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ICGN Statement and Guidance on Non-financial Business Reporting

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  • 1. ICGN Statement and Guidance on Non-financial Business Reporting
  • 2. Preamble The aim of the ICGN Statement and Guidance on Non-financial Business Reporting is to emphasise its importance within the overall context of company reporting and promote better understanding by setting out disclosure criteria that will assist companies in meeting the expectations of investors. As such, the ICGN Statement and Guidance aims to generate substantive dialogue between investors and company boards about the content and timing of non-financial business reporting. The ICGN Statement and Guidance Statement and Guidance on Non- has been developed by the ICGN financial Business Reporting was Non-financial Business Reporting published and launched at an ICGN Committee in consultation with ICGN meeting in Wilmington, Delaware. members. The first draft was published on 31st March 2008 and a consultation The ICGN Non-financial Business paper on the subject was sent to ICGN Reporting Committee recognises members for comment. A wide range of the work of existing bodies seeking responses were received and contributed to advance non-financial business towards the final draft. reporting and will engage with such bodies to promote consistency and There was further consultation at an broad stakeholder acceptance. The aim open meeting of the Non-financial is to co-ordinate existing efforts and Business Reporting Committee with thereby, in due course, lead to a single ICGN members at the 2008 ICGN reference point for companies. This will Annual Conference and AGM in Seoul, promote a cohesive view of investor Republic of Korea. ICGN members needs, and provide a more compelling attending the AGM voted to approve incentive for companies to embrace the draft document, after which the final the key principles of non-financial draft was ratified by the membership by business reporting. email. In December 2008 the ICGN 2 © International Corporate Governance Network 2008
  • 3. Contents Page 1. ICGN Statement on Non-financial Business Reporting 4 1.1 Introduction 4 1.2 Disclosure and transparency 5 1.3 The quality of reporting 6 2. ICGN Guidance on Non-financial Business Reporting 7 2.1 Background 7 2.2 Expectations of non-financial business reporting 8 2.3 Basic requirements from a shareowner 8 and investor perspective Annex 1: Terminology 11 Annex 2: Metrics 12 Annex 3: Resource list 12 Annex 4: Acknowledgments 14 Annex 5: Contacts 15 3
  • 4. 1. ICGN Statement The ICGN believes that reporting of relevant and material non-financial on Non-financial information is an essential part of Business Reporting the disclosure required to enable shareowners and investors to make informed investment decisions. We 1.1 Introduction use the term ‘non-financial’ to refer to information relevant to the assessment The ICGN considers that it is part of economic value, but which does not of the fiduciary duty of institutional fit easily into the traditional accounting investors, such as pension fund framework. Other terms such as trustees and fund managers who are ‘extra-financial’ are also sometimes agents for beneficiaries, to take into used to describe this information account all of the information which (see Annex 1 regarding terminology). assists in identifying and mitigating risk on the one hand, and assists in In a fast-changing, globalising world, identifying sources of wealth creation information material to investor on the other. To perform that duty decision-making is becoming increasingly adequately shareowners and diverse and dynamic. Long term investors require comprehensive success in managing a business in financial and non-financial disclosure today’s complex economic, by investee companies. environmental and social landscape is increasingly dependent on factors not The ICGN position on disclosure and reflected in financial statements and in transparency is set out in the 2005 some instances thought to be outside ‘ICGN Statement on Global Corporate the corporation’s sphere of concern. Governance Principles’ as follows: The same is true for investors when “Corporations should disclose assessing a company’s present and relevant and material information future valuation and ability to understand concerning the corporation on a timely its opportunities and risks. For example, basis, in particular meeting market until recently, climate change drew little guidelines where they exist, so as attention among investors and financial to allow investors to make informed analysts. Today, the confluence of decisions about the acquisition, accepted scientific evidence, the ownership obligations and rights, pricing of environmental impacts and sale of shares.” (e.g. through carbon trading schemes), more rigorous financial models and the surging volume of venture capital 4 © International Corporate Governance Network 2008
  • 5. investments in climate-friendly as well as the financial and non-financial technologies attest to the rapid risks and opportunities which may affect penetration of climate change into its ability to meet those objectives. financial markets. Similarly, a company’s approach to intellectual and human Companies in different industries, capital may have material consequences sectors and social contexts will face for reputation, capacity to innovate, different material and relevant issues. brands, alliances and other intangible Shareholders and investors should seek, assets that are critical to value creation and companies should provide, in the contemporary knowledge and information about the factors which information based economy. enable investors to judge future prospects as well as past performance. These and other issues, including supply chain management, human Non-financial business reporting resources, and environmental contributes to achieving the objectives of management systems, represent a disclosure and transparency as described growing class of variables that drive in the ‘ICGN Statement on Global company performance and valuation. Corporate Governance Principles.’ All can have an impact directly on However, it should not be considered in short and long-term value creation and isolation. It is important that all disclosure destruction. They can have an impact integrates consideration of financial and indirectly through effects such as non-financial risks and factors which may reputation loss or enhancement and affect the company’s ability to achieve its customer satisfaction and loyalty. strategic objectives. Non-financial business information, when combined with financial Sustainability reports serve as a useful information, can provide valuable purpose for multiple stakeholders in insight into the overall quality of informing the wider community, but issues management, a critical variable in the material to investors should be set out appraisal of the firm’s financial prospects. succinctly in the annual report prepared and/or approved by the board itself, and addressed to shareholders. This will 1.2 Disclosure and transparency demonstrate that directors regularly take non-financial issues into account. The ICGN encourages companies to report the information necessary for Non-financial issues that may be material responsible investment decision making. include: the impact of environmental risk, This is based on a proper understanding such as climate change; matters affecting of the company’s strategic objectives, employees, customers, suppliers and 5
  • 6. host communities; the development and forward-looking elements where this protection of intellectual property and will enhance understanding; other intangible assets which are crucial to success; ethics, and governance • be material, relevant and timely; arrangements. Other non-financial matters which are relevant may be • describe the company’s strategy, company or sector-specific. For example, and associated risks and reporting by pharmaceutical companies opportunities, and explain the may include information about the board’s role in assessing and multi-year drug development pipeline, overseeing strategy and the while retail companies may report on management of risks and opportunities; same-store sales. • be accessible and appropriately integrated with other information 1.3 The quality of reporting that enables investors to obtain a whole picture of the company; Standardised reporting within and between companies greatly assists • use key performance indicators investor decision making and that are linked to strategy and comparative analysis. The ICGN facilitate comparisons; welcomes efforts to develop acceptable common understanding, • use objective metrics where they standards and guidance for disclosure apply and evidence-based estimates and reporting to support the financial where they do not; statements which are being pursued by international standards-setting • be strengthened where possible bodies such as the International by independent assurance that is Accounting Standards Board (IASB) carried out having regard to established and the wider corporate reporting disclosure standards applicable to community. The value of qualitative non-financial business reporting, and quantitative reporting alongside such as those issued by the IASB. the financial statements should not be underestimated, nor the importance of The above examples used to illustrate judgement in ensuring the relevance of these guidelines are not by any means an non-financial business reporting. exclusive list. They are designed only to illustrate the need for high standards of The ICGN considers that non-financial non-financial business reporting which, business reporting should: when combined with conventional financial reporting, will enable well- • be genuinely informative and include informed investment decision making. 6 © International Corporate Governance Network 2008
  • 7. 2. ICGN Guidance issue is whether this process can be made more efficient and whether it on Non-financial might benefit from comparable metrics. Business Reporting Efficient asset allocation depends on the ability to compare companies within sectors and ultimately across 2.1 Background sectors and this requires a degree of standardisation of definitions. Conventional financial reporting primarily describes what has already To complement the information provided occurred, for example, revenues, net by traditional accounting, non-financial earnings and depreciation of assets business reporting should provide during a specified time period. These information that helps put historical are essential to understanding a performance into context, and portrays company’s financial results and the risks, opportunities and prospects condition at a point in time. However, for the company in the future, be that traditional accounting is generally two, five or ten years or even longer in transaction focused and ill-equipped to certain industries. It has an important capture intangible drivers which in the role in mitigating the short-termism that modern economy increasingly currently afflicts financial analysis and underpin value creation. The so-called other approaches to valuation and ‘value gap’ between more traditional in helping investors understand a financial accounting measures of value, company’s strategic objectives and such as book value on the one hand its progress towards meeting them. and market capitalisation on the other, suggests a need to go beyond Non-financial business reporting conventional accounting. Investors should seek to reflect the complexities need to understand what drives value. inherent in a contemporary business - the interdependence of financial and Non-financial business reporting can non-financial factors on its prospects; help to inform the investment process management’s understanding of this by revealing in both quantitative and interdependence; its ability to harness qualitative terms those drivers that this for value creation; and awareness increasingly shape company of the risks and opportunities that flow performance. The existence of the from non-financial factors. ‘value gap’ suggests that investors understand the potential importance While failure to recognise these risks of non-financial business reporting in and opportunities may not immediately making investment decisions, and the translate into financial outcomes, this is 7
