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Readable
and relevant
Boardroom pay
How to make annual reports
more valuable to stakeholders
What effect has increased
scrutiny of executive remuneration
had on governance?
issue one | november 2011
Islamic finance
The challenges of reporting
A question of
transparency
© 2011 EYGM Limited. All Rights Reserved.
How is the threat of WikiLeaks
changing corporate reporting?
Welcome to the first issue of Reporting.
Over the past three years, we’ve seen global capital markets
experience huge changes: the near-collapse of the banking sector,
an accelerating shift in economic and political influence to the
high-growth markets of Asia, South America and Africa, and, more
recently, the intensifying debt crisis in all developed markets.
All of these have posed great practical and strategic
challenges to businesses around the world. But, following a
period of retrenchment, many companies are considering how
they should compete in today’s changed and more uncertain
economic landscape.
At Ernst & Young, we believe that companies’ ability to build
and maintain the confidence of their stakeholders is central to
their success — how they constantly and consistently tell their
performance story to the investment community, regulators,
commentators and customers, earning their support for growth
and change.
Of course, the numbers — the “hard” record of financial
performance that, as accountants and financial reporting
professionals, we are deeply involved in assessing — are central.
But reporting in its broadest sense goes well beyond the numbers.
Our research shows that companies that consistently outperform
their peers spend more time and attention explaining their
business strategy, risk assessments, environmental performance
and contribution to society as a whole.
A period of intense change is upon those tasked with
corporate reporting and its oversight, in response to the
financial crisis and its impact globally. While governments need
to instill a new sense of financial discipline, becoming more
open about their operations and budgets, corporate reporters
are facing constant pressure from investors and regulatory
authorities to report more, and more transparently. Accounting
standards are continuously being evaluated and improved.
Discussions on the constituents of effective corporate reporting
and potential changes to reporting regulation and corporate
governance are far-reaching, and attracting more political
attention than ever before. Cross-border regulatory cooperation
and communication is on the increase. Debates in the European
Union and the US on audit policy, corporate governance and
prudential supervision of financial institutions clearly influence
developments on an international scale.
Looking further out, the recently released discussion paper from
the IIRC on integrated reporting proposes significant changes to
how companies describe strategy, performance, risk, governance
and management of capital in its broadest sense. (Read more at
theiirc.org/the-integrated-reporting-discussion-paper)
Ernst & Young has the great privilege and responsibility of
working with thousands of organizations around the globe, and the
conversations we have are rich and varied.
With this magazine, we aim to bring together a range of insights
and ideas that will interest and inform all business executives
involved in their organization’s performance story. We’ll also be
examining how the reporting landscape is changing and presenting
views from the many participants — corporates, investors,
regulators and more.
In this issue, we investigate whether increased scrutiny of
executive pay is improving governance in this area, find out
how the threat posed by WikiLeaks has changed the corporate
reporting landscape, and look at the future of the annual report.
We hope you find Reporting a stimulating read.
ChRISTIAn MOuILLOn
Christian Mouillon is the Global Vice Chair of Assurance
at Ernst & Young
ernst & Young
Assurance | Tax | Transactions | Advisory
© 2011 eYGm Limited. All rights reserved.
eYG no. Au0999
About Ernst & Young
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contents
“Jubilant
Life Sciences
has grown market cap
69-fold, integrated
eight acquisitions
and now reports
under
23 Executive remuneration
Cover photography: Peter Guenzel
seven
accounting
standards”
28
A CEO’s
lessons
learned
12
Reporting in India
04
Watching brief
16
Key issues for reporters
Islamic finance — the challenges
of reporting
06
How does the reporting of islamic finance
tally with global reporting standards?
Perspectives and priorities
new iAsb Chairman Hans Hoogervorst on
the challenges facing his organization over
the next five years
08
Sustainability developments
We examine the growing importance
of sustainability reporting
11
The poll
A recent ernst & Young survey reveals
how companies’ year-end reporting
is changing
12
Growth with financial discipline
r sankaraiah of Jubilant Life sciences
on the challenges of communicating with
stakeholders during a period of rapid
international expansion
30
18
A question of transparency
We investigate how the threat of information
being leaked on WikiLeaks is changing the
corporate reporting landscape
23
The remuneration game
is increased scrutiny of executive pay improving
governance? We examine the issues
27
30
Reporting: the future
What will it take to turn the annual report
into a more valuable document?
The buy side
34
Hugh Young, Asia mD of Aberdeen Asset
management, explains what he looks for
in a potential investment
My wish list
experienced audit committee chair Guylaine
saucier tells us what would make her job easier
28
35
Ariadne Capital Ceo Julie meyer
shares her experience
recent publications from ernst & Young,
plus books that may be of interest
5 things I’ve learned
… and more
november 2011 Reporting [02/03]
Watching brief
Bribery in the UK – crossing borders
Following criticism aimed at the uK for failing to
deal with cross-border bribery and corruption, the
Government introduced the bribery Act 2010.
The Act is intended to force organizations to take
bribery and corruption seriously, implement anticorruption programs and take action to minimize
the risk of bribery and corruption. under the Act, a
business will have no defense in respect of bribery by
those persons acting on its behalf or providing services
to it if it cannot prove that it had adequate prevention
procedures in place.
Crucially, the Act does not only affect companies
based in the uK, but also those that have a demonstrable
business presence in the uK. While jurisdiction questions
44
%
are still being hotly debated, this may mean that
international organizations could be prosecuted in the
uK for corruption occurring anywhere in the world, even
if this corruption has little effect on their uK business.
in march 2011, Kenneth Clarke, the secretary of
state for Justice, released the final guidance for the uK
bribery Act. in a statement, he said: “The ultimate aim of
this legislation is to make life difficult for the minority of
organizations responsible for corruption, not to burden
the vast majority of decent and law-abiding businesses.
We are not going it alone in pursuing this objective
but working in tandem with our partners in the oeCD,
europe and the united states.”
The us introduced the Foreign Corrupt Practices Act
(FCPA) 1977 following investigations in the mid-1970s
involving 400 us companies that admitted making
questionable or illegal payments in excess of us$300m
to foreign government officials, politicians and political
parties. The uK bribery Act goes further than the FCPA,
and further than many pieces of european legislation.
Chandrashekhar Krishnan, executive Director of
Transparency international uK, said: “The Act is a major
step forward by the uK in meeting its international
obligations to fight bribery and corruption, which
does so much damage, particularly within developing
nations and to international business. However, there
is now a vital need for adequate resources for strong
and effective enforcement of the Act. The uK needs to
demonstrate the political will to make sure that it does
not export corruption.”
of finance professionals believe
that enhanced reporting will
potentially give them a competitive
advantage in attracting and
retaining customers
To find out more about the results of an Ernst & Young survey into how
companies are changing what and how they report, turn to p11.
WATCHIng BRIEf
“ When
people
think
Progress toward
convergence
The number of differences between
the accounting standards issued by the
international Accounting standards
board (iAsb) and the us Financial
Accounting standards board (FAsb)
is narrowing as the joint drive toward
convergence continues.
The iAsb and FAsb issued a joint
memorandum of understanding in 2006
highlighting their plans to improve
international Financial reporting
standards (iFrss) and us Generally
Accepted Accounting Principles (us
GAAP) and achieve their convergence.
since then, they have produced periodic
updates, the most recent of which was
published in April 2011.
This latest update outlined their
decision to reduce the number of
remaining priority memorandum of
understanding projects to three:
revenue recognition, leasing and
financial instruments.
The leasing proposals aim to ensure
that all assets and liabilities arising
from lease contracts are recognized in
the statements of financial position.
The project aims to improve reporting
standards for both lessors and lessees.
The revenue recognition proposals aim
to create a single revenue recognition
model that can be applied consistently to
all contracts with customers, enhancing
comparability and understandability for
users of financial statements.
Due to the number of responses
received on both the leasing and revenue
recognition proposals, the boards have
made significant changes and decided to
re-expose both proposals. Companies will
now have the opportunity to comment on
the revised proposals.
While the iAsb and FAsb are likely to
introduce further changes, discussion of
convergence will continue for some time
to come.
in may 2011, staff at the us securities
and exchange Commission issued a
paper containing a possible approach to
incorporating iFrs into the us financial
reporting system.
ruth Picker, ernst & Young’s Global
iFrs Leader, said: “We support the
approach as a thoughtful and balanced
way of moving closer to the ultimate goal
of a single set of high-quality, globally
accepted standards. However, we believe
that the staff’s approach will not enable
us companies to assert full compliance
with iFrss as issued by the iAsb, for a
number of reasons.
“nevertheless, since the convergence
effort began nine years ago, the iAsb
and FAsb have made great progress
in eliminating a significant number
of differences between iFrs and us
GAAP in some fundamental areas such
as share-based payments, business
combinations, consolidation and fair
value measurement. While converged
standards are more similar, differences
will remain. Also, key differences remain
in important areas such as financial
instruments and insurance.”
you live in
denial, they
respond badly.
Sometimes,
the mere act of
communication
matters more
than precisely
what you
say”
To find out more
about the virtues of
transparency, and the
effect that the threat
of WikiLeaks has had on
business, turn to p18.
november 2011 Reporting [04/05]
Perspectives
and priorities
The International Accounting
standards board (iAsb) recently
celebrated its 10th birthday. by any
measure, it has been a remarkable
decade of progress.
When it was founded, a few
companies in a handful of jurisdictions
used the old international Accounting
standards (iAss). The Asian financial
crisis provided a wake-up call to
regulators and international investors
who sought superior investment returns
and diversification opportunities by
investing in unfamiliar places with
little-understood financial reporting
regimes. similarly, in the aftermath
of enron, the us showed a greater
willingness to explore international
convergence as a path to improvements
in its Generally Accepted Accounting
Principles (GAAP).
Fast-forward 10 years and the
financial reporting world has been
through its own revolution. The iAsb
has completed its initial reform of the
old iAss it inherited. more than 100
countries now require or permit the use
of international Financial reporting
standards (iFrss). by next year, more
than two-thirds of G20 members will
require the use of iFrss for domestic
reporting of consolidated financial
statements for publicly listed companies.
Policy-makers are playing catch-up
with international financial markets that
have long been globally interconnected.
The provision of a single set of highquality financial reporting languages
Comment
‘‘
The new Chairman of the iAsb, hans hoogervorst, outlines
the organization’s priorities as it enters its second decade
applied on a consistent basis is seen as
essential to underpin other aspects of
global financial cooperation. That is
why the G20 leaders have repeatedly
called for a rapid move toward global
financial reporting standards. iFrss
are those standards.
These achievements represent the
legacy of my predecessor, sir David
Tweedie. so what does the future hold
for the iAsb as it begins
what i hope will be a
second decade of success?
right now, we have four
main priorities. First, we
need to complete the
remaining convergence
projects with the
us-based Financial
Accounting standards
board (FAsb) to the highest possible
standard. These projects represent
some of the most challenging areas of
accounting standard setting. Already,
the iAsb and the FAsb have succeeded
“There is enormous
support for a single
set of global financial
reporting standards”
PROFILE
Hans Hoogervorst
was a minister in the
Dutch Government
from 1998 to 2007
before becoming
Director of AFm,
the Dutch financial
market supervisory organization. He
succeeded sir David Tweedie as Chairman
of the iAsb on 1 July 2011.
