Dec 16, 2012 - 9.3 Application of the Value Creation Model (VCM) ... It is time to rebalance the global situation and companies need to be part of the ..... than $12 billion to nonprofits and invested $1.6 billion in cause-related .... portfolios.
Hybrid corporations: the next business paradigm
Manuel Pretel Wilson Master’s Dissertation Institute of Sustainability UPC-Barcelona Tech December 16, 2012
Acknowledgments
This dissertation would not have been possible without the people that granted me life and gave me the values I try to live up to every day, I have inherited from my father his tenacity and from my mother her temperance. If there is single value they have contributed to instill in my nature, I dare to say it is autonomy, the authentic source of happiness. I appreciate their constant support to my personal development. I also thank my wife and my daughters the joy and feminine intelligence they have brought to my life, without which I would not have been able to transcend my individuality to embrace something bigger than myself. Àlvar, my dissertation supervisor, believed in the topic from the very beginning and provided me with wise comments along the way. The numerous reflections with my friend Hernán have been crucial for my discovery of the essence of natural capital. Yet my natural tendency towards eco-centrism has been tempered thanks to this research project. We cannot love nature without loving humanity. Human capital and social capital are the condition of possibility of our system of values. This leads me to the architect of the company that has balanced my approach to sustainability. I will never forget the meaning of the word integrity, thanks Cristobal! I also dedicate this dissertation to all the people that work in La Fageda and make their dreams come true. Finally, I was also greatly honored by the participation in the survey research of other hybrid corporations. These and other global value maximizers are helping to rewrite the rules of the next business paradigm
Abstract
The present study is an exploratory research about a type of organization that is emerging and that is defining the next business paradigm: hybrid corporations. Global trends are magnifying their most significant features: traditional organizational sectors are blurring, financial markets are being transformed by the rise of social investors, global values are shifting towards postmodern values, and new business networks are redefining success. The author puts forwards a conceptual framework that defines and identifies hybrid corporations as well as a theoretical model to explain both how they operate and why they generate a positive impact. The research methodology combines two methods to test the two working hypotheses: survey and case study. The survey helps to test the Hypothesis1 on what defines hybrid corporations, namely, they maximize multiple forms of value. In addition, La Fageda case study, a successful company that employs mentally ill people as its core business, has been useful to test both the application of the conceptual framework and the Hypothesis2 which explains how hybrid organizations maximize global value, namely, by embedding a transcendent mission in a corporate design.
Index Page 1. Introduction 2. Literature review 3. Research objectives 4. Explanatory factors behind the business paradigm shift
1-2 3-8 9 10-19
4.1 Traditional organizational sectors are blurring 4.2 Financial markets are being transformed by the rise of social investors 4.3 Global values are shifting towards postmodern values 4.4 New business networks are redefining success
5. Research questions and methodology
20-23
6. Conceptual framework: Capital Stewardship Framework (CSF)
24-43
6.1 Economic value 6.2 Beyond economic value 6.3 Value as Capital Stewardship 6.4 Theories of capitals 6.5 Capital Stewardship Framework (CSF)
7. Theoretical model: Value Creation Model (VCM)
44-59
7.1 Business model approach 7.2 Social innovation approach 7.3 Corporate design approach
8. Research findings (1): Survey
60-68
8.1 Analysis of results 8.2 Discussion of results
9. Research findings (2): La Fageda Case Study
69-88
9.1 Application of the Capital Stewardship Framework (CSF) 9.2 Discussion of results 9.3 Application of the Value Creation Model (VCM) 9.4 Discussion of results
10. Conclusions
89-90
11. Bibliography
91-93
Index of Tables, Figures and Graphs Page Table 1. New Principles for Corporate Design Table 2. Attributes of For-Benefit Corporations
4 4
Figure 1. Taxonomy of hybrid organizations
6
Figure 2. Dimensions of hybrid organizations
7
Figure 3. The Thee Sectors
10
Table 3. Distinctive Attributes of the Sectors
10
Figure 4. The Fourth Sector
12
Table 4. Principles of Responsible Investment
13
Graph 1. Economic Development and Well-Being
16
Graph 2. The shift towards postmaterialist values in Western societies
16
Graph 3. Evolution of registered GRI reports
18
Table 5. BALLE Guiding Principles
19
Graph 4. Economic growth in the last 500 years
24
Figure 6. Zero-Sum Dissonance
32
Figure 7. Blended Value Proposition
33
Table 6. Theories of Capitals
35
Figure 7. Importance and interrelationships between capitals
36
Figure 9. The funnel
40
Table 7. Capital Stewardship Framework (CSF)
43
Figure 10. The four components of a social business model
46
Figure 11. Value Creation Model (VCM)
52
Figure 12. Articulating a vision
53
Figure 13. Positive impact generated by hybrid corporations
59
Page 60
Table 8. Survey respondents Graph 5. Motivation Table 9. Mission statements of responding organizations Graph 6. Non-financial information Graph 7. Metrics and standards Graph 8. Importance of capitals Graph 9. Relationship between capitals Table 10. Revenue by business activity Table 11. Annual Surplus (2003-2010) Table 12. Dairy products revenue (2004-2010) Table 13. La Fageda’s Capital Stewardship Assessment Table 14. Shared beliefs in La Fageda Table 15. La Fageda’s shared values
61 61-62 62 63 63 64 69 70 70 78 81 81
Table 16. Institutional configuration of La Fageda 82
Figure 14. La Fageda’s Organizational Chart 83
1. Introduction
It would not be fair to start this introduction without mentioning the motivation that has driven the author to research the crucial paradigm shift that is emerging in the business world. I have always believed that though companies have been partly responsible for most of the global challenges we are facing today, they are useful and necessary tools to bring forward a system change. Since the Industrial Revolution and the subsequent exponential growth experienced by our market economies, the degradation of humanity and the planet has only become more acute. One subsystem of society, the market sector, has dominated the scene in the name of growth and prosperity. It is time to rebalance the global situation and companies need to be part of the solution by becoming restorative and making communities and ecosystems flourish while contributing to the development of human capabilities.
It may seem a chimerical illusion that springs from ignorance or a naïve vision, but it is something very real that is happening worldwide. Indeed, there are already plenty of companies that are behaving in a restorative and positive manner proving their business concept and by doing so redefining business success. Unlike traditional companies that judge their success based on how well they maximize financial performance and only recently minimize those negative impacts that have a business case, these companies are designed to maximize other forms of value and generate a positive impact.
The author names this type of company the hybrid corporation and we will have the opportunity to get to know them in the following pages. They are a vivid example that proves that authenticity and integrity can coexist in a competitive business environment and that it is possible to redefine success in business without trading off financial performance. Besides their business character, they are vital projects that bring meaning to their members and help them develop their human potential. Moreover, instead of treating their workers as mere human “resources” that have to be squeezed to extract their maximum labor productivity, they grant them a value in themselves, and the same goes for nature. Hybrid corporations do not conceive their companies as ends in themselves, but as means or instruments to achieve higher ends that transcend their private interest and coincide with the public or common good.
But before we learn more about them, as with all academic works, first this research will need to be place within the development of other related fields of knowledge in order to judge its main contributions to the science of sustainable enterprises. By their very nature, we will see that they do not fit in within the established fields of corporate social responsibility (CSR) and social entrepreneurship, because they transcend them by overcoming their inherent concept of value. But not only fields, hybrid corporations are also blurring the boundaries between traditional organizational sectors since they are neither private companies nor NGOs, but carry out roles and functions traditionally assigned to them. So far, however, the few studies of hybrid organizations that have appeared in recent years do not seem to capture their uniqueness because do not question the prevailing concept of value. 1
Once the relevant literature has been reviewed and the research gaps identified, another chapter will be devoted to explain the research objectives in order to narrow down the area of inquiry. To set the background of this research, the next chapter will delve into the changes in the global context and the factors that explain the emergence of a new business paradigm. A set of trends that anticipate a real transformation that is taking place in organizational sectors, financial markets, global values and business networks. Next, the following chapter will articulate the research questions that will guide this study and the methods that will be used to answer them.
Regarding the theoretical framework that informs this dissertation, the author has developed a couple of analytical constructs. Firstly, a conceptual framework will be introduced that provides not only a new concept of value more attuned and more useful to define hybrid corporations but also a practical tool to identify them based on an evaluation of their global value performance. Secondly, a theoretical model will be exposed to help explain how hybrid corporations create multiple forms of value and why they generate a positive impact.
In the last few chapters, the author analyses and discusses the empirical results that have been gathered in the course of the research. However, since he has adopted a mixed method research which combines survey and case study, this part of the dissertation is divided accordingly in two chapters. Finally, in the last chapter he puts together the main conclusions drawn from this research.
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2. Literature review
According to historians, the modern corporation was born 500 years ago due to a social innovation induced by monarchs to channel the money of aristocracy and successful merchants towards colonial aims, namely, the so-called “chartered” corporations were granted the monopoly on trade by a Royal Charter. “The corporation that truly changed the world, however, was the British East India Company, founded in 1600: it pioneered the shareholder model of corporate ownership and built the foundations for the modern business administration that continue to this day” (Hart 2011: 4). However, the fully-fledged modern corporation appeared in the 19th century thanks to another important social innovation with unforeseen consequences: the limited liability of the shareholders for the corporation’s debts and obligations (Senge et al. 2008). Indeed, as the founder of VISA puts it, companies “have become a superb instrument for the capitalization of gain and the socialization of cost” (Dee 2005: 140). Yet this investment instrument satisfied the financial capital needs of the booming private sector by channeling the growing saving of the middle class. In the words of Barnes, “when capitalism started, nature was abundant and capital was scarce; it thus made sense to reward capital above all else” (2006: preface).
Although there is no doubt that the modern corporation and the development of the capitalist system have brought undeniable positive consequences such as material wellbeing, innovation and personal freedom, its enormous power and influence have also generated a number of negative consequences such as climate change, environmental degradation, resource depletion, inequality, human exploitation and financial instability (Bower et al. 2011). The author agrees with other experts that companies’ externalization of the environmental and social costs responds to a structural problem of our economic system (Kelly 2012, Senge et. al 2008). Indeed, the structure of the system produces what it is designed to produce. Modern corporations are designed to maximize profits and externalize costs. This explains why they are so effective at creating economic value but equally effective at creating negative impacts on the planet and humanity. In general, companies are part of a system that forces them to achieve high short term financial returns and it is more extreme in the financial markets where companies have to meet the quarterly earnings and increase the value of their shares. In addition, this obsession is driving the economic system to periodic and structural crises that are eroding not only the trust placed in companies and governments but also the existing social contract.
Therefore, in order to change the current business paradigm and avoid the loss of control of the planet, the collapse of humanity and our human institutions, we need to deal with the root cause of the problem: the design of the modern corporation embedded in our economic system. In this regard, it is not surprising to see some interesting initiatives advocating for a change in corporate designs. Firstly, Corporation 20/201, an international, multi-stakeholder collaboration that aims to “chart a path that embeds social purpose in the organizational “genetics” of corporate structure” and advocates a new set of principles for corporate design (Table 1) 1
www.corporation2020.org
3
Table 1. New Principles for Corporate Design 1.
The purpose of the corporation is to harness private interests to serve the public interest
2.
Corporations shall accrue fair returns for shareholders, but not at the expenses of the legitimate interests of other stakeholders
3.
Corporations shall operate sustainability, meeting the needs of the present generation without compromising the ability of future generations to meet their needs
4.
Corporations shall distribute their wealth equitably among those who contribute to its creation
5.
Corporations shall be governed in a manner that is participatory, transparent, ethical, and accountable
6.
Corporations shall not infringe on the right of natural persons to govern themselves, nor infringe on other universal human rights.
Source: Corporation 20/20
Similarly, Fourth Sector Network (FSN)2 is a coalition of leaders from different sectors working together to create an enabling environment for the development of For-Benefit Organizations and the infrastructure that supports them. As their concept paper explains, these are “organizations that pursue social purpose while engaging in business activities” and, as they say, a fully realized For-Benefit could have the following core attributes (Table 2).
Table 2. Attributes of For-Benefit Corporations SOCIAL PURPOSE. The For-Benefit corporation has a core commitment to social purpose embedded in its organizational structure BUSINESS METHOD. The For-Benefit corporation can conduct any lawful business activity that is consistent with its social purpose and stakeholder responsibilities INCLUSIVE OWNERSHIP. The For-Benefit corporation equitably distributes ownership rights among its stakeholders in accordance with their contributions STAKEHOLDER GOVERNANCE. The For-Benefit corporation shares information and control among stakeholder constituencies as they develop FAIR COMPENSATION. The For-Benefit corporation fairly compensates employees and other stakeholders in proportion to their contributions REASONABLE RETURNS. The For-Benefit corporation rewards investors subject to reasonable limitations that protect the ability of the organization to achieve its mission SOCIAL AND ENVIRONMENTAL RESPONSIBILITY. The For-Benefit corporation committed to continuously improving its social and environmental performance throughout its stakeholder network TRANSPARENCY. The For-Benefit corporation is committed to full and accurate assessment and reporting of its social, environmental, and financial performance and impact PROTECTED ASSETS. The For-Benefit corporation can merge with and acquire any organization as long as the resulting entity is also a social purpose entity. In the event of dissolution, the assets remain dedicated to social purposes and may not be used for the private gain of any individual beyond reasonable limits on compensation Source: Fourth Sector Network 2
www.fourthsector.net
4
Finally, the work of Tomorrow’s Company - a London based global think tank- has also been essential to shape company law, in particular regarding the inclusive duties of directors. That is, as it has advocated, director’s fiduciary duty is not only to act in the best interest of the shareholders but also of the company and this means taking into account its stakeholders.
All these promising initiatives have a faith in the corporation and advocate a change in corporate laws to either redesign the corporation or to create new corporate forms3.
In parallel, we are also witnessing a global set of factors that are acting as catalysts for the emergence of the next business paradigm: the convergence between the traditional organizational sectors; the changes in financial markets and the rise of social investors; a global shift towards postmodern values; new business networks changing the rules of the game. These trends will be analyzed in greater detail in a separate chapter.
Indeed, exogenous incentives such as new corporate laws, new corporate forms, new supporting infrastructure, new sources of capital, new business networks, or new rating and certification systems can play a key role in bringing forwards the next business paradigm by encouraging a different way of doing business. However, the author believes that the change in the structure of the system will be triggered by an endogenous solution, that is, it will come from an internal transformation of the structure of corporations themselves. In fact, a next generation of sustainable companies are already building their own corporate designs and setting the stage for the next business paradigm to emerge. For this reason, the core part of this research will be devoted to understand a new type of business which is designed to solve social and environmental problems, namely, the hybrid corporation4 (Boyd et al. 2009; Haigh and Hoffman 2012).
Academically, the study of hybrid corporations is related to the fields of corporate social responsibility (CSR), social entrepreneurship and cross-sectoral partnership, but due to their blurring nature they transcend those disciplines and the corresponding organizational sectors. In the case of CSR, the main interest of the field has been to understand how the integration of social and environmental initiatives can be a source of competitive advantage for business, especially if they relate to their core business. In other words, to understand the business case of CSR and hence the economic value potential for the company. On the other hand, social entrepreneurship has devoted greater attention to understand the features of successful social entrepreneurs and the innovative business models they have built to tackle social and environmental problems. These are individuals that use business methods to create social and environmental value. Finally, the field of cross-sectoral partnership, mainly between companies and NGOs, studies how strategic partnerships can generate mutual gains when each sector focuses on creating the type of value they are best 3
In fact, new corporate forms has already been considered and implemented. In the UK, the Community Interest Company, and in the US, the Flexible Purpose Corporation (FPC), Benefit Corportion, and Low-profit Limited Liability Company (L3C) 4 This type of organizations have been given endless names: Third Generation Corporations (Hart 2011), Values-Driven Business (Cohen and Warwick 2006), Restaurative Companies (Hawken et al. 1999), Common Good Corporations, Community Development Corps, Community Interest Corporations, Community Wealth Organizations, Stage Five Companies (Willard 2005), Butherflies (Elkington 2001), Trailblazers (Forum for the Future 2003), For-Benefit Enterprise (Sabeti 2011), Blended Value Organizations
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at, companies creating economic value and NGOs creating social/environmental value. Therefore, these fields take for granted a simple and fragmented concept of value which reinforces the silos between them. In fact, the early spread of Elkington’s Triple Bottom Line (TBL) 5 concept may have contributed to reinforce this over-simplistic and fragmented conception of value and zero-sum thinking that prevails in today’s business mind-set. Indeed, even if it was never intended by the author, the fragmentation of value implied a zero sum between the different types of value and thus the need to balance trade-offs by companies. Furthermore, accounting methods based on the TBL concept tend to reduce social and environmental performance to extra-financial value assuming that those dimensions can be reduced to a monetary value. Similar shortcomings can also be found in the concept of sustainable value exposed by Lazlo (2008) which claims to include stakeholder value but end ups reducing it to shareholder value by considering only those social expectations that have a business case. In the case of Hart (2006), although he adopts a concept of sustainable value that expands shareholder value by connecting it to societal performance, yet it falls short of clarifying other dimensions of value. The author avoids fragmenting, simplifying and reducing value to a monetary proxy, and adopts instead a non-divisible, holistic and multidimensional concept of value that captures the nature and behavior of hybrid corporations.
Though the emergence of this kind of organizations has attracted greater attention in recent years, especially in the media, the literature review carried out has only identified a few studies dealing with this recent phenomenon which confirms the exploratory state of field (Alter 2007, Boyd et al. 2009, Haigh and Hoffman 2012). In addition, the author has noticed a research gap concerning the definition of hybrid organizations. According to Alter (2007), “all hybrid organizations generate both social and economic value and are organized by degree of activity as it relates to: 1) motive, 2) accountability, and 3) use of income (2007: 14)”. And then classifies them based on their prevailing motivation (Figure 1), either profit making (right side of the spectrum) or mission (left side of the spectrum).
Figure 1. Taxonomy of hybrid organizations
Source: Alter (2007)
5
Cannibals with Forks: The Triple Bottom Line of 21st Century Business
6
Boyd et al (2009), however, claim that “hybrid organizations cannot be categorized along [a] single dimension […]; rather, profit and mission motives are relatively independent organizational dimensions. Indeed, hybrid organizations exist that are highly driven by both profit and mission” (2009: 8). Instead, these authors prefer to place them along those two dimensions defining them “as a market-oriented, common good mission-centered organization which operates in the blurred space between traditional for-profit and nonprofit enterprises” (Figure 2).
Figure 2. Dimensions of hybrid organizations
Source: Boyd et al. (2009)
Both definitions agree that hybrid organizations are partly for-profit and partly non-profit and hence motivated by both profits and mission. Thus, this dual motivation is what sets them apart from social enterprises which are instead “committed to creating social wealth not private capital” (Spreckley 2011). Behind the dual motivation of hybrid organizations and the single motivation that characterizes both forprofits and social enterprises we find the same simple and fragmented concept of value, and thus the same zero sum mentality. In fact, Boyd et al. (2009) refer directly to this conflict when they state that one of the elements that characterize hybrid organizations is their “sub-market rates of return: while they must be profitable to be sustainable, [they] may continually or perpetually financially under-perform relative to market rates” (2009: 19).
In other words, hybrid organizations are conceptualized as balancing different types of value which is evident in their proposal to treat profit and mission as independent dimensions. They are pictured as ambivalent organizations constantly dealing with the inevitable trade-offs between profits and mission. But what if a positive relation prevails when pursuing different forms of value as the author believes?
What if hybrid corporations demonstrate that it is possible to maximize multiple forms of value? In order to prove this point, the author is going to present a new concept of value that helps conceptualize better the nature of hybrid corporations.
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This concept of value adopts Emerson’s (2003) notion of blended value as having a non-divisible and holistic nature and builds on White’s (2010) concept of capital stewardship but embracing its metaphysical and transcendental connotations. In addition, the existing theories of capitals (Hawken et al. 1999, Porrit 2005, Elkington et al 2006, White 2010) prove useful to expand the multiple dimensions of value but fall short of proving a way to evaluate and measure whether an organization is maximizing multiple forms of value. For this reason, the author adopts an operative concept of value to analyze whether an organization is creating multiple forms of values and hence determine whether it is a hybrid corporation. In turn, this conceptual framework can be a good starting point to develop key performance indicators (KPIs) such as the ones that are currently being used to measure companies’ non-financial performance (e.g. GRI).
Another research gap that has been detected concerns the ability of existing theories to explain how organizations in general, and hybrid organizations in particular, maximize global value. For instance, the literature on CSR has focused on how social and environmental activities can contribute to a company’s financial bottom line. Whereas the business model approach goes one step further explaining the total economic value generated in the business ecosystem, its application in the field of social entrepreneurship assumes that business models generate social value but, similar to the field of social innovation, they do not offer a good explanation of how organizations create global value and hence positive impacts.
Finally, the theoretical model that the author has developed to explain this complex phenomenon is based on the systems thinking approach applied to organizations and advocates a change of metaphor in the field of management to better understand how hybrid corporations do in fact behave. If we continue maintaining the current lens that still dominates the field of management, which sees organizations as machines (Taylor 1891, Weber 1947), their global value potential will always be undercapitalized and hence we will not be able to extract their full and long lasting positive impacts. Therefore, the field of management needs to embrace a different metaphor, organizations as living systems, to unleash their potential and bring forwards a system change (Senge 1990, Capra 2002, Wheatley 2007).
