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The Sustainable Organisation Index (SORG) is a transparent, simple, speculation free index that enables anyone – inside or outside an organisation – to easily and freely understand the real outcome and usefulness of any given organisation, regardless of its size, location and purpose, anywhere at any point in time. Relying on publicly available information from the P&L statement, it can predict the sustainability impact of any type of company or organisation. So it's a transversal tool that can be used, checked and applied by anyone, which is exactly what makes it so powerful

Measuring Sustainability

Over the last century, despite all changes, the measurement system and the focus of organisations have remained highly concentrated on profits and shareholder value. This has highly influenced people’s perspective of value as the way that any organisation performs these measurements defines the very results that may be expected. We need to change this paradigm to a new measurement that we all can understand and compare the real impact any organisation has in our lives and in the lives of generations to come. A transparent, simple, speculation free index that will rank organisations according to their real impact in our society.

That is the meaning of the SORG index where using data publicly available from organisations anyone can simply analyse and evaluate how sustainable an organisation is. Sustainability is the most important criteria to evaluate an organisation performance since it measures its impact over time. Its a trans-generational criteria that considers all cost and benefits of the organisation activity over time. Considering that in a sustainable organisation there is a balance among the economic benefits of the organisation's owners, its employees (the Team) and the community it serves the SORG index measures the internal harmony of the organisation and its impact in the society where it works. It allows a transparent comparison of any organisation, regardless of its size, location or purpose.

This vision can be described by the following formula to assess how balanced the organisation is, both at an internal and external level:

Where:

C = is the economic benefit of the community as a result of the organisation activity

O = is the economic benefit of the owners of the organisation

M = is median salary of the employees of the organisation

A = is the average salary of the employees of the organisation

E = the highest salary in the organisation

Through the use of the SORG, we believe that anyone – inside or outside an organisation – can easily and freely understand the real outcome and usefulness of any given organisation, regardless of its size, location and purpose, anywhere at any point in time. This is still unique today! In fact, in a Sustainable Organisation, the SORG offers a much wider and comprehensive perspective of organisational value when compared to market capitalisation, as it focuses solely on sustainability.

Explaining the SORG

Our aim is to create a new sustainability indicator – the Sustainable Organisation Index (SORG). Like any index, “it is something that helps you understand where you are, which way you are going and how far you are from where you want to be”, Sustainable Measures explains. Furthermore, it becomes increasingly important as it helps any organisation receive an alert to a problem before it gets too bad and obviously, it helps the organisation progress through a better-positioned indicator.

In the case of a sustainable economy, an indicator would focus on areas where there are weak links between the economy, the environment and the society. In the case of organisations, we will focus on the link between the owners of the company, the people working for the company (employees, or the team) and the people affected by the company (the community).

In our hypothesis, an organisation is just a group of people, gathered around a common purpose, to serve the community and it is sustainable if there is a balanced distribution of economic flow among the owners, the team (employees) and the community. The direct value of the organisation’s activity is measured by its revenue and the positive or negative impact it may generate over time - after all, it represents the value the community assigns to the organisation's product(s) or service(s).

Our main challenge is to compare organisations transparently regardless of their size, industry and purpose, using only data available to the public. This is the purpose of the SORG. In the cases presented, what we want to show is not a definite solution, but rather a possible approach using the limited information available. Our challenge has been to make sense of this limited information and our hope is that this will show how further transparency could bring significant results by making this information fully available to everyone. This diagram illustrates the economic flows between the organisation and the internal and external groups that affect it: revenues, salaries, interests, costs, taxes and dividends (blue lines). In the case of non-profit organisations with no revenues, the flow comes from the organisation to the community in the form of donations or voluntary work (green line).

In our hypothesis, we assume that organisations can only be sustainable if there is a balance between COMMUNITY, TEAM and OWNERS.

So in a sustainable organisation C+T≥ O and C≥T. Additionally, in a sustainable organisation, the distribution of all salaries should follow a bell-shaped normal curve and the highest-to-median salary ratio should be lower than 12 to guarantee harmony among all members.

COMMUNITY, TEAM and OWNERS are defined by (all the data is taken from financial reports available online):

COMMUNITY = revenues - cogs - interest + taxes + impact

Revenues represent the value recognised by the community impacted by the organisation’s activity. COGS is the cost of goods sold (suppliers and subcontractors). We deduct the cogs and interest (banks) because that flow goes to external organisations to the one under analysis. Taxes are added since taxes are flows that theoretically return to the community.

