Assessing business performance

David J. Finneren, Jakarta

Recent media reports on corporate corruption, fraud, poor governance, and environmental and social mismanagement have eroded much of the faith held in companies by a broad range of constituent parties. Society wants to better understand what companies are doing -- how they are improving or damaging lives and the environment -- what they are doing to ensure resource use and business operations are set-up for the long haul.

In today's business climate, where companies compete globally for customers and talent, where reputation is as important as financial outcome, and where social and environmental risks have become key business dynamics, companies are increasingly being called to account (both boards and management by implication) -- by a diverse gallery of stakeholders -- across a wide spectrum of their activities and operations.

The first National Corporate Sustainability Reporting Awards were launched in Jakarta in late June in coincidence with the first Sustainable Performance Conference.

In order to demonstrate a true commitment to corporate responsibility, firms need to re-examine their policies, practices and presentation. Companies can no longer afford to outsource their conscience to a corporate foundation or the community development department.

Business is beginning to recognize that a responsible and integrated sustainability strategy is required to ensure that all line departments effectively manage social and environmental issues and impacts in the company. In fact, corporate sustainability is being seen as a core part of the overall business "raison d'etre" and a direct responsibility of the Board that needs to be managed accordingly.

Corporate reporting is evolving as a part of a broader system of business accountability and organizational management. As a practice, reporting is progressing with varying degrees of qualitative and quantifiable language attracting the attention of business owners, mainstream investors, capital markets, and many others.

Various parties are using reporting outputs to benchmark, assess and survey corporate performance, rating and ranking as well as to improve business practices and make investment decisions. This is creating momentum to elevate the quality of reporting guidance, frameworks and tools to a higher level of robust and precise communication.

The primary reason that a company publishes a sustainability report is due to a combination of self-enlightment and self- interest. It is not an altruistic gesture. A company publishes a sustainability report because its directors believe it will benefit the business.

The business case for sustainability reporting is therefore remarkably simple: The process and product bring internal and external benefits that exceed actual or perceived costs. Although a definitive cost/benefit analysis on sustainability reporting has not yet been produced, the steady acceleration and uptake in the activity indicates that companies believe expanded disclosure is a rewarding exercise.

A comprehensive report by Linstock and Imagination during 2004 involved over 1000 publicly-listed enterprises and revealed that companies using generally-accepted reporting guidelines (i.e. GRI) to report on non-financial performance experienced lower share price volatility and significantly higher operating profit margins. The report also attributed the results to the presence of good management teams and noted a somewhat slower rate in comparative revenue growth.

A 2005 Corporate Responsibility survey by KPMG confirms that 52 percent of the top Fortune 250 companies now report specifically on sustainability practices for a number of commercial reasons; to protect brand image and reputation, to maintain strong market position, to increase shareholder value, to insure the trust of the financial community, to be an employer-of-choice and to be innovative in creating new products, services and markets.

Each company, depending on its specific market circumstances, values a variety of business benefits from sustainability reporting. A company that process tons of raw materials might value the reporting process for the internal materials inefficiency it helps identify. A company that depends on brand reputation for continued success might value sustainability reporting for its ability to position and convey the company commitment to ethical principles and community care.

While there are numerous benefits to cite, almost without fail, companies point to the internal benefits of sustainability reporting as far outweighing those reaped externally. They do not belittle the benefits of strengthening dialogue and trust with stakeholders or attracting additional socially responsible and mainstream investors, they just see the internal effects as fundamental improvements to their basic business foundations.

Sustainability reporting requires a concerted effort to arrive at broadly accepted strategies, objectives and action plans. The reporting process links typically discreet and insular corporate functions -- finance, marketing, R&D, human resources -- into a more integrated strategic vision and operation, opening new conversations that pave the way for discovery and innovation.

The strategic impact of a commitment to measuring, reporting and continuous improvement can influence product design and manufacturing processes in the early stages. Setting performance targets and making commitments in a sustainability report can radically alter corporate execution and operational results.

A key purpose of reporting is to track progress and shed light on areas needing improvement. When a corporation publicly reports its performance, there is a marked impact on the inside. By exposing the company to public scrutiny, employees and management become motivated to take action to insure the numbers improve in the next report.

The reporting process also provides a warning for trouble spots -- and unanticipated opportunities -- in supply chains, in communities, among regulators, and in reputation and brand management. These discoveries can help management evaluate potentially damaging developments before they emerge as unwelcome surprises.

In today's business climate, the smart companies are those that identify their operational, social and environmental risks and put plans in place to deal with them.

The corporate sector in Indonesia is no exception in rising to the challenge of more sustainable business practices.

Heeding a recent 2004 analysis of corporate governance impact across the Asia Pacific capital markets by CLSA and the Asia Corporate Governance Association, astute local business leaders now realize that the top quartile of JSX firms possessing good governance ratings enjoyed an average share price out-performance of over 200 percent.

It is a clear indication that implementing and reporting on more accountable operational practices in Indonesia is rewarded by the investment community and delivers major financial benefits.

The writer focuses on corporate sustainability initiatives that impact corporate and national competitiveness, productivity & profitability. He can be reached at finnindo@cbn.net.id