THE so-called "confession season" provides a real opportunity for boards and management to enact meaningful change in how they report, courtesy of a good old-fashioned crisis. A narrow focus on the impact of the global financial crisis and economic downturn on financial performance would mean that an opportunity to fundamentally alter communication of sustainable performance and value to key stakeholders is lost.
There is no doubt that recent turbulence in financial markets and the economic downturn have focused our thinking on the here and now. Governments are stimulating their economies in the short term, and businesses are just trying to survive. But this constant focus on short-term growth and financial earnings at a governmental, organisational and personal level has been a major contributor to this crisis.
There is a growing realisation that for ongoing sustainable growth and performance, we need responsible governance and regulation, responsible business practices and responsible investment operating within our global regulatory, commercial and financial markets.
So how do company boards and management seize this opportunity? Now is the time to report more broadly and tell the company’s story. Europe and Britain are starting to see an aggregation of financial and sustainability (or corporate responsibility) reporting, so that a broader picture of an organisation’s overall strategy and performance can be assessed.
In Australia, we have the opportunity this financial year-end to go one step further and present truly integrated reports. We can tell the whole story by aligning financial and environmental, social and governance (ESG) performance to key elements of corporate strategy. Through candid disclosure, organisations can describe how the global financial crisis has impinged on their business not only financially but also on their other key assets: the workforce, pipeline of innovation, relationships with major customers and suppliers, and the value and penetration of major brands.
Organisations can tell their own story about how they have managed and mitigated the impact of the downturn, and how they have, and still are, managing business risks while protecting and preserving the organisations’ key assets for the upturn. The historic financials may be ugly, but the lead ESG indicators may provide a more positive picture of the company’s future prospects.
Reporting more broadly on corporate performance should also help boards in tackling the executive remuneration issue.
One of the first global responses to the crisis, and an attempt to deal with short-termism in management practices, was the release by the G20 Financial Stability Forum of its Principles of Sound Compensation Practices in April. In Australia, the Australian Prudential Regulation Authority has revised its prudential standard on governance and increased the remuneration and governance requirements for APRA-regulated institutions to incorporate the G20 principles.
In the Prudential Practice Guide that accompanies the revised standard, APRA states that it is important for institutions to recognise and adjust remuneration for non-financial measures such as adherence to corporate values and displaying good corporate citizenship. Even though the revised standard and G20 principles are aimed at financial institutions, they are applicable to all company boards. Organisations should not only seek to align and disclose their company’s financial and ESG performance to the corporate strategy, but also then provide a further link to executive pay and incentives.
Capital markets are beginning to recognise good ESG performance. Many major investors, especially Australian superannuation funds, have signed the UN Principles of Responsible Investment (PRI) and are working out how best to select and invest in responsible, or sustainable, organisations.
Boards and management teams that can clearly demonstrate that they have been agile in response to the crisis across their businesses will be identified as responsible investment opportunities and supported by the capital markets and other key stakeholders for the longer term.
Now is the time for boards and management to seize the opportunity arising from this crisis, and challenge what they are now reporting to their key stakeholders. It’s time for company boards and management to tell us their story.
Nick Ridehalgh is lead partner, corporate reporting and communications, PricewaterhouseCoopers.
