Automation. Digitisation. Trade wars. Climate change. And now the coronavirus pandemic. To excel, in fact even to survive, there is a need for a new kind of organisational leadership regardless of the setting — for-profit, not-for-profit, private, public, or government.
We need to fundamentally rethink established norms in areas such as transport, food supply chains, healthcare, education, data management, and infrastructure. Businesses need to rethink how they operate — from channel delivery, sales and marketing, pricing and procurement, and supply chains to workforce management and cybersecurity.
For companies, that means leading in a way that:
- Benefits the larger community and the environment, while maintaining and improving financial performance (known as PPP, or the triple bottom line of people, planet, and profit); and
- Tackles the business challenges of today and tomorrow and simultaneously makes the long-term sustainability of our world a top priority.
I call this sustainability-oriented leadership or sustainable leadership.
Leaders of accounting professions worldwide have urged accountants and finance professionals to put sustainability and the fight against climate change at the forefront of their work (see "Accounting Profession Leaders Call for Action Against Climate Change", Journal of Accountancy, 25 February 2020).
Also, multiple studies have shown sustainable leadership can harness wide-ranging business opportunities and has become an important consideration in business strategy. The top business benefits are improved talent recruitment and retention and higher staff engagement; improved brand reputation and increased ability to meet consumer demand; and better financial performance.
Steps towards sustainable leadership
Investors, customers, and other stakeholders have shown a growing desire to connect a company's financial performance to its social and environmental impact. Analysts now regularly incorporate environmental, social, and corporate governance (ESG) factors into investment analysis.
An ethically centred approach to customers, employees, and the world at large is increasingly seen as an indicator that a company is a good long-term investment. In January 2020, BlackRock's CEO Larry Fink further endorsed sustainable business performance by indicating that the world's largest asset manager would incorporate ESG into its investment decision-making. Hence finance teams need to appreciate the impact of sustainability on key financial decisions like mergers and acquisitions, capital allocation, and capital raising.
Sustainability is also influencing corporate governance, as shareholders pay closer attention to resolutions that tie social and environmental performance to issues such as compensation and the qualifications of board members. Credit-rating agencies, such as Moody's and Standard & Poor's, now want to know about companies' sustainability practices. Last year, the Governance & Accountability Institute reported that the percentage of S&P 500 companies preparing sustainability reports increased from just under 20% to 86% between 2011 and 2018.
Leading CFOs and other market-facing executives have become more familiar with their companies' most vital ESG issues, and some may go as far as having a hand in shaping the company's ESG strategy. Here are initial steps CFOs can take towards sustainable leadership:
1. A logical first step in driving sustainability efforts is to look for initiatives that can drive an environmental benefit while at the same time improving a company's cost structure and operational efficiency. CFOs have the ability and occasion to head up these endeavours. Finance leaders will also need to prepare for hard questions from stakeholders and need to demonstrate a heightened commitment to ESG performance.
2. Identify major risks, including climate change, that will affect the long-term sustainability of the organisation and the steps needed to manage these risks.
3. The finance team will need to start analysing data such as water and energy use, emissions output, employee transportation, telecommuting, virtual conferencing, and supply and distribution chain policies and practices — anything that contributes to the company's environmental and social impact.
4. Rather than merely ticking the ESG boxes in the annual report, the CFO and finance team can play an active role in partnering with the business to identify which key performance indicators (KPIs) should be monitored to understand and influence the impact the organisation is having in specific areas of sustainability. What data and evidence should be collected to this end? How deeply should we consider the "so what" of those KPIs and how to determine the actions to take? How does the performance management system encourage and measure achievement of those actions and KPIs? Is there some emerging trend or concern to take into account?
5. CFOs and their teams will need to keep up with new and impending environmental and social regulation in all of their business locations and pay attention to how such regulations may affect things such as management and statutory reporting as well as the supply and distribution chain. From time to time, this may extend to locations where the company may not directly have business operations, but its suppliers or customers may be located there.
6. CFOs and their teams will need to incorporate ESG-related factors when they do the competitive scan, to learn more. Similarly, listening carefully and with discernment to the voices of external stakeholders can yield new insights. External stakeholders often are able to offer new and innovative ideas about what knowledge and skills a company has to offer, and they are unencumbered by assumptions about its business model. By doing this, a company may be able to unearth low-cost, high-impact possibilities to serve the community at large, leveraging existing internal resources.
Since the coronavirus pandemic began, ESG factors have become even more important to highlight the need to do well by society and to mitigate business risk in the medium to long term.
Savvy CFOs and their finance teams will proactively advocate responsible behaviour and transparent reporting on the one hand and on the other will anticipate the growing imperative to become more involved in sustainability issues that affect the organisation's finances and maybe survival.
Raju Venkataraman, FCMA, CGMA, was CFO and head of strategy and business development for Disney in Southeast Asia before he became a leadership coach and corporate trainer who offers his services globally. He lives in Singapore. To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, an FM magazine senior editor, at Sabine.Vollmer@aicpa-cima.com.