I propose you to consider the basic issues of reporting, starting with the problem of choosing the approach and standard of non-financial information disclosure. Let us try to identify the main factors that play a key role in the process of making balanced decisions regarding this problem. I hope after reading my post, you`ll get an answer to the question – how to choose the required standard or find another solution for the disclosure of non-financial information.
Choosing standards for non-financial information disclosure is a challenge. Information disclosure plays a key role in assessing the success of company`s performance and improving company’s credibility and acceptance in key markets. It become an increasing trend for businesses to report on social, environmental and sustainable aspects of their operations, as it feels like traditional financially oriented business systems no longer work adequately.
“Guides Planet” in the last couple of decades “gave birth” to a considerable number of guidelines and standards which have found wide application in the world and aimed at non-financial information disclosure. That’s adherence to international standards, indicates the maturity of the company, its readiness to become an equal player in the international financial and industrial arena.
Therefore, companies need to seriously considered a suitable approach, which would be relevant to mission and vision of the organization. Below are some tips that should be taken into consideration in the process of choosing an approach to the disclosure of non-financial information, the main of which is the answer to the question:
Who and why will read the report?
I suggest to look for the answer based on the principle « from the simple to the complex». Let’s start with a situation analysis, assuming a simplified form of the report.
Studies show that the average American remains at the same place of work for only 4.6 years. In general, this figure is as true for the United States, as for Eastern Europe. Moreover, before fortieth anniversary a person can change 10 different place of work. Such a turnover creates risks for companies and makes it impossible to maintain and retaining talents, which are a key factor for success in modern competition.
When the company wants to solve this problem and, in particular, wants to increase the employees engagement, the best, in terms of internal communication, is a free-form report. For example, you can make a great motivational text, because free format provides space for creativity; you can also easily engage staff in the process of forming the content, as well as in the process of distribution, and so forth. At the same time, free format allows to provide the reader with the information submitted in a flexible, unrestricted form, avoiding must have technical elements the, statistical dynamics and disclaimers. The company is a free artist, so the report can be presented in the form of an attractive booklet with bright colors and texts adapted for the motivation, engagement and teambulding. Or it could be the start-up presentation of key points at glance on company computers. Sometimes free form report is so creative that the final product is generally difficult to call the report. I think it is not necessary to explain that if the report is used in the traditional framework of marketing projects, communications, B2C, the version of the free version goes far ahead of “serious” classical and standardized documents.
I give 100% confidence, that a free report is most convenient for the companies, but at the same time, it is 100% that it isn’t meet international organizations expectations and, of course, the information cannot be comparable, reliable and accurate. Typically, free-form reports are intended solely for the domestic audience.
The power company Entergy Corporation submitted its annual report in the form of detective films posters under the slogan “Unlocking value.” “The main roles” were played by the company’s employees. Their faces we can see on the posters.
If the company has set the objective to increase its investment attractiveness, demonstrate transparency, openness and compliance with international standards, at least, it should use the GRI, and ideally – to put attention to the integrated reporting, or a combination of these two approaches. According to the web site of the Integrated Reporting <IR>, more than 100 large companies with a worldwide reputation are already using the integrated reporting. With its help Coca-Cola, Microsoft, Hyundai, Unilever, and others successfully enhance stakeholder confidence in company’s long-term success.
Preparing high-quality, contemporary report without the use of international standards, is simply impossible. Therefore, if you are on the stock exchange, planning IPO, look towards attracting international debt capital, have business operations and \ or its subsidiaries around the world, or you just have a healthy ambition – not standardized solutions for you is not enough. Now let’s consider the particular case. If you are applying for the inclusion of your relatively small company into an international chain of contractors for a large global organization, providing the disclosure of non-financial information, and its audit, the way for you I think is understandable. The same applies to the United Nations; if you’re applying for a more than 1 million dollars contract for services \ supplies, you are also in need of the international non-financial reporting model.
Membership in organizations
An important factor in the process of choosing a reporting approach can be membership in associations or such a prospect. For example the UN Global Compact – a leading international initiative aimed at promoting corporate social responsibility and supporting business community and creating a more stable and inclusive economy. If you want to join the initiative, or are considering such a possibility, for example, with respect to ideological conviction or reputational perspectives, you should be aware of the need to prepare non-financial reporting according to the CoP requirements with its criteria for preparing. Then you can choose CoP, or GRI, which, in turn, includes all the elements of the COP, supplementing and expanding them.
