Do you really know a responsible business when you see one?

If you search online for ‘responsible business’ you will have a lot of reading to do.  And most business owners think they are already running a responsible business, as opposed to an irresponsible business.

But how would you know one when you saw one?

I like this definition from the Responsible Business Project 2030:

A responsible business is a: 

• workplace where its people accept that people and planet issues and making an ethical profit are a responsibility not a choice. 
• place where everyone, regardless of position, plays their part in helping to make the world a better place to live and work.
• sustainable business where the long-term future of its people, of society, and of the planet combined with sustained and ethical profit is part of the over-riding strategy of the business.
• workplace where people are fairly paid, happy and engaged in their work, where well-being is prioritised, where their work is purposeful and their actions respectful of the world we live in.

But reading the first bullet point – just what is an ‘ethical profit’? As opposed to an unethical profit?

Philippe Joubert’s thinking may provide a clue. The international sustainability advisor and former deputy CEO of global transportation company Alstom has long argued that directors are approving ‘counterfeit’ profits.

“It is not because we decided that CO2 in the atmosphere has no price that it has no cost. We are simply sending the bill to the next generation,” Joubert warned at an opening of the Euronext stock exchange in Brussels.

Which gives us an example of what is missing and doesn’t seem to be very ethical.

An affront to directors?

The idea that your calculated profit, all signed off by your auditor, is unethical may feel like an affront to many company directors. Who is to say it’s unethical, especially when it has been calculated by reference to internationally agreed accounting standards and approved by an auditor (who upholds a professional code of ethics). Directors approving ‘counterfeit’ profits? That would surely be illegal. And directors have a legal duty to produce accounts that are true and fair, and their auditor must satisfy themselves that they are true and fair.

The idea that your calculated profit is unethical may feel like an affront to many company directors. And directors have a legal duty to produce accounts that are true and fair

But a responsible business would take responsibility for its costs. Not just the costs agreed in contracts or that are part of legal requirements for running its operations. All the costs that arise as a consequence of running the business and then, hopefully, making a profit.

So what then is a cost? There are many definitions for what is such an intuitive idea. Here’s one example of a dictionary definition:

“the amount of money needed to buy, do, or make something”

The amount of money needed?

I suspect when we read this, we think about the money needed by the business to buy something the business needs that belongs to someone else. The business enters into a contract and the payment can be legally enforced. But what about something the business needs but doesn’t have to pay for? Most businesses can only run their businesses if they contribute to greenhouse gases. They use carbon, but they don’t have to pay for it. Many businesses have unpaid labour in their supply chains or suppliers that pay wages below the rates that the business would pay its own employees. But they can price their products without including that cost.

Hidden costs

Businesses are dependent on using things that have consequences for people that the business does not need to pay for. You could call these the hidden costs of doing business as you can meet international accounting standards and prepare accounts have been accepted as giving a true and fair view without recognising this type of cost.

Which brings us to accounting standards and the concept of a constructive obligation.

Paragraph 10, International Accounting Standard (IAS) 37; Provisions, Contingent Liabilities and Contingent Assets defines a constructive obligation as:

“an obligation that derives from an entity’s actions where;

1. by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and
2. as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.”

This means that if a valid expectation has been created, the business has no choice but to make the payment. There is no escape. Costs have been created by past practice, published policies or a sufficiently specific current statement.

The circle has not quite been closed. There is one more step.

In a recent opinion on the requirement for financial accounts to give a true and fair view, George Bompas, KC said: “On the other hand, a company which actively wants to make concrete sustainability commitments might deliberately choose to structure its commitments in such a way as to create future or even present year obligations which impact upon the accounts.”

A company might choose to take responsibility to pay for things it needs to use. Things for which there is no legal requirement to pay, like carbon, unpaid labour in the supply chain or a viable planet. 

Which means that a company might choose to take responsibility to pay for things it needs to use. Things for which there is no legal requirement to pay, like carbon, unpaid labour in the supply chain or a viable planet. It turns out a business could recognise these costs within existing accounting standards!

Surely a responsible business is a business that takes responsibility for these costs as well – and pays them? The responsible business’s profits will meet international standards and will also give a true and fair view but they won’t be counterfeit and they won’t be unethical. They’ll be responsible.  

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