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The Centre for the Management of Environmental Resources

ENVIRONMENT AND SOCIO-RELATED BALANCED SCORECARD: EXPLORATION OF CRITICAL ISSUES by F. G. G. ZINGALES* A. O’ROURKE** and R. J. ORSSATTO† 2002/47/CMER

This working paper was published in the context of INSEAD’s Centre for the Management of Environmental Resources, an R&D partnership sponsored by Ciba-Geigy, Danfoss, Otto Group and Royal Dutch/Shell and Sandoz AG. *

Research Associate, Centre for the Management of Environmental Resources (CMER) at INSEAD, Boulevard de Constance, 77305 Fontainebleau Cedex, France.

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Research Associate, Centre for the Management of Environmental Resources (CMER) at INSEAD, Boulevard de Constance, 77305 Fontainebleau Cedex, France.

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Assistant Professor, International Institute for Industrial Environmental Economics (IIIEE) at Lund University, PO Box 196, 22100 Lund, Sweden.

A working paper in the INSEAD Working Paper Series is intended as a means whereby a faculty researcher's thoughts and findings may be communicated to interested readers. The paper should be considered preliminary in nature and may require revision. Printed at INSEAD, Fontainebleau, France.

Environment and Socio-related Balanced Scorecard: Exploration of Critical Issues* Francesco G.G. Zingales, and Anastasia R. O’Rourke, Renato J. Orssatto Francesco G.G. Zingales Research Associate Centre for the Management of Environmental Resources (CMER) - INSEAD Boulevard de Constance 77305 Fontainebleau Cedex France Phone + 33 1 60724456 Fax + 33 1 60745564 [email protected]

Anastasia O’Rourke Research Associate Centre for the Management of Environmental Resources (CMER) - INSEAD Boulevard de Constance 77305 Fontainebleau Cedex France Phone + 33 1 60724253 Fax + 33 1 60745564 [email protected]

Renato J. Orssatto Assistant Professor International Institute for Industrial Environmental Economics (IIIEE) Lund University PO Box 196 22100 Lund Sweden Phone: + 46 46 2220251 Fax: + 46 46 222 0230 [email protected]

Paper presented at: The Tenth Annual Business Strategy and the Environment Conference Devonshire Hall, University of Leeds, UK 10-11 September 2000 Abstract Companies have historically preferred financial indicators to design and monitor their strategies. These indicators tend to have a retrospective character, giving little insight to managers on where they should take corrective action. The Balanced Scorecard (BSC) approach was developed in the early 1990s to address this problem. It provides a framework for managers to establish causal relationships between sets of qualitative indicators and the financial bottom line. More recently, the use of the BSC has been proposed to facilitate the management of environmental and social issues by firms. This gives managers the opportunity to integrate environmental and social practices with strategic objectives. This paper raises some critical issues concerning the traditional use of the BSC. These issues are then used to expand the current debate surrounding the new application of the tool in solving the problem of integration. Such an application raises both conceptual and methodological controversies, which are explored in this paper. Furthermore the paper identifies some key issues to be addressed by managers, and postulates some critical areas for the design of future empirical research.

* We would like to acknowledge the financial support form the German Research Ministry (Bundesminsisterium fur Bildung und Forschung, BMBF) that has made this research possible. We are also thankful to the colleagues from University of Lunenburg (DE) and University of St. Gallen (FR) for the constructive exchange of views.

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1. Introduction The corporate strategy tool The Balanced Scorecard (BSC) has gained increased attention at the dawn of the new millennium. Recently, the interest in BSC is witnessed not only in the traditional ‘management gurus’ of Harvard Business School and associated consulting companies, but also by academics who have been searching for appropriate tools to assist managers in integrating environmental and social issues into corporate strategies and practices. The success of the BSC has been such that there is a great deal of optimism among academics and business consultants. It is hoped that that this success story can be repeated on the new frontier of corporate environmental and social responsibility. This paper aims to explain the reasons for this positive expectation, the potential problems associated with the traditional use of the tool, as well its potential use for the management of environmental and social issues. Our argument is developed in seven sections in the paper, following this brief introduction. The first half of the paper (Sections 2 - 5) describes then addresses some of the issues involved in building and using a traditional Balanced Scorecard, while the second half of the paper (Sections (6 - 8), focuses more directly on how an environmental and socio-related BSC might be formulated and applied. Section 2 gives a concise description of the original concept of the Balanced Scorecard approach, originally proposed by Robert Kaplan and David Norton in 1992. The section also introduces the concept of cause-effect relationship mapping, which has been claimed to be particularly useful for managing environmental and social assets. Section 3 surveys some BSC-related literature and other material referring to experiences with historical trends of previous strategy implementation tools, in an attempt to understand and discuss its current success. Section 4 outlines some specific limitations of the BSC, which are particularly relevant for evaluating the usefulness of 2

