It's hard to keep up with all that's happening in the world of corporate reporting. Last week I had the pleasure of attending the IIRC's pilot kick off meeting in Rotterdam. It was a great two days with a real sense of purpose and real engagement from all the pilot companies who attended from around the world. Interestingly there was a clear ambition from all to use the pilot programme to change not only the way they report externally, but just as importantly to influence the mindset and business practices within their organisations. Put simply, integrated reporting starts with an integrated mindset.
Here in London there is also a growing momentum for change. Ed Davey at the Department for Business Innovation and Skills (BIS) is leading a consultation to rethink the structure of annual reports. The paper entitled 'The future of narrative reporting' aims to sharpen the reporting model and make key information easier for investors to find. Central to the proposals is the idea to re-structure the annual report, to focus it on two elements: the strategy report and the directors’ disclosure report. Through this action I believe BIS can encourage a behavioural change in the reporting system, one that encourages companies to focus on what is material to an understanding of business performance - which in the long run can only enhance the efficiency of the market. I’d encourage you to read the consultation document and PwC's news bulletin and most importantly provide your thoughts and comments by the deadline of 25 November 2011.
I also attended the launch of the "Financial Reporting Lab" sponsored by the Financial Reporting Council. Stephen Haddrill the FRC CEO spoke hearteningly about how "the financial reporting community has chosen to come together to thrash out ways of making reports more useful to investors." He went on to say: "Finding solutions will not be easy. The nature of global business, complex transactions and financial reporting standards all contribute to the situation we find ourselves in today. But we are encouraged by the broad support it has received from the business, investor and accounting communities."
PwC fully supports this initiative and has played a central role in its creation and we believe it is a great example of the sort of collaborative effort that will build trust for all parties and has the potential to deliver the meaningful change corporate reporting needs if it is to retain its relevance.
Alongside all this PwC has just published a paper entitled "Corporate reporting - From Compliance to Competitive Edge" giving our views on why today's business information and reporting is falling short, what's driving change, where insight is missing and how companies can take action. This report incorporates some of the findings from our annual survey of the quality of FTSE 350 reporting and this, together with what good reporting looks like, can be found on http://www.pwc.com/corporatereporting
I trust the above provides you with sufficient bedtime reading! But seriously, there is a lot going on and I'm particularly encouraged that most of this activity is trying to break the current reporting mould in order to make reporting more relevant and valued.
As always I am pleased to hear your views and comments on the postings and to take questions about corporate reporting.
Ian Powell, PwC UK Chairman 2011 Building Public Trust Awards keynote speech
This is the fourth successive year that I’ve had the privilege of welcoming you to our Building Public Trust Awards and it’s also the fourth time that I’ve given this speech against the backdrop of significant market uncertainty and a fragile economic outlook. One day I dream of speaking when the outlook is stable and sunny but I suspect that may be a little time off. Having said that I’m hoping to avoid the kind of drama we experienced here four years ago.
If you were here in 2008, you’ll recall that the US market was in freefall, congress had voted to throw out the original TARP reform package and we were all relying on Mary’s hotline back to ITN for regular updates. I remember the tension, the uncertainty, and the feeling that we were standing on the edge of an abyss. Looking back now it’s sobering to think how small the numbers in the original $300 billion TARP package now seem in comparison to the trillions that have since been spent trying to bring stability. And given developments in Europe in recent months, you’d have to be brave to think that we are anywhere close to being out of the woods.
Despite the uncertainty it’s interesting that in private many business leaders are more confident about their business prospects than the general economic outlook would have you believe. In part this reticence to be more overtly confident may be due to natural caution or just fear of tempting fate or more likely a feeling of fragility given factors beyond our control.
Four years ago I told the story of a young Sir Christopher Hogg being mentored by Arnie Weinstock and being told not to worry about events that are beyond your control and that his job as CEO was to focus on the things he could affect in order to proof his business against such events – good advice, and I do think that the vast majority of CEOs and Chairmen have held their nerve and done an admirable job of leading their businesses through testing times. But we all know that restoring our collective economic fortunes depends on the ability of businesses such as those represented here tonight to generate the sustainable growth so necessary to work our economy back to prosperity. We also know that the foundation for this growth depends as much on successfully rebuilding trust and confidence in business as it does on deficit reduction, quantitative easing and regulatory reform.
If we are to rebuild this trust in business we must make our case for business as a positive influence in society. I know that many of you in the room are already very active on this agenda and I’ll touch on specific examples as to how this is already being articulated in a progressive way by some companies, and I also want to explain the part I want the accounting profession to play.
Let me start by re-stating the case for business. It has become fashionable in some circles to deride the role that business plays in society. Too often in the past I think we have conceded the initiative to those people who constantly refer to failings but don’t give any credit to the vast majority of British businesses that make an immense and vital contribution to every aspect of our lives.
