One year on: what most needs to change?

It can’t have escaped your notice that it is now one year since the explosion and fire on board the Deepwater Horizon platform in the Gulf of Mexico. The worst environmental disaster in United States history, the incident has cost BP billions, and the potential for a legal judgment of gross negligence hangs like a cloud over the company.

But you knew all that already. Many tons of ink have already been spilled in analyzing what went wrong, why the disaster happened (and we still don’t know all the answers) and what future disasters loom in the near future. But we probably already know more than we realize.

BP wasn’t alone in the Gulf – they were at the helm of a large and complex chain of contractors and subcontractors, each of whom had their own roles to play – and many of whom haven’t escaped scrutiny for the roles they played or didn’t play. Cameron International, supplier of the blowout preventer, Halliburton, in charge of the cementing, and Transocean, owner of the rig, are all coming under fire for their contributions (and some seem less willing than others to face up to this increased scrutiny, as Transocean shareholders will have discovered already).

It’s this very business model that I am most interested in here. In recent decades, the oil and gas sector has evolved a way of working that involves complex and fragmented chains of contractors and subcontractors – since the mid-1980s, contractors have gone from providing a fairly small minority of man-hours in the industry to over 75% today (as this report from OGP illustrates). That means that the vast majority of the actual work being done in the sector – the actual boots on the ground – belong not to the branded, international company, but to its contracting chain. What the industry does together – as teams working on projects – determines their success in creating positive social and environmental outcomes. It’s also part of the reason why oil and gas companies deliver such divergent levels of performance in different locations.

The truth is that there are numerous – and daunting – problems facing the sector, but many of them stem from the fact that hydrocarbons are increasingly being exploited in difficult, remote and challenging environments. These may be deep water, tar sands, areas of high biodiversity, areas used for traditional livelihoods, regions of poverty and low social development, areas where governance and regulation may be weak – the result is that the challenges of delivering real benefits to shareholders and local communities simultaneously while also avoiding major environmental damage are immense. Lots of people shorthand this as the ‘end of easy oil’. (An oil-sector person once asked in response: ‘When was oil ever easy?’)

Here comes the shameless plug: Today, a new IIED report, Shared Value, Shared Responsibility: A new approach to managing oil & gas contracting chains has been launched, co-authored by Dr. Emma Wilson (IIED’s energy team leader) and me, looking at the environmental and social performance of oil and gas contracting chains. It builds on three years of research and interviews in the sector to understand the challenges and identify some possible solutions. The report is intended primarily for the international operating companies and their first-tier contractors, but we think it sheds light on the broader problems that governments and civil society would find useful as well.

Some of our main findings:

  • We believe many companies and contractors lack a sense of shared responsibility for the overall outcomes of a project. Their legal obligations, and their customary business practices, mean they tend to focus on their individual roles and responsibilities, which means there isn’t anyone who owns the totality of a project’s impact.
  • There is no real lack of systems and processes at the industry’s fingertips that can be used to define and enforce the standards of performance expected from a project. The problem is that they aren’t adequately implemented. Sometimes, it borders on being a paper exercise, and much more effort should go into supporting and ensuring contractors and subcontractors are able to meet expectations.
  • With oil and gas operations taking place in all sorts of countries and regions, there are bound to be cultural and contextual challenges in moving between these regions. Sometimes these challenges hamper contractors’ ability to meet international standards of performance, such as when local contractor markets are underdeveloped, or corruption has taken hold, or operating companies are unfamiliar with local practices.

