Non-financial disclosure: environmental and ethical ...

Non-financial disclosures in Non-financial disclosures in the annual reportthe annual report

The Second Asian Roundtable on The Second Asian Roundtable on Corporate Governance Corporate Governance

(June 2000, Hong Kong)(June 2000, Hong Kong)

Roger AdamsRoger AdamsHead of Technical Services and Research Head of Technical Services and Research

Association of Chartered Certified AccountantsAssociation of Chartered Certified Accountants

Presentation overviewPresentation overview

Aspects of non-financial disclosureAspects of non-financial disclosure Why should non-financial disclosures matter?Why should non-financial disclosures matter? The Turnbull Report on Internal Control (UK - 1999)The Turnbull Report on Internal Control (UK - 1999) New approaches to stakeholder recognition in the UKNew approaches to stakeholder recognition in the UK Risk, internal control and the Operating & Financial Risk, internal control and the Operating & Financial

ReviewReview EU recommendation on environmental disclosureEU recommendation on environmental disclosure Parallel initiatives - the Global Reporting Initiative (GRI)Parallel initiatives - the Global Reporting Initiative (GRI) How are these changes being reflected in the How are these changes being reflected in the

education and training of accountants?education and training of accountants?

Aspects of non-financial Aspects of non-financial disclosuredisclosure

Mainstream corporate governance Mainstream corporate governance disclosuresdisclosures

Turnbull / internal control / risk related Turnbull / internal control / risk related disclosuresdisclosures

Other aspects:Other aspects:– environmentalenvironmental– socialsocial– economiceconomic– human rightshuman rights– fraud and corruption (ethical)fraud and corruption (ethical)

Why should Why should non-financialnon-financial disclosures matter? 1disclosures matter? 1

““Leading companies are beginning to build Leading companies are beginning to build stakeholder trust and simultaneously improve their stakeholder trust and simultaneously improve their business performance by measuring and reporting business performance by measuring and reporting on both financial and non-financial indicators related on both financial and non-financial indicators related to such issues as environmental management, to such issues as environmental management, worker relations and social responsibility. In fact, worker relations and social responsibility. In fact, they are creating a new kind of competitive they are creating a new kind of competitive advantage by linking value and values, to position advantage by linking value and values, to position themselves as the companies of choice among themselves as the companies of choice among customers, employees, investors, suppliers, customers, employees, investors, suppliers, business partners and local communities”. business partners and local communities”.

KPMG “Beyond the Numbers”KPMG “Beyond the Numbers”

Why should Why should non-financialnon-financial disclosures matter? 2disclosures matter? 2

risk can be controlled but not easily financially risk can be controlled but not easily financially quantifiedquantified– mainstream corporate governance issues (board mainstream corporate governance issues (board

structure / auditor independence / voting rights)structure / auditor independence / voting rights)– social issues (labour policies / human rights)social issues (labour policies / human rights)– ethical issues (bribery and corruption / money ethical issues (bribery and corruption / money

laundering / codes of conduct)laundering / codes of conduct)– environmental issues (global warming / GMO’s / environmental issues (global warming / GMO’s /

contaminated land)contaminated land) all exposed in our CNN / goldfish bowl worldall exposed in our CNN / goldfish bowl world trend is towards fuller coverage of above issuestrend is towards fuller coverage of above issues

The Turnbull Report on Internal The Turnbull Report on Internal Control (UK - 1999) Control (UK - 1999)

Are the significant internal and external operational, financial, compliance and other risks identified and assessed on an ongoing basis?

Does the company communicate to its employees what is expected of them and the scope of their freedom to act?

Are there established channels of communication for individuals to report suspected breaches of laws or regulations or other improprieties?

The Turnbull Report on Internal The Turnbull Report on Internal Control (UK - 1999) Control (UK - 1999)

Are there specific arrangements for management monitoring and reporting to the board on risk and control matters of particular importance?

Compliance with Turnbull requires a board to consider all the above issues and more.

Significant risks may include market, credit, liquidity, technological, legal, health, safety, environmental, reputation, and business probity issues.

