Prof Mervyn King: CFOs need to be the chief value officers in their organisations

Prof King reveals that value creation has replaced profit focus in CFO Community Conversation.

On 21 October, CFO South Africa invited Professor Mervyn King to repeat his enormously successful presentation from the Finance Indaba Network launch, at a CFO Community Conversation. Prof King gladly returned to share his view on the importance of CFOs becoming chief value officers.

He kicked off the discussion by explaining that transparent measurement and disclosure of sustainability performance are now considered to be fundamental parts of reporting. However, he added that sustainability disclosure is a tricky business, and developing standards is challenging.

“In the first decade of the 21st century I became chairman of the Global Reporting Initiative and I became steeped in sustainability issues, not only corporate financial issues as we were all taught,” he said, taking attendees back to where it all started.

He had recognised that sustainability reporting was becoming more important because while the population is increasing, natural assets are decreasing. “We’ve had a century of unsustainable development and we couldn’t carry on like that.”

At that time, he explained, companies were reporting in two silos: financial reporting according to IFRS and a sustainability report according to the GRI guidelines, which at the time were not yet standards. No other framework providers had entered that space, until 2005.

As many framework providers decided that this space was becoming more important, the Sustainability Accounting Standards Board was established in America, which focused on industry specific sustainability reporting issues. The development of the Carbon Disclosure Standards Board and other initiatives followed suit.

“However, all of these initiatives, entities and framework providers had created clutter and confusion for the preparers of the report,” Prof King said. “I argued that financial reporting had become almost incomprehensible to the average user, and sustainability on its own was quite meaningless without the numbers.”

In 2006, Prince Charles formed Accounting for Sustainability to try and connect the two silos. Prof King advised them that financial and sustainability reporting were not connected, but actually needed to be integrated. The chair of A4S agreed and they called a meeting with various executives from the IFRS Foundation, the Financial Accounting Standards Board, framework providers, international institutions like the IIA and the World Bank, as well as some iconic companies.

“We presented the meeting around a concept of doing an integrated report,” Prof King explained. “Directors would take out that which is material form the financial report and from the sustainability report, to find that of significant value, and which impacted the three dimensions for sustainability development, namely the economy, society and environment.”

As a result of the meeting, the International Integrated Reporting Council was formed. “It took us a few years to get the integrated reporting framework developed, which was issued in December 2013.”

The new framework became a JSE listing requirement and referred to the six resources within businesses: Financial, manufactured, human, intellectual, natural and social. “So it was a value creation process,” Prof King said.

In 2013, companies moved away from a profit focused governance paradigm to a value creation one. “The entire value creation model changed and not only included creation of value, but also preservation and erosion of value, which had to be accounted for,” Prof King said. “So the CFO was no longer thinking of just profit in the sense of that financial capital model increasing the wealth of shareholders, but instead they had to focus on the long-term health of the company.”

In 2016, Prof King wrote a book called “The Chief Value Officer”, and the subtitle of the book was “Accountants can save the planet”. He explained that his experience as an advisor and consultant to the C-suites of various companies, was that the true changemaker in the C-suite was the accountant.

Prof King explained that, at the start of 2020, the International Federation of Accountants (IFAC) issued a statement saying that he, Prof King, was right and that CFOs should be called Chief Value Officers. IFAC also said that they believed the IFRS Foundation should establish an international sustainability standards board alongside the international accounting standards board, which is now being discussed.

The Wits School of Accountancy will be the first university in the world to launch an accreditation course for Chief Value Officer, with many universities across the world right on its heels.

Standard Bank has already adopted the word “chief value officer” and group FD Arno Daehnke, along with the other CFOs serving at the bank, now wear this title with pride. Arno applauded Prof King for being ahead of the curve so many years ago, explaining that, during the Covid-19 crisis, the hierarchy of needs had been turned upside down. “We now understand that fundamental issues such as health, the environment and basic financial stability are becoming so much more important than just satisfying shareholders.”

Arno also explained that Standard Bank has developed metrics around their sustainability reporting based on the sustainable development goals in the United Nations, one of which is the environment. “We produced our first TCFD report recently that talks about our coal-fired power finance policy and our thermal coal mining policy which set clear parameters for lending in the coal sector,” he said. “While we are very strict in South Africa, if we don’t finance coal-powered power stations in some of our other African markets the alternative is no electricity. So in these markets we consider other factors around the broader societal impact that electricity generation has.”

Prof King pointed out that change had come and that the timing is absolutely critical. “Our economy was in crisis before the virus arrived. When the virus arrived we had regulations, lockdowns and restrictions imposed, which only worsened the state of the economy. And so we’re in a recession at the moment.”

However, he said that directors shouldn’t only be thinking about health and safety at the moment, but they also have to think about coronanomics. “We’re in a survival game, so we’re thinking about the short term. But you have to keep that nucleus at Standard Bank together, so that when we go from survival to thriving you’re ready. You can only be ready if you’re also planning long term, which Standard Bank has done by developing the SDG’s into its business model. Because a company has to be ready for climate change, which is happening as I’m talking to you.”

“What do you believe are some of the pitfalls or the shortcomings of companies around sustainability?” asked Telkom CFO Tsholofelo Molefe.

Prof King said that the critical issue is to get the thinking of the board and the senior executives to buy into integrated thinking. Then it goes right through the company. “My personal experience over the years has been that you need to get buy in from the three tiers of the company; the tone at the top, the tune in the middle and the beat of the feet at the bottom. When you get buy-in from these three tiers you can get ordinary people to achieve the most extraordinary things. But if you don’t get that buy in, you can have PhDs from the top to the bottom, but you won’t even achieve ordinary things.”

Arno concluded the conversation, saying that CFOs are used to allocating resources and will typically allocate financial resources in an old-fashioned way to optimise a financial outcome. “The way I think about a CVO is you need to think of allocating resources (or “capital” in integrated thinking parlance) to drive value across multiple stakeholder dimensions and these are not just the society, environment and shareholders, but also employees.”