13 December 2010

Will XBRL consolidate the filings market?

Ironically, an unintended consequence of the introduction of XBRL may be a consolidation in the filing agent market. Already the market is dominated by a few key players, with a number of smaller filing agents supporting varying numbers of filers. The "Big-4" players of course are RR Donnelly (now including Bowne), PR Newswire (and their subsidiary Vintage) , Merrill and EDGARFiling.  [Okay, I'm human, and I bet I've missed someone very important... you, gentle reader, will no doubt correct me].  Yet there are also much smaller filing agents - almost the proverbial "mom and pop shops" that cater for the needs of small groups of non-accelerated filers, frequently 'local' to the filing agent.

Yet the introduction of XBRL is impacting those relationships. For a couple of years I have had occasional communication with a few smaller filing agents, each time they have come to me asking where they can access affordable XBRL software for their clients.

Recently I've been hearing that some of the large filers are adding additional conditions to the use of their software, in effect further reducing the options for the smaller filers and filing agents. As one small filing agent told me - "it is almost as if XBRL will help them take my clients from me".

The good news of course is that there are options, and exploration will uncover these, for both filing agents and for individual non-accelerated filers creating their own and filing their own XBRL.

Now, this discussion does not relate to those companies that self-file. These companies continue to have access to a wide (ish) range of software tools and processes to create their XBRL. And there are some very good tools out there.

There is a strange irony here.

XBRL threatens to disintermediate the data aggregators. Free, detailed tagged, accurate and timely information is a threat. This will force them, in order to remain relevant, to improve the range of data provided, and the range of value-added services that come with the data subscriptions. The IRA (Institutional Risk Analytics) is a great example. They are taking Call Report data from the FDIC and adding value through bank analysis (and multi-bank analysis), and selling subscriptions to that value-added data.

Unfortunately the filing agents might be using the mandatory provision of XBRL as a mechanism to actually contract the market for filers. The complexity and cost of XBRL creation actually serves to herd the filers into the arms of a smaller set of very large filing agents - the ones that can afford to provide XBRL services, either through self-developed XBRL software or through strategic alliances. The smaller filing agents find themselves with fewer options.

So disintermediation at one end, yet greater aggregation and fewer options at the other. And following the almost "natural order" of things, would it surprise me to see further aggregation?

04 December 2010

With Friends like These...

As we in the northern hemisphere enjoy the earliest days of (dare I say it) WINTER, a good friend in Wellington, New Zealand, sent this today. He noted that we are "enjoying" 3deg Celsius (37f) with clouds, rain, and yesterday a little snow. 

He just wanted to let me know that it was 24deg Celsius (75f) there, and to send along this photo that he took, minutes before.

Or as his e-mail said, "Wgtn was 24deg, calm, and sunny today. Rather nice. Since the internet insists it is miserable weather there, I though this would cheer you up!"

With friends like these...

23 November 2010

Security theater

I had the pleasure of visiting the United States last month, and traveling from New York City to Boston, by train. It was a slow train, but even the fast train wasn't much faster, but that's not the point of this article.

The point is that security in the United States is being used as an excuse by small people to demonstrate their power over other peoples' lives. "I have the POWER over your live now! So now YOU are the little person." It would be funny if it wasn't so sad.

In fact, it is just down right stupid. Moronic. Inept. And a massive waste of money.

So, let me describe the scenario:

1. I purchased my ticket online (key point).
2. At the station, I used the scanner on the machine to read my printed confirmation and print my ticket.
3. The man behind the ticket window was very helpful in pointing me to the right platform.
4. I waited for the train, with my backpack containing a change of clothes.
5. Train arrives, I and others board, find seats.
6. Train leaves, conductor comes along, takes ticket, punched hole in it, returns ticket, continues.

Boston is a nice town, and it was great to visit visit with old and new friends, and unfortunately pass a cold bug along. (Sorry about that).

Two days later it was time to return.

So I took the Boston subway to the Amtrak station, arriving just in time to be told that I the train was closed - and then watched it pull away. Fair enough. If I had been there2, or even 1 minute earlier, I would have simply walked onto the train. Oh well. So I asked the conductor, what are my options? Oh, no problem, he said, just go to the ticket counter and they'll issue you with a ticket on the next train.

7. I go to the ticketing hall - that's all I can call it, a hall, with 8 - 10 granite protected windows (bullet proof glass also I suppose).
8. Only two windows are open, at opposite ends of the room, but there is still the rope-corridor that you are suppose to follow endlessly, even though you are the only one int he queue.
9. Arrive at window (I'll not say which one), and explain, I just missed my train, is it possible to get on the next train to NYC?
10. Certainly - transaction under way, then "I need to see some ID?"
11. Oops. That's when I remember that I've left my passport with the people we are staying with in NYC, and all I have is an expired drivers license. No harm, I hand it over.
12. He studies it., then declares: "This is not valid, give me another ID." Note the politeness along the way...
13. Umm, I don't have any, I forgot my passport in NYC.
14. "Then I cannot sell you a ticket. Amtrak is now under the same rules as Airplanes and the TSA won't let us sell you a ticket with out a valid ID". (But your machine already did, over the Internet, without any ID, and you let me travel to Boston without any ID - I think this, but do not say it.)
15. Umm, how can I get back to NYC?
16. "You can't by train without an ID".
17. Umm, so what are my options?
18. "You can go across the street to the bus station."

Well, I'm not getting anywhere with Mr Charming, so I leave.... ...and

19. Return to the ticket hall, but go directly to window number (other).
20. I just missed my train, is it possible to get on the next train to NYC?
21. Certainly, that will be $6.
22. I hand over the same credit card used to purchase the ticket (over the Internet).
23. Card is swiped, ticket printed, card and ticket passed under the Al-Qaeda Proof Glass barrier.
24. Thank you, and I leave.
25. Time for a quick spot of lunch, then get on the train, walking past the conductor who glances to see that I'm actually carrying a ticket to NYC (or at lease on this train).
26. Find seat, conductor passes through (after we've left the station, takes ticket, clips hole in ticket, returns ticket, moves on.

So Congratulation Amtrak.