this approach for the management of environmental and social issues in firms. It initially describes the tendency of practitioners to reduce the importance of non-financial indicators, or even eliminate them completely - hence, also eliminating the ‘balance’ between financial and non-financial indicators. The section then outlines how the tool addresses problems associated with the definition, rather than the implementation, of the corporate strategy. Finally, it points out how a clearer link between the actions of departments and the financial result of the firm – as the BSC should theoretically provide – will be counteracted (or spurred) by the balance of power within a firm. Section 5 describes how Kaplan and Norton have dealt with the theme of support functions, such as IT (Information Technology) or R&D (Resource and Development), and exemplifies how this theme has been addressed in the particular case of Human Resource Management. The section also explores the role required of the environment/sustainability department, since it normally operates as a support function within the organisational structure. The discussion addresses the complexity involved in the use of scorecards in support functions, as well as the adaptations of the BSC needed for effective management of environmental and social aspects. Section 6 and 7 survey the use of the BSC approach in the field of corporate environmental and social management. Two interlinked reasons justify discussing these areas separately: First, the distinction may be necessary because not only it encompasses a different set of issues, but it may also require specialised capabilities from those using the BSC. Secondly, if prescriptive measures toward these dimensions are needed, then such approach may also facilitate implementation. We use the term ‘environmental or sustainability department’ to describe the environmental and social support functions in a company, as it reflects organisational practices more accurately. The aim of these two sections is to explore gaps in the literature vis-à-vis the success factors and

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limitations of the Balanced Scorecard, described in the previous sections. Finally, Section 8 describes the criteria that an effective environmental/social BSC should encompass. It considers the characteristics and limitations of the Balanced Scorecard, identified in Sections 3 and 4, and the particular solutions devised by various authors (Section 5) for the support functions to discuss the possible shortcomings of the current environmental/social management literature on the topic (Sections 7 and 8). The aim of the discussion is to focus the attention of researchers and practitioners on issues that have not yet been solved, which might constitute problem-areas for future research and application of an environmental and socio-related Balanced Scorecard. 2. The Balanced Scorecard (BSC) In the last ten years, Robert Kaplan (a Professor at Harvard Business School) and David Norton (a business consultant1) successfully developed the Balanced Scorecard (BSC), which is often described as a strategic management control tool. The fundamental argument of Kaplan and Norton is that firms have historically developed a multiplicity of operational indicators, but they do not use them in a coordinated and strategic manner. Because the BSC is not limited to financial indicators but also includes three additional perspectives - customer, internal processes, and learning and growth - it provides a ‘balanced’ and supposedly comprehensive overview of the firm’s performance. By using the BSC framework, managers would define the most important indicators in each of these perspectives, establish actions to achieve these objectives and, most importantly, link causes (leading indicators) to their effects (lagging indicators).

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In the early stages of development, Kaplan and Norton outlined the problems that the BSC approach is supposed to solve (Kaplan and Norton, 1992, 1993). During the first half of the 1990s, the authors analysed the implementation of the BSC in several firms (Kaplan and Norton 1996a; 1996b). This allowed them to broaden the use of the BSC from a simple performance measurement tool to a strategic management system. Their latest work (Kaplan and Norton 2001) provides further evidences for this expansion, bringing the BSC in the domain of public and non-profit organisations, as well as large and small firms.

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The cause-effect relationship is expressed in the BSC through strategic maps - tools used to describe the creation of value in the process of implementing corporate strategy. These maps contain hypotheses or predictions about how organisational processes drive firm performance, which is measured against targets. For instance, actions in learning and growth (e.g. the training of personnel), may impact on internal processes and result in better quality of products. This would increase customer satisfaction and, consequently, generate a better financial return. According to Becker et al. (2001), the ‘mapping’ of the relationships among performance indicators of the four perspectives gives managers more confidence to implement the corporate strategy. Normally, managers validate the (hypothetic) cause-effect relationships by confronting the targets with the actual performance of the firm. 3. Why has the BSC been so successful? Since its inception, the Balanced Scorecard has been implemented by an impressive number of companies worldwide, often in collaboration with the creators of the tool - Robert Kaplan and David Norton. The survey of Silk (1998), for instance, found that 60% of the Fortune 1000 firms have experimented with the BSC. This is a clear indication that during the 1990s the BSC gradually became a successful management fashion in the manner proposed by Abrahanson (1996:254): that “a management fashion is a relatively transitory collective belief that certain management techniques are at the forefront of management progress”. According to Abrahanson, the creation, selection, and dissemination of a management fashion follow basic market principles: it requires a demand for a certain fashion by (management) fashion users, which will be eventually supplied by fashion setters. From the demand side, the BSC apparently satisfied the generic need for strategic management control tools, as initially identified by Kaplan and Norton. But the BSC also addresses the 5

demand for techniques that can help firms to manage intangible assets2. In the past 10 years, practitioners and academics have realized that financial indicators alone are no longer sufficient to describe the value of a firm. For instance, Becker et al. (2001) indicate the necessity of managing intangible assets, such as intellectual capital and environmental and social investments. According to the authors, two main trends justify this need. Firstly, there is an increasing gap between the book value of a firm (the initial shareholder investment) and its market value (the shareholder’s assessment of the firm). The recent hyper-valuation - and subsequent devaluation of internet companies, for instance, suggests the need for an appropriate tool to evaluate and manage the so called intangibles (see: Porter 2001). Secondly, portfolio managers reveal that 35% of an investment decision is determined by non-financial information (Low and Siesfield 1998). In this respect, the BSC is expected to be used as a framework for the management this type of assets by firms. From the perspective of the management fashion setters (i.e: Robert Kaplan, David Norton and associates), the use of the BSC presents several advantages: (i) It helps managers maintain the focus of the strategic vision by requiring them to select a limited number of indicators within each one of the four perspectives - financial, customer, internal processes, and learning and growth; (ii) It acts as a cornerstone of present and future success by informing managers ‘what has gone wrong’ and where they can improve performance; (iii) It encourages managers to achieve goals without creating trade-offs between potential success factors; and (iv) Finally, it provides integration with other improvement programs, such as reengineering and total quality management. Other specialists on the topic seem to support these advantages. Mooraj et al. 2

