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Integrated sustainability and financial reporting is an ethical obligation, argue Robert G. Eccles and Michael P. Krzus
John Elkington, the founder of SustainAbility, has recently called integrated reporting, in which a company reports on its financial and nonfinancial (e.g., environmental, social and governance) performance in a single integrated report, the "Holy Grail" of corporate reporting.
Toby Webb, the founder and publisher of this magazine, recently opined, “It now seems inevitable to me that the notion of integrated reporting will gain increasing credence in business” although he also cautioned, “I think it’s quite a way off, perhaps five years, before we see it done really well, or beginning to be.”
We agree with him on the inevitably of integrated reporting, but are worried that he may also be right about the time frame.
In truth, if we want a truly sustainable society, we can’t afford for it to take five years to see the rapid and broad adoption of high-quality integrated reporting, let alone to still be at the beginning of this becoming standard practice by all listed companies—and ideally private companies as well.
It is our view that integrated reporting is more than the newest “best practice” in corporate reporting which companies can choose to practice or not.
Just good business
Instead, it is a moral obligation of any corporation that truly wants to take an ethical stance towards all of its stakeholders, including investors and civil society.
It is only through integrated reporting that a company can understand the relationships between financial and nonfinancial performance, both positive and negative, in order to make the right decisions for creating a sustainable strategy for a sustainable society.
And it is through integrated reporting that a company makes a binding commitment to do so, provides evidence on its progress, enables all stakeholders to evaluate and challenge its performance and, through the Internet, facilitates dialogue and engagement with them.
While integrated reporting is an ethical obligation of a company in its role of corporate citizen, its implementation requires action on the part of specific individuals.
As we describe in our book, One Report: Integrated Reporting for a Sustainable Society, and its associated social movement website www.integratedreporting.org, integrated reporting requires collaboration across many functions in the company including finance, investor relations, corporate communications, corporate social responsibility, marketing, and operations.
It must come from the top
But the responsibility for taking the decision to practice integrated reporting squarely lies with the Chairman of the Board, the CEO, and the CFO.
The board of directors is responsible for representing the interests of shareholders and, increasingly, all stakeholders and ensuring that the company is a responsible corporate citizen.
It should insist that the company have a sustainable strategy and the leadership for this must come from the Chairman. He or she must also demand that the company implement integrated reporting, both in terms of how it reports on its performance to the board and externally.
Finally, the Chairman needs to work with the Chairman of the Audit Committee to require that the company’s auditor issue an integrated audit opinion by providing assurance on the reported nonfinancial information.
While the CEO must obviously carry out the board’s insistence on a sustainable strategy and integrated reporting, he or she doesn’t have to wait for this to happen. Rather, the CEO should be the person who initiates these actions. In some cases, this will require persuading the board of the ethical necessity in doing so.
Finally, the CFO is the key person—although not the only person—for the implementation of integrated reporting since the foundation of an integrated report is the required financial report.
This will involve making sure that nonfinancial internal control and measurement systems are of the same quality as the financial ones, developing the necessary measurement methodologies (perhaps in collaboration with groups developing standards in this domain), and doing the analytical work necessary to understand and report on the relationships between financial and nonfinancial performance.
Elkington has voiced the concern that while CFOs must inevitably be involved in this, they may not be up to the task and in some cases they may actually hinder the process.
His concern is a justifiable one since integrated reporting takes many CFOs outside of their comfort zone. We believe that the CFO either needs to get comfortable with this, or the CEO should replace him or her with someone who is.
The stakes are high for ensuring a sustainable society. Integrated reporting must happen and it must happen soon. Any company that takes its ethical responsibilities seriously needs to make the commitment today to doing so as quickly as possible. A good way to start is to look at examples of what other companies are doing at www.integratedreporting.org.
Robert G. Eccles is senior lecturer of business administration at Harvard Business School. Michael P. Krzus is a public policy and external affairs partner with Grant Thornton LLP, the U.S. member firm of Grant Thornton.