You let someone onto one of your tains who might have been carrying a bomb in his backpack (but most definitely was not!). You actually let the train travel long enough for that person to detonate that bomb (which wasn't there, not even a practice bomb). You let travel all the way to my destination without ID, based on a ticket I bought online.

But coming back, when I missed my train. Oh no. You wanted me to travel by bus to NYC with all the Al-Qaeda operatives who, without ID, are transporting their bombs to NYC by bus.

US Security is Theater. That's all it is. If I was a terrorist (which I am NOT - please, I'm not. PLEASE - stop, I'm not an enemy combatant, please do not take me to North Carolina and and put me in solitary confinement until I admit anything you tell me to) I can think of probably hundreds of ways to cause problems, and the TSA would simply be the joke that would facilitate my accomplishing my (if I had one) evil plot. (Which I don't, so please don't put on a "No Fly List").

I believe in the Constitution, and believe that these morons in Washington, from both parties, have spent years undermining it. I'm also a veteran, and spent four years in the Pentagon. That doesn't make my a Timothy McVeigh either.

But I've reached the point where I'm afraid to be in the United States, because honestly, I have no idea what I might do that will have me declared an enemy combatant, stripped on my rights, thrown into a cage, and deprived of liberty until I will admit to anything, so they can prove how effective the system is at rooting out terrorism.

It is a Joke. And a very bad one.

(Truth is, I'm actually afraid to publish this. "But is you done nothing wrong, what are you afraid of?" I'm afraid of retribution for even questioning their authority. That's what I'm afraid of.)

22 November 2010

The Crunch Is Coming!

Last week I was talking to the CFO of a small public company - I'll call him "Bob" (not his real name, but you probably guessed that). He said they use specialist software to produce their SEC filings, which they file themselves. He likes the software and process, and he likes the price. But recently he's had a call from the account manager, who was thrilled to tell him that they were ready to meet all his XBRL filing needs - at almost 8 to 10 times their current costs. Bob almost choked. He told me, "Dan, who do they think we are?"

So is XBRL really that complex? (Yes)  Do companies really need help doing this? (Yes) 

So where are the experts? I have asked that question before. Actually, I've been asking that question for years. But that's not the point I want to make today.

The SEC (in its final rule in 2009 - page 117) estimated that there are 8,700 third tier filers. That's 8,700 Bobs out there?

It is now crunch time. In 2011 the 8,700 third wave of filers (Bob-1, Bob-2 ... Bob-8699, Bob-8700) will need to produce XBRL for the SEC. These are not the giants that can throw people at this interesting problem, and maybe with appropraite investment discover ways to use XBRL to improve operational efficiency. These are companies with limited budgets, small finance departments (sometimes only two people) already struggling to ensure that they meet their SEC filing obligations.

In early 2008 I wrote an article recommending 4 steps for companies to get ready for XBRL.

In early 2009 I wrote the following:

"Like any new standard there will be difficulties with implementation, assurance, ease of use, availability of software and tools, and most important a lack of real expertise. Companies that wait for a mandate will find themselves in a SOX type situation - too many companies chasing too few resources. "Experts" will magically appear, and costs could spike, so plan early."

That remains as true today as it was three years ago. A chunch is coming. Companies will either lock-in the resources that they will need early, they will need to "grow their own" (something many simply cannot afford to do), or they will need to complete for scarce skilled resources. And yes, there will be a lot of charlatans out there.

A lot of companies are going to get burned by the price they are going to have to pay.

Limited Seating: At the XBRL table, and at the Cave de la Tour. Comment below or e-mail me to learn more (about limited XBRL seating or Cave de la Tour).

16 November 2010

XBRL IS being audited - at what cost?

Imagine being called to the stand in court and being asked "So, what 'good faith efforts' did you make to ensure that there were no errors in your filing to the SEC?" That question has been keeping CFOs, Audit Partners, and more recently Audit Committees up at night. Certainly the traditional filings in HTML format (for 10Ks and 10Qs) are subject to audit and review as required by the SEC. The XBRL versions of the same documents do not carry that requirement, so nothing "must" be done. 

The same holds true in the UK, where the is no requirement for assurance over the XBRL versions of financial statements that will be filed with the CT600 to HMRC starting April 2011. Only the Danes seem ready to require assurance, and that remains to be defined.

In 2008 I wrote "XBRL Will be Audited", and " and in November 2009, I wrote "So, What about Assurance (or, "Lord make me virtuous, but not yet").

There is of course no mandate for assurance (or audit) of XBRL filed with the SEC today. Filers have been provided with a 2-year window of litigation relief provided they are able to demonstrate a "good faith effort" to produce error-free XBRL. What happens after that 2-year window is anyone's guess. As the first-tier filers are coming up on that 2-year period, I expect they are asking themselves what a "good faith effort" is, especially if some filers are opting for some form of assurance.

XBRL has turned out to be about as expensive as the SEC estimated (for first year, block tagging). But those cost estimates did not include any costs for assurance over the XBRL. This is a cost to filers that was not estimated in the proposed and final rules (because it is not mandated). And if you ask them, the SEC will say "No, assurance is not required. We would hope that companies will take whatever steps they think are appropriate to ensure that their XBRL data is error-free, but we do not require assurance. That is a market led issue."

But make no mistake, XBRL IS being audited. We just aren't allow to call it that. Officially, "reviews" of XBRL are being performed under the guidance provided in the Agreed Upon Procedures (AUP) recommendations of the AICPA.

So what is the price of sleep? Apparently sleep starts around 60 auditor hours, and grows to at least 100 - all for the first filings. Second year (detailed tagging) and the cost of a good night's sleep increases to well over 200 auditor hours. So, on top of the SEC's estimates, companies should expect an additional $15,000 - $25,000 in auditor fees (although from what I've heard, the floor really is around the $25,000 level). Second year (detailed tagging) costs will probably be closer to an additional $50,000 - $75,000 in audit fees.

Now if you are a $1million - $3million in audit fees company, then that extra is pretty cheap for a good night's sleep.

But if you are a third-tier, non-accelerated filer, than those costs are simply outrageous, and other solutions for assurance over the XBRL will need to be found - fast.

