The Sustainability Octopus

Does any one know what the word “sustainability” really means? We all believe that it signifies long term viability, but its definition varies from application to application. And for people who care about our environment and our society, it connotes an implication of healthiness as well.

But how can one assess the sustainability of organizations? Don’t they simply try to maximize their immediate profits every year? Or is it possible to broaden one’s analysis of a business entity to evaluate notions like stability and fitness too?

The International Integrated Reporting Council (IIRC) has created a model that defines the extent to which organizations achieve the twin goals of financial stability and sustainable development. Believe it or not, the Council refers to this framework as an octopus because of its round central body and its many tentacles. If you download the primary image of the model, you’ll see that it is entitled Octopus.jpg.

So … what should we make of it? First and foremost, the central body of the model focuses on business activities. It highlights how organizations acquire inputs, transform them, produce and sell outputs, and then create outcomes that extend well beyond the generation of immediate profits.

The tentacles refer to all of the internal and external resources that businesses utilize to conduct their activities. Financial, manufactured, and intellectual resources appear on their balance sheets as money, as tangible assets, and as intangible assets, respectively. And although their human, social / relationship, and natural resources do not appear on their balance sheets, they are nevertheless utilized for business operations.

These six categories of resources are called “capitals” because accountants quantify them as: (a) the direct value of the assets, minus (b) the value of the liabilities that are incurred to develop and maintain them. Because Assets minus Liabilities equals Capital in the classic accounting equation, these net asset values have become known as “capitals” by users of the framework.

Not yet impressed? Then consider the fact that an author named Jane Gleeson-White emphasizes this model in her non-fiction book entitled Six Capitals, or Can Accountants Save The Planet? She believes, for instance, that our society will only be able to regulate the private sector’s use of the earth’s limited set of natural resources by devising methods to measure the value of those resources. And this type of task can only be completed by accountants.

That’s why the New York State Society of Certified Public Accountants will join the New York Hedge Fund Roundtable next month to present its first annual investment leadership conference on sustainability. Ms. Gleeson-White will appear at that conference, and will presumably exhort the accountants in the audience to proceed with the task of saving the planet.

In other words, the Sustainability Octopus is more than a complicated theoretical model. It helps us understand how businesses develop, utilize, and deplete or pollute valuable internal and external resources. And serious authors like Ms. Gleeson-White are asserting that accountants are uniquely qualified to measure the extent to which these activities are sustainable over the long term.

The next time you join a conversation about the Sustainability Octopus, by all means, please feel welcome to smile at the slight absurdity of the visual reference. But after you do so, then please respect the gravity of the subject matter. After all, the planet’s future might be at stake.

In Corporations We Trust

Many thanks to all of my friends and colleagues who responded with such vigor to my previous blog post entitled Is Trust Necessary? In that post, I suggested that the European leaders who are embroiled in the German – Greek dispute shouldn’t worry so much about trusting each other, and should instead focus on developing reliable verification controls, in the manner first espoused by Ronald Reagan and Mikhail Gorbachev and currently advocated by John Kerry.

That led to a considerable amount of consternation and debate among my readers, with some individuals brusquely asking me whether I was actually implying that trust is worthless. My response?

Of course not. After all, necessity and worth are two entirely different concepts. In fact, although trust is not an absolute requirement for negotiating treaties, it is indeed helpful when it exists.

The same concept applies in the corporate world. Why, for instance, is Apple’s global brand worth more than $118 billion? It is because Apple has built the most valuable brand in the world by ensuring that its customers trust it to provide the most intuitively simple and immaculately stylish electronic devices on earth.

This customer trust in the Apple experience extends to other forums as well. Its unique retail store environment, for instance, extends its product experience to the shopping milieu. And the late Steve Jobs, a person who was trusted to perfect every detail of Apple products, remains one of the most fascinating leaders in business history. Biographies of his life still enrich the book industry.

Of course, it is true that generic “no name” products do exist. They often do quite well in the market place. Indeed, it is obvious that such trust is not necessary to build a successful business.

Nevertheless, Apple has demonstrated that trust can be extremely beneficial. And many other organizations have done so too.

But how can we assess an intangible, and sometimes ephemeral, advantage like trust? Although it represents a tremendously valuable asset, no corporation records “Trust” on its traditional financial statements. And yet some contemporary accountants are starting to design ways to account for trust.

The International Integrated Reporting Council, for instance, defines Social and Relationship Capital as one of the six value drivers (i.e. the “six capitals”) of a business. Trust is a key component of Social and Relationship Capital.

In addition, the Global Reporting Initiative states that “building and maintaining trust in businesses and governments is fundamental to achieving a sustainable economy and world.” It names Trust, along with Transparency and Decision-Making, as the three primary outcomes of its Sustainability Reporting Practices.

This emphasis on non-traditional corporate reporting represents a practice of codifying and then verifying the assertions that are made by corporations about their socially responsible business practices. Its underlying assumption is that public accountants will audit these assertions and verify their accuracy, in the same manner that they audit and verify the traditional financial statements.

In other words, when assessing the business practices of corporations, these organizations aren’t really assuming that verification activities can suffice in place of trust. Instead, they are assuming that verification activities will lead to trust.

It’s a distinctly different premise than the one espoused by Reagan, Gorbachev, and Kerry in the political world, isn’t it? And yet it’s quite possible that, in their world, those three gentlemen would hope that verification activities will eventually lead to trust as well.