-analysis of this body of work shows that there is a correlation between corporate social performance and corporate financial performance (Orlitzky, Schmidt, Rynes, 2003). This finding gives an additional utility to this group of theories for the profit motivated adopting the new ethics of CSR or sustainability makes a contribution to profit so we have a why as well as a what. Ethicists however take issue and question whether the ends adoption of CSR justify the means taking it on because it adds to profit (Gond, Palazzo, Basu, 2009). Within the SME literature there is a strong case argued that contribution to profit is critical and when this can be demonstrated practices which form part of the sustainability agenda may be adopted (Castka, Balzarova, Bamber, Sharp, 2004; Williamson et al., 2006). Studies show that cost savings and competitive advantage can be gained from attention to the environment (Aragà ³n-Correa et al., 2008), successful implementation of eco-efficiency and environmental policies was motivated by a business case (Cà ´tà ©, Booth, Louis, 2006; Kerr, 2006, p. 34) and application of Harts strategies are directly applicable to SMEs (Avram Kà ¼hne, 2008). When looking deeper into the literature for the items identified in the discussion of instrumental theories, ie material usage, waste and physical resources, symbiotic partnerships, relevant social issues and marketing and business models, it is only the clear business performance characteristics which resonate and are considered (Williamson et al., 2006). In considering the integrative framework it will be necessary to consider what elements identified should be considered given the limitations of SME resourcing. Integrative models Integrative models consider how social demands are integrated into a business. They do not have the scope of ethical theories and are bounded in the present what social issues demand the attention of the business now. In Garrigas taxonomy integrative theories include stakeholder management, corporate social performance, issues management and public responsibility. Dunphys pathways framework (Dunphy, Griffiths, Benn, 2007) and Tilbury and Wortmans organisation development methodology (Tilbury Wortman, 2004) are added into this class. Integrative theories developed because an ethical notion of CSR is holistic and does not help the manager in determining the granularity of what issues to address and how to address them. In developing the idea of CSR as a process, issues management, Jones states â€Å"Corporate managers do not advance by asking abstract questions but by making the pragmatic, specific decisions that confront them in the operation of their business.† (Jones, 1980 , p. 60). Similarly in her 1991 paper, Wood develops a practical framework from the previous theoretical work on CSR and corporate social performance, integrating principles, process and outcomes (Wood, 1991). Within the GR literature Thevenet also tries to develop an integrative form of global responsibility in an attempt for relevance. For GR to be effective he suggests business is responsible to expose and train managers, to develop personal reflection and maturity without which he claims ethical decisions cannot be made, â€Å"The key to global responsibility will be, at the end of the day, behavioural responsibility from people† (Thevenet, 2003, p. 124). With a prima facie base in ethics the separation between integrative and ethical theories is ambiguous. The difficulty is that once the theory becomes integrative and focused on application, the origins become less significant and the same process can be used for different reasons. At the extreme is the work of Gond on the Mafia as an organisation which on the surface can be said to exhibit many CSR best practices yet is patently not an ethical organisation. Practices include; developing good relationships with the local community and stakeholders (albeit using