Evidence mounts for reporting beyond the numbers

Earlier in the week I had the great pleasure of attending ‘Reporting beyond the numbers: rival perspectives’, the 11th annual AMBS / LSE conference for academics & practitioners to debate topical issues around alternative forms of corporate reporting What struck me overall with such a controversial title to the conference was the aligned views that sustainability not only could but should be considered financially material. I was pleased to hear that the connection between sustainability performance and financial performance has been not only clearly evidenced in academia but is becoming more established in the mainstream, with an increasing number of sell-side financial reports covering broader issues (such as gender, diversity, safety to climate change).

However, when it comes to corporate reporting, many companies fall short: they may satisfy their fiduciary duty yet fail to convey a clear and honest representation of the company, its performance, its governance, its composition and its prospects. In my view, the goal of any company is to create value for its stakeholders — be they customers, employees, shareholders, or society as a whole, and I think that the reporting process can be used to create better, more honest and more transparent communications about this.

Voluntary commitment to sustainability

George Serafeim, Associate Professor at Harvard Business School, confirmed the business case as he shared research on the effect of a corporate culture of sustainability on different facets of corporate behaviour and performance outcomes. The study, entitled The Impact of Corporate Sustainability on Organisational Processes and Performance, looked at a sample of 180 companies, with a split between those that voluntarily adopted environmental and social policies many years ago - termed 'High Sustainability' companies - and those that did not - 'Low Sustainability' companies. Overall, the study provides evidence that 'High Sustainability' companies significantly outperform their counterparts over the long term, both in terms of stock market and accounting performance. 

So what made the difference?

The 'High Sustainability' companies were not only different in terms of their overall performance, but also had other characteristics in common that contributed to their success:

• Distinct governance mechanisms that directly involve the board in sustainability issues and, in addition, a link between executive compensation and sustainability objectives
• Are more likely to have organised procedures for stakeholder engagement, with more developed systems and processes and more measurement and disclosure of non-financial information regarding employees, customer and suppliers
• Use longer term horizons in external communications
• Higher level of transparency and disclosure

Unsurprisingly, the outperformance was stronger in sectors and businesses more dependent on their relationships with consumers, communities or the environment.

Increasing recognition of the need for ‘purpose beyond profit’?

Our research ‘Purpose Beyond Profit’, conducted jointly with the IIRC and accountancy bodies CIMA and AICPA, explored the views of over 400 C-suite executives from over 50 countries. The findings reinforce the emerging belief that business should be about more than turning a profit. Across all regions, the majority of executives agreed that organisations need to shift focus from pure shareholder value creation to value creation that includes wider stakeholder groups.

• 89% of executives believe business must deliver purpose beyond profit

It also found that in the future, the importance of meeting the expectations and needs of customers, and inspiring and engaging people, will grow far more in importance than only profitability and financial returns for investors.

Today’s information and reporting is holding us back

Despite this wide acknowledgement by executives that a longer-term view and a broader range of performance metrics are key to improved performance and long-term sustainability, the majority are struggling. Only 11% feel able to make strategic decisions based on broader factors and only 24% feel that their external information needs are fulfilled. To achieve this, better management and reporting information is required in order to understand and interpret the future drivers of business. Businesses need to establish a new model of management and leadership to fulfil their mandate to create wider value for all stakeholders. Decision-making will change as organisations start to understand their own value creation processes differently and make changes to the way they measure, manage and understand different elements of performance.

Where to in the future?

At Black Sun, we believe a ‘focus on value creation’ is imperative in today’s world. This will only be achieved through a better understanding and more engaging, regular communication of the wider factors that contribute to value creation in order to build successful relationships with a range of stakeholders. Encouragingly, in our 12th annual analysis of trends in reporting of the FTSE100, titled “The Real Drivers of Value: Lost and Found?', we are beginning to see that while companies may not yet have found a way to articulate the real drivers of value, they are at least beginning to. There is a clear momentum around a number of common themes, such as Value creation, Stakeholder expectations and Long-term thinking, and we are optimistic that we will see incremental progress over time as companies start to feel the pressure from regulators and other stakeholders in this debate, and, most importantly, begin to see the business benefits of doing so.

Want more? Read our blogs on Value Creation and Stakeholder expectations.