Making corporate reporting relevant to your broader stakeholder base

Many people may believe that, from a corporate reporting point of view, investors are a fairly straightforward stakeholder group to cater for – this is no longer the case. A whole host of non-financial measures are quickly rising up the agenda, putting investors under pressure from society and regulators to look for evidence of longer-term value creation.

In fact, investors now want to see a wider range of reporting measures than most other stakeholder groups because they are increasingly coming under pressure from asset owners to improve their environmental, social and corporate governance credentials. They want to see how organisations are addressing the demands of policy makers and regulators, customers, the workforce, suppliers and our world (i.e., the environment, society and the community). Investors also want to see more non-financial information such as environmental (climate change and sustainability), social impact (human rights) and governance (succession planning, culture and values). By better catering to these stakeholder groups, organisations will be able to demonstrate the value they are adding, which will help to restore trust. There is evidence that it is also good for business.

The impact of regulation

This change in focus is also being driven by regulation. In July 2018, the FRC published the UK Corporate Governance Code. It places greater emphasis on engagement between companies, shareholders and stakeholders, promoting the importance of establishing a corporate culture aligned with company purpose, business strategy and one that promotes integrity and values diversity.

In 2019 the FRC revised the 2012 UK Stewardship Code to create the ‘2020 UK Stewardship Code’. This code heralds a major step forward in responsible investment. The FRC requires new Stewardship Reports to be reviewed and approved by the asset owner and the asset managers’ governing body and signed by the Chair Chief Executive, or Chief Investment Officers. Investor behaviour is changing rapidly as a result, with a marked increase in collective engagement across the investor community, as encouraged by the new code. Investors are also now required to report on specific engagement activities and outcomes, leading to more robust demands on the companies they invest in.

The new code also requires investors to formally integrate ESG factors into investment decision-making – a new expectation aligned with a new definition for stewardship that links the allocation of capital with the creation of sustainable benefits not just for clients, but for the economy, the environment and society as well.

Obligations & considerations

These obligations extend to all asset classes – beyond listed equity – and to investments outside of the UK. Companies can therefore expect investors to engage more dynamically across a range of priorities that impact a growing pool of stakeholders.

As a result, there are some questions that boards need to consider and need to be able to answer such as:

• How will you use heightened scrutiny from investors to enable long-term value creation?
• What risks and opportunities will arise due to more collaborative engagement with investors?
• How will you demonstrate what actions your organisation is taking in response to more robust investor expectations?

In answering these questions, you will need to take into account that different types of investors will have varying agendas. Typically, company boards will need to consider both institutional investors or shareholders as well as private investors in their non-financial reporting. Whilst major institutional investors might have significant influence on investee company boards (e.g., due to majority ownership), groups of private individual investors have also been known to exert significant pressure on boards to address, for example, excessive levels of executive pay.

As previously mentioned, all of the financial reporting elements required under normal reporting conditions would be sourced from the finance and accounting teams within an organisation. Non-financial elements that fall outside legislation and regulation that an organisation might wish to report about would need to be agreed between the relevant functional head and the CFO and Group Financial Controller before final ratification by the Director of Investor Relations and/or Head of Corporate Communications.

A lack of appropriate metrics leaves significant company value both unmeasured and unreported. If the metrics and corporate reporting processes are not in place, investors will not be able to fully understand your company’s value based on traditional financial reporting. A number of organisations provide guidance on non-financial metrics to report on including the Embankment Project for Inclusive Capitalism (EPIC), the World Economic Forum (WEF) and the Sustainability Accounting Standards Board (SASB), amongst others.

Issues relating to our world – a climate change impacted environment, society and our communities – are creating business disruption on an unprecedented scale. In fact, these issues have been on the World Economic Forum’s International Business Council agenda for a number of years.

Customers (both existing and potential), the workforce, investors, environmental activists, media, government and many other stakeholder groups all want to learn about the impact that the company they buy from, work for or invest in is having on the climate, environment, society and communities.

Perhaps most notably, investors are increasingly focused on climate change. This is mostly because of the risk of business disruption – there are market risks associated with climate change as consumers start to vote with their feet, increasing global commitments such as the Paris Agreement and the physical changes we are seeing in relation to extreme drought and weather events.

Many investors have committed to the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD recommendations are designed to provide high-level guidance to assessing and disclosing climate-related financial risks and opportunities. With the commitment of many governments, such as the UK government, to reach net zero emissions by 2050, the likelihood of significant new regulation to reduce carbon emissions is very high.