So let`s speak about the GRI
GRI Guidelines – is an international standard for reporting, designed for use by companies, which report on non-financial aspects of their activities. Since its release, the GRI Guidelines was periodically reviewed and appended. Its fourth and, for the moment, the latest version is called a Guide to reporting on sustainable development version G4. If I were asked to say 1 word about GRI, I would say this is a modern reporting “Mecca”. It is a leading and key standard sets the tone for non- financial (and already financial) information disclosure and in the future – a single global model of reporting. Off the record, if GRI was not established, it would have been more difficult to report on non-financial information in the field of CSR and sustainable development. I personally love the GRI with all my heart, using this standard about 7 years old. I`m an official tutor and has prepared a number of reports, so I`m very proud of it!
By the way, GRI reporting use such companies as Intel, Hewlett Packard, AT & T and others. At the time of this writing, more than 210,288 reports of leading international companies have been prepared using this particular guide.
Tradition in the report formation approaches within different sectors
Another important question is accepted standard approaches to the formation of the report in different industries. The tobacco sector reports are generally prepared according to standard AA1000, since the main task of this standard is reporting due to focus on the stakeholder engagement and taking into account their opinion in the process of company’s performance analysis. Following this standard, report preparing requires considerable time; therefore, you need a year or two. You will spend this time preparing and analyzing the results of stakeholder engagement. In short, the essence of the standard is to show how to identify stakeholders, what issues concern them, and what steps to take in response.
By the way, the first company in Russia that prepared the non-financial report according to the international standard AA 1000, in 2001 became the “BAT Russia“.
Therefore, you have to look at the existing practice within the industry in process of choosing the report format. Perhaps you will find there a hint))
“Flower Power” – is a name of Fleurop-Interflora annual report – an organization offering flowers transportation. To visually emphasize the type of company’s activity, the entire graphic part of the annual report was “paved” from the petals of different colors, including illustrations, portraits, graphs and charts.
The maturity of the company is also an important factor. If the company is just starting their CSR journey, the most logical would be structuring a business model «from simple to complex». For example, I recommend my clients to do it. If you want to achieve a high level of compliance with the standard at first time, I have to disappoint you – it will not work. A couple of years ago, when companies preparing reports on the GRI g3 / 3.1, it was possible to notice many high application level (A or B) reports, but it turned out that the company, in order to meet the requirements (to increase the number of indicators) , disclose insignificant aspects for the industry / company.
Formally application level was Level A, but from the standpoint of materiality it was C. With the advent of GRI G4 and the rejection of levels, the situation has become a little better, but the problem of disclosure of insignificant aspects or failure to disclose material one is remained.
I share the view of many experts that recommend starting with a simplified version of GRI, gradually expanding its scope. At the same time, a situation may arise when the company does not want to reflect those or other elements of the GRI. In this case, you can try to use the report in a free form, including in it certain elements of GRI. Such a hybrid format will provide you an opportunity to disclose the aspects, which the company considers material, and, at the same time, keep silent about the necessary but undesirable one. For example, a company may not want to distribute information about trade secrets and market advantages or a strategy that often is confidential.
And now let’s step back. GRI can be considered as an opportunity to give your free report certain rigor and comparability, and thus preserve its flexibility. Want to note, that such things does quite a number of companies.
Another problem related to the maturity of the company is the collection of data. Returning to the thesis about the advisability of gradualism in the development of corporate reporting practices, I want to say – do not assume that you will easily be able to collect the required data. Some information you will collect for the first time, some you may have never taken into account, and some – according to our norms of the legislation, are grouped not according to the alternative calculation, but according to different principle \ basis. In general, there are a lot of problems if you want a quick result. And often, companies fail to overcome them in the first year. And do not forget about the resource, not only financial, but even more human. The company needs to allocate enough human resources. If the company is large, 1 person – is not an option, you need at least 3-4.
An interesting solution is combined and / or integrated reports. This approach implies a certain elements of non-financial reporting in the annual report. Here we can mention two approaches – the use of the annual report with the inclusion of situational essential non-financial aspects in the text or an integrated approach to the determination of the content of the report, assuming a comprehensive demonstration of the company’s capital management.
Also you have to take into account approach of your competitors and your peers. However, having decided to follow the example of others, you should soberly gauge your opportunities and capabilities. Really sober.
Summing up, I want to note that the key factors in choosing the approach for preparing non-financial reporting (or coverage of essential non-financial indicators) are:
– Understanding of key audiences, its expectations and acceptable methods of communication;
– Regulatory requirements, or the requirements of prof. associations;
– The maturity and the company’s ability to use standard or approach for qualitative disclosures;
– Peers benchmark within countries and continents;
– Healthy ambitions.
I recommend my clients to go “on the hard way”, from simple to complex. Let it take a year to achieve excellence in corporate reporting, but be the maintenance of reputation, building a stable functioning system of data collection, and, eventually, the preparation of high-quality non-financial reporting will be a definite plus.
And yes, in case of suggestions, comments or questions, feel free to leave comments, write email, or in the social network. Be sure, I will answer you and moreover, your questions will shape the content of my following posts.