Mitigation Banking

In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) talks about Mitigation Banking which is a mechanism to preserve the ecosystem.

Introduction

Mitigation banking is a system of credits and debits devised by regulatory agencies to ensure that development impacts on wetlands and streams by private companies, as well as rare species and habitats, are offset by the preservation, enhancement, restoration, or creation (PERC) of similar ecological features in nearby areas, ensuring that local ecosystems are not harmed. This system is mainly used in the United States. To ‘mitigate’ anything implies to lessen the severity of it, to compensate for a loss, in this case the environmental harm.

As per the statement by the Ecological Restoration Business Association (ERBA), “mitigation banks are highly regulated enterprises that have historically been proven to deliver the highest quality, most reliable offset to environmental impacts…and a private investment into ‘green infrastructure’ to help offset the impacts associated with economic growth.”

A mitigation bank is a place created specifically for this purpose. A mitigation banker is a person or company that does this type of business. Mitigation credits are assets that may be sold to persons who are striving to comply with particular environmental standards and balance ecological damage they are responsible for. These credits are known as “ecological assets” when they are sold on an active market. They may be likened to other extractable natural resources such as minerals, oil, and natural gas in this regard.

Individuals or businesses conducting commercial or industrial projects that must adhere to state and federal environmental standards are often the buyers of mitigation credits.

There are two types of mitigation banks which are mentioned below:

Wetland And Stream Banks

Wetland and stream banks provide credits to counteract wetlands and streams’ ecological damage. The USACE (Army Corps of Engineers) and the USEPA (United States Environmental Protection Agency) regulate and authorize these banks (Environmental Protection Agency). Wetland banks are still referred to as “mitigation banks” since they were the first sort of offset scheme to be established. However, wetland and stream banks, as well as conservation banks, are now referred to as Mitigation Banks.

Conversation Banks

Conservation banks provide credits to compensate for the loss of rare or unique species and/or their habitats, which are often categorized as threatened or endangered under state and federal regulations. USFWS (Fish and Wildlife Service) and NMFS (National Marine Fisheries Service) regulate and authorize these banks (National Marine Fisheries Service). Unlike wetland and stream banks that focus on a given area, conservation banks deals with species.

The Process Of Mitigation Banking

When a mitigation bank buys a degraded site that it wants to restore, it engages with regulatory bodies like the Mitigation Banking Review Team (MBRT) and the Conservation Banking Review Team (CBRT) to have plans approved for the bank’s construction, maintenance, and monitoring.

These organizations also provide their approval to the quantity of mitigation credits a bank can earn and sell in connection with a certain restoration project. These mitigation credits can be purchased by anybody planning commercial development on or near a wetland or stream in order to mitigate the detrimental impact of their project on the surrounding ecology. The mitigation banker is in charge of not only the mitigation bank’s development, but also its ongoing care and maintenance.

Figure 1. Mitigation Banking Process.

Source: EASI

As depicted above in Figure 1, the US Environmental Protection Agency has established four main components of a mitigation bank:

• The actual area that is repaired, developed, upgraded, or conserved is referred to as the bank site.
• The bank instrument is a written agreement between bank owners and regulators that establishes liabilities, performance criteria, management and monitoring requirements, and loan approval terms.
• The Interagency Assessment Team (IRT) is a multi-agency group that oversees the bank’s regulatory review, approval, and monitoring.
• The service area is the geographical region for which a development project can pay the bank for permissible damages.

Benefits Of Mitigation Banking

The following mentioned below are the benefits of mitigation banking:

Conservation And Protection Of The Environment

Mitigation banks create a permanent conservation easement on the site, with a trust fund committed to the long-term preservation of the bank’s natural resources. Many large landowners, including the government, are able to maintain a property in its current management state (for example, grazing, timber removal, low-impact recreation, or education) while retaining ecological functionality, also known as ecosystem services, by securing mitigation credits from neighboring ecosystems. As a result, mitigation banking contributes to the preservation of nature and its variety. Increased industrialization and urbanization will inevitably have an influence on natural ecosystems, streams, and wetlands. Mitigation banks offer a way to at least somewhat mitigate this effect.

Increased Efficiency

To counteract each specific development, a mitigation bank is more efficient than restoring a distinct biological location. This is because restoring a large, contiguous piece of land is easier than preserving a number of smaller locations. A mitigation bank’s economies of scale and technical competence make it more efficient not just in terms of cost, but also in terms of recovered acreage (an area of land usually used for agricultural purposes) quality.

Regulatory Ease And Reduced Time Lag

Buying credits from an approved mitigation bank is easier for developers than obtaining regulatory permissions, which may take months. Mitigation banks, on the other hand, have already restored impacted acreage units in the process of obtaining credits. As a result, there is little to no time between a service area’s environmental effect and its rehabilitation at a bank site.

Transfer Of Liability

The mitigation banking mechanism effectively transfers ecological loss obligation from the developer (also known as permittee) to the mitigation banker. Once the permittee has purchased the requisite credits, the mitigation banker is responsible for developing, maintaining, and monitoring the site on a long-term basis. If no qualifying mitigation bank exists in a given location, the developer might design their own mitigation project to compensate for environmental loss. Permittee-responsible mitigation is what it’s termed.

Challenges Of Mitigation Banking

The following mentioned below are the challenges of mitigation banking:

Incorrect Valuation Of Ecological Loss

The difficulty of accurately measuring ecological loss in monetary terms is the most significant barrier for successful mitigation banking. Regulators must price and analyze the credits granted to mitigation banks, but despite the adoption of a variety of environmental assessment tools by these agencies, it is difficult to adequately capture the economic cost of natural resource destruction.

Difference In The Quality Of Artificial VS Natural Wetlands

It is debatable if natural ecosystems like wetlands, which have evolved over generations, can be intentionally built in a matter of years. In certain situations, the quality of these intentionally created wetlands has been shown to be inferior to its wild counterparts in terms of floral and faunal richness.

Only Partial Replication Of Impacted Sites

Mitigation banks, as opposed to individual mitigation in which developers establish their own mitigation sites in the neighborhood of acres damaged, are thought to be positioned distant from the impact locations and hence unable to entirely recreate the impacted site.

