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key Points

TIME FOR AN UPGRADEThe traditional shareholder-

centred approach to corporate

governance is no longer fit for purpose.

A more inclusive stakeholder-

centred model needs to be

adopted. This is one in which

boards discharge their duties in the best interests of the company but

pay equal attention to all of its value-creating sources.

THE PERFECT COMBINATION The integrated

report is an ideal medium through which a company

can discuss all of the social,

environmental, and economic factors that affect, and are affected by, its operations.

HOLISTIC TREATMENT

The training of accountants (and

others in the finance industry) needs to cover issues such as

sustainability and climate change.

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A lawyer by training, Mervyn King served as a Supreme Court judge in his native South Africa until he resigned in 1980, frustrated with the injustices of apartheid. He became chairman of Operation Hunger, an NGO tackling child malnutrition in rural parts of the country.

In 1992 he was approached by the Institute of Directors in Southern Africa to draw up new corporate governance guidelines. With encouragement from Nelson Mandela, whom he had known before the politician was jailed for 27 years, King accepted the challenge. The three reports written by the committees that have borne his name since then have been globally influential.

The first report came out in 1994, and King II was published in 2002. “That recommended sustainability reporting to the Johannesburg Stock Exchange (JSE), which adopted it,” he says.

King was then invited to chair a committee to review the UN’s governance practices. “We took the best from governance codes globally and put that in the standards of the various agencies of the UN,” he recalls.

Noting that many firms were issuing separate financial and sustainability statements, 2009’s King III recommended integrated reporting (IR), which became a JSE listing requirement. It was a breakthrough year for IR, as King explains: “The Prince of Wales had started his Accounting for Sustainability initiative four years previously, which talked in terms of ‘connected reporting’. The summit he convened in 2009 – involving bodies such as IFAC, CIMA, the World Bank, and even the IASB and the FASB – resulted in the formation of the International Integrated Reporting Council, of which I became chairman.”

KING’S PROGRESS

An earthly chanceThe shareholder-centred governance model is obsolete – and CFOs will be central to its replacement, argues Mervyn King, HonFCMA.

The future of finance is value creation. So says Mervyn King, the visionary South African lawyer who has become a world-renowned thinker in

the field of corporate governance and reporting over the past two decades.

King, who advocates valuing enterprises through six capitals – financial, manufactured, intellectual, human, social and relationship, and natural – in his capacity as chairman of the International Integrated Reporting Council, sees a natural evolution of the accountant’s role. Chief Value Officer: Accountants Can Save The Planet, the book he has just written with Jill Atkins, chair in financial man agement at Sheffield University Management School, states that the finance function should play a key part in understanding where value has been created and, more crucially, where it’s likely to be created. Accountants can save the planet, they write, because tomorrow’s organisations will be expected to generate value in more responsible and sustainable ways. To this end, CFOs will come to be known as chief value officers.

“The world is at a tipping point because of grow-ing concerns such as poverty, wealth inequality, cli-mate change, drought, famine, and species extinction,” King says. “It is no longer appropriate for businesses to concern themselves solely with maximising their profits, especially where that would adversely affect their workers, suppliers, local communities, and the natural environment.”

When it comes to the relationship between busi-ness and society, he suggests that the argument pro-pounded by the free-market economist Milton Friedman in his influential 1970 article for the New York Times – that “the social responsibility of business is to increase its profits” – is invalid.

Integrated thinking“It seems that Friedman was saying that the corpora-tion is apart from society,” King says. “I believe that nothing is further from the truth. It is absolutely part of society. Look at the collapse of Lehman Brothers in 2008, which had an adverse impact on more than two billion people. Conversely, Microsoft is having a pos-itive impact on two billion people, so it’s clear that companies have become a critical part of society. Those of us who steer businesses have to appreciate this.

“We used to ask: ‘How much money does the com-pany make?’ Today the critical question is: ‘How has the company made its money – and what impact has

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“This concept is essential,” he stresses. “It needs to be implemented in companies worldwide to ensure value creation that’s in line with sustainability goals such as the UN’s carbon emissions targets.”

