2011 WFE Award for Excellence Recipient Mervyn King's Acceptance Speech
The World Federation of Exchanges is an association of excellence. Included, of course, is the Johannesburg Stock Exchange which in the latest global competitiveness report of the World Economic Forum, was once again placed first in terms of market regulation. In this context of excellence it is indeed an honour that the WFE should make me the recipient of an Award of Excellence in recognition of the work I have done in leading national commissions on Corporate Governance, especially the South African commission, and for driving forward integrated reporting which is better suited to the changed world in which we live. I acknowledge the role of the many I have led in the various commissions, the GRI and the IIRC in promoting the ideal of integrated reporting.
The changed world in which we live is one with financial crises, climate change crisis, the use of natural assets faster than nature is regenerating them, evolutionary and revolutionary transparency, greater expectations from stakeholders and population growth. This changed world requires a change in corporate reporting.
The two great challenges of the 21st century are financial stability and sustainability. Both these issues are critical in the changed world which I have described. The global financial crises have shown that financial activity is interconnected. Markets need external regulation but they also need internal regulation, in short, good governance. Markets generally are broader than just the financial market. We have commodities markets, futures markets, derivatives markets. And it is here that we have the intersection of markets and sustainability: carbon, oil, coal, food markets, etc. and their derivatives have to be addressed by external and internal regulation. Common to better external and internal regulation is greater transparency and accountability. How do we achieve that? The answer, in my judgement, lies in reporting. And the reason is that research has shown that reporting influences behaviour.
Companies do not operate in a vacuum but in the triple context of commerce, the environment and society. The interconnectedness of markets and the carrying on of business as unusual because of the changed world, cannot be demonstrated to stakeholders by the form of corporate reporting to which we have all become accustomed. Stakeholders reading those reports have been looking into a rear view mirror!
Financial reporting has developed over the last 100 years into compulsory mainstream reporting but in that stream there is turbulence between the standards of the IASB and the FASB. Hopefully within the near future, convergence will take place. Over the last 12 to 15 years the sustainability stream of reporting has become mainstream. The confluence of these two mainstreams leads the preparer to an Integrated Report.
Research in the UK has shown that there is no common system for preparing the corporate report which companies have used for decades. With an integrated report the system is clear – the collective mind of the board to clearly articulate the connection between the material financial and sustainability issues of the business of the company and how the sustainability issues have been embedded into long term strategy in order to sustain value creation.
A board’s decision is a collective one. The collective mind of a board needs to be applied to ensure that value is not only created but is sustained. In this changed world, business can no longer be conducted as usual and great companies such as Unilever and Procter and Gamble have had to plan to make more but with a declining natural asset base. Consequently, they have started to embed sustainability into their long term strategic planning in order to give them a competitive advantage. Unilever and Procter and Gamble, in the next 5 to 10 years, plan to have all their factories in the 170 odd countries in which they operate, powered by renewable energy. Their products, which we all use, will be re-engineered so that we will use 50% less water and 50% less energy when we consume them. They have also dealt with traceability requiring their suppliers to address the sustainability issues pertinent to their businesses.
Financial reporting alone does not enable investors to make an informed assessment about the sustainability of the business of a company. And if it cannot do that in our changed world then it is no longer fit for purpose. What is needed is a report, in which the board as a collective clearly articulates the connection between the material financial and sustainability issues and how the sustainability issues have been embedded into long term strategy in order to sustain the creation of value. In short, corporate reporting is not what it used to be.
Integrated Reporting is a concept whose time has come. I have little doubt that commentators in 2020 will look back on the decade of 2000 – 2010 and describe it as the decade of stupidity, because generally companies with knowledge of the crises faced by the planet carried on business as usual. They continued to take, make, waste, as if the planet had infinite natural assets and an infinite capacity to absorb waste.
Boards cannot face the challenges of the 21st century with the same mindsets which created these crises. The mindsets have to change. They cannot overcome these problems with the decision making and reporting tools of the 20th century. In decision making account has to be taken of the legitimate expectations of stakeholders and in reporting the board must articulate how the non-financial performance contributed to the financial performance and vice versa.
The decade of 2010 – 2020, I believe, will be known as the decade of change. During this decade because of responsible investment by financial institutions and traceability sustainability issues will be embedded into long term strategy because it makes good business sense and it is the essential thing to do.
The decade of change will hopefully make life on earth sustainable for all those who come after us. And as transient caretakers of planet earth we have a moral duty to do just that.
Thank you very much for the honour bestowed on me which I accept on behalf of all the people around the world who have worked with me on the important issues of governance, sustainability and reporting.
About Mervyn King
Professor King is a Senior Counsel and former Judge of the Supreme Court of South Africa, as well as Professor Extraordinaire at the University of South Africa on Corporate Citizenship. He is Chairman of the Global Reporting Initiative in Amsterdam, and a member of the Private Sector Advisory Group to the World Bank on Corporate Governance. He is the Chairman of the Asian Centre of Corporate Governance, and Chairman of the United Nations Committee on Governance and Oversight.
He is presently the Chairman of Strate, the settlement arm of trades in equities, money market instruments and bonds in South Africa. He has chaired and been a director of companies listed on the London, Luxembourg and Johannesburg Stock Exchanges. He has consulted, advised and spoken on legal, business, advertising, sustainability and corporate governance issues in 43 countries and has received many awards. He is the author of “Transient Caretakers” and “The Corporate Citizen”.