Peter Shergold | CSI blog

In a previous blog I talked about the importance of qualitative attempts by nations to measure the good life.  It was courageous, I thought, to write about statistics.  Today I’m going to address the issue of integrated reporting.  Braver still, I suspect.  I risk becoming the boring bloke who stands between you and the drinks fridge at a party.

I do so because the issue is fundamental to how companies measure, and report upon, their ability to create and sustain value – not just economic and financial but social, environmental and governance factors.  It’s an idea whose time has come.  Below the radar, the reporting framework for companies is set to change.

I sit on the board of a publicly-listed company.  I know, having to read every page, how long, detailed and complex the Annual Report has become.  Much of its arcane nature is driven by regulatory requirements.  Presentation of strategy tends to get lost behind dense technical jargon.

It’s hard to tell our story in an engaging and informative manner to our shareholders, policyholders and stakeholders.  The narrative gets buried in the voluminous financial statements and their detailed explanatory notes.  Like many companies we end up employing workarounds, providing an alternate measure of ‘underlying profit’ that we believe is a better measure of our corporate performance over time.  The financial reporting predominantly looks backwards:  non-executive directors like myself are only too well aware that discussing future prospects gives rise to potential legal liabilities.

Company reporting, then, tends to be extensive but partial.  It is commonplace that documents on corporate citizenship, social responsibility or sustainability are issued separately from the Annual Report.  The measures of performance are then selected from a widening array of reporting vehicles – from the Global Reporting Initiative framework to the London Benchmarking Group.  This gives rise to three problems.

First, it perpetuates the belief that the reporting measures of societal or environmental value may be chosen to present a company’s performance in the best light.

Second, it suggests that community benefit or sustainability initiatives are simply well-meaning (or self-serving) bolt-ons to the real business of the business presented in the Annual Report.

Third, as Helen Brand, the President of the Association of Chartered Certified Accountants has blogged, “Presenting the information separately, in silos, makes it difficult to build up an overall picture of a business’ long-term value …  We need an integrated approach to reporting.”

Thankfully, a move is underway to do just that:  to streamline company reporting, reduce its costs and – most importantly – provide a clearer picture of organisational performance.  The International Integrated Reporting Committee (IIRC) was set up in 2010 by a large group of distinguished corporate, regulatory, academic and civil society leaders to design a more comprehensive but flexible reporting framework.

The IIRC’s mission is to find ways to better communicate the total value that companies create.  To do so it is necessary to make transparent the six ‘capitals’ on which a company depends (financial, manufactured, human, intellectual, natural and social) and to explain how they are assessed and deployed in a strategic manner.  Among the guiding principles of integrated reporting are the connectivity of information, its future orientation, stakeholder inclusiveness and commitment to conciseness, reliability and materiality.

According to Goran Tidstrom, President of the International Federation of Accountants (and a member of the IIRC), “Financial information is not sufficient.  We have to provide information on sustainability, on social issues and environment, and it has to be done in an integrated way with a financial report.”  Here’s how.

Social capital reporting is meant to recognise a company’s social licence to operate, including the corporate values and behaviours that prevail;  how relationships are conducted with customers, suppliers and business partners;  and the extent to which the business enhances individual and collective wellbeing.

Natural capital reporting is intended to exhibit how a company’s activities impact, positively or negatively, on the ecosystem – water, land, minerals, forests and biodiversity. 

Human capital reporting is designed to capture the alignment of a company’s ethical values and governance framework including, for example, how human rights are recognised.

The IIRC has now issued a comprehensive Discussion Paper on its ambitions.  It’s a good read.

The good news is that some Australian innovators are not waiting.  The new cooperative bank, bankmecu, has already announced that it is to work with the Net Balance Foundation to develop an integrated reporting framework for its 2011-12 Annual Report.  At the bigger end of town NAB’s Annual Report for 2011 already includes a significant section on corporate responsibility as an integral part of its business strategy.

Accounting and applied statistics can seem to be dull disciplines.  The truth is that unless we can measure and report upon the value of social and environmental good created by companies effectively, the momentum for them to create ‘shared’ economic and societal value is likely to slow.  That, at least, is my perspective.  I’d welcome your views.

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.

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 Shergold

The American media, somewhat belatedly, is now asking the question:  how big can the ‘Occupying Wall Street’ campaign become?  What began as a relatively small group of protestors in New York’s Lower Manhattan a month ago has now spread to around 150 cities in the US.  As unionists, environmentalists and students join the so-called ‘leaderless movement’, the broad-based anti-corporatist sentiment that has fuelled the agitation seems to be growing.  Numbers are swelling.  Media interest is increasing.  Politicians are positioning.

Amped Status, which claims responsibility for the birth of the ‘99% Movement’ which prompted the “ground-up grassroots decentralised movement”, sees the protest’s origins in the growing inequalities of wealth and power perpetuated by the “neo-liberal economic domination” of corporate America.