Becker et al. (2001:7) provide some criteria for defining ‘intangible assets’: invisible, difficult to quantify, not tracked through accounting, assessment based on assumptions, cannot be bought or imitated, appreciates with purposeful use, has multiple applications without value reduction, best managed with ‘abundance mentality, best leveraged through alignment and dynamic/short shelf life when not used.

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(1999), for instance, claim that such a tool eliminates the need for managers to choose the control system to use at any given time by incorporating aspects of boundary, interactive and diagnostic control systems3. Epstein and Manzoni (1998) compare the BSC with Tableau de Bord, a popular management control tool used in the last forty years in France, outlining how the BSC stimulates firms to gather external information and benchmark their practices against competitors. Companies that implement the BSC are arguably more aware of customer preferences than those that use the Tableau de Bord. Finally, the BSC specialists argue that firms using the BSC to collect external information to feed into the learning and growth perspective seem to have a consistent long-term strategy. 4. Selected Limitations of the BSC The apparent success of the BSC should not detract us from identifying the weaknesses intrinsic to this management tool. When analysing the appropriateness of BSC for the management of social and environmental issues by firms, as this paper intends to do, any limitations of this approach should be considered. Curiously, for reasons that still require research, the BSC has not been the target of extensive critique. The work of Lipe et al. (2000) constitutes a rare example in this direction. They suggest that judgmental effects can limit the effectiveness of the BSC. Such effects relate to the idea that the evaluation, by managers, of the performance of a Strategic Business Unit (SBU), will, for instance, prioritise financial over non-financial indicators simply because these are the common indicators across various SBUs. In other words, the existence of BSC per se may not detract managers from prioritising financial over non-financial indicators in our case, best represented by the ones related to social and environmental performance. 3

Diagnostic control systems periodically and systematically measure progress against plans, concentrating on yesterday’s strategies. Interactive control systems are those requiring regular management attention and discussion

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Although this issue might, at first glance, be seen as minor, elevating operational performance indicators to similar status of financial indicators in the implementation of the firm’s strategy is exactly what the BSC is expected to address. Furthermore, non-financial indicators are normally characterised as leading indicators - they inform managers about the strategic directions of the firm. The very nature of these indicators makes them specific to an SBU; after all, they are expected to capture the peculiarities of the Unit. In sum, if a corporation continues to prioritise the financial over non-financial indicators in the implementation its strategy, the balance of the performance measurement constitutes merely a theoretical exercise. The BSC apparently satisfies the claim of being an efficient control tool for strategy implementation. According to various authors (Mooraj et al. 1999, for instance), the BSC can certainly help managers integrate the various organisational functions into pre-defined strategic goals. Problems may arise, however, when one questions the nature of strategy formation. In simple terms, a firm may effectively implement an equivocated strategy. Such equivocation may be a result of a limited scope of the context external to the firm, considered by the BSC. Stakeholders other than customers and shareholders such as Non-Governmental Organisations (NGOs) and other interest groups, are the best example of such limitation; they are not considered in the four areas of action of the BSC (Atkinson and Waterhouse 1999). Kaplan and Norton (1996) invite companies to add other perspectives to the BSC, if this proves to be important for them. However, no substantive criteria are given to indicate the approach that an organisation should follow, should managers have to add new perspectives. For instance, when should a firm consider the government as an important stakeholder to be included in its Scorecard? What about the strategic importance of suppliers? Overall, what are the criteria that within the organisation, focusing on the formation of tomorrow’s strategies. Boundary control systems are designed

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should be used to define the level of importance of each stakeholder? Hence, it is necessary to question not only how effectively the strategy has been implemented but also the criteria used for its definition. The relative importance of stakeholders encompasses a more generic limitation of the use of BSC in strategy formation within the context of the management of social end environmental issues. According to Reinhardt (1999), the definition of corporate environmental strategy should primarily consider the structure of the industry in which a firm operates. In this respect, does the BSC help managers grasp environment-related opportunities that are specific to the industrial sector? To what extent could the BSC help managers analyse such structural conditions? Internal to the firm, competition for resources among the various departments can also represent a limitation of the BSC. Moreover, the effectiveness of an environment-related scorecard ultimately depends on the balance of power among the various organisational actors during the strategy formation stage (Orssatto and Clegg 1999). For instance, if the countervailing power of the environmental department of a firm is relatively low, the implementation of the BSC does not represent any guarantee that environmental issues will be taken seriously by the organisational leaders or shareholders. Hence, it could be said that the BSC depends primarily on the balance of power in and around the organisation (See: Mintzberg 1984). Since an environmental department constitutes a specific structural arrangement within a firm, the next section presents its main characteristics. This structural arrangement is expected to influence the creation and implementation of the environment and socio-related Scorecards.

to communicate the boundaries of permissible activity to all employees in the organisation (Mooraj et al. 1999:485).

