By Christopher J. Nolan
Most business owners would probably agree that three words—profitable revenue growth—could summarise their corporate objectives, even if expressed more subtly.
Understandably, as the storm-ravaged economy, supported by a government lifebelt, traverses further shoals, this business paradigm is being questioned. Has it got us into this economic mess, and does the continuing pursuit of profit also satisfy the legitimate demands of society for corporate social responsibility and environmental sustainability?
Paradoxically, the answer is ‘yes’ to both questions. The application of that paradigm without the constraints of prudential responsibility, and a general sense of ethics, has most certainly caused the virtual destruction of the financial sector as we once knew it; and over time has contributed significantly to the environmental degradation experienced worldwide.
On the other hand, the application of the same paradigm within those constraints meets the legitimate demands of all stakeholders, including protection of the environment. The exercise of effective fiduciary control ensures economic sustainability; and this ethical framework intrinsically abhors activities that are anti-social or environmentally damaging, and also requires action that is not motivated solely by self-interest.
The business paradigm
The business paradigm can be visualised as being nested within two outer rings. At its centre are three things vital to the survival of a business. ‘Revenue’ is the source of the absolute basic aspirations of stakeholders, such as employees’ income, owners’ dividends, suppliers’ payments, government taxation and community philanthropy. ‘Profit’ is needed to fund the cost of capital, which itself is ultimately the outcome of retained earnings.
It is arguable whether or not real (i.e, after inflation) ‘growth’ is also a necessity, but it is a legitimate stakeholder aspiration, and is required to provide career progression for staff, for example. Like everything else, a business has a life cycle, and growth and decay are integral parts of it.
Stakeholders can be either beneficiaries or benefactors, although some are a combination of both. Owners and employees are obviously beneficiaries, just as customers are benefactors. Suppliers are both, as they derive income, but also provide credit. So is the community, which benefits from businesses in many ways, but also allows those businesses to operate, under conditions that may or may not be clearly defined. For example, private property rights are enshrined in law, whereas the sustainable use of resources is not—but is expected nevertheless.
A business also operates in the context of a market, which like nature promotes the survival of the fittest. The weak can be defined as the ‘unprofitable,’ the result of being unable to combine the generation of value with operational efficiency. The concept of a value-driven business is absolutely fundamental to the business operating paradigm.
Revenue is the outcome of an exchange of value with customers. From their perspective, the exchange has to be worth it, which means the business must in fact create value by its activity. This is particularly important in the specialty fabrics industry, where so much depends on repeat business. Customers who feel they are not getting value will not come back.
The value proposition
There are many notable examples, past and present, of value generation in the specialty fabrics industry. Glen Raven’s introduction of Sunbrella®, woven from solution-dyed acrylic rather than polycotton fibre, extended the expected life of awnings and marine canopies, and allowed a choice of more vibrant colours. Herculite’s Staph-Check®, a reinforced PVC with added antibacterial properties, supplanted cotton mattress ticking in hospitals and reduced the risk of patient cross-infection.
Ferrari’s Precontraint® process reduces the degree of anisotropic behaviour in coated PVC fabrics, which is convenient from a structural design perspective. And the introduction of welding techniques to specialty fabrics, with the design of portable, easy-to-use machines by companies like Sinclair Equipment facilitated the joining of large areas of fabrics onsite. Not all fabric products are industry-changing developments, but value is still the determinant of their success.
‘Profit’ and ‘growth’ can also be expressed in value terms. Without adding value, a business has no point of existence, and becomes simply a toll collector—the need for which is quickly questioned by customers. Profit is the measure of that added value, and growth a measure of the incremental change in that value. As a business grows, so too does the amount of value exchanged, and the number of beneficiaries.
The fundamental linkage in the business operating model can therefore be demonstrated by re-phrasing the elements of profit, revenue and growth as ‘value generation,’ ‘value exchange’ and ‘value increment’ respectively. When its operating model is expressed in this form, commerce starts to regain some of its lost dignity—but only if it demonstrates the repentance of ‘prudential responsibility’.
