How should companies define value?

As world leaders gathered to discuss ‘The new global context’ at the World Economic Forum’s Annual Meeting in Davos, several business leaders questioned the traditional concept of value and urged governments to commit to positive social and environmental goals.

The New York Times reported that corporate leaders at Davos have called on political leaders to set goals that spur companies to take (responsible) action. Paul Polman, chief executive of Unilever, was quoted saying, “If you don’t price what you value, you don’t get people to react.”

Beware of the buzzword

Are we reaching a time when business value is really being refedined? “Value” has long been a favourite buzzword by business leaders and governments. Although widely-used, it can be troublesome because the interpretation of “value” is subjective. When we talk about “business” or “corporate” value, typically we are talking about financial performance. But do we really mean: cash flow; shareholder return; or valuations. Or all of the above?

I believe there is growing opinion that this purely financial dimension of corporate value is becoming too narrow, and that we need a holistic view that acknowledges the broader value a business creates (or reduces) for both society and its shareholders.

The value of doing business

Businesses have always created value for society simply by doing business. They provide people with the goods and services they need. They contribute taxes, create jobs and wealth, and can help lift people out of poverty. However, we must also recognize that there is a ´cost´ of doing business. Companies can create negative effects on people, the environment and draw on the planet´s natural resources (without ´true´ recompense).

These two concepts of value – corporate/financial value and societal value – have historically been seen as separate; each of them important, yet disconnected. This is where I believe we are witnessing dramatic change. This disconnect between corporate and societal value creation is disappearing.

Why? Because corporations that focus on creating more value for society and minimizing their negative impacts, are in a stronger position to reduce risk, grow revenues, cut costs and build business value. In short, corporate value and societal value are becoming inextricably linked, like the two sides of a coin – impossible to separate.

Long-term survival

To ensure long-term survival, business leaders will increasingly need to measure, manage and communicate the value they create for both society and shareholders. They will need to take decisions on the basis of both corporate and societal value creation, with a full appreciation of how the latter affects the former. The question is, how do you do this?

What we need is an approach that will identify and quantify the value corporations create (and reduce) for society, and understand how this affects shareholder value.

It was exciting to witness the debate and some first steps being taken in Davos, for example the fact that more than 1,000 companies and investors and over 70 countries were calling for robust carbon pricing. It is interesting to see many business leaders at Davos beginning to recognize that “externalities” are and should no longer be external. Signs of a new global context? Let’s hope so as 2015 wil be an important year which will see the launch of the Sustainable Development Goals (SDG’s) and the Climate negotiations in Paris.

This article is published in collaboration with LinkedIn. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Barend van Bergen advises global companies on sustainability-strategy integration work.

Image: U.S. one dollar bills blow near the Andalusian capital of Seville. REUTERS/Marcelo Del Pozo.