Triple TOP Liners: Benefit Corporations

The Triple Bottom Line (TBL) is a well recognised approach to incorporating social and environmental aspects within the formal decisions making routines of companies. It gives social, environmental and economic aspects of performance an equal status on the bottom line of a company in recognition of the fact that if society and the natural environment suffer adversely, then so do companies.

The problem with TBL is that economics still sits imperiously alone on the top line. Core business and economic values are not challenged with a TBL which means that only economic goals are pursued with vigour whilst the social and environmental impacts are cast as either obstacles and additional costs to be overcome, or ideals to be pursued only if the real business of economics can find the time and resources.

Whilst a TBL is better for the world than purely economic forms of accounting and goal setting, it is an unsatisfactory compromise. For PR, the TBL is a hybrid of two epistemes, the Modern and the Primal (Birkin & Polesie 2011). Since the Modern possibility of knowledge is now being replaced by the Primal, should this not enable a deep rethinking of the fundamentals of corporate performance appraisal and goal setting?

Indeed it should, and it does. As the self-referencing abstractions of Modernity in the human sciences are replaced by knowledge derived from empirically-grounded science of the Primal age, we are can envision corporations in simple, new and totally changed ways. The Modern corporation is a discrete entity seeking power and growth according to its own definitions of its economic self: the Primal organisation on the other hand is a part of a network of relations many of which need to be acknowledge and acted upon for all practical business purpose. The Primal organisation is not an economic entity trying to tread lightly on social and environmental concerns (as in the TBL) but is reconstituted as an economic/social/environmental entity seeking a harmonious balance between a range of equally valid alternatives.

In this way a Primal corporation refines success. A Primal corporation strives to be not the best in the world but the best for the world….. which is precisely the goal of a Benefit Corporation.

In the USA, Benefit Corporations are emerging to change the business world. They are a new class of corporation that:

1) creates a material positive impact on society and the environment;

2) expands fiduciary duty to require consideration of non-financial interests when making decisions; and

3) reports on its overall social and environmental performance using recognized third party standards.

But most significantly, Benefit Corp. status relieves a corporation of its obligation to maximise shareholder profit – this is why PR argues that they are becoming true Triple Top Liners (TTL). (Under current US law, shareholders can sue corporate boards for not maximizing profits.)

Since 2010, Benefit Corporation legislation has been enacted in 12 states, and is under consideration in twenty more. Make no mistake about it, B-Corps are revolutionary and they have their own Declaration of Independence.

B Corps Declaration of Independence

Getting over Financial & Economic Crises

The Financial Crises of 2007/08 is judged by many economists to be the worst financial crisis since the Great Depression of the 1930s. As a result of the 2008 crisis, significant financial institutions, notably banks and stock markets, lost trillions of $US. In turn housing markets lost value resulting in evictions, foreclosures and unemployment. People saw their savings, pensions and endowments loose overnight the kind of money that takes decades of hard work to save. We are still suffering from this crises as more key business suffer or fail, high street shops and house-hold names go out of business; and  the European sovereign-debt crisis has ruined countless lives  in Greece, Portugal, Spain, Ireland and now Cyprus.

The 2008 crisis took much of the Financial & Economic world by surprise in spite of global studies and close attention from all quarters. The causes of the crisis are difficult to identify and has given rise to extensive debate. It is a global crisis and all of us are involved. The search goes on for ways to stop it happening again.

A significant amount of blame for the crisis has to be the “financialization” of the economy:

Sustainable Business Models: what can change?

The book “Intrinsic Sustainable Development: epistemes, science, business and sustainability” (Birkin & Polesie 2011) is about the impact of an emerging episteme upon ourselves, society and business. Basically an episteme is what makes knowledge possible. It can seem disturbing, even frightening, to think that our world – our whole world – can change because of a change in the possibility of knowledge. But other people see this as liberating: an exciting opportunity to venture forth into new unexplored territories just as the explorers of old.

But consider too that the world does change for individuals and groups in accepted ways. Although PR does not subscribe to any revealed religious orthodoxy, consider how the members of a religious groups, even the humbling Methodists, may regard themselves as “reborn”, “renewed” or “saved” when they accept the Faith for this brings with it a new episteme – a new possibility for knowledge; caused in this case by the recognition that we live in a God-made world. In a way, Buddhism owes its whole existence to overcoming whatever “episteme” makes knowledge possible in an individual’s life – the Buddhist seeking enlightenment and freedom from this world is doing nothing less than overcoming the episteme by means of which a world is brought into existence. Finally, every page of the holy book of Islam, the Koran, exhorts followers to “know yourself” – excellent advice and you can think of this as getting to know the knowledge that that has created our view of ourselves and the world.

