WHY A TRIPLE BOTTOM LINE? At any period in time, governance mustemphasize a particular subset of activities indecision-making and resource allocation - thedominant subset of these activities is calledthe driving governance role. Driving governance role must change withshifts in the importance and nature of theexternalities that shape the agenda of variousstakeholders, particularly with respect tomaximizing the public good. An existing set of activities is not abandonedfor another, rather a different subset of theseactivities becomes dominant in decisionmaking and resource allocation.
OPERATING IN SITUATIONS WITHSIGNIFICANT EXTERNALITIES Private corporations have a fundamental fiduciaryresponsibility of auditing financial performance to ensurethey are being run in the financial interests of their owners –externalities are often relatively insignificant, although this ischanging due to increasing social and environmentalpressures1. Public organizations must take into account a broader viewof their oversight and policy responsibilities – they must dealwith significant externalities ranging from social to economic,environmental, ethical, cultural, political, and even religiousinterests – many of which are complex and ambiguous. Three types of patterns are commonly associated with theemergence of new externalities – economic and politicalcycles, industry and business-model shifts, andorganizational crisis.
SUSTAINABLE DEVELOPMENT Faced with increasing pressures to consider sustainabledevelopment, many organizations have revised theirbusiness models, and these changes are often highlightedin corporate sustainability reports and Web pages. Dupont has publicly stated that, by 2010, it will reduce itsgreen house gas emissions by two-thirds while holding itsannual energy use to 1990 levels. Suncor has pledged to make 12% of its workforceindigenous, given that such populations dominate manyof the areas in which the company works. TransAlta has stated that, with appropriate regulatorysystems in place, it could reduce its carbon dioxideemissions to a net quantity of zero by 2024.
THE NEED FOR REPORTING Because human beings are generally not adept at at self-evaluation and monitoring, a recommended practice is forannual reporting to describe how well these externalities arebeing dealt with. This need is more than disclosure – it is to determine whetherthe action plans and investment of resources actually producethe desired results. A most difficult task is the one of measurement, particularly in aculture that is dominated by financial reporting – this is wherean organization is most likely to benefit from the help ofoutsiders.
MEASURING NON FINANCIALPERFORMANCE Non-financial measures are equally, if not more,susceptible to manipulation as financialaccounting – at least traditional accounting hasrules that govern it ( for example GAAP). The misuse of non-financial measures may be evenmore damaging because of the significantopportunity costs incurred. Can end up measuring too many things, trying tofill every conceivable gap in the measuring systemresulting in a profusion of peripheral, trivial, orirrelevant measures and data. Must prove basic causality to determine therelevance of the information being collected
Jayashree sadri and Sorab SadriThe Three Ms As with any research so too with everystrategy we need to be clear about the threeMs if we are not to trip ourselves up. MEANING: what we mean and why we meanit. METHOD: how do we go about achieving ourgoals and what are our constraints. MEASUREMENT: how do we calculate ourdata to arrive at meaningful conclusions.
COMMON MISTAKES1. Not linking measurement to strategyPerformance measures are intended to direct theallocation of resources, to asses and communicateprogress toward objectives, or to evaluate performance.Adopting a framework like the Balanced Scorecard orsome other off-the-shelf checklist can be characterizedas the “smorgasbord” or “bucket” approach – fill ineach box with something regardless of strategy orobjectives.Require casual models that link performance measuresdirectly to the goals of the strategic plan.
COMMON MISTAKES2. Not setting the right targets Target setting is inherently difficult because italways takes awhile for improvements resultingfrom new initiatives to occur. Organizations are prone to focus on the promise ofshort-term results even though other initiatives mayhave better long-term prospects for success.
COMMON MISTAKES3. Measuring incorrectly Difficult to find metrics that have statistical validity andreliability. “Validity” refers to the extent to which a metricsucceeds in capturing what it is supposed to capture. “Reliability” refers to the degree to which measurementtechniques reveal actual performance changes and donot introduce errors of their own.
CORRECTING THE ERRORS The triple bottom line has no inherent value - it will offerlittle guidance if the data is based on generic orborrowed performance measurement frameworks andmanagerial guesswork rather than a through enquiryinto the factors actually contributing to successfuloutcomes for the particular organization. Otherwise, having prospered as “flavour-of-the-month”,such measures are likely to be abandoned in lean times,along with the managers who promoted and justifiedtheir existence. Unless the measures are directly linked to the strategicplan through some causal model, and regularly updated,managers are prone to disagree on the merits of theeffort and on which performance measures are criticalto success.
THE SCORE CARDCertainty - are all parties clear, every step of the way,as to what they are committed to, through both formaland informal arrangements?Transparency - with due regard for confidentiality incertain business transactions, is the public satisfiedthat the process itself is open, fair and equitable?Accountability - does the process ensure thatthose who hold the public trust are accountable,and to whom?Governance (fiduciary responsibility)- is there aclear process of governance that protectsshareholder interest?
Jayashree sadri and Sorab SadriSOME MUSTS Clear understanding of the “value” of any realproperty assets that is being considered A valuation versus an appraisal process for theseassets that is clear, accountable, defensible, andsubject to independent audit and scrutiny No right to expose the public interest to financialliability beyond the “value” of its equitycontribution
Jayashree sadri and Sorab SadriSOME MORE MUSTS Clear governance structure that meets rigid standards of“best practices” in corporate governance Clear risk management strategy in place that recognizesfinancial, environmental, social, business, market, andpolitical risk Clear disposition agreement or exit strategy for thesubsequent sale or conveyance of any assets Clear performance measures against which theachievement can be measured (gross versus net saleproceeds)
RISK MANAGEMENT GUIDELINES Governance Conflict of interest and ethical conduct standards Due diligence requirements Debt structure requirement (leverage) Record keeping and reporting Approval authorizations Adherence to public policies and procedures Competitive bidding Phasing (market risk) Letters of credit and performance bonds Insurance Cost control Independent scrutiny
“At the end of the day, the essence of acompany is not what they do - it is whatthey know” .Gary Hamel. “Innovation Now”, FastCompany, December 2002
Jayashree sadri and Sorab SadriThe Indian Trilogy It is not just what you know that matters. ThomasHobbes writing in the Leviathan that knowledgeis power was wrong. We opine that how you use the knowledge iswhat gives you power. Using the Indian ethos in management we mustmove from gyan to buddhi and culminate atvivek. Thereby a collective consciousness emerges anddevelopmental growth is enabled.
Jayashree sadri and Sorab SadriIf Not We in management shall be behaving like apatient suffering from Parkinson’s Disease:all movement and no meaning.Corporate Governance tells us what is the rightmovement whereas Business Ethics gives usits true meaning!