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5. Shared Service Units Scorecard (SSU-scorecard) Shared Service Units (SSUs) are expected to have similar role as those performed by the environment/sustainability department in firms. Kaplan and Norton (2001:191) define SSUs as the internal units of an organisation that provide services to different Strategic Business Units (SBUs). According to Kaplan and Norton, SSUs usually are not in direct contact with external customers, unless they generate revenue by providing the same service to other companies. Examples of SSUs include departments of information technology, human resource management, and research and development. Two straightforward situations are listed by the authors, which specifically relate to the design and implementation of an SSU-Scorecard. If the organisation has already developed a BSC for all its strategic business units, then the SSU should view itself as a partner in the process, closely collaborating with the performance setting of these units. On the contrary, if the organisation has not yet developed a BSC anywhere else in the organisation, the SSU should view itself as a business-in-a-business, and the various strategic business units as its customers. In this case, an SSU-Scorecard is based on similar principles of a contractual relationship with an external client. Kaplan and Norton describe these two scenarios apparently for categorization purposes only. The single difference between the two scenarios relates to the articulation of strategy. For a company that has already implemented the scorecard in its SBUs, the strategy implementation process should be more clearly understood by the participants of that unit. Moreover, in this scenario, the contribution of the SSU to the overall performance of the organisation may be formalized more easily. Accordingly, this may not be the case for a firm that has not yet implemented the scorecard. The authors do not go any further in describing the complexities involved in building an SSU-Scorecard.

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It is useful to look at work undertaken by Becker et al. (2001) to develop a SSU-Scorecard for a specific organisational function. According to the authors, the HR-Scorecard should not be designed based on the traditional four perspectives. They propose four different issues as better representing the ‘balance’ of the HR function activities: (i) The core employee capabilities that will leverage HR role in the overall strategy of the firm; (ii) The HR system4; (iii) The extent to which the HR system is aligned with firm strategy, and; (iv) The efficiency with which the employee capabilities are generated (Becker et al. 2001:53). Similarly to the SBU-Scorecards, each one of these perspectives will require the development of their own set of measures. Furthermore, the link with the SBU-Scorecards, which the authors do not analyse further, is insured by the original choice of employee capabilities that should relate to the SBU strategic objectives contained in the four traditional perspectives. In sum, the authors recognize that defining the right measures is not sufficient. Rather, it is necessary to identify the systems that relate to these measures and how they interact. The new outlook proposed for the HR Scorecard and its focus on systems represent an important step towards grasping the complexities inherent to the successful management of a SSU. Indeed, it could be said that this approach differs substantially from the one proposed by Kaplan and Norton, and represents a step forward in the design and implementation of BSCs. Lessons drawn from the design and implementation of the BSC for SSUs such as HR are relevant for the purposes of this paper because environmental/sustainability (E/S) departments can also be classified as SSUs. Nonetheless, two main differences between a (traditional) SSU, in the moulds proposed by Kaplan and Norton, and an E/S department should be outlined. The first relates to

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The HR System is defined as the package of policies and practices built by the HR department that supports and reinforces capabilities of the workforce to generate strategic HR deliverables. It is by all means an HR management system. As in any management system, a set of measures - checklist of leading indicators - must be established to assess its effectiveness over time (Becker et al. 2001:13)

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type of customers attended by E/S department: while SSU units attend mostly internal clients, the E/S department has customers both inside (various SBUs) and outside the company (various stakeholders). This role is indeed unique when compared with a traditional SSU, such as a Research and Development (R&D). The second difference relates to the strategic position the E/S-SBU might have within the firm. Seeking long-term business sustainability might entail a radical shift in the corporate strategy towards more environmentally and socially friendly practices. In this respect, if the E/S department is expected to have an input into the strategy formation process, its position is expected to be significantly different from the one assumed by a traditional SSU. Nevertheless, the guidance provided by Kaplan and Norton, as well as the exemplification of an HR-Scorecard by Becker and associates can be used to build the environment-and social related Scorecard in service-areas that the E/S is expected to deliver. 6. Environment-related Scorecard (e-BSC) The discussion presented in the previous sections established the foundations for the principal focus of this article: the use of the BSC approach to manage environmental and social issues in corporations. In this section we use the insight gained from the discussion to evaluate some attempts to build an environmental BSC (e-BSC), and critically reflect upon it. Attempts at building a social-related BSC (s-BSC) are discussed in Section 7. Apparently, the success of the BSC can be attributed, among other factors, to the capacity of firms to integrate non-financial indicators into the strategic management of firms. Because of this, there is a perceptible confidence - mainly by academics working in environment-related fields - that such success can be extended to indicators of environmental and social performance. This confidence is justifiable. Similar to the operational indicators encompassed by the customer, internal processes, and learning and growth perspectives, environmental indicators are often of 12

