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Showing posts with label TBL. Show all posts
Showing posts with label TBL. Show all posts

Monday, September 20, 2010

A Quality Toolbox: Triple Bottom Line and the future of sustainability reporting


Sustainability, while it may sometimes seem like just another fad for the times, has and will continue to be an essential guiding principle for the future. Consistent with the holistic approach inherent within in sustainability, success of such a triple bottom line can only be accomplished with the combined efforts of governments, communities, businesses and individuals. While it is easy for entities to choose a couple of ‘green’ projects to work on, such an approach often is narrow in focus and makes little lasting change toward the triple bottom line approach. Defining sustainability as part of the existing organizational culture and infrastructure is a much more balanced approach that has a greater chance of sticking. Assuming that sustainability is a concept, indeed a way of life for the future, that we cannot ignore, what metrics are in the global toolbox for implementing triple bottom line accounting?

According to Wayne Norman and Chris MacDonald, authors of “Getting to the Bottom of the ‘Triple Bottom Line’” the “closest tool might be the ADRI (i.e., Approach, Deployment, Results and Improvement) method offered in the Australian Business Excellence Program.”[1] The ADRI method has traditionally been used in Australia within the field of higher education. Specifically, The Australian Universities Quality Agency (AUQA) is an authority when it comes to using ADRI. AUQA is Australia’s national “quality agency for higher education.”[2] It is responsible for: “quality audits of higher education institutions and accreditation authorities; reporting on performance and outcomes; assisting in quality enhancement; advising on quality assurance; and liaising internationally with quality agencies in other jurisdictions”[3] all in an effort to enhance Australian higher education.

AUQA utilizes, as its foremost starting point for audit, “each organization’s own objectives and does not impose an externally prescribed set of standards upon auditees.”[4] Because AUQA wants to work within the framework of a given institution the analysis is intended to consider “the extent to which institutions are meeting these objectives, and how institutions monitor and improve their performance. AUQA also takes into account the requirements of relevant external reference points established to guide institutions in setting their objectives.”[5] AUQA views this as the superior way of reaching objectives. Specifically, this approach “recognizes the auditee’s autonomy in setting its objectives and in implementing processes to achieve them within some overarching parameters, such as criteria set by agreed national or sectoral guidelines.”[6] Using such an auditing metric may also be applicable for greater adoption of triple bottom line accounting.

Norman and MacDonald have postulated that a crossover system using ADRI could work if an organization prepared a written approach to each of the three responsibilities ingrained in a triple bottom line system using the criteria posited in the ADRI method. After that, the company would present a “detailed action plan for the deployment of the approach for a given fiscal year. At the start of the year, it would select the metrics that would be used to determine the results that would indicate how effectively the approach and deployment were working.”[7] In the end, the “expected outcomes or improvement associated with the approach and deployment would be postulated and committed to paper.”[8]

The use of trained independent observers and assessors would need to be present and verify the quality of the results in such a scenario. However, it should possible to use the ADRI approach for all three components of the triple bottom line approach – people, planet and profit. The ADRI “can be scored using the methodology in the Australian Business Excellence Framework. Each of the three components would receive a score based on how the documented outcomes compare to the scoped activity.”[9] Additionally, since compiled scores would represent unit less numbers, “it would be possible to add the three scores and obtain a single measure of sustainability for the organization. It is also possible to score the lagging indicators (results) and add those scores to the final score.”[10]

Be it a single visionary leader or a team or informed executives, triple bottom line objectives and sustainable operations can be achieved within the context of appropriate leadership. Continued research into what leading companies are doing will show that it is possible to develop and implement a triple bottom line plan that can be integrated into a company’s guiding principles and strategic initiatives.[11] For example, a strategic goal of “improving efficiency in the Supply Chain Management Cycle can lead to a sustainability goal of working with suppliers to reduce package waste and an objective of using certified paper suppliers.”[12] Planning organizational change for a triple bottom line approach around a strategic planning process will yield better results and an increased chance for sustained growth.

