Micro-Foundations of Corporate Sustainability

Introduction

The economic system has relied on capitalism since the second half of the last century (Barney & Rangan, 2019). Market competition has stimulated innovation (Adler, 2016), and the capitalist system has brought many benefits and outputs. For example, since the 90s, more than one billion people left abject poverty (Barney & Rangan, 2019). In addition, the average individual material well-being has improved markedly; “for the first time in history, there is the potential to achieve material comfort for all” (Adler, 2016, p. 124). Nevertheless, these benefits have brought important costs. The market competition characteristics do not give incentives for firms to incorporate their impact on the social and natural environment (Adler, 2016). Therefore, the results have not always produced expected outcomes (Barney & Rangan, 2019). Some negative outcomes include climate change, income inequality, and job destruction (Howard-Grenville et al., 2014; Tsui et al., 2018; Zink, 2019).

The capitalism system is multifaceted. On the one hand, awards efficiency, which normally destroys jobs (Davis, 2016; Zink, 2019); and on the other, the reinvestment incentives create new jobs and industries by creating wealth and promising to capture the profits to investors (Zink, 2019). In the latter, the system destroys jobs while in the former, it creates new ones to replace the ones that were destroyed. In this context, the capitalism system is stable only under growth (Zink, 2019). Economies require increased resource consumption, which produces waste while also creating new jobs that efficiently eliminate or cannibalize others. Nowadays, it seems that the economies are not fulfilling both conditions since new technology eliminate more jobs than they create, and produces environmental problems (Zink, 2019). Therefore, the capitalist system has created two current crises: technological job destruction and global ecological destruction (Zink, 2019).

This chapter focuses on environmental degradation and social problems using the micro-foundations framework to explain how firms can tackle these issues. It is oriented toward firms because they explain the economic system and society. Thus, understanding the firms will help to recognize the great strengths and limitations of market capitalism (Barney & Rangan, 2019). Environmental and social issues are gaining momentum in the business and management community. From an academic point of view, different authors have used firms to tackle grand challenges (George et al., 2016), and define alternative objective functions (Lankoski & Smith, 2018), reinvent themselves (Mayer, 2016), redefine its business model (Laasch, 2018) and discover its purpose (Hollensbe et al., 2014).

The practitioner world has not stayed behind, and the importance of the social and natural environment is also gaining momentum. For example, the study carried out by BCG-MIT Sloan Review showed that 90% of firm executives considered sustainability very important; 50% of companies changed their business models to more sustainable ones, and 60% developed a clear sustainability strategy (Kiron et al., 2017). These issues are also important for investment firms. Another study by BCG-MIT Sloan Review showed that 75% of investment firms considered sustainability performance when making an investment decision and 50% of them would not invest in a company with a record of poor sustainability performance (Unruh et al., 2016).