Accept the inevitable

Companies are increasingly judged not just on how well they perform as businesses, but how well they comply with an ever-growing array of regulatory and other non-financial requirements

By Roger Hogan
CFO. 01 June 2005

Like it or not, companies are increasingly judged these days not just on how well they perform as businesses, but how well they comply with a seemingly ever-growing array of regulatory and other non-financial requirements.

This issue of CFO highlights the trend. The cover story (Strange fruit), by Bernard Kellerman, charts the progress of sustainability reporting in Australia and elsewhere.

Sustainability reporting (SR) is one of those ideas that sound good - or, at least, worthy - in theory, but which are difficult to evaluate in terms of their practical benefits. At its simplest, it requires companies to report on the effect their activities have on society and the environment.

As Bernard discovers, Australia lags behind many of its global peers in the adoption of SR. This may not matter to an Australian chief financial officer who has yet to see a persuasive cost-benefit argument in support of the practice. It matters to those who promote the concept, however. In their view, the time is fast approaching when global capital markets will punish companies that fail to adopt SR best practice.

This is the peer pressure argument in favour of SR. There is also the moral blackmail argument: for example, the fear of "reputational risk" for companies employing, or linked to employers of, labour in developing countries. Finally, there is the more congenial and potentially more interesting argument that the level of scrutiny required by SR adds to a company's understanding of its cost structures and risk management.

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Whatever the merits of these arguments, they may ultimately prove irrelevant as governments and regulators climb aboard the SR bandwagon. The British Government has done it and, earlier this year, our own Federal Government sought opinion as to whether the Corporations Act should be used to "require certain types of companies to report on the social and environmental impacts of their activities ..."

In the face of these pressures, CFOs have little choice but to accept the inevitable. Once they implement SR, however, they should execute it well. As Simon Segal notes (Green investors grow), ethical investors are a minority but they are gaining influence. For them, the pages a company devotes in its annual report to SR will provide an important insight into its culture and the quality of its management.

Indeed, for many ethically-minded investors in our expanding shareholder democracy, the SR might even be more important than the columns of figures and pages of notes to the accounts. In this case, there will indeed be a direct link between a company's SR and its share price. The peer-pressure case for SR may have some merit after all.

Free choice guide

It may be some consolation (though not much) that SR is unlikely to turn into a regulatory and administrative impost on quite the same scale as superannuation. What could? Your company's super obligations will become even more complex and costly from next month, when choice of fund legislation comes into force from July 1.

You are, of course, obliged to inform your organisation's superannuation scheme members of how choice of fund legislation will affect them.

CFO is happy to help in this regard. On our home page, you will find a special issue of our quarterly CFO Super supplement, called A Beginner's Guide to Choice, which has been written by Zilla Efrat especially to help super fund members to prepare for choice. It will also help you to fulfil your responsibility to inform and educate your employees on the subject.

To distribute A Beginner's Guide to Choice to your employees, simply download the PDF from the homepage. There is no charge and you may make as many downloads or copies as you wish.

For your own guide as to what super choice means for financial executives and managers, see New laws raise sticky issues and It's in the system.

[ hooray! more work for me ]