There is a growing realization in senior corporate management that business has a responsibility greater than merely maximizing value for investors, and that business must be engaged with issues related to impact on society and the environment. The so-called Triple Bottom Line.
Conventional double entry accounting which was first described in the 13th century is very powerful, and at the core of modern management information systems. Its major shortcoming is that it is one dimensional and only about money transactions and costs, revenues and profit. For the 21st century, a much more comprehensive system of metrics is needed so that both money profit transactions as well as impact on society and the environment are brought into account.
Part of the power of conventional accounting is the double entry construct that gives clarity to the idea of beginning state → flow → ending state by differentiating between balance sheet accounts and profit and loss accounts. This principle is applied very rigorously for money transactions inside the business organization, but not at all for anything that is outside the reporting boundary of the organization.
It is really critical that decision makers in business are enabled to manage in ways that are good for profit and good for society and the environment as well. Peter Drucker famously said ‘You manage what you measure’ and in order to manage to optimize for all the elements of the Triple Bottom Line, there need to be measures for all of these elements.
In the corporate environment, in addition to financial accounting, there is also cost accounting which provides detailed cost information for decision making. There needs to be something similar for value or impact. In cost accounting there is the technique of standard costing, and for value or impact there should be a system of standard values. With such a system it will become possible to associate value and impact to the transactions and balances that already exist in the financial accounts.
In the modern global complex interconnected economy, it is possible for an organization to be very profitable while doing significant damage to society and to the environment. Modern multi dimension impact accounting should help to bring clarity to the totality of business performance both within the central reporting entity but also along the life cycle of both the supply chain and the post-sale use and waste chain.
Using profit as the only measure of performance encourages a ‘race to the bottom’. Comprehensive impact accounting will enable socially responsible business to get investor respect in ways that are not possible simply with conventional financial reporting.
There are many emerging initiatives to facilitate reporting of impact by business organizations, and this is encouraging. However, they are expensive and not particularly well designed. There is a need for an approach that will make it possible to account for impact and report in a way that is effective and at the same time, inexpensive.
The corporate business organization has been responsible for most … though not all … of the technical innovation and investment that has enabled our modern quality of life and standard of living. This has been done using single dimension money metrics. However, as we go forward, it is critical that we design, develop and deploy a multi-dimensional system of metrics so that decision making going into the future takes into consideration both impact on people and the environment as rigorously as there is accounting for profit.
Better yet, the comprehensive integrated impact accounting system that I envision will also make it possible to assess the impact profit … or money surpluses … are having on society and the environment not only within the reporting entity, but throughout society. Economic activities that result in money surplus have the potential to change the world in amazing ways … and one only has to look at the achievements in Saudi Arabia over the past 50 years to see this in practice,
Measurement is vitally important. If you change the way the game is scored, you change the way the game is played. This also applies in business decision making. Multi Dimension Impact Accounting can be this game changer.