How to Measure Corporate Performance Like People and Nature Matter
[Music]
for a quarter of a century now
we’ve been hearing declarations by
politicians business leaders thought
leaders that what we need
is a green economy a circular economy
but instead we are still hurtling into
climate breakdown increasing
intensity of storms and cyclones floods
and drought increasing wildfires
rampant deforestation why is this
happening
i think this is because we have paid too
little attention to who
actually drives the economy these are
not isolated problems that i describe
here
there’s a pattern they are driven by the
impacts of economic activity
and two-thirds of the economy is private
sector in the u.s it is actually
three-fourths
in terms of gdp and jobs the main driver
in the private sector is the large
multinational corporation so the
question that begs to be asked is
can today’s corporation deliver
tomorrow’s economy
let’s look at it what do we have today
what i call corporation 1920 the old
style corporation
which is in pursuit of size because
volumes have to be increased
for profits to be increased it’s the big
and beautiful multinational cooperation
model
they are international arbitrages for
excellence they arbitrage cheap
resources from where licenses are
easiest like africa
skilled labor where it is the cheapest
india bangladesh
manufacturing subsidies from wherever
they are available malaysia korea india
and of course consumer demand from where
it is richest usa europe
the brics countries high net worth
individuals
they are also excellent lobbyists
lobbying has been used
to obfuscate reality for decades on end
for example fossil fuels and climate
change denial
four decades of denial for example
leaded gasoline’s health impacts
six decades of denial even though this
had been researched and established
at yale and harvard in the 1920s
another feature is unlimited leverage
we have been ignoring lessons from four
major recessions which were driven by
the excessive leverage
misused leverage including the asian
debt crisis and the mortgage derivative
crisis of 2008.
a company’s ability to leverage without
limits creates companies that are too
big to fail as they call it
and today it’s not just banks that are
too big to fail you need
banks to survive for clearing and
settlement but today we have car makers
which are too big to fail like general
motors
insurance companies like aig and even
airlines which we are talking about
now thanks to the corvid crisis and and
its recession
and of course how can i forget too big
to fail hedge funds would you believe
like ltcm whatever happened to this
concept that markets are meant to punish
the misallocation of capital the fourth
feature is unethical advertising
a 24x7 barrage of persuasion half truths
and lies
which essentially convert human
insecurities into wants
wants into needs needs into demand
demand into production
and profits advertising executives will
tell you that oh
we are ethically neutral i don’t
understand what that means
you can either in my opinion be either
ethical or unethical
all of this leads to the negative
externalities of the private sector
which are huge
and we’ll talk about that but let’s
first look at what’s the alternative
there is an alternative it’s called
corporation 2020.
a goal aligned business a business
who’s a part of a stakeholder capitalist
world and not just a shareholder
capitalist world
it was henry ford himself who said that
a business that makes nothing but money
is a poor business
recently the us business roundtable a
group of leading
corporate executives at its last summit
redefined its purpose of the corporation
to be
as pushing an economy that serves all
citizens
and this theme was mirrored also at the
world economic forum in davos this year
so we can have corporations which are
also custodians of natural capital
they exercise care they measure and
reduce negative environmental impacts
they minimize damage to natural capital
we can have corporations which are
builders of community
communities of employees suppliers
customers and even competitors
and once one such community has been
built 1.5 million housewives
by a company called matura in brazil
basically a leading cosmetics and
personal products maker
which sells through these housewives we
can have companies which are
builders of human capital institutes
like infosys hiring and training 30 000
young people every year in this campus
in mysore
it’s an example of a human capital
factory there are many like this in
india
generating billions of dollars of
positive externalities
skilled professionals taking their new
skills learning and their brand
and basically adding value to themselves
into society around the world
how do we get from corporation 1920 to
cooperation 2020
i have a theory of change that’s been
developed and worked upon by my
colleagues that just myself and many
others
it’s a complex problem so it will need
complex solutions
there are actually four layers to the
problem excessive demand
under price supply resource depletion
and losses in public capital and these
are all at the macro level
at the economy wide level but if you