intangible nature. The use of the BSC made evident the importance of the contribution of these (previously neglected) non-financial indicators for the overall success of the implementation of firms’ strategy. Extending the same logic, environmental indicators are also expected to assist in the implementation of the strategy. Kaplan and Norton mention environmental and social issues in several instances in their later work, which revises the BSC model. Firstly, when discussing the need for a fifth perspective to deal with stakeholders (other than shareholders and customers), the authors state that stakeholder objectives should be included only when they are vital to the success of the SBU strategy (Kaplan and Norton 1996a). Secondly, some environmental and social indicators emerge as part of companies’ corporate scorecards that relate to the internal process perspective (Kaplan and Norton 2001). Finally, the demonstration of ‘good corporate citizenship’ is mentioned when describing the concept of strategic themes, which serve to focus attention to specific interest areas throughout the organisation (Kaplan and Norton 2001:78). In sum, despite the fact that some environmental and social issues emerge in several occasions, Kaplan and Norton make no specific attempt to address them. The limited attention devoted to the SSU-Scorecards in general can best represent this gap. Hence, it is no surprise that there is a significant degree of doubt about how this integration should occur. In simple terms, both a conceptual framework and a methodology are yet to be developed and, for this reason, are the objects of continuing debate. Johnsons (1998) contributes to the e-BSC debate by explaining that the BSC can help the environmental function to think about the strategic value of its activities. He argues that the primary audience of the e-BSC would be the environmental department (or function) itself, rather than the strategic apex of the corporation (for a description of this concept see: Mintzberg 1979). He also proposes to add ‘employees’ to the learning and growth perspective, and ‘external

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stakeholders’ to the customer perspective. However, Johnson does not present any criteria about how these additions should be decided, neither he considers the influences that such change may have in the implementation of the corporate BSC. In the opinion of Epstein and Wisner (2001), the addition of a fifth dimension to the corporate scorecard, which deals explicitly with environmental and social goals, requires top management to recognise the strategic value of the new dimension. In this respect, the authors do not reason from an environmental perspective; rather they see the environmental department as a support function for Strategic Business Units (SBUs). Thus, designing the e-BSC would help the SBUs to streamline activities with the corporate goals, and contribute to the overall success of the firm. For instance, the corporate goal of ‘minimising environmental impact’ would induce an SBU to reduce packaging through product reformulations or via the increase of refillable products. In this case, the environmental department would fulfil its Shared Service Unit (SSU) role, discussed in the previous section, by promoting a better integration of environmental concerns into product design. As a second option, the authors suggest the possibility of inserting environmental indicators into each one of the four traditional perspectives of the BSC. Although they provide a sample of possible indicators to be used, they do not comment on the most appropriate conditions for their implementation. Brown (1996) suggests that various Environmental Performance Indicators (EPIs) could form one aggregated indicator5 of the Scorecard at the corporate level. This solution – basically analogous to the example provided by Epstein and Wisner - could be seen as modifying the idea of a fifth separate perspective that deals with environmental performance. Exploratory fieldwork6 suggests

5 An aggregated EPI is usually calculated by multiplying each EPI (used in a firm) by a weighted factor (measure of its relative importance) and adding the results. 6 Interviews with C. Tuppen, Corporate Sustainability manager of British Telecom on 16/07/2001, and

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that such a choice contradicts one of the fundamentals of the BSC concept, which is aimed precisely at linking financial with non-financial performance indicators. An aggregated EPI may inform the top management about the company’s environmental performance but it will not demonstrate to what extent it contributes to financial results of the firm. Such ‘missing link’ is present in the management of firms today. For instance, an environmental management system (EMS) provides managers with a set of environmental indicators, which are implicit in the evaluation of targets against real performance. However, these indicators are not explicitly linked to financial performance. As some company representatives have confirmed, aggregated EPIs will make it impossible to identify cause-effect relationship between environmental and social issues and the overall financial performance of the firm. The process of aggregation simplifies the complexity and trade-offs involved in the implementation of the BSC but an aggregated EPI will reduce the visibility of the actions undertaken by a firm to manage a diverse set of environmental aspects and their importance in the corporate performance. Hence, in light of our exploratory fieldwork, Brown’s suggestion of an aggregated EPI may ultimately worsen the environmental performance of firms. Figge et al. (2001) bring the discussion a step further by using a predominantly economicsoriented approach in their analysis. The authors make an attempt to differentiate between industries/firms where environmental and social aspects are internalised in the market system (i.e. a market price is assigned to the underlying scarcities) and industries/firms where these aspects are not internalised (i.e. where as yet no market costs are felt by the firm as a result of their activities)7. They argue that a specific condition within an industry/firm can influence the choice

D. Barnhart, responsible for the corporate BSC at Nova Scotia Power on 15/06/2001. 7 The authors do not establish a difference between industries and firms. Although we see some problems with the appropriateness of this approach, this discussion is beyond the scope of this paper and, therefore, will not be object of specific analysis.

