Changes to the ASX Corporate Governance Principles presents an opportunity for boards and management to reap the benefits of integrated reporting.
The Australian corporate reporting framework is “a mosaic of incrementalism”, according to John Stanhope AM FAICD, chair of Australia Post. Changes required by the fourth edition of the ASX Corporate Governance Principles and Recommendations can either add to the mosaic, or boards and management can use them to drive a more strategic approach in how they report to investors and stakeholders.
The fourth edition, released in 2019 and effective from a company’s full financial year from January 2020, provides support for boards and management seeking to review their current practices, implement required changes and report in a more strategic manner. It also provides an overview of good corporate governance for all Australian organisations, not just listed entities.
The changes focus attention on non-financial business value drivers and risks, including an organisation’s culture and conduct; quality of service and key relationships; internal controls, processes and systems; an organisation’s environmental impact; quality of corporate reporting; and reputation in the community.
Many organisations do not have processes, systems and controls to capture, measure and report quality information in non-financial areas, so they need to start preparing now to identify the areas that require focus and remediation before the financial reporting year starting January 2020.
Besides focusing on non-financial value drivers, the fourth edition has strengthened the requirement for boards to ensure the integrity of corporate reporting. Recommendation 4.3 makes clear the board’s responsibility for processes used to ensure integrity of any periodic corporate report. This provides an opportunity to rethink the organisation’s reporting strategy, in particular:
- Review and benchmark to reduce volume, while increasing the relevance for users.
- Confirm stakeholders and understand their information needs.
- Redefine the corporate reports portfolio, including determining a flagship corporate report for shareholders and other key stakeholders.
Leading organisations have already done this, or are in the process of doing it. Qantas moved to one published regulatory annual report in 2018, moving its investor, operational and sustainability information into one online annual review “value portal”. Lendlease removed two reports when it moved to one integrated annual report in 2016.
Many organisations already prepare their annual report with reference to integrated reporting principles and some will adopt them in FY19. ANZ and NAB prepare standalone integrated annual reviews. Lendlease and AGL use integrated reporting principles to prepare the operating and financial review (OFR) in their directors’ report. A growing number of listed and non-listed organisations are working on an integrated OFR for FY20. Lendlease estimated it saved six weeks of management time at year’s end by revisiting its reporting strategy, which also resulted in the board having two less reports to review.
Longer-term investors see the value. “We like the idea of integrated reporting because, as an investor, it gives us better information on which companies have good strategies for long-term value creation,” says David Atkin, CEO of industry super fund Cbus.
What is integrated reporting?
An integrated report is a concise communication about how an organisation’s strategy, governance, performance and prospects lead to the creation of value in the short, medium and long term, in the context of its external environment. The International Integrated Reporting Council (IIRC) developed the International Integrated Reporting Framework from 2010–13 in response to the global financial crisis.
“The framework is a tool for the better articulation of strategy and to engage investors on a long-term journey to attract investment that will be crucial to achieving sustained, and sustainable, prosperity,” says Professor Mervyn King, chair of the IIRC.
The IR framework has already been adopted by many countries and organisations, and the IIRC expects it to become the global benchmark for effective corporate reporting by 2022.
In December 2017, ASIC gave support for use of the principles in developing OFRs, as this approach aligns with Regulatory Guide 247.
The AICD encourages directors to consider the principles of integrated reporting in operating financial reviews and recognises their usefulness in communicating on strategy, governance, risks, performance and outlook. However, it does not currently recommend adoption of the final framework due to liability concerns with making forward-looking statements. This is a potential area for reform of the Corporations Act 2001 (Cth) to bring the regulatory framework better in line with investor demands for more holistic reporting.
Integrated reporting... covers all stakeholders and explains better what the business is all about.
In 2018, the New Zealand government introduced the Living Standards Framework. This requires public sector entities to take into account not just the financial impact of investment decisions when preparing their budgets and reporting performance, but also the intergenerational outcomes of their likely impact on the workforce, environment, community and infrastructure, as well as access to future funding. In effect, the New Zealand public sector is applying the principles of integrated reporting.
The framework allows organisations to focus their corporate report on the fundamentals of good business practice for their investors while also being of interest to customers, employees, regulators and other stakeholders. An integrated report is constructed around three questions:
What? The company’s strategy, risks and opportunities.
How? Governance and business model.
With? Resources and relationships critical to long-term success.
This brings the concept to life. It focuses on how the organisation’s resources and relationships are used in its business model and governance framework to execute the strategy and so realise the organisation’s purpose.
Stanhope, who is also chancellor of Deakin University, non-executive director of AGL and vice-chair of the IIRC says, “Integrated reporting boils down to far better information covering all outcomes that the business achieves. It’s a change from output reporting to outcome reporting.
It covers all stakeholders and explains better what the business is about, not just economic and financial performance, but all outcomes that emerge from the business. It is all those outcomes that create value, and if you don’t, then even worse, those that can destroy value.”
Companies have an opportunity to review their reporting strategy and redefine their corporate reports portfolio, including the flagship report, to deal with change and better meet the needs of all key stakeholders, while reducing the volume and time required for reporting.
Nick Ridehalgh GAICD leads KPMG’s Better Business Reporting Group. Michael Bray is KPMG Fellow in Integrated Reporting at Deakin University.
Actions boards should take right now
- Consider board and executive management education on fourth-edition changes, including the opportunity to adopt integrated reporting.
- Sponsor development of a business case to support resourcing change activities and determine required outcomes.
- Sponsor an initial assessment of current reporting and underlying processes, systems and controls compared to good practice and relevant guidance; identify gaps and opportunities to improve.
- Revisit the stakeholder engagement process to understand information requirements and gaps in current reporting.
- Sponsor a review of the organisation’s purpose, values, code of conduct and other key internal policies and practices important to protecting the organisation’s reputation and long-term value, as outlined in the fourth edition.
- Sponsor development of the future corporate reports portfolio (audience, content, timing, media, and verification requirements) and design of the future flagship integrated annual report.
- Participate in developing the flagship integrated annual report, revised internal board reporting and aligning performance in the implementation of strategy and effective use of financial and non-financial resources with criteria for variable remuneration.
- Actively engage in the internal change agenda of driving cultural alignment through communications.
- Determine how the board explains its areas of focus for the year in its external reporting and how this might be captured and tracked throughout the year.
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