The plight of companies in 2021 has been to contend with two difficulties. At the start of the coronavirus pandemic last year, some economies were already in a weak state. But the restrictions since imposed by governments to stop the spread of the virus have only made matters worse.
In the early stages of the pandemic, I coined the term “coronanomics”, to reflect how the economic and health crises were intertwined. Companies have been in survival mode and boards of directors around the world are only thinking short term — about how to avoid the liquidation of their businesses.
If a company were to be liquidated at this time, the sale of tangible assets would not achieve market value and human capital would be dispersed.
When we arrive at population immunity through global vaccination, economies will go back into thriving mode. For now, though, directors’ mindset must be one of integration, collaboration and compromise, and they must act accordingly in their relationship with stakeholders. Company directors have to understand the needs, interests and expectations of stakeholders and the hardships they have suffered during coronanomics. Likewise, stakeholders need to consider the challenges companies have had to deal with.
That is why the global economic, social and environmental objectives set by the UN have become so important. Among the 17 sustainable development goals agreed by world leaders in 2015 is one concerning partnerships. That drove the rapid development of Covid-19 vaccines — and such collaboration between stakeholders and companies is essential while economies are in survival mode.
A board, however, cannot ignore its duty to think long term. In this regard, the two critical risks are climate change and cyber security. Directors have to build them into their business models and strategies for the longer term, for when economies regain momentum.
At least, finally, the framework providers for economic, social and governance (ESG) standards are collaborating after years of seeing one another as competitors. That had been an outrage because they were all dealing with improving outcomes for society, by making corporate reporting more informed, and accountability more transparent.
Now, the International Financial Reporting Standards (IFRS) Foundation has agreed to expand its mandate to include sustainability issues and create an International Sustainability Standards Board (ISSB) alongside the International Accounting Standards Board (IASB). This will give ESG standards the same reliability, consistency and rigour as the IASB financial standards, which are applicable in 144 jurisdictions around the world.
The IFRS does not have to reinvent the wheel but it can draw lessons from these collaborating framework providers in establishing sustainability reporting standards for the 144 jurisdictions.
Sustainability has two sides to it. First, there are the effects of a company’s activities, products or services on the three critical dimensions for sustainable development: the economy, society and the environment. Then, there are the effects of those dimensions on companies — for example, the pandemic’s economic and social impact is felt by businesses, as is climate change.
There is every indication ISSB standards will look through a value-creation lens: namely, the effects of those three critical dimensions on a company.
At the same time, if a company wants to report on sustainability issues to show the effects of its activities on those three critical dimensions, it could use the Global Reporting Initiative standards.
Company reporting used to focus on financial aspects under the doctrine of shareholder primacy, but, over the past two decades, it has looked more at enterprise value creation, preservation or erosion.
Company governance also needs to change — from a mindless checklist-based operation to a mindful outcomes-based approach, in line with integrated or strategic reporting, as it is known in the UK. The sustainable development goals are also outcomes-based — for example, clean water, clean production and quality education.
In corporate governance, the four critical outcomes that external stakeholders should see are: ethical culture with effective leadership; trust and confidence in the company by the community where the company operates; adequate and effective controls inside the company; and value creation in a sustainable manner.
If stakeholders’ rational conclusion is that a company is achieving those four outcomes, the company can be said to be practising quality governance. Effective leadership means that directors, individually and collectively, acknowledge that they represent a company’s conscience. A company, as an artificial entity, can have no conscience itself. When something goes wrong, therefore, society should direct its wrath at corporate leaders, rather than companies.
Just as corporate thinking has shifted from the primacy of the shareholder to enterprise value creation for the long-term health of the company, an outcomes-based approach to corporate governance would be in the long-term interests of all stakeholders.
Mervyn King is chair emeritus of the International Integrated Reporting Council and a former judge of the Supreme Court of South Africa