Governance is King - Universitas Indonesia

GOVERNANCE IS KING:INTEGRATED REPORTING

AND BETTER GOVERNANCE

Jakarta19 November 2014

Presented by Mervyn E King SC

Corporate Legal Advisers

THE COMPANY YESTERDAY

The primacy of the shareholders

Wealthy families

Single focus and bottom line

Financial reporting – rear view mirror

Prepare as if only user the investment analyst

100 years but IASB and FASB


“OWNERS”

Person cannot be owned

Shareholders have important incorporeal rights

Secondary markets

Company sovereign

Milton Friedman

Part of society


YESTERDAY’S ECONOMIC MODEL

Yesterday’s economic model was based on two false assumptions that :

there were limitless resources in nature and

that planet earth had an infinite capacity to absorb waste

Take – make – waste

Industrial revolution

Until middle of 20th century


THE COMPANY TODAY

New capitalists

Stakeholders – inclusive

Legitimate NIE’s

Moat of stakeholders

Not in a vacuum – a triple context

What are the megatrends of the 21st

century?


21st CENTURY MEGATRENDS -DRIVERS

Global financial crises

Climate change crisis - anthropocene

Ecological overshoot

Radical transparency

Digital manufacturing

Greater expectations from stakeholders

Population growth and urbanization

Cannot carry on business as usual

Have to learn to make more with less


COMPONENTS OF MARKET VALUE

(SAICA)

8368

3220 19

1732

6880 81

1975 1985 1995 2005 2009

S&P 500

Physical and financial assets Other assets


ICGN

Traditional accounting and reporting emphasise discrete assets, presenting them as additive rather than interdependent. In the modern economy, it is increasingly the interaction among assets, e.g. people, technology, capital, networks, that drives value creation.


THE WORLD

Norway and Sweden

The Stiglitz Report, France

Danish Financial Statements Act

UK Companies Act

German Commercial Code

Indonesia

IFAC and UNCTAD

Harvard

SEC

A4S

GRI

G3 Guidelines on sustainability reporting

IIRC and IRCSA

JSE listing requirement and World Stock Exchanges in Xiamen


INTEGRATED THINKING

Integrated as opposed to “silo thinking”

Every company dependent on relationships and resources

Mindset change at board level

Agenda item inputs

Knowledge of stakeholders’ legitimate NIE’s

Greater stakeholder expectations


WHO ARE STAKEHOLDERS?

Parties who contract with the entity e.g. customers, employees , suppliers etc

Parties who have a non-contractual nexus with the entity e.g. civil society, local communities, NGOs, the environment

The State as legislator or regulator


WHAT IS SOCIETY?

Banks and their depositors

Shareholders – ultimate beneficiary?

Customers

Labour

Suppliers

Directors and managers

NGO’s and civil society – e.g. Greenpeace

Society the licensor


REPUTATION

Managing relationships

In a mutually beneficial way

Cannot buy reputation – a reputation is a consequence of those relationships

What stakeholders perceive about a company

Part of 80% of market value

Trust – a deposit earning interest


INFORMED MANAGEMENT

Knowing the NIEs

Manage on a more informed basis

Develop strategy on a more informed basis

Better business judgment calls

Because meeting stakeholder expectations


CSRO (1)

A corporate stakeholder relationship officer

Ongoing relationship with stakeholders

Ongoing in informing management

Ongoing evaluation of the company’s business model

Ongoing evaluation of the company’s risks and opportunities

Assess the efficacy of all the line functions


CSRO (2)

Capable of integrated thinking

An experienced executive

Who understands business value propositionsand the interdependence between resources used, the business model, the product and stakeholder relationships

Understands the triple context

Good communicator and networker

Report to CEO at each board meeting


BEYOND FINANCIAL REPORTING

Triple context

Report in monetary terms

FR critical but not sufficient

SR critical but not sufficient

F impacts on the NF & vice versa


VALUE

Present value of expected future cash flows

The positive and negative impacts on the triple aspects by business model & product

Enhancing the positives, eradicating or ameliorating the negatives

Embedding sustainability issues into strategy

Reader able to make an informed assessment


EMBED SUSTAINABILITY

Identify sustainability issues material to business

As water is to beverage manufacturer

Embed sustainability into long term strategy

In context of resources, relationships, risks, opportunities and global turbulence


All organizations depend on a variety of resources and relationships for their

success. These resources and relationships can be conceived as different

forms of “capital”. Source: Incite Sustainability 2.0: A Guide to Competing in a Changing World


Financial Manufactured Human Intellectual SocialNatural

INTEGRATED THINKING

(Relationships)


UNILEVER

Anthroprogenic age

Long term plan – re-engineer

Productions and products

Renewable power, recyclable materials, zero waste to landfill, consumer and supplier

InputsCapitals, which may take the form of.

• Funding model

• Infrastructure

• People

• Intellectual property

• Raw materials

• Ecosystems services

• Relationships

Business Activities.

