Robert McGarveyI remember it well: the CEO of the company stood before the cheery assembly of wide-eyed employees brandishing a newly-released report and declaring, “This is the start of our next great journey together, building a more sustainable company and a better, more sustainable, future.”

I then followed the CEO and his team to their top floor offices.

As we entered the executive boardroom, the CEO casually tossed the report onto a nearby chair.

Then we got down to the serious business of reviewing the company’s financial statements. That was the last we heard of the “great journey together.”

I was reminded of this incident while I read a recent New York Times article. The piece, by Andrew Ross Sorkin, was about “How Shareholder Democracy Failed the People.”

Sorkin suggested “That single-minded devotion (shareholder primacy) overran nearly every other constituent, pushing aside the interests of customers, employees and communities.”

You might be surprised to learn that shareholder primacy is a recent development. University of Chicago economist Milton Friedman championed this narrow-minded view of the corporation in the late 1960s. Friedman is infamous for maintaining that increasing profits (and therefore returns for shareholders) is the only legitimate social responsibility of management.


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Even hard-nosed Jack Welch, the iconic former CEO of General Electric, has called this “the world’s worst idea.”

But is all this about to change?

According to Sorkin’s article, 181 chief executives have given their signatures to a new “Statement on the Purpose of a Corporation” that was published by the Business Roundtable recently.

CEOs of major companies like JPMorgan Chase, Apple, Amazon and Walmart have made a “fundamental commitment” to putting all stakeholders on an equal footing and ending shareholder-tyranny forever.

Could this be a major turning point?

It might be, but my experience tells me this is another “great journey together,” which will end as soon as the press has left the room.

Before there can be meaningful change in corporate priorities, changes need to be made to financial reporting and ultimately to what is presently a toxic theory of business.

The prevailing theory suggests that a business exists not to produce quality goods and services, but to generate returns for shareholders. As my former CEO client understood, anything that detracts from that financial goal must be avoided.

The truth is a company’s financial statements – prepared by accountants – which generate the measurable data, frame and order management priorities, and ultimately define the success or failure of a business.

The problem is that very little of real value is recorded on the financial statements.

Recent World Bank statistics suggest that 80 per cent of a company’s value today resides in intangibles, like software, patented innovations and copyright materials, and in more obscure assets like ‘big data,’ corporate reputation, social media networks (like Facebook) and human capital.

Do any of these valuable assets get identified, measured or capitalized on a company’s financial statements?

The short answer is no. The vast majority of revenue-generating assets of a corporation are essentially invisible to management, investors and the public.

Were we to take the advice of the World Bank and begin to identify intangible assets and start measuring them in financial terms, we’d automatically make visible the true value drivers of a company and radically alter management priorities.

For example, measuring the asset value of an experienced workforce and capitalizing the costs associated with training, etc., transforms the employees from a cost centre (that should be reduced), to a valuable asset on the balance sheet.

Perhaps the most important undocumented asset today is a corporation’s reputation. In a social-media-driven world, a reputation can be damaged almost instantly.

Consider that Facebook lost US$120 billion of market capitalization in a single day last year when its reputation was slammed by revelations of wrongdoing that emerged from U.S. Senate hearings.

Does investing in environmental sustainability matter?

Not until reputational value appears on the company’s financial statements.

There’s much wrong with corporate behaviour these days. Antisocial activity like serial tax avoidance, environmental degradation and irrational downsizing has become the norm.

And, ironically, our financial reporting standards and harmful theory of business legitimize it all.

Should we want to start “our next great journey together” with socially responsible businesses, we need to make fundamental changes in what we measure and how we define success in the business world.

Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.

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