CORPORATE HAPPINESS AND AGGREGATE VALUE MANAGEMENT:

A COMMON SENSE APPROACH TO MANAGING ORGANIZATIONS

 (c) Oleg Cheremnykh, 2006. All rights reserved cheremnykho@cnt.ru

Abstract

This paper presents the new organization management paradigm by formulating and justifying a new and more ‘natural’ fundamental management objective – building a ‘happy organization’ (or ‘happiness-focused organization’). It proves that ‘happiness’ of an organization is equivalent to maximization of its aggregate value – financial, functional and emotional – to its stakeholders. The paper presents two key tools for measuring and managing ‘corporate happiness’ - Stakeholder Happiness Scorecard and Organization Happiness Scorecard which could be used independently or in combination with Balanced Scorecards/Strategy Maps and/or other tools.

Who is this paper written for?

This paper was written for strategic business management professionals – professional investors, entrepreneurs, business owners, CEOs, other top managers of business enterprises, strategic business management consultants, etc. It will also be useful (hopefully, very useful) to managers of government entities and non-commercial/non-government (’non-profit’) organizations (commonly called the ‘third sector’).

Why should I read this article?

Regardless of their enormous success, achievements and social status, entrepreneurs, investors, CEOs and other top managers of business entities, business management consultants and the like want to be happy – just like all other human beings. And there are very, very many examples of highly distinguished and highly successful people being at the same time very, very unhappy.

This paper is worth reading because it contains recommendations and guidelines for building a ‘happy organization’ – a business entity, government entity or a non-profit organization. If you are a perfectly happy individual managing a happy organization (or owning a happy business entity), you do not need to read this paper. Otherwise, I believe that this paper can be valuable enough for you to be worth reading.

Why do I need to manage a ‘happy organization’ in order to be happy as an individual?

An individual can only be happy if he or she resides in a comfortable, happy environment. As business owners and managers of businesses and other organizations spend a lot of their time in their workplaces, they have to build and manage ‘happy organizations’ in order to be personally happy.

What is a “happy company/organization”?

By definition (based on a common sense) a ‘happy company’ is a commercial entity (business enterprise) that makes happy all of its key stakeholders – owners/investors/shareholders; consumers ; employees, partners (distributors, dealers, retailers, agents, etc.); suppliers ; government entities ; mass media, business community – local and global - etc. Likewise, a ‘happy non-profit organization’ is the one that makes happy all of its key stakeholders – sponsors/founders, consumers, employees, suppliers, government entities, community – local and global - etc.

A “happy government entity” is an organization that makes happy all of its key stakeholders – constituents (consumers of goods and/or services provided by the government entity); other government entities (especially so-called ‘parent entities’); employees, suppliers, community, etc.

What is a ‘stakeholder’ of an organization?

A ‘stakeholder’ of an organization is an individual or an organization whose well-being – financial, functional and emotional – is materially affected by activities of organization under question and whose activities can materially affect the well-being of an organization.

What is ‘well-being’ of an individual or organization?

Financial and emotional components of an aggregate well-being of an individual or organization are self-explanatory; functional well-being is determined by how well the functional needs of an individual or organization (e.g. transportation, security, information processing, etc.) are satisfied.

In practice, an aggregate well-being is defined by a set of values of certain performance indicators unique for each individual or organization. In other words, a ‘well-being’ is determined by how close actual values of performance indicators are to certain ‘optimal’ values (the optimal value are usually determined using some kind of benchmarking techniques).

Are all stakeholders of an organization equally important?

No. As the primary purpose of a business enterprise is to make money (generate cash flows) for its owners, company owners/investors/shareholders are, naturally, the ‘first among the equals’ (i.e. have top priority among all company stakeholders). For proper stakeholder management or stakeholder relationships management – SRM (a much more comprehensive and appropriate concept than currently used CRM – client/customer relationship management) – all other stakeholders – categories, individuals and corporations - must be prioritized in terms of their relative importance for the success and prosperity of the company.

The primary purpose of a non-profit entity is usually to satisfy the emotional and/or spiritual (in case of religious non-profits) needs of its sponsors/founders; therefore, these individuals or corporations are, naturally, ‘first among the equals’ (i.e. have top priority among all stakeholders of a non-profit organization). Naturally, the SRM concept and methodology are as important to non-profit entities as they are for business enterprises.