Norman and MacDonald’s discussion is but one avenue toward making a triple bottom line a reality for the future. Other forms of accounting, auditing, reporting or benchmarking will need to be developed or adapted to adjust to changing business models and a more informed populous. As we develop our toolbox for accessing sustainable development ADRI may well be key in being able to refocus organizational culture and existing infrastructure. Only time will tell.

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Triple Bottom Line definitions and challenges!


The dictionary of sustainable management defines triple bottom line as the “addition of social and environmental values to the traditional economic measures of a corporation or organization's success.”[1] Fundamentally, a triple bottom line (TBL) accounting system “attempts to describe the social and environmental impact of an organization's activities, in a measurable way, to its economic performance in order to show improvement or to make evaluation more in-depth.”[2] With this definition as a guide, this paper will examine the significance of each prong of the triple bottom line sword, as well as look at some challenges these prongs face toward further integration into the business system.

Fishing around the world has personified prosperity and provided livelihoods for millions over the centuries. Especially in America the whaling industry prompted significant growth for New Englanders for so many years. However because of mismanagement and unsustainable harvesting patterns the whaling industry is all but exhausted in North America.[3] While still a powerful symbol of American prosperity in the 19th century it also “represents the shortsightedness of businessmen whose thirst for profit made their enterprise unsustainable”[4] The fishing industry exemplifies some powerful ways in which a triple bottom line system of accounting is prudent, if not necessary, for sustainable development.
Profit
‘Traditional’ profit could be defined as the “surplus remaining after total costs are deducted from total revenue, and the basis on which tax is computed and dividend is paid.”[5] A triple bottom line definition of profit is therefore different from traditional accounting definitions of profit. As part of the triple bottom line approach to accounting, "profit" is seen as the real economic benefit enjoyed by the host society. Put differently, ‘triple bottom line profit’ is the real economic impact the organization has on its economic environment. Despite the broad nature of this definition, it is still sometimes narrowly understood to mean the ‘internal profits’ of a given organization. While internal profits of a company may still be a fundamental starting point for a company or institution looking to implement a triple bottom line system, it is never-the-less a small piece of the whole picture. It is important not to think of profit, from a triple bottom line point of view, as simply the traditional understandings of corporate accounting with a smattering of social and environmental impacts. Unless triple bottom line ‘profit’ is viewed concurrently with the other prongs of social and environmental profit, the overall holistic nature of a ‘triple bottom line’ system is not complete.

