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Firms should re-engineer business via sustainability

The current corporate governance code, besides requiring NSE listed firms to disclose directors’ pay, diversify their boards and establish a code of ethics, also requires boards to continually work towards the full attainment of an integrated reporting system.

The code, which came into full effect in mid-2017, presents listed firms with an opportunity to gain a competitive edge, provided they don’t turn the process of complying to the code into a bureaucratic box-ticking exercise. Various aspects of the code, specifically the push for full adoption of integrated reporting, could help firms develop their corporate strategies more effectively, allocate resources more efficiently and, ultimately, reward shareholders and other stakeholders more generously – a potent cocktail for success.

Unlike conventional annual reports, which focus exclusively on financial performance, sometimes with a subtle but deliberate sprinkling of CSR photo ops to burnish the company’s image, integrated reporting looks at an organisation’s performance in much broader terms.

An integrated report acknowledges the fact that, for a company to perform well, it needs more than just shareholders’ capital.

It also needs access to a skilled and knowledgeable pool of labour, fair and predictable regulation, access to markets, relationships across its supply chain and a clean environment, among other factors that drive business performance.

Although the aforementioned factors materially affect overall organisational performance, they are often in the control of external stakeholders, such as governments, training institutions and suppliers, just to mention a few.

Conventional annual reports do little to communicate how a company generates value for and in turn derives value from these critical stakeholders, despite their profound impact on the business. Integrated reports, on the other hand, clearly demonstrate these relationships.

The shift from conventional to integrated reporting will set the stage for a new paradigm in corporate strategy. Firms will start thinking more elaborately about the non-financial aspects of the business that affect long-term performance.

As an example, senior managers and company directors are beginning to ask questions such as: Will corporate profits remain sustainable if we overlook our environmental impact today, because of the costs associated with cleaner production technologies, but end up paying hefty fines and taking a reputational hit tomorrow?

Moreover, thanks to an integrated report’s characteristic long-term outlook, managers are no longer tied to quarterly and yearly time horizons – which is what you will ordinarily find in an annual report – but to longer time horizons such as five years and 10 years.

While boards of listed firms typically set long-term strategy (5-year plus), they often have to change course along the way as managers are inevitably conditioned by annual reports to focus on quarterly and yearly milestones. Integrated reporting will help change this, enabling better alignment between boards and management on strategy as well as more efficient resource allocation.

Pierre-Emmanuel Maubert is Director at Africa Practice

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