May 17 2020 15 mins
John’s website: http://www.johnstretch.com
- To view a selection of blogs visit http://www.johnstretch.com/blog
- You can find more examples of the author’s writing at these two websites: https://cfo.co.za and https://fpa-trends.com
- Also visit https://cfotalks.com/podcast/29-john-stretch/
John's recent book: https://www.amazon.com/dp/B086D93NPW/ref=sr_1_1?keywords=the+hidden+balance+sheet&qid=1585295817&s=digital-text&sr=1-1
John’s YouTube channel: https://www.youtube.com/channel/UC4MvDaja0Ua50Quvk-3NY4A
Contact John Stretch:
- Email - [email protected]
- LinkedIn - www.linkedin.com/in/john-stretch-272a475
FULL EPISODE TRANSCRIPT
Adam: (00:05)
Welcome back to episode 66 of Count Me In. I am your host Adam Larson, and today you'll be hearing an important episode on ESG and the unique topic of stakeholder capitalism. Mitch spoke with John Stretch, a published author, lecturer and business consultant specializing in management accounting. John writes and facilitates workshops for various professional institutions with experience across many different industries. In this episode, he explains what the CFO's role is in managing stakeholder capitalism and increasing the value in the organization. Let's hear what he shared with Mitch now.
Mitch: (00:47)
So as I said, if we can first explain what stakeholder capitalism is and why it's so important.
John: (00:56)
Mitchell, stakeholder capitalism is another way of thinking about how we manage organizations, not just corporations, but all kinds of organizations. And in a nutshell, it says dont took it all for the shareholders, leave something on the plate for customers and workers and employees and communities and even societies. It says doing good is good business sense, and another part of the stakeholder capitalism is that managers should take a view on longterm sustainability, not next year when they make decisions. And as a consequence develope better corporate governance to make to make those decisions. And you can ask, so what's the payoff? aAnd the answer is, there's a carrot and a stick. The big carrot is that stakeholder capital is going to make your company worth more in the long term then pure shareholder capitalism. I mean you just need to look at the high market to book ratios of top hundred companies who reinvest the profits in building brands and tech and know how rather than distribute them. And of course share prices are based on prospects of intellectuals as well as physical capital. In the old days we used to call that Goodwill, but today we classify intellectual capital into four groups of human relationships, structure and natural capital. And the stick is that if we adopt the diverse view, we can say that the old movement, Freedman idea of profit without social responsibility as in fact led to responsible decisions, inequalities, damage to the environment, and so on. That's the viewpoint, and so why is it important now? Because since the turn of the century, the world economy has been, it's changed. It's been based now on intellectual, not physical capital. And we know that the value of intangible assets has grown much faster than tangibles, even if it's not all reflected on company balance sheets. And it's actually been proven, there's a, it's a book that came out last year. Capitalism without Capital with two economists have actually proved that intellectual capitalism is growing much faster in the world than the tangibles. So to make the world a better place, make your company more valuable, you should build a combination of different kinds of wealth and stakeholder capitalism has got this vision of a responsible future in which short term thinking would actually be replaced a bit of long term thinking.
Mitch: (03:26)
Now on this podcast we've had a number of conversations about reporting for ESG, and you've mentioned a little bit of ESG data already, and my next question is how do these types of capital that you are mentioning and talking about here really impact sustainability and the integrated reporting? Once again, particularly trying to give it a little bit of a finance and accounting perspective.
John: (03:50)
Okay, well, you know, I think of two overlapping circles, but for me ESG is, is more about the stick than the carrot that I mentioned earlier. ESG, Isabel sustainability. It's something that was coined in 1994 to describe as we will know, the, the ESG, Environmental, Social Governance, factors that not managers, not accountants, but investors should consider when they measuring the long term viability. So they talk about natural capital, diversity, human rights, consumer protection, and corporate governance of those things. So it's about protecting society, and so ESG today is about sustainability and corporate responsibility in the context of the fourth industrial revolution. And what are the ESG people come up with? They've come up with more reporting. So at the January, 2020 meeting in Davos, the world Economic Forum Table, this framework for reporting ESG aspects of business performance and risk, put together along with the big four accounting firms, and it says that companies should report more information, wage rights, local jobs, created gender differentiations. There is massive amount of detail here, and this revised framework is at the proposal stage. And in my view, it's going to take time to be accepted by the accounting bodies around the world. It doesn't address the cost of the systems for collecting the data and whether the the measures should be audited or whether it only apply to public companies and acceptance hasn't been universal. So it's going to take a bit of time, but on the other hand, integrated reporting and integrated thinking is the carrot, which is the other part of the circle, and, of course, managers want to measure the performance of their brands and their research and their software and their knowledge. But as you and I know, the financial accounting systems and not always very helpful and sometimes a bit contradictory, accounting by its nature is a conservative discipline. It's intended to be there all the influences of the income tax and the statutory financial reporting and the stock exchanges and so on. But intellectual capital, assets like recipes and brands, trademarks purchased from other firms,we sell the fixed assets and we write them down over the useful life. But if we do these things internally, we call them sum-costs and they included operating expenses. And so now you get a situation where the, the market value of companies is like 20 times the value of the tangible assets because everything's been written off. So the accounting profession has responded to this, this, this whole thing was saying, look, the financial reporting is one thing, but we have to have a disclosure process called integrated reporting. So open above the audited financial statements, we've got these integrated reports which communica...