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15 The DNA of Corporation 2020Transformation of ‘Corporation 1920’ Paper

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Paper type: Essay , Subject: Dna

1.5 The DNA of Corporation 2020

Transformation of ‘Corporation 1920’ to ‘Corporation 2020’ is the need of the hour. Current corporate modus operandi cannot deliver ‘green economy’, as it is based on techniques developed and adopted hundred years ago, which are not capable of addressing the contemporary issues. The new DNA of corporations will have following four strands;

1. Goals closely aligned with society – Corporate raison d’?tre would no longer be self-interest. Corporation 2020 would seek stakeholder capitalism instead of shareholder capitalism.

2. A vision of the corporation as a capital factory – Corporation 2020 would define ‘capital’ differently; capital would mean anything that facilitates the production of income, including natural resources, relationships and ideas in addition to financial and physical capital. Corporation 2020 would be a custodian of all the capitals; it will responsibly use and conserve them.

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3. An understanding of the corporation as a community – Corporation 2020 would be a community, in which its stakeholders would be tied by a shared culture created by its values, mission, goals, objectives and governance. In a way, Corporation 2020 would build social capital by instilling sense of belonging in its stakeholders.

4. A commitment to developing the corporation as an institute of learning – Corporation 2020 would have a conviction of being an institute, where it will expand knowledge base of its employees and thus create human capital.

1.6 Theory to Practice: Capitals Approach

Our current way of accounting economic gains solely focuses on profits, losses and GDP. However, any business activity has impacts not only on financial capital, but other capitals as well. The third-party impacts, externalities, on other capitals (human, natural and social) are not taken into account in this system. These impacts may have high social costs, and yet our current yardstick fails to measure them (Sukhdev, et al., 2018). The balance sheets prepared using this yardstick do not give the actual account of economic profits and losses.

This challenge can be addressed by using a holistic ‘Four capital approach’ as shown in Figure 5. This accounting framework is essential to translate the ‘theory of Corporation 2020’ in practice. In fact, quantification and inclusion of externalities in all four capitals form foundation for the four ‘micro’ solutions to ‘macro’ issues discussed in previous section.

Figure 5 shows four capitals, namely, Produced, Human, Natural and Social. Produced capital includes man-made assets like manufacturing plants, infrastructure, bank deposits, shares etc.

Natural Capital can be defined as ‘the limited stocks of physical and biological resources found on earth, and of the limited capacity of ecosystems to provide ecosystem services’ (TEEB, 2010). Natural capital is a key input in manufacturing of goods and its quality and capacity is affected by human activities (Sukhdev, et al., 2018).

Human Capital includes ‘the knowledge, skills, competencies and attributes embodied in individuals, which facilitate the creation of personal, social and economic wellbeing’ (OECD, 2001). Human capital is expandable, self-generating, transportable, sharable and non-depreciating (Sukhdev, et al., 2018).

Each of them generate income, but they wouldn’t generate income if there were not Social capital. Social Capital refers to ‘the productive value of social connections, where productive is understood not only in the narrow sense of the production of market goods and services (although this is an essential component) but in terms of the production of a broad range of well-being outcomes’ (Scrivens & Smith, 2013). Social capital is the glue, the binding force that pulls it all these together.

Figure 5 Four Capital Categories and Three Levels of Ownership: Some Examples

(Source – Sukhdev, et al., 2018)

The same approach is reflected in the inclusive wealth calculations which are done on the ‘macro’ level. Inclusive Wealth, as defined by Prof. Partha Dasgupta, ‘is the social value of an economy’s capital assets. The assets comprise (i) manufactured capital (roads, buildings, machines, and equipment), (ii) human capital (skills, education, health), and (iii) natural capital (sub-soil resources, ecosystems, the atmosphere)… Such other durable assets as knowledge, institutions, culture, religion – more broadly, social capital – were taken to be enabling assets; that is, assets that enable the production and allocation of assets in categories (i)-(iii). The effectiveness of enabling assets in a country gets reflected in the shadow prices of assets in categories (i)-(iii)’

1.6.1 Corporate reporting – today and tomorrow…

Corporations today communicate their performance to their stakeholders using multiple reports. Corporations prepare reports, depending on who is being addressed through that report. Each report, as shown in Figure 9, contains different information about the company. As a result, none of them gives a complete picture about corporation’s performance. A ‘Financial report’ written for shareholders would not reflect company’s negative externalities in other capitals. The demand for a ‘holistic’ report is growing especially from responsible investors, who are aware of economic risks of one-dimensional accounting. Nowadays, shareholders are not just interested in returns; they are also interested in how they earned those returns. Answer to this problem lies in integrated reporting; an integrated report combines all the information about a company’s performance, across all four capitals. This kind of report provides a completer information to investors, consumers, regulators or any other stakeholder.

Figure 9 Current and future corporate reporting

(Source: Compiled by authors)

1.6.2 Case studies

The multi-capitals approach is gaining traction amongst corporations, as evidenced by the shift towards integrated reporting demonstrated by key leaders across sectors. In the following section, we highlight a few case studies showcasing this approach.