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3. Research objectives
The current business paradigm shows signs of exhaustion and a radical need for transformation. Since the Industrial Revolution, the economy started to become desembeded from society with companies increasingly externalizing their social and environmental costs. A trend that has only intensified with the progressive decouple of the financial system from business activities. These destructive detachments are the result of an obsession with maximizing short-term shareholder value that dominates the current business paradigm.
In general, the author believes that the endless pursue of that goal above all others responds to the actual design of the economic system. The system is not designed for the betterment of the human condition or the planet, but instead treats them as mere instruments or commodities that can be traded and degraded in the name of growth and prosperity. Besides the loss of respect for human dignity and the planet, it is also resulting in a loss of faith in companies. Against this despairing background, the author is optimistic and hopes that this dissertation will help to restore the trust in companies as agents of social change in the light of the recent global transformation that is taking place.
In this regard, the main objective of this dissertation is to understand the next business paradigm through the study of a type of organization that is emerging: the hybrid corporation. In addition, the specific objectives are stated as follows:
Analyze the factors that anticipate the emergence of a new business paradigm. To do so, it will be important to identify some global trends that are acting as catalysts.
Understand the key features of the next business paradigm. Since the author believes that hybrid corporations are going to be one of the main catalyst bringing forwards this paradigm shift, those qualities are already being exhibited by them.
Develop a conceptual framework to define and identify hybrid corporations.
Develop a theoretical model to explain how hybrid corporations operate and why they generate a positive impact
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4. Explanatory factors behind the business paradigm shift
4.1 Traditional organizational sectors are blurring
Normally, when we think about organizations we tend to associate them with one of the three organizational sectors that make up the societal system: the political, economic and social systems (Figure 3). Figure 3. The Thee Sectors
Source: Waddell (2003)
“Conceptually we can define the three sectors in terms of the three primary options available to organizations to mobilize the resources on which their function depends […] Government organizations mobilize resources through the mechanisms of authority and legitimate coercion, consistent with government’s primary role of preserving social order and social control […] Commercial organizations produce goods and services through the mechanism of exchange […] Organizations in the voluntary sector, in contrast, mobilize resources and social energy through the mechanisms of shared values and expectations” (Brown and Korten 1991: 49-50). In turn, each sector is characterized by different attributes and organizational forms (Table 3). Table 3. Distinctive Attributes of the Sectors
Source: Waddell (2002)
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The relationship between sectors has not always been the same. “With the rise of the welfare state during the Great Depression and after World War II, there was increasing power of the political system as a strategy to make societies more successful. Government became the guarantor of basic services and regulator of the economic system” (Waddell 2005: 20). The Post World War II period resulted in a new social contract negotiated between national governments, big labor and big business. Yet, “the end of the Soviet era market a realignment in favor of both economic and social systems” (Ibid. 79). “The dominance of civil society by labor was overwhelmed by a multitude of new non-governmental organizations (NGOs), including environmental, community development, research, human rights, and humanitarian ones. National markets and businesses had broadly expanded into global ones, with greatly reduced ability of national governments to influence their actions (Waddell 2011: 2)
What about the relationships between business and NGOs? “[In the 1970s], corporations started listening – albeit reluctantly – to nonprofits, as environmentalists clamored for more Earth-friendly practices. Then the 1980s ushered in Margaret Thatcher, Ronald Reagan, privatization, and the slashing of government social services. Charged with serving the world on a shorter shoestring, nonprofits had to become more entrepreneurial, efficient, and professional, and so looked to business for management models. Meanwhile, corporations began increasing their social contributions and even started delivering social services commercially, such as healthcare, childcare, eldercare, education, and prison management” (Austin et al. 2007: 24)
Nowadays, their paths have not only crossed but converged. The expansion of the nonprofit sector with limited funding opportunities has forced nonprofits to pursue new income generating activities to compensate their substantial drop in private and public donations. In fact, according to Salamon (1999), if we take this sector globally, 57% of their income comes from the sales of goods and services and only 13% from private donations. In the case of the market sector, companies have understood that there is a business case for social and environmental projects and these business opportunities have led them to new emerging markets such as: corporate social responsibility (CSR), carbon credits, renewable energy, environmental management, socially responsible investment (SRI), or organic and fairtrade products. In addition, “almost all Fortune 500 companies now make charitable donations, and 25 percent of them include community service and social betterment in their mission or value statements. In 2005, U.S. corporations donated more than $12 billion to nonprofits and invested $1.6 billion in cause-related marketing programs with nonprofits – up 33 percent from 2000, according to the IEG Sponsorship Report” (Autin et al. 2007: 26-27)
Therefore, we can no longer take for granted that nonprofits create social and environmental value whereas corporations create economic value. Indeed, organizations are converging towards a new organizational sector that integrates social purpose with business methods: a Fourth Sector (Figure 4). “In addition to 11
convergence, a second significant pattern of organizational activity has been occurring. The past few decades have seen a proliferation of new hybrid organizational models (Figure 4) formed to address a variety of societal challenges. These organizations consciously blend attributes and strategies from all sectors and thus resist easy classification within the boundaries of the three traditional sectors” (Sabeti et al. 2009: 3)
Figure 4. The Fourth Sector
Source: Sabeti et al (2009)
Finally, other organizational innovations such as Global Action Networks 6 (GANs) that blur the boundaries between the three sectors have also emerged. GANs are multi-stakeholder change networks that are addressing critical global issues like climate change, poverty, health, education, and human security. A
few successful examples that could be mentioned are: 1) The Principles for Responsible Investment (PRI) are shaping the logic of global financial markets by helping integrate consideration of environmental, social and governance (ESG) issues by institutional investors into investment decision-making. 6
This theoretical construct was developed by Waddell and Khagram. For more information, see Waddell (2010), Global Action Networks: Creating Our Future Together
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2) The Forest Stewardship Council (FSC) is halting deforestation and promoting the responsible management of forests worldwide by enabling consumers and business to improve their purchasing decisions when buying paper, timber and non-timber forest products (NTFP)
3) The Global Reporting Initiate (GRI) is contributing to improve companies’ transparency and accountability by mainstreaming their use of sustainability reporting.
4.2 Financial markets are being transformed by the rise of social investors There are several building blocks of this change. The first was led by a group of commercial banks 7 and UNEP in 1991 which were committed to take into account the environmental impact of their operations. In 1992, the initiative was broadened to include other financial institutions besides commercial banks, such as investment banks, venture capitalists or asset managers. A few years later, a group of leading insurance companies8 and pension funds also sided with the UNEP to create a similar initiative. But it was not until 2003 that both initiatives merged together to create the UNEP Financial Initiative which currently has over 200 member institutions from over 40 countries. Later in 2005, together with UN Global Compact, they invited a group of the world’s largest institutional investors to take part in a process to develop a set of voluntary guidelines for investment organizations wishing to address environmental, social and governance issues (ESG). The outcome was the Principles of Responsible Investment (PRI) that have already been signed by 1000 companies representing over US$32 trillion (Table 4):
Table 4. Principles of Responsible Investment 1.
We will incorporate ESG issues into investment analysis and decision-making processes
2.
We will be active owners and incorporate ESG issues into our ownership policies and practices
3.
We will seek appropriate disclosure of ESG issues by the entities in which we invest
4.
We will promote acceptance and implementation of the Principles within the investment industry
5.
We will work together to enhance our effectiveness in implementing the Principles
6.
We will each report on our activities and progress towards implementing the Principles
Source: PRI
The long list of declarations, principles and voluntary guidelines that came out from those public-private partnerships acted as catalysts for some notable changes in the financial markets. Firstly, a group of private sector banks developed the Equator Principles to ensure that all signing financial institutions only grant loans to new project finance over US10$ million when the infrastructure and industrial project comply with the following social and environmental policies and procedures: 7 8
Deutsche Bank, HSBC Holdings, NatWest, Royal Bank of Canada and Wetpac General Accident, Gerling Global Re, National Provident, Storebrand, Sumitomo Marine & Fire and Swiss Re
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1) Assure that borrowers perform an environmental and social impact assessment and adopt action plans to mitigate any negative impacts 2) Consult project affected communities in a structured and culturally appropriate manner and document the process and results of the consultation 3) Review the assessment and the consultation process by an independent expert 4) Monitor and report annually about the implementation of the Equator Principles
In addition, the launch of the Carbon Disclosure Project (CDP) publishing the greenhouse gas emission of the world’s largest corporations, accounting for 26% of the global anthropogenic emissions, has enabled the 655 institutional investors represented in CDP to focus attention on carbon emissions, energy usage and reductions linked to their $78 trillion in assets and hence bring forwards a low carbon economy.
Lastly, the emergence of socially responsible investing (SRI) as an investment strategy that screens companies included in an investment portfolio is also changing financial markets. Thanks to the appearance of several SRI indexes, socially conscious investors are now able to make responsible investment choices based on social and environmental factors. Moreover, the negative screening has led to the exclusion of “sin stocks” such as tobacco, alcohol, gambling from those indexes. Socially responsible investing is a booming market in both the US and Europe. Assets in socially screened portfolios climbed to $3.07 trillion at the start of 2010, a 34% increase since 2005, according to the US SIF's 2010 Report on Socially Responsible Investing Trends in the United States. Globally, it is estimated that 10% of the investment decisions are taken based on social and environmental issues.
Although very laudable, the rationale behind these private sector initiatives in the financial sector has been to avoid harm. In other words, to minimize negative externalities associated with big projects and investment portfolios. However, as Braungart and McDonough (2002) point out, “To be less bad is to accept things as they are, to believe that poorly designed, dishonorable, destructive systems are the best humans can do. This is the ultimate failure of the “be less bad” approach: a failure of the imagination. From our perspective, this is a depressing vision of our species’ role in the world. What about an entirely different model? What would it mean to be 100 percent good?” (2002:67)
But what if the financial markets shifted their investment strategies from negative screening to positive screening, selecting investments that have a positive impact? Well, this shift is already happening and has its roots in the venture capital community9. They are providing financial capital to social enterprises that adopt 9
Renewal2, Acumen Fund, Grassroots Business Fund, Triodos Bank, Venturesome Fund, Aavishkaar, Omidyar Network, Shell Foundation, Gray Ghost Ventures and First Light Ventures, RSF Social Finance, LGT Venture Philanthropy, Calvert Group,
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market-based solutions to social and environmental issues. These enterprises are willing to change dysfunctional systems by exploring neglected market opportunities but need to persuade potential funders that their business concept is viable. Social venture capitalists are helping create new markets in key sectors such as integrated health, renewable energy, biodynamic agriculture, culture or clean technologies. And besides capital, venture capitalists provide counsel on the basis of huge experience and managerial and technical expertise to increase the chances of new business ideas. Similarly, social entrepreneurs are also receiving pro bono services from high profile consultancies10. A case in point is the partnership between McKinsey and Ashoka11. “In this venture Ashoka identifies potential industry-defining leaders in the social sector with powerful strategies and strong organizations. McKinsey then helps these leaders build strategic and management skills, with the partnership now extending to fourteen countries” (Elkington and Hartigan 2008: 66). Finally, philantrocapitalist such Bill Gates, Pierre Omidyan, Richard Branson, George Soros that represent a new wave of wealthy people are also supporting social and environmental entrepreneurs. These leading givers are taking impact performance seriously by demanding the same business discipline as venture capitalists and developing ways of measuring it.
To summarize, what began as a series of initiatives to mitigate the negative externalities linked to investment decisions is growing into a movement searching for investments with positive impact. For this reason, the new generation of social responsible investment (SRI) has been named “impact investing”12, defined as “investment strategies that generate financial returns while intentionally improving social and
environmental conditions” (Bugg-Levine and Emerson 2011:32). In turn, due to the longer term nature of social impact, social investors are not only supporting the management of social enterprises as they grow, but also allowing longer time horizons for return of financial capital, the so-called "patient capital". Regarding the scale of impact investment, “the New York Times has reported analysts’ predictions that the market will grow tenfold by 2014, to $500 billion, and in a November 2010 report, J. P. Morgan projected it would have profits of up to $670 billion over the next decade, which subsequently set the industry abuzz” (Milligan and Schöning 2011: 162)
4.3 Global values are shifting
Another global trend that has been widely researched by an association of social scientists, the World Values Survey (WVS), is the change in values and beliefs in different societies. The WVS has been carrying out representative national surveys in 97 countries containing almost 90% of the world’s population. So far, it has executed 5 waves of surveys on many issues13, from 1981 to 2007, though we are only going to analyze
Investors’ Circle, Root Capital 10 Bain, The Boston Consulting Group, McKinsey, Monitor, and PricewaterhouseCoopers 11 The partnership resulted in the foundation in 1996 of the Ashoka-McKinsey Center for Social Entrepreneurship located in Brazil 12 Derived from the concept of blended value coined by Jed Emerson (2000) 13 Support for democracy, tolerance of foreigners and ethnic minorities, support for gender equality, the role of religion and changing levels of religiosity, the impact of globalization, attitudes toward the environment, work, family, politics, national identity, culture, diversity, insecurity, and subjective well-being
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those that are relevant to this research. Apart from the interesting finding that income adds to happiness but only until a certain threshold14, they have also demonstrated that economic growth “leads to a gradual but fundamental shift in the basic values and goals of the people of advanced industrial societies” (Inglehart 2000: 219). As Graph 1 indicates, before societies reach a certain threshold they emphasize economic growth at any cost, but beyond that point they “begin to emphasize quality of life concerns such as environmental protection and lifestyle issues” (Ibid). Graph 1. Economic Development and Well-Being
Fuente: Inglehart (2000)
In addition, these social scientists have observed a shift from materialists to postmaterialist values that they attribute to the prolonged period of prosperity after World War II coupled with the welfare state (Graph 2). That is, the economic security experienced by people in developed countries is leading them to focus on selfexpression and the nonmaterial quality of life.
Graph 2. The shift towards postmaterialist values in Western societies
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$10.000
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In turn, they consider that this shift responds to a broader shift from modern to postmodern values that are reflected in:
The priority given to environmental protection and cultural issues, even when these goals conflict with maximizing economic growth
People’s emphasis on self-expression instead of deference to authority
Tolerance of other groups and interest for cultural diversity
Rejection of hierarchical and authoritarian structures that reduce individual autonomy
Growing concern for the meaning and purpose of life
Ironically, “the rise of the Protestant ethic—a materialistic value system that tolerated economic accumulation and encouraged it as something laudable and heroic—was a key cultural change that opened the way for capitalism and industrialization” (ibid 225), yet lead to the eventual rise of postmodern values as a result of growth and prosperity in Western societies. “Today, the functional equivalent of the Protestant ethic is most vigorous in East Asia and is fading away in Protestant Europe, as technological development and cultural change become global” (ibid)
Finally, looking into the future, WVS social scientists claim that postmodern values will be predominant in Western Europe as from 2020 (Hakim 2000). Conversely, the author hopes that the recent and severe economic crisis currently faced by some European countries will not jeopardize and postpone this value transition that is spreading in the Western world and maybe to the rest of the world in the coming decades.
4.4 New business networks are redefining success
Though the first network of voluntary initiatives to improve corporate conduct was the Global Compact, the Global Reporting Initiative launched in 2002 has been more success in bringing more accountability and transparency into the corporate world. It was the result of the partnership between two US NGOs, CERES and the Tellus Institute with the support of the UNEP and was set up with a bold vision: “Reporting on economic, environmental and social performance by all organizations is a routine and comparable as financial reporting mission” (GRI)
In order to do so, it has pioneered a widely used sustainability reporting framework that has helped companies measure and report their sustainability performance. In less than a decade, about 4000 organizations from 60 countries, representing 80% of Fortune 250 companies and nearly 70 percent of the 100 largest companies, are using the GRI guidelines to produce their sustainability reports (KPMG 2008). In addition, the “official” number of registered users producing GRI Reports is growing fast (Graph 3).
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Graph 3. Evolution of registered GRI reports
Source: GRI (2011)
The disclosure of non-financial information signals a change in corporate transparency and accountability but does it mean a change in corporate behavior? In White’s words, one of the co-founders of the GRI, “is reporting driving positive change in terms of fair wages, reduced carbon emissions, ethical advertising, and other dimensions of the corporate sustainability agenda? (White and Baraldi 2012).
There are also other organizations like the Social Venture Network (SVN) that are acting from the periphery seeking to “build a new paradigm: one in which business operates to add value to society — without compromising the well-being of future generations." This global network is home to a community of highly successful business leaders, social entrepreneurs and impact investors committed to create more successful, responsible and sustainable enterprises. Notable past and current members include Ben Cohen, Gary Erickson, Paul Hawken, Gary Hirshberg, Jeffrey Hollender, Anita Rodrick and Wayne Silvy. As a platform to connect, inspire and unite its 500 members worldwide, SVN has acted as a catalyst for several successful organizations such as Business for Social Responsibility15 (BSR), Net Impact16, Business Alliance for Local Living Economies (BALLE), Social Enterprise Alliance (SEA)17, Investors' Circle (IC)18 and B-Lab. It is worth to introduce a couple of them since they could play a major role in redefining the rules of the game in the business world.
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BRS is a global network representing 300 companies working to build a just and sustainable world. Net Impact is a nonprofit membership organization for students and professionals interested in using business skills in support of various social and environmental causes 17 Social Enterprise Alliance (SEA) is the leading membership organization in North America for for-profit and non-profit social enterprises, business corporations and venture capitalists actively building the field of social enterprise through networking opportunities, educational forums, strategic partnerships, and impact legislation 18 Investors' Circle is the oldest, largest and most successful early-stage impact investing network in the world. Hundreds of angels, venture capitalists, foundations and family offices have joined IC to promote the transition to a sustainable economy 16
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Let us start with Business Alliance for Local Living Economies (BALLE). This is a North American coalition of 60 local networks that are completely autonomous and represent more than 20 thousand entrepreneurs. “Within a generation, [they] envision a global system of human-scale, interconnected local economies that function in harmony with local ecosystems to meet the basic needs of all people, support just and democratic societies, and foster joyful community life”. Against the trend of globalization, BALLE strives to build strong Local Living Economies by promoting the expansion of local business and ownership, spreading effective ideas and models, connecting local entrepreneurs and leaders, and channeling more investment to local economies. The following table states some of its guiding principles (Table 5)
Table 5. BALLE Guiding Principles Think Local First: BALLE builds Local Living Economies by buying locally produced food, products and services, by putting our capital to work through local investments, and by supporting local arts and independent local media Increase Self-Reliance: BALLE works to increase personal, community and regional security by building entrepreneurial capacity to produce basic needs like food, water and energy as close to home as possible Share prosperity: BALLE shares prosperity, understanding that the fair and equitable distribution of resources is critical to the quality of life we seek Work With Nature: BALLE seeks to integrate our activities with natural systems in order to create real and lasting prosperity Measure What Matters: BALLE measures success by the things that really matter to us -- knowledge, creativity, relationships, health, consciousness and happiness -- rather than continuous material growth Source: BALLE
This localist but interconnected economic system that BALLE advocates highlights a crucial aspect of the next business paradigm. Enterprises will be more rooted and embedded in the communities and the natural environment in which they operate, just like hybrid corporations. Finally, B Lab is a nonprofit organization with a mission to create a new sector of the economy that harnesses the power of business to solve social and environmental problems. One of its strategies is to build a community of certified B-Corporations. Unlike other organizations that can certify different aspects of a company using different standards, there was not a single, independent, comprehensive and transparent standard that assessed global social and environmental performance. To qualify as a B Corporation, all companies must earn a minimum score of 80 points (from 200) on the B Impact Rating System. However, in order to protect their social mission from new bosses, owners or investors, companies also need to institutionalize stakeholders’ interest and the environment in their governing documents. Besides being a useful benchmarking tool for companies to improve their social and environmental performance, it offers a credible rating system for social investors that are seeking impact investment opportunities. So far, there are 650 B Corporations in 21 countries accounting for more than $4.2 Billion and is growing every day. The founder of B lab, Jay Coen Gilbert thinks that soon they will account for 10% of the US GDP (cited in Hollender and Breen 2010: 118). B-Corporations also share some similarities with hybrid corporations since they strive to improve their social and environmental impact alongside their financial result. 19
5. Research questions and methodology
Now that we have set the scene, reviewed the relevant literature and stated the aims of this dissertation, it is time to articulate the research questions, propose some hypothesis and justify the methodology.
Question1: What is the defining feature of hybrid corporations and thus of the next business paradigm?
Hypothesis1: In contrast to the maximization of profits which defines the current business paradigm, the essence of hybrid corporations is to maximize multiple forms of value
I think that the main feature that will prevail in the next generation of sustainable enterprises is a drive for multiple value creation, that is, they will enlarge their value proposition to include other forms of value besides financial value. Moreover, instead of defining hybrid organizations based on a prevalent motive (profits or mission) or dual motive (profits and mission), I propose to define them based on their value performance. That is, besides being driven by a common good mission, hybrid corporations are performance oriented and achieve results consistent with their vision of success. However, in order to test whether they maximize other forms of value beyond financial value, it will be essential to find a concept of value that captures hybrid corporations’ mind-set and also to develop a way to assess their multidimensional value creation. To this end, the author proposes a conceptual framework that will be useful to identify genuine and authentic hybrid corporations. In order to confirm Hypothesis1, the survey method seems to be the most appropriate. “These methods are advantageous when the research goal is to describe the incidence or prevalence of a phenomenon or when it is to be predictive about certain outcomes” (Yin 1994: 9). Moreover, the type of research question (What is the essence of hybrid corporations?) and the exploratory nature of the study also justify the choice of this method. (Yin 1994) The author has designed a survey consisting of two online questionnaires and set up a blog19, where they are inserted, to introduce respondents to the background of the research. The first questionnaire seeks to gather information related to their organization’s mission, motives, non-financial performance and concept of value. The second questionnaire introduces the proposed conceptual framework in order to test whether it is useful and relevant in the case of hybrid corporations to assess their global value performance.
