Creating a truly sustainable organisation isn’t something that can realistically be achieved in the average tenure of a FTSE CEO, which is currently 4.6 years. Long term planning of five years plus is essential for all three of the triple bottom lines. Therefore, it is not surprising that there have been questions raised about how quarterly financial reporting can lead to a short termism. That was the focus of a roundtable discussion held by the Responsible 100 (R100) network, a collection of businesses, investors, NGO's, academics and advisors.
As the founder and MD of R100, Michael Solomon, commented, “we chose to focus on reporting cycles because they are really about the appropriateness and effectiveness of a business's articulation of its long-term goals and strategies. Some forward thinking investors and corporates have concluded that, for many sectors, quarterly reporting is proving to be a poor way to communicate on these critical issues.”
Unilever’s poster boy Paul Polman
The corporate poster boy of long term planning is Paul Polman, the CEO at Unilever. One of his first actions on joining the company in 2009 was to abolish quarterly reports and earnings guidance. The decision was criticised, and shares took an immediate eight-percent dive. However, Polman held his nerve, and has both built an internationally renowned sustainability and governance programme and more than doubled the share price since then, outstripping the FTSE100.
As Polman said in a interview with Forbes Magazine:
“It’s very easy to show more profits, if that’s what you want, by cutting investments in training and development of your people or your IT systems… So what I said when I came here is, I need to create this environment for the company to make the right longer-term decisions. So we stopped doing quarterly reporting… I don’t know if that’s courageous or not, because, at the end of the day, I felt we had to do this to be a long-term viable concern.”
Polman has been demonstrating leadership for over five years, and he isn’t the only one. A flag bearer for longer-term planning, and triple bottom line sustainability, is the FTSE100 financial services firm Legal and General (L&G). Their Head of Corporate Responsibility and Ethics, Graham Precey, is a supporter of R100, hosting the roundtable along with BHP Billiton, PwC and The Investor Forum, amongst several others, at L&G’s HQ in London. As a business, they took the big step of being one of the first FTSE100 companies to stop quarterly reporting and also to send letters to every business in the FTSE350 encouraging them to stop, too. Precey observes that as a business, L&G looks at the longer term, building a relationship with the companies they invest in.
86% support longer time horizons
He points to clear evidence of the value of this approach, with the L&G Corporate Governance report including reference to a survey by McKinsey of more than 1,000 global board and executive members. This data found that 79% felt especially pressured to demonstrate strong returns in two years or less, while 73% noted that it should be more than three years. Having a longer time horizon, 86% declared, would positively affect corporate performance with strengthening longer-term financial returns and increasing innovation. Evidence of the lack of planning is provided by analysis delivered by Black Sun Communications that found that only 13% of FTSE100 Annual reports outline strategic priorities with timeframes of five or more years.
Part of the reason for this shift is because in late 2014, the UK’s Financial Conduct Authority, prompted by the government, removed the mandatory requirement for interim reporting. There was a comparative slow uptake on this shift, as evidenced in April 2016, by the publication Financial Director reporting that quarterly reporting had “become a part of corporate culture and therefore a difficult habit to break.”
The more recent indicators are that momentum is gathering. In addition to the initiatives from Unilever and Legal and General, other investors such as Aberdeen Asset Management have also encouraged a longer term view, and corporates such as Diageo, G4S, Admiral, United Utilities and National Grid have stopped quarterly reporting. In fact, according to the Investment Association, who also called on their members to consider if they needed to continue quarterly reporting, around a third of the FTSE100 and over a half of the FTSE250 have stopped as of 2016, An article in the Financial Times observed that very few complaints have been heard from the City, with financial analysts even comparing quarterly reporting to the shallowness of 24-hour news.
Integrating financial & non-financial
A positive response by companies to the end of the narrow short-term focus of interim financial reports is to consider how they can have a more three-dimensional view, thinking broader and deeper. As Ben Richards, the Consulting Director of the communications specialists Radley Yeldar, observes: “We’re definitely encouraging clients to take a longer-term view in both financial and non-financial reporting. Internally, it prompts a different kind of management discussion about how these factors relate to each other. And externally, as a consequence of these conversations, you’re telling a more complete, transparent and joined-up story about your business.” Of course, the most
A positive response by companies to the end of the narrow short-term focus of interim financial reports is to consider how they can have a more three-dimensional view, thinking broader and deeper. As Ben Richards, the Consulting Director of the communications specialists Radley Yeldar, observes: “We’re definitely encouraging clients to take a longer-term view in both financial and non-financial reporting. Internally, it prompts a different kind of management discussion about how these factors relate to each other. And externally, as a consequence of these conversations, you’re telling a more complete, transparent and joined-up story about your business.” Of course, the most forward thinking organisations are integrating their financial and non-financial reports, with Richards highlighting Astra Zeneca headquartered in the UK and Mondi in South Africa as one to watch.
Looking at the big picture of reporting, it appears therefore that there is a quiet revolution happening, one gently guiding businesses to look up from the short term and consider the long-term futures of their business and our society and planet.