As far as solutions go, each situation is unique, but in general:

  • Early-stage planning and assessment is key to success, and companies should collaborate across all their stakeholder groups to understand the local context to enable clear planning, as early as possible, even before contracts are signed.
  • Underdeveloped local markets are a limiting factor, making operations difficult and local benefits limited. Companies should work proactively to build long-term capacity in local markets to service the oil and gas sector (and broader economy) in the future.
  • Company procurement processes can play a role in proliferating performance standards, sharing good practices, resisting corruption and increasing transparency and accountability.
  • Contracts themselves need to contain a balance of incentives and penalties, to ensure that environmental and social performance are given equal treatment alongside speed and cost of delivery, and to ensure that standards and expectations are clearly understood and contractors are empowered to make the right decisions.
  • Training and capacity building on the job will help improve contractors’ ability to deliver in the real world, and to keep the focus on the overall outcomes, rather than just on distinct and limited tasks.
  • There are many good mechanisms for providing oversight and good quality communication throughout the contracting chain, including encouraging contractors to do more of the front-line engagement with stakeholders in the community.
  • Reporting, responsiveness and good community liaison activities will help build trust and accountability with external stakeholders.

It’s not our intention to point the finger of blame solely at the industry – governments can make it difficult and even impossible to ensure good performance; national oil companies are often inadequate in their response to the environmental and social challenges, and impossible to influence; under-developed local contractor markets are the result of long-term failures of markets and society. The solutions are long-term and require a lot more research and collaboration than we have been able to do, but we hope this is the beginning of a proactive and responsible debate and collaboration to come.

Please let us know what you think!

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Prepare to be assimilated

The CR world, such as it is, which is to say not the real world (but I still love it!), is full of talk of something called integrated reporting. It’s an outgrowth of the 20-year-old field of sustainability reporting, and some say it’s sustainability reporting’s second coming, others its demise, and still others merely a distraction. But since Bob Eccles and Mike Krzus published their book One Report last year, arguing for a single, integrated reporting framework to replace existing regimes of regular financial and non-financial company disclosure it has felt as though IR – whatever it is – is a foregone conclusion.

And right there is both the genius and the rub: We still don’t know what IR is. That is because no consensus has yet emerged as to what this thing will finally look like. It still has the impact of a Rorschach test, where we can all feel good about its broad, positive intentions – but without any of the challenges of a concrete proposal.

I don’t doubt the enormity of this task, given the 500-year history of financial accounting (still not consistent and harmonized on a global basis) and the rather shorter history of sustainability reporting (still a niche practice, still inconsistently applied). But I can’t help thinking its efforts are at risk of being misdirected. I worry that in the rush to integrate – I hesitate to say that resistance is futile – we risk taking some big steps backward if we are not careful.

If I may, I would like to offer some observations, requests and suggestions – for whatever they are worth – to the bright lights behind integrated reporting, which they may find informative or provocative in one way or another.

1. IR appears to be largely driven by the investor-financial accountant axis, with an emphasis on influencing investor decisions (not exclusively; management is another big target of IR), notably by ending the rampant short-termism we all know and love. However, some 70% of all Wall Street trades today are executed by robots. Investment today is very nearly exclusively the result of pre-defined algorithms, self-executing and self-reinforcing, with absolutely no human thought whatsoever. What we need to influence are those algorithms, and it seems to me the thinking around IR is nowhere near being able to do this. This means the risk that IR will end up irrelevant to its putative audience is high.

Today’s financial accounting performs an indispensable hygiene role, when well-executed, ensuring a basic minimum level of reliability in financial statements. But investment isn’t what it once was. How will you ensure the results of the IR efforts will actually be used by the right people and at scale, taking a realistic assessment of how financial markets work?

2. Audiences for sustainability reports have always been low, and always specialized (raising my hand here). The problem, as I see it, is that sustainability reports have no natural audience. Integrating sustainability data with financial data in a single set of indicators will be unlikely to change this state of affairs much. There will still be serious problems with the audience because the storied ‘one report’ does not reflect the way most people make decisions about companies, and that includes most investors. As Niels Christenson (ex-Nestle) said at last week’s JustMeans conference on Integrated Reporting: ‘Before you can integrate reporting, you need to integrate thinking.’

