The reputation repercussions of long-awaited audit reform

March 18, 2021

Corporate scandals have always driven boardroom reform.

Those with long memories will recall that Sir Adrian Cadbury’s landmark report on corporate governance back in 1992 was in direct response to Robert Maxwell’s looting of the Mirror Group pension fund.

More recently, the introduction of the Wates Principles for large, privately-owned companies followed the collapse of Sir Philip Green’s BHS, which left 11,000 staff without a job and a £571m hole in the company’s pension scheme.

Today’s long-awaited white paper – Restoring Trust in Audit and Corporate Governance – follows a similar pattern.

It was drawn up on the back of public and political anger over prominent audit and boardroom failures at the likes of Carillion, Patisserie Valerie and Thomas Cook, which left taxpayers on the hook.

The new regime makes directors personally liable for the accuracy of company’s accounts, with fines and bans for rule breaches.

It also confirms that the Big Four accountancy firms will have to split their audit and consulting businesses to avoid conflicts of interest, and requires them to use smaller, challenger firms to conduct “a meaningful portion” of the annual audit.

From a communications perspective, several other proposals stand out.

One is the provision to claw back bonuses where directors have failed to protect customers’ and employees’ interests. Banks had such malus clauses inserted into executive pay deals in the aftermath of the 2008 financial crisis.

Some progressive companies have adopted similar measures since but as Sky’s Mark Kleinman rightly notes “few of them are triggered by issues which cause damage to a company’s reputation”.

Indeed, the consultation paper refers explicitly to ‘reputational damage’ as one of a set of proposed minimum conditions which may trigger clawback provisions.

In a similar vein:

  • Audits can now extend beyond a company’s financial results to look at wider performance, including against key climate targets, so investors and other stakeholders can hold companies to account
  • Directors can publish annual ‘resilience statements’ that set out how their organisation is mitigating short and long-term risks, encouraging directors to focus on the company’s long-term success and consider key issues like the impact of climate change
  • There are improved powers to review companies’ corporate reporting, including proposals to extend those powers to the whole annual report
  • A voluntary scheme will be introduced for the audit and assurance of more non-financial information over and above the statutory audit

All this matters because what constitutes reputational damage now goes way beyond mere ‘reward for failure’.

Companies today have wider societal responsibilities than just maximizing shareholder profit. In particular, they are increasingly under pressure to disclose more non-financial information related to the “four P’s”: people, profit, planet and purpose.

Any failure to place enough emphasis on a company’s human capital of intangible assets – like its brand and culture – risks considerable reputational damage, especially in the light of persistent racial, gender and economic inequalities highlighted during the coronavirus pandemic.

For communicators, these developments present both a challenge and an opportunity.

As Kevin Martin of the Institute of Corporate Productivity put it in the FT recently: “Disclose too little – or inconsistent data – and face regulatory or legal consequences, or brand and shareholder devaluation resulting from distrust among staff and consumers. But it is also an opportunity for a company to promote commitment and progress in these areas.”

Areas to focus on include:

  • Sustainability
  • ESG (environmental, social and governance)
  • Diversity
  • Health and safety
  • Wellbeing
  • Culture

Of course, turning words into action, and rhetoric into reality, won’t be easy. Authenticity – like trust – has to be earned.

And yes, the reforms won’t prevent more corporate blow-ups and will impose more cost on business.

But from a reputational perspective at least, the prize for getting the balance right and really embracing the new rules is surely a price worth paying.

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