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CSR in Annual Reports: 7 Conflicting Trends

Editor’s Note:  The following article appears in a July 20th Forbes blog (click here) and is authored by Michael Sater, Account Director at Definition 6.  The article has some interesting observations about corporate social responsibility sustainability reporting issues worth reading.

Public companies in the U.S. are, by law, required to disclose financial results only. Then why are a majority of annual reports increasingly addressing social responsibility, sustainable practices and corporate giving?

Though integrated reports may eventually replace annual reports, 52 percent of Fortune 100 Companies included statements of Corporate Social Responsibility in their 2010 annual reports and 10-K. [Best Buy Releases Sixth Annual Sustainability Report]

What’s behind this push for non-financial reporting?

A combination of the current economic environment, public demand for transparency, the rise of social media and third-party verification. Consequently, however, a lack of reporting standards ensures that companies pick and choose if and how they share their charitable works, community involvement, commitment to diversity or environmental stewardship in their annual report.

A company that does it right quickly realizes that effective and transparent communication is key to maximizing investments, as well as transforming the company and its brand. Company executives understand that the organizational and technological innovations they put in place yield both bottom-line and top-line returns.

Johnson Controls, PepsiCo and Abbott Laboratories are excellent examples.

Each of these companies not only communicates the right things; it extends those efforts within its operations, supply chains and product offerings. And it communicates simply articulated objectives, net results or a set of measurement metrics to its shareholders through its annual reports.

These companies’ goals and objectives address issues that are material to their core businesses and competencies. They go beyond putting solar panels on the roofs of their headquarters, donating an extra million dollars to charity, or offering reusable bags to shoppers. The result of this materiality: They are in stronger positions to manage external market forces.

Despite these examples, when it comes to non-financial issues in corporate annual reports, the lack of reporting standards is creating a variety of overlapping and sometime conflicting trends in financial reporting.

In a two-part series, we will discuss and analyze seven main trends that will affect every company in the future, whether they already report on non-financial goals or continue to put it off for a variety of reasons, but mainly fear.

1. Rising expectations.

Over the last decade, pressure has been building for U.S. food companies to cut back on calories, fat and salt. Though higher commodities prices have reduced packaging and portion sizes, trends towards more healthful foods have accelerated. American consumers still demand the convenience of packaged and easy to prepare snacks and meals—now with more fiber, less sugar and salt.

Selective reformulation is a great first step. Real change happens when businesses share a company-wide mandate with their shareholders, quantifying their efforts toward more healthful products to start to meet those higher expectations.

Take PepsiCo, for example: The culture of the company flows downward from chairman and CEO Indra K. Nooyi and her focus on corporate character and, by extension, ethics and growth. As a result, PepsiCo chalks up considerable improvements in its product mix and sales by “investing in a healthier future for people and our planet.”

By laying out additional short- and long-term goals for the company that included metrics related to their performance according to their retail partners, consumers and, of course, their investors, they start bringing the company performance and it’s social and environmental commitments together.

2. Shareholders pushing harder than ever.

CEOs used to be able to brush aside shareholder activists, but today that would be a risky move. It is yet another mark that in the most basic governance struggle in business—the fight between shareholders and managers—investors are gaining power.

In this new environment, corporate leadership just cannot afford to ignore shareholder proposals.

Shareholders have filed 96 resolutions on climate and energy issues so far this proxy season. High-profile disasters—such as the BP oil spill and the Massey Energy mine explosion in West Virginia—have caused shareholders to give a serious look at the strategies companies are using to manage their business risks. Not surprisingly, a disproportionate share of resolutions fall within the coal electric and oil sectors.

For instance, Chevron investors will vote on new proposals placed on the ballot by shareholders including the introduction of sustainability metrics for executive compensation, two proposals calling for a report on hydraulic fracturing in natural gas extraction, and another on deepwater oil wells. Investors have actually requested that Chevrons’ board of directors prepare a report on the financial risks resulting from climate change.

As a result, Chevron is researching these risks and determining the parameters and should release a comprehensive report in September.

Expectations, however, are low, as most of the projects that Chevron’s 2010 Corporate Responsibility Report touts ignore the socially responsible, progressive and sustainable aspects of their business, so parameters are bound to be fairly narrow.

3. Supply chain engagement.

The era of corporate leaders squeezing every last cent in cost reductions from suppliers is over. Confrontational supplier relationships in today’s world have tangible consequences for the bottom line. Every corporation depends on getting access to technology or value creation.

Procter & Gamble, for example, proudly tells investors that sustainability is “fully integrated into [its] growth strategy.” At P&G, this promise is strategically carried out by “creating substantial efficiencies” and “introducing new products that have more favorable environmental profiles.”

In fact, P&G’s five specific sustainability strategies and goals directly led to the company’s recently revised Supplier Environmental Sustainability Scorecard, which moves from benchmarking suppliers to rating and rewarding them.

