The Case for Integrated Reporting
I have been back from Amsterdam for a week, and still feel energized from the people I have met and ideas to which I have been exposed. Although I respect what has been accomplished locally here in Los Angeles, I believe that there is still too much talk and not enough action being done on the sustainability front. And sadly, the lessons that could be learned from the Gulf of Mexico oil spill are getting lost in the incompetence and blame game that is going on between BP and the government. The Global Reporting Initiative, which hosted the conference I attended, is pushing for integrated reporting, or as Michael Krzus, a partner at Grant Thornton, has coined, “one report.” The idea behind integrated reporting is that financial and non-financial disclosures will be intertwined into one report that can stakeholders, shareholders, and potential investors can read and vet. Currently, you have a system where public companies issue an annual report to their shareholders, and in the United States, form 10-K and other documents to the Securities and Exchange Commission as required under US law. Companies also may issue a Corporate Social Responsibility (CSR) or in Europe, an ESG (environment, social, and governance) report, but this is optional. The result is often confusion: many CSR reports go unread either in their PDF or printed formats. Meanwhile, most shareholders and potential investors often avoid the 10-K, which have often morphed into tedious documents full of financial and legal jargon that is often difficult to decipher. But this is slowly changing: the SEC has advised companies that they must include disclosures related to climate change and other environmental factors if they are deemed “material” to a company’s performance. Denmark became the first country to require larger companies to include non-financial information in its annual financial reporting. Meanwhile, in South Africa, the Johannesburg Stock Exchange required its listed companies to replace CSR and financial reports with one integrated report—and if they do not, explain why. At its biennial conference 2 weeks ago, GRI's Chief Executive, Ernst Ligteringen, pushed for mandated integrated reporting by all companies worldwide that disclose any material integration. Naturally, it is in the GRI’s best interest to see this ambitious goal succeed. But I offer a few reasons why integrated reporting should not only be a moral imperative, but makes good business sense:
- Transparency. Investors, stakeholders, and shareholders should know the impact that their company is having on the planet, workers, and in their communities. Having all this information in one report, clearly articulated, will make it more seamless for potential investors to decide whether or not they wish to sink their money in a company. The aftermath of the BP oil spill and the recent financial crises (and scandals) have left many people with a searing distrust of business. Slowly, more investors are more concerned with more than just the bottom line. Being up front about the results of a company’s operations and corporate governance structure can offer a solid first step.
- Competition. Whether it’s offering programs to reduce worker absenteeism or taking steps to reduce a company’s energy or water consumption, many such initiatives can make companies leaner and more efficient in the long run. Wal-Mart is one company has taken huge strides in the sustainability front, chiefly because it saves the company money—and if you know anything about Wal-Mart, they are successful not because they are a big corporate bully, but because when it comes to efficiency, they have run circles around its competition for decades. Sharing information with its competitors—and I don’t mean trade secrets—can save resources and in the end, reduce waste and provide a more lucrative bottom line.
- Better Relationships with Vendors. Activists who slam a company for its business practices are often myopic. The reality is that a product, widget, or service that is causing such consternation is not necessarily the fault of the company who is confronted with bad PR or even a boycott. Take a box of corn flakes: it may have the General Mills or Kellogg’s label on it, but many companies have contributed to that product on the supermarket shelf. One company provided the corn seeds, another the pesticides, someone harvested it, someone made the cardboard boxes, still another hauled it, and yet some firm provided the vitamins and additives that made that list of ingredients so long. Companies like PUMA are working with their vendors and entire supply chain in disclosing the results of their operations—resulting in happier employees, reduced costs, and better working relationships.
- Avoiding regulation. True, integrated reporting will probably only occur if regulators like the SEC require it. But if companies could be encouraged and given a clear framework to disclose financial and non-financial information, they could avoid the wrath of politicians that unfortunately, are masters of overreaction, passing laws that treat everyone like a criminal. Sarbanes-Oxley is arguably one case. Another example is festering now: perhaps if BP had been more upfront about all of the violations it had racked up in the Gulf of Mexico, the Deepwater Horizon disaster would not have occurred—and a flailing Obama administration would not have shut down all offshore oil drilling one month after it embraced such a policy. Obviously this is all hindsight, but draconian laws that only stifle investment and innovation often occur because someone has flouted the rules.