COmmEnT: HAnS HOOgERvORST
Viewpoint
Your chance to take
part in the standardsetting process
Ruth Picker, Global Leader — IFRS Services,
Global Professional Practice, Ernst & Young
in aligning our positions on leasing and
revenue recognition. We are now closing
the differences on financial instruments
accounting. in most cases, there are no easy
answers, so receiving high-quality advice
from around the world is essential.
second, we have begun work on the
development of the iAsb’s post-convergence
program. We recently published a
consultation document that sets out some
ideas but, more importantly, is designed to
solicit feedback. We are interested to know
what is in urgent need of fixing and how we
should best deploy the limited resources at
our disposal. The board must also decide
what to do with projects that were deferred
in response to the financial crisis and the
completion of the convergence program, as
well as the new constitutional requirement
for the completion of post-implementation
reviews of new standards.
Third, we are keen to assist those remaining
major economies that have yet to commit
fully to iFrss. There is enormous support for
a single set of global financial reporting
standards. How do we harness this incredible
support and goodwill to help us achieve our
goal of a single set of high-quality standards?
imminent decisions in the us and Japan
regarding the possible use of iFrss will
provide an important signpost to the
prospects for global standards.
Finally, for those jurisdictions that have
already committed to iFrss, we will continue
to strengthen the iAsb’s institutional
relationships in a way that respects and
enhances the independence of the standard‐
setting process. A key element of this is to
continue to build confidence and trust in
the standard-setting process that the iAsb
followed when developing iFrss.
by focusing on these four priorities, i am
confident that the prospects for delivering a
single set of high-quality financial reporting
standards are high. This is the ambition for
my tenure as Chairman of the iAsb and i will
do everything within my power to achieve
this important goal. n
While the IfRS foundation (the oversight body of the IASB) has
made significant strides over the past 10 years toward its objective
of a single set of global standards, it continues to face a number of
hurdles along this path.
One of the most important challenges is to ensure that the
standards being developed are of a high standard. This means
that the IfRS foundation needs to carefully weigh the concerns
of investors, preparers and the financial community as a whole —
groups that are not always aligned in their views.
This is of particular importance in light of the unprecedented
amount of accounting change that is expected in the upcoming
year, which includes proposals that could affect the accounting for
fundamental transactions such as revenue and impairment of financial
assets. Balancing these often conflicting demands will be the key
to successfully achieving the IfRS foundation’s overall objective.
However, ensuring the development of a high-quality global
set of accounting standards is not just the responsibility of the
IfRS foundation, as these standards will be part of the underlying
foundation for a highly functioning global capital market. The IfRS
community needs to assist the IfRS foundation in achieving its goal
by participating in the standard-setting process whenever possible.
In particular, entities that follow the progress of the IASB’s
projects, and review exposure drafts, have the opportunity to
provide input to, and thereby have an effect on, the standard-setting
process. We encourage our clients, and other organizations, to voice
their views and seek to provide persuasive arguments for the IASB
to consider in its deliberations. The
IASB has demonstrated that it is
receptive to comments and willing
to make changes to its proposals.
Entities have a further role to
play in effectively implementing
the revised standards. The level of accounting change that has
occurred to date and is expected to occur in the near future will not
only require the attention of accounting and finance personnel, but
also the commitment of other resources across an organization.
Communicating these changes to external stakeholders in an effective,
efficient and transparent manner is a fundamental part of this process.
We should also not forget the importance of, and responsibility for,
ensuring consistent application of IfRS among different jurisdictions.
Even if IfRS is adopted on a global level, the risk remains that
practices related to implementation and interpretation will diverge.
Because few issues are unique to one part of the world, where there is
a need for an interpretation, it should be developed at the global level.
We encourage preparers and other stakeholders to continue to submit
requests for interpretation to the IfRS Interpretations Committee.
Ernst & Young is also doing its part in promoting the consistent
application of IfRS. We employ a philosophy of decentralization, with
coordination and support coming from our core global IfRS team in
London. In addition, our IfRS leaders from each of our areas convene
at least weekly to resolve client issues with far-reaching and global
implications. As always, we are available to support and assist IfRS
preparers in their goal of achieving consistent global application.
“Interpretation
should be
developed at
the global level”
november 2011 Reporting [06/07]
sustainability
developments
Sustainability reporting has
become increasingly important as
stakeholders take an ever greater
interest in companies’ performance
in this area. But until there are
commonly agreed standards for
such reporting, investors will find
it hard to compare like with like.
Fiona Harvey reports
The group Chief executive of retail giant Kingfisher,
ian Cheshire, takes a strong interest in sustainability
reporting. He has to: his annual bonus depends on it.
The company — the world’s third-largest home
improvement retailer — aims to be a global leader in
reporting on its sustainability performance. Cheshire
believes that such activity is rapidly becoming a
distinguishing factor for companies that want to show they
are providing the best service possible to their stakeholders
through detailed measurement and reporting.
“Publishing definite targets and concrete objectives has
InfORmATIOn: SUSTAInABILITY REpORTIng
Viewpoint
Good practice in
sustainability reports
Juan Costa Climent, Global Leader for Climate Change
and Sustainability Services, Ernst & Young, and a former
Minister in the Spanish Government
»
helped to raise the bar,” he says. “it’s gone from a generic
thing that people think is vaguely good to something
measurable, which is an important difference.”
if Kingfisher fails to meet the targets he has set,
Cheshire himself will bear the cost, as part of his
compensation depends on meeting sustainability goals.
These include selling products that help consumers
reduce their carbon footprint — a sector worth more
than us$1.6b to the group in 2010.
Kingfisher is unusual in making sustainability
reporting such a core aspect of the chief executive’s
work. However, it is in the vanguard of what is
becoming a much broader movement toward more
detailed sustainability reporting, and also toward
integrated reporting that combines environmental,
social and financial measures. sustainability reporting
is no longer just a vague “nice to have,” occupying
a line or two in a company’s annual report, but is
developing into a stricter set of criteria and a more
developed narrative in the annual report — often with a
separate sustainability report, also delivered annually.
so, what constitutes good practice, and what pitfalls do
companies need to be mindful of? bear in mind, first of
all, that investors have a clearer set of interests than other
stakeholders, says Ken rumph, Director of Cleantech
research at nomura Code securities, a subsidiary of
the Japanese-owned global investment bank.
“investors are used to, and want, data that resembles,
or is usable with, their financial models,” he says. “They
want quantifiable measures that have a time series and
are reported in ways that match the financial data.”
banks, insurance companies, private equity funds
and other institutional investors are considering the
sustainability rankings of the companies in which
they invest. The Dow Jones sustainability indexes,
for example, give stakeholders information about
companies’ social, ethical and environmental impact.
by improving sustainability performance, and the
reporting of this performance, a company can improve
its sustainability ranking.
A POSITIVE IMPACT
To date, it is difficult to get a clear picture of how
investors and other stakeholders use these reports, but
there are some indications that the increased emphasis
on sustainability reporting is having a positive impact.
For example, a global survey of 44 key asset owners
and 46 asset managers, conducted by the institutional
investors Group on Climate Change, the investor Group
Juan Costa Climent says all businesses must wake up to the need
for detailed sustainability reporting.
“Companies need to bear in mind value creation, not only to do
with their financial actions, but also in terms of the impact the
company has on the environment,” he says. “That impact is not
being measured right now, but it will be when the market economy
is working properly. In the future there will be a different way to
measure value together; it will be financial value and we will also
measure the social and ecological impact of our activities.”
He envisages much greater pressure from governments and
economists to include information on issues such as carbon dioxide
emissions, waste management and resource use. Rather than being
seen as extraneous to a company’s financial reports, these will
increasingly be seen as central, he predicts, because they will have
a discernible effect on financial performance.
“As a starting point, the need for greater transparency by
companies on their environmental impact in a carbon-constrained
world is the most important driver of change in the move to a
low-carbon economy.”
Companies must take care to include the full range of
stakeholders: investors, employees, shareholders, trade unions,
consumers, supply chain and partners. “It’s important to ensure
that your dialogue with them is the right one,” adds Costa Climent.
This could include setting up external committees, with independent
input from outside the company, to oversee the work of gathering
and sharing information with stakeholders, and ensuring that the
dialogue is two-way. “Increasingly, clients are asking for some form
of assurance on their sustainability reports. We believe that, over
time, the role of the audit profession and the scope and needs of
assurance will change and new audit skills will be required.”
Businesses must take account of a variety of social factors, too.
“If your subcontractors are operating in countries where child
labor is a problem, you must be able to make sure that you are not
employing child labor in any way. You need to have the management
systems to let you do that,” says Costa Climent. Other social issues
will include employment practices, the treatment of minorities, the
rights of indigenous people and the health and safety of employees,
customers and subcontractors. As Costa Climent says, there is no
point in having perfect environmental reporting if the company’s
employment practices and safety record are not also up to scratch.
on Climate Change Australia/new Zealand and the
north American investor network on Climate risk
(inCr), was published in June 2011. it found rapid
improvements arising from the increased prevalence
of sustainability reporting, saying: “The majority of
investors view climate change as a material investment
risk/opportunity and almost all respondents report on
their climate change-related activities.”
in most parts of the world, however, these reports are
not mandatory. Companies have a choice about whether
and how to measure and record their sustainability
performance, and what to report on. This means there
are wide differences between companies, making it hard
»
november 2011 Reporting [08/09]
The svartsengi Power station in Keflavik,
iceland, which uses geothermal energy
to generate electricity
»
for institutional investors and individual shareholders to
compare like with like. The survey found “a significant
variation in progress regionally, with us investors
continuing to lag behind their counterparts in europe,
Australia and new Zealand.”
The eu Accounts modernisation Directive 2003/51,
for example, stipulates that the business review of
european companies must contain environmental,
social and governmental indicators.
some eu countries, such as sweden
and italy, have gone beyond the
requirements of the Directive and
introduced national mandatory
Total number of
requirements.
mindy Lubber, Director of the ussustainability reports
based
inCr and President of Ceres,
registered on the gRI
an investor group that focuses on
Reports List 2010
sustainability, says: “us investors
have strongly advocated robust climate policies, and
they have succeeded in getting the us securities and
exchange Commission to issue groundbreaking climate
risk disclosure requirements for companies. but their
climate-related investment practices, in most cases,
trail their international peers, and this will be a key
focus for inCr in the coming months.”
1,818
ACCOunTInG FOR SuSTAInABILITY
There are now moves afoot to reconcile sustainability
reporting methods, reinforcing current good practice
ChAnGInG
BEhAVIOR
sir David King, Director of the smith school of
enterprise and the environment at oxford university,
is a former Chief scientific Advisor to the uK
Government. He favors voluntary schemes by which
companies should monitor, report on and attempt
to reduce their greenhouse gas emissions, as a
precursor to the greater government regulation that
should accompany progress on the international
negotiations on a climate change treaty.