As the primary purpose of a government entity is to serve its constituents/consumers, they are ‘first among the equals’ (i.e. have top priority among all company stakeholders). Naturally, the SRM concept and methodology are as important to government entities as they are for business enterprises and non-profit entities.

Why is ‘building a happy organization’ the ‘natural’ key objective of its management?

The universal key objective of a human being – explicit or implicit – is to be happy (‘achieve happiness’) – this is simply human nature, regardless of race, nationality, age, gender, etc. Pursuit of happiness is one of the most fundamental human rights, needs and desires (in the U.S. Constitution it is recognized – and for a good reason - as the third most fundamental human right after the rights to life and freedom).

A human being is a social being; therefore, he or she can be happy only in the ‘happy environment’. Naturally, human beings want to be happy not only at home and in their social relationships, but also in the workplace and in their professional relationships. Therefore, the ‘natural’ key objective of managing organizations is building and managing “happy organizations”. The organization that have accepted creating ‘corporate happiness’ as its key management objective can be called happiness-focused organization.

As, by definition, a happy organization is the one that makes happy all of its stakeholders, a happiness-focused organization can be also called a stakeholder-focused organization.

What are the advantages of ‘happiness-oriented’ organization management paradigm?

First, it much better fits the complex nature of human beings and allows to build a much more comprehensive and much better integrated management systems (it is well-known that managing organizations is essentially managing human beings).

Unfortunately, other key organizational objectives and corresponding methodologies use oversimplified – highly mechanistic and ‘materialistic’ – models of a human beings which do not work well even in the Western cultures and often does not work at all in other cultures that put much higher emphasis on emotional and/or spiritual values (e.g. Oriental or Muslim nations).

Second, it allows to develop a highly effective and efficient ‘common platform’/’integration tool’ for building a modern, diversified, multicultural corporation and integrating highly multicultural personnel into highly efficient and motivated workforce. Unlike ‘success’, ‘profit’, ‘wealth’ and other values highly important in the Western materialistic culture (but much less important, in, say, Muslim world), ‘happiness’ is a universal category difficult to argue against (everyone – explicitly or implicitly – wants to be happy). Therefore, it is a much better platform for uniting company employees and focusing them on a single common objective (‘we are building a happy organization and are helping each other to be happy in the workplace’).

Third, it allows to integrate and ‘harmonize’ the interests of all company stakeholders and focus them on a single common objective, eliminating barriers (currently very noticeable) between company owners, company personnel – managers and employees, clients/customers, suppliers, mass media, community, etc.

Fourth, it creates a single management paradigm for businesses, government entities and non-profit organizations, making it much easier for employees and managers to make transitions from one organization category to the other (which nowadays in many cases presents a significant problem).

How to measure and manage ‘corporate happiness’?

Naturally, corporate happiness can not be measured directly. However, it is possible to measure another performance indicator of an organization – the amount of aggregate value (financial, functional and emotional ), created by this organization for its stakeholders. It can be shown that the company becomes ‘happy’ (or, more precisely, ‘perfectly happy’) when its aggregate value for its stakeholders is maximized.

Aggregate value creation is a two-way street: organization creates value to its stakeholders and the stakeholders create value for the organization. Naturally, in a happy organization aggregate value creation is balanced: while the company maximizes its value to its stakeholder, the stakeholder is also expected (or, more properly, is managed) to maximize its aggregate value to the company.

If the ‘flow of aggregate value’ is skewed towards the stakeholder, the stakeholder is ‘using’ (actually, abusing) the company; if it is skewed towards the company, the company is ‘using’ (actually, abusing) its stakeholder. In both cases, either the company or the stakeholder is unhappy, which, in turn, means that in the longer term, both sides are unhappy.

Therefore, the key objective of stakeholders’ relationships management (SRM) is to ensure that both sides (i.e., an organization and its stakeholders) maximize their aggregate values to each other (in other words, that both sides are happy with the relationship). This natural requirement for the aggregate value balance allows to make the following definitions of a happy stakeholder and a happy company:

A happy stakeholder is an individual or an organization, for whom the organization creates the highest possible amount of aggregate value and who creates the highest possible amount of aggregate value to the organization.

A happy organization is the one that maximizes its aggregate value for all of its key stakeholders and that receives the highest possible amount of aggregate value from its stakeholders.