The Turnbull Report on Internal The Turnbull Report on Internal Control (UK - 1999) Control (UK - 1999)

Accreditation mechanisms such as

– ISO 14000, – SA 8000 and – AA 1000

have a significant role to play in enabling boards to fulfil their newly enlarged responsibilities under the Combined Code

New approaches to stakeholder New approaches to stakeholder recognition in the United recognition in the United

KingdomKingdom

Company Law Review: 1999 - 2002Company Law Review: 1999 - 2002– new responsibilities for directors? pluralism vs. new responsibilities for directors? pluralism vs.

enlightened self-interestenlightened self-interest– enhanced disclosures in Operating and Financial enhanced disclosures in Operating and Financial

Review (= US MD&A)Review (= US MD&A) Other initiativesOther initiatives

– integrated reporting approaches (The Centre for integrated reporting approaches (The Centre for Tomorrows Company)Tomorrows Company)

– new regulations for pensions fund trustees new regulations for pensions fund trustees dealing with explicit recognition of social and dealing with explicit recognition of social and environmental issuesenvironmental issues

Risk, internal control and the Risk, internal control and the Operating & Financial ReviewOperating & Financial Review

What is the appropriate vehicle for these What is the appropriate vehicle for these new types of disclosure?new types of disclosure?

- - a separate report?a separate report?– the unaudited section of the annual report and the unaudited section of the annual report and

accounts pack?accounts pack?– the audited financials themselves?the audited financials themselves?– The Management Discussion & Analysis / MD&A The Management Discussion & Analysis / MD&A

section ( UK = the Operating and Financial section ( UK = the Operating and Financial Review/OFR) - this seems to be the most Review/OFR) - this seems to be the most recommended (though least used?) route open recommended (though least used?) route open

The OFR nowThe OFR now

““A framework for the directors to discuss A framework for the directors to discuss and analyse the business’s performance and analyse the business’s performance and the factors underlying its results and the factors underlying its results and financial position, in order to assist and financial position, in order to assist users to assess for themselves the users to assess for themselves the future potential of the business” future potential of the business”

(UK ASB 1993)(UK ASB 1993)

The OFR nowThe OFR now

operating reviewoperating review: results for the period, : results for the period, dynamics of the business, investment for dynamics of the business, investment for the future, profit for the year, total the future, profit for the year, total recognised gains and losses and recognised gains and losses and shareholders’ perspectiveshareholders’ perspective

financial reviewfinancial review: capital structure and : capital structure and treasury policy, taxation, funds from treasury policy, taxation, funds from operating activities and other sources of operating activities and other sources of cash, current liquidity, going concern, cash, current liquidity, going concern, balance sheet value (inc.. intangibles)balance sheet value (inc.. intangibles)

The OFR in the future - 1The OFR in the future - 1

ii.. A fair review of the development of the company’s / A fair review of the development of the company’s / group’s business over the year and position at the group’s business over the year and position at the end of it, including material post year end events, end of it, including material post year end events, operating performance and material changesoperating performance and material changes

ii. The company’s purpose, strategy and principal ii. The company’s purpose, strategy and principal drivers of performancedrivers of performance

iii. An account of the company’s key relationships, iii. An account of the company’s key relationships, with employees, customers, suppliers and others, on with employees, customers, suppliers and others, on which its success depends.which its success depends.

iv. Corporate governance - values and structuresiv. Corporate governance - values and structures

The OFR in the future - 2The OFR in the future - 2

v. Dynamics of the business: known events, trends, v. Dynamics of the business: known events, trends, uncertainties and other factors which may uncertainties and other factors which may substantially affect future performancesubstantially affect future performance

vi. Environmental policies and performance, including vi. Environmental policies and performance, including compliance with relevant laws and regulationscompliance with relevant laws and regulations

vii. Policies and performance on community, social, vii. Policies and performance on community, social, ethical and reputational issuesethical and reputational issues

viii. Receipts from, and returns to shareholdersviii. Receipts from, and returns to shareholders

““Modern Company Law for a Competitive Economy” Modern Company Law for a Competitive Economy” UK Company law Review Steering Group.UK Company law Review Steering Group.

