Vision and Mission, and the paradox between Profitability and Corporate Social Responsibility

The Purpose of Corporations is to meet the needs of stakeholders (Freeman, 2007) and create value (Koller et al, 2010). ‘Stakeholders are individuals or groups that affect or are affected by the achievement of an organization’s objectives’ (Freeman, 2007). Stakeholders can include employees, shareholders, suppliers, government and customers.

Missioning and visioning work together to identify the stakeholders and what the organization will do in order to create value: this is very intentional and it recasts your purpose as the impetus for strategy activities . Regarding Vision vs Mission: This can be personal, professional, or organizational.

Organizations are exposed to change throughout their lifecycle, and a leader needs to be effective at each stage. Nadler and Tushman (1990) cite 4 organizational changes : tuning, re-creation, adaptation and re-orientation. Leaders need to navigate their way through these cycles, and charisma is often cited as a way of making things happen.

leadership-3331244_1920

Mission without vision is a company without management or leadership, essentially.  Vision is conceptual, and it is created by leaders in order to be applied in the organization by managers, so it is translated into goals, objectives and actions within a defined strategy. The strategic vision outlines the desired future at which the company hopes to arrive. The vision is your statement of what you are going to achieve. As Wilkinson puts it, “Having a clear vision enables you to work on your “why power” instead of just your willpower” (Wilkinson, 2014). It is the reason that you do what you do. It is your starting point, and your end goal. It should give you daily focus and long-term focus.

The corporate mission outlines the fundamental principles guiding strategic choices . There is a paradox between profitability and responsibility. According to McKinsey, the objective of the organization is to create long-term value. This means create profit in the longer term. The organization has a responsibility to earn a higher return on the shareholders’ equity than could be realized at a bank. This could be paradoxically related to CSR, ethics and responsibility, which involves acting in the interest of others, even when there is no legal imperative. These two constraints could be paradox, since an action which leads you to drive profit may be at odds with a choice which the organization has made to act ethically.

hand-1915350_1920

The leader can be a person or a pattern of people. Is charismatic leadership enough?Nadler and Tushman (1990) argue that the charismatic leader is not enough to drive, lead and change organizations. They provide examples where charismatic leadership is a good start to getting large scale change off the ground. However, it is not sustainable. Indicators of charisma do not effectively generate good predictors of leadership. The lack of prediction means that it’s not possible to know who will lead and who will fail.

There can also be a disconnect between the individual themselves, and the narrative that is constructed about that individual (Edwards, 2012). As people’s experience of the charismatic leader changes over time, this can introduce the risk of limiting success.

Therefore, the vision and the mission can help find the balance between the profitability and responsibility paradox, when a choice has to be made. This is a role of the leader, to navigate the course.

 

References

Edwards, E.R., 2012. Charisma and the fictions of Black leadership, Minneapolis, Minn.: University of Minnesota Press.

Freeman, R.E., 2007. Managing for Stakeholders. SSRN Electronic Journal. doi:10.2139/ssrn.1186402

Koller, T., Dobbs, R. and Huyett, B., 2010. Value: The four cornerstones of corporate finance. John Wiley & Sons.

Nadler, D.A. and Tushman, M.L., 1990. Beyond the charismatic leader: Leadership and organizational change. California management review, 32(2), pp.77-97.

Wilkinson, P., 2014. Unstoppable: Using the Power of Focus to Take Action and Achieve Your Goals. John Wiley & Sons.

Fintech-Friendly Microsoft team up with Fintech Insider for exciting podcast series

11:FS, from Fintech Insider, is the #1 business podcast for Fintech innovators, influencers, and those eager to learn more about this exciting space. 11:FS announced that Microsoft has become a strategic partner on their Fintech Insider podcasts.

The latest podcast from London is one of my favourites: Deputy Mayor of London, Rajesh Agrawal, to talk about how Brexit is set to affect the city. As a micro business owner, I was particularly interested in how Agrawal plans to encourage entrepreneurship in London As someone with a keen interest in diversity, there is an interesting segment on how the gender diversity needs to be encouraged to maximise the talent available; particularly important after Brexit.