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of the approach for integrating the environmental and social aspects into the BSC. If these aspects are to be internalised by the industry/firms, they argue, then the integration of environmental and social indicators in each one of the four perspectives would be the best approach. In the authors’ opinion, a niche for green products indicates that ‘the market’ already recognises a premium for environmentally friendly behaviour. In this case, it will be easier for firms to cascade down the strategic goals of the corporate scorecard in order to individuate the contribution of the ecolabelled products - for example the contribution of sales of eco-labelled products to the net profit of the firm being expressed as an indicator. On the contrary, if environmental aspects that are expected to be essential to the success of strategy are not yet internalised by the market, Figge and associates suggest that the addition of a fifth (non-market) perspective to the four traditional perspectives would be more appropriate. They argue that, while these aspects may not fit within the four traditional perspectives of the BSC, the creation of a fifth ad hoc perspective would guarantee their adequate visibility. Finally, it is argued that firms may adopt both solutions simultaneously, in which some of the environmental aspects are internalised and others are not. Such attempt to establish criteria for the choice, according to the specific conditions of and industry/firm, is certainly useful. Nevertheless, Figge et al. (2001) proposition brings us to two reflections. Firstly, the criteria for choice does not seem to be on the level of internalisation of the specific environmental/social aspect by the ‘market’ but rather how well this aspect can fit into the four traditional perspectives. In other words, if an environmental/social aspect does not fit into the traditional BSC, a fifth perspective may be needed, making the discussion about the level of ‘market’ internalisation unnecessary. Although, it could be argued, that non-internalised aspects would be harder to fit into the traditional BSC, this discussion adds complexity (and therefore could act as a distraction) to an issue that should be, in fact, simplified. Secondly,

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similar to the comments we made on Brown’s proposition of an aggregated indicator, the simple existence of a separate fifth perspective could provide more visibility but not necessarily increased importance to the environmental and social aspects of corporate management. Indeed, organisational decision-makers could further sideline environmental and social issues. Regardless of whether environmental and social aspects are displayed in the BSC, they would ‘counterbalance’ other indicators only when ‘linked’ to the firm’s core strategic objectives. Curiously, those proposing the BSC for the management of environmental and social issues in firms do not present a critical view of this approach. One could question, for instance, the influence that judgemental effects (see Section 4) have on the effectiveness of an environmental and/or social management BSC. Does the BSC approach provide the E/S department with information, which is relevant and useful for the strategy formation? Is the BSC an appropriate tool to make this type of information surface? Finally, no explicit reference to the implications of the characteristics of SSU-Scorecards for an e-BSC could be found. These gaps indicate that the evaluation of the e-BSC is still in its early stages. A similar situation can be found in the social aspect of the BSC, addressed in the next section. 7. The Socio-related Scorecard (s-BSC) IN the past decade, there has been an emerging interest in the social agenda and social accountability of firms due partly to the realization that the ‘third leg of the sustainability chair’8 was less developed and needed more attention. This awakening has seen the rapid development and uptake of a variety of tools and measurement techniques, such as social reporting and auditing, social management systems (SA 8000), and social accounting systems, such as AA

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10009. Such tools, which measure corporate social performance, also have various features that overlap with - but also may contribute to – the development of a social-BSC (s-BSC). The increasing interest in social issues has caused a certain level of discomfort for those interested in developing precise and objective measures of corporate economic and environmental performance. The environment and social spheres have much in common, due to the fact that they are often not internalised by organisations in a market driven economy. However, social aspects are often seen by practitioners as ‘softer’ than environmental aspects, therefore being more difficult to quantify10 (Epstein 2001: 34). This happens, in part, because theories of ‘social performance’ already overlap with: (i) What a company does - provide goods and service to people; (ii) Who it does it for - customers, shareholders, staff, and; (iii) How it does it - by producing resources and management techniques though labour. Although the social agenda seems new, it should be placed in context with earlier developments in the field. In fact, many companies had already implemented (then later dropped) social accounting and reporting in the 1970’s and 1980’s. Social accounting theory was developed by fashion setters, such as Bauer and Fenn (1972), Corson and Steiner (1974), Estes (1973; 1976) and Epstein (1977), among others. Techniques such as social audits (see: Epstein 2001) actually

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The three ‘legs’ being environmental, social and economic performance, otherwise charaterised by Elkington as the ‘Triple bottom line’ of sustainability. See J. Elktington (1998) Cannibals with Forks: the Triple Bottom Line of 21st Century Business, B.C. New Society Publishers 9 SA 8000 is a process standard modelled on the ISO series designed by Social Accountability International, an NGO started in 1997. SA 8000 is “A tool for organisations to assure just and decent working conditions in all their facilities and in those of their suppliers” It covers all international labour rights found in the ILO Convention, International Human Rights convention, and UN Convention on the Rights of the Child (See www.SA8000.org The AA1000 is a voluntary accountability standard designed by AccountAbility International, launched in 1999. It is a process standard which describes the way in which a company can measure, manage and communicate social performance with a particular emphasis on stakeholder engagement. See (www.accountability.org.uk) 10 It could be argued that it is not that financial and environmental accounting techniques are more objective than social ones. Rather, the entity that they account for (i.e. money, the environment) is just more easily ‘controlled’.

