The current crisis in confidence over corporate financial reports raises questions that go well beyond a company’s financial sustainability. Business failures provide a vivid reminder of how fundamental corporate activity is to the lives and livelihoods of people and communities worldwide. As shareholders, institutional investors, trades unions, and policymakers take stock of the social repercussions of the Enron and WorldCom affairs, and with the UN World Summit on Sustainable Development (WSSD) still fresh in our minds, it is time for governments to address the limits of financial reporting.
By most assessments, there were two main elements underlying the events that have prompted widespread calls for a higher ethics of corporate responsibility. The first was a failure of accounting systems. The second was a breakdown of corporate governance. Business collapses in recent months were in part attributable to poor audits of required information. But, equally importantly, they resulted from a fundamental reality of financial reporting: even sound numbers that comply fully with required standards do not deliver all that shareholders and others need to know to assess the true health of a corporation.
As they currently stand, financial reports meet certain narrow technical requirements and provide a glimpse of past performance – last quarter's earnings or last year's revenues. But what about the future? Where is the information on the firm's capacity to innovate, train and enrich its human capital, enhance its reputation, strengthen brands, alliances and partnerships? And what about measures of public trust and the quality of governance?
All these intangible assets, if reported at all, appear in non-comparable and inconsistent form. This is the reality, even though the markets clearly signal the growing importance of such intangibles as critical underpinnings of value in the marketplace.
The long-term sustainability of corporations rests on a complex balance of factors. While financial viability is clearly vital, so too are elements such as the ability to adapt in a changing market; to maintain official and public trust; to attract and inspire a workforce; and to retain and expand the support of local communities and the client base.
But financial accounts rarely assess the full environmental impact of a company's activities or products. Nor do they weigh up how its human resources policies may influence the workforce, or how public opinion about its social and human rights record may affect consumer attitudes to its products. This is starting to change, as many corporations seek ways of measuring their so-called 'eco-efficiency' performance.
They are doing this using "sustainability reports" as an adjunct to their financial statements. The concept of "triple bottom line" reporting, such as offered by the Global Reporting Initiative (GRI) – an assessment of a corporation's performance in relation to profit, people and the planet – is increasingly welcomed by financial analysts and investors because it helps them make better judgements about the true value and prospects of a company across a broader range of assets. Moreover, it enables management to anticipate and exploit opportunities to strengthen the firm's market competitiveness and boost company transparency.
Whether companies like it or not, a company’s non-financial performance can directly affect its financial health too. The link between human rights or environment and share value is already well-documented. Four of the world’s major stock markets — New York, London, Hong Kong and Johannesburg — have implemented or are proposing changes to disclosure rules that will require information on corporate governance, environmental liabilities, HIV/AIDs programmes, and human capital issues from basic working conditions to policies on child labour. This development signals a growing recognition that non-financial information linked to sustainability performance is an essential ingredient in forecasting and securing a company’s financial prospects.
Fortunately, a variety of tools are now available to make possible an ever-closer alignment between enhanced financial reporting, sustainability reporting and principles of corporate governance. With the release of its 2002 Sustainable Reporting Guidelines, the GRI provides a flexible mechanism for such enhanced reporting, offering a detailed methodology for performance disclosure. The GRI guidelines can be seen as complementing other instruments, like the OECD Guidelines on Multinational Enterprises and its principles of corporate governance, which guide good business practice. The GRI guidelines have been developed since 1997 in a consultative process involving thousands of representatives from the business, accountancy, labour and NGO sectors around the world. They provide a ready-to-use, consistent and comparable framework designed to reinforce traditional financial reporting.
What kind of information do new GRI-based reports contain? Companies that use the guidelines will report on a broad array of issues, including corporate governance; financial flows from the company to the community where it operates, including taxes, payments, salaries, etc.; materials and energy use; and carbon emission and biodiversity. They will also cover labour practices and human rights; bribery and corruption policies; and product stewardship (how the company handles its responsibility for the whole product life cycle and supply chain). Knowing, for example, how much greenhouse gas a company is producing is important not only for the environment, but also for shareholders, especially if such emissions are taxed or subject to carbon trading. In the same vein, corporate governance is no longer an arcane issue relevant only to boards of directors. It is fundamental to the very survival of the firm and to the well-being of its workers, suppliers and communities.
The GRI guidelines are now used by more than 150 companies worldwide, including for example, ABB, General Motors, Royal/Dutch Shell, Eskom, Rabobank, South African Breweries, Nissan and Ford underlines the growing recognition of this reality. As the business case for sustainability reporting is further articulated and understood, the number of companies issuing GRI reports is likely to reach thousands within a few years.
Sustainability cannot be reached without the robust and focused input of a healthy business sector, working in close collaboration with governments and the rest of civil society. At the Bali preparatory meeting for the WSSD in June 2002, ministers specifically agreed in the draft Plan of Implementation for the summit on the need to enhance corporate environmental and social responsibility and accountability, “taking into account such initiatives as ...the Global Reporting Initiative guidelines on sustainability reporting...". As was evident in Johannesburg, there is a near global consensus that companies should go beyond financial philanthropy and apply their expertise and technology to solve social problems.
Judging from media reports and public opinion polls, the level of public trust in corporations is at an all-time low. The disruption and loss to workers, investors and communities associated with the recent corporate failures have taken a severe toll on economies and societies. Not only is there a clear sense that corporations have a responsibility to provide a full and more accurate account of their financial situation but also that they must make more earnest efforts towards sustainability if they are to win back public support. This is clear from widespread calls by major NGOs for an international, legally binding, mechanism to hold transnational corporations accountable for their behaviour.
Governments must make every effort to assist businesses to meet these challenges. The GRI Sustainable Reporting Guidelines can play a vital role.
• UNEP (2002), Industry as a Partner for Sustainable Development – 10 Years After Rio: The UNEP assessment, www.unep.org