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Video transcript: Annual reporting and stakeholder expectation

Transcript for a video about annual reporting and stakeholder expectation filmed at the 2018 Audit New Zealand client update.

Title: Annual reporting and stakeholder expectations, Felicity Caird, General Manager, Governance Leadership Centre, Institute of Directors

Felicity Caird:

When Steve asked me to come along and talk about what stakeholders are expecting from annual reports, initially I sort of thought, “Well, that’s an interesting topic,” and the more I thought about it the more I thought, “This is actually a really good topic.” And it’s one that, at the institute, we’re seeing quite a lot of change and quite a lot of excitement in. I'm going to share some of our observations with you about annual reporting.

First of all though, I was quite keen to get a little bit of a sense of people in the room and whether you know what the Institute of Directors is – are any of you members, been on any of our courses – could you just raise a hand?

OK, a little bit. Right.

So the Institute of Directors is a voluntary membership organisation for directors. We have over 8,500 members across New Zealand, have eight branches throughout the country, and we also have a very diverse membership of people who are involved in governance and all types of different roles. So, unlike our title, which might imply it’s really just about companies, we’re actually about not-for-profits, public sector entities, as well as companies and other types of entities as well.

We produce a lot of resources, we deliver courses, and the area that I work in, we research and monitor international trends in governance, and provide advice to our members about governance best practice. That’s what I'm gonna share with you today – a little bit about what we’re observing in this space. I thank you for the opportunity to share that with you.

I'm going to talk about three things: first, a little bit about what we’re observing in the stakeholder space. So, who are stakeholders and what do we see as their expectations? And then a bit about reporting, or telling the story, and finally, just to finish on, thinking beyond compliance. That’s the plan.

Stakeholders. It feels like it should be a simple question: who are your stakeholders? Bethia mentioned that I've got a public sector background, and this feels like one of those questions we've been asking forever, and trying to identify who they are, and you can end up with a really long list. And the list is getting more diverse as the current operating environment gets more complex. And I think, particularly, when we’re operating in a digitally connected environment with social media having such power in what we do.

Last week at an IOD event in Auckland, we had a panel discussion about engaging with shareholders and stakeholders, and one of the initial points was around how do you define who your stakeholders are? It used to be a focus on shareholders, consumers, employees, and then the list got longer and longer, I've just mentioned a few up there. Actually, where the panel ended up was defining stakeholders as anyone who can have an impact on your business, and I personally think that’s a really good definition. I talk about business in the wider sense – that can be the services you deliver, or whatever your business is about.

That’s the context that we’re talking about in terms of stakeholders. It includes shareholders, but it’s definitely not exclusive to shareholders. And that, I would say, is probably quite a shift in where the corporate world is now from where it was some years ago. Certainly, when I left the public sector and went to the Institute of Directors four years ago, the environment there was probably more at the shareholder end in terms of a lot of the discussion, and there was talk about stakeholders, and I've seen a real shift in the last few years. And I’ll talk more about that.

One of the things I wanted to highlight in terms of that shift for the Institute of Directors and why we see it as so important. One of the things we do each year, is we hold a director sentiment survey, where we ask our members about things that are important to them. The last couple of years we’ve asked them whether they consider stakeholder interest to be very important to their business. We deliberately said very important, because I think if you said important then everybody would just go, “Yes.”

It was high in the first year that we asked in 2016 – 86% said that stakeholder interests were very important. Last year it was 91%, and that sort of reflected back to us what we were picking up in terms of our operating environment, and what we were hearing from directors, and you will see that more in a bit.

So what we did for this year – so the Institute, what we do throughout our work programme for the year is we’ll have some particular themes that we focus our work around. Last year, for example, we had a theme on digital capability because we knew that in boardrooms there was a lack of digital understanding, know-how, and capability. This year we've got three themes, and the first one this year is on shareholder and stakeholder engagement.

So the event that I mentioned before in Auckland, that was one of the things that we’re running for our members, around this theme. So what's key in this theme is that it’s shareholder and stakeholder, and a lot of the events that have been organised and a lot of the commentary is focusing on that stakeholder end.

