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Active governance – Boards, trust and transparency

Active governance – Boards, trust and transparency

Boards must take the lead when it comes to re-building trust through corporate reporting, upholding the reporting strategy, defining what should be shared with the market, and keeping an eye on long-term sustainability for the benefit of investors and stakeholders.

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Lead Partner, Better Business Reporting

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Moving towards a culture of transparency to build credibility and trust in the market not only takes a commitment from a company’s CEO and management – but also from its Board.

The Board must actively oversee and challenge the development and implementation of the company’s reporting strategy, including the determination of the reports portfolio. They must also set and approve the required level of assurance (Assurance Framework) over the reported information.

It is essential that the Board is confident that the information reported meets the requirements of investors and other key stakeholders, and is presented so that the reader not only understands past performance, but also how the organisation is set up to create value over the short, medium and long term.

Active governance by the Board in this way will provide increased confidence to investors and stakeholders that executive management are being effectively monitored and incentivised to deliver sustainable value for all involved – through implementation of the business strategy and management of risk, in line with what has been reported.

There are some key ways that Boards can ensure their organisation achieves these benefits.

 

1. Driving enhanced and more transparent reporting
Boards can oversee and drive executive management towards development and implementation of the company’s reporting strategy and structuring of the reports portfolio. They should also support management in implementing changes to processes, behaviours and technology as required to realise the business benefits from more transparent reporting such as Integrated Reporting, and an organisation-wide focus on longer term value creation.
2. Opening up information and ensuring it is credible Drawing on the agreed reporting strategy, Boards can play a critical role in deciding what information should pass through to the investment community, so that investors are better equipped to understand how the company creates value, including the strategy, value drivers, risk profile, performance and future prospects. The Board is also responsible for ensuring that such information is credible and ‘investment-grade’ through a robust approach to assurance.
3. Focusing on the long term Organisations are moving past a reflective view on financials and into sharing their vision for the future, and also their strategy to get there. This puts the onus on Boards to hold management to account for delivering on this plan, which in turn helps deliver longer-term value rather than quick wins.
4. Driving new behaviours

Many financial incentives are focused on short-term performance, to the detriment of ensuring ongoing availability of key scarce resources and achieving sustainable results. Some company acquisitions appear to have been made to boost immediate revenue (and achieve targets) rather than being truly strategic and beneficial to the company’s sustainability.

Therefore, Boards have a role to:

  • set and review senior executives’ incentives to focus on effective and balanced management of scarce resources and delivery of long term sustainable performance
  • cascade such incentives throughout the organisation – to drive alignment and common purpose.
5. Looking at the bigger picture

Boards can take a holistic view of the broader impact of the business and its strategy on all stakeholders, including its customers and people, regulators, the community and the environment.

Where there is an actual or potential material impact, the Board can explain the matter and what is being done to mitigate any negative impact or optimise any likely opportunity through clear disclosure in the context of the company’s value creation story. That is, how the Board and management are protecting or enhancing value for investors and other key stakeholders. The Board is responsible to ensure there is balance in such reporting, and over time this transparency will enhance public trust.

 

Corporate governance statements

As the Board embraces active governance, it should also communicate its approach to investors via corporate governance statements, based upon the reporting strategy.

Changes to the ASX Corporate Governance Principles in 2014 meant that companies no longer have to include corporate governance statements in their annual reports, but make reference to them and publish them on their websites. KPMG found in the year to June 30, 2016, 57 percent of ASX200 organisations removed the corporate governance statement from their annual report, putting it on their website. However, in the year to June 30, 2017, just 32 percent of organisations included a governance summary in their flagship report.

In a more positive sign, a further 5 percent offered an ‘active governance summary’, which explored how the Board had supported value creation. Information included:

  • explaining how the Board actively oversees management’s delivery of strategy within the risk appetite for the organisation
  • key areas of concern, activities and actions taken by the Board and its committees during the year and future focus
  • how governance has been adapted to changes in business practices, including changes in the governance structure.

An ‘active governance statement’ is extremely important in the flagship report as it provides confidence to the market that the Board is focusing on the major business issues of the day, and likely future issues that might impact value, and is actively working with management to prioritise and address such matters.

Using an integrated reporting framework to focus Board discussions on future strategy, challenges and opportunities can provide significant value. Superannuation organisation Cbus made its move to integrated reporting in order to more effectively explain its strategy and performance, with CEO David Atkins stating:

“The process was transformative for Cbus. It required us to start thinking more holistically about how we create sustainable value.”

Board sign-off

The International Integrated Reporting Framework includes a section on ‘Responsibility for an integrated report’, requesting that a statement is included from those charged with governance (the Board), acknowledging their responsibility to ensure the integrity of the report, confirming that they have applied their collective mind to the contents, and concluding on whether the report is presented in accordance with the framework. This is similar to ASX Principle 4, when the integrated report is the flagship report in a corporate reports portfolio.

For Boards that are not yet in a position to make such a statement, there is an alternative approach in the framework. This requires an explanation of the role of the Board in progress towards full adoption of the framework, and the likely timeframe.

Only a few organisations in Australia are including Board endorsement at this time, like Australia Post. Lendlease explained that its 2017 annual report had been prepared with reference to the International Integrated Reporting Framework, as they are still working towards full adoption.

Overcoming director concerns

A challenge some Boards face when moving towards integrated reporting is that directors are concerned with personal liability. Some are reluctant to reveal strategy or any likely future challenges, in case such disclosure creates legal issues.

However, any risks can be managed through adopting a cautious, yet transparent approach to crafting forward oriented disclosures. In fact, the principles of integrated reporting call for ‘future-oriented’ information, not forecasts or projections. The information should indicate the health of the organisation and its ongoing access to key resources (such as customer loyalty, employee engagement, technology or ethical supply chain).

Undertaking due process, and transparently reporting on lead indicators to explain the health of the business, potential future issues and their likelihood and impact, and the actions being taken, will likely provide a better defence than staying quiet – and will also improve market trust.

It comes back to trust

If Boards play a deeper role in: supporting development and implementation of the reporting strategy; determining the right information and level of detail to share with investors and other stakeholders; ensuring that the information reported in credible and where appropriate assured; and are open about their approach to active governance, they will be leading the way in building market trust in their organisation, thereby putting it in a better position for a thriving future.

The social licence of an organisation to operate is not just ‘a given’ in today’s world of continual scrutiny and high expectations, so they must be actively listening to communities and be willing to change. Find out more Social impact and rebuilding trust.

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