Cyberloafing refers to employees using computer equipment, provided to them by the company, for personal purposes that are not job-related tasks. This inappropriate workplace behavior can have various negative effects for the organization.

The first and most obvious is a decrease in productivity because the employee can spend a good part of the day browsing different web pages, checking in on the lives of their friends or acquaintances on social networking sites, or having fun watching videos on YouTube, instead of performing job-related duties in the office. This type of behavior is observed in employees of all kinds of organizations, at all levels, and can reach extreme cases, such as the one reported by the U.S. media in which several officials from the Securities Exchange Commission (SEC), including a judge, were found watching and saving pornographic material on their “official” computer, instead of monitoring the transactions of the most important stock exchange in the world.

On the other hand, when visiting various websites on the Internet, employees can inadvertently download malicious software (malware, viruses, cyber worms, etc.) to the company network that could cause serious damage to the company computer equipment or even collapse the network. In a recent study, paid for by the British government, and with the participation of 500 companies in the United Kingdom, it was found that 73% of them had been victims of cyber attacks, as a result of the cyberloafing activities of their employees. The third set of negative consequences for organizations, as a result of cyberloafing, consists of the possible legal repercussions. Employees, when using a “corporate” computer in apparent anonymity, can send emails or express defamatory, xenophobic or immoral opinions, etc. that could be grounds for a lawsuit directed at the company that owns the computer equipment, since the only thing that can be traced is the fingerprint of the computer (IP).

While the negative consequences of cyberloafing are worrisome, it would be unfair not to point out its possible positive effects. Some studies have shown that allowing employees to have some free minutes per day (30 to 45) for a “cyber-break”, instead of a coffee or cigarette break, to remain at their desks to use the computer to send emails to family members or friends, read the news, upload photos and comments on the social network of their choice, use internet banking, or watch funny videos, helps improve productivity and employee psychological well being at work.

As a result of everything described above, companies have incorporated a number of measures and policies to control and regulate cyberloafing. These range from explicit policies that prohibit or limit the use of computer equipment for personal purposes, the use of computer locks that block access to the Internet or certain pages to, for example, the installation of specialized software that monitors the applications that employees use and the pages they visit throughout the workday.

Meanwhile, researchers from the world of management and information technologies have tried to identify what individual, social or work environment variables make a person more prone to use the computer equipment that the office provides them intensively for personal use – not only when they are at work, but also when they work from home.

Today, we know that employees who are resentful toward the company, because they perceive unjust treatment by it or by their immediate supervisor, engage in cyberloafing as a reaction to abuse. It is also known that when the workday is very long and intense, employees justify to themselves cyberloafing activities because of these conditions. It has also been shown that even when there are explicit policies that prohibit cyberloafing, if sanctions are not effective and employees see that other co-workers carry out this type of practice without being punished, they also will do the same thing, as a result of the social justification: “If they do it, why shouldn’t I?”

In terms of the variables that predict cyberloafing in relation to the individual, some studies have been carried out to identify if any major personality traits impact this type of behavior. These studies reveal, without having a strong consensus, that meticulous people who give great attention to detail tend to engage less in cyberloafing activities; on the contrary, the highly extroverts are more likely to be involved in this type of unproductive activity. Also, with regard to individual variables, it has been found that subjects tend to make personal reflections that lead them to justify to themselves the act of cyberloafing. These arguments include, thinking: a) that the working conditions lead them to engage in this type of activity; b) that cyberloafing does not cause real harm to anyone or, if so, it is negligible; or c) that the personal benefits of using computer equipment for personal use outweigh the possible sanctions arising from doing so; i.e., by and large, it is worth committing a wrongdoing and assuming the possible consequences, which are very remote.

After all the aforementioned, one might think that it is difficult for a company to define a concrete plan of action that might reduce the cyberloafing activities of their employees, as some of the mentioned evidence suggests that “some remedies are more serious than the disease itself.” For example, establishing a strict policy that prohibits the use of company computer equipment for personal use may result in strong resentment on the part of the employee who, instead of reducing cyberloafing, actually increases it. Perhaps the same thing would happen if employees found out that in the company’s computer equipment there are installed programs that detect inappropriate use of the same, which raises the question: What actions can be undertaken to actually reduce cyberloafing without affecting the work environment of the company? In Mexico, there is a case of a company in the field of information technology, with headquarters in Guadalajara, which has been successful in controlling cyberloafing and has maintained a favorable work environment, which has enabled it to appear for several consecutive years on the list of Great Places to Work (Mexico). The company has an explicit policy, known by all the employees, that the computer equipment that everyone has at their disposal should not be used for personal purposes. However, there are no cybernetic locks that block access to the Internet or to certain applications. Similarly, employees know that there is software installed in their computers that monitors all the applications they use throughout the day, as well as the web pages they visit. The software also records the total amount of time that the machine was turned on without being used, and quantifies the actual time used in each application, or webpage visited, and thus monitors the effective use of the processor. The immediate supervisor, along with the area of human resources and systems, make a parameter of the software that establishes what applications and webpages can and should be used by each employee, in accordance with his/her post. At the end of the week, or month, a report is made that details the percentage of time that the computer was used for non-work purposes. The package does not record what employees write or what is written to them, in order to protect their privacy. The immediate supervisor has a recurring meeting with the employee to review these results and, instead of the employee being reprimanded for this activity, he or she is given guidance on how to improve productivity. The supervisor makes them see, for example, that when it comes to Facebook they lose track of time and may spend more than an hour a day there without realizing it. The supervisor also points out that this activity makes the employee leave later than the others who occupy similar posts, because “he/she does not have enough time.” Similarly, the software can help them realize why they are not reaching their performance goals. The actions and policies implemented by this company in order to reduce cyberloafing have greatly helped employees develop self-discipline when working behind the screen.?

References:

• Jia, H., Jia, R. & Karau, S. (2013). “Cyberloafing and personality: The impact of the Big Five traits and workplace situational factors,” Journal of Leadership and Organizational Studies, 20, 358-365.
• Cheng, L., Wenli, L., Qingguo, Z. & Smith, R. (2014). “Understanding personal use of internet at work: An integrated model of neutralization techniques and general deterrence theory,” Computers in Human Behavior, 38, 220-228.
• Moody, G.D. & Siponen, M. (2013). “Using the theory of interpersonal behavior to explain non-work-related personal use of internet at work.” Information & Management, 50, 322-335.
• Price Waterhouse Coopers. (2013). 2013 Information security breaches survey.
• a href=”http://www.pwc.co.uk/audit-assurance/publications/2013-information-security-breaches-survey.jhtml”>http://www.pwc.co.uk/audit-assurance/publications/2013-information-security-breaches-survey.jhtml

Pablo González Cid, founder of the Café Punta del Cielo, discovered his entrepreneurial spirit when he was a young university student and worked as a messenger at a brokerage firm. He realized that to be director he would need to work many years and be promoted to an infinite number of positions, and that, in the end, he might never reach his desired position.

His entrepreneurial spirit was further motivated when, at that age, he was without a car after getting into an accident. It was then that he decided to start his first business: selling fish to restaurants. His hard work allowed him to meet important restaurateurs, who increasingly requested his services, and in this way he was able to grow the business. But there was something he could not quite get used to: the smell of fish.