“The pressure one company puts on another by
declaring its emissions is very important,” he says.
and encouraging companies to collaborate on setting
sustainability criteria and measurement. The Prince’s
Accounting for sustainability Project (A4s) was set up
to help ensure that sustainability becomes embedded in
organizations’ DnA, and to provide them with the tools
and methodologies to do so.
matty Yates, an ernst & Young director who is on
secondment to A4s, says the project has identified 10
key elements organizations should consider, ranging
from clear board and senior management commitment
to ensuring that sustainability is the responsibility
of everyone in the organization and not just that of
a specific department. This involves breaking down
targets and objectives for the company as a whole into
targets and objectives for subsidiaries, divisions and
departments, and implementing processes that enable
sustainability issues to be taken into account in day-today decision-making.
A4s is not alone. Along with the Global reporting
initiative and others, A4s has set up the international
integrated reporting Committee (iirC), a group
of businesspeople, civil society representatives and
governance experts convened with the mission to
“create a globally accepted integrated reporting
framework that brings together financial, environmental,
social and governance information in a clear, concise,
consistent and comparable format.”
The iirC has recently published a discussion paper
for public comment that provides a framework for
integrated reporting that builds on the work of A4s.
Yates believes this is vital, saying that integrated
reporting, drawing together social and environmental
impacts and tying them closely to the economic
performance of the company, will be the key to future
developments in sustainability reporting. indeed,
integrated reporting has already become a requirement
for companies that are listed on the Johannesburg
securities exchange.
As the standards develop, the likelihood is that an
ever greater number of investors will take sustainability
reporting into account in their portfolio decisions.
if that is the case, more chief executives are likely
to follow the example of ian Cheshire. Their own
remuneration may come to depend on it. n
“What’s good about these schemes is that they
change behavior.”
ultimately, he believes, voluntary schemes on
carbon regulation must give way to more regulatory
approaches. but, he adds, “this does not diminish
the utility of the voluntary schemes.” rather,
the contrary is true: “These schemes change the
acceptability of regulation.” in this way, he argues,
getting a critical mass of companies to join the
voluntary schemes available is vital to developing
successful regulation in the future.
InSIgHT: THE pOLL
The poll
A SURvEY Of fInAnCE pROfESSIOnALS SUggESTS THAT COmpAnIES
ARE pLAnnIng TO InCREASE THE AmOUnT Of REpORTIng THEY DO,
AnD THE AmOUnT Of DETAIL THEY pROvIDE In THEIR REpORTS
ernst & Young recently carried out a survey of 329
finance professionals in companies around the world.
We asked them a number of questions about their
communication with their stakeholders and how their
reporting is changing for the next financial year-end.
Here are some of the key findings:
REPORTInG IS GOInG BEYOnd
REGuLATORY REquIREMEnTS
How are finance professionals planning to realize these
opportunities in order to gain the advantage that is available
above and beyond compliance?
A significant minority are going beyond the numbers,
making changes in their approach to both investors and
regulators; 44% said that they have improved transparency
in the relationship between the finance function and key
investors over the past year, and a further 33% said that
they have improved transparency with regulators.
The results suggest that changes in reporting
are being driven by perceived opportunities,
including stronger reputation with stakeholders,
and competitive advantage in attracting
both customers and capital, in addition to
regulatory requirements.
COMMunICATIOn WITh STAkEhOLdERS
IS InCREASInG
What do you believe are the key drivers of change
in reporting for your business?
What general actions to strengthen stakeholder
confidence is your company adopting?
50%
45%
Greater management
attention on long-term
reputation management
44%
Potential competitive advantage in
attracting and retaining customers
41%
35%
in order to build transparency and improve stakeholder
confidence, companies are increasing the frequency
and scope of their reporting, as well as adding new
communications channels.
increasing frequency of corporate
communication on performance
with investors
43%
extending financial reporting beyond
regulatory requirements
42%
increased reporting regulation
and guidance
31%
Potential competitive advantage
in raising capital
(% of respondents)
using electronic media to reach a wider
stakeholder base
reporting on your environmental and social impact
(% of respondents)
… And COMPAnIES ARE REPORTInG
WITh MORE dEPTh (see panel, p33)
risk is still center stage as markets remain
in an uncertain state:
• 50% said they had improved their
detailed analysis of key risks
• 42% said they had provided more
detailed information about business
changes and restructuring
And in their next set of financial reports:
• 37% of respondents will increase the level
of detail of their evaluation of market risk
• 35% will increase the level of detail on
sensitivity analysis on price risks (interest
rate, forex, commodity price risk)
environmental reporting is moving up
the agenda in the finance function:
• 32% will increase the detail on
environmental performance (carbon
tax and carbon credits) in their next
financial reports
• 31% are already reporting on
environmental and social impact to
increase stakeholder confidence
50
%
said they had
improved their
detailed analysis
of key risks
november 2011 Reporting [10/11]
Growth with financial
discipline
Over the last decade, Jubilant Life Sciences has transformed itself from
a chemicals company into a global pharmaceutical and life sciences
player. R Sankaraiah, Jubilant’s Executive Director, Finance, tells
Swati Prasad about the challenges of managing such fast-paced growth
photography: siddharth siva
In July 2002, vam organic Chemicals — an india-
based specialty chemicals company — was renamed
Jubilant organosys. The company had moved up the
value chain and was no longer just into commodity
chemicals. more recently, in october 2010, Jubilant
organosys became Jubilant Life sciences. The new
name was chosen to indicate that this is now a focused
life sciences entity.
Jubilant Life sciences is part of the Jubilant bhartia
Group, which has interests in food and retail, oil and gas
and aerospace. over the past 10 years, the company’s
turnover has increased from us$185m (for vam
organics) to us$770m (Jubilant Life sciences). During
key facts
Company: Jubilant Life Sciences
Turnover in FY2011: US$770m
net profit in FY2011: US$92.2m
Employees: 6,000
Market reach: 75 countries
Manufacturing facilities: 10
(7 in India, 3 in north America)
the same period, the company’s market capitalization
has risen 69-fold, from us$8.5m to us$591.7m.
but growth has come with its own set of challenges,
such as those pertaining to financial reporting,
communicating with stakeholders and raising funds for
expansion, without compromising on the core values of
the Jubilant bhartia Group. “The past decade has been
quite challenging, but we are coping well,” is how r
sankaraiah, executive Director, Finance, at Jubilant Life
sciences, summarizes the situation.
Today, Jubilant Life sciences is an integrated
pharmaceutical and life sciences company, offering
products and services to the global life sciences
industry. it is also one of the largest custom research
and manufacturing services organizations, and a leading
integrated drug discovery and development solutions
provider. it has 10 manufacturing facilities and nearly
6,000 employees across the globe.
PuTTInG SYSTEMS In PLACE
Globalization brings its own challenges. For instance,
the company made eight acquisitions in its last growth
phase and, in order to integrate them smoothly, it has
had to follow different regulations and understand
and work in different cultural environments. moreover,
it has relationships with 19 out of the top 20 global
pharmaceutical companies and 7 of the top 10
InSpIRATIOn: JUBILAnT LIfE SCIEnCES
1,500
The number of
regulatory controls
that Jubilant Life
Sciences carries
out every quarter
agrochemical companies. This makes it essential to
focus on regulatory compliance.
The company has a simple policy that ensures
adherence: never compromise on quality and be
transparent in all dealings. “This takes care of most
compliance-related issues,” says sankaraiah.
At Jubilant Life sciences, 229 people certify 1,500
controls every quarter. “We meticulously follow all
statutory requirements,” says sankaraiah. “i have a
checklist that is required to be certified by each plant
head, and, under that, by each functional head or
operations head, to ensure regulatory compliance.”
every quarter, a compliance report is presented
to the audit committee. The company also works on
exceptions. The system generates an exception report
that is monitored by the internal audit team. The top
100 controls are verified and the 10 main exceptions
are sent to sankaraiah with an action plan. The team
concerned works on the corrective measures, which
are then sent to the board.
These well-designed processes help the company
to identify problems and address them when required.
“every department in each office and plant is involved
in regulatory compliance,” says sankaraiah.
ThE ChALLEnGES OF REPORTInG
A fast-growing global company is also required to speak
in different financial reporting languages; international
investors want to be able to read financial statements
in a format they are familiar with.
However, indian companies only tend to produce
financial statements that adhere to overseas reporting
standards when pressed to do so by investors. Although
accountancy is highly developed in india (it’s a skill that
»
november 2011 Reporting [12/13]
»
was taught by the british raj), most of the
country’s large population of chartered accountants
are experienced in indian GAAP, but not in global
reporting standards.
Jubilant has been producing financial information
in accordance with us GAAP and
international Financial reporting
The number of different standards (iFrs), unprompted, for
several years. Today, due to its global
financial reporting
presence, the finance department is
standards Jubilant’s
required to meet seven accounting
finance department
standards: iFrs, us GAAP, indian
is required to meet
Accounting standards (ind-As),
Canadian GAAP, belgian GAAP, singapore
GAAP and Chinese GAAP. The company has put systems
in place that ensure adherence to all seven.
india has notified 35 indian Accounting standards
(known as ind-As) that are converged with iFrs. The
convergence process is to happen in a phased manner.
7
“We will sacrifice
opportunities in order to correct
our debt-equity ratio. Business has
to be economically viable. It cannot
run on emotions”
R Sankaraiah, Jubilant Life Sciences
However, the indian Government has not announced
the date of implementation for ind-As; it has been
postponed because there are several issues that are
yet to be resolved.
The notified ind-As standards contain several carve-outs
from iFrs. Therefore, ind-As financial statements, when
prepared, will not be compliant with iAsb iFrs. multiple
reporting frameworks add cost and complexity for
sankaraiah and his team.
hIGh STAndARdS
When it comes to corporate governance, the Jubilant
bhartia Group has set high standards for itself. For
instance, there are no cross-holdings among the group
companies. “A group is created for following good
practices, not for financial support. each asset should
justify its economic value,” sankaraiah insists.
When a company is growing at such a fast pace,
arranging funds to meet the needs of its growth plans
InSpIRATIOn: JUBILAnT LIfE SCIEnCES
US$591.7m
Jubilant Life Sciences’ market capitalization,
which has increased 69-fold over the past 10 years
— be it capacity expansions, acquisitions or greenfield
operations — can be difficult. Jubilant raised capital to
fund its expansion plans through three primary routes:
foreign currency convertible bonds (FCCbs), private
equity and borrowings from banks. “i have never in my
life got stuck for money,” says sankaraiah, proudly.
To fund its expansion plans overseas, Jubilant came
out with three FCCbs — in 2005, 2006 and 2007 — to
raise about us$350m. many indian companies did
likewise when the economy was booming, only to find it
difficult to retire the bonds when the meltdown arrived.
but that was not Jubilant’s experience. The first bond
was converted into equity in the first year, while for the
second FCCb issue, about 33% got converted into equity.
The company got a chance to buy back some FCCbs
from the market at a discount and it repaid the us$50m
balance on the due date. in the third issue, when bonds
were quoting at a discount, the company bought back
almost 25% of the listed FCCbs from the secondary
market and reduced its liability. balance FCCbs were
repaid fully to the investors on the due date in may 2011,
along with the yield to maturity.
“We were the first company to buy back the bond at
a discount through a tender offer,” sankaraiah says. it
was a wise move. if the other bonds had been converted,
it would have been at a throwaway price. instead, by
buying back the bonds, Jubilant was able to increase its
credibility in the overseas market.
