Transform the company in depth by rethinking its business model

Fifteen years ago, the financial crisis was a reminder of the disastrous consequences of the obsession with short-term profit in large companies. In order to satisfy the demands of shareholders and attract new investors, executives and managers sometimes acted irresponsibly without considering the long-term consequences of their actions.

A few years before the collapse of Lehmann Brothers, the bankruptcy of Enron, as a result of accounting fraud and financial manipulation by some 15 executives, led to tens of thousands of job losses and the evaporation of many retirement savings.

In an effort to make corporate management accountable, regulatory bodies such as the International Accounting Standards Board (IASB) seem to have relied on a disciplinary model. The aim was to make companies more accountable. The Enron scandal was followed by the introduction of the so-called "IFRS" (International Financial Reporting Standards), aimed at "improved" financial reporting. In France, the "New Economic Regulations" law of 15 May 2001 obliged some 700 listed companies to produce extra-financial reports on their social consequences.

However, the solution has shown its limits, sometimes giving an illusion of control. Recently, in France, the race for profit by Orpea's managers is said to have led to a policy of cost-cutting to the detriment of the quality of care provided to the residents of the group's homes for the dependent elderly and the working conditions of its employees. However, the company had very good social responsibility indicators in its reports, particularly because of the weight of the business sector in their calculation.

For more profound changes, it seems that we need to think further upstream, particularly about the context in which managers' actions are taken. How can we focus managers' attention on the long term and make the links between financial and non-financial aspects more visible?

 

Ongoing discussions

Ces dix dernières années, un nouveau cadre a pris de l’ampleur : le Reporting intégré (RI). Introduit en 2013 par l’International Integrated Reporting Committee (IIRC), coalition mondiale regroupant différents types d’acteurs, le RI se fonde sur ce que l’on appelle la « Pensée intégrée ». Elle vise à repenser le modèle d’affaires de l’entreprise en prenant en considération l’ensemble des ressources qui y contribuent (et qu’elle affectera en retour), à la fois financières et non financières.

Over the past decade, a new framework has gained momentum: Integrated Reporting (IR). Introduced in 2013 by the International Integrated Reporting Committee (IIRC), a global coalition of different types of stakeholders, IR is based on what is known as 'Integrated Thinking'. It aims to rethink the company's business model by taking into consideration all the resources that contribute to it (and that it will affect in return), both financial and non-financial.

 

More specifically, financial, natural, manufacturing, intellectual, human, social and environmental resources are mentioned. The aim is to rethink the business model of companies by highlighting the connections between the financial and non-financial, but also by reflecting on the consequences of action in the short, medium and long term. In short, it is a question of 'making management accountable'. The resulting balance sheet would, in the words of the IIRC, "tell the story of the organisation" in a transparent way.

These concepts are now at the heart of the discussions of two major standard-setters responsible for building a non-financial reporting standard: Efrag, the European Financial Reporting Advisory Group, and the ISSB, a body attached to the IFRS Foundation as well as the IASB.

In any case, changing managerial practices in depth requires a strong involvement of the hierarchy. Our research shows that there are two main directions, both to be taken under the impetus of management: the first is structured; the second is more informal, based essentially on discussions involving different functions and different levels of management to compare points of view and reflect together on how the organisation creates value.

 

Structured deployment

Parmi les groupes que nous avons étudiés, Novo Nordisk, une entreprise danoise spécialisée dans le traitement du diabète, illustre bien la première voie. La firme emploie environ 45 000 personnes dans 80 pays et commercialise ses produits dans plus de 170 pays. En 2004, la direction du groupe a poussé la pensée intégrée dans son organisation grâce à deux actions structurantes : la formalisation du principe de gestion intégrée dans les statuts de l’entreprise et la mise en place d’un modèle de gouvernance, le « Novo Nordisk Way Of Management ».

Among the groups we studied, Novo Nordisk, a Danish company specialising in the treatment of diabetes, is a good example of the first path. The company employs about 45,000 people in 80 countries and markets its products in more than 170 countries. In 2004, the group's management pushed integrated thinking into its organisation through two structuring actions: the formalisation of the integrated management principle in the company's articles of association and the implementation of a governance model, the 'Novo Nordisk Way Of Management'.

Mads Ovlisen, the group's CEO at the time, included a clause in the articles of association stating that the company would 'strive to conduct its financial, ecological and social activities in a responsible manner'. This forced the management to think holistically about its value creation process and to report the performance of environmental and social elements alongside the financial elements.

The "Novo Nordisk Way of Management" is based on 10 principles rooted in sustainable development. It underpins, among other things, the steering of the organisation and the managerial remuneration policies. In line with the development of Integrated Thinking in the organisation, Novo Nordisk has published an integrated report according to the IIRC framework since 2014.

The group exemplifies a successful top-down structured and deployed Integrated Thinking model: business operations based on sustainability with 100% of production through renewable energy, easily accessible and affordable medicines, while having one of the highest profitability in the pharmaceutical industry.

 

Conveying a passion for sustainability

There is, however, a second, much less formal way of doing things, adopted for example by Sanford. It is New Zealand's largest and oldest seafood company, listed on the New Zealand Stock Exchange. Volker Kuntz, who was appointed to lead the group in 2013, wanted to make a radical strategic shift from a volume-driven strategy to one that focused on value creation, including moving away from frozen sales and focusing on fresh.

In an interview in 2016, he explained that the development of human capital and the enhancement of natural capital are, in his view, the 'foundations' for long-term financial capital growth. To get his employees on board, he has favoured meetings and direct exchanges at all organisational levels: by sitting down with his management teams and engaging in discussions, but also by travelling to the various fishing sites to get in touch with the operational staff and explain his new strategic vision.

Kuntz says he passed on his passion for sustainability and the long term to his employees and investors. By the time he left, seven years after his commitment to Integrated Thinking in his organisation, Sanford had become an innovative and profitable company that respected environmental resources and valued its people. And this despite the difficult Covid years.

Unlike Novo Nordisk, the construction of Integrated Thinking at Sanford is the result of collective thinking and discussions involving different perspectives and organisational levels. Since 2014, the organisation has produced an integrated report in which it too 'tells its story' in a transparent way to its stakeholders.

 

This article, written by Aziza Laguecir, EDHEC Business School Professor, and Sabrina Roszak, SKEMA Assistant professor, has initially been published in French in The Conversation under Creative Commons licence. Lire l’article original.

 

 

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