Reinventing the Annual Report
Financials Alone Don’t Come Close to Telling the Whole Story
I am always interested in reading what the companies I own stock in have to say about themselves in their ritualistic annual reports filled with financial information, different types of narratives, and lots of pretty pictures.
The amount of detail and the level of complexity in the financial section have grown considerably in response to the increasing onslaught of accounting rules and regulations. What’s more, since going green is now red-hot, a growing number of companies — especially in Europe and Japan — are also starting to issue corporate social responsibility (CSR) or sustainability reports. Sometimes these are mailed with the annual report, but more often they have to be ordered separately or downloaded from the company’s Web site, and the two reports have little to do with each other.
This is a huge problem. A sustainable society requires that all companies be committed to sustainable strategies. Increasing social expectations regarding a company’s commitment to sustainability mean that firms that ignore this do so at their own risk. A leader in recognizing this, BMW Group several years ago began issuing a Sustainable Value Report detailing the energy and water consumed, waste removed, and volatile organic compounds per vehicle produced. BMW believes that its reputation as the world’s “greenest” car company plays an important role in brand awareness and customer satisfaction, factors that contribute to revenue growth.
So how can shareholders and other stakeholders know if a company’s commitment to a sustainable society is contributing to a sustainable strategy that will create value for shareholders over the long term? The answer lies in combining the financial and CSR/sustainability reports into something I call “One Report,” which provides the essential information on a company’s financial, environmental, social, and governance performance and shows the relationships between them.
Some major corporations are starting to take the lead in this effort, including Southwest Airlines (with its Southwest Airlines One Report), United Technologies Corporation (UTC), the Dutch electronics and health-care giant Philips, the German chemical company BASF, and Danish pharmaceutical maker Novo Nordisk. At UTC, a recent integrated report focused on nonfinancial metrics such as lower fuel consumption in new jet engines, and a reduced carbon footprint and lower water consumption in the firm’s factories. The juxtaposition of information on both operations and CSR symbolizes UTC’s commitment to more than just the bottom line and its belief that both sets of data have a significant impact on the long-term success and reputation of the company.
Through integrated reporting, or a One Report, companies demonstrate their commitment to sustainability, make better decisions based on a broader range of information, engage more deeply and effectively with shareholders and other stakeholders, and lower reputational risk through a higher level of transparency.
Given the importance of sustainability, companies have an ethical obligation to practice integrated reporting, and investors have a similar obligation to demand it. In fact, I believe the SEC should require it. As we all try to come up with solutions to the problems of the planet, integrated reporting is one way to make sure that companies are part of the process.
— HBS professor Robert G. Eccles is coauthor with Michael P. Krzus of One Report: Integrated Reporting for a Sustainable Strategy (Wiley, 2010). This article appeared April 19, 2010, on Harvard Business Review’s HBS faculty blog. Reprinted with permission.