King's gambit: The pioneering work of Professor Mervyn King on integrated reporting (IR) has changed forever how South African pics disclose information to their stakeholders. He reports on the progress of the drive to make IR a globally applicable framework.
"If you go back 20 or 30 years there's always been a part of society calling for a greater understanding of the role of companies," he says. "At the same time the purview of directors has widened to take finance, human, natural, societal, manufactured and intellectual capital into account."
King has had a notable career as an academic, a supreme court judge and a company director in South Africa, yet he rose to wider prominence two decades ago when the Institute of Directors in South Africa asked him to chair a committee to recommend corporate governance principles for businesses in the newly democratised country. The King committee (which he still chairs) published three comprehensive reports--in 1994, 2002 and 2009-endorsing an integrated and inclusive approach to reporting. The significance of the resultant governance blueprint for a nation establishing a new set of values is not lost on those who have seen South Africa become a living model of these values. The 1994 report was the first of its kind in South Africa. King I, as it became known, stressed the need for companies to become responsible members of the societies in which they operated. It advocated an inclusive approach to corporate governance and encouraged the practice of good financial, social, ethical and environmental conduct.
In 2002, when the World Summit on Sustainable Development was held in Johannesburg, King pushed for a revision of the report. The result, King II, added new sections 0n sustainability, risk management and the role of the board.
"By then everyone had realised that the planet was in crisis; that we were using more resources than it was regenerating," he says. "In the report we said that, as a listing requirement, companies must carry out sustainability reporting."
In response, the Johannesburg Stock Exchange (JSE) requested listed companies to comply with these recommendations or to explain their level of non-compliance. King II was quoted regularly in the US Congress in the aftermath of the Enron and WorldCom corporate accounting scandals in the early 2000s. Aspects of the report have been adopted by stock exchanges in the US and several other countries ever since.
In 2006, King was appointed chairman of the committee on governance and oversight that produced a governance code for the United Nations. He also became chairman of the Global Reporting Initiative.
The report that was published with further revisions in 2009 as King III became the first ever to call for integrated reporting. The JSE was recognised by the World Federation of Exchanges in 2011 as the best stock-market regulator in the world. Later that year, King received an award of excellence from the World Federation of Exchanges for his work.
"The special thing is that it took into account the interests of all stakeholders," he says of the third report. "It didn't look at the bottom line alone; it looked at the total impact on society, the economy and the environment. We are now at a stage where no collective board thinking can ignore environmental, social and corporate governance issues. This is reflected in the development of sustainability reporting standards."
The IIRC--of which CIMA's CEO, Charles Tilley, is a member and chair of the technical task force--is stepping up its consultation process before it designs a reporting framework that can be applied globally. The committee says that the IR message is spreading through its pilot programme and a process of peer-to-peer learning. King says that there is a global recognition that corporate reporting as we've been doing it for the past seven decades is no longer fit for purpose. He believes that clearly written and concise disclosures explaining how a company is creating value sustainably in a world affected by issues such as climate change are gaining in currency.
The concept of "integrated thinking", which adds value through improved decision-making, is being adopted by big companies such as Coca-Cola, Marks & Spencer and HSBC.
"We're living in a world of finite natural assets, which many companies, especially those that use a lot of resources globally--for example, Unilever and SABMiller--are having to address," King says. "Stakeholders are asking: 'Are these firms moving to renewable energy and do they have a long-term plan to package in recycled material, conserve water and send no waste to landfill?'"
A lethargic governmental response to ecological problems has put the onus on companies to act, because their behaviour has a huge impact on society and the environment, he argues. This is why IR is so important and has been adopted by so many companies around the world. This is not only because it's the right thing to do; it's also because they will go out of business if they don't think about their sustainability. "It is good, hard-nosed business sense to think of these issues," King says.
At the recent CIMA president's dinner, where he was guest speaker, he said: "The collapse of Lehman Brothers and the impact it had on the lives of millions of people indicate that companies and the wider environment are connected."
Out of South Africa
So how crucial an issue is IR for companies around the world? "Even though integrated reporting developed in a company such as Unilever, it is part of a long journey. If you were to ask whether that company's attitude has changed. I would answer in the affirmative. This is a strategic issue and it needs a different mindset. Companies such as Unilever and SABMiller are getting this right."
King concedes that, although stakeholders' increasing expectations are exerting a strong influence, the entire business community is not going to change its approach overnight. He would like reporting to be more of a balanced and cogent story of a business, rather than a mere exercise in compliance. This story, he adds, should be more accessible to different stakeholders--making it easier than before to find the particular information they want.
To be properly accountable and transparent, companies must communicate the state of play in their business in clear and understandable language, King stresses. How else can institutional investors take an informed view of a firm's ability to create value sustainably before investing their ultimate beneficiaries' money? Even private equity houses, which own a substantial chunk of corporations worldwide, need to apply a similar approach to investing.
"The private equity sector is very careful now, because it's not as easy to raise funds as it was five years ago," he says. "If a private equity firm is going to raise a fund, it will need to see a virtuous circle, so it will insist on responsible investments. Responsible investments are a great driver of sustainable capitalism."
King points out that a balance sheet does not adequately represent the true value of a business. Financial reporting is useful, but not enough on its own, while information overload is a real risk. At the CIMA president's dinner, he stressed the need for greater conciseness and clarity by quoting Sir Winston Churchill, who, in a letter to his wife, wrote: "If I'd had more time, I would have written you a shorter letter."
King believes that, although the interests of a company's shareholders are crucial, they are not paramount. In his 2009 book Transient Caretakers: Making Life on Earth Sustainable (co-written by Teodorina Lessidrenska), he argues that corporate boards have long developed beyond their original purpose of taking account of shareholders' interests alone. Other stakeholders are becoming increasingly important in collective boardroom decision-making through the triple context in which a business operates: financially, socially and environmentally.
A company's stakeholders expect the business not to have profited at the expense of the environment, human rights, society and its own integrity. They also expect it to have adequate controls in place to monitor and manage material risks and opportunities.
In learning about the needs, interests and expectations of stakeholders and by identifying the sustainable issues material to the business, management teams can therefore make more informed decisions, King says. "The collective mind of the board can embed the sustainability issues into long-term strategy to give the company a competitive advantage in the changed world in which we live."
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|Publication:||Financial Management (UK)|
|Date:||Dec 1, 2013|
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