When it comes to approaching banks for funding,
sankaraiah prefers to go to the indian banks, especially
the nationalized ones. “They understand our needs a lot
better,” he says.
dISCIPLInE OVER AMBITIOn
Financial discipline is of paramount importance: “We
never borrow short-term money to fund an expansion
plan or an acquisition.” most indian companies do just
that, since it is easier to get a short-term loan and then
convert it into long-term borrowing. but this increases
the cost of capital, especially as interest rates in india
are very high.
ultimately, financial discipline at Jubilant takes
precedence over ambition. As of today, the company has
a high debt-equity ratio of 1.48 — “We have a standard
that it should be less than one.” in order to not stretch
its overall debt burden, the company has decided to
forego acquisitions for the time being. “We will sacrifice
opportunities in order to correct our debt-equity ratio.
business has to be economically viable. it cannot run
on emotions,” says sankaraiah.
is communicating with different investors spread
across different geographies difficult? His reply is
a confident, “no.” The company uses a wide range
of communication channels — its website, email,
magazines, newspapers and other electronic media,
besides regular conference calls — to communicate
with its shareholders. He asserts that companies
must disclose the right message — be it good or bad —
transparently: “it is, after all, a company. We have to
convert money into material and the material back into
money. in the process, there can be ups and downs.
People always understand.”
integrating firms that Jubilant has acquired is
another process that the company undertakes
meticulously. “once we make an acquisition, we change
the CFo almost immediately. We send someone from
here, someone whose integrity is well tested,” says
sankaraiah. However, integrating two businesses takes
time. “We address all cultural issues, hire a consultancy
firm for business and system integration and identify
areas that need attention.”
The company also has a risk management framework
that mitigates fraud, and it has a whistle-blower policy
in place. every purchase over a certain value has to go
through five committees: the supply chain, purchase,
capex, credit control and top management committees.
For other purchases, there are specific authorities that
look into the matter.
As for the future, “The next three years should be
more exciting than the decade gone by,” says sankaraiah.
The company has launched “vision 2014” to lay out its
future growth strategy, which will be driven by capacity
enhancement, innovation-led new launches, expansion
into new geographic markets and vertical integration.
The world over, there is pressure on governments to
reduce spiraling health care costs, given rapidly aging
populations. The developed world is encouraging the use
of low-cost generic drugs, while the increase in patent
expiries is also putting pressure on the innovators.
recently, several large pharma companies have declared
their intent to outsource their manufacturing to costefficient destinations.
As a result, says sankaraiah, the prospects for Jubilant
Life sciences are bright, and he hopes it will grow by 20%
to 30% year-on-year. Hopefully, this growth phase will not
lead to yet another name change. n
november 2011 Reporting [14/15]
Islamic finance
– the challenges of reporting
As the influence of Islamic finance spreads, there is an increasing focus on the
differences between the way financial reporting is carried out under Islamic
rules and the template set out under global standards. Andy Davis reports
There are few businesses anywhere
that are growing as fast as the market for
islamic financial services. As economic
development and wealth spreads across
the muslim world, the sums flowing into
institutions that offer islamic alternatives
to conventional products are multiplying
rapidly. Total sharia’a-compliant assets
are estimated to have passed us$1t
in 2010 and, at the current rate of
growth, are expected to reach us$4t by
2020. However, although it is growing
fast, islamic banking still currently only
represents about 1% of global banking
assets, so there is ample scope for growth
to continue.
Demand in the Gulf states, buoyed by oil
and gas revenues, has been particularly
strong. in recent years, islamic bank assets
in Qatar have grown at 50% a year and
now make up 22% of total bank assets. in
the uAe, growth has reached 38% a year
and sharia’a-compliant bank assets make
up 17% of the total.
The core customers in these markets,
some 10%–20% of the total, are those who,
because of their religious convictions,
will only purchase sharia’a-compliant
products. but beyond this group lies
a much larger one, says Ashar nazim,
menA Leader, islamic Financial services at
ernst & Young in bahrain. This larger group,
representing 40%–50% of the market
in muslim countries, uses conventional
banking and insurance, but would be likely
to choose sharia’a-compliant equivalents if
they were readily available and offered the
required features at an attractive price.
so the market for providers looks
buoyant. This rapid growth, however,
is raising its own questions, mainly
because it is bringing into focus important
differences between the way financial
reporting is carried out under islamic rules
and the template set out under global
standards such as iFrs or GAAP.
nEEd FOR ExTRA
dISCLOSuRE
“The fact that institutions can report
and disclose similar transactions in
different ways poses problems for those
institutions, as well as for the development
of islamic finance itself,” says Aziz Tayyebi,
Head of international Development at
the Association of Chartered Certified
Accountants. He argues that islamic
financial institutions can clearly see the
benefit of globalizing and accessing
finance across different jurisdictions and
that, to do so, they will need to use the
same standards as non-islamic institutions.
US$4t
Estimated global total of
Sharia’a-compliant assets
by 2020, if the current rate
of growth is maintained
However, he also argues that they will
need to provide extra disclosure in their
reporting that explains important
differences in the form that sharia’acompliant transactions take.
There are many detailed differences
between the way financial dealings
are reported under sharia’a principles
and under iFrs. in a useful paper, the
Asian-oceanian standard-setters Group
(AossG) has boiled them down to two
big issues.
The first is the so-called “time value
of money,” which underpins the idea
in Western economies that cash can
earn interest over time. under islamic
principles, riba, or excess (usually
meaning interest), is forbidden and an
alternative way must be found to provide
a return on money. some argue that this
prohibition also forbids the discounting
of future cash flows to generate a
net present value, an essential tool in
conventional reporting.
The second is that islamic finance places
special emphasis on the nature of the
legal contracts that define transactions, in
addition to seeking to capture, primarily,
their economic substance.
The effects of these two differences
can be pronounced. For example, since
a conventional deposit account that
pays interest would not be permitted,
alternatives exist that, in effect, allow
the customer to receive a return by
taking a share of the profit or loss
InfORmATIOn: ISLAmIC fInAnCE
earned by the bank. For reporting and
governance purposes, this raises the
question of whether these depositors
are equity participants in the bank,
depositors in a conventional sense, or
a hybrid that is more akin to the way
mutual funds operate.
similarly, if a company buys an
asset under a lease agreement, under
iFrs, leases that meet the definition
of a finance lease are recorded on the
lessee’s balance sheet, while the bank
would record a receivable in its books for
the principal and interest payable. under
islamic financial standards, the asset
would stay on the bank’s balance sheet
until the lessee has finished paying for
it. The outcome may be the same, but
the form of the legal agreement in both
cases is of paramount importance.
nazim says that under islamic
financial contracts, “the rights and
obligations are fundamentally different
from the way they are defined in
conventional contracts.” This can affect
how and when revenues and liabilities
are recognized, he says, how a bank’s
capital adequacy is worked out and how
its liquidity is managed.
nO SInGLE APPROACh
The debate now involves how far these
two approaches to reporting can be
reconciled, and to what extent islamic
finance is going to need its own,
separate set of reporting standards. As
things stand, there is no single approach
across the main islamic finance markets,
though most use iFrs or GAAP and add
certain further requirements for islamic
financial institutions operating in their
country, whether these are local banks
or sharia’a-compliant branches of
international banks such as HsbC.
These additional reporting standards
were frequently the work of the
Accounting and Auditing organization
for islamic Financial institutions, which
has published more than 50 standards
since it was established in bahrain in
1991. However, many people involved in
this field are looking to the international
Accounting standards board (iAsb) to
produce detailed proposals on how the two
approaches should be brought together.
malaysia has a well-developed sharia’a
“40%-50% of the market
in Muslim countries uses conventional
banking and insurance, but would be likely
to choose Sharia’a-compliant equivalents if
they were readily available”
Ashar nazim, Ernst & Young
banking system, ranked third in the world
in 2009 by The Banker magazine behind
iran and saudi Arabia, with about 10.5%
of global sharia’a-compliant assets. The
malaysian Accounting standards board,
which is the lead member of the AossG,
concluded in 2009 that “the financial
reporting principles in the iFrs do not
conflict with sharia’a.” instead, it decided
that the main difference between the two
approaches to reporting “was not that of
recognition and measurement, but the
extent of the information that needed to
be provided to users.”
even so, there is a clear recognition
that, for this to be widely accepted, the
religious authorities must agree. “in an
industry founded on religious beliefs,
concurrence by sharia’a scholars is of
paramount importance,” observes the
AossG report.
iAsb vice-Chairman ian mackintosh
says that, over the coming months,
the organization will announce
the results of a consultation with
its members on what its priorities
should be for the next few years.
islamic financial reporting is
certain to be on the list of areas
under consideration.
“The point is that these
financial transactions are
taking place and people want
similar transactions to be
reported in a similar way,”
mackintosh concludes. n
22%
Islamic bank assets
as a proportion of
total bank assets in
Qatar, where they
have been growing
at 50% a year
november 2011 Reporting [16/17]
In a post-WikiLeaks world, has the
concept of confidential information
become redundant? Serge Debrebant
examines the issues facing companies
whose secrets could become public
knowledge at any moment
A question of
transparency
photography: Peter Guenzel
InSIgHT: THE WIkILEAkS EffECT
In July 2009
, when iceland was in the midst
of a financial crisis, local television reporters
discovered a cache of potentially explosive documents.
The paperwork suggested that major shareholders of
Kaupthing, the country’s biggest bank, had borrowed
large sums of money unsecured by any significant
assets shortly before the bank collapsed. Although the
records did not indicate any wrongdoing, they revealed
a potential conflict of interest.
The reporters worked intensively on a feature for the
evening news, but five minutes before the start of the
show, the authorities intervened and forbade the station
to air the report. The station complied, but, by way of
protest, the anchorman advised viewers to take a look at
the documents themselves. For several minutes of live
airtime, he showed the name of the website on which
they could be found: wikileaks.org
The information will come out, it seems. but, as
businesses are quickly learning, WikiLeaks speeds up
that process — and often skirts the old obstacles that
companies used to be able to throw up.
Founded by Julian Assange and other activists in
2006, the website states that its purpose is to uncover
unethical behavior in governments and corporations. it
does so by enabling whistle-blowers to send it internal
documents anonymously and without fear of being
detected. The most widely read scoops to result from
this enterprise have been about international affairs
— notably the Afghanistan files and us diplomatic
cables — but the goings-on of the business world have
also been a focus. in recent years, WikiLeaks has
targeted large companies, with a particular focus on
the banking sector
sector.
Last november, Assange told Forbes magazine that
about half of the documents that WikiLeaks possesses
relate to the private sector. in the same interview, he
announced that the next target would be “a big us bank.”
WhISTLE-BLOWInG MAdE EASY
Whistle-blowing is neither a new phenomenon, nor is it
restricted to WikiLeaks. However, the website has made
it easier for disgruntled
employees to reveal
company data. in addition,
the digitization of the
workplace plays into the hands
of those with a mind to steal
sensitive data and share it online.
For companies, the probability that
internal documents might show up in the
public domain has increased exponentially
in the space of a decade. “every company is a
potential target,” says David Chamberlin, Director
of issues & Crisis management at us public relations
agency msLGrouP.
