Adrian Zicari, Prof. of Accounting and Management Control and Director of CEMAS at ESSEC Business School, follows on from Part 1 of his article “The Fourth Financial Statement: When finance turns innovatively green”
The fourth dimension
Developed by Luis Perera Aldama, the Fourth Financial Statement builds on existing VAS models and promotes a simple yet very perspicacious dimension: the breaking down of the profit and loss (P&L) statement into how much value a company creates and how it distributes that value. To obtain the value creation, sales revenue minus direct costs linked to creating the product or service is calculated. The distribution of this value is then displayed in the various sums paid to different company stakeholders: employees, shareholders, taxes, banks and financial suppliers, and the community and environment. In this way, the distribution pattern clearly shows the economic impact of the firm on society by making explicit the proportion of value received by each stakeholder.
The Fourth Financial Statement is unique, too, in that it is accompanied by a comprehensive set of sustainability/CSR-related notes presenting information and performance indicators aligned with other, predominant reporting standards and guidelines. It is also flexible enough to be transferred to other standards that could appear in the future. And beautifully simple in that data for the statement comes from conventional accounting.
CSR VAS in action
Among the increasing number of companies using the Fourth Financial Statement model is the British-Australian mining company BHP Bilton for a division based in Chile – in this case for the last six years. The experience showed that producing the statement first time round calls for enormous effort due to the need to analyze great amounts of information and for the financial team to become familiarized with the model. However, once over the first experience, managers from the company praise the model for the way it makes understanding the numbers easy and facilitates the communication of CSR-related performance to both internal and external stakeholders. Another company using the model in Colombia highlighted the fact that managers from accounts and the CSR departments worked together to implement the model – in sharp contrast to the classic case of sustainability reporting being seen by employees as the ‘toy’ of CSR managers only. Kimberly Clark, the manufacturer of personal and healthcare products and a recognised leader in CSR, uses the Fourth Financial Statement model as a tool for ongoing dialogue with internal stakeholders, thus encouraging CSR to be the concern of departments as diverse as sales (which proposed using the CSR results as a selling argument) and HR. Last but not least, ANTEL, the state-run telecom company of Uruguay, is now considering using the model as an aid for target setting, strategy implementation and monitoring.
Towards a fifth dimension?
Zicari and Perera Aldama’s research and assessment of the Fourth Financial Statement in action focuses mainly on large firms, though they state that the model can also be used in SMEs. It may also be of especially relevant use for emerging economies given the argument that CSR adapts to, and evolves differently in, different parts of the world. Moreover, as CSR has its origins in developed countries, it tends to be focused on its own roots while ignoring or de-emphasizing priorities in emerging countries. As such, the future might well see VAS being used in Africa and various parts of Asia and adapted to local practices and specifics.
The beauty of the model lies in its applicability, not only as a CSR reporting tool but as a way of defining how to manage the firm’s business and pursuing different distribution strategies. For example, one company might choose to pay higher average wages to a smaller workforce, while another might consider its duty to recruit more people. It also makes things crystal clear. Making financial donations to the community from generated profits is fine but it is not the be-all and end-all of good CSR practice. The amount of taxes paid to local and national government, or the costs related to paying for the services of suppliers, is also an indicator of how the company makes its ecosystem and satellites benefit from its business activity.
Despite the initial workload involved in implementing the Fourth Financial Statement, despite the hurdles of getting people to work together across departments; and despite the still common temptation to outsource the process of CSR reporting, the model makes a difference. It becomes the report of all those working in the firm – a far cry from the common situation in which a sustainability report remains the isolated action of a well-intentioned CSR office, with few readers inside the company and even fewer readers outside. It provides an innovative answer to the challenge of wealth distribution in South America and a way in which to ‘walk the talk’ by voluntarily disclosing extremely relevant information. All in all, VAS and the Fourth Financial Statement model add a new, innovative, practical and motivating dimension to CSR in firms.
Return to Part 1 of Prof. Adrian Zicari’s article The Fourth Financial Statement: When finance turns innovatively green
- Discover more about Prof. Adrian Zicari and his work
- Visit ESSEC CEMAS (Center of Excellence Management and Society)
- Read Adrian Zicari’s previous article Can Financial Markets Push for CSR? Part 1, Part 2
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