Published: June 01, 2014
A number of somewhat avant-garde multinationals have realised how far one single document, combining structured and comprehensive communication on financial and non-financial performance, can take them in projecting an image of innovation and in demonstrating real determination to be right up to date. This more co-ordinated and consolidated approach to communication also demonstrates that they want to create a company that is more sustainable in the long run. Doing it is great. Communicating it is even better. Publicising it in a more organised way is ideal. Sometimes it is more the form than the content that will give the impression of pioneering spirit. Some large international groups have understood this – for instance Philips and PepsiCo – and they try to show the readers of their annual reports that they are at the forefront of ‘social responsibility’ and that sustainability goes hand-in-hand with finance.
“It’s no use saying ‘we are doing our best’. You have got to succeed in doing what is necessary”
Winston Churchill
For a few years now, listed companies have had to report their financial results according to high-quality international standards – IFRS or US GAAP. We have sung the praises of the comparability that results from standardisation and financial transparency. This is one of the foundations needed for efficient capital markets. These financial reports naturally draw their institutional legitimacy from various factors such as the need for statutory audit, the effectiveness of mechanisms for preventing fraud, from internal controls, performance metrics, investor information, consolidated and condensed accounts.
Unfortunately, accounting regulations often try to do too much, and users find ever greater difficulty in understanding and unravelling the mass of complex financial information. These standards are criticised because some people think they are not up to the job of capturing the company’s current and future real value, nor of bringing out true value creation. Detractors also see financial statements as being too retrospective, and not forward-looking enough.
The idea of starting with voluntary good practice, and then eventually making it into best practice in terms of governance, is rather enticing. A company making disclosures in this way compels itself to be more virtuous by, for instance, giving details of its water or energy usage, its employee relations, its staff turnover, staff diversity, the independence of its board, its risk approach, its charitable work, etc.
Investors are now avid for such information in addition to the financial results. For instance, since 2009, Bloomberg has added ESG information provided by companies such as Deutsche Bank or General Elecric. The European Union is also thinking of making ESG information compulsory (this is already done by a number of companies applying the G3 guidelines and, as of 2012, the G4 guidelines).
These investors are, little by little, trying to require or encourage listed companies to publish appropriate information on the inclusion of sustainability in their long-term strategies. These same investors want to incorporate these non-financial details in their valuation models. They want to understand how the company will direct capital toward sustainable development.
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The adoption of a single integrated report demonstrates their determination to set themselves apart from other companies by highlighting their commitments to sustainable development. It is also about challenging themselves and striving to be ever more virtuous and to inculcate an in-house discipline. To achieve this, they have to commit to and set targets based on carefully considered KPIs (key performance indicators). No measurement, no progress. In this specific case, it is practice that drives managerial theories, even though the concepts may have appeared for the first time in the 1990s, particularly with PwC’s idea of value reporting. Since then, the Scandinavian countries, Brazil, South Africa and even France have published material on the subject.
The idea of starting with voluntary good practice, and then eventually making it into best practice in terms of governance, is rather enticing.
The IIRC (International Integrated Reporting Committee) has been in existence since July 2009 and intends eventually to publish guidance recommendations on the subject. Having a report that combines financial performance metrics with measurable non-financial performance information, bringing out the relationship between the two, is unfortunately not yet common practice. It all starts to become really meaningful when, for instance, you can compare water consumed in the production of a cotton t-shirt for H&M or GAP against its competitors.
It is worthwhile demonstrating the per capita investment in staff training to increase productivity compared with that of a competitor, thereby seeing whether customer satisfaction is greater or staff turnover less.
Measuring well-being at work makes companies more competitive and attractive. Training is an investment and the return on it should be measured. It produces a number of benefits:
1. Internal benefits, for example better allocation of resources and better decision-making, greater stakeholder engagement, lower reputational risk.
2. External benefits, for example better information for investors wanting ESG data, appearing in the sustainability indices, and
3. Regulatory benefits, for example reducing the risk of non-compliance, being proactive and pioneering in adopting standards or specific requirements of the stock market on which you are listed.
Unfortunately, this is not a universal panacea, but at least it is a way of directing energies and of raising employee awareness. However, this non-financial part of the new approach to reporting has the failing of lack of standardisation. This discipline is still relatively young.
Although guidelines such as G3 exist, it is hard to apply them as they stand to all companies. It is this lack of standardisation that makes it tricky to compare companies’ non-financial performance. Furthermore, since the ‘One Report’ described by Professor R. Eccles of Harvard University is applied on a voluntary basis, it is adopted differently and to different degrees from company to company. Reporting rigour is therefore not the same for everyone. Government bodies could also have a major role to play in setting a good example of best practice. Philips considers this report (which forms part of its DNA), and sustainable development in general, as being a driver of growth. It has a threefold objective: keeping down costs, increasing efficiency and improving communication through a single channel. We should not underestimate the pride that employees feel in working for a sustainable and responsible company.
Time passes inexorably, and it is time to create a more sustainable society. This is also achieved through the messages that we pass to the outside world.
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