If asked to identify any emerging theme resulting from the events of 2020, I’d have to say that we are challenging historical norms at a record-setting pace. There is a large degree of discord in our political system regarding the state of our economy and the suggestions on how to fix it are endless.
Historically, our capitalistic system has favored companies that create economic value through profitability, growth, and retained earnings, almost exclusively measuring and reporting only these financial components. I would suggest that we consider viewing our economic recovery from a multi-dimensional viewpoint.
People First Philosophy
Sometime in the middle of the 20th century, the business community began recognizing the importance of corporate culture, and how it helped companies drive economic success. This concept continued to evolve and gain favor, becoming a staple of the business lexicon. In September of 2013, Curt Coffman penned the book, “Culture Eats Strategy for Lunch” borrowing a phrase first introduced by Peter Drucker, who has been called “the founder of modern management.”
There are many factors that go into developing corporate culture; tone at the top, policies and procedures, mission/vision/value, etc. But, at the very center of all of it are the employees; people who work within the organization at all levels. People want to feel good about the work they do; proud of their company and management, and of what they collectively produce; and excited for the opportunities they have in working for their company.
We regularly measure employee satisfaction, evaluating responses on a variety of questions around all the things mentioned above, and many others. We even give awards to companies whose employees respond most favorably on these factors. However, have you ever made a purchasing decision or investment decision based on a report produced by a company about their corporate culture, employee satisfaction or any of these “Best Company to Work For” awards?
Earth Day was first celebrated on April 22, 1970, just over 50 years ago. We recognized then that we humans, the most dominant inhabitant of this planet, needed to be better stewards of our necessary resources. Finding more sustainable ways to produce food, energy, goods and services, etc. became a pursuit we began to collectively commit to.
Science and technology have developed methods for measuring environmental impact; from carbon emissions, use of renewable resources, impact of disposal, etc. The International Association for Impact Assessment (IAIA) defines an environmental impact assessment as “the process of identifying, predicting, evaluating and mitigating the biophysical, social, and other relevant effects of development proposals prior to major decisions being taken and commitments made.” I can even use my TripIt account to measure the carbon footprint of my annual travel plans; but, again, how many of us factor our understanding of a company’s environmental impact into our purchases?
I ask these themed closing questions somewhat rhetorically. I’m sure many of us at least think about, or consider how companies treat their employees, company culture and environmental impact when choosing our business partners. Ultimately, I believe decisions are made largely on personal economic impact (best cost/value, highest return on investment, etc.). Most company’s annual reports focus on financial position and results, risks that could jeopardize future financial results, product innovations that are expected to enhance future financial results, etc. There is little information that reports on the Company’s environmental impact, or how they treat their people, or how/where they source raw materials or components.
The concept of “Sustainability Reporting” roots back to the 1980s, in the form of Environmental Reports produced by chemical companies who were battling an image problem. This evolved into Corporate Social Responsibility, which was more of an internal commitment by smaller or medium sized businesses, that aim to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethically oriented practices.
More recently, the concept of a Triple Bottom Line, or TBL, is gaining momentum. I personally gravitate to this concept because, well, I’m an accountant and we focus a LOT on the bottom line. The idea of a TBL is you have a measurable outcome that not only focuses on economic gain or profit, but also the company’s social and environmental impact. I think we’re all generally familiar with economic reporting, which includes revenue, costs and growth. Social impact measures the company’s charitable contribution, trade policies, employee welfare, and other social factors. A company’s environmental impact considers natural resource consumption, stewardship of land and land use, and disposal or waste management.
All of these multi-dimensional reporting models focus on Stakeholders (investors and consumers), instead of Stockholders (purely investors). Imagine if the next time you looked at buying a can of beans, you were able to not only see the cost, cost per ounce, and nutritional value per serving, but also a social and environmental impact score. Would you perhaps consider spending a few pennies more on the product that was more sustainably produced by happy employees working for a company that valued the work of community non-profit organizations?
The Sustainability Accounting Standards Board (SASB) was created in 2011 to develop a framework for sustainability accounting and reporting. In December of 2012, the American Institute of Certified Public Accountants (AICPA) created the Sustainability Assurance and Advisory Task Force to develop standards for providing assurance on sustainability reporting. There are many public companies who have begun to embrace sustainability reporting. According to the Governance & Accountability Institute research results, during 2018, 86% of S&P 500 companies published a sustainability/responsibility report, up from 20% in 2011. I’m hopeful more will follow suit.
So perhaps before considering extreme economic measures with an unknown impact, we should consider whether adjustments to stakeholder reporting could be made, resulting in a capital market that enables the free flow of cash and capital to those who embrace a multi-dimensional approach to measuring profit defined by more than just money.