MIM 521: Evaluating and Measuring the Sustainability Performance for Global Organizations

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MIM 521 Evaluating and Measuring the
Sustainability Performance for Global
Organizations

• Darrell Brown
• Les Fahey/KPMG Accounting Fellow

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A little about me

• Education in Forestry (actually Range Habitat
  Management) from UM
• Experience working for the BLM as a contractor,
  primarily mapping rangeland vegetation and soils
• Education in Business, MBA-CPA from UM
• Experience working as a staff accountant in a
  small regional (large local) firm
• Education in managerial and systems, PhD from
  Utah
• Experience teaching/research at PSU
• I bring some science background (ancient) and
  accounting/systems skills, plus some pedagogic
  format

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A little about you

• Education and work experience
• Purpose for taking this course, expectations of
  the course
• Relationship of this course to your outside life
• What resources do you bring to this class

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Information modelhow do we know what happens in
an organization?
ABSTRACTION
Business Activity (Something happens)
Decision Making (Something Happens)
Filtercriterion for
Interpretation, biases
Observe and Record
Presentation of information
Processing, valuing, aggregating
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Information Characteristics

• Objectives of business (accounting) information
• Useful in planning investments
• Useful in predicting cash flow prospects
• Useful in assessing owned resources, claims to
  resources, changes in resources
• How do these ideas relate to information for
  sustainable business?

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Economic Profit to Sustainable Business
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Characteristics of information

• Useful
• Relevant
• Reliable
• Usable
• Presentation
• Organization

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UsefulRelevant

• Connected to business objectives
• Logical, supportable thread from metrics to
  objectives
• Meaningful for the purpose intended, valid
• Predictive value (leading)
• Training, investment in IT, advertising
• Feedback value (lagging)
• ROI, net income, productivity
• Timely

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Lagging Indicators

• Measures of output, end-process measures, record
  effects
• Reflect past performance
• Generally quantitative
• Example Quantity of toxic emission
• Strength Easy to quantify and understand,
  preferred by regulators and publicdeterministic
  rather than probabilistic
• Weakness Time lag in feedback, ignore present
  activities, assumes that future is like the past

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Leading Indicators

• In-process metrics of performance, proactive
• Reflect current status/activitiesfor future
  performance
• Quantitative or qualitative
• Example percent of facilities with worker
  quality-of-life committees
• Strength Represent current actions and
  (potential) future trends
• Weakness Harder to build support for use, harder
  to track to performanceprobabilistic rather than
  deterministic

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UsefulReliable

• Accurate for the purpose intended
• Representational faithfulness
• Verifiable
• Neutral
• Meaning objective, but not purposeless
• Relieves us of the need to assess values1 of
  the data/information, however...
• We need to acknowledge inherent bias in any
  metric/measure
• 1 as opposed to value...quantification versus
  qualification, at some level

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Usable

• Credible
• What users value and trust
• Assess and report on the accuracy of key sources
• Institute a data-quality program for key data
• Timeliness
• Accessibility
• Physically
• Cognitively

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• Engagement
• Must be noticedthru format, medium,
  presentation
• Idiosyncratic to the observer
• Transparent
• Clearly constructed
• Clearly connected
• Clearly collected

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Conventions for interpretation

• Comparabilityacross business units
• Consistencyacross time periods
• Materialityhas important effect
• Conservatismobjectively understated (??)
• Full disclosureinclude all important information
• Cost-benefit relationshipguides all decisions
• The use of a scarce resource for one purpose
  eliminates the ability to use it
  elsewhereopportunity costs

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Categories Of Measurement types

• Direct absolute measures (2 tons of soil loss)
• Relative (normalized) one data item compared to
  another data item (.25 tons of soil loss per
  acre)
• Indexed data related to a standard or baseline,
  e.g. trend analysis (a 50 increase in soil loss)
• Aggregated combined value of same type of data
  from various sources (1500 tons of soil loss in a
  watershed)
• Weighted a factor of significance applied to
  data (-90 carrying capacity due to soil loss
  (each ton is worth .06 wildlife units))

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Reporting going beyond collecting

• History of corporate financial reporting
• Initial CFRearly 1800s, with canals, railroads,
  utilities
• Need to raise capital, balance sheets primarily
• Regulationresult of abuses in 1800s, culminated
  in 1929
• Need to protect naïve owners, income statements
• SEC created to oversee
• Third party verifiers

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Bringing to the current day

• Delegation to private sectorlate 1930s
• FASBstandards for reporting
• AICPAstandards for review
• Auditing
• Profession dedicated to third parties
• Revival of activist government1990s
• Consolidation of auditors
• Power of companies
• Responsiveness to additional stakeholders
• Sarbanes-Oxley Act
• Regulations at the Fed??

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History of environmental metricsGeneration 1

• Driver Compliance
• Objectives Risk management
• Primary audiences Sr. Management, environmental
  staff
• Indicators Regulated emissions, hazardous
  wastes, violations fines
• When Mid 70s to mid 80s

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Environmental metricsGeneration 2

• Driver Stakeholder management, process
  management, pollution prevention
• Objectives Drive continuous improvement,
  communicate eco-efficiency targets progress
  (image), avoid costs, preempt regulations, gain
  competitive advantage
• Primary audiences Stakeholders, line
  management, regulators
• Indicators Resource efficiency, emissions
  waste, financial, implementation
• When Mid 80s to mid 90s

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Environmental metricsGeneration 3

• Driver Stakeholder partnership, sustainability,
  life-cycle management
• Objectives Strategic effectiveness, credibility,
  business sustainability, product friendliness
  (DfE, LCA)
• Primary audiences Broad stakeholder set
• Indicators Balanced scorecard, environmental
  condition, resource efficiency, toxicity
  reduction, products
• When 2000 and beyond

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Corporate Social Responsibility report

• How do organizations disclose to stakeholders
• Voluntary
• Addresses social and environmental issues
• Irregular distribution
• Inconsistent format
• Unpredictable content

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Source of Drivers for CSR

• Stakeholders
• Who are they
• Which require a report
• What do they want reported
• How can these needs be addressed
• Corporations
• Legitimacy
• Competitive advantage
• Enlightened

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Drivers for CSR

• Stakeholders
• Capital markets
• Shareholders
• Regulators
• Customers
• Community
• NGOs
• Employees
• Media
• Trade/Industry
• Academia
• Public
• ...

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Comparing drivers and their effects

• Capital market does not require CSR
• Major concern is tying financial performance to
  sustainability performance
• Stakeholders require different information from
  CSR
• CSR are not standardized
• External verification for CSR is not well
  organized, is inconsistent, is voluntary

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CSR concepts

• Economic (as opposed to, but might include,
  financial)
• Environmental
• Social equity
• SustainabilityTriple bottom line
• Lets look at some...

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Why a CSR?

• PR
• Stakeholder information
• Cultural imperative
• True belief
• Some evidence that being responsible has positive
  impacts on shareholder return
• but dont get too excited