At that time his family had brought the Gloria Jeans franchise to Mexico, and each time he went to the coffee shops, his passion for coffee grew. It was then that he began to study and analyze what made a cup of coffee taste good. He compared qualities of beans, planting and harvesting techniques, favorable climates and regions, forms of roasting, and even ways of preparation. His enthusiasm and his knowledge of coffee were such that he began to document his findings, and he even ended up writing a book on the subject.

In Search of the Best Cup of Coffee

The more he learned about coffee, the more he wondered why Mexico did not have a brand of this product, as did Colombia or Italy. If Mexico is the sixth largest producer of coffee in the world, and the leading producer of organic coffee, why is Mexican coffee associated with a poor, rural Mexico? Why is the per capita consumption of coffee so low in Mexico? Why are we not known for good coffee? It was then that he took on the task of creating an identity for a Mexican coffee, of the highest quality and with an elegant, modern touch.

With that vision in mind, Pablo set out to find where high quality coffee was planted and harvested in our country. He was convinced that he had to pay well for good coffee beans, and this motivated producers. So with the highest quality raw material, he took charge of roasting and packaging it himself. Roasting was not a major challenge. Packing was another story. Pablo wanted to capture the aroma of the coffee that he had produced. And with that challenge, his spirit of technological entrepreneurship emerged. He spent all of his free time and weekends creating a package that would lock in the flavor and aroma of the coffee, so that people would enjoy preparing the “best” cup of coffee. After five years of trying and some explosions, he finally captured the aroma of coffee in cans with a valve, which prevented the pressure from the aroma from making them explode. In this way, the customer could depressurize the container before opening it, and fall in love with the coffee that he/she is going to drink. This first innovation gave Pablo his first patent.

But the challenge of the “best” cup of coffee was not resolved yet. Preparing a good expresso requires a fine grind and a precise amount of coffee, among other things. It was then that he decided to create a few pods that had a good grind and the exact portion needed to prepare it.

The First Coffee Shop

With these proven innovations, Pablo needed to have an appropriate space to share his love of Mexican coffee with others. It was in 2004 when he opened the first Café Punta del Cielo on the corner of Arquímedes and Presidente Masarik. Of course, the store also reflected the modern and contemporary tone that characterized his product. The location could not have been better, and that was also a result of his entrepreneur zeal. That corner had been abandoned for several years, due to legal issues. Pablo knew that it was important to start on the right foot, and that meant having a good location, which was visible, in a busy commercial area, but the lack of resources limited his options. It was then that he was determined to get the place. The location was ideal, and because of the litigation involved, it was very reasonable compared to the rest of the area. In four months, he worked things out, adapted it, and soon everyone who visited Polanco could see the new Café Punta del Cielo coffee shop.

This coffee shop allowed him to approach the market, and for consumers to try out the entire line of innovative products and beverages. Then new challenges emerged. At that time there was a boom for iced cappuccino, but the 100 percent natural coffee made the milk curdle. Pablo began experimenting again to develop a product in which he did not have to use flavorings or a lower-grade coffee. After many attempts he found the formula, and was able to sell cappuccino in cans. Then came other innovations in drinks and coffee-related items. They included 100 percent natural coffee bean drops, chocolates made with coffee, and various expresso-based drinks.

Pablo was committed to accomplishing his dream and would not rest until it came true. The style of the coffee shop had passed the test, and gradually there were more customers and a sense of loyalty began to develop. But Pablo did not see himself managing a coffee shop all of his life. On the contrary, he knew he liked innovation, not management. He set new goals and went to work to achieve them.

Planning and Managing Growth

Pablo wanted to position Café Punta del Cielo throughout the country, and that meant building the business quickly. The entry of national and imported coffee bars was growing by leaps and bounds, and that forced him think about a different business model. So it was that creativity that made him conceptualize three distribution channels: sales of prepared coffee in coffee shops; sales of coffee to corporations, restaurants and hotels; sales of ground coffee or beans, canned or pods, prepared naturally, in convenience stores and supermarkets.

The first coffee shops belonged to him, but opening new shops required a huge investment that Pablo did not have, so he opted for franchising. Thus, there would be other entrepreneurs who would share the risk and provide the resources to grow.

He also made a list of potential customers who might be interested in offering quality coffee. He knocked on several doors, and the first ones to be convinced of the concept were Liverpool and Grupo Posadas de México. The chef at Liverpool was convinced the flavor and quality of Café Punta del Cielo offset the extra price to be paid, and he was right. Grupo Posadas decided it was a good idea to offer the same coffee in all of its hotels, so Café Punta del Cielo offered full service, including not only coffee, but also water and coffeemakers. By 2005, Café Punta del Cielo had a presence in all of the main cities of the country, with relatively little investment.

With such rapid growth, it was necessary to speed up production to meet the growing demand. He decided to get a bank line of credit. With this new injection of resources, coffee production expanded and the product could begin to be placed in convenience stores and supermarkets.

Managing this expansion was another big challenge. Pablo knew he needed a team to support him in this task, and he did not skimp on hiring the best. At first it was not easy. He had to provide a lot of training, good pay and career plans within the company. The entire management team had as a priority that people working for Café Punta del Cielo should be happy.

The rapid development of the business did not distract Pablo’s innovative concerns. This young entrepreneur had a vision of “positioning Mexican coffee as one of the best in the world,” and that meant also proving the concept abroad. He sought, then, internationalization, and in 2008 he opened the first shop in Madrid, Spain, which quickly earned a good reputation. But Spain is one of the countries with the highest coffee consumption per capita in the world. In addition, Spain and Mexico are sister countries that share the same language, culture and customs. It was necessary to find more difficult challenges. So it was decided to test the concept in a country that did not have a long tradition of drinking coffee and that was very different culturally to Mexico. In 2010, the first shop in Hong Kong was opened.

Innovation continues to be the mainstay of Café Punta del Cielo. There is much to invent and improve. Currently, they are already working on a second generation of coffeemakers, more automated, user-friendly, and that use less energy. Undoubtedly, there is still much to be done, but so far, Café Punta del Cielo has shown that it can contend with the larger competitors in the world and innovate in an industry that apparently was mature. Today, millions of Mexicans (and a growing number of foreigners) recognize the value of The Great Coffee of Mexico.?

References

• Extract from book
  
  Gonzalez-Brambila, C; Arciniega Ruiz de Esparza, L; Ruiz Massieu, D. (2013) Un Camino a la innovación tecnológica en México: 15 casos de Éxito. Cengage Learning.

Corporate social responsibility is in decadence. Despite being an attractive and fashionable topic, it is not a sustainable trend, and it is destined to disappear if it is superficially adopted, by way of certifications or seals of endorsement and without the actions of responsibility permeating the interior of the firm.

For a firm’s behavior to really be maintained and changed, it is necessary to institutionalize it and link it to the firm’s strategy.

