Aligning objectives
Aligning the objectives of private enterprise with those of society should offer the most efficient path to meeting the objectives of society.
In a global economy where the connection between stakeholders and decision-makers stretches across continents, how decisions are made may need rethinking.
Rethinking their approach, businesses and governments embrace measures such as the B-Corp status and the UN’s Sustainable Development Goals. Alongside these initiatives, entities are exploring the concept of integrated reporting, looking beyond the single measure of financial capital to six interconnected and complementary capitals forming a holistic model driving long-term sustainable value.
By measuring and reporting on a wider range of factors, business decision makers form a broader picture of success.
Circular economies
Conventional models of accounting often visualise the business as a pipeline. Inputs are processed into outputs, with an element of waste and, hopefully, profit. But in order to truly embrace the UN’s definition of sustainability – ‘Meeting the needs of the present without compromising the ability of future generations to meet their own needs’ – businesses will need to consider circular, or regenerative, economic models.
Beyond finance
Under current legal models businesses and their stakeholders are subservient to financial capital downplaying or ignoring the other capitals (see The Six Capitals below). Prioritising any of the other capitals is likely to diminish profits, while the pursuit of maximisation of profits will invariably compromise results for one or more of the other capitals. A legal form is needed that encourages decision-makers to act in the interests of society and the environment in general, rather than the discrete class of shareholders in the business.
The six capitals
Human capital
People’s competencies, capabilities and experience, and their motivations to innovate.
Social and relationship capital
The institutions and the relationships within and between communities, groups of stakeholders and other networks, and the ability to share information to enhance individual and collective well-being.
Natural capital
All renewable and non-renewable environmental resources and processes that provide goods or services that support the past, current or future prosperity of an organization.
Intellectual capital
Organizational, knowledge-based intangibles, such as tacit knowledge, systems, procedures and protocols.
Manufactured capital
Manufactured physical objects (as distinct from natural physical objects) that are available to an organization for use in the production of goods or the provision of services.
Financial capital
The pool of funds that is available to an organization for use in the production of goods or the provision of services.
How to build better business
Considering how best to build business that benefits society as well as their shareholders requires reflecting on a number of key considerations.
These are:
- Who are the key stakeholders?
- What is ‘value’ to them?
- What are the expected flows of ‘value’ from economic activity to each group of stakeholders?
- How do value flows align with the legal form of the business?
- What guidance and support exists in the regulatory and legislative ecosystem? Are there gaps?
- What are the ethical considerations in filling those gaps?
- What non-regulatory voices exist to guide potential form?
- How will record keeping, communication and reporting need to operate to fit in with the form?
- What are the qualitative characteristics needed to ensure trust in the reporting, form etc?
- What other safeguards are needed to protect the interests of the stakeholders?
Next steps
Business models are changing.
Traditional business models were built on human labour and material goods, but the digital economy relies far more instead on energy use and a relatively small number of highly specialised and capital-intensive machines.
The circular economy principles form a compelling model for sustainable business, and there is nothing to prevent businesses (and their advisers) adopting the appropriate practices and accounting models.
Legal frameworks that offered basic protections have become a ceiling beyond which many businesses and their stakeholders will not go.
For the relationship between business and society to be properly reset, we need to look again at the fundamental drivers of economic decision making in private enterprise and explore new forms that can not only reflect the needs of stakeholders, but also embrace the potential of the digitalised economy.
