Positive Impact … Embracing a new value system for business, to deliver long-term, sustainable value for all stakeholders … Great. So how?
April 14, 2023
Yancey Strickler, the Kickstarter founder, makes a passionate argument that we can, and must, redefine the measures of success if we want a stronger society than the one we have today.
He describes today’s business world as one of “crumbling infrastructure, the dominance of mega companies, and the rise of offshore tax havens.” He isn’t opposed to money, or even wealth. “If businesses were optimised for the community or sustainability” he says, “the rich would still be rich, just not as rich,” whilst the vast majority of people would be wealthier and happier.
In the global pandemic of 2020, the impact of a single-minded pursuit of profit was brought into sharp relief as the business world shut down and huge numbers of people lost jobs. The lack of healthcare provision and social safety nets plunged workers of all levels into turmoil. Similarly, hospitals lacked essential equipment because of a relentless drive for efficiency. As stock markets plunged, and trillions of dollars of value were wiped out, businesses started to realise the folly of their frugality and lack of compassion.
Business has sought to maximise financial performance for so long that it’s hard to imagine another reason for companies to exist.
Profitability and value creation.
Profits have become the predominant metric of success. Many people in business still think that market share and sales revenues are the goals, yet for some time we have seen that big is not always better. As customers and products have become less equal in their relative profitability, it is often more profitable to focus on less rather than more. Similarly, multiple channels with different efficiencies, and a drive to discounting, means that more sales don’t always convert into more profits.
The notion of “value” us important. Businesses are often defined as value exchanges, creating value for customers and capturing value for the business.
Economists evaluate businesses based on the sum of future profits, adjusted for how likely these profits are to emerge. Strong brands, relationships and innovation pipelines make future profits more certain. Their sum is known as the enterprise value, reflected externally on stock markets, based on the judgement of analysts and behaviours of investors, as market value. Executives are incentivised to deliver profits, however more thoughtful incentives will encourage their preference to sustain profits over time, often based around total shareholder return, the growth in market value plus a share of dividends.
Business leaders can decide how to design their value creation machine, in particular how to share value between all stakeholders over time.
As profits emerge each year, leaders decide how much to allocate to employees in salaries and bonuses or as improved conditions, how much to allocate to customers through innovative products and services or better prices, how much to allocate to investors in dividends or cash, and how much to share with society through social initiatives or more generally through taxation. The relative allocations, and for what, determine how effectively the business invests for its future, to sustain the creation of value – or in other words, to grow a larger “value pie”, from which everyone can enjoy a healthy share.
However, that ideology gets disrupted by greed, particularly by owners who are more interested in making a quick return, rather than seeing a sustainable long-term business.
James O’Toole is his book “The Enlightened Capitalists” explores the history of business leaders who have tried to combine the pursuit of profits with virtuous organisational practices – people like jeans maker Levi Strauss and the Body Shop’s Anita Roddick.
He tells the story of William Lever, the inventor of the Sunlight soap bar who created the most profitable company in Britain, the origins of today’s Unilever, and used his money to greatly improve the lives of his workers. In 1884 he bought 56 acres of land on the Wirral, near Liverpool, and built a new town for his workers, known as Port Sunlight, where workers and their families could live healthier and happier lives. Eventually, he lost control of the company to creditors who promptly terminated the enlightened practices he had initiated. The fate of many idealistic capitalists.
From shareholders to stakeholders
In recent years the relationship between business and society has become increasingly fractured. Whilst there is nothing wrong with shareholders, and nothing wrong with profits, the culture of capitalism seemed increasingly out of sync with the world. A series of economic, social and environmental crises made it all the more obvious.
Of course, most businesses have woken up to the importance of sustainable issues, and their responsibilities to society over recent years, but they have largely seen them as a new component of capitalism.
10 years ago, I wrote the book “People Planet Profit: How to embrace sustainability for innovation and growth” which sold many copies, but little seemed to change. Yes, we got the sustainability report as an appendix to the annual report, the foundation that operates at arms’ length from the core business, and a host of initiatives to reduce emissions and waste. At the same time, social enterprises emerged – indeed, I was a CEO of a $50 million non-profit business myself – but such organisations were still seen as a different breed from commercial businesses. Core business didn’t change.
And then three things happened.
- In January 2018, BlackRock’s Larry Fink wrote a letter to the CEOs of all the companies who he invests in, saying that he would not continue unless they could demonstrate that they will delivering on a significant “purpose before profit”. BlackRock is the world’s largest investment firm, a $6 trillion asset manager. This was seismic.
- In August 2019, The Business Roundtable, the most influential group of US business leaders said they would formally embrace stakeholder capitalism, built on “a broader, more complete view of corporate purpose, boards can focus on creating long-term value, better serving everyone – investors, employees, communities, suppliers and customers.”
- In January 2020, the World Economic Forum launched the Davos Manifesto for “a better kind of capitalism” saying “the purpose of a company is to engage all its stakeholders in shared and sustained value creation” with “a shared commitment to policies and decisions that strengthen the long-term prosperity of a company.”
