By Lawrence Loh, Director of Centre for Governance, Institutions and Organisations at National University of Singapore Business School
Boards of directors are living in a time when expectations from all quarters are escalating. Gone are the days when directors literally ‘sit’ on the board. In the new era of corporate governance, the demand for disclosure and transparency has reached an unprecedented peak and created a most heavy burden for boards. This demand normally takes the form of stringent reporting requirements.
Where financial reports together with the annual reports sufficed in the good old times when boards enjoyed the confidence of interested parties, there is now a gamut of newer forms of reports that are deemed critical. These include sustainability and integrated reports, beside the traditional corporate social responsibility (CSR) report.
Typology of reports
How do boards make sense of the emerging plethora of corporate reports? What and how should boards report? Let us take a closer look at the five prevailing types of reports – financial, annual, CSR, sustainability and integrated.
The financial report is the most essential type of communication that a company makes. It usually contains the basic accounting statements, particularly balance sheet and income statement. It also includes slightly more specialised statements pertaining to equity changes as well as cash flows. Very often, the financial statements are accompanied by a detailed section called management discussion and analysis. In many ways, financial reporting is the bread and butter for any company.
However, numbers do not tell the whole story. Companies provide the annual report targeted at shareholders before the annual general meeting. It contains details of the business operations and performances and also provides expectations and outlooks of the future.
Beyond catering to shareholders, annual reports are often public relations documents that are used to project a good image of the company. It is in this light that annual reports carry detailed sections on CSR. Although a promulgated set of guidelines for social responsibility is the ISO 26000, these are actually not widely adopted. In reality, companies take the chance to spin good stories on their good deeds that are often unrelated to their business operations.
Enter sustainability reports. Originally conceived as a platform to demonstrate commitment to protect the natural environment and encouraged by the ISO 14000 series of standards, sustainability reporting has come a long way to embrace social and governance aspects beyond the environmental concerns and, of course, the economic mandates.
At present, there are universal principles for sustainability reporting as in the United Nations Global Compact as well as jurisdiction-specific guidelines issued by regulatory authorities and stock exchanges. However, the most widely used international set of standards is probably the Sustainability Reporting Guidelines developed by the Global Reporting Initiative.
“In the new era of corporate governance, the demand for disclosure and transparency has reached an unprecedented peak and created a most heavy burden for boards”
Companies are currently positioning sustainability reporting as means to validate that each and every phase of their business operation, especially the supply chain, are carried out in sustainable ways. Indeed, where it differs from a CSR report is that it focusses on matters that have critical and longer term impacts on the company.
Just when we thought there were enough types of report, there is another that is gaining traction – the integrated report. Spearheaded by the International Integrated Reporting Council, this is a holistic and comprehensive form of reporting that addresses the key aspects of a company’s business, particularly the key information of its strategy through categories such as finance, governance and sustainability.
Integrated reporting resembles sustainability reporting but the thrust is on the concept of value and how this is being created and managed in the company. An integrated report enables informed decision-making and efficient capital allocation. It is a business-centric way to share critical information that is specially curated for shareholders as well as the array of other stakeholders.
Evolution of reports
We can actually plot the five types of reports along two dimensions to appreciate the evolutionary path of corporate reporting. On the first dimension, we can assess the time orientation, which denotes whether the reporting is primarily driven by a present or future focus. The financial and CSR reports in their traditional forms are more attuned to the present while sustainability and integrated reports look into the future. On the second dimension, we can view the core purpose of the report, which can be business-based or stakeholder-based. The CSR and sustainability reports are more stakeholder-based while financial and integrated reports are more business-based.
The annual report, which takes many forms, can be in any of the categories for the two dimensions. In fact, companies often embed CSR, sustainability or integrated report within the annual report.
A visual framework of the types of report along the two dimensions is shown in Figure 1 (below). It is interesting to note that financial reporting moves into CSR reporting when there is pressure from stakeholders to do so. In this state, the orientation stays on the present since the information is retrospective. With the attention on the diverse stakeholders and especially with the need to cater for the next generations, the focus turns to the future in sustainability reporting. Since the emergence of integrated reporting, there is a re-emphasis on business, especially in the value aspects. The shift has thus come full circle back to the business itself.
Implications for boards
What does the evolutionary path of reporting mean for boards? First, recognise that the financial report and the annual report in their traditional forms are inadequate. In the current era of high stakeholder expectations and business demands, it is good to embrace either a sustainability report or an integrated report. This depends on the context of the company. If it is more necessary for the stakeholders to be provided with information on the economic, environmental, social and governance domains, it will be better to do sustainability reporting. On the other hand, if it is appropriate to present a synthesised value-based view to all, including stakeholders, then an integrated report is better.
Second, go for substance rather than form. Avoid window-dressing which is often prevalent in free-form CSR reporting. Do not just use boilerplates. Sustainability and integrated reports are more amenable to substantive information. Boards will need to understand the underlying rationale of these two types of reports. They should study the conceptual requirements carefully and decide which is suitable for the company.
Third, take ownership of the reporting obligation. It is natural for boards to choose the easy way out and outsource the report completely to consultants, but boards should take the lead by setting the agenda and steering the broad content. It is good to get management directly involved in the report. Leave only the presentational enhancements to the professionals who can be from inside or outside the company.
Bottom line: direct, don’t just report
While there are several types of reports, it is critical to ensure that the report does not become an end in itself. Good business is not run by writing good reports. Boards should not direct companies through the sole use of reports, whatever their types.
At the end of it all, the board is a board of directors, not a board of reporters. Reporting is purely a means to help in the responsibility of directing.
About the Author:
Lawrence Loh is director of Centre for Governance, Institutions and Organisations at National University of Singapore Business School. He is also deputy head and associate professor of Strategy and Policy at the School.