Having shepherded their organizations through the crisis of COVID, a CFO’s leadership has never been more critical to organizations. Every CFO is being tasked with adding value in new ways. Whereas CFOs of the past could look through the lens of historical data for answers about organizational performance and value, today’s CFOs must be able to connect current organizational performance with the future outlook, requiring new inputs of data and new critical thinking skills. Lagging indicators have given way to leading ones, and CFOs must sort through the noise of data to discern what is adding value versus what is not. Nonfinancial organizational data increasingly plays a key role in this new accountability.
At IMA’s recent Virtual Annual Conference and Expo, Mark Freudenberg, Director of Fiscal Operations, Simon Kenton Council, Boy Scouts of America, provided a thought-provoking and compelling look at how nonfinancial data sheds light on organizational risk and process improvement. Entitled, “Maximizing the Benefits of NonFinancial Information,” he discussed how nonfinancial information about an organization can add value for both the short- and long-term, enabling CFOs and senior management to see both where the organization is and where it is going. He cited the importance of sustainability performance data, and how the Balanced Scorecard and strategy map work of Robert S. Kaplan and David P. Norton, are providing organizations with a roadmap for reporting nonfinancial data like environmental impact or progress in social responsibility measures.
Nonfinancial data can add more depth to internal reporting, analysis, and strategy execution. Yet where do organizations start if they have interest in pursuing this path? Freudenberg emphasized the balanced scorecard framework as a tool for measuring and managing business performance across four dimensions:
- Internal business processes
- Learning and growth
For instance, organizations may capture data on their employees’ upskilling efforts (under the learning and growth dimension) which in turn could provide insight on how quickly an organization could implement a new technology. Nonfinancial data holds many clues to the future performance of organizations, and early warning signs that performance goals may not be met based on the current ways of operating.
The internal business processes this balanced scorecard approach elucidates can also be augmented by the use of strategy maps to better align nonfinancial measures, including sustainability metrics, with achievement of organizational strategy and related goals. More detailed discussion of how organizations can leverage sustainability data can be found in IMA’s “Leveraging the COSO Internal Control—Integrated Framework to Improve Confidence in Sustainability Performance Data.”
But, as Freudenberg acknowledged, successful integration of sustainable business practices requires CFO leadership and the ability of finance to function with other departments. “Buy-in” from other members of the C-suite as well as other functions is critical. Recently, IMA conducted fieldwork research and interviews with executives about sustainability issues to look at how the CFO and the finance function can serve as an effective business partner in facilitating integration of an organization’s sustainable business goals and activities in a report entitled, “CFO as Value Creator, Finance Function Partnering for the Integration of Sustainability in Business.”
As this report demonstrates, the appetite for incorporating nonfinancial data into reporting activities is gaining momentum. IMA’s director of corporate reporting research & policy, Shari Littan, along with Liv Watson, former senior director of strategic customer initiatives at Workiva Inc., and Natalia Kaleta-Schraa, ESG and client services manager at Workiva Inc., recently wrote an article for Strategic Finance magazine, “Financial and Sustainable Reporting Converge,” discussing the convergence of mainstream accounting on the standards and frameworks of sustainable business reporting. The authors note how the effects of climate change and biodiversity loss are manifesting in this generation, with wildfires and novel pathogens posing risks humankind has never before faced. This makes the need for “proper identification, measurement, and management of an entity’s precious and finite resources critical.”
Freudenberg echoed these statements in his presentation but went further to note the ethical imperative underlying the push for sustainability reporting. He cited his interpretation of the IMA Statement of Ethical Professional Practice, which every IMA member must uphold, as supportive of sustainability reporting. In section four of this statement, (under “Credibility”) it states: “Communicate information fairly and objectively.” This implies omitting no information that is material to decision-making and thus inclusive of nonfinancial reporting data. Freudenberg’s thesis is that nonfinancial information is often critical to understanding the current and future performance of organizations. Investors and other stakeholders (ranging from employees to society at-large) deserve to know how an organization is creating long-term value, minimizing environmental impacts, and acting as a steward for the future, or what John Elkington has called the triple bottom line (people, planet, and profit).
Management accountants, who are charged with delivering information to help steward their organization’s precious resources, can play a unique role in navigating their organizations towards a sustainable business model. Today, machine-readable systems that utilize tagging for financial reporting may someday be able to use them for nonfinancial data. Standard setters such as the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) produce a taxonomy for every data item reported on the financial statements, and are working with other sustainability organizations to provide more uniformity in standards for sustainability data, eliminating the confusion of multiple bodies setting different standards for this type of data.
So Freudenberg, and other thought leaders in the area, may someday see their vision for a more sustainable future, enabled by nonfinancial data coming to fruition. I sincerely hope so.