A clear strategy to communicate a strong value story to investors and stakeholders will help to rebuild trust and enlist long-term support – and can also bring many day-to-day benefits to the business.
Corporate reporting is one of the core ways that organisations communicate to the market, so it is therefore one of the key foundations for building investor and stakeholder trust.
To leverage the power of corporate reporting, organisations must have a clear corporate reporting strategy. This strategy must be ‘owned’ by the company’s CEO, as it is the basis of telling the company’s value story, and it must be overseen by the Board.
In KPMG's publication Trust through transparency, we explored how many organisations are moving towards integrated reporting as a core way to rebuild and enhance trust, as this approach offers investors a view of how the company creates value, its business model, and how it intends to deliver value over time – a scope that extends beyond traditional ‘reflective’ financial reporting.
However, as with financial reporting, any key disclosures in integrated reports must be ‘investment grade’, in line with Principle 4 of the ASX Corporate Governance Principles.
Principle 4, which was updated in 2014, states: “A listed entity should have formal and rigorous processes that independently verify and safeguard the integrity of its corporate reporting”.
Although the term ‘corporate reporting’ is not defined, it is broader than ‘financial reporting’, the term that it replaced.
Therefore, to offer this level of insight with assurance, a reporting strategy is vital, as it helps to ensure the whole company is working towards providing the most useful and accurate information to the market.
In addition to the reporting strategy, the Board will need to implement an integrated reporting management system to capture, monitor and report key information, as well as a Board approved assurance framework to ensure integrity.
Australian businesses that implement these approaches have the opportunity to build stakeholder confidence and trust, and can also enjoy internal operating benefits from the change.
How to determine what to report
A reporting strategy defines:
- what information your investors and other key stakeholders need
- how to best deliver that information, when, in what form, and through what distribution channels
- why and how to deliver those reports with the required quality.
A reporting strategy must begin with leadership buy in, followed by the appointment of a steering group with representatives from different areas of the business to work together to define the ‘value story’ and the ‘reports portfolio’. The strategy must tie to a business case that defines the return on investment in improved reporting, and the metrics to measure its realisation.
Understanding the value story
Central to the reporting strategy is establishing a clear value story for the organisation. This will underpin all messages delivered to the market through the reports portfolio.
To create the value story, a business needs to answer questions such as the ones below.
- What do you do, and what are your key competitive differentiators?
- How are you reading your current position, what challenges and opportunities do you see in the future, and how will you adapt your organisation to be successful?
- How should investors use the information reported when determining how best to allocate capital to your business, and in pricing it?
The value story helps investors and other key stakeholders make clear decisions about whether to invest in your business, or not – and aids the ultimate goal of building trust.
The flagship report – content plan
It is then necessary to strategise the content that will be included in the flagship report, (which we believe should be an integrated report). An integrated report is more connected than a traditional annual report, as it explains how scarce resources are used in implementing strategic priorities, and the outcomes achieved for the company, its people and the broader community. Integrated reporting supports the organisation’s ongoing licence to operate.
Determining the content to include in the flagship report will require the steering group to:
- discuss with internal stakeholders
- gather the right data and information
- ensure the data is verified to be ‘investment grade’ information.
These are the same requirements as for a traditional financial report, but across a broader subject scope.
Supplementary reports
After defining the flagship report, the steering group may determine that it should be supported by other reports. These may be reports required by law or a regulator, or that the Board believes are important. These could relate to the company’s HR management, environmental sustainability, or certain areas of operational performance. They can be offered as standalone publications, or can be clearly linked online.
Defining the reports portfolio in this way helps to ensure there is no duplication of reporting effort, and that there is a clear roadmap/table of contents (online or print) for each report (or disclosure) which points stakeholders to the exact information they seek.
Considering timing is also key – as it can make sense to report on different areas of the business at different times of the year to prevent an overload during the end of financial year reporting season.
Business backing
Some organisations may argue that they are too busy to focus on reporting to meet the compliance needs of the Australian Securities Investment Commission (ASIC), let alone to build a reporting strategy. However, a reporting strategy can actually support compliance goals, and has many other business benefits.
These include a more holistic understanding of the business by all in it, improved clarity on its future direction, better understanding of risks to the strategy, and better cultural and behavioural alignment. For example, engaging people and sharing deeper insights may move their focus from short-term financial earnings or incentives to the creation of longer-term value.
Further, with staff and other key stakeholders behind the vision, the organisation will be better equipped to cope with today’s fast-changing, technology-driven world, because it has integrated reporting goals in place.
Intangible and capital value
A further advantage is the increased focus on the importance of the organisation’s ‘intangible value’, in a world where ‘tangible’ assets represent a much smaller amount of leading organisations’ market value. Think of Google, Amazon and Microsoft – their value is mostly in their intellectual (brand, Intellectual Property, technology), human and customer capital, which is not on their balance sheets.
Academic research is adding to the evidence of ROI in reporting. In August 2017, Professor Mary Barth (Stanford University) and others issued a paper: The economic consequences associated with integrated reporting quality: Capital market and real effects, in which they concluded that “we find a positive association between IRQ (integrated reporting quality) and [stock] liquidity… and expected future cash flows”.1
In addition, Harvard research found that adoption of integrated reporting is positively associated with a more long-term investor base.
Companies leading the way
A number of high profile Australian companies are leading the way with reporting strategies involving integrated reporting. National Australia Bank (NAB) has released integrated reports for around 7 years, explaining how it creates value not only for shareholders, but also the broader community. It has seen an increase in staff engagement as a result, according to its CEO Gary Lennon: “For them (employees) it brings together what NAB is, and what we are seeking to achieve.”
Property group Lendlease has also adopted a reporting strategy with integrated reporting, and in doing so has reduced its portfolio of shareholder reports from three to one each year end. The integrated report is centred on the company’s five pillars of value and the implementation of strategy. Preparing a single integrated report has removed duplication and focused reporting on what it important to long-term value.
In summary
By implementing a clear reporting strategy, business leaders can better engage with not only their investors, but also other key stakeholders who impact the company’s ability to create and sustain value – customers, staff, suppliers and regulators.
Offering better quality information to support decision making in the market will build and enhance trust in the company.
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Footnote
- Published in Accounting, Organisations and Society through Elsevier.