Six ideas for improving reporting – and by extension, corporate governance

Posted
12 October, 2016

The Purpose of the Corporation Project, with the support of the Modern Corporation Project at Cass Business School, launched two years ago the Corporate Governance for a Changing World Roundtable Series. After holding events in six different countries and speaking to over 260 leaders in business management, investment, regulation, academic and civil society communities, we launched the report with the outcomes of the series at an event in Brussels on September 28.

The Creating Sustainable Companies Summit gathered more than 30 high level speakers and 140 participants to discuss the development of a corporate governance framework that fosters the creation of inclusive and sustainable businesses. Keynote speeches were delivered by Richard Howitt, MEP and incoming CEO of the International Integrated Reporting Council; Věra Jourová, EU Commissioner for Justice, Consumers and Gender Equality; and John Kay, well known author, economist and columnist at Financial Times.

From the 1970s onwards, mainstream corporate governance models have narrowed until the purpose of the corporation has become equated for many with the maximisation of shareholder value. The narrowing in perception of the legitimate scope of corporate purpose and managerial discretion has prompted boards and executives to adopt short-term strategies – and for investors to focus on short-term financial performance.

Our ‘Corporate Governance for a Changing World’ report tackles the question of how to improve corporate reporting and outlines key principles for creating long-term sustainable value. Below you can take a glance at some of the recommendations:

  1. Adopt the International <IR> Framework, allowing corporations to meaningfully report on their value creation strategy, taking into account more than just financial information.
  2. Identify and report on salient risks of adverse social and environmental impacts connected to the corporation’s business, as well as due diligence systems set up to prevent, mitigate and remediate such risks and impacts, including their application.
  3. Carry out and disclose an assessment of systemic risks and explain how the corporation’s strategy reflects these risks, while focusing on long- term value creation.
  4. Reflect the corporation’s long-term sustainable value goals in management and executive incentive schemes.
  5. Develop a materiality matrix to identify and measure the net positive impact value (NPIV) of strategic business decisions to shareholders, stakeholders and society-at-large and their alignment with the corporation’s purpose and strategy for the creation of long-term sustainable value.
  6. Include within the board’s responsibilities an assessment of principal ESG and systemic risks, the development of a strategy to fit within planetary boundaries and a statement on how the corporation meets its purpose, addresses both interests and meets the needs of key stakeholders.

The recommendations above aim to deepen the discussion on how to connect reporting with long-term value creation. The way corporate activity is accounted for is crucial to shape the way investors and other stakeholders see and assess a corporation. The form of corporate reporting used creates powerful incentives for corporate boards to establish their targets and to decide the means to achieve those targets. The current accounting models and legislative framework focus primarily on short-term financial information and do not address several issues that are essential for a corporation’s ability to create sustainable value. The legislative instruments that have been adopted so far to support extra-financial reporting have limited provision for monitoring or enforcement.

At the same time, investors are increasingly interested in the value creation process and there is an evident trend among successful corporations towards reporting on long-term value creation in relation to the interests of all key stakeholders. This is supported by research that shows that corporations with good ESG performance and reporting outperform their peers on the stock market in the long-term and benefit from lower cost of capital.

 

Want to find out more about Frank Bold’s project? Watch the ‘improve corporate reporting‘ session from their conference in Brussels on 28 September 2016