In this blog, Mark Chambers, the Associate Director for Governance at the Institute of Business Ethics (IBE), explains why it’s important that a company’s business model is at the core of its external reporting.
In the IBE’s publication on Ethics and Section 172 launched earlier this year, we cautioned against a box-ticking approach to the new reporting requirements on how boards are discharging their responsibilities. Although a high performing board will already be taking into account a broad range of relevant stakeholder interests in its decision making, we see the new UK reporting requirement as an opportunity for all boards to consider how they might improve the integrity of their decisions and facilitate more effective reporting.
However, whilst Section 172 reporting is a real opportunity for companies to differentiate, there remains a risk that over time these new reports could end up adding to the existing volume of bland conformity that has blighted so much of company reporting.
In recognition of that wider problem, very welcome effort is being put into initiatives to make corporate reporting more accessible, relevant and meaningful.
Key to any solution will be having the company’s business model at the core of its external reporting. The business model is fundamental to every aspect of what a company does but to be effective it needs to operate with high standards of governance, underpinned by ethical values that drive the right behaviours. This will support a strong culture. For a company to be successful over time it needs to have at its core a values based business model that draws effectively on the financial, human and other sources of capital available to it, operates efficiently and effectively in support of its purpose, and delivers outcomes that appropriately balance the needs of its stakeholders.
Every board member and senior executive ought to be able to describe their company’s values and its business model, yet today it is sometimes surprisingly hard to get a clear, simple and comprehensive overview of why a company is in business, what it does and how it does it, even from the annual report. If all of a company’s external reporting was framed around a clear and simple description of its business model, there would be a consistent and meaningful context for every message.
Companies also need to be honest with themselves about one rather awkward aspect of this. The fragmented nature of external reporting has been convenient in allowing companies to be different things to different stakeholder groups, for example producing ESG reporting that paints a picture of social and environmental responsibility whilst at the same time reassuring shareholders that these matters will not get in the way of results. It has been all too easy to project different impressions to different stakeholders and the ability to shift perspective has been a handy tool. By way of analogy, it is worth remembering that a cylinder is a circle when viewed from one angle and a rectangle from another…
The growing uptake of integrated reporting and its multi-capital model is welcome news in this respect. Giving the same gravitas to human, natural, intellectual and social information as traditionally has been given to financial information, through driving connectivity, articulating trade-offs and explaining resource allocation ensures the Board is taking these issues seriously, and investors understand their relevance to the long-term future of the business.
It is good to know that it is no longer enough for ESG reporting to be dominated by anecdotes of the company doing ethical things such as volunteering and community programmes; companies increasingly need to demonstrate that they are carrying out their core business to consistently high ethical standards. This requires companies to be authentic in their reporting, presenting one holistic view of the organization to all stakeholders. The most effective way of reconciling what have been different perspectives is to have the business model at the heart of all external reporting.
In addition to external reporting, boards should also look at internal communications and at their own ways of working. Outside the occasional strategy setting meetings of the board, board agendas are often fragmented, with items of business looking at particular issues in isolation and the agenda responding to issues and challenges that arise. Boards and those supporting them should put the values based business model at the core of board activity, framing the board agenda by reference to the model and thereby providing a consistent context for every item of business that a board is asked to consider.
This approach will also have resonance through the organization. Some companies seem to wallow in complexity and the least enlightened senior leaders leverage their knowledge for power. Colleagues at all levels need to feel the sense of involvement that comes from understanding what the business is doing and why. Great leaders like the late Jack Welch consistently crafted simple, compelling messages around complex business challenges, framed around a clear business model, that could be readily understood at all levels of the organization. Leaders who achieve this will find reward in a highly energized, empowered and engaged workforce.