Planet
Sometimes referred to as natural capital, the planet or environmental aspect of the triple bottom line involves responsible stewardship through sustainable environmental best practices. A company seeking to operate under an effective triple bottom line system endeavors to benefit the natural order as much as possible. At the very least TBL entity should observe the Hippocratic Oath as much as possible and attempt to ‘do no harm,’[6] thereby curtailing environmental impact as much as possible. Among other things, an entity striving for TBL success will find ways to reduce its ‘ecological footprint’. This can be accomplished by careful management of energy and non-renewable resource consumption as well as reducing waste and reducing or eliminating toxins and other harmful agents. One such strategy for effective stewardship of natural capital is called “Cradle to grave”.[7] Proposed by William McDonough the cradle to grave philosophy champions the use and understanding of life cycle assessment of products. The objective of such a philosophy is ultimately to determine and quantify what the ‘true’ environmental cost is for a given product. This includes everything from the growth and harvesting of raw materials any manufacturing and distribution and finally to the eventual disposal and/or consumption of a given product.
Unfortunately, current methods for the disposal of non-degradable or toxic products are largely borne by governments, the natural environment, as well as by the residents near the disposal site and elsewhere. This means that the local population the society and government as well as the natural environment are all directly affected by the disposal of such products. From a triple bottom line point of view this is precisely the reason why the societal and environmental impacts of production need to be factored into the overall ‘profit’. A TBL approach for an enterprise that produces and markets a product which will create a waste problem should be held accountable by society. Therefore, triple bottom line accounting indicates that it would be more equitable for companies and organizations that manufacture and sell problematic products to bear the cost of disposal. Ultimately, ecologically destructive practices, such as overfishing as well as other unsustainable business practices, should be avoided as part of a triple bottom line approach.
People
Sometimes referred to as human capital, the people prong of the triple bottom line pertains to equitable business practices toward all stakeholders that have a ‘stake’ in the company. Entities pursuing a triple bottom line often conceive a ‘reciprocal social structure’ in which the well-being of all stakeholder interests are interdependent. Among other things a TBL enterprise seeks to benefit all of its constituencies or stakeholders. The stakeholder is an individual, group, organization, or system who affects or can be affected by an organization's actions. Fair trade agricultural practices are an example of a possible socially equitable feature of a triple bottom line system. Ideally, triple bottom line entities would not use child labor, would maintain a safe work environment and would not otherwise exploit a community or its labor force. Triple bottom line business may also seek to contribute to the strength and growth of the community or communities they work in or otherwise affect.
Quantifying the people and planet prongs of the TBL accounting system is relatively new and has not been standardized. Organizations like The Global Reporting Initiative (GRI) has developed guidelines to enable corporations and NGOs to comparably report on the social and environmental impact of a business and offers one of the world’s most compelling examples of sustainability reporting.[8]
Challenges
Along with the difficulty inherent in any potential financial or organizational change, the people, planet and profit prongs of the triple bottom line accounting method have their own challenges toward implementation. As it stands, the biggest challenge may well be the lack of a necessary understanding of life cycle assessment as well as sufficient standards that would help businesses and executives more toward a TBL future. Institutions like the Global Reporting Initiative certainly seem to be on the right track and may well, one day, be the hallmark of triple bottom line and sustainability reporting. These challenges do not seem insurmountable. Enormous strides have been taken in just the last few years in terms of the understanding and prevalence of alternatives to more traditional accounting and business methods like TBL. There are also no signs that these trends will slow down in the near future, quite the opposite in fact. More and more people are speculating that a way toward recovery may well be through TBL.

A recent article written January 8th 2010 stated that “there is a strong argument that triple bottom line or building sustainable businesses creates more profitable and successful business.” Indeed, pursuing environmental and social objectives doesn't have to be at the expense of financial objectives and often is reinforcing.[9] A report in April 2009 by Alling Henning Associates Inc. (AHA) examined why some banking institutions were prospering despite recent economic instability and scandal. They found that “financial institutions that commit to corporate social responsibility, back up their pledge with actions and communicate their position clearly are uniquely prepared to build and protect their brands—and even prosper—during market downturns.”[10] Unlike traditional institutions that are driven by profit alone. The banks examined by AHA found that, despite challenges, these triple-bottom-line banks and credit unions offer innovative and underexplored ways of measuring success—ways that not only help people and the planet, but also foster the long-term success and profitability of a company and therefore touch on all three of the prongs of a TBL company.


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Sunday, August 22, 2010

'Traditional' vs. 'Triple Bottom Line' Accounting.










The American Institute of Certified Public Accountants (AICPA) defines accounting as "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof."[1] This, and similar, definition have been crucial over time as governments and individuals have sought to understand and quantify growth and wellbeing of a company. While many entities around the world produce financial and accounting records there is a growing call for a new and more representative means of assessing growth and the overall health of a company. The way accounting procedures are set up today, the end result is the bottom line, and the path that ultimately leads to that bottom line has often been unimportant. In short, companies all around the world have been practicing a, ‘the end justifies the means’, mentality. As the world has grown and becomes ever more globalized, so too should our understanding of growth. Is there a way to serve the means and the end result?