  • 8. unlikely to be true in the long-term, businesses provide information on which is the time horizon of greatest performance against measures that are concern to institutional investors and widely accepted in the sector concerned. their beneficiaries. It is also generally helpful for information to be provided on how the measures have been developed and for a 2.2 Expectations of non-financial consistent approach to be adopted from one year to another so that business reporting changes in performance over time can be evaluated. Different stakeholder groups and interested parties have different needs Critically, businesses need to recognise and expectations about the nature of the link between improvements in non- information relevant to their decision financial areas and in cash flow or the making, depending on the issues of share price. Such improvements can particular concern to them. Investors occur after a time-lag which highlights seek information about how a company the importance of relevant non-financial creates financial value and deals measures as they may act as a lead with issues including governance, indicator of future performance. It is environmental, social and ethical issues also important to avoid measuring too that can affect its financial performance many things leading to a wild profusion and value over time. of peripheral, trivial or irrelevant measures. It is increasingly recognised that relationships with key stakeholder groups including customers, 2.3 Basic requirements employees, and communities can from a shareowner and affect the company’s financial investor perspective performance and future value. In other words, an intangible business value, The ICGN recognises that there is a positive or negative, may be attributed need to balance corporate disclosure to a company’s relationships with with protection of commercially its stakeholders. sensitive information. The purpose of setting out guidance on non-financial Care needs to be taken to make sure business reporting from a shareowner that measures selected are relevant to and investor perspective is to indicate the specific circumstances of the to companies the type of reporting business. It is useful for investors which is useful and to encourage seeking to compare the performance the investment community to solicit of different companies in a sector if such information. 8 © International Corporate Governance Network 2008
  • 9. Bearing in mind that non-financial and it should be made available as business reporting should be both soon as reasonably possible so that quantitative and qualitative in nature, investors are able to make informed disclosures that are valuable to long decisions based on it and the term investors will: likelihood of a false or distorted market is diminished. • be genuinely informative and include forward-looking elements where this Information should be focused in order will enhance understanding. for it to be genuinely useful. Too much information that is not relevant will Non-financial business reporting dilute the message. The materiality should support and enhance the (or not) and relevance of the issues information in the financial statements. covered will be determined by the It will set historic performance in the company’s circumstances and the context of a company’s strategy and sector within which it operates, market conditions and will offer insight rather than being determined by into the potential for future success. a prescriptive approach to what Such forward-looking elements include should be reported. trend data that can help investors to assess the company’s strategy and • describe the company’s prospects. Where forward-looking and strategy, and associated risks historical non-financial business and opportunities, and explain reporting is provided, it should explain the board’s role in assessing how it helps to form an assessment of and overseeing strategy and the company’s strategy and prospects. the management of risks For example, does it indicate and opportunities. significant trends that are not evident from the financial statements and, if The explanation should focus on the so, how these trends are likely to affect key points necessary to help investors the company? understand not only the strategy, risks and opportunities but also form • be material, relevant and timely. a view of the appropriateness and effectiveness of the governance Non-financial business reporting is approach adopted by the board in material if it might reasonably be its oversight of these matters. expected to affect investors’ decisions about the acquisition and sale of • be accessible and appropriately shares or the exercise of ownership integrated with other information that rights and obligations. Non-financial enables investors to obtain a whole business reporting should be timely, picture of the company. in particular meeting market guidelines 9
