Reporting Nonfinancials

Reporting Nonfinancials Kaevan Gazdar

Reporting Nonfinancials

Reporting Nonfinancials Kaevan Gazdar

Copyright © 2007

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Contents

Foreword Acknowledgments Introduction: Goodwill and Blue Skies? Getting a Grip on Nonfinancials Closing the gap between book value and market cap Step 1: Classifying nonfinancials Step 2: Adjusting to regional priorities Step 3: From consciousness to action PART I: THE WHY 1

2

xi xiii 1 2 5 6 7 9

True and Fair View? The Glaring Deficiencies of Financial Reporting The old economy’s reporting paradigm Change reporting, not accounting Getting form to follow function Nonfinancials: The overheads of the 21st century

11

Open Sesame? Nonfinancial Reporting between Pressures, Paradoxes and Potentials Pressures: Regulators, investors and public opinion Paradoxes: A singular lack of clarity and concreteness Potentials: Professionalisation on the march

23

12 14 16 18

25 27 29

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Contents

PART II: THE WHAT

35

3

37

4

Competitive Value Brands, Customers and Markets A. BRANDS: ENGINES OF GROWTH AND REPUTATION Calculating brand value       and reporting on brand equity Rescuing the brand: Reporting as a part of crisis management Strategies for product       and corporate brands B. CUSTOMERS: THE KEY ENTREPRENEURIAL ASSET Customer orientation: Beyond lip worship Customer loyalty: Beyond retention Customer satisfaction: Early warning system or success barometer? Customer commitment: Showing true grit C. MARKETS: TARGETING NICHES, SEGMENTS AND SECTORS Marketing metrics: From market share       to sectorial insights Marketing strategy: Between brand positioning       and financial results SUMMARY OF COMPETITIVE VALUE Management Value Strategy, Governance and Outlook A. STRATEGY: AN AMALGAM OF PROCESSES AND VISIONS Systematising strategy: Concentrating on targets       and on market trends Strategy as a structured process       and as an exercise in restructuring Strategy derived from the vision of a leader       and his insights on markets – or hers B. GOVERNANCE: SHADES OF TRANSPARENCY Regional pressures and structural differences Are governance premiums sufficient incentives for coherent reporting?

38 39 41 43 45 47 51 53 54 56 58 63 65 67 68 69 72 79

80 83 84 87 88 90 93 97 99 101

Contents

Reporting approaches: Between formalism       and hardcore information C. OUTLOOK: FORECASTING AS THE ULTIMATE CHALLENGE Between expectations and regulations Inputs and outputs: Systematising forecasting Uncorking the champagne – or biting the bullet Paths to growth and glory: Unorthodox approaches SUMMARY OF MANAGEMENT VALUE 5

6

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104 106 111 112 113 116 119 121

Human Resources Value Productivity, Motivation and Potential Can people be capitalised? Ambitious concepts, modest results Leveraging human resources: Pinpointing indicators       and reporting coherently A. PRODUCTIVITY: PROMOTING EFFECTIVITY AND EFFICIENCY Ways to productivity: The cultural factor Factual approaches: From basic documentation       to a strategic overview Focusing on the essentials B. MOTIVATION: WILD CARD FOR EXCELLENCE? Corporate culture: The backbone of motivation Mobilising employees: Between satisfaction       and engagement C. POTENTIAL: PROTECTING PROPERTY AND HARNESSING TALENTS Exploiting intellectual property: Defensive and offensive approaches Managing diversity: Qualitative solutions       and quantitative evidence Training: An investment in superior performance SUMMARY OF HR VALUE

129

Ethical Value CSR, Sustainability and Stakeholder Dialogue Good ethics = superior financial performance?

179

130 132 134 137 139 142 143 146 148 149 153 156 159 160 162 165 168 171

180

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Evolution of reporting: From accounting to assurance A. CORPORATE SOCIAL RESPONSIBILITY: CHARITY OR POLICY? Reporting trends: Quantity and quality on the rise? Concretising commitment       and concentrating on core business An emphasis on issues       and on mission B. SUSTAINABILITY: BETWEEN TRIPLE BOTTOM LINE AND REALISTIC TARGETS Reporting between minimalist requirements and maximalist demands From triple bottom line       to challenges and dilemmas Setting targets and executing strategies C. STAKEHOLDER DIALOGUE: CONFLICT-SHOOTING OR WIN–WIN STRATEGY? Curing corporate myopia Systematising processes, developing indicators Addressing specific issues       and systematising consultation Ethical value: A must or a sham? SUMMARY OF ETHICAL VALUE

183 187 190 192 193 195 198 202 204 208 209 210

216 218 220 222 224 227 230

PART III: THE HOW

237

7

239

Says Who? Addressing Stakeholders and Facing Issues Low standards of accountability       and cultural proclivities Focusing on audiences: Communities, employees       the financial community       and NGOs Focusing on specific issues       and tackling general concerns Dialogue as an ongoing process Dialogue perspectives: From evasiveness to civic sense

240 242 244 246 247 251 253 257 261

Contents

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New Wine in New Bottles? Strategy, Structure and Style Strategy: From fundamental questions to an integrated approach Structure: The road to clarity and materiality Style: From story-telling to substance Coherence, brevity, accountability

ix

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274 279 291 300

Bibliography

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Index

311

Foreword

Reporting on non-financial aspects of business performance has become of increasing importance in two respects. First, companies are often significant actors within society. If they are to thrive and to enjoy the trust and cooperation of those around them, they need to be prepared to be transparent and accountable to a range of stakeholders – including governments, employees, customers, communities and NGOs. Second, from a traditional investor perspective, it is quite clear that reporting solely on financial performance provides a seriously incomplete picture of a company’s prospects, especially as intangibles now make up a higher proportion of corporate value than ever before. In regard to meeting the information needs of a range of stakeholders, significant progress has been made through the Global Reporting Initiative as well as through the experiences and innovations of a number of companies in the development of their annual social and environmental reports. From these sources it is now much clearer what the ground rules should be for judging what is material about a company’s non-financial performance and what significant stakeholders expect to see reported. There are also a number of significant initiatives, involving GRI sector supplements and frameworks agreed by industry associations – such as has been done by the International Council on Mining and Metals – to aid comparison between companies operating in the same sector. But the principal focus of Kaevan Gazdar’s thorough and insightful book is how to ensure that reporting on non-financial performance can be made more rigorous, more quantitative and more clearly relevant to the management of core business challenges. It is certainly a frustration that within the financial community the progress made to date in

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Foreword

integrating the work of mainstream financial analysts and their ‘socially responsible investment’ colleagues has been disappointingly slow. It is sometimes marked by a seeming lack of mutual respect of the insights each brings to the process. There is a plethora of national-level initiatives around reporting requirements. The debate has been evolving at different speeds in different geographies and sectors. In Europe, for example, there is perhaps more intensive interest in environmental and social performance than in the United States. But within Europe there are differences with France and Germany putting much of their focus on employee-related ‘social’ issues and reports by many companies in the United Kingdom placing emphasis upon wider issues of business impacts on society at large. In Brazil, India or South Africa issues associated with poverty, development and HIV/AIDS normally loom large. In summary, non-financial reporting should aim to complement the story told by the short-term financials by enabling investors and other stakeholders to understand the underlying drivers of value. These drivers include strategy, reputation, governance, intellectual property, human resources, management of key impacts and stakeholder perceptions. It is taking longer to get to a consensus about how this is best to be done than I had hoped, but as practices evolve I am confident that what will emerge is a more rounded and forward-looking account of a company’s ‘health’ for investors and other stakeholders alike. Kaevan Gazdar’s book deserves attention and through its analysis helps to move the debate forward. Sir Mark Moody-Stuart Chairman of Anglo American plc, Chairman of the United Nations Global Compact Foundation

Acknowledgments

This book developed over a period of years in the context of a number of speeches and seminars, held in various European countries, and of different publications that came out during the same period. Klaus Rainer Kirchhoff, who runs Germany’s leading financial reporting agency, and with whom I have co-authored several books, has always been a stimulating sparring partner in the quest for new ideas and pragmatic solutions. André Habisch, founding director of the Center for Corporate Citizenship in Germany, has an unusually broad view of corporate responsibility, which he was kind enough to share with me. Mike Guillaume of e.com in Brussels is the ideal person to discuss approaches and strategies to reporting; he has invariably been very generous in finding time to discuss relevant issues. David M. Phillips of PricewaterhouseCoopers in England has over the years exchanged ideas and been a mine of information on best reporting practice. Mark Goyder, Founder and Director of Tomorrow’s Company in London, was a prime source of unorthodox perspectives. The author is much indebted to individuals in various companies across the world, who very kindly provided both further information and personal insights for the case studies in this book: Edward Bickham of Anglo American, Charlotte Grezo and Caroline Dewing of Vodafone (all UK), Stephane Quéré of Suez (France), Martin Tanner and Christine Elleboode-Zwaans of Novartis (Switzerland), Susanne Stormer of Novo Nordisk (Denmark), Monica Oberkofler of Gap, Susanne Sonderhoff and Lynelle Preston of Hewlett-Packard (all USA), Leanne Bremner of Canadian Imperial Bank of Commerce (Canada), Martin Hancock of Westpac (Australia), and V. Balakrishnan and John Ponvelil Philip of Infosys (India).

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Acknowledgments

It has been a great pleasure to collaborate with the team at John Wiley. Rachael Wilkie steered the manuscript through the approval phase, Samantha Hartley, Vivienne Wickham and Chris Swain provided a great deal of editorial advice, while Jenny McCall explored the marketing potentials of the book. Finally, Vidya Vijayan of Integra in Pondicherry (India) processed the book very efficiently through the various production phases.

Introduction Goodwill and Blue Skies? Getting a Grip on Nonfinancials

‘Once considered the Cinderella of corporate disclosure, nonfinancial reporting    is quickly taking its place alongside financial reporting as indispensable to assessing company value and future prospects.’ Sir Mark Moody-Stuart, successively Chairman of the Boards of Shell and Anglo American, is one of an increasing number of prominent leaders calling for a broader perspective on measuring and reporting value. A number of influential personalities agree with Moody-Stuart. Mervyn King, for instance, who chaired various Corporate Governance commissions in South Africa, has highlighted the ‘nonfinancial aspects of governance.’ And as far back as 1991, Robert G. Eccles, then a professor at the Harvard Business School, wrote ‘The performance measurement manifest’. In this path-breaking article, published in Harvard Business Review, Eccles called for a shift from purely financial figures to an emphasis on quality, market share and other nonfinancial measures. The question being: Is there a consensus on what nonfinancials are, so that entrepreneurs and managers can focus on them? The quick answer is: No. Classifications vary, depending on the credentials and interests of those propagating the issue. Sir Mark Moody-Stuart, for instance, has a strong sustainability bias, citing carbon emissions, labour standards and corruption policies, but also quality of governance. Mervyn King, when asked outright what he meant by the word, mentioned innovation, technology and human resources. And Robert Eccles has a clear business management perspective; for him, market share, quality, innovation and customer satisfaction are of central importance. Those seeking clarity on the nature of nonfinancials should be prepared to find a vacuum. Search engines like Google show thousands of hits; and financial media like the Financial Times and The Economist write widely on the subject. Definitions, however, are practically nonexistent. In fact, nonfinancials are rather like the minotaur, a monster with the body of a man and the head of a bull, who was kept by King Minos in a labyrinth until Theseus put a sword through him.

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Reporting Nonfinancials

The accounting profession tends to define nonfinancial assets as being physical assets like real estate and machinery. This is far removed from the general perceptions that tag the word onto anything from brands and customers to reputation and social responsibility. However, nonfinancials have a potent synonym: intangibles. Here a plethora of definitions exists: • OECD calls them ‘non-material factors that contribute to the growth and performance of firms and nations without being included in the traditional category of fixed assets’. • Baruch Lev, Professor at the Stern School of Business in New York and a world authority on the subject, uses the words intangibles, knowledge assets and intellectual capital interchangeably. • A UK Government White Paper refers to a company’s intangible assets as consisting of the skills and knowledge of its employees, its business relationships and its reputation. • IAS 38, the International Accounting Standards treatment of intangible assets, considers them to be non-monetary and without physical substance. Examples are computer software, patents and copyright.

CLOSING THE GAP BETWEEN BOOK VALUE AND MARKET CAP This author’s favourite definition comes from an American M&A consultant, who proclaims: ‘Both goodwill and blue sky are intangible assets.’ That, of course, is not exactly a meaningful approach to the subject. In general, intangibles apply more strongly than nonfinancials to assets that cannot be physically touched and that are hence not tangible. Nonfinancials, on the other hand, often serve as a synonym for Sustainability or Corporate Social Responsibility, as was the case in the 2004 ranking Risk & Opportunity: Best Practice in Non-Financial Reporting. This ranking was carried out by the British consultancy SustainAbility in cooperation with UNEP and Standard & Poor’s; the criteria have a strong sustainability slant and, indeed, former versions of the ranking used the term ‘Sustainability Reporting’. There is in fact a prime need for a coherent definition and classification. According to this author, nonfinancials are resources of significant value, that are rarely quantifiable but that both account for the gap between book value and market capitalisation as also contribute greatly to corporate reputation.

Introduction: Goodwill and Blue Skies?

3

Let’s look at the individual terms used in this definition: • Significant value: Leonard Nakamura of the Federal Reserve Bank of Philadelphia estimated that US investments in brands, human resources, Research & Development, etc., totalled around $1 trillion in 2000 and matched the private sector’s investment in physical assets like property and equipment. • Rarely quantifiable: What monetary value can a company legitimately put on its human resources or its reputation? • The gap: In 2004, the pharmaceutical corporation Pfizer had a market cap that reached $270 billion. Its book value barely reached $20 billion. The rest consisted of the market’s consideration of assets like patents, know-how and management skills. • Corporate reputation: Shell’s tribulations with Brent Spar and its involvements in Nigeria in the 1990s led to media flak and consumer boycotts, costing it a fortune in terms of both reputation and revenues. The ratio between book value and market cap is highly volatile. In 1999, during the heyday of the New Economy, it averaged 1 : 12 for a group of high-growth companies. Companies in sectors with strong knowledge assets far exceeded these ratios: Microsoft’s market cap has been more than 25 times as high as its book value. The same applies to companies with valuable brands. Coca-Cola is a case in point. Even conglomerates profit from the brand value attached to their constituent parts: GUS, the British holding company with a significant share in Burberry and the Argos Retail Group, reached a market capitalisation of £75 billion in 2004, with net book value barely reaching £1 billion. Nonfinancials are a vital factor in Mergers and Acquisitions. Goodwill, which includes reputation, brands and perceived strategic advantage, accounts for a large percentage of the purchase price. In many cases, goodwill far exceeds net tangible assets. A classic case was the acquisition of Rowntree by Nestlé in 1988. The Swiss multinational paid £25 billion for the British chocolate-maker, whose physical assets were estimated at only £05 billion. On the other hand, when Britain’s leading bank HSBC took over the US financial institute Household in 2003, the deal was moderately priced at 1.7 times the book value. Nonfinancial reporting can play a major role in presenting a company’s intangible assets and thus contribute to raising the purchase price, just as it can support high market cap. These belong to its most

4

Reporting Nonfinancials

important functions. The results of a survey carried out by the opinion research institute MORI (Table 0.1) highlight other benefits like enhancement of a company’s reputation and increasing stakeholder awareness. Table 0.1 Nonfinancial value drivers Top twelve measures∗ 1. 2. 3. 4. 5. 6.

Leadership Execution of corporate strategy Communication and transparency Brand equity Reputation Alliances and networks

7. 8. 9. 10. 11. 12.

Technology and processes Human capital Workplace organisation and culture Innovation Intellectual capital Adaptability

Top four benefits† 1. Enhances a company’s reputation 2. Stakeholders are increasingly interested

∗ †

3. Is important for business management decisions 4. Makes it easier for investors to understand how well the company is performing

Ernst & Young research. Survey of companies in Britain carried out by MORI.

The key question is: What should a company be reporting about? Obviously about those nonfinancials that create the most value. Jon Low, co-author of the book Invisible Advantage, poses the question: ‘Do you know how much of your company’s value is based on items that don’t appear on the balance sheet?’ Indeed, very few companies have a coherent answer to this question, although research carried out by the Cap Gemini Ernst & Young Center for Business Innovation indicates that around 35% of the decisions made by portfolio managers are determined by nonfinancial issues. Inability to get a grip on nonfinancials is a prime management deficiency. David Larcker, Professor of Accounting at the Wharton School, has warned that companies are failing to identify the right nonfinancial value drivers. According to him, ‘too much is based on management folklore and intuition. This leads to assumptions that are often half-baked or wrong.’ Seconding him in a Financial Times article entitled ‘Non-financial measures just don’t add up’, Robert Bruce highlighted the dangers involved in deciding that factors like employee

Introduction: Goodwill and Blue Skies?

5

loyalty and customer satisfaction are the key performance indicators. This is certainly true but, on the other hand, many companies are run on purely financial criteria, thus ignoring the foundations on which financial success are built. Defining and focusing on vital nonfinancial indicators is becoming a key management issue. Step 1: Classifying Nonfinancials Value drivers vary (see Figure 0.1), depending on countries, sectors and corporate priorities. That is why this book adopts a broadly-based classification of nonfinancials: Competitive Value This category encompasses customers, brands and markets. Competitive value tends to be the major nonfinancial for consumer goods manufacturers like Coca-Cola and retailers like Wal-Mart, but also plays an increasing role in the financial services sector. Brand value, customer base, market share: these and other variables influence the perceptions of investors, analysts and fund managers. Management Value A company’s strategy, its mechanisms and processes of corporate governance and also its ability to forecast future performance are important value constituents. Management skills are a vital asset for all business organisations, being particularly important for conglomerates like General Electric and Siemens, which both have complex business models. Governance has become one of the vital issues of the 21st century in the context of such scandals as Enron, Tyco and Vivendi. A host of ratings and rankings measure the governance performance of companies across the world. Future performance is probably the most potent determinant of share price; most companies, however, restrict their reporting to earnings forecasts and warnings, without providing a rationale for their prognoses. Human Resources Value The productivity, motivation and potential of the company’s workforce are in many cases its most vital asset. Obviously, this particularly applies to software producers like Microsoft and SAP, although it is

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Reporting Nonfinancials

equally true of companies in sectors where intellectual capital is not the vital success factor. Ethical Value Both in terms of strategies and reporting, this value constituent, which covers Corporate Social Responsibility, Sustainability and Stakeholder Dialogue, has exploded in amplitude since the mid-1990s. A company’s ethical value – as perceived by the media, by powerful NGOs like Greenpeace and Ethical Trading Initiative, and by its customers – can make or break its reputation. Shell and Nike are testimony to this premise. Broken reputations can detrimentally affect market cap, although there is no automatic connection between the two. Competitive Value

Ethical Value

• Embedding CSR • Balancing priorities • Managing issues

• Brand equity • Customer base • Market metrics

• Efficiency

• Strategic focus

• Commitment

• Governance

• Talent

• Forecasting

Human Resources Value

Management Value

Figure 0.1 Classification of important nonfinancials

Step 2: Adjusting to Regional Priorities Given this framework, companies need to decide not only on their own priorities but also on normative proclivities in the countries in which they operate. Alison Thomas of Price WaterhouseCoopers highlights regional preferences: according to her research, German stakeholders are attuned to information on quality control whereas the Scandinavians expect environmental benchmarks. This is indeed the case. Countries in Continental Europe, for instance, traditionally provide far

Introduction: Goodwill and Blue Skies?

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more concrete information on human resources than their counterparts in the Anglo-Saxon countries; this derives from mechanisms like co-determination and strong employee lobbies. The same applies to ethical value: • For historic reasons, most US companies see their social responsibility mostly in terms of community work. They in fact seriously underestimate public opinion abroad on ecological or biological issues. Monsanto ignored the reservations about genetically manipulated food in Europe at its peril; ExxonMobil clearly made the same mistake in dismissing the greenhouse effect and neglecting to invest in renewable energies. • Japanese culture and geography have influenced a special approach to corporate philanthropy and a strong degree of ecological orientation. Thus, the country’s sustainability reports have a strong environmental bias. • A stakeholder survey carried out by the PR companies ECC and Fishburn Hedges showed that while a large majority of British respondents expected CSR reports to include business and operational issues and be useful for investors, their German counterparts did not. American companies, such as McDonald’s, have reacted to this kind of regional diversity by producing their own CSR reports for Europe. In general, while Competitive and Management Value can be generally assumed to adhere to universalistic logic, Human Resources and Ethical Value are strongly determined by the cultural environment. Thus, companies need to identify, measure and report on nonfinancials with a uniform strategy, while modifying priorities on a regional level. Step 3: From Consciousness to Action Consciousness of the need to integrate nonfinancials into the managerial and reporting process is growing. The Swiss bank Credit Suisse, for instance, pointed out in its 2001 Annual Report: Credit Suisse Group’s market value is driven by its financials, and also by intangible values that cannot be captured in figures – such as the strength of its brand, its good reputation, the intellectual capital of its employees and the loyalty of its clients. The market acknowledges these values and prices them into sales forecasts and share valuation, though it does not yet do this on a standardized basis.

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Reporting Nonfinancials

A small group of pioneers, including the Danish pharmaceuticals company Novo Nordisk, the British energy provider BP and the Canadian bank CIBC, are well on their way to achieving a dual focus. These companies have a vision that transcends short-term return on equity. Profitability remains a vital issue, balanced however by broader priorities like market position, HR productivity and corporate responsibility. Leaders in these companies show an awareness of the complex interaction between parameters like governance, reputation, brand value and financial performance; their reporting increasingly reflects this awareness of multiple priorities. Instead of producing and distributing gigantic chunks of unsorted data and self-gratifying commentary – still the general reporting rule – these companies provide coherent disclosure and have the courage to be self-critical. This increases both their accountability record and their credibility. A rising number of companies have begun to focus on their nonfinancials and have reported on those issues. However, there is a signal lack of knowledge on why they should do so, what they should concentrate on and how they should go about it. These are the issues that this book addresses.

Part I THE WHY

Though your balance-sheet’s a model of what balance-sheet should be, Typed and ruled with great precision in a type that all can see; Though the grouping of the assets is commendable and clear, And the details which are given more than usually appear; Though investments have been valued at the sale price of the day, And the auditor’s certificate shows everything O.K.; One asset is omitted – and its worth I want to know, The asset is the value of the men who run the show. From: Journal of Accountancy, May 1938

1 True and Fair View? The Glaring Deficiencies of Financial Reporting

‘There must be a moral hidden somewhere in the observation that the Lord’s Prayer consists of 56 words; The Ten Commandments, 297 words; the American Declaration of Independence, 300 words. And a rough estimate puts the guidance on IFRS at about 1.4 million words!’ Kieran Poynter, UK chairman of PricewaterhouseCoopers, certainly made his point, though the comparison limps a bit. International Financial Reporting Standards (IFRS, formerly IAS), like the US Generally Accepted Accounting Practices (GAAP), are not stirring moral commandments. They are required to regulate the accountability of companies of various sizes and in different sectors. Indeed, accounting standards reflect the complexity of today’s business world. This said, there is little doubt that financial reporting is rich in detail and poor on clarity. Above all, it seems geared to outmoded priorities and procedures. The accounting profession in the USA has indeed produced the staggering quantity of around 5000 pages of accounting rules. However, as KPMG partner Bob Elliott points out: ‘At best, today’s financial statements are an obsolete product.’ In actual fact, the accounts published focus on the assets of the industrial age: inventory, machinery, buildings, etc. ‘Accountants are blind to the assets that really matter’, contends Simon Caulkin in The Observer. There have in fact been vociferous protests that the accounting profession has continued to ignore nonfinancials and play down their importance. Their logic is indeed: if you can’t count it, it doesn’t count. The question remains: Who can explain why Microsoft’s market cap far exceeds book value and has at times been larger than that of the US Big Three auto manufacturers added together? The company’s fixed assets are insignificant. But the Microsoft brand is trusted and feared across the world, its intellectual capital is immense and its business strategies are highly effective. And, last but not least, the Gates foundation spends more money than any other foundation on good causes.

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Those reading the company’s annual reports are none the wiser as to its fortes. Microsoft presents a series of catchwords on integrated innovation, responsiveness to customers and intellectual property without specifying or indeed quantifying major assets. The world’s leading software producer’s 10-K Note on Intangible Assets is a typically formal statement primarily addressing acquisitions. On the other hand, its Global Corporate Citizenship Report is a lot more specific, concentrating on issues like Internet safety and digital inclusion that are close to its core business. Microsoft is no exception. Most companies fail to address the ‘N’ question. SAP, a world leader in business process software, has a more systematic approach to reporting nonfinancials than Microsoft. And indeed, it provides relatively good insights into its innovation track record and customer service, while however failing to focus on the business environment or its intellectual capital. On the other hand, the German software producer has published various Innovation and Employee reports, giving an excellent overview of know-how exchange, personnel development, etc. But the fact remains that the reporting of two of the world’s best IT companies hasn’t kept pace with performance; both Microsoft and SAP fail to communicate their true value.

THE OLD ECONOMY’S REPORTING PARADIGM The accounting profession is well aware of these deficiencies. The Institute of Chartered Accountants in England & Wales published a study entitled New Reporting Models for Business, in which it pinpointed five limitations of traditional financial reporting: • It fails to address a broad range of users’ needs. • In reporting historical performance, financial statements ‘focus on lagging indicators and not leading nonfinancial indicators of future financial success’. • Its criteria for recognition of assets preclude the identification of relationship and knowledge assets on which modern business depends. • Contemporary reporting encourages readers to focus on summary earnings and to take a short-term approach.

True and Fair View?

13

• The information provided results in a huge gap between the information level of managers on the one hand and of investors and other stakeholders on the other. Thus, internal and external perceptions of corporate value tend to vary considerably. Basically, reporting adheres to an Old Economy paradigm that is fixated on tangible assets. A number of initiatives on both sides of the Atlantic have focused on improving the standards of business reporting, as opposed to conventional financial reporting. The US Financial Accounting Standards Board (FASB) has published several reports on the subject, but in practical terms, little has changed. Robert A. Howell, an authority on finance and accounting, pointed out in FORTUNE magazine that ‘the big three statements – income statement, balance sheet and statement of cash flow – are about as useful as an 80-year-old Los Angeles road map’. Accounting procedures tend to be not only formalistic but arbitrary, regardless of where they come from. A case in point is the measurement and treatment of intangible assets. For instance, IAS 38 includes within its purview acquired assets like copyright, customer lists and relationships, but excludes internally generated goodwill, brands, human resources, etc. The accounting dilemma is clear: IAS 38 addresses the issue of impairment, which can consist of a fixed amortisation or be subject to an impairment test on a yearly basis, depending on whether an asset has a restricted or indefinite life. The real issue is, however, how to determine the value of an intangible asset in the first place. Here, there is a dearth of viable solutions. This has led to concrete calls for a remodelling of accounting standards and procedures. As far back as 1995, management gurus Michael Porter and Robert Denham called on the Security and Exchange Commission (SEC) and FASB to develop a kind of GAAP for nonfinancials like customer satisfaction, process quality and workforce training. Two years before this, Peter F. Drucker had warned that conventional accounts were like an X-ray of the enterprise’s skeleton, thus not identifying a variety of diseases like cancer and Parkinson’s that could be fatal for a company’s health. In 2001, Thomas A. Stewart criticised in FORTUNE a plethora of meaningless statistics, highlighting the irrelevance of many traditional accounting measures. Practitioners agree: Walt Wriston, the veteran CEO of CitiCorp, approved of the fact that some banks were taking nonfinancials like trade names and patents as collateral.

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Reporting Nonfinancials

One management approach that clearly merges financials and nonfinancials is the Balanced Scorecard, developed by Robert Kaplan and David Norton. Expressly designed to balance, not eliminate, the financial perspective, the Scorecard includes three further perspectives: customers, business processes and ‘learning and growth’. It thus gives companies a larger management dashboard by guiding them to develop new metrics. But while the Scorecard has helped several companies – Sears Roebuck is perhaps the best-known case – to improve their operating results, it has not led to a sea of change in financial reporting. The same applies to more recent attempts to balance corporate priorities. In ‘The blended value proposition: Integrating social and financial returns’, published in California Management Review, Jed Emerson tries to develop integrated metrics for a company’s economic, social and environmental performance. However, there is little guidance as to how nonfinancials can coherently coexist together with their dominant financial cousins in the context of concrete reporting.

CHANGE REPORTING, NOT ACCOUNTING Why has financial reporting proved so resistant to change, despite many calls from influential quarters? The answer could well be: because of the way it has developed. In his treatise Modern Capitalism, the German economist Werner Sombart asserted that capitalism was inextricably interconnected with double-entry book-keeping. This kind of accounting dates back to the year 1494, when a Franciscan monk, Luca Pacioli, published his treatise on double-entry, based on early practice in the Italian city-states. Ever since, reporting has evolved around debit and credit, assets and liabilities. Pacioli’s system conquered the world, being described by Goethe as ‘one of the most beautiful discoveries of the human spirit’. Despite such enthusiasm, it wasn’t till the 19th century that bookkeeping developed in England, though Josiah Wedgwood used basic cost accounting, including calculating overhead costs, to keep his pottery factory in business in the late 18th century. Capital markets developed and the accounting profession came into being, first in Great Britain, then in the United States and other industrialised countries. One basic truth has remained: accounting is reactive, rather than proactive. It took the corporate failures of the Great Depression in 1929 for the American accounting profession to develop its own Generally

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Accepted Accounting Practices. In 1934, the SEC was founded to control the ‘full and fair’ disclosure of financial information. At approximately the same time, Alfred Sloan designed accounting reports at General Motors, while Donaldson Brown developed key ratios like Return on Investment at DuPont. Slowly, the internal world of management accounting and the external world of annual reports merged. The Financial Accounting Standards Board (FASB) was founded in 1973; similar boards developed in other countries. The investing community began getting hitherto confidential data. Key ratios and performance indicators burgeoned, with companies vying with each other to present fancy charts and flashy presentations. This was the Anglo-American model, emulated if not copied in other parts of the world. The traditional emphasis in Continental Europe has been on providing accounts for creditors, not for investors. This led to a defensive approach – to legalism rather than liberalism – but IFRS is expected to put an end to this kind of accounting particularism. Irrespective of cultural proclivities – for instance, French banks have strongly attacked the IFRS process, which is seen to be overly AngloSaxon – accounting is too embedded in traditional priorities to be able to radically change. Most reports, whether annual or quarterly, consist of an array of tables and notes, embellished by mundane commentary that rarely provides insights into the figures. Management Discussions & Analyses (MD&As) or Operating and Financial Reviews (OFRs) seldom give investors a coherent interpretation of the previous year, let alone a clear outlook to the coming year. Investor Relations presentations, often published on websites, put the company’s equity story across a lot more eloquently than conventional reporting does. However, they tend to be equally deficient on nonfinancials. Meanwhile, pressure is mounting on companies to be more explicit about their assets and potentials. In a worldwide survey of senior managers, fittingly entitled In the Dark, Deloitte discovered that 92% of the 250 executives interrogated by them believe that financial indicators do not capture their own companies’ strengths and weaknesses. The majority complained that they lacked key information on nonfinancial drivers of success, which made it difficult for them to take mid- and long-term decisions. Intriguingly, 73% disclosed that they are under increasing pressure to measure nonfinancial factors. These findings are confirmed by the results of surveys covering other stakeholder groups: the consulting company Broadgate polled US portfolio managers, 90% of whom expressed dissatisfaction with

16

Reporting Nonfinancials

financial reporting as a basis for their investment decisions. Indeed, the current standard of reporting makes it difficult for companies to expect an appropriate valuation in the capital markets. A PricewaterhouseCoopers survey in Singapore revealed that 71% of corporate respondents considered their share prices to be undervalued. In a knowledge-based economy like Singapore, such nonfinancials as intellectual capital, brand value and customer satisfaction are particularly important. PwC discovered a reporting gap between the information that chief executives perceived to be important and what got reported; this confirms the evidence provided by the Deloitte study. Dissatisfaction with the current state of financial reporting is also expressed by investors (Table 1.1). Anita Skipper, Head of Corporate Governance at Morley Fund Management, has been quoted as saying: A traditional financial report doesn’t necessarily tell you about a company’s culture, its research and development, its brands, how it treats its employees and its customers. We want to know as much as possible about these issues because they can be just as important to the future health of a company.

Table 1.1 The reporting gap Financial reporting

Nonfinancial reporting

• More than 500 years old • Highly formalised, strong standard-setters (GAAP, IFRS) • Addresses investors • Fixed reporting intervals (yearly, quarterly)

• 10–20 years old • Completely uncharted, no statutory requirements (GRI as voluntary code) • Addresses stakeholders (including investors) • Discretionary reporting (yearly/bi-yearly, etc.)

GETTING FORM TO FOLLOW FUNCTION Despite this pressure, it would be naïve to assume that accounting procedures are going to change radically. Accounting needs continuity, and financial reports have to be comparable over long periods of time. The American economist and presidential adviser John Rutledge has pointed out: ‘Monkeying with financial statements, for almost any reason, is a terrible idea.’

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This is undeniably true in accounting terms. However, accounting is by no means as objective as it often appears. The classic case of how accounting standards can distort results was the financial year 1993 of Daimler-Benz (later DaimlerChrysler). The company recorded a net profit of $733 million under German accounting standards (HGB, the German Commercial Code), while under USGAAP, it made a loss of $589 million, thus creating a staggering discrepancy of $1.3 billion. The real point, however, is that it was difficult for outsiders to judge whether the company was doing rather well or terribly badly. Thus, the function of accounting, being to provide a true and fair view of the company’s performance, was grossly perverted by the form, in this case the diametrically different accounting standards. The corollary of this simple verity is: Trying to introduce nonfinancials into financial statements is difficult at best, and trying to value nonfinancial assets is like squaring a circle. A prime example is Skandia. It pioneered the concept of Intellectual Capital (IC) in the mid-1990s, publishing a series of supplements to its annual reports. This was an intellectually stimulating attempt to pin down intangible assets like human capital, structural capital and customer capital. However, Skandia faced the same problem that confronted the Balanced Scorecard: it was trying to harmonise indicators that don’t fit together. Beyond this, Skandia’s scope was too narrow: it considered intellectual capital to account for the entire difference between book value and market cap, whereas the kinds of know-how, skills and potentials covered by IC only account for a part of the gap. This became clear when the Swedish insurance company experienced a major scandal concerning excessive bonuses and management perks in the early 21st century which led to a spectacular exit of top management. While its 2003 Annual Report conceded that Skandia’s reputation and brand had suffered in the short term, the company was understandably unable to quantify or even estimate in qualitative terms this loss, although it was obviously detrimental to market cap. After the scandal, governance became far more relevant than intellectual capital – an issue on which the company had in any case stopped reporting. There is in fact a primary difference between a company’s accounts and its reports. Even in the ethical community, financial accounting is considered reasonably sound. John Elkington, founder of the consultancy SustainAbility, coined the term ‘Triple Bottom Line’, which postulates that companies need to have not just a financial but also an environmental and social balance sheet. He has estimated

18

Reporting Nonfinancials

that, in general, financial accounting would score 8 out of 10 points, as against 3–4 out of 10 for environmental accounting and 1–2 out of 10 for social accounting. Elkington’s world view is predominantly focused on ethical value; however, the same problems are experienced in trying to extract precise numbers and reliable ratios from brands, customer relationships, human resources and other nonfinancials. Human resources, for instance, are only recorded as a cost. According to a Concept Statement published by FASB, a cost is an economic sacrifice. So the most important resource most companies own is really a sacrifice! This reminds the author of how Arnold Schwarzenegger, the film star and California governor, responded when asked who his famous writers were. ‘My favourite fiction writers’, he said, ‘are studio accountants.’ The point being of course that the most vital nonfinancial asset a film studio owns are its actors and directors, none of whom plays any role in the balance sheet. For historic and structural reasons, accounting is massively overclassified; function literally follows form. Reporting on nonfinancial issues on the other hand is not only not classified, it’s completely uncharted.

NONFINANCIALS: THE OVERHEADS OF THE 21ST CENTURY Financial reporting generally presents a wealth of detail, while lacking coherence. Companies that focus on compliance may manage to produce reports that save them from prosecution. However, in terms of transparency and communicative quality, a compliance fixation can lead to substandard reporting. According to Mike Guillaume, one of the world’s leading experts on reporting and founder of a major international reporting ranking, Enronitis has played a major role in leading companies to adopt a ‘compliance first’ attitude. In the wake of the scandals surrounding Enron, Worldcom, Tyco and several other companies, accounting became an exercise in caution rather than transparency. As the results of the Annual Report on Annual Reports – a yearly ranking of best reporting practice across the world – show, American reports have clearly lost the edge they had in the 1980s and 1990s. In the 2000 ranking, 13 US companies were among the Top Twenty; five years later, not a single corporation from the United States reached the top bracket (Table 1.2).

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Table 1.2 World ranking shows decline of American reporting∗ 2000: Top Twenty 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Ford Motor Alcoa McDonald’s SAS United Technologies Bank of Montreal Sara Lee Anheuser-Busch Volvo Merck Eli Lilly Knight-Ridder IBM Coca-Cola Danone Royal Bank of Canada Quaker Oats Johnson & Johnson Ahold Electrolux

2005: Top Twenty USA USA USA Sweden USA Canada USA USA Sweden USA USA USA USA USA France Canada USA USA Netherlands Sweden

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

CIBC TELUS SCA Trelleborg WPP James Hardie Adidas-Salomon Danone TNT CLP Stora Enso Philips Woolworth Electrolux Sasol Novartis SAS Wienerberger Securitas BMO Financial

Canada Canada Sweden Sweden UK Australia Germany France Netherlands Hong Kong Finland Netherlands Australia Sweden South Africa Switzerland Sweden Austria Sweden Canada

∗

Results of the Annual Report on Annual Reports, run by enterprise.com in Vilvoorde, Belgium, since 1996.

‘Some reports seem to be written for regulatory bodies instead of being aimed at investors and other stakeholders’, according to Guillaume. The MD&A sections in American reports are correspondingly weak, while the standard of European reporting is steadily rising, both in financial and nonfinancial terms. Canadian companies, in particular banks like CIBC and BMO, have made enormous progress in uniting the two worlds; CIBC’s Annual Accountability Report for instance immaculately presents key figures and a detailed breakdown of the year’s results, a detailed outlook with priorities for the coming year as also valuable information and commentary on clients, employees, governance and CSR. Nonfinancials are the overheads of the 21st century. The major challenge facing corporate management is how to grasp their importance, define their parameters and report on them on an ongoing basis. The accounting concept of a going concern has so far been defined in defensive form. According to IFRS, it applies to companies that have neither the intention nor the need to liquidate or cease operations within 12 months of the balance sheet date. Auditors are, however, supposed to consider both financial indicators and nonfinancials, like loss of

20

Reporting Nonfinancials

key management or of market segment, when considering whether the company audited is a going concern. Reporting on financials and nonfinancials needs to present the case for a company as a going concern in broader terms – in other words, present the case for its reputation on financial markets and with stakeholders. None of this can happen from one day to the other. Chris Fay, the former Chairman of Shell UK, was right in commenting: ‘We are clearly at the start of a long and difficult journey towards a new type of business reporting    ’ The question is: How can today’s value drivers be reflected in corporate reporting? As in accounting, reporting nonfinancials only makes sense if a long-term view is taken. No one would dream of disclosing ROI or EVA once only, and never again. Similarly, brand value, employee loyalty, customer satisfaction, social rating and many other indicators only make sense if they are consistently measured and reported. Keynes might have been right in pointing out that, in the long run, we are all dead, but in the meanwhile, consistency counts.

Box 1.1

Boise International: Fictive Case Study (1)

On a cold afternoon in April 2007, Brian O’Neill sat morosely at his desk on the top floor of the Boise skyscraper in Brussels. Actually, he had nothing to complain about. Boise International, a multinational conglomerate based in Belgium with branch offices in 25 countries across the world, had just published its annual accounts for the year 2006 and shown substantial growth during the previous year. Turnover was up by 15% and net revenues had increased by a respectable 9%. As CEO of Boise, O’Neill could be proud of himself. Except for the fact that a sizeable chunk of his and his fellow directors’ salaries were pegged to Boise’s stock performance – and the company’s share price and market cap had remained stagnant for the last three years. O’Neill, born in Ireland and educated at Harrow and Cambridge, kept leafing through his company’s annual report, searching for reasons why financial markets priced Boise at a mere E20 billion, far below benchmarks like General Electric or even Siemens. There were good results from all three divisions: consumer finance had grown revenues by a stunning 18%, medical products was up by 7% and even energy, a notoriously sluggish business area, had registered a 3% rise in income. So why hadn’t the world noticed? O’Neill summoned his CFO, Giovanni Gabrielli and the new Head of IR, a young American called Harry Gremling, for a quick meeting and confronted them with the evidence.

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Gabrielli immediately pulled a long face. He had spent literally every weekend last autumn working to cope with new IFRS stipulations. Boise had successfully dealt with all compliance issues; that in itself was a great achievement, wasn’t it? Financial markets were notoriously volatile, he implied, and share pricing was not something that serious managers should bother with. O’Neill shook his head in exasperation, trying not to fuel his own prejudices about Italians and outdated accounting procedures, and looked at Gremling, who shrugged his shoulders and pointed out: ‘I can tell you why. We simply don’t have a proper equity story. Analysts inevitably do a sum-of-the-parts calculation and then make a conglomerate discount. At the last analysts meeting, one of them told me they don’t know what kind of value drivers we have or even what our strategy amounts to.’ O’Neill got even more worked up: ‘What about our marketing research in consumer finance? GE can’t match that. And I thought everyone knows that our solar technology is world class. Beyond which, we got a prize for our corporate volunteering projects from the EU. But of course, nothing of that kind ever gets into our annual report.’ Gabrielli mumbled that reports were legal documents with no space for loose narrative. Gremling quashed that however by lauding the strategic focus of GE’s statements to stakeholders in its annual reports, while praising Siemens for highlighting success factors in its segment reporting. ‘I want action’, said O’Neill. ‘More visibility and reputation. By this time next year, I want to be invited to speak on corporate transformation at the World Economic Forum in Davos, I want Harvard Business Review to be covering us as best practice.’ Gabrielli stared at the floor, Gremling nodded and shrugged his shoulders. O’Neill convened a top management meeting for the next month. Boise: Corporate Snapshot Founded: Headquarters: Divisions:

Sales∗ Net income∗ Employees∗ ∗

1897 Brussels Consumer finance Medical products Energy and power supply E28 billion E850 million 180 000

Figures from Annual Report 2006.

2 Open Sesame? Nonfinancial Reporting between Pressures, Paradoxes and Potentials

‘Nonfinancial accounting is now too serious to be left to amateurs’, proclaimed The Economist in a valedictory Leader published towards the end of 2004 and appropriately entitled ‘Corporate Storytelling’. The magazine was commenting on the latest version of a ranking put out by the consultancy SustainAbility in cooperation with UNEP – and, for the first time, Standard & Poor’s. The Economist was obviously impressed that another pillar of the financial establishment, S&P, had extended its support to the task of professionalising reporting on such topics as intellectual property, human resources and ethics. The magazine’s advice, delivered with well-meaning severity, is highly relevant: ‘There is still too much waffle about good intentions in even the best reports. Just because such reports are nonfinancial does not mean that their message cannot be conveyed in figures.’ Quantification, materiality and sector relevance are indeed the call of the hour. Unlike the Ali Baba and the Forty Thieves tale, there is no open sesame formula for unleashing the power of nonfinancials – no holy grail that can suddenly be discovered. Since the mid-1990s, there has been a huge rise in the quantity of reports published. In 1993, fewer than 100 reports were produced across the world, according to a study carried out by Corporate Register in cooperation with ACCA. Ten years later, 15 times as many reports were being produced. More than 50% of reporting came from Europe, with the Americas and Asia-Australia trailing with 20% each. However, most reporting has a strong ethical slant. As mentioned in the Introduction to this book, many companies simply equate the term ‘nonfinancials’ with CSR or Sustainability, overlooking the amplitude of issues involved. At first sight, it is impressive that more than a third of the reports include independent verifications or ‘assurances’, as they are now called, and that a rising number of reports adhere at least in principle

24

Reporting Nonfinancials

to the standards set by the Global Reporting Initiative (GRI). However, basic questions of scope, relevance and coherence remain. Materiality is a prime issue: what are companies reporting on and why? Corporate Governance, for instance, is often a legalistic exercise rather than an authentic coverage of management control and ethics. John Elkington of SustainAbility has likened many reports to ‘Frankenstein’s monsters’, with loose bits of information piled together into untidy heaps. Financial reporting may be overformalised, as pointed out in Chapter 1, but nonfinancials certainly lack a solid framework or a set of rules like GAAP or IFRS. According to the Centre for Business Performance at Cranfield University, reporting tends to be ‘discursive’, which is a polite way of saying wishy-washy. Metrics are admittedly difficult to define and measure; most companies do what they feel like doing, or what they feel pressured to do, in terms of PR. Thus, companies like Nike and Adidas that have been attacked for tolerating sweatshop practices on the part of their suppliers, adopt a strong focus on supplier surveillance and stakeholder dialogue. Companies in other sectors are less vulnerable to attacks and are correspondingly indifferent. Cranfield research revealed that less than 1% of space within the IT sector of the annual reports of British companies was devoted to nonfinancials, though the worth of these enterprises lies largely in know-how and knowledge-based products. When published, information tended to be descriptive and self-laudatory. However, nonfinancial reporting is definitely improving. SustainAbility, which carried out six benchmark studies between 1994 and 2004, came to this conclusion. Its Global Reporters 2004 Survey focused on processes rather than performance, using a ‘materiality multiplier’ to ascertain the extent to which companies identified and prioritised key issues. Similarly, the Accountability Rating 2005 organised by CSR network and AccountAbility ranked companies according to how they adopted responsible practices, with particular emphasis on stakeholder engagement, governance and assurance. Here also, the general standard of reporting was higher than in the same rating carried out the previous year. In several respects, both rankings came to the same conclusions:

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• European companies were in the forefront, with US companies lagging particularly in terms of stakeholder engagement and assurance. • Companies in sectors like energy and transportation generally fared better than enterprises from other sectors, reflecting a greater degree of risk-oriented awareness. • The difference between best and worst practice was massive. In the Accountability Rating, which ranked companies belonging to the FORTUNE Global 100, BP reached a score of 78% and ranked No. 1. The American International Group (AIG), one of the world’s leading insurance companies, ranked 91, reaching a paltry 6%. • A small pioneer group of companies was far ahead of the pack. Hit lists often ended up with the ‘usual suspects’. For instance, the top seven companies in the Global Reporters Survey of 2002 were all among the Top Ten two years later (Table 2.1). Table 2.1 Britain in the forefront: Top ten nonfinancial reporters Global Reporters Survey 2004∗ 1. Cooperative Financial Services 2. Novo Nordisk 3. BP 4. British American Tobacco 5. BT Group 6. BAA 7. Rabobank 8. Rio Tinto 9. Royal Dutch/ Shell 10. HP ∗ †

Accountability Rating 2005†

UK

1. BP

Denmark UK UK

2. Royal Dutch/Shell UK/Netherlands 3. Vodafone UK 4. HSBC Holdings UK

UK UK Netherlands

UK

5. Carrefour 6. Ford Motor 7. Tokyo Electric Power UK/Australia 8. Électricité de France UK/Netherlands 9. Peugeot

France USA Japan

USA

USA

10. Chevron

France France

Organised by SustainAbility in cooperation with UNEP and Standard & Poor’s. Organised by AccountAbility in cooperation with CSR Network.

PRESSURES: REGULATORS, INVESTORS AND PUBLIC OPINION At present, nonfinancial reporting is an unregulated ad lib activity. Its quality depends on the initiative of top managers or specialists who

26

Reporting Nonfinancials

voluntarily provide transparency. However, pressures are mounting from various sides. The EU Accounts Modernisation Directive prescribes a Business Review in the annual report providing an analysis of the environmental and social aspects of the company’s business. This Directive applies to all large and medium-sized companies in the Union from 2005 onwards. The British government abandoned its initial plans to go beyond the EU Directive and has abolished mandatory Operating & Financial Review reporting. Other European countries have adopted more explicit procedures. France has required all listed companies to report on social and environmental issues in their annual reports from 2002 onwards. The Scandinavian countries are also in the forefront of ethical reporting: Denmark passed a Green Accounts Act back in 1995, while Norway and Sweden have tightened up their regulations. In the USA, the Financial Accounting Standards Board (FASB) explored rules requiring companies to disclose their intangible assets. The FASB project focus was broader than in Europe, including brands, customer information and technology. Similarly, the Securities and Exchange Commission (SEC) set up a commission to concretise the issues involved. Significantly, FASB discontinued the Intangibles project in 2004 and indeed, compliance has become a more central issue in America in the context of the scandals at Enron and Co. Pressure is also mounting from the financial community. Investors on both sides of the Atlantic are increasingly demanding substantial information on nonfinancials. The ‘Investor perception study’ published by Investor Relations magazine in 2005 revealed that 70% of the US investors and analysts surveyed were in favour of intangible assets being valued on the balance sheet, specifically mentioning patents and R&D. Ernst & Young research shows that 35% of investor decisions are taken on the basis of nonfinancial performance indicators. Pension funds are taking the initiative in pressurising companies to take action. The Enhanced Analytics Initiative – a combined effort on the part of asset managers from Britain, France, Germany and Holland – has encouraged sell-side analysts to cover corporate performance on nonfinancial issues by allotting a minimum of 5% of their commission budgets to reward effective analysis in this area. Regulatory and market pressure is riding on a wave of public opinion. Research carried out by the research company GlobeScan in North

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27

America, Australia and Europe indicates that the majority of consumers is influenced by nonfinancial reporting to buy a company’s products or recommend it to other consumers. A survey of opinion leaders in Europe carried out by the PR agency Porter Novelli revealed the startling fact that 74% of all respondents were in favour of mandatory reporting. These findings are confirmed by research carried out by the Institute of Chartered Accountants in England and Wales. Of those polled, 60% believed that regulations could lead to reporting progress; only a minority believed that the issue could best be resolved by market forces. Thus, there is a clear call for a visible hand to pressurise companies towards increased disclosure.

PARADOXES: A SINGULAR LACK OF CLARITY AND CONCRETENESS The philosopher Alfred North Whitehead is credited with having invented the ‘Fallacy of Misplaced Concreteness’. Basically, the fallacy pinpoints our belief that something is concrete reality when it is in fact more a belief, opinion or theory. Nonfinancials would be an excellent case study for this fallacy. As we saw in the Introduction, no clear definition exists. Nor is there a consensus on priorities. The most concrete classifications come from GRI and from such indices as the Dow Jones Sustainability Index and the FTSE4Good. These arbiters have a strong ethical slant; indicators like brands, customers, strategy and outlook tend to get overlooked. Equally, the FASB definition of intangible assets ignores brands and human capital. However, these organisations are far closer to corporate reality than official bodies like the Multistakeholder Forum of the European Union. This impressively named working group with members from business, trade unions and civil society produced a report of 120 pages full of well-meaning platitudes in 2004 after almost two years of deliberations. Significantly, no agreement was reached on the issue of nonfinancial reporting; the Forum in fact arrived at a meaningless compromise between voluntary and mandatory requirements. Given this kind of miasma, it would seem that any kind of categorisation or templates is the call of the hour. Quantification can, however, be counterproductive. As John Plender indicates in his book Going off the Rails, brand valuation has been developed with different methodologies. However, the stock markets have not accepted the numbers

28

Reporting Nonfinancials

involved as relevant. Plender points out: ‘As with other intangible assets, judgements about brand values, even when dressed up with fancy valuation models, are too subjective to be very helpful.’ The same applies to intellectual capital: pseudo-exactitude is quickly seen as being a sham. A further paradox is that Intangibles are accounted for when acquired but not when self-generated. A prime example is goodwill, which accounts for the difference between purchase price and book value. It encompasses the quality of a company’s R&D, its brands, the quality of its management, etc. Intangibles expert Baruch Lev refers to this discrepancy as an ‘accounting asymmetry’. Basically, it represents the discrimination of inherent values in favour of acquired values. Nonfinancials are meant to go beyond financial disclosure and provide stakeholders with a deeper, more balanced view of the company. What happens, however, when the opposite is the case? In their Harvard Business Review article ‘Coming up short on nonfinancial performance measurement’, Christopher D. Ittner and David F. Larcker pointed towards companies that measure their performance according to the wrong indicators; the number of patents filed or the level of customer satisfaction can be misleading as seismographs. Based on an empirical study, Ittner and Larcker identified four major mistakes: 1. Companies failed to choose the right value drivers; often the measures chosen were not linked to corporate strategy. 2. The link between nonfinancial performance in areas like customer loyalty and employment retention on the one hand and financial results on the other was seldom scrutinised; many companies considered the links to be self-evident. 3. Companies were often mistaken about the significance of their performance targets: according to the authors, 100% customer satisfaction did not necessarily generate increased revenues. 4. The metrics used to measure performance lacked statistical validity and reliability. These findings have obvious consequences for reporting. Irrespective of how professionally a company practises accountability, it can mislead stakeholders – in good faith or manipulatively – by concentrating on the wrong issues.

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Similarly, directors and managers interviewed by Deloitte for their study In the Dark almost unanimously agreed that many indicators not dealt with in financial reporting were of critical importance for corporate success: 97% of the directors identified customer satisfaction, 96% identified product or service quality. Significantly, senior managers were less convinced that excellence in nonfinancials was pegged to the bottom line. Gary Benanav, ViceChairman of New York Life Insurance, echoed the view of Ittner and Larcker by expressing scepticism: All our senior managers are focused on nonfinancial measures, but there is no direct link between nonfinancial measures and financial rewards. If they’re not linked to financial measures you don’t get paid for them. You can pick any of these nonfinancial measures and you can achieve them. And the question is, so what?

POTENTIALS: PROFESSIONALISATION ON THE MARCH Nonfinancials are harbingers of a fundamental change in the links between corporate strategy, financial controlling and communications. For many years, these corporate functions coexisted in their separate worlds; the qualifications and personalities of the managers involved varied as profoundly as their roles in the organigramme. Increasingly, however, departmental barriers are disappearing while leaders are awakening to the need for an integrated approach to addressing vital issues. A McKinsey survey of more than 1000 directors showed that 70% wanted to know more about customers, competitors, market share, brand strength and other factors. This is precisely the information that corporate reporting is currently deficient in providing. Only companies that monitor a broad range of indicators can communicate accordingly. The Balanced Scorecard is one example of the new mix between financial and nonfinancial priorities. The financial perspective is balanced by a corresponding emphasis on customers and internal processes. Similarly, Pricewaterhouse Coopers’ ValueReporting concept provides a coherent framework for disclosure. It identifies reporting gaps in various sectors and also defines the gulf between investor expectations and corporate reporting performance. For instance, banks tend to lag in information on market growth, corporate strategy and quality of management, while pharmaceutical

30

Reporting Nonfinancials

High

companies need to place more emphasis on product innovation and customers. Nonfinancials in fact provide the key to the bottom line. Robert G. Eccles, a former Harvard Business School professor who collaborated with PwC managers in authoring The ValueReporting Revolution, says that the Holy Grail he and others are seeking is the relationship between financial and nonfinancial results. ‘We seek to make sustainability reporting as routine and credible as financial reporting in terms of comparability, rigour, and verifiability’, asserted former GRI director Allen White, at a Conference Board Leadership Conference in 2001. Basically, this is what nonfinancial reporting needs to achieve. Its greatest task is to unite the dynamism of the CSR and Sustainability community with the stability of the strategy, marketing and HR establishments. That involves adopting a systematic approach to the entire process of reporting. Setting priorities is the first step. Nonfinancials can be important because of their financial significance, and this is obviously true of brands and strategy. Equally, issues like CSR or Sustainability are high priority for reputation reasons, even if their financial impact is often negligible (see Figure 2.1). Companies are well advised to

Brands

CSR/Sustainability Customer Satisfaction Human Resources

Reputation

Governance

Low

Strategy

Low

Financial Significance

Figure 2.1 Nonfinancial reporting: Varying priorities

High

Open Sesame?

31

assess the relative importance of various value segments before starting to report on them. These are the value segments on which Part II focuses.

Box 2.1

Boise International: Fictive Case Study (2)

Personal Notes of Company Secretary Jan van Dresen at the Board Meeting on 15 May 2007 CEO Brian O’Neill started the meeting by restating his line of thought. Boise was undervalued on the stock exchange and largely overlooked by the media. This needed to change as soon as possible and reporting was one way of achieving a transformation of the company’s profile. He referred to the Balanced Scorecard concept developed by Kaplan and Norton; financial performance was only one measure of excellence. Why was Boise ignoring customer expectations, internal processes, intellectual capital, etc.? Renée Greuze, the Swiss Head of the Energy division, responded by saying that she had a large amount of data on customer groups, market shares in different countries, etc. No one had ever asked her to disclose them, but if Brian wanted something published, she could provide loads of material. Beyond that, she was considering joining the Global Environmental Management Initiative and remembered reading a sound guide to transparency published by GEMI.1 Gremling immediately promised to locate the guide and to circulate it to all Board members. O’Neill nodded approvingly; he had insisted that the Head of IR attend the Board meeting and was obviously gratified about the young American’s show of initiative. After hesitating for a moment, Heinrich Wassersack pitched in with a question. What was O’Neill really looking for? The German Head of R&D, considered to be one of Europe’s leading physicists, said he could offer facts and figures like the company’s research investment or the

1 Global Environmental Management Initiative: Transparency: A Path to Public Trust. September 2004.

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Box 2.1

Continued

number of patents it had registered. He didn’t, however, know whether people such as analysts and fund managers would be interested in that kind of information. Boise, he modestly indicated, was certainly in the forefront of medical innovation and also played a pioneer role in solar energy development. Arun Desai chimed in next. The Indian-born Director of Marketing and Sales couldn’t help pointing out that Boise lagged far behind General Electric and Siemens in terms of profiling its technical expertise and that he had mentioned this time and again without anything tangible happening. ‘As a marketing man, I could see us presenting both our technology and our brands a lot better. I would however warn against going in for brand valuation; I certainly admire Infosys’s2 regular reporting, but with our three business divisions, we’re a lot more complicated than a software company is.’ Gremling, who had been fidgeting a bit while Wassersack and Desai were expounding their ideas, said that Boise needed proper performance reporting. This is what providing a true and fair view of the business was about. CFO Gabrielli muttered that materiality was vital; Gremling, sensing that O’Neill, to whom he reported, was on his side, immediately countered by stressing the need to quantify as much as possible. ‘It simply means developing new performance indicators. We’ve got to develop our own framework. Nothing I’ve seen so far has really convinced me.’ O’Neill wound up the meeting by nominating Gremlin as leader of a new Reporting Value Drivers project. He was to follow a twopronged approach: first, get input from the three business divisions, analyse the quality of the information available and develop Key Performance Indicators wherever relevant. And parallel to this: gather information and insights from the central departments, ‘including human resources’, O’Neill added, in a slightly reproachful tone of voice. Francis de Ballardé, Boise’s French Head of People, had spent his time staring into space as if the meeting had nothing to do with his brief. He now hastily nodded acquiescence. Gremlin was to report regularly to O’Neill. ‘Our goal is to radically improve our profile by 2008’, the CEO concluded.

2 Infosys is a leading Indian software and services provider that regularly calculates and reports the value of its brand.

Open Sesame? Boise: Board of Directors and Senior Management Peter Hewett Brian O’Neill Giovanni Gabrielli Henry Hoare José Fernandez Renée Greuze Harry Gremling

Chairman CEO CFO Head of Consumer Finance division Head of Medical Products division Head of Energy division Head of IR, Project Leader, ‘REPORTING VALUE DRIVERS’ Arun Desai Director of Marketing & Sales Francis de Ballardé Head of People Jan van Dresen Company Secretary Heinrich Wassersack Director of R&D Heidi Ziegler Head of CSR

33

Part II THE WHAT

Nonfinancial factors are widely regarded as extremely important drivers of success for a company, yet they receive considerably less attention than financial data from the board and senior managers. From: In the Dark. What boards and executives don’t know about the health of their businesses. A survey by Deloitte in cooperation with the Economist Intelligence Unit.

3 Competitive Value Brands, Customers and Markets

‘If all Coca-Cola’s assets were destroyed overnight, whoever owned the Coca-Cola name could walk into a bank the next morning and get a loan to rebuild everything.’ Carlton Curtis, former Vice-President Communications of the world’s leading soft-drink producer, is credited with this quote, that puts into a nutshell what nonfinancials are really worth. Coca-Cola, of course, is the highest priced brand in the world, according to the yearly Interbrand survey. It also has an unparalleled market position and great customer loyalty. Competitive value is a complex equation comprising brands, customers and markets. These in turn are strongly connected with corporate strategy and management. As Coca-Cola’s CFO James Chestnut once pointed out, his company’s market cap is the sum of its brand value and its management systems. So how does the world’s top soft-drink maker communicate these values? The annual reports of the Atlanta-based corporation are a joy to look at, because they present the brand each year in a fascinatingly different way. Indeed, the Coca-Cola approach is subliminal rather than substantial. When it gets to the nitty-gritty of brand value and strategy, the world champion is less convincing. It tends to laud its own brand portfolio, mention new brands, count its ‘unparalleled brandbuilding experience’ among its core competencies, and cite significant brand support expenditures. In its 2004 Annual Report, Coca-Cola stated its intention to re-energise its brands by increasing investment in marketing and innovation by $350–400 million on a permanent yearly basis. But such data is not linked to strategy or to specific market goals. The company’s website also offers fragmentary information rather than orientation. This is obviously more a disclosure rather than a management lag; like many other companies, Coca-Cola regularly measures its brands on a global basis.

38

Reporting Nonfinancials

Its biggest soft-drink competitor provides a vivid contrast. PepsiCo’s reporting is backed by an array of statistics and comparative rankings. These include regularly published tables with: • Largest food brands and top-selling snack chip brands in US supermarkets • Largest PepsiCo brands • Market shares in the US soft-drinks industry • Consumers’ ratings of the healthiest brands • World’s leading food and beverage companies. PepsiCo’s brand presentation is all the more convincing because the company does not hesitate to highlight areas in which it isn’t the No. 1: it has ranked second among the major food brands in American supermarkets and in the US soft-drinks industry, trailing Coca-Cola. It has also published rankings showing it in No. 3 or 4 position worldwide in the food and drinks industry. This kind of candidness is rare in many sectors; most companies go in for cherry-picking, highlighting positive facets and ignoring negative information. They thus undermine their own credibility, since most reporting recipients have other sources of information. Beyond the facts and figures, PepsiCo gives a brief overview of its portfolio and its strategy. Its portfolio, which is remarkably balanced and includes more than 10 brands that each achieve yearly sales of over $1 billion, is the company’s USP. PepsiCo’s Head of IR once pointed out that the company was just trying to give investors a perspective. This is exactly what PepsiCo’s reporting delivers. Customers and markets are less explicitly explored, though the company does make a good case for pinpointing health-oriented consumers and has developed the concept of an ‘energy balance’. It also briefly characterises the nature of its customers in the Management’s Discussion and Analysis (MD&A) section of its annual report. However, the company’s Competitive Value does have a strong brand bias.

A. BRANDS: ENGINES OF GROWTH AND REPUTATION Brands (see Table 3.1 and Figure 3.1) are a nonfinancial microcosm par excellence. Their vital importance as a source of corporate value is readily accepted in Merger & Acquisition transactions. Ford paid

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39

E62 billion for the Jaguar brand, while Altria (Philip Morris at the time) bought Kraft for more than four times its book value. Despite this, reporting provisions tend to be hazy at best:

• IAS 38 obliges companies to account for acquired goodwill in their balance sheets, but no provision needs to be made for existing brand value. • FASB 142 protects the long-term value of acquired brands in accounting years with low sales and profit margins. • British accounting regulations (FRS 10 and 11) are similar. Respected experts have endorsed this approach. Sir Adrian Cadbury, for instance, has been quoted as saying: The market value of a company’s brands can only be established objectively when their ownership is transferred. Any other form of valuation is by definition subjective.

The British accounting view on brands has also been strongly influenced by a report carried out by the London Business School as far back as 1989. LBS argued against valuing brands, citing problems in reaching ‘a sensible and useful premise of value’ and also criticising the ‘subjective judgements’ involved in the valuation process. The Institute of Chartered Accountants, which sponsored the LBS study, has since opposed quantifying brand value. However, spokesmen of the Institute have repeatedly called for more narrative information on brands and, indeed, a separate chapter on brands in the annual report or a section in the MD&A/OFR seems to be the most pragmatic way of progressing on the issue. Britain’s Accounting Standards Board calls for a commentary on brand equity, which is certainly a step in the right direction. A Morgan Stanley research paper came to the conclusion that a successful brand strategy – this involving high brand awareness + positive brand attitude – leads to a stock premium between 2 and 9%. Reporting needs to focus on a company’s strategy, while citing valuations – specially those of specialised agencies like Interbrand and CoreBrand. Calculating Brand Value    Interbrand’s survey of brand value, the Global Brand Scorecard published by Business Week, is certainly the world’s best-known estimate. However, similar estimates are published by CoreBrand, Landor,

40

Reporting Nonfinancials

BrandEconomics and other agencies. Inevitably, calculation models tend to differ, focusing on price premium, earnings valuation, market value or other indicators. Beyond this, methods have to adjust to the parameters involved. As John Goodchild and Clive Callow point out in their book Brands: Visions and Values, retail brands require far more complex evaluations than product marques. At the same time, there is a clear need for action. A survey published by Brand Finance in 2000 revealed that more than 70% of the analysts and managers interrogated expected companies to provide more information on brand value. However, the number of companies accounting for brand value had decreased in the last few years. Reporting on an empirical study in his book Brand Asset Management: Driving Profitable Growth through your Brands, Scott M. Davis writes that only 40% of the companies measured brand value, and half of those who did were dissatisfied with their own methods. One honourable exception to the general rule is Infosys. The Indian software provider values its corporate brand on a yearly basis; brand value is a part of its balance sheet. The company uses a consistent methodology oriented towards brand earnings and publishes both the mode of calculation and important ratios such as brand value as a percentage of market value on an ongoing basis. Thus, in the fiscal year 2003, the Infosys brand appreciated by 3%, whereas market cap increased by 9%. It thus accounted for only 27% of market cap, as against 29% the previous year. This indicated that the company was less susceptible to market perception of its brand and that other factors, such as human resources, accounted for a greater degree of goodwill. By providing both figures and a coherent commentary, this Indian company gives investors and other stakeholders important insights into its intangible assets. Infosys publishes a score sheet in its annual report that gives an overview of its clients, organisation and people. Alone with regard to clients, it publishes indicators such as: 1. 2. 3. 4. 5.

Percentage of revenue from exports Number of new clients acquired in the financial year Sales per client Percentage of revenues from top clients/10 largest clients, etc. Repeat business revenue as a percentage of total revenue.

Thus, Infosys presents its case as a stable brand, bolstered by a high degree of customer loyalty. 92% of revenues came from repeat orders. Apart from this, the company’s dependence on individual

Competitive Value

41

clients has decreased and its customer base correspondingly broadened in recent years. Its CFO’s presentations at the Infosys Annual General Meetings highlight key figures and place brand value in the context of Economic Value Added (EVA) and other commonly accepted ratios. However, the software major’s brand does not just help to generate cash flow. According to Sunil Gulati of the Bank of America, it helps the company to hire the best talent in India and even facilitates supplier dealings. These clearly are qualitative advantages; similarly, the fact that the annual reports of Infosys have repeatedly won awards in annual and international rankings has bolstered the company’s reputation in terms of accountability. Brand valuation needs indeed to be linked to other factors; otherwise mere figures of a brand’s worth can prove to be meaningless. In this connection, David Haigh, Chief Executive of the consulting company Brand Finance, points out: Just providing a brand value is of limited value because it does not allow the analysts to get a better understanding of their own valuation models. What they really need is the underlying information about things like future market growth, market share, distribution, price premium, advertising and marketing spend.

Brand value needs to be linked to the quantitative parameters mentioned by David Haigh; it also, however, has to be in synch with ‘soft facts’ relating to the attractiveness of the brand. Table 3.1 Brands: Key Reporting Indicators Quantitative

Qualitative

• Brand value (including valuation methodology) • Sales and market shares in home market/world markets • Structure of brand portfolio • Benchmarking against competitor/icon brands • Sales targets

• Brand awareness in home market/world markets • Strategy (new products, positioning techniques, etc.) • USP (brand identity) • Link between brand image and corporate image (reputation)

   and Reporting on Brand Equity Infosys is a case in point: it excels both in terms of brand value and equity. Equity, as opposed to value, is generally considered to cover the softer

42

Reporting Nonfinancials

aspects of a brand, such as its symbolic image or its associative power. As Paul Temporal points out in Romancing the Customer, equity is a subjective assessment of what a marque means to the consumer. Marketing expert David Aaker has developed the Brand Equity Ten, this being a mix of 10 factors like price premium, loyalty and perceived quality. However, equity can only be systematised up to a point; a high degree of assumptions and surmises persists. The following three companies have developed their own approach to brand equity reporting: Fuji The Japanese manufacturer of Subaru autos, other vehicles and transport machinery takes a sophisticated long-term approach. Its 2002 Annual Report is entitled ‘Focusing On Our New Brand Equity’ and puts across a brand strategy involving new concept minicars and premium compact cars. This is an astute approach for a relatively minor world player accounting for roughly 1% of the world’s auto production. Subaru concentrates on specialty segments. It focuses on individualising design and presents the vision of its chief designer alongside the statements of top management in its reports. At the same time it presents a 5-Year Plan with quantitative targets broken down on a regional basis. Radisson SAS This Danish hotel group has a strong empirical bias. Its reports feature brand awareness and recall research, including prompted and unprompted awareness. Radisson has a top position in the Nordic countries, with over 90% prompted recognition, and is rapidly gaining ground across Europe. Thus, it emphasises brand ubiquity on the one hand and first-choice status on the other. While relying on external research, the company also monitors its customers’ responses and basically positions itself as the world’s most attentive hotel brand. The company’s credo, published in its 2002 Annual Report, is: ‘Brand recognition and brand awareness are the foundation for getting business.’ A further pillar of corporate strategy is a well-balanced brand portfolio spread across the entire price range from budget to luxury. Like Fuji, Radisson sets itself ambitious targets such as increasing the number of hotels in operation to 700 by 2012. Investors and analysts can regularly test the company’s progress in achieving this goal and others, such as a customer satisfaction index pegged at 90

Competitive Value

43

and EBITDA growth of 15%. The Danish hospitality operator also provides a valuable market overview of the world’s travel industry. Michelin The tyre manufacturer contends that its brand equity – this being the percentage of the population knowing a brand, multiplied by the quality score for the brand – is the highest in the world. Like Radisson, the French company presents an array of opinion research statistics showing a very high degree of brand awareness in Europe and America. It also reports on the performance of its competitors, thus providing the reader with admittedly partisan insights into the pecking order of the motor-tyre business. Michelin’s is a premium approach highlighting a top-quality brand, but also emphasising its multibrand strategy to serve local markets, specifically in North America and China.