From the practical management standpoint, however, it is more convenient to deal not with the aggregate value per se, but rather with the aggregate value-generating capacity of an organization. Which gives another – more useful – definition of a happy organization:

A happy organization is the one that operates at its highest aggregate value-generating capacity; in other words, its aggregate value-generating capacity is maximized and 100% utilized.

It is important to note that operating at maximum value-generation capacity requires maximization of the efficiency of stakeholder relationship management; in other words, an organization operating at maximum value-generation capacity manages its stakeholders in such a way, that their aggregate value for an organization is maximized.

Are all components of aggregate value equally important?

No. As the primary objective of a business enterprise is to make money (generate cash flows), for such a company financial value is the most important component of aggregate value (more specifically, financial value created for the company owners/shareholders – the key company stakeholders), although functional and emotional value created for its consumers is also highly important.

Therefore, for an effective and efficient management of a business entity it becomes highly important to relate other aggregate value components – functional and emotional – to financial value.

The primary objective of the government entity or a non-profit organization is to provide certain services (such entities are typically service-oriented) to the appropriate consumers. Therefore, the most important component of the aggregate value of such organization can be either financial (e.g. Internal Revenue Service in the USA), functional (which is most typical) or emotional.

Why is ‘corporate happiness’ equivalent to aggregate value maximization?

To find an answer to this crucial question, it is necessary to start with asking ourselves a few simple but very fundamental questions: “Why do entrepreneurs start businesses?”; “Why do investors own businesses?”; “Why do founders establish non-profit organizations?”; “Why do sponsors support non-profit organizations?”; “Why do constituents or other government entities establish government entities?”; “Why do employees work for businesses, government entities or non-profit organizations?”; “Why do stakeholders (suppliers, customers, partners, government entities, etc.) interact with organizations?”.

Surprisingly enough, answers to these most fundamental questions of organization management are not that difficult to find.

First, the abovementioned activities are undertaken for financial reasons (in other words, to create and, hopefully, maximize financial value of these activities and corresponding objects created, modified or consumed in these activities).

Entrepreneurs start businesses (and shareholders own business) to make money; employees work for businesses, government entities or non-profit organizations to earn money; suppliers sell their products to businesses also to make money and government and non-government entities also want to get money from businesses (in taxes, charitable contributions, etc.)

Second, these activities are undertaken to satisfy functional needs of businesses (external and internal), individuals, government entities and other stakeholders (in other words, to create and, hopefully, maximize functional value of these activities and corresponding objects created, modified or consumed in these activities). Individuals and businesses buy products and services to satisfy their functional needs; businesses create functional positions, workgroups and departments to generate internal products and services that satisfy corresponding functional needs; government and non-profit entities require certain products or services from commercial enterprises (information, donations in-kind, pro bono services, etc.) to satisfy their functional needs.

Founders establish non-profit organizations and sponsors support these entities also to satisfy certain specific functional or emotional needs of consumers of their products and services and government entities are established to provide financial, functional and/or emotional services to satisfy the corresponding needs of their constituents.

Third, it has been long known that human being are not machines and in addition to satisfying their financial and functional needs, they also want to satisfy their emotional needs (in other words, to create and, hopefully, maximize emotional value of these activities). Certain products, business objects and services, consumed by individuals, satisfy exclusively emotional needs (brands, movies and other entertainment services, etc.); entrepreneurs start, own and develop businesses and employees work for businesses, government entities or non-profit organizations to enjoy what they are doing (i.e. to get emotional satisfaction out of their activities) and all stakeholders of an organization want to make the corresponding relationships emotionally valuable and fulfilling.

Hence, ‘corporate happiness’ is equivalent to aggregate value maximization. It is also important to note that aggregate value of the business enterprise exhibits the synergy effect between different categories of value (financial, functional and emotional). In other words, if understood and managed correctly, maximization of one category of company value both requires and assists maximization of two other value categories.

How to measure aggregate value and value-generating capacity of an organization?

Measuring aggregate value of an organization or its stakeholder and the corresponding value-generating capacities essentially boils down to measuring its components – financial, functional and emotional value. These components, in turn, are measured using a system of corresponding performance indicators (PI) - financial, functional and emotional.