Summarizing The Current Situation Of Mitigation Banks In The US

• Mitigation banking is a methodology that provides a system of credits and debits to transfer accountability for ecological harm from the permittee to the mitigation banker, all while adhering to regulatory rules. A mitigation banker builds, restores, maintains, and administers the land at a bank site in order to gain mitigation credits, which are then sold for a charge to a permittee or developer.
• Mitigation banking is a lengthy and complicated procedure. The most crucial aspect is site selection: the mitigation banker must conduct extensive study about the site’s watershed and service region, as well as identify ecosystems that require restoration and augmentation. The mitigation banker is in charge of maintaining and monitoring the restored environment once all of the permissions are in place.
• A wetland mitigation bank must be capable of restoring 100 acres of damaged wetlands, while a stream mitigation bank must be capable of restoring 4,000 linear feet of degraded streams. Sites that don’t fit these criteria can be grouped together with others in the same watershed to form an umbrella mitigation bank.
• Because only related ecosystems may mitigate development projects, the cost of mitigation bank credits will vary greatly depending on location and effect activities. An emerging wetland credit in Iowa, US, for example, might cost anywhere from $35,000 to $55,000 per acre, while a forested wetland credit can cost up to $75,000.
• In the United States, a number of mitigation banks have been approved. According to the U.S. Army Corps of Engineers’ (USACE) Regulatory In-Lieu Fee and Bank Information Tracking System (RIBITS), there were over 2,000 licensed banks as of July 2021.
• Despite regulations requiring no net loss of habitat value and function, agencies have struggled to manage mitigation efforts. Wetland mitigation initiatives, for example, have been approved in certain circumstances based on total acreage rather than ecological value or function equivalent. Simply assuming a similar number of acres isn’t enough to achieve real equivalence unless the replacement ecological services provided by those acres are also the same. Even with the application of environmental assessment tools, regulatory agencies confront a problem in determining the right economic or monetary value for ecological damage. Despite the fact that mitigation banks must be placed in the same watershed as the damage to be deemed acceptable compensation, mitigation banks are frequently located far from the actual impact location. As a result, retaining the original value and function is challenging.
• Despite some of its flaws, it nevertheless offers a number of benefits. The future of mitigation banking is bright for both project developers and nature, with increased private investment in the establishment of mitigation banks and ecosystem research, as well as reducing regulatory regulations.

Related Posts On The SimTrade Blog

Useful Resources

Ecological Restoration Business Association (ERBA)

USACE (Army Corps of Engineers)

USEPA (United States Environmental Protection Agency)

USFWS (Fish and Wildlife Service)

NMFS (National Marine Fisheries Service)

About The Author

The article was written in August 2024 by Anant JAIN (ESSEC Business School, Master in Management, 2019-2022).

Mission Statement

In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) talks about Mission Statement.

Introduction

A mission statement explains an organization’s purpose of existence. A mission statement defines the organization’s values, ethics, culture, goals, and agenda. It describes the rationale for its existence, specifies its overall goals, and identifies the operational goals (including the product and/or service to deliver, its key clients or market, and the geographical region of operations) in basic and brief terms. A mission statement would be unique and distinct for every organization because every organization is different in terms of history, business, operations, vision, etc.

For example, the mission statement for United Airlines is as follows: “Connecting people. Uniting the world.”

In addition to this, a mission statement also entails how each and every component is applicable to the distinct and various stakeholders of an organization including its employees, customers, suppliers, investors, and society at large. Therefore, it can be used by various stakeholders to assess if an organization’s values and goals align with their own or not.

For example, Nike’s mission statement includes various stakeholder presented ahead: “To expand human potential by creating groundbreaking sport innovations, by making our products more sustainably, by building a creative and diverse global team and by making a positive impact in communities where we live and work.”

A mission statement is an action-oriented declaration of an organization’s purpose to its target audience. A broad explanation of the organization, its role, and its goals is frequently included. As an organization expands, its aims and goals may be met, and they may alter as a result. When a result, as prior goals are fulfilled, mission statements should be amended as appropriate to reflect the organization’s new culture.

A commercial mission statement, according to Chris Bart, professor of strategy and governance at McMaster University, consists of three fundamental components:

• Key market: the target market for the organization
• Contribution: the product or service that has been provided
• Distinction: what distinguishes the product or why should the audience choose it over another

However, Bart (2006) estimates that only around 10 percent of mission statements are useful in practice. As a result, they are commonly viewed with contempt.

Examples Of Mission Statements

Please find below a list of mission statement for some of the most famous companies which I personally found to be concrete & impactful:

• IKEA: To create a better everyday life for the many people.
• Nordstrom: To give customers the most compelling shopping experience possible.
• JetBlue: To inspire humanity – both in the air and on the ground.
• Workday: To put people at the center of enterprise software.
• Tesla: To accelerate the world’s transition to sustainable energy.
• TED: Spread ideas.
• Chipotle: To provide “food with integrity.”
• Walmart: We save people money so they can live better.
• Starbucks: To inspire and nurture the human spirit—one person, one cup, and one neighborhood at a time.
• JP Morgan: To be the best financial services company in the world.
• ESSEC Business School: The mission of ESSEC Business School, a world school with French roots, is to infuse leadership with meaning in order to prepare leaders ready to address contemporary economic, environmental and social challenges. In order to do so, it produces innovative and relevant knowledge to equip the next generation of leaders with the skills, know-how and savoir-être that will make them truly responsible, inclusive and respectful of the environment. Convinced that knowledge provides a path to freedom – Per scientiam ad libertatem – ESSEC inculcates in its students critical thinking and creativity skills that prepare them to anticipate and address the challenges of an increasingly uncertain world. ESSEC supports students in making their actions both meaningful and impactful by relying on both technology and people. It also seeks to enlighten the actions of businesses and organizations in a world transformed by the new industrial revolution, the environmental crisis, a new world balance and other major societal changes.