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preceded techniques developed to account for environmental management, and report on the results. The rise (and indeed fall) of the social accounting movement has been well documented by Epstein (1999, 2001), who traces the waxing and waning interest in corporate social responsibility. The author explores the conditions that brought the ‘failure of social accounting’ and how this experience can assist academics and practitioners in the early 2000’s to achieve longer lasting and transformative results. Epstein (1999) argues that only when social measurements, such as customer satisfaction, or impacts on local communities are shown to contribute to the financial bottom line of firms, and are fully integrated into the corporate culture, can it be said that the current ‘social accounting movement’ has succeeded. In this sense, the social agenda shares many attributes with the environmental agenda – both are attempting to explain how the intangible assets of a firm contribute to its real value, and both are struggling to develop ways in which to account properly for this. Issues such as the impact of firm behaviour on local communities, the effects of a firms products on individual health and behaviour nonetheless have effects which can ‘speak back’ to a firm in various subtle and sometimes more obvious ways. The concept of corporate social responsibility is often being used to ensure a firm’s ‘social license to operate’ so that society - as represented by governments, nongovernment organisations, local communities, consumers, individuals etc - allow the firm to continue to operate in the longer term. However, what all these stakeholder groups are asking for may well blur the line between the social, environmental and even economic bottom-lines. Decisions on social issues are, in most companies, taken in more than one department, such as human resources, public relations, marketing and, of course, the environment/sustainability departments.

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The Balanced Scorecard already displays a number of social intangible assets, which are demonstrated in numerous case studies that directly contribute to the financial bottom line. Inclusion of value-drivers, such as the customer perspective, learning and growth (of human resources), internal business processes (satisfaction of shareholders and customers), and even financial performance (satisfaction of shareholders and management) already suggest a social agenda and imply why the BSC was named ‘balanced’ in the first place. These socially related dimensions were already assigned an important role in the BSC, before any discussions of sustainability made it on the agenda. However, there are some immediately visible gaps, which suggest that the tool gives the illusion of balance rather than a truly balanced perspective. When one tries to include other stakeholders’ concerns, such as impacts on local communities, the impacts of products and services made by the company, the differences in workplace conditions found in large multi-national companies, the neatness of the four-tiered system is somewhat disrupted. Epstein (1999; 2000) addresses this problem by suggesting the addition of more (social) indicators into the existing structure of the BSC. Such indicators include: employee turnover rates, workforce diversity, training budgets, community support and donations, sales of ethical products, and increased sales as a result of improved reputation. The additional indicators are spread over all four of the traditional BSC categories. However, Epstein does not articulate a framework for how and why they are allocated, nor what types of firms should account for the different social indicators. Figge et al. (2001), on the other hand, propose that some social indicators should be internalised to the existing BSC and others relegated to a new fifth dimension the BSC (as described in Section 6). This is argued on the basis that such costs still remain externalised to firms in current economic models and should, therefore, be treated

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separately. Since no specific examples are given (i.e.: what would be considered an internal/external social aspect), it is difficult to comment on the efficacy of this approach. A firm’s impacts on local communities can serve as an example to demonstrate why the above propositions are problematic. Although companies are currently fond of reporting on their positive impacts on local communities via, for instance, their philanthropic support of various community associations, the negative impacts is more difficult to measure and report. Additionally, what it is seen as positive and negative is a subjective judgement, which necessarily complicates the ‘social’ (and the environmental) agenda. The BSC does not assist in clarifying the differences in perspective of corporate behaviour found in reality both internally and externally to the firm. The employment created for hundreds of people in a mining town, for instance, could be measured against the potential loss of revenues coming from decreased tourism activities in the region. Who should make such a decision, and on what grounds? Where do we draw the line on governance for external aspects, both now and in the future? Could firms benefit from tools such as the BSC to manage these boundaries? Clearly more research, and indeed reflection, needs to be undertaken to answer such questions. Although none of the authors cited above attempt to give a comprehensive definition of the ‘social’, a definition is nonetheless hovering close to the surface. ‘The social’ is often assumed to mean simply ‘people’, acting either as employees, consumers, community members – but at all times they are individual entities. On the other hand, if social capital is understood as the interaction and inter-dependence between people (see: Cox 1995, for instance) problems arise on both theoretical and empirical levels. Ultimately, such understanding identifies the differences in and between the cultures and communities with which a firm interacts. On this light, an attempt to gauge a definitive social measure of the impact on such cultures will always be difficult, if not

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impossible. Groups such AccountAbility International have responded to this problem by relying on process standards to ensure accountability, rather than specific social performance indicators11. However, such standards themselves do not take into account the differences in corporate culture. Like other process standards, they tend to assume the existence of a particular type of measurement of culture and management system within firms, which simply may not exist. In the same vein, the question that now needs to be asked is: What sort of cultures - both internal and external to the firm - are assumed by the BSC? The final section is based on these and previous questions, whereby we suggest some problem areas which may serve to guide the design of a framework for developing rigorous environment and socio-related Scorecards. 8. Synthesis of the Critical Issues and Direction of Future Research This paper has so far provided the basis for discussing the key aspects that should orientate the development of Balanced Scorecards dealing with environmental and social issues. Considering the state of the art in the field, this final section identifies five problem-areas of the traditional BSC, which may affect the development and implementation of the environmental and social BSC. These problem areas also serve to highlight the core findings of the paper. Initially, stemming from the weaknesses of the tool, it seems that while providing an adequate framework for strategy implementation, the BSC does not seem to address the problems associated with the definition of organisational strategy. In this respect, Scorecards for managing environmental issues will need, primarily, to include an adequate methodology or framework for scanning the context in which the organisation operates. Such analytical tool should identify the

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For example, processes are set up to make sure that decisions and impacts made by the company are discussed with the communities affected in a transparent fashion.

