The role investors can play in ensuring corporate reporting meets their needs.
At the International Corporate Governance Network’s (ICGN’s) Regional Conference in Frankfurt, a panel discussion facilitated by Jens Laue, an Audit Partner and Head of Governance & Assurance at KPMG in Germany, examined the role of investors in ensuring that corporate reporting meets their needs.
To set the tone for the session, Laue identified the varied challenges facing companies, and their investors. “The financial crisis, unsustainable business models, risk culture, antitrust,” he listed. “Shouldn’t investors be interested in the issues that have caused recent losses of value in public companies? And if investors are interested, shouldn’t auditors be providing assurance over those issues?”
As a starting point, panelists discussed how reporting can become more relevant for investors. “The reporting focus should move to non-tangible assets to be of higher value to investors,” suggested Angeli van Buren, Advisor to the Chief Investment Management, PGGM Investments.
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)
Bob Walker, Vice President of Ethical Funds and Environmental, Social, and Governance (ESG) Services at NEI Investments, said he would like to see principles-based reporting rather than rules and regulation. He acknowledged the challenges raised by Jens Laue, in particular that of corporate culture, posing the question of whether it’s ever possible for an organization to address culture issues before those issues have resulted in a crisis.
Similarly, David Couldridge, ESG Analyst at Investec Asset Management, warmed to this theme, saying he would like to “…see people move from doing things right to doing the right things.” He added that, “Compliance and assurance are two ingredients of the whole picture.”
Recognizing the importance of getting to the right information, Laue asked participants what was missing in corporate reporting around risk from an investor perspective.
Van Buren said there are too many lists of risks and not enough detail around what has actually occurred within a company. She said, “Tell us how you've handled risks, mitigated them, not just how you've defined them.”
Walker agreed. He said that there is far too much boilerplate content in risk disclosures. Such information doesn’t provide insight for investors to take away.
Couldridge noted that the traditional audit is assurance over historical, point-of-time information while forward-looking risk assessments are what investors need most. He asked: “Maybe there [is] a possibility of turning this around? Where the auditors spend more time, on sharing and doing work on the systems of governance and the processes that generate the information, rather than on the verification of the balance sheet and the outcomes.”
Of course the subject of risk brought the discussion back to culture which was highlighted as a significant issue for investors. Walker was open-minded about whether corporate reporting could handle a topic as broad and formless as corporate culture, asking his fellow panel members “Is it possible to capture the quality of culture in a report, or can culture only be understood based on multiple interactions with a company?” Walker’s question sparked a multifaceted conversation about the aspects of culture and the extent to which these lend themselves to corporate reporting – or not. Diversity was a key theme – and the need for more diverse perspectives at the boardroom table in order to evaluate culture. Both panelists and audience members offered examples of existing diversity-focused initiatives, and there was definite agreement that more diversity reporting is needed. Couldridge added that investors also need to push for better, stronger and more diverse leadership on boards.
Speakers in this video: Amra Balic (Managing Director, Head of EMEA Corporate Governance and Responsible Investment at BlackRock), Erik Breen (Chair, ICGN Board of Governors of ICGN and Manager SRI at Triodos Investment Management) and Mark Summerfield (Audit partner and Head of the UK’s Assurance practice at KPMG in the UK)
A question from the floor explored whether investors are looking for assurance over the whole of the annual report, or whether investors want to be more selective about what areas of the report are subject to assurance. For example, would assurance over risk reporting or governance be a priority?
Van Buren said she would like to see assurance over the whole annual report, including risk reporting. She added that, “We want a forward-looking, integrated report.” Couldridge agreed, suggesting that a holistic assurance approach over the whole reporting process was essential.
Looking to the future, panelists recognized that corporate reporting will continue to change. Millennials could be key to this change as they are proving to be more questioning than previous generations and it is questions that drive change. There was some agreement that in 10 years, reporting will likely all be integrated and electronic. Given the evolution of reporting, and the areas where investors want more assurance, Laue asked what investors can do in order to drive changes.
Van Buren said investors should unite and communicate to companies saying what they want reporting to focus on. “In the Netherlands, as investors, we write a focused letter to all listed companies with two or three items we really want them to focus on in their annual report,” she explained in a discussion following the panel. This approach has helped to drive conversations with companies about the issues that matter most to investors. “We've done it for several years already and we really see companies following up on the questions that we ask them each year.”
Laue brought the workshop to a close by highlighting the important role of investors in the change process. “If we have investors saying, ‘This is what we, as investors, would like to have from companies in the report,’ or ‘That's the kind of assurance we would like to have over that reporting,’ – it sends a strong message.”