But we can’t rely on others to argue our case for us, as leaders we have a personal responsibility to champion the pivotal role of business. We need to explain our contribution and be prepared to argue our case.
I think we need to be bold – some suggest it’s about creating a new business ethic, I think it’s more about reminding ourselves and others of the contribution that business makes; in creating the goods and services we all rely on, providing people with jobs and a sense of community, and creating the financial prosperity that pays the taxes which support public services.
I suspect we all take this for granted - but if we are to build trust and retain our licence to operate we need to work with and gain the support of key influencers to build a consensus around the fact that business is good for the country.
Last week I hosted a meeting of our European Leadership Team in Istanbul and a very successful Turkish businessman came to speak to us. He has built a manufacturing company that now has a turnover of over two and a half billion dollars operating in eleven countries. He described Turkey’s turnaround in recent years and he attributed it to Government, regulators and businesspeople all pulling in the same direction. He described how Turkey had learnt from its largely self inflicted difficulties of the past and now benefits from a stable political and business leadership working together. I’m sure you have all seen this collective spirit in other parts of the world especially in Asia.
We need to match this sense of collective spirit, and build constructive cooperation between Government, regulators, investors and business. We must avoid stereotyping, and the tribal and partisan behaviour which is unsettling and counter-productive. Until we can learn to respect and trust each other we can’t expect to regain public trust. The good news is that many of the key players who can drive this process are in this room.
One way to do this is to focus on making business more transparent; which as you know is a central theme of tonight’s awards as we celebrate all that is good in reporting.
Here we should take heart. I’m really inspired by the actions of some of our peers - companies who have gone the extra mile to explain the complexity of what they do, the impact they have and why society should value their contribution. Just looking at two specific examples:
Firstly, Puma, the sports business, which has voluntarily calculated and reported on the cost of carbon and water across its entire supply chain. Their environmental profit and loss account shows a total cost of greenhouse gas emissions and water consumption of almost 100 million Euros – a metric which the company has committed to measure itself against, and secondly
Rio Tinto, which has just produced a detailed separate report to explain its tax contribution in every country in which it operates.
These companies have looked at the changing dynamic and how they can shape their commercial environment and gain competitive advantage at the same time. The precedent they have set will quickly become the norm and I would encourage everyone to take a look at what they have done. I also know that there are many other companies thinking about social economic reporting which focuses on providing a much more macro view of their business.
This is perhaps a timely moment to remember that improved transparency and the quality of reporting is for the most part evolutionary not revolutionary. Over the last nine years of our Building Public Trust programme the quality of reporting in the public and private sectors has improved beyond recognition - and ahead of the regulatory curve - and I’d like to think that these annual awards have played their part. And its timely to thank the Building Public Trust judges, under the new chairmanship of Charles Tilley for all their hard work. It’s greatly appreciated. I’d also like to thank the National Audit Office and many of their staff who have worked with us in promoting good reporting in the public sector. Looking ahead, I suspect that public sector and private sector reporting may converge more given the drive for efficiency in the public sector and the need for the private sector to better explain itself.
Now, having set the bar so high for business it is only fair that I should put the accounting profession under the spotlight. I was down in India a few months ago and I watched a live interview Warren Buffet gave to an Indian news programme. He was announcing Berkshire Hathaway’s moves into the Indian Financial Services market and the interviewer asked Buffet what he wanted his legacy to be, what he wanted to be remembered for, and quick as a flash he said “I want to be remembered as the world’s oldest man!’ I guess I’m not as ambitious as Mr Buffet but I would like my profession to continue to thrive. We are one of the world’s oldest professions but I hasten to add, not the oldest!
I’m proud of my profession. Our role is to help companies and markets operate efficiently by offering services that inform decision making. But at times we have appeared too self-interested and we haven’t done enough to explain our purpose and the value that we add. We make a real contribution to society by creating high quality jobs and training great business leaders many of whom are here tonight.
Too much of what we do is hidden and taken for granted. It’s easy to forget the central role we play in building trust and ensuring the market’s overall integrity and as many of you know we are presently under intense scrutiny.
For the avoidance of doubt at PwC we accept that the profession has to change. And that includes accepting new regulation where it is grounded in evidence and would be proportionate for our clients and our firm. We welcome many of the reforms to our profession currently being promoted by the EU Commissioner Michel Barnier.
Creating EU passports for qualified accounting professionals will promote greater mobility. And removing artificial barriers to entry to the audit market - such as restrictive covenants - and promoting better dialogue between auditors and financial regulators are all reforms we support.
However, Commissioner Barnier also proposes to introduce mandatory audit firm rotation and to require joint audits - which threaten a level of change and cost that will damage the corporate and investment communities that we serve, as well as threatening audit quality.
I want to thank many of you for getting engaged in this debate. I could go on for at least a couple of hours on this topic but you’ll be pleased to hear that this is the end of tonight’s broadcast on our regulatory challenges!
