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DEVELOPMENT OF A SUSTAINABILITY BALANCED
SCORECARD: TRANSLATING STRATEGY INTO VALUE-
BASED SUSTAINABILITY MANAGEMENT
Frank Figge, Tobias Hahn, Stefan Schaltegger and Marcus Wagner, Center for Sustainability Management, University of Lueneburg, Germany.
The Balanced Scorecard is a management tool that supports the successful implementation of corporate strategies on the basis of performance indicators linked with causal chains. It has been discussed and considered widely both in practice and research. By linking operational and non- financial corporate activities through causal chains to the firm’s long-term strategy the Balanced Scorecard allows alignment and management of all corporate activities according to their strategic relevance. The Balanced Scorecard makes it possible to take into account non-monetary strategic success factors that have a significant impact on the economic success of a business. The Balanced Scorecard thus provides a promising starting-point to the incorporation of environmental and social aspects into the main management system of a firm. Given this potential, a range of authors have dealt with the topic of a Sustainability Balanced Scorecard. However, the basic approach and method of value-oriented sustainability management through the Balanced Scorecard have only recently been discussed in detail (cf. Figge et al. 2001a and 2001b). Value-oriented corporate sustainability management with the Balanced Scorecard helps to overcome the shortcomings of conventional approaches to environmental and social management systems by integrating the three pillars of sustainability into a single and overarching management tool.
After a brief discussion of the different pos- sible forms of a Sustainability Balanced Scorecard this article takes a closer look at the process of and steps in formulating a Sustainability Balanced Scorecard for a business unit. Before doing so, the Balanced Scorecard and its suitability for value- oriented sustainability management are briefly outlined.
1 Introduction
In the market system economic scarcities are reflected by assigned market prices. Envi- ronmental and social scarcities are, however, only partially reflected in economic transactions, although they have become increasingly important for business. Management reacts to perceived scarcities through the use of management instruments. To the degree that environmental and social issues are reflected in market transactions and with the growing importance of environmental and social issues many companies have implemented specific environmental or social management systems during the last decade. These systems have, however, rarely been integrated with the general management system of the firm. As a consequence, environmental and social management is mostly not linked to the economic success of the firm and the economic contribution of environmental and social management therefore remains unclear. Given the desire to achieve simultaneous improvements in the economic, environmental, and social performance of businesses, in order to achieve strong contributions to sustainable development, this lack of integration turns
out to be a major obstacle. Concerning the relation between the environmental and social performance of the firm and its economic performance, the literature is mainly based on empirical studies that refer to the correlation, but not to the causality, between environmental and social measures and the economic success of firms. To date there is rather limited literature on the relation between environmental and social measures and the achievement of long-term economic goals. The Balanced Scorecard (BSC) as a strategic management tool claims to identify the major strategically relevant issues of a business and to describe and depict the causal contribution of those issues that contribute to the successful achievement of a firm’s strategy. Thus, it appears promi- sing to use the Balanced Scorecard method to integrate environmental and social management with the general management of a firm. Only recently the basic approaches and methods of value-oriented sustainability management with the Balanced Scorecard have been discussed in detail.
