Moral Capitalism and the Future of The Sustainable Corporation

1. Moral Capitalism and the Future of The Sustainable Corporation Stephen B. Young Global Executive Director The Caux Round Table Brisbane, May 22, 2007

2. What is A Sustainable Corporation? • Quality Income Stream • High net present discounted value • Good capitalization multiplier Good Corporate Value (Warren Buffet would buy it)

3. Today where does most corporate value come from? Intangible Assets!

4. 50 Best Performers of 2005Business Week Burlington Northern Santa Fe: Market value: $29.2 billion Balance sheet assets: 103% of market value ($30.3 billion) Goodwill: None Caterpillar: Market value: $49 billion Balance sheet assets: 95.9% Goodwill: 4.1% United Health Group: Market value: $79 billion Balance sheet assets: 52% Goodwill: 48% Apple: Market value: $58 billion Balance sheet assets: 19.8% Goodwill: 80.2%

5. 50 Best Performers of 2005Business Week Microsoft: Market value: $279 billion Balance sheet assets: 33.7% Goodwill: 66.3% Best Buy: Market value: $26.3 billion Balance sheet assets: 39% Goodwill: 61% Starbucks: Market value: $27.8 billion Balance sheet assets: 12% Goodwill: 88% Goldman Sachs: Market value: $61.7 billion Balance sheet assets: 1.1% Goodwill: 98.9%

6. What is a company worth?How to we measure its value? • Most simple calculation: Discounted net present value of future income X capitalization multiplier

7. First Fundamental Conclusion You cannot establish value without putting risk into the calculation • What is the risk of not achieving predicted future revenue? How certain are estimates of future income? • What are the risk factors that determine the capitalization multiplier? A higher risk demands a lower multiplier Higher risk > more uncertainty > lower present value

8. Note: • Each source of risk drives business value up or down

9. Second Fundamental Conclusion Management of Risk Enhances Enterprise Value • Risk management leads to more certain income • Risk reduction leads to higher valuation

10. How do you manage risk? -Each risk hides in a relationship - customers - investors - government regulation - employees -Each relationship is an intangible asset of the business (Assets can Appreciate or Depreciate). -Lowering risk for each relationship enhances the quality of intangible assets and increases business valuation

11. CSR & Valuation Intangible Assets = CSR Stakeholder Relationships • Customers • Employees • Owners/Investors • Suppliers • Competition Strategies • Community Support

12. To improve company valuation,Improve CSR relationships!Good CSR Relationships Lead to The Sustainable Corporation

13. How to measure CSR Relationships Use CRT Arcturus Risk Assessment Instrument New metrics for enhanced profitability

14. How to Manage for Sustainable Value? • CRT Theory of the Firm • Arcturus

15. Theory of the Moral Firm (self interest considered upon the whole)

16. Theory of the Moral Firm: 2 CRT Principles Stakeholders Leadership Strategy Value Drivers Shareholder Value Corporate Governance Vision

17. Stakeholders: • Customers – moral compass for capitalism • Employees – moral agents, not parts for a machine • Owners and Investors – fiduciary duties of loyalty and due care • Suppliers – friends, not foes • Competitors – compete with quality and innovation, not price • Communities – enhance social capital to enhance future profitability

19. Category 1. Fundamental Duties 2. Customers 3. Employees 4. Owners/ Investors 5. Suppliers/ Partners 6. Competitors 7. Communities 1. Responsi-bilities of Business Criterion 1.1 Criterion 1.2 Criterion 1.3 Criterion 1.4 Criterion 1.5 Criterion 1.6 Criterion 1.7 2. Economic and Social Impact of Business Criterion 2.1 Criterion 2.2 Criterion 2.3 Criterion 2.4 Criterion 2.5 Criterion 2.6 Criterion 2.7 3. Business Behavior Criterion 3.1 Criterion 3.2 Criterion 3.3 Criterion 3.4 Criterion 3.5 Criterion 3.6 Criterion 3.7 4. Respect for Rules Criterion 4.1 Criterion 4.2 Criterion 4.3 Criterion 4.4 Criterion 4.5 Criterion 4.6 Criterion 4.7 5. Support for Multi- lateral Trade Criterion 5.1 Criterion 5.2 Criterion 5.3 Criterion 5.4 Criterion 5.5 Criterion 5.6 Criterion 5.7 6. Respect for the Environment Criterion 6.1 Criterion 6.2 Criterion 6.3 Criterion 6.4 Criterion 6.5 Criterion 6.6 Criterion 6.7 7. Avoidance of Illicit Operations Criterion 7.1 Criterion 7.2 Criterion 7.3 Criterion 7.4 Criterion 7.5 Criterion 7.6 Criterion 7.7 Arcturus Risk Assessment Instrument – Criteria Matrix