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strategic relevance of stakeholders that will influence the definition of indicators for the management of environmental and social issues. Secondly, the design and implementation of an environmental and social BSC requires us to consider the most suitable approach for the integration of existing tools into the BSC. The work of Becker et al. (2001) suggests that a systems approach should be pursued. Similarly to the ‘HR System’, the use of the e-BSC would expand the scope of an environmental management system (EMS), which already encompasses policies and practices that enable the workforce to achieve the environmental targets. The use of a BSC is expected to better align the targets created in the EMS process with the firm’s corporate strategy. Other tools and techniques, such as environmental reporting, environmental performance measurement, life-cycle assessment (LCA), social auditing, and stakeholder dialogue, may also benefit from the BSC approach: the use of the BSC has the potential to reveal the strategic importance of these tools and techniques for the financial performance of the organisation. Nonetheless, some questions about the integration of existing tools into the BSC still remain. How could a functioning environmental management system (EMS), for instance, be integrated into the e-BSC? What difficulties arise from such attempts? Could this integration eventually damage the overall environmental performance of the company? In our opinion, analogous questions could, and indeed should, be raised by those trying to integrate other environment and socio-related tools into the BSC. The distinction between environmental and social responsibilities of a company raises the third issue that should be addressed when designing a framework: the necessary capabilities for managing environmental and social Scorecards. As Becker et al. (2001) pointed out, the implementation of BSCs requires us to identify the types of capabilities that a particular Shared Service Unit (SSU) needs in order to achieve its strategic goals. In this respect, this paper

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questioned the appropriateness of treating the environmental and social issues collectively: are capabilities for their management similar? Who, within the firm, should develop environment and socio-related BSCs? Is there a need for a specialised department or business area to manage these issues? In the light of these questions, ii seems that, at this stage, an all-encompassing sustainability-BSC, as the one proposed by Figge et al. (2001), may better serve theoretical rather than pragmatic purposes. Until more empirical research identify the capabilities required for the management of environmental and social issues, it seems recommendable that a framework considers them as distinct areas of development. The questions associated with capabilities also trigger the fourth problem-area that an environmental and social BSC framework needs to address. We need to question whether specialised organisational areas, such as the one encompassed by an environmental/sustainability SSU (or department), should manage the environmental and social areas of concern, or should them be just ‘internalised’ by each one of the management functions (marketing, logistics, human resources management, operations, etc.). Although Kaplan and Norton claimed that the BSC approach is applicable to any type and size of organisation, it is evident that the tool is especially suited for a preferential type of organisational structure. Indeed, most examples used by the authors are drawn from large-scale American firms and, not surprisingly, the discussion of strategic coordination normally relates to organisational divisions, departments, and SBUs and SSUs alike, which are typical of large-scale enterprises.

Such preferential view of the

organisational structure may also privilege a specific type of solution, and indeed structural arrangement, for the management of environmental issues. For enterprises with an established environmental/sustainability department (or SSU), for instance, it would be natural to include the design and management an e-BSC to its scope of action. Nonetheless, based on the lessons

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learned from the Total Quality Management (TQM) movement, one could question whether this is an appropriate approach to addressing the environmental issues faced by firms. Environmental concerns may have similar attributes to those of quality, and addressing them efficiently may require the internalisation of these principles by each person who collaborates for the overall performance (quality or environmental) of the company. In other words, instead of establishing a specialised area (department) for management of environmental or social issues, the focus would shift to the type of corporate culture that would inspire environmental and social responsibility at all levels of the organisation. The final problem-area relates to the organisational issues involved in the application of both the ‘traditional’ and the environmental and socio-related BSCs. Curiously, the complexities of the ‘organisational life’ associated the implementation of this management tool, have been treated with some degree of superficiality by the specialised literature. Regarding the cause-effect relationships, which are landmarks in the use of the BSC approach, there are many grounds to argue that this mechanistic image of organisation is indeed a limited one. As Bolman and Deal (1991) have stressed, privileging a specific organisational frame, as the BSC does, may limit the capacity of managers to understand why things do not work, as they should. Organisational theorists certainly have a great deal to contribute in this area, since the pitfalls of implementing Balanced Scorecards - environmental, social, or otherwise - could be grasped by using analytical tools that have been developed in the past fifty years (see: Clegg et al. 1996). In particular, the total absence of a discussion on the ‘balance of power’ among the various players participating in the design an implementation of the BSC is somehow alarming. How for instance, does the BSC empower the role of environmental management within a firm? Although this would certainly depend on the specific organisational context, it seems that a framework orientating the

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