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Friday, 12 May, 2017

Inclusive Theory

Summary: Changing our business measurement standard is important, but it only addresses part of the problem, if we are looking for a sustainable and prosperous future for all. Consumers are critically important to business, as they create the demand for products and services. It is their demands which are placing global resources under enormous strain, so consumers have a critical role to play in contributing to a sustainable, fair and prosperous future for all. Inclusive Theory explains that business and consumers are in it together in making sure global resources are cared for, and work for the benefit of all.

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Our understanding of value creation, particularly of who business should create value for has evolved over time.

It started with the idea that shareholders should be the beneficiaries as they provide the financial capital and take the financial risk. This made sense. However, over time concerns grew. Marketers suggested that "customer value" was important. They argued that if we do not continually increase customer value, they will go elsewhere. This also made sense. "What about employees?" argued Human-Resource experts, "they too will go elsewhere unless looked after." "What about the environment?" conjectured environmentalists. "If we continue to destroy what supports us, we have no future." They to make a good case. And so the legitimate claims to become beneficiaries of value creation grew. All claimants making a plausible and logical case for their fair share.

The facts are, there are many participants, or stakeholders involved in the activities of business, such as, customers, staff, suppliers, the community in which the business trades, the environment, as well as shareholders. If all these participants are not "looked after" their support, in the future, may be difficult to achieve. This will make future value creation for the business owners, or shareholders, more difficult. Consequently, sustained, long-term value creation is about creating value for all participants involved in the activities of business, not just one, or a group of select participants.

It's not an altruistic, or "airy fairy" social belief to suggest that all participants be rewarded fairly, but rather a common-sense approach. Adopting a short-term, profiteering mentality, of rewarding one participant at the expense of others, creates an unsustainable imbalance in our economy. When value is more evenly spread among all participants, we have a stronger economy, which leads to a brighter future for all, not just select participants.

For business to be successful, it has to create value for all its participants. You have to see business from a balanced perspective. If you only see shareholder value creation as your sole objective, then you will never achieve it as shareholder value creation is inextricably linked with all other participants. Unless you create value for all participants, long-term shareholder value creation is a wild, unattainable dream.

As obvious as this may be, we have not yet made the transition to "Stakeholder Theory" (as proposed by Edward Freeman,) away from "Shareholder Value Theory" (attributed to Milton Friedman,) which suggests the interests of shareholders be placed above all others. The reason we have not made the transition is a simple one. Our economy relies on comparable measures, so unless we are able to measure stakeholder value creation on a universally comparable basis, businesses will not make the transition. Instead, they rely on our universally applicable financial measures. While not ideal, it is argued that some comparison is better than none. Unfortunately, the use of our financial measures as a business measure has led to undesirable consequences, resulting in it becoming the root cause of our most serious socioeconomic and environmental problems. Therefore, we need to adopt the more balanced approach of "Stakeholder Theory," but this is dependent upon developing a universally applicable value creation measurement framework, which, until now, has been unavailable.

Until we develop and introduce a new business measurement standard, which will provide a balanced approach, and protect the interests of all stakeholders, we hurtle towards the destruction of our socioeconomic and environmental systems, as we know it. Because of the scale and speed of destruction, I believe "Stakeholder Theory" does not go far enough in providing a solution, hence the introduction of "Inclusive Theory", my small "tweak" on "Stakeholder Theory."

The backdrop to this theory are reports like those produced by the WWF and SustainAbility, (plus many others) who conclude that "the Earth cannot keep up with the demand our economy is placing on its ecological assets. Evidence is mounting that the sheer volume of resources flowing through the global economy has become today's key environmental challenge and as human demand for resources grows the Earth's life-supporting natural capital will be liquidated at ever-increasing rates."

If we are to address these problems there has to be a new understanding within business, and between society if we have any chance of averting disaster. Basically, we need a new social contract between business and society. Business has to function as a societal tool. It can no longer be a self-serving mechanism for shareholder enrichment at the expense of others, but rather a tool to serve all stakeholders. Critically, shareholders still need to be rewarded, (this being the primary objective of business) but not at the expense of other stakeholders. Consequently, Capitalism, or the spirit of free enterprise, remains the ideal mechanism to deliver growth and upliftment, provided it is based on balanced rewards for all stakeholders. Currently, this is not the case. This is not the fault of Capitalism. The problem lies with our inadequate and inappropriate business measurement standard, where we use financial measures as a business measure, thereby placing a financial bias on everything, favouring the fortunes of shareholders over all others.

In this new understanding between business and society, we must all accept responsibility and accountability. It's not somebody else's problem, or a case of, “I don't care,” because, the outcomes impact us all. Consequently, it's not just about business doing its bit but also about the critical role consumers and society play in business. For example, if we hold business accountable for upstream environmental/social impacts (i.e. the business fully inherits the environmental/social impacts of its suppliers) as well as being responsible for their own processing and downstream environmental/social impacts, it's only fair that the consumer picks up the upstream environmental/social impacts of the products and services they consume. If business is vilified and driven out of business because of their poor environmental/social impact, then so too must the consumer be vilified and dissuaded from using products and services with a poor environmental and community impact. Consumers are as much part of the supply chain as any business, and must, therefore, be educated into accepting the responsibility for their purchases and their impacts.

"As long as there is a demand, business will fulfil it" is a mindset we can no longer tolerate. There are consequences to this and those producing and consuming while destroying or placing resources under undue stress, must be stopped, or face the consequences. The lifestyle enjoyed by most in the first-world, and to which all others aspire are simply unaffordable in terms of natural resources. We as consumers have to take responsibility for these unsustainable consumption patterns. We have to review our consumption patterns and expectations in light of a growing population and our demands on limited and sometimes irreplaceable resources. What we demand and expect has to be tempered with these constraints. As consumers, it's our demands and expectations, which drive business, so we have a very important role to play on issues we are quite happy to blame on business. We blame them for exploiting scarce resources, pollution, cutting down rain forests and planting commercial products, but we still demand the products responsible for this. We are the ones who set up the demand which results in unethical and unsustainable practice because as long as there's a demand, somebody will try to meet it. Our role is to temper our demands and expectations and become savvier in identifying wasteful, unsustainable, polluting, unethically sourced products, etc. Products with a negative environmental and community impact need to be socially ostracised. We can't continue the way we are now; the responsibility for change lies with consumers as much as it does with business. As a society, rather than celebrate opulence, extravagance and waste, we have to learn to celebrate frugalness, product longevity, etc.... This may not sound attractive, but I know our inventiveness will come up with enticing solutions.

"We are all in it together" sums up "Inclusive Theory." It's a small but important tweak to "Stakeholder Theory." We cannot expect fundamental change that does not involve the most important component of all - the consumer, and wider society. Consumers ultimately determine demand, therefore, they need to set their expectations in accordance with realities - no unbridled expectations just because they have the wherewithal. Consumers must take responsibility for their consumption and not attempt to pass it back upstream. It's not the large corporations chopping down forests to replace them with palm oil plants, or huge beef herds, but rather the consumer because the consumer creates the demand. Consumers must temper their demands based on all the good principles we expect business to uphold.

Consumers also have wider responsibilities to ensure all businesses (even those they have no relationship with) act responsibly, thereby ensuring we all keep a watchful eye over the most important social asset of all - business. We are all accountable and responsible.

Adrian Mark Dore

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Posted by Adrian Mark Dore at 6:51 PM
Edited on: Sunday, 19 November, 2017 2:12 PM
Categories: Broader issues affecting the need for change.