The series is very accessible. Microsoft wants to be an integral part of tackling some of the biggest challenges in financial services and collaborate on topics of interest to the industry audience.

To summarise, I’m glad to see Microsoft are supporting the democratization of data – and Fintech – in this way. I hope you’ll tune in. See you there!

Activity Ratios and their Interpretation

In this series so far, we have covered an overview of the accounting ratios, and we have also looked at Profitability Ratios. We will look through other ratios in future posts, leading up to exploring how we can visualise accounting data in business visualisation.

Screenshot (1)

Activity Ratios are also known as Efficiency Ratios. Essentially, they help to measure the effectiveness of a firm in utilising its assets. There are three main activity ratios:

Stock Turnover Turnover: this ratio answers the question: how effective is the organisation in using its assets to generate sales? It measures the effectiveness of the organisation in generating sales by looking at the margin and turnover. For example, it can show if an organization has an unusually low or high level of fixed assets.

Stockholding Period: This ratio answers the question: how long does the stock remain inside the boundaries of the firm?

Debtor Days (Debtor Collection Period): This ratio answers the question: how long is it until trade debtors pay?

Creditor Days (Creditor Payment Period): This ratio answers the question: how long is it until trade customers pay?

Calculating the Activity Ratios

Stock Turnover is expressed as a number:

Cost of Goods sold/

Average Stock

Stockholding Period is specified in days:

Stock Held /

Stock Used

Debtor Days is specified in days:

Trade Debtors /

Credit Sales

Creditor Days is specified in days:

Trade Creditors /

Credit Purchases

Interpretation of the Ratios

There is a relationship between Return on Net Assets, Net Profit and Net Asset Turnover.  It is useful to look at sales and compare it with the constituents of these ratios. So, if there is a small Net Asset turnover, we can find out if it is made up of fixed or current assets, and this can help us to identify which type of assets makes up the ratio.

Stock turnover can sometimes be used with Sales revenue, but this contains profit which can cause the figure to be misleading.

Summary

As in the case of the other ratios, we cannot just use one number. Next, we will look at Liquidity Ratios in order to understand better how the organization is managing with its working capital.

 

 

 

 

 

 

 

 

Profitability Ratios and their interpretation

Following on from my earlier blog post, discussing Accounting Ratios, let’s take a look at a specific set: Profitability Ratios.Profitability Ratios can be defined as understanding the effectiveness of the company in generating profit. In this blog post, we will concentrate on profitability ratios, working our way around the flow chart presented here:

Screenshot (1)

The formula are presented below, in terms of their meaning:

  • Return on Net Assets (RONA) (Return on Capital employed) – return on the fixed and current assets less current liability. It is also known as the primary ratio.
  • Return on Equity (Return on Shareholders’ Funds) – This also looks at return on the fixed and current assets less current liability, but it looks at it from the Shareholder’s perspective.
  • Gross Profit Margin – percentage of sales revenue remaining after the expense of making the product / solution / delivering the service is taken into account.
  • Net Profit Margin – This is the percentage of sales revenue that’s left, after all of the expenses of running the firm have been fully met.

Let’s have a look at how they are calculated, and what they mean.
money-2696229_1920

Calculating the Profitability Ratios

1.Return on Net Assets (RONA) (Return on Capital employed)

Net Profit before long-term interest and tax /

Total Assets less creditors falling due within one year

This figure is expressed as a percentage, so it is multiplied by 100%. That said, at root, it is fundamentally calculated as follows, expressed as a percentage:

Profit /

Capital

Profit can include one of the following metrics:

  • Operating Profit
  • Net Profit before Interest and Taxation
  • Net profit after taxation
  • Net Profit after taxation
  • Net Profit after taxation and preference dividend

Capital can be measured by one of the following options:

  • Total Assets
  • Total Assets less intangible assets
  • Total Assets less current liabilities
  • Shareholders Funds
  • Shareholders’ Funds less preference shares
  • Shareholders’ Funds plus long-term loans
  • Shareholders’ funds plus total liabilities

What combination do you choose? Basically, the MVP answer holds here: it depends. The definitions depend on what business question you are trying to answer. The RONA definition was chosen here in order to illustrate how it differs from Return on Equity, which is explained below.