RESCUING THE BRAND: REPORTING AS A PART OF CRISIS MANAGEMENT The examples mentioned above all apply to successful periods in companies’ histories. Brands, however, are as much risks as assets. A survey of the food and drinks industry carried out by Lloyd’s asked risk managers of major British and American corporations to identify major image factors. The brand ranked first, with 65% considering it to be the major corporate asset. Conversely, brands are soon on the receiving end of image damage. According to Julian James, managing director of Lloyd’s North America: Brand damage is one of the major business risks of the 21st century. Product incidents – recalls, boycotts, scandals – can cost companies millions, affect share prices and even result in bankruptcies.

In the food business, product contamination is considered to be a major risk, leading to product recall and negative media coverage. One recent case was Coca-Cola’s recall of its bottled water brand Dasani. This is certainly not a unique sectorial risk. One of the most traumatic product recalls in business history happened in 2000, when Ford and its supplier Firestone were forced to take back over 14 million defective tyres, after a series of fatal accidents occurred. The scandal that ensued seriously threatened relations between America’s No. 2 car maker and its tyre manufacturer.

44

Reporting Nonfinancials

Firestone had reacted prematurely in the eyes of many communications experts by severing its 95-year supplier contract with the company that invented cars. Beyond placing the blame on Ford, the company resisted dealing with law suits and even fired the employee who had called attention to the faulty manufacturing process of the tyres. By contrast, Ford’s readiness to take on responsibility and to spend $3 billion on product replacement were considered an adequate response by most experts. Inevitably, Firestone’s Japanese parent Bridgestone was attacked. Referring to the holding company, The Economist scoffed: ‘ “Made in Japan” used to be a sign of engineering excellence. At the moment, it reads more like a health warning.’ PR experts openly called on Bridgestone to eliminate Firestone as a brand. This put the onus on Bridgestone’s Annual Report for the year 2000. How should the company respond? By tackling the issue headon or being lightly evasive? Wisely, Bridgestone took a constructive approach, entitling the report ‘Building Brand Value’, while in actual fact it meant ‘rebuilding’. It bravely paraded the Firestone marque on the opening page, posing the Shakespearean question ‘What’s in a name?’ With this quote from Romeo and Juliet, the Japanese company was not questioning the importance of reputation. Quite the contrary: Bridgestone avowed the importance of safety and quality, thus tackling the issue that had profoundly disturbed consumers in the year under review. Bridgestone’s new president took a stand in the 2000 Annual Report, repositioning the company and expressing continuing commitment to both Firestone and the company’s operations in North America. The new multibrand strategy characterised Firestone as a ‘workhorse brand for our subsidiaries’ while lauding the parent brand for its ‘highly polished identity’. It faced the recall issue while highlighting the company’s success in other regions. ‘Fast facts’ published on the website supported this claim. A company that was lauded by General Motors as Global Supplier of the Year for the sixth time in succession in the year 2000 certainly has something going for it. Indeed, Bridgestone–Firestone had received a series of awards in the 1990s from several auto manufacturers, including Ford. Bridgestone also – albeit belatedly – launched a website devoted entirely to tyre safety and highlighted other measures, such as the free distribution of tyre gauges and safety brochures. All in all, it coped well in reporting terms with the fall-out from the crisis.

Competitive Value

45

Four years later, in 2004, the company’s reporting exuded quiet self-confidence. The Firestone brand found no mention, though the company started its first US advertising campaign after the tyre recall in 2004. The world’s largest tyre manufacturer wisely concentrated on Research & Development, reporting on innovation, quality and safety, while keeping a low-level brand profile. The tyres that Henry Ford’s legendary Model T cars rolled on didn’t play any role in the report, the irony being that Bridgestone only became the sector’s No. 1 by acquiring Firestone in 1988. In overall terms, the Japanese company’s reporting reflected a strong mastery of reporting priorities. Strategies for Product    In his article ‘The core of integration is the brand’, published in Marketing Management, Don E. Schultz averred that ‘the corporate brand is at the heart of all forms of branding’. He cited the Ford–Firestone crisis as proof of this dictum. Although the accidents and product recalls only affected specific car models like the Ford Explorers and Ranger trucks, both Ford and Bridgestone suffered as corporate brands. Thus, product brands can be individually profiled, but responsibility for their performance inevitably has repercussions on the company itself. In reporting terms, this means that product brands are best portrayed in terms of turnover and customer loyalty, while corporate brands are closely linked to corporate identity and strategy. Product brands are particularly important for multibrand manufacturers like Allied Domecq and Unilever: Allied Domecq This British food, spirits and wine manufacturer has a return-oninvestment approach. Its reporting reflects this mindset: the reader is given a series of hit lists on the market position of the top brands – for instance, it owned 14 of the world’s top 100 spirits brands in 2004, with a brand portfolio in No. 1 or 2 position in six categories. Volume and net turnover growth of key brands were provided, showing that while Ballantine’s was prospering, Tia Maria was losing ground, being supplemented by a cream liqueur extension called Tia Lusso. Micro information is supported by a macro approach to describing brand segments and highlighting the role of marketing in stimulating brand portfolio growth in regions like the USA.

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Reporting Nonfinancials

The 2000 Annual Report provided details on the rise in marketing spend, then pointed out: ‘Despite a 14 percent increase in marketing investment, the net brand contribution from the Core 4 brands increased by 7 percent as a result of a 10 percent increase in gross margins.’ In 2003, the revenues from the Spirits & Wine segment increased, despite a slight decrease in expenditure for advertising and promotion, illustrating increasing efficiency. Unilever

High

This Anglo-Dutch food and personal care behemoth has an equally rigorous approach to brand revenues, having radically reduced its portfolio from 1600 to 400 products, using value-based decision criteria. Its reporting adopts a universalistic approach with one report entitled ‘Meeting Everyday Needs of People Everywhere.’ The corporate mission of a company that operates across the world as a local household name with marques like Knorr, Lipton, Lux and Dove also begins with this claim. Fittingly, the first bullet point of the financial highlights of 2003 reported that Unilever’s leading brands grew by 2.5%. This is an admittedly arbitrary brand classification, but the company professed in the same year to being disappointed by revenue growth. Brand investment was, however, to be intensified; rather defensively, the company avowed wanting to maintain rather than expand its market position.

Puma PepsiCo Infosys

Brand Equity

Radisson

Coca-Cola

Low

NTT DoCoMo Low

Brand Value

Figure 3.1 Brands: Financial and emotional approaches

High

Competitive Value

47

Unilever is less explicit than Allied Domecq, but it succeeds in communicating a consolidation strategy designed to increase profitability by concentrating on block-buster brands with sales exceeding E1 billion and star brands with wide international distribution. Both companies provide excellent regional overviews; in Unilever’s case, the key role played by emerging markets could well determine the company’s future success.    and Corporate Brands Both Unilever and Allied Domecq have relatively low profiles as corporate brands. This is the typical situation with multibrand companies that concentrate on brand value, even if they do not assign a precise valuation to individual brands. Monobrands by contrast are innately oriented towards brand equity; reporting needs to convey fascination as much as facts. Recognition and regard – how aware are consumers of the brand and how do they feel about it – play a paramount role. Brand equity models can track the worldwide image of iconic companies: • Nokia, for instance, tracks metrics like spontaneous awareness, consideration and preference. • The South African insurance company Old Mutual links its brand image with responsibility, citing surveys that measure the percentage of respondents that associate the company name with moral values like trust or integrity. • Similarly, the Spanish communications operator Telefonica considers brand awareness to be a pillar of its corporate reputation and estimates the contribution of its brand to total revenue. While such estimates are useful pointers to a basic commitment, their calculation remains arbitrary, despite the precise methodology that is claimed to be used. Companies that need to gain or regain brand equity tend to be far more elaborate in their presentations. Puma, for instance, the cult sports goods brand that is constantly competing with mighty rivals like Nike and Adidas for media attention and market segments, regularly presents in a special section of its annual report its claim to be the world’s most desired sport lifestyle marque. Design, innovation and marketing form the magic formula it claims to possess. This German

48

Reporting Nonfinancials

company goes in for highly individualistic media messages and reports both on ad campaigns and high-profile partnerships with other iconic marques like Ferrari. The Puma brand was completely revitalised in the 1990s after a period of stagnation and decline which threatened the existence of the company. Japan’s premier mobile communications operator NTT DoCoMo has never faced such existential threats. In the yearly brand value rankings published by Nihon Keizai Shimbun, the company spun off in 1992 from Japan’s national PTT has often featured among the top Japanese marques. In the 1990s, the i-mode service turned NTT DoCoMo into Japan’s largest mobile Internet service. Despite this, the company suffered under the usual immobility of elephants not having learned to dance. In 2001, the specialised newsletter ‘Mobile Commerce World’ stated: ‘In the deferential tradition of Japanese conglomerates, NTT DoCoMo straddles the Japanese telecommunications industry like a behemoth.’ Soon, the company was being challenged by brash newcomers like KDDI, with revenues and profits faltering. Its 2005 Annual Report tackled the prime issue involved head-on, sporting the title ‘Time to Create a New DoCoMo Brand’. In a remarkable report devoted exclusively to its brand, the company provided a well-structured array of information and analysis to boost its claim as a provider of ‘lifestyle infrastructure’: 1. Snapshot statistics showing a low churn rate and enormous R&D investments as compared to its competitors. NTT thus tells the reader on a subliminal level: We spend more on research and have more satisfied customers than KDDI or Vodafone, even if we aren’t as profitable. 2. The CEO’s message highlights this long-term approach to success and a firm commitment to brand strength. However, it also includes a remarkable admission that DoCoMo lacks customer-orientation, pointing out that ‘we were undeniably somewhat slow and less than meticulous in meeting the needs of our customers, which diversified quickly as the mobile phone market grew, and we allowed our rivals to take the lead in the areas of handset design and service’. 3. Special Feature 1 is devoted to the evolution of the brand and strategies to strengthen the brand. NTT’s approach is highly systematic,

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49

addressing hardware, software and new business like credit-payment services. 4. Special Feature 2 concentrates on new lifestyles of mobile video communication that NTT’s products and infrastructure can support. Here, too, the presentation is rather technocratic, touching on remote monitoring, global roaming and other facilities that mobile phones of the future can include. 5. A further section in the annual report is devoted to brand-supportive elements like R&D, Human Resources and CSR. This may seem arbitrary at first sight. However, the CEO’s message had stressed the need for support from stakeholders, and though the company’s USP is evidently technology, the report also supplies ‘soft factor’ evidence. Puma and NTT DoCoMo are excellent examples of the two sides of the brand equity coin. Puma’s reporting and website make-over has a highly emotional quality, giving the company a maverick brand image that rhymes with its role as a Daniel in the lion’s den; in terms of size, Puma is dwarfed by Nike and Adidas. NTT, by contrast, provides a highly rational case for the renewed strength of its brand. Both approaches are obviously dictated by corporate strategy and well suited to the perceived identity of the two companies.

Box 3.1

Reporting on Brands: Recommendations

Calculating brand value is an arbitrary endeavour at present; companies should therefore quote existing calculations of their brand values from outside sources but refrain from carrying out calculations of their own (see KPIs below). Instead of valuing their brands, companies should provide a comprehensive overview of their brand strategy. This should include the following: • Assessment of brand strengths and weaknesses • Outside factors affecting the brand: consumer preferences, demographic trends, sectorial developments, expected legislation etc. • Chances and risks deriving from the macro- and microeconomic factors.

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Reporting Nonfinancials

Box 3.1

Continued

Corporate reporting should present an outline of the brand development plan for the next three years: • What distinguishes the brand(s) from the competition? • How can brand loyalty be strengthened? • Spell out how brand satisfaction/commitment/loyalty will be measured – whether through independent surveys, panels or other empirical methods. Finally, give an overview of brand tracking, including a brief account of the IT infrastructure involved. • How is data processed? • How do you ensure the consistency of consumer surveys over a period of time?

Positioning Brand reporting should be part of the Business Review in the Annual Report, preceding the Financial Review/Management Discussion & Analysis. Beyond this, an excerpt of brand strategy + KPIs should be published on the corporate website. Key Performance Indicators Brand portfolio Market share Competitor overview Investment volume

Brand perception Brand ranking

Turnover of key brands for last three years Market shares of key brands (%) in major regions Major competitor brands and market shares Investment in individual brands for last financial year + investment plan for next three years Market research ratings of key brands during last financial year Valuations of corporate brand by independent agencies for last three years (Interbrand/Landor/Core Brand, etc.)

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B. CUSTOMERS: THE KEY ENTREPRENEURIAL ASSET Customers (see Table 3.2 and Figure 3.2) are vital for all businesses; and data and insights on them are an obvious ‘must’. For investors, such indicators as customer base, loyalty and satisfaction provide insights into the company’s managerial skills and entrepreneurial approach. Michelle Edkins of Britain’s major pension fund Hermes has been quoted with the appeal: It would be hugely helpful if companies were to offer better data about how they manage their customers, with clearer divisional breakdowns in their company, their strategy and how this helps add value to the company. It can be done in the annual report and accounts, for instance.

Indeed it can. Only, it seldom happens. The majority of companies offer no systematic overview. When given, customer information is often myopic and haphazard; vital information, like the churn rate or customer satisfaction statistics, are often not disclosed. Here again, the standard-setters have stopped short of integrating customer-relevant information into the balance sheet. IAS 38 in fact points out: An entity may have a portfolio of customers or a market share and expect that, because of its efforts in building customer relationships and loyalty, the customers will continue to trade with the entity. However, in the absence of legal rights to protect, or other ways to control, the relationships with customers or the loyalty of the customers to the entity, the entity usually has insufficient control over the expected economic benefits from customer relationships and loyalty for such items (e.g. portfolio of customers, market shares, customer relationships and customer loyalty) to meet the definition of intangible assets.

The narrowness of how intangible assets are defined is a major obstacle to their integration in corporate accounts. However, companies can in fact report on their customer assets and publish key performance indicators on a regular basis. A London Business School paper entitled ‘The gap in GAAP: The relevance of customer relationship information’ comes to the conclusion that customer acquisition cost is consistently related to current and future revenues, and not only to operating profit. Conversely, churn rates have a delayed but certain impact on revenues. Organisations like the Investor Management Association have highlighted the importance of measuring and reporting on churn rates.

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Reporting Nonfinancials

However, NTT DoCoMo is one of the few companies that highlights its low rate, thus demonstrating its ability to retain customers. It even places its ability to generate customer loyalty in context by comparing its churn rate to that of its competitors.1 Obviously, sectors differ. For the mobile communication business, retention rates are in the long run more important than the number of subscribers or the average revenue per user. This is why the mobile communications unit of the Virgin Group links staff bonuses to customer retention at their operations in Britain, the USA and Australia. Quantification of customer value is at least as questionable as the precise estimation of what brands are worth. Marketing expert Don Peppers, author of Return on Customers, presents an equation: ROC equals a firm’s current-period cash flow from its customers plus any changes in the underlying customer equity, divided by the total customer equity at the beginning of the period.

However, as the Financial Times points out, customer equity is a ‘slippery concept’ at best. It is based on estimates and surmises. The likelihood of it being taken seriously by the financial community is remote. In most sectors, customer satisfaction, loyalty and distribution are of greater importance than the sheer quantity of customers or their supposed value. AOL is a case in point. During the Internet boom in the mid-1990s, the company gave users a large number of incentives to become customers, including free computer disks with software. The company’s customer list grew dramatically, masking the company’s vulnerability. When the New Economy boom came to an abrupt end at the beginning of the 21st century, AOL quickly lost ground, despite its apparently massive customer base. Table 3.2 Customers: Key Reporting Indicators Quantitative

Qualitative

• Customer base (number, distribution) • Customer acquisition (number, type) • Customer satisfaction (opinion research) • Customer loyalty (churn rate) • Client portfolio

• Customer acquisition and retention strategies • Customer preferences (including trends) • Customer relationship management • Cross-selling projects

1

See the first section of this chapter for a description of NTT DoCoMo’s approach.

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CUSTOMER ORIENTATION: BEYOND LIP WORSHIP Management sage Peter F. Drucker once pointed out: ‘Quality in a service or product is not what you put into it. It is what the customer gets out of it.’ Most managers would agree with this verity. However, the average annual report and website is inwardly oriented. Apart from invariably positive testimonials about the excellence of the company’s offerings, the voice of the customer is largely missing. Geest is a remarkable exception to the general rule. This British fresh-foods producer, taken over by the Icelandic Bakkav¨or Group in 2005, provides remarkable insights into the nature of its business with a strikingly informative website supporting its yearly reporting: • Geest cites eight empirically based reasons to support its argument that the fresh-foods market will grow, including the rise in oneperson households, the low percentage of ready meals at the moment and five-year forecasts of a rise in spending. • It then provides an in-depth overview of each of the market niches served by Geest, including the ready meals, pizza, dips and soup segments complete with market growth. • This is supplemented by consumer analysis and an extensive bibliography that enables investors and other stakeholders to examine the company’s assumptions by referring to external sources. • The potential of the Dutch market, in which Geest has an established presence, is compared to the more saturated British market, thus providing a rationale for further expansion into the Netherlands. • A breakdown of consumption patterns in different market segments is given, showing the proportion of households buying fresh foods. Geest also highlights the relatively small share that freshly prepared foods account for in the total food market. The most impressive part of Geest’s reporting is narrative rather than empirical. In its 2003 Annual Report the company cites commissioned opinion research into consumer attitudes towards convenience. The conclusion reached is as follows: Almost without exception, the creation of a home-made main meal, prepared from scratch and eaten together as a family or with friends is still the nostalgic benchmark for today’s consumer. In reality this rarely happens. Over three quarters of all meals have only one or two people present and

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Reporting Nonfinancials Taylor Nelson Sofrès predicts that in fifty years’ time only one in every seven meals will be a main, ‘formal’ meal and that eating alone will be almost a certainty.

Thus, the company makes a persuasive case for its own long-term expansion. Its customer orientation is, however, indirect: customer preferences are in fact placed in a market context. Albertson’s, a leading US food and drug retailer, has a far more direct approach. The company went through a turnaround in the year 2000 and, ever since, its reporting reflects a strong bias towards customer service. ‘Welcome to the New Albertson’s’, the title of its 2000 Annual Report, set the stage for the changed management ethos. Satisfying customer needs became the be-all-and-end-all of corporate strategy. The slogan ‘Customer First, Second to None’ gained credibility because Albertson’s adopted a series of measures to substantiate its claim to be more customer-oriented than its competitors. Ease of shopping, promotional offerings and freshness of products belong to the more conventional features of Albertson’s customer service. These are flanked by innovative strategies like multicultural customisation. Albertson’s neighbourhood marketing programme focuses on local needs, offering kosher foods and other ethnic products in specific localities. It thus caters for the specific needs of Hispanics and Asian-Americans. ‘Working hard to make life easier for our customers’ has become a corporate shibboleth. Though the company does not provide systematic information on customer service scores, it does quote consumer research that shows it to be ahead of the pack. It also, rather like Wal-Mart, cultivates a folksy approach, reprinting letters from grateful customers.

CUSTOMER LOYALTY: BEYOND RETENTION Terms often mirror shifts in mindsets. Customer equity is a buzzword defined as the net discounted contribution stream that the firm will realize from the customer over time. In simpler terms, it means the long-term financial rewards generated from loyal customers. Attracting customers has always been easier than binding them, though most companies constantly need to augment their customer base. One executive with an acute perception of this predicament was Buck Rodgers, a former CEO of IBM. Rodgers once pointed out:

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Most companies are a lot better at prospecting for new customers than maintaining their customer list    I behaved as if every IBM customer were on the verge of leaving and that I’d do anything to keep them from bolting.

This hands-on approach to customer loyalty is the secret behind the success of iconic companies like Dell. This Texan computer company does not just serve customers: it allows them to dictate the company’s strategy. ‘They’re all over the world, inspiring our most innovative thinking’ is how Dell’s 2005 Annual Report is entitled. Dell’s direct delivery business model means that it gets feedback from millions of customers, and this in turn is used to constantly recraft a new customer experience. Dell has a dynamic approach to stimulating loyalty, based on a universalistic low-cost sales strategy. Albertson’s adapts to local neighbourhoods; Dell, on the other hand, treats customers in North America, Europe, Japan and China in exactly the same way. It thus amalgamates customer experience, pegging staff bonuses to customer satisfaction. All this is reported with great narrative verve; however, the company does not release metrics to substantiate its claims to be the most customer-responsive company in the IT business, though it does refer to the many awards it has won. One of its admirers is the Bain consultant Fred Reichheld, whom The Economist has called the ‘high priest of loyalty’. Reichheld particularly appreciates the technical backbone behind Dell’s loyalty orientation: highly efficient supply chain management. According to him: ‘The right way to gather and report loyalty feedback is to take it as seriously as your financial reporting.’ Most companies are far removed from this goal, but some have certainly made large strides towards incorporating loyalty metrics into their reporting grids. Société Générale, for instance, a major French bank, has itemised the cross-selling rates and provided a multi-year comparison, while also citing a figure of 70% of all new customers that have been gained through personal recommendations. The company benchmarks its performance against the sector at large; it also relies on different metrics such as customer satisfaction scores, products per customer and the average age of products. Thus, its reporting has a strong empirical basis.

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Reporting Nonfinancials

CUSTOMER SATISFACTION: EARLY WARNING SYSTEM OR SUCCESS BAROMETER? Customer satisfaction remains the bedrock of customer relationships and the best guarantee of business success. The University of Michigan Business School has carried out research that proves the close correlation between the American Customer Satisfaction Index and the Dow Jones Index. Companies in the top ACSI 50% generated $24 billion in terms of market cap while firms in the bottom half only reached $14 billion. The researchers also pointed out that satisfaction was closely linked to Market Value Added and Return on Investment. Declining satisfaction is often the first sign of a company’s decline. Xerox, for instance, the company that pioneered photocopying in the mid-1950s, had a bad record for service. However, since the company could exploit its patent, it showed increasing revenues until the mid-1970s. After its patent elapsed, however, several more customeroriented Japanese competitors entered the market. As a result, Xerox almost went bankrupt. In his testimony to a Senate Subcommittee on Securities in the year 2000, Peter J. Wallison of the think-tank American Enterprise Institute made the point that ‘even though its financial statements were showing healthy and profitable growth, the company was hollowing out. Investors who relied on Xerox’s financial statements, and did not know the degree of its customer dissatisfaction, were in for a shock.’ Customer satisfaction measurement is more advanced in the United States; many companies have developed business performance models linking loyalty and satisfaction with business success. In their book How to Measure Customer Satisfaction, Nigel Hill and his co-authors cite evidence from blue-chip companies like AT&T, Rank Xerox and the Royal Bank of Scotland, that shows a strong correlation between satisfaction and loyalty: • 95% of customers that respond to surveys by scoring service as being ‘excellent’ or consider themselves ‘very satisfied’ remain loyal. • This contrasts with only 65% of those that respond with ‘good’ or ‘satisfied’, in other words giving the company a B grade. • Those getting a C (‘average’) only have 15% loyalty. Similarly, the British market research agency MORI has measured customer attitudes and their connection to share prices. The main finding is that attitude changes definitely affect the share price with a

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time lag of 3–12 months. In some cases, it takes even longer for poor service to affect performance. Marks & Spencer’s is a classic example: customer satisfaction started to decline in the mid-1990s, three years before the company’s share price and profits suffered. This makes it all the more important for companies to report their ‘satisfaction performance’ on a long-term basis. Unitil, a utility provider in New England, does so both in its annual reports and its Annual General Meeting presentations. In 2004, it reported that 86% of Unitil’s customers considered themselves to be satisfied or very satisfied, up from 84% the year before and 82% in 2002. This serves to counterbalance less favourable results like the number of customers growing only by 1.8% and gas sales declining by 6%. The fact that customer retention exceeds 80% shows that this American company is in sound financial shape. For British Telecom, customer satisfaction is more than an indicator; it is considered the company’s raison d’être. Each month, the company’s customer service is benchmarked against competitors, though not reported in detail. BT subdivides the various aspects of service: provision and repair are measured separately for both private and business customers. The company reports on a yearly basis any increase or decrease of satisfaction, thus providing stakeholders with a clear breakdown. Equally clear is the telecom operator’s goal of reducing dissatisfaction by 25% a year; it more than succeeded in 2003 (37%), but slightly missed the mark in 2004 (22%). Its 2006 Annual Report featured a Business Review with a detailed breakdown of customer groups and revenues. However, customer orientation remains an area of management – and reporting – with great potential. McKinsey Quarterly published an article by Stephanie Coyles and Timothy C. Gokey that was fittingly entitled ‘Customer Retention is Not Enough’. The authors emphasise that companies need to go beyond measuring satisfaction and churn rates by developing loyalty profiles. These profiles provide the key to understanding the drivers of customer loyalty; according to the McKinsey consultants, these consist of emotion, deliberation and inertia. Similarly, customers that defect – Coyles and Gokey call them ‘downward migrators’ – have cogent reasons for doing so: changes in needs, a rational change of preference or active dissatisfaction. This is a highly sophisticated approach; however, the most convincing reporting is done by companies whose commitment to customers transcends classifications and quantifications.

Reporting Nonfinancials

Strong

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Relationship Oriented

Harley-Davidson

FedEx

Geest

Société Générale

Weak

Xerox

Weak

Financially Oriented

Strong

Figure 3.2 Customer approaches: Between satisfaction and profits

CUSTOMER COMMITMENT: SHOWING TRUE GRIT ‘Corporate value statements: Do they mean it?’ The title of Reggie Van Lee’s article in Accountancy Age is well chosen. Commitment to customers is all too often a hackneyed phrase in mission statements. Van Lee, Vice-President of the consulting firm Booz Allen Hamilton, was reporting on the results of a worldwide survey of top managers. A sizeable minority – approximately 30% – reported that they relied on consumer preference data to trace the interconnection between corporate values and customer loyalty. Commitment to customers is a convincing argument when substantiated. The Bank of Scotland, for instance, paid more than lip service to the importance of remote communities by investing in a new fleet of mobile bank vehicles to service customers in over 100 communities and on eight islands. Similarly the US telecom operator Verizon was able to prove its commitment to the handicapped by providing evidence of several Centers for Customers with Disabilities. This company invests in education, publishing an online newsletter geared to the needs of around five million handicapped customers, and has also addressed 70 000 blind customers with a Braille direct mail campaign. Verizon has won a number of prizes for its commitment, including the Helen Keller Achievement Award.

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Mostly, however, commitment has less to do with responsibility and more with deepening the fascination of the brand. Cult companies create communities of the initiated; reporting serves as a means to celebrating both financial success and a sense of belonging. HarleyDavidson for instance, the mega-cult motorcycle manufacturer, produces annual reports that are crafted to convey the ‘experience’. The company’s management boasts a long-standing tradition of intermingling with the customers at the many rallies run by the Harley Owners Group, the world’s largest club of motorcyclists with more than 600 000 members in over 100 countries. As the 1998 report stresses: ‘Every year our executives get out of the office and on the road, attending rallies and events where they meet fellow riders and continue the Harley tradition of staying close to the customer.’ This is as much the company’s USP as the technology and design of the motorbikes. The Harley reports are weak on statistics but strong on ways and means of binding customers for life and winning new ones. In 2004, the company reported proudly that one of every two buyers was new to the brand. Harley-Davidson’s meta-message is community-oriented, while Federal Express plays on its willingness to go to any length to deliver on time. Its value proposition, ‘When it absolutely, positively has to get there overnight’, is what enabled a company that started in 1973 with 23 airplanes and two customers develop into a behemoth that delivers more than four million express packages every day. In a lot of ways, FedEx – as the company started calling itself, because that was how its customers referred to it – symbolises the spirit of America even more than Harley-Davidson, which has more of a hedonistic image. From the beginning onwards, the company was faster than its original competitor, the US Postal Service – a bureaucratic, slow-moving organisation. From 2001 onwards, FedEx started delivering express mail for the Postal Service, a triumph of private initiative over state tutelage. This ‘can-do, don’t-worry’ approach is also reflected in the Memphis-based company’s reporting. In 2001, FedEx’s Annual Report acknowledged a ‘period of challenge and change’ but remained committed to its business model that focuses on brand power and IT. Both are important: in its 2003 report, the company proclaimed: ‘FedEx is as vital to the global supply chain as currency is to commerce.’ Comparisons such as these and the emphasis on ‘delivering certainty’ have made FedEx far more iconic than its competitors UPS and Deutsche

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Post World Net. John Updike’s novel Toward the End of Time pictures FedEx taking over the world; while Tom Hanks plays a FedEx executive in the film Castaway. One of FedEx’s leitmotifs is service. Its reports include case studies or rather sagas emphasising the commitment of the company’s staff, and their ability to deliver punctually under pressure. Two examples: • Despite a port shutdown in Hong Kong, Federal Express managed to get 630 000 pairs of shoes delivered to Timberland in the United States. • FedEx has managed to deliver more than 400 000 Harry Potter books on a Saturday. The second leitmotif of FedEx’s reporting is what makes the company tick: excellent, customer-friendly logistics. One example is PowerShip, which involved integrating customers into FedEx’s information infrastructure. FedEx supplied the hardware and software to link customers to its computer networks; the systems store data such as addresses and shipping information, thus making it easier for customers to take care of paperwork and keep track of their packages. While FedEx physically moves parcels, Amazon is a mixture of clicks and bricks. It sells books and other commodities on its website, then ships them out to the customers. Both companies have been founded by visionary entrepreneurs: Fred Smith has led FedEx in flamboyant fashion, while Jeff Bezos is arguably the world’s most successful Internet service-provider. Amazon’s commitment is expressed more succinctly than that of FedEx. Bezos writes an informative Letter to Shareholders in each year’s report and also reprints the legendary letter of 1997, in which he set the pattern for corporate strategy: We have a window of opportunity as larger players marshal the resources to pursue the online opportunity and as customers, new to purchasing online, are receptive to forming new relationships.

Ever since, Amazon has made customers into partners, allowing them to write reviews of the products offered without censoring negative comments. Bezos in fact broke a deeply rooted business taboo by demonstrating that companies can prosper without blotting out everything negative. The Amazon website is highly personalised; customer commitment can be felt during the entire process of choosing and purchasing a book. Amazon’s USP was not just the easiness of

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ordering products; it was a combination of customer experiences and low prices. In ACSI ratings, the company has regularly reached levels that no other service organisation has attained. Box 3.2

Reporting on Customers: Recommendations

Quantifying customer value or trying to calculate a Return on Customers is an intellectually stimulating endeavour. However, given the lack of standardisation and acceptance of figures in the financial community, companies are well advised to keep their hands off undue quantification. Customer relationship management is the issue on which companies should focus their reporting. Given the fact that satisfaction/loyalty/commitment can be satisfactorily measured, these are also the kind of KPIs that provide stakeholders with orientation. Reporting should focus on strategy and processes: • How do external factors like income trends, demographic shifts and consumer behaviour affect CRM? • What is the company doing to assess customers’ wishes and demands? • Has it developed loyalty profiles to increment its understanding of customer migration and can it compensate for expected losses by targeting new customer segments? This leads to the fundamental strategic question: Is the company’s approach to CRM offensive in terms of customer acquisition campaigns or defensive in the sense of keeping the churn rate under control? Here companies should make a clear statement of intent. Following this, reporting should describe incentives and checks on staff to improve customer service: • How are new ideas of ‘going an extra mile’ being stimulated and rewarded? • Which satisfaction goals have been established for each division and how has staff performance fared so far? Customer reporting needs to go beyond ‘soft’ descriptions of satisfaction and motivation to indicate the IT data basis made available to employees through Intranet. Internal transparency is the first step towards improving performance; describing the info resources is more important than protestations of how precious customers are for the company. Beyond this, does the company use Internet to provide customised data that simplifies the administrative processes of their clients and thus increases loyalty?

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Box 3.2

Continued

Companies need to give the readers insights into structural changes in their customer base: • In which segments does management see growth opportunities and which segments are likely to decline? • How high are the estimated acquisition costs in the different growth segments? • To what extent are new customers derived from recommendations and how does this correlate with the company’s cross-selling performance? Cross-selling is the ultimate test of effective CRM; it needs to be both analysed and tracked (see KPIs).

Positioning Customer reporting should be a sub-heading within divisional reporting in the Annual Report, with a clear focus on customer base, satisfaction and growth. Beyond this, companies should report in their Business Reviews on CRM strategy and cross-selling. The quintessence of CRM and the KPIs should be published on the corporate website.

Key Performance Indicators Customer base

Sales breakdown Customer satisfaction Complaint track record

Employee commitment

Cross-selling rate

Number of customers drilled down to region and to type (individuals, small businesses, etc.) % of sales attributed to different customer groups over last three years Index based on results of surveys of last three years and related to market average Number of complaints launched in last three years and time frame for resolution of complaints % of salary pegged to customer satisfaction, positive/negative trends of last three years Number and breakdown of products per customer for last three years

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C. MARKETS: TARGETING NICHES, SEGMENTS AND SECTORS Sir John Harvey-Jones, former Chairman of ICI and one of Britain’s great managerial talents, has been quoted with the words: ‘Marketing is the key factor in the business. It is not only the fuel, it is the compass of the ship.’ This certainly applies to marketing powerhouses like Procter & Gamble or Unilever. However, Kenneth Chang, a New York Times reporter, seems closer to everyday business with his remark: ‘A market is the combined behaviour of thousands of people responding to information, misinformation and whim.’ Anyone surveying how companies report on marketing (see Table 3.3 and Figure 3.3) is likely to agree with Chang. For every company providing a coherent picture of its market position, strategy and growth outlook in major markets, there are 20 others providing no information, useless metrics or whimsical commentary. For the stock markets however, such information is vital. A Boston Consulting Group study on investors’ expectations revealed that market leaders achieve the highest expectation premiums: Coca-Cola has 84%, SAP 80% and L’Or´eal 82%. Similarly, a majority of financial analysts polled by the consulting agency Brand Finance rated companies higher that extensively disclosed marketing information. They expected to receive the information in both analysts presentations and annual reports. What kind of information is considered important? A survey of both analysts and investors carried out in the UK by PricewaterhouseCoopers showed that market growth and market share are the indicators most desired. Intriguingly, market-oriented facts and figures are almost as important for these target groups as data on costs, earnings and cash flow. Thus, such information can provide support both for the share price and for longer-term valuations. Table 3.3 Markets: Key Reporting Indicators Quantitative

Qualitative

• Market shares (in different segments) • Market size and growth potential • Marketing investment • Income/investment ratios

• Product development (in different segments) • Competitive position (including hit lists) • Marketing strategy • Market trends

Reporting Nonfinancials

Many

64

Diageo

WPP

Kirin

RBS

Facts Oriented

Accor

Few

Foster's

Weak

Strategy Oriented

Strong

Figure 3.3 Market approaches: Between statistics and spin

There is indeed a huge discrepancy between expectations and performance. The London Business School has published a study called Market Metrics: What Should We Tell the Shareholders? It analysed the annual reports of 125 large British companies and arrived at conclusions that can hardly be considered satisfactory: • Only 16% of the companies provided quantified figures on items like marketing spend. • 53% did provide information on new products. • 66% of all information was qualitative, showing a signal lack of metrics. When providing metrics, companies opted for boiler-plate data like sales volume and gross margins. LBS recommended the consistent communication of such metrics as the size of the market, the market share and investment. The authors of the study also conducted a series of interviews with senior executives of around 50 companies, gathering viewpoints on the subject. One financial services manager pointed out: If it were sensitive to one’s competitive position, you wouldn’t want to give it but I actually think people often exaggerate how much it is competitively sensitive. There are so many market services, particularly in an industry like ours, which is very transparent, and there is an awful lot of market research done which is widely available and written about, so I don’t think

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that there is a tremendous amount of what we are trying to do is market sensitive (sic).

Indeed, most reports fail to carry information that is available on public sources. The added value that a company can offer in its reporting is to put the data into perspective. Market position can be linked to market strategy, and market growth to a company’s diversification plan. The LBS findings are more far-reaching than the Accounting Standards Board recommendations with regard to reporting market position, brand strategy, number of customers, products per customer and other data. ASB in fact considers a narrative approach to be largely adequate, leaving the nature of the information disclosed to the discretion of company directors. Tim Ambler, co-author of the LBS study, called for concrete action: ‘The real debate for the marketing industry is which marketing metrics should be disclosed in the OFR.’ Marketing Metrics: From Market Share    The LBS study and the Brand Finance survey equally highlight the importance of market share; some analysts call for it to be classified according to volume, value and growth. Marketing guru Theodore Levitt contends: ‘If you’re not thinking segments, you’re not thinking.’ One company that certainly thinks appropriately is the Royal Bank of Scotland. RBS is a vastly successful financial services operator that successfully took over NatWest in the year 2000. The company has a multibrand, multiple channel strategy involving direct and Internet banking; it also cooperates with Tesco and Virgin and thus covers a variety of market segments. Every year, the bank presents a divisional profile, covering market position and share, client base, number of customers and accounts. Over the years, the expansion of RBS has been accompanied by a constant growth in market share. The 2004 Annual Report showed its leading position in the home market: • The Corporate Banking division serves 95% of the FTSE 100. • RBS has the largest retail network in Britain. • In terms of processing, it is No. 1 both in cheque payments and bank automated clearing system transactions. • RBS Insurance is the country’s second largest general insurer. RBS is, however, reticent as regards its growth strategies and its competitors, referring to ‘intense competition’ without naming its rivals. On the other hand, Accor, Europe’s leading hotel operator with

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a broad range of high- and low-price brands ranging from Sofitel to Ibis, has no such reservations. In its 2003 Annual Report, this French company provided internal data that showed it in No. 4 position worldwide in terms of hotels and rooms, with five brands among the Top 10 in the EU countries. The early years of the 21st century were more than challenging for the hotel industry; Accor responded by increasing its marketing responsiveness to sluggish markets and by entering into partnerships with a host of companies from other sectors: airlines, rail providers and credit card issuers. Accor targets upscale and economy markets alike; however, investments are being increasingly channelled into midscale and economy hotels. This company practises an adroit mixture of hands-on marketing and aggressive sales strategies. While highly international in its focus, with an increasing presence in North America and Asia, Accor plays on its French roots, marketing itself in its high-end Sofitel hotels as a provider of art de vivre. Brand recognition has improved through increased presence and massive advertising: a survey of 600 European opinion leaders showed 81% reporting great familiarity with major Accor brands in 2004, up from 73% two years previously. The company provides a wide array of information on human resources and sustainability, thus giving stakeholders valuable insights into what makes Accor tick. Australia’s leading alcoholic beverage company, Foster’s, gives fewer details than Accor, while however providing a Big Picture snapshot of its market positions. Having acquired Southcorp, Foster’s has become a global leader in premium wine, with a strongly entrenched position in the beer business. The company’s new CEO, Trevor O’Hoy, was refreshingly frank in his 2005 Review, pointing out: Our third challenge (the other two were getting the U.S. wine business and the multi-beverage strategy back on track) was to maximise the value of the Foster’s brand globally and, to be frank, we didn’t make a great deal of progress. The brand had a pretty good year, and did a lot better than the industry, but due to licensing arrangements put in place a decade ago, we don’t get a great share of the earnings.

At the same time, Foster’s made great progress in the US market; its Beringer wine brand profited from various marketing initiatives, with sales increasing by 13%. The company provided a short overview of changing consumer preferences in the United States: 39% opted for wine and 36% for beer, with the same change occurring in the UK.

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Foster’s provides a good mixture of marketing and financial data, with a grid documenting its key brands and growth drivers while also citing both the capital employed and the return on capital employed (ROCE). In the 2002 financial year, ROCE for both domestic and international beer operations was far higher than in the wine segments. This provided the rationale for an acquisition and organic expansion strategy designed to broaden the product base and improve the brand value of Australia’s major beer brewer.    to Sectorial Insights Information on market shares and other metrics is useful; however, a company’s competitive position and future prospects often depend on general market trends. Insights into trends and potentials is important for long-term investors, but also for employees and other stakeholder groups with a vested interest in the company’s future. One company that does a splendid job of providing these insights is WPP. Every year, this leading advertising and marketing service provider delivers an exhaustive, well-documented portrait of the industry in which it operates. The array of metrics provided is impressive: • Breakdown of worldwide communication expenditure, showing that conventional advertising is now dwarfed by specialist communications. • Projected development of world advertising expenditure in absolute terms and as a percentage of Gross Domestic Product. • Projections of the growth in US advertising spending in both absolute terms and in percentage growth. • Overview of the spending growth of America’s Top 10 advertisers on a company and sectorial basis. • Revenues and Earnings before Interest and Taxes (EBIT) margins for WPP and its leading competitors for the financial year and the previous year. Statistics are supplemented by cogent commentary by the CEO on the nature of the market. One important point that WPP makes is that Theodore Levitt’s famous article in the Harvard Business Review postulating a globalisation of consumer tastes and preferences was overstating the case. Global brands or products only account for 10–15% of WPP’s revenues; the rest of the business is local. As the CEO comments: ‘Consumers are probably more interesting for their differences

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Reporting Nonfinancials

than for their similarities, and politically there seems to be less integration than disintegration.’ This flies in the face of the conventional unification logic of the European Union and shows that WPP has its own world-view. WPP’s yearly reports are excellently crafted: clearly structured, wellwritten, creatively illustrated. It’s what one would expect from a company that unites some of the top brands of the communication world: Hill & Knowlton, Young & Rubicam, Grey, Burson Marsteller, etc. But in fact, no other media company communicates with such competence and verve. The annual industry overview is supplemented by an essay on vital issues such as the difference between creativity and cant. Thus, WPP unites the worlds of the quantitative and the qualitative, putting across a persuasive case for its pre-eminent marketing position. The Japanese beer and soft drinks producer Kirin is a leading player in its home market, with a 35% share of the beer market. This company provides a comprehensive and outspoken overview both of the Japanese market for alcohol and of markets like China, which Kirin is in the process of entering. The stagnation in the Japanese market, with a steady decline in total spending on alcohol in the context of reduced corporate entertainment, divergent consumer preferences and state intervention, is clearly pointed out. This is supplemented by statistics showing worldwide beer consumption. Japan slipped to No. 6 in the year 2002, while China ranked No. 2. The company’s goal of becoming the No. 1 beer producer in Asia and Oceania is supported by in-depth information, for instance on the regional nature of the Chinese market, in which Kirin has targeted three separate regions with differing market entry strategies. A three-year Business Plan with projected sales and Return on Equity targets rounds off the company’s systematic approach to consolidating and increasing its market shares. Consumption patterns of the last 10 years show a steady decline in local beer consumption with a corresponding rise in the Happo-shu (beer-like beverage) segment. The company’s presentations to analysts and investors supplement annual reporting and provide further details on market share, expenditure and segment strategies. All in all, both WPP and Kirin present a comprehensive overview of the business environment in which they operate. Marketing Strategy: Between Brand Positioning    ‘Marketers rely too much on intuition’, is how an article in McKinsey Quarterly entitled ‘Better branding’ begins. The three authors, all

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McKinsey consultants, call for a more systematic approach to market segmentation and brand identity in the context of a surfeit of brands and advertising messages contrasting with declining advertising spend in the US. Basically, many companies, in America and elsewhere, need to adopt marketing strategies that pay greater attention to the bottom line. Forward-looking market segmentation and the allying of customer needs to a brand’s identity are important steps towards achieving accountability, while reporting can help companies to make a case for their marketing investments. As Tim Abler points out in Marketing and the Bottom Line: Strip out all the flash talk and pretty posters and you’ll find that marketing is all about cash: either finding where it is and how to get a bigger share of it or spending it in an attempt to generate more of it.

Asia Pacific Breweries in Singapore is one company that endorses a strong empirical approach. It starts with insights into its brand equity and value, citing both awards and the Interbrand valuation of the corporate brand. APB then continues with a detailed overview of its markets, including market shares and growth strategies. It distinguishes between traditional markets like Singapore, Malaysia and New Zealand, where consumer demand is stagnating or moderately improving, and growth markets like Thailand and Vietnam, which already contribute a third of profits. In both these markets, APB has established itself in the premium segment. Similarly, the Japanese brewery Asahi presents a success story with its star product Asahi Super Dry, one of the world’s five top beer brands. This company concentrates on brand positioning, while providing a good overview of the general beer market in Japan. By contrast, Interbrew, the huge Belgian beer powerhouse with excellent brands like Beck’s and Stella Artois, reports on its brand strategies in essayistic style, touching on a variety of products in various countries without however providing a coherent picture of its operations.    and Financial Results The department – store mogul John Wanamaker has been credited with the adage ‘I know half my advertising dollars are wasted – I just don’t know which half!’ Any manager professing to this kind of insouciance today would be quickly out of a job. Marketing budgets need to be accounted for and justified.

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One company that takes accountability seriously is Diageo. As one of the world’s leading alcohol producers, this British giant, that divested itself of its food business in the early years of the 21st century, concentrates on a clearly structured breakdown of marques and markets. With brands like Guinness, Smirnoff, Johnnie Walker and Baileys, the company targets top positions in all the market segments it occupies. It also, however, concentrates on cost-effectiveness and points out in its 2004 Annual Report: Diageo’s size provides an opportunity for significant scale efficiencies in operations and marketing effectiveness. Strategically, Diageo is focused on using this scale to maximise cost efficiencies, and to enable the dissemination of consumer insight across its portfolio.

Economies of scale apply particularly to the top brands: Diageo has eight so-called global priority brands, that accounted for 59% of sales volume in 2004. The performance of each is analysed in detail. Statistics given include number of units sold, volume and net sales movement. Smirnoff is by far the star brand, while J&B seems to be stagnating. Parallel to this, Diageo discloses turnover, net sales and operating profit in each of its four major regional markets, revealing for instance that profitability in Britain trails North America to a great extent. Beyond the 15 key markets, there is a large number of ‘venture markets’ that only account for around 12% of turnover and profits. Again, detailed commentary is given in addition to the figures mentioned. Exact numbers are given for marketing investment, with the eight priority brands accounting for 68%. Diageo’s information output is enormous; at some stage one wonders whether less wouldn’t be more. The authors of the McKinsey Quarterly article ‘Boosting returns on marketing investment’ rightly warn: ‘Beware the quantitative cure-all.’ One company that provides a more coherent picture is the Australian logistics provider Toll Holdings. Logistics is not the most transparent of sectors; Toll Holdings’ breakdown of three market segments, these being automotive, beverage, and food and retail, is valuable contextual information. Market size and potential are both quantified, while the commanding position of the company in auto logistics is highlighted. The real market potential – half the total market volume – comprises in-house logistics. Toll Holdings’ strategy is aligned towards gaining a share of this segment. The company’s Australian customers are rapidly expanding overseas. China is a particularly strong growth market. Toll Holdings

Competitive Value

71

accompanies its customers and is internationalising its operations accordingly. But perhaps the most intriguing part of the company’s reporting relates to its unique market position as a 3.5 logistic provider, meaning a mix of third-party and fourth-party provider. The difference being that third-party providers are conventional operators with vehicle fleets and warehouses, while fourth-party providers optimise the process of moving goods by coordinating the activities of various transport companies with sophisticated IT tools. Toll provides both kinds of services and thus fuses large volumes with technological leadership. This helps to customise logistic services and integrate the entire process.

Box 3.3

Reporting on Markets: Recommendations

Start with an overview of the markets in which you compete. Describe the size of the markets, recent trends and the degree of competition. Continue with an analysis of the company’s market position: • Which segments are covered and what is the company’s role in these segments (champion/contendor/newcomer etc.)? • Classify the markets served by the company (mature/emerging etc.). • Which markets are endangered and for what reasons (legislation, new competition, etc.)? Give insights into your marketing strategy. • Which clientele are you addressing and how does the marketing mix address the clientele? • Which meta message is used as a roof over the individual product messages? Then tackle the issue of market development: • How are new products developing and what kinds of markets are they aimed at (mass markets/niches)? • Which channels will be used to market the fledgling products? • Are media and message tests planned? • How high is the estimated profit potential from new business?

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Box 3.3

Continued

Positioning Markets should be a sub-heading within divisional reporting in the Annual Report, immediately following the sub-heading on customers. Marketing strategy should be a part of the chapter on corporate strategy at the beginning of the Business Review. Metrics on market size, position, etc., should be published on the corporate website. Key Performance Indicators Market size Market position

Growth rate Marketing investment

Return on investment

Size of the market(s) covered by company products for last three years Market share in % for last three years, classified according to product/service and region Rise/fall in turnover and net profit for individual products/services Investment classified according to product and region and according to advertising/direct mail, etc. Margins of various products and breakdown of net income

SUMMARY OF COMPETITIVE VALUE In his valedictory tome Kotler on Marketing, guru Philip Kotler warns the reader to beware of one-liner formulas that seem to guarantee marketing success. This is certainly true: success stories can rarely be reduced to one factor like superior quality, better service or lower prices. Wal-Mart, for instance, became as much a service champion as it was a low-price retailer on its way to becoming the world’s largest trading company. Reporting on competitive value is most successful when the interconnections between brands, customers and markets are well argued and substantiated by evidence. Some examples from this chapter illustrate the success formula:

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73

• PepsiCo provides a huge amount of empirical evidence for its preeminent role in the soft-drinks market, while clearly naming its competitors and conceding them pride of place in different rankings. Its brand positioning is equally coherent. • The Indian software company Infosys provides a concrete estimate of brand value and a host of other metrics; it also publishes vital ratios such as dependence on major clients and client loyalty (measured as the ratio of repeat business revenue to total revenue). • The Danish hotel group Radisson SAS quotes extensively from recognition and opinion research to substantiate its claim of improving brand awareness. It also gives an extensive market overview and sets itself ambitious long-term targets that stakeholders can measure it against. • Japan’s mobile communication operator NTT DoCoMo makes a remarkable mea culpa admission of lacking customer-orientation while presenting a persuasive technology-based case for future brand development. • The British fresh-food producer Geest profiles itself by placing its strategy within the context of the food industry and providing a huge amount of contextual information and comment. • WPP places its market strategy and profile equally firmly into the context of the advertising and marketing services sector. The statistics provided and comments made are equally valuable. The real trade-off for ambitious reporters is between coherence and detail. Obviously, Key Performance Indicators for individual brands and product groups like Return on Investment/Equity, Cost/Income ratios, etc., are important. Fundamental data like marketing investment, composition of the customer base and brand recognition are equally vital. However, a surfeit of data can overwhelm rather than orient. The Duke of Wellington, Britain’s hero of the Napoleonic wars, once made the wry comment: ‘Having lost sight of our objectives, we redoubled our efforts.’ Diageo is a case in point. It provides excellent data and a huge amount of commentary. Despite this, the company’s competitive value remains hazy, because on a meta level, the company lacks a specific profile, despite its divestiture of food-business subsidiaries like Burger King and its focus on alcoholic drinks. Is this the typical predicament of a large holding company whose individual brands like Smirnoff and Guinness are far better known than Diageo itself? Yes and no. Obviously, parents of iconic brands

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tend to give a dreary impression because they seem to be simply the sum of the parts, rather than entities in themselves. However, this is by no means inevitable. WPP’s brilliant reporting shows that a behemoth can be stylish, pithy and informative. Table 3.4 Competitive value reporting: Ten leaders Company

Country

Snapshot

Contact

PepsiCo

USA

www.pepsico.com

Infosys

India

Bridgestone

Japan

NTT DoCoMo

Japan

Geest

UK

Albertson’s Harley-Davidson

USA USA

Accor

France

Foster’s

Australia

WPP

UK

Brand metrics and portfolio overview Brand value and related indicators Marque profiles and crisis management Holistic approach to brand quality Market trends and consumer analysis Customer service Consumers as a community Market position and growth strategies Marketing initiatives and growth drivers Market trends and sectorial break-down

Box 3.4

www.infosys.com www.bridgestone.co.jp www.nttdocomo.co.jp www.bakkavor.com www.albertsons.com www.harley-davidson.com www.accor.com www.fostersgroup.com www.wpp.com

Boise International: Fictive Case Study (3)∗

MEMO FROM HG TO BON, 10 July 2007 RE: PROJECT ‘REPORTING VALUE DRIVERS’ As requested, I have started the project by gathering and analysing information from our divisions, concentrating on marketing in broader terms. After that, I followed up by interviewing Henry, José and Renée. As Arun pointed out at our meeting on 15 May, our reporting on brands is deficient. The same applies to customers, markets and general strategy. My general impression is as follows: ∗

See Box 2.1 on p. 33 for full names and functions of Boise management.

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75

• Consumer Finance: Obviously, we’ll never come anywhere near GE in terms of size and scope; we only have two credit cards. However, we have made great strides after introducing our new Free Deal brand claim in 2003 and going in for large-scale direct marketing. It has given a particular push to Auto Now, while our classic Credit+ card has profited to a lesser extent. • Medical Products: This is a far less volatile market. However, our new Siebel Medical CRM system has dramatically improved data quality. Benefits are particularly visible in our Surgical Instruments (SI) business unit, where analysts have often complained of a general lack of transparency. Diagnostic Products (DP) is easier to understand. The figures show that SI has more than compensated for the declining number of hospitals it serves by substantially increasing the cases-percustomer ratio. DP has increased its outlets without, however, upping sales discernibly. Considering the challenging healthcare environment in Europe, this division is more than holding its own. • Energy: as we know, this is a difficult line of business, dependent on technical developments and public opinion. Our solar photovoltaic and thermal generators have established their positions in what remains a niche market. However, the sizeable rise in sales to multinationals is an encouraging sign; this increases margins. Beyond that, in CRM terms, it’s far better than dealing with municipalities. I suggest the following plan of action: • CF: Highlight brand dynamism and growth in customer base in our 2007 Annual Report. However, in all fairness, we should also publish the unflattering delinquency rate – unduly high in 2005, and now under control, as I gather (we’re approximately on the same level as GE Money). We equally need to present an overview of our brand strategy – the idea behind FD, our successful direct mail campaign supplemented by ads in local newspapers, our ‘quiet champion’ claim deriving from regional strength in Benelux as also in parts of New Europe, specially Poland and the Czech Republic (see KPIs). • MP: Here, the contrast between customer base and earnings is a major issue to report on. Both divisions have done well, but the SI turnaround is particularly impressive, specially when correlated with customer satisfaction. It’s too early to judge satisfaction with DP, because they only started measuring it last year, but the unit could pose a problem: pharmacies are apparently not too happy about our delivery times. However, computer-based training has turned out to be an excellent new initiative and DP is in the forefront,

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Box 3.4

Continued

so that should improve satisfaction in the medium term. DP has developed an excellent interactive program accessible through Internet. SI hasn’t followed suit so far; perhaps it doesn’t need to (see KPIs). • E: We should provide a breakdown of customer groups and market shares. This will show we were right to target Asia as a major new market; it also demonstrates that we should be approaching US corporates to a far greater extent. So far, the green pricing premium has remained stable, but, in Asia, ecological consciousness lags behind the West and this could affect sales. Assuring customers that they can ‘make a difference’ by buying solar energy works increasingly well with corporations in Europe, because this enhances their profiles as ecologically responsible corporate citizens. However, retaining them as customers is proving increasingly difficult (see KPIs). Key Performance Indicators Consumer Finance Brand recognition (%) Customer base Delinquency rate (in %) Market share in Europe: Auto Now (%) Credit+ (%) Earnings: Auto Now (in bln E) Credit+ (in bln E) Medical Products Customer base: Surgical Instruments (hospitals) Diagnostic Products (pharmacies) Earnings: SI (in bln E) DP (in bln E) Customer satisfaction: SI (%) DP (%) Customer training: SI (% of customers) of which CBT

2006

2005

2004

19.5 2.4 mln 9.1

17 1.4 mln 9.6

14 0.8 mln 7.5

4.3 7.2

4.7 6.5

3.5 6.2

16.6 33.4

16.4 30.5

15.6 27.3

710 10320

782 8750

820 6460

5.1 4.3

4.2 4.1

4.5 3.7

83 54

77 n.a.

n.a.∗ n.a.

8.6 n.a.∗

9.2 n.a.

7.8 n.a.

Competitive Value DP (% of customers) of which CBT Energy Customer groups (in %): Municipalities Corporates Others (individuals, small businesses) Market share in solar energy (in %): Europe USA Asia Green pricing premium (as against fossil fuel, in %): Europe USA Asia Customer retention (in %): Municipalities Corporates Others ∗

77

18.5 7.5

14.6 2.5

10.3 n.a.

57 35 8

65 24 11

72 18 10

15 2.3 4.7

13 2.6 2.1

9 1.9 0.6

8.6 4.2 7.5

8.8 4.1 10.4

8.4 4.8 12.6

94 67 78

98 70 76

90 74 76

n.a. = not available.

MEMO FROM BON TO HG, 24 July 2007 Thanks for doing an excellent job. Please attend to the following: • Tell Henry to have the delinquency rate examined; perhaps we need to be more careful about acquiring new customers regardless of their solvency. • Get statistics on our CF track record for complaints and publish them in the 2007 AR regardless of whether they are positive or negative. I want to put pressure on the division to improve operating performance. Being a cash cow isn’t enough in the long run. • FYI: I shall get a management consultant to do an independent assessment of logistics in DP; I am simply dissatisfied with the internal reports that have come in so far. Something is obviously wrong and it needs to be fixed. • FYI: I shall get Giovanni to investigate customer acquisition costs both in SI and DP. We should be able to expand further in both units. It’s too early to report on this in 2007, but by 2008 I want to give readers of our annual reports significant insights into the cost base.

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Box 3.4

Continued

• Very happy to hear that CBT is working well at DP; please let José know that I would appreciate it being introduced soon at SI. • Ask Renée to analyse the critical success factors for penetrating Asia and the USA and to give me her findings, so that we can consider further expansion. What I need is a breakdown of customer groups and margins, so that we can fine-tune our marketing activities.

Next Steps I’d like you to continue by tackling the entire area of strategy, compliance, etc. We can start by meeting together and defining important priorities and you could then discuss legal issues with Jan and anyone else you want to consult. Give Mary a ring in early September as soon as I’m back from vacation; she ought to able to arrange an appointment by mid-September.

4 Management Value Strategy, Governance and Outlook

One ship drives east and another drives west With the selfsame winds that blow. ’Tis the set of the sails And not the gales Which tell us the way to go.

In 1897, the popular American poet Ella Wheeler Wilcox wrote a poem called The Winds of Fate, from which the lines above derive. Indeed, some companies prosper and others do not, though the playing fields have been levelled long ago. The gales of boom periods and recessions affect all companies, but management quality ultimately determines entrepreneurial success. Management quality expresses itself in both tangible and intangible fashion: well-run companies make profits, but also profit from good reputations. Reputation is in fact a more enduring indicator of value created by good management than profits, which often depend on the vagaries of the business environment. FORTUNE’s annual list of the World’s Most Admired Companies shows this discrepancy. ExxonMobil, the most profitable American company in 2004, moved down to No. 41 from No. 32 in previous year. This discrepancy between profit-making and reputation reflected doubts about this company’s ecological policy. Because of its resistance to issues like global warming and alternative sources of energy, one of the world’s largest oil companies has been persistently attacked by Greenpeace and other NGOs. By contrast, General Electric, a company that not only endorses but even embraces ecological issues as a source of innovation, regained top position in FORTUNE’s 2005 ranking after two years as No. 2. This can be seen as a vote of confidence in GE’s management after a period of slight uncertainty following Jack Welsh’s retirement as CEO. Jeff Immelt, Welsh’s successor, repeatedly expressed his commitment to sustainable growth rather than short-term profits. The Financial Times list of the World’s Most Respected Companies has echoed FORTUNE’s verdict

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by repeatedly honouring GE. The FT ranking’s scope is broader than FORTUNE’s: corporate governance and CSR belong to the criteria for measuring respect. Ultimately, companies need to deliver, both in terms of profits and of reputation. They create management value by adopting a dual focus – and communicating it. Strategy is the epicentre of this focus, while corporate governance has gained significance as a means of ensuring managerial guidance and control. Beyond this, the company’s future is at least as important for investors and other stakeholders as its present state and its past achievements. Thus, reporting excellence depends on how a company deals with both strategy and targets.

A. STRATEGY: AN AMALGAM OF PROCESSES AND VISIONS The world’s best-known business strategist, Michael Porter of the Harvard Business School, once pointed out: ‘The underlying principles of strategy are enduring, regardless of technology or the pace of change.’ These principles are dedicated to enabling companies to achieve sustainable advantage. Strategy (see Table 4.1 and Figure 4.1) was formerly often defined as an elaborate and systematic plan of action. This mindset, which dates back to the era of Strategic Planning in the 1960s and 1970s, favours formal procedures and strong quantification. It, however, puts the cart before the horse: vision and strategic focus are far more important than the paraphernalia of checklists and charts favoured by Igor Ansoff and others of the Planning School. Porter’s emphasis on the business

Table 4.1 Strategy: Key Reporting Indicators Quantitative

Qualitative

• Macroeconomic assumptions (GNP, inflation, etc.) • Financial goals (EBITDA, cash flow, EPS, etc.) • Value creation / cost-cutting programmes • Plan–performance track record of last 3–5 years

• Strategic planning process (structure) • Core competencies and strategic focus • Strategic priorities (growth/trust/service, etc.) • Innovation priorities (% of new products/services in portfolio)

Strong

Management Value

Avon

Wal-Mart Telus

Business Focus

81

BMO Cadbury

Fujitsu

Pilkington

Weak

DPWN

Weak

Financial Focus

Strong

Figure 4.1 Strategic focus profiles

environment – his ‘five forces’ model highlights competitors and the bargaining power of buyers and suppliers – seems more realistic. The 1980s and 1990s were the heydays of ambitious business models and witnessed the re-engineering of organisations and processes. Recession and the decline of the New Economy made strategy seem irrelevant in the context of better governance and stringent cost-cutting at the beginning of the 21st century. However, as The Economist pointed out in 2003: ‘Emerging from their cost-cutting bunkers and shaking off the excesses of the turn-ofthe-century boom, they (corporate executives) are talking once more about strategies for growth.’ Realistic visions are the call of the hour – ‘getting the basics right rather than chasing the next rainbow’, as The Economist puts it. Focus and consistency have become paramount management, and reporting, virtues. Strategy has become a complex discipline. In a Sloan Management Review article called ‘Reflecting on the strategic process’, Henry Mintzberg and Joseph Lampel describe 10 different schools of thought ranging from the cognitive to the visionary. Reporting on strategy tends to be fragmented and incoherent. As Daan Andriessen of KPMG has pointed out, though banks and investors judge companies to a major extent on the basis of the quality of their strategy, what gets reported tends to be both limited and amorphous.

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This, however, is more of a managerial issue: a McKinsey survey of senior management revealed the following: • Around 75% want to devote more time to strategic issues. • More than 25% admit to having a limited understanding of the strategy of the companies they are supposed to be running. • More than 50% have no clear idea of their company’s prospects in the next 5–10 years. In other words, there is a large perceived knowledge gap that extends to both strategy and outlook. This internal vacuum goes towards explaining why passages on strategy in annual reports and other documents often tend to be vacuous. For instance, a large Australian bank presents a ‘Strategic Overview’, bringing an assortment of platitudes and catchwords on ‘core capabilities’ and ‘leveraging assets’ without any kind of substantiation. The Overview consists of categories erratically called ‘integrated solutions’, ‘great people’, ‘great place’, etc. This is by no means exceptional. A US cable manufacturer is equally inane. After making consistent losses, the company, which produces apparatus to connect communication equipment, ran an entire chapter in its 2003 Annual Report entitled ‘A Strategy for Success’. The first sentence set the tone for what follows in this chapter: Just as valiant warriors face off against a morning field, so, too, do companies engage in a life or death battle to survive, thrive, prosper. And one thing will predict time and again who will emerge the victor: STRATEGY.

This kind of blood, sweat and tears rhetoric might be appropriate for a management boot camp. In the context of financial reporting, it is both embarrassing and meaningless. What follows is a diatribe on ‘wielding powerful weapons’. All in all, this kind of purple prose is counterproductive: military posturing scarcely masks the fact that this company lacks a sense of direction. Companies are under particular strategic pressure in loss-making years; investors and other stakeholders need reassurance that management has recognised and is tackling the problems and deficits involved. Equivocation is particularly ludicrous when companies have institutionalised strategy without any recognisable output. Take the case of a highly respected Japanese producer of cameras. This is a company that has a managing director with the title Chief Officer of Corporate Strategic Center and two directors as Assistant Chief Officers. All these gentlemen are mentioned by name in a select list of top

Management Value

83

management. The company made a loss in the year in question and suspended the dividend. However, strategy plays no role whatsoever in this report; nonetheless, the CEO’s letter professes that ‘the future remains promising’ and ends with the rather pathetic appeal: We ask shareholders and investors to understand our current situation. Now more than ever, we trust that you will continue to extend us your support.

These three examples of bad practice demonstrate a simple verity: strategy needs substance. Reporting on strategy makes sense when a company has something concrete to communicate: targets, priorities, adjustment to market trends – and, of course, the vision of top management. Systematising Strategy: Concentrating on Targets    The management thinker Henry Mintzberg is of the opinion that strategy is an instinctive rather than a reflective process. Mintzberg, sometimes called ‘the great management iconoclast’ because of his unorthodox views, is against any kind of planning. According to him, strategy is crafted by managers according to the needs of their organisation and the business environment. This could well be the case in many companies. However, successful organisations generally have structured strategies, while heeding the dictum ‘Structure follows strategy’. Two Canadian companies reflect this approach. Telus The telecom company has six strategic imperatives and reports on performance in the context of these goals. The imperatives are qualitative rather than quantitative: they include expanding technical capacity and increasing brand awareness. In the 2002 Annual Report, Telus could proudly state that its strategy had been ‘remarkably resilient in the face of what has surely been the most difficult period in the modern history of telecommunications’. Indeed, Canada’s second largest provider of data, voice and mobility services more than survived the crash of the New Economy. Beyond the imperatives, it set itself clear financial goals in terms of EBITDA growth and cash flow. Several years later, the company had the same basic strategic approach: it presents performance in terms of revenue, EBITDA and

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Reporting Nonfinancials

earnings per share and simultaneously sets clear targets for the coming year. These targets are projected on the basis of premises and sensitivities that are clearly enunciated in the Notes attached to the report. Quantitative goals are balanced by qualitative priorities; Telus’s reporting has a high degree of continuity and coherence. Fittingly, the company has won a series of awards, both for corporate reporting and for environmental excellence. BMO Financial Group One of Canada’s largest banks equally excels in a skilful blend of qualitative and quantitative strategies. BMO (formerly Bank of Montreal) pays particular attention to balancing priorities: financial performance, value for customers, trust on the part of both employees and communities. A special section in each report is devoted to Enterprise-wide Strategic Management, parallel to Risk Management. The company’s strategic objectives, like key player status in specific regions, are concretised into milestones. Each year’s progress is measured and reported. Financial targets are very concrete: the company sets a range of achievement like achieving earnings per share of 10– 15% (in 2003, it reached 28.4%, in 2004 to 29%) or return on equity of 14–15% (achieved 16.4% in 2003, raised the bar for the following year to 16–18% and achieved 19.4%). At the same time, BMO does not hesitate to highlight underperformance. In 2003, for instance, commercial customer loyalty remained below average, despite the goal to achieve top-tier loyalty. The company also openly admits to not becoming the No. 1 in Canadian business banking, though it narrowed the margin to the market leader. The letters of its CEO concentrate on BMO’s transnational growth strategy, which basically involves consolidating market share in Canada while expanding in the USA. In the global Annual Report on Annual Reports competition, BMO’s 2001 Annual Report was adjudged to be the best report in the world. In 2004, the company expanded its list of Strategic Priorities, while retaining the basic focus on a broader measure of success than the purely financial.    and on Market Trends Telus and BMO are both companies that set high internal standards and report on the degree to which they meet their targets and their

Management Value

85

strategic imperatives. Other companies, while being equally systematic, align their strategies towards market trends with a strong focus on competitors. Deutsche Post World Net Deutsche Post, the former German PTT, is now competing successfully with UPS and FedEx after acquiring DHL and Danzas. While lacking the charismatic profile of the major American operators, DPWN argues its case for market leadership in global express and logistic services by persuasively presenting its globalisation strategy. This is as much based on integrating delivery networks under the global DHL brand as on the company’s STAR value creation programme. STAR consists of more than 100 projects designed to raise DPWN’s earnings to E31 billion by 2005 and to eliminate what the company perceived as a valuation discount on capital markets. As Americanlisted companies with charismatic leaders, UPS and FedEx are far more attractive stocks than this erstwhile German nobody that only entered the capital markets after being privatised in 1990. DPWN devotes an entire chapter to corporate strategy in its annual reports, which have progressively gained in sophistication. In the reports up to 2002, the basics of integrating different European operators under one platform were discussed; in the 2002 Annual Report, DPWN concentrated on orienting its core competencies towards customer needs in terms of outsourcing and value-added services. Beyond this, the company reports regularly on the revenues generated by STAR projects. DPWN’s structured approach reflects the composition of top management, which consists to a great degree of former McKinsey consultants. The company’s sustained success has been widely discussed. The Financial Times fittingly entitled an article that focused on DPWN’s growth strategy: ‘The Postal Group that now Delivers.’ Cadbury Schweppes The British food and drinks giant follows a systematic approach to strategy, with a 4-Year Plan for the 2004–2007 period. The plan consists of five goals: 1. Deliver superior shareowner performance 2. Increase global confectionery share 3. Secure and grow regional beverages share

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Reporting Nonfinancials

4. Ensure best-in-class capabilities 5. Reinforce reputation with employees and society. This is a sound mixture of external and internal goals. Each year, Cadbury Schweppes reports in detail on performance. Cadbury is a company that needs to get back to excellence: in 2004, for instance, its total shareowner return ranked it in the second quartile of the peer group, up from the third quartile in the previous year, but still not in the top group. Reducing the cost base is an important priority: Cadbury Schweppes reports on a continuing basis on the factories it has closed and on a corresponding staff reduction. The company’s performance is excellently documented, with tables and charts matching performance to plans and comparing the year’s results with those of the previous year. The deficits in its market presence are also made evident: Cadbury’s as a brand might seem synonymous with chocolate in Britain; beyond this, the company reaches a commanding market share in huge individual regions like South Africa, Australia and India. On the other hand, its chocolate presence in various European markets and in the USA is weak. One particularly relevant target is the innovation rate. By 2007, the company wants to derive 15% of its sales from new products. In 2003, it reached 6% and a year later 9%. Innovation has to do with Research & Development, but also with creative and motivated people. For this reason, the company’s human resources rightly play an important role. In 2004, Cadbury Schweppes conducted its first global employees survey, confirming a high degree of employee commitment. Beyond this, however, indicators like employee turnover shows that the company has a stable workforce. What differentiates Cadbury from DPWN is its mixture of facts and comments. In the 2004 Annual Report, its then Chairman John Sunderland eloquently presented the case for the food industry in a commentary fittingly entitled ‘From hero to villain’. Sunderland both explained why the sector is under fire and tackled issues like obesity, pointing out that this is as much a question of personal choice as of entrepreneurial responsibility. Sunderland’s commentary is an important addition to the report, because if some of the products of the food industry are labelled as being unhealthy or ‘bad’, this would have an obvious impact on Cadbury’s revenues in the long run at least. The sector shows obvious parallels to the tobacco industry. Sunderland points out:

Management Value

87

Red lights on a chocolate bar would be meant to signify ‘eat sparingly’. But when I approach a red traffic light I do not drive through it sparingly, I stop. I do that because red means danger, halt, go no further. Such an approach demonises food. It patronises consumers, it is counterproductive and it carries important risks to health.