Impact is the positive or negative consequence of the organisation’s activity over time. It’s an important indicator associated with each industry, activity. Impact should be a factor determined in function of revenues. In a form:

Where I is the Impact, r are the revenues, F are the factors for each of the n criteria affected by the organisation activity. As a wrap-up to this chapter, we propose an example of a model considering the environmental, health, security and development criteria to determine the impact of any activity/industry.

TEAM = Team Salary + All Benefits

TEAM represents the sum of employee salaries. It should include any type of equity compensation (benefits).

Owners = Net Income - TEQUITY

TEQUITY is the proportion of net income owned by the team. We consider team ownership in TEAM, so it must be deducted here. Some members of the organisation may have two roles, as TEAM and OWNERS. When this happens we include all the flow in TEAM. However, TEQUITY is not always publicly available. Now to analyse the distribution of the flow between these three entities, for one fiscal year, we use the following ratios.

The SORGI (Sustainable Organisation Index I) measures the balance between the owners of the organisation in the community. The higher the value, the higher the benefits the community gets. It only applies when net income is positive. In a sustainable organisation SORGI ≥1.

The SORGII (Sustainable Organisation Index II) measures the internal balance of the organisation. The higher the number, the better and it only applies when net income is positive. Harmony measures fairness. It is given by:

The TEAM MEDIAN and TEAM AVERAGE are the average and median of the salaries and benefits from all people that work in the organisation. The CEO represents the total salary and benefits of the highest salary in the organisation, normally the CEO. The HARMONY index measures internal cohesion. In a sustainable organisation, harmony is always greater than 1. The higher the index, the better.

The SORGIII (Sustainable Organisation Index III) measures balance between the TEAM of the organisation in the COMMUNITY. The higher the value, the higher the benefits the community gets. In a sustainable organisation, SORGIII≥1

To assess how balanced the organisation is, both at an internal and external level, we use the following formula:

The SORG (Sustainable Organisation Index) is a product of SORGI, SORGII and the SORGIII Index and indicates a cumulative effect. In a sustainable organisation SORG ≥1. In a multi-year analysis, which offers a more precise evaluation of the organisation’s activities, each variable should be calculated by the sum of its values for all the fiscal years under analysis.

It is important to note that this can be calculated using only public data but more accurate results could be assured if organisations made salaries publicly available and the IMPACT factor known. Still, it is useful to assess any organisation regardless of its size, industry or purpose.

Overall, the SORG comes as a valuable tool to acquire a clear image of how the organisation behaves in the society and whether or not it is free from speculation, based on factual information publicly available: it is very simple to calculate and it offers a transparent assessment of the sustainability of any organisation.

Applying the SORG Index

To illustrate the application of SORG in 4 completely different types of organisations, considering the data on the table below, we calculated the SORGI, SORGII, Harmony and SORG indexes for MacDonald’s, Boeing, Google and Wikipedia. All financial data was collected from Wolfram Alpha (2013 filing data), median salaries from PayScale.com Dec 2014, average salaries from Careerbliss.com and Wikipedia data from Wikipedia’s financial report 2013.  Wikipedia revenue, cogs and net income are in thousands. TEAM was calculated using average salaries x employees. For these examples, we did not find information about TEQUITY, so TEQUITY was considered zero. In these analyses, we did not consider the IMPACT factor, since it is not yet available. This graph synthesises sustainability of any type of organisation. We overlap graphs of different scales just to offer a simplified analysis.

At first glance — using a colour graph where green represent community, blue represent team and red represent owners – we get the impact of the colours in the background graph. In this case the difference in colours is evident. The colours represent the proportion between COMMUNITY, TEAM and OWNERS. The bigger the green area, the better and the opposite goes for the red area. In a sustainable organisation, considering our hypotheses, BLUE+GREEN ≥ RED. As we can see from this example, MacDonald’s clearly does not benefit the community. Boeing and Wikipedia look balanced and Google clearly benefits the community.

Looking at the SORG Index line, we can see that Google’s sustainability index is 494 times higher than MacDonald’s and only 5 times higher than Wikipedia’s. The difference in this example is so big that the line had to be skewed to fit both extreme points in the graph. Now, why are Google and Wikipedia’s SORG so high? Because those organisations, besides providing clear benefits to the community and a high leverage owners’ effect, have an outstanding internal cohesion, which probably explains our first observation and the results presented by those organisations.