While still in need of fine tuning as well as wide spread adoption, other systems of assessing the health and ‘profit’ of a given entity exist. A popular alternative to traditional accounting is triple bottom line accounting (TBL), sometimes called people, planet and profit. This, so called, full-cost accounting method attempts to expand the traditional spectrum of values and criteria for measuring organizational success by examining growth from a ecological, social as well as economic perspective. This and other methods are inherently harder to quantify thus making adoption and acceptance difficult. Despite these obstacles, changing mindsets of both executives and the individuals is crucial for continued success for both this and subsequent generations.
To change mindsets and spark innovation in this field, one must first, understand the problem. How did our current system of accounting lose its way? According to Mike Niedenthal, writing for the Kansas City Business Journal, “Years of labor efficiency and machine utilization reporting conditioned everyone to a system in which the apparent objective was to keep everyone and all machines busy all of the time.”[2] At the time, traditional cost-accounting practices were considered accurate because direct labor was variable, there was minimal overhead to deal with and most companies manufactured a similar range of products. In the past, “the costs of direct labor and materials could be traced or easily allocated to individual products. However, in today's environment, labor now is largely fixed and overhead has become a large part of total cost.”[3] This system has persisted in various forms for generations. As the accounting became more complex so too did the systems set up to watch over misconduct.

To help watch over traditional accounting systems we have entrusted public regulatory agencies like the Securities and Exchange Commission, Environmental Protection Agency, and Food and Drug Administration with the task of overseeing and scrutinizing entities fiduciary responsibility.[4] Because of their privileged status it is imperative that they act in the best interests of the public. Because of this consideration, looking simply at the bottom line is insufficient at best and negligent at worst. Acting in the best interests of the public “requires consideration of natural, social, and economic systems. Natural systems provide the context and sustenance for social systems and, therefore, must be respected, nurtured, and sustained.”[5] Additionally, “social systems provide the context and purpose of economic systems” and cannot be overlooked.[6] While on a personal or micro level this may seem self evident. Natural systems, social systems and economic systems like those administrated by governments and multinational corporations need to set the example. A global market place that focuses exclusively on the bottom line, is not only naive to its own impacts, but also squeezing itself out of “an excellent change of being more successful tomorrow than it is today, and remaining successful, not just for months or even years, but for decades or generations.”[7] A greater focus on sustainability, which is the hallmark and guiding principle of triple bottom line accounting, is what regulatory agencies like the SEC need to promote growth and limit misconduct.
In recent years there have been a number of major financial setbacks. While there are many factors at work for all these financial setbacks, the SEC’s narrow range of considerations, with a focus solely on the ‘bottom line’ certainly does not help. Even before the global recession many industry executives were aware of problems within the system. In July of 2003 the International Federation of Accountants (IFAC) released a report entitled ‘Rebuilding Public Confidence in Financial Reporting’. The IFAC identified the structural weaknesses of the market system that regulatory bodies like the SEC need to find ways to access more proactively. They are bulleted below.
  • management incentives tied to share prices can produce unacceptable self-satisfying behavior;
  • internal discipline and controls neglected due to entities concentrating solely on the ‘bottom line’.
  • the failure by boards to engender a strong governance culture;
  • auditor independence is continually called into question, particularly in relation to the provision of non-audit services.
  • differences in accounting standards among countries can cause confusion and impedes international comparability.
  • convergence with international standards is the intent of most countries but few have in place an adequate implementation plan;
  • regulation of both companies and professions may vary in effectiveness, particularly where independent monitoring is weak; and
  • an alarming trend has emerged where some participants in the financial reporting process have failed to act ethically.[8]

While triple bottom line accounting does not solve greed, corruption, poor management or any other policy or ethical concern surrounding the current financial markets, it does have the power to change the mindsets of those working in such industries. Perhaps the better approach is not finding the perfectly worded law that promotes financial markets and ultimately growth while preventing misconduct. Perhaps it is our whole approach to the problem. Viewing corporate performance only as an economic outcome not only excludes things like risk management, effects and repercussions to reputation etc., it also ignores the needs of stakeholders who might be socially or environmentally inclined. It ignores investors willing to invest in companies that do not, for example, “employ child labor, buy from companies that operate ‘‘sweat shops’’ for labor, or operate in countries that have questionable political systems or poor human rights records.”[9] Add to that growing concerns about global warming, the trendiness of the ‘green’ generation, the potential for ecological disaster like the recent BP oil spill in the Gulf as well as hysteria surrounding swine flu, mad cow disease, etc. and we begin to see the need for a system like TBL accounting.[10]

