Greater dialogue urged between related institutions on annual reports
Need for a broader dialogue between all regulators to bring in a greater consensus in annual reporting for companies was highlighted recently.
It is difficult for listed companies to comply with so many different regulations, Rajeeva Bandaranaike, CEO Colombo Stock Exchange (CSE) noted at a workshop on ‘What is next on Annual Reports’ to discuss advances made in the presentation of Annual Reports organised by Activity on Monday. The main quagmires arise from reporting on corporate governance.
Too many
At the panel discussion it was noted that a code for corporate governance that was issued in 2013 by the Securities and Exchange Commission (SEC) together with the Institute of Chartered Accountants (CA Sri Lanka) saw some new trends such as best practices for companies brought in 2017. “There should be one code for corporate governance disclosures,” he said. Ironically, the SEC in 2016 has mandated listed corporates to follow the (earlier) code of 2013. And yes, you read right – a year later they joined forces with CA and did a bit of a revamp. While the latest isn’t mandatory, some firms follow it.
It gets murkier. The banks were issued circulars by the Central Bank while insurance companies were issued bits and pieces of regulation through the Insurance Board of Sri Lanka – all based on certain best practices in corporate governance. There are some regulations that are going beyond the corporate governance code, Tishan H. Subasinghe, Joint Managing Director, Managing Director of Moore Stephens Aiyar told the Business Times at a separate discussion. “It is better if these two codes can be harmonised with the Companies’ Act since now it is very difficult for companies to comply with the different regulations,” Mr. Bandaranaike also emphasised to the Business Times.
The panel discussion saw members who included Nuwan Withanage, CFO Softlogic Life Insurance PLC and moderated by former IBSL director and Chartered Accountant Harsha Gunasena in addition to the others, discussing the importance of firms and investors that are moving fast in a rapidly evolving world, and corporate reporting also requiring changing to reflect these dynamics.
The bar has been rising for corporate disclosure standards over the last three decades, Mr. Subasinghe said.
For a growing number of business stakeholders, traditional reporting models are being tested to keep pace with a 21st century redefinition of value and a growing desire to see beyond conventional financial data. Mr. Subasinghe also said that corporate reporting should evolve in a way that will keep speed with the developing economic realities and deal with the needs of a wider stakeholder audience.
The aim of annual reports, an integrated report covering different aspects of a company’s financial and non-financial performances, is to present a fair review of the development of a company’s business and its position is transparent presentation of information, Mr. Bandaranaike added.
“Traditional financial reporting has a very specific focus on reporting financial performance in the annual report and accounts,” Mr. Subasinghe said noting that traditional ESG (environmental, social and governance) reporting has a very detailed focus on reporting non-financial information on environmental, social and governance performance only.
This comes together somewhat in Integrated Reporting but it is more than just merging the disclosure of financial information and non-financial information into one single document. “It requires a new way of thinking about what a business really is: instead of just money-making, an entity should see a business as a means that utilises different capitals, i.e. financial, intellectual, human, social and natural capitals, to form financial, social and environmental values,” Mr. Subasinghe said. Integrated Reporting (IR) in this respect enhances the way organisations think, plan, and report the story of their business.
Many organisations use IR as a chance to communicate a clear, concise, integrated story that describes how value is created within these organisations. IR is an approach that helps businesses think holistically about their strategy and plans, make educated decisions, manage key opportunities and risks to build investor and stakeholder confidence, and help manage the organisation’s performance, Mr. Withanage said noting that IR will build understanding and trust in business.
In the world, South Africa is mainly ahead of the pack due to introducing mandatory integrated reporting in 2009, for companies listed on the Johannesburg Stock Exchange.
Too much
With the IFRS requirements, annual reports are getting bulkier, Mr. Withanage said. “In my opinion if an annual report consists of more than 50 pages, it should be considered as a bulky report. Nowadays many investors aren’t interested in past performances. They want to know how companies will create value using their business models,” he explained. He also added that IR backed by integrated thinking should come out in an annual report. “We still see many gaps in this area. Companies should be sustainable in the long run and it should show in their annual reports.” He added that now, annual reports carry a lot of irrelevant information, harping on historical things. He added that areas such as tech disruption, climate change and changing business models of companies are not included in annual report. He also emphasised that an annual report should be written by employees. “The employees know the story of the company. They may not know flowery language, but they would know the heart of the company.”
An integrated annual report is not the end of the ride but it is one part of a deeper, broader journey directing to healthier and more able and investor-friendly organisations.