After the survey design, the next step has consisted in selecting the first pool of potential candidates based on
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http://valuemaximizers.wordpress.com/
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different sources20 and then collecting all the relevant contact information, especially emails from key executives, to build a large database. Finally the list has been narrowed down to 50 organizations to whom the survey with the two questionnaires was sent.
As a result, the number of responses received has been quite successful, a total of fifteen respondents. Given the size and the quality of the sample, the author believes it is statistically significant to confirm Hypothesis1. Indeed, the respondents of the sample are key executives and their organization meets all the conceptual requirements to be considered a hybrid corporation. Therefore, the author considers the findings are quite robust to draw some general conclusions. In addition, to further validate these findings, the author will complement them with a similar exploratory study that was conducted in the US as part of the Research Initiative on Social Entrepreneurship (RISE)21. In this case, about 200 executives of for-profit social ventures who participated in the research and 115 of those enterprises can be considered a good proxy for hybrid corporations22.
Next, to further validate the application of the conceptual framework, the author has selected one of fifteen organizations participating in the survey as a case study, La Fageda. All the necessary information has been gathered mainly from two case studies prepared by prestigious business schools (Harvard and IESE), the company’s documents (“Model La Fageda”), their sustainability reports (2009 and 2010) and several interviews with its founder, Mr. Cristobal Colón.
Once we have confirmed their most significant feature, that is, that hybrid organizations are multiple value maximizers (Hypothesis1), another related research question arises:
Question2: How do hybrid corporations maximize global value?
That is, even if we can prove that they generate multiple forms of value it will be equally interesting to discover how this complex phenomenon happens. To answer this challenging question the author proposes the following working hypothesis as a starting point to build an explanatory theory.
Hypothesis2: Hybrid corporations maximize global value by embedding a transcendent mission in a corporate design.
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Mainly from the Research Initiative on Social Entrepreneurship (RISE); Blended Value Map; certified B Corporations; Social Capitalist Awards 21 The study was published as For-Profit Social Entrepreneur Report: Balancing Markets and Value (2006) and offers a snapshot of social ventures in seven industry segments as well as insights into the experiences, attitudes, and practices of the people who create and manage them. RISE is a research project whose mission is to study and disseminate knowledge about the markets, metrics and management of for-profit and non-profit social enterprise and social venturing. RISE was a program at Columbia Business School from 2001 to 2010. RISE is currently run as a personal project of Cathy Clark, Adjunct Assistant Professor of CASE at Duke. 22 The sample included CEOs who had applied to present at an Investor’s Circle venture fair, had become a meber of the Social Venture Network, or had applied to complete in the Global Social Venture Competition. Participants were CEOs and top managers of for-profit enterprises who had identified themselves as social ventures over the past 10 years by participating in one or more of the several national and global groups that focus on social ventures
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Building on systems thinking, I claim that “system structure is the source of system behaviour” (Meadows, 2008) and hence the source of its performance. In a nutshell, their corporate design explains their value performance. Therefore, first we need to find out more about what are the internal elements that constitute a corporate design and then understand how hybrid corporations manage to build unique corporate designs that generate multidimensional value.
For this reason, the author has developed a theoretical model to explain how hybrid corporations behave which in turn explains why they generate a positive impact.
To test Hypothesis2, however, I have chosen a different research method. In this case, the aim will not be to obtain a statistically significant sample that enables an extrapolation of the findings to the entire universe of hybrid corporations, as was the case with Hypothesis1, but to develop an explanatory theory of how hybrid corporations behave. To this end, I have decided to use the case study method that will help Hypothesis2 and generate a theory from a single case study (Eisenhart 1989, Yin 1994). Thus, the research procedure will also be different; here the testing of the hypothesis will be based on a theoretical sampling instead of a statistical sampling. Explaining about the difference between those modes of sampling, Eisenhart (1989) writes: “Given the limited number of cases which can usually be studied, it makes sense to choose cases such as extreme situations and polar types in which the process of interest is "transparently observable." Thus, the goal of theoretical sampling is to choose cases which are likely to replicate or extend the emergent theory. In contrast, traditional, within-experiment hypothesistesting studies rely on statistical sampling, in which researchers randomly select the sample from the population. In this type of study, the goal of the sampling process is to obtain accurate statistical evidence on the distributions of variables within the population” (1989: 537)
This is the rationale that has motivated the author to select, based on a preliminary study and a series of interviews23, the same company as a case study mainly because of its extreme circumstances. Indeed, from the very beginning this project seemed unlikely to succeed. In the words of its president, Mr. Cristobal Colón (IESE 2008:1):
"If at that time we had only known, if only tangentially, about the business world, we would have not tried, because objectively the project was crazy. Yes, I believe: we did it because we did not know it was possible".
Therefore, this extreme case will allow a better testing of Hypothesis2. To develop a theory, a single case study may be sufficient (Siggelkow 2007). In fact, there are many accepted theories that are based on a case 23
Corporación Mondragón, Sekem and La Fageda
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study (Weick 1993, Galunic and Eisenhardt 1996, and Dutton and Dukerich 1991). A good example is the explanation of the Cuban missile crisis in 1962 where a single case study helped to understand why a nuclear holocaust was avoided when it seemed inevitable (Allison 1971). Furthermore, it has been generalized in the field of international relations to explain how governments behave in complex situations.
The case study method seems an optimal method for several reasons. Firstly, because of the kind of research question (¿How do hybrid corporations create multiple forms of value?). In addition, we already have a working hypothesis to guide the research (Yin 1994). Next, this method is most suitable when the object of study has not been studied and therefore requires an initial exploratory research. Finally, unlike other methods it allows to combine quantitative and qualitative data and different research methods. Thus, it is consistent with the mixed methods research strategy adopted in this study.
Lastly, the research procedure has consisted in the constant iteration between Hypothesis2 and the data collected from the company until theoretical saturation has been reached24.
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Theoretical saturation is simply the point at which incremental learning is minimal because the researchers are observing phenomena seen before (Glaser and Strauss, 1967)
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6. Conceptual framework: Capital Stewardship Framework (CSF)
6.1 Economic value
Economic value creation, or rather, economic growth has been an enduring feature of our economic system, especially after the Industrial Revolution when the present market economy started to take off (Polanyi 1944). In particular, some historians estimate that world GDP per person has experienced an astonishing 37fold growth since 1750, as Graph 4 indicates global wealth turned into a nearly vertical curve (Beinhocker 2006). To put it in a different way, considering we have 2.5 million years economic history, "over 97 percent of humanity’s wealth was created in just the last 0.01 percent of our history” (Ibid: 11). Therefore, our modern economic system has been and still is very effective at creating economic value.
The source of exponential growth has been attributed to businesses and entrepreneurs. As Schumpeter (1942) argued, entrepreneurs drive the "creative destruction" that is at the base of economic growth. By introducing new innovations in the market, entrepreneurs were in fact destroying old sectors while helping create new ones in the economy. Similarly, Nelson (1982) attributed this phenomenon to the introduction of physical and social (ways of organizing people) technologies by companies. Without doubt technological innovations have brought unprecedented levels of material well-being (even though its global impact has not been evenly distributed).
Graph 4. Economic growth in the last 500 years
But when is economic value created? According to traditional economics, based on its marginal utility theory, the economic value is nothing more than the price at which the goods and services are sold in the market, that is, their exchange value25. And economic value creation happens when consumers are willing to pay for a particular good o service a price that is higher than the cost to produce or provide it. Theoretically, when companies create (and appropriate) economic value they are also increasing consumers’ welfare. Unfortunately, this theory views individual wellbeing as nothing more than satisfying material needs but 25
There is a difference between the use value- the utility of consuming a good- and the exchange value- the price at which goods are exchanged in the marketplace.
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ignores other human needs.
In addition, companies are conceived as being motivated exclusively by a single purpose: profit seeking. Indeed, the role of business in society is simply to create, but mostly capture, as much economic value as possible. “The social responsibility of business is to increase its profits”, wrote Friedman (1970). Furthermore, as in Mandeville’s Fable of the Bees, companies pursuing their own interests will bring public benefits to society thanks to the invisible hand. According to this view, when companies specialize in what they do best, maximizing profits, society gets a better allocation of resources and hence will be better off. Their “responsibility is to conduct the business in accordance with their [owners] desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom” (Ibid). This is how Friedman justified the role of business in society and dismissed any other responsibility as a waste of money.
The market sector needs to devote all its energies to maximizing profits. As the argument goes, if the business of business is economic value creation, the business of government and civil society is thus social value creation. Nevertheless, as we have already mentioned, organizational sectors are blurring. The market sector is expanding its sphere of responsibility to other social and environmental issues, and public and social sectors are adopting business methods. So it is no longer evident which actors are responsible for which types of value.
6.2 Beyond economic value According to Willard (2005), this trend to enlarge business’ responsibility to other matters has five sustainability drivers. In the first wave, it was motivated by founder/CEO personal passion, PR crisis which affected the corporate reputation or regulatory pressures. Currently, two more drivers are emerging, what he calls a “Perfect Storm” of threats to the license to operate and a compelling business case. The assimilation in the business word of certain terminology like “Sustainable Development”, “Corporate Social Responsibility” (CSR) or “Triple Bottom Line” (TBL) also attests to this mainstreaming trend. Indeed, in order to be sustainable, companies need to take care of the 3Ps ("People, Planet and Profit") and embrace a multiple bottom line. Instead of reporting only on their financial performance, they need to report on their broader sustainability performance. Likewise, the pressure of demanding stakeholders26 is also broadening companies’ accountability, shareholders are no longer the only legitimate actor to listen to, stakeholder’s views, concerns and legitimate claims also need to be considered and taken care of.
26
Willard classifies them in 5 groups: “green consumers”, activist shareholders, civil society/NGOs, governments and financial sector
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The need to inform stakeholders and society at large about the impact of business activities explains the success of the Global Reporting Initiative (GRI) in mainstreaming sustainability reporting but also the widespread adoption of standards such as:
ISO 14001 on environmental management aspects
SA 8000 developed by Social Accountability International to certify the implementation of policies and procedures to protect the basic human rights of workers which is now used by around 3.000 facilities in 65 countries (SAAS, June 2012)
AccountAbility’s AA1000 Assurance Standard to assure the credibility and quality of sustainability performance and reporting.
Moreover, the world’s largest online directory of CR reports managed by CorporateRegister has listed more than 44.000 reports from 9.500 companies which use guidelines mainly from the GRI, Accountability AA1000 and the Global Compact.
This improvement in corporate accountability and transparency would not have been possible without a different mind-set in the business world enabled by the assimilation of multiple concepts that have appeared in recent years, most of them associated with the TBL proposed by Elkington in 1995. Even though we do not know the extent to which this trend is bringing a real positive change, companies are indeed making incremental progress towards sustainability. However, if that change of mind-set needs to bring structural changes in our modern economic system, maybe the change of mind-set needs to be a change of paradigm. For Meadows this was the most powerful leverage point to transform systems. Paradigms constitute “the great big unstated assumptions – unstated because unnecessary to state; everyone already knows them- [they are the] deepest set of beliefs about how the world works” (1999: 17).
The author believes, however, that the concept of TBL is not going to trigger the urgently needed change of business paradigm because it is ill suited for that task. Years later, even Elkington acknowledged an implicit and dangerous assumption that could spring from some interpretations of his concept of value. “The TBL concept focused on value created- or destroyed- in relation to the economy, society and the environment. While some chose to interpret this as a zero-sum debate, involving tradeoffs across the various dimensions, we always saw it as –potentially at least- positive sum” (Elkington et al. 2006).
Indeed, the TBL is mostly interpreted as an inherent conflict between the three types of value. Therefore, companies need to find an optimal equilibrium between them. This tension is also manifested in the famous and seemingly insurmountable debate between weak and strong sustainability: can natural capital be substituted by manufactured capital or is it irreplaceable? 26
Other related constructs such as “Net Positive Impact” or “No Net Loss” advocated by The Economics of Ecosystems and Biodiversity (TEEB)27 to measure the impact on natural capital, or the “social return on investment” (SROI) used by the social investor’s community to measure the social and environmental impacts of their investments, can be seen as further developments of the TBL concept. These accounting methods try to measure the extra-financial value generated by a project or an investment based on their positive social and environmental impacts and hence assume that those dimensions can be reduced to a monetary value. This need to assess the integrated TBL impacts of companies and investments is also appearing in Bottom of the Pyramid (BoP) business initiatives (London y Hart 2011).
In short, although not intended by Elkington, the early spread of TBL approach has led to a fragmented, over-simplistic and reductionist concept of value that is cultivating zero-sum thinking in today’s business leaders. Unfortunately, this mind-set is limiting the full value potential of organizations.
If TBL thinking is not going to trigger a change of paradigm, maybe other conceptual proposals will do so? It is worth devoting some time analyzing a couple of approaches that promise to dispel the trade-off myth. Sustainability expert and author, Chris Laszlo, claims that it is possible to find a balance between the shareholder perspective and the stakeholder perspective and proposes the concept of sustainable value to do so. “Value is created when business adds to the capital or well-being of its stakeholders. It is destroyed when business reduces their capital or undermines their well-being”. (2008: 120). Since shareholders are also one type of stakeholders - those interested in financial value appropriation- that definition already assumes an antagonism between different stakeholders implied in the conjunction “or”. I suppose Laszlo did not even notice, because he goes on to say that “sustainable value occurs only when a company creates value that is positive for its shareholders and its stakeholders” (Ibid: 123). Neither did he realize that by reducing stakeholder value to their perception of value, in particular, to companies’ intangibles such as brand value and corporate reputation, he was in fact reducing stakeholder value to shareholder value. Or when stating that “when value is transferred from shareholders to stakeholders, the company incurs a fiduciary liability to its shareholders” (Ibid: 125), he was in fact reinforcing that belief. Similarly, he dismisses philanthropy on the same grounds as a “value transfer”. In other words, shareholder value maximization still prevails as the overarching goal and rising social expectations have to be accommodated as a means to increase shareholder value.
Therefore, even if he believes that a positive relationship exists between shareholder value and stakeholder value, the company should only undertake those social and environmental projects that have a financial return on investment (ROI). In other words, business initiatives that increase the total economic value created for stakeholders, but not increase the value captured by the company, are discarded. Likewise, for those actions that reduce social and environmental negative externalities but do not have a business case. What if 27
The TEEB is a “major international initiative to draw attention to the global economic benefits of biodiversity, to highlight the growing costs of biodiversity loss and ecosystem degradation, and to draw together expertise from the fields of science, economics and policy to enable practical actions moving forward” (TEEB) 27
consumers pay a price premium for products that reduce negative, or increase positive, externalities? Is it a consumer trade-off as the Lazlo believes? In summary, even if Lazlo’s approach aimed to expand the definition of value by including the value for stakeholders, and hence adding another dimension, it eventually reduced it to shareholder value. Furthermore, although the former TBL approach fragmented the concept of value, at least it gave a say to natural capital. Also lacking is the economic value created for stakeholders that is not captured by the company but adds to their well-being. Finally, his sustainable value concept also assumes that trade-offs prevail which are only offset when social expectations have a business case.
The next proposal also named sustainable value comes from the writer and academic Stuart Hart. This theorist claims that the “Great Trade-Off Illusion" — the belief that firms must sacrifice financial performance to meet societal obligations” (2007: 6)- resulted from “end-of-pipe” solutions imposed by command-and-control regulation which reinforced the prejudice that “it didn’t pay to be green”. In the 1990s, however, the pollution prevention approach shattered that trade-off myth, reducing risks and costs. Nevertheless, for social issues, such as poverty reduction, that mentality still prevails, as he acknowledges. Unlike the former approach, sustainable value is about solving sustainability issues and not just social expectations. Sustainable development is multidimensional challenge that can be linked to a multidimensional model of shareholder value creation and, together with Mark Milstein, develops a conceptual framework to help companies identify strategies that create sustainable value (Hart and Milstein 2003). This analytical tool is useful to expand the concept of shareholder value and its relationship with societal performance, but falls short of clarifying other dimensions of value. Hart seems to notice this research gap when referring to ““stakeholder value” which would include the total value created for all the stakeholders by the company” (2011: 13).
It is worth adding a few comments related with this last point. Is it appropriate to reduce the other dimensions of value to stakeholder value? Firstly, it would mean simplifying even more the limited tridimensional concept adopted by TBL approach. Secondly, once we start reducing social capital to stakeholder value, there is a growing temptation to associate human capital with workers and finally natural capital would be an orphan. For this reason, the resulting concept of value would be over-reductionist, as it is to divide the concept of value into shareholder value (financial capital) and stakeholder value (social capital). The author has avoided such matching between groups of stakeholders and types of capital even though sometimes they coincide. Instead, all the stakeholders are related to all types of capital. Furthermore, answering a question posed by Hart (Ibid: 13), “is it possible to connect stakeholder’s interest together so that they become mutually reinforcing rather than competing interests”, the author has some doubts about harmonizing the systems of values held by companies and stakeholders, even less among stakeholders. Even if it were possible, it can be counterproductive for companies. Indeed, companies need to 28
listen, engage and consider stakeholder’s legitimate claims but they also need to be guided by their own mission and values and not sacrifice them to please a particular group of stakeholders. Accordingly, later I will introduce the concept of capital accountability which includes the earned legitimacy by a company and its ethical contribution to humanity. In short, a company has to protect is valuable and unique contribution to humanity. In fact, if it is driven by a transcendent mission28 it will be creating value for all its stakeholders, the planet and humanity.
How can we operationalize a concept of value that takes into account all its dimensions without ending up with over-simplifications and reductionisms that do not capture its complex and deep nature? As the management truism goes: "you can’t manage what you can’t measure." Fortunately, Meadows reminds us that “human beings have been endowed not only with the ability to count, but also with the ability to assess the quality" (2009: 176). Indeed, although assessing value is not an easy task and we have not yet devised any adequate measurement systems, it may be one of the greatest challenges of our time. I would almost dare to say that the future of humanity depends, among other crucial things, on our ability not only to assess value but more importantly to maximize it. Not only "you can't manage what you can't measure", "you can't measure what you can't name". Therefore, the first step in our venture will be to define what we mean by value and then operationalize the concept.
6.1 Value as Capital Stewardship
So far, we have analysed the implicit concepts of value underlying several constructs such as the TBL or sustainable value but, as we have seen, they do not seem to provide the fertile grounds needed to cultivate the intellectual seeds that will trigger a new mind-set in the business world. Instead, the prevailing constructs of value assume a set of features that reinforce a trade-off mentality, namely:
1. Value is depicted as fragmented into seemingly independent dimensions 2. Value is conceived as a simple lens, losing the rich and meaningful aspects of a multidimensional and complex reality 3. Non-financial value is reduced to extra-financial returns or, even more chrematistic, to shareholder value.
In this last case, shareholder value seems to be the ultimate value that really matters and which everything tend to be referred to. However, as the Spanish poet Antonio Machado warned us, “it is foolish to confuse value and price”. According to this point of view, the only meaningful value created is the one that can be translated into shareholder value. Yet is value something we capture for a company? What about when a company is improving the financial well-being of its business ecosystem? Maybe the key rests in 28
Unlike organizations with self-centred missions that only care for their survival and growth, organizations with transcendent missions care for the larger system they belong to. Thus, in their case, the private interest coincides with the common good. Later on when we enter the theoretical model, we will learn more about this type of mission.
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conceptualizing value as something interconnected and holistic that goes beyond the company and its business ecosystem. To this end, the author proposes a new concept of value named capital stewardship that captures the mind-set of the next generation of companies, namely, hybrid corporations. In turn, we may be able to solve the dilemma between strong sustainability and weak sustainability.
Capital stewardship is not a new term, since some notable authors have already used it in the fields of business and finance (Schacter 2000, Goyder 2008, White 2010). Moreover, there are some signs that it could be mainstreamed in the near future since it has already been adopted by the recently launched International Integrated Reporting Council (IIRC), a multi-stakeholder initiative that includes among others the Global Reporting Initiative (GRI), the UN Global Compact and the UN Principles for Responsible Investment (PRI). Indeed, its first proposal to develop an International Integrated Reporting Framework released last September 2011 in a discussion paper states: “An Integrated Report displays an organization’s stewardship not only of financial capital, but also of the other “capitals” (manufactured, human, intellectual, natural and social), their interdependence and how they contribute to success” (IIRC, 2011: 9).
Looking at the submitted responses to the Discussion Paper, the author hopes that the voices pushing for the monetization of other capitals do not stand in the way of the global creation and preservation of value.
Let us start reviewing how the term has been used so far to highlight some shortcomings identified by the author. Mark Schacter, for instance, considers stewardship as the “altruistic” model of CSR, “the corporation has a moral obligation to contribute to the development of a better world, and to contribute to the moral development of both employees and the society” (2000: 10). “It’s the right thing to do, period” (Ibid: 8). Framing the value debate between “moralist” versus “pragmatists” implies a conflict between the common good and private interests that encourages in turn a trade-off mentality. Can organizations harmonize both?