But you may ask what has this got to do with business?

Returns on Growth Pains

ROCE stands for Return On Capital Employed. It underpins economic growth and is the most important equation of our times.

All accounting students learn how to calculate and use this equation within the details of corporate finance but we are all familiar with the concept. ROCE is stated as follows:

ROCE        =             Returns

                                                       Investment

It calculates the ratio between an investment and the amount of increase the investment earns. It is better known as a percentage rate of return. For example a company investing $10 million in a new product and making $2 million profit a year enjoys a 20% ROCE. If PR can afford to invest £10 in a savings account, he might make 20 pence in a year; a 2% ROCE.

If more people are to enjoy getting returns out of investments, then our economy needs to grow. This is the theory that motivates pretty well all business people and political leaders in the West and in the East. This makes ROCE an important equation – it represents our increasing prosperity and source of additional wealth.

Green China?

Is corporate China ready for the green economy? A report from the World Wide Fund for Nature (WWF) and the Association of Chartered Certified Accountants (ACCA) asked that question in October 2012 (ACCA and WWF 2012). In PR’s opinion, no! But corporate China is beginning to say the rights things, think about what is needed for a truly better world and seek sustainability credentials.

China has a massive sustainability hill to climb: very high levels of pollution; an avid shopping culture among those Chinese who can afford it; widespread poverty; a huge population; overcrowded cities; and an economy that can seem more dedicatedly capitalist, growth-minded and money conscious than the worst excesses on Wall Street. So PR does not think that China is ready for the Green Economy.

BUT, China and Chinese people are nothing if not adaptable and pragmatic. Chinese history is a record of how China adapts, accommodates change and survives - for over a very sustainable 3,000 years. Chinese people possess strong pragmatic elements, deep-seated ethical awareness and an ancient culture grounded on principles of harmony between heaven, earth and mankind. So PR thinks it quite possible that China could become Green and sustainable before the West.

The Accountant’s Economic Revolution # 02

“We need a Revolution of Capitalism to balance return on financial, natural and social capital.” So said Peter Bakker at the Prince's Accounting for Sustainability Forum at St. James’s Palace on December 19, 2012.

 

 

Peter is the president of the World Business Council for Sustainable Development (WBCSD) and a widely experienced business man from the Netherlands – find out more about Peter.

 

In his speech, Peter told us that if we are to have a future then business and accounting needs to change. In spite of all the business and accounting initiatives so far implemented, there has been nothing like enough progress. 

 

The Global Accounting Revolutionary Group

Peter made these points in contribution to the Accountant’s Economic Revolution:

 

#1 - Business as usual is not an option for a future-proofed economy. Too many business models and strategies are dependent on the notion that current economic principles and capitalism are static.  This is naïve. 

 

#2 - The conventional model for capitalism is found wanting in terms of the benefits to the majority of society, the impact on the planet, and even in terms of continued economic prosperity. 

 

#3 - Capitalism requires a new operating system, and needs to be re-booted if we are to avoid the ultimate recession or worse total collapse.

 

#4 - Business [and accounting] needs to listen to what the scientists are telling us. We must incorporate the knowledge around the Planetary Boundaries in the setting of priorities for solutions.

 

#5 - We need to consider whether current company reporting provides the right information for this radical transformation.

 

#6 - Sustainability performance needs to be integrated into strategy.

 

#7 - We must change the (accounting) rules of the game.

 

#8  - It is a revolution, a revolution of capitalism, not with the aim to overthrow it, but to improve it in a way that balances the economic, the natural and the social dimensions.

Follow this link for a summary of Peter's speech.

New Economic Order: David Korten

Is David Korten a pioneer of a new economic order? He was born in Longview, Washington in 1937 and was awarded an MBA and PhD from the Stanford University Graduate School of Business. He has taught on the Harvard Business School’s MBA and doctoral programmes. But he is far more exceptional than his brilliant academic career might indicate.

With David’s academic background and business know-how, conventional wisdom might have thought it likely that he would be a leader of some kind: perhaps a man destined to improve the business performance of America. Conventional wisdom was indeed correct on this point - but it is very unlikely it would have foreseen the nature of the improvements that David would want to make:

“Wall Street generates money in astonishing quantities through accounting tricks, financial bubbles, and debt pyramids without producing anything of real value.”

                                                From Capitalism and the Common Good, David Korten, 2012.

If Wall Street (and other financial markets) do not produce anything of real value than the legitimacy of the whole financial sector is challenged. This would indeed herald a new economic order. But where do David’s ideas come from? Are they sound?

