Monday Mornings with Madison

Improving the Quadruple Bottom Line

Word Count: 1,793
Estimated Read Time: 7 min.

In traditional business accounting and common usage, the Bottom Line refers to either a company’s ‘profit’ or ‘loss’.  It is usually recorded on the very Bottom Line of a statement of revenue and expenses.   It is the simplest indicator of a company’s performance and success that year.  And, generally, business leaders not only look at their current Bottom Line, but also forecast what they anticipate the company’s Bottom Line will be in the future, year-over-year.

However, over the last 40-50 years, environmental and social justice advocates have struggled to bring a broader definition of Bottom Line into public consciousness by introducing the concept of full cost accounting.   It is from this effort that a new concept was born:  the Triple Bottom Line (or TBL or 3BL).  The TBL is based on an accounting framework that examined three parts of an organization’s results: social, environmental (or ecological) and, of course, financial. Business writer John Elkington is believed to have coined the phrase Triple Bottom Line model (TBL) in 1994, tasking businesses with being equally concerned with its people (customers, employees, vendors and investors) and the world (the physical environment) as much as with its profits.  Since then, some organizations have adopted the TBL framework to evaluate their performance within a broader perspective to create greater business value.   However, a McKinsey study found that while most executives do believe and understand that environmental, social, and governance programs create shareholder value, CFOs and CEOs do not fully include that when evaluating business projects or planning for them.  They just look at the fiscal Bottom Line.

Triple Bottom Line Framework in Action

So what does a Triple Bottom Line framework look like in practical terms?  Let’s place it in context.  Case in point.  BP, one of the largest oil and gas companies in the world, was highly successful, reporting a very healthy $14 Billion Bottom Line in 2009.  The company was doing great.  However, on April 20, 2010, BP’s Deepwater Horizon station exploded killing 11 and injuring 17 employees, and began an oil leak that ultimately poured 205 million gallons of crude oil into the Gulf of Mexico over a four-month period until the well was sealed.  On September 5, 2014, the federal courts ruled that BP had been “grossly negligent” with regard to the spill, and BP was deemed culpable.  The company incurred a record $18 Billion fine under the Clean Water Act. The court ruled that BP repeatedly cut corners to boost profits.  Decisions were made with a very narrow focus on profits over people and planet.  In the year after the spill, BP reported a $16.97 Billion loss because of the cleanup.  At the time, forecasters believed it would cost BP about $60-80 Billion in damages.  Based on the company’s profits before the spill, BP should have shown a loss for at least four consecutive years just based on costs, fees and penalties related to the spill.

However, the oil giant was back in the black, announcing profits of $5.3 Billion in 2011, just a year after the Deepwater Horizon disaster.  The company said rising oil prices had helped it record a second quarter replacement cost profit of $5.309 Billion — despite an 11% slump in production.  BP’s CEO said, “It was only a year ago — just — that oil was still flowing into the Gulf.  We have re-stabilized the company and re-strengthened the balance sheet.  We’ve announced new exploration deals across the globe, our credit ratings have increased, and we’re back heading in the directions we need.”  Of course, BP went on to pay much more than the $17 Billion loss of 2010 and the $18 Billion fine. By January 2019, BP had paid about $65 Billion in court fees, penalties, and clean-up costs, and by now, that number should be approaching $70 Billion.

Despite the fees, penalties and clean-up costs, what BP paid did not even begin to address the damage done to human life, wildlife, the environment, and the economies of the affected areas.   The BP spill is the biggest oil disaster in U.S. history.  Scientists estimate that the 200+ million gallons of oil spilled into the Gulf, about 18 times the amount spilled by the Exxon Valdez.  The Gulf fishing and tourism industries lost $3.5 Billion to $4.5 Billion a year, for many years, after the spill.  Satellite images showed the oil slick covered 25,000 square miles and impacted the shoreline from Gulfport, Mississippi to Pensacola, Florida.  The oil residue collected by the cleanup in the affected states included 9,810,133 pounds in Louisiana, 941,427 pounds in Alabama, 112,449 pounds in Mississippi, and 73,341 pounds in Florida.  Even after the cleanup, more than 200 miles of shoreline still had oily residue embedded in its marshlands. It killed vegetation long-term and caused erosion.