Purpose Of A Mission Statement

Although the concept of an organization’s purpose may extend beyond that of a mission statement, the primary objective of a commercial mission statement is to define an organization’s core aim/agenda, and it outlines the same in simple words. Businesses use mission statements to communicate not just to themselves and their employees, but also to consumers and other stakeholders. An organization’s mission statement will change as it grows. This is to guarantee that the business stays on course and that the mission statement does not lose its luster and become uninteresting or stale.

Because all strategies are formed and executed with a strong objective as the foundation, being able to construct an impactful statement is the first step to commercial success. The mission statement directs the management team in developing strategies that enable the organization to reinforce its identity and achieve its objectives. It is necessary for:

• Employee motivation
• Customer inspiration
• Strategic planning
• Establishment of values
• Understanding why an organization operates

Advantages Of A Mission Statement

The following are some of the benefits of a mission statement:

Provides guidance and direction

Mission statement contributes to the organization’s ability to make better decisions, which can benefit them. Organizations may struggle to make decisions and prepare for the future if they don’t have a mission statement to guide them. This is why one of the most useful aspects of a goal statement is offering guidance.

Clear And Well-Defined Goal/Purpose

Having a defined mission might help to eliminate any potential uncertainties about an organization’s existence. People who are interested in the organization’s success, such as stakeholders, will want to know that the organization is making the correct decisions and moving closer to its objectives, which will assist to dispel any doubts the stakeholders may have.

A mission statement may be used as a motivator inside an organization, allowing employees to work together toward a common objective that benefits both the organization and the employees. Employee’s happiness and productivity may both benefit from this. It’s critical for employees to have a feeling of purpose. Giving them a feeling of purpose will allow them to concentrate more on their everyday activities while also assisting them in realizing the organizations and their own goals.

Disadvantages And Flaws Of Mission Statements

Even though a mission statement is generally useful to an organization, it does have a few drawbacks, which are listed below:

Unrealistic

Mission statements are frequently found to be unrealistic and too optimistic. A mission statement that is unrealistic can have a negative impact on staff performance and morale. Because an unachievable purpose statement reduces the possibility that employees will be able to reach this objective, it may demotivate employees in the long run. Unrealistic mission statements likewise serve no value and are a waste of effort for management. Another issue that might result from an unachievable mission statement is that in order to attain this objective, incorrect judgments may be made, which could hurt the organization.

Waste Of Resources And Time

Mission statements need planning. For individuals in charge of writing the mission statement, this requires time and effort. It may be result in ineffective use of tuime and resources. If the mission statement is not accomplished, the process of developing it might be viewed as a waste of time by all parties concerned. A strong mission statement may take a lot of effort and work to create, and organizations cannot afford to waste any of that time. The time may have been better spent on other vital responsibilities inside the organization, such as decision-making.

Mission Statement VS Vision Statement

An organization’s mission statement explains what it aims to accomplish, who it wants to help, and why it wants to support them. A vision statement, on the other hand, defines where the organization wants a community or the world to be as a result of its services. As a result, a mission statement serves as a road map for the organization’s goal.

A mission statement states what a brand or organization intends to accomplish. This informs the public about the product and service it offers, as well as who it serves and why it does so. A brand’s vision statement is a declaration that looks to the future and expresses what it aims to accomplish through its mission statement. This is more conceptual, since it shows what the brand may become in the eyes of the consumer, as well as the value it will provide in the long run.

To sum it up, the following are the fundamental distinctions between a mission and a vision statement:

• Mission statements define an organization’s present mission. A mission statement frequently includes information about the organization’s role, target audience, and significant offers.
• Vision statements are a glimpse into an organization’s future or a declaration of the organization’s overarching vision. A vision statement can have the same aspects as a mission statement; however, it will be expressed in the future tense.

Related Posts On The SimTrade Blog

▶ Anant JAIN Analysis Of “The Social Responsibility Of Business Is To Create Value For Stakeholders” Article By Freeman And Elms

▶ Anant JAIN Stakeholder

▶ Anant JAIN Shareholder

▶ Anant JAIN Writing A Mission Statement

Useful resources

Christpher K. Bart (2006) Sex, Lies and Mission Statements

About The Author

The article was written in August 2024 by Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).

Writing A Mission Statement

In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) talks about how to write a mission statement.

Introduction

A mission statement explains an organization’s purpose of existence. A mission statement defines the organization’s values, ethics, culture, goals, and agenda. It describes the rationale for its existence, specifies its overall goals, and identifies the operational goals (including the product and/or service to deliver, its key clients or market, and the geographical region of operations) in basic and brief terms. A mission statement would be unique and distinct for every organization because every organization is different in terms of history, business, operations, vision, etc.

In addition to this, a mission statement also entails how each and every component is applicable to the distinct and various stakeholders of an organization including its employees, customers, suppliers, investors, and society at large. Therefore, it can be used by various stakeholders to assess if an organization’s values and goals align with their own or not.

For example, United Airlines: “Connecting people. Uniting the world.”

A commercial mission statement, according to Chris Bart, professor of strategy and governance at McMaster University, consists of three fundamental components:

• Key market: the target market for the organization
• Contribution: the product or service that has been provided
• Distinction: what distinguishes the product or why should the audience choose it over another

Drafting A Mission Statement

While it may be tough to condense your organization’s emphasis into a single sentence, here are some pointers to help you draft an effective mission statement.

1. First, start by describing what the organization does. This may be a product you create or a service it offers to your customers—whatever it is that keeps the organization running.

2. Secondly, outline how the organization accomplishes its goals. Instead of becoming technical, consider what values are at the heart of the organization. Perhaps it places a premium on quality, customer service, or sustainability, or it encourage creativity and innovation. In its mission statement, it should include these crucial aspects.

3. Finally, in a mission statement, explain “why it does what it does”. This is crucial. It allows it to stand out as an organization by emphasizing what makes it unique in its field. Keep the mission statement succinct and to-the-point.

Remember to go over it, modify it, and have someone else look it over when you’ve finished it. It will need to find a method to include it anywhere you can after you’ve authorized it, such as on your website or in your marketing campaigns—anywhere that key stakeholders will see it.

