When boards approve fake profits, society picks up the tab

The question of sharing wealth between capital, labour and the state is a recurring debate in France. The PACTE bill adopted by the French National Assembly wishes, amongst other things, to strengthen employee share ownership. This is a partial response to criticism from the OXFAM France and BASIC report, published before the summer of 2018, which denounced a profit share of CAC40 companies mainly to shareholders and senior executives, to the detriment of employees and taxpayers.

Within these debates, a fundamental issue is totally absent; the fact that the profit at the heart of these struggles are not true profits. They do not reflect the reality of the environmental costs related to the activity of the company, and are therefore largely overvalued. This leads to senior executives with variable parts of salaries and bonuses indexed on the supposed profits and shareholders being overpaid.

Before sharing the profit, it is necessary to ensure its reality and its accuracy

The profit of a company, being the theoretical difference between incoming revenue and outgoing expenses, is above all an accounting convention, which evolves over time. In reality, this accounting profit overestimates sometimes by a wide margin, the value created by the company. It does not take into account the environmental costs that the company leaves on the account of society as a whole – both current and future generations – without paying the appropriate compensation.

The impacts and responsibilities of business activities on climate change, loss of biodiversity, water and soil pollution are gradually being regulated, but the costs of these impacts are only very rarely and very partially reflected in financial results.

The assumption that nature provides us with free and unlimited goods and services – which continues to lead to foolish abuses – shows it’s absurdity more and more every day. Degradations accumulate and it is now critical for us to act, as one-by-one we reach our planet’s boundaries and the Earth struggles to absorb our pollution and waste or provide us with the services which we freely use and abuse. Structural shortages of water, uncontrollable fires and pollution by plastic are some emblematic examples of this aggravation.

All these environmental degradations cannot be externalized for so long without seriously endangering our social equilibrium or even the existence of our civilization. We must stop the gradual erosion of our natural resources as well as the human impact that results from it. Evaluating the true wealth created by companies – no longer ignoring the unpaid environmental costs – is a necessary first step. It is the clear responsibility of the legislator, who decides on the evolution of the accounting conventions, and of the companies that measure and declare supposed wealth creation.

It is the duty of the board of directors to consider the true profit of the company

The supervision of annual accounts preparation and their presentation at the general assembly is one of the main responsibilities of the board of directors. At Earth on Board, we invite boards of directors to reflect on the reality of the financial results they approve; especially profits that they distribute. They too often look at the short term without considering the fragility of current conventions. If the convention changed tomorrow, what would become of the profit?

Pending these necessary legal changes, the board of directors cannot hide behind their current absence and should respect the obligation to act as a prudent and diligent director to anticipate these evolutions and to assume the consequences. Firstly, by investing in the reduction of environmental impacts, and secondly by providing the necessary sums for the repair of the natural resources that the company expends or impacts.

To be able to exploit a quarry, companies are now obliged to set up provisions to deal with site alterations and dismantling costs, in order to restore the site after exploitation. The nuclear industry must also build provisions for the decommissioning and management of radioactive waste. Shouldn’t every company today have a similar obligation to fund the costs of ecosystem restoration that it is helping to destroy? What about fossil fuels companies, who benefit from the work of nature over millions of years, without paying for this service or compensating for pollution they generate?

There is no greater fraud for a board of directors than to approve the declaration of a false result and to propose the distribution of this non-existent result. But, is this not currently our collective practice? It seems to me that before discussing the distribution of the spoils among those who are present, we should show equal consideration for those who are absent; such as future generations, and listen more attentively to those who are silent; such as nature.

Philippe Joubert at edie’s Sustainability Leaders Forum

Philippe Joubert will be appearing on Day One of edie’s Sustainability Leaders Forum event in London on the 5 & 6 February to discuss “Urgent Leadership needed from the Boardroom”. The session will look at what it means in practice for governance, boards and sustainability practitioners and the role of natural capital as a model for adaptive action.

The two-day event, taking place 5 & 6 February at the Building Design Centre, London, will also include debates on what the future of business leadership in regards to sustainability, CSR and energy will look like.

For more information and to register for the Forum, click here.