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Business Readings
Questions to Consider
 Quality, Profits, and the Environment: Diverse Goals or
Common Objectives?
Is your company light-green or dark-green? By Harold P. Roth, CMA, and Carl E. Keller, Jr. To be successful in today's changing environment, companies must simultaneously consider many different factors in their planning and control activities. The success of many companies may depend on three factors: quality, profitability, and environmental responsibility. To develop strategies for competing in the future, managers and accountants need to understand how these factors interact. Our purpose here is to consider the relationship of quality, profitability, and environmental responsibility to determine if they are diverse goals or common objectives. During the last two decades, U.S. companies learned that quality is a vital element in the marketplace. Manufacturers began improving the quality of their processes, products, and services after foreign competitors captured a significant share of the market.  The concept of quality encompasses
many views and numerous methods of evaluation. Currently, many
companies embrace a total quality management (TQM) philosophy. Table
1 shows the attributes of TQM.
The TQM philosophy is driven by the need to satisfy internal as well as external customers. Internal customers are persons within the company who receive products and services from intracompany transfers. External customers include all parties outside the company who interact with company personnel in any function or department. In addition to customers who buy the company's products, these parties include banks, suppliers, and governmental agencies such as the Internal Revenue Service, the Securities & Exchange Commission, and state tax departments. The processes, products, and services of a company must be of high quality to satisfy customers. Although quality can be evaluated using various criteria, one study has identified several dimensions of product and service quality. Table 2 lists them. While the dimensions shown in Table 2 relate to outputs and are those that customers evaluate, inputs and internal processes also must be of high quality in a TQM environment. Table 3 shows characteristics of high-quality processes. To satisfy customers, companies need processes, products, and services that possess the characteristics shown in Tables 2 and 3. Also, companies need to recognize that these characteristics may be vital in determining whether they are profitable and environmentally responsible. ENVIRONMENTAL RESPONSIBILITY The phrase "environmental responsibility" has different meanings to different people. For some, it means complying with laws and regulations relating to pollution, waste disposal, and other environmental issues. For others, environmental responsibility means striving toward sustainable development. Sustainable development refers to an environmental state that exists when the present inhabitants of the Earth are able to satisfy their needs without compromising the ability of future generations to meet their needs.1  Environmental attitudes may be shown
on a continuum with one end representing "light-green" attitudes and
the other end representing "dark-green" attitudes. Figure 1
illustrates this continuum and provides a comparison of several
differences in the two attitudes. Advocates of sustainable
development are considered "dark-green" in environmental
matters.
In Table 4, light-green individuals are satisfied to fulfill their obligation to the environment by complying with laws and regulations. They generally support activities that are environmentally friendly as long as the costs of these activities do not exceed the benefits. Activities that often satisfy this cost/benefit analysis include waste reduction, recycling, and energy management. Individuals with a dark-green philosophy have a very different view of their responsibility. Generally, dark-greens believe the environment is in a crisis situation. They support the concept of sustainable development, which has different implications for business than the light-green philosophy. Sustainable development implies that the need exists for both intergenerational and intragenerational equity. Intergenerational equity refers to fairness between generations, while intragenerational equity refers to fairness between contemporaries. Except for these broad generalizations, however, economists and environmentalists do not agree on how to attain sustainable development. Some believe sustainable development can occur only if the stock of natural resources (for example, trees, water, and wildlife) does not decline. Others believe that sustainable development requirements can be met even though the Earth's natural assets are changed into buildings, highways, and other physical assets.2 Regardless of their philosophy, companies can undertake many environmentally responsible activities. Those activities could include:
These activities can be considered by most companies regardless of their philosophy. Light-green companies, however, probably will adopt only those practices that are required by law or that currently have a positive ratio of benefits to costs. Because light-green companies do not believe the natural environment is in crisis, they are not proactive in environmental matters. Dark-green individuals and companies believe the environment is in crisis, and they may use criteria other than economic costs and benefits to evaluate activities. For example, they may consider the future state of the environment when making product decisions in areas such as design and development. These decisions also may include quality issues when the product is being evaluated. QUALITY AND ENVIRONMENTAL RESPONSIBILITY Many of the characteristics of high-quality processes and products are consistent with environmental responsibility. For example, the dimensions of quality for products shown in Table 2 include performance, reliability, durability, and serviceability. When performance is improved, products may use less energy and be more efficient. When products are more reliable or their life is extended through increased durability or serviceability, fewer resources are required to manufacture replacement products. Several characteristics of service quality have a direct relationship with environmental responsibility. They include timeliness, consistency, and accuracy. When services are provided in a timely and consistent manner, there is no need to expend energy and resources to follow up with second requests. Likewise, if services are performed correctly the first time, resources are conserved because errors need not be corrected. All the characteristics in Table 3 appear to be compatible with environmental responsibility. When output meets customers' needs, fewer product repairs and returns result in resource and energy savings. When processes are more energy efficient and less wasteful, they are more compatible with the natural environment.  Although theoretical arguments may
support the idea that quality and environmental responsibility are
compatible, empirical studies have produced mixed results. One study
of bathroom tissues supports the idea that high-quality products may
be environmentally friendly. In that study of 44 brands, two brands
of environmentally friendly, unbleached tissues ranked in the top 10.
