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The profits of transparency

Huguette Labelle, chair of Transparency International, tells Vincent Huck why transparency should be at the core of corporate reporting and describes the benefits of being transparent

The industrialist Henry Ford is credited to have said that a business that makes nothing but money is a poor business.

Ford's quote highlights the importance of non-financial value for a business, and the importance to report on its activity in order to build its reputation.

Two fundamental ideas Transparency International chair Huguette Labelle believes in. For her businesses should look beyond the financials and adopt more transparent reporting frameworks in order to ensure sustainability.

Labelle, an International Integrated Reporting Council (IIRC) member, talks to The Accountant shortly after having been appointed chair of the Corporate Reporting Dialogue (CRD).

The CRD is an initiative led by the International Integrated Reporting Council (IIRC) to bring together international organisations from the corporate reporting world in an effort to align Integrated Reporting (<IR>) with their reporting frameworks.

The Accountant: Transparency International is well known for its work in promoting transparency in the public sector, less so in the private sector, is it two different types of work?

Huguette Labelle:
At Transparency International we do press for transparency both from governments and from businesses. Transparency is the only way that you can build trust by the people into these two aspects of society businesses and governments. Because when the information is not available people always have a sense that there is something to hide when maybe there is not. But transparency is also a deterrent to corruption, to fraud, to illicit financial flows. So we do work with businesses, we've developed principles for integrity in business for large and small companies and of course public reporting is very central to all of that.

TA: Do you push for transparency in the same way for both the private and the public sector?

Labelle: It has some differences. For example in working with governments we press for integrity and transparency in the electoral process. We also press for the rules of law, we make recommendations in this regards so that the justice system is there for people to respect the law and to make sure that victims are protected.

We press for the establishment of institutions, such as auditor general and anti-corruption institutions, so that people can report any transgression. We also press for processes and the right systems to be put in place especially when you are dealing with finances: insuring that all the revenues, the budget, are fully and easily accessible to the people in a timely way.

We do a lot of work in procurement and construction which is often a link between businesses and governments. So we develop tools, various instruments to assist in ensuring that procurements and constructions are done in a way which is clean as opposed to have bribery, loss of money and shoddy constructions.

TA: What about your work in the private sector?

Labelle: Looking at the business side, transparency is vital in the kinds of codes of conducts, the kinds of compliance systems and policies companies put in place. And if I come back to reporting, reporting is still the best way of ensuring the people have confidence that the company is adding value. That it has not been bribing its way into contracts. Transparency also helps the company to prevent extortion because some businesses work in very difficult areas.

Therefore the more you publish what you pay to the government, project by project, country by country, the more you report on your operations, on your net profit, the more it gives the community where you work a sense of the value that you bring and at the same time it prevents corruption.

Transparency both in private and public sector is very important in terms of having a society that works and having everything in place for the people to benefit and for sustainability to take place.

TA: There is a fine line between transparency and confidentiality...where do you draw the line in the case of companies competing in a fierce market?

Labelle: The issue of competition is a real, but it has to be handled for very specific cases and not for everything and anything. The great majority of what a company does can be published without affecting competition, and especially once a contract has been won.

If you are developing a product for example and until it has been approved for distribution one doesn't expect the company to have that information publicly available because that is an issue with regards to competition. But once you have signed an agreement you should be in a position where being more transparent is more beneficial for the company.

If you look at a big procurement contracts, what we are talking about is having the full procurement process fully monitored and fully transparent. But necessarily at the time before the decision is made what each company has for example put in their bids shouldn't be disclosed. The details of their bids should not be available before the bids are opened, but after that the competition is no longer relevant: the bids are open and nobody can use your information to put in their own bids.

When you look at the overall aspect, it is at a company's advantage to be transparent because otherwise the danger is that the investors and the stakeholders are beginning to doubt and put greater concern than really exist. If the information isn't there rumors take over.

Increasingly there are regulations around the world in that sense. Equally the best companies do not worry about this. They are leading and increasingly being very transparent on what they do in the community where they work but also nationally.

TA: Which area of corporate reporting should be more transparent?

Labelle: When we look at corporate reporting there are so many different types of industries there are so many different sectors where businesses operate. So what you have is a broad landscape where at one end of the spectrum you have companies leading in reporting what they pay, their operations, their net income, whereas at the other end you have companies that do not report anything.
I'm having difficulty responding to this question because of the great variety between industries.

TA: Integrated Reporting (<IR>) is connected to sustainability and company social responsibility, some would argue the only responsibility of management is to maximise profits, what do you respond to that?

Labelle: Of course companies are not charities they are there to provide returns on the investments of shareholders. But I think increasingly maximizing return for shareholders is more and more perceived as a short term practice which creates long term problems. And therefore it is more and more questionable globally. Now you have much greater pressure on companies by investors, by different organisations, and by some of their own leaders who decided that this practice is not in their best interest because they are losing the trust of the people.
Consequently the language is changing quite dramatically and so are the practices.

TA: As a market driven initiative, <IR> is totally dependent on the "goodwill" of investors adopting it. But in some instances investors have pushed for less commendable practices such as tax avoidance schemes for example. To what extent a "regulatory helping hand" might be needed?

Labelle: We feel that if you can convince companies that this is the right thing to do, then you have energy spent in a constructive positive way where things happen. As opposed to try to understand what the next regulation is going to be. Regulation is important. But at this stage in our development what we hope is being able to work with the companies and bring this to scale. Especially, with the larger industry because of the fact that they radiate more than small and medium enterprises, even though companies of all sizes are important.

A number of large companies are already working with us to model <IR>. Large companies have a huge supply chain, so we are hoping that they are not only adopting <IR> for themselves but that they are also bringing their supply chain into the fold.

The launch of the CRD is another way of encouraging companies to adopt <IR> and become participants, who are all simultaneously standards setters. We hope by bringing these organisations together we can create some alignment, some coordination, between them so that it can also help the companies in implementing <IR>.

TA: Once companies adopt <IR> who should take responsibility for auditing an integrated report? Who should provide assurance on integrated reports?

Labelle: Large accounting firms, at the request of their clients, are increasingly looking beyond the financials when they are doing audits. They are now looking at a great variety of risks which they were not necessarily looking at before.

So what one hopes is that a company would look for independent auditing of the strategy they have established. So that they not only can say they are reporting but that they are also audited independently.

Overtime will there be some certification capacity? It is a question for the future.
I would hope that the large accounting firms would develop increasingly greater capacity in this regard.

TA: You mentioned the CRD, how will it work in practice?

Labelle: Well we have just been created so we will be meeting in the next few weeks and work is being done to prepare such a meeting. But the announcement was done about three weeks ago, we have our terms of reference, we have the list of participants, and we will work on the practicalities at the first meeting.
Basically we will be using the CRD as a platform to coordinate and align the development of those different standards with the eventual common goal to being able to respond to the market call for better alignment and reduce burden in corporate reporting for the businesses.

TA: What weakness would you like to address regarding <IR>? What would you change within the IIRC?

Labelle: Not at this stage. We've developed the framework. It has been tested. It has been modified again and I think we need to continue to implement it and insure that we look for any additional improvement if these are deemed.
It is a bit premature to be able to deal with that question at this time. It is a good question but just a bit too early.

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