For long, value creation in the financial services industry was often viewed as the result of winning the competition on organisational efficiency and functional excellence. Better operations, better distribution networks, better servicing – all were seen as main factors in improving market share, creating value for customers and therefore creating shareholder value. But, as argued in Melnick, Nayyar et al’s 2000 paper, ‘Creating value in financial services’, customers do not care about functional excellence, nor do they care about whether an organisation has unique resources to take advantage of scale or networks. Customers care about whether the product or service is of utility to themselves and (in some cases) to the wider society. This recognition has led to a renaissance in organisational strategies focusing on anticipating, understanding and responding to customer needs and developing long-term relationships with them.
Value creation is not only an outcome but also a process. In the case of Melnick and Nayyar et al, this process involves creating customer value focused strategies, services, systems and measures of success. In the case of the International Integrated Reporting Council (IIRC), this process is more generally defined in the context of its integrated reporting (<IR>) framework as follows:
‘Value is created through an organisation’s business model, which takes inputs from the capitals and transforms them through business activities and interactions to produce outputs and outcomes that, over the short, medium and long term, create or destroy value for the organisation, its stakeholders, society and the environment.’
This definition breaks apart the historically narrow focus of value creation as being the sole deserves of shareholders and, more recently, customers. So for whom should value be created and how can we measure it?
Organisations have a wide range of interactions within the regulatory, societal and environment context within which they operate. This ecosystem promotes relationships between the organisation and its shareholders, consumers, employees, regulators and other stakeholders. The long held dichotomy between creating value for shareholders and creating value for stakeholders was discussed in Porter and Kramer’s 2011 work on ‘Creating shared value’. The central premise is that the competitiveness of a company and the health of the communities around it are mutually dependent. Robert Eccles also tackles this idea by noting that corporations have two basic objectives: to survive and to thrive. He argues that shareholder value should not be the objective of a company but the outcome of the company’s activities.
At the Thinking Ahead Institute, we propose a balanced scorecard approach to better understanding for whom value is being created for and, equally, for whom it is being eroded. Firstly we define four key terms:
-
Owner value proposition (OVP): this is well represented by traditional reporting (balance sheet, profit and loss accounts) and is the value produced for the owner
-
Stakeholder value proposition (SVP): value created for the society and environment in which an organisation operates.This is usually outlined to varying degrees in corporate social responsibility (CSR) reports
-
Client value proposition (CVP): policies and actions that deliver value to clients in services and products
-
Employee value proposition (EVP): policies and actions that attract, retain and develop employees and teams.
Measuring the value created by an organisation needs to take into consideration all four areas. This requires organisations to use new measurement techniques that move beyond traditional accounting and CSR reports. Traditionally EVP and CVP have not been measured and at the Institute we have created a toolkit to help organisations assess these. There is no strong client proposition without a strong employee value proposition so these should equally be considered in an organisation’s mission and strategy.
In a previous article, I referred to John Elkington’s 1997 phrase “the triple bottom line”. He argued that companies should not only focus on the economic value that they add, but also on the environmental and social value they add (and destroy). Companies are increasingly seen as needing a ‘social licence’ to operate, the deterioration of which is linked to tangible reductions in shareholder value and in turn, portfolio return. Understanding the impact and the creation of value by companies is at the heart of modern day initiatives such as the IIRC framework. This framework encourages companies to think about value creation (and destruction) through the lens of multiple capitals over multiple time horizons. The Global Reporting Initiative’s (GRI) Sustainability Reporting Standards leadership on non-financial disclosures also provides an industry trusted framework to enable organisations to publicly report on their economic, environmental and social impacts. However we believe that there is more work to be done to understand how we can better measure value creation of companies – the balanced scorecard framework proposed above provides a first step towards this.