From Corporate Governance to Sustainable Capitalism

Although the many words of a novice may be ignored yet a sole advice from an expert should never be overlooked. During the last Africa CEO Roundtable Conference on Corporate Sustainability and Responsibility (AR-CSRTM) convened in Lagos, ThistlePraxis Consulting hosted the King of Corporate Governance in Africa, Professor Mervyn King as the Keynote Speaker. In his enlightening address, Professor King revealed the next phase of Corporate Governance from an expert’s view. Summarized excerpts from this address reveal unique views about sustainable governance in the 21st century, stakeholder activism, responsible investments, the shift to integrated reporting, and the way forward for African businesses.

Sustainable Governance for the 21st Century

Sustainable Capitalism is the ultimate goal of corporate governance and sustainable governance. One of the great shifts in the 21st century is the ultimate goal of governance and if capitalism is not sustainable, then it would be impossible to have a sustainable world in the future. Since Nigeria is not an island separate from the rest of the world, it is pertinent that boards and captains of industries imbibe this new and important concept.

The shift to sustainable capitalism is due to the high interconnectedness and transparency in the world today driven by the spread of digital technology. The recent analysis released by The Internet Corporation for Assigned Names and Numbers (ICANN), the body responsible for overseeing internet worldwide, records that about 300 million emails, 1.8 million skype calls and about 400,000 tweets are sent every 60 seconds daily. Thus, transparency has tremendous implications on the way businesses are conducted today. Moreover, the technology revolution, in addition to Net Generation of Millennials, the need for responsible investments, have radically changed the scope of doing business anywhere in the world and this places more pressure on the need for Integrated Thinking on sustainability.

New capitalists have emerged with a new approach to business that is different from those of the 19th Century therefore, companies must take into account the critical needs and interests of all stakeholders rather than those of the shareholders, if they hope to continue making profit. As a matter of fact, great companies and multinational enterprises are now appointing executives such as Corporate Stakeholder Relationship Officer (CSRO), whose sole job is to find out what the least expectations of stakeholders are and to inform management accordingly so that the shareholders can have a more informed basis for developing strategy. In a nutshell, companies no longer operate in a vacuum but rather; they operate in a triple context of Economy, Society and Environment (ES&E). There is obviously an increased need to change the corporate behaviour of companies and also to change the way businesses are done otherwise, future generations would not have a sustainable world to live in.

There is also a shift from the perspective that shareholders as members of wealthy families are the only providers of capital for businesses to the new view, which suggests that every member of the society across the globe is the new provider of capital for businesses to thrive. Therefore, the individual has become an integral part of the company.

Wrong Practices and Stakeholder Action

A classic example is the incident between Nestle and Green Peace  that occurred sometime in 2007 when the civil society group blackmailed it for not creating value in a sustainable manner. In that incidence, the corporation was working directly with the Malaysian government who had cut down the entire wetland forests in Kuala Lumpur and replaced them with Palm Tree Plantation that spanned about 50km from the Kuala Lumpur International Airport just for the sake of securing an instrument for foreign exchange. This unsustainable activity had disrupted the natural habitat of many species especially the Orangutans whose new habitat was now in Zoos. As part of its sustainability activities, Green Peace approached the Malaysian government and suggested that it cuts down some of the palm trees and re-grows the wetland forests in order to restore the already endangered species back to their natural habitat. Besides, Kuala Lumpur itself was already choking as at that time, but the government declined.

A few months later, Green Peace approached the management of Nestle at their UK Headquarters so they can in turn re-negotiate with the Malaysian government to restore the wetland forests since they were the major buyer of the palm oil. Again, their efforts proved abortive. Green Peace then decided to create an online video as a guerrilla tactic against the company – a video that went viral on the Internet in just 10 days, with over 500 million emails and about 7 million tweets concerning it.

The lesson from this incidence is the power of the digital media and stakeholders in either making or marring a company’s reputation in the 21st century within a very short time. The Malaysian government is already working to cut down the palm trees and re-grow the wetland forests in a bid to restoring the orangutans to their original habitat, something that could have been done 7 years earlier. Companies that are now impacting the society and the environment positively had looked at the sustainability issues in their locality and grafted them into their business strategy and as such are attracting substantial support from stakeholders and of course, venture capitalists.

The great asset owners of the world have all signed up to the UN Principle for Responsible Investment that would ensure that investments and contracts could only be made and signed respectively after due considerations had been carried out concerning the company’s track record on Environmental, Social and Governance (ESG) factors.

Sustainable Reporting

Hitherto, the focus of companies had been only on the financial aspects of reporting up until the end of the 20th Century. Focusing only on the financial aspect of company’s activities is tantamount to just looking at the rearview mirror of a vehicle without looking forward through the windscreen. It is pertinent to note that financial aspects impact on the non-financials and vice versa, hence, the need for Integrated Thinking and Integrated Reporting.

The new concept of integrated thinking for corporate reporting is a rather dynamic concept that emerged at the turn of the 21st Century. Integrated thinking is important because stakeholder expectations have become very high and there is a sporadic emergence of new and energetic activism of civil society groups whose main objective for existence was the pursuance of sustainable practices by corporate organizations.

Integrated thinking is essentially understanding, knowing and then planning. It focuses on how a company makes its money and how the company would maintain its value creation in a sustainable manner in years ahead. Boards and Managements of companies cannot continue to use the same tools from the corporate toolbox that created problems in the first instance. Companies have to start thinking differently and operating differently in a way that would ensure a symphony of resources and key relationships especially those of stakeholders’ legitimate expectations

Reporting value was hitherto based on silo thinking which focused mainly on financial and manufactured capitals but at present, value reporting should include intangibles such as human capital, intellectual capital, natural capital and social capital, as this would allow companies to attract young talents, great ideas and build strong brands that can sustain customers’ loyalty and trust.

The purpose of corporate reporting is to allow stakeholders make an informed assessment about the actual state of the business by considering both the tangible and intangible assets, which must be done by embedding sustainability issues into business strategy in a clearly understandable language. Traditional financial reporting gives only a part of the state of business and says nothing about the impact of products and services on the society and the environment; and as such, stakeholders cannot make an informed assessment of the sustainability of the business. Integrated Reporting on the contrary offers the much-required platform for including sustainability issues into corporate financial reports and a means for ensuring accountability and transparency. It is thus the duty of boards to spend large amounts of time trying to understand all the dynamics in an integrated report (IR): reading and understanding the non-financial information, and taking up the material information defined as that which affects how the company makes its money and the consequence on Environmental & Social (E&S) issues.

The way forward

The orthodoxy way of expecting the developed industrial economies of the world to give aid to developing economies is yesterday’s thinking and unsustainable. Both developed and developing economies need to ensure that they carry out their businesses in manners that impact positively on the society; improving the quality of life of the people living in the environment where the company is located, enhancing the environment and reducing (if not eliminating) the negative impact of environment pollution.

Furthermore, it is pertinent to ensure a more sustainable capital market in order to attain a sustainable world at the end of the 21st Century so as to avert the colossal crisis facing the planet today.

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