Although both brands of unbleached tissues performed well in the
study, they were expensive when compared with their
competitors.3
Another consumer product with environmental consequences is laundry detergent. To lessen the impact of detergents on water quality, manufacturers produce nonphosphorous versions of leading brands. A study of the phosphorous versus nonphosphorous versions of the same brand found that overall performance of phosphorous detergents matched or exceeded the performance of the nonphosphorous detergents. Yet many nonphosphorous products were almost as good as the best phosphorous brands, and they were much better than the worst phosphorous brands.4 Perhaps no consumer product has generated more environmental controversy than disposable diapers.5 In one study of 16 brands conducted in day care centers, three brands with biodegradable outer plastic sheets ranked 8th, 14th, and 15th in estimated quality.6 Overall, these biodegradable sheet brands were not as satisfactory as the other brands. Apparently, disposable diapers need further development before they satisfy consumers' environmental and quality concerns. DARK-GREEN VS. LIGHT-GREEN: A DILEMMA Although many aspects of quality are compatible with environmental responsibility, a company's performance usually is measured in terms of profits. Therefore, companies will be motivated to undertake environmental projects and manufacture environmentally friendly products if the projects and products impact on profits favorably.  Most U.S. companies recently have
recognized that higher quality results in higher profits. There are
two reasons. First: Higher quality results in less scrap and lower
rework costs, leading to higher profits. Second: Higher quality
results in a larger market share with corresponding higher
profits.
Studies support the idea that TQM has a positive impact on profits. One summary of 20 studies on quality concluded that "TQM is having a widespread, generally positive impact on organization performance, that nonfinancial measures of performance are affected first followed by a variable but often substantial impact on financial measures of performance."7 When quality improvements result in less waste and lower energy usage, one would expect profits to increase. A study of the quality practices at Globe Metallurgical, Inc., a Malcolm Baldrige National Quality Award winner, confirms this expectation: ". . .Globe has virtually eliminated out-of-specification shipments. Improved consistency of manufacturing operations has increased production and reduced energy consumption, a big cost savings for Globe. As a result of quality improvements and waste reduction, Globe cut costs by $17 million...or 15% of sales revenue...from 1986 to 1990. And the company expects $4 million in savings this year."8 The relationship between environmental responsibility and profits is not as clear as the relationship between quality and profits. Many writers, including Vice President Al Gore, suggest that projects that benefit the environment lead to improved profitability. Gore points to 3M Company's "Pollution Prevention Pays" program to show that environmental responsibility increases profits.9 Although there are win-win situations, other writers do not believe all environmental projects will result in improved profits. Supporters of this view believe that environmental expenditures are growing rapidly and provide little chance of any economic payback for most companies.10 The relationship between environmental responsibility and profitability becomes even more suspect if one adopts a dark-green attitude. Sustainable development and profitability may be incompatible because economic activity requires use of resources. Cairncross describes the situation as follows: "Many people hope that economic growth can be made environmentally benign. It never truly can. Most economic activity involves using up energy and raw materials; this, in turn, creates waste that the planet has to absorb. Green growth is therefore a chimera. But greener growth is possible. The history of technology has been about squeezing more output from the same volume of raw materials. Governments can dramatically reduce the environmental harm done by growth if they create incentives for companies to use raw materials more frugally."11 Similarly, Rob Gray notes that production may conflict with dark-green environmental responsibility because products may represent a form of waste. To support a dark-green philosophy, individuals must make and use less, but corporate success depends on producing more. Thus, a fundamental conflict exists between success as it is currently measured and dark-green environmental responsibility. Gray does not believe businesses can solve this dilemma, even if they want to, without a change in the financial, social, and ethical frameworks that exist in the world.12 If Gray is correct in his observation, the only feasible approach in a world where economic profits measure success is to operate using a light-green attitude. Even if a company's managers believe the natural environment is in crisis, they may not be able to operate in a manner that fully supports a dark-green philosophy. But light-green activities such as minimizing waste, improving quality, conserving energy, recycling, and adhering to pollution control laws and regulations are necessary. Companies that want to be environmentally responsible can adopt these practices, but societal and investor attitudes probably will have to change before company operations fully support sustainable development. THE ACCOUNTANTS' ROLE: CHANGING TO GREEN The accountants' role in supporting quality and environmental responsibility activities depends on the attitude adopted by the company. With a light-green attitude, accountants can help by using their expertise to modify and change the planning and control systems to support quality and environmental improvement efforts. Accountants may need to change their practices in the areas of capital investment analysis, standard costs, performance