2 The Balanced Scorecard as an instrument for value-based sustainability management
2.1 The Balanced Scorecard approach The concept of the Balanced Scorecard was developed in the early 90’s as a new approach to performance measurement because of problems of short-termism and past orientation in management accounting (cf. Kaplan & Norton 1992). The concept of the BSC is based on the assumption that the efficient use of investment capital is no longer the sole determinant of competitive advantage but, increasingly, soft factors such as intellectual capital, knowledge creation or excellent customer orientation are becoming more important. As a result Kaplan and Norton suggest a new
performance measurement approach that focuses on corporate strategy from four per- spectives. This BSC aims to make the contribution and the transformation of soft factors and intangible assets into long-term financial success explicit and, thus, controllable. The BSC’s four perspectives can be characterised briefly as follows: The financial perspective indicates whether the transformation of a strategy leads to improved economic success. Thus, the financial measures assume a double role. On the one hand, they define the financial performance that a strategy is expected to achieve. On the other hand, they are the endpoint of cause and effect relationships referring to each of the other BSC perspectives. The customer perspective defines the customer/market segments in which the business competes. By means of appropriate strategic objectives, measures, targets and initiatives the customer value proposition is represented by the customer perspective, through which the firm/business unit wants to achieve a competitive advantage in the envisaged market segments. The internal process perspective identifies those internal business processes, which enable the firm to meet the expectations of customers in the target markets and those of the shareholders. Finally, the learning and growth perspective describes the infrastructure that is necessary for the achievement of the objectives of the other three perspectives. In this case, the most important areas are qualification, motivation and goal orientation of employees, and information systems.
The purpose of a BSC is to formulate a hierarchical system of strategic objectives for the four perspectives, derived from the
into four partial processes. The central question for the theme of this article about the structure of a BSC is mainly related to the first of the four critical management processes to be described by Kaplan and Norton: clarification and translation of vision and strategy.
The BSC is directed top-down, both in its contents and in its development as a management system. Therefore, to be able to clarify and translate the strategy top- management must agree on the strategy. The goal is to create a common and comprehensive strategic basis in the form of a formulated BSC. Because of this, the verbally formulated strategy should be trans- lated and causally linked in terms of objectives and measures. In every perspective the strategic core elements and performance drivers which are pivotal for a successful business unit are identified. These strategic core elements and performance drivers are then associated causally with each other through the four perspectives, as described above, and oriented towards the financial perspective. The result is a hierarchical cause-effect network reflecting the fundamental assumptions for successful translation of the strategy.
2.2 Suitability of the Balanced Scorecard as a tool for value-based sustainability management
In a BSC all aspects relevant for achieving a permanent competitive advantage should be included. The creation and preservation of competitive advantages serves to permanently secure a firm’s economic success. In the four perspectives of the BSC, therefore, the activities critical for creating value are included and causes are linked to effects. In the formulation of a BSC the objectives/measures in all perspectives are
deduced from the long-term strategic financial goals in a top-down process. This hierarchical structure of the BSC guarantees a value orientation for all business activities.
This characteristic of the BSC can also be used for the management of environmental and social aspects. Against the backdrop of the fundamental deficits of most current approaches to environmental and social management, as described above, the ability of the BSC to integrate the three dimensions of sustainability offers the possibility of a value-based approach to the management of environmental and social aspects. A value- based approach to sustainability management aims at a simultaneous achievement of ecological, social and economic goals_._ Therefore, the relation between environmental and social measures and the economic success of the firm has to be explicitly taken into account. The three pillars of sustainability need to be integrated by a value-oriented approach for three reasons:
- Sustainability management that reduces the business value is dangerous because it is carried out by firms only as long as the company is successful and can afford this ″luxury″. If firms find themselves under financial distress, those costs are cut down first which do not contribute to the financial bottom line. Sustainability management which does not create business value will thus be practiced only as long as firms are successful.
- Non-value-oriented sustainability management is an inappropriate role model for other businesses. As firms that want to promote or reinforce their environmental and social management often orientate themselves towards competitors, it is improbable that they will adopt sustainability management which creates losses rather than benefits.
- Non-value-oriented sustainability management is by definition not sustainable. According to the 3-pillar- concept sustainability involves economic, ecological and social aspects. Usually, it is implicitly assumed that these aspects bear a complementary relation to each other. Sustainability is only achieved if ecological, social and economic goals are reached simultaneously. Only a business which improves with regard to all the three dimensions of sustainability demonstrates a clearly sustainable performance.