Sunderland goes on to argue why food warnings are counterproductive. Whether or not the reader agrees with him, Cadbury’s chairman provides food for thought. Cadbury Schweppes, as a member of the Dow Jones Sustainability Index, FTSE4Good and Business in the Community, has a clear ethical profile dating back to the Cadbury family’s strong social commitment. With a reputation to lose, this company obviously needs a strategy to cope with the food sector’s poor image. Its reporting takes up the challenge; Cadbury Schweppes’ 2002 Annual Report was deservedly commended by PricewaterhouseCoopers as best practice in reporting corporate strategy. Strategy as a Structured Process    Another company that received an award from PwC for reporting strategy was Pilkington. As the judging panel pointed out: Pilkington delivers a simple and clear strategy on cost leadership and cash generation that is concise and well-explained; its report takes you through everything you want to know.

Brevity is indeed a major reporting forte of this British manufacturer of glass and glazing products for the building and automobile markets. Pilkington’s strategy is as focused as its product mix. It consists of a three-stage grid: 1. 1997: Improve the effectiveness of existing operations (cost reduction) 2. 2002: Generate cash flow (reduce borrowings) 3. 2005: Invest in profitable growth opportunities (joint ventures, acquisitions). The company has made large strides in all three areas: Overheads decreased by over £300 million over a period of seven years, thus achieving the targets posited in Stage 1; borrowings reduced by 38% (£348 million) in the three years after Stage 2 started; joint ventures have been started in Brazil and Russia, while a production base was established in China (Phase 3).

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The company’s Operating and Financial Review thoroughly discusses strategy, while the Chief Executive assures shareholders that Stage 1 – cost-cutting – will never end. The ‘Project 20’ internal improvement programme is aligned to raise operating efficiency by 20%. Pilkington is in fact a model of strategic coherence. Equally coherent, and with its own three-priority orientation, is Carrefour. This French retailer became No. 1 in Europe and No. 2 in the world after taking over Promodès. Its strategic keyword is multiformat: the hypermarkets that Carrefour pioneered in France are at the top end, supplemented by supermarkets, hard discount and convenience stores. With a strong international focus – half of its sales are made outside France, making it one of the world’s most international retailers – the company practises regional variations on the multiformat theme, adjusting to the needs of local customers. Eighty percent of Carrefour’s sales derive from food products, which makes adjustment to local dietary needs imperative. Each of Carrefour’s annual reports has an entire section on strategy, which tends to be a kaleidoscope of decentralised initiatives: the exact opposite of Pilkington’s crisp centralism.    and as an Exercise in Restructuring Expansion is a joy; restructuring is a pain. Companies in trouble are generally under extreme pressure to communicate their strategies convincingly. This is particularly the case when they have ridden high for many years and capital markets, consumers and other stakeholders need to be reassured about the company’s comeback. Sony is a case in point. Once a model of innovation and a world leader in consumer electronics, this company has been through more downs than ups in the late 1990s and the early 21st century. Dwindling demand for the products of the company that created the Walkman and other iconic gadgets led to losses and substantial retrenchments in different parts of the world. The mobile phone collaboration with Ericsson turned out to be disastrous and in the electronic games sector, Sony’s PlayStation 2 failed to generate the expected turnaround. Its own CEO, Noboyuik Idei, once admitted that Sony was ‘lacking a sense of urgency’. The company’s communication with investors has, however, been straightforward, readily admitting to the immense challenges faced by the Japanese company. Sony’s annual reports have repeatedly figured interviews with Board members, who have emphasised the need to

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restore profitability and accelerate its network strategy. The company set itself a target for 2006, its 60th anniversary: it intended by then to achieve an operating income margin of at least 10%. ‘Transformation 60’ consists of a series of fundamental reforms, in particular convergence strategies in the Home and Mobile electronic sectors. By providing a detailed overview of structural reform, setting clear targets and reiterating its objectives at regular Corporate Strategy Meetings held in New York, London and Tokyo, Sony presented a cogent case for its recuperation. Fujitsu is not in the same predicament, though the services and platforms company has been through the doldrums after the tech bubble burst at the turn of the 21st century. This Japanese company excels in IT services, ranking No. 1 in Japan and No. 3 in the world. Fujitsu follows an integrated approach, stating: The cornerstone of the Fujitsu Group’s business strategy is our interlocked value chain of Services, Platforms and Technologies. This approach creates value by building on a solid foundation of expertise at each link along the chain.

Given this emphasis on a strategic value chain, reporting has a strong technical bias. ‘Everything on the Internet’ is how Fujitsu called its strategy in the 2000 Annual Report, aiming at being both a strong provider and an advanced user. Hailing the coming of broadband Internet, the company’s Chairman admitted the following year in an interview that the company needed to restructure its overseas operations. In the past, Fujitsu had acquired prestigious ‘have-been’ brands: Amdahl in the USA and ICL in Britain. These needed to be refocused, with Amdahl, the classic supercomputer manufacturer, moving from legacy systems to an open systems model. Fujitsu’s reporting is certainly instructive, providing readers with insights into the complexity of networks, programming and services. The company seems less resourceful in terms of service, with Fujitsu’s new president openly pointing out in the 2004 Annual Report that ever since he was appointed, I have repeatedly stressed the importance of customer-centric thinking, quality and timely delivery, and speed. I have met with numerous customers, spent a lot of time at the frontlines of our operations, and worked to bring about a change in the attitudes and conduct of everyone in the company, from senior management on down.

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He thus pinpoints the company’s deficiencies while highlighting various restructuring initiatives, mostly consisting of internal mergers. Global restructuring in North America created extraordinary losses that year, so strategy focused on reforming the organisation and management systems. One year later, in an annual report entitled ‘A Determination to Succeed’, Fujitsu reported on further progress made in restructuring the business portfolio. Tedious, uninspiring tasks, all coherently presented. Strategy derived from the Vision of a Leader    In most companies, structures tend to be stronger than personalities. Chairmen and CEOs come and go; conversely, our very perception of some companies is tied to the personality of their founders and leaders. Basil Liddell Hart, one of Britain’s leading military scholars, once defined strategy as the ‘art of the general’, which neatly describes the dominant role that a charismatic leader can play. (For profiles on strategic focus, see Figure 4.1.) However, there is one important difference between generals and CEOs. The former have a clear mission to win a war, whether by annihilation or attrition; but corporate chiefs are only successful if the companies they found or lead are sustainably successful. The business environment is only a battlefield in partial terms. Marketplaces are more fitting metaphors for the give-and-take of companies buying, selling and providing services. General George Patton famously said: ‘A good plan violently executed now is better than a perfect plan next week.’ Few corporate leaders are likely to agree. Sam Walton is perhaps the most formative founder of a business in America’s history. In 30 years, he moved from owning one store in Arkansas to becoming the head of the world’s largest retailer. When Walton died in 1992, Wal-Mart had surpassed both quality operators like Sears Roebuck and other chains like K-Mart. Ten years later, it became the world’s largest and most admired company in separate FORTUNE rankings. By any standards, Mr Sam’s performance was phenomenal. Unlike Ford, which has gone through a series of upheavals – and concomitant reporting leaps and jumps – in the decades after Henry Ford’s death, Wal-Mart has remained on course, both in terms of hard-core strategy and with regard to managerial style. Sam Walton remains the company’s mentor; his tenets breathe through corporate communications.

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This begins with Walton’s emphasis on customer service and the need for high levels of satisfaction, which led him to constantly visit stores. It continues with rituals like the famous Saturday meetings during which best practice is discussed and the company’s empowering ethos is demonstrated; field managers act as intrapreneurs and share their ideas with both colleagues and top management. It reaches its apogee with Sam’s folksy approach: the Wal-Mart cheer – ‘Give me a W! Give me an A! Give me an L! Give me a squiggly!’ etc. – as a symbol of inclusiveness. The Wal-Mart family encompasses employees (or rather associates – a more dignified expression that Wal-Mart constantly uses), customers, suppliers and the community at large. This ‘tacit nature’ of the Wal-Mart culture – as Allan Afuah described it in his book Innovation Management – born in the one-horse-towns where Sam Walton started business in the 1960s, is difficult to duplicate, as the company’s competitors have discovered. Wal-Mart’s reporting honours these stakeholder traditions, almost as if Walton himself were still alive and in charge of operations. For instance, in the 2004 report: • The CEO expressed pride in the accomplishments of Associates and quoted the founder: ‘Mr Sam said, “Our Associates make the difference,” and he was absolutely right.’ • Wal-Mart’s Chairman Rob Walton also quoted his father who had made it his personal mission to ensure constant change. Walton then emphasised the common interest of all Walton stakeholders, inviting them to send him e-mails. • An entire section was dedicated to the Associates and how in one case of crisis, surgery on an employee’s child was enabled by the company’s medical plan. • The customer mantra revolved around meeting everyday needs with moderately priced merchandise. Here again, profiles of customers illustrated the emphasis on customer service that Sam Walton propagated. • Lasting relationships with individual suppliers were described, with due emphasis placed on the fact that Wal-Mart dealt with many women-owned suppliers. • Equally important were the many grants and initiatives devoted to helping communities, like the ‘Words Are Your Wheels’ literacy campaign. This rhymes with the grass-roots approach of a company that came up from small towns in the deep South.

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• Last but not least: Wal-Mart likes flying the Stars and Stripes, portraying itself as a loyal supporter of those in uniform and proudly mentioning its winning a Corporate Patriotism award. In tangible ways – free phone cards, compensation for the difference between military pay and Wal-Mart wages – the company supported those of its Associates that entered military service. Wal-Mart reporting tends to be highly narrative: the emphasis is on good fellowship, with anecdotes reinforcing basic tenets. The financials play a supporting role; relationships seem far more important. This, of course, is a way of ignoring the real commentary in the outside world by seeming to integrate it. The company has yet to deal convincingly with the huge barrage of law suits and public criticism it has experienced for a number of years. Rather than owning up to or refuting charges that it pays low wages, refuses to allow employee representation, discriminates on ethnic grounds, has a policy of hire-and-fire and a host of other accusations, the company tries to side-step issues, while tacitly acknowledging the need for action. In 2004, Wal-Mart’s CEO mentioned the founding of a Diversity Office and admitted that financial performance was not the only measure by which the company was being judged. Wal-Mart’s reporting reflects the uncertainty of a company struggling to align itself to a new business environment. In his letter to stakeholders, CEO Lee Scott quoted Warren Buffett who pointed out that if 446 other taxpayers each contributed the $4 billion that WalMart paid in federal taxes for 2004, no one else would have had to pay taxes. Whether this can help to deflect criticism remains to be seen. It does, however, say something about Buffet’s cult status as the pre-eminent American business investor. Buffet, of course, is an American icon. The sage of Omaha, as he has often been called, is renowned for his wit and wisdom. America’s most successful financial investor operates far from the turbulence of Wall Street; Berkshire Hathaway’s headquarters are in Omaha, Nebraska. A staggering number of books and articles have been written on his investing strategy. Buffet indeed has the gift of simplicity: his longterm, buy-and-hold approach is based on a thorough understanding of the handful of companies in which Berkshire holds significant investments. His tenets are common sense: Can a business be purchased at a significant value discount, does it have high ROE and high profit

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margins, is management rational and candid and does the business have a consistent track record? These considerations are often discussed in Buffet’s annual Letters to Shareholders in Berkshire’s annual reports. These letters, which have been called ‘eloquent and painstakingly educational’, are a source of investment insight. Buffet despises the usual considerations that motivate institutional investors and fund managers; his triumphs are anticyclic, in other words Berkshire Hathaway fares best at times when the Standard & Poor’s index is down. Addressing his shareholders in the boom year 1997, Buffet acknowledged this and then pointed out: ‘But we expect over time to maintain a modest advantage over the Index, and that is the yardstick against which you should measure us.’ In the same year, Buffet warned his investors – all great longstanding fans of his – that Berkshire’s value creation could not continue indefinitely. In his letter to shareholders for the financial year 2004, Buffet reported on a year in which Berkshire’s book value gain trailed the S&P index. As always, the sage took full responsibility for not making the best use of the cash that Berkshire’s operating businesses had generated. Each of his 20-page letters is like a lecture piece, and each of them encompasses his personal investing vision. Berkshire Hathaway’s annual reports are required reading for those seeking to understand the mechanisms of capital markets; fittingly, it received IR magazine’s 2004 award for the Best Annual Report in the USA.    and His Insights on Markets – or Hers Few companies have cult status and few entrepreneurs can command the same attention and reverence enjoyed by Warren Buffet. However, leaders can profile their companies by providing insights into the markets in which they operate. This is something that British Land achieves extremely well. This London-based property investment company has a portfolio of around £10 billion and is to a great extent responsible for its own property management. British Land’s reports are well documented. The Chairman’s Statement provides the company’s strategic focus, pointing out for instance that apparent availability of total space is a false indicator, as far as property investment in the City of London is concerned. The Chairman also commented on joint ventures, such as a Midlands business park development and enunciated the company’s long-term strategy: strong tenants, long-lease profiles and growth potential. Basically, it sounds

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like Buffet’s stock criteria adapted to real estate. Fittingly, British Land has won several IR magazine awards for the Best Annual Report of a FTSE 100 company. Corporate strategy basically needs clarity and continuity. Flashy declarations can prove to be embarrassing a year or two later. This is particularly important when top leadership changes every few years. One company that scores high marks for clarity and continuity is Southern Company, a super-regional energy provider in Georgia. Southern is one of the largest energy generators in the USA; it also ranks among the best in terms of stock price and customer satisfaction. The annual reports published by Southern in 1996, 2000 and 2004 reflect certain basic tenets, though three different CEOs were responsible. The leitmotif was presented as far back as 1996: be the best investment in the electric utility industry by achieving high levels of customer satisfaction and diversifying away from the core business. Southern reports on all aspects of electric supply – generation, transmission and distribution – while focusing on customer orientation. In the 2000 Annual Report, the then CEO wrote: We don’t follow fads and we don’t react to short-term developments. We focus on being the best at the fundamentals. To us, the fundamentals mean continuously finding better ways to serve our customers’ energy needs more efficiently, reliably, economically, safely, and cleanly. And, in doing so, providing superior, risk-adjusted returns for our shareholders.

This fundamentalist approach is Southern’s strategy. Customer service is a shibboleth: corporate leaders constantly emphasise ‘Southern style’ as an efficient and informal approach to better service. In 2004, the new CEO tackled the issue of change and negated the need for it: Our Southeast-based strategy combines a strong regulated retail utility core business with a steadily growing competitive generation business, and it continues to work well. I believe that investors want a good return for low risk. Therefore, we will work to continue to maintain our excellent credit ratings, strong asset base, low-risk strategy, and outstanding execution.

Strategic conservatism is the nucleus of the company’s value proposition. The CEO addresses shareholders in an informative letter and then restates vital issues in the Question & Answer section of the annual report. Projecting long-term annual customer growth at 1.5% and electricity demand growth at 2%, Southern combines a low-risk strategy with reasonable expansion.

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Despite remarkable advances made in gender equity, particularly in the United States, business remains a man’s world. Diversity programmes and greater fairness have seen women reach top positions in blue-chip companies like Hewlett-Packard and Rank Xerox; but despite this, management and reporting remain a strongly masculine endeavour. Avon is an exception, though the world’s leading purveyor of directly sold beauty products was founded by a man called David McConnell in the late 19th century. As a door-to-door book salesman, McConnell realised that there was a market for directly sold cosmetic articles and, today, Avon has around five million sales representatives across the world. This has always been a ‘Company for Women’ as the title of the 1999 Annual Report proclaims. In the late 1990s, Avon developed a vision statement which ran: We are, uniquely among major corporations, a woman’s company. We sell our products to, for, and through women. We understand their needs and preferences better than most. This understanding should guide our basic business and influence our choice of new business opportunities.

This is not just the company’s USP, it’s an excellent starting point for strategy. At the end of 1999, Avon became a company not just for women but with women in top positions: Andrea Jung became CEO, later joined by Susan J. Kropf as President and COO. Results were strong that year, but Avon’s stock performed badly. The new management developed two major strategies for growth: strengthening brand image and modernising the direct-selling system. Strategic initiatives included increasing global advertising spend by 50%, upgrading sales brochures, investing in sales leadership programmes and relaunching the website. Andrea Jung called for a ‘thoughtful transformation’ of Avon, which, like the George W. Bush administration’s ‘compassionate conservatism’, is an appealing, reassuring slogan. Reporting ever since has echoed these priorities while telling a continuing success story. Sales and income have steadily increased, with the number of sales representatives jumping from three to five million in the course of five years. Avon has figured in the Interbrand list of the world’s top marques for several years, reflecting the brand’s iconic status. Jung and Kropf’s annual letters to shareholders document the company’s sustained success. Avon is constantly on the move, launching new products and expanding initiatives like Sales

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Leadership, which involves representatives recruiting and training others. Avon’s vision has evolved appropriately over the years. In the 2003 Annual Report, it was formulated as follows: ‘To be the company that best understands and satisfies the product, service and self-fulfilment needs of women – globally.’ This is an organic extension of the policy formulated in the 1990s and reflects the company’s growing internationality. The slogan of the 2004 report – ‘Empowering Women throughout the World’ – emphasised the globality of Avon’s value proposition. Indeed, the sluggishness of the American market was more than compensated for by strong growth in other regions. While highly efficient and systematic in its strategic approach, with three 3-Year plans devised to strengthen core business, consolidate market position and expand Avon’s global footprint, Avon retains its specifically feminine flavour. This even applies to corporate responsibility: Avon is a strong contributor to funds for breast cancer research and also supports efforts to eliminate domestic violence.

Box 4.1

Reporting on Strategy: Recommendations

Start by formulating or revising the vision statement. Analyse it carefully. Is it realistic and does it characterise your company’s specific concept of success? Beware of claptrap phrases and pie-in-thesky goals. Then translate the vision into a clearly stated strategic overview: • What are the qualitative and quantitative measures of success (e.g. growth, profitability, reputation)? • Which unique attributes does the company have (e.g. innovative culture, internationality, speed to market, etc.)? • Which macro- and microeconomic factors have affected its success in the year reported on (e.g. legislation, economic upturn/downturn, sectorial shifts)? After this, report on performance in the past financial year as compared to key goals. Have the results tallied with quantitative targets and if not, why not? Comment on the fulfilment of qualitative targets (inclusion in SRI investments, rankings of respected companies, etc.). Enrich general commentary through specific analysis of strategic initiatives like costcutting, process optimisation, etc.

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Conclude by outlining new strategic perspectives and next steps. • Is the company planning to centralise or decentralise? • Will core competencies like R&D or logistics be further developed and where do you see specific growth potential? • Which deficits need to be addressed and which new frontiers does the company want to reach?

Positioning A special chapter in the first section of the Annual Report, directly after the Letter/Message to Shareholders. KPIs should also be published on the corporate website. Key Performance Indicators Growth Profitability Innovation rate Internationality Efficiency

Growth rate of the last three years (turnover and net income) Earnings per share/return on investment for last three years % of new products/services developed in the last three years % of non-domestic business, classified in regions Cost/income ratio

B. GOVERNANCE: SHADES OF TRANSPARENCY ‘You can run, but you cannot hide.’ Thomas P. d’Aquino, President of the Canadian Council of Chief Executives, put the predicament of many companies and their top managers in a nutshell in the title of a talk held at a Corporate Governance conference in 2003. Good governance (see Table 4.2 and Figure 4.2) is a necessity, as d’Aquino pointed out: Inquisitive eyes and ears of governments and regulators, analysts and money managers, customers and NGOs, journalists and whistleblowers are everywhere. Communication is instant. Analysis follows quickly. And the market’s judgment can be swift and brutal.

In the wake of mega scandals, both in the USA and in Europe – Enron, WorldCom and Tyco, among others, in the new world, and Ahold, Vivendi and Parmalat in the old – governance became the

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issue of the early 21st century. Media reports highlighted weaknesses, ratings and rankings mushroomed. Investors grilled top managers at annual general meetings to an unprecedented extent. Major governance themes were remuneration, accounting and top appointments. Remuneration At GlaxoSmithKline, the company was forced to backtrack on the remuneration package of its chief executive, Jean-Pierre Garnier, after institutional investors publicly expressed reservations about his pay package, valued at around £20 million. Institutional investors were quoted with value judgements like ‘decidely iffy’ and ‘dismal profiteering’, while the Financial Times opined that the shareoptions-arrangements were too complicated and too close to the ‘discredited US model’. This was in 2002, shortly after Enron and Co. Equally embarrassing was the rejection of Aegis Group’s remuneration report at the media services company’s AGM in 2004. A majority vote was passed against the chief executive’s 24-month rolling contract, which included a parachute clause equivalent to 60 months salary and pension arrangements pegged at 50% of salary. Corporate greed became as much an issue as the arbitrary nature of executive compensation. Accounting Fraudulent accounting procedures have become the most substantial governance issue. At the Dutch retailer, Ahold, a major scandal developed in the context of false accounting and deception of the auditors, with several members of the company’s Management and Supervisory Boards resigning as a result. Similarly, the US mortgage provider Fannie Mae publicly acknowledged that it had not complied with GAAP provisions and that it needed to restore its relationships with regulators, partners and Congress. Top appointments The days have passed since AGMs simply rubber-stamped the appointment of top managers. At BskyB, there was an uproar in 2003, when the company’s Chairman Rupert Murdoch had his son James appointed Chief Executive, with the former chief executive being given a ‘noncompeting fee’ of £10 million. Though reservations were expressed

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about a father-and-son regime, the resolution appointing Murdoch’s son was passed. Similarly, Nestlé’s CEO Peter Brabeck-Letmathe managed to overcome the opposition of Swiss pension funds and became Chairman of the company as well at the 2005 AGM. Just 50.55% of the shareholders supported the motion to allow Brabeck-Letmathe to wear two corporate hats. The company pleaded that this step was vital to assure strategic continuity and strong leadership. However, though Swiss law allows for dual leadership (by contrast, company law in Germany requires a separation of the two top positions), Nestlé’s decision was widely criticised and was detrimental to the company’s image.

REGIONAL PRESSURES AND STRUCTURAL DIFFERENCES Governance is a fiduciary responsibility for companies of all sizes and in all countries. Sir Adrian Cadbury, one of the world’s leading authorities on the subject, has defined it as being ‘the company’s responsibilities to meet its material obligations to shareholders, employees, customers, suppliers and creditors, to pay its taxes and to meet its statutory duties’. However, consciousness of the need for governance and legal provisions to enforce it tend to vary. England has played a pioneer role in governance regulation: After the Maxwell and Polly Peck scandals of the 1980s, the Cadbury, Greenbury and Hampel committees made recommendations that have been codified in a Combined Code. The code covers Board appointments, financial reporting as also the work of the audit and remuneration committees. It fits well with the AngloSaxon Common Law tradition by regulating to a restrained extent. Companies are obliged to ‘comply or explain’, in other words: if they do not abide by the Code, they should explain why. The British Code has influenced a number of codes in other European countries. However, important differences remain. Germany, for instance, not only has a more prescriptive legal tradition, like other Continental European countries; it also has a two-tier Board with a clear separation made between supervision and management. For this reason, German companies have resisted the European Commission’s recommendation that companies in member countries adopt the British system. However, the country’s governance code, that emulates in several respects the British model, has forced traditionally secretive

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companies towards transparency. One important issue is executive compensation: after much opposition and a parade of spurious arguments, listed companies agreed to disclose the individual salaries of Managing Board members. Despite this, disclosure in British annual reports on remuneration to top management remains far superior to reporting in Germany and other European countries. A transparency and disclosure study, published by Standard & Poor’s, ranked the UK in top position, followed by France, Sweden and the Netherlands. The ranking, which was based on 98 individual criteria, gave such countries as Germany, Italy and Spain mediocre marks. Significantly, companies with ADR (American Depository Receipts) listings had higher levels of governance disclosure than those not liable to publish 20-F supplements to their annual reports. The most dramatic increase in legal provisions for governance has certainly been the Sarbanes–Oxley Act, passed in 2002. SOX has codified disclosure, requiring listed companies to publish an ‘internal control report’ within the annual report, which assesses the effectiveness of the internal control structures and procedures and discloses whether or not the company has adopted a code of ethics. The company’s Chief Executive and Chief Financial Officer are also required to publish an assurance together with the audit report, certifying that the financial statements give a fair view of the company’s condition. Michael G. Oxley has reacted to criticism about the work and cost involved in coping with the Act’s provisions: Some people dismiss it as box-checking, but the work is actually far more significant than that. Sarbanes–Oxley compliance is an investment in every company, it is an investment in our financial system, and it is an investment in the strength of the United States capital markets.

Box-ticking is indeed a major problem. Adhering to the letter of the law is a necessity; however, the spirit of governance involves insights into specific corporate issues. These vary, depending on the company’s business – and, of course, its origin. Take Japan. On paper, corporate structure is identical to the American model, with a Board of Directors, elected by shareholders, that sets policies and oversees the executives who implement these policies. In reality, boards have tended to ignore the interests of shareholders. Almost all directors are senior managers or former top executives with clear internal loyalties. Executive pay has not been tied to profits as is the case in Anglo-Saxon

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countries; however, Japanese companies are progressively moving into the governance mainstream, discarding lifelong employment as a major corporate goal and opening company Boards to outside directors. Astellas Pharma, for instance, founded in 2005 after a merger between the pharmaceutical companies Yamanouchi and Fujisawa, has instituted a two-tier system. The CEO remains the pre-eminent figure both in the Board of Directors and the Executive Committee, which is manned by executive vice-presidents. The Board consists of nine members: three company executives including the CEO, three former executives and three outside members. Board Chairman Hatsuo Aoki, a former executive, considered this to be an effective ‘mixture of the traditional Japanese system and the current Western style’; whether or not the continuing preponderance of managers and former managers can ensure independent control remains to be seen. Table 4.2 Governance: Key Reporting Indicators Quantitative

Qualitative

• Remuneration of top executives (including bonus, share options) • Contractual arrangements for CEO (including ‘parachute’, pension provisions, etc.) • Non-executive directors: number and prerogatives (committees, etc.) • Directors’ attendance and voting at Board meetings

• Procedures for dealing with shareholder complaints • Record of important Board policy decisions • Risk control mechanisms • Ethical code including enforcement (whistle-blowing)

ARE GOVERNANCE PREMIUMS SUFFICIENT INCENTIVES FOR COHERENT REPORTING? Governance can be a chore; it can, however, also reflect a company’s efficiency and enhance its profile on capital markets. A research study commissioned by the governance service provider Institutional Shareholder Services (ISS) came to the conclusion that weakly governed companies performed worse than their peers. These companies had lower profitability and higher share-price volatility. Beyond this, their price-to-book ratios were lower and their cash flows inferior to companies with better governance. Needless to say, they paid lower dividends. Governance quality was measured by the Corporate Governance

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Quotient, a rating system designed to help institutional investors to evaluate the performance of Boards. ISS uses four measures to evaluate performance: Board composition, compensation, take-over defences and audit. Other governance providers have varying criteria and thus arrive at different estimates. Fannie Mae, for instance, got a gold star in a Standard & Poor’s governance rating, meaning a score of 90%. GovernanceMetrics (GM), on the other hand, ranked the mortgage finance company below-average and ISS refused to rate it, because, as a government-sponsored enterprise, Fannie Mae is not required to abide by securities legislation. In the event, GM was proved right when a scandal erupted in 2004 because of inappropriate accounting practices. Fannie Mae is a classic case of governance malpractice: a SEC investigation showed inadequate control mechanisms, and accounting methods that deviated from standard practice. Inadequate control is indeed the key governance issue, one of execution rather than of legal provisions. As Carolyn Kay Brancato of the Conference Board pointed out in the context of a report on corporate governance practice: To ensure maximum board effectiveness, boards need to shift their entire emphasis. They can no longer be just advisors who wait for management to come to them. Their new role requires that they provide active oversight of the company’s business to minimize corporate risk and promote creation of shareholder value.

Investors across the world expect Boards to control effectively. A survey of investors carried out by McKinsey showed a large ‘governance premium’. The premium for well-governed companies varied depending on the region covered: • 12–14% in areas of the world seen as being generally well-governed like North America and Europe • 20–25% in Asia and Latin America • over 30% in Eastern Europe and Africa. Within regions, there is an equally wide spread between countries with well-developed mechanisms and others with inadequate control. A McKinsey Quarterly article, ‘Asia’s governance challenge’, pinpointed vital issues like the presence of independent directors and audit committees. Countries like Singapore and Hong Kong virtually fulfil all international standards, while others – Thailand, Philippines, Indonesia and China – trail far behind.

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The McKinsey findings are confirmed by a survey conducted by Britain’s Investor Relations Society. For approximately half of the investors and analysts interviewed, governance issues play a major role in their assessment of companies. More than 50% favoured an increase in the number of non-executive directors. Coherent reporting is an important sign of good governance. Many companies still equate governance information with a litany of textbook type rules and requirements. Nestlé, for instance, presents its strategy in a succinct one-page overview, while the governance report is a separate 32-page brochure. However, nothing in Nestlé’s reporting touches on why the CEO needed to take-over the role of Chairman at the Annual General Meeting in 2005. In effect, this managerial decision was opposed both by the Swiss Ethos Fund, one of the company’s institutional investors, and by ISS, which criticised it as a ‘step back in best practice’. The company, on the other hand, argued that the Swiss Code of Obligations allowed for this combination and brought forward several other arguments. ISS, however, was of the opinion that the company had provided inadequate justification for its move and criticised the Board’s ‘poor succession planning’. In the event, a tiny majority −5055% – supported management on the issue and the new Chairman + CEO Peter Brabeck-Letmathe later criticised the double-mandate issue as being what he called ‘corporate governance ideology’ and emphasised the need for ‘strategic continuity and strong leadership’. The pros and cons of combining the functions are indeed a far more vital issue than the litany of data on the Board of Directors and Shareholders’ participation that the company published in its Governance report. A growing number of investors expect companies to provide substance rather than form. A Citigate Dewe Rogerson survey revealed general disaffection with formalistic data: Investors want more information to be provided online and find legalistic boilerplates confirming compliance with governance codes of little relevance.

Investors saw a clear correlation between good governance and superior performance. However, they considered factors like trust and integrity, which can hardly be quantified, as vital as regulatory issues such as Board composition and remuneration. This clearly makes the narrative elements of governance reporting as important as the

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classified sections with breakdowns of salaries and the minutes of committee meetings. Indeed, Britain’s Financial Reporting Council, which has published the Combined Code, calls on institutional investors to avoid sheer box-ticking and enter into constructive dialogues with companies that do not fulfil the code provisions. Reporting thus needs to adopt the role of providing the foundation for a dialogue, rather than demonstrating superficial concurrence with legal provisions. Legalism can be counterproductive for all sides. Timothy Copnell, director of corporate governance at KPMG, has pointed out: Increasing the number of principles companies will have to report on will produce reams of extra pages in the annual report. This will add to the regulatory burden faced by listed companies, but one has to question whether it will provide a meaningful insight into how each organisation is governed, if investors will read it, and whether it will influence company behaviour?

Governance is effective when focused and communicated appropriately. Not many investors are likely to concur with Stephen Bryers, Britain’s former Trade Secretary, who has contended that corporate governance is meant to cover issues such as treatment of the workforce, and also impact on the community, the environment and the developing world. The governance mandate is clearly oriented towards protecting investors and ensuring that both the letter and the spirit of the law are not contravened. Investor Relations Officers (IROs) are well aware of the need for effective communication. Over half of those queried by Citigate Dewe Rogerson asserted that the major reason for actively promoting governance lay in enhancing the company’s reputation and its brand value, while over two-thirds believed that it boosts share prices. However, there were complaints about the lack of transparency offered by investors and rating agencies alike. One respondent contended: We never get any feedback as to what the impact of our governance information is that we give out. It would be good if the rating agencies and fund managers would apply to themselves the same rules they apply to us. So far, information flows only in one direction.

Reporting Approaches: Between Formalism    This could well be the reason why the majority of companies seem to lack a sense of orientation. IROs certainly take the matter seriously:

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according to the IR and Annual Report Yearbook 2005, 56% of all respondents in European companies confirmed that they had expanded the amount of information on governance in their reports. This trend was particularly strong in Continental Europe. • ABN-Amro: This bank is a good example of an avowed legalistic approach. It reports on literally each of the more than 100 provisions of the Dutch Corporate Governance Code. The company proudly announced that it complied with all but four provisions of the Code. It meticulously documented its attitude and action towards each provision in a 40-page brochure of more obvious utility to official watchdogs than to investors. • BBVA: Similarly, Banco Bilbao Vizcaya Argentaria is highly informative in terms of profiles of Board members, governance procedures and the activities of various committees. This large Spanish bank also provides relatively detailed and individualised data on executive pay in its 56-page booklet. One particular highlight of the BBVA governance approach is the description of risk management. • Syngenta: This strongly R&D oriented agribusiness company is a market leader in crop protection. Syngenta was founded in 2000 as a merger between the agrochemical business of AstraZeneca and Novartis. Its governance reporting mirrors the relative laxness of the Swiss Code of Best Practice: loads of information on its two-tier Board members but no breakdown of individual compensation. Though the Governance report includes a certification by the company’ auditors Ernst & Young, its blandness highlights the importance of where a company is based. If Syngenta were based in Britain, like AstraZeneca, instead of at Novartis’s base in Switzerland, its reporting would have been far more concrete. Indiscriminate disclosure has become a major trend. As Jonathan Charkham, Chairman of the Audit Committee of Mitzuho International has pointed out, the times have past when a company chairman could say: If the results are good, they speak for themselves and if they aren’t, the less said the better. Today, the opposite is true: the quantity of reporting is often used as a defence mechanism. Data is provided rather than insights. As Charkham aptly puts it: The old adage ‘When in doubt, cut it out’ has given place to a new one: ‘Don’t hesitate – proliferate.’ Everything is now thrown in to avoid a charge of concealment. The cynical might say this was choking the cat with cream, or more accurately, concealment by over inclusion.

Reporting Nonfinancials

Large

106

ABN-Amro

BP

Amount of Data

Nestlé

BAT

Toyota

Small

GE

Low

Quality of Information

High

Figure 4.2 Governance quality profiles

   and Hardcore Information However, an increasing number of companies are discarding concealment mechanisms and pioneering a focus on burning issues rather than everyday claptrap procedures. Unsurprisingly, British companies are in the forefront. BP is a governance leader, starting with an excellent definition: Governance is the system by which the company’s owners and their representatives on the board ensure that it pursues, does not deviate from and only allocates resources to its defined purpose.

This narrows the scope of governance to control; BP makes a point of explaining that governance is not a synonym for compliance, nor is it a ‘higher form of management’. The paramount role of the nonexecutive directors is manifest. The BP approach, well documented in its annual reports and on its website, is clear: • The Board recognises that its working capacity is limited and thus focuses on policy decisions. • The Board has a clear majority of non-executive members: 12 as against six executive directors. • The Board has a high international component with five nationalities represented. • All non-executive members must be free from any relationship with BP.

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• Directors’ attendance at meetings is a serious obligation and is well documented on an individual basis. • The Board Chairman and Deputy-Chairman are both non-executive; the Deputy-Chairman can be directly addressed by shareholders who feel their concerns are not being dealt with adequately by management. All this does not preclude scandals or irregularities occurring, but it does give the Board a high degree of independence. BP’s mental clarity is admirable: on the one hand, it defines an Executive Linkage policy, whereby authority is delegated to the CEO while, on the other hand, its Executive Limitations policy addresses the restrictions laid on top management in terms of ethics, safety, the environment, treatment of employees, etc. BP also gives the Board its own executive resources: the company secretary reports to the Chairman, not to the CEO. His office provides support to all non-executive directors, also ensuring that committee processes are entirely independent of executive influence. Fittingly, Standard & Poor’s gave the company an excellent Governance Score, with top marks for ownership structure and a very high rating for stakeholder relations and financial transparency. S&P was particularly appreciative of BP’s reporting on financials and nonfinancials: The quality and content of public disclosure is exceptional. BP continues to demonstrate leadership in the thoughtfulness and thoroughness of its financial and non-financial disclosure    BP also distinguishes itself by the preparation of comprehensive environmental and social impact reports and has dedicated significant resources to the research and the reporting of nonfinancial information.

Best practice in governance involves independent thought and action. British companies mostly abide by the Combined Code; however, the country’s benchmarks develop their own strategies. British American Tobacco (BAT), for instance, has developed both its Standards of Business Conduct and a Statement of Business Principles, designed to meet the sometimes conflicting expectations of the company’s stakeholders. As with BP, two-thirds of the BAT Board are non-executives. The Board alone decides on business strategy, the company’s budget, dividends and other major issues. Decisions can be taken by a majority vote, thus allowing the non-executives to outvote corporate management. BAT not only has the company secretary reporting to

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the non-executive directors, but the secretary also holds individual interviews with the directors on a yearly basis and then submits a report to the Deputy-Chairman, which is thereupon presented first to the non-executive members and then to the entire Board. This way, disparities or atmospheric frictions can be identified and dealt with in a systematic way. BAT is one of a rising number of companies with a Board Committee on Corporate Social Responsibility. This brings social and environmental issues and risks to the highest decision-making level. The Committee not only identifies potential issues and risks; it also evaluates corporate policies and recommends changes. At Vodafone, governance encompasses charitable contributions and political donations, and both are reported in the company’s annual reports. Equally, Vodafone has a complex process of peer-group performance evaluation with the Chairman assessing the Chief Executive and being assessed himself by the senior independent director. BP, BAT and Vodafone are in the vanguard of clearly defined governance mandates. Toyota, on the other hand, the world’s most sustainedly successful automobile manufacturer, has a far more complex structure. Governance at this Japanese company consists of ‘multidirectional monitoring’. A large number of managing directors and non-Board managing officers interact with an International Advisory Board and several auditors. Beyond this, there are Labour Management Councils and other bodies, flanked by several Philanthropy and Environmental committees. Toyota is very open about having a completely different system and lists all significant differences to US companies listed on the New York Stock Exchange in its 2005 Annual Report. Being perceived as a trusted corporate citizen is almost as important to Toyota as increasing shareholder value. With 27 managing directors, 44 managing officers and 10 foreign advisers, the company would seem to be completely unwieldy in Western terms. However, Toyota’s excellent track record in terms of both profit and reputation shows that there is no single prescription for how governance can effectively function. Toyota’s governance seems overformalised, while General Electric’s makes an informal impression. Governance as an issue is barely touched upon in the company’s annual reports. During the Jack Welch era, GE concentrated on optimising its Operating System with the Corporate Executive Council playing an important role. In his 2005 Letter to Stakeholders, Jeff Immelt, who is both Chairman and CEO,

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very kindly points out: ‘I like and respect our Board of Directors.’ In actual fact, the company has an independent Board with a presiding director. However, the company’s CEO also personifies governance; on GE’s website, Immelt presents the company’s proactive approach to achieving the spirit of governance. British companies seem more advanced in separating governance from corporate strategy, though on a variety of issues – percentage of independent directors, evaluation of top management, etc. – similarities are abundant. A British CEO would make a patronising impression if he were to echo Immelt: ‘Let me emphasize: they (all board members, including executive directors) are persons of incomparable reputation and integrity who have never failed to speak their minds and advance shareowner interests.’ The American governance set-up remains personality-oriented despite NYSE rules and SOX; however, GE’s provisions for nonexecutive directors to meet without management participation and also visit the company’s businesses twice a year without senior management being present are certainly steps in the right direction. Like BAT and Vodafone, GE has a Public Responsibility Committee charged with overseeing CSR activities. Its governance performance has won a number of prizes including IR magazine’s award for 2004 and the FT ranking for corporate governance the same year. James D. Wolfensohn, a former President of the World Bank, presciently said in 1999: ‘The proper governance of companies will become as crucial to the world economy as the proper governing of countries.’ With major companies in Western countries producing greater wealth than the Gross National Products of many developing nations, governance has indeed become a vital issue. Box 4.2

Reporting on Governance: Recommendations

Here, it is particularly important to concentrate on substance rather than form. Obviously, key governance elements are prescribed by various codes, but the real message is about how management control is assured, not how various code stipulations are being adhered to. Focus on the following: • Describe remuneration policy for executive Board members, in particular the payment package of the CEO. How large are stock options and what is the time frame for allotment and disposals? Also describe clauses for premature severance of contracts (parachute clauses).

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Box 4.2

Continued

• Analyse your control arrangements such as the system of performance assessment of the CEO and other executive directors. To what extent is it formalised? How is an independent assessment by non-executive directors assured? • Give insights into how financial reporting is supervised. How are new GAAP/IFRS stipulations tackled? What were the principal milestones of the audit committee’s work in the past financial year? Then describe in broader terms how issues like ethics and stakeholder dialogue are dealt with by the Board: • Who is responsible for enforcing the ethics code and what provisions have been made for whistle-blowing? • Does the company have an ombudsman or other independent spokesperson to address shareholder complaints or a designated representative to respond to demands from NGOs? • How are investor rights codified? Finally, describe the infrastructure of governance: • Do non-executive members have access to independent resources? • What is the role of the company secretary? • How do voting procedures function at board meetings?

Positioning A separate chapter in the Annual Report directly after the Letter/Message to Shareholders and the chapter on strategy. Key Performance Indicators Management control Remuneration

Board composition Governance ratings/rankings

List of committee meetings with documentation of attendance by Board members and major decisions taken Breakdown of salary components and pension fund provisions, in particular performance-bonus link and stock options or LTIs Qualifications and background of Board members Company performance in ratings/rankings published by S&P, ISS, GMI, etc.

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C. OUTLOOK: FORECASTING AS THE ULTIMATE CHALLENGE In a commentary published in Accountancy Age, Richard Barrett highlighted the long-term importance of nonfinancials as a planning tool. Forward-looking companies understand and accept that it is the nonfinancial, operational metrics that ultimately drive the financial performance of the organisation. Instead of attempting to manage using financial measures, they focus on understanding the ‘cause and effect’ relationships between business drivers and their impact on business performance over time.

Predicting the future is the true test of management quality (see Table 4.3 and Figure 4.3). Reporting on it is an even greater challenge. Most reports concentrate on the past; after the turbulences of the New Economy, projecting earnings growth became a risky endeavour. Analysts and investors were quick to write enterprises down that failed to achieve their own targets. Many companies are reluctant to stick their necks out and prognosticate results. False earning forecasts are obviously a danger; however, the investing community has a right to management insights into a company’s prospects, including how it sees macroeconomic developments and sectorial trends. The same right applies to customers, employees and the media. Inadequate reporting reflects an inherent discrepancy between the mindsets of the accounting and the investment worlds. Accountants focus on the last year’s or last quarter’s results. The markets, however, value companies not only on track record but also on their prospects. As Robert Hodgkinson of Arthur Andersen once pointed out: The absence of routine dialogue about the future impairs quoted company accountability and performance. Within all organisations, prospective and historical information complement each other. Budgets are set and people report actual performance against them. Yet this model is rarely deployed for the benefit of outside investors.

There is in fact a major discrepancy between internally available and externally reported information. Most companies fail to build confidence by putting forward their premises, their estimates of the business environments and by outlining the business targets that they plan to achieve on the basis of these premises and estimates.

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BETWEEN EXPECTATIONS AND REGULATIONS So how do companies meet the expectations of investors and other stakeholders? Methodologies or frameworks of reporting are scarce. In its ValueReporting framework, PricewaterhouseCoopers locates forecasting within the category Strategy and Structure. PwC calls on companies to report medium-term targets and milestones, including indicators of risk – such as cost of capital – and of return (cash flow). This should be done both for the company as a whole and for individual divisions. This is basically a quantitative approach, although PwC does call for supporting evidence in terms of business strategies and discussion of the business environment. Management thought is divided on the issue, with fears expressed that an overtly quantitative approach would overlook the imperative need to concentrate on employees and relationships with customers. In their book Profit beyond Measure: Extraordinary Results Through Attention to Work and People, H. Thomas Johnson and Andres Bröms warn: The use of abstract quantitative targets in the practice of ‘managing by results’ entails ‘losing touch’ with the natural reality of the organizations we manage. These quantitative abstractions cause us to see the organization as a mechanistic system. We thereby believe that these abstractions can be used as tools to ‘amplify our grasp of the world’. Unfortunately this belief ignores the reality that a human organization is a living system which can be understood and acted in only as a web of relationships, not as a mechanistic collection of quantifiable parts.

This, of course, is exaggerating the issue. Companies can concentrate on financial targets and simultaneously focus on softer factors. Indeed, sustainedly successful companies like General Electric have excelled in constantly improving the market positions of their divisions while implementing Six Sigma and concentrating on augmenting their intellectual capital. In an occasional research paper called ‘Rhetoric and argument in financial reporting: Disclosures in profit forecasts and takeover documents’ published by ACCA, the reporting of 250 profit forecasts for the period 1988–1992 was analysed. A major finding of this study was that the lack of regulations on the content of profit forecasts meant that it was largely a rhetorical tool used by both bidder and target management during the take-over process. Profit forecasts were used to impress the investing community rather than to conform to

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requirements of standard-setters. The authors called for a specification of minimum levels of disclosure to ensure a greater degree of coherence and consistency. Table 4.3 Outlook: Key Reporting Indicators Quantitative

Qualitative

• Forecasts: macroeconomic premises (GNP, inflation) • Earnings targets (EBITDA/cash flow/EPS, etc.) • Cost targets (cost/income ratio, etc.)

• Estimate of sectorial trends

• Investment plan (including R&D)

• Strategic overview (including marketing, supply chain) • Organisational plans (e.g. spin-offs, reintegration) • Growth prospects (general and divisional)

• Capital ratio targets

INPUTS AND OUTPUTS: SYSTEMATISING FORECASTING If forecasting is a management issue, it needs to be systematised. Stakeholders are not served by essayistic ruminations: they need facts and figures. Equally important, however, are the vision of top management and strategic plans. The world’s largest electricity and gas utility E.On is a good example of a systematic approach. The annual reports of this German company focus regularly on major strategies and planned investments. The company’s integrated business model, which covers both energy production and distribution, in other words up- and downstream, is well documented. Beyond this, the volume of investments and their geographic distribution are both quantified and explained. E.On has a three-year planning cycle and reports both on major investments and on the integration of its subsidiaries. It also briefly describes how it sees the macroeconomic environment in future years. The reporting of DaimlerChrysler is even better structured: 1. The Outlook section in the annual report begins with an assessment of how the world economy is developing. 2. This is followed by an assessment of the automobile sector. 3. After this macro- and mesoeconomic overview, the company analyses its own growth prospects as a Group.

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4. Group growth is followed by a detailed discussion of the prospects of each business unit: Mercedes-Benz, Chrysler, commercial vehicles, etc., complete with expected revenues. 5. Investments are similarly drilled down to the business unit level and quantified. 6. Research & Development is treated like Investments. 7. The section closes with a round-up of future strategies. In structural terms, DaimlerChrysler could serve as a reporting model. Forecasting is both precise and well-argued. This, of course, also reveals the company’s deficiencies under a magnifying glass. In the 1999 Outlook, DaimlerChrysler was aiming at revenues of E167 billion by 2002; the 2001 report scaled down projections, aiming at E142 billion for the next year and E156 billion by 2004. By 2003, the projection for the next year had boiled down to E141 billion. Significantly, the 2004 report did not make a quantitative revenue forecast, reflecting the fact that the German–American company had missed its targets repeatedly and had obviously become more cautious. Despite this projection–reality gap, there are valuable insights to be gained from Daimler’s Outlook section. For instance, investments in property, plant and equipment are to a large extent focused on Chrysler, reflecting the mediocre condition of the American automaker’s production facilities and general infrastructure. By contrast, R&D expenditure is mostly in Germany, reflecting the company’s strong Teutonic engineering bias. Another source of insights is the vehicle model strategy: in 1999 the company announced almost 60 new models by 2005, reflecting the euphoria soon after the merger between Daimler Benz and Chrysler. By 2004, there was more talk about consolidation, though Chrysler remained dynamic, with 16 new models being announced for the 2005–2006 period. E.On and DaimlerChrysler are both stronger on the input side (investments, R&D) than on outputs (earnings, cash flow, etc.). For Shiseido, the contrary is true. The Japanese cosmetics producer exemplifies how important it can be for a company to systematise the planning process and then present it. In the 2001 report, the outlook was rather fragmentary, despite the fact that the company had made a net loss. For the following year, net sales were forecast to increase by 1%, with income from operations decreasing by 38%, reflecting a number of structural reforms. ROE was projected to reach 7% by 2003.

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Beyond this, there was brief mention of improvements in marketing and supply-chain management. Four years later, Shiseido’s new President and CEO Shinzo Maeda presented an impressive 3-Year Plan in his statement to stakeholders. The plan was supported by three pillars:

Strong

• Reforming marketing activities in Japan. This involved a new brand strategy concentrating spending on 35 brands and launching four megabrands. Beyond this, a new marketing and sales organisation was founded to achieve greater synergies and overcome the present barriers between the cosmetics and toiletries businesses. A further marketing initiative involved focusing on new distribution channels such as mail-order sales and health and beauty care. • Accelerating expansion of the China business. The Chinese market has become the company’s motor for growth abroad. The 3-Year Plan set a clear net sales target for 2008, involving an annual overseas growth rate of 10%. Here again, the planning process was highly specific, involving channel-specific brand marketing via advertising and sales promotions. Shiseido focuses its sales efforts in department and voluntary chain stores (individually managed cosmetics stores). • Restructuring the entire business. Last but not least, the company planned in 2005 to increase operating profitability to over 8% by

Unilever

RBC

Shiseido

Daimler

Weak

Target Oriented

Cameco

Low

Strategy Oriented

Figure 4.3 Profiles in forecasting

High

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2008 and over 10% by the end of the next 3-Year Plan(2008–2011). This involved a strong reduction of fixed costs. Personnel costs were scheduled to decline because of early pension plans and efficient control of management resources. Shiseido’s plan is well positioned: the company’s CEO personally presented it in his statement to stakeholders and then enumerated on various points in the course of an 8-page interview. However, investments were referred to, but not concretised. Thus, an ideal outlook would consist of a mixture of the DaimlerChrysler and the Shiseido approaches.

UNCORKING THE CHAMPAGNE – OR BITING THE BULLET The accuracy of forecasts is a sensitive issue. Companies lose credibility if they constantly miss the mark they’ve set themselves. Research carried out by Parson Consulting on FTSE 100 companies revealed that almost half missed Earnings Per Share (EPS) forecasts by more than 10%: 38% underperformed by more than 10%, while 11% overperformed by the same margin. This, however, does mean that more than half the companies arrived reasonably closely to their EPS targets. ‘The forecast a company should release externally should be the aggregate of the objective and accurate internal forecasts, plus the probable incremental value of the interventions management will now take’, according to Tony Vadasz of Parson Consulting in an Accountancy Age article fittingly entitled ‘Forecasting: Come rain or shine’. This means that companies need to constantly roll the planning process, adjusting assessments to performance and to perceived potentials in fixed time periods. This is basically what DaimlerChrysler has done over a longer period. The Royal Bank of Canada is far more thorough in its target-setting than the car-maker and gets high marks for honesty under difficult conditions. Canada’s largest bank both in terms of assets and of market cap has been through difficult periods; earnings and the share price equally show underperformance. The array of targets is highly impressive: • Stock ratios like share price/book value and share price/earnings • Earnings and revenue growth, as also return on equity

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• Ratio of cost growth to revenue growth • Portfolio quality and capital ratio. In almost all areas, RBC’s 2004 Annual Report mentioned considerable underachievement. Instead of being in the first quartile of the S&P banks index in terms of stock ratios, the bank ranged in the third. ROE was projected at 17–19%, but the company only managed 15.9%. The situation in terms of earning growth was far more alarming: instead of growing by 10–15%, earnings actually decreased by 4%. Despite this, the company set itself precise and ambitious quantitative goals for the coming year, projecting earnings growth at over 20% and ROE at 18–20%. In a section fittingly called Frequently Asked Questions, RBC put forward its planning assumptions and arguments for further growing market share in Canada and seriously restructuring the US business. In his message to shareholders and customers, the CEO emphasised the company’s basic stability and discussed plans to grow revenues and create long-term value. He also clearly admitted that costs were growing at a faster pace than revenues: expense growth was 8% in 2004 as against 2% revenue growth. Part of this disparity can be explained by currency imbalances: the Canadian dollar was stronger than the US dollar, which reduced revenues by 500 million Canadian dollars. The CEO’s comments are a valuable guide; they also provide a rationale for RBC’s goals, which at first sight seem overly ambitious. RBC’s goals are to a large extent quantitative; Cameco, on the other hand, concentrates mostly on qualitative targets. The Canadian nuclear energy provider has a dual strategy: increase profitability and efficiency while strengthening the CSR profile and improving workforce diversity. This balance of economic and social goals makes Cameco’s reporting a fascinating equity story. Social goals are not nice-to-have add-ons; they are equally important priorities. Cameco is as systematic as RBC: the forecast roll-over is a yearly ritual, composed of Targets > Results > New Targets. Vision and accountability are closely linked. Cameco’s vision is to be a dominant nuclear energy company generating clean electricity. To achieve this, the company obviously lays great weight on a clean image. In 2002, five long-term goals were outlined: 1. Operate with a strong commitment to people and the environment. Reduction of accident frequency, obtaining ISO 14001 certification and ensuring that 55% of the workforce in the Saskatchewan

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2.

3.

4.

5.

Reporting Nonfinancials

mines are Northerners were the individual goals. Performance was generally good, though accident frequency was higher at 0.27 in 2002 than at 0.22 the previous year. ISO certification was indeed gained and 54% of the workers were Northerners. Identify cost-effective solutions for waste management. This is a far more specific goal, involving an environmental assessment of recycling byproducts with the goal of obtaining regulatory approval. Pursue growth opportunities to achieve 15% return on average capital. Here, growth goals were broadly stated in terms of acquisitions and productivity improvements. Maintain leadership position in uranium and ensure production flexibility. In this case, the targets were specific: starting the operation of a test mine in Kazakhstan and filing a construction licence application. Both were achieved. Build competitive advantage through employees. Extension of the apprenticeship programme and introduction of a wellness programme were the major tasks to be achieved.

These goals were supported by comments of top management, both on the year’s triumphs and its disappointments. Cameco’s CEO was very candid in admitting to setbacks like a fall in net earnings, the delayed restart of a mine and a tragic accident. Two years later, the company streamlined the planning process, while retaining the same reporting grid. The accent in the 2004 Annual Report was on increasing uranium production, starting joint ventures and new exploration activities, and also on demonstrating a commitment to sustainable development. Here again, informal comments increased the reader’s understanding of Cameco’s goals. Answering the question ‘What keeps you awake at night when you’re thinking about 2005?’, the company’s CEO responded that in the context of a share price increase of 165% over two years, it was important to avoid the complacency trap and to strive on towards becoming a dominant nuclear energy company. A third company from the same country, Bell Canada Enterprises, offers a similarly broad picture of the future with three ‘strategic pillars’, that play an important role in the annual report and on the website. These are a shrewd mixture of customer orientation and technical progress. Facing customers as one company leads to a higher priority for the corporate website and a simpler billing system. In technological terms, the telecom provider wanted to speed up its data

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communication and serve a larger number of households with 26 megabits per second transmission. Modernisation is to lead to more than 50% of revenues deriving from next generation services. All this is built on the foundations of the Galileo programme, projected to achieve cost savings of $1–1.5 billion in the space of two years. Bell Canada’s picture is not as coherent as that of RBC or Cameco, but it provides substantial information on the nature of the company’s business and its success factors.

PATHS TO GROWTH AND GLORY: UNORTHODOX APPROACHES ‘The paths of glory lead but to the grave’ – salutory wisdom, but not necessarily the kind of advice that companies need when planning the future. The orthodox way of presenting forecasts involves putting them into the annual report; some companies even publish updates on a quarterly basis. However, there are cases of companies that choose to side-step classical reporting; Unilever and Ericsson both chose different media to present their view of future performance. Unilever This Anglo-Dutch consumer goods producer published an excellent roadshow presentation of its five-year ‘Path to Growth’ strategy, complete with quantitative targets for growth, margins and earnings. The estimates in this presentation made in 2003 were coupled with cost savings and job reduction targets. Unilever in fact provided a comprehensive orientation for investors. Its strategic plans also listed the key growth drivers. The company was in the process of concentrating on specific brands and growth segments, with the turnover of leading brands scheduled to increase drastically. On the one hand, clear targets were set: • Annual top line growth of 5–6% • Operating margins of more than 16% as against 11% at the start of the 5-Year Plan • Low double-digit Earnings per Share growth. On the other hand, Unilever interconnected paths to growth and levers of economic value. Top-line growth should, for instance, be achieved by portfolio improvement and operating margins will profit from a

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restructuring of manufacturing, involving a major site reduction. The company also discussed the key drivers of growth. Undoubtedly, these are all issues that should find pride of place in the annual reports, but the slide-mode of presentation is crisper than a series of report pages. Ericsson Crises can be chances. The Swedish telecom company Ericsson went through a major crisis at the turn of the 21st century. It responded by publishing Business Reviews for the 2001–2002 period parallel to the annual report. The two reviews dealt with sectorial problems and prospects in a very candid way. For instance, in 2002, the title page proclaimed: 2002 was tough. Our customers bought less equipment, competition increased, the roll-out of 3G was slow, and the market was hard to predict. Some observers see no end to these difficulties. We take a very different view.

Starting off like this, the company’s CEO admitted that in the current market situation, Ericsson’s objectives seemed ‘more aspirational than attainable’. He then put forward the company’s efficiency measures and highlighted Ericsson’s end-to-end expertise, enabling customers to get an entire range of services, applications and handsets. The Review included a knowledgeable overview of the competitive environment, clearly stating that market growth could only be expected in the medium term. The 2003 Annual Report confirmed the company’s success in returning to profitability and presented future strategy in general terms. In 2004, progress was confirmed; however, Ericsson was less explicit in terms of forecasting. Clearly, the Business Review was a part of crisis management that was no longer necessary when Ericsson got back on track. Box 4.3

Reporting on Outlook: Recommendations

Start by presenting the premises of business planning. Take a top-down approach: first the expected domestic and international growth rates, inflation, etc., then sectorial trends, followed by specific microeconomic shifts such as changes in lifestyles or in public opinion. Then describe the planning process in detail:

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• Who is responsible for corporate planning and to what extent is the Board involved? • How does the planning process work and what are the planning assumptions, i.e. the foundation of facts and figures used for forecasts? • How is planning reviewed and revised on an ongoing basis, and how often are reality checks applied or forecasts rolled? After going through the mechanics of strategic planning, give insights into your company’s value drivers: • Which core competencies will enable you to achieve your targets, can operational capacity be organically developed or do you need to consider acquisitions? • Which investments will be made where? • Who are the company’s benchmarks in terms of performance, stock price and reputation?

Positioning This should be incorporated in the Strategy chapter in the Annual Report. If planning is seriously revised in the course of the financial year, the interim report should contain a note on changes made and include the new KPIs. Key Performance Indicators Growth in turnover Earnings Efficiency Investments Valuation

Growth rate for next three years, broken down by division Prognosticated ROI/ROE or earnings per share for next three years Forecast of cost/income ratio for next three years Figures and breakdown of planned investments for next financial year Share price/book value or market cap target

SUMMARY OF MANAGEMENT VALUE Management value (Table 4.4) is almost as much a catchword as value-based management. The range of connotations is broad: Deloitte has developed a Human Capital Management Value Map and e-consultancy has developed a method to measure long-term customer

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relationship management value. Value-based management is more precisely defined as a managerial approach oriented towards creating value, mostly for shareholders. Consultancies like Stern Stewart concentrate on optimising financial value, while the Balanced Scorecard Institute has a wider scope, covering human resources and internal processes as much as financial indicators. In the context of this book, management value is more narrowly focused on strategy, targets and governance. This is a general management perspective; reporting is most effective when a company’s strategic and forecasting processes are closely linked, when it has a clear vision and can simultaneously demonstrate good governance. A number of examples in this chapter illustrate this perspective: • Telus connects strategy to goals and performance. The previous year’s performance is flanked by the following year’s targets. The company’s priorities are updated and projected into the future. Strategy is reaffirmed or adjusted on a quarterly basis. Thus, a great degree of managerial flexibility and transparency is ensured. • BMO, like Telus, has a revolving forecasting process, with precise reporting on whether and to what extent targets have been met. Beyond this, the company reports in a regular section on its strategic management, which is strongly oriented towards augmenting its market position in Canada and the USA. • Cadbury Schweppes goes a step further than Telus and BMO. Beyond codifying strategy in terms of five goals, set to be achieved over a four-year period, the company’s Chairman gives a strategic overview of the food sector. This sector faces both public criticism and regulatory pressures. For this reason, the Chairman’s analysis and forthright opinions provide valuable insights into the larger foundations of strategy. • Fujitsu, like Cadbury, faces sectorial problems, coupled with internal deficiencies. As candidly as Cadbury’s Chairman, Fujitsu’s President tackles the problem. In the Japanese company’s case, its lack of customer-orientation and its problems in integrating overseas operations are both addressed. The company’s reporting is highly instructive in the context of a complex technological sector involving platforms, networks and services. • Avon exemplifies companies that derive strategic focus from their USP; in Avon’s case, this involves a clear gender orientation as a company focused on women’s needs. Systematic planning is coupled with strong target-group orientation.

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• BP shows a strategic approach to governance: it focuses on managerial control, allots resources to the non-executive directors and ensures their independence in structural terms. Beyond this, a nonexecutive Board member can be directly addressed by individual shareholders, thus playing the role of an ombudsman. • DaimlerChrysler systematises the forecasting process, allowing investors and other stakeholders to contrast targets and results on an ongoing basis. Forecasting is as well argued as strategy; both provide insights into the specific issues of a vehicle-producing company. • The Royal Bank of Canada measures its own performance as against self-set targets more precisely than DaimlerChrysler, clearly documenting its own operating deficiencies. To report well on management value, companies need a template or a grid that is filled with data and narrative on a continuing basis. This outlook section should be systematised with parts on the macroeconomic environment, sectorial conditions, strategic priorities, use of resources and future targets (both quantitative and qualitative).

Table 4.4 Management value reporting: Ten leaders Company

Country

BMO

Canada

Snapshot

Contact

Grid with plan–performance– www.bmo.com plan structure Sony Japan Clear presentation of www.sony.net structural reform Berkshire-Hathaway USA Leadership vision and wisdom www.berkshire hathaway.com Avon USA Strategic focus and growth www.avoncompany potential .com BP UK Stringent governance policies www.bp.com and strong resources for non-executive directors BAT UK Impressive strategic role of www.bat.com Board Toyota Japan Complex checks and balances, www.toyota.co.jp strong CSR orientation DaimlerChrysler Germany Well structured with www.daimlerchry macro–micro approach and sler.com divisional forecasts RBC Canada Rigorous target-setting and www.rbc.com performance report Ericsson Sweden In-depth outlook in the www.ericsson.com context of crisis management

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Essayistic remarks in the CEO’s letter are a welcome addition; however, a large number of companies make the mistake of assuming that strategy can be put across with a few off-the-cuff comments. Governance, on the other hand, is an issue that most companies report on in detail; here the emphasis needs to be on substance rather than formalistic data. Box 4.4

Boise International: Fictive Case Study (4)∗

MEMO FROM HG TO BON, 25 October 2007 RE: PROJECT ‘REPORTING VALUE DRIVERS’ Thanks for taking the time to meet on 14 September. It was important to get your views on strategy and governance, as also your vision of Boise as a major European conglomerate. As suggested, I had a long conversation with Arun on the connection between marketing and strategy and then consulted our three divisional Heads. I also spoke to Peter Hewett to get the Chairman’s view on governance and then compared notes with Jan, who has his own ideas on the subject. I shall begin my comments on the Group level and then move on to the divisions. As far as financial targets are concerned, we agreed there was no need to change the growth–profitability–efficiency triangle. I am not recommending any further KPIs because Giovanni is already publishing key figures and ratios such as ROI and CIR in the Annual Report. Re governance: Peter stressed that the share price–bonus link is now state of the art for Board members’ remuneration and can’t be changed. However, he agrees we can do a split with group performance accounting for 50% of the bonus. Given this change, we want to increase the bonus base from 50% of total salary, as it is at present, to 65% progressively during the next three years. This demonstrates top management commitment and reassures shareholders that we’re all in the same boat. Jan criticised our ‘parochial’ Benelux Board composition; we plan to commit ourselves to improve internationality from 10% at the moment to 25% by 2010, particularly by recruiting non-executive directors from other parts of Europe. In 2009, several terms run out, so we should be able to increase foreign representation substantially that year. As to the divisions (see also KPIs):

∗

See Box 2.1 on p. 33 for full names and functions of Boise management.

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• Consumer Finance: Henry readily admitted that cost control is the weakest link in their value chain, so they are setting an ambitious Cost/Income target for the next planning horizon. CF plans to offshore loan processing and back-office tasks, thus saving up to E500 million a year by 2009, so the Cost/Income goal is definitely feasible. Apart from that, CF has ambitious plans specifically for Credit+. Given the fragmented market in Europe and our strong position in Benelux, success hinges on increasing brand recognition. If we can manage that, market share should increase correspondingly. Obviously, this involves a sizeable marketing investment, but if business picks up as we assume, we even plan to stock up marketing by 2010. Have also included the delinquency rate among the KPIs, changing it to retention rate, which sounds more positive. • Medical Products: I met both José and his deputy Michèle several times for in-depth discussions on Diagnostic Products. We agreed that we have to focus on customer satisfaction as a key metric and this has to improve drastically in the DP unit. Beyond that, earnings from MP need to contribute to a greater extent to fulfilling Group goals. Our financial goals for Surgical Instruments are more challenging than for DP, because they will need to invest time and resources in customer relationship initiatives, including CBT. • Energy: According to Renée, things are looking up in the solar energy community. Competition is hotting up in Europe, particularly from Germany, but she wants to set ambitious goals for increasing market share in the USA and Asia. Customer retention remains an important issue; our energy experts want to concentrate on holding Corporates, admittedly a difficult proposition. Pricing premiums are too tricky for us to add them in our prospective KPIs, but Renée promised to keep us posted on the issue.

Key Performance Indicators Governance Board remuneration: bonus as a % of total salary % of non-Benelux Board members Outlook: Group level Growth in turnover (%) Revenues (%) Cost/Income ratio (%)

2008

2009

2010

55 10

60 20

65 25

2 3.5 65

2.5 4.5 62

2.5 5 60

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Box 4.5

Continued

Consumer Finance Cost/Income ratio (%)

82

78

76

22

26

30

4.5 7.5 30

4.7 8.2 35

4.7 8.5 40

75 55 0.8

80 60 0.8

80 65 1.2

Earnings: SI (in bln E) DP (in bln E)

5.5 4.5

6.5 4.7

7.0 5.2

Customer satisfaction: SI (%) DP (%)

85 60

90 65

90 70

Customer training: SI (% of customers) of which CBT DP (% of customers) of which CBT

10 5 22 10

12 7.5 25 20

15 10 30 30

R&D investment in % of turnover

15

12

10

Market share in solar energy (in %): Europe USA Asia

15 4 6

16 6 10

16 9 15

Customer retention (in %): Municipalities Corporates Others

90 70 80

90 72 80

90 75 80

Brand recognition (%) Market share in Europe: Auto Now (%) Credit+ Non Benelux Revenues (%) Retention Rate (%): Auto Now Credit+ Marketing investment (in bln E) Medical Products

Energy

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MEMO FROM BON TO HG, 15 November 2007 Thanks for your memo. I’m obviously less than gratified about the bonus arrangement, but if Peter is adamant, I suppose we have to increase the variable component. By all means let’s have more foreigners on the Board; there again, it’s up to Peter to take the initiative. Re the divisions: • I shall speak to Henry about off-shoring in CF. Recently read a PwC1 study that documented detrimental effects to customer relationships and reputation. It would be short-sighted to achieve cost-cutting that way. • Please add an internationalisation KPI for CF. I want the percentage of non-Benelux business to rise to 40% by 2010. Our local markets are simply too small, we risk stagnating if we focus too much on domestic business. • For MP, I want our R&D investment to be published. It shows our strong technological commitment. Ask Heinrich for the figures; basically, 2008 will be particularly heavy, because of ophthalmologic research; after that the R&D ratio of turnover should stabilise at around 10% of turnover. Tell Heinrich I want a commitment to that effect. • I shall talk to Renée about targeting multinationals more aggressively. DuPont for instance wants to increase the percentage of its electricity from renewable energy to 10% by 2010. There’s no reason why we shouldn’t gain a larger slice of the corporate cake.