Next, Goyde uses the stewardship term to prompt shareholders to undertake their most important role, “acting to preserve and protect the company, promoting sustainable, long-term, performance” (2008: 21). Indeed, I certainly agree that value creation is a long-term process that requires a sustained performance over time, but disagree that the preservation of the company is the ultimate goal. This perspective of stewardship is too narrow and takes for granted the current metaphor of companies as property. “We conceptualize corporations as property, as pieces of property owned by shareholders, with a purpose of creating wealth for their owners. This assumption gives rise to the unconscious bias […] the "capital bias" - the notion that returns to capital are the primary aim of company activity” (Kelly 2006: 5)
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More accurately, Allen White, co-founder of the Global Reporting Initiative, defines capital stewardship “as the preservation and enlargement of multiple forms of capital, all of which contribute to long-term value creation by the firm” (2010: 30). Firms create multiple forms of value but do not necessarily appropriate them all because business activities can generate valuable spillover effects. A part from not being the only beneficiaries, companies are not an end in themselves, instead they are only means to preserve and enlarge the full spectrum of value. In spite of this, White seems to imply that all types of capital have the same value. Capital stewardship, therefore, implies that value creation is a long term process that transcends companies’ interests without forgetting their well-being. Moreover, when organizations invest their energies to maximize a certain form of value, they are in fact destroying global value. This applies to companies that only aim to maximize financial value but also to social enterprises focusing exclusively on social value creation. This is the first implication that comes from adopting a non-divisible and holistic concept of value. One tuned with Emerson’s Blended Value Proposition: "all organizations, whether for-profit or not, create value that consists of economic, social and environmental components; and this value itself is non-divisible and, therefore, a blend of these three elements" (Elkington et al. 2006: 9). However, even if they always create a blend of value not all organizations maximize their full value potential. In fact, and this is another implication, only capital stewards maximize blended value. The great management thinker, Peter Drucker, understood this when he wrote: “We have successful examples… They do not “balance” anything. They maximize. But they do not attempt to maximize shareholder value or the short-term interest of any one of the enterprise’s “stakeholders”. Rather, they maximize the wealth-producing capacity of the Enterprise” (2011: 195)
One last condition for organizations to maximize global value is to pursue a transcendent mission. Indeed, capital stewardship can be defined as: The maximization of all those forms of value which contribute to an organization’s transcendent mission
Therefore, this new concept of value applies directly to hybrid corporations and takes us back to our working hypothesis.
Hypothesis1: In contrast to the maximization of profits which defines the current business paradigm, the essence of hybrid corporations is to maximize multiple forms of value
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And we can define hybrid corporations as:
Organizations that live up to their transcendent mission by maximizing multiple forms of value
This feature sets them apart from other type of organizations. So we have to avoid defining them as organizations motivated by both profits and mission to distinguish them from social enterprises which are only motivated by mission (Boyd et al 2009), and assuming a fragmented concept of value and the need to find the right balance between financial and social value to fulfil their dual motivation. Indeed, this definition also implies a zero-sum mentality because hybrid corporations are portrayed as managing tradeoffs between different types of value to achieve an optimal equilibrium. Emerson calls this false dichotomy the Zero-Sum Dissonance and, referring to the nature of returns on investment, illustrates the tension between economic value and social value in the traditional value proposition with the following figure (Figure 6).
Figure 6. Zero-Sum Dissonance
Source: Emerson (2000)
On the contrary, the author’s definition of value solves the apparent paradox of pursuing two competing goals at the same time, maximizing financial value and maximizing social value. For hybrid corporations there is no contradiction, profit and mission are harmonized in a transcendent mission. Furthermore, since their aim is to maximize all the forms of value that contribute to that mission, that means maximizing not only its financial value but also the economic well-being of its business ecosystem. As Emerson shows with the aid of the next figure, hybrid corporations believe that a positive sum prevails among the different dimensions of value and therefore thrive to maximize their value blend (Figure 7). 32
Figure 7. Blended Value Proposition
Fuente: Emerson (2000)
Conceptualizing value this way also solves the dilemma between strong sustainability and weak sustainability by capturing the mind-set of hybrid corporations. They believe that nature has an intrinsic value and we are mere tenants that have to live within its ecological limits. Therefore, it does not make sense to trade natural capital with other forms of capital to compensate its losses. The biocapacity of the planet has to be respected. But besides the preservation of natural capital, hybrid corporations have equal respect for human dignity. As the great philosopher Kant wrote when referring to the value of the person, “[Human being] as a person […] is exalted above all price. For such a one he is not to be valued merely as a means to the ends of other people, or even to his own ends, but is to be prized as an end in himself. This is to say, he possesses a dignity (an absolute inner worth)” (2001: 102)
Hybrid corporations do not treat people as human resources that need to be managed to maximize shareholder value, instead they focus on the development of the person in all aspects.
6.2 Theories of Capitals
Now that we have named and defined the new concept of value, we are prepared to move on to its operationalization. That is, turning an abstract concept into a practical tool to assess an organization’s value creation and determine where it maximizes multiple forms of value. If so, and our Hypothesis1 is correct, we will have some evidence to confirm it is a hybrid corporation. In addition, even if an organization claims it has a transcendent mission, this tool can also be used to assess whether its value performance is consistent 33
with its mission statement. Normally, if the assessed organization maximizes multiple forms of value it will mean that it is driven by a transcendent mission. In some cases, however, we can find an organization motivated by a transcendent mission but it does not show up in its global value performance. Unfortunately, this will mean it is not effective in achieving its common good mission and hence it is not a hybrid corporation.
So far we have argued that the concept of value is composed of multiple forms of value, but we have yet to introduce its different dimensions. To this end, and based on the existing theories of capitals, the author will develop a different theory of capitals that takes into account the holistic and multidimensional nature of value. Traditionally, the definition of sustainable development (published in the Brundtland Report in 1987) has always included three pillars: society, economy and environment. This explains its resemblance with other related concepts that have appeared in the business world like the TBL or CSR. In addition, other labels are also been used to refer to the three legs of sustainability: 3Ps (Profit, Planet, People) or 3Es (Economics, Environment and Equity). Even if this tripartite analysis is often seen as all-embracing, it is not always clear what to include in each dimension. Therefore, the existing theories of capital seem to bring more analytical sharpness and thus are better suited to capture a complex and subtle reality. Furthermore, they are more helpful to conceptualize the positive impacts generated by organizations, that is, their positive externalities Before introducing the author’s theory of capitals let us compare it with others that have been put forwards. As shown in Table 6, the first difference is the amount of capitals proposed in each case. While Hawken et al (1999) identified four capitals and Porritt (2005) and White (2010) increased them to five, in line with the proposal of the International Integrated Reporting Committee (IIRC), the author suggests seven capitals like Elkington et al. (2006). In addition, the most repeated forms of capital are financial capital, natural capital, social capital which coincides of course with the traditional tripartite analysis of sustainability. Second in rank, we find manufactured capital and human capital, both of them well known in the neoclassical growth model29. In third position, appears intellectual capital and organizational capital which share a family resemblance, as the philosopher Wittgenstein would put it and, therefore, can be merged together into a single capital, organizational capital. Regarding those aspects in which they differ will be included in human capital so no meaningful content will be lost. Finally, the remaining rarer capitals such as political capital and spiritual capital will be included, together will other aspects, in a new capital that the author names accountability capital.
29
In Solow’s model, economic growth is explained by technological progress (manufactured capital) and, later to improve the model, human capital was introduced (Jones 2002)
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Table 6. Theories of Capitals Capitals
Hawken et al (1999)
Porritt (2005)
White (2010)
IIRC (2011)
Elkington et al. (2006)
Author
Financial
X
X
X
X
X
X
Manufactured
X
X
Organizational Natural
X X
X
Intellectual Human
X
X
Social
X
X
X
X
X
X
X
X X
X 30
X X
X
X X
X X
Accountability
X X
Political
X
Spiritual
X
In addition to the number of capitals advocates by each theory, they also differ in the importance attached to each of them. In general, though most of these authors identify the main capitals, they do not indicate which are the most relevant and hence they seem to imply they are all equally valuable except in the case of Porritt (2005) and Hawken et al. (1999).
To finish comparing them, I would like to stress that besides White (2010) who gives some clues on what metrics to use, none provides a way to evaluated and measure an organization’s value performance. Indeed, they mention the kind of issues included in each capital, but do not try to parameterize them. The author hopes to fill this gap by suggesting a set value creation areas for each dimension. In turn, this conceptual framework can be a good starting point to develop key performance indicators (KPIs) such as the ones that are being used to measure companies’ non-financial performance (GRI)31. At this point in the development of a value compass, our priority should be to lay the foundations on “what” needs to be measured and not “how” to measured it, that is, the specific KPIs will then be tailored and adapted to the reality of each organization depending on different factors (e.g scale, sector, context). It is more important to start building a consensus on “what” we value as humanity and only after that, based on each case, chose the appropriate metrics to use. Finally, it should be noted that although it is beyond the scope of this study, once the metrics to measure value have been chosen, the resulting tool could be useful to investigate the positive relationships between capitals since the available studies have concentrated mainly on the unilateral relationship with financial value (business case)32. 30
The authors use another label, Red Capital, but according to their description, I would consider it fits this category. In particular, the GRI guidelines provide many indicators to report companies’ sustainability performance; currently they are based on the G3 guidelines although a new G4 version should be underway by 2013. In addition, KPI have also been developed for specific sectors, such as the work been done by the Broad Based Business Reporting del Institute of Chartered Accountants in Australia; the 10 KPIs identified by the Corporate Knights Research Group (CKRG) as the most utilized by investors; the Connected Reporting Framework of the Prince´s Accounting for Sustainability Project; or the KPIs developed for different sectors by the European Federation of Financial Analysts Societies (EFFAS). 32 Besides the positive relationship substantiated by economists between manufactured capital and human capital that explains 31
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6.3 Capital Stewardship Framework (CSF)
So let us introduce now the full conceptual framework with its capitals and value creation areas which the author has baptized as the Capital Stewardship Framework (CSF). As it has already been underlined, in order to steward capital and thus capitalize on their full value potential, companies need to maximize all the forms of value that contribute to their transcendent mission. However, not all those forms of value have the same value and for this reason they will be divided into two groups. On the one hand, we find those capitals that have a relative value because they are means to other ends: financial capital, manufactured capital and organizational capital. On the other hand, there are those that have an absolute value because they are an end in themselves and cannot be traded for other capitals: natural capital, human capital and social capital. Also belonging to this latter group, I will introduce a new capital which differs from those other capitals because it is born in the organization: capital accountability. The author believes than an organization that earns its legitimacy with stakeholders and contributes to the ethical wealth of humanity is nurturing capital accountability.
The following diagram may help understand the importance and interrelationships between the different forms of capital (Figure 8). Figure 8. Importance and interrelationships between capitals
Source: the author
economic growth, other authors have found a positive relationship between social performance and financial performance (Griffin and Mahon 1997; Roman et al. 1997; Margolis and Walsh 2003, Orlitzky et al. 2003; Cornell and Shapiro 1987; Pava and Krausz 1996; Preston and O'Bannon 1997; McGuire et al. 1988; Kraft and Hage 1990; Waddock and Graves 1997; Stanwick and Stanwick 1998; Graves and Waddock 2000). In the case of spiritual capital, understood as the mission and values that guide companies over a long period of time, Collins and Porras (1997) have demonstrated that they contribute positively to the financial bottom line.
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In the centre we have capitals as means that are instrumental to achieve capitals as ends which a located in the upper layers. While the capitals as means have a relative value, a price as Kant would put it, capitals as ends have an absolute value and hence are priceless. Even though natural capital appears in the highest layer, this does not mean that it is the single most precious value from which all value emanates, much like the Platonist idea of the Good. The diagram, instead, represents the relationships and dependencies between the three pillars of sustainability: the economy, society and nature.
Capitals as Means Financial Capital: “Those assets of an organisation that exist in a form of currency that can be owned or traded, including (but not limited to) shares, bonds and banknotes” (Forum for the Future)33
Value Creation Areas Reasonable economic performance
Fair distribution of economic value
Internalization of negative externalities
Regional economic development
Local procurement
For an organization to be self-sustainable, it needs to generate economic value for itself and for all the stakeholders that are part of its business ecosystem (e.g. workers, partners, suppliers, investors). Furthermore, “an economy built on fairness, on designs aimed at a fairer distribution of wealth, is likely to be more resilient” (Kelly 2012: 96). In turn, the market price of the products and services should reflect all the social and environmental costs associated with all the stages of the life cycle of a product, from cradle-tograve34. Lastly, as BALLE advocates, organizations should contribute to the development of the regional economies in which they operate and buy locally produced goods and services. Manufactured Capital: “is material goods and infrastructure owned, leased or controlled by an organisation that contribute to production or service provision, but do not become part of its output” (Forum for the Future)
Value Creation Areas Green buildings and infrastructure
Appropriate technology
Clean production technology
Cradle-to-Cradle model
Reverse logistics
Besides financial capital, companies also production assets such as fixed capital to transform raw materials into finished goods with greater added value, but not at any price. Since the Industrial Revolution our 33
Forum for the Future is a British non-profit organization founded in 1996 by Jonathon Porritt, Sara Parkin and Paul Ekins. Porritt was the first to develop a well-defined theory of capitals, the Five Capitals Model. 34 It is important to notice that negative impacts occur not only in the companies’ facilities. In fact, as Hart states, “often the biggest impacts […] are felt through the upstream (supply chain) or downstream (end use) effects of the company’s activities rather than directly through its immediate products or services” (2005: 157-158). In this respect, there is a very interesting initiative in the textile and footwear industry, the Value Chain Index (VCI), to measure and in the future internalize all social and environmental costs along the whole value chain (Chouinard et al. 2011).
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industrial system has been based on the massive extraction (minerals) and burning (fossil fuels) of nonrenewable resources. Unfortunately, this has resulted in the release of billions of tons of toxic material into the air, water, and soils every year, and in the accumulation of gigantic amounts of waste that is finally buried in holes or burned to ashes. Indeed, the current industrial model is designed on a linear, one-way Take-Make-Waste model (Hawken 1994), and so is its technology. It literary extracts natural resources from the earth's crust to manufacture them into waste at an outstanding speed. Moreover, toxic materials embedded in everyday products also pose significant health risks even before they are discarded to landfills. Currently, the industrial system uses approximately 100 thousand chemical molecules, among them the persistent organic pollutants (POP) which bioaccumulate in the human body and only 15 thousand have been tested to estimate the potential risks from exposure (NRDC 2006). To reduce the industrial system’s devastating consequences, the World Business Council for Sustainable Development (WBCSD) advocated the eco-efficiency approach presented in its 1992 publication Changing Course. The aim was to reduce environmental impact and the use of natural resources through clean production processes and eco-designed goods. And it recommended a set of manufacturing strategies: dematerialize, increase resource productivity, reduce toxicity, increase recyclability, and extend product lifespan. Yet, instead of eliminating waste altogether, eco-efficiency just slows down its appearance and hence the ecological decline. Moreover, “the majority of recycling done today is actually downcycling where materials lose value as they circulate through industrial systems” (Braungart et al. 2006). “Each of these strategies starts with an assumption of the linear, cradle-to-grave flow of materials through industrial systems” (Ibid.). Therefore, this approach does not question the design of the current industrial model because it only aims at doing less harm to the environment by reducing emissions, waste and toxicity.
A more promising solution proposed initially by Stahel in the 1970s and later advocated by McDonough and Braungart in 2002 was the Cradle-to-Cradle approach35. Instead of reducing the negative impact on the environment, their approach strives to generate positive impacts by re-designing the industrial systems in accordance to the regenerative designs found in nature. Toward that end, they promoted three concepts: cradle-to-cradle, waste equals food and solar income. That is to say, man-made designs should mimic nature's life cycles which are closed-loop systems that use waste as nutrients to support metabolic processes and rely exclusively on renewable energy. Practically, it means designing products and processes that can become nutrients (technical or biological) for the other systems (technosphere or biosphere). In order to do so, the industrial system should use non-toxic and biodegradable raw materials that nourish the biosphere and maintain the integrity of the materials used so they can be recycled continuously into new products without losing quality (upcycling).
35
See Cradle-to-Cradle: re-making the way we make things (Braungart y McDonough 2002)
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However, the redesign of the industrial system has to go hand in hand with the redesign of the consumption system. Therefore, besides adopting clean production technology and cradle-to-cradle models, organizations need to go further and embrace the functional economy approach to help create a circular economy (Stahel 1989, 2010). This approach takes into account the full life cycle of products, not just the manufacturing but also the use phase of goods. Companies in a functional economy acknowledge that what fulfils consumer needs are the functions provided by products, not the products themselves, that is, the utilization and satisfaction rather than the consumption of goods. Therefore, they sell mobility instead of cars, cleaning services instead of washing powders and movies instead of DVDs. In order to build a circular economy, companies need to manufacture goods and provide services that “create the highest possible use value for the longest possible time while consuming as few material resources and energy as possible” (Stahel 2010). This economy calls for the internalization of the full environmental costs along the whole life cycle of a product and for making manufacturers the sole owners of the products they take to the marketplace. This change in ownership structure “gives incentives to integrate the 'Factor Time' into the economy through an extended performance responsibility” (Ibid.). Rather than only taking responsibility for the products before they reach the marketplace, companies should recover the products, materials and compounds to either reuse, repair, upgrade or recycle them into new products36.
Finally, besides the environmental cost, manufactured capital can also have social costs; therefore, organizations should adopt appropriate technologies adapted to their local context and that contribute to human development, rather than to worker’s alienation. Organizational Capital: includes not only companies’ management systems that improve operational performance and reduce negative impacts, but relational assets that foster effective cooperation and intangible assets such as brand visibility and capacity to innovate.
Value Creation Areas Sustainability Supply chain management system management system
Relational Capital
Brand awareness
Innovation Capital
As mentioned before, organizational capital has also been referred to as intellectual capital since the management of knowledge is becoming more crucial for corporate survival in the Information Age. However, the author dislikes the term because, as Wheatley writes, “we would notice that when we speak of such things as “assets” or “intellectual capital” that it is not knowledge that is the asset or capital. People are” (2007: 150-151). Indeed, knowledge is created by human beings and belongs to human capital. Therefore, to distinguish organizational capital from human capital, I would say that the former consists of all those assets that even if they have been created by the latter, stay in the company.
36
See The Performance Economy (Stahel 2010)
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Capitals as Ends Natural Capital: “in addition to traditional natural resources such as timber, water, and energy and mineral reserves, also includes biodiversity, endangered species and the ecosystems which perform ecological services” (TEEB 2010).
Value Creation Areas Substitution of rare Substitution of toxic materials substances
Use of renewable resources
Resource productivity
Natural capital protection
The Natural Step (TNS), a non-profit organization, uses a metaphor called the funnel to help visualize our increasing pressure on the biosphere and its ecological limits (Figure 9). All companies depend on resources and ecosystem services and hence will need to live within the stretching walls of the funnel.
Figure 9. The funnel
Source: The Natural Step
In order to guide organizations in their journey towards sustainability, the founder of TNS, Karl-Henrik together with a group of other leading Swedish scientists (1989), developed what he named as The Four System Conditions or principles of sustainability. Based on scientific laws, they came to the conclusion that there are “three basic conditions that must be met if we want to maintain the essential natural resources, structures and functions that sustain human society”. In a sustainable society, nature is not subject to systematically increasing:
1. Concentrations of substances extracted from the earth's crust. Therefore, companies should eliminate their contribution to the progressive buildup of substances (e.g. heavy metals and fossil fuels), especially toxic ones (e.g. lead and mercury), and substitute them for abundant materials. 2. Concentrations of substances produced by society. Similarly, they should avoid accumulating chemicals and compounds produced by society (e.g. dioxins, PCBs, and DDT), especially persistent ones, and substitute them for biodegradable substances. 40
3.
Degradation by physical means. That is, they should avoid the destruction and degradation of ecosystems and manage renewable resources in a sustainable manner.
In addition, Hawken et at. (1999) also mention a couple of shifts in business practices that will contribute to building a restorative economy. 4. “Dramatically increase the productivity of natural resources” (1999: 146) to slow resource depletion and lower pollution. 5. “Reinvest in natural capital. Ultimately, business must restore, sustain, and expand the planet’s ecosystems so that they can produce the vital services and biological resources even more abundantly” (1999: 148) Human capital: “incorporates the health, knowledge, skills, intellectual outputs, motivation and capacity for relationships of the individual [but also] joy, passion, empathy and spirituality” (Forum for the Future).
Value Creation Areas Training and development
Decent work
Health and safety
Work satisfaction
Occupational flexibility
It should be stressed that human capital is related to the concept of human dignity and the development of human capabilities. Hence, enhancing human capital is not limited to increasing labour productivity since it includes the development of the whole person. Taking human dignity seriously means we cannot continue conceptualizing human capital as a “human resource” because it is not an instrument but an end in itself. Moreover, by decent work, I adopt the definition of the International Labour Association (1999), “productive work for women and men in conditions of freedom, equity, security and human dignity”. Finally, I believe that flexible and satisfying jobs provide an intrinsic and enduring motivation to bring out the best in people. Social Capital: “the institutions and relationships established within and between each community, group of stakeholders and other networks to enhance individual and collective well- being” (IIRC 2011)
Value Creation Areas Community development
Positive impact of goods and services
Ethical sourcing
Cultural capital protection
Charity and community service
By community development I am referring to business “practices which play a special role in overcoming poverty and disadvantage, knitting society together at the grass roots and deepening democracy” (Communities and Local Government, 2006). In the case of ethical sourcing, I consider companies’ purchases of goods which come from supply chains that provide decent jobs to workers or fair prices to producers. Lastly, cultural capital is protected when “actions through which communities manifest their 41
identity and cultivate traditions from generation to generation” (Werback 2009: 10) are valued and nurtured by companies.