Such solutions are possible, but I have yet to see them reach the market, and I am watching for those solutions. But today, the major accounting firms have no incentive to actually create such process improvements or tools - their giant clients are willing to pay the extra, and as they have the few skilled individuals, they are able to charge a premium for those services.

But for the remainder of the market, substantive testing of every tagged element simply does not seem to make sense, or at least as much sense as substantively testing each entry in the financial statements. And we know that does not happen - that's what "materiality" and "sampling" are all about.

But better ways are possible. Cheaper, faster. Just not on the market - yet.

A work in progress

14 November 2010

CSR Reporting Risks

Much has been written about the benefits of CSR and Sustainability reporting, so it may be worth taking some time to consider the risks, and potential mitigation of those risks. CSR and Sustainability reporting has a purpose, foremost to communicate a company's achievements, challenges and plan for being a responsible business, and to achieve a level of sustainability possible to that company and its industry.

It is easy (for those involved with sustainability or CSR) to assume that the benefits of reporting outweigh the risks or costs. This is an assumption that needs to be met head-on, to ensure that in each particular situation, the appropriate benefits are being achieved, accurate and relevant information is being reported, key stakeholders are engaged, and that the primary audiences are reading and using the reports.


I’ll start with the assumption that a CSR / Sustainability report is produced, and that a project team is responsible for creation and maintenance of the report. So this is not "just a report", it is a project and a process. What could possibly go wrong? To a certain extent, the list of possible risks mirrors those of any project or set of deliverables. After all, it represents a set of approved expenditure designed to address a set of business needs and issues, and deliver a set of business benefits that should outweigh the investment.

Yet CSR / Sustainability reporting is not just another project or report. A CSR / Sustainability report combines aspects of marketing, financial and regulatory reporting, operational efficiency and effectiveness, and enunciation of the vision and mission of the enterprise. There's a lot riding on that funny little report with its photos of windmills, smiling girls and daisies.

So what are the risks? Here is a summary list, with more detail in the full White Paper.

·         Is it worth it?
·         Market expectations
·         Green-washing
·         Fraud
·         Regulatory requirements
·         Delivery of promise
·         Is it being read? Hitting the target

In discussion each of these risks, I hope you'll bear with my being boring and using a structured approach. For each risk, I'll describe the risk, discuss the likelihood, impact, how to monitor and responses. Dull yes, but systematic when dealing with discussion of risk. And far to long for a blog posting.

You can download the full White Paper here.

02 November 2010

Breaking News: Time for a change?

First, congratulations to Mark on his new role, and our wishes for all possible success. Next, congratulations to "the new boss" (Campbell Pryde) who I am confident will make the lie of the "Who" song.

This is a great change, with leadership that understands the technology at as deep a level as possible, yet with the skills to enunciate the value proposition. Add to this the possibility of changes to membership options, and I think we might see and "XBRL US Inc" that I'll be happy to go back to calling "XUS".

Unfortunately this will not solve the funding crisis, and sadly we will probably see total staffing numbers at XBRL US Inc shrink. But then, I guess that comes wtih the job...

The best news of course will be the opportunity for a "fresh start" and for XUS to get back to its roots and mission.Some of the needed changes will probably not look good, but I'm confident that new (known) leadership will deliver the change needed, and will be able to reach out to the wider XBRL community, reinvigorate the membership (and even focus on members) while also progressing the Labs and other initiatives.

In addition, it can only be good for the international adoption of XBRL, to have the largest jurisdiction, hopefully, on the way to growth and prosperity. I expect the range of changes will also improve the financial situation. It is worth noting that even though as a US Not For Profit, with requirements of transparency, the Form 990 does not have to become public for over a year after the close of the period. So if there was a hemorrhaging of money and members, we might not knowuntil probably February or March next year, and then for 2009 only.

Hopefully the years of a flawed business model will be behind XUS, and with new leadership and new direction, the future will be nothing but success after success.

Good luck, we're behind you all the way! (Yes. really!)

28 October 2010

Why create a CSR report?

Why create a CSR report?

Why should a company create a CSR (Corporate Social Responsibility), sometimes known as a Sustainability report, or even a “Triple Bottom Line” report? What are the drivers? Is CSR a fad, a real reporting opportunity, or a requirement? The answer to that question depends on who you are, your markets and clients, your competitors, and those you report to external to the company.

It is easy to suggest that it is a fad, and we've all seen fads come and go. But it is also easy to see that if it is a fad, it is a fad that is being driven as much by consumers as by companies themselves. Companies across industries are touting their corporate responsibility on their websites. Why? Why would they spend the money and time to create reports, unless they actually believe there is a return for such reporting?

The very fast response is that they believe there is going to be a return, a real ROI, either through reduced costs or increased revenue, or both.


So what are the key drivers? The can be summed up as including:
•    Investors
•    Market expectations
•    Competitors
•    Regulators
•    Employees
•    Communities

And each of these drivers has at its core either increasing revenues, or reducing costs. After all, if a program does not accomplish one or the other, then why should a company incur the associated costs?

In CSR circles, these drives are called "stakeholders", and frequently direct outreach to stakeholders is an important element of creating a successful CSR report. Strangely, for most companies that "stakeholder engagement" has already take place, in one way or another, and the information needed to create the CSR report already exists.

So lets look quickly at each of these drivers.


Why should a company produce any report? Fundamentally reporting should serve the purpose of improving internal decision-making, influencing external parties, or responding to regulator mandates. As CSR reports are external facing in nature, the question then is "who do we want to influence". At the front of the pact should be the investors or potential investors. And this means that the CSR report should provide the information needed for that group - information to demonstrate to investors (and analysts whose results are of interest to investors) that the company understands and is proactive in meeting is "responsibility" imperatives.

Investors want both short- and long-term rewards, and management's program must balance the two. The CSR report should, coupled with or even integrated with the annual and financial report, provide the data that delivers comfort to investors that the company understands and is focused on achieving short-term rewards in a manner that ensures achievement of long-term rewards and goals. Almost sounds like the classic definition of Sustainability - enough for today without stealing from tomorrow (my paraphrase).
Market Expectations

Markets, both B2B and B2C (and every other x2x) are becoming much more aware of the relationship between a supplier's corporate responsibility and the quality of product, acceptance of the product, and reduction of long term costs.