I’m not persuaded that all of the protestors, let alone their many sympathisers, would recognise such an ideological presentation of their beliefs.  Nor is it clear that the increasing range of grievances being brought to the protests can sustain collective cohesion amongst the disparate groups involved in “direct and transparent participatory democracy”.  The future of the protests is uncertain.  The increased organisation of spontaneity may either undermine the movement’s appeal or else – less likely I think – mould it into a more enduring form of political protest.

What is certain is that the concerns that underlie the street occupations are real.  The diversity of opinions, and the lack of political sophistication with which they are often expressed, should not lull observers into the complacent belief that the protest is just the latest day out for the usual ‘anti-globalisation’ suspects.

Something serious is going on.  It was the Harvard Business Review, no less, that earlier this year published an article premised on the prescient view that the “capitalist system is under siege”.  The article, by Michael Porter and Mark Kramer on “Creating Shared Value”, pointed to the fact that companies are “widely perceived to be prospering at the expense of the broader community”, that the legitimacy of corporate activity is falling and that trust in business is now much diminished.

A couple of years ago, at the height of the GFC, I reflected on what impact the severe economic downturn might have on corporate social responsibility (CSR).  I argued that the fundamental causes of the financial crisis – the unconstrained pursuit of high-risk short-term profits – represented the antithesis of the ethical values of corporate citizenship which community and environmental programs were intended to exhibit.

My concern in 2009 was (and remains) that CSR and corporate sustainability are too often located at the periphery of business strategy.  They are embraced as a matter of good corporate relations which can bring the economic benefits of reputational integrity.  Unlike those sleeping on Wall Street, I am persuaded that the community and environmental initiatives of companies really are of significant social benefit.  Their influence is weakened, however, to the extent that they are pursued and reported upon as if they are a peripheral ‘bolt-on’ to core business activities.

This structural weakness helps feed the angry cynicism of the Occupy Wall Street movement.  Corporate responsibility and sustainability are portrayed by protest leaders as little more than a low-cost sop to ‘the 99%’:  a ‘launch, lunch and logo’ designed to present brand identity in a favourable light and a self-serving ploy to ‘greenwash’ products for unwary consumers.  It seems to the protestors that business leaders lack any genuine concern or empathy for society at large.  At best CSR is perceived as a strategy to win political support on Capitol Hill.

The challenge for those of us who believe in market economics is how to restore business legitimacy.   The ‘licence to operate’ needs to be rearticulated.  Business must be able to exhibit its societal value, not to trade-off against the social and environmental costs of economic success but as integral to the supply-chain by which goods and services are produced.  ‘Giving back’ is no longer sufficient.  Charity won’t save capitalism.

This is the provocative thesis that lies at the heart of the arguments propounded by Porter and Kramer.  Companies, they propound, need to demonstrate that, through their policies and practices, they simultaneously advance both economic and societal value.  They need to recognise that they create ‘shared value’ through their business.

Of course companies must return economic value or their financial viability is at risk.  Yet they also need to focus on the societal value they can create through the investors they attract, the suppliers from whom they buy, the employees who work for them and the consumers to whom they sell.  Sustaining a financial return to shareholders requires businesses to take account of their impact on multiple stakeholders.

Crucially, companies need to build into their strategic planning an explicit awareness that long-term economic returns can be accrued through the pursuit of societal value.  Improving value in one area gives rise to opportunity in the other.  The future of capitalism, according to Porter and Kramer, lies in corporations creating a “virtuous cycle of shared value”.

Business needs to get serious about establishing trust in business itself.  Corporate philanthropy alone won’t win the hearts and minds of the public.  Companies need to show, right along the value chain, how societal needs are being embodied in their products, benefits being achieved and harms mitigated.  They need to recognise that they pursue societal impacts because, in a competitive market, they are integral to sustaining long-term project profitability.  Creating shared value is a matter of corporate self-interest.

None of this is likely to persuade those engaged in the Wall Street sit-ins to go home and embrace capitalism.  Their anger will take longer to assuage.   Nor will the virtues of shared value convince those business and political leaders who continue to argue, channelling Milton Friedman, that the only responsibility of business in a capitalist society is to make a profit on their investment of private capital.

The battle for hearts and minds needs to be fought.  An increasing number of hard-nosed multinational companies – such a Google, IBM, Intel, Johnson and Johnson, Unilever and Wal-Mart – have begun to embark on important shared value initiatives.  Indeed in a recent edition of Social Business, I interviewed Peter Kelly, Director of Corporate and External Relations at Nestlé  on the way in which the company was embracing the new approach.  From the support they offer to their agricultural producers in the developing world to the care with which they market their products, Nestlé has become a market leader.

What about Australia?  Do we have companies that are starting to present their business in terms of the shared economic and societal value they are creating?  The answer, I’m pleased to say, is in the affirmative.  Over the next few weeks I’ll blog about a few of our own ‘shared value’ companies.

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.