As a result, an organization should undertake the following in order to produce a succinct and crisp mission statement:

• Describe the product or service that an organization provides.
• Find out what the organization’s essential values are.
• Make a connection between how your organization’s offering and your ideals.
• Combine these statements into a single statement.
• Make sure it is succinct, straightforward, and devoid of fluff.

4. Be inspiring. After drafting the mission statement, one should review each and every word again and question if every word has a meaning associated to the statement or not. Additionally, one should read the mission statement to check if it inspires to spring into action.

5. Use It. You should not spend time on the mission statement if it will not be utilized from your end and will end up becoming just a poster for the hanger wall. On the contrary, your mission statement must become a strong point of reference to analyze any possible future projects and analyze if they align with actualizing the vision.

Related Posts On The SimTrade Blog

▶ Anant JAIN Analysis Of “The Social Responsibility Of Business Is To Create Value For Stakeholders” Article By Freeman And Elms

▶ Anant JAIN Stakeholder

▶ Anant JAIN Shareholder

▶ Anant JAIN Mission Statement

Useful Resources

Christpher K. Bart (2006) Sex, Lies and Mission Statements

About The Author

The article was written in August 2024 by Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).

Stakeholder

In this article, Anant JAIN (ESSEC Business School, Master in Management, 2019-2022) explains the term “Stakeholder” used in management.

Introduction

As defined in a 1963 internal memorandum at the Stanford Research Institute, “In a company, a stakeholder is a member of groups without whose support the organization would cease to exist”. Edward Freeman later refined and promoted the idea of stakeholder in the 1980s.

In other words, a stakeholder is a person, a group, or an organization who is affected by a company, project, or business venture’s outcome. A stakeholder has an interest in a firm and can influence or be influenced by it.

Stakeholders are crucial because their decisions can have a favorable or negative impact on the project. Diverse stakeholders have different interests, and firms frequently have to make trade-offs in order to please every type of stakeholder.

Investors, employees, customers, and suppliers are the major stakeholders of a typical company. However, with the rise of corporate social responsibility, the notion of stakeholder has been expanded to encompass communities, governments, and trade groups.

Types Of Stakeholders

Stakeholders can be classified on the basis of their engagement and involvement with a company and its business. They can be classified as internal stakeholders and external stakeholders.

Internal Stakeholders

Internal stakeholders, also known as Primary stakeholders, are those who are engaged in economic and financial transactions with the company. Internal stakeholders are those who have a direct interest in the company via employment, ownership, or investment. Employees, owners, the board of directors, project managers, investors, and suppliers are just a few examples.

External Stakeholders

External stakeholders are those who are not engaged in direct economic or financial return with the company and are indirectly impacted by the company and its business activities. They do not actively work for a firm, but they are influenced by its activities and its’ consequences in some way. The government, the environment, society, communities, the general public, and the media are just a few examples.

List Of Stakeholders

As previously stated, there are several categories of stakeholders. There are internal and external stakeholders, and every stakeholder falls under either of these categories. Every type of stakeholder group is unique and their expectations are different. Therefore, some stakeholders will be simpler to handle than others. Please find a list of the most frequent stakeholders, as well as their specific needs and participation with a company, below:

• Customers

  Stake: Product/service quality and value
  Type of stakeholder: Internal
  These stakeholders desire the project’s product or service, and they want it to be of high quality and provide value for them. For instance, a customer staying at a hotel would expect his or her stay to be convenient and relaxing.

• Employees

  Stake: Employment income and safety
  Type of stakeholder: Internal
  Employees have a direct investment in the company since they earn a living wage and receive additional perks (both financial and non-monetary). Employees may also have health and safety interest, depending on the nature of the company. This is particularly true for companies in the transportation, mining, oil & gas, and construction sector.

• Investors

  Stake: Financial returns
  Type of stakeholder: Internal
  Shareholders and debtholders are both types of investors. Investors contribute money into the company with the expectation of getting a particular return on their investment. The idea of shareholder value is often a source of priority for investors. All shareholders are stakeholders by definition, however, the reverse is not true.

• Suppliers & Vendors

  Stake: Revenues and safety
  Type of stakeholder: External
  Suppliers and vendors offer goods and/or services to a company and rely on it for ongoing revenue and profits. Suppliers’ health and safety are at risk in many sectors, as they may be directly involved in the company’s activities.

• Communities

  Stake: Health, safety, economic development
  Type of stakeholder: External
  Communities have an important role in the success of significant companies that are based there. Employment opportunity, economic development, health, and safety are all factors that have an influence on them. When a large company moves into or out of a small town, it has an immediate and considerable influence on employment, income, and expenditure.

• Governments

  Stake: Taxes and GDP
  Type of stakeholder: External
  Governments may also be considered a big shareholder in a company since they collect taxes from the company (corporate income taxes), all the people it employs (payroll taxes), and other expenses the company incurs (sales taxes). Furthermore, companies contribute to the total Gross Domestic Product (GDP), which benefits the governments and as a result, the economy as well.

• Problems With Stakeholders

  Stakeholders are critical for several reasons. Internal stakeholders are crucial since the company’s operations rely on their ability to collaborate to achieve the company’s objectives. External stakeholders, on the other hand, might have an indirect impact on the company. Customers, for example, can alter their purchasing patterns, suppliers can alter their production and distribution processes, and governments can alter their laws and regulations.

  The various stakeholder interests may not align, which is a significant difficulty for companies with many stakeholders. In actuality, the interests of different stakeholders might be completely poles apart from each other. For example, from the perspective of its shareholders, a company’s principal purpose is to maximize earnings and increase shareholder value. Because labor expenses are inescapable for most businesses, a company may try to reduce them as low as possible as therefore, affecting its credibility with its employees. Ultimately, maintaining internal and external stakeholder relationships and their expectations is critical for a company’s long-term success.

  Stakeholders VS Shareholders

  Shareholders and stakeholders are not the same thing. A stakeholder might be affected by or invested in the project. A stakeholder can be a shareholder. However, stakeholders can also be employees, bondholders, consumers, suppliers, and vendors.