Those who don’t recognize this learn it the hard way.
in 2008, swiss bank Julius baer discovered that rudolf
»
november 2011 Reporting [18/19]
Julian Assange, one of
the founders of WikiLeaks,
and now its spokesperson
“When people think
you live in denial, they respond
badly. Sometimes, the mere act of
communication matters more than
precisely
what you say”
Philip Gawith, Stockwell Group
»
elmer, a former employee, had published on WikiLeaks
internal documents from a subsidiary based in the
Cayman islands. elmer worked there from 1994 to
2002, when he was fired. There ensued a long fight with
his former employer. He accused Julius baer of helping
wealthy clients to avoid taxes by transferring money
offshore. The bank quickly tried to obtain an injunction,
and a judge in California complied, ordering that
WikiLeaks’ domain name be shut down. it was — but,
almost instantly, mirror sites appeared, and with them
the very material Julius baer had wanted to suppress.
Two weeks later, the judge vacated the injunction.
Julius baer’s decision to take legal action had
backfired. not only were the documents still accessible,
but the injunction had also raised the profile of the case
at a time when American and european governments
were trying to crack down on tax evasion. The us media
published the numeric address of WikiLeaks, allowing
readers to access it directly, and several press and civil
rights organizations defended the website in the name of
freedom of speech. Without Julius baer’s intervention,
the spat with elmer might have gone unnoticed. instead,
it became the victim of one of WikiLeaks’ first big scoops.
The bank had experienced what technology journalist
mike masnick christened the “streisand effect.” in 2003,
actress barbra streisand tried to suppress the publication
of photographs of her house in California, only to discover
that the public outrage over her legal intervention led half
a million viewers to the website on which they were
posted. As Philip Gawith, managing Partner at the
London-based communications agency stockwell Group,
puts it: “There will always be a place for a legal response,
but in a digital world, you need to be more careful.”
STOPPInG ThE LEAk
How, then, are companies supposed to deal with
WikiLeaks? The most obvious step is to try to prevent
the leak in the first place. A survey conducted for the
software company sailPoint in 2009 showed that only
14% of organizations felt they had adequate controls in
place to prevent leaks. Grady summers, who leads
information security Program management services at
ernst & Young, observes that many companies do not
pay enough attention to data security. He lists
inappropriate access control, understaffing and outdated
crisis response plans as the main issues — issues that are
getting an ever-higher profile. “WikiLeaks has made iT
security a boardroom issue,” he says.
InSIgHT: THE WIkILEAkS EffECT
Legal difficulties
3%
media law expert Jeremy Clarke-Williams explains the pros
and cons of taking legal action against those involved in the
publication of confidential company information.
The fall in one major
bank’s share price
following speculation
that documents relating
to it were about to
appear on WikiLeaks
What legal measures can firms take against WikiLeaks?
If it’s confidential material, the company has a claim for
breach of confidence. But that’s where the difficulties
begin. WikiLeaks uses hosts in countries such as Sweden
that have strong legal protection for confidential sources,
which makes it difficult to sue. The company could also try
to find the source; for example, a disgruntled employee.
But I would advise them to run a sophisticated cost-reward
analysis beforehand. You can spend an awful lot of money
with uncertain results. We’ve yet to hear of any significant
successful legal action against WikiLeaks.
14%
Why have legal actions proven to be ineffective? In 2008,
Julius Baer managed to get an injunction, but the material
was quickly published on mirror websites …
That’s the problem with the internet. When something is
closed down, the material might quickly pop up elsewhere.
Of course, the people publishing documents need to be
aware that even if they are simply republishing material,
they can become the targets of a legal claim. But if someone
publishes anonymously, it’s difficult to sue. It doesn’t
surprise me that Julius Baer found it somewhat frustrating.
The legal remedies were established in a different age and
are probably not fit for purpose anymore.
proportion of companies
that felt they had
adequate controls in
place to prevent leaks,
in a 2009 survey
Is there also a danger of raising the profile of the case
when a company brings it into court?
I advise clients that a person who’s publishing material on an
obscure website might be delighted to defend their position
in court. If the publication is confined to a small audience, you
might be better off letting it lie. But that’s an uncomfortable
situation. If the matter blows up into something bigger and
you haven’t reacted, people will ask: “Why didn’t you do
something about it when it first appeared?”
When summers advises companies, he outlines a
four-step plan. First, he helps the company to identify
sensitive data. Then, he helps it to come up with a data
governance policy with appropriate access control and
proper training of employees. Data loss prevention tools
that control data movements help to enforce the policy.
Finally, a crisis response plan empowers executives to
react quickly in case a data breach occurs.
but proper iT security doesn’t rule out leaks. “nothing
is secure,” says Chamberlin, and a look at the data
WikiLeaks has published so far confirms this view. it
includes not only highly sensitive data such as customer
details or secret reports, but also emails, phone
transcripts and other material that would not necessarily
be considered highly confidential, yet could still
embarrass a company or government.
in Chamberlin’s view, it is important to tackle the root
causes of unethical behavior and think about the values
of a company and the way they play out in what
executives do and say. “if there isn’t a level of integrity
and consistency, it’s likely to lead to significant problems,
because everybody’s watching,” he says.
Julian Assange says the site makes business easier for
good companies because the publication of embarrassing
material punishes the bad ones. Is that how you see it?
It’s nice to know that someone has such a clear vision about
what’s good and bad. Business is a difficult area to play god
in. I wish him well if he’s able to do it for the benefit of all of
us. But it might not be as straightforward as he thinks.
do you think websites such as WikiLeaks push companies
to be more open and transparent?
The tendency to keep business activities confidential is
pretty ingrained. maybe, after several decades, this sort
of activity might be seen as beneficial. But, on the whole,
things are confidential for a reason.
RESPOnSE STRATEGIES
All the professionals interviewed for this article agree
that when a leak occurs, the response has be to swift
and precise. Companies such as ernst & Young offer
exercises to test how well a crisis plan works. “it has to
involve all relevant departments: iT and legal, but also
»
Jeremy Clarke-Williams is Head of the Media, Libel
and Privacy department at the UK law firm Russell
Jones & Walker.
november 2011 Reporting [20/21]
»
human resources and public relations,” says summers.
Although often overlooked, Pr plays a key role. “You
need to get your version of events out,” says Gawith.
even if a company is still trying to verify the accuracy
of the leaked documents, it should quickly start
communicating. “When people think you live in denial,
they respond badly,” he adds. “sometimes, the mere
act of communication matters more than precisely
what you say.”
A close look at the documents might also lead to a
response strategy. in the case of Julius baer, the bank
was able to show that elmer had forged a few of the
published documents, which helped the bank to
question his credibility.
if the leaked documents turn out to be real, and
point to real problems, it is better to acknowledge the
revelations and explain how the company wants to
improve its operations, than to blame WikiLeaks or
smear the whistle-blower. “You have to explain how
to fix things so that they don’t happen again,”
Chamberlin says. And of course, in the aftermath,
a company has to turn words into actions in order
to rebuild trust.
hELPInG ThE MARkETS TO FunCTIOn
such an outcome would be exactly what Assange
and his collaborators hoped for when they founded
WikiLeaks. in the Forbes interview in november 2010,
he explained that he “loves markets” and that “in order
for there to be a market, there has to be
information.” From his point of view, WikiLeaks
acts as a beneficial corrective to company
secrecy and enables markets to function
properly. Transparency enables stakeholders
and consumers to make an informed decision
that ultimately leads to more ethical business
practices than before. “WikiLeaks means it’s
easier to run a good business and harder to
run a bad business,” he said.
in the long run, the work of WikiLeaks and
other whistle-blower websites may prompt companies
to communicate more openly with the public,
shareholders and customers. “it‘s a tendency that i had
observed before WikiLeaks,” says Gawith. “People take
a greater interest in how businesses are run than they
did 10 years ago.”
ethical consumerism is the most prominent example
of this trend. Fair trade certification systems guarantee
transparent supply chains, while nGos such as the
environmental investigation Agency, with its
investigations into illegal logging, have forced companies
to change their behavior. in that respect, WikiLeaks is
just one of a number of factors that are contributing to
a trend toward greater transparency in business. n
“WikiLeaks means
it’s easier to run a good business
and harder to run a bad
business”
Julian Assange, WikiLeaks
InSIgHT: THE WIkILEAkS EffECT
Companies are coming under ever greater pressure to disclose what
they pay their senior executives. Vince Heaney investigates whether
increased scrutiny is improving governance in this area
The
remuneratıon
game
Three years on from the onset of the financial crisis,
boardroom pay remains a highly contentious issue for a range
of stakeholders. regulators, more than investors, are driving
reform to the design and disclosure of remuneration plans, while
the media focuses on levels of pay, which has created a source
of reputational risk for companies. but is this intense scrutiny
producing a better system of governance for remuneration?
Any discussion of disclosure has to address what should
be disclosed and to whom. ideally, disclosure should allow
stakeholders access both to the details of the different
components of compensation — salary, bonus and long-term
incentive plans — and to how remuneration policy is linked to
the company’s performance strategy. Comparison should also
be possible between compensation outcomes and the stated
strategy. That information needs to be disclosed to the
company’s shareholders and, increasingly, also to regulators
and governments, which have a wider public policy agenda that
may not be completely aligned with shareholders’ interests.
“The argument for greater disclosure is that ‘sunlight is the
best cure,’” says mark edelsten, Director in ernst & Young’s
Performance & reward team. “The more transparency there is,
the more external pressure there should be to keep excessive
pay demands under control.”
»
»
october 2011 Reporting [22/23]
month 2011 Reporting [23/23]
»
The trend is toward increased disclosure of executive
pay (see panel, p26). so what effect has this had on
companies’ relationships with their stakeholders? While
only introduced in January this year, us “say on pay”
rules have already had an impact on executive pay
practices. From its analysis of the 2011 reporting
season, Clearbridge Compensation Group (a
consultancy firm) highlights that compensation is
becoming more oriented toward “pay for performance,”
both through an increase in performance-related
elements and a reduction in, or elimination of, nonperformance-related components. “For example, Ge
added performance hurdles to the Ceo’s stock option
grants,” says russell miller, managing Director of
Clearbridge. “Disney, meanwhile, eliminated the tax
gross-ups in its compensation program.”
miller also notes changes in the way in which us
companies are communicating with shareholders on
compensation, both by providing more and clearer
information on remuneration in their proxy statements
and by directly engaging with shareholders.
There is, of course, a difference between quantity and
quality, as the longer experience of “say on pay” in the
uK suggests. “‘say on pay’ has been effective in creating
a great deal of dialogue between companies and
shareholders,” says marc Jobling, Assistant Director,
35%
Amount by which
the median total
remuneration
(which includes
short- and
long-term pay
elements) for
CEOs of S&p 500
companies rose
in 2010,
compared
with 2009.
median annual
remuneration
(salaries and
short-term
bonuses) for
this group rose
by 22%
“If performance is so clearly poor that the company wants
to reduce the CEO’s deferred bonus, perhaps the more pertinent question
is whether that executive should still have a job”
Mark Jobling, Association of British Insurers
Corporate Governance, at the Association of british
insurers (Abi). “but what we lack are really convincing
explanations of the link between a company’s strategy
and its remuneration policy and the outcomes of that
policy.” Jobling also has concerns that there may be too
great a focus on boardroom pay. “There is so much focus
on remuneration, but it might not be the most material
factor driving the company’s performance.”
