imaginable risk is written down – sometimes in lists
numbering tens of different factors - without any real
sense of which ones really matter. The new approach to
narrative reporting should add a greater sense of both
context and proportion, especially if the starting point is
the business model.
For example, take a clothing retailer, whose business
involves low margin high volume turnover based on
cheap imported supply. That is a legitimate model,
but this company will be running a much larger risk
of reputational damage and loss of franchise by being
exposed as exploiting labour under unfair conditions,
than a company which sources product closer to home.
Certainly this was a big factor for the companies relying on
factories like those producing garments in the Rana Plaza
building which recently collapsed in Dacca, Bangladesh.
Whether this is fair or not, some companies, like Walmart,
are now struggling with the reputational consequences
of their procurement approach. In the eye of the market
the perception of irresponsibility is the crucial factor and
companies need to show they are ready to handle it. For
many in the retail business this is probably their largest
risk, mattering more than the environment, for example.
Also, the risks change as the business model changes.
Before its calamity in the Gulf of Mexico, BP was a very
US oriented company, with a policy of bearing down
on costs and looking to exploit oil through deep-water
drilling. After the accident, its focus turned to Russia and,
with that, an important dimension of its risks changed.
Suddenly it was running much more political risk in a
different country.
It is worth noting that the risks mentioned so far have all
been in the non-financial category. Of course all companies
run financial risks. They may be vulnerable as a result of
over-borrowing, of customer inability to pay, of exchange
rate fluctuations, of failure to manager their cash flow
or even of mis-reporting by their accountants and fraud.
They have to protect against these risks, any one of which
could in theory be lethal. What brought banks down in
the crisis was often financial error resulting from a flawed
valuation of their assets.
Well-implemented narrative reporting, however serves as
a reminder of what other risks can do to a company. BP
was not brought low by flawed finances. In fact its inherent
financial strength helped it weather the crisis. Take
another current example, the worldwide row about how
much tax companies pay. Although tax is a financial issue
and companies seek to manage their taxation efficiently,
the reputational damage that comes from being perceived
as paying too little has real effect. Starbucks agreed to a
voluntary additional tax payment in the UK because its
customers were deserting its stores.
In the end the purpose of good narrative reporting is to
remind companies that they face a range or risks, much wider
than the financial ones traditionally considered by audit
committees, and to show us that these risks are understood
and being addressed. The nature of these risks will always
reflect the business model the company has chosen and
need to be understood in that context if the company is also
to exploit its opportunities properly. Companies cannot
succeed in the long term if they are at odds with the society
from which they derive their franchise.
The International Integrated Reporting Council is a global coalition of companies, investors, regulators, accountants,
NGOs and standard setters. Chaired by Professor Mervyn King of South Africa who is a leading voice on corporate
governance there, it aims to develop a reporting framework that will look at how companies create value from all
relevant angles.
Companies are urged to develop a single cohesive report covering both financial and non-financial aspects of their
business in a way that clearly shows the relationship between the two. This means reporting on all the inputs that go
into their product and how they use them to create value. Such inputs would include not just financial capital, but human
capital as well as other things, on which companies depend, like environmental resources and infrastructure. They are
ask VB?6?F?&W?'B??F?R?WF6??W2?bF?V?"7F?f?G?????F?W6R&V2g&??6???&?'&?BW'7V7F?fR??7W'&V?F?F?R??$2?26??7V?F??r???G2&??6VBg&?Wv?&??F??Vv??B?2??B6?V"v?FV?66WFVB?Bv???&R?B??r?@?v???&V?FRF?W??7F??r&W?'F??r7F?F&G2?gFW"F?R6??7V?FF????F?R??$2v???&Vf??RF?Rg&?Wv?&??B&?GV6Rf????fW'6?????FV6V?&W"F??2?V"??V?v???R?V?&W"?b6????W2???6?VF??r?&7&?6?gB?B'VFV?F??f???6??&P?'V????r???B&??V7G2??WfV?BF??2W?W&??V?F?7FvR???vWfW"?F?R?W?6??6WBv??6?F?R??$2?2&???F??r( 26???V7F?f?G?( 2?2v????p?&W6???6R???rF??6Rv??F????&?WB??r6????W2v?&??F??fR7W7F??&?R'W6??W726?????W7B&R???7??6?v?F?F?R6?6?WG?g&??v??6??BFW&?fW2?G2g&?6??6R?6??B?W7BV?FW'7F?B??r&?vR?b7&?F?6?&V?F???6??0?v?&??B&R&?RF?FV???7G&FRF??2V?FW'7F?F??rF??G27F?V???FW'2?C@???v????77VS"SgvW2???FBC@???'&F?fR&W?'F??p??'F?6?R'?WFW"???Fv???????2?????