Nov 19, 2010

It's Time to Standardize Integrated Reporting of Financial and Sustainability Performance

Two groups dedicated to sustainability — the London-based Prince's Accounting for Sustainability Project (A4S) and the Amsterdam-based Global Reporting Initiative (GRI) today announced (pdf) the formation of an organization to develop and promote global standards for companies to report both their financial performance and their performance in the areas of environmental sustainability, social responsibility, and governance in an integrated fashion. This is important because integrated reporting is the best way to ensure that companies have sustainable strategies; define them in financial, economic, social, and governance terms; and then communicate the results.
The new organization, the International Integrated Reporting Committee (IIRC), aims to help make integrated reporting the dominant practice on a global basis as soon as possible. (It is already required in South Africa.)
I, along with 32 others from the business, investor, regulatory, NGO and academic communities from around the world, am a member of the IIRC's steering group. I have been studying corporate reporting and how to improve it for more than 20 years. Until recently, I was largely focused on shareholders. But the world has changed, and I have come to see that the interests of shareholders and other stakeholders are highly interdependent if we are going to have a sustainable society. In my recent book, One Report: Integrated Reporting for a Sustainable Strategy, I argue that financial and nonfinancial reporting should be combined and should show the relationships between different categories of performance. I also encourage companies to use the Internet to provide more detailed information and improve dialogue and engagement with all stakeholders.
Establishing integrated reporting as a dominant global practice is clearly an ambitious mission — especially for an organization that has no regulatory authority of any kind. After all, companies in every country are subject to a never-ending accumulation of new disclosure requirements and face increasing pressures for greater transparency from a wide range stakeholders. So why should companies go to the extra trouble of producing a report that integrates both financial and nonfinancial information?
What is telling is that some leading companies around the world already are doing so. While the number is still relatively small, it includes at least three companies in the United States: Southwest Airlines, United Technologies, and American Electric Power. Companies outside the U.S. include the Dutch healthcare and lighting company Philips, the Danish pharmaceutical company Novo Nordisk (pdf), and the Brazilian cosmetics and fragrances company Natura (pdf). They are all releasing integrated reports for a similar reason: They see this as the best way to communicate their sincere commitments to a sustainable strategy and to instill the necessary internal discipline to implement it. The range of industries and countries of these companies suggests that integrated reporting is an idea whose time has come.
Nonetheless, there are still some significant barriers to its rapid and broad adoption. Based on the research I did for my book, here are some of what I think are the most significant ones:
  • "closing the books" on nonfinancial information at the same time as financial information since the internal measurement and control systems of the former currently lag the latter in terms of rigor and sophistication
  • finding a way to understand the relationships between financial and nonfinancial performance (Most companies claim good environmental, social, and governance performance contributes to shareholder value but provide very little data to back up this claim.)
  • getting analysts and investors to really pay attention to the company's nonfinancial performance
  • deciphering the current complexity of financial reporting, which makes it hard for all but the most sophisticated readers of financial statements to truly understand a company's performance
  • figuring out how to measure and disclose the risks a company is taking to create value
  • compensating for the lack of a globally agreed-upon set of standards for nonfinancial information
Please share with me your views on integrated reporting, your thoughts on how we can overcome the barriers to its adoption, and any company examples and academic studies that address these barriers.

Written by : Robert G. Eccles
Robert G. Eccles is a professor of management practice at Harvard Business School.

Reactions:

0 comments:

Post a Comment