In June, KPMG hosted to two sessions at the International Corporate Governance Network’s (ICGN) Annual Conference in San Francisco in order to obtain investor perspectives on how to enhance disclosures and improve the transparency of communication between investors, audit committees and auditors.
Over the course of the two sessions, the discussions with investors kept returning to one factor that influences almost every aspect of a company’s strategy and business operations: governance. They told us they would like to have more detail around a company’s governance structure and processes when making investment decisions because this knowledge can enhance their confidence in a company’s ability to successfully execute on their long-term agenda.
Investors believe that auditors are well-placed to examine governance structures and that the audit process could provide an opportunity to facilitate the collection and dissemination of more robust corporate governance information — information investors can use to determine whether governance structures and board composition are setting the company up for success, thereby informing their investment decisions.
Do the company’s board and management teams include people with the right skill sets to assess and respond to an array of opportunities and challenges, including cybersecurity, digitalization and the evolution of business models?
Ken Hokugo, Director and Head of Corporate Governance at the Pension Fund Association; Michael Herskovich, Head of Corporate Governance for BNP Paribas Asset Management; Scott Marcello, Vice Chair, Audit, KPMG in the US; Mark Vaessen, Global Head of IFRS, KPMG International
Investors also evaluate available information on board composition, looking at gender, age, nationalities, experience and other diversity factors. A diversity of ideas and perspectives can help a company adjust to new market realities or respond to challenges that arise.
Investors recognize that the internal culture of a company plays a pivotal role in a company’s success. Yet, understanding the culture of a company can be complex and often investors are well-removed from the internal workings of an organization. While recognizing it could be difficult, investors are interested in seeing culture included in future assurance. Reporting— a culture audit, if you will — and in learning from the experience of more forward-thinking jurisdictions. One panelist provided an example from the Netherlands: “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.” There may be an opportunity for the external auditor to more actively support the important work done by the internal audit function to develop effective key performance indicators in support of the right culture, beginning with tone at the top.
From our discussions with investors at the ICGN San Francisco Annual Conference, there is support for incorporating governance-related reporting (e.g. board composition, diversity, communication, culture) in the next generation of audit, although the form such inclusions might take remains a topic for debate.