Equally, companies have come to understand that, as Warren Buffet said best "it takes 20 years to build a reputation and 5 minutes to ruin one". Corporate responsibility is not about always doing good, but about being able to prove to yourself and communicate to your customers that always try, honestly, to do good (within a business context of needing to make a profit).

Many companies are now including a requriement for suppliers to specifically address their CSR credential in proposals. One bank in Vancouver includes responses in it ranking of potential service providers. Other companies around the world are now looking for this information in bids.

You should be asking for a copy of any potential suppliers CSR reports before entering into any major contract. Companies that provide such reports are significantly more likely to understand the issues and to work to ensure that they are “responsible” businesses. Companies that cannot demonstrate their CSR credentials may cost you, and cost you big. Too often a failure to report is not because the company is not aware of the issues, but because addressing potential issues (child labor, carbon-intensive production or energy, pollution) can add costs that will eat into the suppliers’ profits. Competing against “responsible” businesses without carrying associated costs can be profitable business. But today, any tourist or activist with a cellphone could destroy your reputation, linking you to irresponsible companies in your supply chain.


Companies should take a very good look at their competitors’ websites and the messages that they are sending.

Working with clients, I make a habit of looking at their competitors’ websites. It comes as a little surprise that many tout their sustainability or responsibility credentials. Sometimes in vapid and empty phrases, or with pictures of windmills, daisies, and little girls smiling in the sunshine (these I almost immediately discount). Others back up their statements with reports, online or in PDF format, sometimes with a GRI Content Index to help find various bits of information.

Then there are the majority - the companies that do not have CSR or Sustainability reports of position statements. I also like to point these out to my clients, asking if demonstrating the company’s credentials might actually provide a competitive advantage. Equally, if the company is already competing of a "level playing field", how level will the field be when their competitors do start showing their credentials?


Ahhh, regulators, the gorilla in the room. Why are they a driver for creating a CSR or Sustainability report? The first reason is to show them that you are already a "responsible" business and therefore, as they say on the police shows - "Move along, nothing to see here". The second reason is to prove that there is no need for all that nasty regulation that they are considering, because you are already "responsible", as demonstrated in you report.

Of course, the first reason the more effective, because for the second to matter, your peers will need to be demonstrating that they are responsible businesses also.

So, the CSR or Sustainability report should be taking informaiton that your company already produces, and complies it into a quality report that all can see, not just the regulators who are already receiving those detailed reports.

A great example is the commercial property and construction industries. Many companies in these industries produce very nice CSR reports. A careful read of the reports, especially their health and safety sections (frequently described as "Caring for our People and our Communities" or words to that effect) can be boring, and sound like boilerplate. At there core is a simple message - "We comply with all health and safety laws". But that is not nearly as interesting as reporting a reduced accident rate, increased training, onsite safety briefings for all visitors (“because we care”), etc.


Employees like to have pride in their company. It is part of them. And a company’s image reflects on the employees. Ask any employee of a "Top 100 Places to Work" (in the US) or virtually any employee of a company like the Co-Op in the UK, and you will see their pride.

And pride in your employer translates directly into reduced unplanned turnover, reduced hiring costs and payroll, and increased productivity. We know that people work for money - but we also know that people chose where they work for many reasons beyond money.

Some companies are intentionally structuring the "responsibility" message with a view to attracting and retaining employees (even in this economy). Some look at their employees as long term assets that require investment. Others understand that the recovery, as it unfolds, will change the employment picture, and companies with a poor reputation will get their pick of the second-level candidates.


Finally, and possibly most importantly, all companies have a "license to operate" that is in no small part predicated on how the local and wider community views that company. Good employers, innovative products and services, and a respect for the environment and society all factor into that "license to operate". Abuse that license and society will turn against the company.

Therefore reports are being written specifically to highlight the value and respect that companies have for their communities. For the multinationals, they report to demonstrate their respect for and support for the varied cultures and communities in which the work and deliver products and services.

The support of companies for their communities is not something that happens because it is in a glossy CSR report. The CSR report highlights the support that the company provides to its communities.

Where does the content come from?

So, I've highlighted the drivers for CSR reporting. But where does all the information contained in such a report come from? The range of information, the number of people that maintain and hold that information within a company can be quite difficult to map. And mapping the sources of that information is important.

The good news is that there are ways to improve access to and collating all that information, filtering out the important from the merely interesting.

This is a subject for a different article, but clearly tools exist or are coming onto the market that will make the collection, collation and selection of already existing information and content much easier. This will facilitate the rapid creation and updating of CSR / Sustainability reports, regardless of the reporting standard used.

What reporting standards should be followed?

Today there are a few reporting standards, and the standard selected should be based on the primary audiences. If you are looking to create a pool of data for analysts, I would recommend you take a good hard look at the KPIs for ESP produced by the DVFA (German Investment Analysts Association) and endorsed by EFFAS. If your primary audience is marketing, consumers, and employees, then the GRI's G3 standard provides a range of reporting levels (they call them "Application Level") that allows you to produce a tailored report, and to grow the range of reported information over time.

The UN Global Compact probably has the "easiest" and "fastest" standard to comply with, and is a good "starter" report. But if a company is going to be serious about meeting the information needs of the widest range of audiences, the UNCG will not be adequate.

The work of the newly formed (August 2010) IIRC (International Integrated Reporting Committee) will be worth following, as the primary objective there is to create reporting standards that integrate sustainability reporting into tranal business reporting (annual reports, etc) and providing a sound accounting base for the reported information.

13 October 2010

Congratulations to the GRI - now in NYC

Congratulations to the GRI (Global Reporting Initiative) on the opening of their NewYork office. The United States remains the largest economy in the world, yet also lags behind in CSR / Sustainability reporting. Certainly there are pockets, and certainlly the very largest companies all produce reports, many following the GRI guidelines.

