Bringing to life the value creation process in corporate reporting

by Kerry Hicks, Senior Policy Advisor, Australian Institute of Company Directors

The reporting process should be seen as an investment which can bring huge rewards, says Dr Carol Adams.

This interview with Carol Adams was first published by the Australian Institute of Company Directors here

Dr Carol Adams is an author, consultant and Non-Executive Director with expertise in financial and non-financial reporting and environmental, social and governance risks. Her work is concerned with the role of accounting and reporting in the relationships between business, society and the environment. She spoke with the Governance Leadership Centre (GLC) about some of her recent research findings.

GLC: When did you undertake your research on the corporate value creation process and who did you interview?

Carol Adams: The interviews were undertaken in 2015 (but the paper was published in 2017). I interviewed non-executive directors, including some Board chairs, of large listed companies on the Johannesburg Stock Exchange and the Australian Stock Exchange.

GLC: The research interviews you undertook for your 2017 paper examined the level of awareness and responsiveness to ESG issues amongst Australian boards versus South African boards. What did you find?

Carol Adams: Corporate reporting processes, and in particular the processes for integrated reporting, set out in the King III Code in South Africa and the International Integrated Reporting Framework (IIRF), influence the way Board members (and Executive Directors) think.

They think more broadly about what value means, about the risks and opportunities facing their organisation and about the types of resources, or ‘capitals’, they need to run it. This new way of thinking enhances board oversight and the integrated reporting framework guides organisations in managing complexity. One important outcome is an increase in awareness of the impact of environment, social and governance (ESG) issues and sustainable development issues, the other being a broader view of value creation – often in spite investor disinterest.

In South Africa there was a stronger understanding of what influences the long term value of a company and a heightened awareness of the impact of social issues on long term business success. There was broad agreement amongst the South Africa interviewees as to what those issues were, how they might impact on their businesses and how they might be resolved.

The level of awareness of and responsiveness to ESG issues amongst the Australian interviewees was more varied and was not as natural or engrained.

GLC: What reason or reasons can you attribute to the lower responsiveness to ESG issues amongst Australian boards you report, as compared with South African boards?

Carol Adams: The difference between South African and Australian interviewees was in large part due to the fact that integrated reporting has been mandatory in South Africa since 2010. South Africa interviewees saw it as a useful framework for addressing broader impacts on long term value creation.

The thinking of Australian interviewees was more traditional or constrained (e.g. by reporting to short-term investors) and, unlike the South African sample, there was no sense of urgency for change from the perspective of either pressing issues or of realising benefits. Directors’ liability legislation was seen as a barrier to adopting a framework. Whilst most Australian interviewees could articulate what integrated thinking and a broader view of value creation might mean, there was a sense that, whilst there had been change, the corporate climate was not where it ought to be on this matter. They expressed a view that boards were not sufficiently aware of ESG risk and opportunities or their impact on business (an awareness which is forced upon South African Board directors through legislation).

Clearly the different sustainable development context played a part in the differences observed. Poverty and inequality and the role of government are big issues on which there was a great deal of consensus amongst South African directors.

GLC: Since undertaking your research, are you aware of any changes to the level of awareness and responsiveness to ESG issue amongst Australian Boards?

Carol Adams: The big difference I’m seeing is the response to the United Nations Sustainable Development Goals (SDGs), particularly by investors. There has been a huge corporate response to the SDGs in terms of a recognition that they need to do something. They are still working out what that is.

The report I’ve written that was published by the International Integrated Reporting Council (IIRC) and the Institute of Chartered Accountants of Scotland (ICAS) sets out five steps for companies to align their strategy for contributing to the SDGs with integrated thinking and the integrated report.

I’ve been working with Cbus Superannuation fund for the last few years on their integrated reporting. In the last two years they’ve incorporated the SDGs into it and won awards for their reports. This influences other funds and has a big potential to influence companies too.

Some research I published in 2016 with colleagues showed that integrated reporting is influencing reporting practices of companies even amongst those that do not explicitly say they are doing it. Companies whether using the IIRC’s Framework or not are starting to adopt parts of it and link their social investment/impact activities with their overall strategies.

Also, a number of organisations are involved in pushing for take up of the recommendations of the Financial Stability Boards Taskforce on Climate related Financial Disclosures.

GLC: How can Australian boards improve what they do?

Carol Adams: I’m surprised that more boards don’t include an understanding of climate change and sustainable development risks and opportunities in their board skills matrix. It is critical to the long term success of the company.

Also, boards tend to see the annual corporate report as an outcome, and partly a compliance exercise. But it is also a process which can be transformational. What you report influences what you do and how you do it. The reporting process should be seen as an investment which can bring huge rewards.

To read more about Carol’s research on the corporate value creation process, refer to the links below:

Adams, CA (2017) Conceptualising the contemporary corporate value creation process, Accounting Auditing and Accountability Journal 30(4): 906-931

The prepublication version can be accessed here free

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