Balanced Scorecard and Sustainability - Insights on the State of this Union

While the Balanced Scorecard is widely discussed in the business world, there is little empirical evidence of its usefulness. The answer to this question is key for those who want to explore the integration of environmental and social actions using the Balanced Scorecard. Adding to this discussion, Francesco Zingales and Kai Hockerts look at examples from literature and practice of Balanced Scorecard in action. They find that despite the fact that the BSC concept was introduced in the early 1990s, firms are far from understanding how (or if) it can be used to their advantage.

by Kai Hockerts,Francesco Zingales
Last Updated: 23 Jul 2013

In studying the literature and the practice on the Balanced Scorecard and Sustainability, Francesco Zingales, Research Associate, and Kai Hockerts, CMER Research Programme Manager attempt to add to the discussion around the BSC concept, and in particular, to the question of its usefulness.

In this Working Paper, they review its use in two companies (documented in the literature) and conduct in-depth interviews with four companies that have integrated environmental and/or social indicators in their BSCs. In doing so they add to the discussion on the topic, but concede that more research needs to be done in order to prove or disprove their intuitions.

Based on their research on how the BSC is working, the duo found “a rather scattered situation.” Among a large pool of companies claiming to use the BSC, the authors found it nearly impossible to reach the control department, let alone find the controller responsible for the BSC. A second group of companies had dropped the BSC altogether because it was perceived as “too heavy”. In the end, out of the 28 companies the authors had targeted, they were able to verify only four – Lunds Energi, Novartis, Novo Nordisk, and Royal Dutch Shell – that could be safely classified as “real” BSCs. This suggests that despite the fact that the BSC concept was introduced in the management literature in the early 1990s, companies are far from understanding how the concept can (or if) be used to their advantage.

Preliminary results from their work revealed the following. In Lunds Energi there was no effort to align environmental management with the Balanced Scorecard. The EMS and the strategic planning cycle (managed through the BSC) are thus running in parallel, which is perceived by management as inefficient. Shell and Novo Nordisk’s approach of integrating environmental and social issues explicitly on the Corporate BSC seems to have solved this problem.

Second is the causal relationship between the BSC use and sustainability management. In other words, is the use of the BSC framework enhancing sustainability management? The authors feel their evidence is largely inadequate to give a definite answer. However they were able to identify a few considerations that might help to design future hypothesis. Firstly, one of the main advantages of the BSC is that it fosters dialogue among top management of strategic issues. This means that the absence of an environmental/sustainability manager from the “decision table” will most likely result in the absence of these issues in the BSC.

The authors regard this as a very dangerous precedent. “Given the current misuse of the tool,” they write, “most companies seem not to be updating the indicators very often (if at all). It seems that once the indicators have been decided the controllers prefer to keep them as they are and they lack effective mechanisms to question their usefulness.

On the other hand, for the companies that had already “digested” the importance of environmental and social issues (i.e. Shell and Novo Nordisk) for their business, the BSC seemed to provide a good implementation mechanism to corporate-relevant issues through to the various layers of the organisation.

The authors conclude by noting that the topic of integration of sustainability in core decision making processes seems to be the on the top of the agenda of many firms today. Whether the Balanced Scorecard represents a way to do that will depend on a number of things, among them, a deep understanding of what integration really means and how this would constitute a competitive advantage in practice.

INSEAD 2003

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