The Landscape of Integrated Reporting: Reflections and Next Steps Edited by Robert G. Eccles doc

The Landscape of Integrated Reporting: Reflections and Next Steps Edited by Robert G. Eccles, Beiting Cheng and Daniela Saltzman Copyright 2010 The President and Fellows of Harvard College Cambridge, Massachusetts, 02138 Smashwords Edition, License Notes This ebook may be reproduced, copied and distributed for non-commercial purposes, provided the ebook remains in its complete original form. The articles in this ebook may be quoted, reproduced, copied and distributed for non-commercial purposes, provided the articles are properly cited. TABLE OF CONTENTS Foreword Nitin Nohria Introduction: The State of Integrated Reporting Today Robert G. Eccles Part I: The Role of the Corporation in Society Accounting and Accountability:Integrated Reporting and the Purpose of the Firm Robert Kinloch Massie A CEO’s Letter to Her Board of Directors John Fullerton and Susan Arterian Chang Drivers of Corporate Sustainability and Implications for Capital Markets: An International Perspective Ioannis Ioannou and George Serafeim Growth, Stuff and a Guinea Pig: Inspired Thoughts from Two Days at Harvard Business School Terence L. Jeyaretnam Integrated Reporting in a Disconnected World? The Macro Measurement Challenge! Alan Willis What Should Be Done with Integrated Reporting? David Wood Part II: The Concept of Integrated Reporting The Five Capitals of Integrated Reporting: Toward a Holistic Architecture for Corporate Disclosure Allen L. White Integrated Reporting: A Perspective from Net Balance Terence L. Jeyaretnam and Kate Niblock-Siddle Think Different Alan Knight ISO Standards for Business and Their Linkage to Integrated Reporting Kevin McKinley Toward a Model for Sustainable Capital Allocation Adam Kanzer Learning from BP's "Sustainable" Self-Portraits: From "Integrated Spin" to Integrated Reporting Sanford Lewis Will Integrated Reporting Make Sustainability Reporting Obsolete? Ernst Ligteringen and Nelmara Arbex Part III: Benefits to Companies Integrating Integrated Reporting Steve Rochlin and Ben Grant Integrated Reporting: The Future of Corporate Reporting? Paul Druckman and Jessica Fries Integrated Reporting Contributes to Embedding Sustainability in Core Business Activities Olaf Brugman Six Reasons Why CFOs Should Be Interested in Sustainability Simon Braaksma Sasol’s Reporting Journey Stiaan Wandrag and Jonathon Hanks One Report; One Message to All Our Stakeholders Frank Janssen Southwest Airlines One Report(TM) Review Aram Hong Integrated Reporting: Managing Corporate Reputation to Thrive in the New Economy Hampton Bridwell A Team like No Other – Who Will Own Your Integrated Report? Christoph Lueneburger Will the USA Take a Leap? Barriers to Integrated Reporting Mike Wallace Integrated Reporting in a Competitive World of Cities Jen Petersen Part IV: The Investor’s Perspective Some Thoughts on Integrated Reporting and Its Possibilities Farha-Joyce Haboucha Integrated Reporting: What’s Faith Got to Do with It? Laura Berry An SRI Perspective on Integrated Reporting Peter DeSimone Towards a 21st Century Balance Sheet: The First Three Steps Toby A.A. Heaps Part V: The Importance of Auditing Does an Integrated Report Require an Integrated Audit? Bruce McCuaig One Audit—Moving towards 21st Century Integrated Assurance Nick Ridehalgh Auditors at the Crossroads Keith L. Johnson Sustainability Reporting – Can It Evolve Without Assurance? The Audit Profession Can Help to Build an Assurance Model Cindy Fornelli Part VI: Leveraging Technology The Role of XBRL and IFRS in Integrated Reporting Maciej Piechocki and Olivier Servais Bringing Order to the Chaos: Integrating Sustainability Reporting Frameworks and Financial Reporting into One Report with XBRL Liv A. Watson and Brad J. Monterio Sustainable Investing and Integrated Reporting: Driving Systematic Behavioral Change in Public Companies through Global Sustainability Rankings, Indexes, Portfolio Screening and Social Media Michael Muyot Integrated Reporting Enablement Richard L. Gristak Leveraging the Internet for Integrated Reporting Kyle Armbrester Part VII: Better Engagement The Business Imperative of Stakeholder Engagement Sandy Nessing Integrated Reporting as a View into Integrated Sustainable Strategies Scott Bolick Integrated Reporting and the Collaborative Community: Creating Trust through the Collective Conversation Kathleen Miller Perkins Online Co-Creation Communities: A New Framework for Engagement Denis Riney Employee Engagement and the Holy Grail Kathy Miller Perkins Engagement as True Conversation Kate Parrot Part VIII: Perspectives on an Action Strategy Tomorrow’s Corporate Reporting Patricia Cleverly, David Phillips, and Charles Tilley Push, Nudge, or Take Control –An Integrated Approach to Integrated Reporting Shelley Xin Li Integrated Reporting: Long-Term Thinking to Drive Long-Term Performance Mindy Lubber and Andrea Moffat Integrated Reporting: Now What? Michael P. Krzus Transformative Innovation towards Integrated Reporting Passes through a Hands- on/Transition Phase and Leads to Real Innovation in Management Livia Piermattei Two Worlds Collide – One World to Emerge! Ralph Thurm Success Factors for Integrated Reporting: A