Integrated reporting underpins sustainable capitalism - Mervyn King wows #findaba16

Mervyn King told the Finance Indaba Africa that business has shifted from thinking about short-term profit to focusing on sustainable capitalism, but that there is much still to be done.

Mervyn King, chairman of the King Committee on Corporate Governance in South Africa, took to the podium at the Finance Indaba Africa on14 October 2016, to explain how business is shifting and must shift from thinking about short-term profit to focusing on sustainable capitalism.

"There have been three major shifts in the corporate world in the 21st century," he said. "First of all, we have shifted from silo thinking and silo reporting to integrated thinking and integrated reporting. The second is from a financial capital market system to an inclusive market capital system. And the third major shift is from short-term profit to sustainable capitalism."

He started with a history lesson for the audience:

"In order to understand this, we need to go back 150 years. In the last part of the 19th century, there were unlimited liability companies. Shareholders would invest capital and have unlimited liability for claims from creditors."

The, he said, because politicians wanted to create more jobs to fulfil promises to voters, wealthy families said that they should create an entity in which they had limited liability, and they would put in the money. So the joint stock markets created a "person" - a company in which risk could be ring-fenced. The majority of directors were the members of wealthy families that had put up the capital.

"Then the shareholders said that they were in the back of the queue in terms of bankruptcy. The managers were taking risk. They wanted some protection. So they were given the right to sue their directors if they felt that they had failed in their duty of care to the company. This exacerbated the shareholder primacy principle."

King described how this played out in action when, in 1919, Henry Ford made excessive profits and wanted to increase the wages of his employees to motivate them, and his shareholders the Dodge Brothers took him to court saying that he must declare his excessive profits as dividends, which the judge upheld.

"Imagine someone going to court to court today saying you must pay more dividends and less wages," said King.

Instead, he said, today, a shareholder cannot even remove a company's pencil or he or she would be committing a theft.

Up until the end of the 20th century, companies were seen through a financial lens. They were required to deliver value for their shareholders and corporate reporting was only financial. "In automotive terms, this was like driving with a rear-view mirror but no windscreen. It was very dangerous to drive and impossible to steer."

Then, King said, planet Earth reached a tipping point. Suddenly civil society and investors started to realise that a company cannot operate with just shareholders. "There are many stakeholders and companies must have a long-term strategy in a resource deprived world that would maintain value creation in a sustainable manner."

He explained that this has played out in many different stories in many different industries. One example is that no member of the board of Nestle would ever have believed that Greenpeace would have posed them a risk - but the civil society movement started to create problems around the deforestation of the orangutan's habitat in Malaysia in the production of palm oil, which had an impact on the company's public profile and profits.

"How we make money has an impact on the three critical aspects of the economy, society and environment," said King. "If the impact is positive, we create value. If it is negative, we start destroying value."

This thinking led to a meeting by the United Nations in Geneva, which concluded that sustainable reporting could not take place in a silo. The drivers of change in the 21st century - climate change, using resources faster than they can regenerate, radical transparency through social media, greater expectations from the public, population growth and the fourth industrial revolution - meant that we could not carry on with business as usual.

"We have to learn to make more with less. We now have to look at the value of a company through the whole value creation process and whether it's going to sustain that. Companies are expected to embed in their strategies how they are dealing with critical social and environmental aspects."

He gave the example of how Coca-Cola, a company that had spent 120 years focusing on output, and the wealthiest brand on the planet until Apple took over, had to bend to the demands of society. Three years ago, civil society alleged that Coca-Cola was the cause of obesity. Mexico slapped on a sugar tax and sales started flattening. So Coca-Cola introduced a new strategy. The beverage company is no longer market to children under twelve, and it has started to encourage physical activity in that age group. They have also tried to create a beverage with as low a calorie count as possible.

"It's extraordinary. Here is a company that for 120 years had focused on output, suddenly changing their strategy to deal with outcomes," said King. "King 4 now says that every board meeting should have an agenda item - 'inputs to outcomes'."

Boards have to be accountable for all of these aspects. And to be accountable they have to be understandable. "You as a board have to spend more time understanding financial statements, putting them in clear, concise and understandable language."

The guidelines for this are contained in the International Integrated Reporting Framework, released by the International Integrated Reporting Council - of which King is the chairman.

King concluded by saying that just as the concept of limited liability was the driver for the second industrial revolution, the concept of integrated reporting is a concept whose time has come.

"The only thing worse than being blind is having sight but no vision. You need to focus on what you know and what you ought to know. And what you ought to know is that you live in a resource-deprived world with a greater demand for output that's going to increase, so there's going to be a huge change in the way we drive our companies with the fourth industrial revolution upon us."



