The Organization of Business Itself will need to Change in a “Captialism 2.0″ World (Part 3)

Michael TownsendIn part 3 of this 5 part series, Mike Townsend examines ownership models in a Capitalism 2.0 world (CAP2).   Feel free to sign up for Volume I of a Strategy Manual called, “Capitalism 2.0: Strategies for the 21st Century Enterprise” to be released in May 2013 and/or join our new LinkedIn Group where we will be discussing the ideas of Capitalism 2.0 in more detail.  We look forward to sharing these ideas with you – click here.Sustainable Business Strategy Series

PART 3: BETTER BY RE-DESIGN – HOW WILL OUR ORGANIZATIONS NEED TO ADAPT TO DELIVER GENUINE SUSTAINABLE BUSINESS SUCCESS?

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” Leon C. Megginson

There’s plenty of talk about the need to transform our businesses, and the need to become more sustainable. But do we really mean it?

Are we really prepared to follow through, to do what it takes, in order to bring about real transformation, and deliver the full implications of sustainability in business?

Not only is there a need to rethink our business models – how we make money – and our strategies for making this happen, we might also need to change and adapt the vehicles we use to deliver these.

Do our conventional organizational and ownership formats provide the flexibility we need, are they resilient enough, and are they suitably aligned with our sustainable business aims and ambitions?

All too often, we tend to carry on, with more or less the same organizational and ownership formats we’ve applied for decades, with little real thought to whether these are really fit-for-purpose.

Of course, we may go through annual re-organizations, mergers, acquisitions, or perhaps make a few tweaks here or there. But all this takes place within a conventional paradigm, and is really just rearranging the deckchairs.

When developing and deploying our sustainability strategies are we really thinking about what is the most appropriate organizational vehicle to deliver our aims and ambitions? Have we got the right format, underpinning legal structure, and ownership model? Perhaps this is just an oversight, or an assumption that the current format is a given, or it might be a great imponderable – in the ‘too hard’ box?

And in the early stages of our journey towards sustainable business, perhaps this is not a major issue; we can keep delivering our eco-efficiency initiatives without too much concern for our organizational models. But, the further we go on our journey; we might encounter some fundamental constraints. We might then need to re-evaluate, and explore alternative models, that could better support the right underpinning behaviours and business practices to enable our strategies to work. After all, there would be little point in developing an ultra efficient ‘green’ engine, and then shoving it into a three-tonne Hummer SUV – the ten-miles-per-gallon dinosaurs produced by General Motors that went out of production in 2009.

Has the conventional publicly-traded company had its day?

The key aspiration for many businesses, over the last thirty years or more, is to achieve a listing on the stock market. This realizes the ambition we might have, provides a gateway to rapid growth, a return on our investment, endeavour and sacrifice, and further investment to secure our future success. It is also a sign that we’ve made it.

Look at the fuss made when Facebook went public, but as founder Mark Zuckerberg found, getting listed wasn’t the end game, but the day the real work started.

And once we’re in this elite club, the expectations are tremendous, unrealistic even, as the relentless pursuit of growth in sales and profit ensues. Quarterly results are eagerly awaited and anticipated; dissected by an army of analysts and pundits, and if not up to expectations, heads will roll, and new faces and strategies proffered, in order to calm the nerves of the market.

But with this man-made construct we have created is a treadmill to oblivion; driven by a short-term focus on maximizing the return to our shareholders, often at the expense of wider business impacts on the environment and society.

And with this short-term outlook, it can become increasingly challenging for businesses to progress the sustainability agenda, too. In the earlier days of our journey, it is relatively straightforward; we ensure compliance, we implement our eco-efficiency initiatives – and we capture the low-hanging fruit of low cost/quick return initiatives. We gain confidence, and we build confidence in our stakeholders. We deliver an attractive return-on-investment and rapid payback. All is well.

David Korten

But then the going gets harder. We seek to become more sustainable, and invest in longer-term solutions – perhaps in product innovation, or new infrastructure for the circular economy, or even transform the business, away from unsustainable products and services, to a new model.

But how will the markets react? Will they understand, appreciate the bigger picture, and support what we are trying to do? Dare we even raise the issue, and risk scaring the horses? Or is it best to keep quiet, keep a low profile; keep delivering what we can, and hope that easier solutions, for some of our more intransigent sustainable business challenges, will somehow materialize further down the line? Should we just wait-and-see?

This is tough – and often a challenge to our personal values, as well as our business-political resilience; we want to do the right thing, to become more sustainable, and to build something that will ultimately deliver better quality of earnings, and for longer – but we are hamstrung by the very limited perspectives of our organizational and ownership models. So what can we do?

