By Mervyn King, Chairman of the King Committee on Corporate Governance in S.A

 

From the time of the Industrial Revolution up to the middle of the 20th Century companies adopted a take, make and waste approach to the carrying-on of business. Waste was freely discharged into rivers and dumped into landfills.

Matter, of course, does not disappear – it merely translates into another form.  With the degradation of the waste dumped into landfills, the toxification of planet earth’s land and water became a reality

Economies were based on the false assumptions that the planet had limitless resources when in fact they were and are finite and that nature had an infinite capacity to absorb waste.  This is how business has been carried on, for the last 150 years – business as usual!

If one adds the issue of population growth and the United Nations extrapolation that by 2050 we will have another 2 billion people on the planet, that is approximately 9 billion people, then it is clear that business cannot be carried on as usual and we all have to learn to make more with less.

In consequence Governance, Strategy and Sustainability have become inseparable.

Many countries have developed responsible investment codes which provide guidance to the trustees of pension funds and financial institutions generally on how they can make an informed assessment about the sustainability of a business in the new economy in which we find ourselves.

This new economy has been created by three crises: the Global Financial crisis, Climate Change crisis and Ecological Overshoot which means that we have used the natural assets of planet earth faster than nature can regenerate them.

Companies are now asking for the traceability of their input products because of the impact this could have on one of their most valuable but intangible assets, their reputation!

Supply chain codes of conduct are having a huge impact on companies which are not listed including small and medium sized enterprises. Wal-Mart, the biggest purchaser of product in the world has a very stringent supply chain code of conduct.

The world has accepted that people, planet and profit are inextricably intertwined, and nowhere was this better illustrated than in July last year in London, when the International Integrated Reporting Committee was formed.

The disparate bodies sitting around the table, such as the FSAB of America, the IASB the GRI, the IAASB, WWF, the Big 4, etc., established within one hour an identity of purpose, namely that financial reporting was not sufficient to make an informed assessment about the sustainability of a business in the new economy.

It was accepted that the annual report had to be an integrated one, that is one where there is a holistic representation of the financial and non-financial performance of the company. In short how the financial impacted on the non-financial and vice-versa.

Traditional accounting which follows the international financial reporting standards emphasizes discrete assets. These are presented as additive. In the new economy, human resource, financial, capital, information technology, natural capital and society are all critically interdependent and create value. No company in developing its strategy can overlook financial, human, natural, social, manufactured and technological capital aspects.

In order to develop an Integrated Report, an interactive strategic communication is needed with a company’s important stakeholders. The board adopts today an inclusive approach to governance, namely it identifies the legitimate needs, interests and expectations of its major stakeholders.

This information assists management to act on a more informed basis and the board being able to develop a long-term strategic direction which actually meets the needs, interests and expectations of the company’s stakeholders. Further, such reporting enables the providers of capital to measure risk on a better basis.

It has now been established that a company which takes into account how its operations impact on society environment and financially, not only attracts a better class of employee, but retains a better class of employee. In addition it can raise capital more easily and more cheaply. All of these are good hard-nosed business reasons to do an integrated report in which the company can tell its stakeholders how it has made its money.

Integrated reporting, however, is different from the outcome which is the report itself. Integrated Reporting needs the cooperation of the various areas of knowledge and skills in the company as well as that which management has learned about the needs, interests and expectations of stakeholders.

In short, from the interactive strategic communication with stakeholders, a pathway of knowledge is built throughout the year. The information is casino online then analyzed to enable the Integrated Report to be published.

Most modern Companies Acts today provide that a company need only report the highlights of the financial information and the total report can be found on the web. Similarly, the material and relevant ESG matter will be contained in the Integrated Report, but the detail again can be found on the web.

On a reading of the Integrated Report, which should be the primary report in clear and understandable language, the user should be able to ascertain the material, financial and ESG issues and how the sustainability issues have been built into the long-term strategic planning of the company.  The user must be able to make an informed assessment of the sustainability of the business of the company.

The European Commission has now called for submissions in regard to why investors should not take account of ESG factors before making their investment decisions.

Consequently the market forces of responsible investment, the traceability of input products, and interactive strategic communication with stakeholders are changing the system of reporting forever.  In short, the system of reporting and the report itself are not what they used to be.

From the corporate report, the reader should be able to tell that:

• The company has not profited at the expense of the environment, human rights, a lack of integrity or society;
• There are adequate controls in place to monitor and manage material risks and opportunities;
• Remuneration is linked to overall performance which includes social, environmental and financial;
• There is an interactive communication with the stakeholders who are strategic to the company’s business; and
• The company is conducting a sustainable business.

To achieve the changes now needed and to do this with the urgency required, demands that all those involved in corporate reporting recognise ‘the elephant in the room’: The behaviour and incentives of institutions and actors within the corporate reporting system are all too often not shaped by an understanding of the system as a whole but rather by the ‘piece’ of which they are a part.

The system must evolve. Tomorrow’s Company’s report on the system of reporting challenges many of the key questions which will determine whether we will succeed: the objective of Corporate Reporting, Global convergence and whether the current corporate reporting system is itself a barrier to change.

Tomorrow’s Company’s report (which can be visited here) provides an important contribution for all of us involved in Corporate Reporting and I want to ensure that it does indeed remain relevant and of value to business, the capital markets and society at large.

This article originally appeared in Tomorrow’s Company, in the United Kingdom.