Archives For IIRC

Frank Curtiss, head of corporate governance at RPMI Railpen Investments

Investor primacy and a clear narrative in the voice of management are key elements in risk reporting.

What I want to see is an honest explanation in the context of the business strategy and the business model and how that risk is managed. While I recognise that other stakeholders will want to look at corporate reports and there is a wider public interest, the purpose of reporting is about stewardship and accountability to those who provide the risk capital.

Boilerplate reports are of little use, as are reports which drag investors into the micromanagement of the business.

A boilerplate approach may be what your lawyers think is a good idea and you may think you can’t be faulted but you can. Even worse is just an exhaustive list of risks, some of which are so obvious. What we need to know are the key risks, why management thinks they are critical and what they are going to do about it.

As a member of the IIRC working group I am naturally a keen proponent of integrated reporting, and keeping risk reporting connected to the broader risk management approach of the company.

It’s also about integrated thinking and working across the company. We see enthusiastic companies taking part in the IIRC pilot programme where finance and corporate social responsibility and investor relations are working together, not in silos.

The less enthusiastic finance departments tend to throw out excuses about sensitive information and increasing the reporting burden. In many cases they should be reporting on these things anyway if only for management information. There’s clearly a balance between informing the markets and giving the game away, but the more transparent companies don’t seem to have a problem. If people tell me ‘it can’t be done, it can’t be done’ I just tell them that some people are already doing it.

Some of the companies I think demonstrate good risk reporting include:

  • Admiral – highlighted the risk relating to their change of strategy in the CEO’s statement – which is where it should be
  • Aggreko – written in a personal voice, refreshingly honest and doesn’t shrink from telling us the potential risks to revenue
  • BT – very good description of the business model and very good up-to-date risk section – we don’t want to read the same thing year after year
  • Great Portland Estates – they explain the strategy pretty clearly, each risk is identified and discussed with helpful cross references to other parts of the report
  • Provident Financial – lending to subprime customers is a very risky business and terribly topical: the risk section is very good and tells what their risk committee agenda is.  But it’s a hugely controversial sector and they know they need to explain it—we don’t need that level of detail from every company.

Often higher levels of transparency can be found in those areas, such as gambling and tobacco, where the ‘licence to operate’ is in question. They are all too aware that the spotlight is on them and they’ve got to justify themselves.

But some industries are in general better than others – the extractive industries are generally ahead of many financial services organisations, for example.

An important factor is the general level of information that is around. There’s the risk of assuming prior knowledge. For a mid-tier company there’ll be nothing like the level of analysis that there is on say, the big telecoms providers and their peers. And even the most clued-up investors don’t know everything – they’re not present at board meetings or risk committee meetings or audit committee meetings so the more that a company explains the better.

In recent years RPMI has shifted its asset allocation considerably away from UK equities and is now a truly global investor across a number of countries. I would like to see a more closely aligned international standard of reporting. However with even English-speaking countries with common traditions having wide variations, it is difficult for companies simply to import a better reporting regime into a different jurisdiction.

There’s got to be a race to the top, that’s why I support the IIRC attempt to promote best practice internationally. There’s definitely a willingness by governments and regulators to embrace this, but investor and privately led initiatives tend to be more successful, as by definition regulation has to be more detailed. We don’t hope to change it tomorrow but we might see a significant step-change between now and 2020.

By this time I hope that more and more reporting will have moved online, hopefully in standardised formats that make it easier for investors to mine and work with the data.

An annual report is useful as a snapshot for stewardship purposes—but as technology improves you will see dynamic integrated reporting as reporters and users become more confident, and that will eventually replace the massive end-of-year annual report.

I have seen a lot of progress in risk reporting since the financial crisis. Risk has now become something that can be discussed when previously it was a four-letter word. The better reporters are telling us something useful about risk—the levels of disclosure used to be terrible across the board, now there are plenty that are not.

Successive generations of management will wonder what all the fuss was about. The benefits of better quality information and greater transparency must outweigh the risks of an enhanced disclosure regime, and any unhelpful side effects will be more than balanced by the positives.

The big challenge now is the mass of companies whose risk reporting is inadequate at best:

There are some shining examples, good reports that tell the story honestly and in the voice of the company. The trick is to get the others up to speed.

High quality risk reporting increases investor confidence, not just in terms of the risks being discussed, but also in the overall quality of management:

It provides reassurance in terms of stewardship and responsibility that the management are taking on all this and that they are looking at the right risks.

Ultimately it’s all about what management think and what they are doing.  And if a company can’t explain its own strategy and its business model itself, then who can?

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By Helen Thompson, head of PR, ACCA

IR can help restore trust in business, but now is the time to put the Framework into action

The launch today of the IIRC’s Integrated Reporting Framework is welcomed by ACCA (the Association of Chartered Certified Accountants), saying this represents a landmark opportunity to break down the silos in corporate reporting.

Helen Brand OBE, ACCA’s chief executive says: “Now is the time to put the Framework into practice. This presents a significant opportunity to refresh corporate reporting and to place investor’s needs central to the process.”

ACCA believes that IR brings a number of benefits because it offers a focus on the long term strategy and performance of a business. The Framework centres on the material information about an organisation’s governance, strategy, prospects and performance that reflect the commercial, social and environmental context within which the organisation operates.

Helen Brand adds: “A better understanding of long-term risks to commercial models can only be of benefit to business and to the investor community. Explaining how corporate value is created and sustained is important, and the IR Framework enables business to do this.

