Integrated Babbling.

For a while now the business reporting environment has been moving from nudge to shove and from suggestion to prescription. It illustrates again how behaviour creates systems, structures and policies. In turn, these policies often have unintended adverse consequences because of an inability to accurately predict human responses.

Integrated company reporting is the latest manifestation of this syndrome which is part of the wider social disenchantment with business behaviour since the “Enronic” scourge at the turn of the century, and the hype around governance, transparency and sustainability that followed it. It is ironic that a full 8 years after Enron, and despite all the governance ballyhoo, poor judgement on the part of financial institutions led to the biggest financial meltdown since the great depression. This has given more pencils to the architects of regulation.

A discussion document on proposals to enforce integrated reporting, as envisaged in King III was launched last week. It is intended to consolidate the growing number of separate accountability documents into the company annual report and reconcile interaction between them. This covers the traditional annual reporting information and others such as the sustainability report, remuneration report, risk disclosures and the ethics statement.

I share David Carte’s scepticism. Few will deny the need for a radical shift in business behaviour, but before one rushes into new rules and onerous prescriptions, one should be fully aware not only of the unintended consequences but the efficacy of the measures themselves. As David suggests, too often the designers have a vested interest in the product and the new requirements hold the threat of red tape overload. Indeed it is valid to ask whether King is not overdressed.

Of course, prescriptions can never guarantee compliance as we saw with Cynthia Caroll’s appointment to the Anglo Platinum chair. At best the Integrated Report will encourage companies to “think on these things” and perhaps promote a kind of “fake it until you make it” milieu. But it has severe shortcomings as a pro-active tool for convincing stakeholders and the broader society of a company’s goodwill. Ultimately that will be determined by customer service and public behaviour more than statements in a report.

For one thing, the value of the annual report itself is often overstated. It is not a popular read even in its target market. The media seldom use them as a source of news but occasionally for background information. Most of the information is historic and if the company has something really important to say, it would not hold this for an annual report. This is particularly so if the information can affect the share price. The time and number of people involved in using the information before publication creates too many opportunities for insider trading.

So far there’s also been limited media and broader interest in the other instruments such as sustainability reports.

The primary interest in company annual reports is from the investment community. Even here, the efficacy of the annual report is often questioned. Interest is still largely focussed on the numbers that give a historic perspective. An American study showed that most of the respondents did not find the directors’ report and analysis sections very useful. The chairman’s statement too was found to be useful only if it contained tangible information about future prospects, which is a requirement under the Integrated Report. In turn, the reliability of this information will clearly depend on the general stability of trading conditions.

Additional information has seen company annual reports evolve from the provision of some statutory and mostly statistical information to multi-page glossy publications with narratives, photographs and graphs. Recent research reported in the Investment Analysts journal confirmed that this has opened the door for substantial editorialising. “Managers use accounting narratives in a self-serving manner, rather than reporting performance objectively”, the writer said. King III tries to address this by insisting on independent verification which is much easier said than done.

There are many other issues that question the effectiveness of the annual report such as accessibility and more importantly trustworthiness. History is full of examples where even audited information simply did not reveal the full truth. Company information sources, including executive statements have always ranked low in trust amongst information sources, according to the Edelman Trust Barometer. Indeed, this barometer shows that less than half of the respondents in the United States and Britain trust business to do the right thing. As long as people distrust business, they will not trust what they say. Trust has declined in these two countries despite some years of recognising the importance of a stakeholder rather than an exclusively shareholder approach.

Then there is the unsolved problem inherent in the Integrated Report of reconciling the quantitative with the qualitative, the numbers with the narrative. This problem dogged the Triple Bottom line, and simply remains unresolved. There is a huge difference between integrated reporting and integrated accounting.

Above all, the most important drawback is one of intent.

The concept of sustainability is not new. In the 1980’s it was standard management school teaching that the strategic intent of any company should be “short term profitability for longer term wealth creation.”

A vastly more competitive environment for capital, investor appetite for quicker returns, uncertain times, shorter horizons and executives with even shorter term personal goals, have created a conflict between profit maximisation and sustainability - as the schizophrenic behaviour such as the B.P. oil spill, Toyota’s quality problems, Pioneer Foods’ bread price collusion and the construction bid-rigging has shown.

Will the Integrated Report make a difference?