The BSC assists the identification and the management of those environmental and social aspects that contribute to financial business goals. Therefore, a Sustainability Balanced Scorecard fulfils the central requirement of the sustainability concept for a permanent improvement of the business’ performance in economic, ecological and social terms. A particular suitability of the BSC for the value-based integration of all three sustainability dimensions results from the possibility of also considering soft factors which cannot be monetarised. Environmental and social aspects often show precisely these characteristics. Thus, it is necessary to determine the environmental and social aspects that are relevant for economic success and to include them in a BSC. In the following section the fundamental possibilities for integrating environmental and social aspects are briefly described.
3 Different possible approaches for integrating environmental and social aspects
There are basically three possibilities for integrating environmental and social aspects
in the BSC. Firstly, environmental and social aspects can be integrated in the four existing standard perspectives. Secondly, an additional perspective can be added to take environmental and social aspects into account. Thirdly, a specific environmental and/or social scorecard can be formulated.
3.1 Integration of environmental and social aspects in the four Balanced Scorecard perspectives
Environmental and social aspects can be subsumed under the four existing BSC perspectives like all other potentially relevant strategic aspects. This means that environmental and social aspects are integrated in the four perspectives through respective strategic core elements or performance drivers for which lagging and leading indicators, as well as targets and measures, are formulated. Through this top- down derivation those environmental and social aspects are identified which are strategically relevant within the framework of the four standard perspectives of the BSC. Environmental/social aspects consequently become an integral part of the conventional Scorecard and are automatically integrated in its cause-effect links and are hierarchically orientated towards the financial perspective and the successful conversion of a business’ strategy.
Within all of its four standard perspectives the logic of the BSC remains almost exclusively in the economic sphere. Exchange processes outside the market mechanism are hardly considered at all. Therefore, the approach of integrating environmental and social aspects by subsuming them under the four standard perspectives is particularly relevant for strategic environmental and social aspects that are already integrated in the market system. For instance, for a firm that targets
3.3 Deduction of a derived environmental and social scorecard
The third approach to integrating environmental and social aspects into the BSC lies in the deduction of an environmental and/or social scorecard. At this point, it is very important to note that because of the value-orientation pursued in this paper such a scorecard cannot be developed in parallel with the conventional scorecard. Instead, in order to achieve value- based sustainability management this is only possible in conjunction with one of the two variants of integration discussed in sections 3.1 and 3.2. Therefore a derived environmental/social scorecard is not an independent alternative for integration , but only an extension of the two variants dis- cussed in the previous sections. A derived scorecard as discussed in this section draws its contents from an existing BSC system and is thus predominantly used in order to coordinate, organise and further differentiate environmental and social aspects, once their strategic relevance and position in the cause-and-effect chains have been identified by the approaches presented above.
Deriving such a scorecard can serve to clarify the relationship of an internal service unit with the strategic business units and their scorecards. Thus, this additional variant of a derived environmental/social scorecard allows coordinated control of all strategically relevant environmental/social aspects which are spread and integrated in the whole overarching BSC system.
3.4 Relationship of the three approaches to build a Sustainability Balanced Scorecard
As already pointed out in the previous paragraph, a fundamental difference exists between the three approaches to building a Sustainability Balanced Scorecard. On the
one hand, the first two variants (subsumption and addition) refer to the structure of the core scorecard for a business unit. On the other hand, the derived environmental/social scorecard is deduced from the core scorecard. In other words, a derived environmental or social scorecard can only be formulated after at least one of the two first variants has been realised for the core scorecard system. The contents of a derived scorecard results from the higher- level BSC of the strategic business unit. Thus, in the process of building up a SBSC, formulating a derived environmental/social scorecard only represents a possible second step. The first step always needs to be integration of the strategically relevant environmental and social aspects into the core BSC with the help of the two variants discussed in 3.1 and 3.2.
