Outcomes over outputs: embracing integrated reporting

29 November 2013

Public sentiment towards big business has suffered in the aftermath of the financial crisis. However, as the economic recovery starts to take hold in the UK, the US and parts of Europe, the industry has a chance to mend this by embracing long-termism. Robin Freestone, group CFO of Pearson and chairman of the 100 Group, advocates a new approach to strategy and reporting that looks beyond the numbers. Jim Banks investigates.

Big business is often criticised for focusing too much on the next quarterly figures. But issues such as sustainability, and the desire of regulators to make the economy and financial system more stable in the wake of the global financial crisis, are forcing businesses to take a broader perspective on their performance and strategic goals.

Companies face tension between the need to make profit and the need to comply with ever-more stringent regulations; however, some senior finance professionals believe that it is healthy to look at more than how much money a company can make.

In a fragile economic climate, it's essential to look at cost savings, but companies must also adapt to a new regime of reporting requirements. Robin Freestone, group CFO of Pearson and new chairman of the 100 Group, is among those who believe that integrated reporting is a powerful tool in the move towards a long-term view of strategy.

"Companies want their shares to be liquid, but they must focus on the long term. Integrated reporting will help them do this."

"Many of the changes to reporting requirements are beneficial, so we are in the right place in terms of matters like the rotation of auditors," says Freestone. "That said, there is a worry that there could be a reduction in the expertise and experience needed to audit complex organisations. Also, we have to push back in areas such as remuneration reporting. The important debate is around long-termism. Companies want their shares to be liquid, but they must focus on the long term. Integrated reporting will help them do this. It is a powerful model for balancing long-term vision with short-term trading."

Beyond the numbers

Integrated reporting puts the focus on value creation, taking into account strategy, governance, performance and prospects for growth in the short, medium and long term. It not only looks at the financial performance of
a company, but also brings in criteria such as sustainability.

"Many of the changes already proposed would take a big step towards integrated reporting, which puts forward the idea that we must look at outcomes - not just outputs and the amount of money a business has made," explains Freestone. "Outcomes must be considered more important than outputs.

"If we get it right, then integrated reporting, which will include sustainability reporting, will catch on. It is all about asking what a company is for, not just how much money it makes. We will see some companies being aggressive and pioneering when it comes to integrated reporting," he adds.

Sky and BAE Systems are among the companies that have taken the lead on integrated reporting, having recognised the importance of taking meaningful action to embrace corporate, social and environmental responsibilities.

"Sustainability is patchy in terms of the approach taken by big business, although it is clear in some sectors what needs to be done," Freestone says. "That is why you see companies like Unilever doing very well and investing a lot in terms of resources and ideas. My company, Pearson, has done a lot in terms of packaging and carbon emissions, although these issues are not as significant for us because we don't directly print anything. For us, the outcome is education.

"There are more students getting better results through what we do. That is the outcome, not the output. If you get better outcomes then the money follows, and our outcome is improving educational standards."

While such pioneers will no doubt pull more businesses in their wake, the shift to integrated reporting is not just about them.

"Pearson will be in the middle of the pack rather than a pioneer because it emphasises one-to-one meetings with shareholders," Freestone opines. "It is one of the top companies for investor relations because it talks directly to shareholders. Nevertheless, the annual report is important and the company, like others, must focus on outcomes."

One concern of Freestone's is that integrated reporting could see some of the detail in the narrative part of company reports, which may be perceived as unimportant, being left out, although he feels it often yields a great deal of useful information. Nevertheless, the idea of integrated reporting is, he believes, a big step in the right direction.

A keen eye on costs

FDs must actively seek opportunities for their businesses to operate more cost-efficiently, and there are many tools available. Embracing new technology is just one.

"There are things the company can do around sustainability, and I know that managing corporate travel in a more efficient way is important for many companies," says Freestone. "We may be at the start of an era where virtual meetings will increasingly take the place of travel; a lot can be done with technology now. There are those of us who travel far too much and don't like it, and we now have a more cost-effective way of talking to people we know well.

"We must look at outcomes – not just outputs and the amount of money a business has made. Integrated reporting is all about asking what a company is for, not just how much money it makes."

We must look at outcomes – not just outputs and the amount of money a business has made. Integrated reporting is all about asking what a company is for, not just how much money it makes.

"That is a very important factor - virtual meetings work with members of a team who know each other. Flying people to the same location is a big waste of time and resources, and virtual teams can work well. The problem in that world, for multinational companies, is that corporate tax issues are hard to administrate. It is not as clear where the decisions are taken - this is very hard to work out - but travel bills are certainly significantly lower," he adds.

Another cost-saving measure that many companies have been keen to explore is shared services, and this is an area where Pearson has been very active. The company has a facility in Bangalore, India, run by IBM, another in Dalian in China, set up by Accenture, and an in-house facility in the Philippine capital of Manila, where Pearson runs sophisticated data analytics.

"These outsourced service centres do deliver labour cost arbitrage, but those savings are never quite what you expect - often, you get back more than you thought as you learn more about your organisation," explains Freestone. "Making shared services work is about getting a clear idea of what to expect. You will reduce your costs, but you mustn't have just a cost agenda; you need to look at the productivity gains.

Cost-cutting in the context of long-term thinking means looking beyond the immediate boost to the bottom line.

"Once again, it is an outcome-based approach," Freestone stresses, "and you need to regularly review the operating model for shared services, which is complex but transformative."

Winning back trust

Perhaps the largest challenge that big companies face in the current climate is the negative sentiment that is the hangover of the global financial crisis.

"Sentiment is hard to influence and there has certainly been a post-crisis backlash against big business," notes Freestone. "Big companies are trying to do the right thing while, at the same time, paying their employees properly and making a profit. The members of the 100 Group, of which I am chairman, are largely committed to a living wage, but they are tarnished with the same brush as other companies even though they are trying to do the right thing."

Big business also faces ongoing criticism over the amount of tax it pays in the UK and there is a perception among the general public that it is getting off the hook as corporate tax rates fall, but Freestone believes this is unjust.

"The companies in the 100 Group are subject to 25 taxes and pay about £80 billion in tax each year, but the debate is always about the wrong figure - the 11% corporate tax rate," he says. "That is one reason sentiment towards big business is perceived as poor. The danger is that, when big business comes out as supportive of the need for the UK to stay in the EU, for example, its voice will not be heard."

The changes that will shift the focus of big business towards long-termism and encourage companies to look beyond short-term profits, one of which is the use of integrated reporting, will go a long way towards healing public perception. The hope is that sentiment will improve soon, so that big business can be heard in the debates that truly matter.

Robin Freestone, group CFO of Pearson and chairman of the 100 Group.
The idea of integrated reporting is, Freestone believes, a big step in the right direction.