EU recommendation on disclosing EU recommendation on disclosing environmental issues in the annual environmental issues in the annual

reportreport

Commission Recommendation “On the recognition, Commission Recommendation “On the recognition, measurement and disclosure of environmental measurement and disclosure of environmental issues in the annual accounts and annual reports issues in the annual accounts and annual reports of companies” - in draft from June 2000of companies” - in draft from June 2000

Covers mainstream (IAS 37 / FRS 12) recognition Covers mainstream (IAS 37 / FRS 12) recognition and measurement issuesand measurement issues

proposes new disclosure requirements to cover proposes new disclosure requirements to cover environmental policies, improvements, resource environmental policies, improvements, resource use and emissions, expenditure to P&L and B/Suse and emissions, expenditure to P&L and B/S

A common core of social indicators may follow in 1 A common core of social indicators may follow in 1 - 2 years- 2 years

Parallel initiatives - the Global Parallel initiatives - the Global Reporting Initiative (GRI)Reporting Initiative (GRI)

Global guidelines for reporting on economic, Global guidelines for reporting on economic, social and environmental aspects of social and environmental aspects of corporate activity (i.e. sustainability or the corporate activity (i.e. sustainability or the triple bottom line - see handout)triple bottom line - see handout)

ACCAACCA + US CERES / Tellus Institute + CICA + + US CERES / Tellus Institute + CICA + UNEP + other European, North American, UNEP + other European, North American, Japanese, Indian and South American Japanese, Indian and South American organisationsorganisations

ED issued 3/99 - revised guidelines due ED issued 3/99 - revised guidelines due June / July 2000. Permanent body from 2001.June / July 2000. Permanent body from 2001.

How are these changes being How are these changes being reflected in the education / training reflected in the education / training of accountants?of accountants?

base accounting and auditing examinations on base accounting and auditing examinations on international standardsinternational standards

set out to “green” the examination syllabusset out to “green” the examination syllabus develop new programs: e.g. international develop new programs: e.g. international

diploma in corporate governancediploma in corporate governance deliver on all these issues regularly through deliver on all these issues regularly through

corporate communications channels: web-site, corporate communications channels: web-site, members journal etcmembers journal etc

sponsor research and influence standard setterssponsor research and influence standard setters in the case of the GRI, become a standard setterin the case of the GRI, become a standard setter

Conclusions - 1Conclusions - 1

Greater accountability & transparencyGreater accountability & transparency More evidence of stakeholder dialogueMore evidence of stakeholder dialogue Growth of integrated or triple bottom line reportingGrowth of integrated or triple bottom line reporting More emphasis on values based reporting and More emphasis on values based reporting and

reporting of valuesreporting of values Expanding the role of the OFR/MD&AExpanding the role of the OFR/MD&A Growth in volume of socially responsible investmentGrowth in volume of socially responsible investment Accountants: best placed act as corporate Accountants: best placed act as corporate

governance referees?governance referees? Accountants:implications for their education and Accountants:implications for their education and

training?training?

Conclusions - 2Conclusions - 2(from “Beyond the Numbers” - KPMG (from “Beyond the Numbers” - KPMG

2000)2000)

““Companies are Companies are recognising that recognising that failure in many non-failure in many non-financial areas can financial areas can heavily damage the heavily damage the bottom line, perhaps bottom line, perhaps irreparably”irreparably”

““Because most general Because most general business risks derive business risks derive from non-financial from non-financial factors, organisations factors, organisations have found that how have found that how they manage those they manage those business risks can business risks can influence their influence their financial success”.financial success”.

ReferencesReferences

““Beyond the numbers” KPMG Beyond the numbers” KPMG ““Risk in the Boardroom” Canadian Institute of CAsRisk in the Boardroom” Canadian Institute of CAs ““Making Values Count” ACCAMaking Values Count” ACCA ““CACG Guidelines - principles for corporate CACG Guidelines - principles for corporate

governance in the Commonwealth”Commonwealth governance in the Commonwealth”Commonwealth Association for Corporate GovernanceAssociation for Corporate Governance

““Reporting Guidelines” Global Reporting InitiativeReporting Guidelines” Global Reporting Initiative ““The Corporate Reporting Jigsaw” Centre for The Corporate Reporting Jigsaw” Centre for

Tomorrow’s CompanyTomorrow’s Company UK Company Law ReviewUK Company Law Review

ReferencesReferences

www.acca.org.uk/resources (for T&R)www.acca.org.uk/resources (for T&R)

www.acca.org.hkwww.acca.org.hk

IASC: www.iasc.org.ukIASC: www.iasc.org.uk

Global Reporting Initiative (GRI): Global Reporting Initiative (GRI): www.globalreporting.orgwww.globalreporting.org