The cost of mistrust has become painfully evident in very concrete ways during the last few years: reduced share prices, lost jobs, shrunken pension funds. At the same time, the potential competitive advantage of trustworthy companies is becoming clearer. Benefits include reduced cost of capital, retention of longer-term investors, distinctive brands and strong reputations.
Restoring confidence and building trust are the themes of the annual meeting of the World Economic Forum this week in Davos, Switzerland. The challenge of doing so has never been more urgent, and the task of doing so never more complex. Yet major strides are possible. By focusing on the linkage between trust and competitiveness, Davos can add impetus to the policy and partnership framework that emerged last year in Johannesburg.
One critical link in building trust is nonfinancial reporting, which measures factors like carbon emissions, labor standards, corruption policy and quality of governance. Once considered the Cinderella of corporate disclosure, nonfinancial reporting – whose importance is highlighted in a major new report by the World Business Council on Sustainable Development – is quickly taking its place alongside financial reporting as indispensable to assessing company value and future prospects.
Such nonfinancial reporting has at least four benefits.
The first is that it can make markets work better. Financial markets operate most effectively when accurate, comparable and consistent information on corporate performance, both past and proposed, is available to all decision-makers. Investors and analysts need transparent information on risks and opportunities. By supplementing traditional financial performance information with data on economic, social, and environmental performance, nonfinancial reporting can help restore confidence to markets and promote their more efficient operation.
The second benefit is that nonfinancial reporting responds to growing pressure and perceptions in the community that business is not doing enough. In a survey of British pension fund trustees released this month, it was revealed that nearly 90 percent believe that companies are providing insufficient information on environmental and social business risks. Moreover, the escalating demand for information from analysts, rating groups, benchmarking organizations and advocacy groups shows no sign of abating. Business must choose whether to lead on reporting, or be led.
Third, nonfinancial reporting can be a powerful management tool. As it has evolved, financial reporting can tell chief executives a great deal about past performance, but it is unable to reveal fully a company’s intangible assets or the various risks and opportunities it faces in the market environment in which it operates.
Finally, by broadening the range of activities reported and responding to stakeholder interests, nonfinancial reporting can strengthen the overall legitimacy of business reporting. While business already compiles and reports a considerable amount of data, it is often not given public credit. This is because it is either reported in a manner that has limited public legitimacy – for example, an industry association framework – or is limited in scope, to environment only or social only. In the eyes of many, the business dictum “you can’t manage what you don’t measure” has become “if you don’t measure, you don’t care.”
That nearly 200 companies, including Royal Dutch/Shell, Ford, Siemens, Toshiba and General Motors, now routinely report nonfinancial performance using the Global Reporting Initiative’s sustainability reporting guidelines, and are winning public recognition of their efforts, is confirmation that Cinderella has finally arrived at the ball.
To prosper in the international economy of the 21st century, global business needs stable markets, sensible regulations and innovative governance structures that encourage and reward responsible practices. Rather than adopting a passive posture, enterprises must actively nurture initiatives and institutions that help create such conditions, which are essential to a healthy business climate and advancement of sustainability goals. Initiatives such as the Global Reporting Initiative and the UN secretary-general’s Global Compact provide business and other stakeholders with a balanced framework to advance these goals in concrete, measurable and trust-building ways.
Sir Mark Moody-Stuart, former chairman of Royal Dutch/Shell Group, is chairman of Anglo American PLC, and a director on the board of the Global Reporting Initiative.