POOR EnGAGEMEnT
While the Abi devotes considerable resource to
engagement on boardroom pay — it facilitated more than
200 consultations on remuneration between companies
and its members in 2010 — there is a perception in some
quarters that the quality of engagement is often poor.
“institutional investors lack the knowledge and capacity
to discuss boardroom pay at a very detailed level,” says
Carl rosen, executive Director of the international
Corporate Governance network (iCGn).
“investors, mainly fund managers, acting as the
agents of the ultimate owners, such as pension funds,
devote insufficient resource to the activity,” adds Colin
melvin, Chief executive of Hermes equity ownership
services, a shareholder advisory group. “That’s not the
fault of the individuals involved, but it means that those
resources are overstretched, producing a complianceoriented approach that follows the letter of the law
through a box-ticking mentality.”
in addition to interacting with their institutional
shareholders, companies must increasingly deal with
regulators about executive compensation. in certain eu
states, for example, government and regulators are
taking an active interest in the design of pay structures,
particularly in the financial services industry in the wake
of the banking crisis. “A lot of governance deliberately
focuses on pay structures rather than pay levels, trying
to exercise influence by addressing design as a proxy for
addressing pay levels,” says edelsten.
some jurisdictions, however, have been prepared to
address pay levels directly, where government ownership
of the institutions involved has made it possible.
“in Germany, it’s very straightforward,” says rené de
InSIgHT: ExECUTIvE pAY
“There is
plenty of
research
to show that
increasing data
transparency
has led over time
to the bidding
up of executive
pay levels
”
Mark Edelsten,
Ernst & Young
Zwaan, who leads the Global Financial services sector
at executive search consultants russell reynolds
Associates. “if a company has accepted money from
the state, an executive’s total compensation cannot
exceed €500,000.”
However, as not all jurisdictions have followed a similar
approach, the result has been a distorted labor market.
“if you work for an international bank in Germany, it can
pay you the same as they would in the us or uK, but if
you are working for a Landesbank that has accepted
state funds, the cap applies,” says de Zwaan. “A few
Landesbanken have had problems hiring or retaining
Ceos as a result.”
in a similar fashion, varying treatment of deferred
bonuses in different jurisdictions means that the us and
european financial services industries are working under
different conditions. According to a report published in
June by mercer1, most european banks now have
performance conditions — or “malus” arrangements
— for reducing or eliminating deferred amounts if there
are losses or if performance conditions are not met. in
contrast, many us banks have not yet introduced these
performance conditions for deferral payouts. The report
highlights that 88% of european companies surveyed
have long-term incentive stock awards dependent on
performance conditions, compared with 50% of
respondents in the us. For stock option plans, 75% of
european companies require performance conditions to
be met, compared with none of the us participants.
making claw-back and malus clauses stick in the
courts is not straightforward, however. “While you can
have rules about disclosure and rules banning certain
structures, it’s very difficult to have legislation about
pay levels,” says rosen. De Zwaan adds: “There have
been one or two cases in continental europe where
banks have tried to claw back cash paid out, but it
hasn’t been upheld in court.” Also, as Jobling points
out, “if performance is so clearly poor that the
company wants to reduce the Ceo’s deferred bonus,
perhaps the more pertinent question is whether that
executive should still have a job.”
A RESTRAInInG InFLuEnCE?
so have changes to disclosure and pay design had a
restraining influence on pay? The figures suggest not.
Governancemetrics international’s Preliminary Ceo Pay
survey for us companies indicated that the median total
remuneration (which includes short- and long-term pay
elements) for Ceos of s&P 500 companies rose by 35% in
2010 compared with 2009. median annual remuneration
(salaries and short-term bonuses) rose by 22%.2
While it is arguably too early for “say on pay” to have
had much impact in the us, the uK experience paints a
similar picture. According to manifest, a uK-based proxy
voting agency, median 2010 remuneration of Ceos of
FTse 100 companies rose by 32% compared with 2009,
»
november 2011 Reporting [24/25]
as compared with the FTse 100 index, which rose by just
9% in the same time period.3
The 2010 rebound, however, owes a lot to the
restraining influence on pay of the financial crisis and
subsequent recession in 2008 and 2009. moreover,
statistics cannot prove a negative, and executive pay
might have grown even faster in the absence of “say on
pay.” “in the early to mid-2000s, it looked as if the uK
was following the us in terms of growth in executive
pay,” says melvin. “but the introduction of ‘say on pay’
in 2002, while not preventing executive pay from
increasing, has kept a lid on it — better than in the
us, where engagement is not yet as good.”
edelsten, however, argues that greater disclosure can
Regulatory push
The current trend in a number of jurisdictions
is toward more disclosure around executive
remuneration. The uK has, since 2002, required
public companies to produce a remuneration report
on which there is an advisory vote at the AGm, and
it is often held up as a template for disclosure.
This trend to allow shareholders a vote, which
is now known as “say on pay,” has since spread to
other jurisdictions. As part of the 2010 DoddFrank financial reforms4, the us now requires
companies to hold an advisory vote on executive
compensation at least once every three years.
The european Commission’s most recent green
paper on governance recognized a mismatch
between performance and executive directors’
remuneration and questioned whether to legislate
pay disclosures and a
shareholder vote on
“In emerging
remuneration policies.5
markets,
regulatory push “The european
Parliament learned
toward stricter from the financial
governance
services crisis that it
on pay is less
is relatively easy to
become more activist
evident”
and drive change from
the center,” says mark edelsten of ernst & Young’s
Performance & reward team. “There aren’t
many barriers to introducing new legislation, and
resistance from stakeholders to having a common
framework has crumbled.”
Ahead of possible eu-wide legislation, several
european countries already offer “say on pay,”
with Germany requiring an advisory vote and
France, the netherlands and sweden requiring
a binding vote on the remuneration report.
meanwhile, in June 2011, the Australian
Government introduced new rules that would
allow shareholders to oust a company’s entire
have perverse effects. “some pay transparency is
necessary for any part of the labor market to work
effectively. but there is a particular problem with
executive pay and the executive labor market, as the
market is essentially very thin,” he says. “There is plenty
of research to show that increasing data transparency
has led over time to the bidding up of executive pay
levels. This is not an argument against disclosure, but
an argument for greater restraint and discipline and,
potentially, for the introduction of standards for those
using executive pay data and advising in this area.”
one manifestation of this trend is the practice of
justifying high executive pay relative to average wages
as necessary to attract and retain top talent. As melvin
argues, however, “often, it is not evident that there is an
efficient market in executives. Generally, there is less
mobility than is claimed in most industries.”
Despite instances of unintended consequences and
continuing examples of rewards for failure, it seems
that remuneration governance is moving in the right
direction. A greater focus on relating rewards to
performance and aligning management incentives
with a company’s longer-term value creation goals
is being pursued in a number of jurisdictions.
The uK may point the way forward. The uK Corporate
Governance Code of June 2010 stipulates that all
directors of FTse 350 companies are now subject to
annual re-election by shareholders. “What we hear
from institutional investors is that they are considering
using the re-election vote rather than the advisory vote
on the remuneration report if they are dissatisfied,”
says Jobling. “A vote against a director rather than
a remuneration report is a powerful signal.” n
Global Financial services executive incentive Plan snapshot survey.
Figures quoted by Catherine Jackson, Corporate Governance Advisor
north America, PGGm investments, in “say on pay” article for the 2011
iCGn yearbook.
3
ibid.
4
Dodd-Frank Wall street reform and Consumer Protection Act 2010.
5
european Commission, The EU Corporate Governance Framework,
April 2011.
6
Corporations Amendment (improving Accountability on Director and
executive remuneration) Act 2011.
1
2
board if there were two successive annual votes of at
least 25% against the remuneration report.6
in emerging markets, regulatory push toward
stricter governance on pay is less evident. in general,
wage structures in emerging countries are more
compressed and lower than in the developed world, for
cultural, historical and political reasons. However, in
russia, india and China, extremely rich executives are
emerging, often heading up public businesses.
“You could argue that these are the most acute
global examples of the result of an absence of
governance,” says edelsten. “many of these countries
have, until recently, had limited or no corporate
governance structures at all. in these circumstances,
these extremely rich individuals are like political lottery
winners. The normal rules don’t seem to apply.”
InSIgHT: THE
InSIgHT:
WIkILEAkS
THE BUY
EffECT
SIDE
The
buy
side
In ThE FIRST OF A SERIES fEATURIng SEnIOR InvESTORS,
HUgH YOUng, ASIA mAnAgIng DIRECTOR Of ABERDEEn
ASSET mAnAgEmEnT, ExpLAInS WHAT HE LOOkS fOR In
COmpAnIES HE’S COnSIDERIng InvESTIng In
Hugh Young is one of the
most experienced and
successful institutional
investors working in the
Asian stock markets. He’s
a lead manager for the giant
asset management group
Aberdeen (where he’s also
on the group board) and
runs its Singapore-based
operations as managing
Director. He co-founded the
Singapore-based Aberdeen
Asia business in 1992,
having been recruited in
1985 to manage Asian
equities from London.
We don’t invest in anything unless
we have met the management, ideally in
various meetings over a period of time.
observation of how companies behave
under stress is an important ingredient of
our process. That tends to mean that we
hold our companies for a prolonged period
as we gain “comfort.” We also analyze the
company financials and cross-check with
other industry contacts.
When we invest in a company, we
follow a bottom-up process based on
a disciplined evaluation of companies
through direct visits and analysis of their
financial statements and reports. We
estimate a company’s worth in two stages:
quality, then price.
When filtering for quality, we look at the
core franchise, recurring earnings growth
from the core business, the quality of the
management team, a strong, transparent
balance sheet and its past treatment of
minority shareholders.
Price is calculated relative to key
financial ratios, market, peer group and
business prospects.
We ask whether the company has
good growth prospects and the balance
sheet to support expansion. The major
difference between east and West is that
Eastern
promise
companies in the east tend to have a
controlling shareholder, whether that is
government, family or multinational, so a
vital part of our process is ensuring that
the key shareholder is acting in all the
shareholders’ interests.
When it comes to financial statements,
we look particularly at operating cash
flow against reported profits, where we
seek to reconcile the differences. We then
strip out capex to get at free cashflow,
which is the cash available as returns
to shareholders.
WhO’S In ChARGE?
There aren’t any particular issues with
southeast Asian countries beyond the
general one of who are the real drivers
of the business we are investing in, as
well as our need to be happy with the
accounting standards.
many investors point to the issue of who
is in control. in China, for instance, the
larger companies are essentially controlled
by the Government, so this issue involves
the Government and the transparency
thereof. but that issue is present elsewhere
in the Asian region as well.
it can also be an issue of families.
broadly, we divide the family-controlled
companies into two camps. At one
end, you have extremely hard-working,
conservative families and, at the other,
the opposite.
