SHOPPING FOR CSR
Reporting Non-Financial Information
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Reporting Non-Financial Information
To tie CSR issues and performance to a brand, reporting is required. Reports will vary based on the nature of the business. Two trends are:
· greater coverage of previously unreported areas of corporate activity to meet the needs of stakeholders other than stockholders, and
· certification of information in the reports by top corporate officers, by second-party certifiers (contractors or consultants) or increasingly and by an accredited third-party certification body.
In first-party reports, the company merely asserts. In second-party-certified reports, the company asserts and “a professional reviewer under contract to us agrees.” In third-party-certified reports, the company asserts and “a professional certification body that has been accredited by a third-party NGO has signed off on our certification to a certain standard.”
When a few shareholders own a company, it may be enough to generate some basic earning statements because the large shareholders will naturally take a personal interest in their investment. This is also the concept behind a bank-centered industry group as exemplified by the German Hausbank or the Japanese keiretsu bank.
When shareholding is more diversified, shareholders properly worry about the Principal-Agent problem, where their hired managers are less concerned about the owners than about themselves. Until 2002, the main system of outside review in the United States was one of outside review by large auditing firms reviewed the financial statements. Independent analysts on Wall Street then commented on these statements.
The Public Company Accounting Oversight Board was interjected into this system in 2002 and serves as a kind of accreditation body for auditing firms.
In this information age, businesses rely more on attracting and retaining a talented workforce than ever before. Intellectual capital does not come cheaply and the loss of a key employee can affect a company’s value. Key employees can go down the elevator and with them take important company information and clients.[1] Recruitment and training are expensive. Productive, innovative employees who know and care for your company certainly provide value, and thus are an intangible asset.
Financial statements fail to tell investors much about what could be a company’s most important asset, namely its employees.[2] If people matter most, as company CEOs like to say in annual reports, then their worth must be measured and a value put on them.
Balance sheets as presently constructed provide useful information, but leave out significant factors. Tangible assets such as machinery can be worthless in a few months if the product they make is superseded; they can only depreciate in value, whether they are used or not. Intangible assets can either increase or decrease in value. Because a reliable market price can not be determined, valuing intangibles is more art than science. And many intangibles, such as intellectual capital or brand loyalty, will not be found in a financial statement.
As investors peruse their annual reports for 2003, they are going to have on their mind major issues of credibility and trust. These are at the heart of the value that shareholders place on the companies they invest in.
The UK government’s Department of Trade and Industry has asked the UK Accounting Standards Board to look at better guidance for disclosure of intangible assets. To help develop an alternative model, the Academy of Enterprise commissioned the Smith Institute to investigate the issue globally. Its report concludes:
"Although the economy has changed, many of its institutions, like the accountancy profession, have failed to keep pace. In many respects, the current accountancy model, developed 500 years ago, attempts to measure the assets of the creative economy with the tools of the manufacturing-based economy. A profession which fails to acknowledge, let alone measure, the core people-based assets of many companies has become cumbersome in its ability to adapt to a changing environment. Today an entire industry -- accountancy -- is based on a fiction: that the valuation auditors produce reflects the real value of the companies they audit. They simply do not. " - Smith Institute, Dynamic Reporting for a Dynamic Economy.
The report echoes Keynes’s dictum: “Better to be vaguely right than precisely wrong.” If corporate brands and reputations are their most enduring asset, it is worth a great deal to corporations to keep their brands and reputations untarnished.
[1] As Prof. Baruch Lev of NYU’s Stern School has said: “To claim that tangible assets should be measured and valued, while intangibles should not, or could not, is like stating that things are valuable while ideas are not.”'
[2] This note relies in part on an argument raised by Alec Reed, “Pounds of Flesh,” Financial Management, a journal of CIMA, London.
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