Roger Simnett & Sarah Adams | Centre for Social Impact Blog

The Centre for Social Impact’s recent roundtable was a great opportunity to examine the confluence of two journeys: that of Integrated Reporting (and the IIRC), and Shared Value (Porter and Kramer 2011). At first glance, these initiatives are quite different: Shared Value refers to a management approach to improve business decision-making, and build economic value (see Phil Preston’s blog ’Why ‘shared value’ is good business’), while Integrated Reporting is a new approach to reporting and communicating strategy and performance (see Peter Shergold’s blog ’Shared Value Business: the Case of Stockland’). However, reflecting on the discussion at the roundtable brought to light some key points where these two journeys intersect.

A New Role for Business

A key connection between the concepts is they both reflect a desire to move beyond businesses prioritising short-term financial performance, and to reorient the efforts of a business toward long-term success and sustainability. This has been driven – at least in part – by the very widely articulated social and economic consequences of the ‘short-termism’ in financial institutions that triggered global economic crisis.

Alongside this there is an implicit recognition that any organisation or firm is an actor that interacts with a complex social and environmental setting. The Shared Value thesis suggests that that cognizance of, and investment in, an organisation’s social and environmental context can create opportunities for augmenting economic value. That is, social, environmental, economic and other sources of value are interrelated and not necessarily mutually exclusive (which is a common argument among corporate responsibility critics). These underpinnings are also reflected in the capitals approach of Integrated Reporting, where organisations are encouraged to ‘make visible’ their use and dependence on many sources of capital (financial, manufactured, human, intellectual, natural and social) and how these are used to create value.

The Trend of Embedding

More broadly, both Shared Value and Integrated Reporting reflect the trend of progressive businesses taking a more strategic approach to sustainability by seeking to embed sustainability into core business practice. Both approaches suggest that breaking down the ‘silos’ of current practice -the corporate responsibility reports vs. annual reports, and the corporate responsibility departments vs. ‘the rest’ of the business – can provide material benefits to organisations. Integrated Reporting is defined by “demonstrating the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates”, and recent evidence shows that the main driver of integrated reporting among the world’s largest companies was “seeking to integrate corporate responsibility into core business”. An example of an organisation pursuing shared value, Stockland (as profiled by Peter on this blog) integrates environmental and community benefits into central business activities and to sustain long-term value.

Looking Out and In

Another key similarity between shared value and integrated reporting is leveraging internal and external factors to the organisation. Two of the ways suggested by Porter and Kramer to create shared value include ‘reconceiving products and markets’, and ‘building clusters’ which both necessitate engagement with an organisation’s context, including deeper connections with stakeholders. These indicate that Shared Value revolves around the idea that sensible and productive decision making within an organisation can be made by positively engaging external resources and organisations. On its own journey, a company producing an integrated report will produce an external communication tool (integrated report) which will be responsive and inclusive to stakeholders, but a crucial additional outcome will be improved internal decision-making and information.

Distinctions

While the two concepts do resonate with each other, their journeys have seen some key distinctions. A key driver of integrated reporting has been the escalating compliance burden of reporting for many organisations. Seeking to cut the clutter of annual reports is a key driver of the initiative for both report producers and its readers.

Another important distinction is the challenges faced in implementation. Integrated Reporting is a holistic and long-term commitment for organisations; for most organisations the production of an integrated report will require extensive preparation and thus a considerable time frame. Integrated Reporting must also accommodate the plethora of laws and standards across the global that relate to reporting compliance and communication. The hurdles are high. In contrast to this, shared value is a more agile management approach, which can be undertaken on many levels: from a product, to program and up to an organisational level.

Despite these distinctions, there are points of confluence for Integrated Reporting and Shared Value. With great momentum, practitioner and academic interest behind these ideas, it will be instructive to consider how these two approaches learn from, and contribute to each other. What do you think? Is there any value in looking at these two concepts together?

Roger Simnett is a professor in accounting at the Australian School of Business.

Sarah Adams is the NAB Research Fellow at the Centre for Social Impact.