Next Steps Tackle HR, I definitely want a substantial section on human capital in our next Annual. Tell Francis he can forget the nondescript stuff he delivered last time. And see that you get some intellectual capital input from Heinrich. 1

PricewaterhouseCoopers: Consumer Finance Update, Winter 2006.

5 Human Resources Value Productivity, Motivation and Potential

Outspokenness can be refreshing. At a Conference Board session on Human Resources, Ron Collard of PricewaterhouseCoopers pointed out that many companies boasted in their annual reports that people were their most important asset, the real subtext being ‘as long as we ignore them, they don’t cost much, and they go away when necessary’. This is certainly the bitter reality in many companies, in particular after the frothy euphoria of the New Economy evaporated. Youngsters became entrepreneurs and top managers in the heady years of the high tech boom. Then came a gigantic hangover, with companies opting for experience rather than bright ideas. When Bob Lutz returned to General Motors at an age when most managers were generally retired, the message was clear: seniority and proven track record were more important than experimentation. The uncertainty caused by 9/11 forced many companies to play safe. The ‘war for talent’ proclaimed by McKinsey consultants in the late 1990s suddenly seemed irrelevant; there was now more managerial talent wandering around than needed. Downsizing and cost control became the mantras of top executives; both seemed opposed to the high-minded tenets of human resources (HR) theory. HR’s problems are, however, at least as structural as temporal. One of the profession’s leading academics, Dave Ulrich, asked the provocative question ‘Should we do away with HR?’ in an article entitled ‘A new mandate for human resources’ published in Harvard Business Review in 1998, and answered it as follows: I must agree that there is good reason for HR’s beleaguered reputation. It is often ineffective, incompetent, and costly; in a phrase, it is value sapping. Indeed, if HR were to remain configured as it is today in many companies, I would have to answer the question above with a resounding ‘Yes – abolish the thing!’

Basically, human resources is a prime example of how noble aims – marshalling the capacity of the company’s most important

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resource – can dissolve into banal tasks of administering personnel: hiring and firing, dealing with compensation issues, transfers, etc. HR can be an important catalyst for change; for instance, it played a major role in the transformation of Sears Roebuck, but such triumphs are comparatively rare. Equally rare is high-quality reporting. The chapter on personnel, if it exists, is generally one of the weakest sections in annual reports. Coverage in CSR and Sustainability reports is rarely satisfactory. The information given is mostly fragmentary and often tendentious. In a period of crisis, companies tend to opt for spin rather than authenticity. One of Germany’s leading auto manufacturers is a classic case. In 1994, the company reacted to poor results by going in for massive retrenchment. Its annual report was entitled ‘People Are Our Future’ – a cynical slogan in the circumstances. The report highlighted the need for a motivated workforce without, however, dealing with the issue of redundancies.

CAN PEOPLE BE CAPITALISED? AMBITIOUS CONCEPTS, MODEST RESULTS Human capital has been defined as the accumulated value of investments in such areas as employee training. HC tries to estimate the accumulated value of workforce skills with the aim of transforming individual competence into collective value. This is a good academic exercise for economists like Gary Becker, but not tangible enough for the management world. Capital encompasses factors like the competence of a company’s employees, their relationship abilities and values. Trying to quantify competence or relationships is like squaring a circle. Similarly, the Balanced Scorecard approach tries to link elements that do not fit together. The financial quadrant of the Scorecard is highly measurable, ‘Learning and Growth’, the HR component, is far less so. In his book Balanced Scorecard Step-by-Step, Paul R. Niven calls Learning and Growth ‘enablers’, which they certainly are. The indicators suggested by the book include ‘employee participation in trade associations’, ‘average years of service’ and an ‘empowerment index’. Here, there is a discrepancy between a success factor (learning and growth) and the indicators that are supposed to help to measure its achievement. Why a company with a greater percentage of unionorganised employees or with long-term staff members is better or

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worse than one with a non-organised and shorter-term workforce is a moot point. A third approach, intellectual capital, was very much in vogue in the 1990s. IC is generally defined as the sum of human, social and organisational capital. A huge amount of literature on the subject has been published, but few concrete benefits have accrued. The Swedish pioneer Skandia has in the meanwhile dropped IC from its management and reporting priorities. By contrast, companies like Bankinter have adopted IC as a management tool and published an impressive number of facts, figures and indicators over a period of years. The Spanish bank has a grid consisting of human, structural and relational capital. • Human capital: Some of the indicators reported include: – The rise in the average length of service demonstrates a high degree of employee loyalty (though of course it could also denote inertia). Similarly, the employee turnover rate has steadily decreased. – A higher percentage of employees speaking English between 2000 and 2002 underlined the growing internationality of this Spanish bank. – The percentage of employees receiving training increased drastically from 77% in 2000 to 92% a year later, while in 2002 it slightly decreased to 87%. The investment in training as a proportion of the total payroll however remained stable at 2%, showing that the cost of training was safely budgeted. – The percentage of employees with variable compensation steadily increased, showing a greater degree of remuneration flexibility. • Structural capital: This area encompasses internal processes and organisational learning. Bankinter shows, for instance, that the number of employees participating in 360 evaluations has expanded steadily. Similarly, management information available to all employees has increased. Internal job rotation on the other hand has decreased. Thus, a higher degree of transparency seemingly contrasts with a lower degree of mobility. • Relational capital: This is an even more amorphous category, featuring indicators like the number of virtual branches and of Bankinter agents, the percentage of staff directly involved in business activities and such ratios as telephone banking contacts per customer.

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The real question of course is: What does all this potentially valuable data signify? Is Bankinter faring badly because a lower percentage of staff is directly involved in business activities, meaning a higher percentage in staff positions? Or is it doing well because Internet connections per active user have increased? Intellectual capital as practised by companies like Bankinter can be an admirable undertaking – unfortunately it also makes the impression of l’art pour l’art, measurement for the sake of measurement. The same applies to BBVA, one of Spain’s largest banks. It, too, makes a great effort to define and measure intellectual capital indicators, using roughly the same grid as Bankinter. The reader discovers that the man/woman ratio is stronger in Spain than in America, where the bank has a sizeable presence, that the percentage of university graduates is slightly higher in Spain and the average years of experience twice as high as in America. Investment in training is mentioned, and hours of training equally so. What does this say about BBVA’s potential as a company? Does the outside world really need to know the ‘number of guideline communications conveying the “BBVA experience” ’? Or the number of video conference rooms in the company? The answer, of course, is negative; senseless information is a burden, specially when commentary is missing. Leveraging Human Resources: Pinpointing Indicators    Regardless of the deficiencies attributed to HR theory, efficient HR strategies are a definite plus point. Research carried out by the HR consultants Watson Wyatt in 16 European countries shows that companies with strong HR management deliver almost twice as much shareholder value as their average competitors. Beyond this, Watson Wyatt constructed a human capital index with five factors: 1. 2. 3. 4. 5.

Recruiting excellence Clear rewards and accountability Collegial flexible workplace Communications integrity Prudent use of resources.

This index, which basically covers major aspects of HR practice, also confirmed that companies with efficient personnel policies fared distinctly better than those with substandard HR performance. The five index factors cover important management and reporting issues.

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The arguments of Bill Catlette and Richard Hadden in their book Contented Cows Give Better Milk go in the same direction: companies with motivated employees make more money. Respected workplaces attract talented employees; Catlette and Hadden focus on six case studies, including companies like Wal-Mart, Hewlett-Packard and Federal Express. Over a period of 10 years, they show how these companies outperformed companies with mediocre policies. In particular, the indicator Net Income per Employee shows a distinct difference between ‘contented cows’ and ‘common cows’. Evidence of this kind seems highly plausible; how indeed can a company operate efficiently if doesn’t remunerate and motivate well? Unfortunately, the connections between good people management and financial success are less automatic than often propagated. A study of HR strategies in around 1000 companies from 47 countries carried out by PricewaterhouseCoopers revealed that companies with lower absenteeism – often interpreted as a sign of employee satisfaction – did not have higher revenues per employee. On the contrary, the opposite was the case. Similarly, no link could be found between profit margins and employee training or management development programmes. This does not mean that these indicators are worthless. However, direct connections between HR investment and stronger profits cannot be made. Companies like SAS report that winning ‘Best workplace’ ratings help them to attract talent, which in turn helps them to be successful. Discussion is rife on the value of the employer brand; while quantifying it is even more difficult than calculating the value of product brands, it is evident that companies have their own cachets and profit from a good image. SAS’s reporting is full of self-confidence: it confidently points out that ‘no other software provider can match our track record’ in its reporting. It also proudly mentions the FORTUNE ‘Best Places to Work’ rankings, in which it has prominently featured. However, it makes no systematic attempt to estimate the value of its own brand as an employer. Beyond image, what kind of indicators are important? A study carried out by the Conference Board showed interest on the part of institutional investors for retention, remuneration, diversity, employee satisfaction and training. Less well explored is the structural question: What kind of HR information is relevant in what context? For instance, in Continental Europe, co-representation and agreements with trade unions continue to be important. In countries with strong commonlaw oriented civil societies like the USA and the UK, diversity is an

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important issue, simply because of the consequences of racial or sexual discrimination. The negative publicity attracted by Texaco because of crude remarks on blacks and the dire consequences of the scandal for the Texan oil company are a salutary example of HR’s regional vagaries.    and Reporting Coherently The investors interviewed by the Conference Board in its study Value at Work were perfectly clear about their needs: they would appreciate more HR reporting, specifically pointing to labour–management relations, turnover, training and diversity as major issues. However, few companies report systematically. In an analysis of FTSE 250 companies carried out by students of the London Business School, a huge gap between measurement and reporting was discovered. Only 24% of the indicators that HR departments tracked were actually published externally – and only a fraction entered annual reports. The rest were provided on a one-on-one basis to ethical investors and rating agencies. The reasons for not reporting were fairly uniform: • Not something that can be shared externally – managers are often afraid of publishing data that could help their competitors or, on the other hand, upset analysts, trade unions, etc. • No clear return on investment – a number of companies believe that the figures would have no meaning for external stakeholders and would simply not warrant the investment in time and resources involved in putting the information and interpretation together. • Lack of clear guidance and universal practice – this lament is endemic; since reporting parameters and formats are not defined, companies feel unable to compare or benchmark their methods of measurement with those of their competitors. • Little support from senior management – HR suffers under a general lack of status, with obvious consequences for reporting. A further reason not mentioned by the LBS study is structural: HR managers are rarely in close contact with CFOs or with the Heads of Investor Relations and Corporate Communications. Thus, there is an organisational hiatus between the gathering of personnel indicators and the diffusion of relevant information.

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The authors of the LBS study summarised the attitudes of the respondents they interviewed as follows: HR professionals tend to be pessimistic about the investors’ interest in Human Capital data. They believe that investors determine the company’s market value by its product, market strategy and results. They are not too sure how investors would actually use HC measures and incorporate them into their decision models.

This pessimism seems unjustified considering the fact that an increasing number of investors and rating agencies now take a broader look at corporate achievement and potential. The Dow Jones Sustainability Index and the FTSE4Good are only two of the more well-known indices that have integrated HR into their rating criteria. And as far as the lack of guidance is concerned, the Global Reporting Initiative (GRI) has developed a grid that companies can take as a starting point. GRI’s criteria have a strong social bias, with the emphasis placed on social security payments, percentage of employees represented by independent trade unions and provision for worker representation in decision-making. This kind of standardisation limits the expressiveness of the information provided. Dow Chemical, for instance, published a report in 2003 based on the GRI grid. The HR information provided included useful diversity information such as the percentage of female managers (16%), which was reasonably high considering that women only accounted for 24% of the workforce. It also provided the percentage of employees represented by independent trade unions: 16% in the USA, 10% on an overall basis. The report, unfortunately, lacked commentary; Dow Chemical’s HR strategy was not presented. However, the GRI guidelines do help companies to identify criteria against which they can measure their performance. This is of particular significance for many British and American companies, as their reporting simply lacks consistency and coherence. The information offered in annual reports is scanty, sometimes even non-existent, and is complemented by haphazard website information. The emphasis is on spin rather than substance: smiling employees, touchy-feely texts. Most of what is reported is irrelevant, and is a waste of time and energy. On the other hand, there are dangers in overdoing the reporting effort. Body Shop is a prime example. This iconic British company published massive ‘employee stakeholder surveys’ in former

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years, plus a ‘Values Report’ dedicated to employees. The amount of information presented was absolutely staggering and more that any stakeholder could possibly digest, let alone interpret. Body Shop provided valuable details on issues like the percentage of women in management and redundancies, but its reporting suffered from a lack of focus. This was reporting as a documentary, not a management endeavour, and inevitably exhausted the resources of a company that has been through difficult times. In Continental Europe, general standards of reporting are higher, reflecting the fact that corporate responsibility for human resources is perceived far more seriously than in Britain and the United States. Despite this, however, there are plenty of cases of shoddy or irrelevant descriptions of HR: • Some companies produce gigantic data cemeteries. One German utility went on in endless detail about the mechanics of administering personnel and provided a huge amount of unenlightening statistics on how it calculates personnel units, but little commentary on strategy or policy. • There is also plenty of the other extreme: glib prose unsubstantiated by evidence. One Dutch company that subsequently went through a large accounting scandal was particularly disingenuous. Perusal of its personnel section revealed that its wage costs had increased by 26% in the course of one year, though staff numbers only rose by 7%. No comment was made on this, but there was plenty of enthusiasm about the ‘friendly, professional service of our associates’. • Readers are often left to draw their own conclusions from the evidence provided; data interpretation tends to be rare. A Swiss pharmaceutical giant provided statistics revealing not only the huge number of people in the US Marketing & Distribution division but also the fact that personnel in the Americas cost more than in Europe and far more than in Asia. Why was this the case? Was the added expenditure compensated for through greater productivity? The company provided no commentary. Consciousness of the need for more professionalism has, however, gained ground. In the Accounting for People report published by a taskforce commissioned by Britain’s Department of Trade and Industry (DTI), widespread agreement was reached on the need for better

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reporting. Prominent business leaders endorsed a call for action: John Sunderland, at the time Chairman of Cadbury Schweppes, indicated: An organisation’s success is the product of its people competence. That link between people and performance should be made visible, and available to all stakeholders.

Similarly, the Chief Executive of Centrica called for ‘formal, but flexible reporting’. The report’s main conclusion was that HR needs a strategic focus. This is indeed the most important deficit in today’s reporting; HR chapters in annual reports and on the website tend to be ragbags of whatever a company happens to measure, with a general atmospheric bias towards the benevolent and the innocuous. Bad news is generally buried; good news trumpeted. Consistent reporting over a period of years is a rare virtue.

A. PRODUCTIVITY: PROMOTING EFFECTIVITY AND EFFICIENCY Productivity (see Table 5.1 and Figure 5.1) is crucial for the wealth of companies and countries alike. In 2005, the Canadian Technology Human Resources Board drew attention to the country’s ‘devil’s dilemma’. Considering the labour shortages expected to occur in the next decades, Canada’s companies needed to boost labour productivity by 25% to avoid being forced to invest abroad. However, as a Watson Wyatt study revealed, productivity in the country has been stagnating. Canada’s problem is shared by other countries in the industrialised world. For companies, as for countries, productivity is influenced by a factor mix: size and composition of the workforce, remuneration including incentives, absenteeism and turnover. HR accounting started in the 1960s: R.G. Barry, an Ohio company, was the first to report on costs systematically in its 1967 Annual Report. While this was basically an expense model, accounting has moved further towards ratios and trends. Some companies have gone in for costing absenteeism, while others have concentrated on employee turnover. While the turnover ratio can be easily calculated – it consists of departures divided by the average size of the workforce – the costs of turnover are distinctly more difficult to estimate. They include the administrative costs of parting with an employee and appointing a new employee, separation pay, training costs for new employees, etc.

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In a series of articles published by Shareholder Value magazine and appropriately entitled ‘Measuring the immeasurable’, Mark Ubelhart of Hewitt Associates presented a model designed to capitalise the acquisition and training of employees, based on their expected retention periods. Ubelhart also developed a human capital grid classifying companies according to growth in number of employees and improvements in individual productivity. Calculations of this kind have yet to be adopted by the corporate mainstream on a consistent basis. Some companies measure their productivity when times are good and stop doing so when they have bad news. This was the case with a Canadian aerospace company that supplied engineering design and parts for leading aircraft manufacturers. In its 2002 Annual Report, the company stated that its productivity, measured as the adjusted revenue per employee, had dropped in the financial year, after consistent rises in the three former years. No figures or percentages were mentioned; however, given the fact that both revenues and number of employees were reported, readers could do their own calculations. Two years later, the company had gone through a major crisis and was in the process of restructuring. Management had changed and the new Chairman asserted that the enterprise had ‘some of the most committed and skilled employees in the aerospace sector’, while pointing out at the same time that ‘their assistance and cooperation will be needed to achieve further productivity gains and expense reductions during 2005 and beyond to remain competitive’. This is an excellent example of brave words, not backed by any kind of evidence. The company provided no data on productivity; indeed, in terms of adjusted revenues per employee, productivity would only have increased because a number of employees were laid off. This, however, would be a cynical way of raising productivity. Basically, the company had an expense orientation towards HR. It reported that 56% of all costs relate to labour and overheads, while pointing out that the company’s wage rates were lower than those of its Western European and US competitors. In this context, the fact that the company planned to further reduce the payroll by reducing headcounts and limiting overtime hardly seemed a feasible strategy. This company has a strategy deficit, not an HR problem. Its new President was obviously equivocating in this remarks to shareholders:

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Last, but not least, our team is much stronger today than it has ever been, partly because we must be counted among the strong if the last three years did not kill us, but also because we have continued to hire the best people and invest heavily in training.

This contrasts starkly with the information on wage reduction mentioned later in the report and reveals that this company was in bad trouble, though only partially ready to admit it. In terms of coherence and continuity, this is not just bad performance; it also shows a company with a credibility problem. Its statements are contradictory and simply do not make sense. Fortunately, this is an exceptional case of bad practice. A number of companies have developed indicators and presented cogent evidence of their own productivity. Table 5.1 HR productivity: Key Reporting Indicators Quantitative

Qualitative

• Personnel cost (broken down into divisions/segments) • Sales/net income per employee

• Structure of remuneration (including bonus/incentives) • Employee retention/redundance schemes • Job rotation and mobility schemes

• Size and composition of workforce (including sales/administrative staff ratio) • Rate of employee turnover • Rate of absenteeism

• HR acquisition strategy • Health and safety management policies

WAYS TO PRODUCTIVITY: THE CULTURAL FACTOR Efficient human resources is an eminently cultural undertaking. Methods that raise productivity in one country do not necessarily do so in others. In an article entitled ‘To team or not to team?’ published in China Business Review, Xiangming Chen and Warren Barshes pinpointed the issue that while American companies are extremely team-oriented and rely on teamwork to increase productivity, Chinese culture embodies a collectivist orientation with rigid hierarchies and top-down control. Thus, while the results of a survey indicated that the employees of US-owned companies in China generally have a positive attitude towards teamwork, getting them to work together effectively

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involves different management methods from those employed in the USA, with its strong individualistic tradition. The same applies to companies in other regions of the world. As the experience of companies in South Africa and Spain illustrates, increasing productivity can be an extremely complex endeavour. Seardel South Africa’s largest textile manufacturer faces both legal restrictions and powerful trade unions. The Employment Equity Act has to be adhered to; thus, 30% of all managers are black, as prescribed by this Act. Considering that over 90% of all employees are black, their representation in management does not appear to be exaggerated. Seardel also regularly furnishes data on stay-aways and strikes organised by the Congress of South African Trade Unions. The 2005 Annual Report listed an absenteeism of 3.5%, up from 3.1% in the previous year. Labour turnover remained constant at 5.9%. Wage negotiation is a protracted process, while the National Bargaining Council has attempted to provide a coherent labour cost framework for the textile sector. Considering this degree of semi-collectivism, it is surprising that this company reports a continuous rise in productivity, connected however with the equally continuous and sizeable reduction of the workforce. The company argued that this was due to the strength of the Rand and international competition. Seardel provides a fair cross-section of information, but no coherent picture of the quality of its employees or of training schemes to improve productivity. Telefónica Spain’s large telecom utility provides a surprising amount of productivity-oriented information in its yearly Corporate Responsibility Reports. Narrative is backed by excellent statistical information that reveals a number of significant facts: • The workforce in Spain declined by around 8% between 2002 and 2004, while increasing by almost 25% in Brazil during the same period. • The ratio between number of employees and income explained why the company was downsizing in Spain and expanding in Brazil: salaries were around three times as high in the company’s home operations.

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• The Employee Redundancy Scheme in Spain was scheduled to reduce the workforce by 15 000 persons between 2003 and 2007. This would reduce the disparity caused by remuneration costs in Spain, which in 2004 were 50% higher than in all the other countries in which Telefónica operated, though Spanish employees only accounted for less than a third of the total workforce. • The company’s capacity to reduce the workforce is relatively limited, since 86% of all employees have fixed contracts. Beyond this, collective bargaining procedures are in force for the majority of the company’s staff. • However, the company has been in the process of increasing the ratio of sales staff as opposed to employees in production and administrative functions. • This is a company with a strongly entrenched workforce: in Spain the average member of staff had been employed for 19 years. The company’s reporting provides further insights. Rationalisation is not only on the level of normal employees; management has been streamlined to an even greater extent. The ‘employee hierarchy rate’, calculated as the percentage of managers compared to total staff, declined slightly between 2003 and 2004. To ascertain the degree of employee satisfaction, Telefónica conducted a survey throughout the Group. The results are intriguing: employees in Spain are less satisfied than those in Latin America, although they earn much more. Cynics would diagnose this as a typically Continental European phenomenon: employees are protected, privileged and discontented. However, Telefónica’s real message is that it is expanding in emerging economies, albeit only in Latin America. The survey is not just a barometer of how happy or unhappy the company’s employees are. Telefónica launched an action programme based on the survey results. Beyond this, average hours of training per employee in all Telefónica companies are published, showing that, in Spain, a huge amount is being invested in improving the competence of medium-level management. This again is evidence of relative inefficiency in the home market. Indeed, this telecom company’s local operations seem sluggish and ineffective: of 1049 suggestions submitted by employees, only 18 were implemented. By contrast, in Telefónica Latinoamérica, 142 of 201 ideas were put into action.

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In terms of general HR reporting quality, Telefónica is hard to top. The gamut of information provided ranges from diversity – a respectable 22.3% of management positions are occupied by women – to telework and safety management. Corporate volunteering is an important issue: the company provides a comprehensive country-wide breakdown of the projects in which its employees are involved. All in all, reporting is remarkably well documented, though commentary tends to be a bit fragmentary. Factual Approaches: From Basic Documentation    The extent of HR coverage often depends on national traditions. Italy, for instance, is a country where general standards of reporting differ from those in other Western countries; Italian annual reports have tended to consist of voluminous documentations running to over 300 pages, providing data rather than interpretation. Generali is a good example of this approach. The large insurance company with a long-standing European presence – the famous writer Franz Kafka earned his living as a petty official at the company’s Prague branch office – discloses its ‘social expenditure’ for staff. This includes corporate contributions to pension funds and for healthcare. The company has its own Pension and Healthcare Funds and provides accident insurance and hospitalisation benefits. Generali also discloses information on training, including the number of days of training and expenditure for in-house and external courses. Separate information is provided on the employees of the Italian holding, including average gross salaries and the total cost per employee. The information provided is useful but rudimentary and no attempt is made to place HR in a larger strategic context. Telecom Italia goes several steps further. The country’s telecom utility is far removed from the range and depth of information provided by its Spanish competitor Telefónica. However, it does provide significant facts about the workforce: • In its Sustainability report, it gives exact figures on turnover and hiring. • Information is also provided on gender balance, both in the workforce and in management; women held around 11% of senior management positions, while accounting for 23% of middle management.

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• The volume and cost of training are cited with some narrative provided on change management and other thematic focuses. • The company’s annual reports provide exact details on the size and composition of the workforce. Information on remuneration is largely focused on stock options. • A range of social benefits are described, including healthcare and initiatives for employees’ children.

Strong

Telecom Italia has measured employee satisfaction and briefly reported it. However, industrial relations are far more important. A huge amount of information on negotiations with trade unions is provided, including the extension of a ‘National Collective Labour Contract’, showing that the company operates in a collectivist environment. In 2003, an important issue was Telecom’s merger with Olivetti and the organisational restructuring involved. Like Generali, Telecom’s HR has a strong paternalistic flavour. Very little is reported on incentives and flexibility. Suez

Telefónica Seardel

Financial Orientation

St Gobain

Weak

Telecom Italia

Weak

Strategic Orientation

Strong

Figure 5.1 HR productivity profiles

   to a Strategic Overview In contrast to Italy, France has made HR reporting obligatory. The nouvelles régulations économiques also prescribe reporting on environmental and social issues. Human resources, however, is more clearly classified than other nonfinancials: companies are expected to report on

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remuneration, diversity, labour standards and other important issues. Significantly, key performance indicators are not prescribed, giving companies leeway for individual strategies. Saint-Gobain and Suez illustrate varying approaches to HR reporting. Saint-Gobain This company has a strong compensation-training-turnover bias. Saint-Gobain consists, on the one hand, of so-called historic businesses like flat glass, packaging and construction, and, on the other, of expanding divisions in areas like building materials. The company provides a thorough overview of employment trends within its various divisions. This is supplemented by a regional breakdown, showing the company’s reduction of activities in Western countries and its expansion into emerging economies in Asia, Latin America and South Africa. The basic trend was clearly outlined in its 2002 Annual Report: On average, Western Europe and North America streamlined their workforces in order to upgrade operations that were struggling and to make the necessary productivity-boosting efforts to stay competitive. All emerging countries created jobs in 2002, on the back of favourable market conditions that supported the Group’s active expansion drive.

In this context, employee turnover is an important signal of SaintGobain’s strategies. With a high turnover rate of 18%, of which more than a third consisted of layoffs, this company faces the challenge of handling negotiations with France’s powerful trade unions and avoiding profit-sapping industrial conflicts. In fact, over 80% of the workforce has employee representation. The company signed over 700 agreements in the course of a year. These covered wages, working conditions and side issues such as vocational training. Wages and fringe benefits are reported, but most of the information given applies to France. The number of employees in France has been steadily decreasing; the company has a policy that prescribes layoffs only as ultima ratio, after all other methods to preserve jobs have failed. Thus, when a reorganisation was carried out at Saint-Gobain Céramiques Avancées, a total of 263 positions were offered to the 172 employees whose jobs had been eliminated. Employment counsellors also provided advice on outplacement; the company eased the departure of the employees through complementary training. Another important issue is absenteeism. More than two-thirds is caused by illness; in order to bridge the gaps in the workforce, temporary

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employees are appointed. In fact, Saint-Gobain employed 4% temporary workers at a time when absenteeism was at 3.9%. The company has also made progress in terms of diversity. In 2002, 13% of all executives were women, up from 10% in the space of five years. As Saint-Gobain documents, only around 18% of the workforce is female, with strong contingents from the Nordic countries, the Baltic states and from Central Europe. Remuneration for women accounted for around 15% of total wages, reflecting insufficient representation in higher level jobs. For this reason, providing a better gender balance is one of SaintGobain’s strategic priorities. Other priorities include recruiting new talent, promoting managerial mobility and boosting training facilities. In all cases, facts and figures of present performance are provided; the rate of mobility among executives lay for instance at 8%, which indicates a relatively high degree of flexibility. Suez This utility company has a broad range of activities: energy, water and waste services. There are huge differences in working conditions and remuneration in the different divisions. Suez provides insights into HR policies in the different sectors in which it operates. The scope of its reporting has steadily expanded; in 2004 it covered 90% of all employees, up from around 60% in 2001. By contrast to Saint-Gobain, this is a company with a low turnover rate: under 2% in energy services, though more than twice as high in the Energy International division, reflecting the volatility of the job market in the USA, where Suez has a strong presence. Absenteeism, on the other hand, was lower in international operations, implying that the traditionally strong employee protection in France was being exploited. Employee loyalty is generally high, as is satisfaction – the company ran its first satisfaction survey in France in 2004. Suez concentrates on a detailed breakdown of compensation policies. Average wages are cited and there is an emphasis on guaranteeing a decent standard of living by paying distinctly more than minimum wages. Both minimum wages and the sectorial average in the countries where the company operates are contrasted with Suez’s remuneration. Cost of living figures are also presented. Thus, social responsibility to employees is concretised. Again, the US presence results in far higher average wages in the international division.

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Training is an important priority: the cost of training, types of courses, percentage of the workforce covered and the number of hours per person are listed. Training has a dual function: it is obviously designed to increase productivity. At the same time, it is intended to promote social advancement. Suez’s Sustainable Development report excellently balances priorities, thus fulfilling the spirit of sustainability. The impact of employment policies on Return on Capital Employed (ROCE) is described, though not quantified. Suez’s stance as a good employer is also put forward. This is clearly a company that has achieved a high degree of diversity: the percentage of women in executive positions in the international division was actually higher than the proportion of women in the workforce. Here, too, the level of detail provided is almost overwhelming: relevant percentages are not just provided for the Group as a whole but for each division. Suez has six HR priorities, one of which is diversity. As with SaintGobain, HR has a strong managerial focus. To an even stronger extent, however, Suez follows integrated strategies designed to transform an oldfashioned national utility into a dynamic, change-oriented world player.

FOCUSING ON THE ESSENTIALS One definite deficit of companies like Saint-Gobain and Suez is the complexity of their reporting. Analysts and other stakeholders are forced to piece facts and figures together and interpret a huge amount of information and comment. However, all French reporting is not so indirect in its focus. Ingenico, for instance – a global provider of secure-transaction and payment systems with 8.5 million payment terminals installed in more than 90 countries – has a very pragmatic approach to productivity. Basically, Ingenico reports on productivity on a monthly basis. Its calculation is based on sales in the last 12 months divided by the number of permanent employees on the payroll at the end of the month. Thus, productivity increased by 9% in the course of 2003, though sales declined in the first half of the year. The productivity per employee increased between June and December 2003 from E215 000 to E263 000 and to E332 000 by the end of 2004. This is an important key performance indicator. This indicator, which Ingenico calls its Competitive Strength Ratio, is supplemented by a Skills Progress Index, also calculated on a monthly basis. This, however, seems a more arbitrary undertaking: total hours of training are divided by total hours worked, total promotions

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and internal transfer plus total skilled new hires minus total departures of skilled employees. While this index showed strong progress in 2004, reflecting the high percentage of internal transfers, promotions and new hires, this kind of quantification indicates a tendency, without really being transparent. However, the productivity scorecard is valuable and easy to grasp. Box 5.1

Reporting on Productivity: Recommendations

Start with the basics. How has workforce size developed in the past financial year and to what extent have personnel costs risen or fallen? Then focus on vital issues: • How high is the variable component in salaries on different hierarchic levels and what kinds of bonuses or other incentives are in place? • How high is employee turnover and what can it be attributed to (attractiveness of competition, voluntary early retirement, redundancy schemes, etc.)? • How has productivity developed in the different divisions: has turnover and net earnings per head increased or decreased? After providing this overview, comment on the results: • Is the rise in productivity satisfactory and sustainable or alternatively: how can a fall in productivity be explained and reversed? • What is management’s assessment of employee productivity and what measures will be taken to increase it? • Can absenteeism be traced to specific issues like stress or an entitlement mentality and how does HRM respond to the problem? Then consider structural aspects: • How high is the proportion of sales personnel to administrative staff (the line-staff ratio)? • What can be done to increase the % of staff directly involved in creating turnover? • What is the % of managers to normal staff and can streamlining be achieved in middle or higher management?

Positioning Productivity is an integral part of the chapter on Human Resources in the Annual Report. It should be placed at the beginning of the chapter. Important KPIs should also be published on the corporate website.

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Box 5.1

Continued Key Performance Indicators

Headcount Personnel costs

Incentive ratio

Productivity ratio Turnover rate

Absenteeism

Employee hierarchy rate Line/Staff ratio

Full-Time Equivalents (FTEs) or equivalent figure for last three years Breakdown of salaries and social benefits (health insurance, pensions etc.) of workforce for last three years Variable component of salary as a % of total salary with breakdown at different hierarchic levels Per capita turnover and net earnings for last three years with breakdown on divisional level % of employees leaving the company for the last three years and comparison to industry average (if available) Rate of absenteeism in last three years and breakdown of causes (sickness, family issues, strikes, etc.) Proportion of managers to normal staff on divisional basis % of employees in divisions, after-sales-service units, etc., in proportion to employees in staff functions (book-keeping, legal affairs, communications, etc.)

B. MOTIVATION: WILD CARD FOR EXCELLENCE? Motivation (see Table 5.2 and Figure 5.2) is the ultimate joker, a playing card whose value can be determined by the manager in charge. Inciting employees to excellence is vital for corporate success; despite this, motivation has remained an unpredictable factor and invited a barrage of satire and irony. E.L. Kersten, for instance, debunks what he calls the Noble Employee Myth in his book The Art of Demotivation: A Visionary Guide for Transforming Your Company’s Least Valuable Asset – Your Employees. The author’s tongue-and-cheek humour is aimed at exposing the catchphrases and wishful thinking provided by what Kersten calls the ‘motivation industry’. One of his recipes runs

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this way: ‘Sometimes the best solution to morale problems is just to fire all of the unhappy people.’ Kersten is obviously in the provocation business. However, a panel of experts consulted by the Conference Board in 2002 confirmed a wide gap between rhetoric and reality. The general answer of the experts to the agenda-setting question ‘Are we any better at managing people?’ tended to be No or Not Really. A large number of motivation theories are bandied around, ranging from hierarchies of needs to reinforcement theories stressing that rewarded behaviour tends to be repeated. Basic truths like ‘People do what they are rewarded for doing’ are propagated by textbooks on the subject. Despite this, successful companies have developed their own formula for gaining commitment, giving incentives and encouraging a culture of achievement. Toyota, generally considered the world’s best automobile company, particularly stresses commitment: People are behind our success. Machines don’t have new ideas, solve problems, or grasp opportunities. Only people who are involved and thinking can make a difference   Every auto plant in the US has basically the same machinery. But how people are utilized and involved varies widely from one company to another. The workforce gives any company its true competitive edge.

For Toyota, the secret lies in creating a synthesis between employer and employee goals. One important aspect is socialisation. Toyota has used a four-day orientation session for new employees to acquaint them with the company’s ideology concerning quality, teamwork and personal development. Thus, recruits are indoctrinated into participating in the corporate mission and sharing the values that Toyota upholds.

CORPORATE CULTURE: THE BACKBONE OF MOTIVATION For many companies, motivating employees means going back to the basics. It starts with a reflection on what the company’s culture consists of and continues with ways and means of communicating it to staff. In other companies, employee satisfaction is regularly measured and serves as a seismograph of collective commitment. Beyond this, individual incentives are provided and issues like work/life balance, which have a strong impact on motivation, are addressed. Three companies

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illustrate a cultural approach to motivation: the British pharmaceutical giant GlaxoSmithKline, the German business software producer SAP and the Australian bank NAB. GlaxoSmithKline The ‘GSK spirit’ became a focal point of the new company’s strategy when Glaxo Wellcome and SmithKline Beecham merged in 2000. Spirit was at the core of the company’s brand and values. In GSK’s first annual review, which focused on individuals, whether as customers, shareholders or employees, the title message was It’s about you. The British pharmaceutical giant expressed its commitment to improving the quality of human life and then commented on its human resources. Retrospectively seen, the company was excessively enthusiastic. It referred to its ‘team of over 100 000 highly skilled and dedicated employees’ and then avowed: These are people who have a genuine desire to win and an unquenchable passion about their work, who set about their tasks with entrepreneurial enthusiasm, excited by a constant search for innovation, with an unmatched sense of urgency to meet the needs of the rapidly changing market environment.

As a newly founded company, GSK obviously felt the need to be inclusive. However, purple prose of this kind is counterproductive; it is senseless to refer to more than 100 000 employees in this way. Fewer adjectives and more facts would have been more appropriate. In subsequent years, the company’s reporting became more substantive. Its yearly Corporate Responsibility reports focused on specific elements of the GSK spirit like ‘performance with integrity’ and ‘entrepreneurial spirit’. Regular surveys of around 10 000 managers assessed the extent to which employees subscribed to the company’s values. They confirmed a high general level of pride in the company, while revealing concerns on specific issues: were people able to perform to their full potential?; could managers support their staff as coaches?; etc. GSK has gone to great lengths to communicate ‘spirit’, including the use of a costumed fortune-teller in Nigeria. Its leadership development programmes have also promoted corporate values. Despite this, the true degree of motivation remains unclear; survey results are briefly discussed but not presented concretely. The same lack of

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hard facts applies to volunteering, where only corporate donations are quantified. The GSK approach is strong on buzzwords like ‘a sense of urgency’ and ‘passion for achievement’, while weak in terms of evidence. SAP This German global player has a more factual approach, though it did entitle its 2003 Annual Report, ‘The Spirit of Innovation’. The focus on innovation is apposite for the world’s leading provider of business software, facing strong competition from companies like Oracle and relying on a series of new technology platforms and applications for its business edge. To mobilise the knowledge and skills of its personnel, SAP has launched a number of programmes. Its Talent Management identifies innovative employees, sends them on project assignments and gives them specialised training. The SAP university plays a major role in developing new talents. Idea management is a major issue: in 2003, around 1700 ideas were submitted by the company’s associates, resulting in an estimated benefit of E36 million. The NextGeneration@SAP competition allows employees to present their ideas to top management. Beyond this, the SAP Innovation Syndicate is an internal network connecting rising talents. SAP’s incentives are closely linked to rewarding innovative behaviour: • Stock appreciation rights and long-term incentives are designed to create long-term bonds between employer and employee. • Work/life balance is actively promoted; this, of course, can be more easily achieved in the software sector, where employees can belong to teleworking schemes. • The company’s Global Mobility Policy initiates an international employee exchange across the world. Around 700 employees from a total staff of over 30 000 are transferred each year to foreign assignments. This furthers both the transfer of knowledge and the intercultural expertise of SAP’s staff. The company’s annual reports regularly provide substantial information on how the highly-trained staff is motivated to achieve more. Beyond this, the SAP Employee Report concentrates on corporate culture, empowerment and remuneration. Programmes like

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the ‘Development meets Customer’ initiative, involving a two-day stay with customers, ensure that software developers remain attuned to the needs of those who organise their companies with SAP software. National Australia Bank Motivation is an important success factor in good times – and even more important when a company experiences a crisis. NAB, one of Australia’s largest banks, went through a stormy period in 2004, when its CEO resigned in the context of big losses through unauthorised foreign-exchange trading. The company was criticised by communications experts for the way it handled the crisis. This bank took more than two weeks to react to media reports and its reputation suffered as a result. In terms of consumer expectations, NAB already had a poor image. Considering all this, the company’s reporting did a good job of tackling unpleasant issues. NAB’s CSR report for 2004 openly pointed out: Internal surveys and external reviews show that employee engagement is low and we need to change our culture to build a strong teamwork and customer focus   Our culture in the past had been too closed, too hierarchical and too prone to filter out bad news.

This kind of ‘mea culpa’ openness is fairly rare in corporate circles and shows that the company was aware that it had a credibility challenge. Staff turnover seemed rather high at 15%. The results of the biennial Employee Opinion Survey were presented in detail, showing a remarkable degree of satisfaction. However, NAB constructed its own matrix, with Commitment – how much people want to improve business results – and Engagement – how much people improve business results – as the next steps on the ladder to business success. The Australian bank offered its employees a wide range of flexible work practices and family-friendly arrangements including child care. NAB won a national award for its Work and Family culture, thus proving that it did not merely pay lip service to supporting a family culture. Its Head of HR rightly pointed out: Work and Family sit like two ends of an old-fashioned set of scales. At the National, we look to provide our people with the tools to help them reach the right personal and professional balance. This is not always easy and it

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is the mutual understanding of that point of equilibrium that has delivered the greatest rewards for both the National and our people.

This kind of candidness is constructive. It enhances the company’s image precisely because it desists from spin and makes it clear that the company is not waving a magic wand or providing largesse. It is trying to devise solutions of mutual benefit to employer and employees alike. Table 5.2 HR motivation: Key Reporting Indicators Quantitative

Qualitative

• Range of incentives (including LTI) and annual budget • Results of HR satisfaction surveys

• Talent identification and development strategies • Methods and frequency of HR satisfaction surveys • Corporate volunteering: project focuses, participation, investments • Management assessment (360 evaluation)

• Cost and breakdown of social benefits (pension funds, health care, etc.) • Idea management (structure, prizes)

Mobilising Employees: Between Satisfaction    AXA Employee motivation is often seen as an issue to be dealt with by the HR department. Successful companies have, however, integrated it into their business models. AXA is a case in point. The French insurance company has developed a comprehensive survey methodology called ‘Scope’ consisting of approximately 50 different questions. These apply to areas such as how employees judge managers, strategy perception and empowerment. AXA has measured employee satisfaction regularly since 1993, and the response rate has steadily risen – from 74% in 2002 to 81% two years later. Satisfaction has also increased. The company reports regularly on the results in its annual report and the Sustainable Development reports. It tackles critical issues such as poor scoring for management, as was the case with AXA Tech – a subsidiary responsible for IT infrastructure. The performance of individual subsidiaries is measured on a worldwide basis and manager compensation is affected by the grades given to managers by their employees, their colleagues and their bosses. This 360 evaluation scheme is an important HR tool for

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AXA. Managers are also expected to meet on an annual basis with their employees to review past performance and set future goals. ‘Scope’ is an integral part of corporate strategy. In Australia, for instance, AXA faced a difficult situation in 2000. Its new Chief Executive set up five goals. Four of them were financial and consisted of doubling the value of new business and the reduction of the expense ratio. One of them was to get into the top quartile in the worldwide AXA hit list of employee satisfaction. Four years later, the company had drastically raised profitability, while significantly improving its performance in the Scope ranking: from No. 51 in the 1999 survey to No. 35 two years later. A further pillar of employee engagement is the AXA Hearts in Action volunteering initiative created in 1991 in France and extended across the world. More than 2500 projects have been carried out. Decisions on volunteering projects are made on a local basis; however, there is a global coordination committee. The hands-on attitude of this French insuring giant was expressed by the company’s President, Henri de Castries, as follows: Corporate philanthropy is not about assuaging one’s conscience by giving money to those who do the actual work. It is a natural extension of the business organization and its values.

This brings volunteering into the mainstream of corporate strategy. Castries has stressed that donations cannot replace voluntary involvement. The range of projects is huge: support for the disabled and the excluded, children’s aid, involvement in AIDS care and many other areas of activity. Over 20 000 employees have been involved, approximately 20% of the workforce. AXA reports extensively on its volunteering projects, both on a central and a regional level. Despite all its efforts, AXA’s HR track record was rated as only average by the Vigeo agency; here again, the company openly published this assessment in its Sustainable Development report. All in all, AXA is a prime example of a company that is both concrete and courageous in its entire approach to mobilising human resources. ING The Dutch bank ING is less strategic; it does, however, measure employee satisfaction and reports on it both extensively and critically.

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Strong

The ING Group employs more than 100 000 people across the world. Its ‘motivation surveys’ are correspondingly international and cover employees in the Netherlands, the Americas and Australia. The first survey carried out in the Netherlands in 2003 only invited a response of 43%. The general trend was positive, with a particularly high score for motivation on the job. However, career development and management skills were critically seen. In the Americas, scoring tended to be homogeneous. ING reports extensively but unevenly on the surveys, both in its annual reports and its ‘ING in Society’ reports. Thus, exact scores were not provided for the Americas, though the three ‘priorities’ mentioned – employee value proposition, operational efficiency/speed and culture – were obviously areas in which the company has deficits. The fact that actions to remedy the situation have become an integral part of performance management and compensation for senior management indicates that the deficiencies were taken seriously. A higher percentage of staff in Australia – almost 70% – responded to the survey. The satisfaction rate was at 59% apparently on the level of the country’s median (60%), though ING does mention that best practice is at 85%. Clearly, ING has far to go in its Australian operations: communication, change processes and pay were criticised. All in all, this company shows that it takes motivation seriously, and is willing to highlight its own weaknesses.

GSK

AXA

NAB

Culture Oriented

SAP

Weak

Lloyds

Low

Incentive Oriented

Figure 5.2 HR motivation profiles

High

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   and Engagement Like AXA, an increasing number of companies are discovering that involving their employees in community activities is not just good for the corporate profile; it also serves as a motivation tool. The Corporate Citizenship Company, a British consultancy, carried out research in a best practice group showing that companies with welldesigned employee volunteering schemes profited from an increase in the self-motivation of the staff involved. One company with both a well-developed corporate volunteering policy and adequate reporting is Lloyds TSB. As one of Britain’s leading banks, with more than 2000 branches across the country, Lloyds has a large community investment programme, coupled with a substantial volunteering project. Lloyds employees help schools, charities and local community agencies by raising money, providing expertise or simply pitching in on various jobs. In its informative CSR report entitled ‘Taking Account’, the bank presents the rationale for its involvement: We know that it (community investment and volunteering) is a key factor in the perception that our staff have about Lloyds TSB’s external profile and consequently plays a definitive role in their satisfaction with the company as an employer. And we can demonstrate a direct relationship between employee satisfaction, customer satisfaction, and, ultimately, shareholder satisfaction.

Lloyds operates a system of matching grants, with around 4000 staff members raising a total of over £4 million for charities. Special initiatives are aimed at aiding hospices. Competition in this area is fuelled by the Group Community Awards scheme. Lloyds staff also work as mentors in schools, learning as much as advising. As one manager pointed out: Working with a head teacher is a valuable development experience. It has enabled me to see very clearly that the management challenges of leading a school are just as much about customer satisfaction, leadership and working effectively in a local market as mine are.

Lloyds’ involvement is predominantly British; Henkel, on the other hand, organises and supports projects across the world. The German manufacturer of detergents, cosmetics and other consumer products founded a scheme called MIT – Make an Impact on Tomorrow – in

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1998. Since then, it has supported several thousand charitable projects that its employees initiated. The Henkel strategy allows for a great degree of autonomy on the part of the initiators, who, to an important extent, are company pensioners. The employees and former employees play the roles of promoters of social causes. Henkel has gained in reputation since starting the project and has been awarded several prizes, including the Charity Prize of the German Children’s Help Council. When Henkel celebrated its 125th anniversary in 2001, the company put aside E125 million for 126 child-aid projects in 50 countries and decided to continue support for children across the world on an ongoing basis. Though started in Germany, the volunteering projects run at 33 Group companies across the world. Each project is decided on by a committee that consists of six managers and a representative of the works council. The employees involved are self-organised in a network, and those with experience serve as mentors for ‘volunteering beginners’. A database developed by employees in their free time provides the information infrastructure necessary to keep track of the large quantity of activities started by Henkel employees. Henkel reports on MIT in its yearly sustainability reports. As the company pointed out in 2003, employee initiatives are appropriate for the company’s slogan ‘A Brand Like a Friend’. Volunteering is generally considered to have originated in the United States and then moved from there, over Britain, to different parts of Continental Europe. In the meanwhile, companies across the world vie with each other in demonstrating engagement in the communities in which they operate. NWS Holdings for instance, a Hong Kongbased infrastructure service company with a broad range of projects – energy, water, roads and ports – in the Greater China region, has founded the NWS Volunteer Alliance to coordinate the activities of its employees. In its annual reports, the company provides a good overview of the money donated, the non-governmental organisations involved and the number of hours worked. Specific projects such as support for psychiatric patients is highlighted. The Alliance was awarded a gold medal for community involvement by the Social Welfare department several times. Thus, NWS has managed to gain a specific profile as a socially involved company in an area of the world faced by major development problems.

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Box 5.2

Reporting on Motivation: Recommendations

Motivation is far less tangible than productivity. Reporting should concentrate on issues that can be defined, rather than verbalising vaguely. Start with corporate values and the code of conduct and describe how they are communicated and enforced company-wide. Also provide data and commentary on the downside of ethics: How many violations of the code were registered and what were the kinds of violation (disclosure of trade secrets, molestations of co-workers etc.)? Then continue an overview of areas with a distinct impact on motivation: • Work/life balance including flexi-time, part-time employment, jobsharing, teleworking, etc. Give statistics and briefly describe the various facilities available to staff. • Employability including outplacement help and internal training of surplus staff for new jobs within the company. • Talent management strategies: How are high potentials identified, acquired and promoted? What kinds of institutional affiliations does the company have with business schools, universities, etc.? How high is the retention rate with top talent? After that, touch on broader issues such as corporate volunteering: • How does the company promote employee involvement in community work? • How is CV connected to HR development, in particular the further qualification of managerial talent? • What kind of mobility and job rotation schemes do you offer and to what extent do staff members take advantage of these opportunities? • How do you optimise the customer orientation of your employees? • Do you offer internal training in CRM or exchange programmes with selected customers? Finally, tackle the issue of evaluation. What kind of schemes do you have for managers and employees (360 evaluation/regular manager–employee dialogues, etc.).

Positioning Management-oriented information such as work/life balance, talent management, employability and evaluation should be placed in the HR chapter of the Annual Report (ideally following the information on productivity). The more idealistic issues such as values, code of conduct

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and volunteering should be placed in the HR section of the Sustainability Report/CSR Report. Key Performance Indicators Employee commitment

Code violations

Work/life balance track record

Volunteering involvement

Results of satisfaction and motivation surveys including highlights and improvement areas % of employees against whom action has been taken for violations of the Code of Conduct, number of cases of whistle-blowing % of employees working part-time, flexi-time, job-sharing, taking sabbaticals, etc. % of employees active in corporate volunteering, breakdown of major areas of involvement (social work, expert advice, etc.)

C. POTENTIAL: PROTECTING PROPERTY AND HARNESSING TALENTS The potential of human resources (see Table 5.3) is vast – and mostly uncharted. At its most abstract, it can be quantified in terms of intellectual property. However, the payback from enlightened and efficient diversity policies cannot be expressed in figures and the same applies to employee development and other policies designed to harness the talents of both the workforce and the management. Despite this, reporting can present strategies and provide evidence. Intellectual property (IP) is often overlooked or treated as a quantité négligeable. As Bob Sherwood puts it in a Financial Times article aptly titled ‘How to make your intangible assets sweat’: It’s not on the balance sheet, the person in charge of it is probably not on the Board and protecting it might even be considered an unnecessary cost. It does seem a strange way to treat one of the most valuable corporate assets.

IP is important for two reasons: it can be a lucrative source of income and it can also boost a company’s reputation. Beyond this, clear IP

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strategies can motivate creative employees and attract valuable talents. A growing number of companies have realised this and are starting to professionalise the handling of their IP portfolios.

EXPLOITING INTELLECTUAL PROPERTY: DEFENSIVE AND OFFENSIVE APPROACHES In the forefront of issues connected with intellectual property are Japanese companies from different sectors. Kikkoman, the country’s top soy sauce manufacturer, has highly developed capabilities in brewing and food-processing technologies. In 2004, it separated its Intellectual Property department from R&D in an effort to professionalise the exploitation of its know-how. Parallel to this, Kikkoman developed a new Employees’ Invention System in 2005 to offer greater incentives. Employees are compensated in three phases: when the company applies for a patent; at the time of registration; and when the patent is gained. In its IP report, Kikkoman gives an overview of the number of patents held in Japan and overseas during the last five years. It also explains why Japanese patents held by the company have been declining: Kikkoman has reduced the number of its applications because of increased scrutiny and has also tightened its reviewing of existing patents. 39% of all patents result from the company’s core business: soy sauce and derivates. The number of trademarks in Japan and abroad is also given on a 5-year basis. All in all, Kikkoman provides a good documentation without highlighting particular issues. Olympus, a company which straddles the imaging and medical systems sectors, goes a step further than Kikkoman and quantifies its ratio of net sales to R&D expenses. It also provides a chart showing R&D efficiency calculated on the basis of the IP strategy index issued by the Japanese Ministry of Trade and Industry. Beyond this, Olympus provides a breakdown of its patents in core competency areas over a period of five years. This reveals a decline in the optical technologies for which the company is known, and a rise in cell-related technology patents, showing the company making strides in terms of medical systems. Olympus publishes its IP report on a yearly basis. Those comparing the 2004 and 2003 reports will find added evidence of Olympus’s drive in the medical systems sector, where it held a 70% market share

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for endoscope devices. The company’s licensing policy is surprisingly defensive: Olympus views intellectual property licensing activities primarily as a means of differentiating its products from those of other manufacturers, rather than as a means of generating licensing revenue. With regard to imaging products, Olympus considers cross licensing to be an important tool because the rate at which technology advances in the imaging industry is extremely rapid   In contrast to this, Olympus strategically uses the acquired patents on the gastro endoscopes that are its leading medical equipment product to maintain market share and make it more difficult for other manufacturers to enter the market.

This is a clearly structured approach; however, Olympus does not disclose any incentives it gives for in-house inventions. It seems to rely more strongly on monitoring newly registered patents and published patent applications, also reviewing its own IP assets on the basis of competitive intelligence; thus its approach can be considered more technocratic than Kikkoman’s. IBM is a world IP leader. For over 10 years, this company has filed more patents at the US patent office than any other company. IBM is proud of its track record and reports on it regularly. However, the professionalisation of IP activities started in 1998 when the then CEO Lou Gerstner challenged executives to find a better return on investment for the patents. In the meantime, IBM earns more than $1 billion a year by proactively selling its patents. The company excels in mixing business and technology talents. ‘We brought the marketplace into our labs’ is how IBM describes this emphasis on customer-oriented research. The world’s leading computer company has recruited a large number of specialists with industry-specific expertise. At the same time, it is careful to avoid l’art pour l’art inventiveness. As it pointed out in its 2000 Annual Report: ‘IBM’s R&D finds its ultimate scorecard not in scientific journals, but in the impact it has on the fundamental problems and opportunities that exist in the world.’ IBM deals with its intellectual capital more in terms of output – earnings from patents – than of input, mentioning its use of experts without, however, providing deeper insights. Grupo Santander (BSCH), on the other hand, one of the few companies that has consistently practised the measurement of intellectual capital, concentrates on quantified, structural input data. Spain’s largest bank provides good ratios like

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Reporting Nonfinancials

training cost/wage bill and training participants/total employees. Its CSR report provides excellent training data, including the evaluation of training satisfaction. These indicators, however, vary with odder ratios like the number of knowledge management projects. The question remains: What does this say about Santander’s competence as a major financial services player? The data provided is not matched by cogent interpretation. However, what does come across is the picture of a Spanish bank rapidly adjusting to the international business environment. Santander has, for instance, acquired an increasing percentage of employees with university degrees and of staff with variable remuneration. In 2004, BSCH took over the British building society Abbey National. As a result of the business crisis between 2002 and 2004, part-time and older employees were laid off to a greater extent than normal full-time employees. HR turnover increased proportionately, while absences declined. Unsurprisingly, employee satisfaction decreased. Abbey, which has a solid HR reporting tradition, duly published relevant data. However, in terms of HR potential, it was unclear whether the take-over would increase know-how and indeed create conditions that would attract talented staff to the company. Table 5.3 HR potential: Key Reporting Indicators Quantitative

Qualitative

• % of part-time and temporary staff

• Work/life balance schemes and participation • Diversity policy and targets

• Diversity metrics (% of women and ethnic minorities in management) • Number of patents and trademarks held, incentives for inventions/innovations • Investment in training, % of employees trained

• Training strategies and target groups (young professionals, high potentials, etc.) • Training facilities, including Corporate University

Managing Diversity: Qualitative Solutions    Diversity is a major issue in the Western corporate world. Legal constraints against gender, race or age discrimination are extremely stringent in the USA and are gaining importance in Europe. In Britain, for instance, the Department of Trade and Industry criticised the diversity

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quotient in the average FTSE 100 Boardroom in 2004 and called for a greater number of directors from ethnic minorities. The DTI also launched the Ethnic Minority FTSE 100 Index in an attempt to publicise the issue. On the other hand, the UK has a far higher share of directors from abroad – 26% – than other European countries, or the USA for that matter. Another area of rising activity is disability. The Employer’s Forum on Disability in Britain launched a Disability Standard in 2004 to professionalise employer approaches to this issue. In countries like Germany, companies face fixed disability quotas, including financial penalties on companies that do not fulfil the quota. A large number of companies have appointed diversity managers and created departments to both enforce and promote equal chances for all. The original issue was equal rights for men and women; gender discrimination and how to overcome it still remains the major diversity focus. Surveys have shown that the percentage of women in top positions is far higher in northern European countries than in southern countries like France, Spain and Italy. The pressure to enforce equity – and to prove that equity exists – is on the rise. A company’s reputation can quickly be damaged by accusations of discrimination. Beyond this, there are obvious monetary benefits involved in harnessing all available talents within the company and attracting new female or minority talents. Approaches to diversity vary. Pearson is a prime example of a company with ambitious aims that, however, are not quantified. David Bell, the company’s Director of People, launched a four-year diversity programme with three phases: 1. A systematic analysis of the workforce in terms of gender, age and diversity, coupled with an analysis of best practice. 2. A project to analyse ‘hidden’ issues that curb promotion within the organisation. This was flanked by initiatives to increase the proportion of candidates from ethnic minorities in internship and business graduate training programmes. 3. Mentoring and training programmes for those within Pearson to increase their chances. This also included pressure on senior management in terms of tieing a part of the bonus to diversity targets. The world’s largest publisher has a section in its CSR report devoted to diversity, as also a dedicated website. Reporting has a distinctly normative flavour: Pearson reports, for instance, that it has

164

Reporting Nonfinancials

evaluated men’s and women’s pay in top management and come to the conclusion that women are not discriminated against. Needless to say, this is a tiny section of the organisation. However, the emphasis at this company is on taking the right steps towards ensuring equity. The 4-Year Plan, which is available on the diversity website, is highly detailed in its scope, though the lack of concrete targets makes it difficult for stakeholders to ascertain what exactly has been achieved. Stora Enso, the Finnish paper and packaging manufacturer, has an equally normative approach, though it does provide a listing of the percentage of women in management positions. This company, a global market leader in its sector, has founded a project called Women in Stora Enso (WISE) and reports extensively in its CSR reports on its interrogation of 23 of the company’s 25 top female executives. The company courageously admitted its deficiencies: • In 2002, the percentage of women at Board and Management Group level was 0 – and was exactly the same two years later. Even at lower levels – divisional management and unit management – no progress was made. • Stora Enso reported extensively on its own opinion research, including unflattering statements that there was a ‘glass ceiling’ in the company and that a change of attitudes was necessary for women to progress further. • The company also pointed out a functional problem: top jobs at the company went to executives with production backgrounds; here, women were highly underrepresented. The female interviewees were very candid: they stressed the importance of good networks, but reported little progress in creating them. The company’s reporting also reveals cultural insights: business dealings in Nordic countries are often combined with visits to saunas and hunting trips, both of which tend to exclude women. As one female executive put it: ‘The sauna door is closed.’ Beyond this kind of anecdotal evidence, the company expressed its commitment to improve the representation of both non-Nordic individuals and women at higher management levels. Every unit in Stora Enso was expected to adopt a systematic approach to gender diversity, though, as with Pearson, no quantitative targets were set.

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   and Quantitative Evidence Diversity is a humanistic issue; social equity is a moral commandment that companies, like states, are bound to fulfil. However, it is also a way of mobilising talent and profiling the company (see Figure 5.3). Thus, standard management practice in terms of setting targets and measuring performance is a way of bringing the issue into the business mainstream. The Anglo-Dutch oil giant Shell is one company that regularly reports on how far it has achieved its targets. Diversity originated in the USA and, unsurprisingly, American companies like Citigroup and Kodak are in the forefront in terms of making diversity an integral part of their global strategies. Shell ‘Diversity and inclusiveness at Shell’ is the title of a brochure that outlines the company’s policy. Shell is a pioneer of long-term planning on the basis of scenario techniques. Thus, the company’s then Chairman, Philip Watts, outlined the rationale for fairness by focusing on Shell’s view of the future world: Our latest scenarios illustrate the need for global companies to be truly multinational, trusted in communities all over the world, while harnessing their worldwide experience to deliver best practice everywhere. They must be open to new ideas, different perspectives and changing expectations.

This is the business case for diversity: harnessing talent and dealing with the needs of a multicultural customer base. Shell has enumerated its reasons for promoting diversity: 1. 2. 3. 4.

Attraction and retention of top talent Increased productivity Stronger customer/market focus License to operate and grow.

The fourth reason, license to operate, is a classic CSR argument. Basically, companies do not need this licence legally; however, they feel the need to gain social legitimacy by proving that they adhere to high ethical standards. The other three reasons, however, are pure business management. To measure its own performance, Shell set itself the target of having 20% of all senior executive positions occupied by women by 2008. In its sustainability statements, the company has reported regularly on

166

Reporting Nonfinancials

its progress towards reaching the target. Disappointingly, the company has not set itself an ethnical quotient as a target, though its diversity vision claims to make Shell ‘a company of choice for men and women of all ethno-cultural backgrounds’. Citigroup The world’s largest bank has not set itself concrete targets. However, it provides a comprehensive breakdown of the gender and ethnic affiliation of its employees in the USA on a yearly basis. The data published shows a strong preponderance of white male employees in managerial positions. Intriguingly, there are more female than male executives from the black community, reflecting the fact that more than twice as many black women work for Citigroup. There is a similar female gender bias with Hispanics. Diversity has high priority for Citigroup. In the CEO’s message to shareholders, the company claims to be perhaps ‘the most diverse company ever created – our staff is 98 percent local in the nearly 100 countries in which we operate’. At the same time, the bank admits that it has a long way to go. Its Director of Global Workforce Diversity outlines a strategy based on the four components: Citgroup wants not only to be the employer of choice, but also the service provider, business partner and neighbour of choice. Employees have a great degree of autonomy on the issue: diversity councils and employee networks further the cause. The company supports 21 employee networks and reports extensively on progress in its Diversity annual reports. The bank can point to a number of public awards that it has received for its policies, including that of Employer of Choice for women and of one of the Best Companies for Minorities. Citigroup has a remarkably broad definition of diversity; its activities extend to the disabled, as also to lesbian, gay, bisexual and transgender individuals. These are recruited from top business schools, showing that Citigroup is canny of the fact that its diversity strategy is a part of the war for talent. Beyond this, heritage and history celebrations are organised for minority customers like the Black History Month and the ‘Year of the Monkey’ for the Chinese community. Kodak Diversity is a particularly challenging goal when a company has to cope with difficult conditions and redundancies. The world’s

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167

most famous photography film manufacturer has had to scramble to survive the digital photography onslaught and has launched a three-year programme involving job-cuts to focus growth on digital businesses. In terms of diversity, Kodak has acquired a good reputation, winning awards as one of the FORTUNE Top 50 Companies for Minorities and as one of the Top 50 for Latinas. Like Citigroup, Kodak sponsors a number of employee networks and founded a new Diversity and Inclusion Council in 2004. The company’s annual reports discuss the subject in great detail. Its three-year diversity charts provide insights such as: • The percentage of women on the Board of Directors and at senior management level decreased more drastically between 2002 and 2004 (from 30 and 33% to 23 and 25%) than the percentage of women employed by the company (36 to 34%). • By contrast, while people of colour accounted for a constant 21% of the workforce, representation on the Board leaped from 30 to 39%, while remaining stable at 14% on senior management level. The company does not explain why women seem to be losing, while coloured employees are gaining ground. This is a common deficiency of much reporting: companies tend to be honest in terms of statistics but rarely interpret and comment on the data they publish. In its 2003 Annual Report, Kodak pledged to eliminate under representation ‘based on availability’. A clear target would be a more credible goal. However, Kodak provides an excellent business case for diversity, by incorporating multicultural market opportunities into its marketing planning. Imaging practices differ across cultures and social classes. Thus, the company developed a zoom digital camera exclusively for Japanese consumers. Diversity can promote a multicultural mindset, something that Kodak promoted by appointing a Director of Multicultural Marketing. The company also supports supplier diversity and reports regularly on the percentage of spending to minority- and women-owned business enterprises. Its diversity website features statements from top management, employees’ views and links to other resources. Thus it has a substantive approach to the issue, focusing both on fairness and on increasing business opportunities.

Reporting Nonfinancials

Strong

168

IBM

Financial Approach

Kodak Citigroup

Pearson

Weak

Olympus

Weak

Strategic Approach

Strong

Figure 5.3 HR potential profiles

TRAINING: AN INVESTMENT IN SUPERIOR PERFORMANCE ‘Education and training are the most important investments in human capital’ according to the Nobel prize-winning economist Gary Becker. Becker, a pioneer of the study of how both formal and vocational education can contribute to higher incomes, also highlights the role of on-the-job training. Most companies report in a fragmentary way about training. Some provide relevant statistics without outlining their development strategies. LVMH, however, the world’s leading luxury goods company, has a clear policy on training, which is regularly reported. The French company’s slogan, ‘Passionate about Creativity’, commits it to imaginative training at all levels: • At the shop-floor level, LVMH has a policy of recruiting people with low qualifications, then training them for several months in craftsmanship processes vital for the quality of the leather, fashion and wine-based products that stand behind iconic brands like Louis Vuitton and Moët Hennessy. • The company recruits young talents from business schools and as interns. In particular the ‘Futura’ campaign has targeted highpotentials at top MBA campuses in the USA and Europe.

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• Training is carried out at centres in Paris, New York, Tokyo and Hong Kong. Beyond this, LVMH House in London serves as an innovation hub, where corporate managers can exchange ideas and develop a common vision. LVMH provides good hard facts on the amount spent on training, the number of training days, etc. This is a highly feminine company: 70% of the workforce and more than 50% of all managers are female. The company profits from a long tradition of developing ‘immaterial’ capital. It estimates its human capital at 77% of market cap. LVMH believes in the autonomy of the high-level marques that it incorporates; this in turn puts pressure on the company to create a joint spirit within the group, despite the high degree of decentralisation. ‘The Spirit of Commerce’ is the Slogan of Metro, one of the world’s largest trading companies with more than 200 000 employees. This conglomerate, consisting of wholesalers, retailers, discounters and Cash & Carry markets has a typically German emphasis on vocational education. It also, however, excels in more sophisticated management training. Described in detail in its annual and sustainability reports, the Metro approach is highly methodical, involving HR potential analysis for the entire Group on the basis of the Metro Group Performance Management scheme. The company offers several well-structured programmes: • Metro Academy (also called the Corporate University) is for top leaders, who are each allotted a managing director as a mentor. • A Corporate Seminar is aimed at teaching second-level executives more about corporate strategy, intercultural skills, etc. • Up-and-coming managers pass though a one-year development programme. Here the emphasis is on case studies and practice-oriented projects. • The Metro Business Programme is for university graduates with 2–3 years experience at the company. They are given insights into how the company works and also instructed in global trading trends. Personnel development is steered by key indicators like the qualification, performance, internationality and innovative potential of individual employees. The company has set itself the target of filling 75% of all executive positions with internal candidates. This means establishing and enforcing uniform standards in 28 countries – a task that Metro is tackling with great panache.

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Reporting Nonfinancials

Box 5.3

Reporting on Potential: Recommendations

Here, the accent lies on mobilising ideas and talent. This also involves ensuring that employees of varying backgrounds all have a fair chance to advance their careers and contribute to corporate success. Training is a vital component. Report on the following: • Organisation and cost of training programmes, number of employees receiving training. • Areas of training (technical, organisational, relational) and forms of instruction (inhouse/external/CBT/corporate university). • Controlling mechanisms such as success of courses, satisfaction of those trained, relevance to company’s business and clients. Then provide an assessment of intellectual property in terms of R&D investment, patents registered, etc.: • What % of turnover is invested in R&D, is intellectual property marketed externally, and if so, how? • How is employee creativity mobilised in terms of idea management? Continue by giving an overview of diversity: • Do you have mentoring programmes for women and members of ethnic or other minorities? • Are there councils and networks in place to ensure fairness and are the attitudes and actions of managers judged in the context of performance appraisal? • What is your policy as regards disability and ageing? • Mention awards you have won as an employer of choice.

Positioning Information on training, intellectual property, R&D and idea management should be published in the HR chapter in the Annual Report. Diversity is an important topic for the HR section in the Sustainability/CSR Report. Key Performance Indicators Training investment

Total budget with breakdown of types of training (on-the-job, orientation courses for new employees, etc.) and as a % of total HR costs

Human Resources Value

Intellectual property R&D quota Idea management

Diversity performance and targets

171

Number of patents registered and gained R&D as a % of turnover Results of idea management programmes: number of ideas submitted and acted on during the last three years % of women and members of ethnic minorities in management positions during the last three years + targets for gender parity, etc.

SUMMARY OF HR VALUE There are two basic approaches to reporting on personnel. One method involves circumstantial evidence, quotes and ‘soft’ facts; the other concentrates on performance indicators and a high degree of quantification. Both are legitimate. However, successful reporting recipes consist of a shrewd mixture (Table 5.4). Best practice shown in this chapter illustrates this point: • Telefónica presents a large number of significant indicators including regional income ratios, hierarchy rates and satisfaction research results with relevant commentary. • Saint-Gobain concentrates on employee turnover, a vital issue in the French business environment. It also highlights gender balance. • Suez places the accent on remuneration, particularly in connection with its operations in developing countries. It also integrates compensation in the context of Return on Capital Employed. • SAP reports extensively on talent management and the promotion of innovation through competitions, exchange programmes, etc. • AXA uses employee satisfaction surveys as a strategic instrument to measure the performance of its managers and also boosts esprit de corps through ambitious volunteering projects. • Henkel has developed a highly autonomous volunteering strategy that empowers employees to take the initiative and supports them accordingly. • Shell focuses its diversity reporting by regularly measuring its progress towards reaching a gender equity target.

