We need a responsive corporate reporting system
The current corporate reporting framework was largely established during the Industrial Revolution and in particular as a result of the need for capital to finance the spectacular growth in the railways. Subsequent changes to the reporting framework have been largely appended rather than integrated into a system that is now increasingly stressed and reliant on information provided outside of the mainstream report.
Since the golden age of steam, the environment within which the corporate reporting system operates has changed beyond all recognition with the pace of change now increasing at a phenomenal rate. Globalisation, unprecedented population growth and giant leaps forward in technology present a whole new series of challenges to a fragmented reporting system that some would say is already failing to serve one of its primary purposes – the efficient allocation of capital.
In my view the target for the efficient allocation of capital is long-term value creation and this requires well-managed organisations. The corporate reporting system provides a window on the internal decision-making capabilities of an organisation. If an entity’s external reports fail to engage or communicate meaningfully then I would suggest that this is a reflection of poor internal management information and most likely consequent sub-optimal decision-making. In short, poor external reporting is an indicator of an organisation that is not well-run, whereas effective reporting has to be founded on a robust management information system that, in turn, is more likely to lead to better decision-making. Directing scarce resources towards those organisations that are well-managed and therefore likely to optimise their use requires an effective corporate reporting system.
The link between the efficient allocation of scarce resources and the corporate system is an important reason why society in general should be concerned that the system is effective and the linkage to well-managed organisations is one of the reasons why CIMA has been particularly interested in this topic over a number of years. Our efforts in support of the key principles of narrative reporting including the operating and financial review, our involvement in the Report Leadership initiative and our participation in the Tomorrow’s Corporate Reporting project represents a continued and significant body of work in this crucial area.
There is a vital need for companies, investors, standard setters and other stakeholders to understand and address the challenges the corporate reporting system faces. We need to create a reporting framework that is responsive to the changing business environment and which adequately accounts for long term value creation. If not, the system may be left behind as the commercial world takes it next evolutionary turn.
Posted by Charles Tilley.