This article first appeared on the CSI blog.

Peter Swan

Now that the Reserve Bank has cut interest rates, the question is – which one of the big four banks will be first to cut, and by how much – if at all?

However may I suggest this may be the wrong question. Instead the RBA may be looking at giving a boost to industry from the cut in interest rates, with any benefit to homeowners just an additional perk.

The 25 basis-point cut to the official cash rate will lower the Australian dollar and take some pressure off the entire export and import competing sectors of the economy, including areas such as education that remain weak. It may take some time to work, but this will be a noticeable effect.

None of the four major banks have moved their standard variable lending rates in response to the RBA’s quarter percentage cut from 4.5 per cent to 4.25 per cent yesterday. Now there is speculation that they are engaged in a game of chicken, each waiting on the other to move first. But I think Australian banks risk the political wrath of not passing on yesterday’s cuts in full as the banks seek to protect their profitability amid rising funding costs.

So far only two relatively minor lenders have passed on the cuts, and they are lenders that finance much of their mortgage lending from savings, rather than borrowing on the wholesale markets.

All banks have warned that, even though most are fully funded for the short term, the European sovereign debt crisis has pushed up wholesale funding costs. The banks’ profit margins are also under pressure given the flat lining credit demand in Australia.

There is a great deal of international uncertainty caused by the meltdown of the Euro and the slashing of the ratings of Euro countries including Germany and France. At the same time, the non-mining sector of the Australian economy remains weak. Indeed, reading their announcement it is clear that the Reserve Bank could be forced to cut interest rates again if the outlook for Europe and the global economy keeps on getting worse. If that happens, the major banks would almost inevitably be forced to pass on the cuts rather than hold back, or they would risk a populist backlash that would anger the government.

Peter Swan is a Professor of Finance at the Australian School of Business.

Michael Sherris

Now that house prices have been on the slide for ten straight months, a major new study from the Australian School of Business is showing where the largest falls are, and how this is impacting on savings in Australia.

The recent international credit crisis has shown the vulnerability to major market collapses in residential property prices of both individuals and financial institutions such as banks who lend to finance residential property. Australia is not immune to global events, and many people may be more exposed than they expect.

Australian house prices are falling at an accelerating rate according to data from RP Data-Rismark, with Sydney’s dwelling values down 1.4 per cent in 2011. For the nation, seasonally adjusted home prices have dropped 4 per cent so far in 2011, and are forecast to fall much further.

Now, it isn’t surprising that this is an area of concern for many homeowners. Residential property is a major component of individual savings in many countries including Australia. Home ownership is high however property values are not as observable as share prices and other financial assets where individuals save. That’s why we need much more data on where and by how much there has been a fall.

After years on a pricing plateau due to a shortage of supply, when many people saw housing as a good way to save for old age and safer than money in the bank, Australian domestic house prices are now steadily falling. That is causing risks for those with a small deposit, and homeowners with large mortgages, or poor loan-to-value ratios.

In effect, some homeowners who thought they were saving are now seeing much of the equity in their home evaporate. It can be even more of a rollercoaster ride than the stock market.

According to data analysed in the study, the highest returns were realised in Sydney’s Central Business District and along the harbour area. If treated as an asset, houses there have an average annual return of over ten percent, beating many other investments. However in other areas, the returns are much lower. It also depends when you ‘realise your assets’ – or sell your house. There are significant above-average sales results in the second and fourth quarter and significant below-average sales in the first quarter.

I always feel when evaluating the risk, a broader assessment than just national house price indices is needed.

Most assessment of risk and growth in property prices is based on market wide indices yet the performance of residential property can be regionalised and it does vary across postcodes and individual houses. The new research shows how applying the latest statistical modelling techniques at a postcode level can indicate how risky it is to just take an overview of house prices. It is important to understand how prices vary with postcodes and the overall market which identify the key factors that drive price growth and risks.

Details of the study are at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1961402.

Michael Sherris is a Professor of Actuarial Studies at the Australian School of Business.

