Moral Capitalism and the Future of The Sustainable

Corporation

Stephen B. Young

Global Executive Director

The Caux Round Table

Brisbane, May 22, 2007

What is A Sustainable Corporation?

• Quality Income Stream

• High net present discounted value

• Good capitalization multiplier

Good Corporate Value

(Warren Buffet would buy it)

Today where does most corporate value come from?

Intangible Assets!

50 Best Performers of 2005Business Week

Burlington Northern Santa Fe: Market value: $29.2 billionBalance sheet assets: 103% of market value ($30.3

billion)Goodwill: None

Caterpillar: Market value: $49 billionBalance sheet assets: 95.9%Goodwill: 4.1%

United Health Group: Market value: $79 billionBalance sheet assets: 52%Goodwill: 48%

Apple: Market value: $58 billionBalance sheet assets: 19.8%Goodwill: 80.2%

50 Best Performers of 2005Business Week

Microsoft: Market value: $279 billionBalance sheet assets: 33.7%Goodwill: 66.3%

Best Buy: Market value: $26.3 billionBalance sheet assets: 39%Goodwill: 61%

Starbucks: Market value: $27.8 billionBalance sheet assets: 12%Goodwill: 88%

Goldman Sachs: Market value: $61.7 billionBalance sheet assets: 1.1%Goodwill: 98.9%

What is a company worth?How to we measure its value?

• Most simple calculation:Discounted net present value of future

income X capitalization multiplier

First Fundamental ConclusionYou cannot establish value without

putting risk into the calculation

– What is the risk of not achieving predicted future revenue? How certain are estimates of future income?

– What are the risk factors that determine the capitalization multiplier? A higher risk demands a lower multiplier

Higher risk > more uncertainty > lower present value

Note:

• Each source of risk drives business value up or down

Second Fundamental Conclusion

Management of Risk Enhances Enterprise Value

- Risk management leads to more certain income

- Risk reduction leads to higher valuation

How do you manage risk?-Each risk hides in a relationship

- customers

- investors

- government regulation

- employees

-Each relationship is an intangible asset of the business (Assets can Appreciate or Depreciate).

-Lowering risk for each relationship enhances the quality of intangible assets and increases business valuation

CSR & Valuation

Intangible Assets = CSR Stakeholder Relationships

• Customers• Employees• Owners/Investors• Suppliers• Competition Strategies• Community Support

To improve company valuation,Improve CSR relationships!

Good CSR Relationships Lead to The Sustainable Corporation

How to measure CSR Relationships

Use CRT Arcturus

Risk Assessment Instrument

New metrics for enhanced profitability

How to Manage for Sustainable Value?

• CRT Theory of the Firm

• Arcturus

INP

UT

S

$; sustainable

profits; low beta; maximum

value

Reputational capital

Social capital

Finance capital

Physical capital

Human capital

Conversion processes

OUTPUT Goods/services

Customers

Return on Capital

(preserve adequacy of capital inputs)

Theory of the Moral Firm(self interest considered upon the whole)

Theory of the Moral Firm: 2

CRT Principles

Vision

Stakeholders

Corporate Governance

Leadership Strategy

Value Drivers

Shareholder Value

Stakeholders:-Customers – moral compass for capitalism

-Employees – moral agents, not parts for a machine

-Owners and Investors – fiduciary duties of loyalty and due care

-Suppliers – friends, not foes

-Competitors – compete with quality and innovation, not price

-Communities – enhance social capital to enhance future profitability

Transforming

Integrated

Innovative

Engaged

Basic

Transforming

Integrated

Innovative

Engaged

Basic

Creating New Markets, New Consumer Paradigms

Leadership Styles

Core Behaviors

Values -Driven

Business Case

Visionary

Values Champion

Social License to Operate

Legal Compliance, Short-termism

Value Steward

Supportive

Disconnected, Erratic, Reactive

Moral Capitalism

Aspirations(Kyosei, Human Dignity, Stewardship)

Category 1. Fundame

ntal Duties

2.Custom

ers

3.Employ

ees

4.Owne

rs/Invest

ors

5.Supplie

rs/Partner

s

6. Competit

ors

7. Communities

1. Responsi-bilities of Business

Criterion1.1

Criterion1.2

Criterion1.3

Criterion1.4

Criterion1.5

Criterion1.6

Criterion1.7

2. Economic and Social Impact of Business

Criterion2.1

Criterion2.2

Criterion2.3

Criterion2.4

Criterion2.5

Criterion2.6

Criterion2.7

3. Business Behavior

Criterion3.1

Criterion3.2

Criterion3.3

Criterion3.4

Criterion3.5

Criterion3.6

Criterion3.7

4. Respect for Rules

Criterion4.1

Criterion4.2

Criterion4.3

Criterion4.4

Criterion4.5

Criterion4.6

Criterion4.7

5. Support for Multi- lateral Trade

Criterion5.1

Criterion5.2

Criterion5.3

Criterion5.4

Criterion5.5

Criterion5.6

Criterion5.7

6. Respect for the Environment

Criterion6.1

Criterion6.2

Criterion6.3

Criterion6.4

Criterion6.5

Criterion6.6

Criterion6.7

7. Avoidance of Illicit Operations

Criterion7.1

Criterion7.2

Criterion7.3

Criterion7.4

Criterion7.5

Criterion7.6

Criterion7.7

Arcturus Risk Assessment Instrument – Criteria Matrix

Assessment Framework – Criterion/Benchmark Example

CUSTOMERS (Section B)

