Speech from Dominic Barton, Chair, International Integrated Reporting Council, to the IIRC Global Conference “Inspiring Alignment through Value-Creation”

Posted
17 May, 2019

Speech from Dominic Barton, Chair, International Integrated Reporting Council, to the IIRC Global Conference “Inspiring Alignment through Value-Creation”, London, 17 May 2019

I’d like to start by explaining why I’m committed to and interested in helping to drive integrated reporting and integrated thinking into the system. 

Second, I want to give a sense of where I think we are in terms of the system. There’s a lot of terrific momentum that’s underway, but there are also the challenges. I wanted to talk about that a little, from my own perspective. 

Third, I wanted to outline some potential priority areas, as we think about ourselves as the IIRC and what we focus on in this new momentum phase.

And finally, I think there are great opportunities when there are changes in leadership. I want us to build a lot on the great momentum that’s been going on, but it is also a good time to step back and to see who we are and where we’re going.

My personal obsession 

On a personal level, I’ve spent most of my career at McKinsey, 33 years, and I’ve lived in all different parts of the world. 

My focus has been primarily on helping CEOs but also government leaders and some NGOs, on how do you fundamentally improve the long term performance of your organisation? That’s been my obsession for all that period.

In the last nine years, when I was leading McKinsey, I began to notice that there were changes in pressures going on with CEOs. 

One of the biggest pressures I felt was more short termism. 

People had shorter time frames. Part of that is because, if you think about CEOs, the average tenure of the CEO for an S&P500 company has dropped by 50%. It’s now about four years. 

It’s not exactly a lot of a time frame to get things done. 

That biggest pressure in fact, was coming from investors. 

And the odd thing about this is when you look at investors and you look at the institutional investors, those are really savers providing the money to those pension funds and in fact even to sovereign wealth funds. 

And then somehow the system gets disaggregated, such that they become short term when they should be long term. 

They should be thinking in 50 year time frames, but what was happening is you had asset managers that were managing some of those long term assets, being evaluated on an annual basis in terms of performance and you saw them in a shorter term focus instead.

In the last thirty years there has also been more of a push for business to be focused on profits. 

Milton Freidman gave a very important speech and wrote an important paper in 1970, which basically said: “The business of business is business. Do not get distracted with this corporate social responsibility nonsense, that you make profit, you deliver,” and that was the focus.

There were probably good reasons for that; companies were getting distracted. 

But I actually think that is not what capitalism is about. 

I’m telling you this because at McKinsey we get criticised and get called all sorts of names. One of the names we get called is we were known as the ‘Jesuits of Capitalism’.

I felt we better think about how we can defend that system. That’s where I started to get involved looking at where is capitalism?

Short-termism 

In my personal view, it had become much too short term, much less inclusive than it had been in the past and less ‘owner-like’, than it was. 

And so we started to write about this. There were a number of investors – BlackRock, the Canada Pension Plan, GIC in Singapore, who shared this belief.

There were also a number of CEOs who were deeply frustrated by this: Paul Polman we know from Unilever, Randall Stephenson from AT&T, Doug McMillon from Walmart.

There was a whole range and we decided to set up a group together called “Focusing capital on the long term”. 

We wanted to have institutional investors, asset managers, and Board members of corporates, together to say how do we try and jolt or fix the system as we go through it?

Now of course in good McKinsey style, we didn’t actually realise that there were a lot of other groups that had already been working on this, like the IIRC. I had no idea. 

I think one of the good things in entrepreneurship is that you want to get going and you drive things, but you don’t spend a lot of time looking at what’s already out there. 

And over time I saw it was Barry Melancon, Charles Tilley, most of all Mervyn King’s longstanding good work, seeing what had actually happened in South Africa, and the notion of integrated thinking

So we said maybe we should become part of that broader movement, that we don’t need the fragmentation. 

And that is the journey that I’ve been through. 

Changing the system – the Momentum Phase

I’m more and more of the view that what gets measured gets done over time and we really need to push this. 

And that’s why I’m excited to be Chair, because I think the IIRC is a wonderful platform to drive this forward. 

I am a volunteer but in some ways we all are.  I think we are volunteers trying to get the system to be better and we that we can and should be selfless in pursuing this. 

I don’t think this is about getting our model working – what we’re trying to do is to change the system. 

That is my sense.

Remember the statistics which show how much value in a company comes from the intangible assets and how little of the value comes from the tangible assets today.

But we focus a lot of our measures on the tangible assets. This is one of the reasons why we have to change. 

But as we look at the systems level, there is a lot of momentum. 

We are in the momentum phase. We should feel very good about the number of companies that are actually reporting on a broader set of measures than just financial measures, so we’ve really got a lot of momentum. 

Confusion

The challenge with this though, is that we also have a lot of confusion. 

People are excited that there’s a movement, but I would argue that investors have got ahead of us in terms of where we are. 

They are moving forward. They’re demanding to see a framework, standards and measures on non-financials. Particularly on the environment but also on human capital, broadening out to all the six capitals. 

They are demanding it and I would argue that they are in my view moving even faster than we are. 

So the sense of urgency is high and I think we need to notice that and inject that into what we’re doing.

The second thing I want to say about it is the confusion and one thing we notice particularly from investors but also corporates – I’m going to use some strong language so please forgive me – is that they are actually getting quite p*ssed off with the confusion of the frameworks that are out there. 

They’re saying, “We cannot report to all of these different standards. Could you guys get organised and get aligned?” 

There are 1500 different standards that are out there, that companies can look at. 

Total, the French energy company, does eight different reports to try and fulfil what they’re doing.  

