The top three stakeholders that benefited from Amazon were customers ($164 billion), third party suppliers ($25 billion) and taxpayers ($21 billion). Shareholders made a fraction of these numbers ($15 billion).
One of the major objections against ESG raised by critics is that stakeholder value is a vague term and unmeasurable. Hence, virtually anything goes given loose definitions of who a stakeholder. I want to challenge that line of thinking and sketch a structure for what a stakeholder value add statement might potentially look like.
Inspiration from Jeff Bezos
In this endeavor, I draw inspiration from a relatively unlikely source: Jeff Bezos, Amazon CEO’s, last letter as CEO to his shareholders in 2021. Here are some excerpts arranged under helpful captions:
· Shareholder value creation:
“Our net income in 2020 was $21.3 billion. If, instead of being a publicly traded company with thousands of owners, Amazon were a sole proprietorship with a single owner, that’s how much the owner would have earned in 2020.”
· Employee value creation:
“In 2020, employees earned $80 billion, plus another $11 billion to include benefits and various payroll taxes, for a total of $91 billion.”
· Third party sellers:
“in 2020, third-party seller profits from selling on Amazon were between $25 billion and $39 billion, and to be conservative here I’ll go with $25 billion.”
· Consumer value add:
Retail consumers
“If you assume that a typical Amazon purchase takes 15 minutes and that it saves you a couple of trips to a physical store a week, that’s more than 75 hours a year saved….So that we can get a dollar figure, let’s value the time savings at $10 per hour, which is conservative. Seventy-five hours multiplied by $10 an hour and subtracting the cost of Prime gives you value creation for each Prime member of about $630. We have 200 million Prime members, for a total in 2020 of $126 billion of value creation.”
AWS consumers
“Direct cost improvements from operating in the cloud versus on premises vary, but a reasonable estimate is 30%. Across AWS’s entire 2020 revenue of $45 billion, that 30% would imply customer value creation of $19 billion (what would have cost them $64 billion on their own cost $45 billion from AWS).”
“The difficult part of this estimation exercise is that the direct cost reduction is the smallest portion of the customer benefit of moving to the cloud. The bigger benefit is the increased speed of software development – something that can significantly improve the customer’s competitiveness and top line. We have no reasonable way of estimating that portion of customer value except to say that it is almost certainly larger than the direct cost savings. To be conservative here (and remembering we are only trying to get ballpark estimates), I’ll say it’s the same and call AWS customer value creation $38 billion in 2020.”
“Adding AWS and consumer together gives us total customer value creation in 2020 of $164 billion.
Summarizing:
Shareholders $21B
Employees $91B
3P Sellers $25B
Customers $164B
Total $301B”
“If each group had an income statement representing their interactions with Amazon, the numbers above would be the “bottom lines” from those income statements. These numbers are part of the reason why people work for us, why sellers sell through us, and why customers buy from us. We create value for them. And this value creation is not a zero-sum game. It is not just moving money from one pocket to another. Draw the box big around all of society, and you’ll find that invention is the root of all real value creation. And value created is best thought of as a metric for innovation.”
· Climate change
“Amazon is making progress toward our own goal of 100% renewable energy by 2025, five years ahead of our initial 2030 target. Amazon is the largest corporate buyer of renewable energy in the world. We have 62 utility-scale wind and solar projects and 125 solar rooftops on fulfillment and sort centers around the globe. These projects have the capacity to generate over 6.9 gigawatts and deliver more than 20 million megawatt-hours of energy annually.”
“Transportation is a major component of Amazon’s business operations and the toughest part of our plan to meet net-zero carbon by 2040..….Ten thousand new (electric) vehicles will be on the road as early as next year, and all 100,000 vehicles will be on the road by 2030 – saving millions of metric tons of carbon.”
A few tweaks on the model
Here is what I would change/tweak Bezos’s model to derive an aspirational version of a stakeholder value statement to be used in other companies.
· Start with natural capital. What is that? As per the US government’s initiative to incorporate natural capital into government accounting, “natural capital measures the economic value that natural assets provide to society—from fish stocks and forests to the quality of our shared air and water.” What might that mean for Amazon? Let’s focus on the “emissions” that Amazon generated in 2020: Scope 1 carbon emitted was 9.62 million tons of carbon, 5.27 million tons in scope 2 and 45.75 million tons in scope 3 emissions. Scope 3 for Amazon includes (i) corporate purchases and Amazon-branded product emissions (e.g., operating expenses, business travel, and Amazon-branded product manufacturing, use phase, and end-of-life); (ii) capital goods (e.g., building construction, servers and other hardware, equipment, vehicles); (iii) other indirect emissions (e.g., third-party transportation, packaging, upstream energy related, lifecycle emissions from customer trips to Amazon’s physical stores). So, the sum of scope 1 and 2 emissions is 14.89 million tons, say rounded to 15 million tons. If you throw in scope 3 emissions, we get 61 million tons of carbon.
