The CEO stood before the chirpy group of employees on the fifth floor, brandishing their recently completed Environmental, Social and Governance (ESG) recommendations to considerable fanfare.
The occasion was the release of the company’s much-anticipated sustainability report, a non-financial report on efforts the company was planning to make to reduce carbon emissions; a goal that the team had been working on together for months.
The CEO smiled and, holding up the freshly-printed report, declared to the enthusiastic gathering, “This is the start of our next great journey together to build a more sustainable company and a better, more sustainable future.”
I followed the CEO and the rest of the senior leadership team as they headed to the executive offices on the 35th floor. As we entered the boardroom, the CEO chatted casually to his team and nonchalantly tossed the report on to a vacant desk close by.
Once the CFO arrived, we got down to the serious business of reviewing the company’s financial statements. That was the last we heard of ‘the great journey together’.
I was reminded of this incident while reading about the sorry state of corporate governance and environmental performance in The New York Times recently. The news report suggested that “single-minded devotion (to shareholder primacy) overran nearly every other constituent, pushing aside the interests of customers, employees and communities”.
From my experience, the journalist was missing an important point – it’s not just shareholder primacy, as inappropriate as that is, but also the iron grip that financial statements have on corporate priorities and decision-making.
Financial statements not only measure corporate performance, but also provide the platform and metrics that define the success or failure of that company to the rest of the world.
The problem is, non-financial reporting of the company’s commitment to reducing carbon emissions, for example, doesn’t penetrate the core, as it’s not integrated into the financial architecture of the corporation, impacting profits, shareholder equity, etc. As a result, it doesn’t get the attention of senior management.
Regrettably, non-financial reporting gets the same treatment as the sustainability team I was talking about. But could this all change?
Last year, 181 CEOs signed a new ‘Statement on the Purpose of a Corporation’ that was published by the Business Roundtable. CEOs of major companies like JPMorgan Chase, Apple, Amazon and Walmart made a ‘fundamental commitment’ to putting all stakeholders on an equal footing in an attempt to end shareholder tyranny.
This could have been a major turning point in the way we do business, but it wasn’t. It was yet another ‘great journey together’, which joined the sustainability report on the vacant desk.
Before there can be meaningful reordering of corporate priorities, changes need to be made to financial reporting and, ultimately, to what is essentially a toxic operating ‘theory of business’.
The prevailing theory suggests that a business exists not to produce quality goods and services, but to generate financial returns for shareholders. Therefore, as my former CEO client understood, anything that detracts from this financial goal, such as investing in ESG should be avoided.
Statistics suggest that upwards of 80 per cent of a company’s value today resides in intangible assets. Included in that inventory resides perhaps the most important undocumented asset for a corporation, its reputation.
In a social media-driven world, a reputation can be damaged almost instantly, and as companies are discovering, publically committing to becoming carbon neutral and not delivering on this promise can seriously damage a business.
Investing in environmental sustainability is important, but it won’t really matter until the value of this investment is integrated into the financial architecture of the company for all to see.
There is so much that is wrong with corporate behaviour and, ironically, our current financial reporting standards and an outdated ‘theory of business’ legitimise it all.
If we want to begin a ‘great journey together’ with socially responsible businesses, we need to make fundamental changes in financial reporting, broadening what we measure and how we define success in the business world.
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Rules based on yesterday’s norms are a guarantee of failure – the rules which shape our economy will only endure if they are based on social norms that will endure. This cannot be a social norm which accepts the end of life on earth.
The economy has clearly changed. Intangibles dominate the global economy but accounting practice hasn’t kept up. As a result financial statements don’t show what is actually creating value (intangible assets) or those things that could lose value (intangible liabilities, such as climate risk).
Ultimately the fact that there is a gender pay gap is the result of decisions made, no doubt by men, based on a belief that motherhood isn’t as valuable as earnings for the company. And balancing gender pay (over time) is similarly a decision, able to be made, by men, who are choosing not to make it. Call it a conscious decision not to make a decision. Now that the gender gap has been exposed, how can the decision to balance it be enabled?