The Emergence of the Triple Bottom Line

Roger Hill, Head of Financial Management Advisory at global advisory firm KPMG, wrote the following editorial concering the emergence of triple-bottom-line reporting in the post-recession economy:

Once the credit crisis is firmly consigned to corporate history, we will likely reflect on just how dramatically it changed the corporate landscape. Not only will it have sent some mighty business names to the wall, it will also have been responsible for fundamentally changing the way the business world operates.
One such example may be in the way that corporate value is determined; will financial measures still be used in isolation as the measure of business value? This approach will soon be challenged, claims Rodger Hill of KPMG Advisory.

The days of purely measuring business performance by financial result may well be numbered. In its place, I believe that discerning investors will look for something broader to measure an entity’s real contribution and performance.

That something could be in the shape of the “triple bottom line”; an amalgam of financial results and an assessment of the social and environmental impacts of a business. Or, put another way: People, Planet and Profits.

If that sounds like something out of a pre credit crisis Corporate Social Responsibility (CSR) manual, that’s because the concept of the triple bottom line has been around for some time and, yes, it has echoes of the CSR debate from the previous decade. CSR however was more an internally focused view; something for employees to feel part of and probably made up just a couple of paragraphs in the annual report. It’s unlikely that investors and lenders were ever making decisions based on a company’s CSR initiatives.

Although mentions of the triple bottom line in the professional press have grown substantially since it was first coined in 19941, any noticeable change in how businesses were measured had been slow before the credit crisis. However, the crisis has been a catalyst, acting as an accelerant to the hopes of broader measures of performance being taken seriously by the business community.

I believe that the time when it is seen as a true measure of a company’s value may be closer than many might think. I think we will now see investors pushing – ever more aggressively – for companies to provide fuller information to illustrate the value they have delivered, and the sustainability of growth.

Regardless of whether or not you agree with the direction this takes us in, you do then have to ask the question of just how many businesses are in a position to report on such non-financial performance aspects. Bearing in mind that recent research2 has highlighted businesses’ and their finance functions’ shortcomings when it came to dealing with the financial result alone (and not forgetting that they’ve just endured two years of being battered by recession-busting cost reduction initiatives), it’s hard to imagine how many could easily transition into this new mindset.

If the credit crisis taught us only one thing, it would be that traditional measures of growth alone are now inadequate as a measure of value. If similar attention had been given to the growth in corporate debt for example, you could argue that the whole crisis could have been avoided.

The argument can be extended to a macro economic level and the apparent obsession with GDP growth. Advocates of the triple bottom line would question the true worth of rising GDP if it is accompanied by unsustainable levels of debt and falling levels of education and health. These social impacts for example are in the very communities which house those corporations that are driving GDP growth.

At an industry level, the same advocates would tell us there is little point of lauding favourable growth results in the fishing industry for example, if it comes at the unsustainable expense of depleted global fish stocks. Commercial populations of some fish in the North Atlantic have fallen by 95% in the last decade; so a once great industry may be on the verge of becoming unsustainable. A simplistic example perhaps – but it makes the point that pure growth and numbers alone can mask much greater issues with regard to the impacts of this growth.

Following this line of argument can quickly transport you into what is a very complex, academic argument about true indicators of value. However, the point here is that the crisis was a wake-up call, highlighting just how intertwined the fortunes of businesses, communities, resources and the man on the street have become. The crisis made investors and stakeholders far more aware of this inter-dependence than ever before; hence the growing desire to look deeper into a company’s performance and beyond the numbers.

Now, the good news in all this is that for those businesses that can grasp this nettle and somehow come to terms with supplying relevant multi-dimensional information to investors, I believe that a share price premium beckons. With capital now in less plentiful supply, investors and lenders may start to make decisions in a more discerning manner. The fall-out from the banking crisis has left a lot of stakeholders associated with investments that have not only lost money but have been shown to have had questionable social value. The painful lessons of recent times will live long in investors’ memories. The triple bottom line measure of value may just prove to be their way of ensuring that mistakes are not repeated.

The whys are wherefores of the triple bottom line thinking could occupy a typical Board for days. However, if you work on the assumption that the concept will soon enter mainstream corporate thinking, then there are some pretty searching questions which need to be asked of businesses’ and finance functions’ capabilities to deliver the right information at the right time to information hungry stakeholders. Could they identify the social and environmental information which stakeholders will require? Will they be able to adequately communicate such information to all relevant parties?

Looking at this from the CFO’s perspective, I believe that many finance functions still struggle to cope with the requirements of reporting the financial results alone, as many are still downloading and reworking numbers for both internal and external reporting needs. KPMG International research3 in late 2008 revealed that 80% of businesses felt that their finance function needed to up their game in terms of the levels of support and challenge they provided to the business. After over a year in which, most likely, little extra time or investment will have been given to the finance function, I doubt whether that 80% dissatisfaction rating will have dropped very far.

This triple bottom line debate is one which you’re going to hear more and more about in the coming months and years. This will be a topic which will occupy governments’ thinking, not just businesses’. Already, France has started down this route with President Sarkozy commissioning a study to look at ways of measuring economic growth and social progress which go way beyond a traditional measure of GDP growth. The question a business will have to ask is whether it, and more importantly its investor and stakeholder community, believes in the concept too. If it does, then it needs to start looking at its reporting capabilities as a matter of urgency – as these may soon be sorely tested.