His Royal Highness Prince Charles, in a videotaped welcome message kicking off The Institute of Internal Auditors International Conference in London this summer, spoke of the importance of long-term value creation, noting that nonfinancial reporting is changing the face of internal audit.
He deferred on the subject to a general session speaker, Professor Mervyn E. King – not the former head of the Bank of England, but the former South African judge widely considered a staunch champion of corporate governance and viewed by some as the father of integrated sustainability reporting.
King, the eponymous architect of South Africa’s pioneering integrated reporting framework, has served and, I believe, continues to serve as chair of the International Integrated Reporting Council (IIRC). The IIRC was created by Prince Charles to examine long-term solutions to value creation and break the cycle of corporate governance driven by short-term financial pressures. Quite a daunting task, and one which required a special person to lead the effort.
Some 14 years ago, I undertook a 32-day trip around the globe to promote a book I wrote on the topic of enterprise risk management. This was, in fact, the first book published on the subject. One of the countries I visited was South Africa. My partners at Andersen in Johannesburg arranged a dinner with several individuals, including Dr. King. It was a long table in a private room and Dr. King and I were seated directly across from each other. While I am sure Dr. King has long forgotten that evening in Johannesburg, it was a memorable experience for me personally. I learned firsthand that he and I had a common core set of views on a wide variety of topics around corporate governance, risk management and internal control, and their importance to creating and protecting enterprise value. Most importantly, he was quite the gentleman.
At the time, Dr. King was chairing a committee that prepared what became known as the King II Report, which updated a prior version of a governance framework. Issued in March 2002, the report covered such topics as directors and their responsibility, risk management, internal audit and integrated sustainability reporting. Acclaimed internationally, King II was a rich source of input to the U.S. Congress in formulating the Sarbanes-Oxley Act. Since then, Dr. King has consulted with and advised bodies all over the world on King II and governance generally.
In 2009, King II was updated because Dr. King was of the view that sustainability issues did not warrant a mere separate chapter but should be integrated into the mainstream. The resulting King III report asserted that strategy, risk, performance and sustainability are inseparable; hence, the phrase “integrated reporting” was used throughout the report.
I recently saw an article referencing King III and its impact on integrated reporting. The principles of the King III framework, which now form the nucleus of the IIRC’s integrated reporting framework, raise the bar for governing and managing an organization. They can be summarized as follows:
- Good governance is essentially about effective leadership. Leaders need to define strategy, provide direction, and establish the ethics and values that will influence and guide practices and behavior with regard to sustainability performance.
- Sustainability is now the primary moral and economic imperative, and it is one of the most important sources of both opportunities and risks for businesses. Nature, society and business are interconnected in complex ways that need to be understood by decision makers. Incremental changes towards sustainability are not sufficient – we need a fundamental shift in the way companies and directors act and organize themselves.
- Innovation, fairness and collaboration are key aspects of any transition to sustainability – innovation provides new ways of doing things, including profitable responses to sustainability. Fairness is vital because social injustice is unsustainable and collaboration is often a prerequisite for large-scale change.
- Social transformation and redress is important and needs to be integrated within the broader transition to sustainability. Integrating sustainability and social transformation in a strategic and coherent manner will give rise to greater opportunities, efficiencies and benefits, for both the company and society.
- Sustainability reporting is in need of renewal in order to respond to a) the lingering distrust among civil society of the intentions and practices of big business, and b) concerns among business decision makers that sustainability reporting is not fulfilling their expectations in a cost-effective manner.
These are sound principles. Slavish devotion to short-term financial goals is an unwise policy from the standpoint of the long-term interests of our global society. While the almighty bottom line will always be important, income inequality, resource preservation, chronic unemployment, carbon footprint size and other issues suggest that business strategies should drive long-term corporate growth and profitability by considering environmental and social issues in the business model. Some take this mantra seriously. Many don’t. King III is a call to action on this front.
Looking back fondly on that dinner, so many years ago, I raise a glass once again in Dr. King’s honor and wish him continued success at bringing his much-needed ideas into the corporate and public company mainstream.