Technical Perspective Ralf Frank Part IX: Action Strategy Tactics Integrated Reporting: Impact of Small Issuer Challenges on Framework Development and Implementation Strategies Lisa French Beware of Greeks Bearing Gifts Partha Bose The Role of Lawyers in Integrated Reporting Galit A. Sarfaty The Role of Stock Exchanges in Expediting Global Adoption of Integrated Reporting Christina Zimmermann Integrated Reporting and Key Performance Indicators Steve Lydenberg and Jean Rogers Developing Key Performance Indicators to Support Integrated Reporting Yoshiko Shibasaka Part X: Lessons from Experience Some Thoughts on Advancing the Vision and Reality of International Integrated Reporting Robert H. Herz The French Grenelle II Act: Enacting Integrated Reporting and Further Developments Patrick d’Humières and Nicolas Jandot Sustainability Reporting: Where Does Australia Stand? Terence L. Jeyaretnam and Kate Niblock-Siddle Integrated Annual Report Survey - New Zealand’s Top 200 Companies: Exploring Responses from Chief Financial Officers on Emerging Reporting Issues Wendy McGuinness and Nicola Bradshaw The Climate Disclosure Standards Board –Setting a Standard for Realism and Resilience Lois Guthrie CDP’s Lessons from Ten Years of Climate Disclosure Nigel Topping Part XI: Final Reflections Integrated Reporting and the MBA Education Daniela Saltzman A Proposed Research Agenda on Integrated Reporting Beiting Cheng FOREWORD (1) Nitin Nohria, Dean Harvard Business School The following are selected excerpts from Dean Nitin Nohria’s opening remarks to participants in Harvard Business School’s inaugural Workshop on Integrated Reporting. I am truly excited to have this opportunity to begin a conversation with all of you on the important topic of integrated reporting. As the dean of Harvard Business School, I find it a matter of great concern that society has lost so much trust in business. We live in a time in which business leaders are often trusted even less than politicians. It is something that I think each and every one of us should pay serious attention to. I believe business contributes to the prosperity of humanity, and is more important to the continued prosperity of humanity than any other institution. Therefore, we must question what got us collectively to a place where society has lost that level of lost trust in business. Whether it be the environment, healthcare, or making sure that people have access to information, I can't think of any major problem that society confronts today that can be effectively solved unless business plays an important part. And yet we find ourselves in a moment where this trust has been badly damaged. We’ve reached a place that feels like a vicious cycle, where nothing progressive is going to happen. Somehow, we have to turn this cycle in the other direction, and restore business to a place where it is experienced as an honorable calling, and a thing that can make great progress in society. How can we get started down this path? One way is to introduce progressive ideas and practices that demonstrate to the world we care about more than profits. It's not that profits aren't important; no business survives without making profits. But that goal isn't incompatible with other societal priorities. I think of integrated reporting as one of these progressive ideas and efforts that can begin to restore society’s trust. If we start in various ways reporting back to society that we care, these reports can demonstrate we're as serious about holding ourselves accountable to and measuring our progress on a wide variety of things that matter most to people. My understanding of the present state of integrated reporting is that many companies are producing reports, yet each is done in its own way without any clear sense of a top-down standard. This is a matter of concern to some, but I would argue that rather than be anxious about it, we should celebrate it and allow a lot of these ideas to bubble up. With some oversight form a coordinating body—of which I know there are a few that have been created now—we can begin to see a pattern and some best practices emerge, possibly inspiring others to take up the charge. Hopefully out of that bottoms-up process some standards will emerge more spontaneously than they would from the top-down. What excites me so much about this idea is that it has yet to fully take hold. It's always important to be in the midst of emerging ideas and to provide support and momentum for ideas that are a little ahead of their time. By being at the leading edge of the movement, we can have real influence, bringing not just management thinking and theory but management practice and perspective. This process might take some time, so I urge you to be patient with yourselves. This is not just for the sake of business that you’re here, but also for the sake of society. I believe deeply that business is an engine for prosperity in society. Most of the challenges that society faces, business must address. By taking on this integrated reporting initiative, business can show its commitment in that direction and in the process restore society’s confidence and trust. Perhaps that will return us to a productive cycle in which business and society have a