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Beyond the balance sheet

27 Jan 2020 | Laura Kelly Laura Kelly, a Director at PwC, discusses the relationship between profit and purpose, its importance for business in defining value and its application in HE institutions.

My recent reflections on profit and purpose are equally applicable to the world of higher education as they are to the corporate world. You need to be profitable to be sustainable and indeed, the OfS conditions of registration requires a view on financial sustainability.

Many a charity CEO and chair has told me that they have a broken business model and need constant subsidies from commercial enterprises and/or private donations to keep the lights on. Higher education (HE) sits at the crossroads between profit and purpose in a way that the charitable sector does not – profit is integral to the business model and has been more expansively described by universities as a ‘surplus’ or a ‘margin for sustainability’.

Profit and purpose

Unlike commercial enterprises that have equity investors who require a financial return (as dividends or capital growth), universities retain all surpluses to reinvest in achieving their purpose.

This crossroad in HE means that it is of the utmost importance that institutions are transparent about their financial flows, but also the non-financial impact of these in their local and international communities.

An example is Newcastle University, which recognises the importance of engagement with its local community and business and has key partnerships with civic organisations such as Newcastle City Council, Newcastle Upon Tyne Hospitals Trust and Northumbria University. The University makes clear that these partnerships are vital to their plans to develop a Civic University Agreement.

In a similar vein, the University of Edinburgh has a commitment to deliver societal impact and over the last year work has been undertaken to identify opportunities to provide benefits for local communities through the university’s procurement. A ‘Community Benefits through Procurement’ Policy was developed and published to provide advice on this. With the support of Zero Waste Scotland, the university’s project will continue to support engagement with their construction suppliers, developing business cases around data driven innovation-led projects on decarbonisation and the circular economy, delivering wider benefits to local communities.

Rebuilding trust

As a professional services advisor, the reporting agenda is close to my heart and I see the transparency of reporting ‘beyond the balance sheet’ as key to rebuilding trust between institutions and broader society.

Larry Fink, CEO of Blackrock, told us all last year that “profits and purpose are inextricably linked” and the influential Business Roundtable group of CEOs changed their definition of the purpose of a corporation from existing primarily to serve shareholders to “creating value for all stakeholders”. The key message was that an organisation’s purpose and not just shareholder wealth is now becoming critical.

This year Larry went further and strongly emphasised sustainability, the risks associated with climate change and reiterated that ‘a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders’.

Scrutiny of non-financial information has increased across influential groups such as the media, the investment community, civil society and consumers. HE is not immune to changes in the broader environment, this past year also saw Extinction Rebellion hit the headlines; a number of declared climate crises and increased emphasis on social and racial injustices.

Authenticity

I have also previously discussed the importance of authenticity in this debate. The diverse nature of a single HE institution with research, teaching, commercial partnerships and spin-offs makes this extremely relevant. We all know too well some of the recent scandals related to donations and scholarships which have severely tainted reputations.

Negative stories about HE institutions relating to conflicts of interest, provision of poor or misleading information and unauthentic strategic oversight have hit the sector’s media headlines just as much as corporate scandals and sometimes lead to new ways of working and practices which aim to achieve authenticity, transparency and assurance.   

Individual institutions will have their own views of how authentic their reporting is.

For me, good signs of authenticity relate to a consistent and supportive tone from leadership, investment in systems and processes to actually track and measure information and openness to scrutiny by an independent verifier.

The very recent Brydon report on the quality and effectiveness of audit discussed that these broader non-financial measures might in the future form part of the scope of the annual audit and this is something I welcome as part of the journey to transparency.

The harder element to capture is the culture within an organisation and a transparent and authentic culture embraces challenge, learns from and is open to mistakes and their people understand implicitly what the right thing to do is in any given moment. None of these things are easy, but they are all part of a journey and therefore part of a story which goes beyond the balance sheet.

With thanks to Phil McNaull for his contribution.

Laura will be speaking at this year’s Let’s Talk Value Conference on 11 February, find out more and book your place here.

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