  A shareholder can be a stakeholder. A stakeholder is someone who has interest in a company and may affect or be affected by the company’s actions. A shareholder, on the other hand, is someone who has made a financial investment in a company. Because shareholders are also stakeholders, that company may begin initiatives in which the shareholder is also a stakeholder. However, stakeholders are not always shareholders. Because a shareholder buys stock in a public company, he or she owns a part of the company and therefore is concerned with the performance of the stock. On the other hand, a stakeholder has an interest in the company’s overall performance and not just the stock performance and financial returns.

  Shareholders are an essential form of stakeholder, but they are far from the only ones. Employees, consumers, suppliers, governments, and the general public are examples of other stakeholders. In recent years, there has been a movement toward thinking about who makes up a company’s stakeholders in a broader sense.

  Related Posts On The SimTrade Blog

  ▶ Anant JAIN Analysis Of “The Social Responsibility Of Business Is To Create Value For Stakeholders” Article By Freeman And Elms

  ▶ Anant JAIN Shareholder

  ▶ Anant JAIN Mission Statement

  ▶ Anant JAIN Writing A Mission Statement

  Useful Resources

  Freeman E., H. Elms, 2018, The Social Responsibility of Business Is to Create Value for Stakeholders, MIT Sloan Management Review, 17/12/2020.

  Jack Welch (2009) Welch condemns share price focus Financial Times.

  About the author

  The article was written in August 2024 by Anant JAIN (ESSEC Business School, Master in Management, 2019-2022).

Shareholder

In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) defines the term “Shareholders”.

Introduction

A shareholder, also known as a stockholder, is a person, company, institution, or any other legal entity that holds stock in a company and is registered as the legal owner of shares of a public or private company’s share capital. To be a partial owner of a company’s stock or mutual fund, a shareholder must hold at least one share. A person or legal entity becomes a shareholder in a company once its name and other details are registered in the company’s register of shareholders or members.

The ownership percentage held determines a shareholder’s influence on the company. A company’s shareholders are legally distinct from the company itself. They are normally not accountable for the company’s obligations, and their liability for business debts is restricted to the paid share price unless a shareholder has been offered guarantees. Since shareholders are technically the owner of the company, they benefit from the success, growth and profitability of a company. These benefits take the shape of higher stock prices and/or dividends. When a company loses money, the share price lowers, which can result in shareholders losing money or seeing their portfolios suffer losses.

Shareholders may have purchased their shares in the primary market by subscribing to initial public offerings (IPOs), and thereby given money to the company. Most shareholders, on the other hand, buy shares in the secondary market and do not contribute to the capital of the company directly. Depending on the share class, shareholders may be offered unique privileges.

Shareholders purchase stock in a firm with the goal of profiting from dividend payments or an increase in the market price of the stock. They may also purchase stock in order to take control of a company.

Shareholders have specific rights, including the ability to vote on certain company affairs, vote for the Board of Directors or be elected to a seat on the Board of Directors, receive dividends from the company, and receive its annual financial statements. A company’s board of directors supervises a company in general for the interest of its stockholders (fiduciary duty).

If the company is dissolved and its assets are sold, the shareholder may be entitled to a percentage of the proceeds (in proportion to the shares held by him or her), assuming all creditors have been paid. When this situation arises, a shareholder does have the obligation to bear the company’s debts and financial commitments, which means creditors cannot force stockholders to pay them.

A majority shareholder is a single shareholder who owns and controls more than 50% of a company’s outstanding shares. Minority shareholders, on the other hand, are individuals who own less than 50% of a corporation’s equity.

Typically, majority shareholders are the founders of companies, while majority shareholders in older companies are frequently descendants of company’s founders. In any scenario, majority shareholders hold more than 50% of the voting rights and as a result, wield enormous authority over important operational decisions, including the replacement of board members and the appopointments of C-level executives such as the chief executive officers (CEO) and other senior employees. Consequently, companies frequently strive to not have any majority shareholder amongst their ranks.

Types Of Shareholders

There are different types of share holders. They can be categorized on the basis of the kind of shares owned, the % of shared owned and ownership’s representation.

On The Basis Of The Kind Of Shares Owned

Common Shareholder

Those who own a company’s common shares (or regular shares) are called common shareholders. This is the most typical shareholding structure. They are the most common form of stockholder, and they have the ability to vote on company’s affairs. They have the right to participate in general meetings of the corporation, in the election of directors, and they can initiate class action lawsuits, when necessary, because they have authority over the governance of the company.

Preferred Shareholder

Preferred shareholders possess a share of the company’s preferred shares/stocks rather than regular shares. They have no voting rights or influence over how the company is operated. They are instead entitled to a predetermined yearly dividend, which will precede the payout before dividends are distributed among the common shareholders.

Therefore, while both common stock and preferred stock appreciate in value as the firm performs well, it is the former that enjoys greater capital gains or losses.

On The Basis Of The Percentage Of Shares Owned

Majority Shareholder

A majority shareholder is someone who actually owns more than 50 percent of a company’s stock. Company’s founders or their successors are typically this type of shareholder.

Minority Shareholder

Minority shareholders own less than 50% of a company’s shares, often as little as one share.

On The Basis Of Ownership’s Representation

Beneficial Shareholder

A person or legal entity that receives financial and economic benefit of ownership of the shares are called Beneficial Shareholders.

Nominee Shareholder

A nominee shareholder is a person or legal entity mentioned as the owner on the company’s register of members, but who, whether disclosed or not, operates for the benefit or at the direction of the beneficial shareholders.

The Rights Of Shareholders

Shareholders may have the following rights, subject to relevant legislation, corporate rules, and any shareholders’ agreement:

• The right to see and inspect the books and records of the company
• To file a lawsuit against the company for breach of fiduciary responsibility
• To nominate directors (though minority safeguards make this difficult in practice) and suggest shareholder resolutions
• To vote on the board of directors’ nominees for directors
• To vote on mergers and corporate charter alterations
• To receive dividends (in the case that they are announced)
• To participate in yearly meetings in person or via teleconferences
• To vote on important matters by proxy (if they are unable to attend voting meetings in person) either through mail-in ballots or digital voting platforms
• To liquidate or sell the shares owned by them
• To acquire the company’s newly issued shares
• To vote on shareholder resolutions and to file them
• To vote on proposed management styles

The rights described above can be divided into two categories: (1) cash-flow rights and (2) voting rights. While the cash-flow rights that come with shares, determine their value, voting rights may be significant as well.

