“ There is growing interest in the notion of corporations adopting societal value as both their purpose and business objective. Years of work by KBA and the Maturity Institute, using the construct of Total Stakeholder Value and the EP Bow Wave, now make it clear how shareholder wealth can be created in ways that enhance societal value, and how this can become a legitimate business objective for every listed company.” MI/KBA Research Programme Proposal, June 2018 – see full technical proposal here Aligning the Interests of Business and Society
The Maturity Institute’s goal of maximising societal value through maximising the value of human capital for all stakeholders is encapsulated in a simple, underlying premise that, with the right understanding, what is good for society is good for business.
This may have seemed idealistic to some, but in the last six years we have been compiling a convincing evidence base that this is indeed the case. More importantly, we have developed our OMINDEX of organisational maturity ratings (OMRs) to measure and compare how companies perform against clear criteria of providing the best value to both society and shareholders, simultaneously. This now forms an integral part of our Total Stakeholder Value (TSV) metric.
The KBA Consulting Group in Australia, who are experts in company valuation and strategy, have also spent years developing an understanding of how wealth is really created in listed companies. Centred on the concept of a Bow Wave of Expected Economic Profits, their work shows that successful companies don’t create wealth by outperforming short-term financial performance expectations, but by building organisational capabilities and harnessing innovation to establish new and higher expectations which they systematically deliver over time. The analytical underpinning for this understanding shows clearly that not only is it possible for a company to create shareholder wealth in ways that also enhance value for society, but that the only way to create wealth for shareholders on an ongoing basis is to ensure that all legitimate stakeholders benefit in an appropriate manner from their association with the company.
In February 2018 MI and KBA brought together the methodologies of OMINDEX and the EP Bow Wave construct. This advanced development brings a superior evidence base to bear on company valuation and investment decision making that is in the best interests of society. This is now the breakthrough technology on which we are basing our joint, UK and Australian research programme to ‘Align the interests of Business & Society’. This research will incorporate a totally integrated analysis that combines the power of OMINDEX rating and EP Bow Wave analysis for FTSE100 and ASX100 corporations. A copy of the full research proposal, with technical details, is now available.
These are a selection of the key findings from the preliminary research, each of which will be an area of focus for the full research programme.
- There is a widespread misunderstanding as to how wealth is really created in listed companies, and in particular how it is created on an ongoing basis in the most successful companies.
- Conventional, single period measures of profitability (particularly Earnings and EPS) amplify this misunderstanding.
- The misunderstanding leads to behaviours that emphasise short-term performance, often at the expense of long term wealth creation. Such behaviours also tend to destroy long-term societal value (TSV)
- Organisational maturity is now quantifiable and is the key dynamic, whole system picture that explains how to drive long-term, sustainable performance.
- Mature organisations become enduring institutions when they continuously improve to produce the greatest value for society. Such organisations are able to create wealth for shareholders on an ongoing basis in ways that enhance the wellbeing of all legitimate stakeholders.
- Unilever: Why the abortive Kraft-Heinz bid appears to have been good for short-term capital market players, but not so good for long-term shareholders and for society.
- Barclays: Why its CCC+ rating equates to a -£2.3bn loss in value to shareholders and society.
- There are a number of areas that require a major, professional education programme for corporate leaders and business managers.
For business leaders, our analysis can now provide the clarity and the evidence they need to be able to make a conscious decision to go down the path of building mature, enduring institutions capable of creating value for shareholders in ways that also enhance societal value.
For institutional investors, it provides the evidence base and rationale they need to preference the allocation of investment funds towards such companies.
For the leaders of civil society, it will be possible to calculate the total societal benefit of both these things occurring, which could ultimately provide an important input into future public policy decisions – potentially including preferential tax treatment for companies or shareholders of companies whose action create significant societal value.
The findings of the full research programme are expected to provide the basis for a much more meaningful and actionable dialogue between institutional investors and the Boards of listed companies, consistent with the principles of responsible ownership that many investors are now adopting.