Over the past couple of years, a number of countries have established new codes or announced plans to review the status quo in corporate governance—something that is encouraged and welcomed by the International Integrated Reporting Council. But why such changes? In reality, is this what boards are really focusing on? And how can we ensure reforms underpin the reality of how a board functions?
The “integrated reporting” answer to these questions is that corporate governance needs to enable a company to run to its full potential, creating value for itself and for others, both now and in the future.
Ask any board member to list what’s at the forefront of his or her mind and you’ll hear about responsibility to shareholders, strategy, a company’s prosperity, living up to a mission and vision, understanding risks and opportunities and of the external environment in which their company operates. Finally, they’ll add that it’s about making sure the structures are in place to make all this happen.
A more natural reporting method
All this can be found in the International <IR> Framework. The language in the Framework won’t be new to board members, but the fact that it exists may be. Integrated reporting is a more natural way of framing the issues on which a board focuses, rather than using the traditional financial report.
For policymakers internationally, part of the focus has been the inclusion of integrated reporting and the values which it represents, through the introduction of stewardship codes. These place new responsibilities on investors and aim to create a richer dialogue between boards and providers of financial capital. In markets such as Japan and South Africa, for example, integrated reporting is becoming the information architecture that supports this dialogue.
We’ve had a mismatch for too long between how a company works on a daily basis, and how it communicates this. It is nonsensical that a board should spend its time talking about broad strategic issues, but when it comes to ensuring shareholders have confidence, it talks only in the narrow remit of finance.
That’s what integrated reporting offers the debate on corporate governance. The <IR> Framework can be used by an organisation to frame the process and discussions that a business already goes through, and put it in to a context and language that will be internationally recognised and understood.
In the three short years since the <IR> Framework was released, more than 1,500 companies in 30 countries have begun to apply its principles. What these companies have realised is that this is about behaviour—not just a report.
Of course, there are still challenges. It will never be easy to resolve these questions in the small number of companies with boards that lack the will to live up to their duties. However, efforts in diversity, defining structures, and introducing better processes should minimise these numbers and we will work to support this.
What about the boards that would accept the principles, but feel trapped by short-term pressures? Companies that think for the long term address risks, opportunities, and adapt their business model. They start to think about their workforce, their supply chains and the environment—they begin to be responsible for their broader value-creation story.
I accept that this shift to “integrated thinking” for the long term is not always easy. We have been part of a number of initiatives all over the world, which have concluded that focusing on the long term is the key to ensuring businesses reengage with society and build trust. Boards will always have time-sensitive decisions to take at every meeting. The process of integrated thinking and reporting acts as a safeguard to ensure that a longer-term perspective is not lost.
Stable and sustainable
Such long-term thinking is the only way we are going to embed financial stability and sustainable development into global markets. It’s great to see that so many of the most recent corporate governance codes acknowledge this. Chapter One of the Dutch code, released in December 2016, is titled Long-term value creation. Principle A of the draft Malaysian code similarly focuses on the long term. At a global level, the International Corporate Governance Network’s Global Governance Principles calls on boards to produce an integrated report.
Part of our core strategy is to embed integrated reporting as a key principle of 21st-century corporate governance globally. If you are a board member, ask how your company is developing its own reporting. And challenge your own thinking, as well as that of your colleagues who think reporting exists only as an issue of compliance for the benefit of the regulator.
Richard Howitt is chief executive of the International Integrated Reporting Council.