Integrated reporting is a complex field, yet it also offers companies a chance to establish trust among their employees and investors.
This text was first published at Handelsblatt online.
Today the information that companies share with the public and their investors has to meet higher standards than in the past, and includes both financial and non-financial information. It’s not just about investment decisions, but also consumption-related choices, and choosing the right employer.
Until recently, non-financial information was shared on a voluntary basis. Now that the CSR Directive Implementation Act (CSR-RLUG, where CSR stands for “Corporate Social Responsibility”) has entered into effect, more than 500 companies in Germany are legally obligated to report their non-financial information. And those companies that are not affected by the law face growing pressure to follow suit.
Fundamentally speaking, this new legislation could help to reinforce customers’ and the public’s trust in companies. In order for that to happen, the reporting can’t just be lip service, as some organisational sociologists have claimed, but must instead deliver convincing evidence of a given company’s commitment to doing business in a sustainable and socially responsible manner.
This is now more important than ever, since public faith in political leaders, government authorities and business executives is extremely low. People no longer trust political or business decision-makers to act in the best interests of the public, or for the sake of the greater good. Instead, they generally assume that these decision-makers act in their own best interests.
High bonuses awarded in financially weak fiscal years, and political decisions that are made on the basis of how they could affect the next election, are partly to blame. Germany’s Chancellor has spoken of a loss of faith among voters, and ten years after the financial crisis sparked by Lehman Brothers, public faith in financial institutions has yet to be restored. And thanks to the diesel scandal, public confidence in statements made by managers from the automotive industry is virtually non-existent, regardless of whether the respective statement is true or not; people have heard too many empty promises.
It is important to restore customers’ and employees’ trust, and integrated reporting can help with that. But when we read reports in which companies claim that diversity and environmental protection are among their primary goals, yet who have a quota for women of zero in their upper management, or whose actions conflict with achieving environmental targets, their reporting can have just the opposite effect, the company’s purported goals are greeted with cynicism, instead of being taken seriously.
That being said, the members of a company’s Senior Management often face a dilemma: potential car buyers seem to have only a limited interest in whether or not an automaker manipulated test results, or whether a given vehicle is environmentally friendly or not. Instead, more cars are now being sold, not fewer, and SUVs are more in demand than electric vehicles. Accordingly, a loss of reputation doesn’t seem to hurt performance, in either the financial sector or the automotive industry.
Moreover, companies who make no effort to include women in their upper management aren’t likely to lose a single customer or investor as a result. Virtually everyone would like to see livestock raised humanely, and to ban child labour; nevertheless, the cheapest poultry and t-shirts continue to sell very well. Though investors and analysts may initially turn against a company when its misconduct makes headlines, this quickly dies down as long as the performance figures remain stable.
In addition, for the sake of their investors and employees, companies have to primarily orient their actions on customer preferences and on making a profit, so as to survive and preserve jobs. Investments in sustainability mean an initial drop in profits. When neither customers nor investors reward companies for being sustainable, it’s all the more difficult for them to choose this path. As such, we as a society are also somewhat cynical and hypocritical.
Nevertheless, you’d think that companies who receive awards for their sustainable practices would advertise that fact. But they rarely do so, a phenomenon that researchers have dubbed “strategic silence”. Companies are reluctant to advertise it when they receive environmental or sustainability awards because – according to a thesis put forward by Chad Carlos and Ben Lewis – the punishment from the public would then be even worse if they were later found guilty of violations, since they would also come off as being hypocritical. In turn, such strategies imply that the companies in question expect to get caught breaking the rules, and fear a further loss of confidence.
As we can see, integrated reporting is a complex matter. Nevertheless, it also represents an opportunity for companies to create trust, and in the process to lastingly strengthen customer, employee and investor loyalty. In order for that to happen, the strategy, objectives, parameters and financial performance all have to fit together. If a company’s reporting fails to meet these criteria, people will become more cynical, and trust in the company’s public statements will further dwindle.
At the same time, customers, employees and investors should live up to their principles as well and reward those companies that behave honestly. If these groups simply claim to support sustainability, but don’t choose their purchases, their employer or the investments they make on that basis, it’s a further incentive for companies to continue their contradictory practices. The developments in this interdependency over the next several years will surely be interesting.