Features | From Pivot Magazine

 Mervyn King makes the case for ‘business as un-usual’

The godfather of integrated reporting on why companies need to do good to prosper

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Mervyn King, the godfather of integrated reporting, on why companies need to do good to prosperMervyn King: one of South Africa’s most valuable exports (Peter Searle)

The term “corporate best practices” once had a specific connotation. It meant running a company exclusively to serve the interests of shareholders, even if that meant ignoring other stakeholders, the environment and society at large. Those days of business as usual are over, says Mervyn King, a world-renowned expert on corporate governance and one of South Africa’s greatest exports. “What we need today,” he says, “is business as unusual.”

As the godfather of integrated reporting, King has worked for decades to convince companies to consider, record and act on the social, economic and environmental impacts of their activities. He is chair emeritus of the Global Reporting Initiative (GRI) and founding chair of the International Integrated Reporting Council (IIRC), past chair of the United Nations Committee on Governance and Oversight, and the respected author of several reports on the subject. (He is, however, not to be confused with his namesake, former Bank of England governor Mervyn A. King.)

A vigorous 81 years old—Pivot caught up with him while he was on a speaking tour in Australia—King continues to travel the world promoting the need for a dramatic reimagining of corporate decision-making and reporting practices. “The 20th century was an era of unsustainable development within a paradigm of shareholder-centric governance,” he says. Such an approach is no longer fit for service in a troubled 21st century. “Our climate is in crisis, nature is in crisis and populations are threatened with global warming. Today, a company has to do well, as well as do good.”

Getting firms to recognize sustainability issues is only a first step, says King.

This isn’t altruism but self-preservation, key to the survival of any business. “Many large pension funds and other investors will simply not invest in a company unless it can express a clear long-term value strategy,” he says. What’s more, if a firm is found to be damaging its societal, economic or environmental reputation—relying on child labour, for instance, or enabling ecological disaster—it will soon find its prospects, and stock price, heading south.

Rosemary McGuire, director of external reporting and capital markets in Research, Guidance and Support at CPA Canada, agrees that change has come. “Things that companies wouldn’t have reported on 10 years ago, like their carbon footprint, are very much on investors’ minds these days. And we need to evolve financial reporting and broaden its outlook to reflect this,” she says.

Nelson MandelaNelson Mandela urged King to write new rules for a new South Africa (Getty Images)

Getting firms to recognize sustainability issues is only a first step, says King. Companies also need to embed critical information about their economic, social and environmental impacts as a feature of their reporting framework beyond Management’s Discussion and Analysis requirements. The process of setting international standards to achieve integrated financial and sustainability reports began as a joint effort between the GRI, with the support of the International Federation of Accountants (of which CPA Canada is a member), and the Accounting for Sustainability Project established by the Prince of Wales. The collaboration culminated in a meeting at St. James’s Palace in London in 2010 that led to the creation of the IIRC. “What was important during that meeting was the acceptance that financial reporting, while critical, was no longer sufficient on its own,” King recalls. “Giving parity to all these other issues requires a mindset change.

King cites Coca-Cola as a firm that is invested in the new reality. Coke substantially reduced its water usage and shifted its marketing and product mix to address complaints about its resource use and social issues such as childhood obesity. Malaysian petroleum giant Petronas is another example. Its embrace of integrated reporting principles has become a strategic advantage in raising capital.

“Who is the true change-maker in a firm? It is the accountant.”

King’s work has deep roots in his personal experience. He is a key figure in South Africa—a former corporate lawyer and judge who became an executive in banking and retail and the chair of the country’s largest textile firm. King first met Nelson Mandela in the 1950s when he was a young articling student in Johannesburg, and Mandela and his partner Oliver Tambo were the country’s first licensed black attorneys. During Mandela’s imprisonment, King ran a charity with Mandela’s daughters that fed millions of impoverished children. As the country was preparing for the end of apartheid, King was asked to write new corporate-governance rules for a new South Africa. Knowing the enormity of the job, King hesitated. One day the phone rang: “How is my favourite judge?” It was Mandela. “Do it. You are the right man for the job.” He agreed.

King invited black South Africans, union leaders and other voices marginalized during apartheid to form a committee to write the new code. “If we had produced the standard shareholder-centric model, it would have been seen that white monopolistic capital was still in control,” he recalls. “And that would’ve been indigestible for a country trying to move away from unequal opportunities.” The resulting King Code on Corporate Governance, released in 1994, broke ground as a national standard of business ethics and a crucial first step in the wider acceptance of corporate social responsibility. Subsequent updates to the code added sustain-ability issues, integrated reporting and enhanced transparency to the list of best practices.

King’s work at the GRI and IIRC—the latter is now chaired by Canadian Dominic Barton, formerly of McKinsey & Company—established the conventions for firms to integrate relevant non-financial information into their statutory reporting. Accountants take on a pivotal role here, leading a broad range of professionals, including ecological experts and civil engineers. “Who is the true change-maker in a firm? It is the accountant,” he says. “It’s the CFO who has to get the C-suite to change their thinking about what really matters to the long-term health of the company.” King’s vision for the profession is laid out in his 2016 book, Chief Value Officer: Accountants Can Save the Planet. As the title suggests, shifting a firm’s focus to creating value should involve a title change as well—from Chief Financial Officer to Chief Value Officer. King says he’s “tickled pink” to see top headhunters pick up on his suggestion by advertising CVO positions.

To evolve with the changes, King is calling for a refocusing of audit codes to place more emphasis on the broader public interest.

The recent work of the accounting profession in the Task Force on Climate-related Financial Disclosures (TCFD) is another major step forward. “CPA Canada is a big supporter of the TCFD,” says McGuire, noting the task force “brings an important common language and business lens to the issue of climate risk.” By providing granular advice on how to integrate sustainability risks related to climate change into financial reporting, the issue shifts from a theoretical concept to a practical accounting exercise. In an interview last year with CPA Canada president and CEO Joy Thomas, Bank of England governor Mark Carney, a driving force of the TCFD, similarly stressed the importance of having accountants put the work “into action.”

King’s latest book, The Auditor: Quo Vadis? (translation: Where Are You Going?), is a timely look at the future of external audits in a world where intangible assets such as intellectual property are just as—and perhaps more—important to investors than audited financial statements. “Look at the S&P 500,” says King. “Only 16 per cent of the market cap of those firms is made up of assets on their balance sheets. Things have changed completely today and the audit has to change as well.” To evolve with the changes, King is calling for a refocusing of audit codes to place more emphasis on the broader public interest.

Given the scope and significance of King’s work, it’s something of a shock to discover business was his back-up career. As a young student, his great love was the law; he started work as an attorney in Johannesburg in 1961 and became a Supreme Court judge in 1977, at age 40. Two years later, a fellow judge, Anton Mostert, came to him for advice after uncovering evidence of a clandestine government propaganda fund. As a result of King’s counsel, Mostert publicly released the information, causing a political bombshell that led to the resignation of South Africa’s president, as well as Mostert’s dismissal from a government commission. King later resigned from the nation’s top court, on principle. “Some people have called it courageous, or maybe it was stupid. But it was a matter of conscience,” he says.He then thought he might try a corporate job. The world of business has been thinking unusually ever since.