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Tone at the top and Integrated Reporting

The expression 'tone at the top' gained currency through a series of high profile corporate failures - from Enron and WorldCom in the United States of America to AWB Limited in Australia and Royal Bank of Scotland Group and Parmalat in the United Kingdom and Europe.

The 'tone at the top' movement has sought to address the conduct of corporations from the stance that legal rules of corporate governance will prove sub-optimal without proper attention being given to the role of boards and management in creating an ethical culture. As a retired Australian judge has observed, "legislation cannot destroy an [ethical] culture or create a new one".

'Tone at the top' thus refers to how an organisation's leadership creates the tone: an ethical - or unethical - atmosphere in the workplace. Leaders' tone, it is assumed, has a trickle-down effect to the lower levels of the organisational hierarchy. If top managers pay attention to and uphold ethics and integrity, so will employees. Its overall outcome for the company should be a capacity for prudent risk-taking within wealth creating commercial objectives, the accomplishment of its objectives and enduring stakeholder support.

The translation of ethical conduct into the corporate context is vital, though subject to tensions which need to be recognised if 'tone at the top' is something other than a mere platitude.

Shorthand statements of idealised behaviour fail to capture the complexity of the environment in which directors and top managers exercise their powers and the sustained commitment required to make the behaviour an organisation-wide reality.

So what practical guidance is there on the horizon which can bolster an organisation leaders' capacity to ensure that their companies have an appropriate ethical culture? By raising this question I am not urging for some 'rule book' of what is and what is not ethical either in absolute or contingent terms. This would be trite and it would contradict the clear reality that the ethics and integrity which a director, as with any other individual, brings to their tasks are a complex interaction of culture, background, up bringing and attitude, as well the characteristics of the business context. Rather, I allude to what mechanisms are available to allow directors to gauge how business is being conducted and what risks are inherent, or appear in the horizon. Such risks may impede, or even destroy, the capacity for ethical conduct throughout the entity, from top to bottom.

Though not designed with the specific objective of driving organisational capacity to build 'tone at the top' and its penetration throughout an organisation, the emergence of Integrated Reporting does offer a substantial path towards these outcomes. Reporting in and of itself does not change behaviour - however its absence, its sub-optimal presentation and an inability to interpret and then apply its meaning, will set an organisation on the path to eroding value and degrading capacity for ethical conduct.
High quality disclosure brings both transparency and supports a board's stewardship responsibilities. It also enables directors to discharge their significant fiduciary duties. Moreover, the capacity for effective governance through accurate and meaningful measurement should not be underestimated.

Integrated Reporting's intended outcome of cohesion and integration in corporate reporting can build capacity to communicate a more complete range of factors that affect the ability of an organisation to create and sustain value. Similarly, the underpinning ideas of integrated thinking will ideally shift the focus of reporting, and thus decision-making, to the actions which create value over the short, medium and long term - the very time horizons in which the risk of declining ethical standards emerge, as the board's and management's actions are better understood in terms of their future ramifications.

While Integrated Reporting may not be a panacea, its wise application by companies does offer an opportunity to boards and management. It enables us to be better equipped to make informed inquiry about information being presented for consideration. It enhances the essential sensitivity on how business is being done, for whose benefit decisions are made and the collateral ramification of pursuing a particular business strategy. It enables us to focus not only on outputs but on more of what matters to us and our stakeholders, now and in the future.

It is expected that the International Integrated Reporting Council will release the first version of an Integrated Reporting Framework in December. It remains to be seen as to how quickly and comprehensively companies adopt this framework as a key component in the armory of best-practice corporate governance and disclosure.

Alex's previous blog post

Auditor reporting



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