Private sector business is often driven by an incessant desire to maximise profit at all times. This is, after all, what the execs get paid to do: produce short term results. As it happens, the private sector has been in another pendulum swing back to value since the Enron debacle. The debate was focused (and rightly so) around business ethics. However, Harvard Business Review has just published an article by Alfred Rappaport, the Leonard Spacek Professor Emeritus at Northwestern University’s J.L. Kellogg Graduate School of Management, in which he reprises his classic dissertation from 1981 regarding shareholder value.
What does shareholder value have to do with social enterprise? Most social enterprises are small organisations structured as limited by guarantee or cooperative structure. Not the kind of structures that conjure up visions of meetings with shareholders demanding higher value and return on their investment.
Actually, reading this article: "Ten Ways to Create Shareholder Value" (HBR, September 2006) got me thinking about the parallels for social enterprise. It’s not a huge leap. Social enterprises are set up to create value, albeit not necessarily monetary in nature.
So how can shareholder value principles instruct leaders of social enterprises? Today, let’s take the first principle and explore how it relates to social enterprise:
Principle 1: Do not manage earnings or provide earnings guidance
What’s so bad about focusing on earnings? First, the accountant’s bottom line approximates neither a company’s value nor its change in value over the reporting period. Second, organisations compromise value when they invest at rates below the cost of capital (over investment) or forgo investment in value-creating opportunities (underinvestment) in an attempt to boost short-term earnings. Third, the practise of reporting rosy earnings via value-destroying operating decisions or by stretching permissible accounting to the limit eventually catches up with companies. Those that can no longer meet investor expectations end up destroying a substantial portion, if not all, of their market value. [HBR, 9/2006 A. Rappaport]
The first point is a refresher in economics, while the third point debunks the supporters of short term gain strategies. I would like to focus your attention on the 2nd point: compromising value. This is likely the most challenging management technique to incorporate into most nascent social enterprises because they are either in a constant feeling of start-up or they have arrived at some stability only to become staid as a result of the early days of feast and famine.
Social enterprises should be investing for value. This includes choosing services for your firm that offer value, not just savings or linkages to a good cause. This also includes investing in areas that will bolster both your mission and trading activity. There are many tools out there (NPV, ROI, etc.) to help you calculate the benefit of any of your investments and/or service offerings. But, it’s less about tools in the end and more about clever strategy to realise that you cannot grow your firm (and subsequently your mission) without appropriate investment and quality services to your firm.
Decisions:
(1) The next time you are faced with a decision to choose one service provider over another (ex: Internet), think about the ramifications of all the non price components (downtime, help, ease of use, flexibility) and pick the provider with the best overall package that match your needs. Note: this does not mean value for money in the traditional sense–but rather a bigger picture perspective.
(2) Facing the possibility of building your reserve or investing in a new service scheme to improve customer satisfaction, which would you choose? Tell the truth. You would likely put the money into the reserves to get your board off your back or cure that sick feeling you still have from last year when you had to use an overdraft for payroll during a sales slump. While it is prudent to put some money away, it is more responsible to invest a larger portion in the future of the firm. Otherwise you may be saving all your money to help with costs to wind up the organisation.
The good news: If you can get this first principle integrated into your leadership strategy, you will be better than 80% of the private firms in the world.
I will explore principles 2 through 10 next week.
Resources:
Shareholder Value
Wikipedia’s larger perspective
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