I think a good example of the expectations that we’re seeing from stakeholders is summed up by Larry Fink. He's the CEO of BlackRock, which is the world’s largest, or at least one of the largest asset management fund managers. They have $6.3 trillion under management, and Larry Fink, for the last few years, has been writing to the CEs of all the companies that they invest in, talking about their expectations as shareholders.

What's interesting is that those expectations are getting broader and broader, beyond financials. That’s the common theme that I’ll be talking about, and that I think, from what I've picked up today, you've been hearing about as well. The Treasury model that was talked about before as a non-financial and financial model. I'm very aware that in the public sector you operate in both a non-financial and financial model. What's different for the corporate sector is the shift towards more of that.

So I won’t read that out because I think you’ve probably all had a chance to read it. What I will add to it is that in his letter and the commentary accompanying that letter, Larry Fink has made it clear what the four priorities are that they’re looking for in the companies that they invest in. And they are: diversity, climate change, human capital and management, and executive pay. So those are four priorities that are not really about making money in the short sense, but they are in the long-term.

So, what’s this all got to do with annual reporting? What it’s got to do with annual reporting is that investors and other stakeholders, be they consumers, be they employees, are looking to understand what organisations and companies are about beyond the bottom line. And the annual report is a core opportunity to be able to engage and communicate with your stakeholders. And this is where you see this trend and more holistic reporting. So, for you people in the public sector, you’ve been working in this environment as your operating environment for some time. It’s different for other sectors where it’s new, where there are different forms of reporting that are new, and there’s sort of like a bit of a catch-up.

I’m gonna talk in this part a little bit about the various forms of more holistic reporting, and a little bit about the corporate governance guidance that’s been coming out in New Zealand, and then a little bit about what we’ve been saying.

The next slide is to really try and illustrate that this isn’t just a trend, I really see it as a bit of an onslaught. Now, hopefully, you’re gonna be relieved to hear that I’m not gonna talk about all those frameworks. They’re really just there to make the point that there’s a whole lot of reporting frameworks out there that are beyond the financials.

What we’re seeing, for example, in integrated reporting, which is one of those frameworks, is more and more take-up of companies who are voluntarily adopting these frameworks because they tell their story in a more meaningful way. So, New Zealand Post was the first New Zealand organisation to adopt integrated reporting. I know you’re gonna hear from Greg Taylor from KiwiRail about their story. There are listed companies like Sanford, Z Energy, who are also using integrated reporting. So they’re doing that because those are the expectations of their stakeholders and shareholders, not because they’re required to. So, that’s gonna take us to my final point around beyond compliance.

It struck me actually yesterday morning, I don’t know if many of you heard Warren Allen on National Radio. He was talking about the research that the XRB and the McGuinness Institute have just released around extended external reporting, which is the last one there. I didn’t hear all of him but what I did pick up on was two phrases, which I already had in my slides, so I sort of thought, “Oh, yes, I’m on target here,” which was “Beyond Financials” and “Beyond Compliance”.

Now I think what’s really sort of meaningful about that is that’s the Chief Executive of our External Reporting Board talking on National Radio about Beyond Financials and Beyond Compliance. That to me is showing where we’re heading. It’s, you know, your financial statements and financial position is only a part of the story. And I think, you know, there’s a much wider acceptance of that in other sectors now, not just the public sector.

The other point I was going to make which felt extremely timely was Grant Robertson, Minister of Finance, yesterday when he announced the government’s new approach to the balance sheet, which you’ve just had a detailed talk about. That level of detail was all new on me. What I picked up in his announcement was at the very high level that it’s gonna be more holistic – that’s the term he used – and it’s going to be focused on four capitals. So, they talked about the financial, human, social, and natural capitals.

So I picked up on that at a high level and thought, “Well that’s an incredible step forward for our government.” I mean, this will be leading in the world in terms of a more holistic approach. It’s got elements of integrated reporting, which has the six capitals. Again, you’ll hear more about that later. But it’s showing a framework for the country that is a really progressive step forward. I mean, our public service is internationally recognised as progressive in this space, and I think this is the next step.

So, from the Institute’s perspective, we’re seeing these trends, we’re seeing increasingly corporates being interested in environmental, social governance reporting, and disclosure, and now we’re seeing it at a government level here.

So, sort of to expand on that, and I don’t know if you’re all familiar with two corporate governance codes that apply in New Zealand. NZX released last year a new corporate governance code. They used to have an appendix called Appendix 16 in the listing rules, which was a couple of pages long. They produced a new guide, which was a new code, which was modelled on the FMA’s Corporate Governance Handbook, which is the one on the right and which was released last month in a revised version. So, what’s of real interest in those codes and in the NZX one in particular is that it’s lifting the game on non-financial information and disclosure. So it introduces ESG – Environmental Social Governance – disclosure and reporting, and brings in a framework for our listed companies to comply or explain, which is a new framework operating here, and I think is meaningful in the context that it’s not mandatory in the way that the listing rules are for listed companies. It’s saying that this is what good practice is. But the expectations are the corporates will do this, that they will comply or explain. So, we see it as lifting the game and it’s in line with what’s happening in other countries as well.

I don’t know if any of you are sort of watching what’s happening in the UK but they’re undergoing some corporate governance reform at the moment. They’ve had some big corporate failures and that’s driven some inquiries through their parliament, and the new corporate governance framework there has been dealing with issues like employee representation on boards. So that came up as a real question for the UK: is this a better way to improve governance? Hasn’t got to that point yet but there’s a whole lot of developments underway which are looking at better corporate governance.

Just to sort of come back a little bit to what part of the change at the Institute of Directors has been over the last few years while I’ve been there. In 2015, we put out a directors’ brief for our members, which was entitled, “What’s the Future of Corporate Reporting?” And we talked about some of those frameworks which were in the list before and raised questions because we felt at the time that the conversation was just starting, and when you wanna take people on a journey you start a conversation rather than say, “This is what we think you should do.” We put out a brief this year, the second one on that, it’s that slide, which is Integrated Thinking – a pathway to greater stakeholder engagement. Now I don’t know if it’s obvious to you but those two titles actually indicate a sort of a couple of steps along a journey that we’ve taken. We are now, our members are talking about this all the time. There’s a lot of early adoption of various standards or frameworks, and this is part of the discourse particularly of big companies and certainly established in other sectors as well.

So, to my final third area, which is “Beyond Compliance”. I mentioned before, hearing Warren Allen use those words yesterday on the radio and how personally heartening I found that because to me, although I’ve worked in OAG and with Audit and I know them and value the importance of reporting, what it’s really all about is meaningful reporting that meets stakeholder expectations. And I think you have to take a mindset that is beyond compliance to, you know, what is it that people want to understand or read from our reports, or other ways of engaging. And it’s really about helping build trust and confidence in the whole system, be that in corporates or be that in the public sector.

And that takes me to my final slide, which is around trust. You’ve heard a lot about that today, I understand, and it’s nothing new for you. I don’t know if you saw last week but Acumen Edelman released the 2018 Trust Barometer, and you’ve probably heard commentary around the global crisis in trust. The barometer measures trust in four key areas: government, media, business, and NGOs. I don’t think, surprisingly, media is the one that fares the lowest. Government, this time round for the New Zealand survey, has actually seen a bit of a lift in one of the stakeholder groups, and business is not too bad but there’s a long way to go. I mean, there are levels of distrust that are not healthy and there is work to be done, there’s no doubt about that. What was particularly of interest for us as an institute and for our members was the results highlighted the need to show commitment to the long-term. And for business, in particular, to act on wider societal issues, and that sort of links back to what Larry Fink was saying about broader issues. One of the key stats that we’re taking note of is that 44% of respondents said that, “Companies that only think about themselves and their profit are bound to fail.”

So, that comes back to that sort of loss of social licence to operate that is at risk if you don’t have that wider stakeholder support.

To conclude, I think the key thing really that I see in this space is that understanding stakeholder expectations is critical, irrespective of what sector you’re operating in or what type of entity you’re working in. And I think we all need to think and engage more broadly. We’re definitely well beyond the financials telling the story by themselves. And it’s not just about thinking more holistically. It is about thinking beyond compliance ‘cause we don’t know what the next wave is gonna be. Whereas if you’re thinking about what your stakeholders are expecting and how to engage meaningfully with them, and you see disclosure and reporting as an opportunity, then that’s the way forward.

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