As other observers have begun to point out, there is actually no shortage of information and data on corporate financial and non-financial performance, strategy and management. There is a serious shortage of understanding, however. This is nothing new. Remember Enron? Remember how they supposedly lied and failed to disclose material information about their financial performance and the status of all those off-balance sheet special purpose entities? It turns out that virtually every fact an investor ever needed to know about it was in one of the company’s regulated, publicly-available filings to the SEC. It’s just that there was so much of it, and it was so complex, that nobody seems to have had either the time or the skill to make any sense of it.

I would like to see the IR movement address this central challenge, not just play around with indicators that won’t enable deeper understanding. Which brings me to…

3. Have you noticed what they can do with software these days? Yes, we have loads of websites, increasing numbers of ratings and the promise of XBRL, but those are still what you might call if-you-have-a-hammer-everything-looks-like-a-nail solutions to a highly complex problem. If you already have a great deal of awareness and sensitivity to what really drives corporate performance, you can probably build your own ‘report’ in a few clicks. For the rest of us, the technology already exists (here’s just one example) to analyze not just company self-reported data, but also external analysis, opinion, stakeholder activity, media and any number of other totally unstructured sources to understand strategy, performance and trends in context

In light of this, it would seem most powerful for the IR agenda to address how to marshal the dizzying variety of potential information in an integrated way. And not, I would argue, to spend even a minute discussing what indicators stakeholders need companies to report to provide a picture of integrated performance. That’s a last-century paradigm.

4. What would be awesome would be a lot more information coming out of the IIRC, the ‘stewards’ of integrated reporting, who have been set up for well over a year, but haven’t yet published anything of any substance. It’s completely possible that my ranting and pontification are off base, but we haven’t had enough communication from the people best placed to know to say one way or another. What are your design criteria? How would an integrated framework work in practice? What contributions can stakeholders and practitioners make to this process besides sending in a form-letter email to persons unknown? What have you done to ensure the relevance and credibility of this effort beyond the financial accountancy profession? What exactly have you talked about for all these months?

Surely, I’m not alone in wanting to know. And surely, these questions will be answered in time. But let’s stop being passive recipients – I want to know what’s on your minds, too, and what the world really needs – and doesn’t need – from integrated reporting.

Yesterday’s news: How about if we all start practicing what we preach?

Two developments took place yesterday that aren’t exactly related, but point to an encouraging reinforcement of the principles of transparency. I say encouraging, but really, I’m rather bemused these principles need to be reiterated in such an elementary fashion.

In the first development, the US Supreme Court rejected AT&T’s bid to keep secret the Federal Communications Commission’s records of investigation into the company’s overcharging schools and libraries in Connecticut for internet access and equipment. An industry group had requested information about the investigation under the Freedom of Information Act. The company argued that FOIA should protect it from disclosures that would violate ‘personal privacy’ – a provision in place to protect individuals, and which the company saw as a way to avoid the embarrassment of having to defend what would surely be seen as unethical, illegal and opportunistic (alleged) actions.

AT&T’s argument was that the company should be treated in the same way as an individual would under the law, which isn’t an unreasonable punt to take in light of the court’s current leanings. But apart from being surreal (reminiscent of Lieutenant Commander Data’s quest for his own humanity in Star Trek: The Next Generation), it is a cynical ploy to prevent the public (and yes, competitors) from learning about this rather unsavory affair.

Let me point out that AT&T’s corporate citizenship website touts a wide-ranging program complete with strategic focus areas, challenges, successes and awards, all suggesting a comprehensive commitment to values-based business. You can download AT&T’s corporate goals referencing customer value, ethics and compliance, and youth education among many others, as well as its GRI-based annual citizenship report.

What does it say about a company that goes to the trouble and expense of a Supreme Court battle over the disclosure of ethics-related activities while at the same time maintaining an extensive CR program and communications campaign around the very same issues? And isn’t it interesting that they chose this route thinking it would protect them from criticism, when it surely has done the very opposite, McLibel-style? I for one will be waiting eagerly to see how AT&T handles this one in their next citizenship report (though it might be nice not to have to wait that long).

