Human beings form institutions for two basic reasons:

• to utilize the resources more effectively,
• to manage the risks better

in order to improve their quality of life.

A corporation is a limited liability institution that aims to make profits for its shareholders1. By definition, a corporation is a construct that incorporates risk management, as it enables pooling of resources2 and limiting the liability of the shareholders. However, limited liability in tort may lead to excessive corporate risk taking and do more harm than the value created, especially when the interests of third parties, namely stakeholders, who may be negatively affected by the decisions of the corporation are also considered3.

Profit motive is the key driver behind economic activity that induce people to invent, innovate, and take risks that they may not otherwise pursue. However, when the sole focus becomes attaining short-term profits and externalities are ignored, in the longer term the company faces significant risks such as loss of social license to operate or to face significant regulatory burdens that undermine long term profitability of the company. Incorporating the externalities4 into the decision-making process not only helps managing the long-term risks better, but also provides an opportunity for value creation by considering the interests of all stakeholders.

The measure of the quality of a business is all about value creation, value delivery, and value capture (a business’s ability to create profits from its transactions). Value creation requires a deep understanding of the customers’ needs and their problems. Developing solutions and delivering them to the customers at a price that is lower than their willingness to pay is the key to success, defined as value capture (the difference between the market price of the developed solution and cost of value creation and delivery).

Value creation is a function of effective utilization of different resources including financial, intellectual, manufactured, natural, human, and social and relationship capitals5. Creating an effective unique value proposition requires a successful strategic direction (consistent choices that differentiate the company from its competitors), efficient and effective utilization of resources, and ability to invest and innovate. Therefore, having preferential access to these resources and continuously building them are critical for the success of the corporation. What gets measured, gets improved. Hence, measuring and managing these different dimensions of capital effectively is key for the success of the corporation

According to the theory of contestable markets6, where entry and exit barriers are low (almost zero), economic profits will converge to zero in the long run. Common barriers to entry include economies of scale and scope, research and development, capital-intensive production, switching costs, brand loyalty, government regulations, and having unique access to limited resources. Ability to continuously invest and innovate is the path to build and keep the entry barriers to be able to continue to make profits.

In the 16th century, after the Ottomans gained control of the Mediterranean, the Portuguese came up with the technical innovations to build ocean travelling ships to reach the richness of Asia through alternative routes. However, the institutional innovations came from the Dutch.

In 1602, Dutch East India Company was founded to better manage the dangers of piracy, disease, shipwreck, and market risks by pooling the resources of its investors and became the world’s first formally listed public company. With its pioneering institutional innovations, it became an early-modern corporate model of a vertically integrated global supply chain and a corporate pioneer of foreign direct investment. After nearly 200 years, it failed mainly due to corporate mismanagement. Principles for good governance began to emerge from the learnings of this demise and perhaps this is the reason for the quality of Dutch corporate governance even today.

Governance comes from the Greek word kybernao, first utilized at the times of Plato and Aristo and means ‘steering’ which incorporates two important concepts: guidance and oversight. Corporate governance, as defined by Sir Cadbury, is “the system by which companies are directed and controlled.” Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing guidance to the leadership to get the strategy implemented (guiding and coaching the management), providing oversight to the management of the business for effective and ethical conduct, and reporting to shareholders on their stewardship

Trust is the essence of good governance and foundation of sustainable development. Trust of stakeholders is key to sustainable success of any institution. Deterioration of trust is similar to having a higher friction coefficient; to get the work done one needs to utilize more energy. Therefore, lack of trust undermines the basic reason for forming an institution such as a corporation, namely effective utilization of resources. Good governance is providing guidance (strategic direction and coaching) and oversight to the management of a company to ensure that value is created with effective resource utilization and stakeholders’ trust to be able to gain access to their7 resources on preferential terms.

Sustainability of the success of a corporation can only be achieved by adopting a long-term perspective, considering the interests of all stakeholders in decision making, and continuous ability to invest and innovate. Sustainable success can be achieved through integrated thinking (for innovation and sustainability), effective implementation (for value creation and capture), and proper communication of value creation and value capture model (value reporting for gaining the trust of the stakeholders to gain preferential access to various dimensions of capitals).

Since 1991, ARGE Consulting has not only been helping the development of these concepts, but also has been a role model with its commitment to implement them. ARGE has adopted a policy of;

• investing one-month-a-year for innovations and continuous education of its consultants to develop its human and intellectual capitals and
• encouraging all its consultants to dedicate one-day-a-week for non-profit work to help develop the community through numerous NGOs to develop its social and relationship capitals.

ARGE has made critical contributions to KalDer (National Quality Association) for developing and leading the National Quality Movement to deploy the EFQM Business Excellence Model throughout the country in public, corporate, and NGO sectors.

Being the first Turkish signatory of UN Global Compact in 2002, ARGE Consulting has also played a critical role in the establishment and development of the Global Compact Local Network in Türkiye and later was elected as the Global Chair of Local Networks to make significant contributions to the global development of the world’s largest sustainability platform.

ARGE Consulting has served as B20 Knowledge Partner (Governance & Sustainability) and helped bring integrated reporting and responsible leadership principles to the attention of G20 leaders, in 2015.

With such an understanding and experience, ARGE Consulting has developed a Sustainable Success Model^© that incorporates the key understandings from integrated thinking (strategic and responsible leadership), EFQM Model (deployment throughout the organization for effective implementation), and value reporting (for better governance and gaining the trust of stakeholders).

In a nutshell, sustainable success requires broadening our perspectives for decision making in four dimensions: time (from short term to long term), place (from where we operate to all the places that our activities make an impact), capitals (not only financial but also intellectual, manufactured, natural, human, and social and relationship), and stakeholders (direct and indirect). In this book we are providing a detailed explanation of this Model for the use of all types of organizations to help improve the quality of life in a sustainable fashion.

References

1. Except non-profit corporations.
2. Except in the case of a single shareholder corporation.
3. Harm may also be for the shareholders if the corporation either cannot bring returns to invested capital or even worse fails to result in loss of invested capital.
4. An externality is a cost or benefit caused by a company that is not financially incurred or received by that company. An externality can be both positive or negative and can stem from either the production or consumption of a good or service. The costs and benefits can be both private, incurring to an individual
or an organization, or social, meaning it can affect the society as a whole.
5. Integrated thinking formulates these six different classes of capitals as the key resources for value creation.
6. William J. Baumol (1982).
7. Providers of resources.