20. Assessment Framework – Criterion/Benchmark Example CUSTOMERS (Section B) 1B - Beyond Shareholders towards Stakeholders - Customers Does the company provide its customers with quality products and services at reasonable prices, and on fair terms, while protecting their health and safety and their physical environment, and respecting their culture and individual dignity? POINTS TO CONSIDER – The company seeks customer feedback on its practices, monitors impacts, and is prepared to modify production or service as a result, plus provides relevant training of staff. Point(s): Please circle 1 2 3 4 5 6 7 Please write down any concerns, explanations or additional comments on how or how not, the company is performing. ____________________________________________________________________________________________________________________________________________________________________________________________________________________ 2B - Economic & Social Impact of Business - Customers Do the company’s products and services contribute to the economic and social advancement of its customers and to the well-being of their communities? POINTS TO CONSIDER – Quality of product/service development; product quality and safety; adherence to relevant customer, safety and environmental codes; products / services positively impact living standards? Point(s): Please circle 1 2 3 4 5 6 7 Please write down any concerns, explanations or additional comments on how or how not, the company is performing. ____________________________________________________________________________________________________________________________________________________________________________________________________________________

21. Value Drivers (positive or negative) - 1 Capital Adequacy Finance Reputation Dividends; interest; stock price; Customer loyalty; transparency; corporate quality; financial governance; risk profile standing; brand CRT Tool - awareness; compliance Physical CRT Tool - Supply chain; depreciation expense Social CRT Tool Taxes; citizenship duties; acceptable externalities Human (ISO 14000); legal; contributions; Compensation; community service work environment; corporate culture CRT Tool CRT Tool -

22. Value Drivers (positive or negative) - 2 Management Sensitive Conversion Processes Production processes (ISO 9000); costs; Outputs Capital HR process; credit/liquidity; R&D process; inventory control; • Procurement productivity ; CRT Assessment Tool Value Drivers (positive or negative) - 3 Market Sensitive Output Conversion Goods/Services Customers processes Quality (ISO 9000); innovation; market knowledge/research CRT Assessment Tool - Value Drivers (positive or negative) - 4 Market Sensitive Customers Quality; price, warranties; service; Output $ Profits advertising; sales; distribution; market research CRT Assessment Tool -

23. Assess Board Management and Employee Decision –MakingPhase I – 60 minutes – CEO, Board Members, Senior Management TeamPhase II – 60 minutes per stakeholder – Other Management Executives & Company Leaders

24. The Corporate Improvement Cycle Performance Improvement Management Action Performance Feedback to Management CRT Assessment

25. How Do Companies Create Value? The Good The Bad The Ugly

26. The Good (Moral Capitalism) • Risk Assessment/continuous Risk Reduction • Optimize Stakeholder Benefits

27. The Bad (Brute Capitalism, Crony Capitalism) • Feed Shareholders, Abuse Stakeholders • Commoditiy pricing/ compete on pricing/low costs • Rent seeking (market power) • Take the money and run: short termism Unsustainable Valuation

28. The Ugly (Punting on the trading floor) • No net wealth creation (Rob Peter to pay Paul) • Irrational Exuberance (Market traders short terism) • False Valuations (Enron: Ponzi Scheme) • Encourage unsustainable pricing of securities

29. Private Equity and Moral Capitalism • Ownership or Stewardship? • Private equity can be: - moral - brutal - speculation on the foibles of others

30. Today’s shareholders are stewards for future shareholders • Ownership has its responsibilities • Business has a social office to perform (Create net wealth) • Owners paid to perform the duties of that office- profit from good service well delivered • Misfortune of residual claimants

31. What of Personal Dominion?Is Private Property Legitimate? All power is subject to the moral sense

32. CRT Principles for the Ownership of Wealth

33. Fundamental Principle:The ownership of wealth entails stewardship.

34. General Principle # 1Wealth should be used to enhance other forms of capital: finance, physical, human, reputational, and social.

35. General Principle # 2The desires of owners for self- satisfaction should be balanced against society’s need for robust accumulation of new capital in all forms.

36. General Principle # 3Wealth must support the creation of social capital.

37. General Principle # 4Wealth should be invested in institutions enhancing human capital.

38. General Principle # 5Private wealth should supplement public expenditures for the social safety net.

39. General Principle # 6No one is morally entitled to the use and enjoyment of wealth procured by fraud, corruption, theft, or other abuse of power.

40. Thank You