The subject of accounting practices bores some people, but not me. I find it absolutely fascinating.
I recently spent a very enjoyable lunchtime with Richard Howitt, chief executive of the International Integrated Reporting Council (IIRC). While the world is getting excited about the Fourth Industrial Revolution and the looming automation of virtually all business systems, including accounting and auditing procedures, Howitt is focusing instead on the actual content of the corporate annual report to make it more relevant to the modern world and the needs of business people around the globe.
He was in Dubai meeting accounting firms, regulators and other market people, and on his way to Riyadh, to explain to them that the Middle East has lots of advantages and opportunities to exploit the new accounting revolution, but is — mostly — failing to fully exploit them.
To understand the problem, pick up virtually any annual report produced by a big regional corporate. The approach is mind-numbingly formulaic: Chairman’s letter, CEO review, finance director’s blurb, operational highlights, auditors’ report and then pages and pages of figures and financial footnotes.
Somewhere in the midst of that there is sometimes — but not always — a section marked “environmental, social and governance” (ESG) or “corporate social responsibility” (CSR). This will affirm that the company stands by the highest standards of ethical business practice with regard to its stakeholders and the wider community in which it operates.
Sometimes, it will describe a tree-planting initiative, or a community medical project the company has funded in some impoverished Asian country. Often, it will laud the company’s stance on gender equality, or boast proudly of the number of nationalities the company employs.
As an exercise in box-ticking, this does not fool anybody, least of all Howitt. He disparagingly calls it “add on” and “greenwash,” and thinks it is next to useless in helping investors understand the wider issues the corporates face.
For example, an oil company might scribble a few lines about its solar panel program, or its arts sponsorship. But you’d have to look closely at the financials to see the cost of the huge polluting oil spill it had to clear up, and you will struggle to find anything about how much it contributes to the global carbon footprint.
With integrated reporting, the approach is radically different. The IIRC, which grew out of the environmental concerns of the British Prince of Wales, uses different metrics to value companies — what it calls the “six capitals” — of which financial capital is just one. The others, all equally important, are manufactured, intellectual, human, social and relationship, and natural capital. An IIRC report looks drastically different to a traditional annual report. It is shorter, but also broader, and eschews accountant speak for layman’s language. It is as much a users’ manual for the company executives trying to achieve strategic goals as it is a source of information for shareholders — though it is the latter too, hopefully in a more practical and usable form.
It is time regional companies take a look at the many global studies of the financial effects of good corporate practice.
Frank Kane
I was surprised to learn that some 1,600 companies around the world already produce an integrated report. American giant GE, Europe’s Unilever and Reliance of India all issue such reports, and some regulators — for example in South Africa — make it a listing requirement to have such an annual review. The new reports have received the blessing of authorities in Japan and China, and India is showing a new interest.
In the Middle East, Howitt gave a few examples of companies that were on the integrated path: Aramex in Dubai, Saudi Investment Bank and Al Rajhi Bank in Riyadh, off the top of his head.
But the region still lags the rest of the world, which is surprising in some respects. Shariah financial principles give high priority to ethical standards such as IIRC promotes, and the move away from oil-dependent economies will also highlight the need for good ESG and CSR practices, not least to ensure the well-being of citizens in times of jarring economic transformation.
Maybe regional corporates should take a look at the many global studies of the financial effects of good corporate practice. All of these, by reliable business research institutions, consulting firms and even investment banks, show a direct financial benefit from the integrated approach.
Companies that go integrated can have easier access to capital, and lower cost, and can expect to enjoy a significantly better share price performance than the traditionalists.
As Saudi Arabia undergoes the economic transformation of Vision 2030, there will be hundreds of companies emerging from state ownership and looking for a new corporate identity. They will be welcoming institutional and retail shareholders onto their registers for the first time.
The institutions are increasingly sold on the integrated approach, while the retail investors must surely want their new investment explained to them in language they can understand rather than obscure accountant argot. They will surely come to understand that integrated reporting is not about box-ticking, or greenwashing, but about holistic value creation for all stakeholders.
• Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai