IFRS – a contribution to building trust?

Let’s return now to the topic of Integrated Reporting, as we no doubt should from time to time. Scrolling through the recent material on the <IR> website, I came across a September 2016 speech by Jonathan Labrey, Chief Strategy Officer, IIRC. Here are some extracts:

  • “It is not possible to put a price on trust but we understand its integral value in business transactions and market behavior; we just haven’t had a reporting formality before that enables the expression of these values – and their value enhancing potential.
  • At its simplest <IR> is an expression of all those things that matter most to us in business – financial and non-financial – some of which can be monetized and may be historic in nature; others that cannot be monetized but are still vital for providing context and assurance that the business model is viable today and into the future.  The goal is a business and investment climate that is stable, viable and sustainable over the long-term.  <IR>’s focus on future orientation helps to provide tomorrow’s reasons for investing today.
  • And the experience over the last five years has revealed two valuable lessons: first, that corporate reporting is an essential and inseparable part of corporate governance; and second, if we measure only those things like financial transactions you will only ever deliver a snapshot, when what people want to see is the full movie – the beginning, middle and end, the good bits, narrative and yes the bad bits too.  Because a story without balance isn’t a real story, it’s spin.  Increasingly businesses that talk the talk but fail to walk the walk are found out and pay a heavy price in terms of their reputation and value.
  • At the heart of advancing the Integrated Reporting message is the view that a financial capital system must transition to an inclusive capital system – in shorthand that means putting the economy’s full range of resources to productive use.  And all the evidence shows that economies and businesses run on this more inclusive model perform better over the long-term…”

The challenge is implicit in the choice of metaphor. Increasingly, people don’t want to sit and watch a full movie – they want to dip in and out of it, live tweet it, fast forward through the dull bits, or instead just play video games, or text, or go on Facebook. When people do go out to watch a movie, it often seems now like a conscious exercise in nostalgia, or one driven by desire for collective experience rather than by the movie as such. And besides, most of the movies people watch are calculated commercial exercises that barely deserve the attention anyway. The films that matter have virtually no audience and in many cases wouldn’t exist if not for various forms of subsidy.

By the same token, it’s yet to be conclusively demonstrated that the demands for better quality corporate reporting truly count for more, in bringing about lasting change, than the compulsive short-termism which feeds on whatever meaningless scraps of information might be at hand. It’s worth asking why they don’t though, given the constant stream of studies and speeches and working groups and reports that in one way or another generate “calls to action” for improvement of one kind or another. Perhaps the movie metaphor holds here too – all the prestigious voices that might advocate for higher art and more nourishing culture ultimately count for much less than the mass dumbness of the herd.

Labrey asks, later in the same speech:

  • “Why is good reporting so important?  First, it helps to build trust, both internally and externally.  We know that the audience for corporate reporting is increasing, reflecting a more active stakeholder community and increased demands from both investors and regulators.  Second, information is the lifeblood of capital markets and helps to facilitate productive investment.  It supports price discovery and, as a study of over 1,000 businesses by Harvard Business School has shown, it helps to attract more long-term investors.  And, third, reporting reflects how businesses are run, strengthening accountability and the bond between businesses and shareholders on issues relating to strategy.”

Note the ordering here. The regular stream of IFRS-compliant reporting provides capital markets with blood, in the sense that it keeps the sharks swirling round. In itself, it doesn’t and can’t do much to further the other points. To a short-term oriented trader, I suppose trustworthy and untrustworthy information are all the same, just means to an end. Trust only matters if you have plans that extend beyond the next hurdle.

And obviously, a set of financial statements in itself is too abstract and disconnected to make more than a secondary contribution toward building that. This is why I always come back to the same point, that if the IASB really wants to achieve anything of lasting importance, it has to start spending more time on the interaction of the financial statements and other disclosures (whether through <IR> or through some other framework) than on fine-tuning the content of the statements themselves…  

 The opinions expressed are solely those of the author

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