What would you pay to use the GRI standard?

Recently Stewart Mckie in a blog posting (http://holistic.tripos.biz/about/gri-and-software-certification/) pointed out that the GRI appears to have changed the wording of its copyright notice with regard to use of the GRI content in software solutions. It is now "Illegal" to use GRI text, indicators or content in software systems without paying a license to the GRI.

The GRI (Global Reporting Initiative) is one of the more widely known and used CSR/Sustainability reporting standards. It was developed using the contributions of members and government grants.

Now the GRI is asserting that if you use software to create a GRI compliant report (i.e. actually use the GRI Indicator label and text) and the software provider did not have the GRI's permission (and pay them a fee), a crime will have been committed. While we've heard a fixed price for the license, I cannot imagine that the GRI would charge a small firm the same as they would charge a very large software provider. It certainly would be a great deal for SAP or Oracle, but not for smaller market participants. And does a flat annual license make sense when one provider's software might facilitate the creation of 100 reports, while another provider's software might facilitate the creation of 1000.

This means that preparers of a GRI compliant report will pay for use of the (free) standard through the license fee that the software provide must remit to GRI. This includes companies that may have contributed to the development of the standard or membership in the GRI as Organizational Stakeholders (OS).

Could the GRI go to the producer of a report with a GRI Index, and ask what software was used to feed the content of that report? What if a company chooses not to disclose their service provider? Is the reporting company then a party to the illegal use of the GRI standard?

Will companies simply stop providing GRI Indexes, and instead simply state "Prepared in the spirit of the GRI G3 standard". The report provider could then simply provide an index. You know, the good old fashion kind with a list of word and concepts, pointing to the page where the information can be found.

Regardless, what does the need to monetise the standard point to, and what might be the unintended consequences of such a move?

Risk of Fraud in CSR / Sustainability reports (the "Balloon")

Risk of Fraud (the balloon)
 

No one should believe that CSR / Sustainability reports will be Fraud-Free zones. Where there is a need or desire to provide reported outcomes that differ from actual outcomes, there will be mis-staement and fraud. Corporate officers are now required (under the US Sarbanes-Oxley law – “SOX”) to certify that the reported results are accurate. These officers face criminal and civil penalties if they knowingly certify inaccurate information in the reports.

While this has reduced the opportunity for direct financial statement fraud and misstatement, the concept of the balloon comes into play. Squeeze the balloon in one place, and it pops out in another. Misstatement of business information with the objective of misleading regulators, investors and analysts is a bit like the balloon. Tighter controls over financial reporting decreases the risk of misstatement of this information, but increases the danger of misstatement of unaudited information.

The fact of greater controls does not mean that the number of individuals willing, able or motivated to "fudge the numbers" has decreased, only that the opportunities have decreased.

Let us consider for a moment the reasons that information is misstated in the first place. Managers and executives in companies are given metrics and objectives that they need to achieve. These metrics could be operational, or could include improvements in share price or other external metrics. To commit fraud there need to be three factors; opportunity, reward and rationalization. Increased internal control quality under SOX has reduced the opportunity, but has done nothing to remove the other two motivations. Where the desire is to influence observers of a company's reported value in order to protect or increase personal reward, those who might have manipulated financial statements will find other externally visible measures they can manipulate. Unaudited information such as CSR/Sustainability information provides such an opportunity.

The investment analyst community use information well beyond the audited reports; non-financial or extra-financial information, projections, unaudited segment information, competitor profiles and performance and industry comparisons, to name a few. Unintentional reporting of inaccurate unaudited information can skew investor models, and intentionally misstated non-financial or extra-financial information could be used to intentionally alter analysts perceptions of a company.

Therefore we should not expect the tightening of systems of internal control and the introduction of penalties for the reporting of knowingly inaccurate information in audited reports to automatically reduce the volumes of intentionally misstated information.

To give an example, imagine a situation in which a company commits, at least in a CSR/Sustainability report, to reduce waste water by a given percentage or volume. Senior managers may have parts of their remuneration tied to achievement of these objectives. In such a case there is an incentive to influence reported results. As this information is not audited, but it is reported externally, senior management could decide to manipulate the results for both positive public relations and to meet personal targets and therefore protect bonuses and other remuneration. The resulting reports, while not audited, certainly are provided into a market place with the intent of influencing valuations of the company.

It should also be noted that we expect this risk to have a relatively short life, as we expect CSR/Sustainability information to become part of SEC and other regulatory reporting over the coming years. In the case of SEC registrant companies, the inclusion of CSR/Sustainability measures into mandated reports could result in this information becoming audited information under the reporting responsibility of the CFO or Finance Director. More importantly this information will become subject to two key sections of Sarbanes-Oxley; 302 and 404.

Under section 302 the CFO and CEO need to certify that the reported results are accurate, with penalties for knowingly reporting inaccurate information. Inclusion of CSR/Sustainability information under this section will result in this information coming under significant additional internal scrutiny, and review by the external audit community.

Should CSR/Sustainability information be considered part of the "Financial Statements" (or equivalent) then the creation of that information will become subject to section 404, and management will be required to both document and test the controls over the production of that information. In this scenario CSR/Sustainability information creation will become far more formalized and process driven, with correspondingly greater depth and quality, resulting in consumers of the information having greater confidence in that information.

Forgetting is not an option

Last weekend I visited Monparnasse Cemetery in Paris. In section 28 there is a family tomb. The top name is familiar to me (and to many others). Subject to false accusations of treason, convicted on false evidence, his sword broken before him and his epaulets torn from his shoulders before being transported to a prison island. Finally rehabilitated, retired from the French Army and died in 1935.

 

Now look at the name directly below. Look at her age. Then read the line directly above that: "Disparue A Auschwitz". 

Now, look at this picture. Potokari cemetery in Bosnia.

 

Does it matter what religion? What country, or time?

Forgetting is not an option.

So the fizzy white wine stays in the bottle for now...

Well, it looks like we were all enthusiastic just a moment too soon. No sooner does it look like a XBRL in the United States was making a huge leap forward - at least in terms of mandating - then the rug gets pulled out from under. It seems the "Data Standard" amendment has been dropped from the financial reform legislation.

And through the weekend I actually thought that the biggest danger was a stalling of the whole vote due to the illness of Senator Byrd (the longest serving member of the US Senate - the "Upper House" of the American congress). Senator Byrd (now deceased as of 3am US time this morning) was a **Republican** (No he wasn't - thank you Bob for pointing that out so quickly, and my apologies to all who read this and believed my error. Here is from CNN "Byrd, a nine-term Democrat, was known as a master of the chamber's often-arcane rules and as the self-proclaimed "champion of the Constitution," a jealous guardian of congressional power.")  and one of only 4 who were voting with the Democrat on the overall law that was being propose. With him being taken ill, the worry was that the law would stall if there were not enough Republicans voting in favour.

With his death, the Governor of West Virginia (his state) will select his replacement to serve out the remainder of his term in office. As the Governor is a Democrat, we can expect a Democrat to be appointed, yet there will still be a delay.

Well, that was my worry, until the e-mail from the CEO of XBRL US Inc. Pity.

Then again, as pointed out in his earlier e-mail, there was still some way to go through the process of "reconciling" the two versions of the law that were before Congress. The American system requires a single version of a law to be passed by both the House of Representatives (the "lower house") and the Senate (the "upper house"). This makes for an arcane world of deals and counter-deals. Swapping favours and influence, and in the process buying votes - both in Congress and from the electorate. It also allows various constituencies see how hard congressional representatives are working for their various constituencies.

It seems in this case that the XBRL constituency was trumped by something bigger.

So the fizzy white wine stays in the bottle for now, and Moet stays in the cellar. Hopefully we'll see both bottles come out again soon.

"Bugga" is about all I can say

A great step forward for XBRL in the US

This e-mail came from XBRL US Inc yesterday (June 26). I'm certain that almost everyone in the XBRL community has seen it. Clearly this will be a great step forward for the adoption of XBRL for business reporting, certainly in the United States.

When this passes and is signed into law, the entire community should collectively open a bottle of fizzy white wine. When the OMB (Office of Management of Budget) says that the Data Standard is XBRL, then the entire community should collectively open a bottle (or two or three) of Moet (or better).

A huge amount will have been accomplished, and the leadership of XBRL US Inc will have a tremendous accomplishment to be proud of.

Basically going forward all recipients of grants from the US Federal Government will be required to report in a "Standard Data Format" - defined in such a way as to make XBRL the logical candidate for such reporting. The opportunities for improving the transparency of reporting of grants expenditure will be fantastic, and could lead to the US government and people actually knowing how their money is spent.

