Three Reflections From Bank Of America’s 2017 Mock Integrated Report
In this post, I will make three reflections based on an article Mike Krzus and I wrote with the help of Carlos Solano, “Constructing Bank of America’s 2017 Mock Integrate Report: Experiment No. 3.” But first, a little context about two previous mock integrated reports prepared by Mike, one for ExxonMobil and one for Alphabet.
Recap of ExxonMobil’s and Alphabet’s Mock Integrated Reports
On March 21, 2018, I wrote about ExxonMobil’s 2016 Mock Integrated Report. I noted that my co-author and collaborator, Mike Krzus, was able to put together a decent 40-page (compared to 133 pages in its 2016 10-K) integrated report for this $336 billion market cap company based on information ExxonMobil had itself put into the public domain. It only took him about 40 hours to do so, challenging the frequent criticism that integrated reporting is simply too difficult to do. This was an experiment and we had no idea what the results would be before we tried. Several efforts to contact the company for a response have been unsuccessful, despite the fact that my post was largely complimentary about the company’s reporting practices.
Nor have I had any response from my July 6, 2018 post about Alphabet’s 2017 Mock Integrated Report (Alphabet is the $868 billion market cap parent company of Google) although I know it has been brought to the attention of some senior executives at Google. One reason could be that this post was more critical of Alphabet’s reporting practices. As a result, It simply wasn’t possible to produce a decent mock integrated report. The 45-page report is largely a summary of the company’s 105-page 2017 10-K. ExxonMobil has been around much longer, and, because of its industry, it is a much-scrutinized company. Over the years it has improved its disclosures due to these pressures.
Google, the main business unit of Alphabet, is a much younger and less controversial company but that is changing quickly as consumers worry about data privacy, security, and addictive use of tech devices. In fairness, Alphabet discloses substantial information about greenhouse gas emissions, the environmental impacts of its products, and its privacy guidelines. However, it does not publish an annual report which explains, in plain English, such things as the company’s medium- and long-term plans, business risks and opportunities, and the role of the board in reviewing corporate strategy which are essential elements of an integrated report. That being said, I suppose Alphabet is starting to feel more pressure to be more transparent regarding many practices.
I also noted that Alphabet could contribute to its mission to “organize the world’s information and make it universally accessible and useful” by developing an “Integrated Report Generator Tool (IRGT).” The IRGT would simply use technology to leverage what Mike has done by hand by organizing a company’s reported information to make it universally accessible and useful through a mock integrated report. This would improve stakeholders’ understanding of a company and would challenge the company to produce its own integrated report. To the extent that anybody at Alphabet read this piece, I guess they just didn’t find the idea all that exciting. Corporate reporting is admittedly an acquired taste. While fundamentally important to trillions of dollars of capital allocation decisions made every year, it isn’t as sexy as the new products and technologies announced by Google at its annual developer conference on May 8, 2018.
Bank of America’s 2017 Mock Integrated Report
Mike and I decided to run one more mock integrated report experiment. We wanted a very different sector and chose financial services, deciding to use Bank of America (BoA), the second largest bank in the world by market cap of around $310 billion vs. JPMorgan Chase of around $387 billion as I write. Again, it took about 40 hours and the 2017 Mock Integrated Report is a fairly decent one. Like oil & gas companies, large banks are heavily scrutinized companies, with regulation playing an even more important role. Thus, it is not surprising that BoA has produced a number of disclosures which made it fairly easy to assemble a quite good 50-page integrate report (compared to its 214-page 2017 10-K).
Guiding Frameworks and Resources
As with the other two mock integrated reports, we outlined the report according to the <IR> framework but used guidance and resources to align other leading frameworks as well:
I. International Integrated Reporting Council (IIRC): we focused on the “Content Elements” and “Guiding Principles” of The International <IR> Framework
II. FCLTGlobal: we focused on its 10 elements of a long-term strategy
III. CECP’s Strategic Investor Initiative (SII): we focused its investor letter to companies presenting long-term plans
Unlike the previous mock integrated reports, we decided to also seek guidance from:
IV. Committee of Sponsoring Organizations of the Treadway Commission’s (COSO) “Enterprise Risk Management: Integrating with Strategy and Performance” framework
An important part of the International <IR> Framework is the six capitals: financial, manufactured, natural, human, intellectual, and social and relationship. Not surprisingly, BoA focused on financial and human capital, where the latter is discussed in terms of how diversity and inclusion, attracting and developing talent, recruiting, personal development, and career growth of the bank’s employees help fulfill its purpose of making “financial lives better for our clients and communities by connecting them to the resources they need to be successful.”
