Whilst international business is also challenged with the task of creating intrinsic value for all stakeholders not just the shareholder, how much more complex is this challenge in South Africa. Philip Kotler in his book Confronting Capitalism notes citizens generally have three economic systems to choose from:
- Unregulated Capitalism
- Capitalism with a heart
- Strict Socialism
Stakeholders in our corporate milieu occupy almost the entire continuum of economic systems stemming from their experience of the past and the current manifestation of how capitalism is working for the country and for them directly. How does business engage with stakeholders such as employees, the union and even the state when they may not believe in capitalism with or without a heart?
THE CURRENT STORY OF BUSINESS
In the words of Professor Ed Freeman “we have a disconnect between the current story of business and the real story of what business is. There is a mismatch between what we teach in business schools and often there is a mismatch between how an executive thinks about his business and what it takes to run a sustainable business. The standard story is that it’s all about the money, it’s all about maximizing profits for the shareholders, it’s all about greed and self-interest. You can’t trust business people, they will lie and cheat and only look after their own interests.”
But somehow there seems to be some flaws to this a logic? Saying that the purpose of business is all about profit is a bit like saying we breathe in order to live, but do we live to breathe? Profit is vital to a business just like we need air to breathe but it is the outcome of doing something. We can’t “do” profit, but we can do something the outcome which can be profitable.
THE PURPOSE OF A BUSINESS
If the purpose of a business it not about profit then what is it about? The purpose of a business is about creating value for all stakeholders with a primary focus on the customer and the market. The purpose of a business drives a business, getting the purpose right will result in sustainable profit for shareholders and intrinsic value for stakeholders. In SA we come from many backgrounds and different histories. As we pass opinions and make judgements on the issues confronting us in our lives including those at work we come to conclusions based on the past and experiences that have brought us to where we currently are. That does not mean that these judgements or opinions are right or wrong, they simply are what we conclude. In our country, we do not often enough create the opportunity to listen to each other’s stories and in so doing experience our diversity. We don’t have to agree with the other person we also don’t have to judge the other person but listening and communicating brings new dimensions of understanding and solutions.
PEOPLE AND BUSINESS
In a business context this is not dissimilar, we need to create a living conversation about purpose and values and how we create value for all our stakeholders ,this drives everything we do and our expectation is that we will do it better each year. I can already hear the protestations from our unions and people but let’s understand how value is created and what it does for all stakeholders. Value created is not profit created, it is value created for all stakeholders not just the shareholder. In order for us to understand this concept we need briefly to explain the accounting of value created or wealth created. It is depicted as below:
We call this the Contribution Account ( Contribution Account©) and it is the only accounting methodology that measures contribution and reward – in other words who contributes to the wealth created in an organization and how they are rewarded for their contribution. In the example above:
- The wealth created by RSA Pty Ltd was R 60 (calculated by subtracting sales (R120) from outside costs (R60). Consider this the “pie “that was baked by all the stakeholders in the business. The key issue, is once we have baked the “pie” who gets what slice of the pie?
- Again in the example above the pie is sliced up as follows :
- Employees got R 27 – 47%.
- Savings R 10 – 10 %.
- Tax R 25 – 15 % to the government.
- Owner received R8- 14 % reflected as profit.
What do we conclude from the Contribution Account?
- Profit is not the biggest slice of the pie, so the perception that the business is all about making profit is clearly not true. In SA the risk adjusted rate of return for owners is 10 % which means that on average profit is 10 %.
- By far the largest slice of the pie goes to employees and this is generally the case. In our experience employees get on average 50 % of the wealth created but this is dependent on the nature of the industry so we use averages with caution.
- In most businesses the government and labour are the overwhelming beneficiaries over capital.
As an illustration of how remote stakeholders are from working together to create wealth let’s consider two current cases in SA.
Case 1 – Mining
The mining industry is in decline in SA, gold mining in particular is in its sunset phase, SA having deteriorated from the top producer of gold in the world to seventh. Mining commodity prices reflect supply and demand. In addition mining is dependent on the exchange rate. When these factors work against the industry, the result can be retrenchments. Inevitably, wealth created has decreased because revenue has decreased and or costs have increased. The share that employees received either increased or remained the same and in some cases exceed wealth created. The result is retrenchments to rebalance the equation. If stakeholders in this case had a common purpose in creating value for all stakeholders and they were actively working together could this massive loss of jobs be prevented? Yes, certainly but they have not and still are not. The Union are threatening mass action throughout the country, the Minister is threatening to revoke mining licenses. Owners are quietly looking elsewhere outside of the country to earn their return, no new shafts have been sunk in SA for the last 20 years. A classic case of stakeholders working against each other with a tragic yet seemingly inevitable outcome.
Case 2- Eskom
Whilst we can deliver the details on the state of Eskom, we seek to illustrate the lack of stakeholders working together towards a solution of Eskom’s problem. It is disingenuous of Numsa to take a position that says the employees are not responsible for the current financial state of the organization. Whilst they may not be, noting of course that the senior management they accuse are also employees, the fact remains that they are all stakeholders in an organization that is in serious trouble. If all stakeholders are responsible for adding value to the organization, it is folly to say it is not our problem, it’s the other stakeholder’s problem. Whilst in the short term Numsa may have succeeded with their demands they and their members will not escape the effect of the destruction of the wealth created at Eskom. As shareholders Government also have serious consequences in store and in effect, have only postponed the inevitable, either extensive retrenchments or a substantial increase in electricity prices to offset the increase in labour costs. If labour really has a legitimate demand at Eskom, it would be an insistence on Board Representation. The challenge is for all stakeholders to work together towards common purpose, can they do this?
The purpose of a business is not to make profit, it is about creating sustainable value for all stakeholders. Critically, between capital, labour and the state they need to share common purpose towards creating wealth as they share a common fate. Wealth creation at a macro -economic level is measured by GDP. Growing wealth in companies contributes to the country’s GDP, providing jobs and prosperity for our people. We need a revolution to create a new story about business in SA and we need through our stakeholder engagement process to drive a living conversation in our businesses about purpose and values and how we create value for all our stakeholder not just shareholders. More of the same is not an option for our business story nor our country.
By Jimmy Furstenburg
Chief of Strategy @ NPI Governance Consulting