Integrated Reporting and Investor Clientele

• DOI: http://doi.org/10.1111/jacf.12116
• Author: George Serafeim
• Date: 01 June 2015
• Published date: 01 June 2015

VOLUME 27 | NUMBER 2 | SPRING 2015

APPLIED CORPORATE FINANCE

Journal of

In This Issue: Sustainability and Shareholder Value

Meaning and Momentum in the Integrated Reporting Movement 8Robert G. Eccles, Harvard Business School,

Michael P. Krzus, Mike Krzus Consulting, and

Sydney Ribot, Independent Researcher

Sustainability versus The System: An Operator’s Perspective 18 Ken Pucker, Berkshire Partners and Boston University’s

Questrom School of Business

Transparent Corporate Objectives—

A Win-Win for Investors and the Companies They Invest In

28 Michael J. Mauboussin, Credit Suisse, and

Alfred Rappaport, Kellogg School of Management,

Northwestern University

Integrated Reporting and Investor Clientele 34 George Serafeim, Harvard Business School

An Alignment Proposal: Boosting the Momentum of Sustainability Reporting 52 Andrew Park and Curtis Ravenel, Bloomberg LP

Growing Demand for ESG Information and Standards:

Understanding Corporate Opportunities as Well as Risks

58 Levi S. Stewart, Sustainability Accounting Standards

Board (SASB)

ESG Integration in Corporate Fixed Income 64 Robert Fernandez and Nicholas Elfner,

Breckinridge Capital Advisors

The “Science” and “Art” of High Quality Investing 73 Dan Hanson and Rohan Dhanuka,

Jarislowsky Fraser Global Investment Management

Intangibles and Sustainability:

Holistic Approaches to Measuring and Managing Value Creation

87 Mary Adams, Smarter-Companies

Tracking “Real-time” Corporate Sustainability Signals

Using Cognitive Computing

95 Greg Bala and Hendrik Bartel, TruValue Labs, and

James P. Hawley and Yung-Jae Lee, Saint Mary’s

College of California

Models of Best Practice in Integrated Reporting 2015 108 Robert G. Eccles, Harvard Business School,

Michael P. Krzus, Mike Krzus Consulting, and Sydney Ribot,

Independent Researcher

34 Journal of Applied Corporate Finance • Volume 27 Number 2 Spring 2015

Integrated Reporting and Investor Clientele

* I recognize nancial support from the Division of Research and Faculty Development

of Harvard Business School. I am grateful for many valuable comments from Mary Barth,

Brian Bushee, Gavin Cassar, Bob Eccles, Gilles Hillary, Mo Khan, Steve Monahan, Mark

Muffet, James Naughton, Grace Pownall, Shiva Rajgopal, and seminar participants at

Emory University, INSEAD, the spring accounting camp at Tilburg University, and the

empirical conference at University of Minnesota. Many thanks go to Bob Eccles and Mike

Krzus for sharing their data on the contents of integrated reports. I am solely responsible

for any errors. I am grateful for research assistance from Andy Knauer and James Zeitler.

Contact email: gserafeim@hbs.edu.

I

ntegrated Reporting (IR) is a relatively new

phenomenon in the world of corporate reporting

that has gained signicant momentum in the last

ten years. e International Integrated Reporting

Council (IIRC) has dened IR as “a process founded on inte-

grated thinking that results in a periodic integrated report by an

organization about value creation over time and related commu-

nications regarding aspects of value creation.” Such integrated

reports contain, along with traditional GAAP-based nancial

statements, considerable information about a company’s envi-

ronmental and social record as well as information related to

intangible assets in the form of social or intellectual capital,

including data on variables such as employee turnover and

satisfaction, product quality metrics, and water and energy

consumption. But unlike the sustainability reports that most

of the world’s largest companies have been producing for a

decade or more, the information provided by integrated reports

is expected to be relevant and linked to long-run corporate

protability and value. In the words of the IIRC, an integrated

report is expected to provide “a concise communication about

how an organization’s strategy, governance, performance and

prospects, in the context of its external environment, lead to the

creation of value in the short, medium and long term.”

By mid-2015, the IIRC’s pilot program included more than

140 large multinational companies that were supported by a n

investor network with more than 35 members, all of which

met the IIRC’s criteria for long-term investors—a group that

is assumed to be the prima ry audience for IR. In the United

States, for example, companies such a s Pzer, American Electric

Power, Clorox, and Southwest Ai rlines have all in recent years

published annual reports t hat they have represented (or “self-

labeled”) as “integrated.” At the same time, many more U.S.

companies have included nonnancial d ata in annual reports

that have not been identied or recognized a s integrated.

While more companies are practicing some form of IR and

more investors are starting to use the reported data, we still

have a very limited understanding of the eects of IR. In this

article, I present the ndings of my recent study that investigates

the relation between IR and the composition of a company’s

investor base. More specically, my study tested the hypoth-

esis that companies that practice IR tend to attract long-term

shareholders while possibly discouraging short-term sharehold-

ers and, as a result, create a more long-term oriented investor

base. Take the case of American Electric Power, one of the rst

companies in the U.S. to “self-declare” its report as integrated.

e institutional shareholder base of this public utility—the

largest emitter of CO2 in North America—has signicantly

lower portfolio turnover than the institutional shareholder bases

of other comparable utilities. And the same is true of Dow

Chemical’s shareholder base relative to those of its competitors.

What’s more, on April 13, 2015, when Dow CEO Andrew

Liveris announced the next (making it the third) generation of

the rm’s 10-year sustainability goals, the company’s stock price

outperformed its competitors’ by some 3.5%, a clear sign of

investor enthusiasm about the rm’s long-run prospects.

But if there is ample anecdotal evidence of a link between

IR and investors with a longer time horizon, no empirical

studies have as yet attempted to establish such a relation. In

this article, I present the ndings of the rst study to provide

broad-based statistical documentation of the tendency of

companies that practice integrated reporting to attract longer-

term shareholders. In so doing, my research complements the

ndings of a case study of a biotech rm called Shire that I

published in this journal a little over a year ago. at case,

which I mention later in this article, shows a fairly dramatic

shift in the company’s investor base that accompanied its

adoption of a number of expanded reporting initiatives

focused on product safety, anti-corruption measures, and the

recruitment, development, and retention of talent. But if such

an in-depth study of one company can provide useful insights,

it has clear limitations, especially in providing guidance to

other companies facing possibly dierent circumstances and

subject to dierent constraints. In the study that is the focus of

this article, I attempt to examine changes in corporate report-

ing and investor base across a large sample of companies while

controlling for other factors that are expected to inuence the

by George Serafeim, Harvard Business School*