positive relationship. Nitin Nohria became the tenth dean of Harvard Business School in July of 2010. He previously served as co-chair of the Leadership Initiative, Senior Associate Dean of Faculty Development, and Head of the Organizational Behavior unit. His intellectual interests center on human motivation, leadership, corporate transformation and accountability, and sustainable economic and human performance. Endnote: (1) This foreword is an edited and abbreviated version of Nitin Nohria’s opening remarks at A Workshop on Integrated Reporting on October 14, 2010. INTRODUCTION: The State of Integrated Reporting Today Robert G. Eccles On October 14-15, 2010, “A Workshop on Integrated Reporting: Frameworks and Action Plan” was held at the Harvard Business School. The workshop was sponsored by the Business & Environment Initiative led by Professors Rebecca Henderson and Forest Reinhardt. Professor Robert G. Eccles was the workshop chairman. Dean Nitin Nohria made the opening remarks, a summary of which form the Foreword of this book. For two days, over 100 of the world’s leading authorities on corporate disclosure discussed the concept of integrated reporting (sometimes referred to as One Report), what its contribution could be to creating a more sustainable society, and what must be done to ensure its rapid and broad adoption in a high quality way (1). The workshop participants included people from a wide range of countries and representing virtually every group that has a stake in integrated reporting and can help to make it happen: companies, analysts and investors, NGOs, regulators and standard setters, accounting firms, technology and data vendors, academics, students, and civil society. A free Executive Summary of the workshop is available. In order to more fully capture the insights and wisdom of the workshop participants, the Harvard Business School decided to publish a free “EBook.” Everyone who attended the workshop was invited to write a contribution for the book. The response was overwhelming in terms of both quantity (64 pieces totaling some 110,000 words) and, more importantly, quality. The editors believe that this book nicely captures the current state of integrated reporting in the world, highlights the critical issues that must be addressed to ensure its rapid and broad adoption, and contains many good suggestions for an effective action strategy to make this happen. We see this book as establishing a baseline from which we can evaluate the progress of the integrated reporting social movement over time. The book is organized into 11 parts. Part I, “The Role of the Corporation in Society,” addresses the fundamental question of “For what purpose does a corporation exist?” Is it to maximize value for shareholders, regardless of its impact on other stakeholders and the environment? Or is its purpose to represent all of society’s stakeholders in as balanced a manner as possible? If the latter, does meeting the needs of other stakeholders contribute to value creation for shareholders, and over what time frame, or are tradeoffs inevitable? In a very real sense, the question of the role of corporations in society and the content and practice of integrated reporting are inseparable. A company’s reporting practices are a representation of how it sees itself and, in turn, they shape what it will become. Rethinking the role of the modern corporation and developing integrated reporting frameworks and practices will reinforce each other. In the first chapter of Part I, “Accounting and Accountability: Integrated Reporting and the Purpose of the Firm,” Massie argues that true integrated reporting will require an integrated theory that reconciles the shareholder and stakeholder models of the firm. Fullerton and Arterian Chang’s hypothetical “A CEO’s Letter to Her Board of Directors” illustrates the challenges a company faces in attempting to adopt such an integrated theory for implementing integrated reporting. Ioannou and Serafeim, writing “Drivers of Corporate Sustainability and Implications for Capital Markets: An International Perspective,” summarize their recent research on the role institutional forces play in causing companies to adopt sustainable business practices and how the market reacts to those who do. Jeyaretnam, in “Growth, Stuff and a Guinea Pig: Inspired Thoughts from Two Days at Harvard Business School,” raises the provocative question of whether greater value for society is best obtained by shifting to a slow or no growth perspective. Along this same theme is Willis’s “Integrated Reporting in a Disconnected World? The Macro Measurement Challenge!,” drawing a parallel between financial reporting by companies and measures of Gross Domestic Product by countries that do not take account of externalities created by growth in GDP to argue for the importance of the IIRC. In the final chapter, “What Should Be Done With Integrated Reporting,” Wood argues that in order for integrated reporting to have its desired impact in changing decisions by companies and investors, all stakeholder groups need to act on the information they are getting—thereby helping to bring about the more integrated theory of the firm called for by Massie. Integrated reporting is an embryonic