After having distinguished the first two approaches from the subsequent possibility of a derived environmental or social scorecard, it is important to take a look at the relation between the two variants con- cerning the structure of a business unit’s core scorecard. It is important to note that certain environmental or social aspects can be subsumed under the four conventional BSC-perspectives parallel with the introduction of a specific perspective for other strategically relevant environmental or social aspects. In other words, the first two alternatives of structuring a SBSC are not mutually exclusive. Given the characteristics of the two alternatives, as outlined in 3.1 and 3.2, it becomes clear that the difference mainly lies in the characteristics of the strategically relevant environmental and social aspects. For those strategically relevant environmental or social aspects which are already integrated in the market system (e.g. environmental costs) it is fairly straight-forward to integrate them by means of appropriate leading or lagging indicators
into one of the four conventional perspectives. In contrast, if environmental and social aspects exert their strategically relevant influence via mechanisms acting in the firm’s non-market environment (e.g. complaints of neighbour groups), then an additional, non-market perspective is necessary.
Because there might well exist situations where strategically relevant environmental or social aspects already incorporated in the market system occur alongside those influencing the business unit via non-market mechanisms, it is neither necessary nor desirable to make a final decision for or against one of the two variants of integration. Most of the authors who have dealt with different approaches to the integration of environmental and social aspects in the BSC so far neither explicitly consider the relationship between the diffe- rent approaches nor discuss the preconditions of their respective appropriateness. Two fundamental conditions for the introduction of an additional non-market perspective can be identified. In order to justify the addition of a non-market perspective (i) environmental and social aspects have to be strategically relevant, i.e. they are either strategic core aspects or performance drivers and (ii) it is not possible to include these aspects appro- priately, i.e. according to their strategic relevance, into the four conventional perspectives of the BSC.
Regarding the process of formulating a Sustainability Balanced Scorecard these findings lead to the conclusion that the decision which structure is appropriate for a specific business unit can not be taken without further consideration. Rather it depends on the nature of the strategically relevant environmental and social aspects that are identified during the process of
formulating a Sustainability Balanced Scorecard. The choice of how environmental and social aspects are integrated is therefore taken during this process, rather than at its beginning. The process of constructing a Sustainability Balanced Scorecard is described in the following section.
4 The process of formulating a Sustainability Balanced Scorecard
Based on our reasoning in the previous sections the process of formulating a Sustainability Balanced Scorecard has to meet a number of basic requirements: First, the process must lead to value- based management of environmental and social aspects (see section 2.2). Second, in order to ensure their value- based management, environmental and social aspects must be integrated with the general management system of the firm. A Sustainability Balanced Scorecard which exactly meets the specific characteristics and requirements of the strategy and the environmental and social aspects of a business unit must not be ge- neric. The process therefore has to ensure, third, that the Sustainability Balanced Scorecard formulated is business unit-specific. Fourth, environmental and social aspects of a business unit must be integrated according to their strategic relevance. This includes the question of whether the introduction of an additional non-market perspective is necessary.
On the basis of these requirements the pro- cess of formulating a Sustainability Balan- ced Scorecard can be divided into three major steps. First, the strategic business unit has to be chosen. This step presupposes that a strategy for the business unit exists. Second, the environmental and social aspects of concern have to be identified.
consider all pertinent environmental inter- ventions in order to come up with a com- prehensive and business unit specific profile of the environmental exposure which leaves out no possible strategically relevant aspects.
Social aspects that are strategically relevant can be identified analogous to the environmental aspects. However, because of the great variety and diversity of social aspects and the lack of a common foundation in natural sciences, as can be found for environmental aspects, it is very difficult to achieve a comprehensive
classification of social aspects. Instead, social aspects are heavily depend on the preferences and values of the different actors involved. It is therefore advisable to classify social aspects not according to their contents but according to the actors involved. The stakeholder approach pro- vides a useful framework with which to classify the actors and which are concerned with different social claims.