===

Dear XBRL International Members:

Just a few hours ago, 12 amendments to H.R. 4173 (the “Dodd Bill” for financial regulatory reform) introduced by Rep. Darrell Issa of California were approved and added to federal legislation.  All 12 call for the use of data standards for a wide range of financial regulatory reporting.  The criteria for data standard is that drafted by XBRL US at the request of committee staff and used in previous bills HR 2392 and SB 303:

The data standards required by subparagraph (A) shall, to the extent practicable, –

(i) incorporate a widely accepted, non-proprietary, searchable, computer-readable data format;

(ii) be consistent with and implement—

(I) United States generally accepted accounting principles or Federal financial accounting standards (as appropriate);

(II) demonstrated best practices; and

(III) Federal regulatory requirements;

(iii) improve the transparency, consistency, and usability of business and financial information;

(iv) ensure interoperability and appropriate reuse of information;

(v) reuse, enhance, harmonize, and integrate existing standards as possible and appropriate; and

(vi) be capable of being continually upgraded to be of maximum use as technologies and content evolve over time.

...

===

I hope nobody but me remembers ADA, or ever watched "Yes Minister".

Passage of the bill will be a great step forward, but it is only the next step. Endorsement by OMB will be an even greater step, but it is only the next step along the road.

ADA was mandated for all programming in DoD (Department of Defence). Unfortunately companies writing programs to run on DoD computers had an option called a "waiver". Those companies spent untold time and money writing waivers, then getting on with writing the COBAL, PL/1, C etc programs that they were writing. After 10 years of mandatory use of ADA, the DoD quietly scraped the requirement.

The XBRL community can learn a lot from the ADA experience. Some basic lessons include:

• A mandate does not equal adoption
• Without enough skilled resources, it was too expensive to implement
• Waivers provided a way out, and were used extensively
• The "Sir Humphry"s of the world always get their way, so make sure their way is your way (or the other way around)
• Continue to look for successes, like the recent AGA report on Creating an Interactive Single Audit Database

None the less, this is a great accomplishment and congratulations to XBRL US Inc for helping get this through Congress.

Myths revisited - Sustainability Indices

On April 15th I wrote about 6 recent myths of Sustainability Reporting. One of those myths is that Sustainability Indices list sustainable companies.

My specific comments from that post are at the bottom of this one, or you can read about all 6 recent myths here: 6 recent myths about sustainability reporting

Well "I told you so" is such a horrible thing to have to say, but the disaster in the Gulf of Mexico has proved the point, and at the beginning of June, BP was removed from the Dow Jones Sustainability Index. Now we just need to see the other Unsustainable Companies removed, or a new category created: The Dow Jones Would Love To See These Companies Actually Be Sustainable Index (the DJWLTSTCABSI - but then, that is probably a bit of a mouthful).

Grist got it right last September, when they asked Joel Makower (of GreenBiz.com) and Auden Schendler (of Aspec Skiing Co) the question - "Is the Dow Jones Sustainabilitiy Index worth a damn?" From my own perspective, the answer is clear - the DJSI (and many/most others), like many/most Sustainability reporting standards, are great for companies that want to put the effort into appearing to be sustainable, eco-friendly, worker/society friendly, etc.

Frankly, I'll be convinced when companies start providing reports fully linked to the DVFA/EFFAS set of key performance indicators for ESG. The guys at DVFA have done a great job of creating a set of metrics that actually do, at an industry level, help report on the range or ESG issues. Will this make them "sustainable companies"? No. But it will help investors, the media and the public gain real insights into the priorities and activities, metrics and performance of companies.

=== Extract from the 6 myths ===

Sustainability Indices list sustainable companies

Every week there seems to be another release of the winners, or top-100, or top-something list of sustainable businesses. There are also the various indices such as the FTSE4Good, Dow Jones Sustainability Index, or any number of mainstream sustainability indices. And every time I look at the lists, they are populated with companies that have produced great CSR reports, not "sustainable" businesses.

As a classic example, in 2009 a press release touted a list of the top 100 global sustainable companies. "The Global 100 includes companies from 15 countries encompassing all sectors of the economy that were evaluated according to how effectively they manage environmental, social and governance risks and opportunities, relative to their industry peers." Thank goodness they declared that this was in comparison to their industry peers.

After all, who would consider Air France to be one of the top 100 sustainable businesses in the world? It is an airline for goodness sakes, a mass producer of high altitude CO2 and high consumer of fuel, in an industry that survives in part on major subsidies such as exemptions from fuel taxes. However, I guess they must be pretty good, when compared to their peers in their industry. But that does not make Air France a “sustainable” business.