  • 10. Non-financial business reporting should comparable over time, unless be in a form which shareowners and circumstances change and they investors can reasonably be expected cease to be appropriate. to understand. For example, complicated technical terms should be explained • use objective metrics where they and care should be taken to ensure apply and evidence-based estimates that the information is clearly written where they do not. and presented. It should be appropriately integrated with and presented Where objective measures of alongside financial information in intangibles are relevant and can be companies’ reports to shareowners. obtained, such measures should be used. In the absence of relevant • use key performance indicators objective measurements, estimates that are linked to strategy and and commentary should be provided. facilitate comparisons. Narrative discussion and judgement can be useful in conveying information. An indicator is likely to be important Both metrics and judgement are valuable and relevant to strategy if it is used by in non-financial business reporting. the board in monitoring the company’s performance in achieving its strategy • be strengthened where possible and if it is therefore likely to affect by independent assurance that is board decisions. However, for non- carried out having regard to financial business reporting to achieve established disclosure standards its potential to assist in efficient capital applicable to non-financial business allocation, it could be argued that reporting, such as those issued by consistent definitions and industry the IASB. norms may be needed for certain metrics even if they are not used Independent assurance about the by management. extent to which non-financial business reporting has followed established Indicators disclosed in non-financial measurement and reporting standards business reporting should facilitate can be useful to enhance the credibility comparisons with other companies and reliability of the reported and for the same company over time. information. Companies should adopt Where sector-specific practices have a clear and disclosed policy towards emerged for indicators, companies obtaining assurance. should follow them unless they have reasons for considering them inappropriate. Companies should disclose indicators that are 10 © International Corporate Governance Network 2008
  • 11. Annex 1: Some companies have responded to these various demands for additional Terminology disclosure by producing “Sustainability Reports” either as part of their annual Non-financial business reporting is a reports to shareholders or as stand wide-ranging term which can include alone reports. both regulated and voluntary disclosure by companies. From a shareowner and In recent years, many companies have investor perspective, it is information, embraced various forms of non-financial other than financial statements, which business reporting, notably in terms is relevant and material to investment of their environmental and social decision making. This may include impacts. In Europe and Japan, there descriptive information around a has also been experimentation with company’s operation and strategy various types of intellectual capital or other disclosures which may bear statements. However, there is as yet on intangible assets and value drivers, no generally accepted definition of and the company’s “social license what constitutes non-financial business to operate”. Other terms such as reporting, though significant progress ‘extra-financial’ and ‘narrative reporting’ has been achieved. are sometimes used to describe such information. In a welcome initiative, the IASB in 2008 began to develop non-mandatory The United Nations’ Principles for guidance for a narrative report Responsible Investment (UNPRI) described as ‘Management encompass a significant subset of Commentary’. The IASB aims to the terms covered by non-financial develop the principles, qualitative business reporting. In this regard, characteristics and essential content the UNPRI has adopted the term, elements necessary to make Environmental, Social and Governance Management Commentary useful (ESG) which covers factors that investors, to investors. This is an important step who wish to be seen as ‘Responsible towards achieving global consensus Investors’, should take into account and on non-financial business reporting equally, ESG disclosures expected of whilst recognising diverse legal, companies. ‘Corporate Social cultural and regulatory environments Responsibility’ or simply ‘Corporate in different jurisdictions. Responsibility’ are widely used terms encouraging positive corporate social and environmental practices and, inter-alia, their disclosure as part of non-financial business reporting. 11
  • 12. Annex 2: and emerging views about topics such as workplace, social and ethical Metrics practices in the field of non-financial business reporting. The impact of Credible and verifiable measurement of global and economic trends should non-financial business reporting is vital. be also taken into account. Often the However, the development of valid impact of such trends is immediate metrics is challenging due to a variety on the financial reporting side, of factors including the measurement but they also have a long term impact of intangibles, claims of proprietary on corporate sustainability and value. information, and comparability across qualitative data elements. The metrics The ICGN aims to encourage companies for non-financial business reporting will to develop and use metrics which suit frequently be determined by the their particular circumstances while specific characteristics of a company pointing to the value of developing and the sector in which it is operating. consensus around components which However, there is a growing consensus allow for comparison. It aims to help on a number of components that will foster such a consensus without have widespread relevance across prescribing any particular solutions. multiple sectors. The ICGN Non-financial Business Reporting Committee’s own Annex 3: deliberations, as well as the work of Resource list other interested groups, highlight a number of broad