Corporate social responsibility is attractive because it is seen as an active and voluntary contribution by the firm towards the solution of complex problems and toward social, economic and environmental improvements. In Mexico in recent years there is a growing number of companies that have become socially responsible. If one takes into account the public data and indicators that are relevant to the matter, there has been an extraordinary increase in the number of companies that have obtained the seal of a Socially Responsible Business (ESR® in Spanish) that is granted by the Mexican Center for Philanthropy (CEMEFI). From the year 2000 until the last report in March of 2014, the number went from 10 businesses in 2000 to more than 900 in 2013.ⁱ

Also, there has been significant growth in the Global Reporting Initiative (GRI®), which is the worldwide standard that is used to report practices of social responsibility by businesses. Created in 1999, to date it has logged 18,488 reports around the globe. In Mexico, the number of companies reporting to GRI® went from one (Industrias Peñoles was the first) in 2005 to 33 in 2013.

Several of the companies reporting, but not all, are public companies on the stock exchange and are part of the Sustainability Index of the Mexican Stock Exchange. This index comprises only those public companies that are on the stock exchange and have been graded on the environmental, social and corporate governance topics as companies with social responsibility.

Compared with the Mexican Stock Exchange’s Index (IPC, for Índice de Precios y Cotizaciones), the Sustainability Index has given, on average, a simple average yieldⁱⁱ of 33%, compared to the average annual yield of the IPC, which, in the same period, rendered 19.8%. It is a fairly attractive return if one considers that the CETES rate (Govenrment bonds), in the best of cases, is around 3% annually.ⁱⁱⁱ However, there is a reasonable doubt as to whether the extraordinary returns are the result of firms in this index being “super companies” or because they are socially responsible companies. Let’s give the benefit of the doubt to the second reason.

So the data seem to suggest that the adoption of a social responsibility is a growing trend and even a source of competitive advantage. If this is the case, then it is worth asking if this trend is sustainable over time, if it is a long-term phenomenon, if it goes beyond a series of good intentions, and if it is here to stay.

From my point of view, the answer is no.

Corporate social responsibility is not sustainable over time, and it is not so because it is sold and seen as an attractive idea, a trend in which adoption occurs due to pressure exerted by actors such as the media, universities, civil society organizations and even governments, and one in which sometimes the main goal is to obtain a seal, an emblem, a registration, an accreditation or a certification. The intentions are laudable, but they do not always permeate the firm and thus they end up only on the surface.

Moreover, corporate social responsibility has a problem with its origin. While it is understood as the active and voluntary contribution of the firm toward social, economic and environmental improvement, the firm, which is composed of people, cannot be personified but by those individuals who run it, and thus it is the individual, not the firm that can be socially responsible. This argument had been put forth before in 1970 by Milton Friedman^iv, who suggested that the firm’s only social responsibility is to increase its profits and that the economic impact of its activities, at the end of the day, would generate economic, social and environmental improvement.

Thus the challenges are twofold: First, that given the depersonalization of the firm, the individuals who compose it opt for the institutionalization of the actions of responsibility; otherwise, if the actions are developed and approved by the same people who generate them, there is a vacuum in their application. Second, that the actions of responsibility be linked to the company’s mission, and, as a result, be aligned with the firm’s strategy.

So, if the superficial version of corporate social responsibility is destined to disappear, how is it possible to permeate the firm with responsible actions that will last and be linked to the strategy?

One possible answer is that there is an underlying model of business management that incorporates, within the firm, business strategies with formal and institutionalized processes that are able to address the complexity and limits imposed by the social, economic and environmental systems and that allow the firm to generate value over time. But first let us understand the topic within a national context, so we can then describe the model at hand.

According with the Business Information System (known as SIEM) within Mexico’s Secretariat of Economy, 681,723 companies in the country are registered^v, and of these, 5.7% are companies with more than 50 employees that account for about 65% of total gross production and employ just over 25% of the labor force (INEGI, 2010).

If it were the case that small businesses individually have less impact compared to large businesses (although as a whole it can be significant), or that they lack the economic resources^vi to adopt social responsibility systems or that they are simply unaware of the issue, their incentives are smaller than those of the large companies.

As for the large companies, based on a study^vii conducted in the ITAM in 2012 of the 500 most important companies in Mexico and according to the list published by Expansión magazine between 2009 and 2011, it appears that only about 50% of the firms have some kind of social responsibility system, while the rest are not sure what the topic means or simply are not interested. Of the 50% that do carry out socially responsible actions, only 53% have institutionalized it by adopting some sort of a formal management system.

If we extrapolate the results, we could conclude that, in the best of cases, only one out of every four firms of the most important companies of Mexico have a clear social responsibility strategy. The reason why many have not adopted one could very well be because companies do not consider its use beyond that of good intentions, or because, once incorporated, eventually they become disenchanted since they expect immediate returns.

The study also found three main incentives for which the companies have adopted actions of responsibility. These are: (1) because it is beneficial to comply with national or international regulation, as it facilitates the implementation of current standards; (2) because there is leadership in the firm that directs them to do so; and (3) to open new markets.

The results help to show that there are specific incentives that firms follow and that these are not isolated efforts but actions that respond to a management model that suggests that actions of social responsibility are characteristic of the firm, without the need for them to be “socially responsible,” at least not in the company etiquette.

Those three incentives show, besides, that they are not products of a trend, but they are part of the “guts” of the firm and that they comply with at least two characteristics: (1) they are linked to the strategy and (2) they are institutionalized. This management model is called the “corporate sustainability model.”^viii

The corporate sustainability model also has a characteristic that functions if and only if its cornerstone is the long-term view. And here it makes sense to think that actions of social responsibility or its variants generate value, for they are linked to competitiveness, which is a long-term phenomenon. However, it is an indispensable requirement to have a strategy^ix that allows the company to meet its objectives.

The connotation of long-term is important. Competitiveness understood “as once in a while” is just an illusion. Thinking that way implies generalizing that a good business deal will recur forever, which is a fallacy that is alien to the concept of competitiveness. In fact, the long-term competitive advantage is known as the “supportable or sustainable competitive advantage.”

Now then, let us think for a moment about the theme of sustainability. Of the many definitions of sustainability^x, the most classic one refers to the ability to live within limits imposed by the environment, taking into account the interconnection between the economic, social and environmental systems, and maintaining the equity of the resources and opportunities for future generations.

This means that the firm must generate value over time, considering the restrictions imposed by the economic, social and environmental systems, which make the business decisions subject to the limits imposed by said systems.

For example, one economic limit is the plant’s production capacity. In the social environment, individual preferences for goods and services are a restriction, and in the environmental system, the scarcity of a basic component such as energy. These restrictions limit the level of competitiveness that a business can attain, and therefore, its permanence. To ignore their existence is like thinking that business decisions are lineal. Thus, the integration of sustainability practices in the business is key for its survival, for such practices, when well established in the strategy, are a source of competitive advantages.

To summarize, a firm’s competitiveness only makes sense in the long term and is subject to limits imposed by the economic, social and environmental systems. Sustainability aligned with strategy is the key to making the business more competitive. Let’s see how we can bring together these ideas to develop a business model as shown in Figure 1.

Figure 1. Model of Corporate Sustainability

The model of corporate sustainability is composed of three elements: the first, in the lower part, where one finds the restrictions and limits imposed by the economic, social and environmental systems; the second, at the far left, which represents the firm’s leadership based on having a corporate governance and leadership that allows it to make important decisions to lead the firm to generate value; and third, in the center, showing the company’s strategy. We are particularly interested in the company’s strategy, for that is where the actions of responsibility are located.

