How changing the way we measure value helps companies focus on the long-term

Understanding the value of purpose

Energy companies are battling public concern over climate change. Tech companies are judged on whether big data and social media positively contribute to society. Pharmaceutical companies face growing calls to justify their use of patents, and to make lifesaving medications more affordable and accessible. Across all industries, leaders today face pressure from consumers, regulators, and investors alike.

When it comes to responding, we often hear similar questions. Who are our most critical stakeholders? What’s our purpose? How is it fulfilling stakeholders’ needs? What outcomes and investments will create the greatest value for them, and how do we articulate and measure that? And, importantly, if we create, articulate, and implement a long-term strategy aligned with our purpose, what will investors think? 

To that last point, there’s a very public, broad shift of capital toward organizations with a clear long-term strategy anchored by a purpose that is authentic and well-communicated. In the United States, the Business Roundtable last August issued a much-heralded statement signed by 181 CEOs recognizing the need for companies to act “for the benefit of all stakeholders – customers, employees, suppliers, communities, and shareholders.”

The problem? While stakeholders increasingly agree organizations thrive when they create a broad spectrum of long-term value – financial, human, consumer, and societal – no one is sure how to measure value beyond dollars alone. In the absence of metrics that clearly articulate the value of a company’s long-term investments, it’s hard to blame investors for continuing to make decisions based on established, short-term metrics and reporting.

Yet that hurts companies and investors alike. With 48% of global enterprise value represented by intangibles², it’s little wonder only 25% of investors believe current financial reporting clearly conveys how a company can create future value through its investments.³

Valuing purpose-driven strategy

In 2017, a group of business leaders together representing $30 trillion of assets under management—including the EY organization—launched the Embankment Project for Inclusive Capitalism (EPIC). The goal was to identify consistent, widely accepted metrics to measure the impact of an effective strategy around today’s key drivers of long-term value – consumer, financial, human, and societal.

For example, measuring how well a company is creating human value could be done by looking at how talent is deployed using metrics such as workforce costs; workforce composition and diversity; training, learning, and development; and engagement and well-being.

The EPIC project did not propose a “one-size-fits-all” solution. It recognized a company’s metrics should measure the areas of value creation most relevant to its purpose and strategic goals, and tested a long-term value framework to identify specific, outcome-based metrics based on a company’s strategy, context, purpose, stakeholders, and strategic capabilities.

That way, companies would have a process to identify the most important metrics to report – and investors a way to know that the metrics had been rigorously selected for their relevance to a company’s situation.

It was a timely contribution that advanced the debate on long-term value. With a concrete way to measure how specific factors create value for a wide range of stakeholders, it’s easier for businesses and investors to align on the best path forward.

That, in turn, makes it easier for organizations to bring their purpose to life, and then execute it with a credible, measurable strategy to maximize the most long-term value.

So, how do you measure long-term value being delivered to stakeholders? Through four key steps:

2. Assess stakeholder outcomes

After establishing the context, you then need to identify the company’s main stakeholders – both inside and outside the organization – and the value they get from the work your company does.

Maybe Millennials are a key consumer base. Maybe your organization’s appeal centers around a specific societal mission. Maybe it depends on delivering constant technological innovation to the market.

In the case of an energy company, maybe it needs to deliver affordable, reliable services to its customers, while decarbonizing the business as much as possible to fight climate change and benefit society.

All of these factors point to critical stakeholders for your company – and suggest the types of value the company will need to create. Whatever the case, it is crucial to identify the ways in which your company is uniquely positioned to add value to the lives of all stakeholders.

3. Identify strategic capabilities

Once you know the company’s context and its stakeholders, you need a clear sense of the capabilities that can be deployed to advance a strategy that serves those stakeholders. What levers create or protect long-term value? What resources does the company need?

Answering these questions is critical to prioritizing the long-term investments and related metrics that matter most to a company’s future. The best strategies approach a transformation challenge from every angle. It’s not acceptable to focus on one stakeholder group at the total expense of another. 

For instance, a company seeking to create greater human value may already have a particular personal development program for employees. That’s a value lever it should include in its strategy – coupled with the specific resources and investments needed to ensure that lever produces the value the strategy calls for.

Or take an automobile company whose stakeholders want to minimize impact on the environment while still producing high-performance cars. In that case, key value levers may be the programs the company has in place for research and development – or the training it offers employees to cultivate new skills that will help the company adapt and innovate.