The concept of value and risk was developed in the 1980s as a new measure of investment risk. It estimates how much a set of investments might lose given various scenarios of market conditions over a certain period of time. One commentator said that in the end, the greatest benefit of value at risk analysis lies in the imposition of a structured methodology for critically thinking about risk. Institutions that go through the process of computing their value at risk are forced to confront their exposure to different risks and to set up a proper risk management function. Extending the logic of value and risk analysis to the external stakeholder environment, the quantification of the insights gained by John Ruggie and at BHP its entire leads to the calculation of what we call external value at stake. External value at stake, like value at risk, looks for potential losses and revenue enhancements emanating from the external stakeholder environment. It explicitly incorporate short-term direct costs and revenues with long-term feedback mechanisms that influenced the opinions of external stakeholders. These stakeholders' future actions impact the future revenues and costs of the company. Estimating external value at stake requires firms to combine data from media monitoring, discussion boards, chat rooms, government and community affairs outreach programs, and more all into a quantitative dataset which captures stakeholders' perceptions of the appropriateness of the firm and its operations, as well as on the issues of greatest concerns or salience to those stakeholders. You also have to identify the network of relationships that link stakeholders and their issues of concern. The critical final step is linking this information to the enterprise risk management system. These stakeholders may act or fail to act in a manner that creates variances in the firm's KPIs and financial models. We have to understand how customer retention, attraction, and willingness to pay will shift in the aftermath of a scandal. How will government policy and investigation shift? How much will legal costs increase? How much manpower will have to be deployed for crisis management? How much media spent will be required on image rehabilitation? How many workers will quit? How much will it cost to identify and train the replacements? How do these costs compared to a more proactive effort to engage the key issues of concern to the stakeholders? Calculating external value at stake will allow managers to understand whether they're appropriately mitigating risks such as those posed by climate change or human rights abuses in their supply chain. It can also guide spending on government affairs interventions on topics like tax and immigration reform. Investors can respond to the resulting insight by buying shares of firms that are investing wisely in mitigation as well as seizing opportunities. Professors of our own, one of the founders of value at risk analysis, also wrote that the process of getting to value at risk may be as important as the number itself. This observation applies in the ESG dimension as well. The benefit of external value at stake, like the benefit of value at risk, lies in the creation of a structured approach for flushing out measuring the downsides and upsides of external engagement, thereby empowering company leaders to mitigate and maximize potential outcomes. Managers who know their external value at stake will not only know whether they have the appropriate risk mitigation strategy, they'll also be more likely to shift their organization to attain and maintain it. They'll expand their risk management functions to focus not just on operational, financial, and market risks, but also external stakeholder engagement. I'd like to next share the story of two managers who transformed their organizations by seeking to measure external value at stake. First, we're going to look at Nick Cotts, at the time the Regional Vice President for environmental and social responsibility at Newmont Ghana Gold Limited. As a leader of the environmental and social responsibility function, he didn't receive a string of successes at his company. From 2006-2010, Newmont Mining Corporation, the parent and the leading Newmont Ghana Gold Limited, one of the world's largest gold mining companies, had remade its image in the communities where it operated. It had previously been reviled as a bully, and now is perceived as a responsible citizen. The work of Nick's team and their leader had propelled the company to be the first gold-mining company in the world to make the Dow Jones Sustainable World Index, which is comprised of rural leaders in sustainable economic environmental and social practices. Newmont hadn't always enjoyed such recognition. In 2006, and it found itself like many of its peers mired in controversy at the number of its operations. In Peru, the company faced strikes and protests. In Pakistan, one of its minds was expropriated by the national government after-tax dispute. Newmont's Yanacocha mine in Peru had also been investigated by the compliance advisor, an ombudsman of the World Bank as part of a conflict or dispute resolution process. In 2009, their Ahafo mine in Ghana had been bestowed the Public Eye Award by Greenpeace and the Berne Declaration on companies that they believed committed evil offenses against their communities and the environment. A Public Eye press release had chided Newmont for its scandalous gold mining project in Eastern Ghana. The head of the Ghanaian non-profit that nominated the company accused it of undertaking brutal forced relocations of local people, destroying wildlife habitats, poisoning land and the rivers. Newmont clearly demonstrated the accusations were incorrect, posting a point-by-point rebuttal online with facts and details, but its answer had not received half of the attention of the allegations. In 2012, thanks to Newmont's work and a company-wide commitment to sustainability and on the ground performance, the taint had dissipated, the torments had passed, and Ahafo seem poised to become one of the company's most important minds. Newmont had not only moved beyond controversy, but it was also lauded as one of the sustainability leaders in its industry. It had undertaken a major study which calculated the total value it created for the Ghanaian economy through its operations, and it used these calculations prominently in their lobbying and communications with the government and other external stakeholders. Based on the success as Nick's annual budgetary review approached, he expected another supportive process without challenge. That