Strengths and Weaknesses
When aligning Bank of America’s 10-K to these frameworks we found many examples of leadership. Yet there are many areas where, with a bit more disclosure, investors and other stakeholders would get a better understanding of the company:
A. Organizational Overview and External Environment (content element): Strong overview through its discussion of “Sustainable Responsible Growth.” However, it could be improved through more discussion of environmental/competitive trends and the growth potential of its products (which are themselves described in detail but with no forward-looking mention of their potential).
B. Stakeholder Relations (guiding principle): The report clearly describes its engagement process, roles and responsibilities regarding engagement with shareholders and stakeholders, and the results of these meetings.
C. Performance (content element): It provides highlights on environmental (e.g., loans for low-carbon and sustainable business models, financing renewable energy opportunities, and financing clean water and sanitation projects) and social (e.g., lending to create housing for veterans, seniors, and the homeless). It could be improved by providing more information beyond boilerplate language (statistics/KPIs/metrics) on how well the bank is accomplishing its strategic objectives and its effects on the relevant capitals.
D. Business Model (content element): There is adequate information available, but it could be improved through more information about encouraging innovation and competitive positioning.
E. Governance (content element): There is generally a good and detailed description of its governance, although the section on Compensation could be improved through more discussion about how individual incentives are linked to specific medium- and long-term performance metrics in support of strategic objectives.
F. Risks and Opportunities (content element): This is excellent thanks to the robust discussion about this topic in the bank’s 10-K. The process to identify material environmental, social, and governance risks is clearly described. The risk management process and the roles of the Board and management are explained in detail. Corporate stress testing and contingency planning is briefly described.
G. Strategy and Resource Allocation (content element): This is a weak section. While its discussion of competitive advantage and broad strategic goals is good, it would be improved by explaining how strategic goals are linked to value drivers. It would also be useful to have a roadmap for how BoA will execute on its strategy.
H. Outlook (content element): This is the weakest section. There is little information provided about how management sees the future and how the bank is positioned to respond to challenges and uncertainties. All language under the MD&A is boilerplate and backward-looking. Although the SEC recommends using this section to provide forward-looking statement of known trends, there is absolutely nothing resembling the use of such recommendations.
Which brings me to my:
First Reflection: Bank of America is well-positioned to produce its first integrated report for 2019
It would be great if it did so since it would provide leadership for integrated reporting in both the U.S., a notably laggard country, and the world’s largest banks. The banking sector is a point of leverage for the integrated reporting movement. Every bank that produces an integrated report on itself has the moral high ground to request that its corporate clients do the same. The information in these reports will be useful to the bank in its relationships with these clients and beyond.
Second Reflection: Any company using the COSO framework is well-positioned to start practicing integrated reporting
Many years ago, I was the academic advisor to this initiative when it was first started. A conscious decision was made at that time to avoid the controversial issue of external reporting. That has changed since COSO now states that “There are natural linkages between enterprise risk management, improved financial reporting and transparency.” More importantly, this analysis makes clear that if a company has implemented the COSO ERM framework it has many of the elements in place to support integrated reporting. We don’t know if BoA is using COSO, but we know many companies are. This is a “secret weapon” for integrated reporting that, at least for us, has not yet been identified.
Third Reflection: Alignment among frameworks will accelerate adoption of Integrated Reporting
Although each of the IIRC, CECP’s SII, and FCLTGlobal has a different mission, I have found them to be a collaborative group with each other. It would be helpful to companies if this were codified in some fashion and made explicit by the organizations themselves. More generally, the corporate and investment communities are overwhelmed with an ever-growing number of well-intentioned initiatives to enable the private sector to better contribute to sustainable development. I’m not exactly sure how, but some degree of clarification and simplification would enable all of these initiatives to better accomplish their objectives.