Going Deeper in the Analysis: Breaking Up SORG

Looking in more detail, we can further explain our first analysis by separating the external and internal impact of the owners’ leverage – SORGI and SORGII. Again, each line uses a different scale but we overlap it just to offer a simplified analysis. We observe the consistency of Wikipedia and Google and even MacDonald’s. Boeing’s inconsistency is due

essentially to the HARMONY factor. That can be explained looking at the CEO-to-median salary ratio (see Company Table on “Applying the SORG”). The harmony and cohesion champion is clearly Wikipedia.

This analysis is thus useful to explain the behaviour of the SORG Index further. It is important to note that this data did not consider the impact factor. Empirically, we know that if we had considered the impact factor, the results would be even more emphasised but with the same trend.

Going Deeper in the Analysis: Looking inside the organisation

Here, we can see the Harmony Index that so strongly influenced SORGII. It is easily explained by the distribution of the salaries and the CEO-to-median salary ratio. Besides, we clearly see that, despite having a USD 22,000 median, the TEAM factor in MacDonald’s is high because of the organisation’s 440,000 employees. This means that the TEAM

factor is obviously influenced by the size of the organisation, even if the salaries are low. This makes sense because, even distributing low salaries, the organisation has a big impact in the society. The “blue” factor in Google, associated with its harmony factor, means that the organisation generates a high income per employee. It is known that an organisation like Google has a strong Employee Ownership and this may be one of the reasons behind such a high proportion directed towards owners.

Conclusion the SORG Analysis

Observing these three graphs, it is easy to understand how the value generated by the organisation is distributed among the COMMUNITY, the TEAM and the OWNERS. In this example, it becomes clear how much the HARMONY factors affects both Boeing and MacDonald’s and how unbalanced MacDonald's seems to be. On the other hand, it also becomes evident that Google and Wikipedia are balanced in the way they benefit the COMMUNITY. If the IMPACT factor was known, the trend would be accentuated: more unbalance to MacDonald’s and Boeing and more balance to Google and Wikipedia.

This analysis becomes especially interesting if these results are compared with the market capitalisation of these organisations, with the advantage of being immune to speculation. A wider analysis considering 5 or more years of the organisation’s activities will provide a more accurate perspective of the organisation’s sustainability.

The Impact Factor

As noted in the definition of Community, the IMPACT factor is considered strongly relevant. Unfortunately, we did not find a universal and normalised analysis of impact by industry or activity. In our perspective, to truly and transparently analyse the real outcome of an organisation, it is extremely important to measure the result of the organisation’s activity over time. Empirically, it is very easy to realise that some activities have a strongly negative impact, as is the case of oil & and gas, armament and fast food, while others can have a very positive leverage, like education, health and environment. So, the purpose of the Impact factor is to determine the net benefit of any activity over time.

As we defined previously, the IMPACT factor can be calculated by:

Where I is the Impact, r are the revenues, F are the factors for each of n the criteria affected by the organisation’s activity. Taking the oil & gas industry as an example, the social cost of carbon is widely known and publicly available. According to data by the US government from May 2013 (Interagency Working Group on Social Cost of Carbon), the cost of cleaning 1 ton of CO2 is USD $221. Therefore, turning these calculations into something easy for everyone to understand, the cost of cleaning one barrel of oil is $95.03. We do not know what price oil is while you are reading this sentence. However, this will probably come as a surprise to you. As an example to demonstrate the influence of IMPACT, running the SORG index on oil & gas major ExxonMobil and just taking into account the environmental criteria, we can show that the SORG goes from 2.12397 to -16.88533, which shows how deeply the impact factor can affect the sustainability of an organisation, which is obvious because someone will have to pay for the mess…

Unfortunately, the environmental impact is never considered when analysing organisations and so we tend to be misguided by the real value of some organisations. Apparently, they generate a positive outcome when looking at the revenues, but when we go deeper, we see that their activity will negatively impact the environment for generations to come.

It is not fair that our taxes will be, at least partiality, wasted on cleaning or recovering from the mess some industries generate. That has a price but unfortunately most people ignore it and the transgressors benefit from it.As you can see, one of the critical points when calculating the impact is to use units that are directly comparable. Revenue is a factor common to any organisation (with the exception of non-profit organisations with no revenue). The idea is very simple. Imagine that we could calculate the average profit someone would get from a USD $1,000 investment in education. It’s not difficult to realise that, empirically, this profit will be several times those $1,000.

