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Tomorrow’s winners will demonstrate sustainable strategies

Why tomorrow’s winners will demonstrate sustainable strategies

It’s long been said that in business “you do well by being good”. While many would agree with this, can you also flourish if you have been not been good?

With the exponential growth of today’s social media channels like Youtube, Facebook and blogging, it’s increasingly difficult for companies to hide their dirty linen. Bad deeds will get found out.

Welcome to the world of integrated reporting.

Integrated reporting is an idea whose time has come. New media, the near collapse of global financial systems, and a host of other social forces make it critical that companies account for not only their financial performance, but also their environmental, social and governance performance.

A couple of principles are at work here. One is that when there were only a limited number of media channels, companies could control the “conversation” about them to a large extent. Those days are gone, as BP will only too sadly attest. No amount of PR spin can save you from the conversation that takes place on the multiple channels over which you have no control.

The second principle is that traditional stakeholders – that is, owners, shareholders and investors – are no longer the only stakeholders. Stakeholders now include the shrimp boat owners whose livelihood is affected by the amount of oil you have spilt in their fishing grounds, and the community who judges how quickly and effectively you put things right when you’ve messed up – and makes its purchasing decisions based on that judgement.

That principle has brought about a critical need for companies to be more transparent. That is, to tell the truth about how they’re performing against the strategies they have chosen to pursue (financial, social, environmental) – whether the news is good or bad.

In their 2010 book One Report: Integrated Reporting for a Sustainable Strategy, Robert Eccles and Grant Thornton Partner Michael Krzus, call this “undressing for success”. Simply publishing Corporate Social Responsibility documents that focus on the “good news” stories will no longer be enough, they argue. Companies who are interested in running a sustainable business must integrate sustainable practices into the heart of their business processes. When that happens, “then what is the logic for producing separate financial and non-financial reports?” they ask. Stakeholders are wanting both - hence the need for integrated reporting.

In responding to this need, an increasing number of major businesses around the world are responding to the challenge of reporting on how well they are delivering their strategies. Some of the movers and shared are Southwest Airlines, United Technologies, and American Electric Power from the US, the Dutch healthcare and lighting company Philips, Danish pharmaceutical company Novo Nordisk, and the Brazilian cosmetics and fragrances company Natura.

One of those leading the charge in New Zealand is the Auckland Council owned Watercare Services Limited, which published its first integrated report in 2001.

Watercare’s Chief Financial Officer, Gary Swift, says the benefits of accounting for all activities are real and measurable. “When we apply for resource consents – which we do often – we’re seen as an organisation that cares about the environment and sustainability. It also helps us attract quality graduate employees. It provides them with another factor to take into account when considering competitive job offers.”

One of the less obvious benefits is the competitive element that it introduces into what is essentially a monopoly business. “It’s hard for us to benchmark ourselves against other organisations,” he says. “Integrated reporting allows us to do that, and that helps keep us on our toes.”

Finally, he says, with the current move to creating the Super City – and the many concerns that Auckland residents have about whether they’ll come out better or worse off as a result – acting transparently makes for a far easier relationship with stakeholders than Watercare might otherwise have.

In South Africa, companies are being forced to get the message: As of June 2010, all 450 companies listed on the Johannesburg Stock Exchange will be required to publish an “integrated report” or explain why they are not doing so.

The push for change is coming from many directions.

In August this year, the International Integrated Reporting Committee (IIRC) was established by Prince Charles’s Accounting for Sustainability Project (A4S) and the Global Reporting Initiative (GRI). On the committee and its 20-strong supporting working group are now three New Zealanders: Alan Teixeira, Director of Technical Activities, International Accounting Standards Board, Ian Ball, Chief Executive of the International Federation of Accountants (which represents the interests of more than two million accountants around the world) and Jane Diplock, Chair of the New Zealand Securities Commission and the Executive Committee of IOSCO – the International Organisation of Securities Commissions.

One of the main aims of the IIRC is to develop “an integrated reporting framework setting out the scope of integrated reporting and its key components” – in other words, establishing some workable, agreed on standards that will enable comparability.

The careful reader will have noted a lack of hard and fast rules and statements in this article, defining exactly what integrated reporting is, and the precise reasons for adopting it (or the potential risks of not doing so). That is deliberate. Integrated reporting is new territory. While there is wide (if not unanimous) agreement that it’s time has come, there is far less agreement about exactly what it is and what it looks like! That picture will emerge over time.

In the meantime, however, there are two things that can be said with great confidence. The first is this: Integrated reporting is not telling a bunch of good news stories of the “we recycled xx tons of paper last year” variety. It is measuring the company’s performance against its own goals. In other words: we were committed to recycling 90% of our paper waste last year, but the actual figure was 65%. We are taking the following steps to bridge that gap this year…

Second, although it is difficult to define precisely what integrated reporting looks like, that does not mean businesses can safely ignore it until a clearer picture emerges. That would be like not earthquake-proofing your home because you can’t predict how big the next earthquake will be or what the landscape will look like after it’s occurred.

The time to get to grips with integrated reporting is now. Doing so will enable your company to engage powerfully with its shareholders, staff, customers, media commentators, detractors, and the wider community – all of whom have a say in how well your business will fare in the future.

Tomorrow’s successful companies, be they large or small, will be those with robust business models who can also demonstrate their commitment to making a meaningful contribution towards a sustainable society. The key word is “tomorrow”. It’s just around the corner.


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