Moral Capitalism and the Future of The Sustainable Corporation
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Transcript of Moral Capitalism and the Future of The Sustainable Corporation
Moral Capitalism and the Future of The Sustainable
Corporation
Stephen B. Young
Global Executive Director
The Caux Round Table
Brisbane, May 22, 2007
What is A Sustainable Corporation?
• Quality Income Stream
• High net present discounted value
• Good capitalization multiplier
Good Corporate Value
(Warren Buffet would buy it)
50 Best Performers of 2005Business Week
Burlington Northern Santa Fe: Market value: $29.2 billionBalance sheet assets: 103% of market value ($30.3
billion)Goodwill: None
Caterpillar: Market value: $49 billionBalance sheet assets: 95.9%Goodwill: 4.1%
United Health Group: Market value: $79 billionBalance sheet assets: 52%Goodwill: 48%
Apple: Market value: $58 billionBalance sheet assets: 19.8%Goodwill: 80.2%
50 Best Performers of 2005Business Week
Microsoft: Market value: $279 billionBalance sheet assets: 33.7%Goodwill: 66.3%
Best Buy: Market value: $26.3 billionBalance sheet assets: 39%Goodwill: 61%
Starbucks: Market value: $27.8 billionBalance sheet assets: 12%Goodwill: 88%
Goldman Sachs: Market value: $61.7 billionBalance sheet assets: 1.1%Goodwill: 98.9%
What is a company worth?How to we measure its value?
• Most simple calculation:Discounted net present value of future
income X capitalization multiplier
First Fundamental ConclusionYou cannot establish value without
putting risk into the calculation
– What is the risk of not achieving predicted future revenue? How certain are estimates of future income?
– What are the risk factors that determine the capitalization multiplier? A higher risk demands a lower multiplier
Higher risk > more uncertainty > lower present value
Second Fundamental Conclusion
Management of Risk Enhances Enterprise Value
- Risk management leads to more certain income
- Risk reduction leads to higher valuation
How do you manage risk?-Each risk hides in a relationship
- customers
- investors
- government regulation
- employees
-Each relationship is an intangible asset of the business (Assets can Appreciate or Depreciate).
-Lowering risk for each relationship enhances the quality of intangible assets and increases business valuation
CSR & Valuation
Intangible Assets = CSR Stakeholder Relationships
• Customers• Employees• Owners/Investors• Suppliers• Competition Strategies• Community Support
To improve company valuation,Improve CSR relationships!
Good CSR Relationships Lead to The Sustainable Corporation
How to measure CSR Relationships
Use CRT Arcturus
Risk Assessment Instrument
New metrics for enhanced profitability
INP
UT
S
$; sustainable
profits; low beta; maximum
value
Reputational capital
Social capital
Finance capital
Physical capital
Human capital
Conversion processes
OUTPUT Goods/services
Customers
Return on Capital
(preserve adequacy of capital inputs)
Theory of the Moral Firm(self interest considered upon the whole)
Theory of the Moral Firm: 2
CRT Principles
Vision
Stakeholders
Corporate Governance
Leadership Strategy
Value Drivers
Shareholder Value
Stakeholders:-Customers – moral compass for capitalism
-Employees – moral agents, not parts for a machine
-Owners and Investors – fiduciary duties of loyalty and due care
-Suppliers – friends, not foes
-Competitors – compete with quality and innovation, not price
-Communities – enhance social capital to enhance future profitability
Transforming
Integrated
Innovative
Engaged
Basic
Transforming
Integrated
Innovative
Engaged
Basic
Creating New Markets, New Consumer Paradigms
Leadership Styles
Core Behaviors
Values -Driven
Business Case
Visionary
Values Champion
Social License to Operate
Legal Compliance, Short-termism
Value Steward
Supportive
Disconnected, Erratic, Reactive
Moral Capitalism
Aspirations(Kyosei, Human Dignity, Stewardship)
Category 1. Fundame
ntal Duties
2.Custom
ers
3.Employ
ees
4.Owne
rs/Invest
ors
5.Supplie
rs/Partner
s
6. Competit
ors
7. Communities
1. Responsi-bilities of Business
Criterion1.1
Criterion1.2
Criterion1.3
Criterion1.4
Criterion1.5
Criterion1.6
Criterion1.7
2. Economic and Social Impact of Business
Criterion2.1
Criterion2.2
Criterion2.3
Criterion2.4
Criterion2.5
Criterion2.6
Criterion2.7
3. Business Behavior
Criterion3.1
Criterion3.2
Criterion3.3
Criterion3.4
Criterion3.5
Criterion3.6
Criterion3.7
4. Respect for Rules
Criterion4.1
Criterion4.2
Criterion4.3
Criterion4.4
Criterion4.5
Criterion4.6
Criterion4.7
5. Support for Multi- lateral Trade
Criterion5.1
Criterion5.2
Criterion5.3
Criterion5.4
Criterion5.5
Criterion5.6
Criterion5.7
6. Respect for the Environment
Criterion6.1
Criterion6.2
Criterion6.3
Criterion6.4
Criterion6.5
Criterion6.6
Criterion6.7
7. Avoidance of Illicit Operations
Criterion7.1
Criterion7.2
Criterion7.3
Criterion7.4
Criterion7.5
Criterion7.6
Criterion7.7
Arcturus Risk Assessment Instrument – Criteria Matrix
Assessment Framework – Criterion/Benchmark Example
CUSTOMERS (Section B)
1B - Beyond Shareholders towards Stakeholders - Customers
Does the company provide its customers with quality products and services at reasonable prices, and on fair terms, while protecting their health and safety and their physical environment, and respecting their culture and individual dignity?
