Transparency has become one of the dominant buzz words today. We would like it from our government, get it (whether we want it or not) from WikiLeaks and now we're demanding it from those voting for the Oscars.
Transparency is also playing an increased role relative to corporate reporting. Until fairly recently, these reports were largely an exercise in management's role as gatekeepers of information, as it determined what was relevant to stakeholders and what wasn't.
But the function of corporate reporting is evolving, says Michael Krzus, a public policy and external affairs partner with Grant Thornton. The nature of instability in markets today has created a demand for transparency, as companies expand their reports from a strictly financial perspective to one of integrated reporting that reflects a sustainable strategy.
"The notion of transparency strikes some people as giving away the company secrets," says Krzus, who spoke at the Beyond Budgeting Conference in Chicago on Tuesday. "But it's about providing more clarity, about how and why you make the decisions you make."
Krzus is co-author of One Report, Integrated Reporting for a Sustainable Strategy, along with Robert G. Eccles, senior lecturer of Business Administration at Harvard University.
Krzus is not an environmental activist. Far from it. Rather, he suggests that the model by which companies report to stakeholders has not evolved since the Great Depression, when the value of property, a plant and equipment were the measurements of critical assets. Today, that equation is far more complicated, as analysts give greater value to intangible assets, such as quality of management, new products in the pipeline, market share and who the company is competing against.
Integrated reporting, says Krzus, explains to shareholders how a company is creating value for shareholders and society, while juggling challenges both short-term and long-term and short-term. Just as important, integrated reporting explains what are the tradeoffs are of financial and non-financial issues.
Krzus cites the efforts of companies both domestic (United Technologies, Southwest Airlines, PepsiCo and American Electric Power) and abroad (HSBC, Philips, Renault and BASF).
"Companies are using the idea of an integrated report to better understand their own internal concepts of materiality and by engaging with their stakeholders," says Krzus. "By having more robust information, it's going to allow for better decision making. That's a benefit on both sides."
As an example, Krzus cites BMW and its innovation in developing a water recycling system at a manufacturing plant in Austria. The investment, he points out, was significant and likely was felt by shareholders, but it also created a cost advantage over other automobile manufacturers.
"The notion of transparency sets the stage for a company holding itself more accountable," says Krzus. "I think that gives them the credibility to make a mistake. It's a question of embracing the challenge, as opposed to viewing it as mitigating risk."
Not everyone will agree with why a company makes the decisions it does. That is to be expected, say Krzus. Integrated reporting provides context and a more detailed explanation.
"When you're being transparent about some of the tradeoffs that are taking place, you're doing that with the knowledge that some people will be disappointed and angry," says Krzus. "But underneath that disappointment and anger comes an understanding that even though you may not agree with the decision that's being made, you at least are learning how the decision was made and what the rationale was. That begins to build a bond of trust with the shareholders."
Thanks to Peter Alpern / Penton Media, Inc. / Business Finance Mag
http://businessfinancemag.com/article/integrated-reporting-it%E2%80%99s-not-just-being-green-0428
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