The phrase is a little tautological, as both words mean ‘sensible’; but ‘responsible’ also means ‘accountable’ and ‘reliable,’ which are key expectations of the benefactor stakeholders. After all, suppliers are providing credit, often unsecured, and usually lose the most in a business’s demise. Consumers expect a product that is fit for its purpose, and if it isn’t, they expect restitution for consequential damages. The community rightly expects taxation obligations to be met, and stability of employment.
Underpinning the entire model is a sense of caution, particularly in the approach toward risk, aptly expressed as ‘expect the best, but be prepared for the worst.’ The image of a sailing vessel traversing the ocean is a particularly good analogy for the management of business risk. A course has to be charted, watch kept, gear maintained, and speed and heading altered to suit the prevailing weather conditions, which are not always favourable. A tempest is the ultimate test, and even a good boat can founder under these conditions. Equity is the equivalent of freeboard, but exactly where the Plimsoll Mark (a load line symbol) should be depends on the voyage and its duration.
The expansion of ethics
Even within the precepts of prudential responsibility, the business operating model is easily corrupted without the outer circle of ‘Ethics.’ For example, it is simply not right, even if done in a prudentially responsible way, for a business to make payments of millions of dollars to sportsmen to promote a product at the same time it is paying subsistence wages to the third-world workers who manufacture it.
Good business ethics are not founded on compliance with laws or regulations, but on a generosity of spirit, such as that espoused by this Jesuit philosophy:
…To give, and not to count the cost;
To fight and not to heed the wounds;
To toil, and not to seek for rest;
To labour, and not to seek reward …”
Ethical business behavior does not preclude acting in one’s self interest, or enjoying the fruits of one’s success. It simply means that the latter outcome is not the primary motive for the actions that achieve it.
This philosophy is utterly inconsistent with the current popular image of business management practices. Fear that businesses are operating outside of the code of ethics that usually governs the behaviour of most of us leads to calls for ‘corporate social responsibility.’ But why should that be the case? Running a business does not cause a Jekyll to Hyde ethical transformation.
Not all business owners are ethical, of course, and there is obviously a need for regulation and oversight of commerce, just as there is for society as a whole—but to what extent? For three centuries, the concept of a limited liability proprietary company has defined the assignment of business risk, and demonstrably encouraged entrepreneurial activity. This, in turn, has underpinned economic growth and prosperity, but could be threatened by the demands of overzealous regulators to hold directors personally liable for the actions of their companies. Consequently, the grounds for such recourse need to be carefully defined in any legislation that is contemplated in this context.
A framework for business
A sense of ethics demands recognition of the needs of others. In business context, this is reflected in the treatment of staff, and involvement in the community; not just in a philanthropic sense, but also by providing opportunity for local employment, career development, training and support for local suppliers. Providing these opportunities is predicated on the operation of free and fair markets, which in reality are distorted by factors often beyond the control of even the best-managed businesses.
For example, if local labour costs are relatively high, and cannot be substantively reduced by innovation or productivity improvement, then sooner or later competitiveness will be threatened by imports from countries where labour is not as highly valued as it should be. In the past, appeals for patriotism, protectionism and the like have not proved to be successful counter strategies, and are unlikely to become so in the future. One cannot defy gravity, and the yardstick for ethical behaviour in this context is how fairly the stakeholders are treated in any adaptation to these circumstances.
If carried out within a framework of ethics, the quest for business efficiencies will also not allow poor environmental practices. The squandering of resources, generation of excessive waste and failure to adopt good recycling practices are simply an anathema. However, good environmental practice does not mean simply adhering to the demands of environmental lobby groups. Even a modest amount of research would have led people to substantially discount the negative campaign against PVC undertaken by Greenpeace in the nineties, and consequently their arguments for discontinuing the use of the material.
We live in a society in which the dignity of labour is generally recognised, but that of commerce is not; where the simple economic model of capital versus labour has dehumanised the interaction between the two; and where ideological extremists, clothed with environmental and social righteousness, seek to dominate the political agenda with measures that are fundamentally anti-business. Despite all of this, we still have the values of family, which are still inherent in family-owned businesses, which in turn form a large part of the specialty fabrics industry worldwide. As the global economy comes about, it may be this ethical framework which helps support the recovery of our businesses.