There are obvious metrics that could be used to measure environmental impact such as carbon footprint, water use, plastics use/creation and annual reduction in waste. But there are others that are less easily attained. These include resource scarcity, the WEF’s sustainable value creation metrics, alignment with the Paris Agreement and exposure to climate-related risk.

Climate and environment aside, companies also need to demonstrate the value that they add to society and to the communities in which they operate, as this too is rising up the list of regulators, investors’ and other stakeholders’ areas of focus. Many investors see social impact as being intrinsically linked to a company’s ability to both preserve and generate long-term value.

Investors increasingly want to know how a board is assessing, managing and measuring the social impact of its business, what risks it presents to value preservation and creation and what steps are being taken by the company to proactively engage with local communities. Business leaders should equally want to demonstrate to their local communities how they support them. Companies also need to manage and mitigate social risks such as accidents, human rights and ethical sourcing. The effectiveness of managing such risks are increasingly coming under scrutiny. The Modern Slavery Act disclosure requirement is an example of how reporting on social risks is being enacted in regulation.

Whether reporting on environmental impacts, climate change, societal or community initiatives, organisations will inevitably need to identify and agree what to measure as well as putting the systems, processes and mechanisms in place to report effectively against their KPIs. This will require Chief Sustainability Officers, Chief Procurement Officers and other functional heads to work with their CFOs and Group Financial Controllers to agree the right KPIs to measure and report on as well as ensuring that they have the right mechanisms, procedures and policies in place to do so.

Arguably, the workforce – both permanent employees and contractors – is the most valuable asset for organisations, without them a business simply couldn’t exist.

Yet, according to a report published by the FRC’s Financial Reporting Lab (Lab) in January 2020, reporting on workforce-related issues needs to improve to meet investor needs and reflect modern-day workforces. Workforce-related matters such as working conditions, changing contractual arrangements and automation have all become areas of increasing investor focus in recent years and the Lab’s report reveals investors’ overwhelming support for clearer company disclosures.

With generational change, the ways in which the workforce judges its employer have also changed, treating the workplace more like a consumer, seeking an agile environment that offers total flexibility and expecting their employer to demonstrate how they are contributing more broadly to society, the environment and the community. In turn employers are finding it increasingly difficult to retain their best talent. The other significant shift is the number of metrics that organisations will need to report on to their workforce to demonstrate the business’s investment in its workforce and the value it collectively generates.

Investors and regulators are demanding increasing levels of transparency from organisations around culture, diversity and inclusion. In parallel with this, a healthy culture and well-executed diversity and inclusion strategy has been shown to be a differentiator for talent attraction and retention. Supply contracts now almost always include diversity and inclusion requirements and are demanding the highest ethical standards. There has never been more focus on corporate culture, diversity and inclusion as there is today. Organisations need to respond by fostering a culture of inclusivity where all of their workforce is represented; and where the organisation’s values are demonstrably aligned to its purpose and strategy.

Measuring culture, diversity and inclusion is becoming essential. The market is increasingly providing solutions in the form of comprehensive frameworks and technology to provide a picture of the diverse make-up of the organisation and the unique blend of the values, attributes and behaviours people experience when at work.

Chief Human Resource Officers (CHROs) and Chief People Officers (CPOs) are recognising the importance of reporting on both measures that comply with legislation and those that influence the potential workforce’s likelihood to join the organisation, as well as those that encourage the existing workforce to engage with and continue to work at the organisation.

By working together, senior financial and HR executives can identify what needs measuring; put processes, systems and mechanisms in place to measure and report the true value that employees deliver to the business; and agree who owns the metrics, the measurement and the systems and processes.

Whether organisations are reporting in order to cater to regulators and investors or to the workforce, it’s clear that the metrics are not simple to gather, and it can be challenging to ensure that the data is accurate. But it is vital that the workforce, as a stakeholder group, is addressed. After all, it’s one of the most valuable assets of most organisations.

There is little doubt that customers are crucial to the long-term viability of any business. In fact, if people do not want to buy what your business is selling, there is no way that your business can survive.

Whilst it’s important to report on measures that impact on customers’ likelihood to buy from your business, it’s equally important to remember that a number of factors impact on your customers’ willingness to buy from your business, including:

• Price.
• Convenience.
• Level of innovation.
• Features and benefits.
• Environmental credentials.
• Tax transparency.
• Community contribution.
• Corporate values.

