Applying SORG Index

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).

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):
The diagram below 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.

 Chart

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.

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

SORG Impact
Where I is the Impact, r are the revenues, F are the factors for each of the n criteria affected by the organisation's activities.
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.

SORG

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:

Harmony measures fairness
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.

SORG III
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 experiences. 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:

Balanced Organisation

 

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.