Most of these performance indicators are already well-known; therefore, to build a comprehensive and efficient aggregate value management system it is necessary to classify each performance indicator as either financial, functional or emotional. Desired values of these performance indicators are typically established and evaluated using some kind of benchmarking methodologies and procedures.

Key financial performance indicator is financial value proper; other indicators (financial statements items, financial ratios, etc.) measure what is commonly called financial efficiency.

Functional value of an organization to an external stakeholder (or a stakeholder to an organization) is determined by how well this organization satisfies functional needs of the stakeholder (or vice versa) relative to direct and indirect competition (which requires utilization of a certain set of functional performance indicators unique for each category of external stakeholders).

In other words, functional value of an object for an organization is determined by its operational or ‘functional’ efficiency

Emotional value of an organization (or its object) to an external stakeholder (or a stakeholder to an organization) is determined by how well this organization or an object satisfies the emotional needs of the stakeholder (or vice versa) relative to direct and indirect competition (which requires utilization of a certain set of emotional performance indicators unique for each category of external stakeholders).

How to manage the aggregate value and value-generating capacity of an organization?

Aggregate value of an organization can be managed using three key tools - Organization Stakeholders Diagram (OSD), Shareholder Happiness Scorecard (SHS) and Organization Happiness Scorecard (OHS) and several supporting tools. These tools can be used either independently or in combination with other business management tools, such as BSC/SM, KPI, etc. Organization Stakeholders Diagram (see Appendix) presents in visual form the hierarchy of key categories of stakeholders and individual stakeholders of an organization. It can then be linked to SHS for each individual stakeholder and to OHS for an organization as a whole.

Shareholder Happiness Scorecard determines – using the appropriate stakeholder performance indicators how well the organization creates aggregate value for the corresponding stakeholder and how well this stakeholder creates aggregate value for the organization (in other words, the aggregate value-generating capacity for and of an individual stakeholder).

Organization Happiness Scorecard essentially determines how well all ‘traditional’ components of an organization – business units, regional branches, products, brands, etc. – ‘fit together’ in terms of aggregate value generation (in other words, the aggregate value-generating capacity of the organization as a whole). Therefore, OHS is used to measure corporate integrity which is an important component of corporate happiness.

Aggregate value management process boils down to the following nine steps:

  1. Identify all key categories and all key individual stakeholders (by definition, ‘key’ stakeholders are those 20% of all stakeholders that – according to the famous ‘Pareto principle’ account for 80% of the aggregate value generated in an organization)

  2. Compile the history of an organization in terms of aggregate value generation (capacity and results) using as guidelines the structure of the Organization Happiness Scorecard and the following ‘history description template’:

Facts -> Analysis -> Trends -> Conclusions -> Recommendations
  1. Compile histories of relationship with each individual key individual stakeholder of an organization using as guidelines the structure of the Shareholder Happiness Scorecard and the same ‘history description template’ as defined in the previous step

  2. Define the current (‘AS IS’) state/condition of the organization as a whole (in terms of aggregate value generating capacity) and of relationship with each individual stakeholder by filling in the ‘AS IS’ versions of OHS and SHS (this procedure is called a ‘comprehensive happiness audit’ of an organization and its stakeholders)

  3. Define the desired (‘TO BE’) state/condition of the organization as a whole (in terms of aggregate value generating capacity) and of relationship with each individual stakeholder by filling in the ‘TO BE’ versions (structurally identical to ‘AS IS’ versions) of OHS and SHS (this procedure is called a ‘comprehensive happiness audit’ of an organization and its stakeholders)

  4. Develop ‘reengineering plans’ (in other words, plans for making a transition from current to desired state/condition of an organization and each stakeholder relationship). These plans typically consist of a financial plan (values of financial performance indicators to be achieved), operational plan (values of non-financial – functional and emotional - performance indicators to be achieved plus a system of jobs/activities to be performed to achieve the desired values of performance indicators) and textual comments and explanations to financial and operational plans (in business entities these comments are usually called the ‘business plan’ of the reengineering project)

  5. Execute re-engineering plans, adjusting them to changes in reality when necessary

  6. Evaluate the results of reengineering projects (measured by comparing planned and actual results).

  7. Repeat steps 1 to 8 when required by changes in the internal or external environment of an organization

Appendix. Key Stakeholders of a Typical Business Entity

A somewhat longer and detailed version of this article (in MS Word format) can be found here

changed January 7, 2008