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Reporting Nonfinancials

• Citigroup reports extensively on social equity in its annual and Diversity reports and supports a large number of special-interest networks. • LVMH provides an excellent overview of training measures at all corporate levels and also estimates the value of its human capital. Reporting needs to be a structured process, avoiding cute assertions and merely anecdotal evidence. Substantial information on incentives, flexibility, diversity and other issues should be presented coherently. If indicators are presented, they need to be both consistent and long term. Companies should first decide what is relevant in the specific business environment in which they operate. Priorities vary in America, Europe and Asia. They should then begin with basics: the HR strategy, productivity, diversity, training, etc. After this, they can move on to particular issues like promotion of know-how and volunteering.

Table 5.4 HR value reporting: Ten leaders Company

Country

Snapshot

Contact

Telefónica

Spain

www.telefonica.es

Saint-Gobain

France

Suez

France

SAP

Germany

NAB

Australia

Lloyds TSB

UK

Henkel

Germany

IBM

USA

Stora Enso Citigroup

Finland USA

Metrics on workforce productivity and rationalisation projects Employment trends and employee turnover Compensation policies and promotion of employee loyalty Talent management and promotion of innovation Motivation strategies and work/life balance policies Corporate volunteering strategy and projects Decentralised volunteering scheme with strong financial investment Proactive intellectual property strategies Clear diversity policies Diversity strategies aimed at various target groups

www.saint-gobain.com www.suez.com

www.sap.com www.nabgroup.com www.lloydstsb.com www.henkel.com

www.ibm.com www.storaenso.com www.citigroup.com

Human Resources Value

Box 5.4

173

Boise International: Fictive Case Study (5)∗

MEMO FROM HG TO BON, 15 December 2007 RE: PROJECT ‘REPORTING VALUE DRIVERS’ Re Human Resources: I had an initial discussion with Heinrich and then went through several meetings with Francis before consulting the divisions. Heinrich didn’t really have much to offer beyond what he had already given me (you remember my including the R&D investment : turnover for medical products on your request). One disappointing issue is that our high investment ratio – definitely above average – is by no means reflected in the patent filings, which strongly decreased in 2005, but recovered last year somewhat. Despite this, I am still waiting for a satisfactory answer why our increasing R&D investment isn’t mirrored in more patents; Heinrich suggested that MP staff were demoralised by the wave of redundancies. On the other hand, patents filed in the energy division have steadily increased, despite the fact that we also sharply reduced staff in 2005. We don’t have accurate R&D figures at the moment; have asked Heinrich to investigate. We’re certainly going to be upfront in publishing the patents statistics; and I hope this spurns our MP lads and lasses to stop meditating and start performing. The overall HR picture is certainly encouraging. The figures I got from Francis’s controllers show that we have managed to reduce personnel costs last year, though number of staff marginally increased. The real savings occurred of course in 2005, the year when numbers decreased by approximately 12 000. Also, we were able to slightly reduce social security costs by launching our own pension fund. One particularly encouraging development is the stronger variable component in remuneration. It’s risen considerably for our executives, but at 15%, it’s also relatively high for normal staff. Intriguingly, absenteeism has steadily fallen, though I assume this is not necessarily caused by greater motivation. Considering the high proportion of redundancies, it could be that an increasing number of colleagues are wary of the consequences of staying away from work. The per capita redundancy costs are steadily decreasing, which is certainly good news.

∗

See Box 2.1 on p. 33 for full names and functions of Boise management.

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Reporting Nonfinancials

Box 5.4

Continued

Another highlight of the last three years is the introduction of our Code of Conduct. You remember how reluctant many of our managers were at the beginning; I remember one fairly senior man complaining about banalities and platitudes that simply wasted time. Well, the number of staff being trained has steadily risen and so have the code offences reported to our ombudsman. For reasons of data security, we don’t have a breakdown of the nature of the complaints but it seems to be very much a mixture of illicit communication of trade secrets and sexual molestation. Now for the lowlights: downsizing has particularly hit our part-timers, whose numbers decreased to 24% last year. This is a great pity, because they’re good for our image as an employer of choice and also come in handy when we quickly need to deal with short-term peaks, specially in consumer finance. This has also had repercussions on our diversity target: You remember that we unofficially set ourselves a task of 40% female managers. In actual fact, the percentage has decreased from 35 in 2004 to 32 last year. This is certainly something we need to do better. Re quantitative targets: Francis is completely against our publishing future goals. According to him, we still have to sort out a number of strategic issues before we commit ourselves to achieving diversity or absenteeism goals. After that, I met with the divisional Heads and their HR specialists to get some further information and insights: • Consumer Finance: Here, staff is almost on the same level as three years ago and there’s definitely a bullish, can-do attitude. Henry is proud of the fact that they have increased investment in training and personal development despite cutting total personnel costs to cope with trends and challenges in the consumer finance business (more so for Credt+ employees; Auto Now is a far more stable business model). One thing the CF experts can’t explain – they’re rather embarrassed about it – is the low level of employee satisfaction. Henry said CF people had a tendency to be constantly chasing rainbows, but I think it’s more because wages are relatively low and the workload is heavy. They’re certainly increasing their marketing budget and aggressively competing for high potentials, but they don’t keep a record on retention and I do have the feeling that they need to tackle the commitment issue more seriously. • Medical Products: Here the staff cuts were particularly heavy, but this division has always invested in its people, so the survivors of the

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redundancy waves are well taken care of. The ratio of training cost to total HR wage bill is far higher than in CF and my feeling is that optimism is growing. In terms of employee satisfaction, MP is a lot better than CF. Of course, as I mentioned earlier, the creative output in terms of patents filed could be a lot better, so we need to translate satisfaction into real commitment. • Energy: Here, the situation is mixed. Renée said she knows the other divisions are envious about the high salaries she pays; on the other hand, this is an area where employees have radically increased the number of patents filed. In the meantime we almost have a ‘hot shop’ reputation in the solar community. The satisfaction ratings are also extremely positive; now, only the bottom line needs to improve.

Key Performance Indicators Group level Staff (on 31 Dec. of each respective year)

2006

2005

2004

180 000

178 000

190 000

Personnel expenditure of which: social security costs (%)

E78 bln

E79 bln

E88 bln

32

34

34

Variable component in salaries (%): Medium-level and junior executives Non-executives Absenteeism (% of total hours worked)

35 15 4.5

23 10 6.2

20 10 5.7

Annual per capita cost of absenteeism

E650

E720

E750

% of employees with training in Code of Conduct (%)

85

74

62

Number of reported code offences

35

24

15

Part-time employees (%)

24

27

31

% of female managers (medium-level and junior)

32

30

35

Consumer Finance Staff (on 31 Dec. of each respective year)

141 000

138 000

142 000

Personnel expenditure

E53 bln

E54 bln

E57 bln

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Reporting Nonfinancials

Box 5.4

Continued

Investment in staff development

E315 mln

E280 mln

E265 mln

Training cost: wage bill ratio (%)

5.9

5.2

4.6

Employee satisfaction survey (in %): Very satisfied + satisfied Dissatisfied and very dissatisfied

68 25

69 28

78 18

Personnel marketing (ads, campus recruitment costs, etc.)

E45 mln

E25 mln

E35 mln

Creativity ratio (% of ideas submitted to total staff)

8

7

7

Staff (on 31 Dec. of each respective year)

32 000

34 000

40 000

Personnel expenditure

E20 bln

E21 bln

E24 bln

Investment in staff development

E160 mln

E140 mln

E192 bln

Training cost: wage bill ratio (%)

8

6.7

8

Employee satisfaction survey (in %): Very satisfied + satisfied Dissatisfied and very dissatisfied

82 12

80 15

84 10

Patents filed

240

190

280

Staff (on 31 Dec. of each respective year)

7000

6000

8000

Personnel expenditure

E05 bln

E04 bln

E07 bln

Investment in staff development

E35 mln

E28 mln

E32 mln

Employee satisfaction survey (in %): Very satisfied + satisfied Dissatisfied and very dissatisfied

88 9

89 8

91 7

Patents filed

75

48

34

Medical Products

Energy

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177

MEMO FROM BON TO HG, 22 December 2007 Thanks again for a good round-up of the ups and downs. The KPIs are excellent; I want all of them to be published in our next annual report; we can afford to be honest and it’s a good way of pressurising people to take action. Kudos to Francis for doing a good job in general terms, but by 2008, he’s got to be in a position to set coherent targets – and to reach them. I shall send him a note to that effect. A few more points: • Absenteeism might have gone down a bit, but it’s way below the quota in the USA (approx. 2%). So let’s not be complacent about getting it down to 4.5%; I shall write to the divisional heads that it’s their responsibility to see that attendance picks up. • Please pass on to Henry a recent Deloitte Talent Management Strategies Survey1 I gave you to look at. Retention is an increasingly important issue; CF has got to invest in motivation – incentives, awards, you name it. I want concrete suggestions from him by the end of January. • I shall speak to Heinrich about our nonexistent R&D strategy. We need a clear input–output calculation: What are we investing in human capital and what do we get out of it? I’m seriously shocked that MP is performing so poorly in terms of patents. There’s no point in being proud of the training/wages ratio if, at the end of the day, we’re poorly served by our researchers. Has MP got rid of the wrong people? Please tell José I want a memo on the issue. Baxter, a company that I admire, has got Cisco to install an Internet-based tool that helps them to track retention, employee development, etc. We probably need something similar. • We’ve got a bit slack on diversity; it’s an important Group goal regardless of redundancies and restructuring. I’m still waiting for our mentoring programme to get under way. I shall talk to Francis. I definitely want us to reach a 40% quota for women in management by 2010 – and, of course, by then we definitely need a female Board member – hopefully, we can recruit one internally. I shall keep an eye on that myself.

Next Steps Time is too short for us to publish a new CSR Report early next year but I want a proper chapter on the subject in our next AR. Could you arrange for us to meet in early 2008, so that we can discuss the issues involved. 1

Deloitte: 2005 Talent Management Strategies Survey.

6 Ethical Value CSR, Sustainability and Stakeholder Dialogue

What price moral commitment? In typically sceptical fashion, The Economist focused in early 2005 on corporate ‘do gooders’, visibly afraid that the world of business was being taken hostage by PR wonks while being morally blackmailed by NGOs and other lobby groups. It would be a challenge to find a recent annual report of any big international company that justifies the firm’s existence merely in terms of profit, rather than ‘service to the community’. Such reports often talk proudly of efforts to improve society and safeguard the environment    before turning hesitantly to less important matters such as profits. Big firms nowadays are called upon to be good corporate citizens, and they all want to show that they are.

The magazine very rightly bemoaned tokenism and political correctness. Any kind of moralism is easily hypocritical, beyond which most companies are still baffled for words and actions to tackle issues that neither business schools nor standard business practice have prepared managers for. Ethical value can rarely be measured in terms of return on investment. On the contrary, CSR and Sustainability are often treated as moral responsibilities; image gains are a pleasant side-effect but not the original motivation for investments of money and time. In actual fact, the issues involved are too important to be tackled with Sunday School platitudes like ‘giving back to the community’ and gaining a ‘licence to operate’. Ironically, The Economist survey ‘The good company’, while highly critical of corporate cant, comes across like a repetitive diatribe, almost as if the magazine’s style had been contaminated by the miasmic prose contained in umpteen CSR reports. Globalisation has endowed the corporate world with new obligations. The resources of the world’s global players are often superior to the Gross Domestic Product (GDP) of many Third World countries. They also far exceed those of most individuals, apart from billionaires like Warren Buffet and Bill Gates; the Gates foundation alone has

180

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an endowment of more than $25 billion, thus enabling it to play a significant role in development aid. Companies of all sizes profit from the infrastructure of the countries in which they operate, from the know-how of the workforce, from the goodwill of societies and from various other factors that have little to do with business transactions and economic logic. Inevitably, companies tend to ignore their dependence on the business environment until attacked by NGOs or by the media. Intriguingly, companies in the line of fire, like Shell and Dow Chemical, then become the forerunners of issues relating to CSR, sustainability, and stakeholder dialogue. Traumatised Sauls become model Pauls.

GOOD ETHICS = SUPERIOR FINANCIAL PERFORMANCE? While an increasing number of companies have adopted CSR or sustainability strategies and appointed managers to coordinate action and set priorities, ethics in management remains a contentious issue. In an Occasional Paper of the Swiss Consulting Group aptly entitled The Rise of Ethics in Corporate Management – License to Operate or Moral Vanity?, Johannes von de Ven examines the ‘ethics crusade’, while also commenting on those for whom the term ‘business ethics’ is an oxymoron, a juxtaposition of two contradictory words. One of CSR’s greatest detractors is David Henderson. His often quoted diatribe Misguided Virtue: False Notions of Corporate Social Responsibility is a typical economist viewpoint: CSR undermines free-market conditions and saps economic freedom. Henderson sees particular dangers in regulations relating to social justice; according to him, they undermine the freedom of contract and can damage the functioning of labour markets. Henderson’s standpoint is classical neoliberalism and rhymes with Milton Friedman’s assertion that a company’s only social responsibility is to make profits. According to the Nobel prize-winning economist: Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. This is a fundamentally subversive doctrine.

The Friedman mantra of the business of business being business can, however, be confidently ignored. In a Business Week poll carried

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out in the year 2000, 95% of all respondents agreed with the claim that US corporations should achieve more than just making profits for their shareholders; only 4% agreed with Friedman’s precepts. Companies in many different sectors are well advised to guard their own and their shareholders’ interests by tracking possible protest, proactively gaining goodwill and thus reducing operating risks. Ethical rating agencies like CoreRatings rightly focus on the risk aspect of business operations and the ethical strategies to deal with these risks. If a tobacco company like BAT were to ignore the many regulations and public protests against smoking and just concentrate on making a profit and paying its shareholders large dividends, it would fail to do just that. As things stand, BAT is a pioneer of stakeholder dialogue, which functions both like an early warning system and contributes to the company’s image as being open to criticism. Stakeholder dialogue has to do with gauging the atmosphere and getting into discussions with potentially dangerous opponents to prevent issues escalating; it indeed has a strong political focus. Organised dialogues are rather like the town hall meetings traditionally run in the USA. The belief that companies merely have a fiduciary duty to their stockholders was much in vogue during the Reagan and Thatcher periods; even in Britain and the USA, it has lost ground, while other parts of the world like Continental Europe and Canada never subscribed to it in the first place. The importance of CSR is widely recognised by business executives across the world. Of those interviewed in the 2006 McKinsey Global Survey, 84% agreed that contributions to the public good – such as providing decent jobs, making philanthropic donations and minimising pollution – also generate high returns for investors. They also considered the handling of social issues as being an integral part of risk management. Sustainable development (SD) is a more contentious issue than stakeholder dialogue. Though institutionalised by the summits in Rio 1992 and Johannesburg 2002, it has been criticised both from the left and the right. Some developing countries have objected that sustainability is an ideology imposed by the wealthy industrialised countries to bolster the status quo and to impose severe conditions for foreign aid. Similarly, ecologists have attacked it for not fundamentally questioning the tenets of consumerism. These are basically minority viewpoints that have not found a larger consensus.

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However, free-market criticism of the assumptions made by SD seems more cogent. What if resources are not limited and being rapidly depleted, as the propagators of sustainability contend? Is a balance of economic, ecological and social priorities at all practicable – and if it is, should it be imposed or voluntarily adopted? Jerry Taylor of the Cato Institute, a Conservative think-tank, puts the SD criticism into a nutshell: The fundamental premise of the idea that economic growth, if left unconstrained and unmanaged by the state, threatens unnecessary harm to the environment and may prove ephemeral – is dubious    The current Western system of free markets, property rights, and the rule of law is in fact the best hope for environmentally sustainable development.

Whether Taylor’s robust optimism in free-market mechanisms is justified remains to be seen. But a more relevant issue for managers is the simple question: Does ethical behaviour, whether CSR or SD – make financial sense? Here, the evidence is mixed: • Britain’s Institute of Business Ethics carried out a study of the FTSE 250, showing that companies with a clear code of ethics – this being taken as a proxy for ethical commitment – performed better than those without a code. • By contrast, a Scoris comparative sustainability rating of Germany’s DAX 30 companies showed no correlation between high sustainability scorings and financial performance. Commenting on this rather sobering result, Axel Wilhelm of the Scoris rating agency admitted that ‘for some market participants this kind of result might be tendentially disappointing’. • The link between CSR on the one hand and executive action or customer behaviour on the other is tenuous at best. A Hill & Knowlton survey of 175 executives in 40 countries commissioned by the Economist Intelligence Unit discovered that fewer than one in 10 considered corporate reputation to be an important part of relationships to customers. Similarly, a poll of 23 000 customers in the UK and the USA revealed that consumers rarely make buying decisions on the basis of a company’s reputation or social image. Thus, good ethical performance is not necessarily a recipe for financial success. However, it seems evident that companies with sustained financial success need sound ethical foundations. By corollary,

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companies are well advised to report on their ethical strategy and performance as much as on financials. At present, reporting on CSR, SD and associated issues is more push than pull. Companies like BP and BT try to gain competitive advantage by excelling in this area. As BT Chief Executive Ben Verwaayen once pointed out, CSR creates a ‘sense of pride’ with employees. It still, however, has to make an impact on the financial community. Verwaayen mentioned having over 100 meetings with investors and not a single one of them asked him anything about the company’s ethical policies. However, other stakeholder groups definitely expect companies to communicate proactively. Similarly, BP has reported on its carbon emissions since 1997, setting itself a target of reducing emissions by 10% till 2010. In actual fact, the company reached this target by 2001. Despite the importance of the global warming issue for the energy sector, one of the company’s CSR managers reported that he seldom gets questions from investors.

EVOLUTION OF REPORTING: FROM ACCOUNTING TO ASSURANCE In a discussion paper entitled ‘Corporate social reporting revisited’, researchers at the Berlin Wissenschaftszentrum (Centre of Science) examined the genesis of reporting. In the 1970s, ‘corporate social accounting’ and concepts of social auditing developed in the USA and then spread to Europe. Reporting had a strong balance-sheet focus, reflected in the bilan social in France and the Sozialbericht in Germany. This attempt to quantify social impact was a signal failure and the fledgling reports dwindled in number and finally disappeared by the 1980s. The only country with mandatory reporting provisions was France; however, the information released was strongly HR oriented and legalistic rather than impact oriented. A new wave of reporting developed in the mid-1990s and has continued ever since. The Global Reporting Initiative (GRI) founded in 1997 has strongly encouraged reporting and also provided a stable framework. In some countries, legislation and codes have prodded companies to take action: • French company law was amended in 2001, forcing the premier marché companies – i.e. those with the largest market cap – to report on their social and environmental impact.

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• Similarly, Canadian companies are required to publish a yearly Public Accountability statement. However, before GRI came into existence, several trailblazing companies had already come out with pioneering reports. The ice-cream producer Ben & Jerry’s got a ‘social auditor’ to prepare a so-called stakeholder report as far back as 1989 on the basis of interviews and information received from the company. The social auditor was given free access to everyone in the company for two weeks; he also spoke to suppliers and community representatives. After B&J had prepared the report, the auditor appended a social auditor’s attest. Thus, long before companies employed auditors or consultants to ‘assure’ their reporting, the American company used a rudimentary kind of certification. Body Shop was equally pioneering; it in fact became the acknowledged trend-setter with its ‘Values Reports’. This was a gigantic undertaking, and as with B&J, strongly stakeholder oriented. It was also more of a documentation than a presentation: the company’s 1997 report amounted to more than 200 pages of closely printed information. Since the late 1990s, the quantity and quality of reporting has increased by leaps and bounds. Rankings and surveys carried out by organisations like the accountants’ association ACCA, the auditors KPMG and the consultants SustainAbility in cooperation with UNEP have fuelled progress. As Simon Zadek pointed out in 2002: ‘The very fact that the Values Report now seems fairly clumsy compared with more recent social and sustainability reports is a tribute to how much has since been achieved.’ Reporting on ethical issues has obvious inherent deficits. The ‘triple bottom line’, for instance, a prime sustainability reporting concept, is a poignantly symbolic metaphor, but actually a misnomer. Proper metrics or key indicators can rarely be derived from social and ecological factors and they certainly cannot be put on a balance sheet or a profit and loss account. Economic ratios like EPS or cost/income ratios are universally accepted and understood. Ecological and social ratios hardly exist, and where they do, there is no proper supervision of their use. The Economist unkindly but rightly castigated the vagueness of the sustainability aficionados: The great virtue of the single bottom line is that it holds managers to account for something. The triple bottom line does not. It is not so much a licence to operate as a licence to obfuscate    The triple bottom line

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is just shorthand for saying: take other things into account, acknowledge that profit isn’t everything, and don’t pursue profit relentlessly, as you would otherwise be inclined to, even at the expense of damage to the environment and infringements of the rights of workers and other stakeholders.

The lack of clear reporting parameters reflects a dearth of coherent standards. GRI provides a grid that encourages an emphasis on quantity rather than quality, and on documentary details rather than coherence. Many companies also orient towards the data that ethical indices like DJSI and FTSE4Good request. DJSI is more comprehensive in its requirements than FTSE, but both demand a huge amount of detail. The Cato Institute study speaks of sustainability metrics as being a collection of ‘smoke and mirrors’ and calls the indicators arbitrary or irrelevant. Indeed, the best evidence of irrelevance can be found in CSR and sustainability reports. In a hilarious prize-winning essay called ‘Plus ça change, plus c’est la même chose’: The grand illusion of corporate social responsibility, Tim Wright exposes the absurdity of much reporting. How relevant is it, for instance, that Manchester United Plc in their annual report proclaim that they are progressing ‘towards environmental sustainability, developing positive relationships with stakeholders and upholding and supporting universal human rights?’ Or, for that matter, that the food company Geest proudly reports that two of its sites had birthday parties and invited the local community to join? In the first case, a football club minting money goes for moral posturing; in the other, a company domesticises stakeholder dialogue. Wright exaggerates a bit, however, when he contends: The vague and ambiguous language used to describe the responsibilities of the corporation exposes the Sisyphean task of achieving corporate citizenship and its ultimate futility as currently defined.

What the language used really shows is a certain awkwardness, an inability to come to the point and to concentrate on issues that are important for the company rather than to make vague declarations of faith. Loose vocabulary is rampant: one large international bank brings a headline on its website: ‘Corporate citizenship – our business approach’ and then adds a sentence saying it is promoting ‘the sustainable development, on which all our futures depend   ’. Here again,

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a company is trying to kill several birds with one stone and failing miserably. Quality control is an increasingly important issue for companies aiming at improving their reporting performance. A large number of companies get an ‘assurance’ from their accountants or from specialised organisations for their reports. This certainly increases credibility in the outside world: • 59% of all stakeholders participating in the PR company Pleon’s Second World-wide Survey on Stakeholder Attitudes wanted CSR reports to be verified by a professional body. • Similarly, a GlobeScan Survey of Sustainability Experts discovered that a clear majority – 73% – thought independent social and environmental auditing was the most effective way of measuring CSR performance. Auditing can shield companies against accusations that they have been indulging in ‘greenwashing’ or other kinds of window-dressing. A large number of service providers are providing assurances; these can cover the data presented, the systems used to manage performance or even the materiality of the information provided. Leading financial auditors like KPMG and Deloitte offer their services; audits are also carried out by specialised agencies like Social Accountability International (SAI) or AccountAbility, which have established standards like the SA8000 and the AA1000. External assurance remains the exception to the general rule in the USA, while European companies increasingly get their reports certified. Independent verification certainly increases the respectability of the reporting effort. At times, it even exposes weaknesses to the public eye. A railway company, for instance, published a CSR report which contained an auditor’s opinion that the report did not present a complete or balanced view of the company’s performance, while an airline faced criticism from its auditors that it had not heeded advice on improving the quality of its guidelines and data collection. In some cases, however, it is not too clear what the assurers really check. Can they gauge social impact or ethical intentions? And is it ethical for a CSR consultant to both advise a client and then provide an ‘attestation statement’ for the report, as was the case with a large beverage corporation? Obviously, conflicts of interest need to be sorted out. However, assurance is a way of ensuring common standards and comparability.

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A. CORPORATE SOCIAL RESPONSIBILITY: CHARITY OR POLICY? ‘It pains me to say this, but I am becoming less cynical about CSR.’ In this comment made in 2003, Jane Fuller, Financial Editor of the Financial Times, clearly was fighting to overcome her own preconceptions of Corporate Social Responsibility. What does CSR consist of? The basic consensus is that it covers the business commitment both to act ethically and to contribute to public welfare. Definitions of public welfare tend to vary from the more narrow, which centre on being honest about taxes and taking care of employees, to wider demands that companies should contribute to local communities and to society at large. Minimalists see CSR as a kind of corporate charity, best expressed in the vocabulary of ‘giving back to the community’ (see Table 6.1). Maximalists emphasise that social responsibility is the quintessence of business itself. Paul Gilding, a former Executive Director of Greenpeace who changed sides in 1995 by founding the sustainability consultancy Ecos, has a radical view on the matter: I would like to ban the words ‘corporate social responsibility’. If you think about the language of CSR, it’s about focusing not only on profits but on the ‘right thing to do’   As soon as you say that, you are effectively saying to the corporate world that this whole agenda is about things that you should do and are morally obligated to do, but not that you want to do or that are good for business. That mindset, whatever you think of it morally, will fail in business.

Gilding certainly has a point. There is a benign, humanistic quality about being socially responsible. It misleads companies into acting in a well-meaning, but muddled-headed fashion – and to reporting on what they are doing with charming vagueness. The moralistic postures of a fair number of protagonists from NGOs and the nonfinancial media coupled with the bad consciences of corporate managers earning massive salaries have combined to make most companies defensive on the issue. They generally act to pre-empt criticism, not to do things of mutual benefit to their companies and society. Exceptions prove the general rule. Home Depot is a successful company with an excellent CSR record and clear policies. These include paying supplements to employees in military service, building public

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playgrounds and supporting the Hands On Network’s ‘Month of Service’ corporate volunteering scheme. In a Business Week interview, the company’s Chief Executive Robert Nardelli admitted that he could not measure a return on investment for the $25 million that Home Depot was investing in the playgrounds project, calling it simply a responsibility: ‘I don’t measure it. It’s something we do willingly, with tremendous support from our Board and tremendous support from our 325 000 associates.’ This kind of enthusiasm is admirable, but completely estranged from the kind of logic behind business management. The world’s leading home equipment retailer might profit in terms of image and also become an employer of choice because of its generosity, but it does not link its social policy to its business strategy. On the other hand, Home Depot runs excellent projects, and reports on them regularly, both in its annual reports and on the website: • The Home Depot foundation, which publishes its own annual report, helps people of modest income to access quality accommodation by supporting the building of homes in conjunction with the company’s suppliers. This is a sensible approach to responsibility, because it is close to Home Depot’s core business. • Complementing the foundation’s efforts is Team Depot, the company’s volunteering initiative, which involves associates contributing millions of hours of honorary service. CEO Nardelli has regularly commented on the company’s social programmes in his messages to shareholders and has referred to the ‘sweat equity’ that volunteers deliver. Partnering with organisations like Habitat for Humanity, employees help their neighbours to build and repair their homes, using products available at Home Depot. This again is in line with the company’s identity. • Home Depot also responds quickly to catastrophes: the foundation funded long-term rebuilding in communities affected by natural disasters like the wildfires in California and Canada in 2003 and hurricane Katrina in 2005. Home Depot is in several senses a quintessentially American company. It is highly patriotic, sponsoring for instance a Declaration of Independence Road Trip that brings an original copy of ‘America’s birth certificate’ to hundreds of cities. It has received the Corporate Patriotism Award from the American Veterans Association for its

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support of employees in military service and was also honoured several times by President George W. Bush. The company even has a programme called Project Homefront, which involves donations and volunteering help for the homes of military families. This kind of patriotism does not find imitation or emulation in other industrialised countries. German and Japanese companies are for historic reasons understandably careful of seeming to be nationalistic. However, the same applies to other countries in Europe like Britain, France and even Italy. Companies do not define their social responsibility in national terms; their reporting indeed emphasises international priorities and universal goals of equity and emancipation. Home Depot has a typically American emphasis on ‘giving back’ to the communities in which it is active. Its 2002 Annual Report states: Our straightforward definition of corporate responsibility is to be both profitable and responsible and to balance this with the needs of our communities.

How this kind of balancing act really functions remains unclear. However, Home Depot is a convincing example of hands-on involvement. It harnesses the pioneer ethos and calls ‘giving back’ a fundamental value. It also illustrates the importance of top-level commitment: Nardelli has served on the President’s Council on Service and Civic Participation and has certainly been considered to be a national role model in terms of social involvement. Real commitment is fairly rare. Indeed, a great amount of hypocrisy and cynicism exists. One person who has stridently opposed charity for its own sake is Nestlé CEO Peter Brabeck-Letmathe. In a speech at Boston College’s Chief Executives Club in 2005, he declared that a company’s social obligation is fulfilled when it creates jobs and makes products. One of his often quoted remarks has been: ‘What the hell have we taken away from society by being a successful company that employs people?’ Is this characteristic of a backlash against CSR? Assumptions of this kind could be premature. However, it would be naïve to take the solemn declarations made at corporate venues like the World Economic Forum in Davos at face value. Speaking at a Social Enterprise Conference at the Harvard Business School, Matthew Bishop of The Economist praised Brabeck-Letmathe for having the courage of his convictions: ‘All the other chief executives with whom I spoke (at Davos) said

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they thought he was completely mad to get up and say that in a public forum. However, privately, they completely agreed with him.’ Promoters of CSR are rarely eloquent, while non-CEO detractors certainly are. In the foreword to David Henderson’s book The Role of Business in the Modern World, the American publisher Steve Forbes gleefully pointed out: CSR may be viewed as the collectivists’ backhanded compliment to the success of the modern corporation   The CSR thesis is simple: Politics should determine the goals of society; the private sector – incentivized by regulatory quotas and taxes – will provide the motor force for their realization   This is the market socialism dream: The market will efficiently row, the government will steer.

Needless to say, this is a massive exaggeration of the situation; most CSR pressures on companies come from NGOs and other stakeholders, not from governments. But it mirrors the thinking of those who consider the market economy to be a law of nature, and social programmes to be an ideologically motivated unlevelling of the playing-fields.

REPORTING TRENDS: QUANTITY AND QUALITY ON THE RISE? Since 1993, the auditing major KPMG has surveyed CR reporting. Its 2005 Survey of the Top 250 of the FORTUNE 500 showed an enormous increase in companies reporting either in separate documents or in their various reports. • Between 2002 and 2005, the percentage of companies with standalone reports increased from 45 to 52. Almost two-thirds of all the companies reported in annuals or on websites on the subject. • Top reporters in terms of quantity were Japan, the UK and Canada. In Japan, 80% of the companies surveyed reported, showing that CR is by no means a Western phenomenon. • Large sectorial differences were registered. The financial services sector was the most dynamic, with a staggering 170% increase in dedicated CR reports. In terms of quantity of reports, corporate responsibility has certainly taken huge strides. However, the quality of reporting has not kept pace. Research carried out by the University of Sydney into the CR

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reports of Australia’s Top 500 showed that only 25 of them published separate reports and that the reports were ‘overwhelmingly biased towards positive information, with negative information either being ignored or at best couched in positive terms’. This is by no means just an Australian problem. White-washing is a common phenomenon. One large German company provided a huge amount of detail on its worldwide activities but conveniently forgot to mention that it was ejected from the Dow Jones Sustainability Index during the year under survey. It also avoided any mention of frictions with labour, though these were widely reported on in the press. Many reports seem constructed for gullible readers. Commenting on the KPMG survey, Riva Krut of the environmental management consultant Cameron Cole criticised the general quality of reporting, specifically mentioning reporting on management systems, targets and assurance statements as areas in need of improvement. Does CSR lack conceptual clarity? The respondents of a survey of sustainability experts carried out by GlobeScan in 2005 certainly thought so. The majority were not sure whether it was an adequate way for companies to support a society’s transition to sustainable development. This of course assumes that the transition is a given, which is far from accepted wisdom in large parts of the world. But the reasons given for CSR’s inadequacy were that it lacked a clear definition and was not comprehensive enough. Indeed, there are enormous variations in the style and substance of reporting. Publications range from pathetic PR claptrap to formidable documents that only the brave will plough through. However, a number of reports are outstanding for different reasons.

Table 6.1 CSR: Key Reporting Indicators Quantitative

Qualitative

• Social impact (taxes, salaries, supplier payments, etc.) • Community investment (donations, projects, etc.) • Image as corporate citizen (surveys, opinion research, reputation polls, etc.)

• Social policy (commitment, specific focus, etc.) • Key projects (description, impact) • Track record (awards, indices) • Assurance/certification • Organisation (Board role, operative control, etc.)

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Concretising Commitment    Two banks that have certainly professionalised their CSR strategies are the Royal Banks of Scotland and Canada. Both have cornerstone priorities and a clear focus on projects; RBS and RBC also report with exemplary clarity. Royal Bank of Scotland RBS published its first Responsibility Report in 2004 but has a longstanding involvement in helping both customers and communities. Customer monitoring and advice is a clear priority: the bank is the largest supporter of the Money Advice Trust, promoting free, confidential and impartial advice on money matters. RBS, one of Europe’s major financial services companies, is also a leader in financial literacy. It sponsors projects designed to educate children to act responsibly in monetary terms. Money Matters is one of three programmes on which this Scottish bank focuses. The other two are help for disadvantaged young people and subsidies for staff involvement. The bank supports The Prince’s Trust to help young people from deprived areas to join the social mainstream: 800 employees volunteered alone for The Prince’s Trust. The bank also cooperates with other organisations, and supports both volunteering and employees’ donations, doubling the sums donated. The Scottish bank’s reporting is convincing because it has a highly pragmatic and fact-oriented approach. Performance is clearly quantified. RBS discloses the taxes it pays and its lending to deprived areas; it also provides an excellent breakdown of its social investment, backed by a coherent review of projects supported. All partnerships are regularly reviewed, and there is a constant emphasis on targets and their achievement: • Community investment, targeted to be increased, was indeed raised from £40 million to £46 million between 2003 and 2004. • Stakeholder awareness of the company’s community investment activities was surveyed and showed that public perception was in line with that of other financial services providers. • Employee donations and volunteering also rose, as targeted. RBS’s society involvement is well structured, clearly argued and is enlightenedly self-serving. Reporting conveys the culture of a bank

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that doesn’t brag, but tends to do what it says. The strong emphasis on quantification – ranging also to other issues like employee opinion surveys, flexible working, customer satisfaction and CO2 emissions – substantiates the texts. Royal Bank of Canada The RBC approach is similar to that of the RBS in several ways. To start with, the emphasis on goals is clear: improving education, supporting the underprivileged and caring for ethnic minorities. Canada’s largest bank measures its own economic impact in terms of taxes, money spent on supplies and technology and loans to small businesses. This is supplemented by a precise breakdown of community investment, with donations classified on a regional basis. Employee involvement is strengthened by volunteer grants that RBC pays to causes that their people support. In ethnic terms, the bank supports education and social activities for the aboriginal community in Canada, and here again, the precise amount of donations and other support schemes is disclosed. RBC is proud of its Firsts: it embedded corporate responsibility into its employee code of conduct as far back as 1980 and was the first Canadian bank to feature on the Dow Jones Sustainability Index. It was also the first to adopt the Equator Principles. Corporate Responsibility reporting is well structured and highly informative.    and Concentrating on Core Business Companies aren’t governments, even if some of them have resources on the same scale. Given this simple verity, it seems normal and legitimate that they concentrate on areas where they have acknowledged competence. Here, the corporate world can make a social impact, using resources more efficiently than state institutions. Several major corporations have focused their CSR activities on their core business (see Figure 6.1). Starbucks, for instance, the world’s leading chain of coffee shops, has devoted its attention to improving the standards of living of the coffee producers. It does so in several ways: paying Fair Trade Certified prices, rewarding farmers who adopt the company’s guidelines by giving them favoured status, investing in social programmes and providing coffee producers access to credits with fair rates of interest.

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The Starbucks dual approach – supporting both the livelihoods of their suppliers and protecting the environment in the countries where coffee is harvested – is widely acclaimed and was analysed in a Harvard Business Review article in 2004. In its CSR reports, the company tackles ticklish questions like the fact that they are continually opening more stores across the world, thus gaining in bargaining power with their suppliers. Starbucks is highly concrete: it mentions the premium price it pays to the farmers and shows how that compares to the normal market price. Its relations with suppliers are regulated by a code, the Coffee and Farmer Equity Practice, that is independently verified and well reported. The company also provides farmers with long-term contracts, thus giving them a measure of security. Just like RBS and RBC, this American company is clear about its economic footprint, mentioning the amount it pays in taxes and for charity. However, the goals it sets itself tend to be qualitative rather than quantitative. All in all, ‘Starbucks achieves an elusive goal – producing a substantive report that is also a pretty good read’ as the magazine Ethical Corporation points out. DaimlerChrysler, the German–American vehicle producer, is not quite as focused, but has made great strides in moving from a ragbag of initiatives to a more methodological approach. In 2002, its Responsibility Report manoeuvered vaguely between Global Compact, supporting nature, bringing business and science together as also supporting sport and children’s foundations. In other words, the report was like a kind of elevated protocol of its activities. Strategy? Nonexistent. Two years later, the company achieved a volte-face. Activities and reporting gained a strong mobility focus. It continued reporting on win–win projects like the cocoa-fibre developed in Brazil that reduced poverty and conserved the environment, while providing DaimlerChrysler with a product that could easily be recycled. Another line of activity close to the company’s mobility mission is traffic research: across the world, Daimler has pooled its resources in the quest to find ways and means of reducing accidents. Projects like Mobile Kids are designed to teach children how to move as pedestrians. Germany’s leading car producer has an extensive world focus in its 2004 CR Report, systematically analysing activities in various regions of the world. The emphasis on mobility and traffic security is apposite for a company that has a stake in these areas.

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Novartis, the Swiss pharmaceutical giant, has integrated corporate citizenship into its business model. It reports extensively in its annual reports and focuses entirely on its core competency: helping patients. Innovation helps it be successful, both in business and in social terms. The company makes this connection between commercial and humanistic success in its 2004 Annual Report: Thanks to our good results, our Corporate Citizenship program reaches millions of patients worldwide. We bring the revolution in biomedical research to bear on diseases of the developing world, and provide medicines at cost – or sometimes free – to patients who otherwise would not have had access to treatment.

The company’s motto, ‘Caring and Curing’, adequately covers its social involvement. Healthcare is promoted by public/private partnerships with organisations like the World Health Organisation. Beyond this, the Novartis Foundation for Sustainable Development works with Ministries of Health in developing countries to improve the treatment of patients. Novartis has a highly substantive approach to reporting. It provides a detailed breakdown of programme spending, objectives and patients reached. It also describes projects carried out in various parts of the world, thus staking its claim to be a responsible global citizen. By integrating CSR into its corporate reporting and attaching an Independent Assurance Report to its Citizenship section, this company shows that it means business, even when it carries out charitable activities. An Emphasis on Issues    Companies that produce alcohol have an incipient problem with responsibility. By selling their products, they seem to be contributing to the creation of social problems. Thus, their credibility as corporate citizens is constantly at stake. One company that has taken a refreshingly vigorous approach to ethics is Allied Domecq. Its Social Reports are a joy to read because they come to the point, don’t pull punches and openly acknowledge the dilemmas Allied faces as a company dedicated to distributing wines and spirits across the world. CSR is the responsibility of the President of Wines. This in itself seems at first sight rather like appointing the devil to guard the

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gates of heaven. However, as the incumbent explains in the company’s 2004 Social Report: ‘It’s part of our day jobs, not some sort of add-on that can be ignored when it suits us or when budgets are tight. But getting to this point hasn’t been easy.’ He then describes how Allied Domecq started with a charitable-donation approach and then evolved to a more organic conception of social responsibility. What does organic mean? In Allied’s case, it involves focusing on issues like marketing and on specific problems faced by women and young people. The company, for instance, tackles under-age drinking by supporting ‘cops-in-shops’ in the USA – in other words, police officers overseeing the sale of alcohol in liquor stores. It also publishes point-of-sale material and has developed an interactive computer installation which consists of a virtual reality game demonstrating the dangers of alcohol. The company is a sector leader in the Business in the Environment index. It also follows a clear ethical trading policy with suppliers. However, its most original achievement is the founding of a Marketing Review Board. As Chief Executive Philip Bowman pointed out, this Board, which rigorously reviews all advertising and marketing that Allied Domecq plans, is a pioneer effort: It has enabled us to put marketing compliance into the wider context of our deeply-held corporate social responsibility agenda. And, far from restricting our marketing, it has helped us and our partner agencies to think more deeply and creatively about the essence of our brands.

The Board is an innovative form of governance and publishes its own annual report. It oversees the company’s marketing code and is supposed to safeguard responsible consumption. As the case studies published show, the Board has stopped the company’s sponsorship of jet ski, seen as being a potentially dangerous sport, and also had an ad campaign discontinued as it used an iconographic devil in a way that was seen as being irresponsible. Non-executive members are in the majority on the Board, thus ensuring that it does not simply rubber-stamp corporate management’s decisions. Allied’s reporting standards are extremely high; it deals with CSR briefly in its annual report, publishes social reports and also has an extensive section on its website. The company’s actions are vividly

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described; future targets are clearly outlined. CSR expert Steve Hilton called his review of Allied Domecq’s reporting in Ethical Corporation magazine ‘A toast to refreshing clarity’ and underlined the disarming quality of the online presentation: The website is a model of transparency. All relevant policies and codes of practice are disclosed; big issues are dealt with up front, and the coverage is comprehensive. But the single thing that stands out   is the tone of voice. There’s just something about the way Allied Domecq talks about corporate responsibility that really makes you believe the company is committed to it.

H&M, the large Swedish textile retailer, is decidedly less eloquent, but comparably committed. The lynchpin of its activities is the Code of Conduct; in the company’s 2004 CSR Report, compliance issues are addressed in great detail. Using a simple format – ‘The Codes states’ immediately followed by ‘Auditing dilemma’ – the company highlights its problems in enforcing the code. How, for instance, does H&M ensure their code provision that suppliers must follow national laws even when the national laws of some countries are difficult to understand? It consults local government and legal experts. Similarly, the code policy on child labour is based on the UN convention on the Rights of the Child. However, detecting it is extremely difficult, since neither the child concerned nor the factory manager has an interest in being detected. H&M outlines its detection strategies. Similarly, in a Responsibility brochure, the work of the Code of Conduct inspectors in different parts of the world is described in detail. Allied Domecq developed its policies on CSR through its own strategic thinking. H&M, on the other hand, is more reactive. Its CEO Rolf Eriksen, who identified strongly with the enforcement of the code, openly admitted the company’s self-interest: At H&M we always focus on our customers, and in recent years it has been evident that our customers are increasingly concerned about the environment and social responsibility. I have also noticed that our own staff have a growing interest in such issues. So I am convinced that it is important for H&M to genuinely take responsibility for these matters if we are to retain the confidence of our customers and staff in the longer term.

Strong

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Home Depot Starbucks

Ethical Commitment

Allied Domecq

RBC

Weak

RBS

Weak

Strategic Approach

Strong

Figure 6.1 CSR profiles

   and on Mission In industrialised countries with social states, companies set their own priorities independent of governments. In developing countries, corporate responsibility is often attuned to national priorities, and this is particularly the case in South Africa. Eskom, the country’s dominant electric power supplier with a 95% share of the market, is a company owned by the South African government. Despite this, it has ambitious plans of expanding globally. Eskom clearly has a public welfare approach. In fact, it outdoes American companies like Wal-Mart and Home Depot in terms of fervent declarations of faith: Our global focus however begins with the expression of our African personality on the African continent. This resonates well with the African Renaissance vision which inspires confidence that Africa is poised to play a much more meaningful role in defining her future.

Brave words in the context of Africa’s manifold problems. However, Eskom has won international prizes like the 2001 Global Power Company of the Year for providing lowest cost electricity while carrying out technical innovations. This is clearly a company capable of competing internationally, despite the devout language in its annual report on the need for Africa to ‘nurture leaders whose defining features are probity,

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humility, integrity, compassion and humanity’, which prompts thought on whether the present brand of politicians in Africa aren’t excellent examples of exactly the opposite of the qualities described above. No Western company would dream of publishing pious prose of this kind in any of its reports; nor would it lavish praise as Eskom does on the country’s past and present presidents and various ministers. Eskom’s CSR priorities are clearly in synch with official wisdom. Despite this, the company’s Development Foundation carries out important work in rural communities and won a prize for its Community Development Programme at the Global Energy Awards. Barloworld, by contrast, is a privately held corporation, but subscribes to the same kind of priorities. This South African conglomerate, with interests in motor cars and steel, fully endorses Black Economic Empowerment, which is designed to rectify the legacy of apartheid. This is basically a stakeholder approach to empowering larger numbers of people. Like Eskom, Barloworld supports the New Partnership for Africa’s Development, which is a South African government initiative with a pan-African purview. Different norms lead to different kinds of ratings. EmpowerLogic, for instance, rated the empowerment performance of Barloworld and scored it at 42% in 2004. This is clearly substandard, as the company pointed out; 65% is considered an acceptable score. The company avows to reach this target through a 5-Year Plan that includes preferential procurement and social investment initiatives, particularly aimed at improving the prospects of black youths. By contrast, the involvement of India’s leading group, the Tata conglomerate, is far more Western in its orientation, though it does support the general goal of promoting the country’s welfare. The company has a long tradition of social involvement dating back to its founder Jamshedji Tata, who founded the country’s first indigenous steelmanufacturing enterprise. This commitment has remained an important priority, as corporate leader Ratan Tata underlined in 1996: We are not doing this for propaganda. We are not doing this for visibility. I think we should do it for the satisfaction of knowing that we have really achieved something worthwhile and given something to the community in which we are working.

This sounds almost alarmingly altruistic. However, the Group has a professional attitude towards both organising and reporting on its activities. Tata Steel, the Group’s major entity, was the only Indian

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company among the Top 100 in SustainAbility’s Global Reporters Survey. Eighteen Tata companies have been involved in producing sustainability reports; this again is a record in the Indian context. The Tata Group coordinates its social efforts through a Council for Community Initiatives. These extend from classic social help to educational support; the company has founded several institutes of higher learning including the Tata Institute of Fundamental Research. It also helps spontaneously, as in the case of the tsunami in 2005. One important priority is to promote self-help in India’s many distressed rural communities: • In Chennai, the Taj Group engaged women self-help groups as suppliers of fish to its hotels, thus supporting local initiatives and providing women with their own livelihoods. • In Gujerat, Tata Chemicals helped villagers to solve their water problems in a classic transfer of technical expertise. • In Pune, Tata Motors started a comprehensive rural development programme. Tata is thus less part of a state-led endeavour to improve national conditions of life. Unlike Eskom and Barloworld, it sets its own priorities and has become the private-sector benchmark in the region.

Box 6.1

Reporting on CSR: Recommendations

Start by describing your CSR strategy. What is your company’s ethos and how is your involvement in nonprofit activities related to your line of business? Which sectorial and regional biases do you have? Stakeholders reading your reporting should understand how CSR is related to your business model. Beyond this, the structural anchoring is important: Who is responsible for CSR at Board level; how is the function defined in operating terms; and how do CSR managers interact with line management? Then address specific issues: • Present major activities: goals pursued, institutions cooperated with including public/private partnerships and projects carried out. Who has profited from your activities and how do you measure success (surveys, independent assessments, etc.)? • Describe corporate volunteering projects, touching on whether management initiates them or whether you rely on employee initiative. How do you marshal the talents of your staff? Do you have

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a clear policy on integrating volunteering into your HR development programmes (as a social qualification for young managers and trainees)? Do you encourage employee engagement through a system of matching grants for employee donations, through leave of absence, etc.? • Give insights into your challenges: What were the major setbacks you faced; which ethical scandals was your company involved in; and what measures are you taking to compensate for deficits (for instance, modifying or intensifying the code of conduct)? After that, move on to important events during the last financial year. Name the catastrophes or crises where you helped to mitigate suffering and describe your role. On a more mundane note, describe your contacts with communities in which your headquarters/sites are based. Which achievements are you particularly proud of, what do you want to achieve in future?

Positioning The quintessence of CSR, including KPIs, should be published in a separate chapter of the Annual Report. Snapshots on projects should be put on the corporate website. A more detailed description, tackling issues like ethos and volunteering strategy, should form part of the annual CSR Report, including the assurance statement. Key Performance Indicators Investment

Value added statement

Indices Awards

Impact

Total social investment with breakdown of important project investments and regional focus Breakdown of distribution of corporate income: taxes, wages, social investment, etc. Ethical/CSR indices in which the company is listed (DJSI, FTSE4Good, etc.) Recognition of CSR performance (Business in the Community ranking, FORTUNE/FT ranking, special awards, etc.) Evaluation of impact of CSR projects (external assessment, survey results, etc.)

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B. SUSTAINABILITY: BETWEEN TRIPLE BOTTOM LINE AND REALISTIC TARGETS ‘Sustainability is as foreign a concept to managers in capitalist societies as profits are to managers in the former Soviet Union.’ This is an obvious exaggeration. However, William Ruckelshaus, a former twoterm Head of the US Environmental Protection Authority (EPA), knew what he was talking about. As CEO of Browning Ferris, he had firsthand experience as a top manager and was in a good position to judge how strange the tenets of Sustainable Development (SD) seem to those running companies. The classic definition of SD is derived from the Brundtland Report of 1987. In an often quoted turn of phrase, it postulated a ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’. Gro Brundtland, a former prime minister of Norway, was taking an elder statesman view of the world. Most managers are less laid back. To keep their jobs and gain their bonuses, they have to deliver here and now. It certainly doesn’t belong to their job descriptions to reflect about the future of the world. However, just as some of the former managers of the Soviet Union to whom Ruckelshaus referred have, in the meantime, become successful capitalists, so also have a growing number of top business leaders endorsed the principles of sustainability. Chip Goodyear, for instance, Chief Executive of BHP Billiton, the world’s largest mining company, put it flatly when he said that SD was not a matter of choice but an essential for all businesses (see Table 6.2). For an enterprise in BHP Billiton’s line of business, classic environmentalism is the all-important issue. The company has implemented a ‘greenhouse strategy’ designed to reduce emissions and is looking for other ways of minimising its ecological impact. However, support has come from many other sectors, including financial services, whose direct impact on the natural environment is fairly limited. Is sustainability a concept whose time has come? Yes and no. The need for companies to contribute to social welfare and be responsible for environmental emissions is widely accepted. On the other hand, SD’s amorphous character has made it difficult to implement, and support for the concept, while still strong, could have well peaked. The GlobeScan agency, which regularly surveys experts on SD trends, reports the following:

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• In 1997, an overwhelming 86% endorsed sustainability as an accepted goal in their organisation, while only 1% rejected it. • In 2005, the rate of acceptance had fallen to 79%, while the rate of rejection had risen to 8%. These hints of growing scepticism are fuel for those who believe that there is something very wrong with the basic concept. The economist Steven E. Landsburg made his own stance clear in the essay Why I Am Not An Environmentalist, asserting that ‘environmentalism goes beyond science when it elevates matters of preference to matters of morality’. This is a standard argument of the non-believers. They resist what they consider to be a coercive approach on the part of those seeking to save the planet. Landsburg is very explicit about what he resents: It seems to me that the ‘irrevocability’ argument, the ‘future generations’ argument, and the ‘preferences not profits’ argument all rely on false distinctions that wither before honest scrutiny. Why, then, do some environmentalists repeat these arguments? Perhaps honest scrutiny is simply not a part of their agenda.

Sustainability originated in the environmental movement and though it has progressed to a great extent since then, it is certainly more ecologically defined than CSR, which has a stronger social orientation. But is it really impossible for a company to balance profit orientation with a larger sense of responsibility? One company that seems to have managed the balancing act rather well is the American maker of quality office furniture Hermann Miller. The Michigan-based company, whose furniture designs have been exhibited in New York’s Museum of Modern Art, fulfils the basic sustainability precept of balancing ecological, social and economic priorities: 1. Ecological: The company has made great strides in limiting the ecological fall-out from its production process. Trash has been cut by more than 90% in the course of 20 years. The company invested in waste-to-energy heating and in incinerators that burned 98% of the toxic solvents coming from wood-staining. This exceeded the requirements of the Clear Air Act. 2. Social: Acclaimed as one of the 100 Best Companies to Work For in America, Hermann Miller gives employee relations a high priority. As one of very few US companies, it has a Vice-President

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for People. Performance evaluation is both a top-down and bottomup process with managers rating employees and vice versa. And, in an era of exploding executive salaries, the remuneration of top management was restricted to a maximum of 20 times the average wage of a Miller factory worker. 3. Economic: The company went through a difficult period in the 1990s. Sales slowly increased while profits declined. In an age of cost-cutting, the company seemed to have become a victim of its own enlightened management style. However, under a new CEO, Mike Volkema, Hermann Miller expanded its customer base and increased efficiency while retaining a humane working atmosphere and investing in ecological innovation. Design standards were maintained, R&D expenditure equally so. Hermann Miller’s ‘Journey toward Sustainability’, as the company calls its environment-oriented design, has been a success. Product durability and quality are the company’s success recipe. The Environmental Quality Action Team sets ecological priorities. Miller’s sustainability commitment is largely ecological; the company’s founder D.J. DePree once declared that it ‘will be a good corporate neighbor by being a good steward of the environment’. This commitment is reflected in the company’s values, one of which is simply called ‘A better world’. This orientation certainly embellishes the company’s reputation: Herman Miller has won an impressive array of awards from the EPA and other institutions over several decades, is listed on the Dow Jones Sustainability Index and has also repeated been designated one of the world’s top stocks by Sustainable Business.

REPORTING BETWEEN MINIMALIST REQUIREMENTS AND MAXIMALIST DEMANDS Hermann Miller is an excellent sustainability performer, but a poor reporter. It does not publish a sustainability report of any kind and only deals indirectly with the subject in its various annuals. Information on the website is concise but does not provide a coherent view of the company’s profile and activities. It also uses the terms ‘environmentalism’ and ‘sustainability’ synonymously. Clearly, this company undersells its competencies. However, there is an endemic problem here. No consensus exists on what sustainability is or is not. The term covers a broad range of issues

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like environmental impacts, ethical compliance and governance, social responsibility, and accountability to stakeholders. Environmental indicators are by far the best defined. Britain’s Environment Agency has developed reporting guidelines that include key performance indicators for emissions to air, water and land, and also use of natural resources. The Agency carried out an analysis of the FTSE All Share companies and came to highly critical conclusions: • 89% of companies made some kind of disclosure on environmental issues. • However, the information given lacked both depth and quantification in many cases. Only 24% of the 570 FTSE All Share Companies made quantitative disclosures and only 17% referred to the important issue of climate change risks. • Only 11% linked environmental issues to financial performance, showing that sustainability is seldom linked with the business model. This is by no means a purely British phenomenon. Similar results have been reported from Norway, one of the traditionally advanced Scandinavian countries. Assessing the sustainability reporting of major companies, the University of Oslo disclosed that in terms of voluntary reporting, the environmental dimension scored well with 64% of the companies ranked as satisfactory or very satisfactory. In terms of internal social responsibility – in other words human resources – the score was 53%, while in terms of external social responsibility – CSR – it only reached 24%. Most companies are indeed in the early phases of sustainability reporting. SustainAbility, the leading consultancy in this area, whose founder John Elkington coined the term ‘triple bottom line’, has developed a five-stage reporting model: 1. 2. 3. 4. 5.

Green glossy reporting One-off-reporting Descriptive reporting State of the art reporting Sustainability reporting.

In a special feature entitled The New Corporate Balance Sheet: Black, Red – and Green, the Pacific Research Institute examined the pros and cons of triple-bottom-line (3BL) reporting. It highlighted the positive aspects of the maximalist demand for social and environmental reporting on a par with financial reporting, while stressing

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the increasing cooperation between corporations and environmentalist groups: Dow Chemical, for instance, teamed up with the Natural Resources Defence Council to reduce pollution discharged at its production sites by 35%. In three years’ time, a 43% reduction was achieved – and the company also saved costs of $5 million. Similarly, Shell has collaborated with Greenpeace. Companies like AT&T and British Telecom have used 3BL as a metaphor for their efforts to disclose information on a wider range of issues. At the same time, PRI points out that 3BL sometimes restates the obvious and simply speeds up processes, like the quest for greater energy efficiency, that are already in place. This hardly seems to be negative. However, the 3BL paradigm has been attacked more stridently. In a Business Ethics Quarterly article, Wayne Norman and Chris MacDonald criticise the vague claims of those endorsing the concept and declare: ‘What’s sound about the 3BL project is not novel, and what is novel is not sound.’ Norman and MacDonald contrast the maximalism of 3BL with the minimalist approach of the Global Reporting Initiative. This independent institution has developed a series of Sustainability Reporting Guidelines for voluntary use by companies and other organisations. The GRI guidelines, which have been adopted by a broad cross-section of companies across the world, are a worthy undertaking but far removed from the precision of GAAP or IFRS. Beyond this, the list of topics to be covered by reporters is exhaustive rather than illuminating, making sustainability disclosure more of an academic exercise or a declaration of faith than a foundation for investing decisions. In his foreword to the study Added Values? Measuring the ‘Value Relevance’ of Sustainability Reporting, GRI’s Chief Executive Ernst Ligteringen summed up the issues at stake: What is to be the future of sustainability reporting vis-à-vis financial reporting? Is a single, integrated report the way ahead? How do we interpret the paradox that the main drivers for sustainability reporting are apparently the desire to build trust and reputation with customers and the wider public, while the main readership group is the investment community? How and when will sustainability issues become more relevant to the mainstream investment community?

These are all cogent questions that are yet to be answered. While CSR reporting remains an individual endeavour depending on corporate priorities, sustainability reports tend to either religiously follow GRI guidelines or be in accordance with them to some extent.

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Basically, companies can choose their own dosage. This has led to a certain amount of inconsistencies that Andrew Newton targeted in an Ethical Corporation article called ‘GRI reporters: Who’s fooling whom?’ Newton examined the reporting performance of financial services companies and found that some were publicised as adhering to the standards even though they did not actually fulfil the GRI stipulations. Similarly, Mallen Baker has repeatedly criticised the inadequacy of the GRI framework of indicators. In actual fact, the quality and utility of a company’s reporting does not depend on GRI, as can be seen from best practice companies like Novo Nordisk, Suez and BP, described on the following pages (see Figure 6.2). Table 6.2 Sustainability: Key Reporting Indicators Qualitative

• Investments in ecological innovation (including processes) • Ecological scorecard (heating, waste, water, etc.) • Accordance with GRI • Main economic ratios (ROE, EBITDA, etc.) • Targets and performance (emissions, fatalities, etc.)

• Business model (balance of priorities, commitment) • Employee policies (job security, social benefits, etc.) • Effects of climate change and other risks • Awards and indices

Strong

Quantitative

• Dilemmas and solutions (specific projects)

UPS

Novo Nordisk

Quantitative Approach

BP Rio Tinto Suez

Weak

Chiquita

Weak

Strategic Approach

Figure 6.2 Sustainability profiles

Strong

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From Triple Bottom Line    Novo Nordisk is a company that has moulded its entire reporting around the triple bottom line. This Danish healthcare company has produced a series of 3BL reports; in 2004, it produced an annual report that simultaneously dealt with financial, social and environmental performance. Novo is in many ways a model company. It follows GRI guidelines, began reporting on environmental and social issues as far back as 1994, and presents a huge amount of nonfinancial data. This company has committed itself to integrating sustainability into every business decision it makes. Needless to say, the reports are independently verified. As a healthcare company, Novo’s key social issue is improving the quality of life across the world; this internationalism makes particular sense for a company whose sales are up to 99% outside the home market. The company sets itself clear targets and reports on their status every year. It has also developed its own indices: the eco-productivity index, for instance, measures resource effectiveness and showed a 7% improvement for water and 8% for energy in 2004. Similarly, in social terms, employee turnover and frequency of occupational injuries is measured on a long-term basis. One problem with the company’s approach is the difficulty of seeing the wood for the trees. The amount of data provided is so massive, with several pages full of figures and 3BL performance indicators, that most stakeholders would be overwhelmed. However, there is a mine of useful information, for example: • The company’s global warming and ozone layer depletion is measured annually; in 2004, its global warming impact sharply increased. • Similarly, compliance issues are listed, including complaints and accidental releases. • Training costs per employee are disclosed, showing a strong increase in 2004. • Important ratios are also given, for instance environmental investments as a percentage of investments in tangible assets; here again, 2004 was a record year. Measuring the company’s footprint on society and the environment remains a vital issue. Novo Nordisk’s report regularly features among

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the best in the world and has received a series of awards. The seriousness of the company’s endeavour is beyond question; the 2004 combined report is a remarkable achievement, sustainability at its holistic best. The French utility Suez has a similarly broad focus and presents a broad array of 3BL indicators: 1. Economic: A number of relevant ratios are provided, including EBITDA, net cash flow, risk exposure and return on capital employed. 2. Environmental: Greenhouse gas emissions, eco-efficiency of energy production and waste-to-energy conversion are measured over several years. 3. Social: Rates of accidents and seriousness of accidents are given; this is augmented by HR data such as percentage of personnel trained. As is the case with Novo Nordisk, the company is strong on internal data and weak on external indicators. Community investment, for instance, or range of CSR spending is not reported on. Thus, despite the large amount of information on the business environment, stakeholder involvement is not apparent and social responsibility is – in typically Continental European fashion – concentrated on those employed.    to Challenges and Dilemmas Most reporting is avowedly affirmative. Successes and triumphs predominate; correspondingly, failures of whatever kind are generally no-shows, at best grudgingly admitted or relativised. A growing number of companies are, however, finding the courage to openly explore their own conflicting priorities, the predicaments in which they find themselves and their need to take hard decisions. BP is at the forefront of such efforts. As one of the world’s largest energy suppliers, it has changed its name from British Petroleum to Beyond Petroleum, thus underlining its commitment to alternative energy sources. For several years the company’s sustainability reports have contrasted achievement with ‘challenges’ – a polite synonym for problems, dilemmas, etc. In 2001, for instance, BP reported on accidents in Papua New Guinea and the USA. The company also provided information on job cuts, oil spills and a safety fine in Scotland. Two years later, themes like oil

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spills and fatalities continued to be reported. Beyond that, BP showed that employee satisfaction had slightly fallen in the context of job cuts and also commented that social investment was decidedly lower than in the previous year. In all cases, the company readily admitted its responsibility and presented its arguments for dealing with the situations. Another area in which the company sets standards is assurance. The attestation statements have grown in sophistication over the years; in one report there was an extensive three-page review of BP’s performance with clear provisos in terms of materiality. Reviewing the report in Ethical Corporation, Matthew Gitsham pointed out that while far ahead of the vast majority of companies across the world, BP’s reporting still manifests ‘a frustrating lack of clarity and comprehensiveness’. He clearly criticised an oblique approach to emissions targets and extended his critique to performance targets in general, which are not presented and reported on systematically. This is certainly the case: the BP report is far more political than Novo Nordisk’s and far better presented, but relatively thin on hard evidence. The same mixture of honesty and vagueness applies to ABN-Amro. The Dutch bank is a sectorial leader in terms of sustainability and also fairly advanced in terms of stakeholder engagement. While BP as a production company reported on physical mishaps on site and other concrete issues, ABN-Amro brought a section on Responsible Financial Services in its Sustainability Report, that pinpoints the specific problems faced by banks. Relevant issues are, for instance, weapon financing in the context both of international conventions and the bank’s own code of conduct. The bank also discussed the Baku-Tblisi-Ceyhan pipeline financing and other project finance issues. It openly admitted to not just moral considerations when rejecting long-term real estate financing for an animal-testing medical company because of the possible danger of violence to ABN staff by radical anti-testing activists. The reporting grid – description of the dilemma, followed by the bank’s considerations and, finally, its actions – is straightforward and well presented. However, like BP, this bank is weak in terms of targets.

SETTING TARGETS AND EXECUTING STRATEGIES Commitment to sustainability can easily be adulterated by vague and well-meaning statements not backed by evidence. The best way of

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signalling accountability consists of setting clear targets and reporting on their fulfilment. Beyond this, sustainability is not an end in itself; it needs to become an integral part of corporate strategy. Three companies in completely different sectors illustrate the target-strategy nexus. Rio Tinto This leading Anglo-Australian mining company has a highly structured approach to the issue. After a series of ‘Social and Environmental Reviews’, it decided to publish its first Sustainable Development Review for the year 2004. For several years, Rio Tinto has adopted a clear grid consisting of targets, performance as compared to the previous year, comment on the achievement or non-achievement of targets and longer-term trends. This results in a precise profile of the year’s performance, which is put into context. In 2004, for instance: • The target of no fatalities was missed, though the one death that occurred compared well with the six deaths in 2003. • Similarly, progress was made in achieving a 50% reduction in the lost-time injury frequency rate (21%). • Beyond safety, occupational health was an important priority. Seeking a 40% reduction of the number of new occupational disease cases, Rio Tinto achieved 32%, pointing out, however, that this was partially due to divestment. Environmental targets were not so well achieved: instead of a 10% reduction in freshwater per tonne of product, there was a 1% increase per product, though total freshwater use has decreased. Similarly, the company was seriously off-target in terms of the 5% reduction in energy consumption projected to be achieved between 2003 and 2008. In 2004, the energy reduction was a mere 0.5%. This kind of clarity increases the credibility of Rio Tinto’s reporting and orients stakeholders to the company’s priorities and challenges. Future targets are defined and placed in the context of ‘The Way we Work’, the company’s mission statement. The assurance statements of the independent verifiers are clearly formulated and include advice on further improving performance. This makes Rio Tinto’s sustainability stance even more substantial.

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UPS The world’s largest package deliverer is more strategic in its approach than Rio Tinto. Sustainability is closely linked to business strategy, which focuses on a synchronized delivery model based on an integrated network structure. This sounds technocratic at first sight but is justified by the company’s size and complexity: around 400 000 employees, of whom more than 75% are in the USA. Around eight million customers are served every day, with the number of parcels delivered amounting to over three billion a year. With more than 250 of its own aircraft, the company is one of the 10 largest airlines in the world. Beyond this, it has a gigantic fleet of cars, vans, tractors and motorcycles. This puts a strong onus on the company to constantly review its processes. Sustainability is linked to the entire supply chain; the company has oriented its business strategies towards increasing globalisation on the one hand and smaller, more frequent shipments on the other. Reducing emissions is obviously a prime priority: UPS has policies in place to optimise its transport networks, reduce fuel consumption and introduce both energy-efficient and alternative-fuel vehicles. Fuel is also a cost factor; the company estimates that it has the lowest operating costs for fuel in the industry and is constantly optimising the gas–diesel–natural gas mix. The company’s Sustainability Report for 2004 set clear targets on a broad range of relevant issues and reported on their achievement. It also set goals for 2007: • Retention rate: This was at 92% and UPS pledged to maintain this high level of loyalty by employee ownership schemes, career development measures, etc. • Employee participation: The rate of participation in the yearly Opinion Survey had risen from 80% in 2000 to 89% in 2004 and was scheduled to reach 95% by 2007. • Injury rate: The lost-time injury frequency had decreased from 11.1 per 200,000 hours to 3.9 between 2000 and 2004 and was targeted to be reduced to 3.2 by 2007. • Fuel consumption: The gallons of fuel per package had decreased unevenly during the course of the last five years; in 2004, they in fact rose. UPS committed itself to reversing this trend and to radically reducing fuel consumption.

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• Noise reduction: Here the benchmark consisted of achieving the International Civil Aviation Organization’s regulations. Progress was made by increasing the percentage of the UPS air fleet fulfilling the ICAO guidelines from 92% in 2002 to 95% two years later; the target for 2007 was 97%. This highly structured approach to setting and achieving concrete sustainability targets certainly boosts the company’s reputation; UPS has prominently and repeatedly figured on the FORTUNE list of the world’s most admired companies and also belongs to both the Dow Jones Sustainability Index and the FTSE4Good. The Conference Board analysed UPS’s reporting as an example of best practice and particularly praised its policy of ‘embedding and cascading sustainability goals across the entire supply chain’. Chiquita Rio Tinto and UPS are both prosperous companies with good track records. The history of Chiquita, on the other hand, the famous or rather notorious banana producer and trader, is dotted with scandals and irregularities. The company has been accused of political corruption, trade union repression and environmental destruction. Attacked both by the media and NGOs in the 1990s, the company was close to bankruptcy in 2001. It survived, however, and made great efforts to become a responsible company. Chiquita published its first nonfinancial report in 2001 and also started working towards achieving the workplace standard established by Social Accountability International (SA 8000). While lacking the quantitative, hard-core targets set by UPS and Rio Tinto, the company set itself a number of ambitious qualitative goals and reported on their achievement in its 2002 CR Report. Targets included getting independent banana growers to establish processes for getting certified in terms of SA 8000 and for inspections by the Rainforest Alliance. Corporate goals were put in a sustainability framework: 1. Financial: Developing a convincing business case for responsibility and integrating socio-environmental criteria into the evaluation process for suppliers. 2. Social: Developing a multilanguage Code of Conduct and dealing with the issue of temporary workers.

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3. Environmental: Increasing the percentage of bananas from Rainforest Alliance-certified farms to 70 and developing a chlorine-free water recirculation system. Thus, while far removed from the sophistication of 3BL reporting, this company was evidently moving towards a sustainable business strategy. Chiquita was also very open in recapitulating a Human Rights Watch report that criticised the company’s treatment of workers. The company presented its own view on the subject and reported on progress made in improving conditions of labour. It also provided a second case study on a divestment in Panama, in which the initial labour-management conflict was defused by a change of ownership to a worker-owned cooperative which the company continued buying fruit from at market prices. Thus, Chiquita provided stakeholders with insights into the particular challenges faced in its sector. Chiquita is a prime example of a company transforming its own identity and becoming a responsible corporate citizen. It has now changed its accountability strategy: each annual report includes a short section on corporate responsibility. Relevant issues covered include certification of farms, adhering to core values and community support projects.

