Have US CEOs finally shaken off the Friedman doctrine they subscribed to for nearly 50 years? They have certainly taken a bold step to legitimately grant themselves permission to put societal value first. They must, however, determine a common purpose and measure their progress. The Maturity Institute’s OMINDEX rates corporations to determine their Total Stakeholder Value (TSV), where higher TSV benefits everyone, in a mutually inclusive cycle of value. We invite these firms and all their stakeholders to begin using our universal standard of measurement.
The new statement of ‘purpose’ by the Business Roundtable (BRT), on 19th August 2019, “was signed by 181 CEOs who commit to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders”. We genuinely welcome this development and are willing to take their commitment at face value. This is because we have the means to test whether these firms are able to follow through with concrete actions, to bring a more enlightened and mature form of responsible capitalism to fruition. In fact, we have already gathered OMINDEX ratings on 13 of the signatories and plan to grow this BRT grouping. Already, our ratings clearly indicate that there are significant opportunities for higher company valuations, financial returns and societal value; none of these objectives have to be mutually exclusive. Those CEOs who are prepared to act upon their words, to raise their own thinking and behaviours to a higher level of maturity, will be able to deliver on their promise.
Organizational Maturity and Total Stakeholder Value (TSV)
Maturity analysis is predicated on the premise that we cannot expect corporate behaviours, encouraged over the last 50 years by a skewed economic theory, to suddenly change for the better. Mature, organizational development is a transition along a continuum. Our OMINDEX scale runs from D to AAA, mirroring S&P credit rating, asking CEOs the key question – ‘How much value are you realising through all your stakeholders – for the benefit of all?’ How much credit have you earned with employees, customers, citizens? This is the new mindset each CEO is espousing so they need to formulate an equally new, organizational management strategy, and systems, to effect meaningful, value generating change.
Fortunately, they can learn from the exemplars already on OMINDEX; which we have distilled into a coherent, easily understood and practical model. For US automotive firms, like the Ford Motor Company, perhaps they can now begin to properly understand the root causes of Toyota Motor Corporation’s success, achieved through the competitive differentiation and enhanced value available by working as a true, whole system – where all stakeholders are genuinely engaged. This should be really good news for signatory James P. Hackett, President and CEO of Ford. If there were any other solution available, for the challenges he faces, he would probably have found it by now. Similarly, the CEOs of retailers and banks can learn how top-rated companies like Mercadona and Handelsbanken have translated their explicitly social purpose into long-term outperformance, relative to all their peers.
But this cannot be about individual, American, CEOs. Their joint statement suggests that “…each of our individual companies serves its own corporate purpose”. Some clarity is required here. A ‘Total Stakeholder’ philosophy demands a ‘whole system’ worldview: if “all” stakeholders’ interests are to be fully integrated into business strategies. Our ultimate, over-arching purpose at the Maturity Institute is universal – to maximise the value of everyone on the planet, for the benefit of everyone on the planet. We rate individual corporations and measure their TSV, relative to the whole global system, not from a narrow geographical perspective. This is an important opportunity not to be missed by the Business Roundtable, for many reasons.
BRT firms need to distinguish between their strategic business objectives and their ultimate purpose. For example, on Ford’s website William Clay Ford Jr., Ford’s Executive Chairman, states “The purpose of any company should be to make people’s lives better. Otherwise, it shouldn’t exist.” We agree, as long as Ford is thinking of the human ecosystem that comprises the firm’s whole system. If he isn’t, then Ford cannot begin its own journey of maturity. More importantly, the gap in Ford’s performance, relative to mature peers such as Toyota, will only widen. The same applies to all other signatories, regardless of sector, that have yet to embrace the benefits to shareholders that come with maturity, as well as all other stakeholders.
Where should BRT members start?