The part of the process we’ve found
ourselves focusing on in the past few
months is the reputation and background
of the controlling shareholders. in
indonesia, for example, we’ve avoided
the companies connected with suharto
[President until 2008]. n
november
month 2011
2011Reporting
Reporting[26
27
[26
/27
/27
] ]
5
things
I’ve
learned
Julie Meyer has experience of both sides of the
reporting equation. She tells us what she’s learned
from her years spent analyzing companies and
communicating with her own stakeholders
Interview: Andy Davis photography: Harry borden
1) Trust is vital
Ariadne Capital is my fourth business,
and the biggest lesson i’ve learned from
all my businesses is the importance of
being trustworthy, instilling trust in all
relationships, and not bringing people into
the team who don’t operate in this manner.
everything comes down to whether people
trust you, so the most important thing is
your personal character. i focus on making
sure that people can trust what i say, then
i “over-communicate” so that people know
this is the way i do things, and if there’s
anything bothering them, we’ll be able to
discuss it. importantly, they give me the
benefit of the doubt because they trust me.
2) Learn from your mistakes
i think deeply about mistakes i’ve made. my
biggest lesson came when we were setting
up [networking forum] First Tuesday. i’d
been raising money for brent Hoberman and
martha Lane Fox at lastminute.com. i’d seen
how closely they worked together. i wanted
a partnership like that. but my partners at
First Tuesday were giving me clear signals.
They could not have been more clear that
they were going to be disengaged and
weren’t as committed as i was. i didn’t see it
at the time. Who you go into business with is
nearly as important as who you marry.
3) The CEO is the architect of
the business
i’ve always believed the people who own the
numbers in a business are in a very good
position to control the dialogue and strategy
of a firm. i’ve found that the best way to
work with a CFo is to agree the metrics that
you are going to use, and then empower
them and delegate. They are the financial
architect of the business. but as Ceo, i’m
the architect.
4) Get a good night’s sleep
if you have to communicate a difficult
message, the most important thing is to
get a lot of sleep the night before. i’m not
joking. To do my current job, you have to
be in good mental, physical and emotional
shape. it’s like being on an airplane — you
have to put your own oxygen mask on
before you can save your children. if you
have personal issues going on, you’ve got to
eliminate them somehow. it’s just not going
to work if you’re not in a stable situation
yourself. And if you’re not, it probably
means you should do something different.
5) You can only do so much by email
i have 58 shareholders and they’re
everywhere from san Francisco to Tokyo
and from mumbai to italy. You can only do
so much by email, but i keep a regular flow
of communication going on. And when i
travel, i make sure i see people; you try to
ensure that there’s a relationship and that
you don’t just go and see them when there’s
a problem. There are no shortcuts. These
people own the business and they have an
influence on who i am in the market. As an
investor, i look at how the entrepreneurs
we work with communicate with their
shareholders and interpret this for them
— although some have been too young to
take the advice. sometimes i’ve deliberately
scared them; i want to live in a carrot world
and not a stick world, but some people need
to have a vision of how black it could be in
order to get them to do the right thing. n
12
Trust
is vital
InSpIRATIOn: JULIE mEYER
Learn from
your mistakes
34
The CEO is
the architect of
the business
5
Get a good
night’s sleep
You can only do
so much by email
American-born Julie Meyer is CEO of Ariadne Capital, which
she set up in August 2000 with backing from 58 entrepreneurs,
and managing partner of the Ariadne Capital Entrepreneurs fund,
which closed its first round of fundraising in early 2011. She founded
the networking organization Entrepreneur Country in
2008. Before Ariadne, meyer was one of the four founders of first
Tuesday, which was set up in 1998 and sold to Yazam in 2000. She
sits on the boards of the business school InSEAd and
Vestergaard Frandsen, a for-profit humanitarian development
organization based in Lausanne, Switzerland.
november 2011 Reporting [28/29]
reporting:
the future
Critics say many annual reports have become bland and
uninformative, while the constant drip-feed of financial
information has reduced their relevance. Christopher Swann
examines the issues and looks at ways of making the annual
report a more valuable document
InSIgHT: THE fUTURE Of THE AnnUAL REpORT
The arrival of
a company’s
glossy annual report was once a muchanticipated event. investors eagerly
scanned the document for the latest
information on a firm’s shifting fortunes
and changes in strategy.
but these publications seem to be
losing their shine. Long before they
land on doormats or in inboxes, analysts
have plugged headline-grabbing
numbers into their spreadsheets. The
yearly dump of financial information
has been replaced by a constant
drip-feed. And much of these everbulkier documents now consists of
bland disclosures intended to placate
regulators rather than inform investors.
To make matters worse, much of
the valuable information requires hard
digging to extract, even by skilled
analysts. overall, annual reports serve up
“a combination of boilerplate language
and marketing spin,” says robert Talbut,
Chief investment
officer at royal
London Asset
management.
“i find them of
little or no use,
aside from the
numbers.”
The problems
can be even more
acute outside the
main developed
markets,
according to
Colin melvin,
Andrew Hobbs, ernst & Young
Chief executive
of Hermes
equity ownership services, which helps
institutional investors.
“overall, reporting standards in
emerging markets tend to lag those of
developed markets, not only in the quality
and quantity of information, but also in
the timely delivery of key materials,” he
says. “it is also common that disclosure is
initially provided in local languages, and
that distribution in english is delayed,
often hindering the ability of proxy voting
international investors to vote intelligently
and on time.” These issues are often most
acute in eastern europe and the middle
east, while melvin says that Asian reports
— especially those from singapore and
Hong Kong — are of a higher quality.
Amid such carping, annual reports are
in danger of becoming ever less relevant.
so, is there anything companies and
officials worldwide can do to restore the
“Corporate
reporting needs to
tell a more coherent
and balanced story
about a company’s
business model,
the risks to it and
how they’re being
managed”
luster of these once pivotal documents?
First, it’s worth noting that a firm’s
yearly data dump has not completely
lost its usefulness. According to Andrew
Hobbs from regulatory & Public Policy
at ernst & Young, the annual report still
has a crucial disciplining role. “it is, of
course, a benchmark by which all other
statements by a company can be judged,
not least because it bears a stamp of
approval by the auditors,” he says. As a
result, it enables shareholders to assess
the veracity of the other numbers a firm
discloses during the year.
Without this constraint, firms might
be more tempted to issue self-serving
forecasts, says Phillip stocken, Professor
of Accounting at Dartmouth College
in the us. “management teams have a
clear incentive to be more upbeat when
stock options are about to expire, since
it will help to boost share prices at a
vital moment and thus lift their total
compensation,” he says. “Chief executives
are also prone to unrealistic exuberance
when a firm is doing badly, since it may
enable them to hold on to their jobs for
longer. Academic research shows that the
audited annual report helps keep these
tendencies in check.”
Reporting apps
As of October 2011:
79
annual reports
are available
to download as
ipad apps
A COnSISTEnT nARRATIVE
still, few would deny that annual reports
are badly in need of a facelift.
one of the most obvious deficiencies
of many annual reports comes in the
management’s own written statement.
in theory, this account — known as the
management Discussion and Analysis in
the us, and the operating and Financial
review in the uK — should spell out the
vision of the company’s leaders. since
most of the financial figures are already
in the public domain when the report
comes out, this section should provide
much of the added value. What an investor
really needs, says Talbut, is “a consistent
narrative running through the report and
accounts with a realistic assessment of the
risks, strategy and prospects of a firm.”
instead, he says, they are more likely to
get a “promotional document that aims to
spin the story in the most positive possible
way for a company.”
in addition, few firms lay out specific
goals, according to Futurevalue, a
consultancy that helps companies
produce more compelling annual
reports. in 2009, Futurevalue calculated
that a quarter of FTse 350 firms
had “increase shareholder value” as »
7
annual reports
are available
to download as
iphone apps
4
annual reports
are available
to download as
Android apps
november 2011 Reporting [30/31]
»
their sole declared objective in their
annual report. Futurevalue Director
ian mcDonald Wood believes this is
“shockingly vague.”
many investors and accountants are
calling for change. For a start, firms
need to get better at drawing out
important themes for investors, says
ernst & Young’s Hobbs — especially
relating to the risks they face. “This
has become a more important issue,
especially following the financial crisis,”
he says. “information is available in
the financial statements that allows
users to assess a company’s ability to
withstand hard times. sadly, it’s not
found in one place in the accounts.
investors would welcome aggregated or
signposted reporting that helps them
to assess a company’s sustainability
in the face of future challenges; for
example, information about financing
“Reporting standards in emerging markets
tend to lag those of developed markets in the quality
and quantity of
information”
Colin melvin, Hermes equity ownership services
models, cash flows and other risks to
the business model.”
Yardsticks by which a management’s
progress could be judged would also
be helpful, says mcDonald Wood. For
example, if a company states that it
wants to be the most innovative firm in
its sector, it might set itself the goal of
having a certain share of sales coming
from products that it was not selling
three years ago. one shining example
of this, according to mcDonald Wood, is
swedish bank svenska Handelsbanken,
which offers shareholders a detailed list
A glimpse of the future
In July 2011, Ernst & Young commissioned a survey of senior
finance executives in 13 countries on the topic of financial
reporting (see p11 for more information). The results suggest
some of the ways in which annual reports are evolving:
how will you improve
transparency in your next
end-of-year reports?
4%
other
50%
more detailed
analysis of key risks
Coverage of
environmental
performance
19%
increased coverage
of non-financial
performance measures
36%
42%
36%
more detailed
information about
business forecasting
more detailed information
about business changes
and restructuring
35%
Description of
risk management
approach
of goals linked to a clear set of strategies
to get there and benchmarks by which
the board can be assessed.
FOOTnOTES TO ThE FORE
The fact that shareholders can get much
of the financial “meat” in advance has
also changed how investors consume
annual reports. Footnotes — once regarded
as bland — have become the stars of the
annual report. nexxar, a vienna-based
consultancy that helps companies to liven
up online reports, believes that between a
quarter and a fifth of readers go straight
to the notes at the back of annual reports.
“The main aim of the footnotes should
be to illuminate the more complex
numbers in the report and explain how
they are arrived at,” says Frank Curtiss,
a board member of the international
Corporate Governance network. “in fact,
many firms make a bad job of this. They
follow the letter of the law without offering
true transparency.”
ideally, Curtiss argues, firms would
provide much richer footnotes. For
example, investors would like to see
better breakdowns of where revenues
come from, including geographical
segmentation. For financial services
firms, sophisticated shareholders would
welcome more information on the
nature of financial assets and derivative
positions. “investors should be putting
more pressure on firms to include such
information,” says Curtiss.
even the figures provided have not
escaped criticism. The cash flow is
among the most disparaged parts of a
financial statement. most firms in the uK
and us use the indirect method of cash
flow reporting, which starts with a firm’s
net income and adds back in non-cash
items such as depreciation. “This is very
confusing for investors,” says stocken.
instead, many investors favor pushing
firms to adopt a direct method of cash
flow, which breaks out cash received from
customers and paid out to suppliers or the
tax authorities. This useful information can
be difficult, and sometimes impossible, to
tease out of indirect cash flow statements.
“The direct method is more expensive and
time-consuming for firms to put together,
InSIgHT: THE fUTURE Of THE AnnUAL REpORT
but it is far more useful to investors,”
says stocken. some firms, such as the
us pharmacy chain Cvs, already use this
method, but they are in a tiny minority.
IS TEChnOLOGY ThE kEY?
