Book Review: Capital Institute Contributes to Harvard eBook on Integrated Reporting

Capital Institute contributed to a new Ebook, just published by Harvard University Business School. The Landscape of Integrated Reporting is a collection of articles and thought pieces by those who attended a recent Integrated Reporting Workshop organized by Professor Robert Eccles, co-author of One Report. Our contribution is a letter written by a fictional CEO to her board of directors. Read it below and access the Ebook in its entirety here. Introduction Capital Institute is pleased to participate in this creative and important project. The challenge of measuring what matters is not new. But what matters now, in a world where we consume the earth’s resources at a rate 1.5 times faster than they can be regenerated, is profoundly new. The laws of thermodynamics do matter, more so every year, as our ecological footprint continues to grow. Our economics, and capitalism itself, depend upon business playing a leadership role in finding a path to truly sustainable capitalism. We are especially heartened by Dean Nitin Nohria’s expressed belief that by committing itself to that path and assuming that critical leadership role, business can reclaim society’s faith and trust. —John Fullerton A CEO’s Letter to Her Board of Directors This hypothetical letter from a fictional CEO to her board of directors represents our best efforts to distill the collective wisdom of the Integrated Reporting workshop participants through the “lens” of the Capital Institute.–Susan Arterian Chang I am writing this letter to the board having just returned from a Harvard Business School conference on “Developing an Action Plan for Integrated Reporting.” The experience has altered my worldview and how I perceive my role as CEO of this corporation. If I can pinpoint the transformational moment I would say it was when GRI’s Ernst Ligteringen shared a chart based on data sourced from the Global Footprint Network, illustrating that our economy has been running a deficit relationship with the earth’s ecosystem since the 1980s and that we are now consuming resources on an annual basis equivalent to 1.5 planet earths. Shockingly, when I returned home from the workshop, my thirteen-year-old daughter informed me that she had calculated that our family has an ecological footprint of seven. She asked me if I knew what my company’s ecological footprint was, and looked into my eyes in a new way, not like a child, but like a mature fellow traveler who knew.

It is now impossible for me to escape the conclusion that unless we find a way to negate the laws of physics, our destructive, business-as-usual course will end in certain planetary disaster and human tragedy of a scope scarcely imaginable. At the same time, this realization gives me a sense of the tremendous opportunity before us–to be among the leaders in the great transition to a more just and sustainable economy.

How should public companies like ours mobilize to meet this challenge and opportunity? Our most urgent priority must be to begin to identify the indicators that will allow us to measure, assess, and manage our contribution to this ecological emergency and report the results to our stakeholders in a transparent way. We will attempt to integrate these indicators and performance measurement systems into our financial reporting process where that is possible. But when it is not, we will nonetheless include all material sustainability analysis alongside our financial results in a single report. Failure to commit to this holistic management and reporting system will henceforth be deemed tantamount, as Ligteringen says, to “flying blind.” Dean Nitin Nohria’s opening remarks also resonated with me deeply. He described how society had lost faith in the corporate community due to its failure to take responsibility for its contribution to environmental and societal ills in its relentless pursuit of short-term profits. “When I was growing up a business person’s word meant something that could be honored,” Dean Nohria said. “Now if you ask the common person what their view of business leaders is they will say ‘they care about nothing but themselves. They don’t even want to maximize shareholder value, just their own.’” In last year’s annual report, my letter to “shareholders” focused on our corporation’s strategies to preserve our bottom line against the backdrop of a severe economic downturn. This year’s letter will be addressed to “stakeholders” and will focus on our strategies to reverse a sustainability crisis that has far more profound implications for our survival than the current recession. We will begin immediately in all communications with stakeholders, to describe, not just with numbers, but also with narrative, what goals we have set and what steps we are taking to address our role in that crisis. In short, we will set out on the road to restore society’s trust in us. We will be proceeding without the benefit of mandatory guidelines and even without a clear consensus about what this new way of reporting should look like. We simply don’t have the luxury of time. As the saying goes, what gets measured gets managed and we will begin with measuring and reporting, guided by early standard setters like the Global Reporting Initiative. We will then leverage our core competencies in the service of our sustainability strategies.

