New research from the Netherlands shows that organisations who make an overall social contribution have a stronger chance of a secure future
Defining the societal value of organisations and companies can play a significant role in ensuring their futures, by providing a level of security for stakeholders beyond financial statements, a new study from the Rotterdam School of Management Erasmus University (RSM) and Nyenrode Business University suggests.
The research, undertaken by Professors Dirk Schoenmaker of RSM and Dr. Willem Schramade of Nyenrode in partnership with strategic agency ftrprf, explores where true worth lies when it comes to company valuation.
Traditional finance metrics, the researchers state, are insufficient when it comes to conducting long-term valuations. Their work considers the impact of wider organisational factors, such as the social contributions and ecological standing. These elements, they suggest, can provide a more reliable idea of the value an organisation holds in its industry and with its customers. To explore this, the researchers developed a custom-built Integrated Value methodology tool. Using publicly available data, the tool combines the financial, social and ecological value of a company to produce a single number, representing its Integrated Value.
This is then ratioed against the company’s financial value, generating a “Futureproofing Ratio”. These ratios, the researchers state, can help decision-makers to more accurately assess a company’s long-term value potential, transition risks, and opportunities. A ratio greater than one signifies a net positive social and ecological contribution, while a ratio between zero and one indicates a net negative social and ecological value, with financial value compensating. A ratio below zero indicates an unsustainable business model, where the negative social and ecological value outweighs the financial value.
Crucial, yet often overlooked
Social value, Professor Schoenmaker explains, is a crucial yet often overlooked indicator. The greater a company’s social value, the greater its long-term prospects will be, even where financial values are low. For companies that make an overall social contribution that is greater than its financial value, there exists a stronger chance of a secure future.
To explore this further, a collaboration between 400 corporate finance master’s students at RSM, a dozen MBA students from Nyenrode, and a team of analysts, designers, and project managers from ftrprf, has resulted in the AEX Futureproof Index Report, which provides an Integrated Value analysis of 23 AEX-listed companies and provides their scores, offering insights and guidance for how companies can better address their sustainable investment commitments. Such valuations also provide important learnings for public services too, allowing governments and other stakeholders make better assessments.
In using this model to determine the future of Nederlandse Spoorwegen (NS) – the Dutch national rail operator, which has been subject to significant financial losses in recent years – the calculated integrated value (financial+ social + ecological) of €72.8 bn, was revealed to be much larger than its financial value of €6.4 bn. This means, the researchers state, that NS has a future-proofing ratio of 11.3 and, conversely to the financial data, indicates a bright future ahead.
Wander Marijnissen of ftrprf says: “While the public debate mainly gets stuck on financial deficits, our analysis shows that the societal value of NS is in fact enormous. From social inclusion to climate benefits: rail transport delivers far more to society than it costs. We must cherish and further build on that value.”
The findings of the assessment on NS have been published in a separate report. For government actors making service and budgetary decisions, the researchers believe this publication provides important learnings.
Dirk Schoenmaker continues: “A well-funded NS is vital for the Netherlands. Focusing only on NS’s financial losses risks undermining a vital public service. NS creates tremendous value by transporting people and improving accessibility – at much lower emissions than cars. Recent experiences in England show what happens when railways are chronically underfunded: higher fares, declining service quality, and worsening accessibility.”
Lead image: A Nederlandse Spoorwegen train © Bjoern Wylezich / Shutterstock.com