Total Stakeholder Value (TSV)
Two fundamental, leadership lessons are there to be won from the global financial crisis of 2008. First, corporations can no longer be left to define ‘success’ for themselves. Second, neither can their shareholders; because the era of ‘shareholder value’ primacy has finally run its course. As Joe Nocera remarks in his excellent Bloomberg piece – “Toppling the idol of shareholder value” –
“The shareholder-value movement did some good, especially in those early years. It became de rigueur for boards to create performance criteria that executives had to meet to get bonuses and stock options. And it was a means of imposing discipline.
But the pendulum has swung too far, and today the ethos embodied by the phrase “maximizing shareholder value” does more harm than good. It has widened income inequality. It has rewarded short-term “make-the-quarter” thinking over long-term value creation. It is the reason companies take on too much debt and perform feats of useless — but stock-price enhancing — financial engineering. ….. When shareholders matter more than employees or customers or communities, some people do very well, but the purpose of a corporation becomes warped and society loses.”
As the worlds’ needs change we have to constantly remain vigilant regarding our most deeply held values and principles and how they can best be reconciled with the core, capitalist concept of market value. The big questions are progress at what cost and how must corporate purpose now be reformed? Certainly, the conventional, simplistic, proxy standards that have been used since the industrial revolution – profitability and related measures of financial returns – are no longer, in isolation, fit for purpose.
So it has to be replaced by a more convincing rationale for social legitimacy – stakeholder value. This is the argument presented in Nocera’s article; one now well supported by a mounting evidence-base within the ESG investment community.
Figure 1. Mature organizations shift their performance to a much higher level
It is a more sophisticated and civilised cultural paradigm (see Figure 1.) that requires a much broader and increasingly complex strategy for organizational effectiveness and responsibility. It also has to be translated into leadership and management practice and its inherent complexity captured within a new set of organizational metrics and reporting standards. The standard that has been developed by the Maturity Institute specifically for this purpose is Total Stakeholder Value (TSV) and combines a conventional indicator of organizational performance – the P/B or price to book ratio – with a corporation’s maturity rating score in the OMINDEX.
TSV = P/B x OMINDEX (i.e. the company’s Organisational Maturity Rating or OMR)
For example, Barclays Bank’s current P/B is 0.49. The P/B ratio, on its own, reveals the value that the stock market attaches to Barclays, through its share price, relative to its asset value. In layman’s terms, a P/B of less than 1 implies the bank is not being managed well enough to at least deliver the returns one might expect from its asset value. However, like all such indicators, we should not view it in isolation. Even if Barclays had a P/B of, say, 1.5 it might suggest it is being well managed but it has not taken into account another significant variable – its human capital and how that capital is governed and managed on a day-to-day basis. In other words, P/B only captures part of the overall value equation. The OMR score, based on a set of 30+ searching questions for the CEO paints a holistic picture of the governance, culture and other critical dimensions of how the organization is led and managed.
Handelsbanken, for example, currently the highest rated bank in the OMINDEX, has an OMR of AA- which equates to a score of 82.6% and a P/B of 1.88 producing a TSV of 1.55 calculated as follows: –
P/B 1.88 x OMR 82.6% = TSV 1.55
This suggests not only a business that is performing exceptionally well by conventional standards but one that also converts its very valuable human capital into high market value. The rationale behind TSV also suggests that Handelsbanken is satisfying customers and acting responsibly to all other stakeholders. By dint of that fact its social legitimacy as a bank is well established.
Obviously all companies have to satisfy legal and regulatory requirements but corporate law (in a variety of jurisdictions including the UK, EU and USA) does not impose a clear responsibility to give primacy to society as a whole. So, while the question of legitimacy is well-served by TSV, legality could be seen as lagging behind changing societal values. The society in question is the world’s entire population because every single one of us is an equal stakeholder in the planet we all share. Therefore, we need a durable, universal standard such as TSV by which the performance of corporations can be accurately and meaningfully judged.