But as long as the GRI was viewed as "something European" there was going to be push-back. The lack of a national standard for sustainability reporting in the US, and the lack of a clearly defined mandate from the SEC (for listed companies) has also allowed business to avoid CSR and Sustainability reporting as "just another overhead, another reporting burden".

That of course is changing, as companies understand the financial benefits of both being sustainable, and of communicating that sustainability progress to their stakeholders.

It is also interesting to note the Big-4 are all helping.

"Each of the ‘Big Four’ accounting and professional services firms in the United States – Deloitte, Ernst & Young LLP, KPMG and PwC U.S. – has agreed to provide donations to sponsor GRI’s new Focal Point USA for the first two years."

Some time ago I reported that the GRI was making the rounds to the Big-4 asking for $200,000 each. Subsequently I received confirmation that the GRI was probalby going to get support. It looks like they got it, or some other support in kind.

Ignoring the Big-4 connections for a moment, the news of the GRI opening their NYC office is very good news. Located in New York, the GRI will have far greater access to business. And while New York is not Washington, a presence in the United States cannot but help the GRI's efforts to have the standard mandated by the SEC.

While the GRI has, either directly or through proxies, lobbies the SEC to mandate the G3 standard, their efforts to date have had limited effect. The SEC's "interpretive release" at the beginning of the year (2010) only reinforced company's responsibility to report issues where the company considers them to be material - or potentially material. This is a long way from a mandated standard. The SEC pointed out that companies already have a requirement to report on a wider range of issues, and in the CSR / Sustainability area the SEC highlighted:

  • Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.
  • Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
  • Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
  • Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

So the GRI's presence in New York will help further establish the standard in the US, and provide a platform for communicating with the SEC and other regulators.

11 October 2010

HBR Case Study; Should Sustainability Have a Seat in the C-Suite?

Harvard Business Review has the best case studies, but then I guess we should expect that. I know that I read their case studies, and say "Well, of course" in answer to their question. But like most really good questions, the answers are never "yes" or "no". There is a real pleasure in thinking through the problem.

This month it was no different.  Their question was: Should Sustainability Have a Seat in the C-Suite? My gut reaction is "Well, yeah, how else are they going to be, and be seen to be serious about this?" But a close reading of the case, a mythical computer and electronics company called Narinex, made me rethink my automatic response. They are losing bids, not all the time, and not all the big ones, but enough to make them look closer. And one of the key differentiators is their competitor's (in the situation highlighted) sustainability record. At least, it seems to be their record.

Closer reading shows that it is not the sustainability record, but in part the presentation of that record through the appointed CSO (Chief Sustainability Officer) at one of their competitors.

I won't rehash the case here, you can read it at the link above. But I do want to mention two of the comments submitted by readers.

Elaine Cohen, as usual, is clear in her argument - "I believe the question at this point is not whether to hire a CSO but what is the sustainability reality for the Narinex company. The focus on sustainability is not going away, and is now a minimum expectation of businesses." She then goes on to recommend a Sustainability Mapping Study, with result provided to leadership for decision making.

She ends by saying "Sooner or later, in my experience, if a company is serious about sustainability, a CSO is a necessary asset. However, in the first stages, moving forward step by step may require broader expertise that one CSO can deliver and it might be better to establish some initial good practice through engaging the management team in their own functional areas, but only if there is someone in the business who is prepared to champion this as a short-medium term assignment."

The other comment that I really liked was from Erik Thomsen, who approached the problem from a slightly different point of view. Erik focuses on the availability of information for clear future decision making. He says "This is because the financial metrics traditionally used in the C-Suite are inherently backward looking and fail to capture critical environmental and social factors that are the drivers of medium to long-term financial performance. "

He's right. The information provided, and modeling performed remains based on well worn paradigms, one of which is that a zero price input today will remain a zero price input in the future. The pricing of externalities, if not in fact then certainly in projections, is critical to corporate success.

While I favour hiring a CSO, Erik has a different view: "What’s more, hiring a Chief Sustainability Officer implies that the rest of the C-Suite is too busy to be concerned with sustainability. This would implicitly de-position sustainability, putting it into a box other members of the C-Suite don’t have to think about."

He finished by saying "Finally, addressing the VP of Sales’ concerns -- who is going to generate more buzz, a Chief Sustainability Officer talking about issues that could be handled by someone in marketing and communications? Or the CFO, COO and CEO talking about the strategic business decisions that will ensure the company’s future profitability in an environmentally and socially sustainable way?"

Both Erik and Elaine are right, even through their suggestions in the end are different, I think they are both right. I think they should hire a CSO. Yet Erik makes the point well, who better than the entire leadership team to make the point that sustainability has become part of the DNA of the company?

It will be interesting to see how this evolves.

Real Pink Falmingos - near Alres, France

10 October 2010

Is XBRL like Blood?

This is the second year of the SEC's three-year phase-in of XBRL for listed companies in the US. So far one would have to say that the process has been remarkably smooth, considering that this is a new reporting technology for filers, and for the SEC. But it remains an "experiment" and sometimes experiments fail. Especially experiments that provide benefits to the downstream recipients, while imposing costs of the providers. The options are to ensure there are adequate benefits for the provider, and that provider costs are minimized.

To use a crude example, there is a chronic shortage of blood donors. Why? After all, it only hurts a little, and you get a nice cup of tea (has anyone but me noticed that "cup of tea" is almost always preceded by "a nice", as if there exists no alternative) and a really warm feeling inside that you've done the right thing. I would argue that the primary reason there is a constant shortage of blood donors is that most of the benefits accrue to the downstream recipients of the blood. Certainly the person receiving the blood is a major beneficiary. But looking further, easily the greatest beneficiaries are the for-profit hospitals and medical establishments.

So there should be little surprise that there remains an almost constant shortage of supplies of donated blood.  Provider pays, recipient benefits.

Now lets look at XBRL.

Today companies are given the opportunity (well, it was an opportunity, now it is a mandate) to spend their money and time to produce reports in the new reporting technology, only to have the benefits accrue to the downstream users of the data - the SEC and the analyst community (through free, high quality data).

