Public companies in the U.S. are, by law, only required to disclose financial results. Then why are a majority of annual reports increasingly addressing social responsibility, sustainable practices and corporate giving?
Though integrated reports may eventually replace annual reports, 52 percent of Fortune 100 Companies included statements of Corporate Social Responsibility (CSR) in their 2010 annual reports and 10-K. [See: Best Buy Releases Sixth Annual Sustainability Report]
What's behind this push for non-financial reporting?
A combination of the current economic environment, public demand for transparency, the rise of social media and third-party verification. Consequently, however, a lack of reporting standards ensures that companies pick and choose if and how they share their charitable works, community involvement, commitment to diversity or environmental stewardship in their annual report.
A company that does it right quickly realizes that effective and transparent communication is key to maximizing investments, as well as transforming the company and its brand. Company executives understand that the organizational and technological innovations they put in place yield both bottom-line and top-line returns.
Johnson Controls, PepsiCo and Abbott Laboratories are excellent examples.
Each of these companies not only communicates the right things, they extend those efforts within their operations, supply chains and product offerings. And they communicate in simply articulated objectives, net results or, a set of measurement metrics to their shareholders through their annual reports.
Their goals and objectives address issues that are material to their core business and competencies. They go beyond putting solar panels on the roof of their headquarters, donating an extra million dollars to charity, and/or offering reusable bags to shoppers. The result of this materiality: they are in stronger position to manage external market forces.
Despite these examples, when it comes to non-financial issues in corporate annual reports, the lack of reporting standards is creating a variety of overlapping and sometime conflicting trends in financial reporting.
[SEE: AS WALL STREET WELCOMES GRI, EXECS PUT CSR REPORTING IN PERSPECTIVE]
In a two-part series, we will discuss – and analyze -- seven main trends that impact every company going forward, whether they already report on non-financial goals or continue to put it off for a variety of reasons, but mostly, fear.
1. Rising Expectations
Over the last decade, pressure has been building for U.S. food companies to cut back on calories, fat and salt. Though higher commodities prices have reduced packaging and portion sizes, trends towards more healthful foods have accelerated. American consumers still demand the convenience of packaged and easy to prepare snacks and meals — now with more fiber, less sugar and salt.
Selective reformulation is a great first step. Real change happens when businesses share a company-wide mandate with their shareholders, quantifying their impacts toward more healthful products starts to meet those higher expectations.
Take PepsiCo, for example: The culture of the company flows downward from Chairman and CEO Indra K. Nooyi and her focus on corporate character and, by extension, ethics and growth. As a result, PepsiCo chalks up considerable improvements in its product mix and sales due to "investing in a healthier future for people and our planet."
By laying out additional short- and long-term goals for the company that included metrics related to their performance according to their retail partners, consumers and, of course, their investors, they start bringing the company performance and it's social and environmental commitments together.
2. Shareholders pushing harder than ever
While CEOs used to be able to brush aside shareholder activists, today, that would be a risky move. It is yet another mark that in the most basic governance struggle in business—the fight between shareholders and managers—investors are gaining power.
In this new paradigm, corporate leadership just cannot afford to ignore shareholder proposals.
Shareholders have filed 96 resolutions on climate and energy issues so far this proxy season. High-profile disasters—such as the BP oil spill and the Massey Energy mine explosion in West Virginia—have caused shareholders to give a serious look at the strategies companies are using to manage business risks. Not surprisingly, a disproportionate share of resolutions is within the coal electric and oil sectors.
For instance, Chevron investors will vote on new proposals placed on the ballot by shareholders, including the introduction of sustainability metrics for executive compensation, two proposals calling for a report on hydraulic fracturing in natural gas extraction, and another on deepwater oil wells. Investors have actually requested that Chevrons’ Board of Directors prepare a report on the financial risks resulting from climate change.
As a result, Chevron is researching these risks, determining the parameters and should release a comprehensive report in September.
Expectations, however, are low as most of the projects that Chevron’s 2010 touts ignore the socially responsible, progressive and sustainable aspects of their business and so parameters are bound to be fairly narrow.
3. Supply Chain Engagement
The era of corporate leaders squeezing every last cent in cost reductions from suppliers is over. Confrontational supplier relationships in today’s world have tangible consequences to the bottom line. Every corporation depends on getting access to technology or value creation.
Proctor and Gamble, for example, proudly tells investors that sustainability is "fully integrated into (its) growth strategy." At P&G, this promise is strategically carried out by "creating substantial efficiencies" and "introducing new products that have more favorable environmental profiles."
In fact, P&G’s five specific sustainability strategies and goals directly resulted in their recently revised Supplier Environmental Sustainability Scorecard, which moves from benchmarking their suppliers to rating and rewarding them.
Suppliers that most effectively improve key environmental indicators and partner with P&G to deliver more sustainable products and services for their consumers are rewarded with more business. Incentives work. And by conveying this long-term strategy, the consumer products company is enabling its shareholders to appreciate the fiscal and reputational value of responsible business practices.
--By Michael Sater
Michael Sater is an expert in creating and implementing global brand management strategies designed to communicate the unique value of corporate responsibility and sustainability initiatives for companies. He is a Washington University in St. Louis alum and previously cofounded Maurgood. Currently, Sater is an account director at Definition 6, a unified marketing agency, bringing his diverse skill set to addressing client needs on projects from conception to execution.
Tomorrow: The remaining four trends … and how do we move forward?
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