I would also like to point out that I am aware that the value of many of our most precious natural and social assets cannot be expressed in monetary terms or “by the numbers.” For those we will invent a new vocabulary to describe and report their value. We will be treading new ground as we seek to convince the markets that our nonfinancial returns may sometimes be more critical to predicting our future performance than our financial ones.

We will ask our financial auditors to provide the same level of assurance on our holistic value reports as they do on our financial reports. We will expect them to get up to speed with us quickly and to push us to demonstrate that we have identified all material issues, indicators and data and have engaged all the stakeholders required to conduct effective sustainability performance analysis and reporting. To address the concerns expressed by some members of the responsible investing community let me assure you that we will not short-circuit sustainability metrics by focusing too narrowly on producing a streamlined holistic report. We will call on you for guidance, and your early, pioneering work will be recognized and validated. Indeed, I would offer these cautionary words to the CEO of Southwest whose enthusiasm for integrated reporting appears to be as much about promoting efficiency in the reporting function as it is to drive sustainability. I take the view that we may need to sacrifice efficiency as we begin to adopt the structure of a more complex, adaptable system when we undertake holistic reporting. We know that the process may mean that for the first time functions within the organization that never communicated with one another will need to collaborate in ways that mimic complex natural systems. That transition may slow some of our processes and our decision-making but I believe the resilience and transdisciplinary knowledge sharing it nurtures within our organization will serve us well in a world of increasingly scarce natural capital.

As we decide what sustainability indicators are material to report on we will engage all our stakeholders and NGOS, including our most vocal critics. This frank and sometimes painful engagement process may lead us to conclude that we have no other option but to wind down those portions of our business that, despite our best reengineering efforts, continue to contribute egregiously to global ecosystem overshoot. At the same time we will begin to transition into businesses that will support the creation of a just society that honors the finite nature of the ecosystem and its resources.

Some of the information we will disclose as part of our holistic reporting may put us at a competitive disadvantage in the short-term, either because we are communicating intelligence about our exposure to environmental and social risks that our competitors have chosen not to disclose, or, on the other hand, because we will be revealing information about our best practices that we believe it is our duty to share with society at large. We will debate with our attorneys when they counsel us that this degree of transparency is imprudent. We are well aware that sustainability reporting may not be a priority for many of our investors–and that even signatories to the UN PRI are often paying mere lip service to its tenets. But it will be our job to persuade them that they must partner with us in this grand experiment. I also intend to line up three sovereign wealth funds committed to long- term value and five pension funds that have already declared their desire to focus on long-term stakeholder value. I will ask them to support us should any of our major shareholders decide to disinvest on the day we announce our vision. I plan to invite my industry colleagues and our key stakeholders to establish a set of key sustainability performance indicators for our sector. This will allow investors and all stakeholders to benchmark our performance and to push us to compete against something beyond short-term financial indicators. I will also form an industry group and invite our institutional investors to join us in lobbying the SEC to issue a ruling requiring mandatory holistic reporting. Our regulators need to hear from issuers like us and from the mainstream investment community, not just from “responsible” investors, that mandatory holistic reporting will serve to create a more transparent and level playing field for all market participants. Let me conclude by saying that while we admire Southwest Airlines for putting their employees and customers ahead of profits henceforth we intend to do them one better. It will be our mission to include among our primary stakeholders global society and the earth’s ecosystem, with the view that prosperity for all stakeholders will follow. Ladies and gentlemen, we have a new purpose. I ask for your support and your trust as we tread new ground together, knowing that any short-term challenges we encounter will be dwarfed by the long-term value you have entrusted our management team to create.