As to strategy, the model of corporate sustainability is supported by three views: the market view, the resources based view, and the institutional view. These elements that support the company strategy are the ones that lead to the achievement of competitiveness.

The first element, the market view, is based on the classic argument of a competitive advantage based on leadership in costs and on leadership in differentiation or in benefits (Porter, 1985). On the one hand, this support is the catalyst for the preferences of individuals and, on the other, the generator of operating margins. A company that generates greater perceived profits compared to the competition will be able to generate greater value, while, if it is able to reduce costs through strategic actions, it will obtain a greater operating margin.

From the point of view of differentiation, sustainability is an element that increases the company’s attributes and can increase the differentiation and increment the capture of value, while, on the cost side, Porter and Van der Linde (1995) propose that it is through the optimization of resources that an increase in productivity is possible, and, as a result, a reduction in costs.

The idea, in reality, is that actions of responsibility are geared toward increasing differentiation and reducing operating costs, and these do not necessarily derive from social responsibility but from the commitment of management that allows the firm to address the challenges inherent in seeking alternatives that yield more value to the client at a lesser cost.

The second model of corporate sustainability is based on the view of resources and capabilities (Barney, 1991; Hart, 1995; Russo and Fouts, 1997). According to this idea, the company proposes to use and exploit strategic assets, resources and capabilities bases on tangible and intangible assets that enable it to continue being competitive. This position considers that the resources and capabilities of a company create value when they are valuable, rare, inimitable and adaptable to the organization in a purely business context or as an expansion of natural resources (Hart, 1995) while considering that the strategic assets are subject to biophysical limits set by the environment itself.

In addition, Hart argues that the biophysical limits that are imposed can be a source of competitive advantage. One way to obtain new capabilities and resources based on the limits of natural resources is to develop the view of a sustainable company. Companies can gain advantages through waste reduction, the design of new products and technologies, the integration of stakeholders in the decision-making process and, most importantly, by having a long-term view (Hart, 1995). This is definitely the way that results in the key link with ecology, the environment and the company.

Finally, the third element, the institutional theory, or the new institutionalism, has been considered recently in the literature of management by Peng et al. (2009), among others.

Peng suggests that the source of competitive advantage is found within the institutional limits established inside and outside of the company. However, it is necessary to go beyond the limits and establish the institutional view as an essential factor to understand corporate sustainability. If one considers classical definitions, the institutions are the precepts, laws, rules, codes, customs and traditions that determine our behavior. Thus, boundaries are established between which individuals, businesses and governments take actions. Their main attribute is to provide certainty to business operations and reduce transaction costs.

In this sense, the view of the company’s institutional theory of the company indicates that the normative or cognitive framework establishes limits along which the organization moves, formally or informally. For sustainability to exist, it is essential to have an institutional view, because the company is subject to regional, national and international regulations, as well as internal self-regulatory mechanisms that determine its behavior. The ability to adapt to the institutional conditions gives the company the ability to generate long-term strategies that help it create, capture and generate value.

In summary, the business model of corporate sustainability is subject to the limits imposed by the economic, environmental and social systems. The company’s strategy should be long-term, so that it can assure competitiveness. For that, it is necessary to incorporate the concept of sustainability into the business model, which is achieved with three elements: (1) the market view, (2) the view of natural resources, and (3) the institutional view.

A strategy akin to the three elements can adapt and react more quickly to changes in the environment, thereby reducing risk exposure, since the three elements allow the company to adopt a longer-term perspective to create, generate and capture value.

In conclusion, unless corporate social responsibility is modified to move from something superficial to a management model based on its institutionalization and linkage to strategy, so that it becomes a model of corporate sustainability, there is a great risk of missing a golden opportunity. It is important to take advantage of the power that the business sector has to change the behavior of businesses, governments and society, and to not waste the opportunity that social responsibility offers to do things right. That opportunity may not be seen again.?

References

• Aigner, D.J., and A. Lloret, “Competitiveness and Sustainability in Mexico,” Management Research Review, Volume 36, Issue 12, pp. 1252-1271, 2013.
• Barney, J.B., “Firm Resources and Sustained Competitive Advantage,” Journal of Management 17(1), pp. 99-120, 1991.
• Clarkson, P.M., Li, Y., Richardson, G.D., and F.P. Vasvari, “Does it really pay to be green? Determinants and consequences of proactive environmental strategies,” Journal of Accounting and Public Policy 30(2), pp. 122-144, 2011.
• Hart, S.L., “A Natural-Resource-Based View of the Firm”, The Academy of Management Review 20(4), pp. 986-1014, 1995. Available at http://www.jstor.org/stable/258963
• King, A., and M.J. Lenox, “Does It Really Pay to Be Green? Accounting for Strategy Selection in the Relationship Between Environmental and Financial Performance,” Journal of Industrial Ecology 5(1), pp. 105-116, 2001.
• Russo, M., and A. Fouts, “A Resource Based Perspective on Corporate Environmental Performance and Profitability,” Academy of Management Review, 40, pp. 534-559, 1997.
• Orlitzky, M., Schimdt, F.L., and S.L. Rynes, “Corporate Social and Financial Performance: A Meta-analysis,” Organization Studies 24(3), pp. 403-441, 2003.
• Peng, M., “The Institution-Based View as a Third Leg for a Strategy Tripod,” Academy of Management Perspectives, Vol. (23), Number 3, pp. 63-81, 2009.
• Porter, M.E., and C. van der Linde, “Toward a New Conception of the Environment-Competitiveness Relationship,” The Journal of Economic Perspectives, 9(4), pp. 97-118, 1995.
• Thompson, Strickland and Gamble, Crafting and Executing Strategy, McGraw-Hill/Irwin, 2008.

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ⁱ CEMEFI grants the ESR® seal annually, and while there are companies that have obtained it for as long as 14 years, there are firms that have left and have not continued to report to CEMEFI and may not be continuing to carry out social responsibility actions.

ⁱⁱ The calculation was made by BMV for the period from November 2008 to February 2014, although the sustainability index starts trading in December 2011. Information available at http://www.bmv.com.mx. Date of page view: June 10, 2014.

ⁱⁱⁱ Current CETES rate at 182 days is 3.05%. Source Bank of Mexico. Information available at http://www.banxico.org.mx. Date of page view: June 10, 2014.

^iv In fact, his position was misinterpreted by the media, since Friedman, as a good libertarian immersed in the Cold War climax, aimed his criticism particularly at the fact that the government was passing on responsibilities to the firm, dictating what it should do in the way of Social Responsibility.

^v SIEM only evaluates companies registered voluntarily in its database. INEGI, meanwhile, has a database from the National Statistical Directory of Economic Units (DENUE), which ranges from businesses, micro and small businesses to large corporations, including subsidiaries, factories or establishments incorporated with other firms. In the latest update of DENUE 2013, INEGI reported 4.4 million economic units, of which 47,388 are economic units with more than 50 employees, or 1.07%. Date of page views for INEGI and SIEM: June 10, 2014.