management practice whose meaning is not yet well defined. As yet, no institutionally recognized framework exists, although the International Integrated Reporting Committee (IIRC) is working on developing the first draft of one. Similarly, there is no global set of standards for measuring and reporting on nonfinancial (e.g., environmental, social and governance) performance although important work has been done here by the Global Reporting Initiative through its “G3 Guidelines” and the work of the Carbon Disclosure Project and the Climate Disclosure Standards Board in creating a “Climate Change Reporting Framework.” Thus the concept and practice of integrated reporting is very much a work in progress. Part II, “The Concept of Integrated Reporting,” contains seven thoughtful chapters which contribute to our understanding of just what integrated reporting means. In “The Five Capitals of Integrated Reporting: Toward a Holistic Architecture for Corporate Disclosure,” White offers the idea of “capital stewardship” as the foundation for fusing the distinctly different characteristics of financial and nonfinancial reporting. Jeyaretnam and Niblock-Siddle emphasize in “Integrated Reporting: A Perspective from Net Balance” that integrated reporting requires the integration of sustainability into the company’s business strategy; they also point out that “One Report” can and should be supplemented with targeted communications to different stakeholders using the company’s website. In “Think Different,” Knight cautions against the risk of the IIRC losing its “nerve and ambition” and explores five issues that need to be addressed in order to ensure the promise of integrated reporting. One of the great challenges in implementing integrated reporting is developing standards for nonfinancial information; McKinley’s “ISO Standards for Business and Their Linkage to Integrated Reporting” provides insights into how this can be done based on the experience of the International Standards Organization and explains the contribution of ISO 26000 “Guidance on social responsibility” to integrated reporting. As with standards, another key issue for integrated reporting is the definition of materiality and Kanzer, “Toward a Model for Sustainable Capital Allocation,” frames the issue by asking the question of “Material to whom?” Using the example of BP’s Deepwater Horizon oil spill disaster, in “Learning from BP’s ‘Sustainable’ Self- Portrait: From ‘Integrated Spin’ to Integrated Reporting,” Lewis explains how integrated reporting must overcome weaknesses in both financial and sustainability reporting in order for an integrated report to provide reliable and credible information rather than being “a mere marketing tool.” Ligteringen and Arbex discuss how the GRI’s next generation of G4 Guidelines will contribute to integrated reporting by making “ESG reporting more mainstream.” With the exception of South Africa and, in a certain way France, implementing integrated reporting is a completely voluntary exercise by companies. To the extent that companies see real advantages in doing so, they will adopt this practice on their own volition, as a few companies have already done and more are doing. Thus making the case for integrated reporting from the company perspective is very important in order to bring the power of market forces to bear on spreading its adoption. Part III, “Benefits to Companies,” contains 10 chapters that provide strong evidence based on companies’ actual experience and some persuasive logical arguments for the benefits companies will receive from integrated reporting: -“Integrating Integrated Reporting” (Rochlin and Grant) argues that integrated reporting can be a vital driver of organizational change towards “Responsible Competitiveness” which “is the enterprise-wide approach to managing environmental, social, economic, and governance issues.” -“Integrated Reporting: The Future of Corporate Reporting?” (Druckman and Fries) provides insights based on research conducted by The Prince’s Accounting for Sustainability Project; it also discusses the mission and some key milestones of the IIRC. -“Integrated Reporting Contributes to Embedding Sustainability in Core Business Processes” (Brugman) describes the benefits to Rabobank, including “an internal redefinition of what is material to us” and the “internal embedding of sustainability in core business processes” which “will allow for a fairer and more balanced evaluation of our business activities.” -“Six Reasons Why CFOs Should Be Interested in Sustainability” (Braaksma) describes the benefits Philips has already received from integrated reporting and identifies three areas targeted for improvement: improved engagement by feedback loops, improved workflow management, and providing reasonable assurance. -“Sasol’s Reporting Journey” (Wandrag and Hanks) is a longitudinal analysis of Sasol’s evolving corporate reporting practices since 2002 and the benefits it has achieved, such as “improving our internal management and reporting systems.” -“One Report; One Message to All Our Stakeholders” (Janssen) explains that this private company has benefited from “new feedback” from its stakeholders due to integrated reporting. -“Southwest Airlines One Report™ Review” (Hong) presents an analysis of Southwest Airlines’ first integrated report, along with a set of recommendations for improving it. -“Integrated Reporting: Managing Corporate Reputation to Thrive in the New Economy” (Bridwell) argues that integrated reporting is an important tool for helping companies to manage their corporate reputation. -“A Team like No Other” (Lueneburger) describes three phases for implementing integrated reporting and the key competencies within each one needed by the team that has this [...]