Why the corporate world needs to reconsider what value means

Value

Value. What is it? Who defines it? How can we measure it? Is our current understanding of how it is created adequate for the challenges facing business and society in general, and the audit profession in particular? These issues were at the heart of the 2019 EY Financial Reporting Outlook (FRO) conference in early November.

Mariana Mazzucato, currently one of the most influential thinkers in this area, kicked off the conference with a passionate and inspiring talk. A professor in Economics of Innovation and Public Value at University College London and the founder/director of the college’s Institute for Innovation and Public Purpose, she sits at the nexus of business, politics and academia. Her speech was a forthright call for a new kind of capitalism – one with purpose and a redesigned understanding of value at its heart.

“It’s impossible to engage in any meaningful conversation about ‘purpose’ without talking about how value is created by all the stakeholders,” she said. She also questioned the ideas underlying why we value certain behaviors. Central to her thesis is the need to create partnerships that go beyond simple, market-led solutions and look deeper into what we value.

A fundamental rethink

“Capitalism is going the wrong direction,” said Mazzucato. “It is being directed by consumption and not investment, and the fact that private debt is back to pre-crisis levels tells you all you need to know.” She added that the “siphoning effect”, exemplified by the growing corporate habit of activating share buybacks, went some way toward explaining why investment levels remain stubbornly low. “And don’t forget that just 20% of funds in the finance industry go back into the ‘real economy’,” she said; “80% is simply fuel for FIRE – financial services, insurance and real estate.”

She called for a fundamental rethink of some commonly held truths: that the market should decide on value (“Markets are outcomes, not actors,” she reminded the delegates); that governments should stay out of the way of private sector innovators (“Those phones in your pockets wouldn’t be very smart without government-funded research”); and that regulation should be primarily aimed at punishing business misconduct (“We need to be thinking about how to encourage and reward useful behavior”).

Instead, she argued, governments should act as co-sponsors of, and investors in, innovation, “but that government support and investment must be conditional on ethical and sustainable behavior from businesses. Act well and get a slice of the pie. Simple.”

The importance of good corporate behavior was also highlighted by Hywel Ball, Head of Audit at EY in the UK, in his opening remarks. “People are beginning to get the message that it can’t just be business as usual,” he told delegates, pointing out that radical ideas are gaining ground in unexpected places. For example, in August, the CEOs of the top 200 US companies signed a pledge that made a commitment to all stakeholders – including employees and investors, communities and regulators – having previously explicitly put shareholders first.

“ At EY  we are playing our part,” he added, “working with the Coalition for Inclusive Capitalism to develop a new reporting framework we call the Embankment Project, which puts the creation of long-term value at the forefront.”

The long run

For Iain Mackay, CFO of GlaxoSmithKline, the question of long-term value is intrinsic to his role at one of the world’s largest and most influential pharma companies – to the underlying business, and also to the way in which it reports its activities.

“We need to be providing reports that are fair, balanced and understandable to the lay person; that’s the challenge facing all of us in the profession,” he said. “Our stakeholders need to understand how we create value – not just from a shareholder perspective, but on the social side as well. That means addressing every group of stakeholders; employees, the communities we serve and so on.”

Corporate culture

FRO delegates had the choice of a range of topics to explore in breakout sessions throughout the day – from technical updates to sessions on climate risk, cyber security and culture.

Arun Batra, founder and CEO of the UK National Equality Standard and a partner at EY in the UK, led a session on the importance of culture. He discussed how focusing on developing a more diverse corporate culture can not only deliver a better working environment, but also affect the bottom line.

“Our research showed that in teams with a 60% female and a 40% male mix, engagement was higher on average, while 57% of such teams were likely to outperform revenue targets,” he said. “So these teams’ outputs were outstanding, and they were more likely to speak up as well as displaying less ‘cultural stress’, where morale is low and engagement slips.”

Batra’s argument was simple: if you encourage greater diversity at all levels in the business, improved performance will follow. “Human engagement is the biggest driver of success,” he said, “and opening up your organization to a more diverse cohort will pay itself back across all kinds of measures.”

The human factor

The human factor was also at the heart of a session delivered by journalist and author Misha Glenny. His work on cyber crime across the world culminated in the publication (and subsequent TV adaptation) of his bestseller McMafia, and he said that the threat from both organized crime and state-sponsored hackers is growing every year. Indeed, he pointed out that the World Economic Forum’s recent report, The Cybersecurity Guide for Leaders in Today’s Digital World, pinpointed cyber crime as the number one risk for US corporations, ahead of terrorist attacks and asset bubbles.

“We are the primary vulnerability – our habit of doing silly things with our computers has long been the biggest weakness,” Glenny said. But he added that this is beginning to change: “Digital transformation means we are becoming less important because we are outsourcing security to machines and artificial intelligence.”

However, our growing reliance on machines to protect us is not necessarily good news: “When you have a system of machine-to-machine learning, if a cyber criminal is able to insert themselves into that process, the payoff will be much, much greater.”

Companies and regulators need to recognize this, Glenny argued, and respond in a proactive, purposeful way. “These cyber threats aren’t about to disappear, but the more engaged business leaders will take the lead on designing solutions.”