As a CEO in a corporation and a Chair of a couple of companies, that’s just not acceptable to have that system.

We’re seeing regulators starting to say, if you guys can’t figure it out, we will figure it out for you.

We’ve got to deal with that and that’s why I think what Ian Mackintosh is leading, with the Corporate Reporting Dialogue, is so vitally important. 

We need to bring this together and we do need to be selfless about it. 

Is it our system or another system… who cares? 

We’ve got to move the system forward and we’ve got to start measuring properly. 

The good news is we’ve got investors, we’ve got corporates who want to do this, let’s not make it difficult. 

That’s my sense in a nutshell. There’s a lot of momentum, investors are moving even faster than we are.  But there’s a lot of confusion even on the taxonomy, between frameworks, reports, and standards. 

We had debates even in the IIRC: is it ‘non-financial‘ or is it ‘sustainable’? People got quite upset at me using the wrong word. But we just have to be clear on what we’re trying to do. 

Time to bring it together 

I accept that’s natural, when there’s a movement. There are a lot of different ideas, there’s a lot of energy.  But I think it’s now time to bring it together. 

We have a number of sponsors like Bloomberg and the Ford Foundation who are actually sponsoring multiple initiatives, that are now saying that we need to consolidate and focus on what we’re doing. 

I think we’re also seeing an interesting set of players amongst the data providers. We have a huge number of important data providers, including some really good ones that are being developed on ESG. 

There’s a group that came from LeapFrog – an impact private equity firm – that’s trying to measure a broader set on impact and trying to provide a new data set for people who focus that way.  That’s good news as investors are getting frustrated on that side and I think that can be one help as we move forward.

A priority on simplification 

As we look ahead and think about what are our priorities – one of them has to be simplifying, rationalising, and consolidating. 

We should do everything we can to support the CRD and to bring people in. 

We need everyone to be at the table to try and bring that together to make it easier for people to do this. 

One of the things that frustrates corporates is saying: if I do report on this and there isn’t a common standard, how can people in the system gain? 

And this brings the question of how we can get more alignment. 

I think the CRD effort is fundamental and that we should do everything we can to support that move in driving things forward.  

Ambition 

The second thing I think we need to think about is our ambition. 

What is our ambition? 

I mentioned earlier that there are a number of companies that are beginning to report on various different approaches, that we have out there. 

I would argue that we have to move faster – when do we want to get this done? 

We’ve discussed that it’s 2025 with this momentum phase. 

I think we better be ambitious on timescale and that’s something we should talk about further.

We should have some notion of a target. 

It’s interesting to see what’s happening in Turkey, in India, in Japan, in France. There’s a lot of progress there.

It can help our ambition and to drive us, to say that we’re not doing well unless we’ve hit these numbers by this particular time. 

Our influencing model 

I think the third area is that we need to re-examine is our own influence.  

There are some very interesting examples within the room, of having conversations with corporates, with CEOs, about how to get them to believe that having an integrated report is a good thing to do. 

How do you actually help people, convince them to be able to do that? 

How do we talk with regulators, to help them understand that some are moving faster than others?

Connecting with our customers 

And the fourth area is that we have to recommit and reconnect with our customers. 

Our customers are investors, corporates and regulators. 

I’m excited to see in the room that we have all of these constituents around the table. 

But I think we’re also going to have to bring in more of the largest investors in the world. 

When I think about the work we’re doing in the CRD, we need BlackRock, we need Vanguard, we need GIC, we need some of the largest investors to say that this is how we see where it’s moving and to be at the table. 

And there is a commitment to that. 

To getting that group more directly involved in what’s happening. 

Those are just some areas we can work on together.

Inviting you to be involved 

I’d love your feedback as to whether you think I’m missing anything, and on these four areas where I would like to push?

It’s about simplifying and rationalising the approaches, thinking about our ambition, and where we are. Thinking about our influence model, how we get CEOs, corporates but also institutional investors and also regulators to change faster. And then how we reconnect more with our customers, the investors, corporates and the regulators. 

And I think finally that also has some implications on how we use our time together. 

One of the things I worry about in the world is that there are a lot of echo chambers. 

I don’t think there’s anyone in this room who thinks that there shouldn’t be some sort of environmental standards; but we should realise there are people out there that do not believe that that’s the case. 

So thinking about who are the people that actually come to the events that we’re at, where we can have debates and identifying people that challenge us in terms of where things are, is going to be an important part of it. 

The learning which I saw that yesterday in the case examples that were up there from the different corporates and what people are doing in terms of the different challenges they had in trying to drive it.

I think this is very useful, sharing more of the examples of how we do it. 

Celebrating even more people, organisations, countries that have actually made a lot of progress, can be important to get the awareness up. 

I think about the IIRC, there’s a lot of thinking and academic thinking that also needs to continue.

Assurance 

We need to think about assurance – how are we going to assure some of these reports?

If you think about human capital, it’s an area in which a lot of corporates and investors are interested.

It’s a very complicated area to assess, let alone to assure it. 

We’ve also got new areas we have to push, in our thinking. So where we want to use our time, to focus on things, is something which we should think about.

Being selfless

We’re in a tremendous momentum phase.  Great, great work has been done, Richard Howitt, Jonathan Labrey, Lisa French and your team.

And they and I think for an organisation that has achieved so much and done so much, we should be prepared to dream even bigger and drive even faster.

Again we can do this keeping the to this model of being selfless. 

We’re not trying to make it our system, to be the winner. 

We are trying to change the system. 

I look forward to working with you and learning with you and together to changing the system with you.

Thank you very much.

END.

Nb: This is an unofficial, edited transcript of Dominic Barton’s speech, as delivered.