Calculation Of The Value Of Cash-Flow Rights

Discounting future free cash flows can be used to calculate the value of shareholders’ cash-flow rights.

Calculation Of The Value Of Voting Rights

There are four ways to calculate the worth of a shareholder’s voting rights:

• The distinction between voting and non-voting stock (dual-class approach)
• The difference between the price paid in a block-trade transaction and the price paid in a subsequent exchange transaction (block-trade approach)
• The implied voting value obtained from option prices
• The excess lending fee over voting events

Role Of A Shareholder

Being a shareholder entails more than simply getting profits; it also entails certain duties. They are as follows:

• Deciding about and determining what powers they will be provided to the company’s directors, such as electing and dismissing them from the position.
• Setting a compensation for the directors. Shareholders must ensure that the sum given will cover the director’s cost of living in the city where he or she lives without jeopardizing the company’s finances.
• Making decisions on matters over which the board of directors has no authority, such as modifications to the company’s constitution.
• Examining the company’s financial accounts and approving them.

Shareholder VS Stakeholder

Many individuals mistakenly believe that shareholder and stakeholder are the same term. The terms, however, do not have the same meaning. A shareholder is a company’s owner based on the number of shares they possess. A stakeholder, unlike a shareholder, does not own a share of the company and yet is invested in its performance which may or may not be monetary in nature.

For example, a hotel chain in the United States has multiple stakeholders, including its employees, who rely on the company for their livelihood. Because of the taxes the company must pay each year, its stakeholders also include local and national governments.

Shareholder VS Subscriber

A company begins as a private limited company that is governed, founded, and structured by a group of people known as “subscribers” until becoming public. The subscribers are the company’s founding members, as their names appear in the memorandum of association. Their names are written in the public register after the firm goes public, and they remain there even if they leave the company.

Related Posts On The SimTrade Blog

▶ Anant JAIN Analysis Of “The Social Responsibility Of Business Is To Create Value For Stakeholders” Article By Freeman And Elms

▶ Anant JAIN Stakeholder

▶ Anant JAIN Mission Statement

▶ Anant JAIN Writing A Mission Statement

Useful Resources

Freeman E., H. Elms, 2018, The Social Responsibility of Business Is to Create Value for Stakeholders, MIT Sloan Management Review, 17/12/2020.

Jack Welch (2009) Welch condemns share price focus Financial Times.

About The Author

The article was written in August 2024 by Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).

Key Expressions In The Article “The Social Responsibility Of Business Is To Create Value For Stakeholders” By Edward Freeman And Heather Elms

In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) defines the key expressions used in the article “The Social Responsibility of Business Is to Create Value for Stakeholders” written by Edward Freeman and Heather Elms in 2018.

Summary Of The Article

In the article “The Social Responsibility of Business Is to Create Value for Stakeholders”, Edward Freeman and Heather Elms (2018) argue against the statement made by Milton Friedman in a famous article published in The New York Times in 1970 that “The Social Responsibility of Business Is to Increase Its Profits”. Friedman’s view corresponds to the traditional “Shareholder Approach”. Freeman and Elms state that businesses need to create value for all stakeholders (not only shareholders but also employees, customers, suppliers, communities, governments, etc.) if they want to be successful in the 21st century leading to the introduction of a new story: the “Stakeholder Approach”.

Key Expressions

We explain below key expressions to fully understand the article by Freeman and Elms: shareholders, stakeholders, corporate social responsibility, and mission statement.

Shareholders

A shareholder (also called stockholder) is a person, company, or institution that owns at least one share of a company’s stock called equity. The shareholders essentially own the company and therefore, reap the benefits of a business’s success. These benefits received may be in the form of the increase in the stock valuation or profits received as dividends. However, when a company incur losses, shareholders also incur them in the form of a decrease in the stock price or a decrease or absence in the dividends.

Stakeholders

Stakeholders are a group / party that are involved with a company and affect and/or are affected by the company’s action, either directly or indirectly. The main stakeholders for a typical company would include employees, customers, suppliers, and investors like shareholders and creditors. However, as corporate social responsibility has gained traction, the notion has been expanded to encompass communities, trade groups (trade unions and chambers of commerce for example), and governments.

Stakeholders can be of two different types: internal or external. Internal stakeholders are a group / party which are directly involved with a company and its business activities such as employees and investors. External stakeholders are a group / party which are indirectly affected by the company and its business activities and outcomes such as customers, suppliers, communities, and governments, and more broadly the environment and society.

Corporate Social Responsibility

Corporate Social Responsibility (CSR) is a type of self-regulatory business model that enables a company to be socially responsible towards itself, its stakeholders, the public and the environment. Companies can be aware of their impact on all aspects of society, including economic, social, and environmental, by practicing corporate social responsibility. Corporate social responsibility is a broad concept that varies depending on the company and industry. Businesses can benefit society while boosting their brands through CSR programs, corporate philanthropy, and volunteer efforts.

CSR is important for the communities, but it is also important for businesses themselves. Companies and its employees can indulge in CSR activities, that can help to form stronger bonds between the company and its employees. As a result, it can boost morale and make both employees and employers feel more connected to each other and the world around them.

Mission Statement

A mission statement explains company’s purpose of existence. A mission statement defines the company’s values, ethics, culture, goals, and agenda. In addition to this, a mission statement also entails how each and every component of a mission statement is applicable to the distinction stakeholders of a company including its employees, customers, suppliers, investors, and society at large.

A mission statement includes “What, How & Why” for a company i.e., what a company does, how it does it, and why it does it. It can be used by various stakeholders to assess if a company’s values and goals align with their own or not.

A mission statement would be unique and distinct for every company. A few examples of mission statement by popular companies are mentioned below:

• Tesla: To accelerate the world’s transition to sustainable energy.
• JP Morgan: To be the best financial services company in the world.
• Starbucks: To inspire and nurture the human spirit—one person, one cup, and one neighbourhood at a time.
• Nike: To expand human potential by creating ground-breaking sport innovations, by making our products more sustainably, by building a creative and diverse global team and by making a positive impact in communities where we live and work.