Accountability Capital: in addition to an inclusive, responsive and transparent governance system that takes into account stakeholders, it also includes the mission and core values of an organization.
Value Creation Areas Stakeholder engagement
Inclusive and responsive governance
Material information transparency
Mission and core values
Mission-controlled governance
Accountability capital, unlike other capitals that are normally inputs of business activity, can be seen as an output from an organization’s activity, in particular, from its way of acting and being in society. It could be said that accountability capital represents an organization’s unique contribution to humanity. On the one hand, it is built when organizations aim to legitimize their actions by engaging their stakeholders, listening and responding to their concerns, or providing them with all the relevant and material information. On the other hand, apart from pleasing their stakeholders, however, organizations have to maintain a corporate identity that “contributes to the ethical wealth of nations” (Lozano 2009: 167). Indeed, organizations create capital accountability when they live up to their transcendent mission and embody a coherent set of core values. Accordingly, it is not a means to increase shareholder value, but an end in itself. This way of being and behaving converts them in role models. Finally, to continue contributing to the world in a unique way, the organization needs to find a suitable governance design to protect its mission over time, the ultimate source of value (as we will see in the next chapter).
To finish this chapter, Table 7 compiles in a single matrix all the types of capital and corresponding value creating areas. Its application will determine whether an organization is maximizing all the forms of value that contribute to its transcendent mission and therefore if it is a hybrid corporation. However, we must bear in mind that this tool is only a starting point proposed by the author that will need to be applied to hybrid corporations in order to test whether the Capital Stewardship Framework (CSF) is useful and relevant to assess their global value performance.
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Table 7. Capital Stewardship Framework (CSF) CAPITALS
VALUE CREATION AREAS
FINANCIAL
Reasonable economic performance
Fair Internalization distribution of of negative economic value externalities
Regional economic development
Local procurement
MANUFACTURED
Green buildings and infrastructure
Appropriate technology
Clean production technology
Cradle-toCradle model
Reverse logistics
ORGANIZATIONAL
Sustainability management system
Supply chain management system
Relational Capital
Brand awareness
Innovation Capital
NATURAL
Substitution of rare materials
Substitution of toxic substances
Use of renewable resources
Resource productivity
Natural capital protection
Training and development
Decent work
HUMAN
Health and safety
Work satisfaction
Occupational flexibility
SOCIAL
Community development
Positive impact of goods and services
Ethical sourcing
Cultural capital protection
Charity and community service
ACCOUNTABILITY
Stakeholder engagement
Inclusive and responsive governance
Material information transparency
Mission and core values
Missioncontrolled governance
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7. Theoretical model: Value Creation Model (VCM)
So far we have labelled and defined a new concept of value, namely:
Capital stewardship: the maximization of all those forms of value which contribute to an organization’s transcendent mission.
Furthermore, we have developed a tool to assess the value performance of an organization and determine whether we have found a global value maximizer, thus a hybrid corporation. Hence, the conceptual framework has been useful to reconceptualise value and assess the maximization of all its dimensions. But how is global value maximized in the first place? In other words, we lack an explanatory theory to illuminate this complex phenomenon.
While we have some convincing explanations on how economic value is created (Schumpeter 1942, Nelson 1982, and Beinhocker 2006), the author has not found yet any satisfying explanations for global value creation. I do not want to suggest that there is an academic gap, plenty of literature exists in the fields of CSR and social entrepreneurship and, in fact, we will go through some proposals that have been put forwards to ponder their merit. In the case of CSR, their efforts have been mostly devoted to investigate the business case for CSR. Namely, what relationship prevails between CSR and shareholder value37? Can companies expect any extra-financial returns from undertaking social and environmental initiatives? If so, how to capitalize them? The aim, therefore, has been to understand how a company can increase its total value appropriation, rather than its global value creation. On the contrary, any positive externalities that threaten their competitive advantage have to be minimized. In short, value creation is always self-centred; companies only contribute to the common good when it adds shareholder value. “Thus, although advocates of CSR like to propose that companies should be measured by a ‘triple bottom line’ of financial, social and environmental benefits, ultimately only one bottom line usually matters: financial profit” (Yunus et al. 2010: 309). Again, companies are designed to maximize profit above all else, so this approach still belongs to the old business paradigm. In the next two sections we will analyse further attempts.
7.1 Business model approach The business model is a construct that has been defined as “the rationale of how an organization creates, delivers, and captures value” (Osterwalder and Pigneur 2010). Alternatively, as “a template of how a firm conducts business, how it delivers value to stakeholders (e.g the focal firm, customers, partners etc.) and how it links factor and product market (Zott and Amit 2010). The growing literature acknowledges that business 37
According to Friedman (1962), CSR activities are a waste of money and resources for companies. Cornell and Shapiro (1987), on the other hand, disagree and believe that companies can improve their financial performance by taking into account their stakeholders’ concerns. Finally, other authors, think the relationship is neutral (McWilliams and Siegel 2000; Anderson and Frankle 1980; Aupperle et al. 1985; Freedman and Jaggi 1982)
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models include business strategy but go beyond them, adopting terms such as value ecosystem or value constellation to highlight that value creation is not limited to value appropriation. Moreover, unlike the traditional conception of strategy where companies adopt a certain strategy (position) in the marketplace to compete to capture higher profits than other firms in the same industry, now companies are conceived as being part of a network or business ecosystem that creates value and hence compels them to cooperate to increase their chances of business success. The focus has gone from defending their market share from competitors to maintaining their competitive advantage by fulfilling customer’s needs or wants, from capturing economic value from their competitors to generating value for their customers, the so-called value proposition of the company.
However, most of the time the value created by the business models is thought to be economic value. This is most oblivious in the literature related to the Base of the Pyramid (BoP) where the emphasis has shifted from “finding a fortune at the base of the pyramid” to “creating a fortune with the base of the pyramid” (London 2011). By adopting business models that capitalize on local skills and local partnerships these business ventures can improve the socioeconomic conditions of poor people in developing countries and by doing so encourage the creation of economic value. However, as sustainability expert, Tania Ellis, writes: “The Base of the Pyramid concept creates value but does not automatically make a company’s activities sustainable. BOP-customized products like single-serve plastic packaging, for instance, are criticized for causing environmental problems because they are not biodegradable. And weaving and clothing manufacture in emerging markets have proven unsustainable because they have ignored the long-term needs of communities in preserving their social fabric and natural environment” (2010: 127).
The related field of social entrepreneurship goes one step further by claiming the social entrepreneurs build innovative business models that create both profits and societal wealth challenging conventional business models. Yunus et al. (2010), for instance, have developed a social business model framework that enlarges the value proposition and the value constellation to encompass all stakeholders, not just customers, and introduces what they call the “social profit equation” because social business models “must focus not only on financial profit, but on profit for all stakeholder” (2010: 317). However, this framework seems to be a blend of the TBL and sustainable value approaches, since the concept of value is fragmented into the three traditional dimensions and social value is reduced to stakeholder value (Figure 10).
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Figure 10. The four components of a social business model
Source: Yunus et al. (2010)
Moreover, this example is symptomatic of a broader trend in the field of social entrepreneurship which is to assume that business models are the sources of social and environmental value creation. In other words, since a business model is an activity system which describes how firms do business (Zott and Amit 2010), societal value creation is the result of a company’s way of operating. However, this does not seem a good explanation of global value creation; to say that business activities create multiple forms of value is too general, vague and redundant to be considered a theory.
A less systematic but more specific strategy has consisted in providing CEOs from social ventures with a list of the main vehicles of social value creation and asking them which are used more frequently (RISE 2006): Product/Service, Supply Chain, Internal Operations, Advocacy/Philanthropy, Ethics. According to the survey findings, “more than 77% of the CEOs choose product/service as their primary vehicle for creating social change. For most industry segments, ethics considerations are the secondary means of creating social value” (2006: 19-20). Ethics may be secondary in ranking but not secondary in importance as will become evident in the following pages. Furthermore, creating multiple forms of value implies much more than selling products and services with an intrinsic social value and nothing less than living up to a transcendent mission, as we will see.
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7.2 Social innovation approach
There is another hypothesis put forwards by some experts in the social innovation field: “Social entrepreneurs are, of course, important because they see new patterns and possibilities for innovation and are willing to bring these new ways of doing things to fruition even when established organizations are unwilling to try them. And enterprises are important because they deliver innovation. But ultimately, innovation is what creates social value.” (2008:37).”
They argue that social innovation is a new solution to a social problem where society is the main beneficiary. This makes them different from traditional innovations that generate private value. Moreover, social innovation is not the exclusive domain of social entrepreneurs and social enterprises since it can emerge in other places such as non-profits, for-profits and governments. Anticipating criticisms, they define social innovation as: “A novel solution to a social problem that is more effective, efficient, sustainable, or just than existing solutions” (Ibid: 38). In other words, social innovations are the best available solution to a social problem. What about the subprime mortgages that allowed people with low incomes to have access to housing but triggered the global financial crisis? What have they got to say about it? “Admittedly, the subprime mortgage crisis casts a shadow over this social innovation. But a closer examination of the crisis reveals that the problem lies not in the innovation itself, but in its overzealous” commercialization—a kind of social innovation gone wild” (Ibid: 42). In short, subprime mortgages were not the best available solution, Self-Help instead provided less abusive loan conditions to low-income borrowers. However, months later after their article, the shares of the Federal National Mortgage Association, also called Fannie Mae, which bought the repackaged Self-Help’s mortgages, tumbled more than 90% from their one-year prior levels and was rescued by the Treasury Department in the US. The authors also place carbon markets and microcredits as their next bet of proper social innovations.
Are social innovations the source of social value? In fact, in recent years, there seems to be an abusive use of microcredits, which has even been criticised by its founder38, Mohamed Yunus. Instead of providing access to credit for poor families to get them out of poverty, it seems that the social mission that guided microcredit lending is been replaced by a profit mission, and rather than liberating is slaving those families. What will the authors say if the carbon markets end up creating the next speculative bubble, maybe that REDD 39 was better social innovation. In any case, it seems that social innovations can be the source of value creation or value destruction and it is difficult to say which will have long lasting positive effects40.
38
Yunus (2011), Sacrificing Microcredits for Megaprofits, New York Times It is a program design by the UN to reduce the emission caused by deforestation and degradation of forests and managed by three organizations: FAO, UNDP, UNEP 40 Consider the case of the Internet which is a quintessential social innovation that has transformed our lives 39
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In summary, we have seen that CSR is concerned about enlarging shareholder value and hence explaining economic value appropriation; the business model approach only focuses on explaining the economic value created in the business ecosystem and, when applied to social entrepreneurship, it assumes but does not explain social value creation; finally, social innovations alone without their underlying missions do not explain social value creation. Therefore, none of these approaches provide a plausible explanation of how global value is created.
7.3 Corporate designs
As noted above, value creation is a long term process (not a fad) and therefore implies a sustained behaviour over time. In other words, it requires that organizations’ activities follow a constant pattern of behaviour. Otherwise, as happens with some social innovations and continuously with the stock market, value creation would be, by definition, something unstable and volatile.
If that is the case, where does that stability come from? Put differently, what causes patterns of behaviour that generate a sustained impact? In my view, systems thinking may provide the key answer we are looking for. Indeed, Meadow’s transmitted a profound insight when she wrote: “System structure is the source of system behaviour. System behaviour reveals itself as a series of events over time” (2008: 89)
Therefore, what causes a pattern of behaviour is the internal structure of a system, in our case, the structure of an organization. Organizations can be configured in such a way that they can create or destroy value. For this reason, ultimately, the design of a system is responsible for the creation or destruction of value, namely, the corporate design.
Even though many would agree with this statement, corporate designs like social innovations can be a source of good and evil, how do we distinguish between good and bad corporate designs? An easy answer would be to appeal to the consequences of their behaviour and assess whether they generate a positive or negative impact. Nevertheless, consequences are just expressions of something deeper and sometimes implicit. This element determines the behaviour of the system and has been labelled by system thinkers as the function41 or purpose of the system. Listening again to Meadows, The “purpose is not necessarily spoken, written, or expressed explicitly, except through the operation of the system. The best way to deduce the system’s purpose is to watch for a while to see how the system behaves" (2008: 14).
41
Normally applied to non-human systems
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Consequently, the behaviour displayed by a system will be motivated by the underlying mission of the system. To connect the dots, we can recall that value creation is closely linked to a special kind of mission embraced by organizations that strive to improve the well-being of the broader system they belongs to, namely, transcendent missions. As psychology professor Csikszentmihalyi notices, "we infer the existence of [transcendent mission] when a system uses some of its surplus energy to reach outside itself and invest it in another system, becoming in the process a stakeholder in an entity larger than itself” (2003: 145). In turn, the Value Stewardship Framework (VSC) could be useful to analyse an organization’s performance over time and deduce if its driven by a transcendent mission or “if all its energies are devoted merely to keeping itself alive and growing” (Ibid). But given that global value creation is a long term process, maybe an organization’s transcendent mission will not show up immediately but will eventually reveal itself. And when it does, that is, when the organization lives up to its transcendent mission by maximizing multiple forms of value, it will become a hybrid corporation.
Now that we have all the pieces of the puzzle, we can affirm that value creation is a long term process that implies consistency of behaviour with a transcendent mission, when that happens we can consider that an organization is creating multiples forms of value and hence is a hybrid corporation. In some way, we can say that the ultimate source of all value rests in a transcendent mission but to unfold its greatness it has to be embedded in a corporate design. In summary, let me restate my Hypothesis2:
Hybrid corporations maximize global value by embedding a transcendent mission in a corporate design.
We could draw a parallel with human beings and say that hybrid corporations resemble great people. Just like great people have been recognised not only for upholding high ideals but for having lived up to them every day throughout their life, hybrid corporations also show deep commitment towards their transcendent mission honouring it with their loyal and coherent actions over time. Why would they be different if organizations can be seen as a community of individuals pursuing a shared vision?
Organizations as social systems
It has been mentioned that the structure of a system will determine its behaviour, but what is the internal structure of corporate designs? To understand how human organizations are configured, first we need to understand how social systems differ from biological systems.
All living systems share a common property, self-organization: "the ability to structure themselves, to create new structures, to learn, diversify, and complexify" (Meadows 2008: 81). In fact, scientists have defined life itself as self-production. Surprisingly, this self-organizing capacity enables living systems to create very complex structures from relatively simple organizing rules. "All life, from viruses to redwood trees, from 49
amoebas to elephants, is based on the basic organizing rules encapsulated in the chemistry of DNA, RNA, and protein molecules" (Ibid.).
Indeed, all living systems can generate new structures spontaneously but unlike biological systems, social systems can also design new structures deliberately. That is, while biological systems are ruled by an unconscious function, in human systems we find another common property, conscious reflection or meaning. "More specifically, our ability to hold mental images of material objects and events seems to be a fundamental condition for the emergence of the key characteristics of social life" (Capra 2002: 73). I do not want to imply that biological systems are unconscious beings, but rather that social systems are equipped with a self-conscious ability that enables them to design structures for a purpose and give them meaning. And these structures that they design can be of two types, either material structures (e.g. buildings, physical technologies, artefacts) or social structures (social technologies). Nevertheless, not all social structures are designed by social systems; some emerge spontaneously from the rules followed by individuals. In short, social systems, and in our case organizations, can create planned or emergent structures.
Organizations as living systems
In order to understand how organizations really work we need to abandon the old metaphor that has permeated modern management thinking. Rather than seeing organizations as machines, the prevailing metaphor, we need to adopt a new metaphor, organizations are living systems. The old metaphor has its roots in the 19th Century mechanical engineer, Frederick Taylor, and the school of “scientific management” he pioneered. “Taylor battled against wasted motion, poorly designed tasks, lax or unrealistic performance standards, misfits between job requirements and worker capabilities, and incentive systems that discouraged best efforts” (Hamel 2007: 12). Like machines, companies need to be designed accordingly in order to improve the efficiency and productivity of their operations. The task of managers, therefore, was to redesign work and implement the necessary changes so that the machine was always well oiled and running at its best. Workers were literary considered as cogs in a machine that needed to perform in the most efficient way. Thus, the main objective of management was to improve economic efficiency and better designed formal structures were the means.
Furthermore, the metaphor of the organization as machine is closely linked to the metaphor of the organization as property. As Capra notes, "a machine is designed by engineers for a specific purpose and it owned by someone who is free to sell it. It implies that a company is created and owned by people outside the system” […] If we see the organization as a living being, however, the question of ownership becomes problematic” (Capra 2002: 104).
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However, these top-down formal structures designed according to a purpose only describe one part of the story, because organizations can also build by themselves bottom-up informal structures, which are essential for organizational learning and adaptation, without the need of managers or consultants. Therefore, managers need to drop the old machine-like metaphor and embrace the living system metaphor to understand the true nature of organizations.
Internal structure of corporate designs
Once we have explained what makes social systems unique, an ability to design structures according to a purpose and give them meaning, and what all living systems have in common, an ability to self-organize and create new structures, we are ready to go deeper into what defines the internal structure of organizations. At the most basic level, all human organizations are a blend of formal and informal structures that merge together. But to understand how complex organizations such as companies or hybrid corporations behave, we will need to put together and introduce more extra elements that make up their internal structure and hence constitute their corporate design.
The first element has already been introduced. Behind the behaviour of an organization there is always a raison d'être, an ultimate purpose that gives meaning and guides a project. Organization’s need to understand first and foremost: who they are, why they exist and how they add value to the world in a unique way. This essential element, the corporate identity, is quite stable and brings coherence and clarity to the other elements and is the cornerstone of the corporate design.
Moreover, in the field of management, the formal and informal structures coincide with the organizational structure and corporate culture respectively. Whereas the first denotes the set of fixed rules and procedures followed by the members of an organization, the second refers to the shared values and vision among them. Therefore, both of them shape the behaviour of an organization. But in order to channel people’s energies in the right direction and fulfil the shared vision set by the corporate identity, we will need to introduce a beloved element by management gurus, the corporate strategy. Strategies explain the patterns of behaviour observed in organizations. Lastly, the role of the final element named organizational performance is to provide accurate information to the organization so it knows whether it is fulfilling its vision of success. Before starting to describe each element, the author proposes a theoretical construct, the Value Creation Model (VCM), to illustrate the existing interrelationships between all the elements that configure a corporate design (Figure 11).
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Figure 11. Value Creation Model (VCM)
Source: the author
Corporate Identity
We have already introduced the essential element of the corporate design that gives meaning, cohesion and coherency to the rest of elements, the corporate identity, that is, the fundamental reason for being of an organization. This stable and permanent element instils its character in other elements and acts as the source of meaning and direction for the organization. The corporate identity, in turn, is constituted by a central and coherent nucleus of sub-elements: the mission, core values and vision of the organization. The management guru, Peter Drucker, once said that “if you want to know what a business is, you have to start with its purpose, which must be found outside the business itself—in society, since a business enterprise is an organ of society” (1993: 37). That is why he considered it a fallacy to affirm that the purpose of the company was to maximize profits. Profit and profitability are crucial. “Yet profitability is not the purpose of, but a limiting factor on business enterprise and business activity. Profit is not the explanation, cause, or rationale of business behaviour and business decisions, but rather the test of their validity” (1993: 34). Another of his memorable quotes, “profit for a company is like oxygen for a person; if you don’t have enough of it, you’re out of the game” (cited in Senge: 2010: 326). Indeed, financial performance is a means and a sign of success but never the purpose of a company.
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Rather, the mission of an organization refers to its contribution to society, its unique and distinct way to add value to the world. In addition, according to Collins and Porras (1994), “core values are the organization's essential and enduring tenets - a small set of timeless guiding principles that require no external justification, they have intrinsic value and importance to those inside the organization" (1994: 222). And the vision is the mental image held by an organization about its envisioned future which consists of two components “a thento-thirty-year Big Hairy Audacious Goal (or BHAG) and a ‘vivid description’ of what it would be like when the organization achieves the BHAG” (Ibid.). All these sub-elements constitute a coherent and stable core that the authors depict with the following figure (Figure 12):
Figure 12. Articulating a vision
Source: Collins y Porras (1994)
The vision is like a compass that enables organizations to move from a present state they find themselves into a future desired state they want to achieve and, more crucial, brings to its members the energy and motivation needed to fulfill the envisioned future. So far so good, but the authors go as far as claiming that the content of a vision is irrelevant, what matters is that companies have strong ideology and, if so, long-term business success will follow suit.
I have some doubts that in the future companies with a strong mission will continue performing well, even financially speaking, regardless of their type of mission. Global value creation will be a must. Therefore, we need one last ingredient that “transforms workers form self-centered, static individuals into entities yearning to grow and connect with other beings” (Csikszentmihalyi 2003: 197). In brief, we need companies driven by a transcendent mission, real global value maximizers. “Businesses that exist in order to live out a [mission] contributing to the health of larger systems, not simply in order to make a profit” (Senge 2008: 326). In fact, as Csikszentmihalyi believes, when organizations embrace a transcendent mission, “then the organization itself becomes invested with soul. It does not exist solely for its own benefit, or for the benefit of those who by investing in it have made its existence possible. It has a purpose beyond itself and reaches out to help other systems, to create other forms of organizations” (2003: 154). This kind of missions motivates its 53
members to invest their energies in something bigger than themselves and more meaningful. Furthermore, this psychologist classifies transcendent missions in three main types: striving for excellence, doing something of benefit to others, and building a better world. “When each of these three elements of [mission] are present, business is transformed from a tool for making profits into a creative, humane experiment for improving life” (2003: 199).
