But what are we talking about? What is, pun intended, the ‘value’ of this concept? More importantly, as a business manager, how can you enable your organization to create value in the wider sense? In this blog we’ll outline in detail what value creation really is about (spoiler alert: sustainability) and next month, we are going to give some practical tips on how to work with this concept.
What about long-term value creation?
A short history lesson. Value creation as a concept comes from Integrated Reporting, which started growing around 2008. During that time, we collectively found out that economic stability can’t really be judged based on financial, backward looking, reporting only.
So, the International Integrated Reporting Council (IIRC) came up with a holistic reporting framework for the investor community, asking companies to disclose their impact and report contextually, by including information on external influences, strategic priorities and the dynamics of the business model.
The central concept? Value creation, not only in the form of financial capital, but also through manufactured, human, social and relationship, intellectual and natural capital. These represent the resources organizations use to create value, as the image below shows.
Following this development, in The Netherlands the term long-term value creation began really buzzing by the end of 2016, when the Dutch Corporate Governance Code – the guidance for good governance – was revised. One big change was the explicit request to company boards to act sustainably by focusing on long term value creation. It states ‘long term sustainability is the key consideration when determining strategy and making decisions’, a process in which stakeholder interests are to be taken into consideration.
One year later, in his annual letter to S&P 500 CEOs, Larry Fink, CEO of BlackRock, talked about long-term value creation and corporate purpose, this time even more elaborate than previous years. Fink pointed out that governments seem to be failing to prepare for long-term issues and that ‘society is increasingly turning to the private sector’ to address societal challenges, that ‘society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.’
And in 2018, John Elkington, the originator of the concept Triple Bottom Line (TBL), recalled his idea as to finetune it. He notes that the TBL has been embraced and it has progressed into concepts like ‘Integrated Profit & Loss’, but it was not meant to just be an accounting tool. Instead, he says, ‘it was intended as a genetic code, a triple helix of change for tomorrow’s capitalism, with a focus was on breakthrough change, disruption, asymmetric growth (with unsustainable sectors actively sidelined), and the scaling of next-generation market solutions.’
In conclusion to the question ‘what is value creation’, it’s about integrated sustainability, or as we at Sustainalize like to say, good & smart business.
From talking the talk to walking the walk
Given that the idea originated in a reporting framework, we now see many annual reports which explicitly mention ‘long term value creation’ and how boards and management take this into account, but the underlying aim of integrated reporting is to change corporate behavior through integrated thinking.
Unlike ‘value creation’, trying to get some clarity on integrated thinking is not so easy by just Googling around. IIRC itself explains: ‘Integrated thinking is the active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects’.
That’s pretty abstract stuff, and neither IIRC or the business science community have really explained it in more concrete words. Simply speaking, value creation can be in the economic, social and environmental dimension, and impact in those areas can be positive or negative. There may be trade-offs between value creation with the different capitals. Just think about a company that, in order to remain financially fit, needs to let go of a number of staff. Or an investment decision leading to economic growth, which will go hand in hand with negative environmental impact.
Integrated thinking is about the organizational capacity to understand these interrelations and trade-offs, with an outside-in perspective of the big trends and developments that are shaping our world today. It is a lot like systems thinking, which concerns looking at the big picture instead of the individual parts. It is a way of seeing and thinking, understanding strategic and operational dilemma’s and as a result, being able to innovate and adapt.
Moreover, systems thinking is useful when it comes to complex problems, like, climate change. Essentially, it comes down to dilemmas and how you resolve them, by looking at the issue at hand from a kaleidoscope. To us, that is precisely the benefit of integrated thinking.
Capitalizing by addressing societal needs
A company that seems to have this down, is Royal DSM. They started as the Dutch State Mines in 1902 and have transformed multiple times in response to a changing world, moving to petrochemicals, then to being a diversified life sciences and materials company, focusing on nutrition, health, climate and energy. Their Brighter Living Solutions products make up 62% of sales.
One of those products are cargo nets made from DSM’s ‘Dyneema’, a lightweight fiber. Air France-KLM-Martinair Cargo, AmSafe Bridport and DSM collaborated in the development and testing of the lightweight nets for several years. The result: a cargo net weighing just 9 kg, half the weight of a traditional net.
That led to value creation in different capitals. It improved safety for people working with the nets, who had fewer back injuries. It saved the airline fuel, cutting operating costs and as a result it lowered CO2 -emissions. A triple win.
Another good example is Randstad. In the past years, the global HR services provider transitioned to integrated sustainability by creating a vision for the future of work. Their ultimate goal: to touch the work lives of 500 million people worldwide by 2030. If they succeed in reaching this commitment, their bottom line will certainly benefit, and they will be addressing societal questions of youth unemployment, diversity and inclusion. But it will require them to question the current core business, as DSM has had to.
How to get started with integrated thinking and doing?
To create this culture of integrated sustainability and innovation, companies need to move beyond the typical sustainability department pushing the sustainability agenda, towards creating a culture of ‘sustainability learning’ throughout the organization.
Maybe you’re now asking yourself: how am I going to create such a collaborative culture? How is my organization going to be bustling with people that understand that value creation is much more than just the bottom line?
In our next blog, we´ll present a method on how to get started.
Author: Jacqueline Houweling, consultant Sustainalize