3 Predictors of Sustainable Financial PerformanceFeb 11, 2023
By Nathan Havey
How does a company create sustainable financial performance over time?
If all goes well, the P&L Statement of a company will show that the company has made enough profit to stay in business. While the bottom line is an important number on the report card of a company, it’s not very useful in helping managers understand how all of the activity of the company impacted it. Profit is a trailing measure, the result of all of the company’s activity. But to affect profit (and other trailing measures), managers have to make guesses about what changes will impact the bottom line — and in what ways.
As you might know from your own experience, this can quickly get tricky, particularly if you extend the time horizon beyond the next quarter or two. So, how does a company create sustainable financial performance? In the face of all of the complexity of the business world, there are three leading measures that can predict the success or failure of a company better than anything else we’ve discovered to date.
1. Fostering Wellbeing
Business is about people. Even in highly automated industries, there are people behind the machines and algorithms. The health and wellbeing of those people is critical to sustainable financial performance. Of course it is, right? But ask yourself this question: Whose job is it in your company to make sure your team (and ideally your other stakeholders) are well? Human Resources might come to mind, but most HR professionals would tell you that their job has much more to do with enforcing policy, regardless of its impact on wellbeing.
Wellbeing can be measured, and it can be managed. Companies that invest in the wellbeing of their teams (hint: we’re not talking about ping-pong tables and office happy hours), are more innovative, resilient, and nimble as they seek to navigate a dynamic business landscape, ultimately resulting in sustainable financial performance.
2. Cultivating Trust
We’ll be the first to admit that this is an overused cliché, but it’s part of this article for a reason. And that's because of what happens when a company actually measures the levels of trust that exists between its key stakeholders. There are a variety of methods for measuring trust, and they need not be too cumbersome to implement. Some companies ask employees directly to rate trust on a five-point scale. Others prefer the NPS (Net Promoter Score) method, and some use a qualitative approach to get a finger on the pulse of the stories circulating below the surface of official communication, which ferment into real trust or a lack thereof.
The magic happens when a company not only measures trust but treats those measurements with the same priority as other measurements, like accounts receivable and cash-on-hand. If a debt of trust is uncovered somewhere in the value chain, it’s a proverbial hole in the boat. It demands urgent investigation and remedy.
Trust is a powerful lubricant for the gears of business. High-trust value chains run smoothly, even when there are shocks to the system. Low-trust value chains create much friction and wasted energy, sabotaging performance over time. Who in your company is measuring trust, and what level of priority are those measurements given?
3. Prioritizing the Environment
Nature provides the essential services that support life on Earth. There is a direct link between the quality of these services in a given area and the wellbeing and trust that exist in that area. In areas of abundant clean water, fresh air, and healthy soil, people are healthy and have the opportunity to thrive. But when those services are constrained by pollution, overdevelopment, and extractive resource use, people get sick and begin to question whether the institutions that allowed this degradation to occur care about the harm they’re inflicting on the surrounding communities.
Unless regulators demand it, few companies up until now have prioritized measuring the impact their activities have on the essential natural services in the places where they do business. In many cases, it seems, doing so would demand massive changes to the business.
As is becoming increasingly clear in the modern moment, ignoring impacts on nature's life-support services is a huge threat to sustainable financial performance. Consider the impact of a severe winter storm that closes airports in an entire region for a week and the economic impact that has on airlines forced to cancel thousands of flights. Now consider that airline emissions account for 4 percent of total global greenhouse gas emissions, and with the frequency, severity, and geographic reach of such business, disruptive storms are increasing as greenhouse gas emissions concentrate in the atmosphere.
By contrast, creating (or transforming) businesses that are able to provide their products and services in the same way that nature does — with processes and waste that enhances (not diminishes) clean air, clean water, soil, habitat creation, and stable climate — are much more likely to enjoy sustainable financial performance in the next few years and the next few decades.