Get ready: Why the future of corporate reporting is integrated

Get ready: Why the future of corporate reporting is integrated

Robert Eccles, professor of management practice at Harvard Business School, is a pioneer when it comes to integrated reporting. Also known as “One Report,” integrated reporting requires public companies publish annual reports that go beyond the required financial information and also include their environmental, social and governance performances.

The practice remains optional, however, and has been adopted by only a small group of companies -- including United Technologies Corporation (NYSE: UTX), American Electric Power (NYSE: AEP), Southwest Airlines (NYSE: LUV), Denmark’s Novo Nordisk (NYSE: NVO), Germany’s BASF, Natura in Brazil and the Netherlands’ Philips.

Eccles spoke recently with David Kiron, executive editor of Innovation Hubs for MIT Sloan Management Review. Here's an edited excerpt from that interview:

Kiron: What is the incentive to do integrated reporting if it’s not mandatory?

Eccles: Good companies will see integrated reporting as an opportunity to communicate on and implement a sustainable strategy, which I define as one that creates value for shareholders over the long term while contributing to a sustainable society. But accomplishing this at a global scale means that integrated reporting needs to be a mandatory, not voluntary, exercise. It also needs to be done to a set of standards. Think of financial reporting. We wouldn’t have the capital markets we have today if companies didn’t have to do it. Some people have said, “Oh, integrated reporting, if it’s really good for companies, they’ll do it on a voluntary basis, so we don’t need to regulate them.” I mean, that’s bullshit, right? Good companies would and bad companies wouldn’t and the market would have an incomplete set of information for making decisions.

Kiron: What do you think are the top three challenges for creating some nonfinancial standards?

Eccles: The first challenge is how to do it fast. Those of us that play in this space say, look, this can’t take 20 years like we’ve seen with some accounting standards. If reporting is going to have a meaningful impact upon behavior and how we use natural resources and our impact on people and the planet, taking 10 years to come up with a set of standards is like, game over…

The second challenge is, how do you make those legitimate? It’s a tough question, because you have to answer the question of who the primary audience is for the information that’s going to be based on these standards. The shareholders? The stakeholders? Both? When you answer the question of who it’s for, that then tells you who you should involve in the standard-setting process...

The third challenge is how do you make them institutionally legitimate? How do you make them universally applied? What’s the enforcement mechanism? Should integrated reports have integrated audits to ensure their quality, like is done with financial reporting? There are a variety of ways institutional legitimacy can be created, such as through stock exchanges making it a listing requirement. It could be passed through legislation. Here in the United States, it could be overseen by the SEC.

Kiron: What do you think will be required to make integrated reporting on a global basis?

Eccles: … Anybody who cares about our capital markets and their contribution to creating a sustainable society should think about how they can get involved to support the integrated reporting movement. We’re running out of time and we’re all living together on Planet Earth — at least until some scientist at my beloved alma mater MIT invents faster-than-light and economical spaceships.

This article is adapted from “Get Ready: Mandated Integrated Reporting Is The Future of Corporate Reporting,” by David Kiron, which was published by MIT Sloan Management Review in March 2012. This interview is part of MIT SMR’s research and content theme, Sustainability & Innovation. The complete interview is available at http://mitsmr.com/IbMGmd

Copyright © Massachusetts Institute of Technology, 2010. All rights reserved.

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