Related Posts On The SimTrade Blog

▶ Anant JAIN Analysis Of “The Social Responsibility Of Business Is To Create Value For Stakeholders” Article By Freeman And Elms

▶ Anant JAIN Stakeholder

▶ Anant JAIN Shareholder

▶ Anant JAIN Mission Statement

▶ Anant JAIN Writing A Mission Statement

Useful Resources

Freeman E., H. Elms, 2018, The Social Responsibility of Business Is to Create Value for Stakeholders, MIT Sloan Management Review, 17/12/2020.

Jack Welch (2009) Welch condemns share price focus Financial Times.

About The Author

The article was written in August 2024 by Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).

Analysis Of “The Social Responsibility Of Business Is To Create Value For Stakeholders” Article By Freeman And Elms

In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) analyzes the article “The Social Responsibility of Business Is to Create Value for Stakeholders” written by Edward Freeman and Heather Elms in 2018.

Edward Freeman is a strategy, ethics, and entrepreneurship professor at the University of Virginia’s Darden School of Business. Heather Elms is an associate professor of international business at American University’s Kogod School of Business in Washington, D.C.

Summary

In the article “The Social Responsibility of Business Is to Create Value for Stakeholders”, Freeman and Elms (2018) argue against the statement made by Milton Friedman in a famous article published in The New York Times in 1970 that “The Social Responsibility of Business Is to Increase Its Profits”. Friedman’s view corresponds to the traditional “Shareholder Approach”. Freeman and Elms state that businesses need to create value for all stakeholders (not only shareholders but also employees, customers, suppliers, communities, governments, etc.) if they want to be successful in the 21st century. This leads to the introduction of a new story: the “Stakeholder Approach”.

Reasons For A New Approach

Freeman and Elms explain the reasons for the need of a new story which are as follows:

• They state that the Great Recession of the late 2000s made it abundantly clear the shareholder approach is no longer appropriate or applicable in today’s world. They explain it using the examples of companies (the investment bank Lehman Brothers and the automotive company General Motor) that got bankrupt/shutdown because they did not realize the need to switch from the shareholder approach to another approach.
• They further refer to the former CEO of General Electric, Jack Welch, who stated in the Financial Times in 2009 that “Shareholder value is a result, not a strategy. Your main constituencies are your employees, your customers, and your products”.

Therefore, this new story, the Stakeholder Approach, spotlights stakeholders and not only shareholders.

• In other words, stakeholders are interrelated and therefore interdependent on each other. Hence, the agenda for a business should be to create as much value as possible for all the stakeholders, which also includes creating profits for shareholders but is not limited to them.
• Freeman and Elms state that “the winning business models of the 21st century figure out how to get these interests going in the same direction, with as few trade-offs as possible”. In other words, they mean that it is impossible to trade a stakeholders’ interest for another’s because someone else will figure out a way to do the same business without that trade-off. For example, Amazon, Genentech, Apple, and Google are all “high purpose stakeholder-oriented companies” i.e., they are focused on value creation for multiple stakeholders without compromising on any stakeholder.
• Freeman and Elms state that worldwide, there are legal flexibility provided to companies to balance their stakeholders (including shareholders) in the interest of the business. In another sense, management’s role is to define, create and balance relationships with various stakeholders.

Freeman and Elms mention that businesses are driven to increase their demand (from customers).

• However, “there are some activities in which business should not engage” to drive their demand. They explain the same using the example of business providing products at cheaper prices to the customers to drive their demand but at the cost of deprivation of value for their employees. In other words, the trade-off between stakeholders should not be opted for.
• As a result, business will lead to the demand for new technological innovation. In a similar way, “business drives demand for responsible capitalism by offering responsible options for all its stakeholders”.
• In addition to this, Freeman and Elms also mention that responsible capitalism is based on responsible behavior from stakeholders as well and not just the business. For example, customers should purchase responsible products, employees should choose to work for responsible employers, etc.

Freeman and Elms state that “business can be a part of solution to societal problems, rather than the cause”.

• • They use the example of Tesla, Renewable Energy, IBM and smart cities, and start-ups like Milk Stork (that provide an option for mothers who travel for business to get breast milk home to the children).
  • Freeman and Elms use this to explain to us the stakeholder approach and how the future of business and capitalism is related. They state that “capitalism is the greatest system of social cooperation that we have yet invented”. This is because it enables free people to cooperate and collaborate together and create value for one another in a way that no individual can do on their own.

To conclude, in their article, Freeman and Elms state and mention repetitively the need for existing and new companies (and their managers) to aspire to be a kind of business that creates value for all stakeholders without compromising on the value of one stakeholder to make some other stakeholders better off, to corporate and create value for one another.

Why Should I Be Interested In This Post?

This article should be read by management students or students from any other field to understand the importance of different stakeholders and how each stakeholder may be linked to one another. It will help them in the future when choosing an organization, either creating one from scratch or working as an employee for an organization, to align with the values of the organization and any stakeholder which may be important to them as well. This article can also we read by people currently employed or self-employed. It will help them to refresh their memories about the stakeholder approach and recheck if the current organization they are a part of align with their personal values or not. In general, this article will be helpful for anyone to briefly understand the stakeholder approach and how the importance of the stakeholder approach diverted from the shareholder approach and how useful and impactful it can be in today’s world.

Related Posts On The SimTrade Blog

   ▶ Anant JAIN Key Expressions In The Article “The Social Responsibility Of Business Is To Create Value For Stakeholders” By Edward Freeman And Heather Elms

   ▶ Anant JAIN Stakeholder

   ▶ Anant JAIN Shareholder

   ▶ Anant JAIN Mission Statement

   ▶ Anant JAIN Writing A Mission Statement

Useful Resources

Freeman E., H. Elms, 2018, The Social Responsibility of Business Is to Create Value for Stakeholders, MIT Sloan Management Review, 17/12/2020.

Jack Welch (2009) Welch condemns share price focus Financial Times.

About The Author

The article was written in August 2024 by Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).

