Corporate Reporting blog

What doesn't get measured, gets ignored

The old adage of "What gets measured, gets done" has been around for many generations.  It's been embraced over the decades by many prominent business gurus and writers but has its roots in the age where human and mechanical productivity were for the first time seen as the source of competitive advantage and financial success.

In recent centuries the most powerful and dominant measure of success has been financial profit. It plays centre stage in our capitalist system, it determines how capital is allocated and how corporate success is measured and is increasingly influential in the way society rewards different groups and individuals.  

For many decades we have recognised that a model which is overly focused on financial performance may not deliver a sustainable world. Most respectable companies have tried to measure other critical activities in the business by making a balanced scorecard central to the management dashboard.

But if we're honest, it’s the financial element that still dominates all that moves. One could perhaps accept this situation if the financial measurement system was efficient at capturing all the inputs needed to reflect the contribution of business to society. Unfortunately, as we know this is not the case. It's not that accountants aren't diligent people, they are, it’s just that the model they've been asked to operate is incomplete and constructed for a different time.

Puma, the German sports lifestyle company, brought this home in a stark way a few weeks ago. In reporting an unprecedented environmental profit and loss account, it cut its reported profit of €200m  in half, by highlighting that a valuation of the environmental impacts caused by greenhouse gas emissions and water consumption along its supply chain would result in an estimated additional financial cost of €100m.

While this is an emerging field of reporting, it is a stark reminder of the inadequacy of the current financial measurement model. This ground-breaking analysis poses so many questions for the system that need to be answered on how we measure corporate success, and the knock-on effects into how the capital markets allocate capital and how wealth is distributed between key stakeholder groups. If we had to cut the pie in half, who gets what?

Importantly, Puma's analysis highlights the risk that exists to the world of continuing to push an outdated reporting model - "if it doesn't get measured, human nature has a strong tendency to ignore it". The analysis highlights the opportunity to use the reporting model as a change mechanism, for a radical rethink of business and its critical contribution to the future sustainability of the world.

Interestingly, this is what Puma are using the analysis to achieve, but for them it’s about competitive advantage, their brand, consumer behaviour, sustainable products and, yes their contribution to society.

As always, I'd be delighted to hear your thoughts and opinions on this matter

David

Systemic risk - the here and now versus the future

In reading the press over the last few days, I'm reminded again of the critical interdependencies that underpin our daily lives. We've seen the difficulty and the unintended consequences that played out in Germany as officials tried to isolate the reason for an E.coli outbreak in complex supply chains - acting first before all the facts are known is a dangerous and damaging game.

We've also been reminded of the vulnerability of Britain's energy supply at a time when nuclear energy is back under the spot light in many parts of the world. It's little comfort to anyone to know we rank alongside developing economies on energy security.

This occurs at a time when the G-20 is being warned again over the rise in protectionism by the International Chamber of Commerce. What happened to all those promises at the time of the banking crisis? Sadly politicians have shorter memories than most, despite the rhetoric of needing to plan for the long term. I was reflecting on this divergence of thinking recently having participated in a very interesting seminar on risk.

A question posed was whether some elements of risk in the world today need to be assumed by governments and could not be sub- contracted to the private sector. My own view is that the fundamentals of human life are central to any state’s mandate to its people - if the state does nothing more, it should deliver a robust and tested strategy for delivering an uninterrupted supply of heat (energy), food and water, healthcare and security. After this, everything could be considered a luxury!

In an increasingly resource constrained world, I'm sure I'm not alone in thinking that the strategy for each area must be to focus on a move to self sufficiency.

This might be a challenge for an island with a significant population, but I suspect we have some way to go in delivering on this ambition, and unless others tell me otherwise, my sense is that we have some work to do just to draw up plans, let alone putting them into effect.

Some argue we'll do something when there's a crisis, a burning platform - the lights go out, there's no food on the supermarket shelves. I suspect this might be too late.

How we measure corporate performance, seems on the face of it, almost irrelevant against these other more basic challenges. But, as I outlined in my previous blog, at the time of the launch of our Tomorrow's Corporate Reporting study, this system is pivotal to the way in which the private sector measures wealth and in turn how it operates to create it.

While we haven't necessarily got a burning platform, it does appear that change is in the wind and I hope this article - A critical system at risk - which provides some insights into why, despite the gloom, we should feel upbeat about getting corporate reporting right, even if the more fundamental building blocks of life take a little longer to sort out. 

You may also be interested in the other articles on reporting that can be found in World Watch magazine.

As always, I'd be fascinated to take your thoughts and opinions.

David