Video transcript: Stakeholder expectations and the annual report

Transcript for a video of a presentation about stakeholder expectations and annual reports filmed at the 2018 Audit New Zealand client update.

Title: Stakeholder expectations and the annual report, Selwyn Eathorne, Senior Advisor, Governance Leadership Centre, Institute of Directors

Selwyn Eathorne:

Good afternoon, everyone. Thank you Andy and Audit New Zealand for having me here today. I'm just going to have a brief chat about the evolving expectations of stakeholders, and the annual report, and just provide a bit of a high-level overview of some observations that we've got at the Institute of Directors, and also share some insights and some trends, and developments that are happening overseas, but also in New Zealand.

Just by way of interest, I'm wondering if there's any members of the Institute of Directors here, or anyone that’s been on our courses, some of our events, or conferences?

Excellent. Well, it’s good to see a few hands. Just for those of you who don’t know, we’re a voluntary membership-based organisation; we've got over eight-and-a-half-thousand members who serve on all organisations in New Zealand, from large listed companies, state sector organisations, not-for-profits, and charities. We've got eight branches around New Zealand, including in Canterbury. We’re all about driving excellence and governance, and that’s across business and society.

So I thought I might start by talking about Kylie Jenner. She's not in your demographic, but she's one of the daughters in Keeping up with the Kardashians. She's the daughter of Caitlin Jenner and Kris Kardashian. I had to Wikipedia her; she's described as a socialite, she's a rapper, she's a model, she's got her own cosmetics brand.

Why am I talking about her today at an Audit New Zealand event? Well, she sent a tweet, or she tweeted earlier this year about Snapchat. Some of you might have Snapchat on your phone –it’s an online communication platform. It’s an app – you can send videos, texts to your friends or family, it’s got a newsfeed on it as well. This is what she said. So for those of you who can't read, you can't see it from out there. She said, “Sooo,” (spelt with three O’s) does anyone else not open Snapchat anymore, or is it just me? Ohh, this is so sad!”

What's the significance of that? Shortly afterwards, Snapchat lost a billion dollars, which was about 6% of its share price at the time; and this was attributed to this tweet.


Audience member:

So sad! [laughter]



That’s exactly right – I'm glad it’s not lost on you. You might be able to see there, 300-odd thousand people have liked it, it’s been retweeted about 80,000 times, and it was picked up by the media and went all around the world. There have been articles since saying that the share price drop wasn’t necessarily attributed to her, but in any event it highlights that she had a significant effect on Snapchat’s brand. She had about 24 million followers at that stage. I just thought it was a good example to show that, also we’re in the age of the consumer, the age of social media. The landscape is different now than it was 10 years ago, and if you're a social media influence you can have a significant impact on an organisation’s brand and be an important stakeholder for them.

It also shows, I think, that stakeholders are much broader. It wasn’t that long ago you might have concentrated on your employees, your shareholder, and your customers as well. Hopefully, it shows as well that stakeholders are as important as ever. I suppose, obviously in the state sector, you've got state services commissioner, or you've got Parliament, citizens – it will depend on the type of entity and operating environment. The second point here was reflected in a recent IOD branch event, up in Auckland, on stakeholder engagement. Sue Sheldon and a number of leading directors were on the panel. They said it pretty much came to consensus that it’s anyone that can have an impact on your organisation will be a stakeholder, and obviously it’s incredibly wide.

What are we seeing at the Institute of Directors?

On the right-hand side, that’s a little blurb from our annual director sentiment survey. So our surveys take the pulse of the director community, and that shows that 91% of directors think that stakeholder interests are very important to their organisation. And that’s up I think 5% from the year before. On the left-hand side is our first theme for the year. So we run three ‘what matters’ themes for the year. They can be on topical issues, or areas that we think directors need to learn more about or upskill in. Having shareholder and stakeholder engagement is an indication of how serious or important we consider this issue.

We’re also seeing, globally, a trend to recognising stakeholder interest as well. You often see it, I think, after large corporate governance scandals, especially since the GFC. Corporate governance regimes have been reformed around the world. And I’ll touch on a couple of things that have happened in New Zealand. But, in the UK, there's been a number of large scandals – there's been British Home stores in recent years, Sports Direct, most recently Carillion. And Carillion is, I think, it’s one of the largest construction firms in the UK. That seemed to have collapsed out of the blue earlier this year, and there's a number of investigations going on at the moment.