Therefore, we should not be surprised to hear of directors of external financial reporting complaining that "it is too complex, with 16,000 elements and new software", not to mention either consultants or the external printers each taking their cut. And this is before any costs for assurance. I know, assurance is not required - but the SEC does say that filers must be able to demonstrate a "good faith effort" to provide clean and error-free data. So who wants to be the test case for what a "good faith effort" means in the XBRL world?

Fundamentally what is needed is cheap, easy-to-use software that removes the complexity burden, and radically reduces the cost of production of XBRL. Also needed is almost ubiquitous training to bring the reporting community up to a minimal standard of understanding. Face it, if close to 50% of all errors in filings (in the United States) are due to a negative number being entered with a leading "-" minus sign, when the element is already a debit item and therefore assumes a negative number - is that the fault of the financial reporting people, the fault of an overly complex standard, or the fault of software that does not help the user avoid that mistake?

Should a filer really need to spend additional money on a "consistency suite" to catch those errors, and to ensure that they selected the same elements as their peers? Surely that should be a public-good provided by the SEC as part of their validation checks.

So, maybe the SEC and the analyst community should be funding the XBRL validation software, to reduce or remove where possible any costs of creation of XBRL. After all, if they benefit, shouldn't they be carrying the cost of that benefit.

So again, if the "experiment" is going to be successful, three things are desperately needed:

1. Inexpensive software that intuitively helps the filer create their XBRL report, as "just another output format"
2. Ubiquitous training to build the baseline understanding required to reduce the potential for errors. Should the SEC be funding such training?
3. Validation software provided by the SEC to absolutely reduce the risk of error prone XBRL submissions.

What does this really boil down to? Reduce the cost to the provider. As long as the provider of the benefit does not receive the benefit, there will be push-back. Blood and information flow easier from provider to recipient when the costs and benefits are shared.

06 October 2010

Amazing Europe - Don't you just love a great revolution?

Don't you just love a great revolution? The banners, the marching in the streets, the riots and sniff of teargas, the decapitations (well, I am in France), and yes of course, the incredible feeling that the old order is being swept away before your very eyes.

Sadly, the people who do the best revolutions, the Europeans, seem to be engaged in a terribly boring revolution. Non-the-less, an old order is being swept away before our eyes, and XBRL marches through the capital cities, sweeping away the forces of conservative (not political party) business reporting.

On September 21st, XBRL EU held a meeting in Paris. Not only was the meeting in Paris (already a good start), but the range of projects discussed, across countries and industries, was quite amazing. Some time ago I wrote about "Spain, the quiet achiever". I have to amend that to "Europe, the quiet revolutionaries".

Gilles Maguet, Director General of XBRL Europe, opened the session and gave a fascinating overview of the range of programs underway across Europe. He presented a slide (link) that shows projects by industry/category and by country. Certainly the table is not complete, but it is impressive to just how much is happening.

Probably the most impressive sector is the Business Register sector, in which 2.5 million companies across four countries are providing their accounts in XBRL. In France the filing is still paper based and the local Business Register (Infogreffe) is converting all the files in XBRL to put them at disposal of the consumers. The next step in France will be to allow companies to file directly in XBRL. In the UK, Companies House (the business register) is able to create XBRL versions of company records, and in the Netherlands the system remains voluntary under the SBR programme (formerly the NTP: Netherlands Taxonomy Project).

In the Revenue and Tax Filing sector, six countries have XBRL related projects underway, or discussions for future projects, with the UK's mandatory iXBRL program being the highest profile, coming into force in April 2011.

Then there is the Banking sector, with COREP-FINREP projects in place in most countries. In some countries, there are projects that go beyond COREP-FINREP.

The European Commission remains engaged in the discussions, and as has been seen on the XBRL-International mailing list, continues to be a topic for engagement. Four specific EU consultation documents specifically mention XBRL, and EU officials have officially participated in XBRL conferences.

The full set of presentations can be found here: http://www.xbrl.org/eu/20100921Paris/index.html


When I specifically highlighted the progress in Spain, I was only just scratching the surface of all the progress that is being made. Much, well most, driven by regulators, but the number of projects and the depth of engagement is really quite impressive. Congratulations to XBRL EU and each country jurisdiction for the projects. 

(I would like to thank Gilles Maguet for his assistance in ensuring that I have my facts right - but of course, any errors are mine alone)

04 October 2010

Is CO2 material?

Let me set the context for this question - CO2 released into the atmosphere is the primary cause of global Climate Change, which is real, and is primarily being caused by human activity.  The question - "is CO2 material?" asks about the materiality of CO2, if priced, to the average corporation. Here of course I'm taking the view of "materiality" frequently used by the auditing community to mean of an amount or value that will materially impact the companies performance or reported results. Frequently this level is, somewhat arbitrarily, set at 5% of revenue.

So in this context, is CO2 "material" to the average business, and what are the implications of any answer? Very probably not. In fact, considering the range of inputs (and outputs) for virtually all services based companies, CO2 (as a product of energy use) will be negligible from a financial materiality perspective.

First, for something to be "material" it must have a price. So an associated question is, at what price per ton of CO2 does it become material to a business?

Clearly for some businesses, primarily energy companies, extractive industries, transportation industries, and primary producers such as steel factories, the raw energy inputs (and consequent CO2 content) increase the probability that CO2 is material to their business, if a price is placed on the CO2.

Also, any suggestion that CO2 is "not material" is not the same as saying that there does not, desperately, need to be limits (be they market driven or regulator imposed) on the production and dumping of CO2 into the atmosphere. After all, I cannot imaging cyanide ever being "material" to a person when measured by the 5% definition, when something very far less than 0.1% would kill that person.

The question becomes important when auditors look at a company's financial statements, and when the company (if publicly listed on a US exchange) has to produce their MD&A (Management Discussion and Analysis) as part of their filing with the SEC. In these cases, the "materiality" threshold becomes important, that where CO2 falls below that threshold, there is no reporting requirement.

