Supporters of stakeholder theory call for a more integrated view of business, arguing that for an organisation to be successful, the cooperation of many participants is required, and that the interests of multiple stakeholders should be considered when making business decisions.
The value chain and five forces models developed by Harvard Business School School professor Michael Porter capture that complex reality well. These models are familiar to us from business classes, professional articles on management or perhaps when studying for ACCA exams. However, what does stakeholder theory really mean for accountants’ everyday work? I fear that we have a long way to go before we fully integrate the theory into practice.
Let’s look at internal stakeholders – for example, employees. How often do accountants engage with the human resources team to understand the complex reality of ‘human assets’ hiding behind the profit and loss account of salary costs?
The traditional way of analysing this area is by comparing costs against the budget and asking the heads of departments to ‘deal’ with any overspend. A different approach would be to take an interest in the reality of these employees to better understand the requirements they have to do good work.
Accounting inclusive of non-financial metrics not only produces a more thorough analysis of how the organisation performs but one that explains the drivers behind performance
Accountants do not need to become experts in HR management. What the theory calls for is to consider the ‘bigger picture’, inclusive of all players involved in conducting business. In practice, it means analysing financial figures through the lens of human capital metrics such as employee turnover, motivation or amount of training provided. The result is not only a more thorough analysis of how the organisation performs but, more importantly, one that explains the drivers behind performance.
Considering multiple stakeholders will be a challenge for accountants because we are used to looking at the business from a particular perspective. A case in point is annual budgeting. A vast majority of businesses continue to go through the ritual of setting annual targets. Finance teams are often responsible for putting the files together and investigating every penny. However, McKinsey found in its 2020 CFO Survey that executives are already thinking of making their forecasts more agile and fit for an uncertain world.
Accountants should ensure that traditional forms of financial control evolve and are more inclusive. Making non-financial metrics as prominent as the financial data that they supplement can help to draw attention to a wider context of business operations. Also, valuable qualitative data obtained from various stakeholders could be useful to provide a context for more informed decision-making.
An integrated view of business also includes a clear strategy for managing the risk. The events of 2020 showed that things can take a turn for the worse fast and unexpectedly. Having a good grasp of risk related to all key stakeholders, both internal and external, makes it easier to react quickly and efficiently to ensure the survival of the business.
In his article ’An animal kingdom of disruptive risks’, James C Lam lists several cognitive biases that prevent organisations from managing risks effectively. The biases include difficulties with accepting the existence of risks that business has never encountered before, avoiding information that contradicts one’s personal beliefs, short-termism, and overrelying on the consensus reached by the group to the exclusion of minority views.
Accounting professionals do not need to be experts in risk management, but we can ensure that the business’s decision-making is not divorced from facts. We can ensure that no assumption goes unchallenged, and that constructive dissent is encouraged and not silenced.
Artificial intelligence and robotics will slowly change the nature of accountants’ work, and storing and processing financial data will continue to be automated. Increasingly, advanced data analysis tools can bring all information together at the click of a button. However, replacing an inquisitive human mind is much harder. It is in the interest of accountants to take responsibility for our own professional development and to take a broader look at the businesses we are working in.
Accountants need to appreciate that financial figures stand for very complex realities such as client satisfaction, employee engagement, compliance with regulation, efficient internal controls, and innovation. Every organisation and finance team is different.
Old habits die hard, but gradually accountants should try and weave non-financial metrics into their reporting to provide the management with a richer view of business performance. A profit figure alone cannot tell anything about how well an organisation is prepared to face future risks or how well the management is prepared to deal with uncertainties. It also cannot tell if current profits are sustainable or if they have been generated at a cost of long-term viability of organisation.
A growing interest in stakeholder theory within the business community is an opportunity for accountants to develop ways of measuring business performance that show contribution of all stakeholders engaged with the business. This will not only be beneficial to organisations, but also to accountants, who have a chance of becoming the business leaders of tomorrow rather than obsolete figures confined to the past.
Watch Dr Rob Yeung’s video on how to build a strong business case