The turn towards corporate social responsibility may have started as a moral one. However, the economic arguments are starting to speak louder and accounting firms are uniquely positioned to support this growing interest.
Why Focus on Sustainability?
Most businesses have operated under the same fiduciary concept since the 1970s. From Milton Friedman’s New York Times essay entitled A Friedman Doctrine: The Social Responsibility of Business is to Increase Its Profits, and Michael Jenson and William Meckling publishing their paper on the principal-agent problem, it was clear thoughts on capitalism were changing.
The idea was that a company’s only responsibility was to increase profits for the owners/stockholders, as long as it didn’t engage in deception or fraud. Since then, shareholder primacy has become dogma and a sacred cow. Public companies started to live and die by their earnings reports.
Measuring a business’s health and success by one variable may make things easy, but it does not reflect an organization’s actual health or ability to continue to generate earnings in an inevitably changing market. The tides are turning from shareholder value to stakeholder value. Not just operating a business on the triple bottom line, but the quadruple bottom line of people, planet, purpose and profit.
The evidence of an evolving world and shift in investor focus is most visible in the financial markets and company valuations. The gap between a company’s value on their balance sheet and their market value reflected in its stock price grow larger each year.
Earlier this year, the Governance & Accountability Institute shared that sustainability reporting and disclosure activities for the S&P 500 was at an all-time high of 90 percent. These reports look at everything from risk management to internal controls. Sustainability reporting exists to reflect the intangible value that has been traditional missing from book values and financial reporting for enterprise valuations for buyers and investors.
The message of driving shareholder value is rapidly changing to a more socially responsible stakeholder value. The Business Roundtable, a non-profit association that is comprised exclusively of CEOs of major U.S. companies, has been beating the shareholder drum for the past 50 years.
Surprisingly in 2019, the Business Roundtable came out with a revised ethos stating the purpose of a corporation was to promote a commitment to all stakeholders (customers, employees, suppliers, communities, environment, and shareholders).Business isn’t looking a whole lot like “business as usual.” Sustainability is positioning to be the next big disruptor and the future of business.
Why Have an Accounting Firm Focus on Sustainability?
As mentioned before, accounting firms are uniquely positioned to support this growing interest. As trusted advisors, firms are established to offer assurance and transparency in this process. Auditing processes, calculating data, and analyzing gaps is work that is all in our wheelhouse.
In 2018, our firm became the first and only accounting firm in California to attain B Corporation (B Corp) certification — a globally recognized for-profit certification granted by the non-profit B Lab for companies meeting rigorous standards of social and environmental performance, accountability and transparency. After completing this process ourselves, we began to see the benefits in our operations and how our clients could benefit.
An audit partner also expressed interest in diving into Sustainability Accounting Standards Board (SASB) work and supporting clients with tracking and reporting nonfinancial metrics. We combine these services to form a sustainability practice.
The compliance services that the accounting profession has historically relied on to turn a profit is becoming more commoditized and suffering from lower margins. Many see the writing on the wall and that the future of accounting is consulting. To that end, firms have started building out consulting services and seeking out ways to serve clients in nonfinancial compliance means.
Sustainability frameworks also assist firms in gaining a deeper understanding of their clients and how to serve them. You get a holistic view of a company’s operating structure that is more encompassing than that of a typical audit.
Besides having the skill set and level of trust to provide these services, accounting firms can significantly benefit from adopting sustainability practices themselves. As purpose-driven space continues to grow, becoming a purpose-driven firm, like a certified B Corporation, is a valuable differentiator in a rapidly emerging area.
When thinking about new service lines and consulting practices, it is good to think outside the box. Academics and corporate executives alike are seeing a critical link that exists between sustainability performance and financial performance. Accounting firms that can station themselves at that intersection will be poised and ready. It’s an exciting and vital new area to explore.