So there are two key barriers today to mandated reporting of CO2 by companies.
  1. There is no price for CO2. Until there is a price, it cannot be "material". So, CO2 must have a price, through a Carbon Tax or through a Cap & Trade. Of course, the benefit fo a Cap & Trade system would be to allow the markets to create a price. The alternative benefit of a Carbon Tax (a sort of Tobin Tax) would be to create a revenue stream for governments that could be used to support "green" technology and infrastructrue investment - but I dream.
  2. The concept of "material" in relation to CO2 must be modified to be closer to what would be a "material" level of cyanide in a person, than the 5% level used to determine that something "material" financially.

Certainly the SEC released additional guidance earlier this year on reporting of CSR (Corporate Social Responsibility) and Climate Change related information. Unfortunately the nature of that guidance was simply a reminder filers that they must report "known trends" and "uncertainties". Sadly I expect that guidance will be inadequate.

27 September 2010

Friedman - yes, he was right

Milton Friedman said it best, and is often quoted - "The business of business is business". He also said "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud".

It is these quotes and others from Friedman, that are frequently used to justify a position that CSR and Sustainability are not the responsibility of business, and that business has no role to play in the sustainability argument. A derivative is that the only issue of sustainability that should be of interest to a company is the sustainability of the company.

In a way both of these positions are accurate, and both arguments support the active engagement of business in CSR and Sustainability as more widely defined.

Certainly business can and should look to government for regulation, and should seek to influence government to avoid the introduction or support the repeal of harmful regulation.

Likewise businesses should recognize and accept the prerogative of governments, as representatives of the people, to develop regulation. In carrying out this role, government is simply fulfilling its responsibility, and business then as the obligation to implementation and comply with such regulation. In one very real example - Climate Change is real. the arguments are done. Now governments are setting objectives and agendas. It is time for business to stop pretending and get on with preparing, and indeed leading to achieve the changes that will be required.

At the same time there is no reason that a business should not, in the interests of fulfilling the spirit of Milton Friedman's quote, implement CSR and Sustainability programs, especially where such programs will enable the accomplishment of the business plan and objectives. For example, very specifically "social programs" such as assisting local communities with the establishment of basic education or clean water resources can be a manifestation of a company's desire to keep a local workforce supportive of the company, and in so doing ensure a long term source of appropriate labor, and reduction in the risk of local of national government intervention in company activities. In such a way a "social program" can serve as a cost effective method of supporting the core business of the company.

Taking the same example a step further, it is probably significantly harder to suggest that programs in areas either not serviced by the company, or outside the company's labor or raw material catchments, are justifiable as anything other than public relations exercises (which, it should be noted, are equally valid and appropriate business activities).

Another legitimate reason to implement a CSR program might be to thwart a government's desire to create a specific law. If there is the danger of the introduction of a law that the company (or industry group) perceives as being too restrictive, and the company believes that their actions could forestall the introduction of that law, a company may decide to introduce its own very visible program, therefore undercutting the 'need' for the law. This in no small part explains the tobacco industry’s involvement with the corporate responsibility movements, and it’s participation in CSR events (although sometimes in a side room).

For all that has been said in support of CSR and Sustainability activities above, no business should be initiating such activities, projects or reporting simply to create a "warm and fuzzy" feeling. That is not good business, and does not represent the interests of shareholders, and is a failure of management to uphold their fiduciary responsibility.

So in a funny way, Milton Frieidman was right - AND Corporate Social Responsibility and Sustainability ARE issues for business. The business that ignores CSR and Sustainability risks endangering its license to operate, risks increased costs, risks customer defection, and faces a grim future of watching its competition move steadily forward while it whithers away while proudly upholds a principle ("the business of business is business").

17 September 2010

SEC and the EOL data; a really smart move

So the SEC buys access to EDGAROnline's database. My initial reaction was "What, the SEC is buying their own data from a vendor". I talked this through with someone, whose take was completely different. He pointed out that EOL has already tagged over 10 years of all public company data in the US, both annual and quarterly data. He also pointed out that multi-year analytics will require multi-year data streams. Finally - because I was being a bit thick, he gently reminded me that the current stream of XBRL data is only one year old, maybe two to the largest filers. Multi-year analysis, and with that the ability to gain the data analysis advantages that XBRL delivers, is simply not possible without years of data.

Who has that data? EOL.

It seems a very smart move on the part of the SEC. Coupled with the i-Metrix tools, they will be able to download that data in a format that is well understood by almost all analysts: Excel.

The difficulty may come in mapping from the historical tagging that was performed by EOL to the actual tagging performed by the reporting company. But I expect that will be a much "easier" problem to solve than attempting to perform the historical tagging for themselves.

Frankly, it sounds like a great investment by the SEC.

(Disclosure: I am completely independent of EOL) 

15 September 2010

The SEC gains an(other) XBRL advocate

Yesterday it was announced that Mike Starr is joining the SEC as Deputy Chief Accountant for Policy Support and Market Monitoring. The press release lists some of Mike's achievements and past activities. What it does not say is that Mike is a very strong advocate for XBRL, and has been a keep supporter for XBRL for almost a decade.

Mike Starr served until the end of last year as a member of the Board of XBRL US Inc, and has strong connections in the XBRL community. He understands the vision of XBRL as a standard that can create significant efficiencies throughout the business reporting supply chain.

Congratulations to Mike Starr, and to the SEC. 

10 September 2010

CSR/Sustainability reporting: the coming explosion

The next three years will see CSR/Sustainability reporting transition from a "nice to have" to a "Cost of Entry". Companies will find themselves less able to win contracts, upstream supply chain participants will expect reports, and banks will demand to see the CSR report just as they require a set of (audited) financial statements (I'll talk about "audited" in another post).

Today the creation and maintenance of a CSR report can be expensive and time-consuming, and there doesn't seem to be the demand.

Cast your mind back to the darkest reaches of history - say - 1995. The Internet was reasonably well established, and you could search for sites, sort of. If you knew the website of a company (or someone's e-mail address, not everyone had one) you could type in the www then the e-mail address after the @ but before the ".com", and if you were lucky, or the company was really really big, you could find a website.

Companies around the world knew that being on the web mattered, and certainly the leaders had some pretty fantastic sites.

A century or two later, sometime around 1998, I don't remember when exactly, I did the little dance of the cut-and-paste to search for a company website... and for this search, there was no site. I rang my contact at the company and asked "I'm surprised your company doesn't have a website. Why not?"

