Global perspectives

David Pitt-Watson

IIRC Council Member

Former Co-Chair, UN Environment Programme Finance Initiative

“The proper governance of companies will become as crucial to the world economy as the proper governing of countries.”

James Wolfensohn, Former President of the World Bank.

Good governance is about ensuring the proper use of entrusted power. Today, global companies have huge influence. So, the way we govern them really matters.

Central to good governance is accountability. That those to whom we have entrusted power can be held to account for its exercise. In the case of corporations that means the company board and its senior executives.

The information they are asked to provide is of value in two ways. First it allows the principals to take appropriate action, since they know what their agents have been doing. (That is what economists call ‘exogenous’ information.) But more important agents will act in a way which ensures that the account given, is one which will be viewed positively—just as a student will study the appropriate subjects to pass an exam. As Nell Minnow cheekily remarked, “boards of directors behave like subatomic particles ‘differently when observed’”. That is one of the reasons that ‘you get what you measure’. (Economists call this sort of information ‘endogenous’.)

So we need to decide what we want companies to do, in order to decide what we should measure.

A generation ago the answer to that question would almost exclusively have been about private financial returns. It reflected what is now regarded as the extreme worldview of Milton Friedman; the only responsibility of business is to make a profit. But even Friedman noted that “the corporate executive is an employee of the owners of the business… [with a responsibility] to conduct the business in accordance with their desires”.

So what do today’s owners want from the companies whose shares they hold? Let’s remember that the ultimate beneficial owners of most big businesses are millions of people saving for long-term pensions. They are invested in hundreds of companies. They don’t want short-term profit myopia that does not create long-term value. It cannot be in the interest of such shareholders for companies to behave in an antisocial fashion, or to destroy the environment in which the owners live. Of course owners want companies to make a profit, but not one which is made by stealing from Peter to pay Paul.

That is why we are seeing such a growth in the responsible investment movement. It underpins the demand that companies be ‘purposeful’. They need to know not just about financial returns, but about other impacts, on physical, human and intellectual, on social and natural capital.

And that is just the owners. Stakeholders will be even more concerned about these matters.

Let’s not forget that the reason we want this is to enhance accountability. I am often aghast at CEOs who declare they want to run their companies purposefully, but not to be made accountable to shareholders or anyone else. These kings have no clothes.

We also need to be sure that we use existing systems of reporting and accountability before finding new ones. For example, until recently corporate accounts were valuing ‘stranded assets’, whose worth was entirely incompatible with a sustainable climate. To allow this to happen while engaging in erudite discussions about next generation reporting is at best self-deluding, at worst hypocritical.

Finally, we need to find reporting frameworks upon which we can agree. Today we have scores of them, which allows companies to pick and choose. That is not a recipe for rigorous accountability.

But what is clear is that good governance requires accountability. The future of corporate reporting must be directed towards that goal.