Integrated reporting draft raises director liability concerns

Wednesday, 01 May 2013


    There have been mixed responses from Australian directors to the Consultation Draft of the International Integrated Reporting Framework, with many concerned it could increase their liabilities.

    The draft framework, recently released by the International Integrated Reporting Council (IIRC) through 15 events around the world, creates the foundations for a new corporate reporting model and introduces the concept of "six capitals" – a prism through which organisations should assess, and then report, the degree to which they are creating, diminishing or destroying value over time.

    Dr Carol Adams GAICD, the founding director of Integrated Horizons and member of the IIRC's Capitals Technical Collaboration Group, expects the framework, if accepted, to change the nature of corporate reporting, facilitate sound management and affect the work of boards.

    She says while the short and medium term are not ignored, integrated reporting stands out from other reporting frameworks because of its emphasis on, and encouragement of, long-term thinking. The requirement to provide information on an organisation's strategy will encourage senior executives and boards to think long term.

    "The concept of creating value will also encourage senior executives and boards to think about performance more broadly than the financial bottom line. Value creation goes beyond financial returns to providers of capital and considers the impact on the other capitals."

    Australia Post chairman John Stanhope FAICD, who helped launch the draft in Australia, welcomes the framework, noting it has been "informed by a prototype and responses to a discussion paper from the IIRC". "And, it continues to be informed by trials in many countries and global activity."

    But Stanhope notes: "There is still discussion to be had on two issues and both concern directors. The first is how will integrated reporting be assured – what will the level of assurance be and who will do it? The second is directors' liability. The framework suggests that companies should talk about their business models and how sustainable they are, and that they should give some indication about the future. But directors don't like talking about the future because they are concerned about their liability. This needs more discussion on this. There has been talk about safe harbours and the like,but that may require a regulator and perhaps more legislation. For Australia to have integrated reporting, this issue would have to be addressed."

    Michael Coleman FAICD, deputy chairman of the Financial Reporting Council and a member of the audit committee of the Reserve Bank of Australia, says the draft is pretty consistent with what was expected.

    He says: "Many directors are concerned that this could be an additional reporting requirement ... But if you treat the concept as a guide to the way in which you should prepare your management discussion and analysis report, or operating and financial review, then it's heading in a way that most of us can live with. But like all these things, the devil is in the detail."

    Coleman, who is also chairman of Company Directors' reporting committee, adds: "If Australia is asked to adopt this type of report, until such time as there is a safe harbour, I think a lot of directors will be very careful and cautious in what they do about forward-looking commentary. It's an issue of director liability."

    Former president of the Business Council of Australia Graham Bradley FAICD is also concerned about the director liability issue. "At the end of the day, busy boards of directors must sign off on all major corporate reports, including integrated reports," he says. "It is dangerous to delegate this task to management following the James Hardie and Centro cases."

    Bradley believes that encouraging public companies to provide more useful and user-friendly information to shareholders is a worthy aim. But he says: "It is a pity that the IIRC has gone well beyond a principles-based approach and produced the draft, which, despite disclaimers, appears to be highly prescriptive.

    "The draft introduces new reporting language and jargon, which may prove to be more academic than useful in practice. A prime example is a company's 'capitals'. The metaphor 'human capital' (which many feel is a rather ugly way to describe employees) has now been extended to 'manufactured capital', 'social capital', 'relationship capital' and 'natural capital'. A company is asked to report how it uses, grows or interacts with these 'capitals'. This new language is vague and will cause considerable debate and uncertainty."

    Bradley questions how much value the framework will add for public companies that already take their reporting to stakeholders seriously, with lengthy annual reports, remuneration reports and sustainability reports. "I suspect many companies will find that following the framework will lead to much longer, but not necessarily more useful, annual reports. Indeed, the framework sets up a tension between its call for 'completeness' and its principle of 'concise reporting'," he says.

    "I would prefer to see the draft framed in less prescriptive terms, with greater emphasis on key principles that should guide the quality of reporting to stakeholders. Also, I feel that the framework has an excessive focus on reporting of 'opportunities and risks'. This runs the danger of making annual reports too much like prospectuses, filled with uninformative boilerplate about the obvious risks inherent in any business in the modern world.

    "Similarly, the push for more 'future-oriented information' will be of particular concern for boards given the self-evident liability risks of forecasting in a volatile global business environment. The risk is that lengthy cautionary statements and extensive listing of key assumptions will erode the informational value of mandating more detailed future outlook statements." Bradley adds: "The draft framework seems to assume that a company will produce one comprehensive and integrated report to stakeholders. I see corporate reporting evolving differently.

    "For example, many companies are reducing the size of their annual report and choosing to place detailed descriptions of their assets and business operations on their websites, where it can be regularly updated. Such information can be kept more current than in the case with annual reports in the past. Similarly, webcasting analyst briefings make them readily available to ordinary shareholders.

    Accordingly, companies are moving towards a diverse approach to reporting that is at odds with the draft framework but may be more efficient and effective." Responses to the consultation paper are due by 15 July 2013. Company Directors is currently compiling its response on behalf of members.

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