It is therefore important to ensure that you are reporting effectively on these aspects by, for example, evidencing a transparent and responsible supply chain, treatment of your employees and environmental impact (find out more about the other stakeholder groups you could address in your corporate reporting here).

Stakeholders, and investors in particular, will want to know how likely it is that customers will buy and continue to buy from your business. Is your company innovating to keep up with evolving demands? To what extent do people trust your company? And how do your company’s products and services impact people's health? All of these factors will help a variety of stakeholders to gauge how well your company is positioned to stay relevant over the long term.

With this in mind, it’s important to identify what you need to measure to tell the right story and accurately demonstrate the value your organisation generates. Common metrics include net promoter score, product reliability and product or service innovation indicators – and a whole host more. Some metrics are simple to measure (e.g., revenue, customer acquisition cost and ratio of sales from repeat customers) while others are much harder to consistently measure accurately (such as brand value, customer trust, health impacts and proportion of revenue generated by new products or services).

It’s therefore vitally important for the Chief Marketing Officer to work with the Chief Financial Officer (CFO) and Group Financial Controller to identify what needs measuring; and put the processes, systems and mechanisms in place to measure and report the true value that the business delivers to customers; as well as agreeing who owns the metrics, measurement, systems and processes.

The megatrends disrupting today’s business environment are notable for the breadth of their impact across stakeholder groups. The workforce, customers and the public at large, among others, are directly affected. This has led to heightened scrutiny from policy makers and regulators, and a demand for more reliable and relevant information that can be used by stakeholders beyond a company’s shareholders.

This presents a growing challenge to business, as the increased focus of policy makers and regulators leads to new reporting requirements and other changes to legislation and regulation.

A failure to fully comply can be significant not just in terms of potential fines, but also in terms of reputational damage and repercussions for leaving the legitimate information needs of a company’s shareholders and other material stakeholders unmet. The speed at which developments emerge will require businesses to both routinely monitor the ever-changing regulatory landscape and consider how to respond to developments in ways that align with business strategy.

Regulatory and legislative changes, and in particular new reporting requirements, clearly present challenges. But they also offer an opportunity for businesses to re-assess the quality of their existing disclosures and the potential value to be created through better serving their stakeholders.

Put differently, organisations have to report to a minimum level of legal compliance. But what about aspects that a company feels it should report on – there might be a moral imperative to go above legal compliance? Or the depth to which a company could report on – to be seen as a leader in an area of particular interest to its key stakeholders – possibly aligned with its corporate strategy? For example, organisations are required to report on their gender pay gap. But where there is an imperative to demonstrate leadership on workforce issues (e.g., companies in which the workforce represents one of the main assets), they could also consider reporting on ethnic pay gap, number/ratio of ethnic minorities on its board or commitment to total gender equality on the board.

When reporting both financial and non-financial measures, business leaders need to identify and agree what they might want to work with policy makers and regulators on as well as consider any metrics they might want to report on ‘above and beyond’ minimum compliance levels. It’s likely that many businesses will not have the systems, processes and mechanisms in place to take their reporting to the next level. So, the Chief Compliance Officer, Company Secretary, CFO, Group Financial Controller and the relevant functional head will need to work together to deliver what’s needed.

Although there are now mandatory disclosure requirements around prompt payment practices, it is fair to say that the value which suppliers contribute to the business model, and the importance of how well the company works with its suppliers, is rarely emphasised in corporate reporting.

This is surprising, given that other stakeholders such as customers and communities may also be interested in your organisation’s treatment of suppliers (and, in turn, their treatment of others) if they are to gain trust in your business’s ability to deliver or be comfortable that you are not having a detrimental impact on particular areas of society.

The way that a business works with its suppliers can be a real differentiator. If you are able to demonstrate that you are working to mutual advantage and shared values, this indicates a stronger relationship, with a vested interest in resolving supply chain issues and achieving better outcomes for end customers.

One thing is certain – a growing number of stakeholders want to know that your organisation treats its suppliers fairly and ethically. To support this, they will expect your organisation to have a compliance framework around relevant areas such as responsible sourcing, supply chain transparency, the Modern Slavery Act, and bribery and corruption.

Chief Procurement Officers and Chief Risk Officers will need to work with their CFO and Group Financial Controller colleagues to agree what needs to be reported and what level reporting is currently at for suppliers. Then they will need to agree what needs to be reported before putting the systems, policies and procedures in place to monitor and record what needs to be measured. Some of this will require collaboration with suppliers too.