CFO can ask and enable the ‘whys’ and ‘what-ifs’ to drive value creation
After protests held by thousands of people (out of which around 13 people lost their lives) against a polluting industry, four times shutdown since 1955, a final closure notice in 2018 was given to Vedanta-owned Sterlite Copper plant in Thoothukudi district. For not thinking sustainably, it was the demise of India’s largest copper-producing factory. As reported by PTI’s interview with Anil Agarwal the group’s chairman, Vedanta lost $200 million in profits because of this and it led to loss of 20,000 direct and indirect jobs and affected 98,400 jobs in the consumer or downstream industries.
For a company that was contributing significantly to the economy with its copper production, was generating profits enough for them to sustain? Apparently not!
Therefore, the question that CFOs needs to brainstorm more frequently is while making capex and opex plan how should they focus on profitability or sustainability, or both.
Here is what ETCFO has analysed.
Profitability is the life line for any company Profitability: Let there be money
Profitability is the life line for any company. The survival of the organisation is determined on the profitability.
Paul Polman, the former CEO of Unilever once made a powerful and a relevant statement saying, “we will double our profits while halving the environmental impact.”
This statement recognises a bigger picture of the company’s goals, it explains that without profits companies will not be in a position to go beyond business.
Giri Giridhar, Executive Vice President and CFO at Indian Hotels explains Polman’s statement. He says that even though financial profitability is fundamental to the health of any organisation it has to make sense on multiple fronts. This means not only environment but employees, suppliers, government (through paying tax and other compliance), and an integrated performance.
But in a going concern, what stops anyone from going beyond financials? Profitability is a significant measure for investors to have confidence in a company or a business. Uncertainty on profits’ performance makes them jittery.
Hence, investors want to evaluate quarterly results, which as per JN Gupta, Founder and Managing Director of a proxy advisory firm, Stakeholders Empowerment Services (SES) has turned into a nightmare.
“There is pressure on every CFO to report better quarter after quarter result, which is certainly not possible,” said Gupta. This might lead to businesses cooking up books at times.
The increasing understanding about quarterly results is now encouraging companies to reimagine the nature of profit in a more holistic sense of how business performs in society, shared Anant G. Nadkarni, Advisor, Value Creation.
So, it is important to realise that there will be ups and downs in business cycles, but that necessarily doesn’t mean poor performance either! And, importantly, businesses do not work only for those who invest or supply financial capital.
Therefore, organisations need to be transparent and accept if something has gone wrong as part of self-corrective practice. Gupta felt, “When you have a disease, you don’t cover it but you cure it, even if it is taking time in the long run.”
Therefore, it’s okay to have a bad quarter, while realising that profit is not the end.
Sustainability is the ability to exist constantly. If one doesn’t go for sustainable and holistic development one may come to an end sooner than later. Let there be sustainability
Sustainability comes with its own challenges. Raising and managing debts, running a successful and seamless business cycle quarter after quarter and doing it in a sustainable way in a constantly changing economic environment is what CFOs have to juggle with.
But what is sustainability?
“Sustainability is when the happiness quotient improves. When employees, suppliers or customers are unhappy you may lose out on potential gains,” said Gupta of SES. If one doesn’t go for sustainable and holistic development one may come to an end sooner than later.
As the company’s performance is based on return to the shareholders, the experts feel that returns are maximised ensuring right environment, social and governance (ESG) initiatives in managing enterprises.
“In addition to financial profitability, corporate governance, sustainability and corporate social responsibility are key pillars of value creation for all stakeholders,” added Lalit Malik, CFO of the FMCG firm, Dabur.
What is changing is that businesses have to find a balance between their short-term and long-term goals and work for shareholders, stakeholders and the larger society it serves.
Thomas Cook’s Nandy, a finance head, said it may be tempting to report higher profits for short term gains but, “One should be able to see beyond the quarter and also convey the same vision to analysts, shareholders and all stakeholders.”
Also Read: An organisation is not only about making profits: President & Group CFO, Thomas Cook
Hence, it is also necessary to explain the stakeholders what goes beyond profits. As per McKinsey report on refining sustainability, it finds out that many investors and stakeholders find it difficult to read sustainability disclosures. The 2019 report also points out that 82% investors feel that companies should be required by law to issue sustainability report.
Companies’ sustainability disclosures are not as neatly presented as their financial disclosures. The reports finds out that unless information on sustainability is comparable, in the form of hard data, it is of little use to investors.
Value creation: Redefining profitability with sustainability
One major fallout for companies is recognising how enterprises create value which is not just financial but includes human, social, environmental aspects as well.
These are called non-financial metrics. They are important for the overall impact and sustained survival of the company feels Giridhar. “As per the integrated reporting concept there are six capitals of value – financial capital, manufactured capital, intellectual capital, human capital, social and relationship capital, and natural capital,” he added. This is how businesses operate in the multiple capital scenario.
It is like a “triple bottom line” — people, profit, and planet.
However, “The challenge is how fast can we help create business models and enablers that are environment friendly and socially beneficial,” asks the veteran finance leader Giridhar.
But sustainability comes at a cost which profitability manages. Going the sustainable way costs companies, for example using environment friendly raw material that are expensive, setting up a waste management plant for the waste a company is producing, training of their employees, social projects and so on. The cost is like a tradeoff for the biggest benefit — good reputation and sustainability.
Giridhar suggested that government incentives can help. It’ll help in accelerating adoption of technology and with that scalability will increase, cost will reduce, and eventually the government incentives can fall off.
For example: Investing in solar was heavy cost intensive some 10 years ago, as compared to now. With the government incentives for solar the country is one of the largest producers of solar power, commercially.
And while measuring the non-financials is still under evaluation, Integrated Reporting helps. “It helps one understand the areas where the company is outperforming and underperforming,” said Nandy of Thomas Cook, one of the 50 companies that file Integrated Reports
Since 2013, globally, over 1500 businesses have adopted
As per Nadkarni, “…enlightened businesses, growing in revenue and scale, realised two facets — the power to create wealth or value, as well as reduce value on the planet. So money is critical, but it is necessary to reimagine it only a means to achieve more holistic narrative in human existence, well-being and fulfilment.”
It is important to realise that there will be ups and downs in business cycles. It’s okay to have a bad quarter, while realising that profit is not the end, as long as the business is sustainable. CFO as the value creator
Giridhar said, “CFO can ask and enable the ‘whys’ and ‘what-ifs’ to drive value creation.”
He said that CFOs can ask questions like, what could happen to the company’s bottom line if it switched to sustainable ways at more cost? What is the business case for sustainability? For who and why will you adopt sustainable ways?
“These questions will help you find the courage to create more value,” he assured.
But, will the role of the CFO alone can bring this change?
“It is not only a CFO’s job,” articulated Gupta. So the future lies in how CFOs work with every employee and especially executives and board members to connect the dots with profitability and sustainability. And rise to reach higher aspirations as value creators!