^vi According to Expok, a consultant on Social Responsibility topics, the ESR® certification can range from 12,000 to 50,000 pesos, plus the cost of the consultation and the investment to implement social responsibility systems. Source: Expoknews of December 11, 2013, in http://www.expoknews.com/cuanto-cuesta-obtener-el-distintivo-esr/. Page View Date: June 10, 2014.

^vii The results of the study, supported by the Mexican Association of Culture A.C., and funded by UCMEXUS-CONACYT are published in Aigner and Lloret, 2013, Management Research Review (36) 12 and can be requested from antonio.lloret@itam.mx.

^viii The link between competitiveness and corporate sustainability is found in the literature on financial performance and environmental and social performance (for example, Clarkson et al, 2011; King and Lenox, 2001; Orlitzky et al., 2003). The results indicate that a company that strives to improve its environmental and social performance also achieves, over time, a positive financial performance.

^ix According to Thompson et al. (2009), the strategy consists of the competitive moves and business management that administrators employ to grow the business, attract and satisfy consumers and compete successfully through operations with which organizational goals are achieved.

^x Which by the way is a word borrowed from English and has it no translation into Spanish despite the fact that its use in business is already accepted and it has been adopted.

Leasing activities in companies are very common. For those companies that assume the role of lessee, it means to agree to the use of assets required for its operations, without being exposed to the risks of taking ownership of them, in what was until now known as an “operating lease.”

Renting computer equipment, transportation, real estate or machinery, instead of making them company property, offers advantages that allow the company’s resources to be dedicated to its core business and not be affected, for example, by the obsolescence of these assets.

Another way in which the entities may acquire assets under long-term financing is the “capital lease,” also known as the “financial lease,” a concept in which the basic postulate of economic substance is applied clearly on the legal form, considering that the risks and benefits of the asset are borne by the lessee from the start of the term of the contract.

The Mexican standard, in force since 1991 for this issue, is Bulletin D-5 Leases, which was issued by the Mexican Institute of Public Accountants and is now part of the Financial Reporting Standards (FRS), released by the Mexican Council of Financial Reporting Standards (CINIF, acronym in Spanish).

This standard defines a lease as an “agreement that grants the right to use movable and immovable property, plant and/or equipment, in exchange for a rent” and states that, at the start of the contract, it must be classified as a capital lease or an operating lease.

The capital lease is defined as that “which transfers substantially all the risks and benefits inherent in the ownership of an asset, whether the property is transferred or not.” The operating lease is defined as “any lease that is not classified as a capital lease.”

The standard that applies to this matter in the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB) is the International Accounting Standard 17 (IAS 17, Leases). This standard also classifies operating and financial leases, depending more on the nature of the transaction than the form of the contract.

For a lease to be classified as “financial,” it must comply with one or more of the following requirements:

1. that ownership of the asset be transferred to the lessee at the end of the contract;
2. that the lessee have the option to purchase the asset at a price sufficiently lower than the reasonable value and that at the beginning of the lease term it can be expected with reasonable certainty that the option will be exercised;
3. that the term of the lease cover the major part of the asset’s economic life;
4. that the present value of the minimum lease payments be substantially the entire fair value of the asset; and
5. that the leased asset be of such a specialized nature that only the lessee may use it without making major modifications.

Other additional indicators for classifying a lease as “financial” are presented, but if the lease does not comply with the conditions mentioned above, or with any of these indicators, the lease must be classified as “operating.”

Since 2010, a comprehensive analysis to amend the IAS 17 has been underway through the joint work of the IASB and the Financial Accounting Standards Board (FASB), the organization that issues the US GAAP. The need to revise the content of this standard arose from the concern of some users of financial information, who questioned whether the current standard actually reflected the nature and impact of this activity on the financial statement.

In May of 2013, the regulatory bodies issued an exposure draft. Since then, they have held discussions; however, given the complexity that the modifications of this standard represent, it has taken time to reach agreements that meet the objective of increasing the transparency and the comparability of financial information based on the appropriate recognition, measurement and disclosure of the operations that are conducted regarding leases.

During the present year, 2014, deliberations have continued, without reaching a final version. The new standard is expected to be completed in 2015 and, perhaps, will go into effect in 2017.

This exposure draft changes in the definitions of “leases” and in the scope of the standard. It defines, among other things, the accounting model to be applied to the lessor and the accounting model to be applied to the lessee as well as the applicable approach for the classification of leases and the requirements for measurement and disclosure.

Something that stands out is that exceptions for smaller and for short-term leases could be applied, as companies would be asked to determine whether the fulfillment of the contract depends on the use of an identified asset and if the contract conveys the right to control the use of the identified asset for a period of time. The latter refers to the lessee having the ability to both direct the use of the identified asset and to derive economic benefits from its use during the period of use.

The exposure draft aims to classify leases as Type A and Type B. This classification would be based on the economic benefits of the underlying asset, which the lessee is expected to consume during the term of the lease, and not by the fulfillment of a condition or an indicator, such as those established by the existing standard.

The new way to classify would be used to determine the method and the time when the income or expense generated by the lease must be recognized.

It is considered that the existing standard applies a model that does not always meet the need for reliable financial information. For example, in a lease that is classified today as operating, the lessee acknowledges the payments made and expenses incurred during the period of the lease. Under the new approach of the standard, which refers to the financial lease as Type A and the operating lease as Type B, the lessee should classify the contract as “Type A Lease” and recognize the leased item as part of the lessee’s assets, if the lessee complies with the characteristic of having the “right to control the use” of the corresponding asset.

The consequence of this different way of treating the financial accounting of the leases is that the numbers on the statement of the financial position and the consolidated financial statement would be different from those obtained by applying the standard still in force and, therefore, would also affect the results of the financial accounts related to the assets, liabilities and profits. Depending on the agreements that are made, some companies may benefit from the change and others may be affected negatively.

Regulatory agencies must reach an agreement on the definition, the scope of the standard, the way to separate the components of the lease from those that are not part of it, in addition to clearly identifying the applicable accounting models for lessors and lessees, taking into account all the factors that relate to the topic.

As has happened in other cases, the Mexican standard concerning leases must be analyzed and the CINIF must decide if it should issue an FRS adhering in whole or in part to the international standard, as part of the convergence process.

Conclusion

The proposed changes to the draft of the IAS 17 Leases will have a significant impact, mainly because the number of contracts that would qualify as operating leases will be reduced. This will have an effect on the financial statements and the financial performance of companies that have signed these contracts.

It is recommended that each company analyze to what extent these changes in the standard affect it, taking into account that this is an accounting change that must be applied retroactively in accordance with the guidelines established in the International Accounting Standard 8, Accounting Policies, Changes in Accounting Estimates and Errors.?

References

The purpose of this paper is to examine, through empirical analysis, if the 2014 Tax Reform of the Special Tax on Production and Services Law (LIEPS, for its acronym in Spanish), particularly the added tax to sugary beverages and snack food, has managed to reduce the consumption of these products and, consequently, decrease the problems of child and adult obesity in Mexico.