Tim Harcourt

For those of you think economists are not a festive bunch, here’s a thought that will cheer you up for Christmas. Father Christmas, Saint Nick or, as he is better known, Santa Claus himself is a symbol of the global economy. After all, Santa Claus is an exporter. He delivers goods (toys) to consumers (children that are good) across the world in a regular, once a year, seamless service.

For those of you who don’t believe it, (“Ho Ho Ho” we hear you say), look more closely at the Santa Claus (Proprietary Limited) operation. You will find that Santa’s business operation; structure and delivery system have strong support in the academic literature on what makes a thriving export business tick.

First of all, Santa Claus is a born global. Santa realised a long time ago that the North Pole has a limited domestic market for toys. He therefore decided to run his business on an international basis. This is an important lesson for many companies in a small country like Australia. If you have a limited domestic market, you should think about exporting. Austrade research recently highlighted many companies that are ‘born global’. Take Lochard, an airport noise and flight monitoring company based in Melbourne. Lochard knew that its growth in Australia was limited to the small number of airports so it immediately looked overseas to sell its monitoring equipment. As a result it now sells the UK, the USA, Asia, the Middle East and South America. Many Australian companies are born global – particularly in knowledge-based industries. Around a quarter of new exporters are born globals.

Secondly, like most successful global businesses, Santa Claus is a well-known brand and he has built a sustainable export business around the brand whilst keeping his corporate headquarters in the North Pole. In this way, he maintains a worldwide brand whilst maintaining the company’s roots and strong local identity (which is part of his brand’s strength and reputation). This is a good lesson for potential exporters. As Austrade research shows, global brands can be built from small local economies – especially in rural and regional Australia.

Thirdly, Santa Claus has maintained a high standard of human resource management. He has a stable, loyal workforce and good industrial relations. In fact, there’s never been a strike or lockout at the North Pole as Workchoices never made it that far north! Santa’s Little Helpers have been with the company all their careers and have hence built up strong networks and knowledge about the company and its operations. The academic knowledge management literature shows that long-serving employees are the best knowledge workers as their experience and social networks make them far more effective to the company than younger workers. Furthermore, good wages and conditions help too. Austrade research shows that exporting companies, on average pay higher wages and provide better conditions and job security than do non-exporters. This helps the company too in terms of skill development and productivity.

Fourthly, Santa overcomes logistical problems by using intermediaries. He cannot gain all the market knowledge he needs so he uses proxies (such as parents, grandparents, aunties and uncles) to ascertain the ultimate needs of consumers. He then franchises to reliable local parties to ensure that he goes the “last quarter mile” in satisfying the customer (and therefore avoids the pitfalls that have beset many dot.com companies).

Fifthly, Santa, like all successful exporters, visits the market on a regular basis and undertakes market research in the lead up to Christmas. He seeks advice about the market (where required) through strategic positioning at shopping centres and by making selective appearances at Christmas parties. This has enabled him to adapt his product to different cultures in countries all over the world. On the big night itself, he uses simple market entry strategies – via the chimney – and responds well to clear market signals (such as Christmas stockings hung over mantle pieces).

Finally, like all successful exporters, Santa Claus is flexible and innovative. Like all good exporters, he leads the market in terms of consumer tastes and trends. For instance, Santa knew when wooden toys were making way for plastics and electrical goods. He’s always up with all the latest technology. Furthermore, Austrade research shows that exporters are very innovative in terms of production methods and business practices. Santa is no exception. When faced with an unusual natural resource (a red nosed reindeer named Rudolph) Santa demonstrated his ability to think outside the box and had Rudolph lead the other reindeers in pulling the sleigh in bad weather.

So there you have it, Santa is a long-term, sustainable exporter operating a global business in many different markets. He knows his customer (through direct and indirect mechanisms), knows the importance of his brand and treats his workers and his reindeers well. So enjoy the Christmas break and let’s hope Santa delivers for you too.

