At the ICGN San Francisco Annual Conference, KPMG hosted a session on the role of non-GAAP measures, traditional operating metrics, and emerging sustainability reporting concepts. Scott Marcello, Vice Chair of KPMG US, introduced the panel topic, then opened the discussion by asking what areas of the corporate report investors are, or should be, looking at when making investment decisions.
Michael Herskovich, Head of Corporate Governance at BNP Paribas Asset Management, said transparency is one factor. “It’s the first question for investors to point out. If you look at financial metrics, non-financial metrics, non-GAAP metrics – there’s always the same question of transparency.”
Herskovich added that consistency is also key. “It’s really important to all non-standard information, to also have consistency from issuers on the way they calculate this information and the way they disclose it.”
When asked about ESG information in particular, Claudia Kruse, Managing Director Sustainability & Governance, APG Asset Management, said information can be relevant for different reasons. “It is relevant for investment decisions, for running a portfolio against it, but also…for us to be able to decide whether a company abides by the standards of responsible conduct that we expect of companies we want to invest in.”
Kruse said investors expect, “Companies to report on the broad areas of environment, labor standards, human rights and bribery and corruption.” Disclosure guidance documents are already available covering these areas. Governance of sustainability and corporate governance are also important.
Building on this, Marcello asked Robyn Bew, Director of Strategic Content Development for the National Association of Corporate Directors (NACD) what discussions are arising in the boardroom related to ESG.
“For leading companies and for leading boards, sustainability is really part and parcel of the conversations about strategy,” Bew answered. “[NACD] encourages directors to think about [ESG] in terms alignment, making sure that management’s short term objectives are aligned with long term outcomes, and also that those things are…very transparently communicated to investors”
Companies in different countries have different levels of ESG maturity. Ken Hokugo, Director, Head of Corporate Governance at Pension Fund Association of Japan, said Japan is still evolving in terms of stewardship and corporate governance. Japanese investors are particularly interested in how many shares are held by allegiant shareholders because they will always vote for management. “We need more guidance or rules from the regulators with respect to how to disclose such a holding,” Hokugo suggested.
Mauro Rodrigues da Cunha, Chief Executive Officer at Amec, said current sustainability metrics are not relevant to investment professionals and need to be translated for a broader audience – such as by spelling out environmental and social factors in the risk factors. He said Brazil is a good example. “The regulator came up with a new regulation for risk disclosure, which is having a profound effect on companies. They’re actually doing their homework and realizing that they had gaps in many aspects, including environmental and social.”
He added, “What’s missing is really an engagement policy…We always talk about investor engagement. The company [and CEO] needs to engage with the market to tell them the items that are really relevant for the sustainable growth of the company.”
“In terms of sustainability reporting, we’re seeing directors asking more questions to management around, ‘Are we producing investment grade information -- and, how do we know that?’” Bew said. The same is true for non-GAAP information; directors want to understand where information is coming from, how it has been verified, and what controls exist.
Marcello then asked what attributes of governance are most important to investors.
Kruse said board composition – their skills, experience and how they function together. She noted, “The new Dutch corporate governance code…specifically introduced a requirement that there should be competencies with regard to digital and new business models on the board.”
Da Cunha said communications is critical. “Companies need to develop engagement policies, make those public, and make them systematic so that investors will know what to expect.” He added the trend toward electronic meetings is worrisome as face-to-face meetings are important for raising accountability.
Investors always look to see whether a subject is discussed at the board level and integrated in the risk assessment framework, added Herskovich. He also said diversity is important, and that the recent focus on gender diversity has helped increase overall diversity.
When it comes to governance, there needs to be a balance, however. For Bew, that starts with board independence, but also includes education and transparency – with boards explaining what they do, their processes, and links between strategy and action to stakeholders.
“Culture is key, added Kruse. “The Dutch code specifically requests the supervisory board to oversee what kind of culture the management is establishing within the company and whether it is the appropriate one to run the company, in the interest of long term value creation. Similar things are happening in France and the UK.”
Marcello steered the conversation toward cyber-security, asking how investors evaluate risks.
Herskovich said investors consider various factors, including whether the company has a cyber-security policy and, if so, its scope, coverage, and how cyber-risks are assessed.
Da Cunha and Bew agreed cyber-security needs to be on the recurring board agenda. However, there is a massive cyber-security talent shortage at the management level. Consequently, boards need to find alternative ways to obtain information – whether through an experienced director, or regular briefings from third party experts or government agencies.
The session ended with an audience member asking whether boards use third parties adequately.
Bew responded, “We’re seeing more and more boards doing war-gaming and table top exercises…simulations of a cyber breach, where the whole team [board and management] is involved.” Bew also suggested boards ask their existing independent advisors about trends, while Kruse noted that boards could create an advisory board to access additional expertise.