I Introduction

The Special Tax on Production and Services Law (LIEPS) was published in the Official Gazette of the Federation (DOF, for its acronym in Spanish) on December 30, 1980, by President José López Portillo. Its initial objective was to tax individuals and legal entities (corporations) that conduct acts or activities listed below:

1. The Special Tax on Production and Services Law (LIEPS) was published in the Official Gazette of the Federation (DOF, for its acronym in Spanish) on December 30, 1980, by President José López Portillo. Its initial objective was to tax individuals and legal entities (corporations) that conduct acts or activities listed below:
2. The provision of the services referred to in this Law.

On December 11, 2013, the initiative to reform the law was launched and the law went into effect on January 1, 2014. The primary objectives for its amendment were the following:

1. To strengthen the financial capacity of the three levels of government, strengthening tax collection incentives in the states and municipalities that are accorded by the Federal Investment Funds.
2. To improve the distribution, destination and use of the resources from the Federal Contribution Funds, to strengthen the objectives for which they were created, and thus ensure better use of resources, greater transparency in the distribution to the states and municipalities, and greater predictability in these to facilitate planning.
3. To support the municipalities in the country to achieve and maintain sound public finances by implementing a system of incentives and schemes aimed at ensuring payments in respect of national waters and strengthening the collection of property taxes.

Added to the above, the report by the Health Secretary states that obesity and overweight are the main public health problem in Mexico, which is in first place worldwide in child obesity and second in adult obesity. Therefore, the federal government decided to issue a bill to reform the Special Tax on Production and Services Law, which is briefly explained below:

It is of vital importance to avoid the problem of being overweight and obese, which has increased in recent years in Mexico, as well as the risk of chronic, non-communicable diseases.

According to information issued by the Health Secretariat, Mexico spends 7% of the health budget on obesity, just two points behind the United States, which invests 9%. Poor diet, sedentary lifestyle and lack of access to nutritious food are the determinant factors in this situation. Taking into consideration the information gathered by the National Institute of Statistics and Geography (INEGI), per 100 inhabitants, an average of 24 people, including males and females five years of age and over, are obese and overweight (Graph 1).

Graph 1. Prevalence of being overweight and obese in the population five years of age and over by federal entity, according to gender, 2006

II Explanation of the taxing mechanism

II.1 Tax on food and beverages

In accordance with the reform applicable beginning with the financial year 2014, a tax of $1 Mexican peso per liter is applicable to the sale or importation of flavored beverages, concentrated juices, powders, syrups, essences or flavoring extracts, which when diluted become sweetened beverages, and syrups or concentrates for the preparation of these drinks, when these beverages are sold in open containers using any type of added sweetener.

For this law, flavored drinks are defined as those non-alcoholic beverages prepared through the dissolution in water of any type of sweetener.

This tax applies only to manufacturers, producers or importers and will be incurred at the moment they charge the compensation on the sale, so that the tax paid on the importation and transfer is passed on to the taxpayer in the acquisition of said products.

The tax shall be calculated on the sale of the total number of liters of flavored drinks with added sugars. In addition, the monthly payment of this tax shall be the amount obtained by applying the fee to the liters of the sugary beverages sold during the month or the total amount of liters that can be obtained from the concentrates.

11.2 Tax on non-staple foods with high caloric density

The new treatment consists in adding an 8% tax on the retail price of the sale or importation of non-staple food, with a caloric density of 275 or more kilocalories per 100 grams, which includes snacks, confectionery products, chocolate and other products derived from cocoa, as well as custards, puddings, sweets made from fruit and vegetables, peanut and hazelnut butters, sweet milk candies, cereal-based food and treats, ice cream and popsicles.

It also states that when the foods mentioned above comply with the general provisions on labeling specifications for this type of product, taxpayers will be able to consider the kilocalories shown on the label. When there is no label, these foods will be considered as containing an amount equal to or more than the 275 kilocalories per 100 grams, and therefore will be subject to this tax.

The IEPS taxes the sale and importation of these products; therefore, in principle, it taxes the entire market chain, and the tax will be incurred at the moment when the compensation is charged on the amount of the sales price.

The treatment to be applied to the entities that elaborate or prepare this type of food for consumption – as might be the case of restaurants, cinemas and theaters – is not specified. However, in the case of flavored beverages with added sweeteners, an exemption is expressly established.

Similarly, this law establishes that said tax will be applied to the services that consist in the commission, mediation, agency, representation, brokerage, consignment and distribution in connection with the sale of these non-staple foods. The applied tax will be the same as the sale of these goods (8%).

III Empirical Analysis

Whereas the primary objective of the reform initiative of the LIEPS was to increase the price of the products commonly called “junk food” and sugary beverages to the final consumer, we sought to analyze the elasticity in the quantity of these goods that were consumed as a result of the higher prices caused by the increase in raw materials during the supply chain¹. To do this, we decided to interview the salespersons at grocery stores, as well as convenience stores.

The total sample consisted of 50 stores located in the Federal District, particularly in the Nápoles, Narvarte, Del Valle, Centro, Tacubaya and Escandón neighborhoods, with the objective of seeking consumers of different classes: upper middle, middle, lower middle, and low.

Of all the stores analyzed, 80% were convenience stores and 20% grocery stores.²

__________

¹A supply chain is formed by all parts that are directly or indirectly involved in satisfying a customer request. The supply chain includes not only the manufacturer and the provider, but also the transporters, storeowners, salespersons (retail or wholesale) and also the customers themselves. Each organization, like that of the manufacturer, encompasses all the functions involved in the reception of and the compliance with a customer´s request. These functions include, but are not limited to, the development of new products, marketing, operations, distribution, finances and customer service.

²The interviews of the salespersons at the convenience stores, as well as those from the grocery stores, were conducted from the end of May to the beginning of the month of June.

The question asked of the salespersons of each of the stores was the following: “Since January 1, 2014, has there been a decrease in the consumption of soft drinks, juices, concentrates for preparing flavored beverages and, in general, all kinds of junk food?”

The responses were striking, as shown in Table 1 and in Graph 2.

Table 1. Answers to the question of how the consumption of junk food and sugary beverages was affected by the tax reforms applied since January 2014.

Graph 2. Answers to the question of how the consumption of junk food and sugary beverages was affected by the tax reforms applied since January 2014.

As can be observed, the objective of the federal government, according to this analysis, was not achieved, because unfortunately the diet of the average Mexican is based on the consumption of cola beverages and junk food. In spite of the increase in prices, it was not possible to reduce the amount consumed. Therefore, based on the data of this sample, it can be concluded that, among the economic classes analyzed, the demand is basically the same, despite the variation in the prices of these goods.

So the solution for attaining a reduction in the consumption of such food must come through the education within Mexican families. A change in the consumption habits of children should be encouraged, inculcating a healthy diet that does not contain so much sugar, fat and carbohydrates, i.e., inculcating the importance of a balanced diet.

Finally, the results of the Tax Administration Services (SAT), particularly the results of the IEPS for the first quarter of 2014 (Graphs 3 and 4), were analyzed.

Graph 3. Figures in millions of pesos for the first quarter of 2014 of the IEPS.

According to the information presented in the Tax and Management Report of the SAT for the first quarter of 2014, it can be seen that from the year 2005 to date, the average annual volatility has been 403%. However, the percentage change in the first quarter of 2014 compared to the same quarter last year was 313%. This demonstrates that part of the original objective of the reform applicable since 2014 has been achieved: increasing revenue.
Similarly, we will analyze whether this increase is due to the increase in the number of active taxpayers, which includes both individuals and corporations.