2. Return on Equity (Return on Shareholders’ Funds)

Net Profit before long-term interest and tax /

Share Capital and Reserves

This figure is expressed as a percentage, so it is multiplied by 100%.

3. Gross Profit Margin

Gross Profit /

Sales

This figure is expressed as a percentage, so it is multiplied by 100%.

4. Net Profit Margin

Net Profit before long-term interest and tax /

Sales

This figure is expressed as a percentage, so it is multiplied by 100%.

It’s possible to see that these ratios are made of five different things. I’m a visual person so I’m marking these in colour since I will need to remember them for my exam!

  • Gross Profit
  • Net Profit before long-term interest and tax 
  • Sales
  • Share Capital and Reserves
  • Total Assets less creditors falling due within one year

Interpreting the Profitability Ratios

With the Return on Net Assets figure, we are looking at the effectiveness of the assets that are financed by long-term creditors as well as the shareholders, and we are looking at the profit generated as a result of these combined assets. Higher RONA can mean that the company using its assets efficiently. Also an increasing RONA may indicate an emphasis on executing efficiently, as evidenced in improved profitability and overall performance.

The Return on Equity ratio looks at the same issue, but from the perspective of the shareholder only. The long-term creditors are partialled out. Understandably, shareholders want to see a high return on equity ratio, since this would show that the organisation is being effective in its deployment of investors’ funds. Shareholders can also track progress by calculating the return on equity at the beginning of a period and then check it again at the end of a period to see if there is a change in return.

Net Profit Margin shows the sales revenue after all of the expenses have been removed. It should be as large as it can possibly be, as long as it is sustainable. However, this should not be taking place at the expense of another aspect of the business. Be wary of short-term attitude to profit. This is sometimes evidenced in the net profit margin.

Limitations on the Productivity Financial Ratios

Accounting Ratios give us useful insights in the management of a company, but it is not the whole story. The business context, and the company itself, should also be considered. RONA does not calculate a company’s future ability to create value. Additionally, the values on the balance sheet might not represent the replacement cost, therefore masking the reality of asset utilisation.

In the next post, we will look at Activity Ratios and how they are calculated, along with some advantages and limitations. We are leading up towards visualizing these ratios in Power BI, and it’s important to understand the ‘why’ as well as the ‘how’ of visualizing these ratios.

Digital Transformation for the HR Leader

Digital Transformation is a hot topic with CEOs and the C-level suite, renewing their interest in data and what it can do to empower the organisation. As part of the Digital Transformation story, data can help to bring clarity and predictability to the HR leader to make strategic decisions, understand how their customers and employees behave, and measure what really matters to the HR team and the organisation overall.

Digital and today’s HR go hand-in-hand – whether organizations and HR departments like it or not.

HR must step forward and take a leadership role, understanding the reasons for the digital transformation to guide the process forward without adversely affecting workforce morale, engagement and productivity.

Over a few years HR discipline has undergone a rapid evolution. For example, replacement of legacy talent systems with integrated HR platforms, reskilling HR professionals, integrating the organisation, and implementing analytics and digital management practices and agile organisation design become central to business thinking.

A recent survey by Deloitte showed:

· Fifty-six percent of companies are redesigning their HR programs to leverage digital and mobile tools.

· Fifty-one percent of companies are currently in the process of redesigning their organisations for digital business models.

· Thirty-three percent of surveyed HR teams are using some form of artificial intelligence (AI) technology to deliver HR solutions, and 41 percent are actively building mobile apps to deliver HR services.