There are other ways in which annual
reports could be made more useful,
and technology may offer the key. The
internet can help provide more depth and
greater immediacy, while cutting printing
costs. “merely posting a PDF version of
an annual report on the web is no longer
enough,” says Thomas rosenmayr,
nexxar’s Chief executive. Continental
european companies have been in the lead
here, with uK firms catching up and many
in the us still lagging.
rosenmayr points to the online annual
report of chemicals firm bAsF (which
his company helped to design) as an
example of what can be done. First, the
huge document has an easy-to-use search
function, with all hits sorted by relevance.
This is especially useful when delving into
the minutiae of the notes. second, bAsF’s
site is highly interactive, allowing investors
to generate their own charts by selecting
the years and figures they are interested
in. “retail investors love to play around
with these functions,” says rosenmayr.
For the more discerning institutional
investor, any table or series can easily be
downloaded to a spreadsheet. both types
of investor welcome the online glossary,
which links readers directly from the text
to a firm’s definition of specific financial
terms. since each firm may define certain
terms in subtly different ways, this can be
useful even to sophisticated investors.
While bAsF is a particularly good
example of online reporting, rosenmayr
says it is not alone. in the us, intel and
General electric, in particular, have
produced highly user-friendly reports.
some companies are also making their
annual report available on other platforms,
such as the iPad. As of september 2011,
Svenska
handelsbanken’s
annual report offers
shareholders a detailed
list of goals, along with its
strategies to attain them
% of respondents who plan to provide more information on …
Financial
reporting
disclosures
driven by
changes in
accounting
standards
environmental
performance
(carbon tax,
carbon credits)
37%
32%
how do you believe
the content of your
next set of financial
reports will change
from last year?
73 annual reports were available as iPad
apps on the iTunes store site; 41 in english
alone, 22 in english and one or more other
languages and just one in French alone.
most impressively, indesit and statoil have
made their annual reports available in 21
languages, including Chinese, Japanese
and russian. For the most part, though,
apps are a north American and european
phenomenon for the time being.
InTEGRATEd SuSTAInABILITY
REPORTInG
A more recent question being asked is
whether annual reports should go beyond
the needs of shareholders to consider
the firm’s impact on society, requiring
businesses to analyze and disclose their
impact on the environment, employees
and communities in which they operate,
linked to their financial performance. (see
‘sustainability developments’, p8.)
A good example is southwest Airlines
in the us, whose report provides a wide
array of data that might not interest the
typical investor, including a breakdown
of greenhouse gas emissions
and charitable donations.
Advocates of this approach believe
there is more than altruism behind
such moves, since integrated reporting
can help institutions to identify risks
from failing to operate in a socially and
29%
37%
Going concern
discussions
evaluation
valuation of market risk
35%
37%
Capital flows and
financing decisions
sensitivity analysis
on price risks
(interest rate,
forex, commodity
price risk)
environmentally sustainable manner.
but, as accountants and regulators
look for ways to develop annual
reports for the 21st century, there are
also basic problems that need to be
addressed. Andrew Hobbs believes that
auditors should be asked to give a more
holistic opinion on the annual report.
“When a company fails, it is not
uncommon for the public to assume the
auditor has failed too,” he says. “The
problem is that the auditor’s current job
is fairly limited; it’s designed to provide
reasonable comfort that the financial
statements have no material errors. To
better meet the public’s expectations,
corporate reporting needs to tell a
more coherent and balanced story
about a company’s business model,
the risks to it and how they’re being
managed. based on their knowledge
of the company, auditors could then
provide an independent view on whether
this narrative reporting is balanced or
missing important information.”
Annual reports have certainly become
less pivotal to investors over the years,
but they need not slide into irrelevance.
Pioneering companies, accountants and
technology consultants are teeming with
ideas to bring the annual report back to
life. if they succeed, these publications will
have a bright future. n
november 2011 Reporting [32/33]
mY WISH LIST: gUYLAInE SAUCIER
my wish
list
GuYLAInE SAuCIER hAS SERVEd On AudIT
COMMITTEES In CAnAdA And AT GLOBAL
CORPORATIOnS hEAdquARTEREd In FRAnCE. ShE
ExPLAInS WhAT WOuLd MAkE hER LIFE EASIER
A TRuE PARTnERShIP
Profile
guylaine Saucier is
currently Chairman of
the Audit Committee
at Areva, Danone
and Wendel and an
Independent Director
of Bank of montreal.
She has served on
many company boards
and is a former Chair
of the Canadian
Institute of Chartered
Accountants (CICA), a
former Director of the
International federation
of Accountants, and
was Chair of the
Joint Committee on
Corporate governance
established by the
CICA, the Toronto
Stock Exchange and
the Canadian venture
Exchange.
Auditors and audit committees share an
oversight responsibility for financial reporting.
While recognizing that the existing relationship
between management and auditors is a
requirement for true and fair financial
reporting, i do wish that auditors could have a
more open partnership with audit committees,
in order to build on each other’s experience and
competence and, ultimately, do a better job.
A COMMOn LAnGuAGE
in Canada, we’re in the process of converting to
iFrs, which is a complex transition — but most
big Canadian companies are also listed in the
us, and us GAAP is also evolving. it sometimes
seems as if we have to deal with new principles
every other week in one or other code.
if the us would accept iFrs, it would make life
much easier. i wish we had one set of accounting
standards throughout the world, and that no one
would try to improve on them for a while.
undERSTAndInG ThE RISkS
in my role as a director of bank of montreal,
i’m travelling to China soon to meet with
customers so that i can understand their needs
and their environment. i was going to say that i
wish more companies would do that, but it’s not
a choice, it’s a requirement. We have to adapt.
FOLLOWInG ThE RuLES
one of the main external challenges is keeping
updated on all the relevant regulatory issues,
especially for companies that work in multiple
jurisdictions. it is particularly hard in europe,
where you have national, european and
international regulations to follow. if you don’t
have an efficient system in place to update
people, you’re in trouble. but i do wish that
the regulators would give us time to digest and
implement the existing regulations.
An OPEn RELATIOnShIP
i’ve been a director for a long time, and the
job has got a lot harder. Companies are more
complex, and when it comes to reporting, we are
giving much more information than we used to.
i wish we could report in a more succinct way, in
plain language, so that our shareholders would
be more interested in reading and understanding
what we report to them.
it does make the job easier if the relationship
between the audit committee and management
is an open and transparent one. so that’s my
final wish: that we can continue to build a
relationship of mutual trust at all the companies
i work with. n
one of the toughest roles for the audit
committee today is the oversight of risk
management — above all, when the company
works in different countries. most of the firms
i work with are involved in countries such as
China, india and indonesia, and it is changing the
way we do business. some of these countries
may not consistently have the financial
discipline, control culture or code of business
conduct that we’re used to. i would at least like
to be reassured that audit firms
use the same accounting
standards worldwide and
implement them in the same
way. As audit committees, we
need a better understanding
of the risks of doing business
in a different culture.
The opinions expressed in this article are those of the interviewee alone and do not necessarily reflect those of ernst & Young.
“I do wish that the regulators
would give us time to digest and
implement the existing
regulations”
REvIEWS
...and more
Recent publications from Ernst & Young
FInAnCE FORTE: ThE FuTuRE
OF FInAnCE LEAdERShIP
Two-thirds of senior finance
professionals believe the title “CFO”
is inadequate. This report provides
insight on the future of the CFO role
and what current CFOs, aspiring CFOs
and boards need to do to keep up.
ey.com/cfo
EuROzOnE FORECAST
quarterly updates on the
developments within the Eurozone
and the implications they will have on
businesses based in, or doing business
with, member states. The business
community is justifiably concerned,
not only about the weak state of
public finances, but also about the
way governments may seek to address their problems.
Based on the European Central Bank’s model, this
business-friendly forecast seeks to provide the
information that business leaders need to develop
their strategies with confidence.
ey.com/eurozone
T MAGAzInE — TAx InSIGhT
FOR BuSInESS LEAdERS — ThE
SuSTAInABILITY AGEndA
This issue of T Magazine explores the
sustainability agenda in the context of
a rapidly evolving fiscal and regulatory
environment. It looks at how leading
companies are responding to calls for
greater corporate responsibility from
stakeholders, and discusses the importance of cost
management and tax planning as a component of
a sustainability strategy.
ey.com/tmagazine
FInAnCIAL REPORTInG OuTLOOk
Ernst & Young hosts the annual Financial Reporting
Outlook conference in London on Monday, 21 november
2011. With the changes to the leadership at the IASB,
and the likely upcoming decision by the SEC on the
adoption of IFRS in the uS, this is an important period
in global financial reporting. Sign up for the event and
receive a summary.
financialreportingoutlook.com
For the latest updates on IFRS, visit ey.com/IFRS
Recommended
Books that CfOs describe as “must-read”
The art of action by stephen bungay
(nicholas brealey Publishing, 2011)
Change the way you see yourself: through
asset-based thinking by Kathryn D. Cramer
& Hank Wasiak (running Press, 2006)
driving down cost: how to manage and cut
costs — intelligently by Andrew Wileman
(nicholas brealey Publishing, 2010)
The 7 habits of highly effective people
by stephen r. Covey (Free Press, 2004)
The 21 irrefutable laws of leadership:
follow them and people will follow you
by John C. maxwell (Thomas nelson, 2007)
On the shelf
Recently published books
Talk normal
by Tim Phillips (kogan Page, September 2011)
subtitled “stop the business speak, jargon and waffle,” this
book (a spin-off from the author’s entertaining, informative
and often mischievous blog, talknormal.co.uk) uses
excruciating examples of corporate jargon to show where
businesses are going wrong in their communications.
The power of LEO: a revolutionary process for achieving
extraordinary results
by Subir Chowdhury (McGraw-hill, October 2011)
Chowdhury, described by BusinessWeek as “the Quality
Prophet,” is the author of the bestselling Design for Six
Sigma and The power of Six Sigma. His latest book outlines
a three-part strategy for building continuous quality
improvement into a business’s operations.
Steering Group
Christian mouillon, Global vice Chair, Assurance
Felice Friedman, Director, Global Public Policy
Philippe Peuch-Lestrade, Global Government & Public sector Leader
r balachander, Assurance markets Leader, india
richard Wilson, Assurance services
ruth Picker, Global Leader, iFrs services, Global Professional Practice
Warmolt Prins, Assurance markets Leader, emeiA
Editor Tim Turner
Contributing Editor Andy Davis
Art director Angela Lyons
Account director emma King
Production Manager John Faulkner
For Ernst & Young
Josy roberts-Pay, marketing
Director, emeiA Assurance
Joan Fulton, Program manager
Printed by newnorth
For more information about
Reporting, please contact
[email protected]
Reporting is published on behalf
of ernst & Young by
Wardour
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34-43 russell street
London WC2b 5AH
Tel +44 (0)20 7010 0999
www.wardour.co.uk
november 2011 Reporting [34/35]
Reporting
It’s more than the numbers
Trailblazers,
pioneers and
adventurers flourish
in new territories.
So do well-informed
business leaders.
There are those who see
dangers and those who
see opportunities. Our Growing
Beyond program explores
how the world’s most
successful organizations seize
opportunities to grow into new
markets — even in the toughest
conditions. Find out more at
ey.com/growingbeyond.
See More | Growth
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© 2011 EYGM Limited. All Rights Reserved.
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