The UK, they're currently reforming their regime and they're looking at how to strengthen stakeholders’ voice within their corporate governance regimes. They're trying to look at how they can have employee representation at board level, and they've come up with a number of different options that they're looking at there. They have also, under their company’s legislation, they have a duty to take into account stakeholder interests, so it’s a specific duty. And they're looking at actually ensuring that directors or organisations report in their annual report how they've had regard to stakeholder interests. So that’s a significant step.

Some of you might have seen this, but this is a couple of extracts from Larry Fink’s letter to CEOs all around the world. Larry Fink is the CEO of BlackRock, which is the largest institutional investor. Each year he sends a letter which is a good example of institutional investors’ expectations of companies and there’s many of New Zealand companies as well this is relevant to. So, he’s saying  – up top – “Companies must benefit all stakeholders,” and if they don’t act for a purpose they’ll ultimately lose licence from their key stakeholders. He goes on and asks other questions. Companies must ask themselves, I think it’s relevant as well to other organisations, “what role do we play in the community? How are we managing our impact on the environment? Are we creating a diverse workforce? What are we doing to adapt to technological change? What are we doing around the future of work?”

And there’s another document that sits beside this letter as well and it sets out BlackRock’s four priorities for the year. One of them is diversity, another is executive pay, human capital management, and also climate change. They’re just often reflected as well across other institutional investors who also put letter of expectations out or a framework out. I think there’s a trend worldwide as well. I think the institutional investors probably in the most dominant stock ownership position that they’ve ever been in. It’s moved away from individual ownership now into a lot concentrated into institutional investors and it gives them, I suppose, more power and influence to bring about change, and we’re seeing a more active stewardship approach as well from institutional investors where they’re engaging with organisations.

This is some of the other things that are happening. On the right-hand side, that’s just a bit of a clip from the World Economics Forums Global Risk Report, and you can see there’s a couple of things on climate change in there and a couple on data and that’s why I wanted to focus on them.

The banks in Australia at the moment are obviously going through a fair bit of scrutiny with the Royal Commission that’s going on, but something that would have come for directors last year was the Commonwealth Bank of Australia was sued for allegedly inadequately disclosing its climate-related risks. This was by a couple of its shareholders. It managed to settle the lawsuit but had to enter into a number of compromises to do so, and so it actually in its 2017 annual report it noted that it had significant exposure to climate-related risks and it promised to undertake a business-wide review to see the full extent of its exposure. It also released a climate change policy and it agreed not to fund a controversial mining project in Australia.

In New Zealand, obviously the government has indicated that addressing climate change is going to be a key priority for it, and the Zero Carbon Bill is coming in later this year. You might have seen last week the Productivity Commission released a report with a number of recommendations about how New Zealand can address climate change, and one of them was introducing mandatory reporting on climate-related risks. So, that will be a significant step if that comes in.

In terms of data, obviously it’s an incredibly broad topic. I read recently that in 2017 more data was produced than in the last 5,000 years. It’s relevant to the public sector. Obviously, if you think of cyber security and data breaches there’s been a number of well-known breaches over the years. It’s relevant to analytics and big data, data privacy. If you think about Mark Zuckerberg’s just been before the Senate in the US having to answer what their role was in the Cambridge Analytica scandal. It also relates to data use and data ethics.

So, a couple of things that are on the horizon, the European Union’s GDPR you might have heard of, General Data Protection Regulation. It essentially applies to any organisation that’s processing data of EU citizens, so it’s going to capture a lot of New Zealand organisations as well, and that comes into effect this month. We’re also bringing in obviously an updated Privacy Act which is being looked at at the moment. It’s been 25 years since the last Privacy Act was brought into effect and things have obviously moved on. We’re in a different landscape now, the internet has evolved tremendously, and we need to make sure it’s fit for purpose. A key change within that is they’re looking to introduce mandatory privacy breach reporting, so that would mean that for certain breaches where significant harm could be caused, organisations will have to report that to the Privacy Commissioner and also to affected individuals. So, that’s a large change that’s on the horizon.

The last point is about extended external reporting surveys. You might have seen earlier this year the McGuinness Institute and the XRB released a number of reports looking at what users want from extended external reporting, so more holistic reporting, and also what preparers think users want. There’s some great detail and analysis in there at This is Your Space. I think one of the key things that came out from there was there was a big gap between what users want and what preparers expected as well.