Box 6.2

Reporting on Sustainability: Recommendations

It is not advisable to concentrate on CSR and Sustainability simultaneously; both concepts provide adequate frameworks for action independently of each other. Companies that subscribe to sustainability rather than CSR – generally because they have a strong environmental focus – should start by defining their approach to sustainability. Do they adhere to the classical definition of trying to balance ecological, economic and social priorities; or do they follow their own approach, with sustainability as a by-word for a long-term approach to planning, thus concentrating on financial solidity, ecological priorities and reputation rather than quarterly results and large dividends? Then, move on to concrete strategies and activities: • Ecological track record, including targets for reducing emissions and water consumption, recycling waste, using environmentally sound heating, etc., set against actual performance. Detail the savings – for instance, reduction of lost time through better health and security performance.

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• Projects and partnerships with ecological or socioecological groups/ institutions to achieve specific goals like reducing pollution in your offices and factories or improving the conditions of life in the areas in which you operate. • Challenges faced by the company in the past financial year: accidents, public criticism of policies, etc. What is the company doing to cope with these challenges? Then continue by outlining corporate policy on important issues such as global warming: • How does your company contribute to the discussion of these issues (speeches, participation in working groups or in associations)? • Have you set targets for your company to contribute to solving global problems like reducing ozone layer depletion? • Close by giving an overview of future policies, including the dilemmas you are likely to face in the future.

Positioning Reporting on sustainability in the Annual Report should be restricted to a chapter focusing, above all, on ecological issues (alternatively publish a chapter on CSR focusing on social issues). In a separate Sustainability Report (alternative to a CSR Report), present a broad overview of corporate performance in ecological, economic and social terms including assurance statement. Put important environmental and social data on the corporate website. Key Performance Indicators Ecological investment

Ecological performance Social performance

Ecological and social targets

Specific investments in waste disposal, heating systems, new power generation, waste-energy-conversion, etc. Consumption figures for energy, water, etc., for the last three years Health and security performance for the last three years (number of accidents, illnesses and deaths, technical mishaps, etc.) Targets to increase energy efficiency, reduce waste, improve injury rate, etc.

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C. STAKEHOLDER DIALOGUE: CONFLICT-SHOOTING OR WIN–WIN STRATEGY? ‘Spar is not, as so many believe, an environmental problem, rather it will go down in history as a symbol of industry’s inability to engage with the outside world.’ Referring to the Brent Spar fiasco, Heinz Rothermund, Managing Director of Shell UK Exploration, was certainly not exaggerating. Brent Spar is indeed the classic case of a leading company persistent in pursuing a course of action – sinking a floating oil platform into the North Sea in 1995 – until forced by a Greenpeace campaign und gigantic public pressure to back down. The irony of it was that, in retrospect, Shell’s original decision was better founded than Greenpeace’s demand that the company dismantle the platform on land. However, for the media and public opinion, the case was clear: arrogant big business subverting nature and resisting public opinion. Shell then proved that the opposite was a viable option and became a pioneer in engaging with both experts and the general public. Starting with the Brent Spar Dialogue Process, a series of sessions involving a discussion between Shell managers and a group of European stakeholders facilitated by the Environment Council, the company rapidly institutionalised interaction with a broad range of experts, NGOs and community representatives. With ‘Tell Shell’, the company set a benchmark. This consisted of an invitation to the general public to express its views and the company committed itself to reproducing these views uncensored. Messages could be sent by normal mail, e-mail or posted on Shell’s web forum. The quintessence of this feedback has been published in Shell’s sustainability reports. The mail Shell gets is nothing if not forthright. It is often candid to the point of being offensive, sometimes downright naïve – and thus a plausible cross-section of public opinion. In Shell’s reports, remarks of this kind have been reproduced: • ‘How much of your profits have you really spent or invested as I would call it? 1%? I doubt it. Cut down your ad spending and really do something for every part of the world you exist in.’ (Comment from India) • ‘An oil company cannot contribute to sustainable development unless it gets out of oil! When do you plan to take the IPCC’s

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warnings seriously, stop all new oil exploration and become a renewable energy company?’ (UK) • ‘PLEASE do not drill for oil in the Sundarbans. The tigers are already on the verge of extinction, this is not a place for oil drilling! I am concerned for the future of the tigers in this area, and hope that you will think carefully about this.’ (Unknown source) Reprinting these comments, arguments and insults and responding to them as Shell does calls for a great deal of courage and openness. There have, however, been criticisms of tokenism, in other words, that the company is going through the motions of consultation while continuing to abide by its own agenda. But the sheer fact that a company is ready to reproduce negative views on itself is highly innovative and has certainly enriched Shell’s reputation. In the worldwide survey Global Stakeholder Report 2005, Shell was ranked No. 1 in reporting, as it was in the previous survey carried out in 2003. Shell was particularly astute in using state-of-the-art communications technology in the form of an interactive web forum. ‘Tell Shell’ functions as a kind of debating club, where both Shell and its stakeholders make comments and respond to each other. As one respondent wrote: I was deeply impressed by your willingness to share some very blunt feedbacks. I think this is REAL listening to your customers. I personally like very much this kind of openness and taking care. I am a quite loyal customer to your products and this kind of communication between a giant company and its customers will make me loyal even more. Keep your ability to listen, it is very important.

Other companies have responded to being pilloried in less spectacular ways. Dow Chemical, for instance, was a typical target of the antiVietnam War movement in the 1960s, since it manufactured weapons like napalm and Agent Orange. More recently, it was publicly criticised for covertly exerting political influence. The NGO Infact confronted Dow with allegations at its annual general meeting in 2002, urging it to reduce its influence on public policy. Together with other companies like Philip Morris, it has featured in Infact’s ‘Hall of Shame’. Dow’s response has been fairly low-key: It has organised stakeholder surveys of various kinds: community advisory panels, customer loyalty surveys, employee communication panels and an Environmental Advisory

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Council. In its 2003 Global Reporting Initiative Report, the company briefly described its processes.

CURING CORPORATE MYOPIA Dialogues (see Table 6.3) are a needed antidote for the myopia that the corporate environment often generates. A survey carried out by Rating Research in 2004 showed that 65% of the senior management of US pharmaceutical companies believed that they acted ethically, while only 44% of US citizens interviewed believed so. Seventy percent of the public thought that the pharmaceutical industry put profits before people. This means that an entire sector has a credibility problem. It not only needs to reform its way of doing business but also to consider its engagement with the outside world. The consequences of imperviousness have been suffered by a long line of companies from Shell to Monsanto and ExxonMobil: consumer boycotts and a loss of reputation are the most apparent damages suffered. The question remains: Which stakeholders should a company concentrate on? Some utilize a scorecard. Bank of Montreal, for instance, weighted its stakeholders as follows: • • • •

Shareholders 40% Customers 30% Employees 20% Communities 10%.

This is obviously quite an arbitrary classification; it ignores among other things the power of NGOs, which is often stronger than that of communities. The public is generally the most passive stakeholder group – until aroused by the media or NGOs. Investors, customers, employees and NGOs are far more vociferous. When CALPERS wrote to GlaxoSmithKline asking it to re-evaluate its AIDS policies, an important stakeholder – the world’s largest pension fund – was heard across the world. Implicitly, the question to be put is: Why didn’t Glaxo enter into a dialogue with the Californian pension fund in advance to avoid this embarrassing reprimand? Large companies often live in splendid isolation, becoming islands of immobility in a changing world. Stakeholder dialogue and the reporting process often have an early warning function. They alert executives to potential dangers. However, the phenomenon has its sceptics. In a cogent comment in Ethical

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Corporation magazine entitled ‘Stakeholder dialogue can be dangerous to your health’, Jon Entine, an adjunct fellow with the American Enterprise Institute, contended: The politically correct consensus is that transparency demands that multinational corporations engage with advocacy groups to mediate hot-button issues: global warming, GMOs, resource exploration, globalisation and human rights disputes. But let’s not sing Kum-By-Ya ’round the campfire just yet. The dirty little secret is that stakeholder dialogue is wildly overrated and often counterproductive – for businesses and even for their advocacy antagonists, who frequently back policies that hurt the very stakeholders that they presume to represent.

This of course is an extreme argument that categorises NGOs like Greenpeace as dangerous stakeholders. But it is certainly true that companies need clear strategies and policies to cope with the dialogues and their outcomes. They would be well advised not to take Felicity Lawrence too seriously. In a delightfully cynical article published in The Guardian on the occasion of the Earth Summit in Johannesburg in 2002, Lawrence poked fun at CSR, calling it the ‘latest fashion accessory’ and made a tongue-in-cheek comment: A key part of CSR is to subject yourself willingly to the tirades of NGOs and campaigners. This is called dialogue with stakeholders. It may be painful, but you can always say you don’t agree with them at the end.

A number of companies have moved ahead to engage and report systematically on their interaction with the outside world. Some of them follow a highly systematised approach; others are more issues-oriented; while companies in particularly vulnerable sectors like cigarettes and sports goods use dialogue as a testing ground for public opinion. Table 6.3 Dialogue: Key Reporting Indicators Quantitative

Qualitative

• Structured dialogue input (e.g. employee panels) • Results of opinion surveys (e.g. customer priorities) • Supplier priorities • List of NGOs/experts engaged with • Composition of consultative councils

• Dialogue processes (frequency, mechanisms, etc.) • Advice from community panels • Quotes from individual stakeholders (experts, etc.) • Activities of consultative councils • Key dialogue issues

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SYSTEMATISING PROCESSES, DEVELOPING INDICATORS Stakeholder dialogue only makes sense if companies identify the target groups that are vital for their businesses and concentrate on issues that are relevant in their sectors (see Figure 6.3). Respondents surveyed for the Global Stakeholder Report 2005 identified the following audiences for CSR reporting: • • • • •

Investors 67% Employees 52% Consumers 43% Media 35% NGOs 30%.

An analysis of companies in the banking sector shows that enterprises have their own priorities and modes of reporting. Cooperative Finance Services This British enterprise, which was founded in 2002 when the Cooperative Insurance Services and the Cooperative Bank merged, is a clear leader both in stakeholder dialogue and sustainability reporting. Its reports have won numerous prizes, including the Sustainability/UNEP 2004 ranking as the world’s best nonfinancial report. CFS is in some sense an atypical company, since it only has one equity shareholder: the Cooperative Group. However, it concentrates on both stakeholder groups and key issues: • Customers: Regular research is carried out in focus groups of both private and corporate clients to ascertain their priorities. Service and relationships emerged as the major issues of these groups. • Employees: Opinion surveys were carried out, showing that the company’s staff – the total number of employees was over 60 000 – prioritised salary package, personal development and career opportunities. • Suppliers: Qualitative research revealed issues like prompt payment, good relationships and fair treatment as particularly relevant. • Society: Here CFS seemed somewhat at a loss, balloting customers on ethical issues. There is no mention of contacts to NGOs or local government or community representatives, which would have been more appropriate.

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Despite this, the depth and breadth of the company’s stakeholder coverage is unparalleled and certainly a benchmark not only in the banking sector. Cooperative Financial Services is one of Britain’s most highly regarded companies – a poll of British Members of Parliament ranked it in third place after BT and BP – and an overwhelming majority of the general public in the UK consider it to be the most ethically responsible financial services provider. CFS has published detailed charts on stakeholder opinion research over a period of several years. These show that while both private and business customers are very satisfied, a certain amount of disaffection has developed with employees: a distinctly lower percentage agreed in 2005 that their overall benefits were good, that their career opportunities were being taken care of and that they appreciated the job security provided by CFS. As the company explains, it introduced a new operating model in 2004, destined to cut costs and be more customer focused; this was scheduled to reduce staff by 2500. Apart from this, rates of satisfaction were generally high. All things considered, CFS provides an impressive array of indicators and measured impacts for its ‘partners’. It has, however, become more concrete in its purview recently: its 2002 Partnership Report, for example, still included ‘past and future generations of cooperators’ as stakeholders, which seems rather nebulous. While the documentation presented is highly impressive, it is sometimes difficult to see the woods for the trees. Polling 500 000 customers to obtain guidance for a new ethical engagement policy on how the company should invest its assets seems a bit exaggerated, though the fact that 44 000 responded shows that CFS has excellent relationship management. Westpac This large Australian bank is equally a major player in terms of sustainability and stakeholder orientation. Westpac is the sector leader in the Dow Jones Sustainability Index and has a global profile on ethical issues. Its dialogue processes are fewer in number as compared to CFS, but seem quite cogent. Customer dialogue, for instance, is a part of the total quality process: Westpac’s tenet is that their clients should only Ask Once and it surveys 1000 clients every week to discover its progress in satisfying their needs. The company sets itself clear improvement targets; thus, listening to customers has an impact on service quality. Statistics

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on customer satisfaction and the percentage of complaints resolved at first contact are tracked. Similarly, employee opinion is regularly assessed and a commitment index shows the degree of employee satisfaction. The company is also an innovative reporter, publishing a ‘Stakeholder Impact Report’ on a yearly basis. Its approach is both systematic and whimsical, with pencilled-in comments lightening the often dreary succession of facts, figures and issues. Westpac has developed a formal dialogue framework and founded a Community Consultative Council, with participation from government, consumer advocacy, environmental and indigenous groups, and trade unions. It thus interacts with a fair cross-section of society. Deutsche Bank Germany’s largest bank has developed an added value grid, structuring its services towards investors, customers, employees and society. This forms the basis of its reporting framework and illustrates the company’s intention to address stakeholder interests with the same kind of professionalism that it applies to its business activities. Given the fact that the bank has been through a volatile period with the focus shifting several times between retail and investment banking, the employee commitment index, derived from an opinion survey, is a valuable indicator of a rising degree of dissatisfaction. In the year 2000, the commitment index was at 72, four years later, it had reached 68. Similarly, the rate of employee turnover increased. Deutsche Bank is a major supporter of public/private partnerships; it cultivates institutional links in areas such as microfinancing, rather than community consultation of the kind carried out by Westpac. Addressing Specific Issues    The banks examined above all have a general approach to engaging with stakeholders. The British mobile telephone operator, mmO2 , is by contrast highly specific in its scope, focusing strongly on mast siting as an issue with deep impact on communities. The company asserted in its first Corporate Responsibility Report for the year 2003: We use stakeholder dialogue at mmO2 as a way to talk, listen and learn from the groups and people who have a direct and indirect interest in the

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way we operate. Our aim is to promote a genuine understanding of how we operate as a company and of what we hope to offer through our products and our mobile services. By the same token, we also want to understand how we are perceived by society and what people expect of us.

Strong

While this sounds characteristically general, mmO2 also gives a specific list of the institutions and NGOs with which it is in contact, ranging from the Internet Watch Foundation and the Mobile Operators Association to the Community Action Network and the National Consumer Council. Here, the company is admirably specific. Having established contact with a broad range of society representatives, mmO2 focuses on consultation, proactively seeking a debate on important concerns. Mast siting is a prime issue and as one of the company’s community relations managers points out, though they have been building far fewer masts than in the past, the level of community consultation has greatly increased. Samples of concerned commentary are published, including the letter from a local community that ends with the invocation: ‘We would urge you to reconsider the siting of this mast because the local community is very upset.’ Dilemmas of this kind belong to mmO2 ’s business, and reporting on them represents a constructive approach towards the challenges this company faces.

CFS

Westpac

mm O2

Issues-oriented Approach

BAT Shell

Weak

Deutsche Bank

Weak

Systematised Approach

Figure 6.3 Dialogue profiles

Strong

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   and Systematising Consultation mmO2 is in a relatively ‘harmless’ sector. Public perceptions of the telecom branch in general and mobile communications in particular are mostly positive. The opposite is the case with the tobacco industry. All producers and distributors automatically have image problems. This certainly applies to British American Tobacco (BAT) one of the world’s largest cigarette manufacturers. Like Shell, BAT has made a virtue out of necessity and launched into a highly ambitious stakeholder dialogue programme. This is a professional approach to identifying issues and consulting stakeholders on a global basis. Issues range from product impact (health risks through tobacco, marketing practices) to supply chain, community and employees. Dialogues have a fixed framework and strong involvement by independent bodies, including assurers. Comments are reproduced verbatim, including juicy invective. The company presents itself as open to all kinds of commentaries and issues, including the sensitive topic of tobacco regulation. It seeks a broad range of dialogue partners, while admitting that not everyone is willing to participate. As Chief Executive Paul Adams remarked in the company’s 2004–2005 Social Report: Some stakeholders are still reluctant to engage with us, particularly in the public health and tobacco control communities and amongst some NGOs. Our message is simply that our door remains open. We do not seek to compromise any stakeholder and we believe that, even on some of the most challenging issues, there are real areas of common ground for working towards solutions.

BAT shows that it takes dialogues seriously by participating in them from the Board level downwards. Adams himself reviewed dialogues he had participated in both in Kenya and in Brussels. The company adheres to both the AA1000 and GRI standards. It certainly sets the benchmark for structured dialogue processes. It also tackles the important issue of product stewardship in terms of lower tar products, health impact research, underage smoking and cigarette taxes. The amount of detail provided in BAT’s yearly reports is impressive but daunting. Here is a definite risk of over engineering – most stakeholders will find it difficult to digest the quantity of information

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provided. Despite this, the range and colour of comment provided is highly instructive. Some examples from the company’s social reports: • ‘The Achilles heel of the industry is that it is still dealing with the legacy of its past behaviour   There is only so much you can say when you’re being sued.’ • ‘We see the policies – we’d like reassurance that they’re rigorously enforced worldwide.’ • ‘Very “talk” orientated. Would be good to make it more “action” based.’ • ‘A bit motherhood and apple pie.’ Compared to the invectives hurled at Shell, this is relatively mild stuff. The company insists that dialoguing isn’t just a ‘talk-fest’. BAT promises to take action on the issues raised by stakeholders, who have a broad range of affiliations: government, multilateral organisations, NGOs, farmers’ organisations, etc. Critics have accused this tobacco company of smoke-screen tactics, obfuscating the real issues by diverging on CSR. However, what is the alternative? As long as BAT is in business, it will be producing goods that are potentially detrimental to the health of the consumers. It seems in the interests of all concerned that the extent of health hazards is reduced as far as possible. Dialogue is the first step to achieving this. Another company that has made stakeholder consultation a structured process is Adidas. The German company has never been as much a butt of public wrath as its American competitor Nike. Despite this, since the late 1990s, it has moved towards formal consultations across the world. Alone in 2004, it held two dialogues in Asia, two in Latin America and one in Europe. A broad range of stakeholders participated, from government officials and investors to trade unions, suppliers, journalists, sports experts and distributors. In contrast to BAT, Adidas has a stronger business focus, supplementing its dialogues through sessions with socially responsible investors (the SRI community). Employees have also been involved in the consultations. The sports company’s reporting is less extensive than that of BAT – no verbatim comments for instance are reproduced in Adidas’ social and environmental reports. However, the structure of

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reporting is highly effective, since it compresses information into an easily grasped format: 1. 2. 3. 4.

Description of the dialogues Action on the basis of the previous year’s stakeholder feedback General feedback for the current year Future action plan to deal with the current year’s feedback.

In 2003, for instance, one issue raised was that multinational companies like Adidas should make a contribution to dealing with AIDS. The following year, the company reported on carrying out an AIDS pilot programme in Thailand and developing a strategy on the issue. Adidas also reported itself as lagging on specific demands such as carrying out a global employee survey as requested by stakeholders. Basically, the onus on the company is to tighten the screws on its suppliers as regards explosive issues such as child labour and other types of exploitation. There were also demands for more independent audits to be carried out by the Fair Labor Association. By concentrating on the nitty-gritty in its dialogues, Adidas is minimising the risk of being exposed as an irresponsible Western company exploiting cheap labour from the Third World.

Box 6.3

Reporting on Stakeholders: Recommendations

Start by outlining who the company’s principal stakeholders are: financial community (analysts, fund managers, institutional investors including SRI representatives); employees’ representatives; major customers and suppliers; experts; NGOs (specify which organisations), community representatives. Describe the formal dialogue mechanisms in place (townhall meetings, customer panels, community councils, website interaction, etc.). Specify to what extent top management is involved in stakeholder interaction. Then describe your dealings with stakeholders during the last financial year: • Which target groups did you concentrate on and whom did you contact (e.g. Regional Head of Transparency International, Director of works council, etc.)? • Major issues of discussion/areas of contention (e.g. company products, impact on the environment, social protest)

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• Insights and ideas gained through dialogue mechanisms (e.g. improving service quality, institutionalising contacts to NGOs, improving HR development) After that, outline your goals for the future: • Do you plan to target new stakeholder groups or deepen your contacts to existing groups? • What is your action plan, based on the concerns expressed by the stakeholders you consulted?

Positioning Stakeholder reporting should form part of the chapter on CSR/ Sustainability in the Annual Report. Beyond this, it is an integral part of the stand-alone CSR/Sustainability Report published on a yearly basis. Key Performance Indicators Results of surveys

% of satisfaction/dissatisfaction voiced by community representatives/NGO representatives in surveys

Stakeholder contact

List of major stakeholder groups that the company interacts with + form and periodicity of contact

ETHICAL VALUE: A MUST OR A SHAM? Ethics is a chore; it can also be a bore, as those regularly perusing responsibility and sustainability reports can testify (Table 6.4). Ethics has variously been defined as a ‘discipline dealing with good and evil and with moral duty’, and also as moral principles or practice. In the corporate world, practice tends to be more important than principles. Scott Adams pillories principles in a Dilbert cartoon, where a training facilitator addresses a class, saying: In this two-day workshop, you will learn to embrace our company’s mission and vision. At first glance it will appear to be a bunch of useless jargon created by functionally illiterate executives. But after we do some mind-numbing group exercises, you’ll forget that you’re underpaid and you have no job security  

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Plenty of cynicism abounds of the type like ‘Right is what you can get away with. Wrong is what you can’t.’ A prime example of this yawning gap between precepts and practice was the famous pipeline company that started buying and selling natural gas, then moved into commodities trading and started brokering all kinds of electricity deals, moving on to hawking advertising time on television and becoming one of the biggest e-commerce companies in the 1990s. This company had excellent ethical mechanisms in place. In its Corporate Responsibility Annual Report for 2000, it stated: Employees are reminded quarterly that they can address questions, comments, concerns, violations of Enron company policy, and suspected criminal activity through any of the following anonymous and confidential reporting methods: Confidential Post Office Box, confidential office of the Chairman e-mail box, or confidential Office of the Chairman voicemail box. Instructions for using these facilities are provided so that employees who wish to remain anonymous are assured of doing so.

One can’t do much better than that in terms of whistle blowing mechanisms. And yet, a few months after the Responsibility Report was published, Enron capsized and found itself in bankruptcy. For six consecutive years, FORTUNE had called it America’s most innovative company; now it was America’s most corrupt. As Joel Bakan pointed out in his highly acclaimed book The Corporation, Enron ‘collapsed under the weight of its executives’ greed, hubris, and criminality. Enron’s story shows just how wide a gap can exist between a company’s cleverly crafted do-gooder image and its actual operations and suggests, at a minimum, that scepticism about corporate social responsibility is well warranted.’ Is ethics ‘a barrel of worms’, as Omar Burleson, a Democratic party Member of the US House of Representatives, once commented? No, it’s all a question of individual responsibility. And for every example like Enron or WorldCom, there are plenty of others testifying to the opposite. Take the famous case of Johnson & Johnson and the Tylenol capsules. In 1982, consumers died of cyanide that had been illicitly injected into the capsules. J&J was guiltless; this was a clear case of sabotage. Despite this, the company launched one of the largest consumer alerts in business history, recalled batches of Tylenol, which was an alternative drug to aspirin, and designed a tamper-resistant package, which it then successfully introduced into the market.

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By being open and exceeding its fiduciary duties, J&J remained one of America’s most respected companies and even managed to rescue Tylenol as a brand name. Consumers responded to surveys by saying that the company had been ‘honest and sincere’; a year after the disaster occurred, Tylenol regained its market share. Johnson & Johnson thus lived up to its famous credo, which has prominently featured in its annual reports for many years. This credo commits the company to primary responsibility to doctors, nurses and patients, followed by employees and communities. The company’s final responsibility is to shareholders. This kind of prioritisation is one reason why J&J has proved a more sustainable company than Enron. Table 6.4 Ethical value reporting: Ten leaders Company

Country

Starbucks

USA

Snapshot

Socio-environmental approach to CSR focusing on farmers’ needs Novartis Switzerland CSR integrated into the business model Allied Domecq UK Ethics embedded into business and reporting mainstream Tata Group India Well-coordinated community initiatives Novo Nordisk Denmark Detailed and professional approach to sustainability Rio Tinto UK – Australia Clear links between targets, performance and future targets UPS USA Sustainability integrated into business strategy and operations Shell UK – Netherlands Proactive approach to feedback from stakeholders Westpac Australia Systematised dialogue and reporting processes BAT UK Excellent issue identification and dialogue documentation

Contact www.starbucks.com

www.novartis.com www.allieddomecq.com www.tata.com www.novonordisk.com

www.riotinto.com www.ups.com

www.shell.com www.westpac.com.au www.bat.com

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SUMMARY OF ETHICAL VALUE CSR and sustainability reporting is a signal of a company’s intentions; it is also a measure of how companies practise ethics, and this chapter has featured a number of different approaches: • Home Depot has an admittedly charitable approach. Giving back to the community has nothing to do with corporate strategy. However, the company shows an exemplary sense of initiative and has profited in image terms from its well-publicised actions. • RBS focuses on financial literacy, rightly so, because this is close to the bank’s core business and is an area in which its employees have obvious expertise. • Starbucks concentrates on improving living standards for coffee producers, also a case of relying on core competencies. • Novartis places special emphasis on innovation, both as a R&D strategy and as a way of helping millions of patients around the world. • Allied Domecq addresses the prime issue of responsibly advertising alcohol by founding an independent Marketing Review Board. Thus it has integrated ethics into everyday business. • Novo Nordisk strictly adheres to the 3BL framework and provides a clear picture of its sustainability footprint. • BP reports extensively on challenges and failures, thus increasing the plausibility of its own reporting. • UPS excels in a target-performance-new target strategy that forms the basis of its reporting. • CFS relies on a huge amount of empirical evidence derived from focus groups and opinion surveys when formulating its stakeholder policies and also reports on them in great detail. • mmO2 focuses on specific stakeholder issues like mast siting and reproduces the concerns of the communities affected by its activities. Ethical reporting still has far to go, and there is a prime need for companies to define important issues. Lots of reporting is unnecessary and redundant; many reports are still full of facts and figures that no one needs to know. A second common deficiency is lack of interpretation. Much reporting follows a kind of documentary impulse, rather than providing stakeholders with a clear orientation. Both documentary evidence and narrative are, however, important. Addressing the right target groups and providing them with insights

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rather than data is the prime aim of all nonfinancial reporting. These issues are discussed in Part III.

Box 6.4

Boise International: Fictive Case Study (6)∗

MEMO FROM HG TO BON, 22 January 2008 RE: PROJECT ‘REPORTING VALUE DRIVERS’ Thanks for finding the time to meet on 12 January. We both agreed that Boise doesn’t have a clear CSR strategy at the moment and that there’s no point in trying to pretend we have one. However, I think we both see that there’s a proactive and reactive need to take action. In proactive terms, we can certainly sharpen our profile: I still remember your mentioning at one of our meetings last year that you wanted to be talking on corporate transformation at the World Economic Forum this year and also wanted us to figure in a HBR case study. Needless to say, we’re far removed from those goals. In reactive terms, we have to be prepared to get flak from consumer groups and the odd NGO. You remember how, last year, a consumer protection organisation in the Czech Republic attacked our Consumer Finance division for exploitative interest rates and contractual terms. Fortunately, so far, NGOs have left us alone – in fact, Greenpeace once even praised our solar energy experts for playing a constructive role in furthering alternative energy distribution. But of course, things could change. I’m a bit worried about the continuing attacks on the pharma sector; at some stage, medical product manufacturers could equally be targeted and accused of illicit gains. This time, I started my research with our new Head of CSR, Heidi Ziegler. Heidi has a strong ecological background, understandable for someone from Austria. But she also worked as a CSR manager for several American companies, so I think she has a very balanced vita, ideal for our needs. According to her, we should start in bottom-up fashion, in other words analyse and optimise what we are already doing in the divisions and then carefully develop our corporate strategy. In terms of our Annual Report, she recommends that we restrict ourselves to a few KPIs on the group level, things like donations and social investment. According to her, we should differentiate between pure donations and our support of social projects or our financial ∗

See Box 2.1 on p. 33 for full names and functions of Boise management.

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Box 6.4

Continued

participation in public/private partnerships. This is important because the figures for the last three years show that we have systematically reduced pure donations – rightly, because they lack focus and effectiveness – and invested the money in proper projects that are closer to our core competencies. Similarly, we are well on our way to changing what you have often called our parochial focus: Benelux still gets a large percentage of social spending, but Central Europe’s share is increasing steadily. We have also reduced spending in the USA and parts of Asia, simply because the logistics of keeping track of what is being supported and why overweigh the reputation benefits. Volunteering has been consolidated by progressively reducing the number of social organisations we work with. In 2005, there was a brief slump in the number of volunteers; understandable because this was a year of great uncertainty for staff members. But the year after, things picked up and we can highlight a few projects when we get round to publishing our first CSR Report. According to Heidi, we should wait until next year before publishing something extensive. At the moment, our activities are simply not coherent enough. I then broached the issue of stakeholder dialogue. Heidi told me she had read a highly enlightening article in the Journal of Corporate Citizenship,1 in which an American consultant vividly described the pitfalls and dangers of business–NGO relations in the European context. One of the companies involved in the survey was a medical products manufacturer and the basic message was that the self-images of companies and their NGO critics strongly differed. According to her, we shouldn’t hasten our steps unnecessarily. First, we need a convincing strategy and proof of our activities, then we can start discussing things with outside parties. After that, I entered into in-depth talks with our divisional heads: • Consumer Finance: Here the accent is firmly on microfinance. The idea being: why not be active in an area where we have clear expertise and create links between our business model and social responsibility? According to Henry, top banks like Citigroup and Deutsche Bank are leading the way. Citigroup is particularly active in India, where they have started a series of initiatives, while Deutsche is even more ambitious. The Germans have launched a Global Consortium

1

Poncelet, Eric C. (2003). Resisting corporate citizenship. Journal of Corporate Citizenship, Spring, pp. 97ff.

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and are closely interacting with development agencies. They started with their own Development Fund and have supported 40 institutions in 24 countries. Obviously, our scope is a lot smaller, but we can certainly make a difference in some of the Central European countries. Henry is convinced that we should focus on microfinance: according to him, it creates a ‘virtuous circle’, promoting enterprise, reducing household debt, improving educational standards and nutrition. Another important issue that CF is considering involvement in is financial literacy; obviously a large percentage of those going in for small loans aren’t particularly educated. So we should be giving them an unfiltered view of the pros and cons. • Medical Products: In this division, the focus is equally clear. In fact, a large part of our donations on group level are in actual fact gifts of surgical and diagnostic equipment. The extent of our involvement depends on the local needs situation: in Poland, for instance, we donated laser microscopes to three hospitals last year, while in Romania, where conditions are a lot tougher, we equipped an entire hospital with surgical equipment. We have also entered into a cooperation with a pan-European foundation for healthcare that investigates the issue and recommends fields of investment. According to José, Abbott Laboratories is one of the sector’s benchmarks. They have invested largely in fighting AIDS in the developing world and also distributed a rheumatic arthritis drug free of cost to Medicareeligible senior citizens in the USA. José would like to emulate this by improving our profile, but this obviously involves increasing investments. • Energy: Here, actual spending has been low. Renée asserts, however, that our membership of the Energy Saving Network hits several birds with one stone. It profiles us at the forefront of the energy saving and efficiency movement, we make valuable contacts to state authorities, large energy consumers and pressure groups – and it gives us access to the latest technical developments in solar energy. According to the 2005 EU Green Paper on Energy Efficiency, Europe can save 20% of its energy consumption by 2020.2 We want to have a slice of the remaining cake, so participating in the network and contributing expertise free of charge makes mercantile sense. Beyond this, our energy division has a tradition of donating solar units to schools, charitable organisations and other nonprofit institutions.

2

SENET: Declaration of the Energy Saving Network, May 2006.

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Box 6.4

Continued

Key Performance Indicators

2006

2005

2004

65 15 50

58 17 41

63 21 42

Group level Nonprofit investment (in E mln) of which: donations social investment Regional focus of investment: Benelux (in E mln) Central Europe (in E mln) Rest of world (in E mln) Corporate Volunteering: Number of volunteers Number of projects

32 30 3 650

38 15 5 580

44 12 7 620

35

38

43

Consumer Finance Investment in microfinance (in E mln) Number of institutions cooperated with

35 24

28 14

26 10

13

12.6

11.5

11 2

10.5 2.1

10.1 1.4

85

70

52

Medical Products Donations of medical equipment (in E mln) of which: surgical instruments Diagnostic products Energy Number of solar units donated

MEMO FROM BON TO HG, 10 February 2008 Thanks once more for the clearly structured overview. I completely agree that we shouldn’t rush things in strategic terms. However, I would like to see action taken on the following issues: • Tell Heidi that I want 70% of our nonprofit investment, regardless of whether donations or social investment, channelled into Central Europe by 2010. These are our new markets and I see no reason why we should pamper our local markets; the Benelux countries in any case have munificent social states that do more than enough for the people here.

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• CF has a strong reputation focus. I shall pass on to Henry one of the latest annual reports of the International Finance Corporation.3 They’re certainly very active in Third World regions, but also have interesting projects in Eastern Europe such as a Russian women’s microfinance network. I shall ask Henry to investigate the issue; perhaps we could do a joint project with IFC, which certainly would be good for our image. • Re stakeholder dialogue: I thoroughly understand Heidi’s apprehensions. However, I think we should tackle dialogues in an issue-oriented way, rather than just talking to all and sundry. To give you an example: The European Commission has launched a series of dialogues on Biotechnology for Europe.4 José should investigate whether we can’t join the discussions, at least as observers. What I like about the group they got assembled in 2006 was the broad variety of bureaucrats, representatives of trade associations and NGOs. Basically, Renée’s network goes in the same direction, so that’s where we should be moving. • Beyond which, I get José’s point about investing more, but it simply isn’t on. I can’t justify it to shareholders; you remember complaints at the last AGM that we were overly liberal in distributing ‘largesse’, as that idiot at the back of the hall put it. What we have to do is consolidate our resources and invest more in liaising with outside groups and the media. That’s why I like Renée’s gambit; our ESN membership could be the key to an indirect and inexpensive approach to CSR.

Next Steps Put the gist of what you described in this memo into the CSR chapter of our 2007 Annual Report. The KPIs are fine. But: by this time next year, I not only want the flesh and bones of our first CSR Report; I also want a clear system of targets for the next three years. I’m looking forward to getting your progress report for our Annual Report in a couple of weeks. After we’ve dealt with the journalists and analysts, I’d like you to tackle stakeholder dialogue and give me your comments in early summer. 3

International Finance Corporation: Investing in Progress, 2005 Annual Report. European Commission: 2nd Dialogue with Stakeholders: The Biotechnology for Europe Study, 23 May 2006. 4

Part III THE HOW

‘The annual report is a regulatory requirement, a communications necessity, and a tangible symbol of a company’s character as well as a record of its progress.’ Mark Goyder, founder and director of the think-tank Tomorrow’s Company, in: Sooner, Sharper, Simpler    A Lean Vision of an Inclusive Annual Report.

7 Says Who? Addressing Stakeholders and Facing Issues

What price stakeholders? Opinions on them vary profoundly. The famous American newspaper columnist William Safire has decribed them ironically: ‘Enter the New Socialist Person. He or she is called the “stakeholder”. Remember that word: it has replaced “proletariat” in the lexicon of the left.’ On the other hand, his British colleague Will Hutton, former editor of The Observer, has stressed the significance of the stakeholder phenomenon in terms of a new kind of social equity. In the article ‘Six stakeholder propositions’, published in Business Strategy Review, he argues: ‘The endgame of stakeholding is to try and construct a system which as far as possible is self-regulating.’ The battle-lines are clear. Conservatives like Safire decry the whole idea of stakeholders as a diversion from the real priorities of a selfregulating market economy. Hutton, on the other hand, as a Keynesian economist – he in fact calls himself New Keynesian – believes that building social capital is of economic benefit. In the meantime, stakeholders – ranging from those affected by companies, like communities, to those with an impact on companies like NGOs – belong to the corporate facts of life. Their importance varies depending on sectors: companies producing sportswear and textiles like Nike, Gap and Adidas are obviously more liable to reputation risk than financial services operators. Those with strong brands are particularly vulnerable. Interest in the issue developed in the late 1990s, spurred by the publication of books like The Stakeholder Corporation, a so-called Body Shop Blueprint for Maximising Stakeholder Value, as the undertitle indicated. Since then, a spate of standards, guidelines and benchmarks have emerged, including the AccountAbility AA 1000SES Stakeholder Engagement Standard and the Copenhagen Charter, a management guide to stakeholder reporting.

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Low Standards of Accountability    Despite this, the general level of stakeholder accountability is rather low. The Accountability Rating 2004 of the world’s 100 largest companies, carried out by CSR Network in association with AccountAbility, revealed that most companies performed poorly in terms of stakeholder engagement. They lacked systematic processes for integrating employees, communities and other groups into decision-making. Only 16 of the 100 companies identified their stakeholders and described processes for engaging with them. Only five companies included external stakeholders on high-level Boards: companies like Unilever, which recruited outsiders into their Environment Group, a strategy and policymaking body, were the exception to the general rule. Similarly, a ranking of supply chain labour standards in 35 British companies carried out by AccountAbility brought to light that stakeholder engagement is the weakest link in the supply chain. Of the companies analysed, Marks & Spencer distinguished itself by both belonging to the Ethical Trading Initiative and initiating its own dialogue with stakeholder representatives from countries that supplied them with products. AccountAbility’s Chief Executive Simon Zadek has deplored the fact that most companies have ‘a very poor record in covering even the basics’. Why is this the case? A variety of explanations come to mind: the comparative novelty of the stakeholder phenomenon, the difficulty of getting a grip on an amorphous mass of people with varying priorities, and the lack of a specific stakeholder perspective in conventional business management. Joseph E. Coombs and K. Matthew Gilley provided an intriguing explanation for poor performance in their article ‘Stakeholder management as a predictor of CEO compensation’, published in Strategic Management Journal. After examining how corporate leaders were paid in America’s largest companies and the way in which this was correlated to financial performance and stakeholder management, they came to the startling conclusion that CEOs were seemingly given monetary incentives to decrease their focus on stakeholder issues like community, diversity and the environment. Conversely, those who remained focused on pure financials received higher rates of remuneration. The often described principal/agent relationship, whereby managers are the agents of the company’s principals, generally its shareholders, is still the prevalent business model.

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The reasons to engage with stakeholders are by no means altruistic (see Table 7.1). They can be summarised as follows: 1. Minimising risks: A dialogue can be an early warning approach to potentially explosive issues, something that companies like Gap and Nike have quickly grasped after being lambasted by campaigners. 2. Enhancing reputation: Companies can create communities of interest and demonstrate a basic openness to important issues. BP is an excellent example of a company whose image has profited from its readiness to dialogue; it is also a company that has institutionalised stakeholder engagement on a local basis by, for instance, setting up a community steering committee in Colombia, a country with strong security and money-laundering problems. 3. Sensitising management: There is an important internal component to dialogue; corporate myopia is an endemic phenomenon. Companies like Shell and Monsanto have discovered to their cost that it can be highly counterproductive to ignore seemingly irrelevant protests. Relatively few companies use the Internet to communicate with stakeholders. A survey of the websites of Britain’s largest companies carried out by CTN and Futerra discovered that only a tiny minority featuring the ‘usual suspects’ – corporate frontrunners like Shell, BP and BT – offered interactive functionalities like a forum or bulletin board. Most companies still acted as if communicating with the outside world was a one-way street. The same is the case in other parts of the world. In the USA, a comparable lack of two-way communication is visible. However, there are a number of exceptions to the general rule. Dow Chemical, for instance, has an ethics website, where the general public can question the company on any issue. This is one method of suscitating feedback and queries. Another form of openness is practised by Procter & Gamble. The company, which serves five billion consumers with household products, offers a menu on its website with its perspectives on government policies and scientific research. Covered topics include product safety and the environment. Internet visitors can give the company their feedback and are also provided with links to third parties, including pressure groups and NGOs that are critical of P&G. This is a mature approach to communication; instead of ignoring criticism, the company integrates it, thus proving its openness to the outside world.

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Shareholder Value

Stakeholder Value

• Maximising financial returns (dividends) • One interest group (shareholders)

• Balanced performance (profits, eco-efficiency, social fairness) • Several groups with partially divergent interests • Long-term perspective (lasting value for all) • Largely qualitative (lack of uniform metrics on costs and impacts)

• Often short-term oriented (quarterly results) • Quantitative success metrics (cash flow, EVA, market cap, etc.)

   and Cultural Proclivities Two-way communication is a must for companies out to minimise the risk of being surprised by waves of protest or by the sudden emergence of burning issues. Another vital point is gauging what can be called the cultural factor. Monsanto made the dramatic mistake of assuming that stakeholders in Europe would not react differently to those in the USA when confronted with the phenomenon of genetically modified organisms. European consumers and NGOs, however, reacted allergically. The Greenpeace campaign in the UK and elsewhere was a huge success; the company later publicly admitted that it made a mistake in addressing the wrong stakeholders in Europe and relying on assumptions made in the USA about the safety and benefits of the ‘Frankenstein foods’, as the genetic seeds were soon called in Europe. ‘When we tried to explain the benefits, the science and the safety, we did not understand that our tone – our very approach – was seen as arrogant’, as Monsanto’s President Hendrik Verfaillie later acknowledged. The activists were soon joined by an international network of research scientists. The general public supported the protestors; the Japanese government gave protests a higher degree of legitimacy by refusing to allow the import of genetic seeds from Canada. The sequel was that an anti-GM campaign started in the USA, spurred by the news of successful protests in Europe; the Interfaith Center on Corporate Responsibility coordinated the campaign, which consisted mostly of resolutions at annual meetings and calls for a moratorium on genetically manipulated products. The Monsanto saga is an excellent case study of the dangers of cultural obliviousness; protests that started abroad and were initially ignored eventually reached the company’s home market.

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Public expectations and reactions can strongly vary. Commenting on the results of a GlobeScan study on corporate responsibility, Alison Maitland pointed out in the Financial Times: To Chinese consumers, the hallmark of a socially responsible company is safe, high-quality products. For Germany, it is secure employment. In South Africa, what matters most is a company’s contribution to social needs such as health-care and education.

However, it would be simplistic to divide the world into continents. Europe is a continent divided by more issues than unite it. This also applies to the perceptions and expectations of stakeholders in different countries. A survey carried out by ECC-Fishburn showed major differences between perceptions in the UK and Germany. Only 43% of German respondents, but 71% of the British, expected accountability towards stakeholders and only 27% of the Germans as against 62% of the British expected a sustainability report to include information for shareholders as well. In Germany and other Continental countries like France, employees constitute major stakeholders, while society at large is relatively unimportant. Employees are well-organised in unions and represented on supervisory boards because of mandatory co-determination laws. Stakeholder expectations can best be summarised as: charity begins at home. When the Deutsche Bank announced in early 2005 that it had made a record profit of E25 billion but had also decided to reduce staff numbers by 6400, there was a huge outcry across Germany and the company’s image suffered dramatically. The fact that the bank spends more on CSR projects than any other company in the country was completely ignored; it was simply not of any interest. Each business environment breeds its own priorities. AngloPlatinum, which, like its majority shareholder Anglo American, operates in South Africa, has listed stakeholder issues that certainly differ from those faced by companies in North America and Europe: • • • • • •

Training and development needs High levels of unemployment Economic stagnation HIV/AIDS, malaria and tuberculosis Starvation and malnutrition Access to basic services such as electricity, water and sewerage.

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Anglo-Platinum provides an excellent breakdown of various stakeholder groups. Unsurprisingly, a number of trade unions figure in this list, as does a number of communities and government bodies. Basically, stakeholder strategies need a regional core; a head office sitting far away is rarely capable of fathoming local sensitivities and fears. Focusing on Audiences: Communities, Employees    Dialogues and reporting obviously can’t be all things to all men. Stakeholder mapping is important (see Figure 7.1): companies need to identify which stakeholders can hurt or help them most and then concentrate their energies on entering into a dialogue with them. A good example of overreach is Body Shop. Its approach to reporting featured a campaigning style encompassing trade, human rights, the planet, ‘self esteem’ and animal testing. After doing two huge ‘Values Reports’, this cult enterprise produced a series of ‘Stakeholder Accounts’, serving suppliers, investors, customers, franchisees, employees and the environment. This was an ambitious and honourable experiment in establishing ownership and clarifying overlaps between different stakeholder groups. However, as the company later admitted, it also led to high resource consumption and did not improve Body Shop’s visibility to any great extent. Reporting became a repetitive exercise. It would seem more important for a company in Body Shop’s line of business to concentrate on issues of real relevance like animal testing and environmental impact. In fact, the company has committed itself to a more targeted form of reporting, more closely oriented to specific stakeholder interests. The stakeholder policies of the German chemical company BASF are characteristic of a grass-roots approach. The company has established Community Advisory Panels mostly in North and South America, but also in Europe and Asia. These have a dual purpose: the more than 60 CAPs contribute towards community development, while BASF also aims at promoting its reputation in the communities in which it is based. This is a form of permanent and institutionalised dialogue. BASF regularly reports on its Panels, though it does not disclose the precise nature of the interaction with the communities. Basically, the company engages with local social leaders from community groups, schools, environmental associations, etc. The CAPs, though initiated by BASF, operate independently of corporate control. Meetings take place several

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times a year and focus on topics of local importance such as traffic problems or emissions. BASF specialises in open house sessions, where local residents can visit the factories and get acquainted with the benefits and risks of chemical production. It reports both on local websites across the world and in its responsibility reports. The world’s leading chemical corporation has a highly decentralised approach. By contrast, the mining company BHP Billiton has instituted a Forum on Corporate Responsibility (FCR) which meets twice a year. It brings top management together with both NGO leaders, like the Chairman of Pro Natura, and community opinion leaders. BHP emphasises that the company is not bound to take FCR’s advice and the forum does not necessarily accept the company’s decisions. However, the forum provides a platform to enable corporate executives to exchange views and deal with differing viewpoints on a regular, organised basis. General standards of identifying audiences have improved, as ACCA and The Environment Council pointed out in their study Improving Stakeholder Engagement Reporting. Two-thirds of the 84 British companies analysed identified stakeholders and a fair cross-section prioritised the audiences they addressed. However, only 7% reported on the process of identification. One company that has provided a high degree of transparency is Philips. In its 2003 Sustainability Report, the Dutch company discussed the results of a reputation study carried out in eight countries ranging from the UK, France and Germany to the USA, Brazil, India and China. A broad cross-section of stakeholder representatives was interviewed: • • • • • • • •

Employees (1009 persons) Employers’ federations and labour unions (114) Pressure groups and NGOs (113) Politicians and civil servants (188) Business schools and technical universities (197) Suppliers (109) Financial community (140) and business community (152) The general public (1613).

Thus, in quantitative terms, staff and community dominated. In qualitative terms, Philips developed key drivers for reputation such as innovation, employer values and sustainability. It also benchmarked its own reputation against those of key competitors. These companies are however not named in the report. Despite this, the results are intriguing. For instance, the company’s employees had a far better

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opinion of its reputation than the general public. Beyond this, suppliers gave the company an excellent reputation score, while NGOs and the financial and business community were less enthusiastic. This indicated that Philips had an image problem. The company’s task is clear: it needs to significantly improve its rapport with investors and analysts on the one hand and with NGOs and the general public on the other. This is the classic case of a company highly estimated by insiders – employees and suppliers – and disregarded by the outside world. Philips avowed that it had got the message and was strengthening its efforts to become ‘a truly market-driven and responsible company’. Reputation is often linked to successful dialogue mechanisms. Philips, for instance, has excellent systems in place to engage its staff: beyond the Euroforum, a consultation platform that involves European employees in a regular exchange of views with management, there are focus groups in eight countries, addressing specific issues such as improving career opportunities and making these issues more transparent. This was supplemented by structured interviews with high potentials and a global sample survey of 3500 employees, leading to an improved survey infrastructure. Philips’ reporting lacked substance when discussing the results of these surveys, but the company was obviously on the right track with its employee dialogue plans. This company obviously needs to broaden its perspectives and address other stakeholders equally efficiently.    the Financial Community   On the face of it, investors, analysts and fund managers are prime targets for engagement. They are the true owners and judges of all listed companies and have a right to be informed and consulted on nonfinancial issues. There has been a seismic shift in corporate value – at the beginning of the 1980s, intangible assets accounted for only 17%, according to research carried out by Arthur D. Little, while at the end of the 1990s, the percentage had risen to 71. The financial community also constitutes the prime audience for CSR reporting: 67% of those surveyed by Pleon in the context of the Global Stakeholder Report 2005 put shareholders and investors in first place, followed by employees (52%) and consumers (50%). Despite this, the level of interaction between companies and the financial community on nonfinancial issues has remained limited.

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Apart from the SRI sector and ethical indices, presentations and consultation are rare. BT, which consulted SRI analysts while developing the Stakeholder Engagement section in its Social and Environmental Report, is an exception to the general rule. One company that engages in a constant process of interaction is the Indian software service provider Infosys. Its reporting quantifies nonfinancial assets like brands and HR, thus making them more tangible for the financial community. Asked about Infosys’s priorities, one senior manager commented: We believe that the investors are the real owners of the company and the managers the trustees of their wealth. Keeping this in mind, we always strive to reduce the asymmetry of information between investors and the management    The performance and the business of the company are best understood if certain non-financial information is also shared with the investors.

Business Partners

Investors

Employees

NGOs

Individuals Groups Institutions

Society

Customers

Local Communities

Figure 7.1 A broad range of stakeholders

   and NGOs Considering the power and potential of NGOs like Greenpeace, Human Rights Watch and Transparency International, it seems remarkable that many companies still tend to ignore their importance. A survey carried out by the Economist Intelligence Unit in 2005 asked the question: What are the most important stakeholders to your company? Of the senior executives who answered, 65% opted for customers, 61% for employees, 46% for investors, and only 1% mentioned NGOs. Myopia or ignorance? Probably a combination of both.

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This of course is not just a corporate phenomenon. Jonathan Wootliff, who led Greenpeace before changing sides and joining the communications consultancy Edelmann, has cogently pointed out: ‘Many NGOs believed that working with companies was comparable with “Sleeping with the Devil” and companies believed the same of working with NGOs.’ NGOs are important. Various surveys have shown that the general public trusts them to a far greater degree than the corporate world. They often play the role of opinion leaders for the general public, which tends to endorse NGO attitudes towards business. Engagement with hostile pressure groups is often the best policy. The British retailer Marks & Spencer was, for instance, attacked by Friends of the Earth (FOE) because of pesticide residues in the fruits and vegetables it sold. These were higher than in the products of all other retailers. Management came to the conclusion that these allegations indeed reflected the concerns of M&S’s customers, and FOE had simply voiced them in a militant fashion. This prompted the company to radically change its policies with regard to chemicals used in the production process and it then became the best performer in the FOE ranking. M&S managers redefined their entire attitudes towards critical NGOs, going as far as calling them ‘brand editors’ in the sense that they converted huge chunks of information on complex issues into clear messages understood by both the media and consumers. The company thus made a virtue out of necessity, or rather out of the predicament it was in because of the attacks. A multiclient study carried out by MORI into the views of various stakeholder groups revealed that 78% of the NGOs endorsed the statement ‘Industry and commerce do not pay enough attention to their social responsibilities’, with 70% of the general public subscribing to the same view. The fact that two-thirds of the NGOs rejected the proposition that most companies are serious about fulfilling their commitments to society and the environment, indicates a general climate of distrust. At the same time, 71% of the NGOs queried agreed with the proposition that nonfinancial reports were essential instruments for the assessment of corporate responsibility performance. This makes reporting an important tool of communication, though companies obviously need to develop personal relationships with nongovernmental organisations parallel to reporting. Indeed, as globalisation develops and the powers of national governments progressively decrease, NGOs

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are vital interlocutors for companies. Peter Sutherland, Chairman of Goldman Sachs and BP, once commented: The only organisations now capable of global thought and action – the ones who will conduct the most important dialogues of the 21st century – are the multinational corporations and the NGOs.

Unsurprisingly, companies attacked by NGOs have been in the forefront of partnerships with these organisations: • Shell has cooperated in various ways with Greenpeace, its famous antagonist in the Brent Spar incident, including sharing a platform with the NGO at the Johannesburg earth summit in 2002. • Nike, an equally strong campaign target because of the labour policies of its suppliers, has funded micro-enterprise projects developed by the China Foundation for Poverty Alleviation. • Chiquita, in the past a prime example of an irresponsible corporation that put profits before people, has cooperated with the Rainforest Alliance and partially lost its ‘banana republic’ image. Reporting on NGO engagement is still in its infancy. Most companies either do not disclose their contacts or rely on stray remarks. GlaxoSmithKline is one company that has integrated stakeholder engagement into its management framework for responsibility. It reports on its stakeholder dialogue processes and provides some detail on partnerships with NGOs like Forum for the Future and the Earthwatch Institute. However, little is mentioned about such organisations as Oxfam, which have a direct impact on the company’s core business. GSK was one of several pharmaceutical companies attacked by NGOs in the early 21st century because of its profit-making policies in developing countries. The controversy surrounding the pricing of AIDS drugs in South Africa and the significant discounts that GSK and other pharmaceutical giants ultimately agreed to are more important issues than environmental protection. In May 2001, Oxfam campaigners dressed in lab coats disrupted the company’s annual general meeting, calling on GSK to donate to a UN global health fund. The company’s Chairman Jean-Pierre Garnier stressed that while the company had to make a profit for shareholders, its primary objective was public health. This is a key issue for all pharmaceutical companies and their interaction with NGOs and other pressure groups is a vital barometer of their reputation.

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In stakeholder dialogue as in other nonfinancial issues, reporting can only follow strategy, not replace it. Companies can profit from NGO partnerships only if they pursue them in sustained fashion. An excellent example of this long-term approach is Starbucks, whose ‘people before profits’ attitude has distinguished it from companies with stronger shareholder orientation. The world’s largest coffee shop operator has cooperated with a broad cross-section of international organisations: • It has promoted sustainable coffee growth by working together with Conservation International since 1998 to preserve sensitive habitat areas and encourage shade-grown coffee, a traditional method of growing coffee beans that promotes biodiversity. • Since 1992, Starbucks has supported CARE International, a charitable organisation dedicated to alleviating global poverty. The collaboration focuses on three million people in coffee-origin countries. Here again, the coffee retailer’s approach is in accord with its core business. • Beyond this, Starbucks has supported other organisations over a period of several years, including the Coffee Kids and the Mercy Corps, which aims at improving the quality of life of rural communities near Darjeeling in India, a region that supplies the company with premium tea. Despite this excellent record of stakeholder engagement and an equally impressive reputation as a fair employer, Starbucks was targeted by the human rights NGO Global Exchange for paying low prices to coffee farmers and not using ‘Fair Trade’ coffee beans marketed by TransFair. The NGO disrupted the company’s annual general meeting and also threatened a national boycott. In the California Management Review article ‘Collaborating with activists: How Starbucks works with NGOs’, Paul A. Argenti described how the company was torn between fears of damaging its brands and justified anxiety of the impact of Global Exchange’s campaign on its reputation. Eventually, it did roast and retail Fair Trade coffee to a limited extent and achieved a quid pro quo with its critics. In reporting terms, Starbucks’ coverage of its critics is decidedly weak. Its annual responsibility reports do not directly discuss the issues at stake; NGOs and advocacy groups are treated as a tiny fraction of the company’s stakeholders. The website is equally ‘goody-goody’, suggesting a world of sweet harmony. This contrasts with the excellent

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reporting on community projects and the company’s relations with its ‘partners’ (employees). Focusing on Specific Issues    Stakeholder consultation (see Figure 7.2) makes sense when it becomes a regular structured process tackling specific issues and focusing on major impacts caused by companies. Novo Nordisk has developed a scale to track the phases of maturity of different issues. Issues tend to be latent at the beginning, with consciousness limited to NGOs and experts. They then move into the emerging phase, with media and political awareness growing steadily, and then reach the consolidation phase, with business practices and sectorial initiatives emerging to cope with public demands. In the final stage, issues become institutionalised, with legislation or voluntary codes of conduct being established. Companies in regulated sectors – food, pharmaceuticals, power supply, etc. – have an even stronger need to manage stakeholder relations. Achieving a quid pro quo with government regulators and NGOs, that often put pressure on governments to take action, is not just nice to have; it is vital for business success. Despite this, most companies have a haphazard approach to liaising with important stakeholders, according to the article ‘The role of regulation in strategy’ published in the McKinsey Quarterly: Despite the increasing importance of regulation, many businesses, even in heavily regulated industries, treat regulatory strategy as more art than science. Many lobby and conduct public relations on an ad hoc basis without the benefit of hard facts or a clear understanding of the tradeoffs; others adopt a fatalistic or confrontational approach to industry regulators   Stakeholder management – a vital part of an effective regulatory strategy – depends on creativity, experience, and judgment.

To cope with the dynamism with which issues can develop, companies need to have both coherent and flexible strategies. This has an impact on whether their images are those of leaders or laggards. Vodafone and British Land both have a systematic dialogue approach focusing on specific issues: Vodafone This leading telecom operator employs a wide range of dialogue instruments, from one-on-one meetings to large-scale opinion research. Since

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many issues are local, the Vodafone subsidiaries in different countries have set their own priorities, with support in the form of guidelines and an engagement toolkit provided by headquarters in Britain. Thus, Vodafone in Greece involved around 150 academics, journalists, businessmen, customers and NGO spokesmen in its engagement programme, while in Italy, the company surveyed a broad cross-section of opinion leaders in six cities. The company has a realistic attitude to the problems involved; in its Responsibility Report for 2004/2005, it stated: We want to understand the views of a wide range of stakeholders and to have an opportunity to explain our perspectives. We also aim to build mutual trust in the relationships we have with stakeholders. We know that we will not satisfy everyone’s demands and believe that being open, honest and respectful of different views is the right approach.

Investor discussions and customer surveys have served to identify Vodafone’s vital issues. Radio frequency fields and health turn out to be the most important stakeholder concerns. After getting comments from customers, the company admitted that it needed to improve its reporting on this issue, adding: ‘We have set ourselves the goal of leading the industry in terms of transparency and communication on RF fields and health. Our website now provides links to leading independent review bodies.’ This is a typically pragmatic approach. Other important themes include the responsible use of mobiles and the question of handset recycling. The company carried out surveys of customers in European countries and in Egypt, Japan and New Zealand. In its reporting, Vodafone gave anonymous information on the level of approval for specific issues without identifying the regions concerned. Similarly, experts and NGOs were not identified by name. Despite this, the company’s reporting approach seems refreshingly hands-on, concentrating on a clear cut ‘We said – We have – We will’ structure, while covering plans of action, actual action and future plans. According to a source at the company, responsible marketing has become part of the day-to-day routine. On the issue of content standards for children, Vodafone consulted child protection agencies like the Children’s Charities Coalition for Internet Safety. The company involves itself in a broad range of engagement activities: partnering with the Virtual Global Task Force, discussing the social impact of mobiles in Africa with academics and development organisations,

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cooperating with suppliers on energy saving projects. In 2004, it commissioned an opinion leader survey on perceptions of Vodafone’s CR performance and reporting; while 72% of those interviewed rated the company positively, reporting on supply chain and employment issues was seen as being inadequate. Vodafone is also one of the few companies that targets major investors with nonfinancial issues, not merely the SRI community. In the year 2004, for instance, it held meetings with over 20 institutional investors. Thus, its dialogue processes are broad-based. British Land This property development company is equally proactive in eliciting responses from a broad range of stakeholders. Reacting to the wish for broader-based stakeholder consultation during the planning and pre-planning phases, British Land decided to expand dialogue mechanisms. Its reporting focuses on an ‘Engagement Matrix’, which identifies focus areas like tenant engagement, use of resources, and biodiversity and then identifies the stakeholder groups with a primary or secondary interest in the issue. This is matched by British Land’s response – for instance, the establishing of community and environment working groups in the Broadgate estate area. Similarly, more than 200 stakeholders in the Lower Don Valley region near Sheffield, where British Land has been carrying out a project designed to regenerate the region, were consulted, identifying concerns like building plans for a casino. BL acknowledged its commitment to ensure responsible gaming. The company’s Corporate Responsibility Reports provide a detailed overview both of relevant issues and of those affected by British Land’s projects. Like Vodafone, reporting is structured in a grid: issues identified, feedback registered, strategies adapted.    and Tackling General Concerns Stakeholder dialogue can focus on specific issues. It can also extend to every kind of impact that a country has on the outside world. Pfizer, a world leader in pharmaceuticals, for instance called its Annual Review 2004 ‘An Open Dialogue’. The entire report consisted of 10 questions posed by stakeholders and the company’s concrete response.

Reporting Nonfinancials

Broad

254

Online Forums Community Advisory Panels

Focus

Expert Consultations Surveys

Narrow

Dialogue Meetings

Partnerships Small

Focus Groups

Number of Participants

Large

Figure 7.2 Stakeholder engagement: Choosing instruments

The American company didn’t pull punches when choosing the questions to answer. Here are five of them: 1. A California fisherman voiced the resentments of many customers when posing the question: ‘Why does a little pill cost me so much?’ 2. A drug researcher from Florida was more specific, focusing her attention on the company’s products: ‘Over the past year, Celebrex and Bextra have been in the news a lot. How do I make sense of all that I see and hear?’ 3. A shareholder in New Jersey was equally critical: ‘Pfizer’s share price dropped 24% in 2004. Why? What are you doing about the share price?’ 4. An ophthalmologist from Virginia working at the American Eye Center expressed an institutional view, pointing out: ‘Millions of people suffer each year because they don’t have access to decent healthcare. What are you doing about that?’ 5. A French employee asked the cogent question: ‘Why do people resent our industry? How do we regain trust?’ Pfizer responded with arguments and evidence. Stakeholder questions were preceded by a CEO introduction and a wrap-up of the company’s policies was provided at the end. The company’s reporting was in synch with its mission, published on the Pfizer website, which is to become ‘the world’s most valued company to patients, customers,

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colleagues, investors, business partners and the communities where we work and live’. By reproducing the concerns of identified stakeholders and responding to them in detail, Pfizer showed its readiness to be concrete about dialoguing. This also enlarged the purview of the company’s reporting; an annual review is generally a document aimed at private shareholders. The Pfizer Review, by contrast, addresses a wide range of audiences. In 2003, the company had changed its reporting style: the Annual Review became more oriented towards nonfinancials while including basic financial indicators; the Financial Report concentrated on the accounting fundamentals. In his 2003 letter to shareholders, CEO Hank McKinnell asserted: ‘We define success as something broader than performance in the marketplace.’ Pfizer’s three key standards are financial performance, access to healthcare and CSR. Thus, the company adopted a wider focus, and reporting from 2004 onwards has gained in perspective. In his letter to stakeholders at the beginning of Pfizer’s 2005 Corporate Citizenship Report, CEO McKinnell reasserted the company’s specific responsibility as the world’s largest healthcare provider. This report also included a roll call of the company’s stakeholders, which turned out to be more a laundry list than a focused diagram. However, Pfizer commissioned external agencies to conduct interviews with NGOs and healthcare leaders across the world about their views both on the pharmaceutical industry and on Pfizer. By publishing the quintessence of the results, including the fact that Pfizer’s reputation in NGO circles was low, the company showed that it was serious about conducting a dialogue. Stakeholder dialogue can serve as a periscope; it enables the company to see over the heads of its own staff and advisers and thus identify challenges and risks. A company like McDonald’s, the world’s largest food service corporation, seen by many as the epitome of America both in positive and in negative terms, is particularly dependent on input from outside. To tackle this need for information and viewpoints on a regional basis, McDonald’s Europe conducted a two-year process of stakeholder engagement. A pan-European group of representatives from think-tanks, NGOs, journalism, politics and trade unions participated in several meetings, identifying topics for inclusion in the European social report. This was supplemented by employee consultation. Input was also gleaned from the company’s ‘Open Doors’ initiative, which

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involves outsiders visiting McDonald’s restaurants and suppliers to ask whatever questions they have. Major issues and dilemmas identified by these dialogue mechanisms were food sourcing, food safety, and nutritional information. The recommendations of stakeholders also extended to improving methods of communication and have helped the company to develop a ‘proactive and anticipatory stance’, as it pointed out. The European Corporate Responsibility Report 2005 reflected this broad focus. The report concentrated on food, in particular the challenge of obesity. This is highly pertinent since McDonald’s has been widely criticised as purveyors of fattening foods. Other issues addressed are food quality and supply chain practices. On the meta level, the entire report signals openness. It figures critical, obviously uncensored comments such as ‘McDonald’s doesn’t value its employees, it is more concerned with its shareholders’, drawn from the European stakeholder dialogue. By contrast, the Global CR Report published in 2004 tends to gloss over problems, with facile assertions like ‘At McDonald’s, making customers happy is what our business is all about. And we know it takes a lot to make that happen.’ In an Ethical Corporation report review, Paul Hawken dismissed the report as ‘a mélange of homilies, generalities and soft assurances that do not provide the hard metrics of the company, its activities or its impact on society and the environment’. Stakeholder engagement is described in general terms, but reporting is far removed from the seriousness and depth of the McDonalds’ European Report. Here again, the cultural gap between the USA and Europe becomes apparent. One company that initiated the general process of stakeholder dialogue at an early phase is Westpac. The Australian bank was reacting in the 1990s to a public backlash against issues like rural bank closures and fees. As a senior manager at Westpac observes, the first step was simply to start listening and to admit that those protesting had legitimate concerns. The next step involved moving from a reactive to a proactive attitude. This meant: • Securing the involvement of the Board • Identifying issues, assessing their relevance and locating important stakeholders

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• Establishing a Community Consultative Council (CCC) to assure an ongoing dialogue and to determine vital priorities • Publishing an annual Stakeholder Impact Report.

Starbucks

Gap Vodafone Philips

United Utilities

Anglo American

Westpac

Narrow

Target Group Oriented

Broad

‘The Council is not about talking – it leads to action’, according to the company’s 2005 Stakeholder Impact Report. An indicator of its importance is the fact that CCC is chaired by Westpac’s CEO and includes top level representatives from a range of institutions, foundations and associations. The Terms of Reference of the Community Council encompass both feedback from council members and joint collaborative action. The Council also determines what Wespac communicates in its Stakeholder Impact Report. Consumer debt, financial literacy and recruiting of mature-aged staff constitute major priorities that the Council has discerned. Stakeholder involvement is verified in the context of the assurance process. All in all, Westpac is a dialogue benchmark and has ranked No. 1 several times on the Dow Jones Sustainability Index and other prominent indices (see Figure 7.3).

Weak

Issue Oriented

Strong

Figure 7.3 Stakeholder engagement profiles

DIALOGUE AS AN ONGOING PROCESS Stakeholder dialogue can’t be suddenly installed. It has to develop organically over a period of years (see Figure 7.4), gaining successively

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in sophistication and amplitude. Like Westpac, a growing number of companies have progressively improved their processes of engagement. United Utilities The company has systematically professionalised its dialogue procedures. This British water utility provider started in 2001 by adopting the Winning with Integrity structure developed by ‘Business in the Community’. This structure, encompassing four quadrants – marketplace, environment, workplace and community – is intended to facilitate both the identification of relevant issues and reporting on company action. By virtue of various consultation procedures including workshops, United Utilities (UU) constructed a Stakeholder Radar, thus prioritising issues. Prime issues were waste minimisation/recycling and skills/job training, followed by themes such as climate change/renewable energy and equal opportunities. UU wisely concentrated on key issues, changing the name of its former Social and Environmental Impacts Report to Corporate Responsibility Report in 2003. This was symbolic of a broader perspective on both dialogue and action. The following year, the Radar showed that strong concerns were being voiced in the marketplace quadrant. Important issues were drinking water quality, standards of service and charging policy. Beyond getting feedback from around 3000 individuals who read the former year’s report, UU engaged with stakeholders in the UK through public meetings, suppliers workshops, interviews with financial analysts, employee forums and customer liaison groups. Following the example of an increasing number of companies, UU restricted its printed report to the quintessence of stakeholder comment and action plans, while making detailed coverage available on its website. In 2005, the company moved a step further, publishing a Stakeholder Report that modified the original Winning with Integrity structure. The report had a basic sustainability framework, with three sections: economic performance, environment and society. Stakeholder involvement became a more personalised, intensified process with UU holding four workshops involving 50 individual stakeholders. Supplemented by other mechanisms such as customer research, investor surveys, supplier workshops and open days for communities, this move to personal

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contact signified an emphasis on depth of discussion rather than breadth of coverage. Again, priority issues for stakeholders were identified and addressed. The Stakeholder Report included an honest overview of the company’s performance on four targets: 1. Reduce written complaints to a branch office – not achieved, the number of complaints actually increased. 2. Achieve 71% domestic customer satisfaction and 45% business customer satisfaction in a particular region – partially achieved. 3. Carry out eight environmental supply chain workshops – not achieved, only six were held. 4. Invest in improvements in 81 wastewater treatment works and 19 water treatment works – partially achieved. Beyond showing the company’s readiness to admit to not being as far as it planned to be, targets provided valuable insights into the challenges faced by UU. This water utility belongs to the frontrunners in the professionalisation of dialogue. Because it sets priorities and targets, it transforms dialogue from being an end in itself to providing input for strategic planning. Kesko The same emphasis on dialogue as a means to achieving greater efficiency applies to Kesko, Finland’s largest trading group. This company has developed a management grid that covers the following: • • • •

Stakeholder group Kesko’s activities Stakeholders’ expectations Indicators.

Thus, for the stakeholder group consumers, the company offered retail concepts, marketing campaigns and loyalty programmes. Kesko’s consumers expected both easy shopping and the opportunity to make ethical (fair trade) consumption choices. Indicators included customer satisfaction surveys and image surveys. In its 2004 CR Report, the company’s target was to use dialogue input to influence the company’s annual and long-term planning by 2006 and to integrate stakeholder cooperation indicators into reporting.