When talking about organizations as living systems it might seem that we are neglecting individuals, but this is far from the truth since they are the true architects of social system. Corporate identities harbouring transcendent missions are normally set up by visionary leaders that want to transform themselves through transforming the social reality that surround them. Referring to this personal transformation, the philosopher Ortega y Gasset, once wrote: "I am myself and my circumstances, and if I do not save them, I do not save myself”. It is usually these leaders who institutionalize the corporate identity, who make sure the organization knows itself and its history in order to keep its mission always fresh and alive. This is so at least at the initial stages of its development before the organization matures.
However, this cannot last forever and sooner or later, the leader will have to step out because the stakes are too high when the vision is held by a single individual. “One heart attack can literally wipe out the organization’s key strategist”, Mintzberg writes. Instead, Collins and Porras (1994) recommend visionary leaders to build a visionary organization and use a suggestive metaphor described in the following passage: “Imagine you met a remarkable person who could look at the sun or stars at any time of day or night and state the exact time and date: ‘It’s April 23, 1401, 2:36 A.M., and 12 seconds.’ This person would be an amazing time teller, and we’d probably revere that person for the ability to tell time. But wouldn’t that person be even more amazing if, instead of telling the time, he or she built a clock that could tell time forever, even after he or she was dead and gone? […] The builders of visionary companies tend to be clock builders, not time tellers. They concentrate primarily on building an organization […]. Their greatest creation is the company itself and what it stands for” (1994: 22-23)
Corporate Culture
This metaphor leads us to the next element of corporate design but despite its usefulness to explain how to achieve the sustainability of the project beyond its founder, we cannot forget that organizations are not machines but living systems that host a community of individuals. And their shared values and vision give life to the corporate culture of the organization.
But how does it come into being? The corporate culture can be seen as a property that emerges from the informal structure, that is, from the unplanned communication that takes place between the members of an 54
organization. Indeed, besides the traditional communication channels established by the formal structure, people interact through the informal communication networks that emerge within organizations spontaneously. According to Capra (2002), culture is generated “as a consequence of the dual role of human communication. On the one hand, the network continually generates mental images, thoughts and meaning, on the other hand, it continually coordinates the behaviour of its members" (2002: 86). Both processes merge into an integrated system of values, beliefs and rules of conduct which gives life to the shared vision and values held by the members of the organization. In turn, they also create a context of meaning which will determine which information becomes meaningful and relevant to its members.
This last point is very important to understand how living systems react to the information they receive, since they only take notice and respond to the information they interpret as meaningful. To use Maturana and Varela’s (1980) insightful quote: “You can never direct a living system. You can only disturb it ". This is one of the great contributions of systems thinking to the field management. Instead of giving instructions, managers or leaders need to shape the contexts of meaning so their decisions are more effective, because if people do not interpret them in the right way they will not react accordingly. Building the right context of meaning is crucial to align people’s decisions with the corporate identity. Chester Barnard, the executive and management guru, meant this when he asserted “that the CEO's role is to harness the social forces in the organization, to shape and guide values. He described good value-shapers as effective managers, contrasting them with the mere manipulators of formal rewards who dealt only with the narrower concept of efficiency” (Waterman et al. 1980). By articulating a vision and transmitting the values, leaders and managers can channel people’s action towards a particular direction. Success in transmitting ideas and values, however, depends not only on communicating them well but on leading by example. According to Phillips and Kennedy (1980), “the success in instilling values [is] derived from obvious, sincere and sustained personal commitment to the values the leaders sought to implant” (cited in Peters and Waterman 1982: 288). Persistence is also a key trait, “these leaders believe, like an evangelist, in constantly preaching the “truth”, not from their office but away from it - in the field" (Ibid.). Finally, another role is to fortify the culture of the organization, “around the leader swirls the culture, much as the queen bee emits the chemical substance that holds the hive together” (Mintzberg 2011:140). But not only leaders, managers and middle managers should also be involved in sustaining the corporate culture by transmitting the same vision and values. Because if not, as Mintzberg warns us, "the culture of an organization may be rather difficult to establish, and to change- that can take years, if ever- but it can be rather easy to destroy, given a neglectful management” (2011:70).
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Organizational Structure
The next element of corporate design is perhaps the most known and widely used (abused?), in particular, by command and control management. Besides the traditional formal structure (social) designed to allocate, coordinate and control the behaviour of people in an organization, the corporate structure also includes the material structures (buildings, goods or artefacts) and the environment where the business activities take place. Inside the formal structure we find not only the governance system and the management structure but also the management systems, codes of conduct and policies, all of them are a fixed set of rules designed or adopted by an organization and need to be strictly followed by the members of the organization. In truth, we are referring to the deliberate power structure established by an organization where each person is assigned a set of tasks, roles and responsibilities and is reflected in the traditional organizational charts.
The resulting chain of command is useful to coordinate business activities in the most efficient and productive way. Consultants and managers have invested a lot of efforts and energy in this tool, thinking it was the most effective to improve labour productivity and economic efficiency. One of the intellectual fathers of this conviction was Frederick Taylor, as mentioned above, and the other the sociologist Max Weber, who believed that the ideal organization exhibited the following features (Hamel 2007: 13-14):
The division of labour and responsibilities were clearly delineated for every member of the organization
Positions were organized into hierarchy resulting in a scale of authority
Members were selected for positions based on their technical competence or education
Everyone in the organization was subject to strict rules and controls relevant to their particular job.
Managers worked for the owners of the enterprise, but were not the primary owners themselves
Undoubtedly, these formal structures have helped companies increase their productivity, generated stability, discipline and security, but also bureaucracy. However, as mentioned above, people do not respond automatically to the commands imposed by the formal structure, instead these instructions need to be interpreted in the light of their beliefs and values. This does not mean that they are immune to the influence of the formal structure. On the contrary, there is a reciprocal relationship between the formal structure and the corporate culture, that is, the former also shapes the latter, and hence people are affected by both. Similarly, material structures and environmental factors also shape the corporate culture. Therefore, besides formal structures, leaders and managers can also design material structures and chose certain physical locations to reinforce the corporate culture and help fulfil the organizations’ mission and vision.
Before moving on to the next element of the corporate design, the corporate strategy, and leaving behind the organizational structure, it is appropriate to comment on their relationship. As the famous management proverb goes (Chander 1962): "structure follows strategy". That is, logically speaking, it seems that the 56
organizational structure is always determined by the business strategy; first we need to develop a strategy and then design the right structure to implement it. But as systems thinking acknowledges, path dependency is unavoidable. When organizations invest resources and create new social and material structures, they are creating a dependency on the past, because often they will not be able to undo everything and start from scratch again, instead they will need to adapt their strategies to those existing structures. This is obvious in the case of material structures such as technological investments, but also happens with social structures that generate rigid routines. Accordingly, “structure follows strategy the way the left foot follows the right foot in walking. In effect, the development of strategy and the design of structure both support the organization, as well as each other. Each always precedes the other, and follows it”, conclude Mintzberg et al (2009: 37).
Corporate Strategy Corporate strategy has traditionally been associated with strategic planning. “Strategies result from a controlled, conscious process of formal planning” (Mintzberg et. al 2009) conducted by the CEO and the top management is then responsible for executing them. Following systems thinking, I believe that strategies are not always deliberate, and I agree with Mintzberg that the formulation and implementation of strategy are not separate processes. Instead, strategy is a learning process where experimentation occurs and patterns of behaviour emerge. Moreover, emergent strategies can be initiated by CEOs or the senior management team, but can also result from a collective process involving other members of the organization. This does not mean that deliberate strategies are non-existent, they can happen but it is not always the case. Most of the time what happens is that an emergent strategy that has been institutionalized due to its success and then it becomes a deliberate strategy. Thus, as argued by Mintzberg (Ibid: 12), realized strategies are a blend of deliberate and emergent strategies.
However, an easy criticism could be: how can an organization align the corporate strategy with the corporate identity if most of the strategies are emergent? How can it control the emerging pattern so that it keeps in line with its transcendent mission? Well, by fostering deliberately emerging strategies. In other words, “learning can take place within a broad vision – the umbrella strategy - that is deliberate in its overall perspective yet emergent in its specific positions” (Ibid: 208). Mintzberg et al. offers the following description to clarify what they mean by an umbrella strategy: “Strategies originate in constraints; leadership, in partial control of organizational actions, defines strategic boundaries or targets within which other actors respond to own experiences or preferences; perspective is deliberate, positions, etc. can be emergent; strategy can also be described as deliberately emergent” (Ibid: 201)
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Organizational Performance
We have reached the last but not least element that finally configures a fully-fledged corporate design. The organizational performance can be defined as the measurement system that provides all the necessary meaningful information to know whether the organization is achieving its vision of success, enabling its growth, learning and adaption. However, to fulfil its role effectively, the measurement system needs to reflect whether the results achieved by the organization are coherent with its corporate identity. To do so, the organization will need to adopt or develop a set of relevant indicators that provides the right information. Meadows told us (2009), "you can get the system to operate with a surprising ease if it provides more timely, more accurate and more complete" (Meadows 2009: 173). More surprising, "systems, like the three wishes of the traditional fairy tale, have a terrible tendency to produce exactly and only what you are asked to produce" (2009: 138). Conversely, if organizations do not measure the right things, the corporate design will not produce the desired results.
Therefore, in order to align the corporate performance with the corporate identity, the measurement system needs to be able to express whether the organization is achieving its vision of success. If the measurement system shows a deviation from the transcendent path, the organization may need to adjust the corporate strategy and/or the organizational structure to adapt to its environment. In extreme cases, when an organization faces a growing gap between the corporate culture and its environment, that is, a “strategic drift" (Johnson 1987), it will need to change its corporate strategy radically and develop a new corporate identity while maintaining its corporate identity intact.
As some readers may have already guessed, the author wants to highlight the conceptual link between the measurement system adopted by a hybrid corporation and the Capital Stewardship Framework (CSF) he proposes. Indeed, as mentioned earlier, the CSF can be useful to assess whether an organization is able to express its transcendent mission through its results and therefore determine if it is a hybrid corporation. Put differently, the measurement system adopted by a hybrid corporation could be based on the CSF developed by the author. However, although the CSF aims to be a comprehensive conceptual framework, it will not always by suitable to assess the realization of the all possible transcendent missions held by the universe of hybrid corporations. Therefore, first they will need to identify which are the relevant capitals and areas of value creation that apply to them and then develop a set of key performance indicators (KPIs) to measure the achievement of their vision of success.
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Concluding remarks
The author believes that the theoretical model presented in these pages offers a better explanation of how hybrid corporations create global value. Certainly, going back to our hypothesis:
Hypothesis2: Hybrid corporations maximize global value by embedding a transcendent mission in a corporate design.
Furthermore, this theoretical model also explains why hybrid corporations generate a positive impact, namely, because their corporate designs contribute to the betterment of humanity and the planet. Indeed, above all, hybrid corporations have built corporate designs that maximize capitals with an intrinsic value: natural capital, human capital, social capital and accountability capital. In summary, we can conclude this chapter illustrating how positive impact is ultimately the result of embedding a transcendent mission in a corporate design (Figure 13).
Figure 13. Positive impact generated by hybrid corporations
Source: the author
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8. Research findings: Survey
8.1 Analysis of results
In this section the author will describe the main findings of the survey. The following table summarizes some general details of the survey respondents and their organizations (Table 8). If we look at their age, we can see that while some organizations have a long experience others are quite young. In addition, the sample includes organizations from a wide range of industry segments. More importantly, most of the respondents are key executives occupying senior management positions.
Table 8. Survey respondents Organization
Year founded
Industry segment
Name
Position
Mondragon Corporation
1956
Finance, Industry, Retail and Knowledge
J.A.Mendikute
La Fageda
1982
Albert Riera
Sekem
1977
Agriculture, Health and Food Organic agriculture
Organic Valley/ CROPP Cooperative South Mountain Company Sustainability Advantage New Avenue Small Dogs Electronics Worn Again
1988
Former director of the Business Faculty in Mondragón Unibertsitatea Director of communications Sustainable Development Project Manager Sustainability Program Manager President and CEO
One World Projects Portfolio 21 Investments B-Lab PAX
1992 1982
Namaste Solar
2004
Maximilian Boes
Jonathan Reinbold
2002
Consumer Packaged Goods Architecture, Building, Energy All / Sustainability
2008 1995
Internet Retail / Wholesale
Kevin Casey Hapy Mayer
2005
Clothing & textile resource transformation Fair Trade Socially Responsible Investment Non-profit Engineering: Mechanical Solar energy
Cyndi Rhoades
Closed loop Executive Officer
Sylva Dvorak Carsten Henningsen
Partner Chairman
Jay Coen Gilbert Jay Harman
Co-founder CEO
Blake Jones
President
1975
2006 1997
John Abrams Bob Willard
Sustainability Author and Speaker Founder CFO
On the other hand, the author has also included the answers to the second questionnaire of an anonymous respondent.
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Findings of the first questionnaire:
Firstly, according to some authors, one of the key features that hybrid organizations are supposed to exhibit is a dual motivation for profit and mission. However, only 64% of the respondents declared that their organizations where driven primary by both financial value and social/environmental value, and the other 36% said to be mainly driven by social/environmental value (Graph 5).
Graph 5. Motivation
Secondly, after analysing their mission statements, we can affirm that these organizations are driven by a transcendent mission (Table 9).
Table 9. Mission statements of responding organizations Organization
Mission statement
Mondragon Corporation
We are firmly committed to the environment, competitive improvement and customer satisfaction in order to generate wealth in society through business development and the creation of, preferably co-operative, employment To improve people’s lives by providing them with a meaningful job The development of the individual, society and environment through a holistic concept integrating economic, societal and cultural life To save family farming culture through organic farming and distribute the highest quality organic food in the nation
La Fageda Sekem Organic Valley/ CROPP Cooperative South Mountain Company Sustainability Advantage
New Avenue Small Dogs Electronics
To enrich our community by designing and building for the future To inspire business leaders to integrate sustainability strategies into company strategies. To provide useful resources for an army of sustainability champions so that they have the competence and confidence to accelerate the transformation toward a sustainable global society We aim to be the platform that brings this new way of creating housing to our existing communities We believe that our effect on our environment, community, customers, and employees is just as important as maintaining our profitability 61
To design out waste from the global apparel industry and design in ‘closed loop’ models where garments are recaptured, returned back to equivalent raw materials and turned back into yarn, fabric and garments as part of a continual cycle One World Projects To create viable economic alternatives for artisans and their families, and to expand the reaches of ethical and fair trade to include compassionate trade™` Portfolio 21 To address the ecological risks and opportunities of the investment process in the 21st Investments century B-Lab To serve a global movement of entrepreneurs using the power of business to solve social and environmental problems Worn Again
PAX Namaste Solar
To apply nature's core design principles to engineer energy efficient products that enhance and sustain life on Earth To propagate the responsible use of solar energy, pioneer conscientious business practices, and create holistic wealth for ourselves and our community
As Table 9 shows, these transcendent missions range from improving their communities (employment, housing, culture), changing the rules of the game in their industries (apparel, investment), inspiring business leaders, providing entrepreneurs with the tools to bring forwards social change, protecting family farming and artisans, promoting fair trade, solar energy or enhancing life on Earth.
Next, most organizations measure their non-financial performance (Graph 6).
Graph 6. Non-financial information
In fact, Worn Again, one of the two companies that do not measure financial performance, and also a relatively young company founded in 2005, intends to do so in the near future. In the words of Cyndi Rhoades, co-founder and Chief Executive, “We are currently in an intense R&D phase on a radical textile recycling technology. Once this is taken to scale, of course we will track our non-financial performance as that's a primary driver”
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And the other company does not measure it because as it explains: “we are small and license our designs to manufacturers” (anonymous).
In addition, when asked about which tools, metrics or standards they use to measure their nonfinancial performance, the B-Corporation standard leads the ranking followed by integrated reporting and sustainability reporting (Graph 7). Furthermore, some companies have customized metrics such as the Sustainability Flower (Sekem) or Community Impact reports (One World Projects).
Graph 7. Metrics and standards
Then, when asked about which forms of capital are the most important to their organizations, respondents consider that human capital, social capital and natural capital are the most relevant (Graph 8).
Graph 8. Importance of capitals
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Moreover, when asked about the prevailing relationship that exists between the different forms of capital, all except for one of the respondents believe it is positive (Graph 9).
Graph 9. Relationship between capitals
Similarly, the RISE study also confirms a positive relationship since it has found a correlation between financial success and diversity of social value created (2006: 16).
Findings of the second questionnaire: After introducing the respondents to the author’s Capital Stewardship Framework (CSF), the following findings have been observed.
Firstly, judging from the number of responses in each dimension of value, it seems that the survey participants find that the CSF is a useful tool to assess their organization’s multiple value creation.
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Secondly, the self-application of the CSF has also given us a picture of their strengths and weaknesses.
Regarding the upsides, it should be highlighted that most organizations: o Are financially sustainable, distribute economic value fairly and contribute to their regional economies o Prioritize local and ethical purchases o Have a strong brand and sell products/services with a positive impact o Perform highly in most value creation areas of human capital o Engage stakeholders and disclose material information o Are eco-efficient and help protect natural capital 65
As for the downsides, the following challenges have been identified: o Occupational flexibility and inclusive governance are not widespread o Their environmental impact could be improved by substituting certain materials and substances and adopting cradle-to-cradle models o Only 50% of the organizations have a supply chain management system o Closed-loop models and mission-controlled governance are rare
8.2 Discussion of results
Firstly, the dual motivation of profit and mission currently proposed to define hybrid organizations does not seem to hold true. Instead, hybrid corporations are equal or socially/environmentally oriented. This is also confirmed by the RISE survey mentioned above. From a sample of 211 CEOs from for-profit social ventures, “about 60% emphasized that social value was as important or more important than financial value” (2006: 9). This study labels these organizations as “activists” and “change agents” which would largely coincide with hybrid corporations. Secondly, according to the author’s definition of hybrid corporations, one of the criteria to decide whether these organizations are hybrid corporations is to investigate whether they are driven by a transcendent mission. That is, do they want to contribute to the health of larger systems, not simply to their financial bottom line? Indeed, according to their mission statements, these organizations qualify as hybrid corporations but we will need to confirm whether they live up to their transcendent missions.
Next, besides being motivated by a common good mission, these organizations also track their non-financial performance to know whether they are achieving their vision of success. Therefore, this indicates that they are performance oriented organizations which is another condition to qualify as a hybrid corporation.
Regarding their value mind-set, the importance attached to different forms of capital seems to indicate that they hold a holistic and multifaceted concept of value, yet they do not attach the same value to all forms of capital. Therefore, the distinction between capitals as means and capitals as ends proposed by the author seems to make sense. Finally, they believe that a positive sum prevails among them.
In the case of accountability capital, however, it has been mentioned fewer times than expected. One interpretation could be that, since accountability has never been conceptualized as a form of capital and was only described later in the second questionnaire, the respondents were not familiar with this new form of capital.
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In summary, the answers to the first questionnaire seem to support the author’s belief that hybrid corporations hold a different concept of value: capital stewardship. Indeed, they want to maximize all those forms of capital which contribute to their transcendent mission and believe it is possible because a positive sum prevails among them.
But are they maximizing global value? Indeed, according to the self-application of the Capital Stewardship Framework (CSF) conducted by the respondents, these organizations seem to perform well in most forms of value and therefore we can assume that they are living up to their transcendent missions by maximizing multiple forms of value.
So turning back to our original question:
Question1: What is the defining feature of hybrid corporations and thus of the next business paradigm?
We can conclude that the research findings support the proposed hypothesis:
Hypothesis1: In contrast to the maximization of profits which defines the current business paradigm, the essence of hybrid corporations is to maximize multiple forms of value
Furthermore, since the findings also confirms the following qualities of hybrid corporations:
Driven by a transcendent mission
Oriented towards performance
Global value maximizers
We can define hybrid corporations as:
Performance oriented organizations that live up to their transcendent mission by maximizing multiple forms of value
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9. Research findings: La Fageda Case Study
As was already mentioned in the methodological chapter, I have chosen La Fageda, on the one hand, to further validate the application of the Capital Stewardship Framework (CSF) and, on the other, to test the theoretical model to explain how such a value is created. But beforehand I will briefly introduce the company.
La Fageda was born from the conviction of its founder, Mr. Cristóbal Colón, that work is a therapeutic tool. He reached this conviction after introducing several work-therapy programs in various psychiatric hospitals. “It was then when I realized that this type of job did not provide the meaning of a real job, it was only arts and crafts. This job was not useful to anybody, there was no economic exchange, it was not real. And the sensation of the patient himself was that, it is not real” (IESE 2008. 2). For this reason, in 1982 together with his wife, two fellow therapists and fourteen mentally ill people, he decides to found the cooperative La Fageda. This legal form offered the mentally ill people the opportunity to recover their human dignity by granting them responsibility and self-respect. “We did not only want to provide them with a job, a real paid job, but a vital project in which they were the main characters acting as both workers and cooperative owners” (IESE 2008.8). Finally he managed to build a project which gave their members a sense of belonging.