Yesterday’s second news item was a bit of embarrassment for PR giant Edelman – they of the much-vaunted and influential annual Trust Barometer, not to mention the myriad CR initiatives they have built for blue-chip clients. It seems they were expelled from the UN Global Compact for failure to submit their regular Communication on Progress, which was due a year ago. Today, it transpires (via a tweet, mind you, I don’t have anything more substantial) that Edelman didn’t get UNGC’s emails reminding them to update their COP, so weren’t aware they were in breach of the requirement until hearing about their expulsion yesterday. So apparently they’ll be rectifying the situation post haste.

Let’s just have a look at this in more detail:

1.     They didn’t know they were in breach. This means nobody at Edelman pays any attention to the UNGC. It also means they aren’t monitoring their own reputation, since the Global Compact Critics blog was already flagging their missing COP two months ago.

2.     If this sort of thing had happened at IBM, Wal-Mart or ExxonMobil, Edelman would rightly point out it’s up to the company to ensure their actions and communications provide a reliable basis for trust, and such mistakes speak to a deeper problem with the underlying issues. As the most recent Trust Barometer highlights, today’s trust landscape is: “different and conditional, premised on what a company does and how it communicates…Trust is no longer a commodity that is acquired, but rather a benefit that is bestowed.” Physician, heal thyself.

3.     Edelman has no excuse. When I looked for further information on this story yesterday, I came upon the rather astonishing fact that the company experienced very nearly the same fate in 2008, when they had also run afoul of the COP requirement, again apparently unawares. Richard Edelman’s blog post at the time turns lemons into lemonade by advising companies not to take their “friends in civil society for granted”; to “deal with a problem at the source”; and to “do all of this with speed”. Looks to me like they have yet to take their own advice to heart.

Critics will contend that the real issue is with the Global Compact itself and the “fig leaf” factor it provides for companies not genuinely interested in responsible, accountable behavior; I’m not going to address that here. But I am quite dumbfounded that an organization of such expertise in corporate reputation could misunderstand so fully what’s at stake with such a program, could manage its affairs so sloppily, and could do it all not once but repeatedly. And I’m afraid it does increase the critics’ concern that the whole thing is a hollow exercise.

Between AT&T and Edelman, I feel like I’ve dropped down some sort of CR rabbit hole, where the most fundamental truisms are lost amid a flurry of self-defeating and irrelevant behaviors. Are these cases the exception, or a rather more troubling norm?

Reporting…change? Why I’m over reporting awards

The latest GRI Readers & Reporters Survey, Reporting Change, has been released as a joint effort between Futerra, KPMG and SustainAbility. The survey follows the second round of GRI Readers’ Choice reporting awards, released in May 2010. Congratulations to the authors for finalizing their work, and also to GRI for the ongoing effort to raise the profile of reporting and of the people who demand it. But I hope you will forgive me if my response is unenthusiastic.

It’s not just the Readers’ Choice awards and survey. In the last few weeks, I’ve had the almost daily emails from Corporate Register reminding me of the ever-diminishing time left in which to vote for their CRRA ’11 awards winners. If I’m completely honest, I can’t be bothered. I read reports all the time; I just don’t see any benefit in plugging my brains into these ostensible pulse-taking efforts anymore, and sometimes I think they actually harm rather than help.

I’m a big supporter of corporate sustainability reporting. It’s been a substantial part of my professional life for decades. But reporting awards just don’t work, and they encourage the wrong type of action. They were fun for a while – and they do produce some good talking points, sometimes – but we’ve got work to do, and this isn’t it.

