The company secretary is particularly well-placed to carry out the function of a corporate stakeholder relationship officer (CSRO), argues Professor Mervyn King SC, Chairman of the International Integrated Reporting Council.
Companies operate in a completely changed world in the 21st century. It is a world which has financial crises, a climate change crisis, the use by companies of natural assets faster than nature is regenerating them, radical transparency, greater expectations by stakeholders and population growth.
With the growing population the demand for product will increase and yet the natural assets which need to be beneficiated are finite and diminishing. In order to bring these two projections together it is clear that companies cannot carry on business as usual. They have to develop long-term strategic plans that will enable them to make more, but with less.
Analysis of companies listed on the world’s great stock exchanges shows that, at least from the start of the 21st century, the majority of the market capitalisation of companies consisted of so-called intangible assets which would not be additives in a balance sheet according to the accounting standards set either by the International Accounting Standards Board (IASB) or the Financial Accounting Standards Board (FASB).
This is a clear indication that responsible investment is making a difference. Some of the world’s great asset owners have agreed to the United Nations Principles for Responsible Investments and a study done by the UNEP Financial Initiative and the UN Global Compact shows that 79% of asset owners and 95%
of investment managers are now integrating environmental, social and governance (ESG) information into their investment decisions.
Responsible investment is changing the landscape
Integrated thinking is exactly the opposite to silo thinking. Every company is dependent on relationships with its key stakeholders and the resources which it uses. All companies use six main capitals or resources, (namely financial, manufactured, human, intellectual, natural and social). Companies consist of interacting, interrelated and interdependent operations, functions, relationships and resources. The board, acting as a collective, has to take account of the connectivity between these factors.
In order for stakeholders – and particularly trustees of pension funds, which have become great shareholders of companies – to make an informed assessment of the sustainability of a company’s business, they need clear and understandable reporting. To be accountable, reporting has to be understandable. One is reminded of the immortal words of TS Eliot in his poem ‘The rock’: ‘Where is the knowledge we have lost in information?’
Annual reports were being issued between 300 to 400 pages in length and to the average user in incomprehensible financial and other reporting language. The financial report is essential and the standards set are more than adequate as are the assurance standards. But to the average user, who is a provider of capital indirectly through pension funds, the annual reports which have been issued over the last four decades have become incomprehensible. As already stated, to be accountable, that which we report has to be understandable.
Growing expectations for corporate responsibility
Consequently, all this led to a historic meeting in St James’ Palace, London, in 2010 where a who’s who of corporate reporting agreed that the way companies report at present is no longer fit for purpose.
With integrated thinking the sustainability issues material to the business of the company are identified as water is to the beverage manufacturer. This is embedded into the long-term strategy such as plans to reduce the use of water, reuse it, replenish it and recycle it.
At the same time, stakeholders expect the company to act as a decent corporate citizen and not to profit at the expense of the environment, human rights, integrity or society. We have seen companies where, in the supply chain, a supplier may have used child labour which has affected the reputation of the purchaser company causing it to lose a large part of its market capitalisation overnight.
The essential question being asked today is how has the company made its money and how will the company sustain value creation in the longer term in the very changed world in which the company now operates.
Assigning ownership of responsibility
In this regard, an ongoing communication is required with the key stakeholders of a company. Several companies have recently appointed a corporate stakeholder relationship officer (CSRO) whose job is to communicate with the company’s key stakeholders, find out what their legitimate needs, interests and expectations are, and report that information to management. Management can then manage operations and develop strategy on a more informed basis.
Boards today should add the agenda item ‘stakeholder relationships’ to every board meeting. At the meeting the CSRO’s written report on how the relationships with the key stakeholders are developing can be discussed. The board is thus informed throughout the 12-month reporting period about the company’s relationships with its stakeholders.
On 18 September 2012, the pilot programmers of the International Integrated Reporting Council (IIRC) – some 80-odd organisations who have now started the journey of integrated thinking and integrated reporting – shared their experiences with the working group and task teams of the IIRC.
Benefits for companies
Arising out of that meeting, Black Sun (a communications consultancy) did research on the benefits of integrated thinking and integrated reporting from a business point of view. Its findings are revealing. The research found that among these 80 iconic organisations, one of the most mentioned benefits of integrated reporting was the opportunity provided to connect teams from across an organisation, breaking down silos and leading to more integrated thinking. It improved internal processes leading to a better understanding of the business itself.
It also increased the focus and awareness of senior management and increased their interest and engagement in issues around the long-term sustainability of the business, which helped them gain a more holistic understanding of the business itself. It improved their ability to articulate the strategy and business model of the company. Also, they have started to identify ways to measure the value to stakeholders of managing and reporting on sustainability issues which have been embedded into long-term strategy.
A company may not be inclined to appoint another senior executive, the CSRO, but then management has to carry out this ongoing communication with the key stakeholders. This will reduce management’s time and focus on its role to implement the decisions of the board.
But what of the company secretary? The company secretary is particularly well-placed to carry out the function of a CSRO. Company secretaries are aware of the capital resources being used by the company and the identity of the key stakeholders of the business of the company. From attending board meetings and even executive meetings, they would know the strategic long-term thinking of the company.
The company secretary can actually carry out this role in addition to the functionary role as company secretary fulfilling both statutory and other duties. This of course would place an additional burden on the company secretary which may result in the company secretarial department having to be strengthened by the addition, for example, of a general counsel. The attributes of the company secretary would have to include the ability to network, to be a business analyst, to communicate and to have boardroom presence to make presentations in the boardroom.
Not every company will be able to appoint a CSRO, but every company has a company secretary who knows and understands the company’s interdependency on the resources used by it and its stakeholder relationships. They can carry out that role already informed. There could be a whole new future awaiting company secretaries and it is an exciting one.
Professor Mervyn King SC
Chairman, International Integrated Reporting Council
Mervyn King is also a Senior Counsel and former Judge of the Supreme Court of South Africa. He serves as Chairman of the King Committee on Corporate Governance. He is Professor Extraordinaire at the University of South Africa on Corporate Citizenship; Honorary Professor at the University of Pretoria; Visiting Professor in the Rhodes Investec Business School; and has an honorary Doctor of Laws from the University of the Witwatersrand. He chaired the United Nations Committee on Governance and Oversight. He has been Chairman of the Global Reporting Initiative and is the author of ‘Transient Caretakers’ (with Teodorina Lessidrenska) and ‘The Corporate Citizen’.
You can hear a podcast on this topic at www.CSAust.com/ knowledge-resources/podcasts. This article was first published in the February 2013 issue of ‘Keeping good companies’, the journal of Chartered Secretaries Australia. Professor Mervyn King can be contacted by email at: Mervyn@mervynking.co.za.