Another strong conviction was that in order for a job to be therapeutic and rehabilitative it could not be any type of job, it had to be a meaningful job. “A meaningful job is one that is well done, that is useful to others, and that is done in a responsible and conscious manner” (Model La Fageda 2008.35). Therefore, they would have to experiment with different business activities to achieve this goal. They started in 1982 with gardening, thanks to the support of the municipality of Olot (Catalonia, Spain); with religious imagery and clothing manufacturing, activities which they dismissed for being a meaningless maquila job. In 1984 they turned to dairy farming and selling milk, after purchasing a farm located in a natural park in Garrotxa, a county in northern Catalonia. In 1987 they set up nurseries for reforesting taking advantage of the European funds available at that time. And finally in 1993, at a critical point when these funds were reduced and maximum milk quotas were established for all European countries, they choose to manufacture yogurts as a solution to save the project and the cows.
It should be noted that La Fageda project is not a business project per se, but a social project that encompasses business activities and welfare activities for its “users”, namely, mentally ill people. Some are employed in productive activities in the Special Job Center (CET) while others due to their degree of severity are occupied in other tasks in the Occupational Center. But they also employ professionals for the commercial activities and specialized staff dedicated to the care of the users. In total there are 270 workers, 170 of which have certified disabilities.
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9.1 Application of the Capital Stewarship Framework (CSF)
Is La Fageda a hybrid corporation, an organization that lives up to its transcendent mission by maximizing multiple forms of value? To know this, we will apply the Capital Stewardship Framework (CSF). In turn, it will also help us determine whether it is a useful tool to assess multiple value creation.
Financial capital
Economically speaking, is La Fageda performing reasonably well? This company is an example of perseverance and determination which after trying different businesses during 12 years finally manages to find a business opportunity to guarantee the economic sustainability of the project. Between 1992 and 1993, La Fageda experiences a critical moment when the nurseries and the sale of milk cease to be profitable, yet they did not want to sacrifice the cows. So what could they do? Realizing the growing interest in healthier foods, Colón seized upon the opportunity and began making high quality, naturally-made yoghurts which turned out to be the most successful business strategy. In fact, this was an underserved market niche by large multinational yogurt companies in Catalonia. Nowadays, this is the main business activity representing around 85% as shown in the following table (Table 10):
Table 10. Revenue by business activity Business activity
Euros
Percentage
Dairy products
9.182.374
85%
Gardening
644.887
6%
Said and done
305.540
3%
Livestock farming
53.509
0
Visitor Service (SAV)
161.967
2%
Ice-creams
222.572
2%
Dining-room and transport
162.188
2%
Forest nursery
17.935
0
Source: La Fageda
Furthermore, as we see in the following table (Table 11), its economic value creation has always resulted in a surplus to the cooperative.
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Table 11. Annual Surplus (2003-2010) Years
Revenue (€)
Surplus (€)
2003
5.948.270
250.854
2004
6.893.057
157.448
2005
7.860.659
143.298
2006
9.103.353
174.433
2007
11.023.424
206.239
2009
9.773.286
250.850
2010
10.750.970
157.450
2008
Source: La Fageda
If we analyze the evolution of the revenue generated by their dairy products [Table 8], we can see it has been increasing over the years making La Fageda the third manufacturer of yogurts in Catalonia, after Danone and Lactalis (before Nestlé).
Table 12. Dairy products revenue (2004-2010) 2004
2005
2006
2007
4.910.835€
5.282.507€
6.284.520€
7.744.784€
2008
2009
2010
8.620.889€
9.182.374€
Source: La Fageda
Next, does this organization distribute its economic value creation fairly? La Fageda does not have shareholders and its profit policy is to reinvest 100% of the surplus in the business and welfare needs of the project. Another differential feature is its wage policy. It pays the workers in its Special Job Center (CET) above average compared to other CETs, the professionals earn a market wage and managers 10% below market wages. Moreover, the wage differential ratio among its workers is 1:4 which shows a fair difference between the highest and the lowest wages. In addition, La Fageda discloses the wage tables approved by its General Assembly. Finally, it also provides a retirement plan for its workers.
Does it internalize the social and environmental costs of its activity? In the case of social costs, rather than generating negative externalities, its activity creates positive externalities by providing jobs to a traditionally excluded group in society, adults with mental health problems. As regards environmental costs, La Fageda carries out important investments to mitigate its negative impacts and has a compost facility for the liquid manure generated by the livestock farming and a biological wastewater treatment plant.
What about its contribution to the regional economic development? As just mentioned, La Fageda adds value to the local economy where it operates by providing employment and integrating a socially excluded group. In fact, the unemployment rate of mentally ill people in Garrotxa is 0%; anybody who has a disability certifi70
cate and wants to work has a guaranteed job in La Fageda. In other areas of Spain, the average unemployment rate for this group is around 90%. Furthermore, to expand their contribution to the regional economy, in 2007 La Fageda launched its Community Integration Service (SIC) in order to find them a job in other companies located in the same county. So far, there are already around 30 people who have found work through that service. Finally, it is also worth mentioning that La Fageda is contributing to the local economy by attracting more than 50 thousand visitors every year and promoting sustainable tourism through its Information Point in Garrotxa Volcanic Zone Natural Park. Regarding La Fageda’s purchasing policies, it also contributes to the regional economy by buying from local companies. Approximately 64% of their suppliers are from the province of Girona and 100% of the shipping of goods and the transport of people (bus) are done by companies in Garrotxa.
Before entering the next capital, it is important to emphasize that Colón believes that the business cannot grow endlessly but must reach an optimal scale in order to remain competitive and be able to fulfill its mission.
Manufactured capital In keeping with La Fageda’s philosophy to create employment opportunities, it has chosen a type of business activities that are quite manual and has only mechanized those operations that improve peoples’ work. Therefore, it does not aim to substitute people with machines since it would go against its mission. Instead, it tries to use appropriate technology adapting it to the needs of people. The most mechanized production processes are found in the dairy products section, because although being an artisan product and produced with milk from its own cows, La Fageda still uses a fair amount of technology to transform this raw material into high quality products. But as its founder says, “we only mechanize what can be mechanized”. As regards the use of clean technology, they use a heat exchanger to heat the water using the heat generated by the pasteurization of the milk. In fact, they are currently designing a new eco-efficient factory that will run entirely on forest biomass energy.
What about its industrial model, is it a Cradle-to-Cradle model? Not completely, but we find some elements in that direction. It converts the liquid manure from the cows into fertilizers for the farmland, that is, into nutrients for the biosphere, and the wastewater into clean water. Finally, in relation to the buildings and infrastructure, La Fageda is located in a privileged natural park and adopts measures to integrate its activity in the environment: “reconstruction of existing buildings, new structures that are not very high, use of materials and colors that blend in with the environment, increase of flora on the estate with plantations of indigenous species” (Sustainability Report 2010). And it complies with the urban planning requirements derived from the Special Plan of the Natural Park.
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Organizational capital We could start highlighting La Fageda’s capacity to innovate. Firstly, in terms of its business model, because it has transformed a social problem into a business opportunity, representing a paradigmatic example of social innovation. La Fageda does not employ workers to sell yogurts and earn money but sells yogurts to employ people. The product itself is not important as long as it generates meaningful jobs. Likewise, a cooperative where mentally ill people are the owners also represents a true social innovation. But its innovation is not only social, La Fageda has been able to constantly reinvent itself by finding new business opportunities, from selling milk to selling yogurts, and currently converting its forest nursery into a garden to cultivate edible plants in order to make jam and tinned natural products. Indeed, La Fageda has never stopped innovating until the solution to the social problem has become economically viable.
As regards its brand, it has managed to create its own brand associated to a natural and artisan product that is produced in a farm that has its own cows and linked to the Catalan land. In fact, La Fageda has achieved a high brand awareness among its costumers thanks to a communication policy which is not based on advertising or social marketing but on the thousands of visits they receive every year and which become their ambassadors.
On the other hand, its relational capital is stunning considering its size. It has managed to build strong partnerships with similar organizations in the area that pursue the same cause and thereby shares its “knowhow”42. At the Catalan level, its membership expands into other organizations dealing with the same social issues43 and also participates in the cooperative community44. Moreover, La Fageda is a co-founder of the Group Clade, the cooperative business group from Catalonia, and of Sinergrup, a Special Job Center (CET) association. Its strong partnership with the Accenture Foundation, the philanthropic branch of a high profile global consultant company, is also worth mentioning. Finally, La Fageda has been chosen as a member of the Schwab Foundation for Social Entrepreneurship, one of the most renowned worldwide organizations that promote social entrepreneurship, which is linked the World Economic Forum. La Fageda’s partnerships have a strong rationale, Colón believes that if the organization is to achieve its mission it cannot grow too much, therefore, is uses these partnerships as a strategic tool to increase its social impact by advising, inspiring and helping other organizations to replicate similar projects in other communities all over the world.
To finalize, besides operating according to a quality management system (ISO 9001/APPCC), La Fageda has implemented a environmental management system (IS 14001) and a supply chain management system to 42
Technical Commission of Mentally Ill of Garrotxa, Network of Mental Health, Day Center, Social Welfare Consortium of Garrotxa, Guardian Foundation of the Girona regions, External Inpatient Unit for Intellectually Disabled, Service specialized in Mental Health 43 Catalan Federation for People with Mental Retardment (APPS), Catalan Supported Employment Association (ACTAS) 44 Federation of Employment Cooperatives in Catalonia, Federation of Agricultural Cooperatives in Catalonia
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assure both the quality of the milk and the working conditions of the farms from which it buys. In addition, all their suppliers have signed a letter agreeing to improve their environmental and social performance.
Natural capital
Although La Fageda is a project with a strong social mission, its respect for the natural environment is equally strong. Regarding the use of renewable resources, they manage the milk produced by their cows in a sustainable manner, looking after their health and food needs45 to give them a decent life and recompensing them with classical music. In addition, are they helping protect natural capital? Well, during the years when the forest nursery was doing well, they contributed to the restoration of landscapes and forests in Spain with native species, including also the reforestation of cork oak forests in the Altas Mountains in Morocco. Likewise, its gardening activity contributes to maintain the public and private green zones in the county as well as Garrotxa Volcanic Zone Natural Park.
In terms of substituting non-renewable resources such as fossil fuels, La Fageda is carrying out a study to substitute them completely with renewable energy, in particular, with forest biomass which is very abundant in the region. Similarly, they are also studying how to substitute the packaging with biodegradable plastics in order to minimize the waste generated by their dairy products at the end of life.
Regarding the productivity of the resources that it uses, according to its sustainability report:
The water consumption per ton of production has been reduced compared with 2010, especially on the farm where it has gone down from 6,53 m3 of water per cow every month in 2009 to 5 m3 in 2010.
In the case of waste, they have achieved a similar reduction going down from 27,1 tons of waste per ton of production in 2009 to 23,6 tons in 2010. In turn, the recycling team that has been set up and which operates weekly has also reduced the amount of waste generated.
If we consider the increase in the production of yogurts in 2010, the electric consumption per ton is also lower.
Thanks to the installation of a new boiler, the CO2 emissions have also been reduced although it has not been quantified.
Finally, they are studying how to reduce the weight of the plastic packaging from the current 0,95 mm to 0,90 mm.
45
There is a myth that their cows are treated so well that they eat bread with tomato, which is typically Catalan, but what is very true is that they are not fed on animal feed, a common practice of dairy farms.
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Human capital This is one of the fundamental pillars of La Fageda. In fact, it defines itself as “a global care project for mentally ill people in Garrotxa, with the aim of helping them achieve the highest degree of autonomy in all aspects: individual, family, occupational and social, and therefore improving their quality of life” (La Fageda Model 2008:3). Moreover, they want to create a job that not only fulfills the material and relational needs of their members but also their transcendent needs. “Those needs that give meaning to what you do. When you feel that the job is part of something bigger than yourself, that it is useful to others, that it transcends, occupies a place in the world, forms part of something bigger” (ibid.: 4). Next, the occupational flexibility that La Fageda practices is also remarkable. They believe that “everybody has different capabilities and their potential will reveal itself if we offer them the necessary conditions” (ibíd: 10). Therefore, they are offered the possibility of changing job when they request to do so either through their tutors or supervisors. In addition, the people who work in the office are allowed flexible hours.
Turning now to work satisfaction, it is quite significant if we consider that the labor turnover is only 5,44% since workers tend to stay a long time. To take good care of the workers, each user is allocated a tutor which will assist them and, in the case of professionals, through their supervisors. Moreover, it conducts an employment satisfaction survey to collect the remarks and proposals of the workers and then discusses them with each department. The recreational and leisure activities organized by La Fageda, such as holiday trips, also contribute to work satisfaction. Likewise, the healthy natural environment where La Fageda is located made of exceptional green, wooden, pre-Pyrenean landscapes favors a more positive work atmosphere. The healthcare service provided to their users also contributes to improve their quality of life. Another key element is its own canteen that makes sure its members eat in a healthy way based on traditional dishes.
As regards health and safety, the new workers have access to a welcome book with all the information about the precautionary measures and all workers have a compulsory course on occupational risk prevention. Finally, La Fageda believes that training and development is essential for its members and therefore 100% of its employees attend courses every year, not only to improve their productive skills but to improve their lives. In fact, as Colón likes to highlight, cookery has been one of the most successful courses.
Social capital This is the other fundamental pillar. In the words of its founder, “in La Fageda we establish an internal, formal and real commitment to resolve the needs of the county. That is to say, we promise not only to do what we can but to solve the problems faced by this group in the county” (IESE 2008: 3). Indeed, its contribution 74
to the community is not limited to their social and labor market integration, since it also provides them with healthcare and accommodation, improving their autonomy. “In Garrotxa we are a model institution that forms part of the social fabric of the region, because we are a business that solves, successfully, a social problem” (IESE 2008: 15). Therefore, La Fageda has a strong commitment to community development.
La Fageda also adds to the cultural capital of Garrotxa taking part in cultural events and restoring historic heritage areas within La Fageda d’en Jordà, an exceptional beech forest, such as the Mas Els Casals estate where they are located or the recent rebuilding of 400 meters of dry stone walls that mark the boundary with the neighboring estates or with the hiking trails of the natural park (La Fageda 2011). Moreover, its support of local culture is evident in the labeling of its products using the Catalan language and a poem written by the poet Joan Maragall describing the beautiful landscape of La Fageda d’en Jordà that is printed on the yogurt packs.
On the other hand, although its founder does not believe in charitable giving as such because it can create dependence, La Fageda gives away yogurts and desserts for cultural and sporting events in the area. Finally, its products and services contribute positively to society, either through the consumption of natural and healthy products improving the physical health of consumers or its healthcare service that helps improve the quality of life of mentally ill people.
Accountability capital
Finally, how does La Fageda contribute to accountability capital? On one hand, its sustainability report shows that it has identified and engages all its stakeholders which includes: trustees of the two foundations and advisors of the cooperative that belong to La Fageda project46; the virtual community, clients, consumers, municipalities of Garrotxa, the Healthcare Service of Garrotxa, Public Administrations, the media, and the local community and its residents. Regarding its “internal clients” (workers, users and families), the engagement is done personally by means of interviews and periodic meetings. Besides conducting a workers’ satisfaction survey, La Fageda publishes a quarterly magazine “Things of La Fageda” and displays information produced by the communication commission throughout the working areas. They also carry out around 4000 visitors’ surveys every year in order to assess their satisfaction of the visit and the products they have tasted. And recently they have started to use social networks to engage the virtual community.
Another instrument it uses to legitimate its activity is to provide transparent and material information to all its stakeholders by means of their annual sustainability report. A document that includes the financial infor46
The La Fageda project is constituted by three organizations: La Fageda, a Catalan Limited Cooperative Company that carries out the business activities, the Healthcare Service Foundation of Garrotxa that provides the healthcare service and the Meaning Foundation that integrates the general services provided to the cooperative.
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mation of the three organizations that belong to La Fageda project and the non-financial information segmented in three classic vectors of sustainability (economic, social and environmental). Furthermore, it is based on the indicators of the Global Reporting Initiative (GRI), the Sustainable Management Code of Garrotxa and Collsacabra, the Balanced Scorecard of La Fageda and the ISO (9001/14001). Finally, the report has been checked by a third-party, the Garrotxa Lider Foundation, and registered in the GRI granting it a C qualification.
In relation to the governance system, we can consider that it is inclusive since all the internal clients are represented. However, most of the strategic decision making is carried out by the Executive Committee which is common to the three organizations and is composed of the senior management team and the president, Mr. Colón. In turn, each organization has its own governing bodies and, although some members coincide, they are not always the same, especially regarding the Meaning Foundation. Moreover, even if the General Assembly of the cooperative has the final authority in the management of the affairs of the cooperative, its decision making is limited because the Meaning Foundation is the owner of the premises and the brand to sell yogurts.
This takes us to the next point, has La Fageda a governance system that protects its mission? That is to say, can it continue maintaining its mission despite the internal and external changes it may face? The decision to transfer the assets to the Meaning Foundation seemed a good solution to make sure they were used to fulfill its social mission. Similarly, another strategy was to professionalize management so that its founder could concentrate on consolidating the project and find the external support to ensure its future. But a change in the senior management team this same year has left the founder with a great challenge: how to assure the continuity of the La Fageda project?
Finally, La Fageda lives according to its mission and core values showing its integrity and becoming a national and international role model that contributes to the “the ethical wealth of nations”.
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9.2 Discussion of results After applying the Capital Stewardship Framework (CSF) to the case of La Fageda, we have observed the following results:
On the financial capital side, La Fageda has proved its business success in terms of its financial performance, distributes the economic value fairly among the stakeholders that help create it such as its workers, internalizes its environmental costs and contributes to the economic development of the region where it operates by providing jobs for mentally ill people, promoting sustainable tourism and buying locally.
On the manufactured capital side, its commitment to acquire clean production technology is evident, especially in the design of the new factory. Moreover, there are some elements of a cradle-to-cradle model since it transforms waste into nutrients for the biosphere. Next, we can consider that La Fageda uses appropriate technology because in keeping with its mission it has only introduced technology to improve people’s work but never to substitute them. Likewise, its buildings and infrastructure respect the natural environment.
On the organizational capital side, La Fageda has adopted a sustainability management system, exhibited a high capacity to innovate over the years in order to adapt to its changing environment, built a strong brand, and its relational capital is also impressive.
On the natural capital side, it manages its renewable resources in a sustainable manner and has contributed to the restoration of natural capital with its forest nurseries of native species. In addition, La Fageda plans to substitute its use of fossil fuels for forest biomass and is studying how to substitute plastics of the packaging of its products for biogradable plastics. Finally, it is increasing the productivity of the resources that it uses. On the human capital side, the occupational flexibility is an essential of the La Fageda’s project, because it enables its users to find a job that provides meaning. Job satisfaction, considering it has a low labor turnover, targets the broad spectrum of human needs, offers the workers a unique and privileged natural environment that favors their rehabilitation, and the quality of their meals the kitchen service provides. Furthermore, learning is considered not only as a way to improve working skills but to develop their members.
On the social capital side, La Fageda contributes to community development by taking care of a group with a high risk of social exclusion, providing them with jobs, healthcare and accommodation. It helps preserve the cultural capital of the region. Its products have a positive impact on the health of their consumers and its services on its users, improving their quality of life. Lastly, on the accountability capital side, besides engaging its stakeholder, La Fageda’s governance system is inclusive and transparent, provides material information to its stakeholders, and its transcendent mission and core values contribute to “the ethical wealth of nations”. 77
To conclude, according to the assessment of its multiple value creation, we can confirm that La Fageda is an authentic hybrid corporation that stewards capital, since it lives up to its transcendent mission by maximizing multiple forms of value (Table 13). In addition, La Fageda has been a useful case study to further validate the application of the Capital Stewardship Framework (CSF).
e Table 13. La Fageda’s Capital Stewardship Assessment CAPITALS
VALUE CREATION AREAS
FINANCIAL
Reasonable economic performance
Fair Internalization distribution of of negative economic value externalities
Regional economic development
Local procurement
MANUFACTURED
Green buildings and infrastructure
Appropriate technology
Clean production technology
Cradle-toCradle model
Reverse logistics
ORGANIZATIONAL
Sustainability management system
Supply chain management system
Relational Capital
Brand awareness
Innovation Capital
NATURAL
Substitution of rare materials
Substitution of toxic substances
Use of renewable resources
Resource productivity
Natural capital protection
Training and development
Decent work
HUMAN
Health and safety
Work satisfaction
Occupational flexibility
SOCIAL
Community development
Positive impact of goods and services
Ethical sourcing
Cultural capital protection
Charity and community service
ACCOUNTABILITY
Stakeholder engagement
Inclusive and responsive governance
Material information transparency
Mission and core values
Missioncontrolled governance
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9.3 Application of the Value Creation Model (VCM) Now that La Fageda has passed the authenticity test making it a true hybrid corporation, what is the secret of its success? How is it capable of redefining business success by maximizing global value rather than only profits? As the author claims with his Value Creation Model (VCM), perhaps one of the clues can be found in its coherent nucleus that constitutes its corporate identity and how it unfolds to build its corporate design.
In the words of Colón himself, the person who has established the mission and the core values of La Fageda: “When you start from principles and they are authentic, that is, it is not enough to put them in writing, you have to display them. Since they are within you, you apply them from when you get up in the morning until you go to bed, in everything you do in life” (interview with the author).
