Corporate Reporting blog

Keeping focused on the long term agenda - mainstreaming of sustainability reporting

I have just returned from an International Corporate Governance Network conference in Korea. The meeting was most enlightening and as you might suspect was dominated by the credit crunch and what we should learn from the activities of the past few years. Put simply the conference highlighted that we need to understand the unintended consequences of the US's policy objective of supporting economic growth through debt and low interest rates. These actions have impacted our calibration of risk and at the margin have encouraged the wrong type of business behaviour. The discussions also highlighted a fundamental corporate governance failure in so far as financial products were not understood by the financial institutions trading them, the regulators regulating them or the credit rating agencies who provided the stamp of authenticity.

But the horse has bolted and as we close the stable door the harsh reality of what has occurred is beginning to be revealed. The findings of the Hay Group and the Centre for Economic and Business Research suggests that the economic slowdown brought on by the credit crisis is likely to depress company performance up to 2010. The group indicated that business leaders see tough times ahead with corporate profits dipping by about 1.3% in the current year and the likelihood that one in 85 UK workers will loose their job (equivalent to 350,000 jobs in total).

But as we speculate on the future, we should not lose sight of the longer term and many would argue more fundamental challenges facing the world. It was therefore gratifying to hear Richard Lambert the director-general of the CBI warning politicians that the economic slow down is no reason for them to get distracted from the urgent action needed to tackle climate change and to secure the country's future energy supply.

At a more granular level it is encouraging to see that some companies have not lost sight of the sustainability agenda at a time when the instincts of short term survival are more prevalent. I would direct you to two recent examples of reporting from Aviva and BT who have both reported their emissions, waste and resource usage using the framework developed by the Accounting For Sustainability (A4S) project. In the case of Aviva, the template can be found on pages 72 and 73 of their annual report, and includes the mix of financial, non financial and narrative information in a single statement as recommended in the A4S report. Importantly they have reported information on their indirect impacts, targets and benchmarks. BT in contrast has produced a modified version of the framework on pages 20 and 21 of their sustainability report.  I would recommend reading the whole report as it does a great job of explaining the importance of the sustainability agenda to BT, the strategy, drivers of values, risks etc.

Do let me know what you think of these examples, either by commenting on the blog or by emailing me direct.

David

Cash is king, particularly when times are hard

As we all know the NICE decade is at an end.  Gone are the years of No Inflation, Constant Expansion.  As we go through the process of de-leveraging the world economy and recalibrating risk, it’s an opportune moment to stop and take breath. As a leading academic put it recently, it’s the companies who make the right calls in the next 6 months who will come out of the downturn stronger and in a position of competitive advantage. How many times have I heard this advice or similar thoughts. The answer sadly is too many, I'm the wrong side of 50 and that's what grey hair and experience teach you. I've been here before and it’s going to be painful.

At times like this that the hard realities of business resurface and perhaps the most critical is the importance of cash. You can have the best business in the world, including a bank, but if you don't have cash to fund its working capital and growth its days will be numbered. Cash is also something that the more discerning investor worries about. I was therefore pleased to see Peter Reilly, a leading analyst at Deutsche Bank, expressing his strong view on the inadequacies of cash reporting in an article he wrote for the Financial Times.

I know Peter, and I'm not surprised by his outburst. He is a breed of analyst who takes real interest in the reports and accounts of companies. Yes he reads them, and yes he thinks they have value, provided they contain useful information. He points out that while balance sheets are important they tell you nothing about the critical flows in the business - he is bold enough to suggest that if you don't understand the cash flows, then you cannot claim to understand the company. For him the current status of cash reporting makes him wonder whether the standard setters are living on the same planet.

So if the model is failing investors so badly, why isn't it a priority issue for standard setters? Do read his article, I have a lot of sympathy for his views and position. What do you think? Contact me either by commenting on this blog or by email. Peter, some may think you come from an alien planet but I don't think you're alone.