It could be argued that David’s early, post-Stanford career from 1959 was unduly influential upon his young and passionate mind. He devoted himself to setting up business schools in low-income countries such as Ethiopia. In the developing world, David would certainly have seen the struggles, hardships and pain that might have aroused his sympathy and turned him against the securities and comforts of the American establishment. But he chose this career with the poor overseas – something within him had already turned before he even left the USA.

There is no suggestion here that David was in any way a latent Marxist; though he would have witnessed the McCarthy communist accusations in the USA, that Second Red Scare of the early 1950’s. After all, David was a business-studies student throughout that period.

But whatever resource, insight, compassion, understanding or humanity the younger David possessed that set him upon his life’s path, his later career consolidated his views. For 15 years from the late 1970s, David lived in South-east Asia and served as a Ford Foundation project specialist then as an Asia regional advisor to the United States Agency for International Development (USAID). He came to understand the root causes of development failure in South-east Asia. He began to see that the economic policies of the developed world including the USA and the UK were themselves the cause of global environmental and social crises.

Perhaps David gets his ideas by experiencing life on the outside, as it were, of the existing economic order. He got to know the downside of existing economics but unlike the millions who suffer in silence, David had the knowledge and skills to seek a solution.

Wherever his ideas came from, David is now famous for promoting a new kind of economic order. In Capitalism and the Common Good 2011, a speech David gave at the University of Oregon, he identified two kinds of economy, the existing and the emerging as follows:

The Existing Economy

“The greed-driven, money-serving, corporate-ruled Wall Street Economy measures its success exclusively by the financial profits it generates for the already rich. It neither acknowledges nor accepts responsibility for the economic, social, environmental, and political devastation it leaves in its wake.”

The Emerging Economy

“The democratic, community-rooted, market-based, life-serving Main Street economies that ordinary people are rebuilding across the nation and around the world measure success by their contribution to securing adequate and meaningful livelihoods for everyone in a balanced relationship to nature.”

David’s Emerging Economy is based on common sense, business and economic knowledge, and wide experience. But is there necessarily something else that David possesses? After all, how many business leaders in the Existing Economy posses these self-same qualities and they do not recognise the need for fundamental economic change?

What is that something else that enables David to see a world that his fellows simple cannot see? After all, it is that something else which means that David can see a new kind of economic order emerging whilst others think he is, at the best, deluded.

Does that something else have to do with epistemes, the possibilities of knowledge? An episteme change would certainly explain why David can see a wholly different world from many of his contemporaries. It is in the nature of episteme change that those with old knowledge possibilities cannot deal with, cannot see and appreciate, the new (Foucault 1970).

Perhaps we are led to conclude that David Korten’s view of economics is a consequence of his open-mindedness: his innate ability to see changes for what they are, as they take place. If this is the case then he is liberated: he deals with fresh facts untrammelled by the economics of dogma.   

David Korten

References

Korten, D. (2011). Capitalism and the Common Good. USA: Living Economies Forum. Available at <http://livingeconomiesforum.org/From-Main-Street-to-Wall-Street> [Accessed December 2012].

Foucault, M. (1970). The Order of Things: An Archaeology of the Human Sciences. London: Routledge.

Sustainable Business Models: Getting Over Growth

Existing business models have to grow. It is a compulsion and it has a well known technical driver.

The technical compulsion for growth is embedded in the way we measure business success in terms of the return created for the investment made. This is well known: if you are lucky enough to have surplus cash and you put some of this money into a savings account then you expect to get more money out after a period of time. You expect your investment to grow.

For accountants in business, this growth is measured as the return or profit gained for the capital employed or invested. It is represented by the equation

                                          Profit before Tax
                                         Capital Employed.

It is the fundamental driver of business and economic growth. It is known as the Return On Capital Employed (ROCE). To get no return is not an option in business.

This kind of growth is a problem for its disciples appear to recognises no limits to growth; this is true even when society, nature and the planet suffers because of too much business growth. Because growth causes so many problems, degrowth is now being seriously proposed.

The Club for Degrowth as featured on The Worldwatch Website

The Club for Degrowth argues that degrowth is essential for over-developed countries such as the USA and the UK. But does this mean that businesses in such over-developed countries will stagnate or wither? No - not at all…. but we do need to reconceive what is actually happening.

For example, if we first reconsider the above ROCE equation, the “Profit before Tax” and put it into the context of the world that science now reveals. The world that science now reveals is complex with many inter-dependencies,  interactions and uncertainties. To encourage businesses to focus upon “Profit before Tax” in this complex world is like asking a tourist to navigate a rain-forest using a map of London.

The “Capital Employed” for any business is not just money invested. All businesses use functioning societies and environmental inputs and necessarily create their space in the planet’s eco-systems. This has always been the case, but for too long the formal information systems of businesses focused far too much upon money transactions alone and simply did not see the social and ecological relations upon which they depend.