How HR can manage the challenges of digital transformation?

HR knows change requires flexibility and support for employees. But these are often around things like putting a new policy in place. What can HR do when change is a much bigger beast, as it is with digital transformation?

Digital is the future, whether companies are ready or not.

Shifting gears towards digital business models is something that requires fundamental change to core organisational processes and the way that employees work day-to-day. It’s disruptive, and many European organisations are now facing the challenges digital transformation imposes head on.

A 2017 IDC study titled Future business: Unleashing your talent, presented as a webinar by Cornerstone OnDemand, unveiled how digital transformation is impacting HR, and how HR and line managers view it. The study found that cultural resistance to change was the primary barrier to digital transformation. This was followed – perhaps unsurprisingly – by legacy IT systems and retaining critical talent.

Interestingly, the study also found that high-growth organisations have a higher frequency of interaction between HR and line of business managers, and also better alignment between HR and IT, so it’s crucial HR helps overcome the barriers preventing digital transformation. After all, digital is the future, whether companies are ready or not.

Here’s how HR can work with line of business managers and C-suite executives to deliver change and keep employees engaged.

Communicate and interact

Effective cultural change required frequent and effective communication within your organisation. Be sure to use all the available channels you have to foster this transformation, and do not rely on static means of interaction. Instead, focus on providing opportunities for an open conversation as much as possible.

Ensure buy-in

Engage the leadership team to drive the cultural change in your organisation, ensuring buy-in from the higher echelons within the organisation. Your HR team cannot accomplish this change by itself and will need the support of the C-suite, along with the understanding of all stakeholders across the employee spectrum, in order to be successful with digital transformation.

Map out the journey – and adjust

Research and provide best practices, examples and visible roadmaps for digital transformation that lead to culture shift, while simultaneously ensuring that culture change is being monitored, readjusted, and tracked within your organisation. This will give your organisation a clear idea of how digital transformation can and should play out, and hopefully break down any barriers that are currently in the way.

Engage and retain

Retaining your key talent is pivotal while digital transformation occurs. Design and implement a comprehensive strategy that will keep the highly skilled and valuable talent of the organisation engaged and committed to the long-term vision of your company, and they will help steer the successful digital transformation journey.

Get feedback

Aside from having a plan to retain talent, you need to pay regular attention to the level of satisfaction and the perception of the organisation among employees both internally and externally, ensuring that happiness and pride are common and well founded. Employer branding is critical in the acquisition and retention of talent, and a few bad reviews on Glassdoor about your company can stop you making a great new hire.

Digital transformation will continue to be a top priority among European organisations, and it’s up to HR teams across organisations to be the enablers of change. The IDC and Cornerstone OnDemand study found that the majority of line managers recognise HR as playing a vital role in achieving digital transformation, so it’s more important than ever that HR moves itself to a more business-oriented role in the company, and move away from admin and record-keeping.

Ensure you’re working together with line of business managers and senior decisions makers to communicate, map out a success plan, develop your people, and reassess along the way.

The process of adopting a new digital HR platform can be delicate for many reasons. Selecting the right software for your business requires a great deal of research and analysis. The technical implementation itself is extremely intricate. But the most complex variable of all are your employees; how do they react to HR software changes, especially if they have to adopt new behaviours post-implementation? Your job as an HR professional is not only to ensure that they embrace the changes, but that the changes improve the working lives of you employees.

The secrets to leading your staff happily through a period of digital HR transformation to a better future are:

· Identify problems that need to be solved

· Make sure a new system answers existing problems

· Train your workforce on a new platform

· Get enthusiastic buy-in, by making sure benefits are well-communicated

· Keep employee engagement high throughout the transformation

· Co-create solutions by bringing your workforce into the process

In my session, I showed how Power BI could be used to share and disseminate human resources information since it is easy-to-use, and also reasonably priced. It’s a good starting point for the Excel user. Communication is key to all of the items mentioned here, and data storytelling is such a key part of the process.