At a board strategy session recently a consultant challenged us to pose our strategic priorities in the negative to see if they still made sense. Some didn’t. He said, ‘When setting strategy, you have a choice. If you don’t have a choice to make, it’s not strategy.’
That started me thinking about how some companies aim for ‘minimum compliance’ for reporting. Taking the consultant’s advice, I asked myself: could a well-governed company choose not to meet compliance requirements? Of course not; disclosures must comply with the rules. There’s no choice. But it is entirely possible (and far too common) to comply and yet miss the point.
In a landscape still crowded with the alphabet soup of standards and frameworks, and with evolving expectations, it’s no surprise that ‘compliance’ is a comfort zone for many. But this can bring reputational risk. Inconsistencies and missing explanations can arise: ‘The standard doesn’t say that I need to disclose why that happened,’ I recently heard a company say.
Companies need to think about why they are making each disclosure
I’ve never heard a standard setter say their job is to create disclosure checklists. Rather, their aim is to create a set of points for companies to cover in their disclosures, with full knowledge that there will be other things that need to be disclosed but that can’t be anticipated when writing a standard.
They also are aware that not all disclosures will apply to every company. Even the European Sustainability Reporting Standards (ESRS), which people love to complain about as being a rules-based checklist, have a disclosure objective: to enable users to understand the various actions taken and their consequences.
Going deeper
Companies should think about what they need to say, and how, making sure their ‘checklist’ covers whether each disclosure is relevant to the business and accurately represents what it says it does. In other words, they need to think about why they are making each disclosure. Only then do they comply.
But what does it matter, as long as a company has ticked all the boxes in the disclosure checklist? Auditors, regulators and investors will all judge what’s compliant. Companies tend to take the path of least resistance with auditors and disclose everything in the auditor’s checklist. Regulators may fine a company for missing disclosures, sometimes publicly calling it out and causing reputational damage.
Compliance is an outcome, not the objective
Investors tend to leave the checklist judging to auditors and regulators. For them, what also matters is whether the company has made the disclosure but missed the point. Whether the reader of a company’s disclosures is a shareholder, a potential investor, an analyst or a banker, they’ll look for not just what’s there, but also what’s not, and whether it all adds up given what else they know about it and its peers. (AI will no doubt make this analysis easier.) If they don’t trust that a company complies with the rules in a way that meets their information needs, they will move their capital elsewhere. And that can have serious financial implications.
Complying with the rules and communicating clearly is not always easy. An investor quoted in PwC’s Global Investor Survey 2024 said: ‘Sometimes you see companies that are doing the right things but communicating them badly. Other times, you see companies that are not doing the right things but communicate them very well. But what you almost never see is a company doing the right thing and communicating effectively.’
Steps to take
So, what can you do to get it right? First you need to focus on what you want the reader to know, then tick the relevant disclosure boxes. This might mean following your own structure. (Here’s a tip: start with strategy, not governance.)
Too many companies start with the requirements and then struggle to find the ‘story’. That’s because they don’t spend enough time thinking about what the issues mean for their business. It’s no wonder they find it hard to talk about them in a credible way. Remember, compliance is an outcome, not the objective.
The process of preparing disclosures teaches you something
You also need to answer the ‘so what’. Explain the metrics, give context and bring it together as a coherent story. If it’s hard to write it down, investors will struggle to figure out what you’re trying to say. When the story isn’t clear, they will fill the gap with what they think the answer’s likely to be. Anecdotally, I’ve never heard this involving giving the company the benefit of the doubt.
Finally, don’t worry about ‘gold plating’ your disclosures. I’ve never heard an investor complain about too much relevant information – quite the opposite. In fact, hiding material information with unnecessary detail is likely to be non-compliant.
If you keep in mind that corporate reporting aims to help investors make decisions, it becomes clear that ‘compliance’ can’t come at the cost of communicating effectively about performance, risks or prospects. Ask yourself: would this information, if known – and, equally, if not known – influence an investor’s decision about providing capital to you? That can guide what and how much to disclose.
The fear of non-compliance weighs heavily on any reporting professional’s mind. Many find focusing on compliance easier: you find the information on the checklist and write it down. Working through what it all means to make sense of it for an external audience is a different matter. But that misses an important opportunity. The process of preparing disclosures – gathering the data, seeing what it tells you, putting it into words – teaches you something. Then you can decide what action to take as a result. That’s what strategy is all about.
