Last month, Harvard Business School’s Working Knowledge published a working paper explaining how mandatory reporting of non-financial information can influence not only a company’s performance on environmental or social targets, but also how it impacts talent management within that company as well. And according to the papers authors, Ioannis Ioannou of London Business School and George Serafeim of Harvard Business School, the influence is significant.
The paper, Consequences of Mandatory Corporate Sustainability Reporting, explains that while many of the globe’s largest corporations voluntarily report non-financial information, several countries have moved toward requiring them to do so, for example in Denmark, Sweden, France, and South Africa.
Here are five ways, based on the results of the authors’ study of companies in 58 countries, that corporate responsibility reporting (called “sustainability” reporting in the paper, but referring to environmental, social, and governance reporting) improves management within companies.
1. Employee Training Increases
According to the authors, the study revealed that corporate responsibility reporting compels management to focus on human capital and employee training. And, they write, we can expect to see more time and money being spent on human capital learning and development. They write:
“In addition, we expect that firms will increase investments in human capital in the form of employee training as a result of a renewed focus on managing human capital (social pillar). Human capital has received increased attention in the last two decades with companies, investors and regulators increasingly recognizing its importance for economic development, and the United Nations establishing the Human Development Index.”
2. Social Responsibility of Leadership Promoted
According to the study, mandatory corporate responsibility reporting sends a message to leadership that they are being held accountable for social responsibility factors. Ioannou and Serafeim write:
“The results show that mandatory sustainability reporting effectively promotes socially responsible managerial practices. In particular, after the adoption of mandatory disclosure laws and regulations, perceptions regarding the social responsibility of business leaders improve.”
Because mandatory reporting encourages everyone to focus on social responsibility, they know that leadership is facing scrutiny around this issue and must perform.
3. Managerial Credibility Improves
Not only is leadership perceived to perform better on social issues when sustainability reporting is mandatory, but management is considered more credible. Ioannou and Serafeim explain:
“The next analysis tests whether managerial credibility increases after mandatory sustainability reporting. This may be the result of companies showing a heightened socially responsible behavior by treating employees and the environment with prudence and implementing ethical practices across their operations and supply chains. An increase in managerial credibility is a necessary element in forging a relationship of trust between business and society, which in turn is an important determinant of the competitiveness and economic development of nations (Knack and Keefer, 1997). We find strong results that managerial credibility increases following the year of mandatory sustainability reporting.”
The paper shows that mandatory sustainability reporting – that is corporate responsibility reporting that actually holds leadership accountable for their claims – improves management all around, as well as improving corporate performance on issues like corruption and bribery. Adopting non-financial reporting standards are more than just a nice thing to do – they encourage companies to operate better and ultimately more efficiently, effectively, and likely, more profitably.