1. MIM 521: Evaluating and Measuring the Sustainability Performance for Global Organizations Darrell Brown Les Fahey/KPMG Accounting Fellow

2. A little about me Education in Forestry (actually Range Habitat Management) from UM Experience working for the BLM as a contractor, primarily mapping rangeland vegetation and soils Education in Business, MBA-CPA from UM Experience working as a staff accountant in a small regional (large local) firm Education in managerial and systems, PhD from Utah Experience teaching/research at PSU I bring some science background (ancient) and accounting/systems skills, plus some pedagogic format

3. A little about you Education and work experience Purpose for taking this course, expectations of the course Relationship of this course to your outside life What resources do you bring to this class

4. Information model—how do we know what happens in an organization? Business Activity (Something happens) Filter—criterion for: Processing, valuing, aggregating Interpretation, biases ABSTRACTION Observe and Record Presentation of information Decision Making (Something Happens)

5. Information Characteristics Objectives of business (accounting) information Useful in planning –investments Useful in predicting –cash flow prospects Useful in assessing –owned resources, claims to resources, changes in resources How do these ideas relate to information for sustainable business?

6. Economic Profit to Sustainable Business Economic ProfitSustainable Business PlanningWhere do I want to put my money to get the greatest ROI- financial Where do I want to spend my time, energy, political capital, money—greatest ROI-sustainability PredictingWhat cash flows will occur What are the likely outcomes of my activities, e.g. what changes in soil loss will occur if I change grazing patterns AssessingWhat do I own, what do I owe, what financial changes occurred What is the current status of my soil, what activities effect the soil, what changes have happened over time?

7. Characteristics of information Useful Relevant Reliable Usable Presentation Organization

8. Useful—Relevant Connected to business objectives Logical, supportable thread from metrics to objectives Meaningful for the purpose intended, valid Predictive value (leading) Training, investment in IT, advertising Feedback value (lagging) ROI, net income, productivity Timely

9. Lagging Indicators Measures of output, end-process measures, record effects Reflect past performance Generally quantitative Example: Quantity of toxic emission Strength: Easy to quantify and understand, preferred by regulators and public—deterministic rather than probabilistic Weakness: Time lag in feedback, ignore present activities, assumes that future is like the past

10. Leading Indicators In-process metrics of performance, proactive Reflect current status/activities—for future performance Quantitative or qualitative Example: percent of facilities with worker quality-of-life committees Strength: Represent current actions and (potential) future trends Weakness: Harder to build support for use, harder to track to performance—probabilistic rather than deterministic

11. Useful—Reliable Accurate for the purpose intended Representational faithfulness Verifiable Neutral Meaning objective, but not purposeless Relieves us of the need to assess “values” 1 of the data/information, however... We need to acknowledge inherent bias in any metric/measure 1 as opposed to value...quantification versus qualification, at some level

12. Usable Credible What users value and trust Assess and report on the accuracy of key sources Institute a data-quality program for key data Timeliness Accessibility Physically Cognitively

13. Engagement Must be noticed…thru format, medium, presentation… Idiosyncratic to the observer Transparent Clearly constructed Clearly connected Clearly collected

14. Conventions for interpretation Comparability—across business units Consistency—across time periods Materiality—has important effect Conservatism—objectively understated (??) Full disclosure—include all important information Cost-benefit relationship—guides all decisions The use of a scarce resource for one purpose eliminates the ability to use it elsewhere—opportunity costs

15. Categories Of Measurement types Direct: absolute measures (2 tons of soil loss) Relative (normalized): one data item compared to another data item (.25 tons of soil loss per acre) Indexed: data related to a standard or baseline, e.g. trend analysis (a 50% increase in soil loss) Aggregated: combined value of same type of data from various sources (1500 tons of soil loss in a watershed) Weighted: a factor of significance applied to data (-90 carrying capacity due to soil loss (each ton is worth.06 wildlife units))

16. Reporting: going beyond collecting History of corporate financial reporting Initial CFR—early 1800’s, with canals, railroads, utilities Need to raise capital, balance sheets primarily Regulation—result of abuses in 1800’s, culminated in 1929 Need to protect naïve owners, income statements SEC created to oversee Third party verifiers

17. Bringing to the current day Delegation to private sector—late 1930s FASB—standards for reporting AICPA—standards for review Auditing Profession dedicated to “third parties” Revival of activist government—1990s Consolidation of auditors Power of companies Responsiveness to additional stakeholders Sarbanes-Oxley Act Regulations at the Fed??

18. History of environmental metrics—Generation 1 Driver: Compliance Objectives: Risk management Primary audiences: Sr. Management, environmental staff Indicators: Regulated emissions, hazardous wastes, violations & fines When: Mid 70s to mid 80s

19. Driver: Stakeholder management, process management, pollution prevention Objectives: Drive continuous improvement, communicate eco- efficiency targets & progress (image), avoid costs, preempt regulations, gain competitive advantage Primary audiences: Stakeholders, line management, regulators Indicators: Resource efficiency, emissions & waste, financial, implementation When: Mid 80s to mid 90s Environmental metrics—Generation 2

20. Driver: Stakeholder partnership, sustainability, life-cycle management Objectives: Strategic effectiveness, credibility, business sustainability, product friendliness (DfE, LCA) Primary audiences: Broad stakeholder set Indicators: Balanced scorecard, environmental condition, resource efficiency, toxicity reduction, products When: 2000 and beyond Environmental metrics—Generation 3

21. Corporate Social Responsibility report How do organizations disclose to stakeholders Voluntary Addresses social and environmental issues Irregular distribution Inconsistent format Unpredictable content

22. Source of Drivers for CSR Stakeholders— Who are they Which require a report What do they want reported How can these needs be addressed Corporations— Legitimacy Competitive advantage Enlightened

23. Drivers for CSR Stakeholders Capital markets Shareholders Regulators Customers Community NGOs Employees Media Trade/Industry Academia Public...

24. Comparing drivers and their effects Capital market does not require CSR Major concern is tying financial performance to sustainability performance Stakeholders require different information from CSR CSR are not standardized External verification for CSR is not well organized, is inconsistent, is voluntary

25. CSR concepts Economic (as opposed to, but might include, financial) Environmental Social equity Sustainability—Triple bottom line… Lets look at some...

26. Why a CSR? PR Stakeholder information Cultural imperative True belief Some evidence that being responsible has positive impacts on shareholder return but don’t get too excited…