New business model: measure value creation in 4 areas
What role should businesses play in today’s volatile world? Business leaders cannot continue to act as if financial performance is their only report card without also considering the impact of their decisions on their company’s contribution to society.
150 years after the start of the industrial revolution, we know a little more about the impact of companies on the world. Global GDP has grown dramatically to over US$100 trillion today, strengthening economies, creating a stronger middle class, and creating innovations that have improved our quality of life.
But there has been a cost, including worsening environmental damage, widening economic inequality and deepening social injustice. Where is the rulebook describing how to do this while dealing with these larger crises?
I’ve spent the past 20 years working with companies in 40 countries and the top performers offer lessons in what companies can do to improve. The best view their lasting contribution to society through four value filters: Reputational, Organizational, Societal, Financial.
Lead by example. Your company’s reputation in society depends on your ability to galvanize stakeholder interests while ensuring the company’s financial health. You earn trust by keeping the promises you make and the values you embrace. When the company trusts you, you get temporary permission to continue operating. But if you breach the trust, the company can revoke that permission, destroying your reputation. As Warren Buffet said, “it takes 20 years to build a reputation and 5 minutes to ruin it”. If you think about it, you will do things differently. When leaders truly lead by example, reputation value improveshttps://competentboards.com/.
Corporate cultures have deep-rooted orthodoxies, relationships, and unwritten rules. Anything that disrupts these comfortable routines stimulates resistance, so how do you know where to start the change effort? There are probably people in your company who have been involved in highly collaborative projects. They understand the sense of purposeful accomplishment that drives such work.
Tap into their wisdom and experience to help inspire a workplace and company culture that is more like a cause. When people believe their work matters, they will increase their discretionary effort with others beyond what is expected due to the greater good they perceive they are pursuing, and organizational value will be enhanced.
It is a set of actions designed to improve the quality of life and well-being of the communities you serve. The people inside want to know what your business is doing to contribute to healthy community dynamics, beyond job creation. Are you part of the social fabric or just occupying space for financial convenience? Are business leaders seen as energizers or de-energizers of the community?
When your business is absent from the life of the local community, “us versus them” tensions are heightened, making reputation building that much more difficult and damaging your relationships with stakeholders. A laser focus on societal value is good for investors. 73% say that being socially responsible contributes positively to their return on investment. However, only 36% of consumers trust business leaders to do the right thing. It is both a problem and an opportunity. The problem is obvious: you are not trusted. The opportunity is also clear: engage deeply with the community by demonstrating that you care about them.
The health of a business is measured by its financial condition, which is a function of its ability to embrace the three values described above. The blind pursuit of financial gain in the absence of a deliberate focus on the above three values may lead to short-term success, but the business will not survive long if profits and shareholder wealth are the only ones. value measures. In short, financial value is the results of success in reinforcing the first three values. Also, the sources of capital are changing and you would do well to pay close attention to these changes.
The factors that shape what is considered valuable in society have been ongoing for years. The risks associated with investments once considered safe are increasingly risky, and opportunities that were once considered risky are now critical to your business’ relevance and survival in the marketplace. Young investors favor companies with credible ESG initiatives. The question is not whether a change is necessary, but how quickly can you be part of it. Think about climate change. A Swiss Re study predicted the financial impact of climate change on the economies of 48 countries (90% of the global economy).
- 18% reduction in global GDP if no action is taken (3.2°C increase)
- 14% reduction if certain actions are taken (increase of 2.6°C)
- 11% reduction if other measures are taken (2°C increase)
- 4% reduction if the Paris targets are achieved (increase of less than 2°C)
If you choose not to act, you are helping to hasten future climate disasters, worsening human and financial costs, and contributing to reduced GDP, which is certainly not a reputation-enhancing decision. So why not decide instead to change by being part of the solution?
In short, these four values are important, but it’s essential that you build your business around the first three. Only then will lasting financial value occur.
John A Davis is award-winning academic, business leader and author of Radical company: How to transform your organization in the age of global crisis published by Emerald.