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April 8, 2014

Is it time to air dirty laundry? Benefits of sharing your “sin sheet”

With the value chain an upcoming CGMA theme, and a focus on ethics and corporate governance, I attended relevant sessions during the Business in the Community’s Responsible Business Week event.

Challenges that business faces globally are more complex than ever, with resource depletion, demands for transparency and heightened connectedness through multiple level supply chains and extended relationships and partnerships. Framing this is an ongoing values shift. Research continues to show that "good" business makes good business. A session on responsible investment highlighted the rise in investors showing keen interest in the ESG (economic, social and governance) aspects of the company they have a stake in. The leadership team and the Board to be able to evidence not only their awareness of external impacts on the value chain today, but also must be looking ahead as to how such influences will change their business model.

With low levels of trust in business from the general public, as evidenced annually by the Edelman trust barometer, it is necessary to gauge public perception of what is deemed responsible or not. Few companies would have prioritised transparency of their tax affairs some five years ago, many deeming it no-one else’s business. Today it is clearly a CFO’s business to have a more robust response, should they not wish to face a backlash.

Little surprise then for the institutional investors on the panel that their priority was related to reputation. Quite simply they didn’t want to be holding a stake in a risk. This mirrors findings from our CGMA survey last year that the top factor behind the increased global focus on reputational risk was the public’s demand for transparency. Over two thirds of CGMAs recognised that businesses in their industry were placing more focus on reputational risk today than in previous years. More tellingly nearly a quarter had faced a reputational failure.

Such demand for transparency is required by insightful investors who expect a company they invest, or hope to invest in, to be very open about their "sin sheet". Being able to talk through challenging issues that may have arisen, or are due to, that are material to the company is essential. The CEO and CFO should be able to articulate what is being faced, why it came about, and importantly not only how it is being resolved but also what will be put in place to mitigate a repeat. Even the smallest company can face unexpected issues – for global, complex, multinationals with extensive supply chains and tens of thousands of staff it is not so much of if something may happen, it’s when it may happen.

What sets a responsible company apart is how it is then placed to deal with the issue and how open they are about it, their overall resilience. Will we see a trend beginning in annual reports of not only listing the "good news" but also what didn’t go right and how it was responded to and fixed for the future? There seems to be an appetite for this.

Metrics in regard to ESG issues can help further inform all stakeholders, both in numerical and qualitative form. Some firms are reporting in their governance pages, for example, how many calls there have been to hotlines, or regulatory issues raised. Not only this, but also how many of these issues have led to disciplinary action or dismissals – or even prosecutions. Such action can only increase trust.

The investors present would like to see more of this type of disclosure – the hanging out of "dirty laundry" in the annual report. After all it is far better to have something out in the open getting aired and hopefully cleaned, than festering in the dark to become a full blown disaster.

Tanya’s previous blog postWolves, Gekkos and the consequences of unethical actions

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