Report on Luncheon Talk by Professor Mervyn King
KUALA LUMPUR: The successful implementation of Malaysia’s Economic Transformation Programme (ETP) is dependent on the government and business acknowledging that issues of governance, strategy and sustainability are inseparable as the country seeks to attain its goal of being a high-income nation come 2020, said Prof Mervyn E. King, chairman of the Global Reporting Initiative and deputy chairman of the International Integrated Reporting Committee (IIRC).
He emphasised that adopting the old ways of doing business in rolling out the ETP projects just will not cut it. “The government’s ETP targets will only be achieved with an appreciation that governance and building sustainability issues relevant to business into the long term strategic direction of companies are, in fact, inseparable,” said Prof King during a luncheon talk organised by the Malaysian Alliance of Corporate Directors (MACD) in Kuala Lumpur on 11 November 2010.
Prof King, who also serves as chairman of MACD’s board of advisors, said it was a fallacy to think that the ETP initiatives would succeed if the various parties involved conducted “business as usual”. “For 150 years, companies had conducted their business on an economic model based on two false assumptions—Firstly, the planet has limitless resources and secondly, that nature has an infinite capacity to absorb waste.”
He pointed out that freshwater was planet Earth’s scarcest natural asset and that the largest landfill in the world was not on land but in the middle of the Pacific Ocean, a floating rubbish dump the size of Texas.
“You have to learn to conduct business ‘as unusual’ and make more with less for the simple reason that the world’s population is increasing and natural assets of planet Earth are less, and decreasing by the day. We are in the global financial crisis but one thing is clear, like the Great Depression of the 1930s, capital markets will be restored. But once natural assets are spent, they cannot be restored.”
Prof King explained that the world was conducting business and regulating companies in the context of three crises—the global financial crisis, the climate change crisis and, most important of all, the degradation of our ecosystems and loss of biodiversity.
“A third of our biodiversity is already gone, and we all know the critical inter-dependency of all the creatures of planet Earth. Two thirds of our ecosystem, tropical forests, farmlands, freshwater, marine resources, have been used beyond nature’s capacity to regenerate.”
“That statement alone is terrifying. So if you think you can carry on business as usual and achieve this ETP plan, you are mistaken,” added Prof King. You need to carry on business as unusual.
Paying a Heavy Price
The senior counsel and former judge of the South African Supreme Court cited various examples of companies which failed to take into account sustainability issues critical to their operations, and in the process paid a heavy price for it.
In the case of the Coca-Cola Co, the US beverage giant set up a bottling plant about 12 years ago in Kerala, India. “Water in Kerala is sourced from an aquifer, but within a year of Coca-Cola’s operations, the aquifer ran dry. The state of Kerala then sued Coca-Cola,” said Prof King, adding that to Coca-Cola’s credit, the multinational subsequently embarked on a long-term strategic plan to replenish, reuse and recycle water.
“This shows to investors like Warren Buffett and the trustees of your pension funds that the board back in Atlanta, Georgia, made an informed assessment of the sustainability of Coca-Cola’s business. The board applied its collective mind to come up with a long-term strategic plan to reuse water, and not waste a drop of water, the scarcest natural asset of the planet and critical to the production of Coca-Cola,” he said.
“It is quite obvious that when the trustees of your pensions funds come to invest, the only way they can discharge their duties to you is to make an informed assessment of the sustainability of the business and whether to buy the equity of company A or company B.”
Prof King said a company that is deemed to be having environmentally sustainable operations will be able to raise funds or make borrowings more easily and at a lower cost compared to a company which does not.
He also pointed out that from an environmental perspective, people, the planet and profit can no longer be separated. “The great companies of the world like Walmart have started supply chain codes of conduct because investors want to have traceability of products,” he said.
In contrast, he said investors do not want to invest in companies like Nike where it was discovered that their shoes were being made by child labour in Third World countries, and consequently the company’s market capitalisation plunged overnight. “Labour issues are being scrutinised in companies. Human rights issues as well. If you ignore that you can actually destroy your company and your company’s reputation,” said Prof King.
Prof King also highlighted the need for a change of mindset with regards to corporate reporting, in particular, the shift towards integrated reporting which demonstrates the linkages between a company’s strategy, governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, integrated reporting enables business to make more sustainable decisions and enable investors and other stakeholders to understand how an organisation is really performing.
“At the World Congress of Accountants Conference held last November in Kuala Lumpur, with over 6,000 accountants from all over the world participating, there was consensus that governance, strategy and sustainability are becoming inseparable and that integrated reporting is critical as it is one of the steps to making life on Earth sustainable because of the millions of companies around the world.”
“We have to report on how the company is positively or negatively impacting the community economically, socially and environmentally through its operations in its year of review. You should also be able to tell your stakeholders how you are going to enhance those positive aspects or eradicate those negative aspects in the year ahead,” said Prof King.
The International Federation of Accountants (IFAC), which co-hosted the WCOA with the Malaysian Institute of Accountants, has accepted that financial reporting alone itself is not enough in the new economy, said Prof King. He also said that a number of countries including Norway, Sweden, Denmark and Indonesia have also legislated to provide for the use of integrated reporting.
The US Securities and Exchange Commission (SEC), the regulator of listed companies in US, recently issued guidelines on environmental issues relevant to businesses listed on American exchanges, he said. Back in his native South Africa, the Johannesburg Stock Exchange became the first exchange in the world to require listed companies to submit integrated reports, beginning March 2010.
“If you are doing something wrong and you report it to your stakeholders, your ultimate compliance officers will no longer support your company. It is as simple as that,” Prof King added.
Corporate Impact on Society
Companies also need to be aware that their corporate successes or failures can have major impacts on society. “When Enron collapsed, it impacted the lives of millions of people. The company is a link for millions of stakeholders. Take any of your great companies in Malaysia—millions of people are also linked to it. The impact on society and the environment of these big companies are huge,” said Prof King.
As such, he said boards have to take into account the interests of the millions of stakeholders of these big companies. “Have they created confidence and trust among the stakeholders? And you have got to maintain that trust, that’s your duty as a director. The question is how do you do that in the new economy? Can you carry on business as usual? The answer is clearly no!”
Prof King also said stakeholders are now more and more aware of whether companies are operating as a good corporate citizen of Malaysia or not. “You as directors have to have foresight. You deal with uncertainty and it is your duty to take risks. None of us are perfect. You can see many corporate scars on my body from the business judgment errors that I have made. In this new economy, we have to take the first step of a long journey. You’ll face obstacles and difficulties but you have to overcome them,” he advised the many directors present at the full-capacity talk.
(Prof. Mervyn King also serves as Chairman of the Board of Advisors of MACD)
By Lee Min Keong