Playing To Win

Sustainability Strategy

Utilizing the Four Quadrants of the Virtue Matrix

Source: Roger L. Martin, 2022

For corporations, sustainability has moved from a maybe to a must over the past decade. It is no longer a question of whether or not to have a conscious and coherent strategy. The question for corporations is choosing where and how to deploy their sustainability investments. That choice is challenging and is the subject of my 33rd Year II Playing to Win/Practitioner Insights (PTW/PI) piece is Sustainability Strategy: Utilizing the Four Quadrants of the Virtue Matrix. You can find the previous 84 PTW/PI here.

Some History

As with most new things in the world, sustainability took a goodly amount of time to take hold in the population generally and in executive suites of the world’s corporations. But I think most if not all would agree it has arrived. Buyers are increasingly voting for sustainability with their pocketbooks, investors pressuring corporations to show environmental responsibility, and executives understanding that they can’t stand on the sidelines of the quest for planetary sustainability.

But in my observation, corporate leadership teams still struggle with how to how to target and prioritize their increasingly large investments in sustainability. They know they have to act and to so authoritatively — but how to frame and make the key sustainability strategy decisions?

Twenty years ago (wow, time flies!), I wrote a Harvard Business Review article on the broader topic of corporate social responsibility entitled The Virtue Matrix: Calculating the Return on Corporate Responsibility that has relevance to the sustainability challenge. It provided a framework for thinking about a corporation’s ability to contribute positively to society in four distinct domains, as shown above in the illustration from the article. I will give a brief overview of the framework before applying it to Sustainability Strategy.

The lower half defines what I call the Civil Foundation. One quadrant is Compliance, in which the corporation shows appropriate responsibility by fully complying with the laws and regulations that society puts in place with the intention of making the world a better place, whether those from EPA or OSHA or SEC, etc. The other quadrant is Choice, the norms and conventions to which corporations choose to adhere, which, to the extent that corporations choose adherence, makes the world a better place, for example all corporations in a city making a financial commitment to the annual United Way campaign based on conventions related to their size and/or profitability.

The upper half is what I call the Frontier, which contains initiatives in which no corporation currently engages, which, if a corporation did, would make the world a better place. One quadrant is the Strategic Frontier, in which corporations pioneer initiatives that make the world a better place and the initiatives end up being sufficiently profitable to be financially sustainable for the innovating corporation. For example, by paying far in excess of minimum wage, Costco has happier and more financially secure employees, which is good for the world. Those employees create a shopper experience that has made the chain more successful than all of its competitors making its generous employee treatment entirely financially sustainable. The other quadrant is the Structural Frontier, in which innovations, if sustainable financially, would make the world a better place, but if a corporation pioneered on its own would be unsustainably unprofitable. In this quadrant, collective action by a number of companies is necessary to generate the societal benefit. For example, since 2016 over 50 major self-insured American companies have joined the Health Transformation Alliance to attempt to collectively fix America’s broken health care system when individual action wouldn’t make a meaningful difference.

If all corporations in a society both comply with the existing laws and regulations, and choose to adopt the loftiest norms and conventions, the Civil Foundation will be strong to the benefit of society. In addition, if corporations innovate successfully in the Strategic Frontier and form coalitions to tackle issues in the Structural Frontier, this will have the effect of increasing the depth of the Civil Foundation, thus enabling it to generate more benefits for society. This happens in two ways. First, successful Strategic Frontier innovations tend to be copied because they are shown to have worked for both the innovating corporation and society. In due course, the copying becomes part of the Civil Foundation. The five-day work week is an example of this phenomenon. It started as an initiative of the few and became the standard for all. Second, government can put in place regulations to support companies who take action in the Structural Frontier even if it doesn’t benefit them. There were US corporations, like P&G, that strictly banned bribery in their foreign operations long before the passage of the Foreign Corrupt Practices Act (FCPA) in 1977. But it often put those companies at a disadvantage to those who engaged in bribery. The FCPA supported the attempt of the ethical companies to make the world a better place by moving the bribery issue into the Compliance quadrant of the Civil Foundation.

The Virtue Matrix framework can be used in a more narrowly targeted way to formulate a corporation’s sustainability strategy.