If the board takes a risk, and supports a more holistic and sustainable approach, to invest in our common future, could we be open to legal challenges from our shareholders? There are a few cases, such as eBay v Newmark in the US, where profit is still judged to provide the primary and overriding focus, and that companies should not stray too far beyond modest philanthropy. But in reality, the likelihood of legal action being taken is low. Perhaps more realistically, directors will be changed or shares sold, if shareholders are unhappy with the direction taken – this is known as Wall Street Rule.

And there are some cases being found the opposite way. In the seminal corporate law case of BCE and Bell Canada, the Supreme Court stated that corporate directors must resolve to balance stakeholder interests “in accordance with their fiduciary duty to act in the best interests of the corporation, viewed as a good corporate citizen.”

In short, this signals that it is in keeping with the directors’ duty to act as more than a mere trustee of shareholder’s assets.

And quite perversely, we see Chevron Corporation taking an opposite stance – threatening legal action against investors that challenge the company to improve its environmental impact and corporate governance. Although, one can’t imagine that this will be a successful strategy, in the long run.

We also have to be mindful of the paradox of investment. We tend to go along with the notion that trading in stocks and shares is a good thing, that we are somehow investing in the company concerned.

But here’s the real deal, as David Korten points out with piercing insight in his excellent book, The Post Corporate World:

… in all but the rare instance in which we are buying shares sold in an initial public offering, not a penny of our money goes to the company whose shares we are buying.”

The reality is that we are merely speculating in the future earnings potential of a company, and are in no way supporting the ability of the business to generate further wealth, such that it can itself then invest in a more sustainable future. And worse than that – with share options a ubiquitous part of the executive remuneration package – the reality is that much of the rewards of success go to the executives, not the business.

And share ownership and the markets are notoriously short-term in nature.In 2007, the average term for shareholding was seven months in US and seven and a half months in UK. According to Al Gore,high frequency trading (HFT) – aided by computer algorithms – accounted for approximately 70% of consolidated trading volume in the US and 77% in the UK.

There can be little real mindful thought concerning long-term sustainability impacts and strategies within this system.

And although Paul Polman has shown tremendous leadership in breaking the tyranny of quarterly reporting at Unilever – with his focus on customers first, and not not primarily the shareholders – he is certainly a rarity, working against the grain.

If all other CEOs followed his lead, perhaps this would become a game-changer? But will they?

The real point is that in this format, ownership and decision-making power is perhaps too remote to deliver what the business needs, or make the right long-term decisions that would enable a truly sustainable business strategy to be delivered.

Is Limited less limiting?

A privately-owned limited liability company is of course less constrained; it doesn’t have to be organised just for the profit goal, and is not subjected to the short-term vagaries of the stock market.

Of course, short-termism can still be an issue in privately-owned businesses, but many owners will be in it for longer term – often in spite of any short-term difficulties – and that is an important difference.

According to a recent Boston Consulting Group study, it is also true that family-owned businesses are more likely to deliver better long-term financial performance, and are more resilient, especially in an economic downturn. And research by the Network for Business Sustainability also finds that family-owned businesses tend to pollute less.

A gross generalization, perhaps, but one might conclude, that a family-owned business could have the lowest total cost of ownership, through its life, and add greatest value to all its stakeholders – including the planet.

So, is there an option for the publicly-listed company to simply buy back its shares and de-list from the stock market? Could this be better for the long-term control and direction of the business, and for meeting the requirements of our full spectrum of stakeholders?

It is perhaps true to say that buying back shares – either directly or through an employee ownership scheme, and re-capitalizing the business – can appear to be an expensive and impractical option. But then again, which route is likely to be more costly in the long run: the cost of buying back shares, or a falling market capitalization, if the business cannot deliver on its fully sustainable strategy?

Timing, of course, is everything.

A more sustainable alternative?

But before we dismiss the publicly-traded company model completely, there are also more sustainable publically-traded models available, including the format pioneered by the likes of Triodos Bank and Café Direct, that could offer greater flexibility, resilience and a more equitable distribution of wealth.

Triodos Bank shares are owned by a mixture of individuals and institutions, such as pension funds, but with institutional interests capped at 10%, such that the bank will always be independent. This blend and diversity of ownership is also traded within a matched bargain market, away from the short-term volatility of the conventional stock market. This helps to maintain the integrity of the Bank’s mission and makes a longer-term view workable, while still attracting the necessary external capital required – the best of both worlds, perhaps?

New formats – redefining business success?