Corporative Identity In order to understand the different elements that configure La Fageda’s corporate design, we have to start with the essence of the project, its reason of being, because the corporate identity instills its character on the rest of elements. In the case of La Fageda, its corporate identity coincides with the identity of its founder: “La Fageda is as it is because I am as I am”.
When asked about its mission, Colón replies eloquently: “The only thing I have contributed to La Fageda is to recognize that work is an important thing in peoples’ life. The meaning of a job is a job with meaning and the meaning of life is a life with meaning. Thus, the mission of La Fageda is to give meaning to people’s life through a meaningful job” (interview with the author).
What about its core values? He enumerates not only integrity and responsibility, but also truth, beauty and justice as an afterthought. “Here we do not tolerate lies, neither do we tolerate injustice, nor lack of respect. We have to “be virtuous, do things right”, he tells the author.
Furthermore, the laudable vision that drives and guides the project giving it a sense of direction is:
To achieve the social and labor market integration of all the mentally ill people in the county of Garrotxa.
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This means that La Fageda deliberately restricts its operations to solving the social problems that affect this group in Garrotxa and does not want to expand to other regions, just as it chose to limit the sales of its dairy products to the Catalan market. These decisions respond to the founder’s belief that La Fageda can only achieve its mission if it reaches an optimal scale, neither too big no too small, otherwise it would jeopardize the whole project.
It should be noted that the mission of La Fageda has all the essential ingredients to qualify as a transcendent mission: striving for excellence, doing something of benefit to others, and building a better world. In addition, “when each of these three elements of [mission] are present, business is transformed from a tool for making profits into a creative, humane experiment for improving life” (Csikszentmihalyi 2003: 199). Hence, La Fageda is more than a business, it is a living organization with a soul and its “people feel proud to be working in the project”, Colón likes to say.
As is normally the case, behind this type of social projects there is always a personal life project: “La Fageda is the result of my own life project, that is the combination of a personal project (to give meaning to my work) and a professional project (to give meaning to other peoples’ work)” (quoted in Vernis y Iglesias 2010: 121)
In order to embed the mission and the values in the organization it is necessary to establish them somehow, for instance, through the corporate culture. In fact, one of the crucial ways to solve the continuity dilemma of hybrid corporations surely lies in this element. Indeed, leaders need to build a visionary organization to keep their ideals alive, just as a clock is built to continue giving the time (Collins and Porras 1994: 22-23). As they say in La Fageda, “the figure of the leader, who does not only have to be a good manager, but must look after the culture and mission of the organization, is essential”. Therefore, the crucial role of Colón is to communicate and transmit the mission, to clarify and articulate the vision, and to explain the history of La Fageda in order to keep its corporate identity alive.
Corporate culture
As a psychologist, Colón knows that La Fageda is a project that gives meaning to its members because it transcends their individuality, they work for something that goes beyond them. Hence, he always insists that behind its value chain there is a “meaning chain” that motivates them to give the best of themselves. Moreover, there is a positive feedback between both chains, “we need a successful business to ensure a therapeutic success” (IESE 2008: 5).
The sense of community present in La Fageda is a result of its strong corporate culture, the shared values and vision held by their members. Though organizations have vision statements, it is more difficult to analyze the 80
system of implicit beliefs upon which they rest. Fortunately, in the case of La Fageda, after an intense year of work, they have brought them to the surface and compiled them in a document that they name La Fageda Model. As the following table shows, they have been divided into three groups47 (Table 14).
Table 14. Shared beliefs in La Fageda Person
Work
Project
Individuals need to develop in all aspects Capability development improves people’s life Occupations can be matched to people’s needs
Work can be rehabilitating if it has meaning Search for excellence and continuous improvement Demanding with the job
The project’s success will make us grow personally We have to communicate showing transparency Sharing our experience will transform the world
The shared vision held by their members can be seen as the articulation and manifestation of La Fageda’s corporate identity and this explains its consistency. In addition, besides a shared vision, the corporate culture is also made of a set of shared values that guide the behavior of its members. Similarly to the systems of beliefs, shared values are also implicit, but La Fageda has also documented them (Table 15). As we can see, their shared values are aligned with the core values.
Table 15. La Fageda’s shared values Responsibility The person as the fundamental axis
Hope Integrity
Effort Trust
In this case, Colón’s fundamental role is to reinforce the corporate culture by acting in accordance to those values and hence practicing what he preaches. His strong personality, charisma and moral authority converts him into a natural leader, but he knows that La Fageda cannot depend on the health and vision of one person. Therefore, sooner or later he will need to build a visionary business. Maybe this is what led him to professionalize management in 2005, to create a new leadership that could bring stability to the project after his departure. The following paragraph seems to imply so: “It is for this reason that the person, or the team, that leads the project must have a high moral authority and a strategic vision in the long run to be capable of intervening and building synergies between both business and healthcare activities, without ever forgetting that the first is at the service of the second” (La Fageda Model 2008: 25).
In this respect, senior or middle managers also play a key role in strengthening the corporate culture by conveying the same vision and values to their members and nurturing the sense of belonging to the project. However, as Mintzberg warns us, "the culture of an organization may be rather difficult to establish, and to change- that can take years, if ever- but it can be rather easy to destroy, given a neglectful management” 47
The author has reframed some of the beliefs and has chosen the ones that he has considered most significant to understand the project, but he apologizes if he has left out any important ones.
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(2011:70). Unfortunately, this prophesy has come true in the case of La Fageda and in order to save the project, the founder has had to fire the CEO and the CFO a few months ago having to take over himself the management once again.
Organizational structure
In terms of the governance system, although we have being referring to La Fageda project as a unit, institutionally it is constituted by three organizations that perform different roles but that complement each other (Table 16). Firstly, we have La Fageda, a Limited Catalan Cooperative Society (SCCL) that carries out the business activities. Next, the Healthcare Service Foundation of Garrotxa (FPSAG) that was created to separate the healthcare services from the business activities. Lastly, the Meaning Foundation was established to solve a legal problem and integrates the general services needed to run the cooperative (finance, sales, human resources, communication and production): “With the growing development of the business activity regarding yogurts, there was a progressive incorporation of professionals. Consequently, the legal ratio that it required to maintain at least 70% of the mentally ill workers in order to capitalize the benefits of special work centers was being dangerously exceeded” (IESE 2008: 9).
Therefore, the Meaning Foundation was a solution that enabled La Fageda to hire professionals and to respect the legal ratio of the cooperative as a special work center. In addition, they also decided to separate the assets from the business activity by transferring the premises and the brand to sell yogurts to this foundation in order to assure that they are always used to fulfill a social mission.
Table 16. Institutional configuration of La Fageda
Activities
Groups (n)
Relationship with the cooperative (n) Governing bodies
La Fageda Cooperative Gardening Livestock farming Dairy products Forest nursery Visitor service Dining Transport Central services Disabled 33-66% (86) Professionals (33) Tutors (9) Worker members (126) General Assembly Executive Board
Healthcare Foundation
Meaning Foundation
Occupational therapy service Housing Autonomy at home Community integration service
Administrative, commercial and communication services
Disabled > 66% (50) Tutors/psychologist (28)
Professionals (31)
Consumer members (51)
Consumer members (8)
Board of Trustees
Board of Trustees
Source: IESE (2008)
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As mentioned above, even though each organization has its own governing bodies and their members can sometimes differ between them, as in the case of the Meaning Foundation, they all share the same Executive Committee and the same President, Mr. Colón. This is fundamental to manage the synergies between the different activities accordingly. Furthermore, this executive body guarantees that the strategic and operative decisions are in line with the corporative identity of La Fageda.
Besides the changes to the legal structure of the project, in parallel they also undertook other changes to the management structure. It started in 2003 when a new CEO was hired, Mr. Josep Maria Corbino, to manage the daily activities and later it was completed with a senior management team, so that the founder could devote himself to the consolidation and the institutional representation of La Fageda. Nowadays, the organizational chart is as follows (Figure 14): Figure 14. La Fageda’s Organizational Chart President
People’s Area Director
CEO
Production Director
CFO
Sales Director
Communications Director
Visitor Service
Healthcare Technical Director
Labour Management Director
Gardening
STO/SOI and Social Club
Said and done – Forest nursery
Housing and SSAPLL
Livestock farming
SIC
Dairy products factory
USAP
Ice-cream factory
Leisure Area
Dining and Transport
Source: La Fageda
As we can observe in the organization chart, the CEO and the People’s Area Director are at the same level which indicates the importance given to people in the organization since they are the fundamental axis. For this reason, the design of organizational structure contributes to La Fageda’s mission. Likewise, the designation of “people” in the job title, instead of resources, also strengthens the message that people are developed in all their aspects (occupational, personal, social and spiritual). Moreover, to fulfill these needs the People’s area is structured in different services/areas/programs that target them:
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Housing = accommodation
Occupational Therapy Service (STO) and Individual Program of Rehabilitation (PIR) = mental health
Community Integration Service (SIC) = social integration
Leisure Area = leisure
Dining = physical health
Transport = mobility
Moreover, thanks to the dining (canteen), transport (buses) and leisure activities, the corporate culture is also being strengthened because it enables the interaction and communication between its members. The same goes for the established meetings that are held periodically between the members of La Fageda.
In terms of the job descriptions, they have created the figure of the tutor within the healthcare team that is allocated to each user. “In this way, each one is given the opportunity to speak individually with the psychologist or the technical director. We also hold meetings between the groups of the users and the tutors, where they make proposals, report and discuss everyday conflicts. But not only users, as they continue telling us, “each one of our professionals has an individual follow-up with their supervisor, to talk about professional and personal issues and as members of the team. So, in the job descriptions of coordinators and technical managers of our services the following concepts always appear:
Coordinate and ensure that the aim of the service is achieved, working with: - the activities and needs of the users and their families - the sound performance of the team of tutors - the belonging to a larger project (La Fageda project)” (La Fageda Model 2008: 46)”
As it was mentioned earlier, the occupational flexibility is a well instituted practice and can be requested either through their tutors (users) or their supervisors (professionals). Indeed, users can change jobs until they find a suitable position in the organization and develop their capabilities. This is a key organizational design that is consistent with La Fageda’s mission to provide meaningful jobs.
Regarding the physical structures, among them the environment and the buildings where the activity takes place, also contribute to the well-being of their members. “The environment, working in contact with nature, is an important element for the project’s success”, they will tell us in La Fageda. In fact, this was the main 84
reason why Colón chose the Mas Els Casals estate located in the Natural Park of the Volcanic Area of Garrotxa, because it was surrounded by a natural and exceptional landscape. “Work done in a natural surrounding adds a therapeutic touch” (interview in Catalonia Radio 2012). They also understand that the atmosphere is not only important for their people but also for their cows and hence they like them to listen to classical music. They reckon that it contributes to their well-being and to the quality of the milk used to produce “the best yogurt in the world”, as Colón likes to emphasize. In addition, their products are also material structures that are designed to embody the shared values and beliefs of La Fageda: responsibility, effort, and search for excellence and continuous improvement.
What about the rules and policies found in La Fageda? Regarding the former, they have a welcome book where they explain all the internal regulations to new workers in order to make their integration in the organization easier. There, we can find information on the organizational chart, the participation system, the health and safety measures, and the duties of workers. On the other hand, they also have a code of conduct concerning environmental protection based on the guidelines developed by the Environment Council of the Catalan Government. This code of conduct, therefore, touches on one of the core values of the corporate identity, responsibility, which is also one of the shared values of the corporate culture.
In terms of policies, let us start with the communication policy. The external communication consists mostly of guided visits to their facilities. An activity that is institutionalized through the visitor service and helps reinforces the sense of community which is at the heart of its corporate culture. The internal communication with the families is also institutionalized and shows once again the importance of dealing with people in all aspects of life, in this case, on a personal and family level. On the other hand, they have never used social marketing as a selling point. As the communications director of La Fageda, Albert Riera acknowledges, one of the fundamental challenges is to remain true to the essence of the project and never to betray it. That is, although the project may continuously attract the attention of the media, they must avoid offending the sensibility of its internal clients because they want them to be proud of what is being said about La Fageda (ESADE 2009: 7). Therefore, the communication policy gives priority to the value of integrity and they strive to generate enthusiasm amongst its members.
As for the purchasing policies, a subject already discussed, they are committed to the development of their local economy and that is why they buy mostly from local suppliers. Next, the production policy also exhibits some of its shared values: the trust in the capabilities of their members, the effort that such a project requires, and the responsibility demanded by a high quality product with “zero faults”. Its recruiting policy is also coherent with its mission because 40% of the employment opportunities are offered to disadvantaged groups (Sustainability Report 2010). Similarly, its wage policy offers a decent wage to its workers, a sine qua non condition to provide a meaningful job.
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In summary, we can say that La Fageda has designed or chosen an organizational structure that helps reinforce its corporate culture and align the behavior of its members with its transcendent mission.
Corporate strategy
La Fageda has followed what has been named as an umbrella strategy to select its winning strategies. They had the freedom to choose any type of business activity as long as it was consistent with its mission. That is, their business activities had to improve people’s lives by providing them with a meaningful job. This is why they ruled out religious imaginary and clothing manufacturing because they fostered dependence and did not have the features of a conscious job. Instead, Colón was looking for jobs that resembled craftsmen jobs where the worker is conscious of all the process and of the real utility of what he produces. Later, they decided to sell products directly such as ashtrays, pencil holders, mirrors… but it was a failure. Gardening, on the other hand, provided work in the open air and in contact with nature and therefore, it had clear therapeutic benefits for mentally ill people and was also useful because it contributed to the maintenance of green areas. Similarly, the forest nurseries also favored contact with nature and contributed to the reforestation with native species of landscapes all over Spain. The selling of milk was also a job done in the open air and in contact with animals. Another promising business activity was to produce “vermicompost, a natural fertilizer obtained from the transformation which the worms make after digesting waste from organic matter and that is used as fertilizer and soil conditioner. The product had everything: the opportunity to create its own brand, control the whole production chain, work in contact with nature and obtain a useful and innovative product” (IESE 2008: 4). Unfortunately, it was also a failure. As the founder says, “we have failed many times. My father used to say to me: my son, you must be tenacious, not stubborn. A person who is stubborn is one who always falls over the same stone, a person who is tenacious gets up and changes direction to find the right way. We have been tenacious” (Catalonia Radio interview 2012).
Hence, both forest nurseries and the selling of milk seemed to be ideal business activities that provide meaningful jobs with healing benefits for mentally ill people. However, the former created dependence with the system of grants from the European forestry policy and the latter with the system of quotas introduced by the Common Agricultural Policy (CAP). Unfortunately, in 1993 they faced a critical moment when the milk quota system took effect. This measure was adopted to deal with the problem of surplus milk production in the EU and consisted in allocating to each member state a national production quota which was distributed to farmers. In the case of La Fageda, it meant that they could not exceed their milk quota and, if so, they would be liable to pay a penalty. Luckily, they managed to transform the problem of what do to do with their cows into an opportunity: Make the best yogurts in the world!
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In other words, its mission has never been a burden but a compass to guide its learning process, fostering deliberately emerging strategies. It has always set the boundaries within which new business opportunities could be detected and hence, new strategies could emerge, some more successful than others. The winning strategies have then become deliberate strategies. In this respect, the Executive Committee has defined the deliberate strategies in a Strategic Plan, which has counted on the participation of the whole organization and the approval of the government bodies. As noted above, La Fageda’s business strategy has also been shaped by its desire to achieve an optimal scale to remain competitive without compromising its mission. As Colón reflects: “Sometimes I wonder whether pursuing future growth will put the soul of La Fageda at stake. Whilst we managed misery, the only possible discussion was that of survival … but… Will we know how to manage wealth and growth without putting the commitment with our “users” and clients” in jeopardy (IESE 2008: 16).
In any case, the umbrella strategy pursued by La Fageda, always in line with its mission, has generated a coherent pattern of behavior and therefore a set of results. This takes us to the last element of its corporate design.
Corporate performance
Does La Fageda have a measuring system in place to assess whether it is achieving its vision of success? Indeed, “thanks to a joint collaboration with the Group Clade of cooperatives, to which La Fageda belongs, it has designed an Integrated Balance Scorecard with both strategic and operational indicators to identify any deviations from the established targets” (Sustainability Report 2009: 19). This measuring system has been implemented with the aid of the consulting company Avantium. Due to the fact that it is very recent, the author does not know to what extent it has been useful to La Fageda, but he is sure it will help to implement the Strategic Plan by defining a set of targets in line with its mission. However, since he has not had access to the indicators it uses, he cannot give an opinion on how relevant they are to assess whether it is achieving its vision of success. On the other hand, the application of the Value Stewardship Framework (VSF) has confirmed that La Fageda is a genuine hybrid corporation because it maximizes multiple forms of capital. Therefore, so far, we can affirm that its results demonstrate that it is living up to its transcendent mission. Finally, the author considers that besides assessing its global value performance, it is possible to adapt the VSF to the case of La Fageda and develop a set of key performance indicators (KPI) to measure its desired goals and thus realize its full value potential.
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9.4 Discussion of Results After applying the Value Creation Model (VCM) to La Fageda’s case study, the author can evaluate whether his research question has found a successful answer:
Question2: ¿How do hybrid corporations maximize global value?
The findings have proved that La Fageda has managed to unfold its corporative identity by infusing its character into the rest of elements that constitute its corporate design. Firstly, we have seen how the strong corporate culture that has emerged provides its members with a set of values and a vision to guide them towards the desired future established by its mission. Secondly, La Fageda has been able to design the appropriate material and social structures to reinforce its corporate culture and align the behavior of its members with its mission. Thirdly, the umbrella strategy practiced over the years, has been consistent with its mission and has provided the grounds to learn and develop a coherent pattern of behavior. And, as the application of the Value Stewardship Framework (FSF) has shown, La Fageda is achieving its vision of success.
Therefore, after applying the theoretical construct (VCM) to an extreme case in order to test the working hypothesis, we can conclude that we have generated a plausible explanation of how hybrid corporations maximize global value and we can now state the hypothesis as a theory.
Theory: Hybrid corporations maximize global value by embedding a transcendent mission in a corporate design.
Finally, this theory also explains why hybrid corporations generate positive impacts because their corporate designs contribute to the betterment of humanity and the planet
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10. Conclusions
The main aim of this dissertation was to understand the next business paradigm through the study of a type of organization that is emerging: the hybrid corporation. The author has analyzed the factors that anticipate the emergence of a new business paradigm. Firstly, traditional organizational sectors are blurring and hence, we can no longer take for granted that non-profits create social/environmental value whereas corporations create economic value. Indeed, organizations are converging towards a new organizational sector that integrates social purpose with business methods. Secondly, financial markets are being transformed with the rise of social investors. Social Responsible Investing (SRI), as an investment strategy to screen investments based on their negative impact, is growing into a movement, driven by the social venture community which is promoting impact investment and patient capital. That is, social investors are pursuing investment strategies that generate financial returns while improving social and environmental conditions. Thirdly, global values are shifting. Indeed, materialistic values which have emphasized economic accumulation at all costs are giving way to postmodern values which give priority to environmental and cultural issues as well as to the meaning and purpose of life. Finally, new business networks are redefining success. While the Business Alliance for Local Living Economies (BALLE) strives to embed enterprises in the communities and natural environment in which they operate, B Lab is helping develop a new sector of the economy through building a community of certified B Corporations that harnesses the power of business to solve social and environmental problems.
Therefore, we can conclude that these global trends are magnifying and mainstreaming one of the most salient features exhibited by hybrid corporations: the maximization of multiple forms of value. Indeed, this defining feature has been confirmed by the survey findings.
The survey findings also show that hybrid corporations hold a new value mind-set: capital stewardship. Rather than conceiving value as fragmented, simplistic and reductionist, which reinforces a zero-sum mentality, they embrace a holistic and multidimensional concept of value. Furthermore, hybrid corporations believe that a positive sum prevails among the different forms of capital yet, they do not consider them equally valuable, that is, human, social and natural capital are more meaningful to them. In addition, hybrid corporations are driven by a transcendent mission that aims to contribute to the health of larger systems not simply to their financial bottom-line. However, besides being driven by a common good mission, hybrid corporations track their non-financial performance to know whether they are achieving their vision of success. For all these qualities, the author has defined hybrid corporations as performance oriented organizations that live up to their transcendent mission by maximizing multiple forms of value.
In turn, the Capital Stewardship Framework (CSF) developed by the author seems to be a useful tool to assess value performance and determine whether an organization is a global value maximizer, and thus a hybrid corporation. Since value maximization always implies a transcendent mission, the CSF can also be 89
used to analyze whether an organization is living up to its transcendent mission. If so, it will show up in its value performance.
Furthermore, La Fageda case study has been useful not only to further validate the CSF but to build a plausible theory that explains how hybrid corporations maximize global value. Indeed, the application of a theoretical construct, the Value Creation Model (VCM) to this extreme case, has confirmed that hybrid corporations maximize global value by embedding a transcendent mission in a corporate design. That is, the ultimate source of all value rests in their transcendent mission, in particular, in a coherent nucleus that constitutes their corporate identity. But to display their global value potential, hybrid corporations have managed to instill their transcendent mission in the rest of the elements that configure their corporate design.
Lastly, this theoretical model also explains why hybrid corporations generate a positive impact, namely, because their corporate designs contribute to the betterment of humanity and the planet. Indeed, above all, they have built corporate designs that maximize capitals with an intrinsic value: natural capital, human capital, social capital and accountability capital.
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