Graph 4. Number of active taxpayers, quarterly comparative corresponding to the same period of last year.

According to this information, the increase in revenue is not directly proportional to the growth of the tax base, taking as a reference the percentage change in the first quarter of 2014, compared to the same quarter of last year, which was 2.6%.

Conclusions

Based on the result of the analysis conducted in this study, it can be concluded that the Tax Reform applicable from the beginning of the financial year 2014 has not yielded the results that were planned.

Originally, the federal government sought to increase the tax base. Nevertheless, the increase has not been very high. Unfortunately, the amendment to the IEPS law has fallen on the so-called “captive taxpayers”, i.e., those manufacturers, sellers, distributors, etc. who already paid taxes and whose tax burden has increased due to this modification.

The same thing applies to the final consumers, since it was found, based on the surveys, that the purchase volume in the Federal District, and particularly among the middle and lower classes, has undermined their budget, even though the consumption has not been reduced until now.

Therefore, the basic objective of reducing obesity among children and adults has not yet been achieved. ?

References

• Compilación fiscal, Dofiscal, Mexico, 2014.
• Chevez, Ruíz, Zamarripa; Tópicos fiscales, Mexico, 2014.
• National Institute of Statistics and Geography, 2014. Consulted on June 13, 2014, at http://www3.inegi.org.mx/sistemas/sisept/default.aspx?t=msal75&s=est&c=26762 Tax Administration Services, “Informe Tributario y de Gestión (primer trimestre de 2014)”. Consulted on June 13, 2014, at http://www.sat.gob.mx/transparencia_focalizada/Paginas/informe_tributario_gestion.aspx

Interviews

40 salespersons in convenience stores
10 salespersons in small grocery stores

When to recognize revenue is one of the current issues that has impacted the accounting field. It seems to be a simple matter in itself or a simple concept, without complexity, however, revenue recognition in economic environments is critical and its determination is often as sophisticated as the different economic activities.

According to Zha (2014), the records of the Securities and Exchange Commission (SEC) show that by 2013, 53 percent of the errors in financial statements were related or associated with revenue recognition. At the same time, different studies have shown that the incorrect application of the rules relating to revenue recognition often leads to the restatement of financial statements.

The US GAAP (generally accepted accounting principles in the United States) issued by the Financial Accounting Standards Board (FASB) contains a comprehensive framework in relation with the methodology related to the various moments of revenue recognition. According to Bohusova (2009) there are more than 100 standards or detailed regulations in various industries that relate to revenue recognition.

Although not as extensive as those applicable to the U.S. standards, the International Accounting Standards (IAS, issued by the International Accounting Standards Board (IASB), includes the requirements and the basis for income recognition as well as other interpretations (IFRIC) in two standards (IAS 18 and IAS 11).

In 2002, both the IASB and FASB initiated a joint project to develop a new standard in order to generate a single standard that would prevent substantial differences between the two regulatory bodies governing revenue recognition and to provide a more robust framework for addressing different special features related to the topic. This project ended on May 28, 2014, when the standard ASU 2014-09 was published for the FASB, and IFRS 15, for the IASB, which will take effect for public companies on January 1, 2017 (for public companies using US GAAP, it will be on December 15, 2016, and for the other entities, on December 15, 2017).

The standard establishes a comprehensive conceptual and implementation framework to determine when and for how long revenue should be recognized. In principle, the basic criterion for revenue recognition is related to the moment when the company transfers goods or services to customers in an amount that reflects what it expects to receive in exchange for them.

In general terms, in accordance with the new standard, a company must recognize revenue by applying the following five steps:

1. Identify the contract (s) with a customer. The contract (whether written, oral or implied) must create rights and obligations between two or more parties and meet certain criteria to be recognized. Among the criteria to be considered is that the contract must contain commercial substance and, if possible, that the company receives economic benefits in exchange for goods or services rendered.
2. Identify the performance obligations in the contract.A performance obligation refers to the promise of transferring to the customer (1) either a different good or service (or a package of goods and services) or (2) a sequence of different goods or services that are substantially the same or have the same pattern of transfer to the customer.
   To determine whether a good or service is of a different nature, the company must consider if the client can benefit from the good or service by itself or together with other resources that he already has available. Similarly, a company must consider whether the good or service should be identified separately from other promises in the contract.
3. Determination of the price. The price refers to the compensation that the company expects to receive in exchange for the transfer of goods and/or services. This price includes discounts, rebates, refunds, credits, incentives, bonuses, penalties or other similar things, and can be fixed, variable or both.
   In determining the price, the following effects should be considered:
   1. variable consideration – expected value: estimate analyzed by probabilities or the most probable import;
   2. value of money over time if there is a significant financial component;
   3. noncash compensations – valuation at fair value; and
   4. compensations that have to be paid to the customer.

4. Price allocation to the performance obligations. When the contract contains more than one performance obligation, the company will distribute the price to each performance obligation using independent retail prices.
   If an independent retail price is not observable, the company would have to estimate (using the adjustment for market risk, expected cost plus a margin and the technique of residual amounts). Sometimes, the price of the transaction may include a discount or a variable remuneration that applies in full to a specific part of the contract. The requirements specify when the company must allocate the discount or variable compensation to a specific part of the contract and not to all performance obligations established in the contract.
5. Recognize revenue when a performance obligation is satisfied.Finally, the company will recognize the revenue when transferring a promised good or service to a customer, i.e., when the customer obtains control of that good or service. Gaining control refers to when there is the legal obligation to carry out the compensation, there is legal ownership of the asset, there is physical possession of the asset, there are risks and benefits of the asset and the customer has accepted the asset.
   As can be seen, the implementation of these five steps is based on satisfying the performance obligations, and is based on the revenue recognition from a perspective that is not unilateral. The entity that receives or contracts the service is also considered, which will generate a significant evolution within the conceptual framework of these activities.

Moreover, with the publication of this new standard, a joint effort of several years is shown, which yielded a single comprehensive model for companies with regard to the accounting of the revenue coming from contracts with customers. Also, this standard replaces most of the current guidelines related to revenue recognition.

Without doubt, this will improve the comparability of financial statements of companies worldwide.?

References

• Bohusova, H., “Revenue Recognition under US GAAP and IFRS Comparison,” The Business Review, Cambridge, summer 2009, 284-291, 2009.
• Crowley, M., and K. Bauer, “Heads Up — Boards Issue Guidance on Revenue From Contracts With Customers,” Deloitte & Touche LLP, Volume 21, Number 14, May 28, 2014. Consulted on May 29, 2014 at www.iasplus.com/en/publications/us/heads-up/2014/revenue
• FASB, “Accounting Standards Update No. 2014-09: Revenue From Contracts With Customers,” 2014. Consulted on May 29, 2014 at http://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175828814244&blobheader=application%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=1265035&blobheadervalue1=filename%DASU_2014-09_Section_A.pdf&blobcol=urldata&blobtable=MungoBlobs
• GAO, Financial Restatements – Update for Public Company Trends, Market Impacts, and Regulatory Enforcement Activities, GAO-06-678, Washington, D.C., 2006.
• IASB, “IASB and FASB issue converged Standard on revenue recognition”, 2014. Consulted on May 29, 2014 at http://www.ifrs.org/Alerts/ProjectUpdate/Pages/IASB-and-FASB-issue-converged-Standard-on-revenue-recognition-May-2014.aspx
• Zha, J., “The Roles of Receivables and Deferred Revenues in Revenue Management,” AAA Western Region Meeting, 2014. Consulted on May 29, 2014 at SSRN: http://ssrn.com/abstract=2424848

stract=2424848

Companies are accustomed to submitting financial reports with historical, financial and quantified information. However, these features impose limitations at the moment of understanding and making decisions in a business.

