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Profits alone are not a good measure of business success

OPINION
By Caroline Nyamweya | November 24th 2021

Business arrow graph chart [Courtesy]

Traditionally, the success of an organisation was measured by how much profit it raked in.

This has however changed and increasingly, the success is depicted by a model referred to as a “three-legged stool” consisting of people, profits and the planet. This model treats each of these three pillars as distinct but equal entities with the underlying concept that if any of the legs is missing or is shorter, the stool will be unstable.

There have been growing concerns over the effects of an organisation’s activities on the environment and society within which it operates. These concerns have prompted the ongoing discussions on sustainability which focuses on three dimensions: Economic, social and environmental performance of an organisation.

Inevitably, activities of every organisation have a lasting impact on the environment and society. Consequently, organisations now have a new role and responsibility to society of ensuring that they meet the present needs without compromising those of future generations. This is what sustainability depicts. The “three-legged stool” approach of profits, people and planet is now used to measure corporate performance by ensuring that business successors and future generations are not left with inherited problems.

To ensure sustainability, most organisations both in Kenya and across the globe are now investing in climate-smart solutions such as clean energy and climate-smart agribusiness. Financial institutions are also developing innovative financial products such as green bonds and green loans that are meant to raise capital for projects in renewable energy, energy efficiency, pollution prevention and control and waste-water treatment.

Others have put in place conservation initiatives that help replenish depleted natural resources through afforestation programmes and having comprehensive and effective Corporate Social Responsibility activities that ensure organisations engage constructively with stakeholders so as to add value to the communities in which they operate. All these actions demonstrate the commitment to sustainability and are aimed at supporting transition to a sustainable economy.

Undoubtedly, organisations engaging in initiatives geared towards environmental and social sustainability are now perceived more positively than those that don’t. Their corporate image is greatly enhanced and they build customer loyalty, thereby improving corporate identity and visibility to both the local community and socially responsible global investors.

There has therefore been a gradual appreciation that even though generation of profits is vital in measuring organisational success, that alone is not enough. Moreover, information that is material to investor decisions is becoming more diverse and the long-term success of a company is now dependent on other factors not reflected in its financial statements. Accordingly, sustainability is becoming inevitable, not only as a result of voluntary appreciation of its competitive advantage by organisations, but also as a result of ‘peer effect’ whereby organisations are influenced by their peers’ sustainability actions such as CSR.

The ‘peer effect’ notwithstanding, as a good corporate governance practice, organisations need to support the sustainability agenda by having strategic approaches towards managing the social and environmental impacts of their activities. In order to attract socially responsible investors, it is also important for organisations to report on their sustainability initiatives through the Environmental, Social and Governance (ESG) reporting which is now becoming popular in the business world.

The UN Global Compact has provided an ESG reporting framework referred to as a Global Reporting Initiative (GRI) which is a strategic initiative for organisations committed to aligning their strategies to 10 universally accepted principles. Participating companies are required to accept a set of core values spread across the areas of human rights, labour standards, environment and anti-corruption. Such organisations are expected to eliminate all forms of discrimination in employment, undertake initiatives that promote greater environmental responsibility, work against corruption in all its forms and ensure that they are not complicit in human rights abuses.

The Capital Markets Authority on the other hand requires organisations listed on the Nairobi Securities Exchange to have formal strategies that promote sustainability by paying attention to ESG aspects of the business which underpin sustainability and to continually work towards adopting an integrated reporting framework. The Mwongozo Code of Governance for State Corporations also requires state entities to report on sustainability in their half-year and annual reports based on the triple bottom line concept.

To this end, organisations need to commit to sustainability by clearly spelling out their sustainability strategies while ensuring that ESG and integrated reporting are as routine and comparable as financial reporting. Given that most investors and other stakeholders are now keen on companies with robust approaches to sustainability, there is every reason for organisations to align sustainability to their corporate strategies. Organisations also need to ensure that integrated reporting takes centre-stage in their reporting without viewing such disclosures as yet another business expense but as a strategy that will enhance value for the company.

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