The Multi-stakeholder Operating System
When corporate leaders genuinely adopt a multi-stakeholder mindset, it breeds an attitude of caring throughout the firm — about providing optimal long-term returns for investors; about being a good neighbor in the communities where it operates; about creating a work environment or culture that inspires people to give their best efforts; about maintaining mutually beneficial and trusting relationships with suppliers; about minimizing negative social and environmental impacts resulting from operations; and especially about providing quality and value to customers. This is what a well-executed multi-stakeholder operating system is meant to accomplish.
Why the Multi-stakeholder Operating System?
With all the buzz words out there, why MsOS?
At Concinnity Advisors, LP, we believe capitalism should be practiced in ways that make it more highly regarded as a system worthy of encouragement and preservation.
We're not alone in this belief as evidenced by ongoing discussions about the future of capitalism under banners from above such as conscious capitalism and inclusive capitalism. In addition, investors are increasingly expressing their desire for capitalism to be practiced in ways that benefit more people and for companies to demonstrate a more caring, long-term view of their place in society. This is confirmed by the growing interest of investors in socially responsible, sustainable, triple bottom line, or impact type investment strategies.
Our basic premise is that meeting investor expectations embedded within any definition used to describe responsible investing, or aligning with the versions of capitalism named above, will almost always require publicly traded companies to adopt a multi-stakeholder operating system. This is more easily said than done.
Customer Relationship Quality
Corporate Reputation Management
MsOS Company Evaluation Criteria
Supplier Relationship Quality
Quality of Financial Reporting
Labor and Human Rights (Supply Chain)
The Multi-stakeholder Operating System Maximizing Value Creation
The premise that a multi-stakeholder operating system (MsOS) is good for companies, good for capitalism, good for employees and good for investors is not new. For quite some time, many researchers, business leaders, academic authors and management consultants have presented compelling arguments for why companies should adopt a multi-stakeholder operating system. While this steady and increasing body of work is impressive, the main impetus behind the design of the MsOS research process was the hands-on experience of its creators. In their previous work as consultants, they had constructed causal path models within companies that were comprised of various stakeholder indices (e.g., customer value, employee engagement, supplier relationships, community perceptions, cultural characteristics, et al). The objective was to determine the relationship between the performance of those intangible indices and corporate performance. And that relationship consistently revealed itself in a significant way. In short, these upstream intangible assets proved to be key drivers that produce very tangible downstream financial consequences.
Since an MsOS is comprised of intangible assets, the framework for the Concinnity Advisors’ MsOS investment research process is mostly an intangible asset information system. A significant portion of the market value of S&P 500 companies is attributable to intangible assets. Some research (Ocean Tomo) suggests it’s as much as 80%. And yet, investors are largely left guessing about how well those assets are being safeguarded and leveraged.
Characteristics of an MsOS Company
Companies guided by a multi-stakeholder operating system generally demonstrate these key characteristics:
Their customers are willing to pay an economically profitable price for their products and services, feel well-served and keep coming back.
Their work environment inspires employees to be highly committed, productive and innovative.
Their culture gives them a competitive advantage and increases their adaptive strength and resiliency to changing market conditions.
Communities welcome them and invite them to set up shop, thereby increasing the local customer base and decreasing the likelihood of regulatory or legal issues.
They develop high quality relationships with suppliers that reduce the occurrence of labor and human rights abuses and supply chain disruptions.
They possess a reputation for transparency and integrity and demonstrate an unwillingness to sacrifice long-term financial health for more transitory short-term earnings.
They do not believe that compromises have to be made between creating wealth for shareholders and tending to the interdependent needs of multiple stakeholders.
Evolution of Socially Resonsible Investing
Exclude individual companies
e.g. Exxon Mobil, Nike, Monsanto
Industry Exclusion Funds
Exclude entire industries
e.g. no tobacco, no firearms
Negative ESG Factors
Remove companies with low ESG factor scores
e.g. poor carbon score, poor governance score
Positive ESG Factors
Choose companies with high ESG factor scores
e.g. good social score, good governance score
Factor Materiality per Industry
Weight factors based on industry
e.g. higher weight for environment in energy,
higher weight for governance in banking
Multi-stakeholder Operating System (MsOS)
Use multi-stakeholder factors as well as ESG
e.g. use factors that measure culture, employee engagement, and customer satisfaction
MsOS is the Latest Step in the Evolution of Socially Responsible Investing
As socially responsible investing (SRI) has become more popular, SRI investment vehicles have become more sophisticated.
Early funds simply banned companies, such as Exxon Mobil after the 1989 Valdez oil spill, or Nike after the 1996 Life Magazine article showing a child stitching their logo onto a football. Later, funds banned entire industries, such as tobacco, firearms, or alcohol.
In the 2000s, as vendors began to provide Environmental, Social, and Governance (ESG) data for many companies, investment vehicles were introduced that used ESG factors to determine socially responsible companies. ESG data was also examined to determine which ESG factors were material to particular industries.
Concinnity believes that the Multi-stakeholder Operating System (MsOS), which uses factors which measure a company's relationships with all of its stakeholders, including its culture, innovation, and branding, along with ESG factors, will be the latest step in this evolution.
MsOS Intellectual Influences
Mary Parker Follett publishes "The New State", which talks of the holistic nature of community, "win-win" relationships, and "Transformational Leadership".
Ed Freeman publishes the book "Strategic Management: A Stakeholder Approach".
"The idea that business is about maximizing profits for shareholders is outdated and doesn’t work very well, as the recent global financial crisis has taught us. The 21st Century is one of “Managing for Stakeholders”. The task of executives is to create as much value as possible for stakeholders without resorting to tradeoffs. Great companies endure because they manage to get stakeholder interests aligned in the same direction."
The Concininnty Group was formed to explore a research process to identify companies that they believe follow a Multi-stakeholder Operating System (MsOS) and to evolve this research into an investment process.
Rajendra S. Sisodia and John Mackey publish "Conscious Capitalism: Liberating the Heroic Spirit of Business".
Milton Friedman publishes an article in The New York Times Magazine titled "The Social Responsibility of Business is to Increase its Profits".
"In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom."
Peter Drucker publishes "Managing for the Future".
Drucker claims that maximizing the wealth-producing capacity of the enterprise is the objective on which all constituencies depend for the satisfaction of their expectations, whether shareholders, customers or employees.
Rajendra S. Sisodia, Jagdish N. Sheth and David Wolfe publish "Firms of Endearment: How World-Class Companies Profit from Passion and Purpose".
Second edition of Firms of Endearment is published.