... Muyot makes the case that a combination of rankings and social media can improve disclosure by companies and gives evidence of this in the cases of Microsoft, Cisco, and Oracle Gristak, Integrated Reporting Enablement,” echoes the importance of XBRL and Web tools and to these he adds the even newer technology of cloud computing The final chapter by Armbrester, “Leveraging the Internet for Integrated. .. devised and enacted in times when we had a far less complete understanding of the nature of the universe and the limits of our planet Earth within it Nor was there a true and realistic appreciation of the constructs of economic, natural, human and social capital that many of us now see as essential to the sustainability of human enterprise, society and the planet Except perhaps in South Africa, there... acknowledges the interdependence of treatment with the natural systems of the body If the goal of modern economic life is sustainable prosperity, and one of the main vehicles for its achievement is the complex and powerful modern firm, then we need to acknowledge the full range of underlying assumptions, and thus create not just integrated practice through reporting but integrated theory as well This is the. .. integrated reporting (“Beware of Greeks Bearing Gifts” by Bose) -How lawyers can and should support the development of reporting standards ( The Role of Lawyers in Integrated Reporting” by Sarfaty) -The role stock exchanges can play in spreading the adoption of integrated reporting ( The Role of Stock Exchanges in Expediting the Global Adoption of Integrated Reporting” by Zimmerman) -A process for defining... reporting—are exploring whether the two can, in some manner, be merged The choice of how to approach such a merger, however, depends on one’s views of the core purpose of the firm If one believes that the purpose of the firm is exclusively to promote the interests of shareholders, then the path toward integrated reporting might be simply to select a handful of measurements from the sustainability field... sustainability of the planet and its tenants This inspired me to think about the human addiction to growth, the ferocious appetite for “stuff” and how this may be overcome by the optimistic vision of a special cohabitant, “Guinea Pig B.” The paradox of growth The session on integrated reporting opened up the dialogue to integrated management and indeed integrated living The issues associated with the unlikely... and then pass it on to your friends The Story of Stuff shows us that the real price of producing that gadget is up in the air as pollution and carbon, and in the land and waters as contamination It is also reflected in the social and cultural capital we lose and the human capital that is eroded away In a world where over ninety percent of what is bought by US households ends up in landfill within the. .. turn, often feel stereotyped and misunderstood, when they discover that their motivations, talents, and decisions are routinely rejected as compromised The massive disruptions in capital and corporate markets and the stupendous destruction of value—throughout the first decade of the twenty-first century has called into question the viability of the shareholder primacy model The introduction of the stakeholder... explore the assumptions in greater detail, let's begin with the statement of purpose—or “terms of reference”—for the Working Group of the International Integrated Reporting Committee (IIRC) (1) The objective of the recently formed committee, they write, is to develop an integrated reporting framework” that will: 1 support the information needs of long-term investors, by showing the broader and longerterm... rights Shareholders lay claim to predominance and to corporate governance because of the supposedly unique risk they bear as both the providers of initial capital and as the residual claimants, after other debt holders and contractual parties have been paid, to the remaining value of the firm Under a theory of shareholder primacy, the purpose of introducing integrated reporting is to surface previously . The Landscape of Integrated Reporting: Reflections and Next Steps Edited by Robert G. Eccles, Beiting Cheng and Daniela Saltzman Copyright 2010 The President and Fellows of Harvard College Cambridge,. Nohria Introduction: The State of Integrated Reporting Today Robert G. Eccles Part I: The Role of the Corporation in Society Accounting and Accountability :Integrated Reporting and the Purpose of the Firm Robert. need to act on the information they are getting—thereby helping to bring about the more integrated theory of the firm called for by Massie. Integrated reporting is an embryonic management practice