Acid-Test Ratio

In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) explains how the Acid-Test Ratio can be used to assess the liquidity of company.

Introduction

The Acid-Test Ratio, also called the quick ratio or the acid ratio, is a liquidity ratio that determines if a company’s short-term assets are adequate to pay its short-term liabilities. Short-term liabilities can be debts (like bank debts) and commitments (like salaries). In other words, the acid-test ratio is a measure of a company’s ability to meet its financial obligations in the short term. There is a considerable danger of default if this is not accomplished.

Creditors regularly use the Acid-Test Ratio to assess their customers and borrowers, respectively. It may also be used by shareholders to determine if a company has enough cash to pay a dividend to its shareholders.

Calculation Of Acid-Test Ratio

To get a company’s acid test ratio, sum up all of its liquid assets, such as cash and cash equivalents along with its short-term investments such as marketable securities, as well as accounts receivable, and divide by the entire amount of current liabilities. On a company’s balance sheet, all of this information is listed as separate line items. On the balance sheet, the current liabilities amount is shown as a subtotal.

The acid-test ratio is calculated as follows:

Where,

• Cash and cash equivalents: company’s most liquid current assets, such as savings accounts, term deposits, and T-bills
• Marketable securities: liquid financial instruments (like money market mutual funds) that may be easily turned into cash
• Accounts receivables: funds owed to the company as a result of selling in credit products and/or services to customers
• Current liabilities: debts and commitments that are due in the next 12 months:

Another method to calculate the numerator is to add up all current assets and exclude illiquid assets, such as inventory. As a result, the acid-test ratio formula can also be represented as follows:

Where,

• Current assets: assets that can be turned into cash in a year’s time
• Inventory: value of goods and materials that a firm holds in order to sell to consumers
• Current liabilities: debts and commitments that are due in the next 12 months

The argument behind this is that inventory is typically sluggish moving and hence difficult to convert into cash. Furthermore, if it needed to be turned into cash fast, it would most likely be sold at a significant discount to the balance sheet carrying cost. Other assets on a balance sheet, including advances to suppliers, prepayments, and deferred tax assets, etc., should be deducted if they cannot be utilized to fulfil liabilities in the short term.

Current Ratio VS Acid Test Ratio

Both the current ratio (also known as the working capital ratio) and the acid-test ratio calculates the capacity of a company to earn enough cash in the short term to pay off all of its current liabilities if they all came due at the same time. However, there are a few differences between both the ratios which are as follows:

• The acid-test ratio, on the other hand, is regarded more cautious than the current ratio because it excludes assets like inventories, which might be difficult to liquidate rapidly.
• Another distinguishing feature is that the current ratio considers assets that can be converted to cash in one year whereas the acid-test ratio only considers assets that can be converted to cash in 90 days or fewer.

Understanding Acid-Test Ratio

Analysts favor the acid-test ratio over the current ratio (also known as the working capital ratio) in some cases because the acid-test technique eliminates assets like inventories, which might be difficult to dispose rapidly. As a result, the acid test ratio is a more cautious and conservative measurement.

As a rule, the acid-test ratio should be higher than one such that the short-term assets cover the short-term liabilities. Companies having an acid-test ratio of less than one has insufficient liquid assets to cover their present liabilities and should be avoided. Moreover, if the acid-test ratio is significantly lower than the current ratio, a company’s current assets are heavily reliant on inventories.

This isn’t always a bad indicator, though, because certain company models are fundamentally inventory dependent. For example, retail stores may have extremely low acid-test ratios without being in a dire situation. The best acid-test ratio for a firm is determined by the industry and markets in which it works, the type of the company’s activity, and its overall financial health. For example, a low acid-test ratio is less important for a well-established company with long-term contract income or a company with excellent credit that can readily get short-term financing when needed. Usually, the acid-test ratio should be ideally greater than 1.

A high ratio, on the other hand, isn’t necessarily a positive thing. It might mean that money has accumulated and is sitting idle rather than being re-invested in productive use or returned to shareholders. Some IT corporations (like Apple) produce enormous cash flows, resulting in acid-test ratios much larger than one (up to 7 or 8). While this is definitely preferable than the alternative (an acid-test ratio less than one), activist investors who prefer that shareholders receive a piece of the earnings have criticized these corporations.

Drawbacks Of The Acid-Test Ratio

There are a number of drawbacks and limits and to utilize the acid-test ratio which are as follows:

• The acid-test ratio alone is insufficient to identify the company’s liquidity condition. Other liquidity ratios, such as the current ratio or cash flow ratio, are frequently employed with the acid-test ratio to offer a more full and accurate picture of a company’s liquidity position.
• Inventory is not included in the computation since it is not typically considered a liquid asset. Some firms, on the other hand, are able to sell their goods promptly and at a reasonable market price. In certain situations, the company’s inventory qualifies as an asset that can be turned into cash quickly.
• The ratio does not include information on the timing and magnitude of cash flows, which are crucial in establishing a company’s capacity to meet its commitments on time.
• The acid-test ratio presupposes that accounts receivable are easily and quickly collectible, although this isn’t always the case (due to delay of payments and bankruptcy of customers).

Conclusion

Acid-test ratio, also known as the quick ratio (as funds have to be quickly available on the assets side), determines whether a company has or can get sufficient cash to pay off its immediate liabilities, such as short-term debt. The acid-test ratio should be more than one. If it’s less than one, a company’s liquid assets are insufficient to cover its present liabilities, and it should be avoided. If the current ratio is significantly higher than the acid-test ratio, then it implies that a company’s current assets are heavily reliant on its inventory. A high acid-test ratio, on the other hand, may imply that cash has accumulated and is not being reinvested in productive use or returned to shareholders.

As a result, the ratio is most beneficial in scenarios where some assets, such as inventories, have fluctuating and uncertain liquidity. These goods may take a long time to convert to cash, thus they should not be compared to current liabilities. As a result, the ratio is frequently used to assess companies in industries that rely heavily on inventory, such as retail and manufacturing. It is less useful in service-based companies with substantial cash balances, such as Internet companies.

Useful Resources

Related Posts On The SimTrade Blog

About The Author

The article was written in August 2024 by Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).