measures, and disclosures. In the capital investment area, accountants can help managers by including quality and environmental benefits in the analysis. If a proposed project is more energy efficient or produces less pollution than an alternative, those factors should be included in the analysis. The financial data should include any cost savings resulting from lower energy usage. If the company must control pollution, the financial impact should be recognized. Although pollution that is not regulated may not represent a cost to the company, the pollution is still a cost to society. Pollution that cannot be evaluated using dollars can be included in the analysis as a qualitative factor. Also, accountants may help companies become environmentally responsible by revising standard costs to indicate the waste that is inherent in the production process. When standard costs include an allowance for waste or inefficiencies, the cost system does not encourage improvements in performance. If waste or inefficiency is present in the process, standard costs should exclude any waste allowance. This practice would encourage the reporting of the cost of waste as a variance. In addition to variances for waste, other performance measures could be developed for quality and environmental items. Many quality measures have been reported in the literature.13Environmental measures could include such items as energy usage, waste reduction, and water pollution. In the reporting function, accountants can encourage their companies to disclose environmental matters in annual reports. Although some environmental issues are covered under current Financial Accounting Standards Board and Securities & Exchange Commission requirements, others are not.14 Full disclosures of environmental and quality data would provide customers, creditors, and stockholders with a more comprehensive evaluation of the company's performance. If companies adopt a dark-green philosophy, the role of accountants may change. For example, methods other than discounted cash flow techniques may be needed for evaluating capital investment projects. Although the discounted cash flow techniques are theoretically correct, often there are problems in calculating cash flows and determining the appropriate discount rate. These methods also ignore any costs to society that are not recognized as costs to the company. In a dark-green environment, financial data may be superseded by qualitative environmental data in the investment analysis. Furthermore, accountants may need to develop new performance measures for dark-green companies. These measures may reflect aspects of performance other than financial measures. Perhaps a measure could be developed to determine progress toward sustainable development. At the least, measures should be able to reflect energy consumption and waste outputs. Changes also are needed in reporting formats for disclosing environmental activity. Perhaps balance sheets and income statements can be developed to reflect environmental performance in nonfinancial terms. Creativity will be needed to develop reports that support the sustainable development philosophy. NEW DIRECTIONS Although accountants can help analyze the impact of quality and environmental responsibility on profitability, the compatibility of these factors depends on the philosophy adopted by the company. Generally, quality and profitability are compatible objectives, and many improvements in quality are consistent with environmental responsibility. Many environmentally friendly activities, however, may not be compatible with profitability goals. Generally, current performance measures do not support sustainable development objectives. If society decides that dark-green environmental responsibility is desirable, then more comprehensive performance measures are needed to evaluate a company's performance. The accounting profession can provide a valuable service to society by developing and refining these comprehensive performance measures. Harold P. Roth, CMA, CPA, Ph.D., is a professor of accounting at the University of Tennessee, Knoxville. He is a past president of the Knoxville Chapter of the IMA, through which this article was submitted. Professor Roth can be reached at (423) 974-1756. Carl E. Keller, Jr., Ph.D., is an assistant professor of accounting at Coastal Carolina University in Conway, S.C. He can be reached at (803) 349-2683. 1 Frances Cairncross, Costing the Earth, Harvard Business School Press, Boston, 1992, p. 26. 2 For a discussion of sustainable development, see Cairncross, pp. 26-29. 3 "Bathroom Tissues," Consumer Reports, September 1991, p. 609. 4 "Cleaner, Faster, Greener?" Consumer Reports, February 1991, p. 105. 5 For a discussion of the environmental issues with this product, see Jaclyn Fierman, "The Big Muddle in Green Marketing," Fortune, June 3, 1991, pp. 91-101, and "Which Are Best for the Environment?" Consumer Reports, August 1991, pp. 555-556. 6 "Diaper Decisions: Which Are Best for the Baby?" Consumer Reports, August 1991, p. 554. 7 "Total Quality Management Studies Analyzed," Deloitte & Touche Review, September 6, 1993, p. 12. 8 Ellen Freeman Roth, "Wins of Change," KPMG Peat Marwick World, No. 2, 1991, p. 14. 9 Al Gore, Earth in the Balance, Houghton Mifflin Company, Boston, 1992, p. 342. 10 Noah Walley and Bradley Whitehead, "It's Not Easy Being Green," Harvard Business Review, May/June 1994, p. 46. 11 Cairncross, p. 13. 12 Rob Gray with Jan Bebbington and Diane Walters, Accounting for the Environment, Markus Wiener Publishing, Inc., New York, 1993, pp. 130-131. 13 For examples of quality measures, see KPMG Peat Marwick and William Winchell, Current Trends in Cost of Quality: Linking the Cost of Quality and Continuous Improvement, Institute of Management Accountants, Montvale, N.J., 1991. 14 For a discussion of current requirements for disclosures of environmental matters, see Understanding Environmental Accounting & Disclosures Today, Executive Enterprises Publications Co., New York, 1992.
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