after all would assure that Newmont didn't backslide from its hard-won gains. When the meeting came, however, to review Nick's annual budget, he didn't follow the script he planned. Instead of plaudits and a free pass, Nick got pushback from the CFO. At the meeting, Newmont's leadership team asked him whether we might be spending too much on ESG risk management. He responded with mock outrage. What are you looking for? The amount of our budget that you could cut before something bad happens? He couldn't believe he was being asked to justify his budget in light of all the recent success and good news, but his boss wouldn't budge. His answer to Nick was calm but firm. Look, every other decision we make he said, every other decision in this budget review process is based on a business case. But when it comes to sustainability, your argument is always shifting to what is right, what is better. The answer can't be that we always have to spend more. At some point, it eats into profits we could return to shareholders, wages we could pay to our employees, and investments we could make. Tell me why we're spending this much money. Until you can, your budget is frozen. Nick applied a new tool that was co-developed by Deloitte and the International Finance Corporation with funding from the Norwegian Foreign Ministry. The tool had previously been applied at Rio Tinto's Alcan facility. The tool allowed him to compare four sustainability initiatives on the basis of their short-term costs and benefits, as well as their medium to longer-term impacts, both in terms of risk mitigation and market growth. When he completed this process and he was able to answer the CFO with hard evidence of the ROI of his initiatives, the more conciliatory land acquisition process for which he had hired so many additional negotiators and spent so much on training was a huge win because the average price of land acquired was $2.87 lower per square foot and the negotiations took four months less than anticipated. Similarly, the malaria eradication program that was originally perceived as a corporate social responsibility initiative was actually a strategic investment in human capital. By eliminating malaria from the workforce, it had recouped its 850,000 cost over two years because they didn't have to pay for malaria treatment or loss stays work. The same analysis was extended to numerous other programs and the cost savings found ranged from human resources to operations to development. For example, when they were assessing the benefits of addressing the concerns that the local population had around water issues, they set against the costs of investing in water treatment, the benefits in terms of having a lower incidence and a lower magnitude of protests around the water issue. By including the probabilistic impact of corporate diplomacy on hiring costs, retention rates, accident rates, work stoppages, lawsuits protests, and other material risks, according to the estimates not just of the sustainability team, but the risk owners at Newmont Ahafo Gold, the tool allowed for an estimate of the ROI on environment, social, and governance risk management. Nick's sustainability team had been transformed and empowered by their use of the tool. The members of Nick's team reported in interviews quotes like this, ''When we first heard of it, those of us on the social side were happy to get something that would help finance understand us. We're more confident in costing the programs that we do. This puts us in a much better position with finance. In previous meetings, the other departments had figures and we had to talk to explain. But now we're putting figures to our words just like the other departments.'' A quote from another member of the ES, environment social team, ''The change within our team is marked. What are these risks that we're trying to mitigate? Are their costs justified in terms of risk mitigation? Previously, the program owners weren't connecting the dots to risk mitigation or value creation. Now we challenge the numbers. Previously, we had no framework to evaluate. People are now trying to highlight the value of their initiatives for the business, not just for their stakeholders''. The impact on the external perceptions of the sustainability team by senior management in other functions was even more striking. Here's a quote from the member of the finance team. ''My biggest surprise is that it's possible for the environmental and social team to have a conversation in financial terms. Every conversation I had with them before, they could never articulate their assumptions. They couldn't acknowledge costs. Now they can and they do. They have their act together. They can explain a business case. Previously, they weren't able to make it. Finance environment social responsibility are now working together much better than before. Just those changes alone justify the use of this tool." Another executive named Lester who worked in the strategy department noted that in the last business planning meeting, he saw a huge improvement in the social and responsibility team's presentation of their budget and their use of supporting data of the business benefits of their programs. The meeting went very smoothly compared to previous efforts where they just came in and talked about the importance of making these investments. This experience mirrored the results of the Rio Tinto pilot project in Cameroon where the tool was first deployed. There, the participants noted, "That while it was important to have the carrot of a net present value calculation as a motivator for embarking on the process, it became clear that the process itself yielded value for the team. Bringing together multiple functions within the company to discuss sustainability, the risks it could help mitigate, the opportunities it could help Rio Tinto realize created buy-in from the rest of the company for the sustainability interventions and serve to more closely align sustainability investments with operational risks and opportunities." Nick felt vindicated, but later when he reflected on the experience, he realized that the process of calculating the return on sustainability had been even more important than the numbers that emerged. That process had finally taken the company where he had so long argue that should go beyond the superficial and, in his mind, the obvious debate as to whether the net present value of what he was doing was positive to how can we work together to enhance that return. Ironically, as he said, we were only able to get beyond the net present value calculation once we'd actually calculated it.