The social issues concerning a business unit can thus be identified by syste- matically following a comprehensive framework of potentially relevant stakeholder groups. Table 2 provides such a
framework. Potentially relevant stakeholder groups for a business unit can be distinguished into internal stakeholders, stakeholders along the value chain, stakehol- ders in the local community and societal stakeholders. As a further, cross-sectional classification direct stakeholders can be distinguished from indirect stakeholders. Direct stakeholders are those groups which are related to the firm by direct material resource exchange flows, while with indirect stakeholders no such direct material ex- change flows are established. As a first step, all pertinent stakeholder groups for a business unit have to be identified. In the second step the social claims and issues brought up by these groups have to be identified. By specifying the framework shown in Table 2 a specific profile of the social exposure of the business unit can be obtained.
Environmental Exposure of a Business Unit Type of Environmental Intervention Business Unit specific Occurrence
Emissions (to air, water, and soil) …
Waste …
Material Input/Material Intensity …
Energy Intensity …
Noise and Vibrations …
Waste Heat …
Radiation …
Direct Interventions on Nature and Landscape
…
Table 2. Framework for the identification of the social exposure of a business unit.
Table 1. Framework for the identification of the environmental exposure of a business unit.
Social Exposure of a Business Unit Direct Stakeholders Indirect Stakeholders internal (^) value chainalong the in the localcommunity societal internal (^) value chainalong the communityin the local Societal particular stakeholdergroup … claim/issue ...
particular stakeholdergroup … claim/issue ...
particular stakeholder group … claim/issue ...
particular stakeholdergroup … claim/issue ...
particular stakeholdergroup … claim/issue ...
particular stakeholdergroup … claim/issue ...
particular stakeholder group … claim/issue ...
particular stakeholdergroup … claim/issue ...
4.3 Determination of the strategic relevance of environmental and social aspects
For both the conventional as well as the Sustainability Balanced Scorecard the
identification and alignment of strategically relevant aspects is the core step. The purpose of this step is to translate the verbally formulated strategy of a business unit into causally linked objectives and indicators. As already mentioned above (see 2.1) the Balanced Scorecard is a tool to identify the 15 to 25 strategically most relevant aspects and to link them causally and hierarchically to long-term financial success as measured by the financial per- spective. For the formulation of a Balanced Scorecard, Kaplan and Norton propose a top-down process with which the strategically relevant aspects in all the perspectives are identified, starting from the financial perspective. In principle, this approach can also be used for the formulation of a SBSC. The only difference is that in addition to “conventional” aspects environmental and social aspects have to be considered, too. For each perspective the strategic core issues represented by lagging indicators and the performance drivers represented by the leading indicators have to be determined for the specific strategy of the business unit chosen. By going through the perspectives in a cascade-like process
starting from the financial perspective as indicated in Figure 1 the hierarchical and causal linkage of the strategically relevant aspects is guaranteed. This serves to align all strategically relevant aspects of a business
unit towards the successful conversion of the strategy and thus towards long-term economic success. Like all other business issues we can distinguish between three stages of strategic relevance of environmental and social aspects: Environmental or social aspects can represent strategic core issues for which lagging indicators have to be defined. Those lagging indicators measure whether the strategic core requirements in the perspective have been achieved. Kaplan and Norton have proposed generic categories for the formulation of lagging indicators in each perspective (see Table 3). Performance drivers, as represented by leading indicators, show how the results in each perspective, reflected by the lagging indicators, are to be achieved. Performance drivers are highly business specific but there are once again categories to support identification (see Table 4). Leading indicators will reflect environmental or social issues whenever environmental and social aspects act as performance drivers.
Financial perspective Customer perspective
Process perspective
Learning and growth perspective
Non-market perspective
Revenue growth Productivity growth Asset utilization
Market share Customer acquisition Customer retention Customer satisfaction Customer profitability
Innovation process Operations process Postsale service process
Employee retention Employee productivity Employee satisfaction
Freedom of action Legitimacy Legality
Table 3. Generic categories for the formulation of lagging indicators.