To get to this point, there needs to be a “seismic change” in the way that accountants are educated and trained. “That entails ensuring that accountants and financial managers are incorporated into integrated thinking – and that they learn how to produce truly integrated reports,” King says. “It’s in the best long-term interests of shareholders for a board to give par-ity to the sources of value creation, which implies the primacy of sustainable development in both business strategy and corporate reporting.”

WHEN ARE THE OWNERS OF A COMPANY NOT THE OWNERS OF A COMPANY?

To address the question of how businesses can create value sustainably, we must first question whether a company’s shareholders are actually its owners, writes Mervyn King. The answer is that, contrary to what traditional financial theory tells us, they are not.

There were sociopolitical pressures for the creation of a limited-liability entity in the mid-19th century. Wealthy middle-class equity investors wanted curbs on the claims of the creditors of the firms they were financing, while politicians wanted these businesses to grow in order to create jobs and boost the wider economy. The shareholder ownership model seemed the best solution. Under the UK’s Limited Liability Act 1855, the shareholders of a limited company were absolved of responsibility for its liabilities.

In legal terms, then, it’s incorrect to say that a limited company’s shareholders are its owners. A corporate body is legally a person – and owning a person is outlawed. Shareholders have no responsibility for the company. Their relationship with the corporation is transient. They don’t own anything in the business. Indeed, with the arrival of internet trading, beneficial ownership can change hands in seconds.

We have come to a situation where we understand that a company has no actual owners. The world has moved away from the primacy of the shareholder. That’s important, because the shareholder-centred model of governance does not incentivise companies to create value in a sustainable manner.

There’s a need to adopt an inclusive, stakeholder-centred governance model. This is one under which a company’s directors discharge their duties in its best interests but pay equal attention to its value-creating sources, which include the ongoing relationships between the organisation and all of its material stakeholders.

it had on the junction of the economy, society, and the environment in doing so?’”

How the company makes its money will affect all three areas, according to King. “These impacts can be positive or negative,” he says. “The positives should be enhanced and the negatives should be ameliorated or eradicated. The total value depends on your business model and strategy. Only by recognising this can you make a truly informed assessment about value creation in the longer term.”

Every company needs to engage properly with its wider stakeholders, having fair and equal conversa-tions, King stresses. Introducing the role of “corporate stakeholder relationship officer” should enhance this process and, ultimately, enhance the value of the business and strengthen its public reputation.

“Only through effective, inclusive dialogue can companies understand stakeholders’ concerns and address these adequately,” he says.

King has a stark warning for any business leader who persists in following traditional finance theory and pursuing short-term returns to keep their share-holders happy. Such a myopic approach “will only lead to complete disaster in the coming decades”. A governance model based on the primacy of the share-holder is unlikely to encourage companies to create value in a sustainable manner, he stresses (see panel, right). Even the widespread adoption of the “enlight-ened shareholder value” approach, which takes social and environmental concerns into account to the extent that they are relevant to financial value, would be insufficient to save the planet, he adds.

“Nature is in crisis and our climate is in crisis –human populations are threatened by global warm-ing. A shareholder-centred approach will not deal with these globally catastrophic issues,” King insists.

He argues that accountants need to assume a lead-ing role in transforming how business is conducted. “Finance has a critical part to play in the change from maximising profits for shareholders to maintaining value creation in a sustainable manner,” King says, observing that chief value officers will be the best equipped people to navigate their organisations safely through a particularly turbulent era for business.

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CHIEF VALUE OFFICER: ACCOUNTANTS CAN SAVE THE PLANETby Mervyn King and Jill Atkins, Greenleaf Publishing, 2016.

SIX CAPITALSby Jane Gleeson-White, W. W. Norton & Company, 2015.

READ ON

“WE USED TO ASK: ‘HOW MUCH MONEY DOES

THE COMPANY MAKE?’ TODAY THE CRITICAL QUESTION IS: ‘HOW HAS THE COMPANY

MADE ITS MONEY?’”

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