Because the triple bottom line method of accounting is intended to “capture and present a comprehensive view of corporate economic interactions with all stakeholders” it is able to be more representative as well as more adaptive.[11] This allows prolonged growth with an emphasis on the long-term. This is accomplished in TBL accounting because “the scope of the economic interactions with the impacts of the corporation on the stakeholders go beyond those of the traditional financial reports in that issues such as intangible assets gain more weight in TBL reporting.”[12]
CMA Management Magazine published an article entitled ‘Adapting your Accounting Practices to Triple Bottom Line Reporting’. This article along with being a practical guide for accounting professionals to transition also discussed areas that may be adjusted in order to accommodate triple bottom line accounting. With regard to assurance and auditing processes, certified management accountant David Crawford said, “In the future, accountants will need to be capable of verifying environmental and social criteria, or have the ability to work with other experts such as environmental auditors and community-based organizations to verify non-financial performance.”[13] Ultimately, accountants in the future will be “required to report and verify non-financial information to the same standards that financial information must meet.”[14] As part of needing to verify and quantify environmental and social criteria reporting in the future will need to be assessed. As such TBL reporting processed are standardized, “accountants and their member bodies will be involved in integrating these processes into existing structures or will be assigned responsibility to create new processes.”[15] Similarly, in the future many managerial accountants will need to develop and access environmental and social key performance indicators (KPI). Common environmental KPIs include “emissions to air, land and water and natural resource use. Environmental KPIs are often calculated per unit of production so that stakeholders can easily understand an organization’s direct environmental impacts.”[16] Common social KPIs include “worker injury and illness rates. In the future, accountants will have to know what indicators are appropriate to measure TBL performance.”[17] Additional areas that will need to be adapted toward triple bottom line reporting is taxes and subsidies. Accountants will be directly involved in financial calculations that “demonstrate how organizations can reduce their taxes or take advantage of new market conditions as a result of changes in government policies. Examples include tax exemptions for the production of sustainable energy and job creation incentives for disadvantaged social groups.”[18] All in all there are a great many ways in which a traditional corporate governance business systems can be adapted to fit a triple bottom line method. While standardization is still key, the greatest impediment seems to be acceptance and the overall need that such systems provide.

Accounting as a system, is more than 7,000 years old.[19] Clearly much in the accounting field has changed to keep pace with the times. Each time a cross roads, and each time a stronger more successful way forward was found. We are at those cross roads again and I am certain that, as time will tell, we find our way. Not only is there a stewardship factor that cannot be overlooked, but so too are untapped sources of wealth. For example, “DuPont has introduced the use of renewable energy, which generates annual savings of between $10 to $15 million U.S. dollars.”[20] Accountants and business professionals need to look at a changing business world as an opportunity. Triple bottom line accounting is the future. Still undecided is the specific nature of such a system but any way forward will have to consider the values of TBL accounting and a shared understanding of the needs of people, planet and profit.


[5] Ibid, page 2.
[6] Ibid, page 2.
[10] Berthelot, S., D. Cormier and M. Magnan, ‘‘Environmental Disclosure Research: Review
and Synthesis,’’ Journal of Accounting Literature 22 (2003), pp. 1–44.
[12] Ibid, page 125.
[15] Ibid.
[16] Ibid.
[17] Ibid.
[18] Ibid.
[19] Friedlob, G. Thomas & Plewa, Franklin James, Understanding balance sheets, John Wiley & Sons, NYC, 1996, ISBN 0471130753, p.1
[20] http://www.greenbiz.com/business/research/report/2005/02/08/adapting-your-accounting-practices-triple-bottom-line-reporting/
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