- What might be the cost of such emissions to society be? That’s a thorny question and estimates of the social cost of carbon vary from $50 a ton to $190 a ton. Let’s go with $50 a ton. If we include scope 3, this leads to a social cost of $3 billion ($50*61 million tons). I, of course, assume that consumers will be unwilling to absorb this tax.
· Let’s move to consumer value add. This is the hardest part to empirically estimate for an average company with public data. Given Bezos’s estimates, let’s go with $164 billion.
· What about employee value add? Note how Bezos discusses compensation costs of $91 billion but does not seem to address employees’ next best alternative. Stephen O’Byrne and I label the difference between compensation cost relative to what a next best alternative employer might pay as employee value add. Again, this can be an intensive data gathering exercise for outside observers. Our estimates for Amazon’s employee value add is roughly $10 billion.
· Supplier value add: A reasonable estimate of supplier value add might be margins that Amazon’s suppliers make off Amazon. Again, going with Bezos’s estimates, we have $25 billion. You could ask why I have not used an economic value-added type of motivation for suppliers. I could have used a cost of capital charge like I will for shareholder value add. But should we penalize Amazon if the supplier is poorly run? Alternatively, one could ask what supplier profits would be if 3P merchants sold their goods on a different platform? This is harder to measure but if the supplier could do better elsewhere, would they have switched to someone else? I could not make up mind on this topic and have hence left the supplier value add at $25 billion as suggested by Bezos.
· Taxpayer value add: Bezos ignores the role of the state in this conversation. Amazon collects and pays sales taxes and potentially income taxes to the state. In exchange, it pays penalties for regulatory offenses but takes grants and subsidies from the state. Let us also not forget that Amazon got a pass on collecting sales tax from its founding in 1994 to 2017. This is an advantage that an offline retailer such as Walmart did not have. The 5-10% “discount” related to sales tax in the invoice price propelled Amazon to a giant. Technically, customers had to self-report a use-tax in most states although I suspect very few did.
If one were to try and put a dollar value on this tax subsidy, consider Amazon’s sales from 1994 to 2017 which add up to $820 billion. Assuming a 5% sales tax rate, we are looking at a $41 billion subsidy that states gave up to support Amazon ($820 billion*5%). Of course, 5% of 2020’s revenues of $386 billion were collected by Amazon as sales taxes ($19 billion).
This is not the right forum to carefully assess taxpayer value add partitioned by year but a few datapoints here are relevant:
o As per the Violation Tracker database, Amazon paid $268 million in penalties and litigation settlement proceeds. Two caveats here. First, the violations, by definition, are discovered infractions as opposed to latent ones that have not been surfaced. Second, penalties charged by regulators is usually a tiny fraction of the social value lost. So, the social value of regulatory violations is much larger than $268 million.
o Next, consider the explicit subsidies that states have given out to Amazon. As per the Subsidy Tracker database, $5.3 billion has been given to Amazon primarily by Oregon ($1.5 billion), Virginia ($0.964 billion), Illinois ($0.741 billion), Washington ($0.461 billion) and Texas ($0.287 billion). You could always come back and argue these create indirect jobs in these states. But some work suggests that subsidies are an expensive way to create jobs in these states. It is not even obvious that Amazon would not have gone to that state, had the subsidy not been given. Even if that were the case, Amazon would have gone to another state but not left the country.
o What about income taxes? In 2020, net income was $21 Billion after providing for income taxes of $2.8 billion.
o For simplicity, I have only considered the income and sales taxes for 2020 and have ignored the sales tax subsidy till 2017, the explicit subsidies the states gave Amazon and the social harm suggested by understated penalty numbers.
· Shareholder value add: Traditionally net profit of $21 billion is adjusted for the cost of equity capital that the shareholder might be earned elsewhere. Assuming that Amazon’s cost of capital is 10% and given that the opening book value of Amazon’s equity for 2020 is $62 billion, shareholder value add is $15 billion ($21-10%*$62 billion). We can consider fancier versions of shareholder value add after adjusting for intangible spending and so on, but I have ignored that for now. I also deliberately ignore stock market returns of Amazon because, in a rational market, stock price captures the present value of shareholder value add. Moreover, I have no way of verifying what the market is really pricing. Is it sentiment or future profits and how much of which?
A first stab at Amazon’s stakeholder value add:
Summarizing:
Carbon tax: -$3B
Shareholder value added: $15B
Employee value added: $10B
3P Sellers $25B (unchanged from Bezos’s assessment)
Customers $164B (unchanged from Bezos’s assessment)
Taxpayer value added: $21B
Total $231B
Bottomline, customers captured most of the value added by Amazon. For sure, there are lots of holes in my analysis. But this piece was meant to simply sketch the way forward for a stakeholder value add statement. Constructive comments welcome.
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