1.6.2.1 Yarra Valley Water 2016

Yarra Valley Water is a water company, located in Melbourne, which is one of the most liveable cities in the world (State Government of Victoria, 2018). It caters to water and sanitation needs of more than 1.9 million people and 50,000 businesses in Melbourne (Yarra Valley Water, 2018).

Yarra Valley Water undertook an Integrated Profit and Loss study, with a view of ‘doubling social value by 2020’ (Yarra Valley Water, 2018). Figure 6 shows findings of this study, which shows positive as well as negative impacts of all the major operations of Yarra Valley Water. This study shows that Yarra Valley Water is not just a profit-making machine, but an institution that adds to the ‘liveability’ of Melbourne by value creation and is also aware of negative impacts of its operations.

Figure 6 Yarra Valley Water IP&L findings

(Source: Yarra Valley Water, 2018)

1.6.2.2 AkzoNobel “4D-P&L” 2014

AkzoNobel is a multinational company, which manufactures paints and coatings (AkzoNobel, 2017), with market cap of $22.4 billion, in 2018 (Forbes, 2018). AkzoNobel conducted a similar study at their Pulp and Performance Chemicals business in Brazil, to identify where they can improve. This study provided insights about positive and negative impacts of plant operations on all four capitals in context of a developing country, as shown in Figure 7.

Figure 7 AkzoNobel ‘4D-P&L’ findings

(Source: AkzoNobel, 2015)

1.6.2.3 Infosys 2011, ‘12, ‘13

Infosys is a leading IT sector company, with market capitalization of $38.3 billion in 2018 (Forbes, 2018). Through training initiatives of massive scales, Infosys has created enormous positive externalities in human capital, as shown in Table 1. Infosys’ primary training campus is located in Mysore, which is the largest corporate university in the world (Barney, 2010). By 2009, Infosys built infrastructure that had the capacity to train 14,000 employees at a time (Infosys, 2009). In 2013, value of the human capital externality created by Infosys was nearly $1.4 billion (See Table 1).

Table 1 Human Capital Creation in Infosys

(Source: Infosys, 2012 & Infosys, 2013)

In ? crore, unless stated otherwise

2013 2012 2011

Employees (No.)

Software professionals 147,008 141,788 123,811

Support 9,680 8,206 7,009

Total 156,688 149,994 130,820

Value of human capital

Software professionals 124,867 115,900 89,507

Support 12,978 9,817 8,640

Total 137,845 125, 717 98,147

Value of human capital externality

Software professionals 6,767 6,182 4,702

Support 878 649 563

Total 7,645 6,831 5,265

Total value of human capital and human capital externality 145,490 132,548 103,412

Ratio

Value of human capital per employee 0.88 0.84 0.75

Assumptions:

1. Long run inflation rate assumed at 5%

2. Discounting rate assumed at 4%

Human capital is extremely important, says the analysis presented in Inclusice Wealth Report 2014 (UNU-IHDP and UNEP, 2014). As shown in Figure 8, share of human capital in total wealth is much higher as compared to natural capital for developed countries. Therefore, goal of developing countries should be to focus on creation of human capital, as no development strategy works without competent human capital.

Figure 8 Shares of human capital & natural capital in total wealth, average 1990-2010

(Source: UNU-IHDP and UNEP, 2014)

1.7 Conclusion

Owing to its inherent limitations, Corporation 1920 cannot help our society achieve ‘Green Economy’. Corporation 1920 is a self-serving entity and its goals seldom align with social wellbeing. Corporation 1920’s hunger for size and scale and the means by which it pursues the same (leveraging, unaccountable advertising and lobbying) generate huge negative externalities. These externalities are socialized and rarely reflected in the price of the product. As a result, demand for such ‘cheap’ products are very high, our resources are depleted and public is paying for the corporate externalities.

Corporation 2020 is a vision for tomorrow’s corporations. This vision is based on four planks, which address the above-mentioned economic issues created by Corporation 1920. The four planks; ethical advertising, externality disclosure, limiting leverage and resource taxation are urgently needed to transform the prevalent business model to the one that can achieve the dream of ‘Green Economy’. Redesigning of the corporate DNA is a must. This new DNA would give birth to corporate world in which the all four capitals – natural, human, social and financial – are visible and conserved. Corporation 2020 would not have any negative externalities because their negative impacts would be accounted for and reflected in the actual price of goods.

Until and unless externalities in all four capitals are measured, disclosed and managed, Corporation 2020 cannot come in to existence. A new way of reporting – integrated reporting – is need of hour. Corporate reporting must shift from publishing multiple reports to a single, integrated report that discloses all the positive as well as negative externalities, across all four capitals. All four capitals together, not just financial capital, create wealth and this new reporting structure is essential for the corporations and government to realize this. We are fighting a war for survival and corporations have the ability to take the lead, if only they can evolve.

About the author

The following sample is written by Matthew who studies English Language and Literature at the University of Michigan. All the content of this paper is his own research and point of view on 15 The DNA of Corporation 2020Transformation of ‘Corporation 1920’ and can be used only as an alternative perspective.

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