Crafting a Sustainability Strategy

The many corporations that want to contribute to making the planet more sustainable need to make fundamental choices in each of the four quadrants. Those choices should embody the following four characteristics:

1) Civil Foundation: Compliance

It has processes and procedures in place that ensure that it complies fully with all environmental laws and regulations.

This may seem like a trivial thing — shouldn’t every corporation follow the laws and regulations fully? Yes, but every year there are thousands of corporations fined for violation of environmental laws and regulations. I do not believe all or even most purposely flaunt the environmental laws pertaining to them. I think that many of the violators simply have not invested enough sustainability resources in ensuring that they are fully compliant. Regardless of what else it does, that is not a corporation exhibiting a high-quality sustainability strategy.

2) Civil Foundation: Choice

It explicitly chooses to adhere fully to the highest level of sustainability norms and conventions in its industry and/or jurisdiction.

For a time, it might have been difficult to identify the prevailing norms in sustainability. But thankfully for the sustainability effort, strong norms have emerged that make it easier for corporations to make their adherence choice. They can commit to the Science-Based Target initiative (SBTi) or make a Net Zero pledge and be confident that they are adhering to the highest norms, in this case, globally.

3) Frontier: Strategic

At any point in time, it is investing in at least one sustainability project in the Strategic Frontier that has the potential of contributing to sustainability by showing the world that something which hasn’t been done before can be done to benefit sustainability.

A corporation doesn’t have to do this to be a perfectly fine contributor to global sustainability. But if it wants to really make a difference, it needs to dive into the Frontier. Examples abound where a corporation did something that was thought undoable — from Patagonia showing the corporate world that you can take more life-cycle responsibility for your products and prosper, to Paul Polman at Unilever making bold sustainability pledges before there were norms for them and showing other public companies that such pledges did not result in the feared disastrous equity market reaction.

The outsize benefit of these ventures in the Strategic Frontier is that the innovator emboldens others to follow — with the ultimate payoff for sustainability being the move of a sustainability initiative from the Frontier into the Civil Foundation — where everybody does it.

4) Frontier: Structural

It chooses to work in collaboration with other corporations to invest in sustainability projects that have the potential of making society a better place, but one corporation can’t make happen on its own because too little of the benefits will accrue to the corporation that makes the investment for it to be financially sustainable.

In geeky econo-speak, there are too many externalities — the benefits are captured by others, not the corporation making the investments. But that doesn’t mean that corporations can’t make the societal benefit happen. They need to work together for that to happen. An example is the Cement Sustainability Initiative, spurred by Swiss cement giant Holcim. It began in 1999 with 10 leading global cement companies agreeing to work together to significantly reduce the industry’s CO2 emissions. It has since expanded to 32 companies with operations across 100 countries. If all companies commit to goals, each individual company won’t be disadvantaged against its competitors by the expenses associated with the worthy initiative.

Practitioner Insights

No single corporation can solve the world’s sustainability challenges — obviously. But every single corporation can and should contribute. But where and how to contribute? How can you lead your corporation to be exemplary?

Formulate your strategy by considering the four quadrants of the Virtue Matrix. First, take steps to make sure you can be confident that your corporation is in full compliance with all applicable environmental laws and regulations. Then choose to which voluntary norms you will commit to adhere. That may mean recommitting to your existing norms or making a new and more expansive commitment.

Then go farther! Always have at least one project underway in the Strategic Frontier, something that no other corporation has done but would make a beneficial impact on the world, an initiative that is matched to your business for which you would have an advantage. Your efforts won’t all succeed, nor will those of other corporations. But that is the nature of innovation in the Strategic Frontier. It is inherently risky — but enough efforts will succeed to help the world advance.

Finally, have a least one project underway in the Structural Frontier. Be like Holcim with the Cement Sustainability Initiative or Unilever with Marine Stewardship Council. Be the catalyst of bringing corporations together to accomplish something no single one could do on its own.

If you think about your sustainability strategy in these buckets, it will make the challenge more tractable and help you make a genuine difference. And it will enable you to be better positioned to explain to your stakeholders the difference you are making.

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Roger Martin

Professor Roger Martin is a writer, strategy advisor and in 2017 was named the #1 management thinker in world. He is also former Dean of the Rotman School.