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It takes a King to govern on integrated sustainability reportingIndependent assurance may not guarantee compliance. It may not guarantee anything at all. But hopefully, it will help point some of the big players in the right direction, towards doing business with a conscience. And that is the kind of business I would want to work for, writes Grant Fisher.
One can speculate about how many people were familiar with the term “corporate governance” prior to 1994. The answer is, probably not that many.
However, 15 years into our delicate democracy, the term is as commonplace as apple pie – or should that be braaivleis and rugby?
For this, we can thank Professor Mervyn King and his team of lawyers, accountants and business gurus from the King Commission.
And believe it or not, there is reason to be thankful. The hard-hearted business world of yesteryear is giving way to a compassionate capitalism, where chasing the all-mighty dollar is balanced with social responsibility and caring for the environment.
Admittedly, there is a long way to go, but the third King report on corporate governance is helping to light the way.
The role of the board, risk management, internal audit, and audit committees – these things have been talked about before.
But the term “integrated sustainability reporting” is new. And it is important – for all of us.
It is important because we care about the future. King III stresses that integrated reporting on economic, social and environmental issues should be forward-looking so that stakeholders can make more informed assessments of the economic value of a company as opposed to its book value.
This is not the first time, though, that the limitations of financial reporting have been identified, albeit indirectly. On the contrary, academics and analysts alike have long since debated the notorious difficulty of relying on financial reporting as a meaningful indicator of value creation.
EBITDA (earnings before interest, taxes, depreciation and amortisation), PBIT (profit before interest and tax), HEPS (headline earnings per share), dividends, economic value added – everyone is searching for a model that will tell you something about the true value of a company.
The well-known corporate failures of the last decade even led to an interesting comment from former United States President George W. Bush, namely that “not everything is black and white in the world of corporate accounting”.
Come to think of it, I can clearly remember an Economics lecturer I had, teaching us that wealth was “the present value of expected future income flows”. Wow, that is something; a big change from the difference between assets and liabilities.
Most start-up companies would never get off the ground if the entrepreneurs behind them did not have faith that the numbers would start looking better as the first few years went by.
And perhaps that is the essence of sustainability reporting – faith. Good faith.
Far from answering only to shareholders, companies have to answer to customers, suppliers, employees and the communities in which they operate.
And that takes good faith, because you cannot fool everyone all the time (even if you could pull it off once a year – sustainability reporting needs to be more often).
This leads to the concept of a “reporting gap”. Financial reporting has a long history. Reporting on risk management and internal control is a little more recent.
But if you take a look at the annual reports of some of the better or lesser known JSE-listed companies, one thing that may strike you is how they all seem to say the same thing about risk management and internal audit.
They all have internal audit departments with unrestricted access to the audit committee. They all have risk management processes embedded in their corporate strategies.
It is easy to say you are doing something when no one is checking. That is why the audit profession came into being in the first place.
But fret not, because the King III report has already thought of this. According to Principle 6.5, “Sustainability reporting and disclosure should have independent assurance”.
