Since the industrial revolution, the market economy has propelled prosperity, well-being, life expectancy, cultural creativity and personal fulfilment. However, our economy is also aggravating natural resource depletion, deadly pollution, over-consumption and growing social concerns ranging from income inequality to climate migrations. A plethora of global studies support one of the largest scientific consensuses ever: the ecosystem that supports humankind and its business is in crisis.
The only way forward is to change how the economy operates. This starts with changing how businesses are run. Corporate governance is an instrumental tool to shift towards a sustainable economy. The essential change that will make this shift possible is making sustainability the basis of business decisions at every level. It is no longer just about doing good and making the world a better place: it is about staying in business and having a place to live.
This article is a preview of our publication 10 ideas to make corporate governance a driver of a sustainable economy. The paper suggests changes in boards’ roles and practices; and proposes legislative and non-legislative actions by EU and national policymakers and regulators. It outlines the critical importance of integrated thinking and reporting.
To make these changes, we need to think and act in an integrated way. This means not only taking into account financial capital but also the other capitals used in the <IR> Framework. They all need to be managed, but moreover, considered jointly. To create and preserve sustainable value, the focus cannot be solely on shareholders; all the relevant stakeholders of a business need to be considered. Without integrated thinking, risk and opportunities will be missed; long term value creation and resilience cannot be assured.
Boards need to integrate the environment as a consideration at all levels of the business and to take a fully integrated approach to strategy and management. This can be done with a comprehensive approach to strategic planning, including scenario analysis. Boards can also manage change inclusively and efficiently through experimentation, decentralization and empowerment
To get there, businesses need to put in place mechanisms to ensure that the business operates in a wholly connected and consistent way. Decisions can no longer be based on financial factors alone or considered in a time-frame that doesn’t match the impacts of the business. Furthermore, connecting information helps to make more informed decisions, with improved awareness of externalities. It thus leads to a more efficient and productive allocation of the different capitals needed by business both within an entity and on markets.
Businesses should report on their performance in an integrated way using the IIRC’s integrated reporting <IR> Framework. This will help to measure transformative progress and share experience on issues that are of public interest. It may be helpful to also ask businesses to explain the basis on which they make their strategic choices and how they move toward a fully integrated approach. To play their role, such disclosures would need to be verifiable and trustworthy.
Boards need to assess the skills and characteristics necessary to support their collective functioning and efficiency. Most boards have been centred around financial performance, controls and risk. It is in boards’ interest to reorganize themselves and review the roles, duties and competences of directors, without waiting for regulatory prescriptions.
Since value creation encompasses more than financial gain, new roles are necessary, and the board has a strategic responsibility to create them. These roles are necessary to take a broader perspective on value creation and fully integrate environmental, social and governance (ESG) factors with financial performance, to ensure that the business model shifts towards sustainability. Many qualified accountants, including those currently acting as CFOs and CEOs, have the education and skills to take up such new roles.
In their different capacities, accountants play a key role at all stages of corporate governance. Good business decisions start with reliable information. As businesses change their benchmarks for success, accountants contribute by: measuring impacts, disclosing information, and certifying what is reported.
The accountancy profession has leveraged its expertise in the field of non-financial reporting and now has long-standing experience on how to help companies make the right changes to reduce their environmental footprint – and costs.
Corporate governance is the prime instrument to drive change. It needs to take an integrated and holistic approach to consider all aspects of doing business. It must prioritize the transition to a circular economy as this increasingly appears as the only option in a finite world. The private and public sector need to work together more, at local, national, European and global levels. The IIRC has positively contributed to this discussion in their Corporate Reporting Dialogue. Policymakers must also play a leading role and help the internalization of negative externalities into business costs.
Adopting the <IR> Framework is a key step in the right direction. Accountancy Europe and the IIRC share the objective of better, more consistent corporate reporting that includes sustainability matters. We have been cooperating with the IIRC since its inception and will continue to do so to support effective change in this area.
Change starts today!
Now that you have a first glimpse, we invite you to read the full publication: 10 ideas to make corporate governance a driver of a sustainable economy, which aims to inspire debate, so we welcome your feedback. Send your thoughts and opinions on how corporate governance needs to evolve to firstname.lastname@example.org by 1 October 2019.