The needs of stakeholders in a corporate ecosystem are changing. New generations of employees who will soon make up the majority of the workforce are demanding more than just safe and fairly compensated work. They want to see meaning in the work they do.
Suppliers want to grow, partner and learn with their customers rather than just fulfilling orders. Customers are after experiences, rather than just supply for their demand. Communities expect business to take an ever more just and responsible role in society. Shareholders want to earn sustainable profits, and make sure that the companies they own stay innovative, agile and relevant.
The Sustainability Board Report has developed an organisational framework that taps into the power of purpose, individual management style and fosters outcomes that benefit all stakeholders in a corporate ecosystem. We call it the PEP framework (PEP): Purpose, Enablement and the second P stands for various terms: Productivity, Performance, Profitability, Prosperity, Parity.
PEP not only caters to the changing needs of a modern organisation, but also embraces a more stakeholder centric approach due to its interconnected application throughout all of a company’s stakeholder groups. An equilibrium of all stakeholder interest is commonly regarded as the gold standard for organisational health and performance.
How PEP works
Let’s assume a current “conventional” organisation that mostly caters to the fiduciary interests of investors; one’s management style would be focused almost exclusively around monetary targets and the P&L. This could be, for example, maximising employees’ workload in their respectively assigned roles; securing supply at the lowest possible price with the longest possible payment terms; committing customers to the highest willingness to pay with the least possible liability and warranty for provided services and products; and the highest possible acceptance of business operations by a community at the lowest possible taxation and most favourable regulatory environment.
In this scenario, organisational targets and values are set top-down, deviations require sign-offs bottom-up, and the comprehensiveness of such sign-offs in case one needs “to do things differently” is dependent on the number of managerial layers.
PEP takes a different approach. Firstly, the guiding principles require a clearly articulated corporate strategy with directions of travel and a clear vision. A good corporate strategy replaces the budgetary “true north”. Secondly, it requires an authentic purpose. That is, a clearly articulated mission that unites all stakeholders behind a common goal and gives the business’s output a wider meaning; often linked to social or environmental context. The benefits of purpose applied in organisational development have been explored recently by some of the world’s leading authorities on business management.
The entire organisation will work towards the strategy organically rather than only top-down, using its purpose as the driver. Financial targets are part of the strategy, nonetheless. Each stakeholder group is then managed under the PEP principles:
Employees What is their (personal) purpose (P)? How does this tie in with the corporate purpose? How can their tasks be translated into a role that supports their purpose? Achieving the maximum employee satisfaction through enabling (E) their purpose will lead to maximum productivity (P) naturally. A realignment of employee’s roles within an organisation will take some time but all workload will be covered through the organic integration of employee’s roles in the corporate ecosystem.
Suppliers Their first P (purpose) is to supply services and products to a customer to pay their bills. But that is just the tip of the iceberg. Every supplier grows, learns and ultimately derives value from their relationships with their customer far beyond just making profit. Often, suppliers are even performing their services below their actual cost, as they consider certain customers as “strategic”. They feel they are gaining more through their relationship with a customer in a certain scenario and forgo profitability intentionally. Hence, it is important to enable (E) a supplier and strategically align with them. Both sides will ultimately gain peak performance (a second P) only through mutual understanding of one’s purpose (P again).
Customers Basic economic theory tells us that customers demand the highest quality product or service for the lowest possible price. Their purpose (P) is to align their willingness to pay to their demanded product or service. What has become more dominant in recent years is “customer experience”. Modern customer satisfaction is a combination of matching willingness to pay with outstanding experiences. In other words, it is important to not only enable (E) a transaction from a supply and demand perspective but also to overachieve and be innovative. Much can be written of how to succeed in outstanding customer experiences. Let’s just agree that innovative and creative firms tend to do better here—often enabled by employees and/or suppliers as well as communities. Lastly, customers’ second P would be Pleasure—that’s what’s derived from a transaction.
Community A business’s purpose (P) regarding their communities is to thrive and be in balance with society and the environment. This has been a challenge, for example, for the extractive industry for years. Their communal impact is so material that they should be leading from the front. Point being, there is a varying materiality of how much power your business has in order to contribute to environmental and social balance. Let’s just explore the basics. How do you enable (E) your community? Here a few very simplified suggestions. Provide quality jobs. Ensure you are supporting the future of work. Pay fair taxes. Eradicate any environmental impact that is caused by one’s business. Enabling communities will result in achieving the second P—prosperity and parity (reducing inequality).
Shareholders Although it might seem counterintuitive, we’re strong believers that shareholders are the easiest to satisfy out of all stakeholders. That is, enabling (E) each stakeholder’s purpose (P) generates a second P also for shareholders: profitability. Recent research by Harvard Business School shows that driving purpose increases outperformance—not necessarily higher profitability, but certainly never less. The top 10% of the world’s companies are 100% more productive than the bottom 10%. Most of the top bracket are companies strongly driven (and enabled) by purpose.
The role of the board
The advantage of PEP is that it can be implemented at any organisational level. It is simple, logical and purposeful. In also gives middle management more freedom in decision-making, and autonomy in negotiations with the various stakeholder groups.
However, a healthy level of corporate governance and supervision also is required for PEP. We recommend implementing quantitative “thresholds” for managers to act within, around each ‘P’ and the ‘E’. That is for example, giving managers the flexibility to redesign employees’ roles or adjust their salaries to a certain extent. It could be fixed percentage thresholds that cannot be under- or over-shot when managers are negotiating with suppliers. Or perhaps a threshold for price adjustments that managers need to adhere to, for services and/or products as well as minimum quotas for new hires hailing from local communities.
When analysing your company’s current level of “thresholds”, you will most certainly find that you already have a lot of similar controls in place. Most likely, they have never been used in a PEP context, however.
The board will be helpful to approve any initiatives that lie outside of those thresholds. This not only keeps the level of governance as lean as possible, but it also flags major organisational shifts to the
board directly, that could imbalance the stakeholder equilibrium that is supposed to be maintained under PEP. Remember that bringing this equilibrium out of balance will decrease the shareholder value too.
Governing PEP will not necessarily require a new board committee, although this is certainly a possibility. To keep a company’s board lean, any threshold sign-offs can be done within existing committees. PEP sign-offs simply become another point on the agenda when committees gather.
A board itself can be set up under PEP as well. As Colin Mayer has found in his oft-cited book Prosperity, governing fiduciary responsibility is an important part of a board of directors’ duties, but more than anything it is “being the custodian of a company’s purpose”.
Frederik Otto is founder of The Sustainability Board Report.