Why a new capitalism requires a new accounting
Accountants and CFOs need to focus on organizational value creation that extends far beyond a financial lens (Getty Images/alvarez)
The calls for a new capitalism are increasing. Bankers, investors and business leaders are joining others who are challenging an unsustainable status quo. Although the degree and speed to which capitalism will evolve remains to be seen, dramatic shifts in our ideas about acceptable business behaviour are taking form. Existential issues such as climate change, the global pandemic, crisis in the world economy—and the stark inequalities these have exposed—have brought us to a tipping point. Change is inevitable, not simply because it is the right thing to do, but because it may be necessary for human survival.
The World Economic Forum (WEF) has long been a champion of the principles of a new capitalism. The WEF has done extensive work to define this as the capacity of the private sector to generate long-term value for all stakeholders, including shareholders, members of society and our planet. We have already seen major corporate leaders, in partnership with the WEF, speak up and commit to a rebalancing of corporate purpose around this concept. “It’s time for a new capitalism—a more fair, equal and sustainable capitalism,” Salesforce CEO Marc Benioff wrote in a New York Times column, “where businesses . . . don’t just take from society but truly give back and have a positive impact.”
Capitalism, as it exists today, has driven significant advancements in our world, but it is also a root cause of global inequity, giving grossly inadequate attention to social and environmental issues. The inherent competitive nature of the system, which prioritizes profitability and shareholder value, has failed to unfold in a sustainable manner.
Today, a new expectation for corporate performance is emerging. As the world shifts its attention to this broader definition of capitalism, the accounting profession has an opportunity to respond.
Accounting is the language of business and it plays a critical role in transactional processing, measurement and reporting on financial performance. This is important because financial capital enables corporations and other organizations to achieve their objectives. Accounting then demonstrates and communicates if those objectives are being achieved in a fiscally responsible manner. Yet accounting does little to report on the actual achievements of newer, purpose-driven objectives in which this financial capital is being invested.
But the language of business is changing. Accountability and transparency are foundational tenets of the profession and they are at the heart of this discussion. Corporations and their leaders are expected to state what they are doing, how they are doing it and whether or not they have achieved their goals. This relies on clear and understandable reporting that will inform decision-making and lead to fundamental shifts in behaviour by corporations, investors and other stakeholders across the entire system.
In his 2016 book, Chief Value Officer, Mervyn King, former chair of the International Integrated Reporting Council (IIRC), makes a compelling argument for accountants and CFOs to focus on organizational value creation that extends far beyond a financial lens. King advocates for a multi-capital approach to long-term value creation. These multiple capitals include: natural, human, social and relationship, manufactured and financial. As this is far different from a traditional capitalist perspective, how we define success and measure performance must also be different. Movement toward a new form of capitalism is incumbent on changes in the underlying framework and paradigm that support it.
Opportunities for change are emerging. Social purpose corporations, the doughnut economy, and a transition from an industrial age-based linear economy to a circular economy all give rise to the need for a new range of performance metrics. Frameworks such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) and integrated reporting provide some of the answers. Most recently, we are seeing the likely establishment of a global Sustainability Standards Board by the IFRS Foundation, with an initial focus on climate change—a critical issue of our time. The confluence of sustainability reporting frameworks appears to be on the horizon.
In accounting for sustainability, the measurement and reporting of social and environmental factors must be viewed as essential in corporate performance. While helping to drive long-term value creation for a broad spectrum of stakeholders, these elements must become the foundation of corporate purpose.
The opportunity is now for professional accountants to demonstrate leadership and help drive the changes our world needs. We can drive systemic change by extending the same effort toward these critical areas as we do to financial performance. With the movement toward a more inclusive form of capitalism that embraces multiple measures of success for both people and planet, the need for a new accounting is clear. As CPAs, we need to measure what matters most to ensure that which matters is achieved.
SUSTAINABLE ACCOUNTING
Look to CPA Canada’s Foresight: Reimagining the Profession initiative for insights into how the accounting profession is embracing measuring value beyond financials and establishing new models for data governance, developing skills and competencies.