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Value Creation Beyond TSR

October 31, 2011 By Tawfik Hammoud , Jérôme Hervé , Andy Maguire , and Saleh Tamim

The shareholder value approach to corporate management has come under increasing scrutiny in recent years, with critics arguing that it contributed to the global economic crisis as well as to recent environmental disasters such as the BP oil spill and Japan’s nuclear crisis. It is commonly argued that the approach encourages managers to put the interests of shareholders above those of other stakeholder groups, and to focus on managing quarterly earnings at the expense of long-term sustainable value.

Against the backdrop of this ongoing debate, many companies have been taking concrete steps to broaden their views on value creation, with the majority of Fortune 500 and FTSE 100 companies now maintaining a corporate-social-responsibility function and issuing an annual sustainability report for investors. Leaders in the practice, such as BMW and BASF, go so far as to specify their sustainability objectives and achievements on a number of social and environmental dimensions supported by a range of metrics, including value creation for each stakeholder group over a long-term horizon. A handful of companies have taken steps to incorporate sustainability goals into their employees’ incentive plans. Royal DSM, for example, links almost one-quarter of management compensation to the company’s performance in eco-product development, energy efficiency, and employee engagement, with another quarter tied to greenhouse gas efficiency.

Individual company initiatives are the product of a growing focus on sustainability by the wider business community. A number of indexes have been developed to allow investors to evaluate the performance of companies on criteria related to sustainability. The Dow Jones Sustainability Index (DJSI) measures companies’ long-term economic, environmental, and social performance. Other organizations have worked to establish standards for sustainability reporting, such as the widely followed Global Reporting Initiative (GRI). The International Organization for Standardization (ISO), DJSI, GRI, and Bloomberg have all compiled lists of key indicators to assess companies’ performance in areas such as reporting transparency, management integrity, risk management, and environmental and social impact.

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Value Creation Beyond TSR

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