Tim Harcourt is the JW Nevile Fellow in Economics at the Australian School of Business, UNSW and the author of The Airport Economist: www.theairporteconomist.com

Peter Shergold | CSI blog

It was in May 1968 that Robert Kennedy, with characteristically brilliant oratory, identified the abject failure of governments to measure the quality of life afforded their people.  The traditional statistic – per capita Gross Domestic Product (GDP) – “does not allow for the health of our children, the quality of their education, or the joy of their play;  it does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials …  It measures everything, in short, except that which makes life worthwhile.”  Listen to the speech on YouTube:  it will raise the hairs on the back of your neck.

Two generations on, governments are struggling to address Kennedy’s challenge.  As not-for-profits increasingly seek to measure social returns on investment, and companies to give quantitative dimension to societal as well as financial value, give a thought to the world’s statisticians.  Frustrated with the shortfalls of GDP as an indicator of wellbeing, they are struggling to find alternative means to measure progress in the quality of people’s lives.

It’s not a moment too soon.  Democracy is under challenge.  Levels of trust in politicians are worryingly low.  Less remarked upon is the lack of public confidence in official statistics.  In France and the UK, for instance, only one-third of citizens believe official figures.

Not surprisingly there is a renewed sense of urgency amongst government statisticians.  In May this year the OECD, as part of its 50^th anniversary celebrations, launched the Better Life Index.  It builds on a French initiative, the Commission on the Measurement of Economic Performance and Social Progress, led by renowned American economist Joseph Stiglitz, which reported in 2010.    The Commission concluded that for many purposes there were better economic statistics than a measure of production, GDP:  levels of real household income, for example, or the extent of income inequality.  It is not that GDP is a wrong measure but that it is often inappropriate as a measure what people care about.  In many instances data on social or environmental wellbeing is more relevant.

The Better Life Index seeks to respond to the Commission’s challenge.  It measures 11 dimensions, with 1-3 indicators in each:  housing, income, jobs, education, the environment, governance, health, life satisfaction, safety and work-life balance.  It’s proposed to add more criteria in the future.

The challenge, of course, is how to address the relative importance of such indices of well-being.  The OECD deftly sidesteps the problem by making the index interactive.  Each visitor can weight the variables on-line as they want and share their views with others via Twitter or Facebook.  This is statistics in the age of social media.

It’s made difficult to work out which of the OECD’s 34 member states scores best.  You have to measure the height of flowers and the size of their petals!  I know you don’t believe me but take a look.  Weighing all variables equally on the horticultural scale Australia, I think, is placed second, just behind Canada and just ahead of Sweden in the Better Life garden fertility stakes!  Some 75% of Australians are satisfied with their lives compared to just 59% for the OECD as a whole.

As a nation we rate particularly well on the Community dimension.  Around 95% of Australian respondents believe that they know someone they could rely on in a time of need.  Interestingly 65% report that they have helped a stranger in the last month, compared to an OECD average of only 47%.

The United Nations is also actively seeking to move beyond traditional measures of national wealth. The UN Development Program argues that “an excessive obsession with the creation of material wealth can obscure the ultimate objective of enriching human lives”.  Seeking to redress that defect it has recently issued its 2011 Human Development Report.

Frankly it doesn’t pack the enjoyment of the Better Life Index, requiring its users to possess some understanding of income logarithms and geometric means.  The data, which graph trends back to 1980, is probably more compelling.  It creates a composite index of human development by measuring 3 dimensions (health, education and living standards) against 4 indicators (life expectancy at birth, years of schooling, expected years of schooling and gross national income per capita).

Now I know that your ethical self will recognise the dangers of putting such data into league tables.  But I also know that your inquisitive self wants to know how Australia performs.  The answer is that of 269 countries (47 developed nations) we rank 2^nd after Norway, performing slightly better than the Netherlands, the US, New Zealand and Canada.  In short, the more comprehensive statistical metrics suggest that Australia provides a better quality of life than measures of GDP indicate.

Peter Shergold is the Macquarie Group Foundation Professor at the Centre for Social Impact (CSI) at UNSW. This blog post first appeared on the CSI blog.