Corporates struggle with generating long term sustainable value

01 August 2016

Many of the world’s largest companies have not been able to generate sustainable value over a long period, a new report finds. Internal barriers, including talent retention, loss of vision and complexity are cited as areas of critical concern.  

Creating companies that bring with them long term sustainable growth is no easy feat, according to a newly released report from Bain & Company. The firm, as part of its ‘Barriers and Pathways to Sustainable Growth’ report, performed an 18-year longitudinal study of sustained value creators. The research combines two surveys of senior executives from across the globe, with desk research and interviews.

Sustained value creators

Low growth
According to the study, the number of companies that managed to generate real sales growth of more than 2x country growth stood at around 20% between 2004 and 2014, while 15% managed real profit growth 2x above that of the country growth in the same period. Only a small number (11%) of large companies, those with revenues in excess of $500 million, can call themselves “sustained value creators” – this group managed to achieve a sustained growth in revenues and profits while also generating back their cost of capital over the course of a decadeInternal vs. external factorsThe research highlights that, while a number of factors are affecting the long term sustainable growth outlook for companies, it are predominantly internal factors that hold companies back from success. Two major internal barriers are an inability to focus, cited by 34% of respondents, and an unaligned culture, also cited by 34% of respondents. Organisational complexity comes fourth, cited by 26% as an issue, while a weak business plan was cited by 24% of respondents as problematic. The biggest concern for companies, however, is insufficient resources, highlighting the growing impact of the talent shortage which is unfolding globally. The shortage is in particular visible in high demand talent segments, such as digital, programming and design, with for instance a recent study by A.T. Kearney finding that as many as 72% of leading companies are currently struggling to find the right analytics talent.

Internal barriers to growth

Internal barriers to growth
Respondents were also asked to disclose the biggest internal barriers holding back their business from growth. The chief issue is access to talent in order to keep up with the pace of business growth, as cited by 55% of respondent companies. The second biggest barrier is the death of a nobler mission. The third major barrier is complexity, as a company expands too rapidly out of oversight.

Additional concerns include the ‘curse of the matrix’ as employment structures cause havoc (also highlighted by a recent McKinsey study), while ‘unscalable founder’ takes the number five spot with 37% of respondents. Additional concerns include ‘fragmentation of customer experience’, ‘lost voices from front line’ and ‘erosion of accountability’, at 30%, 25% and 22% of respondents respectively. 

Managing talent

The research further looked at the biggest challenges that low performing companies face. The top challenge is that they increasingly find it difficult to attract and retain top-tier talent, followed by spending too much time strategizing or dealing with overcoming internal barriers. Additional concerns highlighted by the respondents is that they do not have a strong process in place to manage succession of leadership’ and that their processes feel complicated and make the company more bureaucratic. The result is on par with study conducted last year by the Economist Intelligence Unit, a UK-based think tank, which found that more than half (55%) of businesses agree that organisational complexity is taking a toll on profits.

Low performing companies also have difficulty differentiating their products from those of their competitors, as well as lacking a ‘well-defined repeatable model for growth’.

Complexity and process

Bain’s research found that, as companies scale, problems related to internal versus external barriers begin to increase. Around 20% of respondents from small companies say that they either strongly agree or agree more than they disagree that they spend too much time strategizing and dealing with internal issues. For moderate companies this jumps to 37%, with around 10% strongly agreeing to the issue. For large companies, around 15% strongly agree that internal barriers are an issue, with in total 44% saying that they agree more than they disagree.

One of the biggest issues cited is complexity, and its spiral of doom. Complexity, in terms of processes and bureaucracy, is particularly an issue for larger companies, at 60% agreeing that it is an issue, while almost half of those strongly agree that it is an issue. For small companies, around a quarter are beset by the issue, with around 5% strongly agreeing that their processes are overly bureaucratic.


Private equity firms ramp up sustainability focus

19 April 2019

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.