Senior Partner Emeritus, Senior Adviser, McKinsey & Company
Economic activity is causing climate change. It is also distributing income and income security more unequally than before – stressing social cohesion in the West (while raising millions out of poverty in the developing world). Technology platforms may slowly be depriving people of their inner, private lives.
Corporations are major actors in the economy – all the indications are that the philosophy bestowed on them by Milton Friedman in the 1970s is falling short. Corporations maximizing profit at the borders of what is legal (or simply exploiting what is not yet regulated), with little consideration of their impact on people and planet are, in all probability, not sustainable. They will likely lose their reputations and, with this, their ability to attract customers, to recruit and retain employees and, indeed, to attract investors concerned about the value of corporations to them in the medium- and long-term.
Millennials are in the driving seat. They demand that corporations have positive purpose – that they state the contribution they hope to make and how they will make it without eroding the social and physical environment. They are now building their households – their custom (or lifetime value) is highly attractive to marketeers. They are the recruits needed to staff corporations for the next generation. They are the citizens who are starting to influence the political and regulatory system. And as heirs to the baby boomer assets, they are becoming the investors who set the tone.
Investors are increasingly demanding environmental, social and governance data from corporations to assess the risks that a degrading social or physical environment may place on the corporation’s viability, as well as how corporations might be contributing to that degradation, for example by emitting greenhouse gases.
How are corporations to react to this bottom-up pressure from a generation and the top-down pressure from investment institutions?
The board and the executive need to lead differently. They need to broaden their perspective to embrace the needs of society and the planet – as well as the pecuniary needs of shareholders. Decisions, and day to day actions, need to integrate this more complex set of objectives and optimize with them in mind. In short, corporations need to embrace integrated thinking.
Integrated thinking is a change of belief and a change in behaviour for most boards and executive teams. (As employees rarely are motivated by ‘shareholder value optimisation’ it may well be an easier transition for them). Integrated reporting is an important tool to feed and sustain this mindset change. An integrated report demands that boards consider the corporation’s impact and behaviours, and judge them for their consistency with the corporation’s purpose and values. Integrated reporting gives the board legitimacy in exploring these issues with the executive and in gathering the necessary information and data (UK non-executive directors are now required to ‘monitor culture’. Many have concluded that reports on employee engagement are not enough – they need to meet employees!) Integrated reporting also provides transparency to all engaged stakeholders – who can then express their viewpoint, often bolstering a board’s resolve to go further – generating an encouraging feedback loop.
For most of my career I worked at McKinsey & Co, a private firm whose shareholders are the current generation of active partners. Its driving force was its dual mission of delivering positive client impact and attracting and retaining exceptional people. The mission informed all of the appraisal systems in the Firm – from Senior Partner down. The partners were also concerned with handing on a better firm to the next generation. Economic success was seen as the result of the mission well executed – not, itself, the mission of the Firm. No firm is perfect – but the long-term intergenerational philosophy I lived at McKinsey was intergenerational integrated thinking – even if it was never called that name. This philosophy, prevalent in many good private firms, may be about to be reinjected into public companies.
The IIRC has led a wave of integrated reporting and thinking, and is now catching a bigger one, as these practices become mainstream. I look forward to the next ten years of integrated thinking