POINTS TO CONSIDER – The company seeks customer feedback on its practices, monitors impacts, and is prepared to modify production or service as a result, plus provides relevant training of staff.
Point(s): Please circle
1 2 3 4 5 6 7
Please write down any concerns, explanations or additional comments on how or how not, the company is performing.
____________________________________________________________________________________________________________________________________________________________________________________________________________________
2B - Economic & Social Impact of Business - Customers
Do the company’s products and services contribute to the economic and social advancement of its customers and to the well-being of their communities?
POINTS TO CONSIDER – Quality of product/service development; product quality and safety; adherence to relevant customer, safety and environmental codes; products / services positively impact living standards?
Point(s): Please circle
1 2 3 4 5 6 7
Please write down any concerns, explanations or additional comments on how or how not, the company is performing.
____________________________________________________________________________________________________________________________________________________________________________________________________________________
Value Drivers (positive or negative) - 1 Capital Adequacy
Reputation
Customer loyalty; quality; financial standing; brand
awareness; compliance
Social
Taxes; citizenship duties; acceptable
externalities (ISO 14000); legal;
contributions; community service
Finance
Dividends; interest; stock price;
transparency; corporate governance; risk profile
Physical
Supply chain; depreciation expense
Human
Compensation; work environment; corporate culture
CRT Tool -
CRT Tool
CRT Tool-
CRT Tool
CRT Tool-
Value Drivers (positive or negative) - 2 Management Sensitive
Conversion Processes Production processes (ISO 9000); costs;
HR process; credit/liquidity; R&D process; inventory control;
Procurement productivity;
CRT Assessment Tool
Capital Outputs
Value Drivers (positive or negative) - 3 Market Sensitive
Output Goods/Services
Quality (ISO 9000); innovation; market knowledge/research
CRT Assessment Tool-
Conversion processes Customers
Value Drivers (positive or negative) - 4 Market Sensitive
Customers Quality; price, warranties; service;
advertising; sales; distribution; market research
CRT Assessment Tool-
Output $ Profits
Assess Board Management and Employee Decision –Making
Phase I – 60 minutes – CEO, Board Members, Senior Management Team
Phase II – 60 minutes per stakeholder – Other Management Executives & Company Leaders
The Corporate Improvement Cycle
Performance Improvement
Performance Feedback to Management
Management Action
CRT Assessment
The Good (Moral Capitalism)
• Risk Assessment/continuous Risk Reduction
• Optimize Stakeholder Benefits
The Bad (Brute Capitalism, Crony Capitalism)
• Feed Shareholders, Abuse Stakeholders• Commoditiy pricing/ compete on
pricing/low costs• Rent seeking (market power)• Take the money and run: short termism
Unsustainable Valuation
The Ugly (Punting on the trading floor)
• No net wealth creation
(Rob Peter to pay Paul)• Irrational Exuberance
(Market traders short terism)• False Valuations
(Enron: Ponzi Scheme)• Encourage unsustainable pricing of securities
Private Equity and Moral Capitalism
• Ownership or Stewardship?
• Private equity can be:
- moral
- brutal
- speculation on the foibles of others
Today’s shareholders are stewards for future
shareholders• Ownership has its responsibilities
• Business has a social office to perform
(Create net wealth)
• Owners paid to perform the duties of that office- profit from good service well delivered
• Misfortune of residual claimants
General Principle # 1
Wealth should be used to enhance other forms of capital: finance, physical, human, reputational, and social.
General Principle # 2
The desires of owners for self- satisfaction should be balanced against society’s need for robust accumulation of new capital in all forms.
General Principle # 5
Private wealth should supplement public expenditures for the social safety net.
General Principle # 6
No one is morally entitled to the use and enjoyment of
wealth procured by fraud, corruption, theft, or other abuse of power.