Getting Real about Measuring what Matters

During one of my early career assignments at Philips, a global healthcare technology company, I was tasked to turn around profitability for our business in India. Measured in millions of improved cash flow, the assignment was succesful. However, after returning to my home country of the Netherlands, memories of what I had experienced in India beyond the assignment, kept haunting me. The inequality and poverty affected me to such an extent that I was ready to resign with Philips not knowing what to do next. Perhaps government, perhaps an NGO, but surely not for-profit. Fast forward 15 years and having lived and worked in many different countries, I am still employed by Philips. Why? Partially because I learnt that I wasn’t alone feeling the friction between the focus on driving share-holder gains on the one hand, and the impact that large corporations have on other stakeholders. Like many others, I felt that that friction should be leveraged for the better, to drive change from within. Philips’ stated purpose to improve the lives of 2.5 billion people by 2030 and our global leadership in matters of Environmental, Social & Governance (ESG) are great examples of progress.1 But is it enough?

The downsides of this unbelievable growth do not show up anywhere on the so called financial statements

The era of industrial revolution has brought tremendous progress on nearly all fronts that matter. Just in a few short decades, hundreds of millions of people have been lifted from poverty. The downsides of this unbelievable growth however do not show up anywhere on the so called financial statements. I am referring of course to what economists call externalities: those impacts caused by producers that are not financially incurred by those producers. By now, it is crystal clear that the growth of the past decades has been fueled by an ever increasing toll on the natural environment. A toll that will largely not be paid by the current generation, but by their children and their children. Although progress that has been made through CSR (Corporate Social Responsibility) and ESG movements, impact has been too little, too?late. ?

In fact, very little of what truly matters in light of our global challenges shows up on those financial statements that matter most for any corporate leader

In the corporate world, it is widely accepted that what gets measured, gets managed. What gets measured however, through the financial doctrine of Profit & Loss; Balance Sheet; and Cash Flow statements, is in no way representative for the negative impact that global corporations have. In fact, very little of what truly matters in light of our global challenges shows up on those financial statements that matter most for any corporate leader. If we would accurately account for the negative impact that corporations have on the environment, most bottom lines would turn deep red. Or, to make it personal: one of my own business categories in North America shows a very healthy double digit EBIT margin (Earnings Before Interest and Taxes) That same EBIT however, might very well turn red if I would account for the cost it would theoretically take to off-set the impact to the natural environment caused by the production, logistics and usage of products related to that portfolio. Apply this example to industries with a relatively much bigger industrial footprint and it becomes clear that that reality might not be one that many corporate leaders will eagerly acknowledge. It is hard enough running a global business without having to ponder about impacts that nobody is really asking us to ponder about and that don’t show up anywhere in any meaningful form. Or as Professor Mayer at the Oxford Said School of Business argued in a recent article: “It is way easier for corporate leaders to go for an opportunistic appropriation of the concept of sustainability, than having to confront the cold facts.”

I foresee a future in which corporate leaders will have to confront and manage the impact they have on society, with the same intensity that they are currently applying to managing their corporate bottom line

?I believe the coming decade will see a sea change when it comes to accountability of large corporations. I foresee a future in which corporate leaders will have to confront and manage the impact that they have on society, with the same intensity that they are currently applying to managing their corporate bottom line. Ideally because leaders will become aware of the inevitable negative consequences of not doing so. Ideally because leaders will figure out to turn risk into opportunity. But if not, simply because regulators, governments, customers and capital markets will ultimately make them do it.

Peter Bakker, ex CEO of TNT was clearly onto something when he said, during the 2012 United Nations Conference on Sustainable Development in Rio de Janeiro: “Accountants will Save the World.”2 ?Problem is, so far they really haven′t. And I don′t think they will without their key customers demanding them to do so. Although critically important, it is not enough for corporations to establish corporate sustainability functions. Only with clarity about measurements on every single level of the corporation, within the financial statements and not outside, will we get serious about bottom up change. A pipe dream? Not quite.

After the Wall Street Crash of 1929, some business leaders argued that the introduction of the Securities Exchange Commission (SEC) and Generally Accepted Accounting Principles (GAAP) would be the end of the American capitalist system. Looking back, I agree with Ronald Cohen, author of Impact 3 , that it is hard to see how previous generations were able to invest for so long without any dependable information about the profitability of companies. I also agree with him that one day, the same will be true for generations of investors, customers and business leaders that look back and will say: “How did we not take into account what truly mattered?” ?There is one important difference with 1929 though: We do not have the luxury of time to get it right.

If you would take into account the negative impact that your organization has on the environment, what would your P&L look like? And what can YOU do about it?

Through my membership as a Young Global Leader at the World Economic Forum, I will work with urgency to advocate for change. As a first call to action, I will challenge the class of 2022, including myself, to answer the following question: If you would take into account the negative impact that your organization has on the environment, what would your P&L look like? And what can YOU do about it? ?Lets then manage what gets measured and matters!

?1 https://www.philips.com/a-w/about/environmental-social-governance.html

2 https://hbr.org/2013/03/accountants-will-save-the-worl

3 Cohen, Ronald “Impact: Reshaping Capitalism to Drive Real Change”, Morgan James Publishing, 2021