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BALANCING MARKET AND REGULATORY FORCES

Adding and changing reporting regulations is a constant source of struggle between companies and those demanding information from them. Both parties put pressures on the State based on their own concerns. Although listed companies accept reporting requirements as a prerequisite for access to the capital markets, they still decry additional reporting burdens. Virtually any additional reporting requirement being considered by a country's legislature or a regulator11 becomes the subject of a fierce debate. Companies argue that it will be costly to implement, may be irrelevant, will put them at a competitive disadvantage, or increase litigation risk—raising the question of just where the "sweet spot" falls between the extremes of irrelevance and risk. Companies insist that a proper cost/benefit analysis be done before they are required to report and point out, with some justification, that reporting requirements are never eliminated, even for issues that are no longer salient. Those in favor of a new reporting requirement will have equally strong arguments about the benefits to a particular group of having this information. Because the struggle between these forces represents the ongoing negotiation between the Corporation and the State over what responsibilities the former has for the license to operate given to it by the latter, it is inevitable.

Any group whose mission is directly related to reporting must decide how to frame its work in the context of the existing mandatory reporting environment. At one extreme, the group can adopt a purely regulatory strategy. In this case, it lobbies the appropriate government bodies to get its reporting framework or standards adopted as an additional reporting requirement or more likely, to get them included in an existing reporting requirement. If successful, this strategy for the movement means the State will enforce company compliance with integrated reporting as it does with financial reporting. If the regulation is carefully crafted and well-enforced, it can also contribute to the reliability and comparability of information in an integrated report.

The success of such a strategy requires overcoming a number of barriers. Because of the resistance it will likely see from the corporate community, the State is typically slow to act in this domain, making regulation a long-term goal. Consequently, such a strategy can require substantial resources that few NGOs have. Finally, while regulation can ensure broad compliance, it can also result in just that—a tick-the-box compliance approach that meets the letter but not the spirit of the law.

At the other extreme is a purely market-based strategy in which the group appeals to the self-interest of companies to voluntarily adopt its framework or standards through an "it's just good business" pitch. Common arguments include the idea that doing so will help investors better understand the company's value proposition (presumably resulting in a higher stock price), that the company will enhance its reputation and credibility with stakeholders (presumably reducing the risk of being a target of some NGO's campaign), that the discipline in gathering the data for external reporting purposes and using it for internal reporting purposes will lead to a better-managed company (integrated thinking), and that the company will also be better managed as a result of the dialogue and engagement with shareholders and other stakeholders that comes with the reporting of this information (the transformation function of corporate reporting). Compared to a regulatory-driven approach, this strategy is much less threatening. Consequently, it is less likely that the corporate community will mobilize itself to slow down or stop the initiative.

When companies voluntarily decide to implement a practice, they will also attempt to adhere to the spirit of its intent rather than to treat it as a mere compliance exercise. Not surprisingly, most NGOs focused on reporting place great emphasis on the benefits of voluntary adoption, while also pointing out the risks of failing to report and falling behind peers already adopting the practice. The disadvantage of this strategy is that adoption can be slow when relying entirely upon the voluntary actions of companies. Furthermore, system-level benefits, such as the ability to compare the performance of any given set of companies and influencing resource allocation decisions at a societal level, are lost. Nevertheless, Global Reporting Initiative's (GRI's) success with sustainability reporting is evidence that a market-based strategy can be effective.

In practice, a combination of both strategies should be used, the balance shifting over time. A largely market-based strategy is most effective in the early days of a movement while it is still heavily focused on the codification stage of meaning. During this stage, the movement is creating awareness and some degree of institutional legitimacy, finding early adopter companies and an audience who cares about what these companies are reporting, and gaining testimonials from them and their stakeholders about the benefits. At this time, the movement can engage with regulators to educate them and ascertain their willingness to provide some degree of support, laying the groundwork for the institutionalization phase of meaning. The greater the degree of market uptake, the more likely regulators will provide this support. In doing so, they would be moving with the wind, rather than against it. The movement can also be opportunistic and seek to embed its work in pending legislation or regulation. The pace at which the movement increases its emphasis on a regulatory strategy must match that with which experimentation is shifting to codification. Even in the unlikely chance that a mandate is achieved early on, a strong regulatory focus while experimentation is still active can backfire if the regulation ends up being suboptimal or runs counter to the desired goal.

The balance and timing of the mix of these two pure-type strategies will also vary by country. For example, a more heavily regulatory-oriented strategy is likely to be more successful in the European Union or China than in the United States, where, at least in the short term, a more market-based strategy would be effective. Within the larger countries, and on a global basis, sector- or industry-specific strategies may also be appropriate, although it would be more relevant for mobilizing market rather than regulatory forces.

Recommendation Number Two: Members of the integrated reporting movement should engage in a dialogue to establish a global strategy for the balance and timing of market- and regulatory-based strategies to speed the adoption of integrated reporting, adapting this strategy to take account of country and sector context as necessary.

 
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