CPAs play a critical role in an evolving corporate mindset by establishing transparency and accountability (Getty Images/Morso Images)
Believe it or not, corporations weren’t always driven by profit.
Dating back to the 17th century, the earliest corporations were established to help support the greater society, whether it was to build hospitals or effectively develop a product; the corporation offered a formal, organized structure meant to protect liabilities and the management of the business itself. It’s not that they weren’t making money, but that was not strictly the focus.
Only later did the corporation’s primary goal shift to constant economic growth—driving profit margins and enhancing shareholder return. This new emphasis led corporations down an entirely different path.
But there has been a recent shift. We are now beginning to see the return of the purpose-driven corporation and accountants will play a key role in a trend that is expected to continue.
Arguably the chief driver of the profit-driven company was the emergence of the capital market system and the advent of trading shares. Those external forces meant that corporate success became motivated by raising capital and measured by how much the share value increased.
Some economists would point to the case of Henry Ford, who established the Ford Motor Company in 1903, as a turning point. Ford, in my opinion, understood the bigger economics of things. He wanted to raise wages and provide an income that would ensure his employees were able to buy homes and buy a car (he even once said he hoped his workers could one day buy two cars, which was unheard of in those days) and recognized an opportunity to influence social good as well as economic prosperity. Ford’s board of directors—part of the corporate structure—pushed back on this, concerned that he was going against their mandate of optimizing profits and value. They overruled him.
Many decisions that lead to profitability are short-term in nature. Longer-term growth and success often come at the expense of immediate gains.
Now corporate leaders are beginning to redefine success, arguing that they can’t call themselves successful without delivering success in a broader context beyond shareholder value. Both leaders and investors are realizing that the truly successful companies are ones that contemplate the success of the societies that they rely on for customers, suppliers and employees—all of whom must be successful as well, or else the corporation won’t survive. An organization must consider more than just how it contributes to its own bottom line.
That is just one piece of the puzzle, though. Beneath the surface is a broader democratization of the business world as a whole. People are much more aware of, and concerned about, issues like climate change, social inequality and human rights.
Social purpose in business is a concept that has moved from the fringe to the mainstream. Corporations are being held to account by their shareholders and employees. Investors are pushing companies to define their social purpose, because they realize that can lead to long-term value. Even institutional investors, like pension funds whose outlook is 60, 70 years down the line are recognizing that the purpose-driven model is what will allow them to reap the returns.
The motivation for socially responsible corporate governance goes beyond just doing the right thing. There is a tangible element behind this movement: when purpose is built into a corporation’s mandate, then it begins to raise and reallocate capital investments in line with that social purpose. Investors and corporate leaders increasingly believe that those organizations that are purpose-driven will be more financially successful. They are going to drive value, and, as a result, will be better investments. And so in many ways this mindset shift from profits toward social good has become a survival tactic. Evolve or die.
Through transparency and accountability, CPAs are playing a critical role in shepherding this evolving corporate mindset.
Take, for example, the countless companies that are now committing to climate-driven measures like “net zero.” CEOs across sectors are celebrating their own efforts in this regard. But when put to the test, do they really have the capacity and internal capabilities to contribute to net zero? Do they have a real plan? Too often the answer to that question is “no.” That is precisely why now is the time to promote the measuring and reporting of these ambitions. Accountants are the ones who will put the measures in place that will allow investors to evaluate a corporation’s performance against its purpose. Accountants are the ones who will ensure that we aren’t simply taking leaders at their word. We are holding them accountable.
Embracing this underlying role will be a big part in continuing to attract young people to the profession. Our focus must go beyond the numbers—the dollars, cents, and profitability. Much like corporations themselves, our own purpose is changing as well.
Expand your mindset at the upcoming ESG Annual Symposium. The virtual event takes place on June 2, 2022 and includes sessions on best practices for communicating net-zero targets and the impact how to measure sustainable-driven financial value.
Plus, find out how CPAs exemplify the Canadian Ideal of Good Business.