Investor perspectives from the International Corporate Governance Network’s Regional Conference in Frankfurt.
By engaging with investors at a roundtable and panel discussions at the ICGN Frankfurt conference, we gained a lot of insight into their key challenges with respect to audit quality and reporting. While culture was raised as a significant issue for investors, so too was governance.
To a degree, governance and risk information is included in the up front section of a company’s annual report. But what investors told us is that the information provided just isn’t enough. Investors said companies too often use boilerplate information, incorporating lists of risks without information around managing and mitigating them. In order to gain real insights, investors want more forward-focused risk information. This means companies need to take a more holistic approach – not just to reporting, but to governance.
One investor explained, “We need to understand the business model, what the risks are that are inherent in that business model, and what’s the overall system of governance that has been put in place.”
Part of the reason investors want this information is so that they can go to a company’s annual general meeting and ask more targeted questions around risk. Investors recognize they need to hold directors more accountable, but in order to do so they need clearer information around risk areas.
Speakers in this video: David Couldridge (ESG Analyst at Investec Asset Management), Jens C. Laue (Audit partner and Head of Governance & Assurance at KPMG in Germany), Robert Walker (Vice President of Ethical Funds and Environmental, Social, and Governance (ESG) Services at NEI Investments) and Mark Summerfield (Audit partner and Head of the UK’s Assurance practice at KPMG in the UK).
One option discussed involved giving investors more transparency around the number of changes made to financial statements and other information. If investors knew that an auditor has spent a lot of time with management discussing one particular risk, they could spend more time looking at that issue and asking about the company’s strategy.
Our KPMG audit participants in the roundtable shared investor concerns around governance and risk reporting. One auditor noted that, “I’ve seen risk analysis where there is no process within that company to properly identify the risks.” The challenge is that auditors are currently limited in what they can do about it. In Germany, one auditing standard has been established, the PS 980, which is solely on the compliance system.
It was apparent from our ICGN discussions that both investors and auditors believe it is important to focus not only on verifying specific information, but on doing work around the systems and processes that generate that information. This type of integration of governance and compliance reporting would require an expanded auditor mandate – an issue I’ll discuss in a later blog.
Of course, our conversations with investors around governance at the ICGN conference were just the beginning. See how the social media conversation unfolded at the ICGN conference in Frankfurt. We look forward to furthering the discussion with investors at the San Francisco Annual Conference in June.