SDA Professor Mario Vinzia, 26/11/2020
Risk, value and sustainability are the pillars on which the company’s lifecycle is built on.
In fact, the management puts all of its energy into value creation, business risk management and a sustainable long-term growth.
Value creation and risk appetite
If we ask ourselves which is the final objective of a business, one could say that is the creation of value and therefore positive cash flows or even profits (a term used recently).
This approach seems however incomplete because every economic and financial decision made can only result in being a risk-return choice.
A certain level of profit is quite difficult to assess if not in relation to the risk taken to reach a certain result: a greater risk taken should obtain a greater return in terms of profit. Therefore, the value creation may be read in strict relation with the risk appetite that each entity must have.
The final objective of a company cannot be the value creation as such, but the value creation in line with the risk level that the company intends to take (Risk Appetite).
The combination of risk-return
The amount of risk has gradually assumed dignity equal to that of value, so much so that one wonders whether, to optimize the risk-return combination, is it first necessary to define the Risk Appetite and subsequently maximize the value in line with one’s risk appetite, or identify a path to create value and then mitigate the risks encountered along this path to balance the risk exposure according to one’s propensity (in taking a risk).
The second approach is perhaps more obsolete, since it considers the amount of risk as a series of obstacles to be removed along the path of the value creation. Vice versa, the creation of value passes through the ability to select the appropriate risks in terms of size and quality in order to generate sustainable growth over time.
The concept of “sustainability”
The concept of sustainability is considered part of the three dimensions essential for the management of the company. In other words, the combination of risk-return needs to be sustainable over time, and to be sustainable the creation of value must not be orientated only on the basis of a short period and/or at the advantage exclusively of the shareholders.
At the beginning of the 1980’s Robert Edward Freeman was the first to propose the Stakeholder Theory, which paved the way for the development of a common ground of reflection on the importance of all the those who can influence or be influenced by the strategies that the company puts in place (Freeman and Reed 1983).
According to William Evan and R.E. Freeman, the stakeholders – ” are those groups who have a stake in or a claim on the firm. Specifically, we include suppliers, customers, employees, stockholders, and the local community, as well as management in its role as agent for these groups” (Evan e Freeman 1988).
More recently in 2011, Micheal.E.Porter and Mark.R. Kramer published an article called “Creating Shared Value”, in which they introduced the concept of shared value creation: the relation between competitive advantage and social responsibility of businesses. With the concept of Shared Value, Porter and Kramer aim to reinvent capitalism to lead to global growth. In short, the objectives need to be measured in medium-long terms and all of the stakeholders together with the shareholders must be at the centre of the choices made by the company, therefore changing from shareholder value to shared value.
Generally speaking, sustainability means respecting the environment in which the company operates, i.e. natural resources such as energy, water and air, avoiding pollution and the waste management in the field of circular economy. It also means, focusing on society and human rights, the development of human resources, on gender discrimination by guaranteeing equal opportunities for everybody and the implementation of a efficient corporate governance by creating anti-corruption practices, compliance, a correct return model and lastly the risk management of a company.
Social objectives and shared value
The integration of social objectives in the core of the business and the company strategies suggests a necessary movement of the time frame of reference: reaching objectives and the evaluation of the performance must be measured within a medium-long period, keeping in mind not only the immediate profit but also the value produced for the company and the all of the stakeholders.
Are you interested in learning more this topic?
Take part in the virtual arena where we will talk about “Risk Adjusted Performance Measures” on December 18th!
Find out how to define a planning and control system that knows how to combine risk-value-sustainability, assigning equal dignity to each of these three dimensions.
Click on the button below and book your seat (the event will be in italian):