Integrated reporting underpins sustainable capitalism
Mervyn King told the Finance Indaba Africa that business has shifted from thinking about short-term profit to focusing on sustainable capitalism, but that there is much still to be done.
Mervyn King, chairman of the King Committee on Corporate Governance in South Africa, took to the podium at the Finance Indaba Africa on14 October, to explain how business is shifting and must shift from thinking about short-term profit to focusing on sustainable capitalism. "There have been three major shifts in the corporate world in the 21st century," he said. "First of all, we have shifted from silo thinking and silo reporting to integrated thinking and integrated reporting. The second is from a financial capital market system to an inclusive market capital system. And the third major shift is from short-term profit to sustainable capitalism." He started with a history lesson for the audience. "In order to understand this, we need to go back 150 years. In the last part of the 19th century, there were unlimited liability companies. Shareholders would invest capital and have unlimited liability for claims from creditors." The, he said, because politicians wanted to create more jobs to fulfil promises to voters, wealthy families said that they should create an entity in which they had limited liability, and they would put in the money. So the joint stock markets created a "person" - a company in which risk could be ringfenced. The majority of directors were the members of wealthy families that had put up the capital. "Then the shareholders said that they were in the back of the queue in terms of bankruptcy. The managers were taking risk. They wanted some protection. So they were given the right to sue their directors if they felt that they had failed in their duty of care to the company. This exacerbated the shareholder primacy principle." King described how this played out in action when, in 1919, Henry Ford made excessive profits and wanted to increase the wages of his employees to motivate them, and his shareholders the Dodge Brothers took him to court saying that he must declare his excessive profits as dividends, which the judge upheld. "Imagine someone going to court to court today saying you must pay more dividends and less wages," said King. Instead, he said, today, a shareholder cannot even remove a company's pencil or he or she would be committing a theft. Up until the end of the 20th century, companies were seen through a financial lens. They were required to deliver value for their shareholders and corporate reporting was only financial. "In automotive terms, this was like driving with a rear-view mirror but no windscreen. It was very dangerous to drive and impossible to steer." Then, King said, planet Earth reached a tipping point. Suddenly civil society and investors started to realise that a company cannot operate with just shareholders. "There are many stakeholders and companies must have a long-term strategy in a resource deprived world that would maintain value creation in a sustainable manner." He explained that this has played out in many different stories in many different industries. One example is that no member of the board of Nestle would ever have believed that Greenpeace would have posed them a risk - but the civil society movement started to create problems around the deforestation of the orang-utan's habitat in Malaysia in the production of palm oil, which had an impact on the company's public profile and profits. "How we make money has an impact on the three critical aspects of the economy, society and environment," said King. "If the impact is positive, we create value. If it is negative, we start destroying value." This thinking led to a meeting by the United Nations in Geneva, which concluded that sustainable reporting could not take place in a silo. The drivers of change in the 21st century - climate change, using resources faster than they can regenerate, radical transparency through social media, greater expectations from the public, population growth and the fourth industrial revolution - meant that we could not carry on with business as usual."We have to learn to make more with less. We now have to look at the value of a company through the whole value creation process and whether it's going to sustain that. Companies are expected to embed in their strategies how they are dealing with critical social and environmental aspects." He gave the example of how Coca-Cola, a company that had spent 120 years focusing on output, and the wealthiest brand on the planet until Apple took over, had to bend to the demands of society. Three years ago, civil society alleged that Coca-Cola was the cause of obesity. Mexico slapped on a sugar tax and sales started flattening. So Coca-Cola introduced a new strategy. The beverage company is no longer market to children under twelve, and it has started to encourage physical activity in that age group. They have also tried to create a beverage with as low a calorie count as possible. "It's extraordinary. Here is a company that for 120 years had focused on output, suddenly changing their strategy to deal with outcomes," said King. "King 4 now says that every board meeting should have an agenda item - 'inputs to outcomes'." Boards have to be accountable for all of these aspects. And to be accountable they have to be understandable. "You as a board have to spend more time understanding financial statements, putting them in clear, concise and understandable language." The guidelines for this are contained in the International Integrated Reporting Framework, released by the International Integrated Reporting Council - of which King is the chairman. King concluded by saying that just as the concept of limited liability was the driver for the second industrial revolution, the concept of integrated reporting is a concept whose time has come. "The only thing worse than being blind is having sight but no vision. You need to focus on what you know and what you ought to know. And what you ought to know is that you live in a resource-deprived world with a greater demand for output that's going to increase, so there's going to be a huge change in the way we drive our companies with the fourth industrial revolution upon us."