When I spoke at these awards twelve months ago I set out what even I thought was an ambitious plan for the auditing profession and the business community. We called the plan the ‘Progressive Agenda’ and I’d like to take a couple of minutes to give you an honest report on progress.
Our first priority was to raise the standard of our own auditing. We retain a relentless focus on improving the quality of a PwC audit because we know we can and must do even better. You can read more about this in our own recently published Transparency Report and in the report published by the independent Audit Inspection Unit earlier this year.
Our second key objective was to improve the transparency of the audit process. And here there’s good progress to report. Six of our FTSE100 clients have already adopted a more expansive audit committee report and more have said they intend to do so this year.
Progress has, predictably, been more limited on our longer term objectives around shaping the future of reporting and audit – changing standards and legislation takes time. But there is some good news;
Ed Davey at BIS is leading a consultation to rethink the structure of annual reports, aiming to make them easier to understand by relegating some compliance information to a separate disclosure report. We fully support this initiative and the FRC in their wider efforts to “cut the clutter” and to create a new ‘reporting lab’ where business, investors, auditors and regulators can come together to develop and test new thinking. This is a great example of the sort of collaborative effort that will build trust for all parties and has the potential to deliver the meaningful change corporate reporting needs if it is to retain its relevance.
One of the key challenges this new ‘reporting lab’ has to address is how to develop reports that are comprehensive, but not overly complex.
I think Steve Jobs got it right when he said: “Simple can be harder than complex: You have to work harder to make it simple. But it is worth it in the end because once you get there you can move mountains.”
But applying this mantra of simplicity and focus will require all of us - regulators, companies, investors and auditors – to be willing to really engage and be prepared to take some calculated risks. And if companies are going to go the extra mile, if auditors are to act decisively in supporting this kind of change we need to put the creation of a sensible "safe-harbour" on the table for discussion.
So our work on the Progressive Agenda will continue. We will be focusing in the next 12 months on actions which support BIS and the FRC’s efforts to improve corporate reporting. Closer to home we’ll concentrate on further improving the transparency of the audit process.
Outside this agenda we have continued our efforts to improve our own transparency. I announced in the Summer the creation of a new Executive Board position focused on reputation and public policy, something that seems to be resonating with many boards and we’ve created a new Public Interest Body headed by Sir Richard Lapthorne and made up of a majority of senior independent non-executives from the public and private sectors. Its remit is to enhance confidence in the public interest aspects of our firm’s decision making and it’s a welcome independent influence.
While we take our work on building public trust very seriously, we know we don’t have a monopoly on good ideas and we are planning a series of external debates, networking events and white papers which I hope many of you will participate in to stimulate fresh thinking. We will also be launching a major research project looking at how companies can better understand trust. Some of you in this room will be asked to participate, and I can promise that if we find the Holy Grail you'll be the first to know!
Before I forget, there is one important new venture I want to mention so please forgive me for advertising something that we are very proud of. Next to our new More London office on Tooley Street there’s an old fire station which we have refurbished as a hub for social enterprise. We have worked together with the School for Social Entrepreneurs, the Simon Boyle Foundation, local and national government and other corporates and charities to bring together a range of activities all focused on developing new social entrepreneurial businesses. But the real advert is for the excellent new Brigade restaurant on the ground floor which we are running with DeVere and The Beyond Food Foundation which trains homeless people for careers in catering. I’m shameless in plugging the restaurant at every opportunity so please visit Brigade and see it for yourself, it’s a great cause, all profits go back into the foundation and the food is fantastic!
By the time we meet for next year’s Building Public Trust dinner London will have hosted what I fully expect to be the best Olympic Games ever. So we should look to the Olympic spirit for optimism.
I’m sure many of you get the opportunity to meet would be Olympic athletes and at PwC we’re lucky enough to have two Great Britain competitors – Ben Smith and Iain Mackay - one a hockey player, the other a rower. Coincidentally Ben and Iain compete in sports where they use extremely large pieces of wood. I’m not sure what that says about the nature of those we employ but both had no trouble negotiating their time off for training! The commitment Ben and Iain show and their desire to compete is a state of mind that we all admire. We need a similar focus and ambition in the business world.
I began this evening by making the case for leaders taking the initiative to rebuild trust in business. We need to play our part and be able to explain the purpose and demonstrate the value of business. It’s central to restoring our country’s wider economic fortunes. With the pressures you face, and the huge demands on your time, I’m delighted to see so many senior figures from the public and private sectors here tonight. It demonstrates the importance that you all attach to building public trust.
Despite the current economic conditions and the scale of the challenges we all face I do believe we can take the initiative to build a consensus on the way forward. Business is a force for good in society and it can and should be trusted.
More than 300 business leaders, senior civil servants, regulators, standard setters and members of professional bodies went to the Building Public Trust Annual Dinner last night, at which the panel of independent judges recognised three organisations:
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