We need world-wide corporate reporting standards
It was many years ago that I first heard the optimistic adage, “you do well by doing good.” Back then, advocates of so-called Corporate Social Responsibility were trying to make a business case for good corporate behavior. Few were persuaded.
The main reason for lack of success in winning support for the “being good,” is that the adage was not true. Many companies did well by being bad. Creative accounting, unfair labor practices, corporate secrecy, monopolistic behaviors, externalizing costs, and shady environmental behaviors could help beef up the bottom line. Not to mention that corporate executives themselves could “do well” by paying astronomical bonuses, even while their companies were struggling.
But the collapse of the financial systems and the global economic crisis of 2009 were a wakeup call to the world. It’s become clear that business can’t succeed in a world that is failing. And the world has never faced greater challenges: Over-consumption of limited natural resources, the threat of global warming, and the need to provide clean water, food and a better standard of living for a growing global population.
Decisions taken in tackling these issues need to be based on clear and comprehensive information, something which seems self-evident but there was no world-wide agreement on just what that information should look like. A coalition of representatives from around the world from major corporations, the Big Four auditors: PwC, Deloitte, Ernst & Young and KPMG, securities agencies, regulatory bodies, non-governmental organizations and standard-setting sectors have studied the issue. The group’s recommendation is the formulation of the International Integrated Reporting Committee (IIRC).
Currently, publicly listed companies must file an annual report. These reports follow either the U.S. Generally Accepted Accounting Principles (U.S. GAAP) or the International Financial Reporting Standards (IFRS). Increasingly companies are also voluntarily producing corporate social responsibility or sustainability reports. But the relevance and quality of the information is all over the map. Some companies issue a two-paragraph statement while others produce weighty tomes. There is no global standard for measuring and reporting on environmental, social and governance performance.
“To make our economy sustainable we have to relearn everything we have learnt from the past. That means making more from less and ensuring that governance, strategy and sustainability are inseparable” said Professor Mervyn King, Chairman of the Global Reporting Initiative. “Integrated Reporting builds on the practice of financial reporting, and environmental, social and governance – or ESG – reporting, and equips companies to strategically manage their operations, brand and reputation to stakeholders and be better prepared to manage any risk that may compromise the long-term sustainability of the business.”
The IIRC wants a globally accepted framework that brings together financial, environmental, social and governance information in a clear, consistent and comparable format.
The objectives for the framework are to:
a) support the information needs of long-term investors, by showing the broader and longer-term consequences of decision-making;
b) reflect the interconnections between environmental, social, governance and financial factors in decisions that affect long-term performance and condition, making clear the link between sustainability and economic value;
c) provide the necessary framework for environmental and social factors to be taken into account systematically in reporting and decision-making;
d) rebalance performance metrics away from an undue emphasis on short-term
financial performance; and
e) bring reporting closer to the information used by management to run the business on a day-to-day basis.
In my mind, the creation of the IIRC is another manifestation of an old force with new power that is rising in business, one that has far-reaching implications for most everyone. Nascent for half a century, this force has quietly gained momentum through the last decade and is now triggering profound changes across the corporate world. Evidence suggests firms that embrace this force and harness its power will thrive. Those who ignore or oppose it will suffer.
The force is transparency.
Globalization, instant communications, organized civil society — and now a crisis in trust, have changed the rules of the game. Firms are being held to complex and changing sets of standards—from unrelenting webs of “stakeholders” who pass judgment on corporate behavior—to regulations, new and old, that govern and often complicate everyday activities. In an ultra-transparent world of instant communications, every step and misstep is subject to scrutiny. And every company with a brand or reputation to protect is vulnerable.
Customers can evaluate the worth of products and services at levels not possible before. Employees share formerly secret information about corporate strategy, management and challenges. To collaborate effectively, companies and their business partners have no choice but to share intimate knowledge with one another. Powerful institutional investors today own or manage most wealth, and they are developing x-ray vision. Finally, in a world of instant communications, whistleblowers, inquisitive media, and Googling, citizens and communities routinely put firms under the microscope.
I’ve produced a few “studies in bad timing” in my life. One stellar example was a book I co-authored with the brilliant business strategist David Ticoll — The Naked Corporation: How the Age of Transparency Will Revolutionize Business. As people researching how technology changes things, we became interested in how the Internet would change the use and communication of information. We defined transparency as “access to pertinent information by stakeholders.” By “pertinent,” we meant information that can help if you have it and hurt if you don’t.
It’s been almost a decade since the book hit the streets. We argued that the corporation is becoming naked, and as a result will have no choice but to rethink values and behaviors – for the better. Our tag line was “you’re going to be naked, so you’d better be buff!” Reviewers either loved the book or hated it. Sales were modest. My deepest regret, in hindsight, was that clearly the book was not read and heeded by the leaders of our financial services industries. Lacking “fitness” they brought down the industry and with it the global economy.
To paraphrase Victor Hugo, there is nothing so powerful as an idea whose time has come – again. To build trusting relationships and succeed in a transparent economy, growing numbers of firms in all parts of the globe are being forced to behave more responsibly than ever. Disgraced banks represent the old model – a dying breed. I say good riddance. Business integrity is on the rise, not just for legal or purely ethical reasons but because it makes economic sense. Companies need to do good – act with integrity – not just to secure a healthy business environment, but for their own sustainability and competitive advantage. Firms with ethical values, openness, and candor have discovered that they can be more competitive and profitable.
Further, today’s winners increasingly undress for success. Our research suggests that open corporations perform better. Transparency is a new form of power, which pays off when harnessed. Rather than to be feared, transparency is becoming central to business success. Rather than be stripped unwillingly, smart firms are choosing to be open. Over time, what we call open enterprises – firms that operate with candor, integrity, and engagement – are most likely to survive and thrive. And any bank executives who think they can return to the old ways are mistaken. In the new business environment firms will do well by doing good.