Does Balanced Scorecard Still Apply in a Sustainability-Focused Organisation?
Palladium is launching the next iteration of its week-long certification course, "Kaplan-Norton Strategy Execution Boot Camp - Positive Impact and the Execution Premium Process". This new iteration will help organisations create inclusive growth strategies that create social as well as bottom-line impact. Palladium's David McMillan discusses the relevance to organisations today.
In the spirit of this updated course, I wanted to pose the question, “Does Balanced Scorecard Still Apply in a Sustainability-Focused Organization?”
The world has woken up to the fact that care for social outcomes in addition to financial outcomes is good for business. Earlier this year, Larry Fink, CEO of Blackrock, wrote in his annual letter to CEOs, “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” (Fink, 2018) This sentiment is not just a perception but is reinforced by recent research of Harvard Business School professor and Palladium thought leader, George Serafeim and his colleagues which showed the superior financial results of “high sustainability” firms. (Eccles, Loannou, & Serafeim, 2014)
Organizations are increasingly working to incorporate ESG principles, CSR ambitions, and UN Sustainable Development Goals into their strategies. Sustainability functions, though many times still at the periphery of organizations, are increasingly becoming more integral to the corporate strategy process. Publicly communicated strategies are increasingly reflecting commitments to society in addition to shareholders.
As with any new way of thinking, tools start to get created and codified to make the notion replicable and efficient. A literature review Palladium recently conducted suggests that while there has been a new set of reporting tools emerging (e.g., Global Reporting Index (GRI), Multicapital Scorecard™, Carbon Disclosure Project (CDP)), there is not a notable emergence of new sustainability strategy governance tools. The design of sustainability and inclusive growth strategies continue to leverage tools like materiality assessment, supply chain mapping, and Experience Co-Creation. But what does the lack of an emerging sustainability-specific implementation framework mean? Does the tried and true Kaplan-Norton Balanced Scorecard have a future in this new environment?
There are a few realities that a Balanced Scorecard-based strategy management approach has been proven very effective in addressing.
1. Strategy is an “integrated” set of choices. One challenge of the current sustainability efforts in many companies is a lack of integration between projects and with the overall business strategy. The Balanced Scorecard, through its perspective structure, is developed starting with the vision and work towards increasingly granular levels of actionable detail (i.e., economic and stakeholder outcomes, process, intangible enablers, initiatives). This vision to tactical details approach helps to constantly prompt the question of how new ideas support the overall direction.
2. Time passes between activity and results. Another challenge sustainability efforts face is demonstrating value in the short term when a longer period of time is truly required (e.g., the STEM education initiative meant to contribute to workforce sustainability years in the future). Jamie Dimon and Warren Buffet recently argued for not providing quarterly guidance to shareholders because it motivates prioritizing short term results over comparatively better and more sustainable outcomes. (Dimon & Buffet, 2018) Their Wall Street Journal op-ed is but one call for a healthier balance between short-term results and longer-term decision making. Balanced Scorecard can assist in reinforcing the long-term nature of certain investments through the cause-and-effect logic inherent in the framework and through clear business cases for the strategic initiatives within the framework.
3. Strategy is only as good as the execution that realizes it. Sustainability strategies are still dependent on an actionable plan that is clear on outcomes, well understood across those helping to drive progress, judged through measurement, and actioned through investments made in initiatives. These elements need to be governed to achieve timely and effective feedback and decision making. The Balanced Scorecard has a decades-long track record of structuring strategies in an easily-grasped format that makes them easy to communicate and govern. In the Balanced Scorecard objectives clarify outcomes and the cause-and-effect-related goals that support them, measures track performance, targets set expectations for progress, and initiatives are implemented to create the change the strategy requires. There are vast numbers of cases that demonstrate the track record of a Balanced Scorecard-based management approach in governing the execution of strategy.
Tailored sustainability tools and frameworks have useful applications that enhance the quality of the strategy, but don’t replace the core governance function that a Balanced Scorecard provides. The Multicapital Scorecard™ provides an evolved structure for considering outcomes across John Elkington’s Triple Bottom Line, which bolsters consideration of the balance between social outcomes. Materiality Assessment aids in identifying the best opportunities to pursue as part of the development of the strategy the Balanced Scorecard reflects. The Global Reporting Index provides guidance on measurement and how it relates to social outcomes, which can make the measurements within the Balanced Scorecard more robust.
A Balanced Scorecard-based strategy approach is just as relevant in the new environment of increased focus on sustainability as it has ever been. The framework continues to demonstrate that it is sufficiently flexible to be relevant for the execution of strategies focused on any set of outcomes while encouraging adherence to core principles (e.g., outcome orientation, cause-and-effect linkages, measurement) that ensure a minimum level of rigor and quality. The bottom line – design an impactful, sustainable strategy that targets both economic and social outcomes and use a Balanced Scorecard to manage that strategy to success.
Office of Strategy Management, Palladium
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