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Gap While Kesko practises a broad-based approach to stakeholder engagement, the US garment manufacturer Gap focuses on its suppliers. Originally, this was a response to virulent public criticism of working conditions in supplier factories. Gap was one of 18 manufacturers allegedly responsible for human rights abuses in Saipan, a territory under US jurisdiction, according to a lawsuit filed in 1999. The company responded in several ways: 1. It created a $29 million fund dedicated to worker compensation and independent factory monitoring. 2. Gap’s management also responded by intensifying stakeholder relationships with NGOs, activist groups, community leaders, trade unions and governments. The company also entered into a process of interaction with other apparel and garment producers. As one of the company’s CSR managers explained, a Global Partnership team based in San Francisco and around the world in countries with supplier factories like India, now coordinates stakeholder engagement. The team also has the dedicated task of developing bilateral partnerships with outside organisations. As far back as 1996, Gap had published a code of vendor conduct prohibiting child labour and other forms of exploitation. Shareholder activists urged the company to provide details of compliance on the code; Gap responded by founding a Public Reporting Working Group. This Group consults with the company to ensure a high degree of transparency. The company’s Social Responsibility Reports, published from 2004 onwards, include a highly detailed breakdown of code violations, including the number of revocations of approval for factories that do not comply with Gap’s labour standards. They also provide extensive data on the factory evaluation process and a geographic analysis of monitoring results. The Working Group has attested its belief that Gap is ‘sincerely struggling with these complex issues’. Since the Group comprises both socially responsible investors like Domini Social Investments and activist organisations, its involvement certainly increases Gap’s credibility as an ethical contractor with dealings in Third World countries. Like Nike, which also publishes detailed information on compliance violations, Gap demonstrates openness by reproducing a variety of critical comments from a broad group of stakeholders in its reports. These

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relate to issues such as external verification for the code violation control programme and the evaluation of production timelines. This kind of openness was honoured when Gap received the 2004 Social Reporting Award from Business Ethics magazine. A Gap spokesman stresses the great internal importance of reporting as a form of increasing employee morale and creating pressure for action on ethical issues. In the meantime, the company has progressed to the point where it is exploring the connection between improved labour standards and higher productivity. This involves developing an integrated supplier scorecard with ethical working conditions as one component of the scorecard. Thus, Gap is in the process of developing the business case for ethical garment production.

Communicating

• Document meetings • Report on action taken • Establish informal feedback channels

• Establish dialogue mechanisms • Involve top management and employees • Make commitments

Mapping

• Identify potential contacts • Prioritise stakeholder groups and concerns

• Contact group representatives • Achieve consensus on mutual concerns

Responding

Contacting

Figure 7.4 Structuring the engagement process

DIALOGUE PERSPECTIVES: FROM EVASIVENESS TO CIVIC SENSE Stakeholder dialogues are successful when strategically planned, clearly structured and when followed up by action. The entire process – strategy, structure, action – needs to be reported on coherently. The starting point for all successful dialogues is a basic willingness to enter into a dialogue. As Monsanto’s CEO Robert Shapiro

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recognised in retrospect, the company became a victim of its own technocratic mindset on the issue of genetically modified crops: It was natural for us to see this as a scientific issue. We didn’t listen very well to people who insisted that there were relevant ethical, religious, cultural, social and economic issues as well.

The company was in fact committed to sustainable development and Shapiro himself had high-level contacts in the relevant set, including luminaries like Amory Lovins of the Rocky Mountain Institute and Paul Hawken of the Natural Step movement. However, Monsanto ignored the grass-roots unease about its technical innovations. In their Sloan Management Review article ‘The challenges of innovating for sustainable development’, Jeremy Hall and Harrie Vredenburg contend that the innovation management of most companies ignores potential threats. Most companies concentrate on customers, investors and suppliers. They tend to ignore secondary stakeholder groups like safety advocates and community spokesmen, who often don’t speak the same technical language. One company that recognised the importance of engaging a broad cross-section of interest groups is the Canadian oil producer Suncor. The company’s CEO, Rick George, actively targeted environmentalists and got closely networked with activist groups. This kind of camaraderie, called ‘strategic bridging’ paid enormous dividends when the company got into an Australian oil shale venture. Greenpeace’s opposition to the project was considered far less virulent than it would otherwise have been because Suncor had profiled itself as a company willing to both talk and walk the talk. It started reducing greenhouse gases even before the Kyoto agreement and was also involved in a pioneering emission-trading contract. Beyond that, it invested $100 million in renewable energy. This, combined with its allies in the NGO world, increased its reputation enormously and helped in fact make it become a profitable company. Suncor’s win–win strategy is a paragon of inclusive vision. However, there are more mundane ways to achieve a sustainable dialogue. According to the old adage, structure follows strategy. Anglo American is a prime example of a company with a coherent stakeholder strategy. Its business principles stipulate: We aim to promote strong relationships with and enhance the capacities of the communities of which we are a part. We will increasingly seek

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to assess the contribution our operations make to social and economic development and to report upon it.

This British mining company is a major employer and investor in Africa, where it was originally founded. Thus, it has a specially strong commitment to improving conditions of life and reducing tensions in that continent, though its business operations are global. The business principles provide the rationale for its site level Community Engagement Plans (CEP). These are mandatory for all significant operations, are annually reviewed and have a three-year horizon. The Plans consist of: • A list of local stakeholders and the method of engagement for each group • An analysis of determining issues and impacts • Social investment plans • Complaints procedures • Key performance indicators and success criteria • Annual review mechanisms • Accountabilities and resources. These plans are supported by a management system called the SocioEconomic Assessment Toolbox (SEAT), which consists of social and economic assessment techniques, stakeholder identification and mapping, building a community profile and selecting the appropriate means of engagement. Some 250 Anglo American employees across the world are trained to implement SEAT, while modifying the template to adjust to local conditions. The Toolbox helps units that have not so far carried out a social impact assessment or where the assessment needs to be updated. Typical issues where operations are taking initiatives to improve performance in response to stakeholder inputs are: partnerships with local government, community-based organisations or donor agencies; human capital development and training; water and energy projects, local business development and consultation in connection with the closure of mines. Internal and external reporting is integrated into the Toolbox. The company commits itself to give feedback to the communities it operates in, thus participating in civil society as corporate citizens. Communication is not merely a tool; it is frequently also the root of frictions at the local level. Anglo American discovered for instance at its Chagres smelter factory in Chile that local resentments deriving

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from the environmental and economic impact of mining operations turned out to be the result of inadequate communication and consultation procedures. A SEAT assessment helped the company to pinpoint the major problem – one of poor husbandry, not pollution – and led to concrete measures such as a crop rotation policy on company land. In his analysis of the company’s experience with stakeholder engagement, Edward Bickham of Anglo American observed: So what have we learned? First, there is generally a period in which, if interactions have previously been restricted or narrowly focused, community expectations of a sudden outpouring of corporate largesse have to be managed. Second, we are not always quite as popular as we have believed to be the case and that there is often a trust deficit on environmental and health issues. Third, that a number of what are seen by the community to be major issues have arisen as a result of communication failures rather than because of substantive operational failures. Fourth that many initiatives which can generate genuine improvements in social or economic conditions can be achieved at relatively modest marginal costs but through greater understanding and flexibility.

Communication is indeed paramount. Documenting engagement is only one aspect of the communicative challenge. Gathering feedback is equally important and estimating the impact of an ongoing dialogue is an important reporting task. What makes Anglo American a benchmark is the way it professionalises the entire engagement process. As the company’s Chairman Sir Mark Moody-Stuart once observed, CEP puts the management of community issues into a managerial framework, imposing the kind of rigour towards achieving and measuring results that generally applies to ‘hard core’ activities like sales or financial controlling. It also involves diffusion of best practice throughout the organisation: More than 95% of Anglo America’s operations have a Community Engagement Plan in place.

Box 7.1

Stakeholder Management: Recommendations

Stakeholder management is an area of activity that demands both clarity and continuity. Clarity means deciding very precisely which people and institutions the company needs to be in contact with, what the important issues are and how they can impact on the company. Continuity is vital: stakeholder relationships need to be nurtured on a long-term basis.

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To optimise the process of interaction, assign a specific degree of importance to individual stakeholders and groups. A typical classification puts them into one of three categories: • Indispensable: Important analysts, recognised experts and opinion leaders, heads of important NGOs, director of the works council or similar employee body, mayor or important civic official. • Important: SRI fund managers or analysts, journalists with specialised knowledge of the company, major customers and suppliers. • Included: Normal customers, employees, local associations, members of the public. After that, allocate a contact mechanism to each stakeholder group. Indispensable stakeholders should be contacted both informally (telephone, e-mail) and formally (letters with enclosed reports and other info, invitations to meetings, etc.) on an ongoing basis and instantly in times of crisis. Important stakeholders should be contacted periodically, e.g. on the occasion of the publication of the Annual Report or CSR/Sustainability Report and should also be visited or invited to special meetings. ‘Included’ stakeholders should be informed in standardised fashion – e.g. web newsletter or electronic bulletin board – and should be asked their opinions in surveys. They should also be able to contact an ombudsman or spokesman of the company if they have questions or comments on specific issues. Then, draw up a reputational risk register: • Which stakeholders can endanger the company’s brand or employerof-choice image or its general reputation? • How can the threat be neutralised or minimised through communication, negotiations or legal action? This list needs to be constantly added to or revised, depending on events. Similarly, draw up a list of allies and ways in which support can be solicited, both on an ongoing basis and in times of crisis. Allies should be mostly contacted informally and alerted to potential threats to the company’s performance or reputation. They should also be used as a sounding-board for new ideas and initiatives and as a source of early warnings on crucial issues. Once a year, an official dialogue meeting should be held. An independent moderator ensures an impartial approach to the debate on various issues. Participants should comprise a mixture of ‘risky’ and favourable individuals/group representatives and allies. A member of top management, preferably the CEO, should attend the meeting. The agenda should

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Box 7.1

Continued

consist of vital issues relevant to the company’s business and with an impact on its reputation. At the end of the meeting, a clear commitment should be made to take action on specific issues and the protocol of the meeting, which is distributed to all participants, documents this commitment. A summary or quintessence of the protocol should be published in the annual CSR Report. Beyond this institutionalised dialogue, go for quick informal meetings in times of crisis. Important Tools Contacts

List of stakeholders with prioritisation: indispensable, important, included

Methods of contact

Matching list with contact mechanisms for individual stakeholders/stakeholder groups

Reputational risk register

List of stakeholders that pose a particular risk to reputation, tallied with company action to neutralise the risk List of stakeholders with positive attitude to company and areas in which they can help the company Protocol of the yearly stakeholder dialogue meeting with list of To Dos and time frame for their accomplishment

List of allies

Protocol of yearly dialogue

Another must is prioritising stakeholders. No company can afford to address all of them continually. It is perfectly legitimate to concentrate on specific groups. GlaxoSmithKline, for instance, angles its nonfinancial reporting towards the financial community as the prime target group, followed by NGOs and employees. The priority given to NGOs is particularly wise, considering that GSK has often been attacked by pressure groups. An allied issue is how far to allow stakeholders to dictate issues. A working group posed the right questions in the ACCA study Improving Stakeholder Engagement Reporting: How do you manage stakeholder perception vs reality? The ‘power of one’ can distort or raise expectations for other stakeholders – so how can this be managed? Reporters would need to have some kind of ‘sanity check’ mechanism.

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There are no patent recipes for such problems. However, consciousness of the need to consult a broad cross-section of stakeholders can help companies avoid the pitfalls of getting trapped into exaggerating the importance of issues raised by any one group. In an article entitled ‘The path to corporate responsibility’ published in Harvard Business Review, Simon Zadek contends that companies move through five stages of organisational learning. They tend to react defensively to CSR priorities at the beginning – ‘It’s not our job to fix that’ – while then moving to the compliance stage: ‘We’ll do just as much as we have to’. These two stages are followed by the managerial – ‘It’s the business, stupid’ – and the strategic phases: ‘It gives us a competitive edge.’ Companies like United Utilities and Anglo American seem to be close to the fifth phase, the so-called civic stage: ‘We need to make sure everybody does it.’ Others with exemplary strategies like BP, Dow Chemical, BT and Novo Nordisk serve as trail-blazers for their sectors. They force competitors to follow, because they show reputation gains and minimise risks by operating responsibly. Stakeholder dialogue is important for all stages, but vital in the civic phase, because it ultimately integrates the company into civil society. Civic sense ultimately makes business sense. Box 7.2

Boise International: Fictive Case Study (7)∗

MEMO FROM HG TO BON, 14 May 2008 RE: PROJECT ‘REPORTING VALUE DRIVERS’ Allow me to recapitulate. In my last memo, I wrote that Heidi Ziegler wants to carefully develop an overall strategy for stakeholder dialogue. You responded by agreeing, but pointed out that you favour an issueoriented approach, with a strong emphasis on liaisons with interest groups and the media. You also made it clear that Boise cannot afford to invest substantial amounts of money in providing ‘largesse’. This indeed implies a strong bias towards stakeholder dialogue. I duly consulted Heidi and discussed further steps. The great advantages of a dialogue are: • Minimal costs, compared to donations or other forms of CSR. ∗

See Box 2.1 on p. 33 for full names and functions of Boise management.

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Box 7.2

Continued

• We influence public opinion and enhance our reputation in an indirect way, often more credible than grand public gestures which are often seen as being token or even misleading. • Above all: We make valuable contacts and gain allies who can help us when Boise or one of its divisions is attacked. You might remember the case I mentioned in my last memo of the Czech consumer group that attacked Consumer Finance for extortionary interest rates. Basically, we were lucky that they didn’t get much publicity and the protest fizzled out. We didn’t have any strategy in place to deal with the crisis; local management proved to be rather helpless and no one felt responsible in headquarters (this was before Heidi joined us). So what Heidi and I suggest is that we enter into alliances with specific pressure groups and also consider – in the case of CF – creating a customer advisory board. On a strategic level, we feel our three divisions should study best practice and emulate it with Heidi coordinating efforts to enhance Boise’s reputation. This can be done by arranging Board level participation, organising the occasional media contact in collaboration with our Communications department, etc. Heidi is also in the process of grading our present stock of stakeholders. She showed me a matrix she is using as a tool derived from a book called ‘Stakeholder Power’.1 The authors categorise stakeholders according to their attitude and behaviour: the committed, who are positive and supportive, in other words typical allies; then the accessible, who have a positive attitude but have been unsupportive so far, in other words potential allies. Then you have the high-risk category, comprising individuals and organisations who are both negative in their attitudes and unsupportive; these, of course, are the people who can wreck one’s reputation. The final category can be more or less ignored: it consists of captives, meaning people with negative attitudes who are however supportive (reminds me of some of our employee representatives!). Once the stakeholders are classified, we can develop strategies and action plans to deal with them. One thing we would definitely like to do on an annual basis is the ‘Chairman’s Circle’, a fireside meeting with off-the-record discussion and VIPs from politics, the media, business associations and NGOs as participants. We originally thought that you should be the person involved, but reconsidered the issue. A ‘CEO Circle’ might compromise you, 1

Walker, Stephen F. and Morr (2001). Stakeholder Power. Basic Books.

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while Peter Hewett as a non-executive chairman can always plead that he has an advisory and governance role. The Circle idea is clearly to win allies; beyond that, it’s expected to help us to get expert opinions and thus gain a better feeling for coming trends and public opinion changes. We would appreciate your comments and would then approach Peter. Let me continue by briefly summarising thinking at the divisions: • Consumer Finance: Heidi and I discussed further steps with Henry, who’s very eager to take concrete action because he senses that CF could soon be in for new attacks from other parts of Europe (the Dutch consumer groups are fairly militant and there have also been rumblings in Poland). Re liaisons with interest groups: he cites HSBC’s cooperation with WWF as an excellent example of a win–win deal. The bank went in for a five-year partnership and spent approximately $18 million (Henry knows we can’t possibly compete with that). In return, it has improved its image as a bank that cares for environmental issues. Henry would like to do something similar on a medium-term basis – 5–7 years – with a consumer advisory organisation. That way, we can show we are using our expertise not just to make money; in fact, we help to improve people’s financial decisions. Beyond this, Henry is eager to join the Coalition for Responsible Credit. This is a transatlantic partnership of consumer organisations, community associations, church groups – and a select number of financial institutions. We would be one of the relatively few mainstream participants and could help to host a conference in Brussels. (This would only cost us a modest sum of money and would certainly give us a good profile. We would also be in good company: Citigroup has already done some substantial sponsoring.) • Medical Products: José will follow up on your suggestion of joining the European Biotechnology Dialogues. However, he is of the opinion that we should be concentrating on mainstream issues, in line with our product range. According to him, GlaxoSmithKline has been through a series of well-run projects with NGOs like the Green Alliance and Earthwatch; in our case, however, he suggests that we concentrate on deepening our contacts with medical care interest groups – and also getting the views of major customers. This is easy as far as the Surgical Instruments unit is concerned; he already has personal contacts to the directors of various large hospitals and wants to arrange an unprotocolled exchange of views in autumn this year. With Diagnostic Products, it isn’t so easy, because the unit delivers to a myriad of small chemists. Here, he is considering a more structured dialogue with

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Box 7.2

Continued

assistance from a professional organisation like The Environmental Council (Smiths Group in Britain used their services some years ago). • Energy: Renée was obviously bucked by your praise of ESN. She will present us with a plan of action by June and sees great contacts potential in the network. Beyond that, she is quite impressed by the way in which Npower, the British RWE subsidiary, has collaborated with Greenpeace to develop a new electricity product based on renewable energy. Considering the fact that Greenpeace already knows us and has favourably commented on our activities, this should give us a good entrée in terms of carrying out a project with them. Heidi believes that the chances of publicising a ‘clean energy’ contribution in terms of media coverage, speeches at conferences held by Ethical Corporation, etc., to be quite good (see also the enclosed Stakeholder Compass). Boise Stakeholder Compass Category

Name and Divisional Affiliation

Strategy

Action

Committed

Energy Savings Network (Energy Division)

Increase leverage

Sponsor conference, get website publicity

Coalition for Responsible Credit (Consumer Finance Division)

- dito -

Join the organisation, act as sponsor

Accessible

Greenpeace (Energy Division)

Deepen involvement

Joint project to develop new solar energy generator

High risk

Consumer Advisory Board (Consumer Finance Division)

Neutralise by intensifying contact

Explore possibility of founding an international Board in 2009

Captive

Structured customer dialogue (Medical Products Division)

Involve

Enter into a dialogue with 300 customers in 2008

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MEMO FROM BON TO HG, 10 June 2008 This is a lot more tangible than I expected. I just have a few points: • I’m missing concrete info on the Consumer Advisory Board. Whom do you have in mind, and how can we avoid things getting out of control? I’m a bit afraid that if we let the genie out of the bottle, we won’t get the creature in again. Consumer finance is sticky business, so let’s not be blue-eyed about getting advice from potentially antagonistic parties. A lot of the potential participants belong to Heidi’s high-risk category; let’s see we don’t get burnt by seeking their acquaintance. • Let Heidi put together a small list of present and potential stakeholders, grouping them in the categories she describes. We can then decide on next steps, whereby I expect the divisions to act autonomously. Heidi should regularly report to me on progress and problems. • Re Chairman’s Circle – if Peter agrees, by all means go ahead with your Circle idea. I envy him for not having to constantly be accountable for all sorts of things; he’s the ideal person to bring the outside world into Boise. • Thoroughly approve of the divisional plans and particularly like the idea of our joining the Coalition for Responsible Credit.

Next Steps I want a chapter on stakeholder dialogue as a regular feature in our CSR reports. So by the end of this year, I expect enough progress to have been made for us to be able to report on it.

8 New Wine in New Bottles? Strategy, Structure and Style

For Allen L. White, co-founder and former director of the Global Reporting Initiative, the future is clear. Nonfinancial reporting is here to stay. In his Business Brief, ‘New Wine, New Bottles’, White contends that reporting on issues like quality of management, brands, reputation, governance and environmental risks will move ‘from the extraordinary to the exceptional to the expected’. Indeed, a large body of academic research and a fair amount of empirical evidence indicate that reporting has at least moved from the extraordinary to the exceptional phase. Part II of this book has provided a wide range of best practice for reporting on different forms of value. However, the vast majority of companies across the world have a highly fragmentary understanding of the issues at stake. Often, the term ‘nonfinancials’ turns out to be just a fancy synonym for CSR or sustainability, in other words: old wine in new bottles. Very few companies have a conceptional view of the subject; particularly of the interplay between strategy, brands and responsibility. These companies are the frontrunners of integration, they excel at uniting the so far separate worlds of financial and nonfinancial disclosure. The frontrunners provide investors, customers, employees and NGOs – in most cases, these are the major stakeholder groups addressed – with insights into their planning processes, and also into their corporate culture. As White points out: In the end, leading nonfinancial reports share one overarching attribute – they provide the reader with a penetrating look into the mind of the company – its self-concept, the way it makes decisions, and how such decisions are linked to outcomes disclosed in the report. Leading reporters are astute at using data to portray, in a fair and balanced fashion, past achievements, current shortcomings, and future opportunities and challenges in a credible fashion.

Credibility is the conditio sine qua non for both financial and nonfinancial reporting. Just as annual reports and accounts are expected

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to provide a true and fair view of the company’s operations, nonfinancials only make sense if they provide insights rather than flattering but unbelievable statements or declarations of faith. In an article called ‘The biggest contract’ published in The Economist, McKinsey’s managing director Ian Davis rightly criticised the fact that the contributions made by business to society are insufficiently articulated and acknowledged. The purview of his comments, however, needs to be expanded; companies are not only deficient in covering issues like CSR. They consistently fail to let the world know how they tick. If financial reporting represents the company’s skeleton, nonfinancials are the flesh that make it recognisable and attractive. Reporting (Figure 8.1) makes sense when it follows a long-term strategy, when it adheres to clear structures and when its style corresponds to the contents reported.

Investor Accountability

Employee Motivation

NGOs Track Record

Analyst/Fund Manager Value Potential

Reporting Goals

Society & Media Reputation

Customer Reliability

Communities Support

Figure 8.1 Aligning reporting to audiences

STRATEGY: FROM FUNDAMENTAL QUESTIONS TO AN INTEGRATED APPROACH The famous Prussian strategist Carl von Clausewitz once said that everything that had to do with strategy was very simple, though not very easy (for a summary of reporting strategy, see Figure 8.2). This is indeed the case with nonfinancials. Companies have to start with basic questions and then move on to concrete activities:

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1. Identity: Companies differ and nonfinancials, the flesh on their financial bones, need to reflect this divergence. Paul Anderson, former CEO of BHP Billiton, once observed: ‘You have to address the issue of who we are before you can really address strategy because the “who we are” tells you what raw material you have to pursue a strategy and what kind of possibilities it creates.’ So the I-question is the starting point for both actions and reporting. 2. Objective: This is the next logical step. What does the company want to achieve through reporting? For Baruch Lev, the world’s leading expert on intangibles, correcting the perception gap between management and investors is the primary goal. The more a company communicates about factors like its innovation policies, the better its value can be judged by analysts and other members of the financial community. The Spanish electricity provider Iberdrola also identifies investors as its primary target group, though it does not experience pressure from the investment community. Its objectives are therefore broader based: reducing risk, improving brand image, increasing employee commitment. 3. Focus: After deciding on objectives and target group, companies need to clarify which indicators they prioritise, measure and report on. The choice of indicators can also be determined by sectorial pressures: chemical companies for instance will generally choose environmental issues like emissions and social issues like safety, while banks tend to focus on emission trade, ethical investment funds, etc. Beyond this, there are general priorities. A survey of companies carried out by Griffin University in Australia identified customer satisfaction, market share, innovation and employee satisfaction as priority indicators. However, the decision of which indicators drive a company’s business cannot consist of following the crowd. It needs to be consciously taken by top management on the basis of a strategic plan. 4. Scale and frequency: There is a wide range of possibilities here, from supplements to annual reports, which is how Skandia started tackling the issue of intellectual capital, to fully integrated reports like those of Novo Nordisk and Novartis, that cover both financials and nonfinancials. Most companies opt for separate reports, published on an annual or bi-annual basis. A rising number of enterprises – among others Kingfisher and Rio Tinto – have opted for a shrewd mixture of printed reports and web-based disclosure.

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5. Controlling: Reporting is not an end in itself. Performance and reporting need to be linked. Changes in corporate performance, in particular crises, dictate corresponding adjustments in annual, CSR and other reports. Conversely, the reporting process helps to identify deficiencies and potentials, in other words, it serves as input for strategic change. Companies such as BP have been praised by experts like Jonathan Low for defining relevant issues, showing how they measure their own performance and reacting to comments and criticism from stakeholders. Reporting needs in fact to be more than ‘end of pipe’ disclosure; it is as much a strategic tool of analysis as a means of communication. The British airport authority BAA exemplifies an emphasis on objectives and focus. As a high-visibility commercial player, its objectives are determined by the expectations of multiple stakeholders: local authorities and the community, pressure groups and the media, political leaders and passenger representatives. To focus its own activities, BAA carried out a large-scale stakeholder survey, which enabled the company to identify three key issues per stakeholder group: • For local authorities, for instance, transport, noise and air quality were the prime questions in order of importance. • Pressure groups mentioned air quality, noise and the environment. • Passenger representatives identified transport, community and need for growth. On the basis of a broad issue consensus, the company developed indicators and targets for measuring its performance. Air quality and noise were obvious areas of activity; however, BAA also pledged to cope with waste – an issue given first priority by its own employees. At Heathrow, Europe’s largest airport, the company started an action plan dedicated to achieve 0% growth in waste and a recycling quota of 40% by 2010. In terms of scale and frequency of reporting, BAA opted for giving a broad overview of its sustainability performance in its annual report, while providing further details on objectives, targets and performance on its website. Beyond this, its associated airports issued their own reports. Heathrow, for instance, published a Responsibility Report for 2004/2005 in which it summarised its performance in key areas,

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awarding scores like 8 out of 10 for air quality, 9.5 out of 10 for noise and 5 out of 10 for its internal selection process. This showed strong environmental and weak human resources performance. The company then pledged to improve the diversity of its management staff, faulting itself for not having developed an internal applications monitoring process (1 out of 10). Readers were provided with web links to gain further information and were urged to provide feedback. BAA’s agenda and performance were the subject of statements made by the airport’s Business Strategy Director and its Communications Director. This was a clear sign that the company had a ‘controlling’ approach to nonfinancials, making a clear link between performance and reporting. The identity of an airport authority is clearly defined by its mission, that of serving mobility. Pharmaceutical companies are similarly dedicated to ensuring health and curing disease. Novartis is a good example of a company that unites financials and nonfinancials in both activities and reporting. Its mission statement asserts: We want to discover, develop and successfully market innovative products to cure diseases, to ease suffering and to enhance the quality of life. We also want to provide a shareholder return that reflects outstanding performance and to adequately reward those who invest ideas and resources in our Company.

Given this broad perspective, the company’s slogan ‘Caring and Curing’ is both a financial proposition and an ethical claim. Novartis aims at being a top innovator by developing cutting-edge research and a strong pipeline of pharmaceutical products. At the same time, it embellishes its reputation by placing access to medicine in the centre of its corporate citizenship activities. As one senior manager explains, this focus makes sense because it is quite evidently the largest possible contribution Novartis can make to public well-being. Improvement of health is achieved by numerous activities such as free access to leprosy services and strongly reduced prices for malaria treatment, the provision of basic health services and even the empowerment of AIDS orphans. Novartis documents these activities almost as concretely as it reports on its financial performance. The monetary value of access to medicine is reported on, as also the number of patients reached by Novartis’ programmes. Beyond this, policies are reported on in terms of a Targets–Results–Future Targets grid. Thus, its annual reports consist

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of around 80 pages of financial reporting and a 30-page section on corporate citizenship, followed by an extensive chapter on corporate governance. In the company’s strategy, corporate citizenship is an integral part of an expanded concept of governance. The emphasis is on documenting efforts rather than quick image gains. CEO Daniel Vasella has clearly explained the company’s stance, pointing out in the Financial Times: ‘Unless the pharmaceutical industry achieves its objective of being an accepted and valued player in society, we will be at a disadvantage in every new law and regulation that comes up.’ Thus, profit and nonprofit activities coexist, fuelled by an acute sense of enlightened self-interest. Here is a company where keeping a low profile rhymes with strong commitment. Sectorial involvement often dictates strategic specialisation. As a pharmaceutical corporation, Novartis is strongly focused on social issues; as a utility with strong business units in the areas of water and waste, the French multinational Suez concentrates on environmental issues such as rehabilitation of polluted soil, recycling of organic waste, processing of sludge and odours. Its mission is defined as ‘Delivering the essentials of life.’ Suez provides a whole range of performance indicators such as waste-to-energy conversion and the technical efficiency of water distribution. A source in the company emphasises its pioneer role in reporting: Suez started as far back as 1999, concentrating on long-term development. Five challenges are at the root of Suez’s strategy: 1. 2. 3. 4. 5.

Community involvement Market shifts Climate change Resource preservation Quality of life.

Understandably, as a utility, Suez places a strong emphasis on risk management. One of its managers emphasises that delegates from risk control are part of the internal network of those who provide the input for reporting with a mandate to ensure that the company’s licence to operate is not undermined by noncompliance with international laws and regulations. The company’s action plans are developed with a holistic perspective involving business goals, environmental needs, HR considerations and legal issues.

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Business Case

Reporting Process • Frequency and volume of reporting • Stakeholder input • Scope of reporting • Case studies • Board role, steering committee and reporting network • Editorial team • Action plan and timetable

• External drivers • Sectorial benchmarking • Risks and opportunities

• Corporate identity and image • Strategic goals • Key messages

Organisational Plan

Strategic Review

Figure 8.2 Systematising reporting strategy

STRUCTURE: THE ROAD TO CLARITY AND MATERIALITY ‘Few companies have a cohesive approach to governance, strategy and CSR throughout their reports.’ The IR Yearbook 2005 published by Investor Relations magazine pinpointed an important reporting deficit. Most companies have a haphazard approach to structuring their reporting. Brand reporting is often nonexistent or desultory; governance statements often read like textbooks and are dealt with in different places in the annual report or printed separately. One large US consumer goods producer consistently tries to do too much: its annual reports are a whimsical mélange of unsorted information on marketing, strategic issues, governance, HR and responsibility. Reporting is not, however, an essayistic undertaking. Without proper structure (see Table 8.1), vital information and insights lose significance and risk being overlooked. As the IR Yearbook points out, most companies are incapable of providing a coherent picture of their identity and their nonfinancial activities: Unfortunately, only a minority of companies managed to bring all of these themes together into one comprehensive whole. Those that were able to convey the links between good governance, strategy, management oversight and responsible corporate behavior throughout all of their documentation were few and far between.

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Lack of coherence is particularly true of responsibility reporting. The large amounts of information and case studies provided by an increasing number of companies obscure rather than reveal material issues. The management consultancy Arthur D. Little discovered a huge communication gap between corporate communicators and investors. Its research report Speaking the Same Language in fact comes to the opposite conclusion; texts often verge on gibberish. Even ethical professionals are sometimes baffled by corporate disclosure. The Socially Responsible Investment (SRI) community is often ‘confused and frustrated’, while mainstream investors see no reason to enhance their analysis with input from responsibility reports. Arthur D. Little’s research was carried out in Britain, a country with a high general level of CSR and sustainability reporting and with a strong SRI sector. The situation in other countries tends to be even more extreme. Most companies churn out documentations in the guise of reports; information is given because it is available, not because it is important. Instead of pointing out the issues relevant to their sector and to their own business model at the beginning of the report and then focusing on these issues, companies often provide the reader with a ragbag of all and sundry. Chances and risks are rarely developed in a systematic way though they are of paramount importance to investors. In an article entitled ‘Window dressing’, The Economist condemned disclosure of unnecessary data and vague information. This criticism applies to the best of reporters: Cooperative Financial Services, whose report ranked No. 1 in the SustainAbility/S&P benchmark study, was faulted by the magazine for providing data such as its CO2 emissions per customer account, which is both meaningless and relatively irrelevant for a company in the financial services sector. Beyond this, short-termism is rampant. A number of Germany’s leading companies started off with glossy sustainability or CSR reports in the heyday of the Global Compact, and rapidly discarded or radically reduced the content of the reports, when business got tough and there were no quick gains in reputation that could be traced back to reporting. This kind of opportunism certainly confirms the suspicion that a fair cross-section of corporate reporters is more interested in windowdressing than in authentic disclosure. Writing on the Johannesburg Earth Summit in 2002, Felicity Lawrence satirised the PR orientation

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in an article called ‘Businesses acquire the latest fashion accessory: A conscience’, published in The Guardian: The must-have accessory for the CSR pack is a newly published company report on their social performance, dressed up with colour photos of happy poor children in the developing countries where they do business, and arty close-ups of wild flowers, which they will most definitely not be endangering by their activities.

The advent of web reporting has exacerbated the situation. Internet websites tend to be more loosely structured than printed material. The almost infinite range of graphical design tends to be counterproductive: fancy pictures and jazzy charts dominate to an even greater extent than in printed reporting. A study of information on sustainability posted on the websites of 95 companies from the chemical, electronics and pharmaceutical sectors of the FORTUNE Global 500 came to the conclusion that the PDF or HTML versions of printed reports were still the most coherent forms of reporting. The study, carried out by the Roberts Environmental Center of Claremont McKenna College, measured the quality of reporting according to 140 topics that constitute the Pacific Sustainability Index. The researchers discovered that web presentation styles tended to be either ad hoc – isolated web pages – or ad lib, in other words, nonlinear hyperlinked web pages, that seldom made sense. Beyond being confusing, they often made for poor print-outs, with the right-hand ends of sentences getting truncated. Printed reporting has the great advantage of forcing a certain basic structure on report producers. There are widely accepted layout conventions for headlines, subtitles, tables and graphics. Above all, printed

Table 8.1 Structural alternatives Integrated Report

Separate Reports

• Holistic company profile, goal of one coherent message • Close cooperation between IR, CSR, business units, etc. • Self-defined challenge of front-rank companies • ‘All things for all men’

• Clear differentiation between financials and nonfinancials • Separation of responsibility between CFO/IR and Chairman/CSR • Standard practice of corporate mainstream • Clear distinction between target groups

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reports are linear, they have a beginning and an end, whereas dealing with web-reporting is like fishing in the ocean. Novo Nordisk and CIBC exemplify an integrated print-based approach to reporting, while Rio Tinto can serve as best practice for a web-reporting approach. Novo Nordisk This Danish pharmaceutical corporation, a world leader in diabetes care, exemplifies a systematic approach to integrating financials and nonfinancials: • In 1999 and 2000, it published conventional environmental and social reports. • In 2001, it took a firm step towards sustainability by using the title ‘Reporting on the Triple Bottom Line’ on its report. • For the next two years, Novo Nordisk produced an annual sustainability report that was in accordance with GRI standards. • Then, in 2004, the company produced an annual report that integrated economic, social and environmental issues. This report was both in accordance with IFRS and GRI, thus simultaneously meeting the highest financial and nonfinancial requirements. It replaced the former trio Annual Review–Annual Financial Report–Sustainability Report through a unified format addressing a broad range of stakeholders, from the financial community to customers, government organisations and NGOs. Looking like a magazine at first sight, this report didn’t waste the reader’s time with preliminary protestations of good faith. It started by addressing ‘hot issues’ such as defeating diabetes and improved access to health. In both areas, Novo Nordisk has clear strategies, priorities and activities. Leading the fight against diabetes while operating profitably is the company’s dual mission. This duality led to a maelstrom of allied questions: transparency of clinical trial data, product pricing in industrialised and developing countries, industry funding of medical education, etc. Novo Nordisk did not have all the answers but it certainly addressed the issues in a coherent manner. The company highlighted dilemmas while evincing a basic readiness to institutionalise its broad approach to responsibility. For instance, in 2004, it amended its articles of association to specify that the company will ‘strive to conduct its

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activities in a financially, environmentally and socially responsible way’. The bonus scheme for top executives includes appraisal of their performance on sustainability projects. Beyond this, one of the company’s Fundamentals establishes a no-nonsense approach to collecting data: ‘Every manager requiring reporting from others must explain the actual use of the reports and the added value.’ Thus, starting at a grass-roots level, there is a clear emphasis on coherence and clarity. Novo has systematised its reporting strategy. After having produced three different reports in 2003, the company set itself the following mission: We will develop Novo Nordisk’s annual reporting as a tool that will support the business and our brand and meet or exceed multiple stakeholder expectations.

The company then targeted its reporting audiences and invited recommendations from three independent sources, while also analysing trends and carrying out benchmarking. It deliberated on three proposals – compliance-driven reporting concentrating on the basics, parallel reporting of financials and sustainability, integrated reporting – and decided to unify its annual communication to stakeholders. Integrated reporting offered several advantages: coherent messaging, structural clarity, and a better balance between compliance and communication. Novo then produced its innovative 2004 report that concentrated on key issues such as diabetes treatment and access to health. This report gained extravagant praise: Allen White went as far as calling it ‘better than the Bible’. Novo decided to continue in the same direction, while considering critical comments relating to clearer explanations of the company’s vision and the materiality filter. Major areas of improvement that were located included improving reader guidance by streamlining the report’s structure, cross-referencing to online reporting and the reintroduction of elements from past reports such as stakeholder involvement. Novo aims at providing a clear overview, satisfying compliance requirements, providing accountability and strengthening its reputation. ‘For us, form follows substance’, a Novo spokesman pointed out. ‘Accountability is more important than sheer reporting.’ This

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involves responding to issues voiced by stakeholders. The Danish company has not been motivated by the business case. It is driven by principles, an attitude to which the financial community is still adjusting. However, the strategic emphasis on improving market access to pharmaceuticals and on stimulating innovation makes financial sense; simultaneously, Novo takes responsibility for public health. The core of Novo Nordisk’s reporting is a large section with financial and nonfinancial performance data: 1. The section consists of a Management Report and Discussion – an equivalent of the usual OFR or MD&A – that starts with financial targets and performance and moves on to a broad panorama of nonfinancial issues like Human Resources, Research & Development and eco efficiency. 2. This is followed by a large array of facts and figures provided on a five-year basis. These include long-term targets such as operating margin, reduction of CO2 emissions, and the measurement of performance as against targets. 3. Following performance figures, the report focuses on performance indicators like providing access to health, employee turnover rate, percentage of animal tests, improvements in water and energy efficiency, and return on invested capital. 4. After this very compact presentation of facts, figures and indicators, Novo Nordisk’s ‘Economic Footprint’ is discussed in broader terms. Sections on corporate governance and risk management follow. 5. The online annual report provides additional background, context and data. This includes a full set of interactive charts on nonfinancial data. An original bookmark, ‘index at your fingertips’, provides cross-references to topics covered online. Novo Nordisk is a clear case of vision translated into action. Its CEO, Lars Rebien Sørensen, who was presented with the annual Sustainability Leadership Award in 2005, has taken a long-term perspective towards adapting the company’s business model and making it accountable in a broader sense of the term. In his yearly statement to stakeholders, the CEO describes dilemmas and setbacks while emphasising Novo’s successes. The company’s integrated report is audited in accordance with the IFRS and assured according to the principles of AccountAbility’s AA1000AS.

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Reporting Process: Recommendations

The major issue to be addressed in the planning phase of the next annual report and/or CSR report is the value proposition of the company. How does the company create value and what distinguishes the company and makes it unique, in other words: what is the company’s Unique Selling Proposition (USP). The company’s identity and its USP should be perceptible in all reports, in particular in the vision and mission statement, but also in the Statement to Shareholders/Stakeholders, the chapter on strategy and other major sections. Then decide on the message that the report should bring across. The report should not contain more than one central message. The message should thematicise your mission or your success, for instance: Masters of Mobility or Creating a New World of Services. It should be subliminal, but also incorporate your USP. Have your art director design a cover that supports the verbal message and then decide whether you want to illustrate the report with visuals – double-page or single-page spreads – that convey the message. Do not bring visuals that have nothing to do with the message; they are generally a waste of time and money and tend to irritate rather than inform the reader. After that, consider the performance during the last financial year. Has the company achieved its targets? What do the key indicators show? The performance determines content and tone of voice of the CEO’s message. This should be ideally written by the CEO or by a senior executive with direct access to the CEO. It should be a personal view of the past and the future, not a summary of the past year’s events. It should also comment on the company’s image and can includes quotes from the media or from important stakeholders (analysts, investors, etc.). To ensure a specifically individual style, it is advisable not to include the Chairman as the co-author (if necessary, a separate Chairman’s Statement can be attached). After the message or letter has been written, the chapter on strategy can be put together. Here it is important that the quintessence of corporate strategy is already expressed in the CEO statement and that the strategy chapter focuses on functional issues like the business model and core competencies. After that, a short chapter called Outlook should be written. This should give both an estimate of economic trends and a forecast of the company’s performance during the next three years. The next stage involves collecting and editing various sections of the report:

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Box 8.1

Continued

• The chapter on corporate governance should come from the company secretary and be approved by the Chairman. • The ‘Our People’ chapter comes from the Head of HR and should provide not just a breakdown of facts and figures but also a strategic view of human capital and how the company is marshalling its resources. • The CSR chapter comes from the Head of CSR and contains the quintessence of policies and projects; it can refer to a more comprehensive description provided in the CSR Report. • At the beginning of the Business Review, a short chapter on marketing should be placed. The Marketing Director should give an overview of brand strategy and equity, CRM, customer satisfaction survey results, market shares in different markets and marketing strategy, etc. After this, the standard components of the Annual Report can be assembled, starting with the Financial Review and continuing with the accounts (Profit & Loss, Balance Sheet, etc.) and the Notes. Here the Head of Controlling is responsible for the input. After everything has been typeset, it needs to be checked not just in terms of printing errors. Is the report coherent? Does it provide not just a true and fair view but also comprehensive insights into the company? Integrated Annual Report: Structure Position / Section

Chapter

Content

Cover

Slogan or message (derived from USP) with visual underpinning

Inside Cover

Corporate vision, mission statement, 3–5 bullet points with milestones of past year Table with key figures for the past year and the previous year (turnover, income, assets, key ratios like earnings per share, C/I ratio, etc.) Detailed Table of Contents

Page 1

Financial Highlights

Page 2

Contents

New Wine in New Bottles?

Page 3

Key Indicators

Stakeholder Information

CEO’s Message to Stakeholders

Corporate Governance

Human Resources

Corporate Social Responsibility

Strategy and Goals

Corporate Strategy Outlook

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List of key indicators that the company uses to measure its success–brand value, market share, ROE, safety record, membership of ethical ratings, etc.–with overview of targets–results–future targets Personal message with short description of the previous year; insights into the company’s strengths and weaknesses as reflected in the indicators as also overview of future prospects Overview of important governance issues, including managerial remuneration, table with breakdown of salaries of Board members Provides insights into HR strategy including diversity and recruitment and provides both key figures (size of workforce, composition, turnover rate, training, etc.) and critical analysis of issues like code of conduct Describes the company’s objectives and gives a round-up of important projects, providing key figures (cross reference to CSR Report that provides further information) Analyses the company’s business model, its top priorities and its core competencies. Portrays macroeconomic context and expected sectorial trends, then outlines the company’s targets with reference to both indicators and key ratios

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Box 8.1 Business Review

Continued Marketing

Our Divisions

Financial Review Accounts Notes Info

Gives an overview of the company’s brands, its Customer Relationship Management and its marketing strategy Overview of results of the divisions, including specific information on major products, sales initiatives, etc. Review of financial performance P&L, balance sheet, cash flow, etc. Further financial information

Important dates and contacts

CIBC Like Novo Nordisk, Canadian Imperial Bank of Commerce (CIBC) has organically developed and refined its reporting, moving from a conventional financial framework to an Annual Accountability Report. Accountability is best understood in this context as tangible responsibility, but also the requirement to give an account or an explanation. In the Canadian context, accountability is also a statutory requirement. Banks and other financial institutions with assets exceeding Canadian $1 billion are required to publish a Public Accountability Statement on an annual basis. This statement is expected to describe the enterprise’s contribution to both the Canadian economy and society. As the country’s leading bank, CIBC decided to make a virtue out of necessity. Its 2000 Annual Report, despite being entitled ‘Innovation + Accountability’, was a conventional though highly substantial financial accounting document with a bit of community added on. Three years later, the company adopted a broader approach, committing itself to creating a ‘winning culture’ for employees and communities as much as for shareholders. However, the indicators it used to measure performance were exclusively financial. The company’s reporting approach then changed radically in 2004: CIBC published its first Annual Accountability Report, combining a financial report with the prescribed accountability statement. However,

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this was not an additive endeavour. As a CIBC manager explains, the guiding thought was to provide shareholders, clients, employees and other stakeholders with relevant data to facilitate their evaluation of the bank. The first paragraph of the Accountability Statement, signed by the company’s CEO John S. Hunkin, made it clear that a new era had started for the company: The company annual report has traditionally been a retrospective snapshot of an enterprise’s financial results with a message from senior management, anchored by a letter from the shareholders’ auditors. As the document’s format evolved over time, reports often added other information on business accomplishments, new initiatives and, increasingly, details on topics like the environment and community involvement. This was a reflection of the fact that businesses do not exist in isolation from society. Indeed, there is a growing realization that long-term value creation is driven by successfully addressing a host of non-financial issues, including but not limted to client satisfaction, employee commitment, community involvement, brand strength and ethical behaviour.

CIBC then concretised its approach to creating value by adopting a framework of seven factors and discussing progress in each of them: 1. Client satisfaction: Improved satisfaction registered with retail customers with regard to professionalism, quality of advice and personalised service. 2. Employee commitment: Ranked No. 2 in the list of top workplaces for minorities published by a Canadian business magazine. 3. Risk management: Market risk was 42.5% lower than the level two years previously. 4. Environment: Equator principles were adopted. 5. Contributions to communities: The size of the company’s charitable contributions was mentioned ($44 million, of which $28 million was spent in Canada). 6. Governance: Ranked third most respected corporation in Canada in terms of corporate governance in a survey carried out by KPMG. 7. Financial performance: Earnings growth increased by 6.6% as compared to the previous year, while dividend paid was raised by 34.1%. The company’s readiness to measure and report on its performance in a broad-based manner is also reflected in the Balanced Scorecard it published. While financial indicators like Return on Equity, capital strength and dividend payout ratio still dominated, the company

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also set itself nonfinancial objectives such as becoming a recognised leader in client relationships and an employer of choice. The CEO’s letter underlined this broader commitment, though the quantifiability of the nonfinancial objectives was obviously less fulfillable than the financial goals. The company’s client orientation was particularly impressive, ranging from Affordable Banking to such issues as Aboriginal Banking. CIBC’s reporting on employees, the community and the environment was less comprehensive, though valuable information was provided on themes like diversity and environmental risk management. In its 2005 Annual Report, the company took the further step of highlighting its ‘disappointments’ as much as its accomplishments, thus providing a more balanced view of its performance. The nonfinancial measures were also concretised to a greater extent. Rio Tinto Novo Nordisk and CIBC both exemplify an integrated, print-oriented approach to reporting: one broad-based report unites financial and nonfinancial disclosure. In its empirical study of integrated reporting, the sustainability consultancy Solstice came to the conclusion that the main benefits of unified reporting are ‘intangible and internal – challenge for staff, improved understanding of the links between sustainability and business strategy, coherent messaging, and improved decision-making’. Rio Tinto, by contrast, has a decentralised web-oriented strategy. Print reporting is restricted to summaries. The company’s Sustainable Development Review is structured according to the corporate policies in Rio Tinto’s mission statement, ‘The way we work’. A large collection of key performance indicators can be found in the web review, which is a massive information reservoir, estimated to amount to more than 1500 web pages. One advantage of the Internet presentation is that stakeholders can click onto the Review Index and drill more deeply by means of pulldown menus. Navigation is simplified by a clear web structure. For instance, the index item Case Studies breaks down into topics like human rights, land access, environment and employment. The company’s philosophy, namely ‘that there is no conflict between sustainable development and business’, seems less sophisticated than those of Novo Nordisk and CIBC and there is too little focus on strategy, brands, etc.

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Broad

However, the information presented by this major Australian company is material to the mining sector to which it belongs. Relevant issues include safety and operational health targets. The review is in fact a lead publication, flanked by a phalanx of fact sheets, brochures und statements of business practice. Rio Tinto achieves a fine balance between texts and figures, issues and case studies, tables, diagrams and photos. Targets, performance and future targets are clearly stated. Reporting profiles for various companies are shown in Figure 8.3.

CIBC

Rio Tinto

Wells Fargo

Focus

Novo Nordisk

HP

Narrow

BAA

Novartis

General

Strategy

Special

Figure 8.3 Reporting profiles

STYLE: FROM STORY-TELLING TO SUBSTANCE ‘Corporate storytelling’ is how The Economist entitles an article on nonfinancial reporting, citing BP CEO Lord John Browne, who once stated that his company’s intention was to ‘tell a broader story’ rather than just report on financial performance. The magazine rightly points out that storytelling needs to be relevant to a company’s performance and line of business, while deploring gloss: ‘There is still too much waffle about good intentions in even the best reports.’ Basically, reporting has to be a substantial endeavour. The substance of reports, however, has also to be digestible. If a company wants to profile itself and not just document its activities, reporting

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has indeed to be a good read (see Figure 8.4). This is seldom the case. Writing in The Guardian, Steve Hilton found something ‘almost comically depressing’ in most CSR reports und cited platitudes like challenges being dutifully addressed and processes of engagement. He felt quite drained by the ‘relentless uniformity and studied humility that characterises the genre’. These platitudes derive from the context they describe. CSR, sustainability and stakeholder dialogue are foreign to the intrinsic nature of companies as profit-making enterprises. Most managers feel awkward about nonprofit activities and this awkwardness is reflected in disclosure. Reporting on brands or HR is quite the opposite. Brand reporting tends to be fizzy, with hard facts seldom presented; HR reporting, which generally boils down to a chapter on ‘Our People’, is often vaguely patronising. In terms of reporting style, companies in fact are easily caught between the devil and the deep sea. If they adopt a studious image and earnestly profess to do their duty towards society, they reap criticism of the kind voiced by Steve Hilton. If, on the other hand, they bring to reporting a sense of urbanity and elegance, they risk being condemned for producing hot air. NGOs like Friends of the Earth and Oxfam criticise what they call ‘token reporting’, calling for a greater accent on quantified, comparable data. Reviewing the alcohol producer Allied Domecq’s first CSR Report in Ethical Corporation magazine, Roger Cowe considered it to be a ‘triumph of style over substance’. More specifically, Cowe criticised what he perceived to be a preponderance of statements of intent over hard data; he also found the report self-laudatory. So should companies present themselves in sack and ashes, confessing to their sins and asking the reader for dispensation? That obviously would be absurd – and might even foster criticism of undue humility, not to speak of hypocritical dissembling. However, there is no doubt that most reports are unduly positive; for understandable reasons, companies are not enthusiastic about highlighting their own weaknesses. Openness indeed involves owning up to mistakes, and, more importantly, describing measures to make remedies. Most reporting is too glossy and creates a never-never world of endless achievement. By presenting everything they do positively, companies can lose credibility. A survey carried out by Burson Marsteller showed that NGOs are particularly wary of companies that seem to whitewash all they do. While 79% found CSR reports useful, only 44% considered

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them to be believable. Companies could according to the NGOs gain credibility if they would disclose poor performance or noncompliance with laws or regulations. This remains a ticklish issue. However, a number of companies, including BP and CIBC, readily admit to facing specific challenges and to missing certain targets they have set themselves. This gives stakeholders a balanced view of their achievements and failures. In the context of credibility, the letter, message or statement of the CEO plays a pre-eminent role. These epistles are generally placed at the beginning of the report and set the tone for what follows. CEO statements should make the company’s priorities clear and set realistic targets. They should also read as if the CEO – and not the PR department – wrote them. In a ‘Memo to the CEO’ published by the Financial Times, Alison Maitland calls on corporate leaders to be concrete about the specific challenges that their companies face in their messages, criticising the ‘warm, fuzzy generalisations that still populate the language of corporate social responsibility’. She quotes the Chief Executive of the French dairy producer Danone expounding on the Danone Way, this being ‘a response to a real need – which is to preserve and pass on a culture based on our dual commitment to business success and social progress’. Protestations of this kind obviously seem hollow or even nonsensical. Indeed, they reek of good-speak, the propaganda of impeccable intentions and honourable achievements. Intriguingly, Allied Domecq, the company criticised by Roger Cowe for giving precedence to style over substance, seems more than willing to take the bull by the horns. The company’s 2005 Social Report reproduced Alison Maitland’s article from the FT and in his well-written message to readers, Chief Executive Philip Bowman praised it for cutting ‘through the soft soap that can give corporate responsibility a bad name’. He pledged to address the company’s real issues and the report did so, starting with Allied Domecq’s key theme: alcohol. The company’s reporting thus pledged to be both substantial and stylish. Style is in fact a term that encompasses communication skills – both verbal and optical – in the widest sense of the term. The accounting organisation ACCA ranks nonfinancial reports according to three clusters of indicators:

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1. Completeness (scope, reporting policies, etc.) 2. Credibility (compliance, stakeholder dialogue, third-party statement, etc.) 3. Communication (readability, layout, innovative approach, etc.).

Verbal Style

Verbal Structure Q&A set-up Terms as verbal signposts Claim + strategy Target + achievement

Coherent

Message Fit

Highlighting keywords

Harmonising texts and visuals

Playing on words Emphasising testimonials

Integrating the message into the report’s structure

Using quotes to highlight essentials

Avoiding conflicting messages

Compelling

Convincing

Figure 8.4 Optimising readability

Some reports impress the reader because of their simplicity; others because of their sophistication. HP and Wells Fargo exemplify a basic simplicity, while WPP is the epitome of sophistication. Hewlett-Packard Some companies are fortunate in being able to draw on a legacy of far-sighted leadership. HP is one of this breed of companies. Its charismatic co-founder, David Packard, said as far back as 1947: Many assume, wrongly, that a company exists simply to make money    the real reason HP exists is to make a contribution    to improve the welfare of humanity    to advance the frontiers of science. Profit is not the proper end and aim of management – it is what makes all of the proper ends and aims possible   

Building on this, HP has consistently been reckoned to be one of the most responsible enterprises in the USA. The world’s largest consumer IT company believes that good citizenship is good business and that ethical value is closely linked to brand equity. A number

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of its key programmes – including e-inclusion and the Digital Cultural Exchange – show great zest and have improved the company’s entrepreneurial reputation. The ‘living lab’, a key project in the Indian town Kuppam, which is part of the e-inclusion programme, was portrayed in a large article published in Harvard Business Review. Increasingly, citizenship is being fused to business strategy and is described in business management terms. Achieving a balance between financial and social priorities is a complex analytical challenge, according to an HP manager. By taking on the challenge, HP avoids the Scylla of humility and the Charybdis of bragging. By treating those in receipt of the company’s philanthropy as potential customers, management avoids the usual unction, concentrating on using HP’s operating skills to improve the lives of villagers in India and other parts of the world. Hewlett-Packard bridges the ‘digital divide’ and provides communities in developing countries with access to modern technology, in tune with the company’s sectorial bias as an IT provider. This in turn should enable them to buy the company’s products; HP describes its own strategy as one of enlightened self-interest. This is both authentic and sensible, if not inspiring, and HP’s vocabulary and style of writing are correspondingly matter-of-fact. ‘Our style is intentionally so’, observes a HP spokesman. ‘If the reporting tone gets too soft or too advertising-oriented, our messages lose credibility.’ HP’s 2002 Social and Environmental Responsibility Report was dedicated to telling ‘the story of HP’s long-standing commitment to social and environmental responsibility’. The next year, the company produced a Global Citizenship Report, but the more ambitious title masked an equally systematic approach to nonfinancials. The then CEO, Carleton S. Fiorina, touched in her letter on what she considered to be HP’s most valuable contribution to society: the human capital represented by the experience and knowledge of its staff: Rather than simply writing a check, we are committing some of our best talent to underdeveloped communities from East Palo Alto, CA to Kuppam, India; charging them with the responsibility of working with local citizens to set goals; and then working as a catalyst to bring together local governments, nongovernmental organizations, and other organizations to create technology based solutions that accelerate economic development.

This emphasis on not just writing a cheque is the leitmotif of HP’s involvement with stakeholders; it is restated in various places in the company’s reporting. Global citizenship is one of the company’s

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seven objectives, coexisting with customer loyalty, market leadership, employee commitment, and, yes, profit. As one executive points out, business-type goal-setting – one target is to recycle £1 billion of computer equipment yearly by 2007 – is a great incentive towards improving performance. The entire style of reporting is lean: the Abridged Global Citizenship Report sets priorities, addresses issues and describes performance. It also sets clear targets. This clarity in recognising and addressing key issues was what the judges of the CERES-ACCA North American Awards for Sustainability Reporting appreciated when they ranked HP’s publication as the Best Sustainability Report in the region for the year 2004. Wells Fargo Like HP, Wells Fargo has a strong Californian identity, which in fact dates back to the gold rush. The famous stagecoach and banking company founded in 1852 still cherishes this image and uses it widely in its brand positioning. Its annual reports and other publications carry the slogan ‘The Next Stage’ – a play on words that couples the stagecoach era to the company’s expansion strategy. This expansion involved the successful acquisition of First Interstate Bancorporation in 1996, following which, in 1998, the bank was itself taken over by Norwest Bancorporation. Wisely, the combined corporation adopted the Wells Fargo identity to capitalise on its 150-year history. Despite this glorious past, WF has faced severe criticism from customers and pressure groups about abusive lending and predatory business practices. A website called ‘Wells Fargo Watch’ has documented fines paid by the company and official investigation because of allegedly racist lending policies. On the other hand, Business Ethics magazine ranked the company No. 6 in the list of America’s 100 Best Corporate Citizens for 2005, citing Wells Fargo’s support for the construction of single-family homes for Native Americans. Wells Fargo has asserted in its vision statement that it aims to be known as one of America’s great companies. This is a quintessentially monolithic aim, underlined by the company’s CEO Richard M. Kovacevich’s assertion on the corporate website: ‘We will continue to grow – not to become bigger but as a result of getting better.’ Given this emphasis on simplicity, the company’s reporting is both consistent and coherent. In his annual messages to shareholders,

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Kovacevich has over the years cultivated a clear-cut, no-punchespulled approach. In one of his messages, he quoted himself giving a speech at the Federal Reserve Bank of Chicago and saying that ‘the banking industry is dead and we should bury it’. Basically, he meant that conventional banks would soon be outclassed or taken over by financial services operators with a broad range of products. This credo of attempting to satisfy all customer needs through cross-selling is omnipresent in Wells Fargo’s reporting. To measure what the company calls ‘the next stage of success’, WF has introduced a broader set of measures including market value indicators such as customer service, and human resources indicators such as staff retention. Pointing to analogies as far afield as baseball, Kovacevich emphasised the need for a new business approach in his message to the 2004 Report, positioning Wells Fargo as a pioneer in creating value, while asserting: We don’t pretend to be as smart as the experts on this subject. We don’t propose any fancy new theories. We are simply suggesting a new set of value-creation measures for financial services companies so there is an apples-to-apples way to compare companies’ performance across the industry in the measures that really matter.

This kind of hands-on, no-nonsense approach is augmented by the CEO’s analysis of the ‘Gap in GAAP’, in other words the incapability of financial accounting standards to measure the value of intangible assets. Basically, Wells Fargo emphasises the importance of intellectual capital and human resources. It also highlights community involvement, focusing both on affordable housing and financial literacy. The 2001 Annual Report was dedicated to the company’s 150th anniversary, and 16 staff members presented a person or event for each decade of the company’s history. This is certainly a company that emphasises its identity while constantly searching for new frontiers. Although they share a common Go West heritage, HP and WF fundamentally differ in their reporting styles. HP is factual and functional, emphasising its professionality even in areas like CSR. WF, on the other hand, is flamboyant and exuberant, closer perhaps to clichés of Californian identity. WPP Re clichés, WPP is certainly the epitome of Old Country sophistication. This British company has a great mastery of style and structure; in

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fact, its annual reports reflect a seemingly effortless mastery of the English language. This is as it should be, considering WPP’s line of business: the company is one of the world’s leading communications service groups, uniting a prestigious group of advertising and PR agencies such as J. Walter Thompson, Hill & Knowlton and Ogilvy and Mather. The high quality of WPP’s reporting – both of its Annual Report and its yearly Responsibility Report – can be traced back to the following features: • Each annual report starts with a ‘Fast Read’, the quintessence of what is reported, which, according to company estimates, can be consumed in six minutes. This is an excellent way of serving readers who don’t want to plough through details. • WPP increases accessibility by using natural language in sectional headings: ‘Why we exist’ (mission statement), ‘How we’re doing’ (letter to shareholders and segment reports), ‘How we behave’ (corporate governance and CSR). This makes the report approachable for non-specialists. • The letter to shareholders is extremely extensive; however, subtitles lead the reader, while the company’s strategic priorities and objectives are well discussed. • The USP of WPP’s annual reports is the perennial section ‘What we think’. This presents an excellent overview of the advertising and marketing services industry, backed by a massive input of facts and figures. These both enlighten the reader and illustrate the company’s sectorial competence. This overview is followed by an essay of a stylistic quality that can easily compete with that of any business magazine. Here again, instead of pontificating about the creativity of its associates, the company simply demonstrates its textual skills. Responsibility reporting is refreshingly forthright, showing that the company keeps to its house style whether discussing financials or nonfinancials. In its first CSR Report, modestly called a review, WPP’s founder and Chief Executive Sir Martin Sorrell set the ball rolling with a question: Why should WPP bother about Corporate Social Responsibility (CSR)? We are not a major polluter. We don’t employ garment workers in developing countries or make potentially dangerous products. But CSR remains highly

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relevant to us because it affects our vitally important relationships with our people, our clients and our investors. We are a people business and our people don’t leave their values at home.

Similarly, WPP concentrates on marketing ethics in a chapter called ‘Let’s not duck the difficult issues’. Some of these are described: marketing to children and thus encouraging them to adopt unhealthy eating habits; working for countries that NGOs have condemned for human rights abuse; and even paying for news coverage in markets where it is common practice. WPP has its critics: the NGO Center for Media and Democracy has called the company World Propaganda Power. WPP was originally an obscure manufacturing enterprise called Wire & Plastic Products before Sorrell and a partner bought the company. Sorrell himself was described by TIME magazine as the ‘Machiavelli on Madison Avenue’. However, WPP’s approach to reporting is as straightforward as its strategy, which remains extremely decentralised; Sorrell has been quoted as saying: ‘We are not one huge, amorphous, elephantine company    We have a collection of tribes.’ This claim is supported by a series of short operating reviews from the various subsidiaries that have a uniform structure, but feature styles of writing that reflect the plurality of WPP’s brand identity. The general quality of WPP’s Annual Report gained it the Accountancy Age Award in 2005. The judges praised the easy navigation within the report and pointed out that WPP was using its presentation skills as a communications service operator to upgrade its reporting. WPP’s reports are not only a joy to read but also to look at. As the Accountancy Age judges commented: It’s a consistently good report. It’s challenging to get the design to support the message, but it works with WPP. It’s full of interesting stuff, good on analysis. While the visuals are attractive, the content also delivers.

Design is not an end in itself; it only makes sense in reporting when it supports the report’s message and is in synch with the sector to which the company belongs. As a communications company, WPP is right to use flamboyant graphics, drawings and photomontages. HP, on the other hand, is equally right to be more restrained in its optical presentation, while Wells Fargo has a typically American touchy-feely look, that is suitable for a retail-oriented bank.

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Reporting is not an isolated undertaking; continuity is of great importance. There is in fact an incipient need for a uniform style of presentation, in the same way as companies have a uniform corporate design for all publications. This is particularly true in the case of integrated reports. PepsiCo is a case in point. Writing in Ethical Corporation, a reviewer criticised the ‘distinct difference in style and substance’ between financial and nonfinancial information in the company’s annual report. The vague descriptions of sustainability initiatives did not fit with the stringent, risk-oriented discussion of financial results. This is a common problem, deriving from the different backgrounds of the managers involved; it is also a signal that, for instance, sustainability issues are not taken as seriously as financial issues. Thus, if companies cannot achieve a uniform style in their reporting, it makes sense for them to publish separate reports. However, since companies have a single identity, reports should ideally have a specific tonality, irrespective of whether they deal with financials or nonfinancials (see Table 8.2). Table 8.2 From style to meaning Words Syntax Symbols Messages

• • • • • • • • • •

Slogan (Cover) Follow-up (Opening Pages) Headlines, subheads, bullet points Chapter composition: headlines–text–subtext Metaphors Analogies Contextual associations Preferably one! Sustained! Convincing!

COHERENCE, BREVITY, ACCOUNTABILITY Mark Goyder, director of Tomorrow’s Company, has the following vision of what he calls inclusive reporting: The document is an annual report. It tells you what you need to know to form a working knowledge of the company, its personality and achievements. But it is different from the traditional glossy Annual Report. It is shorter, for a start. It is simpler. It is more accessible. In less than 20 pages

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it tells you the headlines you really need to know about the company. It answers the key questions you have in your mind, whether you are in search of a job, a buyer evaluating the company’s suitability as a partner, or any of the different needs (sic) of the company’s various stakeholders.

WPP’s reporting already fulfils several of Goyder’s requirements: it provides an excellent summary at the beginning of the report, indepth information for those looking for it, and is an excellent read for shareholders, customers, the media and the general public. Nonfinancial reporting is not just output for the outside world; it also, for instance, enabled Hewlett-Packard to expose internal deficiencies and is thus a management tool in disguise. HP’s CSR Director Ken Larson was quoted as saying: ‘We manage HP better, I would say, as a result of the report.’ To achieve this analytical status, reporting needs to be linked to corporate strategy, just as the Balanced Scorecard represents a connection between measurement and management. Beyond this, the Scorecard has inspired managers to think beyond financials and, in fact, to take a broader view of what constitutes corporate success. Nonfinancial reporting can stimulate and present this broader view. To achieve this, nonfinancials need a responsible face – a person with authority and access to top management. The Danish chemical and food ingredient company Novozymes has a Vice President, Stakeholder Communications, who reports directly to the CEO and to whom the Heads of investor, employee, media and NGO relations all report. This ensures a consistent communications style, but also an audience orientation rather than a subject orientation. As the Head of IR has pointed out: ‘We try to weave nonfinancial issues into everything we report.’ Unsurprisingly, Novozymes excels in both financial and nonfinancial reporting, having won several awards for the quality of its disclosure. In Fellini’s film Orchestra Rehearsal, a mediocre German conductor with authoritarian allures clashes with recalcitrant members of an Italian orchestra. Net result: it becomes impossible for the orchestra to play the score properly, and the rehearsal develops into a fiasco. The film has been interpreted as an allegory on contemporary Italian society. However, the business implications are compelling. Reporting is a team endeavour. It cannot be dictated, relying on the esprit de corps of a broad cross-section of managers and specialists. In the context of this book, management value can be seen to represent

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the strings, ethical value the woodwinds, HR value the brass and competitive value the percussions. Getting them not only to play together but also to impress audiences is the ultimate reporting challenge.

Box 8.2

Boise International: Fictive Case Study (8)∗

MEMO FROM HG TO BON, 21 February 2008 RE: PROJECT ‘REPORTING VALUE DRIVERS’ We’re working day and night on the Annual Report for 2007 and trying to include as many of your suggestions and requests in the final version as possible. Considering the fact that we have to publish the report by 20 March, in time for the press conference and analysts meeting, we won’t be able to implement everything this time, but allow me to assure you that the 2008 report will be a lot more advanced. I started the reporting process in October by putting together a project team consisting of myself, Theresa Dryer, our art director, and Etienne Lagrosz from our Communications department, who is responsible for project coordination and editing. The first thing we did was a brainstorming about the report message. I read through our mission statement in advance a couple of times – in my opinion, it needs to be modernised a bit, but that’s something that can be postponed – and also looked at what other companies are doing. Etienne read through a whole lot of material published by us: our own press releases and Boise coverage in the international press, current issues of the corporate magazine, blogs of some of our staff, etc. Then, we compared notes. Like GE and Siemens, we have to find a roof that fittingly covers our broad range of activities, from the Free Deal brand promise in consumer finance to the more sober approach taken by Medical Products and the Green image that our energy division cultivates. We have decided on a slogan called ‘Reforming and Refining’. This, I must admit, is not entirely original: Novartis’s motto inspired us (‘Caring and Curing’). The slogan is both positive and moderate; we can’t pretend as a niche player, which we basically are, to conquer the universe. Theresa will be doing some simple artwork for the cover – a satellite picture of the world in the background and the slogan moving diagonally upwards through the centre of the page. Inside, we don’t want to print the usual stock pictures. They don’t mean a thing and just look silly. Rather than ∗

See Box 2.1 on p. 33 for full names and functions of Boise management.

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that, we want to bring snapshots and quotes of employees whose ideas were implemented by Boise, showing that we have a large pool of talent. I shall send you a draft of the CEO letter to stakeholders next week. Basically, I would like you to flesh out the R&R claim, then touch on our excellent financial performance in 2007 and end by outlining our ambitious planning for 2008–2010. I shall also put in a self-critical passage that Boise takes public protest and customer feedback extremely seriously and is working to align its consumer finance activities towards a balance between profit and social goals. This gives you the opportunity to report on our CSR strategy and the growing emphasis on a dialogue with different stakeholder groups. By the way, we need a new snapshot to illustrate the letter; the one we used last year looks very staid. Hope you agree. I shall ask our house photographer to phone Mary and arrange a photo session in the next two weeks. For the first time, we’ll have chapters on strategy and brands in the annual report. Arun has provided a lot of info and been a great source of insights on both topics. Obviously, the brand story is a CF story, but we will balance that by publishing a certain amount of info on the importance of customer service for the Medical Products division and our new marketing approach in solar energy. Re strategy: quite honestly, our problem is that we don’t have any on a group level. We definitely need a Head of Strategy or Strategic Planning; Arun is too preoccupied with operational details to really spend time on big-picture issues. So for this year’s report, let’s just have a para at the beginning, flourishing our balanced business model (which happened by accidence and accrual rather than by plan, but that’s not what we tell the readers). After that, we simply get down to the divisional level, where our Heads have given me lots of info we can draw on. Etienne has promised to finish a draft in 10 days, shall forward it on to you for comment. The outlook chapter will be very short – I estimate one page – and just give an overview of our divisional targets and comment on particularly ambitious goals. Now getting onto the ‘softer’ issues: Francis has been very cooperative and proved a mine of information and informed comment on HR. We’re going to slant the chapter strongly towards human capital, so that we can use Heinrich’s plans for increasing innovation. This will in fact be a chapter that suggests: we still have a long way to go, our ‘creative’ performance does not match up to our general financial performance. Another highlight is remuneration; we’ll provide a breakdown of our incentives – and of course trumpet our reduced wage bill. We won’t avoid the problems: flexi-time and part-time work have decreased strongly.