In the complex, interactive, interdependent and uncertain world that we now know and experience, our businesses need to generate benefits according to more than one metric: they need to deliver a Triple Top Line (TTL) (McDonough and Braungart 2002) of social, environmental/ecological and economic gains. To achieve this goal, the ROCE equation needs to be recognised for what it really is, just one of the many tools now available to assess business performance in a Sustainability Balanced Scorecard (SBC).

The Sustainability Balanced Scorecard prepared from the ISIS (Cloverleaf) Concept
(ISD Book 2011, p. 297).

References
ISD Book. (2011). "Intrinsic Sustainable Development: epistemes, science  business and sustainability. Singapore: World Scientific Press.

McDonough, W. and Braungart, M. (2002). "Design for the Triple Top Line". Charlottesville, Virgnia: McDonough Braungart Design Chemistry. Available at <http://www.mcdonough.com/writings/design_for_triple.htm>. [Accessed December 2012].

Sustainable Business Model: Recognising the Relations

A first step in developing a sustainable business model is being able to see business for what it is. If we conceive of a business in monetary terms - as monetary accounting and finance does - then we fail to recognise the rich set of non-monetary relations that are essential to maintaining a business.

In the past when businesses were conceived in only monetary terms and their success was measured crudely as extra money created, business managers and owners could become systematically blinded to the social and environmental harm their businesses caused. Back in 19th century Victorian England when the country was being industrialised, the negative social impact of business was so bad that Karl Marx dedicated his life to fight against business, the capitalists as he named them. Marx of course developed a political ideology to which China still adheres.

In our own times, businesses that do not recognise their social, environmental and ecological impacts are a major cause of unsustainable development. This is a well known fact. There are many initiatives that try and make businesses formally recognise more of the relations upon which their (and our) long-term survival depends - whether the managers and owners see the relations or not. These initiatives include: the Global Reporting Initiative, Environmental Management Accounting,  the UN Global Compact 2010-2012, KPMG Sustainability Reporting Guidelines, SustainAbility 2008 Guidelines and the growing number of sectoral reporting schemes in such as Mining and Metals, Food Processing, NGOs, Airports, Apparel & Footwear, Construction & Real Estate, Events, Logistics & Transportation, Media, Oils & Gas, and Telecommunications.

This approach is to be admired since it marks a potential sea-change in the way we assess and value business performance. However this approach does not get to the root cause of the problem. It does not provide an alternative conception of what business relations really are: instead this approach attempts to take the traditional narrow monetary concept of a business and add-on other relations. This creates many problems among which the question of boundaries is paramount.

If we do not provide a fresh core-concept of what a business really is and attempt to advance sustainability by reporting alone, then we loose sight of what the business boundaries are. This is an inevitable consequence which is analogous to trying to alter the direction airplanes take by looking at and reporting on their slipstreams.

What are the boundaries of business sustainability reporting?
(Van Wensen et al. 2011, p. 108)

Instead of “chasing tails” and trying to make the world more sustainable with reports alone, we can redefine a business at its core. We can rethink what we now know about business activity - and add back those relations that were not recognised in businesses 200 hundred years ago when their foundations were laid. We can now recognise that a business, any business, is part of complex social, environmental and ecological relations as well as economic; and we can redesign a business so that it does - as a matter of routine - add value to all these relations.

Reference

Van Wensen, K., Broer, W., Klein, J., and Knopf, J. (2011). “The State of play in Sustainability Reporting in the European Union.” CREM B.V. and Adelphi Consult., Brussels: European Union.

The Accountant’s Economic Revolution

It is nothing new for members of environmental or socialist movements to call for revisions to the capitalist system…. it is however something else when the Institute of Chartered Accountants of England and Wales (see - ICAEW) does so. The ICAEW is a professional membership organisation, supporting over 138,000 chartered accountants around the world. The highly paid members of ICAEW provide the financial and business knowledge to support individuals, organisations and communities in their goals of achieving economic success. The ICAEW and its accounting members play important roles in ensuring the smooth running of capitalism – so when they debate changing the capitalist model we should give them our serious attention.

In the ICAEW members’ magazine, Nicholas Shaxson  argues that it is time to create wealth for society – not for shareholders (“In Step with Society”, Economia, Issue 3, 2012, pp. 41-45). Is the ghost of Karl Marx giving them this direction?  And as if this forthright assault on the holy grail of free enterprise was not enough, Nicholas goes on to quote from Keynes regarding what is in essence the sine qua non of Modern financial markets – the separation of ownership and operation of capital: 

“But experience is accumulating that remoteness between ownership and operation is an evil in the relations among men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation.”

Accountant's join the Revolution