Ep. 66: John Stretch - Stakeholder Capitalism

John’s website: http://www.johnstretch.com


To view a selection of blogs visit
http://www.johnstretch.com/blog

You can find more examples of the author’s writing at these
two websites: https://cfo.co.za and https://fpa-trends.com

Also visit https://cfotalks.com/podcast/29-john-stretch/



John's recent book:
https://www.amazon.com/dp/B086D93NPW/ref=sr_1_1?keywords=the+hidden+balance+sheet&qid=1585295817&s=digital-text&sr=1-1


John’s YouTube channel:
https://www.youtube.com/channel/UC4MvDaja0Ua50Quvk-3NY4A


Contact John Stretch:


Email - stretch@global.co.za    

LinkedIn - www.linkedin.com/in/john-stretch-272a475 




FULL EPISODE TRANSCRIPT
Adam: (00:05)


Welcome back to episode 66 of Count Me In. I am your host Adam
Larson, and today you'll be hearing an important episode on ESG
and the unique topic of stakeholder capitalism. Mitch spoke with
John Stretch, a published author, lecturer and business
consultant specializing in management accounting. John writes and
facilitates workshops for various professional institutions with
experience across many different industries. In this episode, he
explains what the CFO's role is in managing stakeholder
capitalism and increasing the value in the organization. Let's
hear what he shared with Mitch now. 


 


Mitch: (00:47)


So as I said, if we can first explain what stakeholder capitalism
is and why it's so important. 


 


John: (00:56)


Mitchell, stakeholder capitalism is another way of thinking about
how we manage organizations, not just corporations, but all kinds
of organizations. And in a nutshell, it says dont took it all for
the shareholders, leave something on the plate for customers and
workers and employees and communities and even societies. It says
doing good is good business sense, and another part of the
stakeholder capitalism is that managers should take a view on
longterm sustainability, not next year when they make decisions.
And as a consequence develope better corporate governance to make
to make those decisions. And you can ask, so what's the payoff?
aAnd the answer is, there's a carrot and a stick. The big carrot
is that  stakeholder capital is going to make your company
worth more in the long term then pure shareholder capitalism. I
mean you just need to look at the high market to book ratios of
top hundred companies who reinvest the profits in building brands
and tech and know how rather than distribute them. And of course
share prices are based on prospects of intellectuals as well as
physical capital. In the old days we used to call that Goodwill,
but today we classify intellectual capital into four groups of
human relationships, structure and natural capital. And the stick
is that if we adopt the diverse view, we can say that the old
movement, Freedman idea of profit without social responsibility
as in fact led to responsible decisions, inequalities, damage to
the environment, and so on. That's the viewpoint, and so why is
it important now? Because since the turn of the century, the
world economy has been, it's changed. It's been based now on
intellectual, not physical capital. And we know that the value of
intangible assets has grown much faster than tangibles, even if
it's not all reflected on company balance sheets. And it's
actually been proven, there's a, it's a book that came out last
year. Capitalism without Capital with two economists have
actually proved that intellectual capitalism is growing much
faster in the world than the tangibles. So to make the world a
better place, make your company more valuable, you should build a
combination of different kinds of wealth and stakeholder
capitalism has got this vision of a responsible future in which
short term thinking would actually be  replaced a bit of
long term thinking. 


 


Mitch: (03:26)


Now on this podcast we've had a number of conversations about
reporting for ESG, and you've mentioned a little bit of ESG data
already, and my next question is how do these types of capital
that you are mentioning and talking about here really impact
sustainability and the integrated reporting? Once again,
particularly trying to give it a little bit of a finance and
accounting perspective. 


 


John: (03:50)


Okay, well, you know, I think of two overlapping circles, but for
me ESG is, is more about the stick than the carrot that I
mentioned earlier. ESG, Isabel sustainability. It's something
that was coined in 1994 to describe as we will know, the, the
ESG, Environmental, Social Governance, factors that not managers,
not accountants, but investors should consider when they
measuring the long term viability. So they talk about natural
capital, diversity, human rights, consumer protection, and
corporate governance of those things. So it's about protecting
society, and so ESG today is about sustainability and corporate
responsibility in the context of the fourth industrial
revolution. And what are the ESG people come up with? They've
come up with more reporting. So at the January, 2020 meeting in
Davos, the world Economic Forum Table, this framework for
reporting ESG aspects of business performance and risk, put
together along with the big four accounting firms, and it says
that companies should report more information, wage rights, local
jobs, created gender differentiations. There is massive amount of
detail here, and this revised framework is at the proposal stage.
And in my view, it's going to take time to be accepted by the
accounting bodies around the world. It doesn't address the cost
of the systems for collecting the data and whether the the
measures should be audited or whether it only apply to public
companies and acceptance hasn't been universal. So it's going to
take a bit of time, but on the other hand, integrated reporting
and integrated thinking is the carrot, which is the other part of
the circle, and, of course, managers want to measure the
performance of their brands and their research and their software
and their knowledge. But as you and I know, the financial
accounting systems and not always very helpful and sometimes a
bit contradictory, accounting by its nature is a conservative
discipline. It's intended to be there all the influences of the
income tax and the statutory financial reporting and the stock
exchanges and so on. But intellectual capital, assets like
recipes and brands, trademarks purchased from other firms,we sell
the fixed assets and we write them down over the useful life. But
if we do these things internally, we call them sum-costs and they
included operating expenses. And so now you get a situation where
the, the market value of companies is like 20 times the value of
the tangible assets because everything's been written off. So the
accounting profession has responded to this, this, this whole
thing was saying, look, the financial reporting is one thing, but
we have to have a disclosure process called integrated reporting.
So open above the audited financial statements, we've got these
integrated reports which communica...