Integrated Disclosure Is a First Step to Responsible Corporate Governance

integrityThe Brazilian Institute of Corporate Governance (IBGC) is organizing a book on issues related to the contribution of good governance, ethics and compliance to the development of integrity in the Brazilian business environment.  The book will be launched in November.  The following is an excerpt from my contribution to the book.

Disclosure with Integrity

The CSR phenomenon has manifested itself most visibly in the realm of disclosure.  In the last decade, the number of CSR Reports issued by corporations has grown exponentially.  A number of organizations, such as SASB (the Sustainability Accounting Standards Board) and GRI (the Global Reporting Initiative), have done remarkably good work establishing disclosure standards that allow corporations to provide comparable data with respect to social and environmental performance.  The EU has issued a directive that will require member states to create rules requiring thousands of listed companies to report on sustainability metrics. The Securities and Exchange Commission in the US has put its toe in these waters with conflict minerals rules and guidance on climate disclosure.

Reporting on a corporation’s social and environmental effects is critical to obtaining an accurate picture of corporate performance.  Contrast traditional financial reporting, which focuses solely on revenues, profits and changes in financial value. That type of reporting provides a detailed picture of a company’s effect on its shareholders, but tells us nothing about its effect on the lives of its workers, on its customers and community, or on society and the environment.  Thus, traditional financial reporting, even if entirely correct and precise, is radically incomplete, and thus lacking in authentic integrity.

This is because integrity is not simply honesty—it is a particular type of truth-telling that requires addressing the entire picture.  Thus, a person with integrity doesn’t simply tell the truth, she is consistent in all aspects of her life—her code of conduct in her business mode matches her code in her personal life.  By the same token, a manufacturer that reports with integrity should be telling us the level of carbon emissions created over its products’ lifecycles—not just providing a narrow view of how much profit it creates for shareholders.

Without such integrated disclosure, we cannot understand the true cost of a corporation’s products, regardless of the accuracy of their financial reporting.  Jane Gleeson-White illustrates this market failure by reference to a World Bank economist’s estimation that the real cost of fast food hamburger was $200 once the cost of carbon footprint, water use, soil degradation and healthcare for diet-related illness were factored in—but because those “externalities” are not borne by the seller, they do not show up on  financial statements.[1]

The word integrity comes from the Latin for “complete.”  That is why “integers” are whole numbers and “integrate” is to combine many into a whole.  This is why integrity is a fundamental value.  Other important values, such as honesty and responsibility, are compromised if not applied consistently. (How trustworthy is someone who tells the truth most of the time?)  The same is true of corporate performance.  That is why the move to report on all aspects of corporations’ performance is essential to understanding their role in society.  With traditional financial reporting, we have no idea how successful a corporation actually is.  Do their profits come from the creation of real and durable value?  Or are the earnings simply value appropriated from others through poor treatment of workers, environmentally irresponsible production methods, and other negative externalities?

One important project– the Framework for Integrated Reporting– attempts to close this gap; it establishes standards that encourage companies to explain how their operations affect not only financial capital, but also social, human, natural and other capitals.[2]  Eccles, Herron and Serafim explain why it is critical for corporations to give a full picture of their performance:

More comprehensive and better integrated external reporting is essential—and not a peripheral—step toward achieving this goal [of creating sustainable entities].  The provision of more complete information to a wider range of corporate constituencies—shareholders, employees, suppliers and customers—is the forcing mechanism needed to promote more durable corporate sustainability.[3]

[1] Jane Gleeson-White, Six Capitals or Can Accountants Save the Planet? XV (2014).
[2] See
[3] Robert C. Eccles, Jack Herron and George Serafeim, Promoting Corporate Sustainability Through Integrated Reporting: The Role of Investment Fiduciaries and the Responsibilities of the Corporation Board, in Cambridge Handbook of institutional investment and fiduciary duty 403, 404 (2014).

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