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Box 8.2

Continued

Our diversity performance is particularly poor. Here, we’ll make a clear commitment to improve matters, without mentioning a direct target (you remember Francis’s apprehensions). Finally, CSR. We agreed to publish a short extract in the 2007 AR and follow up next year with a proper CSR report. Heidi has already drafted the chapter; she stresses our new approach to professionalising our social investment, i.e. reducing sheer donations and increasing the nonprofit transmission of products and above all expertise. She connects this approach to our new volunteering orientation, which moves away from the usual social work to tasks where our engineers and accountants can really help charitable organisations, schools and other institutions with their specific expertise. We have brief comment on what the individual divisions are doing and an outlook that indicates without really spelling out our new emphasis on stakeholder dialogue and networking. I agree with Heidi that we shouldn’t be too cut-and-dried at present; as things stand, we profit more from the dialogues than we contribute, so in idealistic terms, we aren’t really that angelic. We will however indicate that dialogue is a win–win game, which of course is true. Those are basically the highlights of the next report; as always, Giovanni and his staff will be supplying the financial review and the accounts. Shall make a point of seeing that the Review is more in synch with the presentations we are preparing for the analysts meeting and that it isn’t quite as dry and heavy on details as last time. We need your feedback on the CEO message and any other changes you want made by 5 March by the latest; we have to go to press on 12 March to have the first copies of the report available by 20 March (the journalists insist on getting printed copies, my analyst friends are perfectly happy with a PDF version, but we do need it in print for the media). Boise Annual Report 2007: Story Board Cover Inside Cover

Slogan ‘Reforming and Refining’, artwork Short paragraph explaining why reforming and refining is the quintessence of what Boise is about. After that: mission statement and 3 bullet points on performance, one for each of our divisions

New Wine in New Bottles?

Key Indicators

Growth rate; Return on Investment; Cost/Income ratio on group level; Targets and results for 2007; Targets for 2008–2010

CEO’s Letter

Two paras on CEO’s commitment to R&R; 2–3 paras on general achievements in 2007+3 bullet points on divisional achievements. One para on challenges (public criticism in CF, low customer satisfaction in DP); 1 para on our response including CSR; 1 final para on CEO’s optimism for the future One para on the Boise business model; 3–4 paras each per division focusing on key issues such as CRM (CF) and earnings (MP)

Strategy

Outlook

Boise – a brand metamorphosis

Our People

CSR

305

Focuses entirely on divisions. One para on each division highlighting sectorial trends and commenting on particular challenges – C/I ratio in CF, customer satisfaction in MP, expansion in US and Asia in Energy. Plus table with complete set of indicators for each division Three paras on how brand recognition has improved and on overall brand strategy. Then 4–5 paras on CRM in all three divisions, flanked by tables showing our customer base, statistics on customer satisfaction, retention rate, etc. Special box with CBT in MP. Finally, 3 paras on marketing strategy and activities, flanked by tables showing market shares One para on importance of developing human capital; 2 paras on our HC plans; 4–5 paras on remuneration + comprehensive table of incentives; 3 paras on work/life balance + table of facilities offered; 3 paras on diversity; 3–4 paras on employee satisfaction with table showing results of CF survey. Separate box with Code of Conduct including extracts from the text Three or four paras on professionalisation of social investment + a table with total investment; 2 paras on corporate volunteering on group level; 1 para on each division, focusing on major issues (microfinance in CF, equipment donation and advice in MP, socially oriented innovation in energy); 1 para on outlook, emphasising stakeholder dialogue.

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Box 8.2

Continued

MEMO FROM BON TO HG, 4 March, 2008 I’m really looking forward to seeing the new Annual Report – it should be miles ahead of anything we’ve published so far. Please make a point of distributing it widely. In fact, I want it to be an informative giveaway for important stakeholders; so please see that the mayors of the municipalities where we do business get it, as also the Heads of the Chambers of Commerce and Industry and other important officials and opinion leaders. The divisions should also distribute it widely to major customers. Tell our Communications people that I want a large article on it in our in-house magazine; would like them to bring an interview with me, in which I stress that this is only the beginning of a new era of transparency. I like the slogan; obviously, denigrators could make malicious remarks about how we’re reforming consumer finance by turning the screws on our poor customers. But I think we should be bold and make a claim for the Group as a whole. By all means bring employee testimonials, but please publish what they say without editing it unduly; our in-house mag is full of unctuous guff that makes you realise how much our PR people are doctoring the quotes. I’m returning your draft of the CEO letter with a few comments. Let’s not overdo it with the benefactor image and visionary postures; last year, we were grilled at the AGM for not expanding fast enough. This is a commercial enterprise and I have to be seen as a competent leader, otherwise people will be asking whether Boise needs another CEO. But I certainly endorse a broader approach to business success, a more inclusive one. (I think we should use that word, it’s really in vogue, even if it vaguely sounds like Sunday school.) I get your point with our weak Group strategy. I shall discuss it at our next Board meeting. I completely agree with your low-key approach to strategy and outlook; let’s not exaggerate. I’m very happy that we will now have a chapter on marketing. Ultimately, I want Boise to gain a corporate face; at the moment, we’re literally invisible as a Group. HR and CSR are as discussed; I have no further suggestions. Thanks again for your efforts and look forward to seeing the finished product soon.

Bibliography

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Index 3BL 206–8, 214 see also Triple bottom line 360 degree evaluations 153–4 Aaker, David 42 Abbey National 162 Abbott Laboratories 233 Abler, Tim 69 ABN-Amro 105–6, 211 Absenteeism rates, human resources (HR) 133, 137–9, 144–5, 147–8, 174–7 ACCA 23, 112–13, 184, 245, 266–7, 293–4 Accor 65, 66 Account Ability 240, 284 Accountability needs 8, 11, 24–5, 70, 117–18, 132–3, 239–42, 283–4, 288–90 Accountability Rating 24–5, 240 Accountancy Age 58, 111, 116, 299 Accounting fraud 98 profession 2, 11–14 standards 2, 11, 13–14, 17–18, 65 Accounting for People 136–7 Accounting Standards Board 65 Accounts Modernisation Directive, EU 26 ACSI, see American Customer Satisfaction Index (ACSI) Adams, Paul 224 Adams, Scott 227–8 Adaptability 4 Adidas 24, 47, 49, 225–6, 239 ADRs, see American Depository Receipts (ADRs) Advertising 67, 69–70 Aegis Group 98 Africa 47, 86, 140, 144, 198–9, 243–4, 249, 252–3, 263 Afuah, Allan 91

Age discrimination, human resources (HR) 162–8 AGMs, see Annual General Meetings (AGMs) Ahold 97–8 AIDS 218, 226, 233, 243, 249, 277 AIG, see American International Group (AIG) Albertson’s 54, 74 Alcoa 19 Alcohol producers 195–6, 292 Alliances 4, 87, 269 Allied Domecq 45–7, 195–6, 198, 229–30, 292–3 Altria 39 Amazon 60–1 Ambler, Tim 65 American Customer Satisfaction Index (ACSI) 56, 61 American Declaration of Independence 11 American Depository Receipts (ADRs) 100 American Enterprise Institute 219 American Eye Center 254 American International Group (AIG) 25 Anderson, Paul 275 Anglo American 1, 243, 257, 262–4, 268 Anglo-American model 15 Anglo-Platinum 243–4 Anglo-Saxon countries 7, 100–1 see also UK; USA Animal testing 244 Annual General Meetings (AGMs) 57, 306 Annual Report on Annual Reports 18–19, 84 Annual Report Yearbook 2005 105 Annual reports 11–21, 37–8, 41–3, 82–4, 96–7, 105, 130, 147–8, 158–9, 237, 273–91, 304–6

312

Index

Annual reports (cont.) brand reporting 50 clarity issues 11, 13–14, 18–19, 230, 279–92, 300–2 deficiencies 11–21, 111–12, 273–4, 279–91 human resources (HR) 130, 147–8, 158–9 integrated approaches 274–82, 286–8, 300 overload problems 11, 13–14, 18–19, 279 readability issues 291–300 recommendations 32, 41–3, 49–50, 52, 61–2, 65, 71–2, 97–8, 101, 109–10, 113, 120–1, 137, 139, 147–8, 153, 158–9, 183–6, 190–221, 226–7, 274–302 story-telling factors 291–300 strategy 81–4, 96–7, 273–9, 285–8, 304–6 structure considerations 279–91 style issues 291–300 sustainability issues 215 X-ray analogy 13 see also Balance sheets; Financial reporting Aoki, Hatsuo 101 AOL 52 Argenti, Paul A. 250 Argos Retail Group 3 The Art of Demotivation... (Kersten) 148 Arthur Andersen 111 Asahi 69 Asia 23, 68–9, 102, 136, 144 Asia Pacific Breweries (APB) 69 Assessments, human resources (HR) 153–4, 158–9, 203–4 Assurance, see Independent verifications, nonfinancial reporting Astellas Pharma 101 AT&T 56, 206 Auditors 9, 19–21, 99–110, 185–6 Australia 23, 27, 66, 70, 73–4, 82, 86, 150, 152–5, 172, 190–1, 211–12, 221–2, 229, 256–7, 262, 275, 290–1 Avon 81, 95–6, 122–3 Awards, corporate social responsibility (CSR) 201 AXA 153–6, 171–2 BAA 25, 276–7, 291 Baileys 70 Bain 55 Bakan, Joel 228 Baker, Mallen 208

Balance sheets 4, 9, 13, 17–18, 19–20, 26–7, 184–5, 205–8, 214, 282–4, 286–8 going concern concept 19–20 triple bottom line 17–18, 184–5, 205–8, 214, 282–4 Balanced Scorecard, concepts 14, 17, 30–1, 122, 130–1, 289–90, 301 Bank of America 41 Bank of Scotland 58 Bankinter 131–2 Bargaining power of buyers/sellers, ‘five forces’ (Porter) 81 Barloworld 199–200 Barrett, Richard 111 Barshes, Warren 139 BASF 244–5 BAT, see British American Tobacco (BAT) BBVA 105, 132 Becker, Gary 130, 168 Beck’s 69 Belgium 69, 75 Bell Canada Enterprises 118–19 Bell, David 163 Ben & Jerry’s 184 Benanav, Gary 29 Benchmarks 121 Berkshire Hathaway 92–3, 123 Berlin Wissenschaftszentrum 183 Bextra 254 Bezos, Jeff 60 BHP Billiton 202–3, 245, 275 Bibliography 308–10 Bickham, Edward 264 Bishop, Matthew 189–90 BMO Financial Group 19, 84–5, 122–3 Boards of directors Corporate Social Responsibility (CSR) 196–7, 200–1 diversity 163–8, 171, 177 governance 99–110, 196–7, 200–1 Body Shop 135–6, 184, 239, 244 Boise International 20–1, 31–3, 74–8, 124–7, 173–7, 232–5, 268–72, 302–6 Book-keeping 14–15 Book value concepts 2–8, 11–12, 121 market capitalisation 2–8, 11–12, 121 Boston Consulting Group 63 Bowman, Philip 293

Index Box-ticking issues, governance 100–1 BP 8, 25, 106–8, 123, 183, 208, 210–11, 221, 241, 249, 268, 276, 293 Brabeck-Letmathe, Peter 99, 103, 189 Brancato, Carolyn Kay 102 Brand Asset Management... (Davis) 40 Brand equity 42, 46–7 Brand Equity Ten 42 Brand Finance 40, 41, 63–4 BrandEconomics 40 Brands 2–8, 11–12, 13, 16–18, 26–30, 37–50, 68–9, 72–8, 279, 286–306 concepts 2–8, 11–12, 13, 16–18, 26–30, 37–50, 68–9, 72–8, 279, 286–8 corporate brands 45, 47–50 crisis management 43–50 emotional approaches 46–9 equity 41–2 investment volume 50 key performance indicators (KPIs) 32, 49–50, 73–8, 124–7 key reporting indicators 32, 41, 49–50 perception indicators 50 portfolio indicators 50 product brands 45–7 rankings 50 reporting 32, 41–3, 49–50, 279, 286–306 reputation/growth engine 38–43 risk 43–4 success factors 72–8 turnover 45–7, 50 valuations 27–8, 39–43, 49–50 see also Competitive value Brands: Visions and Values (Goodchild and Callow) 40 Brazil 140–1, 194 Brent Spar 3, 216, 249 Bridgestone 44–5 British American Tobacco (BAT) 106, 107–9, 123, 181, 223, 224–5, 229 British Land (BL) 93–4, 251, 253 Broadgate 15–16 Bröms, Andres 112 Brown, Donaldson 15 Browne, Lord John 291 Browning Ferris 202 Bruce, Robert 4–5 Brundtland Report 202 Bryers, Stephen 104 BSCH, see Grupo Santander (BSCH) BskyB 98

313

BT Group 25, 57, 183, 206, 221, 241, 247, 268 Buffett, Warren 92–4, 179–80 Burberry 3 Burger King 73 Burleson, Omar 228 Burson Marsteller survey 292–3 Bush, George W. 95, 189 Business Ethics magazine 206, 261, 296 Business planning 80, 111–21 Business plans 68 Business relationships, intangible assets 2 Business reporting 13 Business reviews 26, 50, 57, 119–20, 286–8 brand reporting 50 see also Annual reports Business Strategy Review 239 Business Week 39, 180–1, 188 Buyers, ‘five forces’ (Porter) 81 Cadbury Schweppes 85–6, 87, 122, 137 Cadbury, Sir Adrian 39, 99 Callow, Clive 40 CALPERS 218–19 Cameco 115, 117–19 Camera producers 82 Canada 8, 19, 83–4, 97, 116–17, 123, 137–8, 184, 188, 190–1, 262, 282, 288–90 Canadian Imperial Bank of Commerce (CIBC) 8, 19, 282, 288–91, 293 Cap Gemini Ernst & Young Center for Business Innovation 4 Capital concepts 129–31 human capital 1, 4–6, 7, 11–13, 18, 23, 27, 49, 121–2, 129–77, 286–306 markets 14–15, 101–2, 111–12 Capitalism 14–15 Carbon emissions 1, 79, 193, 208, 262, 280, 284 CARE International 250 Carrefour 25, 88 Case studies, Boise International 20–1, 31–3, 74–8, 124–7, 173–7, 232–6, 268–71, 302–6 Cash flow statements 13, 288 see also Annual reports Castries, Henri de 154 Catlette, Bill 133 Cato Institute 182, 185

314

Index

Caulkin, Simon 11 Celebrex 254 Centre for Business Performance, Cranfield University 24 CEOs 98–110, 124, 137–9, 145–8, 240, 279, 282–3, 284, 285–9, 293, 303–6 essayistic remarks 124, 279, 293 generals 90 governance 98–101, 108–10, 124, 284 remuneration issues 98, 99–110, 137–9, 145–8, 240, 282–3, 287 reporting recommendations 124, 279, 285–9, 293, 303–6 CFOs, HR managers 134–5 CFS, see Cooperative Financial Services (CFS) Chairman’s Statement 285 Chang, Kenneth 63 Change needs 16–17, 91–2 Charismatic leaders 90–3 see also Leadership Charkham, Jonathan 105–6 Chen, Xiangming 139 Chestnut, James 37 Children’s Charities Coalition for Internet Safety 252 Chile 263–4 China 43, 68, 102, 115, 139–40, 157, 243, 249 China Business Review 139 Chiquita 208, 214, 249 Chocolate 86 Churn rates, customers 48–9, 51–2 CIBC, see Canadian Imperial Bank of Commerce (CIBC) Circle idea, stakeholder dialogue 270, 272 CitiCorp 13 Citigate Dewe Rogerson 103–4 Citigroup 165, 166–8, 172, 232–3, 270 Civic stage, organisational learning 268 Clausewitz, Carl von 274–5 Clear Air Act 203 Co-determination 7 Coca-Cola 3, 5, 37–8, 43, 46, 63 Codes of conduct, human resources (HR) 158–9, 174–5, 287, 305 Coffee Kids 250 Collard, Ron 129 Combined Code, governance 99, 104, 107 Commitment factors customers 58–62

human resources (HR) 5–6, 62, 133, 148–59, 289–306 Communication factors 4, 29–33, 132–3, 241–2, 251–65, 275, 280–302 human resources (HR) 132–3 Internet communications 241, 252–4, 275, 281–2, 290–1 style issues 291–300 Community activities Corporate Social Responsibility (CSR) 187–201, 289 motivation issues 153–9 stakeholder dialogue 218–27, 239–71 Community advisory panels, stakeholder engagement instruments 254 Companies, valuations 16, 121 Competitive value 5–6, 7, 30, 37–78, 183 case study 74–8 components 37–8, 72–8 concepts 5–6, 7, 37–78 regional issues 7 success factors 72–8 summary 72–8 see also Brands; Customers; Markets Competitors ‘five forces’ (Porter) 81 overview 50, 84–6 strategy 81, 84–6 trends 67, 84–6 Complaints, customers 62, 77, 191 Compliance fixation 18–19, 268 Computer software 2 Concrete reality, fallacy 27 Conflict-shooting dialogue, stakeholders 216–18 Consciousness-to-action needs, nonfinancial reporting 7–8 Conservation International 250 Consultations, stakeholders 222–6, 251–65, 268–71, 301–2, 306 Consumer surveys 50, 254, 259, 276, 286–8 see also Customers Contented Cows Give Better Milk (Catlette and Hadden) 133 Continuity needs, financial reporting 16–18 Control functions, reporting strategy 276 Coombs, Joseph 240 Cooperative Financial Services (CFS) 25, 220–1, 223, 231, 280 Copnell, Timothy 104

Index Copyrights 2 Core competencies 80, 97, 121 CoreBrand 39–40, 50 CoreRatings 181 Corporate brands concepts 45, 47–50 see also Brands; Corporate identity Corporate governance, see Governance Corporate identity concepts 45, 47–50, 69 see also Corporate brands Corporate Register 23 Corporate Social Responsibility (CSR) 2, 6–7, 23, 30, 49, 80, 109, 165–6, 180–235, 273, 276–92, 294–306 backlash 189–90 boards of directors 196–7, 200–1 charity/policy issues 187–201 clarity issues 191, 197, 209–10, 279–80 concepts 180–255, 273, 280–92, 298–9 core business 193–5 definitions 187, 189 historical background 183–6 individual approaches 206–7, 273, 279 key performance indicators (KPIs) 201 key reporting indicators 191 language uses 185–6, 273, 292, 300 mission 198–200 regulators 183–4 reporting 190–201, 220–1, 280–306 sustainability issues 214–15 UK 189, 280 see also Ethical value Corporate strategy 4, 5–6, 11–12, 27, 29–33, 37–8, 45, 47–50, 60, 68–9, 72, 79–127, 251, 268, 273–9, 285–306 see also Strategy The Corporation (Bakan) 228 Corruption policies 1 Cost accounting 14 Cost-cutting exercises 80–1 Cost of capital 112 Cost/income ratios (C/I ratios) 73–4, 97, 121, 125–6, 184–5, 286, 305 Costs definition 18 human resources (HR) 129–30, 147–8, 153, 173, 175–7

315

Cowe, Roger 292 Coyles, Stephanie 57 Cranfield University 24 Credit Suisse Group 7–8 Creditors 15 Crisis management 43–50, 123–4 CRM, see Customer relationship management (CRM) Cross-selling projects 52, 62 CSR, see Corporate Social Responsibility (CSR) CSR Network 24–5, 240 CTN 241 Cult companies 46, 47–9, 59 Cultural issues 4, 6–7, 15–16, 68, 139–46, 148–59, 242–6 motivation factors 148–59 productivity factors 139–46 stakeholders 242–6 see also Regional issues Curtis, Carlton 37 Customer equity, definition 54–5 Customer relationship management (CRM) 51–62, 121–2, 286 Customers acquisition indicators 52, 61–2 Balanced Scorecard 14, 30–1, 122, 289–90, 301 base 5–6, 12, 26–30, 51–2, 61–2 churn rates 48–9, 51–2 commitment factors 58–62 complaints 62, 77, 191 concepts 7, 28–9, 45–7, 50, 51–62, 72–8, 218–27, 286–306 entrepreneurial assets 51–62 key performance indicators (KPIs) 61–2, 73–8, 125–7 key reporting indicators 52, 61–2 loyalty 7, 28–9, 45–7, 50, 51–2, 54–62, 217–18, 296 orientation factors 53–4 reporting 52, 61–2, 286–306 retention 48–9, 51–62, 126 sales breakdowns 62 satisfaction 1, 5, 7, 12, 13, 16, 18, 20, 28, 51–2, 56–62, 191, 259, 286–306 success factors 72–8 valuations 52–3 see also Competitive value; Stakeholders Czech Republic 75, 232, 269

316

Index

DaimlerChrysler 17, 113–16, 123, 194–5 Danone 293 D’Aquino, Thomas P. 97 Dasani 43 Davis, Ian 274 Davis, Scott M. 40 DAX 30, 182 De Ballardé, Francis 32, 174, 303–4 Dell 55 Deloitte 15–16, 29, 35, 121–2, 186 Denham, Robert 13 Denmark 8, 25, 26, 43, 73, 207–9, 229, 282–4, 301 Department of Trade and Industry (DTI) 136–7, 162–3 Departmental barriers 29–33 DePree, D.J. 204 Desai, Arun 32–3 Deutsche Bank 222–3, 232, 243 Deutsche Post World Net (DPWN) 60, 85, 86 Development human resources (HR) 12, 13–14, 143–6, 151–2, 158–9, 162, 168–77, 210, 227, 287 sustainable development (SD) 181–3, 202–15, 290–1 DHL 85 Diageo 70, 73 Dialogue meetings, stakeholder-engagement instruments 254, 258, 261, 268–9 Dilbert cartoons 227–8 Disability, diversity issues 163–8 Disclosures 1–8, 26, 37–8, 63, 100 see also Transparency issues Distribution channels 65–7, 71–2 Diversification plans, markets 65 Diversity issues, human resources (HR) 133–4, 144–5, 162–8, 171, 174–7, 287, 305 DJSI, see Dow Jones Sustainability Index (DJSI) Domini Social Investments 260 Double-entry book-keeping 14–15 Dow Chemical 135, 180, 206, 217, 241, 268 Dow Jones Index 56 Dow Jones Sustainability Index (DJSI) 27, 135, 191, 193, 201, 204, 221–2 Downsizing 129–30, 174, 243–4

DPWN, see Deutsche Post World Net (DPWN) Drucker, Peter 13, 53 DTI, see Department of Trade and Industry (DTI) DuPont 15 E-consultancy 121–2 Earnings per share (EPS) 80, 84, 113, 116, 119–20, 184–5, 286, 289 Earth Summit 219, 280–1 Earthwatch Institute 249, 270 EBITDA 43, 80, 83, 113, 208 ECC 7 ECC-Fishburn 243 Eccles, Robert G. 1, 30 Ecological policy 79, 202–15, 284 see also Sustainability issues Economic Value Added (EVA) 20, 41, 242 The Economist 1, 23, 35, 55, 81, 179, 182, 184–5, 189–90, 247–8, 274, 280, 291 Ecos 187 Edelmann 248 Edkins, Michelle 51 Education performance issues 143–6, 168–71 see also Training Effectivity 137–48 Efficiency 137–48 Egypt 252 Elkington, John 17, 24, 205 Elliot, Bob 11 Emerging economies 141, 144–5, 179–80 Emerson, Jed 14 Emotional approaches, brands 46–9 Employees, see Human resources (HR) Empowerment, motivation issues 150–2 Energy Efficiency EU Green Paper 233 Enhanced Analytics Initiative 26 Enron 5, 18, 26, 97–8, 228 Entine, Jon 219 Entrepreneurs 51–62, 90–96, 150–1 see also Leadership Environment Agency, UK 205 Environmental accounting 17–18, 26 E.On 113–15 EPS, see Earnings per share (EPS) Equity, brands 41–2

Index Ericsson 120–1, 123–4 Eriksen, Rolf 197 Ernst & Young 4, 26, 105 Eskom 198–200 Essayistic remarks, CEOs 124, 279, 293 Ethical Corporation magazine 194, 197, 208, 211, 218–19, 256, 292, 300 Ethical Trading Initiative 6 Ethical value 6, 7, 17–18, 23, 27, 101, 133, 179–235, 260–1 accounting to assurance 183–6 concepts 6, 7, 101, 179–235, 260–1 critique 227–31 free markets 181–3 historical background 183–6 indices 27, 135, 185, 201 key performance indicators (KPIs) 201, 215, 226–7, 234–5 performance issues 180–3, 201, 215, 226–7, 234–5 regional issues 7 reporting evolution 183–6 ten leaders 229 see also Corporate Social Responsibility (CSR); Stakeholders; Sustainability Ethnic Minority FTSE 100 Index 163 EU, see European Union (EU) Europe Corporate Social Responsibility (CSR) 189 genetically modified foods 7, 242 governance 99–100, 102, 105 human resources (HR) 136–7 McDonald’s 255–6 rankings 25–6 regional issues 6–7, 15, 23, 26, 99–100, 242–3 European Corporate Responsibility Report (2005) 256 European Union (EU) Accounts Modernisation Directive 26 Energy Efficiency Green Paper 233 Multistakeholder Forum of the European Union 27 EVA, see Economic Value Added (EVA) Evasiveness issues, stakeholder dialogue 261–71 Expectations, regulations 112–13 Expert consultations, stakeholder engagement instruments 254 ExxonMobil 7, 79, 218

317

Factual approaches, human resources (HR) 142–6 Fair Labor Association 226 Fair Trade Certificates 193–4, 250–1 Fallacy of Misplaced Concreteness 27 Fannie Mae 102 FASB, see Financial Accounting Standards Board (FASB) Fay, Chris 20 Federal Express (FedEx) 59–60, 85, 133 Federal Reserve Bank of Chicago 297 Federal Reserve Bank of Philadelphia 3 Feedback, stakeholders 222–6, 251–61, 303 Fellini, Federico 301 Ferrari 48 Film studios 18 Financial Accounting Standards Board (FASB) 13, 15, 18, 26, 39 Concept Statement 18 FASB 142 39 Financial community, stakeholders 242, 245, 246–8, 265–6 Financial controlling 29–33 Financial performance Balanced Scorecard 14, 17, 30–1, 122, 130–1, 289–90, 301 see also Performance issues Financial reporting Annual Report on Annual Reports 18–19 change needs 16–17 clarity issues 11, 13–14, 18–19, 230, 279–92, 300–2 continuity needs 16–18 deficiencies 11–21, 111–12, 273–4, 279–91 historical background 14–15 integrated approaches 274–82, 286–8, 300 overload problems 11, 13–14, 18–19, 279 recommendations 32, 41–3, 49–50, 52, 61–2, 65, 71–2, 97–8, 101, 109–10, 113, 120–1, 137, 139, 147–8, 153, 158–9, 183–6, 190–221, 226–7, 274–302 reporting gap 16, 30–1, 111–13, 273–4, 279–80, 297 resistance to change 14–15 strategy 96–7, 273–9, 285–8, 304–6 structure considerations 279–91 style issues 291–300 true and fair view 17–21, 273–4, 286–8 see also Annual reports

318

Index

Financial Reporting Council 104 Financial Reporting Standards (FRSs) FRS 10 39 FRS 11 39 Financial reviews 50 see also Annual reports Financial Times 1, 4–5, 52, 79–80, 98, 159–60, 187, 243, 278, 293 Finland 172, 259 Fiorina, Carleton S. 295 Firestone tyres 43–5 Fishburn Hedges 7 ‘Five forces’ (Porter) 81 Fixed assets 2 Focus reporting strategy 275–6 strategy 79–127, 290–1 Focus groups, stakeholder-engagement instruments 254 FOE, see Friends of the Earth (FOE) Forbes, Steve 190 Ford, Henry 90 Ford Motor 19, 25, 38–9, 43–5 Forecasts 5–6, 12–13, 80, 111–27, 287–8, 305–6 accuracy issues 116–19 challenges 111–27 concepts 111–27, 287–8, 305 key performance indicators (KPIs) 121 key reporting indicators 113 paths to growth/glory 119–21 profits 112–13, 121 reporting 113, 120–1, 287–8, 305 systemised forecasts 113–16 unorthodox approaches 119–21 see also Strategy FORTUNE 13, 25, 79–80, 133, 167, 190–1, 213, 228, 281 Forum for the Future 249 Foster’s 66, 67, 74 France 15, 19, 25–6, 55–6, 66, 73–4, 88, 100, 143–6, 153–6, 163, 168–9, 172, 183–4, 189, 243–5, 293 Free markets, ethical value 181–3 Fresh-foods market 53–4 Friedman, Milton 180–1 Friends of the Earth (FOE) 248, 292 FRSs, see Financial Reporting Standards (FRSs) FTSE 100 65, 94, 116, 163

250 134, 182 All Share 205 FTSE4Good 27, 135, 185, 201, 213 Fuji 42 Fujitsu 89–90, 122 Full and fair disclosures, SEC 15 Fuller, Jane 187 Fund managers 5, 246–7, 265–6 Futerra 241 Future performance 5–6, 12–13 GAAP, see Generally Accepted Accounting Practices (GAAP) Gabrielli, Giovanni 20–1, 32, 77, 304 Gap 239, 260–1 Garnier, Jean-Pierre 98, 249 Gates, Bill 11, 179–80 GDP, see Gross Domestic Product (GDP) GE, see General Electric (GE) Geest 53–5, 73–4, 185 GEMI, see Global Environmental Management Initiative (GEMI) Gender issues 91, 95–6, 122–3, 135–6, 142, 145, 162–8, 177 General Electric (GE) 5, 20, 32, 75, 79, 106, 108–9, 112, 302 General Motors 15, 44–5, 129 Generali 142–3 Generally Accepted Accounting Practices (GAAP) 11, 13, 14–15, 16–17, 24, 51–2, 98, 110, 206, 297 Genetically modified foods 7, 242, 262 George, Rick 262 Germany 6–7, 12, 17, 26, 48, 85, 99–100, 113–14, 123, 130, 136, 151–2, 156–7, 172, 182, 189, 191, 194, 222, 225–6, 243–5, 280 Gerstner, Lou 161 Gilding, Paul 187 Gilley, K. Matthew 240 Gitsham, Matthew 211 GlaxoSmithKline (GSK) 98, 150–1, 155, 218, 249, 266–7, 270 Global Brand Scorecard 39–40 Global Environmental Management Initiative (GEMI) 31 Global Reporters Survey (2004) 25 Global Reporting Initiative (GRI) 16, 24, 27, 30, 135, 183–4, 206–7, 224, 273, 282 Global Stakeholder Report 220, 246–7

Index Global warming 79 Globalisation 179–80, 248–9 GlobeScan 26–7, 186, 191, 202–3, 243 GM, see Genetically modified foods; GovernanceMetrics (GM) Goethe, J.W. 14 Going concern concept 19–20 Going off the Rails (Plender) 27–8 Gokey, Timothy C. 57 Goldman Sachs 249 Goodchild, John 40 Goodwill 2–4, 13, 28, 40–1 Goodyear, Chip 202 Google 1 Governance accounting fraud 98 auditors 99–110 boards of directors 99–110, 196–7, 200–1 box-ticking issues 100–1 capital markets 101–2 CEOs 98–101, 108–10, 124, 284 Combined Code 99, 104, 107 committees 99 concepts 1–2, 5–6, 8, 17, 24–5, 79–80, 97–110, 121–7, 279, 286–306 definition 99 historical background 97–8, 99–100 institutional investors 98, 101–2 key performance indicators (KPIs) 110, 125–7 key reporting indicators 97–8, 101 non-executive directors 106–10 premium incentives 101–10 rankings/ratings 100–2, 107, 110, 289, 293–4, 296–7 regional issues 99–103 regulators 97–8, 100–1, 104 remuneration issues 98, 99–110, 137–9, 145–8, 240, 282–3, 287 reporting 97–8, 101, 109–10, 279, 286–306 top management 98–110 UK role 99–103, 106 see also Management; Transparency issues GovernanceMetrics (GM) 102 Goyder, Mark 237, 300–1 Great Britain, see UK Great Depression (1929) 14–15 Greece 252 Green Alliance 270

319

Greenbury committee 99 Greenhouse effect 7, 210, 262 Greenpeace 6, 79, 187, 206, 216, 219, 242, 247–9, 262, 271 Gremling, Harry 20–1, 32, 74–8, 124–7, 173–7, 232–5, 268–71, 302–6 Greuze, Renée 31 GRI, see Global Reporting Initiative (GRI) Gross Domestic Product (GDP) 179–80 Growth, strategy KPIs 97 Grupo Santander (BSCH) 161–2 GSK, see GlaxoSmithKline (GSK) The Guardian 219, 281, 292 Guillaume, Mike 18–19 Guinness 70, 73–4 Gulati, Sunil 41 GUS 3 H&M 197 Hadden, Richard 133 Haigh, David 41 Hall, Jeremy 262 Hampel committee 99 Hanks, Tom 60 Harley-Davidson 59, 74 Hart, Basil Liddell 90 Harvard Business Review 1, 21, 28, 67, 129–30, 194, 268, 295 Harvard Business School 1, 30, 80, 189–90 Harvey-Jones, Sir John 63 Hawken, Paul 256, 262 Helen Keller Achievement Award 58 Henderson, David 180–1, 190 Henkel 156–7, 171–2 Hermann Miller 203–4 Hermes 51 Hewitt Associates 138 Hewlett-Packard (HP) 25, 95, 133, 291, 294–6, 301 Hill & Knowlton 182, 298 Hill, Nigel 56 Hilton, Steve 197, 292 Hodgkinson, Robert 111 Holistic perspectives 278–9, 281–2 Holland, see Netherlands Home Depot 187–9, 198 Hong Kong 102, 157 Household 3 How to Measure Customer Satisfaction (Hill et al) 56 Howell, Robert A. 13

320

Index

HP, see Hewlett-Packard (HP) HR, see Human resources (HR) HR managers, CFOs 134–5 HSBC 3, 25, 269 Human capital 1, 4–7, 11–13, 18, 23, 27, 49, 121–2, 129–77, 286–306 concepts 130–77, 286–7, 295–6 definition 130 education/training benefits 168 index 132–4 Human resources (HR) 4–7, 13–14, 18, 23, 30, 49, 91–2, 129–77, 203–4, 218–27, 240–71, 286–306 absenteeism rates 133, 137–9, 144–5, 147–8, 174–7 age discrimination 162–8 annual reports 130, 147–8, 158–9 assessments 153–4, 158–9, 203–4 Balanced Scorecard 14, 130–1, 289–90, 301 codes of conduct 158–9, 174–5, 287, 305 collegial flexible workplace 132–3 commitment factors 5–6, 62, 133, 148–59, 289–306 communications integrity 132–3 concepts 129–77, 218–19, 240–2, 286–8, 295–6 costs 129–30, 147–8, 153, 173, 175–7 development 12, 13–14, 143–6, 151–2, 158–9, 162, 168–77, 209, 227, 287 diversity issues 133–4, 144–5, 162–8, 171, 174–7, 287, 305 downsizing 129–30, 174, 243–4 factual approaches 142–6 focus needs 146–7, 244–6 gender issues 135–6, 142, 145, 162–8, 175–7 key performance indicators (KPIs) 148, 159, 170–1, 175–7 key reporting indicators 137, 139, 147–8, 158–9, 162 leveraging 132–7 loyalty 4–5, 28 race discrimination 162–8 recruitment 132–4, 287 regional issues 7 reporting 137, 139, 147–8, 158–9, 162, 286–306 retention 28, 132–4, 137–9, 144–5, 212–13, 284, 287

rewards 132–3, 153–6, 173–4, 305 strategy 143–6 talent-harnessing activities 159–71 ten leaders 172 trade unions 135–6, 140, 144, 244 training 143–6, 151–2, 158–9, 162, 168–77, 209, 227, 287 turnover 137–9, 144–8, 162, 284, 287 value concepts 129–77, 302 work–life balance 149–50, 152–3, 158–9, 162, 305 see also Motivation issues; Stakeholders Human rights 214, 244, 247, 260 Human Rights Watch 214, 247 Hunkin, John S. 289 Hurricane Katrina 188 Hutton, Will 239 IASs, see International Accounting Standards (IASs) Iberdrola 275 Ibis 66 IBM 54–5, 161, 168, 172 ICI 63 Idei, Noboyuik 88 Identity, reporting strategy 275–6 IFRSs, see International Financial Reporting Standards (IFRSs) Image 41, 47, 259 Immelt, Jeff 79, 108–9 Improving Stakeholder Engagement Reporting (ACCA) 266–7 In the Dark survey (Deloitte) 15–16, 29, 35 Income statements 13, 286–8 see also Annual reports Independent verifications, nonfinancial reporting 23–4, 186–7, 209–10 India 41, 73–4, 86, 199–200, 229, 247, 295 Indonesia 102 Infosys 40–2, 46, 73–4, 247 ING 154–6 Ingenico 146 Innovation Management (Afuah) 91 Innovations 1, 4, 12, 37–8, 79–80, 86, 97, 150–2, 160–71, 262 potential threats 262 strategy KPIs 97 Insight, leadership 93–7, 274 The Institute of Chartered Accountants in England & Wales 12–13, 27, 39

Index Institutional investors, governance 98, 101–2 Institutional Shareholder Services (ISS) 101–2, 110 Intangible assets concepts 2–4, 12, 13–14, 51, 159–71, 246–7, 275 self-generation issues 28 valuations 13–14, 26–8, 246–7 Integrated approaches, reporting strategy 274–82, 286–8, 300 Intellectual capital (IC) 2, 4, 7, 11–13, 16–17, 23, 28, 131–2, 159–71, 275, 295–6 concepts 2, 4, 7, 11–13, 16–17, 23, 28, 131–2, 159–71, 275, 295–6 definition 131 see also Human capital Intellectual property (IP) 2, 4, 7, 11–13, 16–17, 23, 28, 131–2, 159–71, 275 concepts 159–71 defensive/offensive exploitation approaches 160–8 exploitation 159–68 key reporting indicators 162 Interbrand 39–40, 50 Interbrew 69 Internal processes, Balanced Scorecard 14, 30–1, 122, 289–90, 301 International Accounting Standards (IASs) 2, 11 IAS 38 intangible assets 2, 13, 39, 51 International Civil Aviation Organization (ICAO) 213 International Financial Reporting Standards (IFRSs) 11, 15–16, 24, 110, 206, 282, 284 Internationality, strategy KPIs 97 Internet 48, 60–1, 65, 76, 89, 241, 252–4, 275, 281–2, 290–1 Intranets 61 Investment volume, brands 50 Investor Management Association 51–2 Investor pressures, nonfinancial reporting 26–7, 97–8, 103–4, 111–12 Investor Relations magazine 26, 94, 279 Investor Relations Officers (IROs) 104–5 Investor relations presentations 15, 246–7 Investor Relations Society 103 Investors 15, 101–3, 104–5, 110, 138, 218–27, 239, 241–2, 246–7

321

see also Stakeholders Invisible Advantage 4 IP, see Intellectual property (IP) IR Yearbook 2005 279 IROs, see Investor Relations Officers (IROs) ISO certification 117–18 ISS, see Institutional Shareholder Services (ISS) Italy 100, 142, 163, 189, 252, 301–2 Ittner, Christopher D. 28–9 J&B 70 J&J, see Johnson & Johnson (J&J) J. Walter Thompson 298 Jaguar 39 James, Julian 43 Japan 7, 25, 43–4, 48, 68–9, 73–4, 82, 88–9, 100–1, 108, 114–16, 123, 160–1, 189–91, 242, 252 Firestone tyres 43–4 governance 100–1 rankings 25 regional issues 7, 242–3 Johnnie Walker 70 Johnson & Johnson (J&J) 228–9 Johnson, H. Thomas 112 Joint ventures 87, 93–4 Journal of Accountancy 9 Journal of Corporate Citizenship 232 Jung, Andrea 95 Kaplan, Robert 14, 31 KDDI 48 Kersten, E.L. 148–9 Kesko 259–60 Key performance indicators (KPIs) 32, 49–50, 73–8, 125–7, 175–7 brands 49–50, 73–8, 125 Corporate Social Responsibility (CSR) 201 customers 61–2, 73–8 ethical value 201, 215, 226–7, 234–5 governance 110, 125–7 human resources (HR) 148, 159, 170–1, 173–7 markets 72, 73–8, 124–7 motivation issues 159 outlook 121, 125–7 productivity issues 148 stakeholders 226–7 strategy 97, 124–7 sustainability issues 215

322

Index

Key reporting indicators brands 32, 41, 49–50 Corporate Social Responsibility (CSR) 191 customers 52, 61–2 governance 97–8, 101 human resources (HR) 137, 139, 147–8, 158–9, 162 intellectual property (IP) 162 markets 66 motivation issues 153 outlook 113 productivity factors 137, 139 stakeholder dialogue 218–19 strategy 80–1, 96–7 sustainability issues 207 Keynes, J.M. 20, 239 Kikkoman 160–1 King, Mervyn 1 Kingfisher 275 Kirin 68 K-Mart 90 Know-how 12, 17, 180 Knowledge assets 2, 3, 12–13, 295–6 see also Human capital Kodak 165, 166–8 Kotler, Philip 72 Kovacevich, Richard M. 296–7 KPMG 11, 81, 104, 184, 186, 190–1 Kraft 39 Kropf, Susan J. 95 Krut, Riva 191 Kyoto agreement 262 Labour standards 1 Lampel, Joseph 81 Landor 39–40, 50 Landsburg, Steven E. 203 Larcker, David 4, 28–9 Larson, Ken 301 Latin America 102–3, 141, 144 Lawrence, Felicity 219, 280–1 LBS, see London Business School (LBS) Leadership 4, 93–6, 98–110, 123, 137–9, 145–8, 240, 279, 282–3, 284, 285–9, 293 CEOs 98–110, 124, 137–9, 145–8, 240, 279, 282–3, 284, 285–9, 293, 303–6 charismatic leaders 90–3 governance 98–110 insight 93–7, 274 strategy 87–97

vision 90–7, 285–6, 300–1 see also Entrepreneurs; Management Learning and growth, Balanced Scorecard 14, 130–1, 301 Legalism 15, 24 Lev, Baruch 2, 28, 275 Levitt, Theodore 65, 67 Liberalism 15 Ligteringen, Ernst 206–7 Little, Arthur D. 246, 280 Lloyds TSB 43, 155–6, 172 Logistics 70–1 London Business School (LBS) 39, 51–2, 63–4, 134–5 Long-term decisions 15–16, 20 Lord’s Prayer 11 L’Oréal 63 Lovins, Amory 262 Low, Jon 4, 276 Lutz, Bob 129 LVMH 168–9, 172 M&As, see Mergers and Acquisitions (M&As) McConnell, David 95 MacDonald, Chris 206 McDonald’s 7, 19, 255–6 Machinery 2 McKinnell, Hank 255 McKinsey 30, 57, 68–70, 82, 102–3, 129, 181, 251, 274 McKinsey Quarterly 57, 68–70, 102, 251 Maeda, Shinzo 115 Maitland, Alison 243, 293 Malaysia 69 Management 98–110, 124, 137–9, 145–8, 240, 279, 282–3, 284, 285–9, 293, 301–2 360 degree evaluations 153–4 concepts 79–127, 301–2 crisis management 43–50, 123 deficiencies 4–5 diversity 133–4, 144–5, 162–8, 171, 174–7, 287 nonfinancials 4–6, 7, 9, 27–9, 37–8, 43–50, 79–127, 301–2 ten leaders 123, 172 turnover 19–20 value 79–127, 301–2 see also Governance; Leadership; Outlook; Strategy

Index Management Discussions & Analyses (MD&As) 15, 19, 38–9, 50, 284 see also Annual reports Manchester United Plc 185 Market capitalisation book-value 2–8, 11–12, 121 concepts 2–8, 37–8, 40, 121, 246–7 Market Metrics... (LBS) 64–5 Market position, market strategy 63, 68–9, 71–2 Market research, brands 50 Market shares 1, 5, 20, 30, 38, 41, 50–1, 63–7, 72, 76–8, 84–6, 126, 286–306 Market strategy, market position 63, 68–9, 71–2 Market value added 56 Marketing 37–8, 63, 69–71, 115–16, 288, 306 Marketing and the Bottom Line (Abler) 69 Marketing Management 45 Markets 37–8, 63–78, 124–7, 278, 287–8 concepts 63–78 diversification plans 65 key performance indicators (KPIs) 72, 73–8, 125–7 key reporting indicators 63 market shares 1, 5, 20, 30, 38, 41, 50–1, 63–7, 72, 76–8, 84, 86, 125, 286–306 metrics 6, 63–4, 72 new products 71–2 niches 63–4 reporting 66, 71–2 sectors 63, 67–8, 278, 287–8 segments 30, 63–4, 71–2 size indicators 72 success factors 72–8 trends 67, 84–7 see also Competitive value Marks & Spencer (M&S) 57, 240, 248 Materiality concerns 24, 211, 279–91 Maximalist/minimalist sustainability reporting 204–10 Maxwell, Robert 99 MBA campuses, USA 168 MD&As, see Management Discussions & Analyses (MD&As) Mercedes-Benz 114 Mercy Corps 250 Mergers and Acquisitions (M&As) 2, 3–4, 12, 38–9, 87 Metrics, markets 6, 63–4, 72

323

Metro 169 Michelin 43 Microsoft 3, 5–6, 11–12 Mid-term decisions 15–16 Minimalist/maximalist sustainability reporting 204–10 Minos, King 1–2 Minotaur 1–2 Mintzberg, Henry 81–3 Mission statements 58, 198–200, 227, 277, 285–6, 290–1, 298, 304–5 Mitzuho International 105–6 MmO2 222–4, 231 Mobile phones 48–9, 52, 222–3, 251–3 Modern Capitalism (Sombart) 14 Monobrand companies 47–8 Monsanto 7, 218, 241–3, 261–2 Moody-Stuart, Sir Mark 1, 264 Moralism 179–80 see also Ethical value Morgan Stanley 39 MORI 4, 56–7, 248 Morley Fund Management 16 Motivation issues community activities 153–9 concepts 5–6, 133, 148–59, 173, 177, 212, 261 cultural factors 148–59 empowerment 150–2 human resources (HR) 5–6, 133, 148–59, 173–7 key performance indicators (KPIs) 159 key reporting indicators 153 reporting 153, 158–9 satisfaction factors 153–6 socialisation aspects 149 Multibrand companies 45, 46–7 Multistakeholder Forum of the European Union 27 Murdoch, Rupert 98–9 NAB, see National Australia Bank (NAB) Nakamura, Leonard 3 Napoleonic wars 73 Nardelli, Robert 188–9 National Australia Bank (NAB) 150, 152–3, 155, 172 Natural Resources Defence Council 206 NatWest 65 Nestlé 3, 99, 103, 106

324

Index

Netherlands 19, 25, 26, 53, 75, 100, 105, 119–20, 136, 154–6, 165, 229 Networks 4 New Economy 3, 81, 129 New products 71 New Reporting Models for Business (Institute of Chartered Accountants in England & Wales) 12 New Wine, New Bottles Business Brief (White) 273 New York Life Insurance 29 New York Times 63 New Zealand 69, 252 Newton, Andrew 208 NGOs 6, 79, 97, 110, 179–80, 187–90, 213–14, 217–27, 232–3, 239, 245–71, 292–3 concepts 247–70, 292–3 importance 247–51, 266–8, 292–3 see also Stakeholders Niches, markets 63–4 Nike 6, 24, 47, 49, 239, 249, 260 Niven, Paul R. 130 Nokia 47 Non-executive directors 106–10, 123 Nonfinancial reporting Balanced Scorecard 14, 17, 30–1, 122, 130–1, 289–90, 301 concepts 1–8, 11–14, 15, 273–306 crisis management 43–50, 121–4 critique 23–5, 273–306 importance 1, 3–4, 8, 11–12, 15, 19, 111–12, 273–306 independent verifications 23–4, 186–7, 209 integrated approaches 274–82, 286–8, 300 investor pressures 26–7, 97–8, 103–4, 111–12 materiality concerns 24, 211, 279–91 paradoxes 27–9 potentials 29–33 pressures 25–7, 97–8, 103–4, 111–12, 273–306 priorities 29–30 rankings 18–19, 24–6, 50, 100–2, 107, 110, 280, 289, 293–4, 296–7 readability issues 291–300 recommendations 41–3, 49–50, 52, 61–2, 65, 71–2, 97–8, 101, 109–10, 113,

120–1, 137, 139, 147–8, 153, 158–9, 183–6, 190–221, 226–7, 274–302 regulators 25–7, 97–8, 100–1, 104, 112–13 reporting gap 16, 30–1, 111–13, 273–4, 279–80, 297 rules 24–7 self-concepts 273–4 statistics 23–6 story-telling factors 291–300 strategy 96–7, 273–9, 285–8, 304–6 structure considerations 279–91 style issues 291–300 tokenism 217, 280–1, 292 Nonfinancials classification 5–6 concepts 1–8, 18–21, 273–306 consciousness-to-action needs 7–8 definitions 1–2, 27–8, 273–4 overheads 18–21 performance issues 1–8, 28–9 quantification factors 2–3, 184–5, 190–201 regional issues 6–7, 15–16 synonyms 2, 273 value drivers 4–5, 21, 28–30, 32, 74–8, 124–7, 173–7, 232–6, 268–71, 301–6 Norman, Wayne 206 Norton, David 14, 31 Norway 26, 202, 205 Notes to the accounts 286, 288 Novartis 195, 198, 229–30, 275, 277–8, 291, 302 Novo Nordisk 8, 25, 208–10, 229–30, 251, 268, 275, 282–4, 290–1 Novozymes 301 Npower 271 NTT DoCoMo 46, 48–9, 52, 73–4 NWS Holdings 157 NYSE 109 Objectives, reporting strategy 275–6 The Observer 11 OECD 2 OFRs, see Operating and Financial Reviews (OFRs) Ogilvy and Mather 298 O’Hoy, Trevor 66 Old Economy paradigm 12–14 Old Mutual 47 Olivetti 143

Index Olympus 160–1, 168 O’Neill, Brian 20–1, 31–3 Online forums, stakeholder-engagement instruments 254 Operating and Financial Reviews (OFRs) 15, 26, 39, 88, 284 Orchestra Rehearsal (film) 301 Organisational learning, stages 268 Outlook 5–6, 12–13, 82, 111–27, 287–8, 305–6 concepts 111–27, 287–8, 305 key performance indicators (KPIs) 121, 125–7 key reporting indicators 113 reporting 113, 120–1, 287–8, 305–6 see also Management Overheads 14, 18–21 Oxfam 249, 292 Oxley, Michael G. 100 Pacific Research Institute 205–6 Pacific Sustainability Index 281 Pacioli, Luca 14 Packard, David 294–5 Paradoxes, nonfinancial reporting 27–9 Parmalat 97–8 Parson Consulting 116 Partnerships, stakeholder-engagement instruments 254 Patents 2, 13, 26, 28, 160–2, 176–7 Patton, General George 90 Pearson 163–4, 168 Pension funds 26, 51, 99, 218–19 Peppers, Don 52 PepsiCo 38, 46, 73–4, 300 Perception indicators, brands 50 Performance issues 8, 15, 20, 32, 41, 49–50, 73–8, 97, 113, 116–17, 124–7, 146–8, 184–5, 208, 286–92 ethical value 180–3, 201, 215, 226–7, 234–5 nonfinancial reporting 1–8, 27–30 ratios 8, 15, 20, 41, 73–4, 97, 113, 116–17, 146–8, 184–5, 208, 286–9, 305 training 143–6, 168–71 see also Key performance indicators (KPIs) Personnel, see Human resources (HR) Pfizer 3, 253–5 Philip Morris 39, 217 Philippines 102

325

Philips 245–6, 257 Pilkington 87, 88 Plender, John 27–8 Pleon’s Second World-wide Survey on Stakeholder Attitudes 186, 246–7 Poland 75, 270 Polly Peck 99 Poncelet, Eric C. 232 Porter, Michael 13, 80 Porter Novelli 27 Portfolio managers 15–16 Potential-harnessing activities human resources (HR) 159–71 reporting recommendations 170–1 Potentials, nonfinancial reporting 29–33 Poynter, Kieran 11 PR exercises 24, 27, 44, 191, 280–1, 293, 298 Pressures, nonfinancial reporting 25–7, 97–8, 103–4, 111–12, 273–306 PricewaterhouseCoopers (PwC) 6–7, 11, 16, 30, 63, 87, 112, 129, 133 Prince’s Trust 192 Principal/agent relationships 240 Priorities, nonfinancial reporting 29–30 Pro Natura 245 Process factors 4, 13–14, 24–5, 80–97, 121–7, 220–7 Balanced Scorecard 14, 30–1, 122, 289–90, 301 stakeholder dialogue 220–7, 240–2 strategy 80–97, 121–7 Procter & Gamble 63, 241 Product brands concepts 45–7 see also Brands Productivity factors 5–6, 137–48, 165, 172–7 concepts 5–6, 137–48, 172–7 cultural issues 139–46 influencing factors 137–9 key performance indicators (KPIs) 148 key reporting indicators 137, 139, 147–8 ratios 148 reporting 137, 139, 147–8 Profit and loss accounts, see Income statements Profit beyond Measure   (Johnson and Bröms) 112

326

Index

Profits customer satisfaction 56–8 forecasts 112–13, 121 strategy KPIs 97 see also Return... PTT 48 Public welfare 187–235 concepts 187–201 definition 187 see also Corporate Social Responsibility (CSR) Puma 46, 47–9 PwC, see PricewaterhouseCoopers (PwC) Qualitative/quantitative strategies 80–97 see also Strategy Quality issues 1, 6–7, 29, 53 Quantification factors, nonfinancials 2–3, 184–5, 190–201 Quantitative strategies 80–97 see also Strategy R&D, see Research & Development (R&D) Race discrimination, human resources (HR) 162–8 Radisson SAS 42–3, 46, 73–4 Rainforest Alliance 249 Rank Xerox 56, 95 Rankings 18–19, 24–6, 50, 100–2, 107, 110, 280, 289, 293–4, 296–7 Rating Research 218 Ratios 8, 15, 20, 41, 73–4, 97, 113, 116–17, 146–8, 184–5, 208, 286–9, 305 RBC, see Royal Bank of Canada (RBC) RBS, see Royal Bank of Scotland (RBS) Readability issues, reporting 291–300 Reagan, Ronald 181 Real estate 2 Recommendations, reporting 32, 41–3, 49–50, 52, 61–2, 66, 71–2, 97–8, 101, 109–10, 113, 120–1, 137, 139, 147–8, 153, 158–9, 183–6, 190–221, 226–7, 274–302 Recruitment 132–4, 287 Regional issues 6–7, 15–16, 23, 26, 70, 99–103, 139–46, 242–3 see also Cultural issues Regulators Corporate Social Responsibility (CSR) 183–4 expectations 112–13

governance 97–8, 100–1, 104 nonfinancial reporting 25–7, 97–8, 100–1, 104, 112–13 stakeholder dialogue 251–2 strategy 251 Reichheld, Fred 55 Relational capital 131–2 Remuneration issues governance 98, 99–110, 137–9, 145–8, 240, 282–3, 287 human resources (HR) 132–3, 153–6, 173–4, 305 Reputations brands 38–43 concepts 2–4, 6, 7–8, 17, 20, 38–43, 79–80, 129–30, 191, 241, 244–6, 266–8 intangible assets 2 stakeholder dialogue 241, 244–6, 266, 267–8 Research & Development (R&D) 3, 26, 28, 31, 45, 49, 97, 114, 127, 160, 171, 173, 284 Restructuring 88–9, 115–16, 129–30, , 177, 243 Retention customers 48–9, 51–62, 126 human resources (HR) 28, 132–4, 137–9, 144–5, 212–13, 284, 287 Return on Capital (ROC) 52 Return on Capital Employed (ROCE) 67, 146, 208 Return on Customers (Peppers) 52 Return on Equity (ROE) 8, 49, 68, 73, 84, 114–17, 121, 208, 287, 289–90 Return on Investment (ROI) 15, 20, 56, 72–3, 121, 305 Returns, risk 94 Rewards, human resources (HR) 132–3, 153–6, 173–4, 305 R.G. Barry 137 Rio Tinto 208, 211–12, 213, 229–30, 275, 282, 290–1 Risk brands 43–4 minimisation 241, 289 returns 94 Risk & Opportunity: Best Practice in Non-Financial Reporting 2 Roberts Environmental Center of Claremont McKenna College 281 ROC, see Return on Capital (ROC)

Index ROCE, see Return on Capital Employed (ROCE) Rodgers, Buck 54–5 ROE, see Return on Equity (ROE) Roebuck 90 ROI, see Return on Investment (ROI) Romancing the Customer (Temporal) 42 Rothermund, Heinz 216 Rowntree 3 Royal Bank of Canada (RBC) 116–17, 123, 193, 198 Royal Bank of Scotland (RBS) 56, 65–6, 69, 115, 193–4, 198 Royal Dutch/Shell 25 Ruckelshaus, William 202 Rutledge, John 16–17 S&P, see Standard & Poor’s (S&P) Safire, William 239 SAI, see Social Accountability International (SAI) Saint-Gobain 143–6, 171–2 Saipan 260 SAP 5–6, 12, 63, 150, 151–2, 155, 171–2 Sarbanes–Oxley Act 2002 (SOX) 100, 109 SAS 19, 133 SCA 19 Scale and frequency, reporting strategy 275–6 Scandals 5, 18, 26, 97–8, 228–9 Scandinavia 6–7, 26, 205 see also individual countries Schultz, Don E. 45 Schwarzenegger, Arnold 18 Scoris rating agency 182 Scott, Lee 92 SD, see Sustainable development (SD) Seardel 140, 143 Sears Roebuck 14, 130 SEAT, see Socio-Economic Assessment Toolbox (SEAT) SEC, see Security and Exchange Commission (SEC) Sectors, markets 63, 67–9, 278, 287–8 Security and Exchange Commission (SEC) 13, 15, 102 Segments, markets 30, 63–4, 71–2 Self-concepts, nonfinancial reporting 273–4 Self-generation issues, intangible assets 28 Self-regulation issues, stakeholders 239 Shapiro, Robert 261–2

327

Shareholder value 239, 241–2 Shareholder Value magazine 138 Shareholders 101–2, 110, 138, 218–27, 239, 241–2, 285–6 see also Stakeholders Shell 1, 3, 6, 20, 25, 165–6, 171–2, 180, 206, 216, 218, 223–4, 229–30, 241, 249 Sherwood, Bob 159–60 Shiseido 114–16 Short-term returns 8, 12–13, 79–80 Siemens 5, 20, 32, 302 Singapore 16, 69–70, 102 Six Sigma 112 Skandia 17, 275 Skipper, Anita 16 Sloan, Alfred 15 Sloan Management Review article 81, 262 Smirnoff 70, 73–4 Smith, Fred 60 Social Accountability International (SAI) 186, 213–14 Social accounting 17–18, 26 Social auditing 183–6 Social responsibility 2, 6–7, 17–18, 23, 49, 108–9, 165–6, 180–235, 260, 274, 278, 294–6 Socialisation aspects, motivation issues 149 Socially Responsible Investment (SRI) 280 Société Générale 55–6 Socio-Economic Assessment Toolbox (SEAT) 263–4 Sofitel 66 Soft factors 49, 61–2, 112 Sombart, Werner 14 Sony 88, 123 Sørensen, Lars Rebien 284 Sorrell, Sir Martin 298–9 South Africa 47, 86, 140, 144, 198–9, 243–4, 249 Southcorp 66 Southern Company 94 Soviet Union 202–3 SOX, see Sarbanes–Oxley Act 2002 (SOX) Spain 47, 100, 105, 131–2, 140–2, 161–3, 172, 275 Speaking the Same Language research report 280 Spin 64 Sports goods 46–8 SRI, see Socially Responsible Investment (SRI)

328

Index

Stakeholder value 239, 241–2 Stakeholders 4, 6, 13–16, 24–7, 91–2, 111–13, 135–6, 180–1, 216–35, 239–71, 273–9, 285–91, 301–2, 306 accountability issues 8, 11, 24–5, 70, 117–18, 132–3, 239–42, 283–4, 288–90 annual reports 227 audience identification 218, 226–7, 239, 244–7, 265–6 concepts 216–35, 239–71, 273–9, 285–91, 301–2, 306 conflict-shooting dialogue 216–18 consultations 222–6, 251–65, 268–71, 301–2, 306 corporate myopia 218–19, 241, 247–8 critique 239–71 cultural issues 242–6 dialogue 216–35, 239–71 engagement benefits 50, 241–2, 254, 259, 261, 265–8, 275–7, 280, 301–2, 306 evasiveness issues 261–71 feedback 222–6, 251–61, 303 financial community 242, 245, 246–8, 265–6 identification 218, 226–7, 239, 244–7, 265–6, 273–4 Internet communications 241, 252–4, 275, 281–2, 290–1 key performance indicators (KPIs) 226–7 key reporting indicators 218–19 management recommendations 264–6 mapping 244, 247 NGOs 6, 79, 97, 110, 179–80, 187–90, 213–14, 217–27, 232–6, 239, 245–71, 292–3 novelty factors 239–42 ongoing dialogue processes 257–61 potential threats 262 regulators 251–2 reporting 218–19, 226–7, 285–91, 306 reputation benefits 241, 244–6, 266, 267–8 self-regulation issues 239 systemising processes 220–7 tokenism 217, 280–1, 292 types 218, 226–7, 239, 244–7, 265–6 weightings 218, 244, 247–8, 261, 265–6, 268–9, 273–4 win–win strategy 216–18, 262–3 see also Ethical value

Standard & Poor’s (S&P) 2, 23, 93, 100–2, 107, 110, 280 Starbucks 193–4, 198, 229–30, 250, 257 Stella Artois 69 Stern Stewart 122 Stewart, Thomas A. 13 Stock options 109–10 Stora Enso 164, 172 Story-telling factors, nonfinancial reporting 291–300 Strategic Management Journal 240 Strategic planning 80, 111–21 Strategy 4–6, 11–12, 27, 29–33, 37–8, 45, 47–50, 64, 68–9, 71–2, 79–127, 251, 268–79, 285–306 annual reports 82–5, 96–7, 273–9 competitors 81, 84–6 concepts 79–97, 121–7, 273–9, 285–306 definitions 80–1, 90–1 human resources (HR) 143–6 instinctive/reflective processes 83–4 integrated reports 274–82, 286–8, 300 key performance indicators (KPIs) 97, 125–8 key reporting indicators 80–1, 96–7 processes 80–97, 121–7 purple prose 82 qualitative/quantitative strategies 80–97 regulations 251 report recommendations 80–1, 96–7, 273–9, 285–8, 304–6 restructuring 88–9, 115–16, 129–30 simplicity 274–5 sustainability issues 211–15 targets 83–7, 112, 114–18, 211–15 vision 8, 42, 80–97, 121–7, 285–6, 300–1 see also Management Structural capital 131–2 Structure considerations, reporting 279–91 Style issues, reporting 291–300 Success factors competitive value 72–8 people competence 137 Suez 143, 145–6, 171–2, 208–10, 279 Suncor 262 Sunderland, John 86, 137 Suppliers 81, 220–7 ‘five forces’ (Porter) 81 see also Stakeholders

Index Supply chains 240 Surveys, stakeholder-engagement instruments 50, 254, 259, 276, 286–8 Sustainability 2, 17–18, 23–4, 184, 205, 220, 280 Sustainability issues 1, 2, 6, 23, 30–1, 142–3, 153, 180–3, 202–15, 273–4, 280–2, 290–1 annual reports 215 concepts 202–15, 273–4, 280–2, 290–1 Corporate Social Responsibility (CSR) 214–15 key performance indicators (KPIs) 215 key reporting indicators 208 minimalist/maximalist reporting needs 204–10 reporting 204–10, 214–15, 280–2, 290–1 strategy 211–15 targets 211–15 UK 205, 211–12, 280 see also Ethical value Sustainable development (SD) 181–3, 202–15, 290–1 concepts 181–3, 202–15, 290–1 definition 202 trends 202–4 Sutherland, Peter 249 Sweden 17, 19, 26, 100, 120–1, 123 Swiss Consulting Group 180 Swiss Ethos Fund 103 Switzerland 99, 103, 195, 198, 229 Syngenta 105 Systemised forecasts 113–16 see also Forecasts Talent-harnessing activities, human resources (HR) 159–71 Targets strategy 83–7, 112, 114–18, 211–15 sustainability issues 211–15 Tata Group 199–200, 229–30 Tata, Jamshedji 199 Taylor, Jerry 182 Taylor Nelson Sofrès 54 Team Depot 188 Teams 149 Technology 1, 4, 26, 127, 161–2 Telecom Italia 143 Telefónica 47, 140–3, 171–2

329

TELUS 19, 83–4, 122 Temporal, Paul 42 Ten Commandments 11 Tesco 65 Texaco 134 Thailand 69, 102 Thatcher, Margaret 181 Theseus 1–2 Thomas, Alison 6–7 Tokenism 217, 280–1, 292 Toll Holdings 70–1 Tomorrow’s Company 237, 300–1 Top-down approaches, business planning 120–1 Toward the End of Time (Updike) 60 Toyota 106, 108, 123, 149 Trade names 13 Trade unions 135–6, 140, 144, 244 Training human resources (HR) 143–6, 151–2, 158–9, 162, 168–77, 210, 227, 287 see also Education Transparency International 247 Transparency issues 4, 18–19, 61–2, 97–110, 121–7, 146–7, 247, 252 see also Disclosures; Governance Trelleborg 19 Trends, markets 67–8, 84–6 Triple bottom line 17–18, 184–5, 205–8, 214, 282–4 True and fair view 17–21, 273–4, 286–8 Turnover brands 45–7, 50 human resources 137–9, 144–8, 162, 284, 287 Tyco 5, 18, 97–8 Tylenol capsules 228–9 Ubelhart, Mark 138 UK 2, 14, 25–6, 53–4, 70–4, 85–6, 100–6, 119–20, 123, 133–7, 150–1, 156–7, 163–8, 172, 182–3, 205, 211–12, 220–9, 252, 280, 297–8 book-keeping developments 14 brands 39 Corporate Social Responsibility (CSR) 189, 280 customer satisfaction 56–7 diversity issues 162–8 governance role 99–103, 106

330

Index

UK (cont.) Government White Paper on intangible assets 2 human resources (HR) 133–7 rankings 25 stakeholders 242–6, 252 sustainability issues 205, 211–12, 280 UNEP 2, 23, 25, 220 Unilever 45, 46–7, 63, 115, 119–20, 240 Unique Selling Proposition (USP) 41, 122–3, 285–6, 298 United Technologies 19 United Utilities (UU) 257, 258–9, 268 Unitil 57 University of Michigan Business School 56 Updike, John 60 UPS 59–60, 85, 213–14, 229–30 USA 7, 11–19, 23–7, 43–4, 55–7, 66, 73–4, 81–2, 86, 117, 123, 133–5, 155, 161, 166–8, 172, 180–1, 210, 228–9, 260, 294–5 Annual Report on Annual Reports 18–19 auto manufacturers 11, 43–4 community activities 7 customer satisfaction 56–7 diversity issues 162–3 FASB 13, 15, 18, 26, 39 GAAP 11, 13, 14–15, 16–17, 24, 51–2, 98, 110, 206, 297 genetically modified foods 7, 242, 262 Great Depression (1929) 14–15 human resources (HR) 133–7 McDonald’s 7, 19, 255–6 portfolio managers 15–16 rankings 18–19, 25–6 Sarbanes–Oxley Act 2002 100 SEC 13, 15 statistics 23 USP, see Unique Selling Proposition (USP) Vadasz, Tony 116 Valuations brands 27–8, 39–43, 49–50 companies 16, 121 customers 52–3 intangible assets 13–14, 26–8, 246–7 Value added statements 201 Value-based management 121–2

Value drivers 4–5, 21, 28–9, 32, 74–8, 124–7, 173–7, 232–6, 268–72, 301–6 concepts 4–5, 21, 28–9, 124, 301–2 identification 28 Value propositions 59 Value reporting 1 Value segments, concepts 30 ValueReporting, PricewaterhouseCoopers 30, 112 Van Lee, Reggie 58 Vasella, Daniel 278 Verfaillie, Hendrik 242 Verizon 58 Verwaayen, Ben 183 Vietnam 69, 217 Virgin Group 52, 65–6 Vision 8, 42, 80–97, 117–18, 121–7, 227–8, 285–6, 300–1 accountability links 117–18 leadership 90–7, 285–6, 300–1 Vivendi 5, 97–8 Vodafone 48, 108, 251–3, 257 Volkema, Mike 204 von de Ven, Johannes 180 Vredenburg, Harrie 262 Wal-Mart 5, 54, 72, 90–2, 133, 198 Wallison, Peter J. 56 Walton, Rob 91 Walton, Sam 90–1 Wanamaker, John 69 Wassersack, Heinrich 31–3, 173, 303–4 Watson Wyatt 132–3, 137 Watts, Philip 165 websites, see Internet Wedgwood, Josiah 14 Welch, Jack 79, 108 Wellington, Duke of 73 Wells Fargo (WF) 291, 294, 296–7 Westpac 221–3, 229–30, 256–8 Wharton School 4 White, Allen 30, 273, 283 Whitehead, Alfred North 27 Wilcox, Ella Wheeler 79 Wilhelm, Axel 182 Win–win strategy, stakeholder dialogue 216–18, 262–3 The Winds of Fate (Wilcox) 79 Wolfensohn, James D. 109

Index Wootliff, Jonathan 248 Work–life balance 149–50, 152–3, 158–9, 162, 305 World Bank 109 World Economic Forum 189–90, 232 World Health Organization 195 Worldcom 18, 97–8, 228 WPP 19, 67–9, 73–4, 294, 297–301

Wright, Tim 185 Wriston, Walt 13 WWF 270 Xerox

56

Zadek, Simon 184, 240, 268 Ziegler, Heidi 232–3, 268–71

331