Suppliers that most effectively improve key environmental indicators and partner with P&G to deliver more sustainable products and services for their consumers are rewarded with more business. Incentives work. And by conveying this long-term strategy, the consumer products company enables its shareholders to appreciate the fiscal and reputational value of responsible business practices.

4. Shared knowledge.

Though corporate espionage is on the rise, the world’s most respected companies unite rather than compete to advance their own businesses and move markets.

Whether it’s the Sustainable Furnishings Council, Business for Innovative Climate and Energy Policy, EarthShare NY Green Teams or the Boston College Center for Corporate Citizenship, coalitions vary by industry, interest and region. Joining these groups multiplies every member’s gains, from those with a long track record in corporate responsibility to those just getting started, as they together seek innovative strategies that can help them enter new markets and create greater stock value.

As members of the Sustainable Apparel Coalition—Macy’s, Nike, Gap Inc, H&M, Levi Strauss, Marks & Spencer, and Patagonia—have found out, working together to lead the apparel industry towards developing improved sustainability strategies and tools to measure and evaluate sustainability performance is the only way forward.

In partnership they will “develop plans to soften the apparel industry’s impact on water and industry consumption, while making commitments to improved waste diversion and the reduction in the use of chemicals.”

5. Clear leadership.

The winners in the battle over increasingly costly energy and natural resources are leaders capable of motivating teams, partners and customers to act as investors.

Over the past 10 years, the intensified competition for raw materials, natural resources and highly-skilled employees combined with the emerging middle-class in China and India have added fuel to strategic concerns for corporate leaders. Companies pushing to become front runners in their markets and communities must look beyond the next quarter and communicate goals and vision to shareholders, suppliers and regulators.

For Johnson Controls, this realization has meant ensuring that global stakeholders, including investors, fully understand how the entire organization sees sustainable and responsible business practices as part of the corporate DNA.

Since 2005, Johnson Controls’ Business and Sustainability Report has effectively communicated the company’s strategic goals and progress in at least six languages. The prominence of sustainability on Johnson’s website ensures that visitors are always one click away from content that speaks to them, such as environmental scorecards tracking progress towards company-wide goals.

6. Localization.

One of the many things companies have learned from the recent earthquake-tsunami-nuclear disaster in Japan is that today’s long supply chains are extremely vulnerable to fallout from events far outside their control.

It does not need to take a natural disaster for organizations to reconsider distant just-in-time manufacturing and procurement. For decades, low wages, inexpensive raw materials and transportation costs have enabled China’s factories to supply the world with cheap goods. But a decade of rising materials costs, the distance between production and consumption, and a greater need for supply chain responsiveness has pushed organizations to revisit their love affair with global supply chains.

Sysco, a North American marketer and distributor of food service products, has pursued a decade-long drive to diversify its product selection and enable every regional operating unit to respond to local tastes. Rather than focusing on the lowest-priced suppliers and the limits of efficient but narrow product lines, Sysco is providing meaningful connections to the people and places behind its food and limiting its exposure to increasing transportation and inventory costs, a serious weakness in its business model.

Its new value chain approach establishes a competitive advantage that looks beyond the transaction, providing more corporate legitimacy in sales and engaging, responsive product portfolios.

7. Increased transparency/accountability/integrity.

Finally, the 800-pound gorilla in the board room. Today’s consumer landscape is saturated with marketing campaigns that promise customers green(er) services or products but are challenged to deliver substantiated data that empowers, educates and connects with buyers values. Don’t pity the company that tells a white lie. Today’s consumers are smart, better informed, and way better connected than ever before. And they are demanding equal treatment in every transaction.

Leadership on transparency and corporate responsibility comes from the top.

As Wal-Mart President and CEO Mike Duke said recently “We believe transparency and accountability are part of being a good and responsible company, and that they also make us a better company. Through the Global Responsibility Report, we are strengthening our commitment to transparency and holding ourselves accountable for what we do within our company and for our communities. We also know there are still many opportunities ahead for Wal-Mart.”

Since 2006, when Wal-Mart and Sam’s Club launched the Sustainable Packaging Scorecard, it has been rolled out in Canada, Mexico and China and other countries. As of this spring, Wal-Mart has a total of 627,000 items for sale in stores and clubs that have been entered in the scorecard, a 90% increase over 2009 levels. The company is striving for openness in a big way. And because of its sheer size, it is having significant effect.

Because customers ultimately touch, feel and engage with products and packaging at the shelf, Fortune 100 Companies are publicly sharing their current green achievements and continuing efforts to become more responsible.

In an increasingly mobile economy where information and misinformation may be found and shared in an instant, online engagement strives to provide every stakeholder open access to the facts. Each company is a work in progress. And while perfection is not yet expected, transparency and accountability are critical elements of any businesses strategy.
So, how do we move forward?

Responsibility is today’s reality.

The stage is set for a year of more open and engaging corporate reporting with these seven issues continuing to influence annual reports and the broader conversation. Remember that each element of this mainline issue, in the end, affects not only your brand reputation but also your ability to do business and make a bigger profit next year.

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