The financial crisis has accentuated the need for a new approach to the presentation of financial reports, and models have emerged for presenting non-financial reports, such as sustainability reports. But there was a need to prepare integrated company reports based on a structure that would cover everything and meet users’ needs.

Business reports are an important source of information on the company’s activities. They provide a wide range of data, which the investor requests in order to make decisions.

This information may relate to the likely growth of the sector, the characteristics of the economy in which the company operates, its competitors, changes in technology, factors affecting markets, and more specific information about the company’s performance, its administration and its plans. As circumstances change and new types of information acquire greater importance, market opportunities arise for those who generate such information.

Thus, the International Integrated Reporting Council (IIRC), together with world leaders in the areas of business, investors, regulators, academics and civil society, undertook the initiative for a new approach to integrated information that responds to current business needs.

The objective of this project was to develop a conceptual framework for the preparation of the Integrated Report. In this project, more than 350 companies participated in a global consultation. The majority expressed their support for this report. Finally, on December 9, 2013, the IIRC published the Conceptual Framework for the preparation of the Integrated Report, which offers companies a starting point for reporting, in a comprehensive manner, the different conditions that define their overall situation.

The traditional annual reports mainly focus on the past financial performance and financial risks. However, other types of reports (administrative, sustainability, etc.) may contain more information that is rarely presented as linked to the strategic objectives of the organization and to its ability to create and sustain value in the future.

The need for integrated information is due to major changes in the way of doing business, how companies create value and the context in which they operate. These changes are interdependent and reflect various trends, such as, for example, globalization and the growth of political activity around the world in response to the crises of the past 10 years, the need for greater transparency in the information of the companies and, therefore, in accountability, environmental problems, scarcity of resources, and population growth, among others.

Therefore, the type of information that is needed to assess the performance of organizations and their future ability to generate value is much broader than what has traditionally been presented.

The objective of the Integrated Report is to provide information on the company history in a clear and concise manner: what it is, what it does and how it creates value, what are its opportunities and risks, its business model, its corporate governance, its strategy and objectives. Thus, it offers users a complete overview of the company and of its future.

Integrated reports also include forward-looking information to enable interested parties to make an assessment of the ability to create and sustain value in the short, medium and long term.

In addition, the Integrated Report shows how the business model of the organization interacts with external factors that affect it, as well as resources and relationships used by the organization to create and sustain value, which leads to greater explanation of the results.

Because the information has been generated in separate and disconnected ways, the reports are becoming more extensive. To avoid this, a conceptual framework is needed that can support the development of information by gathering the various information sources in a coherent and integrated manner and, at the same time, reflect the organization’s ability to generate value.

The objective of the International Integrated Reporting Framework is to support the development of information in the coming decades, and it is focused on how an organization creates and sustains value. It also provides high-level guidance to the organizations that choose to prepare Integrated Reports, thus helping to ensure coherence in the content and an integrated approach to information.

The International Integrated Reporting Framework issued by IIRC seeks the following:

1. To communicate the organization’s strategy, business model, results and plans in the context in which it operates.
2. To provide a coherent framework within which the market and the requirements for information compliance can be integrated.
3. To encourage the convergence of approaches and, therefore, the rapid understanding of the information presented.
4. To reflect the use and effect on all the resources and relationships or “capitals” (human and social, as well as financial, production and intellectual) of which the organization and society depend on for their development.
5. To reflect and communicate the interdependencies between the success of the organization and the value it creates for its investors, employees, customers and for society.

According to the Conceptual Framework, the basic components that make up the preparation of an integrated report are the following:

1. The strategic approach. It should contain the vision of the strategic objectives of the organization, how these objectives relate to its ability to create and sustain value over time and with resources, and how it relates to other components of its business model.
2. Connectivity of the information. It should show the connections between the different components of the business model of the organization, the external factors that affect it and the various resources on which it and its operation depend.
3. Future orientation. It should include how the organization balances interests in the short and long term, the goal that it aims to reach over time, given challenges and obstacles, and an analysis of the sustainability of the business model. Similarly, the report may also include objectives, forecasts, projections, estimates and sensitivity analysis.

An Integrated Report consists of content elements that are interlinked and shown below:

• Responsiveness and inclusion of stakeholders. It should submit the perception of the organization’s relations with its key stakeholders and how and to what extent it responds to their needs, in order to improve transparency and accountability.
• Reliability and materiality. The information it contains should be concise, reliable, relevant and comparable between organizations, as well as coherent for the organization itself over time.
• Overview of the organization and business model. It should show the organization’s mission, main activities, markets, products and services, its business model and the value indicators.
• Operating context that includes risks and opportunities. It identifies the circumstances under which the organization operates, considering the key resources, relationships on which it depends and the main risks and opportunities it faces.
• Strategic objectives and strategies to achieve those objectives. It describes the organization’s strategic objectives and the strategies to achieve them; identifies what makes the organization unique and capable of creating value in the future, along with considerations of sustainability.
• Governance and remuneration. It presents the structure of governance of the organization, along with the capabilities of those charged with governance and the way in which it endorses the strategic objectives; describes the actions that have been made to influence the strategic direction of the organization as well as its culture, ethical values and relationships with key stakeholders, and how the compensation of executives is linked to the outcome in the short, medium and long term.
• Results. It presents the performance of the organization in achieving its objectives, through a description of its vision in relation to its main external, economic, environmental and social impacts, as well as the risks of increasing or decreasing the value chain, along with the quantitative information. The past results should be clearly linked with the present results, and future prospects. The report includes both qualitative and quantitative information.
• Future prospects. It provides information about the opportunities, challenges and uncertainty that the organization most likely will face and how the organization is prepared to respond to the operational context that it will confront.

Conclusion

Although the Integrated Report is a new practice, the benefits that it provides to all interested parties have been identified as far as the ability of an organization to create value over time, including for the employees, partners, customers, suppliers, regulators, among others, because it presents information that allows a better assessment of the combined impact of several factors that materially affect the long term value of the organization and its needs.

It is likely that in the future it will become the main report of all organizations, because it can be prepared in response to global information requirements.

Finally, the Integrated Report is the right path for companies that really consider sustainability as part of their business strategy, and the Conceptual Framework, which is currently being tested in 25 countries, will be used to accelerate the adoption of the Integrated Report worldwide.?

References

• International Integrated Reporting Council, The International (IR) Framework, 2013. Consulted on May 29, 2014, at http://theiirc.org/international-ir-framework/