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Move Over, Sustainability Accounting, Here Comes Purpose Accounting

Image credit: World Business Council for Sustainable Development (WBCSD)

Everyone’s heard of financial performance, asset performance and sustainability performance. Now comes purpose performance, a new measure of organizational performance that assesses impacts relative to the voluntary commitments organizations make to provide public benefits, contribute to the achievement of the Sustainable Development Goals (SDGs), or to generally pursue beneficial purposes of one kind or another. Let’s call performance accounting for purpose, “Purpose Accounting.”

Benefit Corporations already doing it

In some cases, measuring and reporting purpose performance is already required. Take Benefit Corporations, for example; and Delaware’s Benefit Corporation statute, in particular. Like all states that recognize such companies, Delaware’s statute requires that Benefit Corporations issue periodic reports on their performance relative to the public benefits they have declared. But before it does that, the same statute specifies the duties of directors as follows:

The board of directors shall manage or direct the business and affairs of the public benefit corporation in a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.

With that as a foundation, the statute then reads:

Mark McElroy
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Purpose Accounting

The Science
and Benefits of

New Metrics '18.
A public benefit corporation shall no less than biennially provide its stockholders with a statement as to the promotion of the public benefit or public benefits identified in the certificate of incorporation and of the best interests of those materially affected by the corporation’s conduct.

The Delaware statute is remarkable for at least two reasons. First, it formally recognizes the interests of stakeholders, not just shareholders, who are legally entitled to consideration when it comes to the management of a corporation. It does this by use of the phrase “those materially affected,” which is a leading criterion for determining stakeholder standing in the contemporary sustainability literature. If your actions affect the sufficiency of resources that others rely on for their wellbeing, your actions are material for performance accounting purposes, whether they involve financial performance and shareholders or not.

The second remarkable thing about Delaware’s statute, and frankly Benefit Corporations everywhere, is that they have the effect of placing self-imposed, voluntary commitments of one kind or another on an equal footing with financial performance and the interests of shareholders. This is vitally important to our topic here, because it means that performance accounting in such organizations must in some way explicitly integrate assessments of purpose performance with financial performance.

When voluntary becomes obligatory

But this raises a kind of moral quandary: Can organizations legitimately be held to the same standard of performance (and reporting) as we apply to, say, financial accounting in cases where what we are talking about are purely voluntary commitments — especially for non-Benefit Corporations, including certified B Corps? For example, if a company engages in voluntary philanthropy one year but not the next, would it ever make sense to say that in the second year its performance was unsustainable or in some way in violation of a legal or moral duty? If an act is purely voluntary to begin with, how can a decision not to do it be viewed as a violation at all?

Over dinner a few months ago with my good friend and colleague, Brendan LeBlanc of Ernst & Young, I raised this very question. The answer he gave was illuminating, to say the least. It turns out that in common law, there is a principle known as promissory estoppel. In layman’s terms, promissory estoppel means that if you make a public commitment to do X and I, as a recipient of that news, give you Y in return, the fact that there may have been no formal contract between us per se cannot prevent me from holding you to account in the event that you decide not to do X. If I buy your product, invest in your stock, or agree to go to work for you because of the promise you made to do X, you have an enforceable duty and obligation to in fact do X — or at least try to.

For me, this was liberating because it finally paved the way for how otherwise voluntary commitments to purpose, the SDGs, and public benefits (whether for Benefit Corps or not) could legitimately be addressed under the same kinds of performance accounting principles we routinely apply to obligatory areas of impact (e.g., the fiduciary duties owed to shareholders). Short of that, the inclusion of otherwise voluntary or discretionary areas of impact could be construed as arbitrary and disingenuous, just another way of sandbagging reports with superficially positive performance in order to improve results. But thanks to the principle of promissory estoppel, what is voluntary or discretionary one day can become obligatory the next.

If you’re Ben & Jerry’s, for example, and your commitments to social activism are just as important as your financial commitments — and just as publicly declared, mind you — your performance relative to social activism not only can be included in your performance reporting, it must be. Any public commitment made by an organization that has the effect of encouraging reciprocal support of some kind in return necessarily gives rise to a corresponding duty to perform, against which actual performance should be measured and reported.

All of this is very good news indeed for the serious director or manager of a Benefit Corp, or any other type of organization that simply wants to make a genuine and formal commitment to doing good in the world — beyond profits — including certified B Corps that have not yet become full-fledged Benefit Corporations. Indeed, the explosive growth of purpose-driven strategies, and the adoption of purpose declarations in general, now has a performance accounting solution to go with it. By applying the principle of promissory estoppel to voluntary and public statements of purpose, we now have a theoretical framework at our disposal that organizations can use to measure and report their purpose-related performance, side-by-side with their more conventional financial performance and their triple-bottom-line performance as well.

