Redefining Company and Brand Value
I have always been fascinated by the factors that determine the value of a product, company, brand or service. We have all experienced dramatic fluctuations in produce prices where simple demand and supply forces are at work, but looking at the value of a company or brand is however more complicated.
The reason I raise this topic is that over the past thirty years there has been a steady shift in what underpins the value of a share price. This shift was recently highlighted at the Sustainable Brands New Metrics workshop in Boston by Paul Herman of HIP Investor, who showed that in 1975, 83% of share market value was driven by tangible assets such as buildings, equipment, stock on hand, cash in the bank and so on. By 2010, this has changed to the point where 80% of share market value is driven by intangibles.
What exactly is intangible value?
Mark W. McElroy who heads up the Center for Sustainable Organizations and pioneered the MultiCapital Scorecard, has provided a good framework within which to understand intangible value.
His approach to assessing company value looks at six types of capital that an organization can create. The first is Constructed Capital which looks at the world of human artifacts and design, particularly how these objects and systems add value to a company.
External Economic Capital is the second capital type that consists of all financial funds available from outside the organization. Sometimes these can be non-financial in nature, relating to externalities that escape the financial accounting system. These are identified as positive or negative impacts on natural resources, ecosystem services, socio-economic systems and so on.
Human Capital constitutes the third type of capital that underpins company value. It relates to knowledge, skills, experience, health, values and attitudes of employees and key stakeholder networks. While we are familiar with the fact that people are important to the business and should be valued, this does not show up on the balance sheet despite efforts by people like Leif Edvinsson and Michael Malone (1997) to quantify intellectual capital.
McElroy’s fourth type of capital is Internal Economic Capital which is debt and equity as well as brand value which we are all familiar with.
The fifth capital type is Natural Capital which relates to the natural resources (air, land, water, minerals, flora, fauna etc.) and ecosystem services (bee pollination, insect predators, fertilization by grazers etc) a company relies on to deliver its products/services.
The final capital type is Social and Relational Capital. This constitutes the effectivity/cohesiveness of teams, networks and hierarchies working together to share human capital. Often such contributing social networks reside outside the organization.
The importance of understanding the expanded range of capital types
Investor groups are already becoming more sophisticated in their analysis of companies they may want to invest in. The International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB) are just two examples of well accredited organizations that have emerged to help support the investment community with more refined analytical tools and benchmarks.
Since most of the retailers growers sell to are publicly traded companies, this puts tremendous pressure on them to show how they are performing in relation to McElroy’s capital classifications. This ultimately will start to impact growers and distributors as we are already seeing with Wal-Mart’s Sustainability Index and Wholefoods Responsibly Grown label.
Apart from the investment community, Millennials are also starting to demand products and services that are socially and environmentally more acceptable as confirmed in the Deloitte 2014 Millennial Survey.
What does this all mean for growers and retailers?
The hard truth is that investors and consumers are increasingly forcing all stakeholders in the fresh produce industry to reassess the way they do business. Gone are the days when simply delivering or selling a good quality product is acceptable.
The story behind the production, distribution, merchandising and nutritional value of the product and those who make it happen is now being told. This involves understanding, building, accounting for and reconciling the six capitals presented earlier on to a much wider audience than just shareholders.
How ready is your organization for this new business reality?
Latest posts by Andrew Southwood (see all)
- Unlocking Value in the Fresh Produce Industry - August 4, 2015
- Capturing Consumer Loyalty with Meaningful Brands - April 1, 2015
- Redefining Company and Brand Value - November 3, 2014
- The Importance of Managing Brand Equity and Company Reputation Well - July 22, 2014