Bringing investors in from the dark

A new global study is calling for businesses to give a truer account of company performance or face losing stakeholder confidence.

In its ‘agenda for debate’ PwC , the Chartered Institute of Management Accountants (CIMA) and think tank Tomorrow’s Company warn the days of measuring performance by profitability at the exclusion of other outcomes are ending.

“A sea-change in global trends means non-financial reporting is growing in importance” says PwC’s Auckland Managing Partner Michele Embling. “We must respond now or New Zealand businesses will be burdened with catch-up costs and missed opportunities later.”

The study – Tomorrow’s Corporate Reporting: A critical system at risk – says current corporate-reporting standards are rooted in a 150-year-old “take, waste and make” approach to business. It challenges industry bodies to develop an integrated reporting system to better meet today’s “people, planet and profit” needs.

“New Zealand is going down a path of more regulation, more complexity with a greater financial focus, without adding any clarity to how we report performance. So many other factors influence a company’s value, its reputation and future money-making prospects beyond financial performance.

“We need to take stock and discuss how we can create a reporting system that isn’t bogged down with technical compliance, but is easy to understand and gives a complete picture of business health and rebuild trust in our capital markets,” says Mrs Embling.

By examining the dynamics and structural weaknesses of global-reporting systems across 22 countries – including New Zealand – the study sets out a roadmap for change. Central to this are a series of critical questions and key principles that need to be addressed and challenges that need to be understood. The study comes ahead of a high-profile report by the International Integrated Reporting Committee (made up of leading industry bodies) which will propose future reporting standards, which have been given emphasis following the global credit crunch.

CIMA chief executive Charles Tilley says “It is critical that we have a system which is better positioned to spot the warning signs of another financial crisis.”

Mrs Embling says New Zealand companies have more reason than most to pay attention to emerging international trends. “Our prosperity is reliant upon our global reputation. If we don’t start showing our social and environmental impacts they’ll come a time when global customers will stop buying our goods and services.”

“The calls for integrated reporting offer an opportunity for New Zealand to actively work with and influence relevant overseas counterparts rather than lag behind. The question is, do we have an impetus for change, how will we get there and what will it look like?” adds Mrs Embling.

Our findings:

Barriers to change

Uniquely, the study has looked at the whole reporting system (people, organisations, rules and processes) rather than just the reporting model (specific requirements) or the design and content of the ‘ideal’ report. Issues identified include:

• Stakeholders tending to see pieces of a jigsaw, rather than the whole system.
• A focus on data, rather than people, culture and behaviours.
• What’s the purpose of corporate reporting? Is it for shareholders or the public interest? Few are on the same page.
• An acceptance that it’s easier to add more disclosures as new requirements bolted onto the old model, than to recast the model on the basis of what’s important.
• Complexity, but there is inertia on changes which might increase liability.
• Quantity, not quality – there are often vast disclosures of immaterial issues, yet the corporate reporting system fails to cater for many factors that are material to the survival of many businesses.
• Create a system that will meet the challenges of the future rather than seek to address the problems of the past.

Roadmap for change

Looking to the future, the research sets out a roadmap for consensus building and change. Central to this are a series of critical questions that need to be addressed by those who oversee the reporting agenda, particularly its health, relevance and ability to explain business performance in a world constrained not just by financial capital, but also by human, social and physical capital. The questions include:

• What is the objective of corporate reporting and is global convergence a worthwhile goal?
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• Does anyone have oversight of the entire system?
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• Is the current reporting system itself a barrier to change?
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• What are the implications of integrated reporting for the structure and governance of standard setters like the International Accounting Standards Board (IASB)?

Key principles

In order to design a corporate reporting system fit for the future it should:

• Encourage innovation and change – through collaboration so that trust in the corporate reporting, and between participants, is maintained.
• Balance judgement and compliance – create a reporting system that encourages companies and professions to lift their sights beyond merely complying with externally laid-down requirements.
• Support company decision making – by focusing on the key drivers of long-term value – and their associated risks.
• Make reporting accessible, timely and relevant – encouraging companies to communicate everything that is material to their present and future success in a clear way.
• Support shareholder and investor decision making – by allowing them to compare the prospects and performance of companies and assess their long-term sustainability and value-creating capabilities.
• Recognise the importance of those who have responsibility for the oversight of the system.