• Research and development

• Planning

• Design

• Production/ conversion

• Product differentiation

• Market segmentation

• Distribution

• Service provision

• Quality control

• Operational improvement

• Relationship management

• After-sales service

Outputs• Products

• Services

• Waste

• Other by-products

Outcomes

• Customer satisfaction.

• Profit/loss

• Shareholder return.

• Asset consumption.

• Contribution to local economy through taxes.

• Job creation

• Employee development and engagement

• Improved standard of living

• Environment impact

• License to operate

Impact on long term value creation (internal &external)

Source-IFAC, CIMA, PwC


INTEGRATED THINKING

Impacts

Leverage

Of company’s business model

KPI’s and KRI’s fall under financial or non-financial?


INTEGRATED THINKING

Understanding, knowing and then planning:

The impacts of how the company makes it money

The impacts of the company’s product

How the company will sustain value creation in the long term


THE OPEN KIMONO

Reporting influences behaviour

Integrated reporting – King III

IIRC – formation 2010

Informed assessment

Discharge of fiduciary duty by trustee


SYSTEM OF REPORTING

Is there one?

Bolt on a division’s report to another

Chairman’s statement

Integrated report has a system

The collective mind of the board

FR impact on NF and how material sustainability embedded into strategy to sustain value creation


INTEGRATED REPORT


AN ORGANISATION’S VALUE CREATION PROCESS

30


DRIVERS FOR INTEGRATED THINKING

Megatrends

The customer of today

The new capitalist

The identity & reputation of companies

Market forces – external – e.g. natural assets

Responsible investment


EVOLUTION AND REVOLUTION

The integrated report is evolving

It is an evolution in corporate reporting

Integrated thinking is a revolution

A revolution in the approach to managing environmental and societal issues

Overwhelming support for integrated thinking


THE INTEGRATED REPORT

To be accountable you have to be understandable

“If I had more time …..”

Vodacom


WHAT IS MATERIAL TO STAKEHOLDERS

(VODACOM)


BUSINESS NETWORK

Pioneer - framework

Champions

Street of last opportunity

Avenue of sustainable capitalism


SOME CONCLUSIONS

Tell your stakeholders what you do, do what you tell them, and write it down in your Integrated Report

Companies cannot solve 21st century problems with the same mindset their boards used when they created them

We cannot solve 21st century corporate challenges with 20th century decision making or reporting


INTEGRATED REPORT

Reporting influences decision making

A concept, fit for purpose

Whose time has come

Because of the changed world

Financial, natural, human, society, manufacturing, intellectual capital

Critically interdependent and interconnected

theiirc.org


THE FUTURE

Mindset change

Capitals and stakeholder relationships

Population and diminishing natural assets

Sustainable capitalism

Greater stakeholder expectations

Responsible investment


THE WBG AND THE IMF (1)

Meeting 10 October 2014 in Washington

Mark Carney, Governor of the Bank of England & Chairman of the FSB

Betrand Badre managing director of the WBG

Discussed how IR facilitates transparency and financial stability

Improves the quality of information available to providers of financial capital

FSB: Stability and sustainability – 21st century challenges



Mark Carney: “By improving reporting requirements for organisations, Integrated Reporting can bring additional information, in particular about the longer-term costs of climate change, to feed into markets and inform decision-making and policy-formulation by institutions. If achieved, it will lead to better informed and more sustainable long-term investment, for the benefit of society”



Bertrand Badre: “Public sector entities are one of the largest, if not the largest, reporting entities in the world, so the transparency of their financial information is of importance to us all. Integrated Reporting would enable governments and their stakeholders to gain a better understanding of resources available and help them to manage these more effectively


THE B20 (4)

The B20 recommends that a review be conducted by the IIRC and the IASB in relation to making corporate reporting more conducive to infrastructure and other long term investment and eliminating or addressing current barriers


THE GLOBAL COMMISSION (5)

On the economy and climate

Has recommended that businesses should adopt and implement the IR framework


THE JAPANESE GOVERNMENT (6)

Japan’s Ministry of Economy, Trade and Industry (METI) has endorsed IR as a means of communicating the long-term value creation proposition of companies, and is encouraging Japanese companies to become best practice leaders in IR


ICGN (7)

7.5 of their governance principles: “the board should provide an integrated report”

That fits with CRISA’s principle one


EU DIRECTIVE AND UK FRC (8)

ESG reporting in EU for large companies and Strategy Reports in UK

Both one step to IR


SINGAPORE, MALAYSIA, INDIA AND PHILIPPINES (9)

National strategy in Singapore

SCM strong support for IR

SEBI called on the CII to build a roadmap to produce IRs

IIRC framework being introduced to the Philippine Stock Exchange

ADB invites MEK in Q.1 of 2015 to address IR with major Asian corporations


IDEAS

Man and nations

Helen Keller: “The only thing worse than being blind is having sight and no vision”

We have the light

Why grope in the dark?

THANK YOU

Prof Mervyn E King SC

Governance is King - Universitas Indonesia

Documents