Klaus Schwab, founder of WEF, called it “the funeral of shareholder capitalism”, but also as the bold and brave birth of stakeholder capitalism.
Marc Benioff of Salesforce added that “Capitalism as we know it is dead. This obsession with the pursuit of profits just for shareholders does not work”. IBM’s Gina Rometty said that there are now two types of business “good and bad”.
Jim Snabe of Maersk said, “companies need to start making the change right now, to the way they work, the resources they use, the taxes they pay, and the decisions they make.”
Smarter choices, positive impact.
The ideology sounds compelling. The challenge is to ensure that it changes how businesses work, the choices we make, and the impacts we have.
“Smarter choices” is the first challenge. A key role for the business leader is to make decision, yet this has become much harder of a complex world of many trade-offs. Strategy is also about choices, the directions and priorities for the business, short and long-term.
“Smart” lies in the ability to align the business purpose with all its stakeholders, and to find an effective way in which together they can sustain enlightened value creation.
“Positive impact” is the second challenge. Long have we heard the mantra, “what gets measured gets done”. Therefore, leaders need to underpin their stakeholder ideology with a new set of performance metrics, which drive behaviours, define progress, and rewards.
“Positive” lies in the ability for the business to create a “net positive” contribution to the world in which it exists, some of which will be financial, but also non-financial.
In particular, I get frustrated when people get excited about new zero. Yes of course, we want and need to dramatically reduce the carbon emissions of business. But net zero sounds like a terrible compromise, and indeed we see many carbon emitters still seeking to offset their badness by planting forests of trees, and claiming net zero as a success.
Positive impact is therefore about value creation. Creating more value for all stakeholders.
Not as a compromise or trade-off. Not the short-termist mindset that will seek more value for shareholders at the expense of customers (less innovation) or employees (lower salaries) or society (negative impacts).
This is not utopia. It comes by creating that bigger “value pie” and then each taking a fairer, larger slices of a bigger whole.
It comes through a long-term perspective – how business wins through amazing and well rewarded people, who develop and deliver incredible products and services for customers, who are happy to pay more for them and stay loyal, with less harm to the environment and more good for society, all producing more and more sustained returns for shareholders too.
And as a results a sustainable, virtuous circle of value creation emerges. Sustained, shared, superior value.
Performance metrics, making it happen.
All this sounds great. But what gets measured gets done.
Stakeholder capitalism desperately needs a set of metrics for sustainable value creation.
To seek a coherent model for this across the business and investment communities, the WEF brought 140 of the world’s largest companies together, supported by the four largest accounting firms – Deloitte, EY, KPMG and PwC.
Their starting point was to align the existing approaches to measuring Environmental, Social, and Governance (ESG) performance and the Sustainable Development Goals (SDGs). They agreed to seek common metrics for greenhouse gas emissions and strategies, diversity, employee health and well-being as factors to publish in annual reports alongside financial metrics.
The proposed metrics and recommended disclosures have been organised into four pillars that are aligned with the SDGs and ESG domains. They are
- Principles of Governance, aligned with SDGs 12, 16 and 17, and focusing on a company’s commitment to ethics and societal benefit
- Planet, aligned with SDGs 6, 7, 12, 13, 14 and 15, and focusing on climate sustainability and environmental responsibility
- People, aligned with SDGs 1,3, 4, 5 and 10, and focusing on the roles human and social capital play in business
- Prosperity, aligned with SDGs 1, 8, 9 and 10, and focusing on business contributions to equitable, innovative growth.
There is some way to go in getting close to “integrated reporting”, and in particular connecting financial and non-financial metrics which enable the more difficult trade-off decisions, and to understand the genuine long-term health of an organisation.
One approach, developed by BCG, is Total Societal Impact (TSI) which is a defined basket of financial metrics and non-financial assessments, brought together as one overall score. This enables leaders to consider the relative overall impact of different strategic options.
The challenge of course, is that any private company’s total value will always be financial, as long as it is possible for a buyer to come along and pay a certain price for it.
A new value map for business
Deloitte recently proposed a new Sustainable Value Map for business that brings together:
- An ROI-based approach: To facilitate the consideration of what value creation looks like for each stakeholder group, the map provides baseline ROI frameworks for each. This approach provides two levels of drivers for both the ROI numerator (returns) and for the denominator (invested resources). Note that the frameworks represent illustrative starting points, informed by popular sustainability frameworks. We expect companies and their stakeholders to have their own views on the value drivers, and we propose that they work together to develop their own formulations.
- Linked ROI frameworks: To aid the determination of the “input/output” relationships between the value creation frameworks, the SVM also provides examples of potential resource and impact flows across stakeholder groups. The nature of these dependencies will vary by company, but this starting point can help jump-start a deeper understanding and articulation by leadership teams.
- A system view: To promote the orchestrated management of value creation across stakeholders the SVM puts the value frameworks and inputs/outputs on a single page. This makes it easier to avoid tunnel vision around any single stakeholder and also draws out the recognition of relationships and dependencies not always apparent in traditional analyses.
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