Traditional accounting return ratios and business sustainability: An incompatible relationship in the context of Greek strategic business units

Abstract

The pursuit of sustainability in business practices has necessitated the integrated assessment of corporate economic, environmental and social performances. Continuous technological, political and legal evolutions enforce the implementation of Sustainable Development (SD) principles in major sectors of Greek corporate reality. However, the ultimate criteria for the evaluation of a company's performance remain its profitability and market value. Interesting parties emphasise and base their credit and investment decisions on various accounting ratios of return produced on data disclosed in the financial statements of companies. This paper analyses how the traditional accounting ratios, discourage the implementation of investment plans that aim to improve the environmental performance of companies and therefore can prove inadequate and misleading for SD applications. With few exceptions, most international studies have recorded a positive relationship between the environmental performances of proactive firms and their financial positions and market values in the long run. This fact has consistently been disregarded in the computation of the return ratios, widely used in the Greek context to set up the basis for management rewards and bonuses. The divergence of the real market value of a corporation from the book value on which ratios are based indicates the urgent need for adjustment to the return ratios so that they can record the positive economic impact of sustainable actions and encourage decision makers in this direction. This article offers recommendations about how such an adjustment can be achieved while the company works within traditional accounting principles.