subject areas as Some examples of useful guidance being integral components of non- documents, standards and studies financial business reporting. These relating to non-financial business include not only corporate governance, reporting, including those which is a central focus of the ICGN’s recommended by ICGN members mission, but also areas such as who responded to the consultation intellectual capital, human capital, the on the subject, are listed below. environment, customer goodwill, Further examples will be available in reputation, human rights, anti-corruption, due course on the ICGN website at suppliers and community relations. www.icgn.org. These areas may themselves be redefined or reshaped over time as the field of non-financial business reporting evolves often in line with developments in legal and regulatory requirements 12 © International Corporate Governance Network 2008
  • 13. International references • Canadian Institute of Chartered Accountants, ‘MD&A Guidance on • CFA Institute, ‘Environmental, Preparation and Disclosure’ Social, and Governance factors • Deloitte, ‘Added value, long term: at Listed Companies: a Manual for non-financial sustainability key Investors’ (2008) performance indicators on their • Global Reporting Initiative, way into financial reports of ‘G3 Sustainability Reporting German companies’ Guidelines’ (2006) • DVFA – Society of Investment • International Accounting Standards Professionals in Germany, Board, ‘Management Commentary Committee on Non-financials, Discussion Paper’ (2005) ‘Key performance indicators in the telecommunications sector’ • International Auditing and Assurance Standards Board, ‘ISA 720 Other • Institute of Chartered Accountants Information in Documents Containing in Australia, ‘Extended performance Audited Financial Information’ reporting: an overview of techniques’ • UNEP Finance Initiative and UN • Institute of Chartered Accountants Global Compact ‘Principles for in England and Wales, 'Sustainability: Responsible Investment’ (2006) the role of accountants' (2004) • UNEP Finance Initiative, Asset • The Norwegian Society of Financial Management Working Group, Analysts, ‘Recommended guidelines ‘Show me the money – linking for the reporting of additional environmental, social and information on value creation’ governance issues to company • Universities Superannuation Scheme, value’ (2006) James O’Loughlin and Raj Thamotheram, ‘Enhanced analytics for a new generation of investor’ National references • US Securities and Exchange • Accountability, ‘AA100 Accountability Commission, ‘Management’s Principles Standard’ (2008) Discussion and Analysis of Financial Condition and Results of Operations’ • Accounting Standards Board (UK), ‘Operating and Financial Review’ • Australian Institute of Company Directors & PricewaterhouseCoopers, ‘Shareholder friendly report’ 13
  • 14. Annex 4: George Dallas, F&C Management Ltd (UK), Shade Duffy, AXA Investment Acknowledgments Managers (UK), Susan Enefer, BC Investment Management Corporation The ICGN is grateful for the work of (Canada), Helen Eyles, Australian the members of the Non-financial Institute of Company Directors Business Reporting Committee in (Australia), John Jarrett, developing the Statement and GovernanceMetrics International (USA), Guidance who include: Professor Oscar Jasaui, Pacific Credit Rating Co Margaret Blair, Vanderbilt University (Peru), Guy Jubb, Standard Life (UK), (USA), Anthony Carey, Mazars (UK), Mervyn King, Brait (South Africa), Sir Frank Curtiss (Chairman), RAILPEN Andrew Likierman, London Business Investments (UK), Joyce Haboucha, School (UK), Steve Maslin, Grant Rockefeller & Co (USA), Edith Lohman, Thornton (UK), Ola Peter Krohn Gjessing, MacKenzie Partners Inc (USA), Jon Norges Bank Investment (Norway), Lukomnik until July 2008, Sinclair Mark Preisenger, Coca Cola Company Capital (USA), Alan MacDougall until (USA), Anthony Williams (UK), Geoff October 2008, PIRC (UK), Phil Spathis, Rothschild, Johannesburg Stock Australian Council of Superannuation Exchange (South Africa), Mark van Investors (Australia), Dr Daniel Clieaf, MVC Associates International Summerfield until October 2008, (USA), Jeff Willemain and Steve Maslin, Universities Superannuation Scheme Global Public Policy Committee (USA). (UK), Dr Ariane van Buren, CERES (USA), Dr Allen White until January The ICGN is also grateful for 2008, Tellus Institute (USA), contributions from Anita Skipper Alan Willis, Canadian Institute of and Steve Waygood, Morley Fund Chartered Accountants, (Canada), Management, Karina Litvack, F&C and Anne Simpson and Kerrie Waring, Management Ltd, Brian Singleton ex-officio, ICGN. Green, Institute of Chartered Accountants in England & Wales, The Statement and Guidance were Alison Thomas, PwC, Peter Montagnon, developed in consultation with ICGN ICGN Chairman, and the ICGN Board members and comments from the for their support. following individuals were gratefully received: Bruce Beebe, Deloitte (USA), Tom Bonham Carter, Armstrong Bonham Carter LLP (UK), Robert Colson, Grant Thornton LLP (USA), 14 © International Corporate Governance Network 2008
  • 15. Annex 5: Contacts For more information about the work of the ICGN Non-financial Business Reporting Committee please visit the ICGN website at www.icgn.org or contact: Frank Curtiss Kerrie Waring Chairman Chief Operating Officer ICGN Non-financial Business ICGN: Reporting Committee: By email: By email: frank.curtiss@icgn.org kerrie.waring@icgn.org By phone: By phone: +44 (0) 207 256 8003 +44 (0) 207 612 7098 By post: By post: Railpen Investments ICGN Secretariat 6th Floor, Broad Street House 16 Park Crescent 55 Old Broad Street London W1B 1AH London EC2M 1LJ 15
  • 16. INTERNATIONAL CORPORATE GOVERNANCE NETWORK 16 Park Crescent, London, W1B 1AH, United Kingdom Phone: +44 (0) 207 612 7098 Fax: +44 (0) 207 612 7047 Email: secretariat@icgn.org Web: www.icgn.org Price £25.00