Principles and theories, however, only get us so far. What about practical methodology? How can this be done in practice?

Purpose Accounting in action

In my view, there can be no better way to integrate financial, non-financial and purpose-driven metrics into a unified whole than the MultiCapital Scorecard (MCS), an open-source performance accounting system (see Figure 1). As many readers will already know, the MCS is a context-based measurement and reporting system that applies a sustainability criterion to performance assessments, whereby impacts of any kind are sustainable, or not, depending on how they compare to sustainability standards of performance.

Figure 1 — Sample MultiCapital Scorecard with Purpose Accounting included (Click to enlarge.)

Apart from using context-based metrics, another hallmark of the MCS is that its composition or content (i.e., in terms of specific areas of impact and metrics) is always organization-specific. In other words, it does not predetermine areas of impact or metrics for what any or all organizations should measure. Rather, it relies very heavily upon the results of a materiality analysis as its first step, after which specific context-based metrics can be applied. This is precisely where organization-specific statements of purpose, public benefits, etc can come into play. Thanks to the principle of promissory estoppel, organization-specific, publicly declared commitments to benefits and purpose are material, especially for certified B Corps and Benefit Corporations.

Certified B Corps that have already used the MCS include Ben & Jerry’s (Unilever), Cabot Creamery Cooperative (Agri-Mark, Inc), and New Chapter, Inc (Procter & Gamble). In the case of Ben & Jerry’s, their scorecard includes metrics for social activism, since under the principle of promissory estoppel, the fact that they have publicly committed to it creates a duty to perform. The same goes for their commitment to improve the lives of their smallholder suppliers, a commitment also featured in the MCS implementations at Cabot and New Chapter. In all three cases, associated sustainability standards of performance were defined, against which actual performance can be measured. Performance is then scored and reported accordingly, if only for internal management purposes.

Purpose Accounting has arrived

To sum up, I believe we can safely say the following:

  • The dramatic increase in the development of statements of purpose in organizations has arguably given rise to the need for a new kind of performance accounting: Purpose Accounting. The same can be said for the benefit declarations of certified B Corps, Benefit Corporations, and the wide-ranging commitments many organizations are now also making in support of the SDGs.
  • Purpose/benefit statements or declarations, in turn, give rise to non-discretionary or obligatory requirements for their makers to perform accordingly. What may have been discretionary one day can effectively become obligatory the next, simply by virtue of having made a commitment public, thanks to the principle of promissory estoppel. Of course, in most cases this is quite intentional. Companies that formally develop statements of purpose very much want to be seen as having done so and welcome the opportunity to be held to account accordingly. Purpose Accounting, therefore, is a logical and hopefully welcome consequence of making commitments to purpose.
  • Purpose Accounting, however, must be flexible. Since no two organizations’ statements of purpose or public benefit aspirations will necessarily be alike, Purpose Accounting must make it possible for each of them — and all others — to tailor and implement a performance accounting tool that can be adapted to their requirements, while still making it possible for the performances of all of them to be meaningfully compared. The MultiCapital Scorecard is ideally suited to meet this requirement, since it does not predetermine areas of impact or metrics that all organizations must use. Rather, it defers to organizational contexts as its starting point by relying on the results of materiality analyses in order to determine its content.
  • A tool such as the MultiCapital Scorecard also makes it possible to integrate performance accounting on multiple fronts, just as the Triple Bottom Line does. Such integrated measurement and reporting can include financial performance, social impacts, environmental performance, or any other category of performance associated with an organization’s statement of purpose or public benefit aspirations. The MCS is truly Fit for Purpose!

Finally, it is perhaps worth mentioning that the MultiCapital Scorecard has already been formally endorsed as a performance accounting tool by the United Nations (UNEP) for all organizations, and also by B Lab as an endorsed third-party standard for reporting by Benefit Corporations. Other tools, as well, may very well meet the needs of Purpose Accounting, and if so, they, too, should be considered. The main thing to appreciate at this stage is not one specific tool over another, but that Purpose Accounting as a new form of measurement and reporting has arrived!

Mark W. McElroy, Ph.D. is the founder and Executive Director of the Center for Sustainable Organizations and the original developer of the Context-Based Sustainability method. He is also co-founder of Thomas & McElroy LLC, creators of the MultiCapital Scorecard, and… [Read more about Mark McElroy]

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