Accounting frameworks ‘rooted in 20th-century practices’

Accounting systems must be adapted so they better capture modern-day value creation, particularly in the context of climate and intangible assets, a top academic and business leader have agreed.

Shivaram Rajgopal, a professor at Columbia Business School, and Anjali Bansal, founding partner, Avaana Capital, made the observation at an event in Mumbai, organised by the Business Standard website.

At the event, Rajgopal emphasised the inadequacy of traditional accounting frameworks, which he said remain rooted in 20th-century practices. He commented: “If you take the framework to a modern-day income statement, it’s completely opaque. Income statements in the US haven’t changed since maybe 1920,” he said, highlighting how intangibles, such as research and development (R&D) contributions, and externalities, both positive and negative, are often ignored.

Rajgopal cited examples like Coca-Cola’s minimal costs for water usage and the societal benefits from innovations like Pfizer’s Covid-19 vaccine to underline the misalignment in measuring corporate value. He added that while negative externalities like carbon emissions are captured, consumer value created through R&D is often overlooked.

Avaana Capital’s Bansal linked governance and intent to broader accountability issues in corporate operations. She pointed out how equity-heavy executive compensation structures incentivise short-term shareholder gains at the expense of broader stakeholder value, including environmental sustainability.

“I think this is the problem that we have with the quarter-to-quarter management style of most enterprises today. How is your stock price going? Executive compensation getting linked more and being very equity-heavy means that there is an incentive to maximise one aspect of value creation, which is value creation for shareholders, and not necessarily value creation for your stakeholders, which includes the community, suppliers, and customers,” said Bansal.

The pair touched on the polarisation of environmental, social, and governance (ESG) initiatives, especially in the US, where political divisions have hampered progress. “ESG has become a bad word, at least in the US, with that whole conversation being highly politicised,” said Rajgopal, noting that frameworks like carbon taxes are politically unpalatable due to inflationary concerns.

Rajgopal suggested that aligning corporate “values and value” is essential for integrating ESG into business strategies, adding that a more holistic definition of value creation encompassing societal expectations is needed.

While discussing how India can compete globally, Rajgopal stated that it is challenging to decarbonise and grow simultaneously, but quality of life remains a concern, with the Air Quality Index (AQI) in Indian cities worsening by the day. “Maybe the state needs to be a better actor. These are externality problems that the private sector by itself cannot solve,” he said.

As the global economy pivots towards decarbonisation, the need for strong regulatory oversight is evident, particularly in the allocation of climate finance and ensuring investments in sustainability are responsibly managed. Countries and corporations must integrate governance structures that prioritise long-term societal value over short-term profits, he added.

India Missions urged to identify overseas opportunities

India’s commerce ministry has asked the commercial wings of Indian Missions of 20 countries to specifically identify market opportunities in specific goods and services to boost the country’s overseas sales exports.

Ways to increase the exports were discussed during a three-day meeting at the start of January between senior officials from the ministry and commercial wings of Indian Missions, the commerce ministry confirmed.

The official said the missions were asked to market opportunities in sectors including technology, investment, tourism, engineering goods and electronics.

He said the meeting was important as the commerce ministry is in the process of formulating a strategy to push exports of six key product categories, including engineering goods and electronics, to 20 focus countries, including the US, Australia, France, China, Russia, the UK, Japan, South Korea, Singapore and Indonesia.

These countries, including the US and the European Union nations, account for a major chunk of India’s total exports.

After recording double-digit growth in October 2024, India’s exports in November contracted 4.85% year-on-year to $32.11 billion.

Cumulatively, during April-November this fiscal year, exports increased by 2.17% to $284.31 billion and imports by 8.35% to $486.73 billion.

Services exports reached an all-time high of $34.31 billion in October, registering an increase of 22.3% year-on-year.