The obsession with financial results has sometimes led large companies to act irresponsibly. Hence the emergence of Integrated Thinking. In recent years, this new way of thinking about business has highlighted the key contribution of non-financial results to an organization’s financial performance. Research by Sabrina Roszak, professor at SKEMA Business School, and Aziza Laguecir (Edhec), reveals two very different ways of disseminating it.
Fifteen years ago, the financial crisis reminded us of the disastrous consequences of large corporations’ obsession with short-term profit. To satisfy the demands of shareholders and attract new investors, directors and managers have sometimes acted irresponsibly without considering the long-term repercussions of their actions.
A few years before Lehman Brothers collapsed, Enron went bankrupt following accounting fraud and financial manipulations committed by 15 or so of its senior leaders, causing tens of thousands of people to lose their jobs and resulting in the evaporation of many more people’s retirement savings.
The Orpea mirage and the illusion of control
In an effort to make corporate management shoulder more responsibility, regulatory bodies like the International Accounting Standards Board (IASB) seem to have relied on a disciplinary model. The goal was to hold businesses to greater account. For example, after the Enron scandal, the International Financial Reporting Standards (IFRS) were established with the aim of “improved” financial reporting. In France, the “Nouvelles regulations économiques” (editor’s note: “New Economic Regulations”) Act of 15 May 2001 compelled some 700 listed companies to produce non-financial reports on the social impact of their businesses.
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This solution proved to be limited though, in some cases providing only an illusion of control. Recently in France, the obsession of Orpea’s directors with profit led to a cost-cutting policy that severely impaired the quality of care provided to residents of the group’s senior care homes, as well as its employees’ working conditions. And yet the company presented outstanding corporate social responsibility indicators in its reports, mainly due to the weight of the business sector in their calculations.
Integrated Thinking, beyond financial results
For changes to occur at a deeper level, it seems that more advance thinking is required, particularly about the context in which managers’ actions will be taken. So, how can we focus leaders’ attention on the long term and shine a brighter light on the links between financial and non-financial results?
Over the past decade, a new framework has been gaining ground, called integrated reporting (IR). Introduced in 2013 by the International Integrated Reporting Council (IIRC), a global coalition of different types of actors, IR is based on the concept of integrated thinking, which aims to rethink business models by taking into account all the financial and non-financial resources that contribute to them (and which they affect in turn).
More specifically, integrated thinking considers financial, natural, manufacturing, intellectual, human, social and environmental resources (author’s note: the IIRC would say “capitals”). The goal is to rethink business models and value creations processes by underscoring the connections between financial and non-financial aspects, but also by thinking about the consequences of each action in the short, medium and long terms. In short, it truly is about holding management accountable. According to the IIRC, the resulting assessment would transparently “tell the organisation’s story”.
Two main avenues
These concepts are now at the heart of the discussions taking place within two major standards actors that have been tasked with building a standard for non-financial reporting, EFRAG (European Financial Reporting Advisory Group) and the ISSB (International Sustainability Standards Board) which, like the IASB, is attached to the IFRS.
In any case, effecting profound changes to managerial practices will require substantial engagement amongst an organisation’s upper ranks. Our research shows that there are two main avenues, both involving management as the driving force: the first is structured way, while the second is more informal, essentially based on discussions that include different departments and different levels of management, where they compare viewpoints and reflect together on how the organisation creates value.
The Danish organization…
Of the groups we studied, Novo Nordisk – a Danish company specialising in diabetes treatment – is a good example of the first approach. The company employs some 45,000 people in 80 countries and sells its products in over 170 countries. In 2004, the group’s management incorporated integrated thinking into its organisation through two structural actions: formally enshrining the principle of integrated management in the company’s articles of association and introducing a governance model, the “Novo Nordisk Way of Management”.
Mads Øvlisen, the group’s then CEO, included a clause in the articles of association stipulating that the company would “endeavour to carry out its financial, ecological and social activities in a responsible manner”. As a result, management had to think holistically about its value creation process and report on its environmental and social performance as well as its financials.
The Novo Nordisk Way of Management is based on 10 principles rooted in sustainable development. It underpins the running of the organisation and its remuneration policies for managerial staff, amongst other points. In line with the development of integrated thinking within the organisation, Novo Nordisk has been publishing an integrated report according to the Integrated Reporting Framework since 2014.
The group exemplifies an integrated thinking model, deployed top-down, that has proved its worth: its commercial activities are now based on sustainability with 100% of production using renewable energy, easily accessible and affordable medicines, and it has one of the highest levels of profitability in the pharmaceutical industry.
…and the New Zealand transmission
There is however a second, much less formal approach, that has for example been adopted by Sanford, New Zealand’s largest and oldest seafood company, listed on New Zealand’s Exchange (NZX). Volker Kuntz, appointed head of the group in 2013, wanted to make a radical strategic shift from a volume-centric strategy to one focused on value creation, in particular by dropping frozen products and concentrating on fresh goods.
In an interview conducted in 2016, he explained his conviction that developing human capital and making the best use of natural capital are the “foundations” for the long-term growth of financial capital. To win his employees’ support, he prioritised meetings and direct exchanges at all levels of the organisation, not only sitting down with his management teams for discussions but also travelling to the company’s various fishing sites to make contact with operational staff and explain his new strategic vision to them.
Kuntz says this was how he successfully championed his belief in sustainability and the long-term view with his staff and investors. When he left, seven years after his decision to develop integrated thinking at his organisation, Sanford had become an innovative, profitable company that was both environmentally sound and respectful of its human resources. And all that, in spite of the difficult COVID years.
Unlike at Novo Nordisk, integrated thinking at Sanford was built as the result of collective reflection within the company and discussions involving various perspectives and different organisational levels. Since 2014, the company has been producing an integrated report in which it transparently “tells its story” to its stakeholders.