notice these are being driven
by the micro level in other words the
cooperation level because it is the
marketing and advertising of
corporations that is driving excessive
demand
the leverage without limits of
corporations and also
the lack of pricing of resources
properly which is driving under price
supply
and of course underpriced resources also
lead to resource depletion
then we have externalized costs leading
to underpriced supply as well as public
capital losses
all of these micro level problems
however do have micro level solutions as
well
for instance in terms of marketing and
advertising
advertising accountability can be
achieved look at the european cosmetics
association which has
rules and regulations against the use of
sex or children
in its advertising leverage can be
contained through capital limits and
indeed through consortium limits as
we’ve had in india
resource taxations can be used look at
norway they’ve had a resource tax on
oil extraction basically a 79 resource
tax
and despite that oil companies still use
their their oily fields
and finally we can measure and disclose
externalities and that’s
what i’m going to describe to you how
this is a big problem
corporate externalities are the biggest
free lunch in human history
people like truecast and my company just
have measured and valued them and the
answer is in trillions of dollars
seven to 11 trillion dollars for primary
sector and for the entire corporate
sectors however
today’s externalities are tomorrow’s
risks and day after tomorrow’s losses
and this is why i’m optimistic
corporate c-suite executives should
realize this and investors are beginning
to realize this
however everyone is searching for
information searching for impact
information
and they don’t have it you cannot manage
what you do not measure
the c-suite should care about this
intensely not just because it’s the
right thing to do but because it’s good
for the company
because if you manage your supplies
carefully
and reduce energy use and reduce
resource use you will reduce
costs if you source your resources and
supplies from where it’s safe for
society
where you’re not going to get bans
imposed or or carbon taxes or pollution
taxes imposed
then you will reduce risk today’s risk
is tomorrow’s cost
if you develop sustainability as a core
theme in your company you will create a
culture of innovation as young people
will
step up and they will try to find
innovative solutions
for products and for processes and
finally you will improve brand value
and all of this will lead to you being
listed amongst the potential
equities and and which can be purchased
by esg funds and by sri funds socially
responsible investments
so there are benefits to being
sustainable and getting there
is something that investors do care
about if we look at this graph out here
you’ll see that the volume of debt and
equity assets
that have been examined and filtered
through some lens of sustainability or
the other
over the last decade has increased from
13 trillion in 2012 all the way to 30
trillion
in 2018 and i believe now the number is
going to be 45 trillion
we do need to start however measuring
corporate impacts to be able to inform
the corporation and to inform the
investor and this is also possible
it’s a question of broadening the
landscape which we measure today we just
measure produced capital basically
factories buildings
cash and the value of those assets to
our shareholders
and we report ifrs style year by year
but we are just measuring produced
capital in private ownership we are not
even measuring produced capital owned by
communities
which we help create through csr
programs or produce capital which we use
which is public
roads and bridges and we are certainly
not measuring human capital
that can be created and used and we are
definitely not measuring natural capital
impacts
and what binds it all together social
capital the rules and regulations the
institutions in society our impact on
those
no measurement this is the problem we
need to start measuring the entire
landscape of capitals
for performance to be measured properly
and this can be done here’s an example
done by my company
a so-called impact weighted account or
an integrated profit not account
showing the impacts along the four
capital classes aggregating them
and then also showing how it compares
with their competitors
essentially doing a survey of
competitors and also breaking up these
impacts
into the 17 sdts showing to what extent
which sdg is going to be hurt
or aided by the actions of your company
if all this is possible and it’s
happening
why doesn’t it scale why can’t we speed
this up
my friends that’s because we need a
movement for this we need you and
companies and executives
to band up and basically push for change
and the change will have to be in
regulations and awareness both
this change will enable cooperation 2020
to be seen as the greater value
generator
to society to be seen as a company that
truly performs
cooperation 2020 then will become the
dominant model not the old-style
cooperation 1920
and that in turn will give us the green
and equitable economy of permanence