The answer I got was "Creating and maintaining a website is expensive and time-consuming, and there doesn't seem to be the demand." Sound familiar?

So what changed to make websites truly ubiquitous?

The cost of creation plummeted, tools became available to help build sites, large numbers of people played with HTML and other web technologies. But most important, people; me, and you, began to expect to find a website. Companies without websites dropped in our estimation as "serious" companies. 

Did the websites need to be sexy, smart, absolutely current as of this morning? No. But there had better be a site.

The coming explosion

CSR/Sustainability reporting is at that cusp. the big companies, regardless of industry, have CSR reports. Thousands of companies provide reports to the CDP (Carbon Disclosure Project), over a thousand are producing GRI (Global Reporting Initiative) compliant reports and/or GRI Content Indexes. Today I go to websites and wonder if I do not see Corporate Responsibility, or CSR, or Sustainability. I'm reaching the point where I wonder what they are hiding.

And I ask "I'm surprised you don't have a sustainability policy or a CSR report. Why not?" Well, you know the answer that I'm getting.

But that is about to change, and change pretty radically. Demand creates innovation. Innovation drives adoption. Adoption feeds innovation and demand.

I am confident that there will soon be tools and processes that will make the creation of CSR reports "easy", inexpensive, and ubiquitous. And when that happens, centuries will have passed in an instant, and we will be living in a world in which CSR/Sustainability reporting is simply assumed. That regardless of the size of the company, if it is a "serious" company, wanting to attract and retain clients, staff, and frankly needing to demonstrate that it understands the importance of the societal/corporate "contract", CSR/Sustainability reporting will be a core element of communications and corporate reporting. Just like a website for (audited) financial statements are today.

04 September 2010

Earthquake in Christchurch, NZ

Christchurch, New Zealand suffered a 7.1 earthquake yesterday. It appears, remarkably, there there have been injuries but no fatalities. Christchurch is a lovely city on the Canterbury Plains next to the Pacific Ocean. I have found memories of many visits to the city, and have close friends living there. We have been in contact and other than bad damage to their house and the neighbours, all are safe and uninjured.

GNS Science, a New Zealand government-owned research organisation released the following Media Release.

As background, the Hawke's Bay earthquake of 1931 killed hundreds, and raise the port of Napier far enough that the port was too shallow for ships and it silted over. There is now an airfield over what was a port. In addition, the rebuilding that took place in Napier after that quake followed the style of the day, making Napier a center of Art Deco buildings.

Christchurch will recover (quickly), and will continue to be a beautiful city on the plains of the South Island.

At the same time, this is a reminder to all New Zealanders of the importance of earthquake preparedness. Especially in Wellington!





The magnitude 7.1 earthquake that hit Canterbury early today is expected  to be the most damaging since the 1931 magnitude 7.8 Hawke's Bay  earthquake.

The earthquake, which jolted Cantabrians awake at 4.35am on Saturday, was  located 30km west of Christchurch near Darfield at a depth of 10km. It was  felt throughout the South Island and as far north as New Plymouth. Damage  to buildings and infrastructure in Christchurch and surrounding areas is  considerable.

Dozens of aftershocks occurred in the first few hours after the quake and  it is likely they will continue for weeks.   GNS Science duty seismologist, John Ristau, said typically the largest  aftershocks occurred within the first 48 hours of a large earthquake. They  generally declined in frequency and size over time.

"A rule of thumb for a large earthquake at a shallow depth such as this is  that the largest aftershock will be about one unit of magnitude lower than  the main shock," Dr Ristau said.   Seismologists say a foreshock of about magnitude 5.4 occurred a few  seconds before the main shock. Both shocks occurred in slightly different  locations. Seismic energy from the two shocks became entangled making it  difficult to pinpoint the size, location, and depth of the main shock.   There are several known active faults under the Canterbury Plains and in  the Canterbury foothills, but at this stage it appears the earthquake has  not occurred on a known fault.   Scientists from GNS Science, Victoria University of Wellington and  Stanford University in the US have joined colleagues from Canterbury  University to deploy about 40 portable earthquake instruments to record  aftershocks over the next few weeks.

The GNS Science contingent hopes to have most of their portable  instruments deployed around Canterbury by Sunday night. This will mean  approaching landowners and seeking permission, as they hope to place some  of the instruments on private land.   They will concentrate their deployment on the areas where most of the  aftershocks have already occurred.

 The battery-powered instruments will be left unattended for about three  weeks to record aftershocks. Seismologists study aftershock sequences to  find out more about the mechanics of the main shock and rupture, and to  ascertain if stress in the earth's crust has been transferred onto other  faults in the region.

Scientists will also study satellite data to investigate surface  deformation in Canterbury as a result of the earthquake. Geologists from  GNS Science have travelled to Canterbury to investigate the geological and  environmental impacts of the quake, and to undertake a detailed ground  study.   Engineering seismologists from GNS Science will join colleagues from the  Building Research Association of NZ and Canterbury and Auckland  Universities to investigate the impacts on buildings and infrastructure in  Canterbury to find out how different construction types performed.

The information they gather will be fed into the engineering community to  help ensure structures are built appropriately to cope with stresses  caused by strong ground shaking. It will also help as older buildings and  structures are retro-fitted to improve their ability to withstand  earthquake shaking.

Much of the scientific response to the earthquake is being coordinated  under the GNS Science-led Natural Hazards Research Platform, set up by the  government a year ago to provide long-term funding for natural hazards  research.   Manager of the Platform, Kelvin Berryman, said post-earthquake  reconnaissance was one of the roles of the Platform, as well as developing  quantitative estimates of earthquake, volcano, landslide, tsunami, flood,  snow, and wind hazards in New Zealand.

"We have an obligation to learn as much as we can from this event to help  improve our understanding of earthquakes and their impact on society, and  to help ensure that New Zealand is well prepared for future earthquakes,"  Dr Berryman said.   To see more information on the earthquake go to our GeoNet site.

http://www.geonet.org.nz/ Specific information on the Darfield quake can be found here.