Taking another example, we can calculate the impact of an organisation like Médecins Sans Frontières (MSF) considering two main criteria: health – we could look at how much it would cost to treat someone with MSF, a positive impact measured in terms of the number of people treated – and development, because every healthy person will at least have the capability of generating a minimum amount of US dollars per year.

Looking at Walmart, we can analyse a different kind of impact on the community. According to a study undertaken by Americans for Tax Fairness, a coalition of 400 national and state-level progressive groups, published on April 15, 2014, the multinational retail corporation’s workers are costing US taxpayers an estimated $6.2 billion in public assistance including food stamps, Medicaid and subsidised housing. The report found that “a single Walmart Supercenter cost taxpayers between $904,542 and $1.75 million per year, or between $3,015 and $5,815 on average for each of 300 workers”.

A similar study showed that the American fast food industry outsourced a combined $7 billion in annual labour costs to taxpayers, accounting $1.2 billion of that total to MacDonald’s alone.

Impact analysis can also be useful to value non-profit organisations. In the case of Wikipedia, for instance, it is estimated that it could be worth tens of billions of dollars, according to an article on Smithsonian Mag. The blog and cooperative resource site hosted by the American University InfoJustice (www.infojustice.org), researchers Jonathan Band and Jonathan Gerafi identified a few factors that could help value an organisation like Wikipedia, namely market value, replacement cost and consumer value. They reached this conclusion by looking at what other sites that get similar traffic are worth, how much people would be willing to pay for Wikipedia and how much would it cost to replace the site. In the end, they concluded it is worth “tens of billions of dollars” with a replacement cost of $6.6 billion dollars. “The millions of hours contributed by volunteer writers and editors leverage this modest budget, funded by donations, into an asset worth tens of billions of dollars that produces hundreds of billions of dollars of consumer benefit”, they wrote.

We could use the same rationale to calculate any impact from an activity through four criteria that are essential to human life: environment, health, security and development. Those are all the needs humans can aspire.

These are merely simple ideas. What we aspire to achieve with this concept is to inspire people, especially academics, to go deeper in this analysis and generate a full impact table that shows the real economic impact of any activity humans may develop. Such an impact table would be useful, not only for the purpose of supplementing this SORG analysis, but also as an additional framework to guide investment decisions.

Extreme types of Organisations

The application of the SORG index enables us to categorise organisations into different groups, according to the results. These groups determine whether the organisation is more focused on its TEAM, the OWNERS or the COMMUNITY.

"Prince John" Organisation

We use the “Prince John” designation to describe organisations where the revenue directed to the OWNERS by the organisation is superior to the revenue directed to the TEAM and the COMMUNITY, or O ≥ T+C. In other words, organisations where the focus lies on the creation of wealth for the owners themselves at the cost of the workers and the community it affects. In this type of organisations, the SORG is always lower than 1.

"Robin Hood" Organisation

These would be the exact opposite of Prince John organisations, where the organisation directs most of its revenue to the COMMUNITY, or C ≥ O+T. These include organisations where the revenue is inevitably focused on the community it affects and not the workers or the owners. In this type of organisations, the SORG is always greater than 1.

"Brotherhoods" Organisation

Brotherhoods are commonly described as groups or organisations of people who share the same interests and jobs, characterised by feelings of friendship, support and understanding between people. In brotherhood organisations, the distribution of revenue widely favours the TEAM, rather than the community or the owners, or T ≥ C+O. This group could include organisations like sport clubs, NGO and government entities, where the TEAM clearly use community and owners trust and passion to benefit disproportionally. In this type of organisation, the SORG is always lower than 1.

This is a very simple classification that may help any citizen to understand the real purpose of any given organisation. It could also prove extremely useful if integrated in the rankings for world top organisations

Conclusion

The SORG is a corollary of the Sustainable Organisation model proposed in our book “The Sustainable Organisation – a paradigm for a fairer society” and originates from our curiosity to understand the world we live in as well as an attempt to improve this world. We simply want people to understand, think, compare and make wise decisions, based on the premise that wisdom is the foundation of security and development. Founded on new values, relationships, metrics and purposes, this Sustainable Organisation model is our attempt to change the way that organisations are built and perceived by society.

As a transparent society is our major guarantee to security and development, we hope this will represent a decisive contribution to a fair and sustainable society built on sustainable organisations. We see Google as a great example of how an organisation can prove to be useful and become profitable in a sustainable manner that shows balance at all the levels of the organisation.