“Ultimately, I hope that IR will restore trust in business – reporting models have been criticised in the past, but now is the time for change. I am sure the accountancy profession is ready and willing to show the necessary leadership to make that change happen.”

ACCA and IR

  • Helen Brand, ACCA’s chief executive, is a member of the IIRC’s Council;
  • Neil Stevenson, ACCA’s executive director – brand, sits on the IIRC’s Working Group;
  • ACCA’s global network has been raising awareness of IR and supporting the IIRC’s outreach work for a number of years;
  • ACCA’s Annual Reports for 2011 / 12 and 2012 / 13 have been produced using the IR Framework, giving a concise, clear and comprehensive picture of how ACCA has created value by making its strategy happen.

the city

By Ramona Dzinkowski, economist and business journalist

Twenty years ago, the CFO was a finance, accounting and control expert. Today, most research points to an expanded CFO role as business partner and strategist. More specifically, beyond the finance role three other typical CFO types have evolved, according to a recent study by McKinsey: the generalist, with high honed operational skills; the performance leader, with a strong track record in business transformation and business analytics; and the growth champion, with significant experience in M&A, external networks, independent thinking and strategic insight, often gleaned through working in professional services firms. Each company places a different weight on the value of these skill-sets.

But have regulators, standard setters and other accounting/finance-related organisation recognised that the CFO’s purview has expanded beyond financial compliance and control? According to the ACCA/IMA report released in October 2012, they have not. It says that CFOs will continue to be challenged by the tug of war between their role as senior strategist and business partner and the increasing demands placed on them by greater compliance, control and regulatory complexity.

Six major International Accounting Standards Board (IASB) came into force this January – IAS 19 Employee Benefits, IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, and IFRS 13 Fair Value Measurement. There will also be a host of exposure drafts amending major standards, including financial instrument impairment, hedge accounting, insurance contracts and leases, as well as the appearance of interim standards for rate-regulated activities and revenue recognition.

In the EU, the Committee of Sponsoring Organisations of the Treadway Commision (COSO) released a major update to its risk management framework which many SOX 404 filters have adopted. It is now under revision and is expected to be ready for implementation in 2013.

The Global Reporting Initiative (GRI) will be launching its fourth generation of guidelines for sustainability reporting and the final version of the Society for Human Resource Management’s guideline for reporting human capital metrics will also be likely forthcoming in 2013.

Meanwhile the International Integrated Reporting Council (IIRC) has released the integrated reporting framework. The prototype is out, a formal consultation draft will be released in April, and the aim is for a final version in December.

These are just a few examples of the compliance and control-related initiatives that will land on the CFO’s plate in 2013.

Sure improving standards and the regulatory environments in crucial, and forward thinking in many important areas of disclosure and control is necessary for business management to evolve, but how is it possible for the CFO, particularly in SMEs, to remain strategic under the weight of all this new direction?

McKinsey echoes the sentiments of many CFOs today in asking where it will all end and pointing out that ‘It’s unproductive to stretch the role too far and unreasonable to expect a CFO to be good at everything’.

This post first appeared in Accounting and business, February 2013

The multiple capitals model

aksaroya —  3 October 2012 — 1 Comment

by James Bonner, independent sustainability contact

As initially introduced in a previous blog post in this series (Natural capital as a material issue) the concept of multiple ‘capitals’ is an approach to sustainable development theory that extends the notion of capital, in a traditional economics sense, to broader sustainability issues. While the conventional economic definition of capital – essentially the manufactured goods which produce, or facilitate the production of, other goods and services – serves to account for the durable goods which are a means of production for businesses,  it ignores the vital inputs garnered  from the natural environment and society. The fundamental essence of the concept of capital is that it is a stock or asset that provides a flow of goods and services for the benefit of human wellbeing. However, it is quite clear that the narrow traditional economic definition does not adequately cover all of the sources that businesses gain benefits from and that there are sources of capital beyond simply the manufactured assets of an organisation which facilitate production and economic output.

It is increasingly recognised that capitals such as natural resources, human knowledge and social cohesion are vital stocks/assets which business and the economy in general draw upon for their products and services. As such, a number of models considering multiple capitals have been developed and supported by various bodies in the past few years – the World Bank, the OECD, and DEFRA – aiming to recognise and distinguish these wider stocks and assets. The IIRC are one such significant body who are incorporating the concept of a multiple capital model into their work, and have, through their Discussion Paper Towards Integrated Reporting: Communicating Value in the 21st century’ and subsequent consultation with stakeholders, begun investigating both how the capital model might be applied to corporate reporting, and the boundaries/types of capital it might include.

Indeed, at this stage, the IIRC have proposed 6 categories of capital, each of which interact and interconnect with one another- and consequently are the fundamental resources that organisations rely upon to function and deliver their products and services. The following extract from the IIRC’s discussion paper highlights these different capitals- financial, manufactured, human, intellectual, natural and social- offers a definition of each, and descibes how they might manifest themselves in the context of a business or organisation:

Source: http://theiirc.org/wp-content/uploads/2011/09/IR-Discussion-Paper-2011_spreads.pdf

This blog post intends to primarily support ACCA’s Accounting for the future session ‘Practical Workshop: 6 Capitals of integrated reporting- practical skills for accountants’ on Tuesday the 9th of October by introducing the concept of multiple capital models, and the IIRC’s work in the area. The session will look at the IIRC’s work in greater detail, and furthermore the role of accountancy in such a model.