1B - Beyond Shareholders towards Stakeholders - Customers

Does the company provide its customers with quality products and services at reasonable prices, and on fair terms, while protecting their health and safety and their physical environment, and respecting their culture and individual dignity?

POINTS TO CONSIDER – The company seeks customer feedback on its practices, monitors impacts, and is prepared to modify production or service as a result, plus provides relevant training of staff.

Point(s): Please circle

1 2 3 4 5 6 7

Please write down any concerns, explanations or additional comments on how or how not, the company is performing.

____________________________________________________________________________________________________________________________________________________________________________________________________________________

2B - Economic & Social Impact of Business - Customers

Do the company’s products and services contribute to the economic and social advancement of its customers and to the well-being of their communities?

POINTS TO CONSIDER – Quality of product/service development; product quality and safety; adherence to relevant customer, safety and environmental codes; products / services positively impact living standards?

Point(s): Please circle

1 2 3 4 5 6 7

Please write down any concerns, explanations or additional comments on how or how not, the company is performing.

____________________________________________________________________________________________________________________________________________________________________________________________________________________

Value Drivers (positive or negative) - 1 Capital Adequacy

Reputation

Customer loyalty; quality; financial standing; brand

awareness; compliance

Social

Taxes; citizenship duties; acceptable

externalities (ISO 14000); legal;

contributions; community service

Finance

Dividends; interest; stock price;

transparency; corporate governance; risk profile

Physical

Supply chain; depreciation expense

Human

Compensation; work environment; corporate culture

CRT Tool -

CRT Tool

CRT Tool-

CRT Tool

CRT Tool-

Value Drivers (positive or negative) - 2 Management Sensitive

Conversion Processes Production processes (ISO 9000); costs;

HR process; credit/liquidity; R&D process; inventory control;

Procurement productivity;

CRT Assessment Tool

Capital Outputs

Value Drivers (positive or negative) - 3 Market Sensitive

Output Goods/Services

Quality (ISO 9000); innovation; market knowledge/research

CRT Assessment Tool-

Conversion processes Customers

Value Drivers (positive or negative) - 4 Market Sensitive

Customers Quality; price, warranties; service;

advertising; sales; distribution; market research

CRT Assessment Tool-

Output $ Profits

Assess Board Management and Employee Decision –Making

Phase I – 60 minutes – CEO, Board Members, Senior Management Team

Phase II – 60 minutes per stakeholder – Other Management Executives & Company Leaders

The Corporate Improvement Cycle

Performance Improvement

Performance Feedback to Management

Management Action

CRT Assessment

How Do Companies Create Value?

-The Good

-The Bad

-The Ugly

The Good (Moral Capitalism)

• Risk Assessment/continuous Risk Reduction

• Optimize Stakeholder Benefits

The Bad (Brute Capitalism, Crony Capitalism)

• Feed Shareholders, Abuse Stakeholders• Commoditiy pricing/ compete on

pricing/low costs• Rent seeking (market power)• Take the money and run: short termism

Unsustainable Valuation

The Ugly (Punting on the trading floor)

• No net wealth creation

(Rob Peter to pay Paul)• Irrational Exuberance

(Market traders short terism)• False Valuations

(Enron: Ponzi Scheme)• Encourage unsustainable pricing of securities

Private Equity and Moral Capitalism

• Ownership or Stewardship?

• Private equity can be:

- moral

- brutal

- speculation on the foibles of others

Today’s shareholders are stewards for future

shareholders• Ownership has its responsibilities

• Business has a social office to perform

(Create net wealth)

• Owners paid to perform the duties of that office- profit from good service well delivered

• Misfortune of residual claimants

What of Personal Dominion?Is Private Property

Legitimate?

All power is subject to the moral sense

CRT Principles for the Ownership of Wealth

Fundamental Principle: 

The ownership of wealth entails stewardship.

 

General Principle # 1 

Wealth should be used to enhance other forms of capital: finance, physical, human, reputational, and social. 

General Principle # 2

The desires of owners for self- satisfaction should be balanced against society’s need for robust accumulation of new capital in all forms.

General Principle # 3

Wealth must support the creation of social capital. 

General Principle # 4

Wealth should be invested in institutions enhancing

human capital. 

General Principle # 5

Private wealth should supplement public expenditures for the social safety net. 

General Principle # 6

No one is morally entitled to the use and enjoyment of

wealth procured by fraud, corruption, theft, or other abuse of power. 

Thank You