So, I suppose to summarise at a high level around stakeholder expectations, they’re looking for information that they care about beyond financial performance as well. This will include not only what your organisation’s doing, but how you’re doing it, what impact are you having on the environment and society. For consumers this might mean looking at the origin and composition of products, including further supply chain, employee treatment, corporate practices. For institutional investors it might be looking at the business model, how that adds values. Is the business sustainable over the long-term? What’s a strategy? What are the key risks? Do you have a high-performing board? That’s what BlackRock looks for anyway. And do you have effective governance?

Obviously the public sector’s been in this space for some time but the private sector is catching up. There are a number of leaders – Sanford, who use an integrated report, Air New Zealand have recently released an excellent sustainability report, Meridian as well, state-owned enterprises, New Zealand Post has been in this space for some time, KiwiRail. I know that Greg Taylor from KiwiRail presented in Wellington and I think his slides are on the Audit New Zealand website, and if you’re interested to understand a bit more about their journey I’d urge you to have a look. I suppose a key point here is really that more holistic reporting, being able to better tell your story is a way to more effectively engage with stakeholders and it’s a key opportunity.

These are just some of the different frameworks that you could use or some of the descriptions as well. I haven’t put the sustainable development goals up there but they’re essentially looking at solving some of the world’s economic, social, and environmental problems and challenges. It’s things like ending world hunger, ending inequality, protecting the planet. Some businesses are already reporting against these and it takes a collaborative effort. It’s also across government and last week there was a first STG summit up in Wellington and it’s raised a whole bunch of concerns about should there be a minister to look over these goals, and we’re probably going to see a lot of development in that space.

In terms of integrated reporting, I obviously just touched on that briefly before but it’s essentially looking at how organisations create value over time. They use a framework with six capitals – financial, manufactured, intellectual, social, human, and natural. So, you will have also heard this morning I think from Treasury about their Living Standards Framework and essentially a similar approach using different capitals.

These are some of the key developments in the New Zealand landscape in terms of corporate governance but also beefing up environmental, social, and governance matters and what organisations should be doing in terms of good practice. On the left-hand side, that’s the New Zealand Corporate Governance Code, and that was updated last year. Before that it was a reasonably skinny sort of streamlined approach, so it’s been significantly improved. On the right-hand side, that’s a Financial Market Authorities Corporate Governance Handbook. They have a similar framework. The NZX one is a complier explains, so organisations, when they’re disclosing in their annual report will say how they’ve complied with the recommendations or they’ll explain why not and sometimes there’s good reasons. The FMA’s one, it has eight high-level principles, so it has things on auditors, it has things on board committees, on ethics, on remuneration and it has specific recognition of stakeholder interests as well and the principles. And it has a principle on financial and non-financial reporting. It’s probably most relevant to the public sector because some of those entities are caught. State-owned enterprises are also caught by it.

This is the title from a directors’ brief that we sent to our members earlier this year. It goes hand in hand with integrated reporting. I’m going to include it in my slides if you’re interested in looking at it. It summarises some of the things that I’ve talked about today but also some of the things in this more holistic reporting space.

The last part that I wanted to talk about was going beyond compliance. Obviously more holistic reporting is not just about ticking the boxes, it’s about taking a stand back and I suppose it’s big picture thinking. It’s critical to build trust across society, across business, and across government. I heard earlier this year Warren Allen, CEO of the XRB, talking about having this “beyond compliance” mindset.

I just thought I’d briefly touch upon trust. Obviously it’s important across all sectors, and at our recent IOD conference up in Auckland the theme was Leading Edge, and we had people from around the world talking about blockchain, about artificial intelligence, about digital transformation, but the underlying theme was trust and the importance and the necessity from stakeholders. This is reflected in the 2018 Acumen Edelman Trust Barometer, and there’s record low levels of trust. New Zealand’s a bit better than some other countries around the world. The US has plummeted. But it’s across government, it’s across NGOs, and business as well. Some of the key results in the report were that there was a need to show commitment to the long-term, and that was for all organisations. There was a need for businesses to act on wider societal issues and 44% of respondents said that companies that only focus on themselves or their profits are bound to fail. This comes back to what Larry Fink was saying in his letter earlier on about social licence to operate.

So, it’s sort of a bit of a whirlwind of this space. If there was three key points I’d note is: (1) it’s critical to understand the expectations of our stakeholders; (2) it’s about more holistic thinking and going beyond compliance; and (3) is about reporting and disclosure can be a key opportunity to more meaningfully engage with our stakeholders.

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