The biggest and most complex challenges facing capitalism and the global economy today can only be resolved through a long-term, widespread transition in organizational maturity. Yet BRT members can start today with some very simple, practical, easily implementable steps. For example, how can the signatories at least deliver on the specific ‘commitments’ they have already made? How does OMINDEX score them in these areas and how does this translate into TSV? Our maturity analysts ask 32 questions (using our ‘OM30’ diagnostic) to find out how any organization really thinks, behaves and creates value across their entire human ecosystem.
BRT Commitment 1. “Delivering value to our customers”
“We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.”
One way to ‘further this tradition’ is to look at the OM30’s cluster of questions that we see as generating underlying improvement in intrinsic value for the organization (Questions # 9 Quality system, #20 Innovation, #21 Performance Management System, #23 measures of human capital value, #30 stakeholder prioritisation). These are very meaningful measures of just how much value is finding its way through to customers and communities today and how much more value is likely to be added in the future.
BRT Commitment 2. “Investing in our employees”
“This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.”
On the BRT website, under ‘Investing in our employees’, we see supporting statements such as: “….Hearst workers access to more than 3,200 courses….. The Bechtel University program offers accredited courses in-person and online, helping more than 7,500 workers earn or maintain professional certifications.’
Our OM30 deals directly with the relationships between how people are managed (e.g. through pay systems) and value outcomes, including learning and development; but this requires a much more nuanced analysis. The maturity analyst’s expertise can sometimes seem counter-intuitive. For example, our analysis would not automatically assume that training expenditure, or the levels of activity this encourages, will feed through to value; shareholder or otherwise. Many corporate reports make proud boasts about how many training days their employees receive each year; but a mature organization makes sure every cent spent on learning is connected to value creation or risk mitigation. Without systematic learning, focused on value, we view such numbers as ill-conceived, contraindicators with sub-optimal investment returns likely.
When American corporations currently spend $87.6 billion on training each year, even a 1% improvement through a tighter focus on value is an easy win of $876 million. This shift should start immediately but it requires a conscious effort to install a learning system. This is covered by OM30 question #22 ‘Learning & knowledge’, which asks – “To what extent is this a learning organization that continuously and expeditiously aims to acquire and apply knowledge, expertise and experience to continuously create more value and reduce risk?”
BRT Commitment 3. Dealing fairly and ethically with our suppliers
“We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.”
Terms such as ‘fair’ and ‘ethical’ are open to interpretation in the absence of precise definition. The OM30 applies questions #14, #16, #17, #19, #20 as our ‘supply chain’ cluster. These cover how suppliers are managed from a value perspective as well as corporate ‘culture’, ‘business planning’, ‘evidence-based management’, ‘quality system’ and ‘innovation system’. This helps to determine levels of fairness and ethical behaviour and how this impacts in value and risk terms. Note how the last two also feature in Commitment 1; demonstrating just how interconnected all of these factors are in ‘whole system thinking’ and optimised organizational management.
BRT Commitment 4. Supporting the communities in which we work
“We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.”
Our own definition of TSV explicitly factors in the reduction and avoidance of harm in human and environmental terms (see graphic below). We measure Value across several specific questions. Question #30 ‘Stakeholders’, is where we see evidence that ‘society’ comes first. Other stakeholder groups in this list are scored according to which stakeholders are afforded primacy; including ‘customers’, employees, shareholders/investors/owners and regulators.
BRT Commitment 5. Generating long-term value for shareholders
“Who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.”
OMINDEX and TSV provide a whole system that unifies shareholder and societal value. Our OM30 is a diagnostic instrument that allows Boards and CEOs to work constructively with all stakeholders to leverage opportunities to enhance value, minimise risk and avoid harm. This forms the fully-integrated, TSV system in our ‘virtuous cycle’ graphic and is the anchor point from which to consider how BRT members can translate purpose into value-based practice.
Delivering on the promise
The Maturity Institute has a wealth of knowledge that can be shared. For any signatory CEOs reading this, or for any Board member, or investor, our OM30 is an open source document. We are happy to send a copy to you and there is a textbook which explains how to use it – ‘The Mature Corporation – A Model of Responsible Capitalism’. We see no reason why you should not start reaping immediate benefits from the commitments you have already made.