Managing the triple bottom line: Exploring implications for public real property

1. Managing the triple bottom line:Exploring implications for public real property An overview of the triple bottom line approach: Implications for the management of public real estate James McKellar Schulich School of Business York University April 29, 2004

2. Why a triple bottom line? • At any period in time, governance must emphasize a particular subset of activities in decision-making and resource allocation - the dominant subset of these activities is called the driving governance role. • Driving governance role1 must change with shifts in the importance and nature of the externalities that shape the agenda of various stakeholders, particularly with respect to maximizing the public good. • An existing set of activities is not abandoned for another, rather a different subset of these activities becomes dominant in decision making and resource allocation. 1. Paul Strebel, “The Case for Contingent Governance”,MIT Sloan Management Review, Winter 2004

3. Operating in situations with significant externalities • Private corporations have a fundamental fiduciary responsibility of auditing financial performance to ensure they are being run in the financial interests of their owners – externalities are often relatively insignificant, although this is changing due to increasing social and environmental pressures1. • Public organizations must take into account a broader view of their oversight and policy responsibilities – they must deal with significant externalities ranging from social to economic, environmental, ethical, cultural, political, and even religious interests – many of which are complex and ambiguous. • Three types of patterns are commonly associated with the emergence of new externalities – economic and political cycles, industry and business-model shifts, and organizational crisis. 1. Jeremy Hall and Harrie Vredenburg. “The Challenges of Innovating for Sustainable Development”. MIT Sloan Management Review, Fall 2003

4. Sustainable development1 • Faced with increasing pressures to consider sustainable development, many organizations have revised their business models, and these changes are often highlighted in corporate sustainability reports and Web pages. • Dupont has publicly stated that, by 2010, it will reduce its green house gas emissions by two-thirds while holding its annual energy use to 1990 levels. • Suncor has pledged to make 12% of its workforce indigenous, given that such populations dominate many of the areas in which the company works. • TransAlta has stated that, with appropriate regulatory systems in place, it could reduce its carbon dioxide emissions to a net quantity of zero by 2024. 1. Jeremy Hall and Harrie Vredenburg. “The Challenges of Innovating for Sustainable Development”. MIT Sloan Management Review, Fall 2003

5. The need for reporting • Because human beings are generally not adept at at self-evaluation and monitoring, a recommended practice is for annual reporting to describe how well these externalities are being dealt with. • This need is more than disclosure – it is to determine whether the action plans and investment of resources actually produce the desired results. • A most difficult task is the one of measurement, particularly in a culture that is dominated by financial reporting – this is where an organization is most likely to benefit from the help of outsiders.

6. Measuring nonfinancial performance • Nonfinancial measures are equally, if not more, susceptible to manipulation as financial accounting – at least traditional accounting has rules that govern it ( for example GAAP). • The misuse of nonfinancial measures may be even more damaging because of the significant opportunity costs incurred. • Can end up measuring too many things, trying to fill every conceivable gap in the measuring system resulting in a profusion of peripheral, trivial, or irrelevant measures and data. • Must prove basic causality to determine the relevance of the information being collected

7. Some common mistakes1 1. Not linking measurement to strategy • Performance measures are intended to direct the allocation of resources, to asses and communicate progress toward objectives, or to evaluate performance. • Adopting a framework like the Balanced Scorecard or some other off-the-shelf checklist can be characterized as the “smorgasbord” or “bucket” approach – fill in each box with something regardless of strategy or objectives. • Require casual models that link performance measures directly to the goals of the strategic plan. 1. Adapted from Coming Up Short by Christopher D. Ittner and David F. Larcker, Harvard Business Review, November 2003

8. Some common mistakes 2. Not setting the right performance targets • Target setting is inherently difficult because it always takes awhile for improvements resulting from new initiatives to occur. • Organizations are prone to focus on the promise of short-term results even though other initiatives may have better long-term prospects for success.

9. Some common mistakes1 3. Measuring incorrectly • Difficult to find metrics that have statistical validity and reliability. • “Validity” refers to the extent to which a metric succeeds in capturing what it is supposed to capture. • “Reliability” refers to the degree to which measurement techniques reveal actual performance changes and do not introduce errors of their own.

10. Doing it right • The triple bottom line has no inherent value - it will offer little guidance if the data is based on generic or borrowed performance measurement frameworks and managerial guesswork rather than a through enquiry into the factors actually contributing to successful outcomes for the particular organization. • Otherwise, having prospered as “flavour-of-the-month”, such measures are likely to be abandoned in lean times, along with the managers who promoted and justified their existence. • Unless the measures are directly linked to the strategic plan through some causal model, and regularly updated, managers are prone to disagree on the merits of the effort and on which performance measures are critical to success.

11. THE SCORE CARD Certainty - are all parties clear, every step of the way, as to what they are committed to, through both formal and informal arrangements? Transparency - with due regard for confidentiality in certain business transactions, is the public satisfied that the process itself is open, fair and equitable? Accountability - does the process ensure that those who hold the public trust are accountable, and to whom? Governance (fiduciary responsibility)- is there a clear process of governance that protects shareholder interest?

12. Clear understanding of the “value” of any real property assets that is being considered • A valuation versus an appraisal process for these assets that is clear, accountable, defensible, and subject to independent audit and scrutiny • No right to expose the public interest to financial liability beyond the “value” of its equity contribution • Clear governance structure that meets rigid standards of “best practices” in corporate governance • Clear risk management strategy in place that recognizes financial, environmental, social, business, market, and political risk • Clear disposition agreement or exit strategy for the subsequent sale or conveyance of any assets • Clear performance measures against which the achievement can be measured (gross versus net sale proceeds)

13. Risk management guidelines • Governance • Conflict of interest and ethical conduct standards • Due diligence requirements • Debt structure requirement (leverage) • Record keeping and reporting • Approval authorizations • Adherence to public policies and procedures • Competitive bidding • Phasing (market risk) • Letters of credit and performance bonds • Insurance • Cost control • Independent scrutiny

14. “At the end of the day, the essence of a company is not what they do - it is what they know” Gary Hamel. “Innovation Now”, Fast Company, December 2002