Are there any environmental or social aspects that influence the business unit’s success via non-market mechanisms? Do these environmental or social aspects represent strategic core elements at which the business unit has to excel in order to successfully execute its strategy? What is the substantial contribution of the performance driver to the achievement of the business unit’s strategy? When going through the perspectives in the described cascade-like manner it is important to remember that the causal relationships between the strategically relevant aspects identified not only exist be- tween lagging and leading indicators within one perspective. Rather, all the aspects and indicators have to be directly or indirectly linked towards the financial perspective. The strategic core aspects and value drivers of the lower level perspectives in the cascade shown in Figure 1 serve to achieve the objectives set by the indicators in the upper level perspectives. Therefore, every time a move is made from an upper level perspective to the next lower level perspective in the cascade it has to be ensured that and shown explicitly how the lower level strategic core aspects and performance drivers contribute to the
achievement of the objectives in the higher level perspective(s). This serves to establish the hierarchic cause-and-effect chains, which link all strategically relevant aspects towards the successful execution of the strategy. As discussed above (see 3.2) in contrast to the other scorecard perspectives the non-market perspective acts as a frame, which embeds the other perspectives. However, the strategic aspects of the non- market perspective have to be linked directly or indirectly to the financial perspective as well. It is important to note in this context that the core aspects of the non-market perspective can in principle influence objectives in any other perspective. Consequently, as indicated in the last column of Table 4, the performance drivers for the non-market perspective can also be found in any other perspective. As the result of the process described above, all strategically relevant aspects reflected by appropriate lagging or leading indicators are part of cause-and-effect network, which visualises and translates the strategy of the business unit. By systematically going through the perspectives in a top down direction the strategic relevance of the pertinent environmental and social aspects is determined as for all other, “conventional” aspects. This ensures the full and value-
Figure 2. Matrix to determine the strategic relevance of environmental and social aspects.
Social exposure Environmental exposure Direct Stakeholders Indirect Stakeholders
EmissionsWasteMaterialinput/intensityEnergyintensityNoise andvibrationsWaste heatRadiationLand useInternalAlong thevalue chainIn the localcommunitySocietalInternalAlong thevalue chainIn the localcommunitySocietal
Strategiccore issues …
Perfor-mancedrivers ...
orientated integration of environmental and social aspects in the general management system. The process of formulating a Sustainability Balanced Scorecard described in this paper shows how environmental and social issues can be integrated with the general management of a business unit. The process is designed in such a way, that it can be applied no matter whether a conventional scorecard already exists prior to integrating environmental and social aspects. Thus the Sustainability Balanced Scorecard provides a strong tool for an integrated and value- based sustainability management. It helps to overcome the shortcomings of the often parallel approaches of environmental and social management systems implemented in the past.
References
Figge, F. (2001): Wertschaffendes Umweltmanagement. Lüneburg: Center for Sustainability Management. Figge, F. & Schaltegger, S. (1997): Environmental Shareholder Value. Basel: WWZ and Bank Sarasin. Figge, F.; Hahn, T.; Schaltegger, S. & Wagner, M. (2001a): Sustainability Balanced Scorecard. Wertorientiertes Nachhaltigkeitsmanagement mit der Balanced Scorecard. Lüneberg: Center for Sustainability Management. Figge, F.; Hahn, T.; Schaltegger, S. & Wagner, M. (2001b): The Sustainability Balanced Scorecard – A Tool for Value- Oriented Sustainability Management in Strategy-Focused Organisations, paper presented at the Eco-Management and Auditing Conference 2001 in Nijmegen (The Netherlands), forthcoming in:
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Tobias Hahn and Marcus Wagner are scientific researchers at the Center for Sustainability Management (CSM), University of Lueneburg, Germany. Dr. Frank Figge is senior researcher and lecturer and Prof. Dr. Stefan Schaltegger is full professor and head of the CSM. Address: CSM, University of Lueneburg, Scharnhorststr. 1, 21335 Lueneburg, Germany. They can be contacted through Stefan at schaltegger@uni-lueneburg.de.
