Sustainability: Where’s it Heading?
Written by:
Miguel Reynolds Brandão on August 31, 2015
From the public debate over Amazon’s workplace culture to the Security and Exchange Commission’s approval of the CEO-to-worker rule, it’s been an interesting few weeks for those of us who care about sustainable organizations. Clearly people have strong feelings about what companies owe society and how front-line workers should be treated.
When the SEC rule finally goes forward, publicly traded companies will have to disclose what their CEO makes relative to the median compensation of their workers. It seems like something any company could easily figure out on a spreadsheet, but it actually took five long years for this measure to see the light of day. While it won’t take effect until 2017, the rule is already causing quite a stir in the corporate world. Some think it will bring real change, while others find it useless or even potentially harmful.
As for me, I feel hopeful. Count me among those who are shocked by the fact that as of 2013, US CEOs were making 300 times more than typical workers (up from 20 times as much in the 1960s). The divide is growing, and that’s a problem for society. When gaps are big, people tend to fall through.
In my last post, I introduced the Sustainable Organization Index (SORG) as a tool to inform us whether or not an organization is sustainable. I also covered different assessments according to organizational focus. In this post, I’ll break down the index into its internal and external components to help identify imbalances. (That’s precisely why I’m so interested in the SEC rule. If it moves forward – and let’s hope it does – it could be critical in assessing the internal balance of public organizations.)
Why do we need to break it down? Well, looking at internal and external factors helps us know where the organization has its strengths and weaknesses when it comes to sustainability. It also takes the focus away from a more traditional but highly problematic measure of organizational success: speculation (i.e., the stock market).
The following model shows the way that value moves between the organization and the internal and external groups that affect it. I'm talking about revenues, salaries, interests, costs, taxes and dividends (represented by the blue lines). This model can be used with all organizations, even non-profits, where the flow comes from the organization to the community in the form of donations or voluntary work (the green line).
Thinking about these flows, the key principle is there can only be sustainability if there is a balance between the community, the employees (the team) and the owners. In other words, not only do the community and the team need to generate more value than the owners, but the distribution of the team’s salaries needs to follow a bell-shaped curve with a CEO-to-worker ratio lower than 1:12 to assure there is harmony between all members. And this is where the SEC vote becomes important.
So, to enable an internal assessment, we created the SORG I, SORG II, SORG III and the Harmony Index. The SORG I measures the balance between the owners and the community; the SORG II measures the internal balance; the Harmony Index measures internal cohesion and the SORG III measures the balance between the team and the community. With all of these indexes, the higher the outcome (ideally, > 1) the more benefits we see. The Harmony Index brings even more relevance to the need to cap CEO salaries against workers’ pay as a measure to increase harmony across organizations.
As explained in my last post, the SORG is a product of all these metrics and offers a precise valuation and view of how the organization is behaving. Looking at the metrics individually enables us to assess where an organization is doing better or worse. Here’s how to calculate a SORG:
But it’s important to note that these internal factors cannot be analyzed on their own. If we are to provide an accurate picture of how an organization is behaving, then it’s also critical to consider the external factors, i.e. the impact the organization has over time determined as a function of its revenues.
Does this still sound too complicated? Let’s look at an example:
In this non-normalized graph we overlay the SORG with its parts – SORGI, SORGII and Harmony. This clearly illustrates why the SORG is very low in company B, despite an apparent balance between Community, Team and Owners. The Harmony factor is dragging it down. In this case, the internal distribution of the economic flows generated by the organization does not follow a normal curve. The impact of the CEO-to-worker median ratio is massive. Another obvious conclusion from this comparative analysis is the fact that company G’s activity highly benefits the community it serves.
This analysis can go deeper by comparing results to the market capitalization of the organizations being assessed. It can go wider by considering five or more years of the organization’s activities. But all in all, these are just ideas, suggestions and propositions. Feel free to be inspired.
If you’d like to know more about this topic, please visit my website and get in touch. If you want to find out how to explore organizational impact in a more holistic manner, drop me a comment on this page. In the meantime, please check out my book, The Sustainable Organization: a paradigm for a fairer society, to find out what companies are included alongside SAS as leaders in the field of sustainability. And to learn what it means to be a leader at corporate sustainability from an organization who is doing it right, check out the latest data from SAS at the SAS Corporate Social Responsibility site.
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