GRI and its supporters have put in efforts bordering on the heroic over several years to establish the Readers’ Choice awards – creating the methodology, setting up technical and integrity oversight committees, publicizing the awards and launching the results at their biennial conferences. The awards were conceived with the intention of finding the best reports in the world, without any jury of ‘experts’, just real readers. Real readers were supposed to transform the status of sustainability reporting from a niche practice dominated by consultants to a mainstream endeavour that makes a difference to our everyday decisions. It didn’t happen.

The problem, in a nutshell – and this is a bit of an embarrassment for GRI – is that the results have become a foregone conclusion. For reasons no one has fully fathomed, the awards and survey have become absolutely huge in Brazil, to the exclusion of all other countries. Unfortunately, no one has been brave enough to say this out loud, so it seems that’s up to me. The 2008 awards were led by Petrobras, hardly the first company to spring to mind when one considers the top sustainability leaders.  The 2010 awards were topped by Banco do Brasil as the overall winner, with all six categories won by Brazilian companies (Petrobras as 2008 winner were excluded in 2010, sort of like the Eurovision song contest).  In fact, not only were the six category winners from Brazil, but of the 24 runners up (four per category), 13 were also Brazilian. Of the 5700+ survey respondents, a full 73% came from Brazil. The rest comprised 10% from India, 5% from the United States, and 12% from everywhere else combined.

You have to ask why anyone would invest their time and energy in ranking a bunch of reports and responding to such a survey when they are so vastly outnumbered? And when readers’ habits seem so predictable and parochial?

They’re good reports, don’t get me wrong, and some of them are really pretty exemplary, such as Natura’s. Forgive me, but they’re not the best reports in the world. What these companies have managed is to create an audience motivated to participate in the awards.  Again, much like the Eurovision song contest.

I’m disappointed not to see this issue tackled head-on in Reporting Change. The authors – all redoubtable experts in their field – offer only a fairly weak glossing-over of the phenomenon: As Solitaire Townsend of Futerra, a formidable professional, put it in her recent Guardian blog post: ‘Of course sustainability reports from emerging markets are going to win the numbers game in surveys (bigger populations).’  This might be plausible in the case of India, which represents some 15% of the world’s population. It is not plausible of Brazil.

Maybe it’s just me, but the obvious answer seems to be that there is something highly effective about Brazilian companies’ efforts to get the word out, get people signed up, and get their ranks to the top of the list. Maybe they are a proud, ambitious and competitive society. Maybe Europeans and Americans simply aren’t all that interested in sustainability reporting. Or are just more interested in using reporting for something other than awards.

It’s a difficult truth for GRI, but the Readers’ Choice Award has taken a turn that doesn’t especially help their cause. The organization would do well to take an honest look at the most interesting questions posed (but not answered) by Reporting Change:

  1. With such low levels of report reading generally, is a global view on quality or effectiveness even possible?
  2. Can the Readers’ Choice Awards accurately select the ‘best’ entries if readers only ever read a few?

To this, I would add a third question: Does it really matter after all which reports are ‘the best’? It seems a lot more likely that the impact of reporting will come much more powerfully through integration into business practices, and integration with mainstream business reporting – and therefore into internal decisions and investors’ judgements and actions – than through a fairly small-scale cheerleading exercise.

There are other awards programs out there that recognize the best annual report, or the best corporate communications campaign or some such, but these are only of interest to the in-crowd – the PR, communications and other professions that take a technical and experienced view of the matter, and whose intention is to spread good practices in their own sector. The audiences for these are much more specialized, and narrow, but much more expert and trusted. And this is not where GRI’s interests lie.

But neither is GRI (or Corporate Register, for that matter) in the business of facilitating what strikes me as an unenlightening exercise in self-congratulation. There are ways to improve the awards and reduce some of the risks, but in the end, I think it would be little more than tinkering at the edges. It would be valuable to survey readers’ habits, needs and wishes – in a robust, reliable and probably rather expensive way – but the link to the awards distorts this beyond usability.

What other ways can you think of to recognize good reporting practices, encourage or even demand broader uptake, and flag up irresponsible practices? I would love to hear them.