The oil disaster also affected the cellular function of the killifish, a common fish used as bait at the base of the food chain. It harmed the development of larger fish such as mahi-mahi and reduced the number of juvenile bluefin tuna by 20 percent.  In 2011 alone, half of the area’s bottlenose dolphins were sick with lung disease due to a “toxic exposure to oil” and 20% died.  Between May 2010 and November 2012, more than 1,700 sea turtles were stranded, compared to about 240 normally found per year.  Likewise, 930 dolphins and whales were discovered stranded from February 2010 to April 2013, when normally only 20 are usually found that way.  To replace lost foraging habitat for ducks and other migratory birds, 79,000 acres of harvested and idle rice fields were intentionally flooded.   The spill also threatened more than 65,000 acres in four National Wildlife Refuges, home to endangered species. Approximately 40% of coastal wetlands of the lower 48 states is located in Louisiana and valued at $96 Billion.  That damage was not factored into the BP fines, penalties and clean-up costs.

People, Planet and Profits

So, what would a full, societal cost-benefit analysis have looked like for BP had it been performed?   The Triple Bottom Line adds two more “Bottom Lines” to the calculation:  social and environmental (ecological) concerns.   If a full cost accounting framework had been used to calculate profit-loss, then surely BP would not have had been able to report such a healthy Bottom Line right away… or for a very long time.   If considering the social Bottom Line, BP should have been in the red because of how it negatively affected the lives and livelihood of its employees, customers, vendors and that of people in markets surrounding the spill area.  And, BP’s environmental Bottom Line could arguably be considered in the red for the last decade and for years more to come.  However, if instead of just looking at the fiscal Bottom Line, BP had made a commitment to corporate social responsibility in 2009, they would have had an obligation to publicly report the business’ results as reflected on the environment and people as well as the profits.  That would have likely have resulted in different decisions being made about safety and environmental issues, not just profits.  Such considerations might have prevented the oil spill in the first place.  In that way, Triple Bottom Line becomes a framework for viewing and assessing the tangible impact of a company in the world in real time, and that puts pressure to behave in responsible, ethical and socially-conscious ways.

People, Planet, Profits… and Potential

However, there is an even more comprehensive accounting framework being used now.  It includes four pillars of full cost accounting known as the Quadruple Bottom Line (or QBL or 4BL).  The fourth pillar denotes a future-oriented approach (future generations, intergenerational equity, etc.). It is a long-term outlook that sets sustainable development and sustainability concerns as separate from the social, environmental, and economic considerations.  It addresses the challenges of a Triple Bottom Line in the long-term, allowing an organization to take a future-focused perspective when planning strategy and making decisions.

Why Take a Quadruple Bottom Line Approach?

If a social, environmental and future-oriented approach to planning and evaluating business success seems like bleeding-heart nonsense, consider the tangible cost of the BP spill on the company.  Yes, BP did show a profit one year after the spill.  However, long-term, the cost to the company has been almost $70 Billion so far.

What about the cost to the brand and to BP’s investors?  The all-time high for BP’s stock occurred on November 9, 2007 when BP was trading at $75.13 per share.  By comparison, BP’s stock hit an all-time low of just $27.05 June 28, 2010, two months after the start of the spill when the media reported that BP engineers could not find a way to cap the well.  At the time, the well was gushing a million gallons of oil per day into the Gulf of Mexico.  BP’s stock recovered somewhat after that, but dropped again spiraling downward from July 2014 until February, 2016 when it hit $29.92 per share after news about the company’s culpability broke followed by stories about the escalating cost of the cleanup by 2015.   Even now, nearly a decade after the spill, BP shares are trading at just $39.83, slightly more than half the price of its peak three years before the spill.  BP’s shareholders and brand both took a major hit because of the spill from which the company has yet to recover.  It is considered a target for a hostile takeover.  The decisions that put BP’s profits and financial Bottom Line ahead of its social and environmental responsibilities may not have cost the company its existence, but the price has been steep.   As Warren Buffet once said, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

Anyone worried about analyzing the financials of a company should be equally concerned with its social, environmental and long-term strategy and plans.  Just ask Perdue Pharma, which is dealing with an opioid-driven public health crisis of its own making that will likely bankrupt the company.  Or ask Boeing which is dealing with the massive fallout of the Max 8 jet crisis, also of its own making.  These companies made decisions that focused on profits at the expense of people, planet and potential.  If those companies had taken a Quadruple Bottom Line approach to their company’s planning, goals and strategies, they would likely be in a much better place today.  As Niall Fitzgerald explained, “Corporate Social Responsibility is a hard-edged business decision. Not because it is a nice thing to do or because people are forcing us to do it because it is good for our business.”  As planning for 2020 begins, leaders would be wise to consider a QBL perspective.  It is the smart approach.

 

Quote of the Week

“Creating a strong business and building a better world are not conflicting goals – they are both essential ingredients for long-term success” Bill Ford

 

© 2019, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.

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