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Long-term thinking

By Institute of Directors
7 May 2019

The first Wellbeing Budget on 30 May will introduce concepts from private and public sector reporting to the Government's accounts and put long-term outcomes at the heart of spending priorities.

As boards increasingly consider environmental and social concerns alongside business strategy, the Government is becoming more rigorous in establishing a business case for its spending.

When Finance Minister Grant Robertson delivers the Wellbeing Budget on 30 May it will include five specific priority areas against which future governments can measure the outcomes of their spending, rather than simply seeking to balance the books. This focus on outcomes will, ultimately, make the budget more business like, says ASB Chief Economist Nick Tuffley.

“It’s behaving a lot more as we would expect a private business to behave. In the past, governments had a tendency to focus on inputs – say, $3b for health. That’s great, but what outcomes are we trying to achieve? This framework should give us a sense of how effective policy outcomes are – more measurement, more focus on achievement,” Tuffley says.

While not entirely new – Tuffley notes the OECD has been measuring living standards for years – the focus on outcomes for citizens has been hailed internationally as an innovative way to improve public policy value for money. That’s because having clearer goals will enable governments to develop new metrics, which in turn will lead to better policy development. Tuffley says the key is expanding the measures reported in a Wellbeing Budget to provide a tool for assessing the effectiveness of resource allocation and policies.

“In a Budget sense, that means trying to get the most out of what you have got,” Tuffley says.

Jane Diplock CFInstD is chair of the governance and nominations committee of the International Integrated Reporting Council (IIRC). She describes the upcoming Wellbeing Budget as “extraordinarily important”.

“I see it as a symbol of the realisation that the elements that are important to a society and to communities are not necessarily easily seen in GDP,” Diplock says.

“What else is a budget about, really, than the wellbeing of New Zealand? It is a real triumph for New Zealand to be the first in the world to be making this journey.”

Trust issues

New and improved measurements of performance are something the private sector has been seeking for many years. In the past decade, the rise of integrated reporting (IR) and increasing interest in environmental, social and governance (ESG) issues have broadened the measures boards are putting in place to understand organisational success.

“Integrated reporting is a concept which has really, it’s fair to say, taken the world by storm,” Diplock says.

It’s one of those ideas that had been building for quite some time – we had the triple bottom line, we had people looking at non-financial reporting. It became clear that corporations needed to be thinking about the business more holistically. Integrated reporting brought a number of concepts together, asking entities to integrate their sustainability reporting and financial reporting, and to describe their business model and how it adds value over the short, medium and long term. In other words, what makes their enterprise sustainable. Here in New Zealand it has been a great pleasure to see the interest grow and grow.”

This shift occurred at the same time as businesses were starting to understand that there has been a diminution of trust.

“There were calls for greater transparency about all the things that companies do,” Diplock says.

“It has become self-evident to most businesses that when they look at what their stakeholders are requiring of them that they can no longer rely merely on the financial reporting standards, that they need to tell their story in a way that their stakeholders can understand,” Diplock says.

“We are seeing business looking beyond straightforward profit and loss to things like customer satisfaction and their brand and reputation. They are seeking a more holistic view,” Tuffley says.

As business has shifted its approach, trust scores have improved. According to the Edelman Trust Barometer 2019, “my employer” is now the most trusted institution globally (the 2018 survey, conversely, described an attitude of “stagnant distrust” across the global population). Edelman 2019 also found CEOs are now expected to lead social change with 76% of respondents saying a company can increase profits and improve social and economic conditions at the same time.

“Part of the raison d’etre for IR is to enable stakeholders within communities, countries, companies to see what the business model of the company is – what they are really about and what they are trying to achieve,” says Diplock.

“Return for shareholders is not the only aim, or the only outcome, to having a company. It goes back to the level of trust.”

Government transparency

Treasury Deputy Secretary and Chief Economic Adviser Tim Ng describes the Wellbeing Budget as motivated by similar ideas to those underlying integrated reporting – transparency, accountability and connection to data and evidence. The Wellbeing Budget will provide transparency, in that what the government expects to get for its money will be visible alongside how much is being spent, Ng notes.

“That transparency will provide accountability around what the government is trying to achieve, and what is being achieved,” he says.

Ng says the Wellbeing Budget will be, in a sense, the government drawing from trends in the broader reporting environment for its own prioritisation, planning and reporting processes. “The same factors, I think, underlie integrated reporting in the private sector, and in the public sector. The goal is to allow for integrated management, which is the whole point.”

Underpinning the Wellbeing Budget is Treasury’s Living Standards Framework. This is a system for measuring wellbeing based around the four “capitals” of natural capital, social capital, human capital and financial and physical capital (IR is based on six capitals), and the different dimensions of current wellbeing these capitals support. Indicators of these fundamentals of wellbeing are tracked on a dashboard that describes wellbeing outcomes for different demographic splits, for the country as a whole as well as different regions, and for the future, including our resilience to shocks and changing circumstances.

“The Framework has been part of the process the Minister has used to develop the budget priorities,” Ng says. “It is exciting. We are getting a lot of interest from overseas in how we are using these tools and processes to shift the way we provide public services and make policy decisions in New Zealand.”

He describes the Living Standards Framework as a tool for “measuring better what ultimately matters to people, and analysing it in a way that supports policy development”.

As the first country to deliver a Wellbeing Budget, New Zealand will be watched closely by the international community, particularly for what we choose to measure and focus on.

Nobel economics laureate Joseph Stiglitz says the metrics of a “wellbeing budget” must be developed to reveal impacts of policy as well as to help governments select the right tools to address issues. “Governments putting wellbeing at the centre of their agenda will redirect their budgets accordingly,” Stiglitz says.

Ng is quick to note that we should not expect to get everything right first time.

“The availability of data has increased massively over the past 10-15 years. We are much more able to measure lots of things. Now, the challenge is about putting it together coherently with a causal view of what most influences wellbeing over the longer term. This is a journey. We are just at the start of that.”

What should we measure?

Economists will measure “pretty much anything”, Tuffley says, if it helps to understand human behaviour and our use of resources.

“There is more data available. There are things that we couldn’t measure before – the day-to-day or minute-tominute data that some organisations, like Google, have access to which can inform them about things like spending patterns,” Tuffley says.

“Where the Living Standards Framework comes in is where the Government is developing indicators that provide a basis for effective tracking. This is long-term and intergenerational. It’s not about putting a policy in place then next year finding it didn’t do what you wanted and trying something else.”

Ng says that going through this exercise will help make clear which aspects of wellbeing are being measured effectively, and which are not.

“What we are continuing to discover is that what we really want to measure is not always being measured. That is one of the benefits of the process,” Ng says.

He offers the example of child wellbeing as an area that needs to be measured better. “You can make assumptions, but most of the information collected is from, and about, adults.”

Again, the private sector can offer a roadmap in this journey. Diplock says that putting together an integrated report requires corporations to collect data they may previously have overlooked and to place it in the context of their business strategy.

“Data collection can be very useful for a full understanding of the business model. Integrated reporting allows for telling a story and the understanding of business models inter-generationally – which is very important for iwi and for the government. On these wellbeing indices you may want to see some correlation between what the companies owned by the government are doing compared with the social mandate reflected in their integrated report.”

Published in Boardroom Apr May 2019 issue

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