Recasting the reporting model - A G20 priority
February 20, 2009
Last weekend's G7 finance ministers meeting under delivered in many people's eyes. It appears that those attending were merely able to repeat the positioning which has coloured many public pronouncements in recent months. Perhaps we shouldn't be surprised - politicians' priorities remain largely domestic regardless of the rhetoric, with most effort focused on trying to both stabilise and kick start the banking system.
I sense we are still some way off the time when the G20 leaders will be really engaged on an international agenda. It is therefore unclear what can be achieved at the next G20 meeting here in London in early April. Hopefully some momentum and focus can be given to the process of rethinking some of the critical components of the model needed to underpin economic activity over the next 50 years. This work has already started in earnest but needs to form part of a new coherent blueprint now that we're operating in largely uncharted waters. The challenge is made even greater by the fact we need solutions which are capable of joining the global with the local. Not an easy ask given the significant differences in regulatory motivations, governance structures and levels of transparency that exist around the world today. Put simply, the credit crunch has exposed the significant differences that exist in each national model - things we have been able to ignore in the past as unimportant.
From my discussions, I am also aware of a growing recognition in many territories that too many critical checks and balances in the system were operated in isolation and through an unthinking adherence to process. Insufficient regard was given to the critical linkages that exist between regulation, governance and reporting and which elements of each activity were really valued by market participants.
As the G20 leaders start to build the new blueprint they should recognise that the effectiveness of whatever model they devise will be in large part dependent on the scope and quality of the information set available. Asking the question "what do we want to know?" at an early stage may secure the right answer and save everyone a lot of effort in the long run.
Perhaps we should start with some big picture questions:
- Should the reporting model be focused on the needs of shareholders and investors or regulators - their needs are different and I would suggest neither have been well served in the past?
- Should the reporting model be accessible to the "informed business person" or is it acceptable or desirable to allow it to remain the domain of the technically elite?
- Do we need to rethink the whole reporting model if we are to avoid being overwhelmed by more disclosures and data being added to the existing model?
- Can we understand corporate performance and the motivations of management by just focusing on financial information? In fact has the narrow focus on financial information been a contributing factor to the credit crunch?
- How can the reporting model be developed to enhance management's accountability and assist shareholders in their decision making?
- How can we make long term sustainability live through the way companies report?
- How are we embedding carbon reporting into the mainstream?
For these reasons alone, I believe a project to consider how corporate reporting can be enhanced, is a public policy priority that cannot be ignored by the G20 leaders. The first step must be to determine what information is important and this process should involve all key stakeholders, particularly shareholders and corporates. Only once we have determined the information set should we determine which aspects need to be regulated and how. For many aspects of corporate performance regulation should be restricted to establishing a framework for disclosure after which it should be left to external organisations, both public and private, to challenge and expose the competent from the lucky and incompetent.
I am encouraged that there is a growing recognition that we need to fix various aspects of reporting. The question is not should we, the question is how do we? How do we create a model that provides more cohesive explanation of corporate performance which exposes the links between strategy, governance, remuneration, risk and KPIs?
If you're interested in giving more thought to the subject you might be interested in the attached letter and thought piece which I have been using in recent months to engage policy makers and other opinion formers. I'd encourage you to share these with others and remain hopeful that this issue will gain traction with the G20 leaders as they meet in London in April.
As always I am pleased to hear your views and comments on the postings and to take questions about corporate reporting.