B Corp

Perhaps not surprisingly, out of these challenging times, we see the emergence of new and alternative organizational models for our businesses, which help us find more responsive and meaningful vehicles to enable the right things to happen.

While the social enterprise format can be a viable route, the profit motive will still be a significant driver for many businesses. Can we harness the best of both worlds – a business format that can meet social and environmental objectives, as well as the profit motive?

We have seen some interesting developments here, particularly in the US, with the emergence of the Flexible Purposes Corporation (Flex-C) in California and also the B Corporation, originally in Maryland, but now also in 11 further states, and rising.

Both of these legal frameworks allow greater flexibility and enable businesses to incorporate a range of goals in addition to the profit motive. And they are growing in popularity.

Lets drill down into the B Corporation movement – which provides both a new organizational format for business (Certified B Corp status) and the underpinning legislative framework (B Corporation) – a new legal corporate structure that puts people and planet on equal footing with profit, and as such provides clarity to directors and shareholders alike on the creation of public benefit and consideration of non-financial interests, as well as profit.

And these are not just fine words – it carries legal weight and protection for the business, against being sued by shareholders for not putting profit first.

B Lab – the driving force behind this approach – is a non-profit organization, dedicated to using the power of business to solve social and environmental problems. It focuses on three interrelated initiatives: building a community of Certified B Corporations; accelerating the growth of impact investing through use of B Lab’s GIIRS impact rating system; and promoting supportive public policies and legislation.

The founders of B Lab established the approach because they felt that while Government and the non-profit sector are both essential, business is also a powerful force for change, and which needed to transform, in order to create value for society, not just the shareholders. They also recognized that systemic challenges require systemic solutions, and therefore sought to develop a movement that could offer a concrete, market-based and scalable solution.

The ultimate aim is to create a new sector of the economy comprised of B Corporations that are legally recognized by the states, tax preferred by the IRS, and valued by workers, investors, and consumers. As a result, individuals and communities will have greater economic opportunity, and society will have moved closer to achieving a positive environmental footprint.

B Corp Certification means that businesses meet rigorous standards of social and environmental performance, accountability, and transparency. As B Lab describes it, Certification is bit like Fair Trade is to coffee, in establishing a new gold standard for business.

The criteria for assessment include some of the usual ESG metrics, but there is also a strong emphasis on the ‘Workers’ – including the creation of jobs and employee ownership. Certification is available throughout the United States, and indeed the rest of the world. Each B Corp must re-certify every two years.

The benefits for becoming a Certified B Corp include a blend of altruistic goals and business sense:

  • Differentiate the company in a confusing market place, in which almost everyone claims to be green and sustainable, by offering a positive vision of a better way to do business;
  • Demonstrate leadership by voluntarily holding the business accountable to higher standards of corporate purpose, accountability and transparency; and
  • Create higher quality jobs and improve the quality of life in communities.

It is also fair to say that this format also helps to manage the tension between shareholder, business, employees, community and planet and provide a smoother transition into the sustainable economy.

It is well worth looking at the Index and criteria in the 2012 Annual Report. B Corps are understood to create a 25% higher quality impact on measured attributes than the other 1,941 sustainable businesses that have gone through the B Impact assessment. It might be interesting to extend the approach further, perhaps by considering the impact of business models, and also testing the correlation between Certification and longer-term financial success?

By early March 2013, 700 businesses have become Certified B Corps, across 60 industries in 24 countries. Perhaps one of the most high-profile B Corps, at least in terms of sustainability, is Patagonia. But the growing roster of progressive companies also includes Ben and Jerry’s, and a whole host of businesses working towards the new economy.

There are just two certified B Corps in UK at this time, although there are plans to spread the word in Europe – it will be fascinating to see how this movement could take hold here.

But when considering business operating formats, we can’t readily ignore the issue of ownership.

The B Corp format certainly encourages a degree of worker ownership – with 5% or more, as a desirable first step – but should we go further?

Can we truly deliver sustainability on business if we ignore the ownership issue? We explore this fundamental point in Part 4, coming soon here on 2degrees.

This article was originally published on 2degrees

To view part 1 of this series click here
Part 2 click here
Part 4 click here
Part 5 click here
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Michael Townsend is the Founder and CEO of Earthshine Solutions.  He is passionate about promoting the benefits of sustainable business, and author of The Rough Guide to Sustainable Business (forthcoming).  Michael is an engineering graduate and MBA: a business transformation leader with over twenty-five years experience in a range of sectors. Michael has developed “best in class” performance for a range of organizations, including Norwich Union (Aviva) Insurance, BAA, British Airways, Mace, The Home Office and Gazeley, amongst others.

 

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