A more collaborative management style which focuses on long-term targets is being favoured
by Anthony Hilton FCSI(Hon)
Some senior executives and corporate leaders are apparently abandoning the hard-driving world where short-term profit is everything and are instead embracing a more collaborative style of management. In the widely reported words of Rita Gunther McGrath of Columbia Business School, their mantra now is to empathise with their workforce, rather than “managing badly performing robots”.
This is certainly the view of an editorial in the Financial Times in December 2021, ‘Turbulence ahead: new leaders required’, which sees Covid-19 as the catalyst for management learning compassion, communication, and collaboration, and requiring leaders with a vulnerable rather than a ‘macho’ side. The idea is that if executives are expected to comment on climate change, race, human rights, and culture wars, they will also need to inspire trust in their workforce and to focus on long-term goals.
However, if this indeed is the trend, there doesn’t seem to be much embracing of climate change in their companies’ legally required financial results. Nor does it seem to have permeated into auditors’ thinking as shown, for example, by them also ignoring climate change in financial reporting.
This was shown in a report Flying blind: The glaring absence of climate risks in financial reporting published in September 2021 by Carbon Tracker, a think tank, and commissioned by the UN Principles for Responsible Investment (PRI), an international network of investors focused on promoting responsible finance.
70% of 107 publicly listed large companies did not seem to have considered climate matters when preparing their financial statements
The study looked at 2020 filings from 107 publicly listed large companies, including 94 from carbon-intensive industries – the likes of Airbus, Unilever, Volkswagen, Exxon Mobil, China Steel, Saudi Aramco, Danone, and Vale, so truly global. It then discovered that 70% of them did not seem to have considered climate matters when preparing their 2020 financial statements. These companies form many of the “world’s largest corporate industrial greenhouse gas emitters”, according to the report’s press release, so they are the ones which also have a responsibility for helping the world to transition to net zero.
The auditors could have put the companies’ feet to the fire and made them comply or, if they did not, they could have qualified the audit report. But 80% of the companies’ auditors – almost all which were from the big four of PwC, Deloitte, KPMG, and Ernst & Young – took the companies’ side. They provided no information on whether they had considered material climate matters, such as emissions targets, stranded assets, changes to regulation, or declining demand for the company’s products.
This is despite three of the four accounting and auditing standard setters, including the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board, issuing guidance that climate change matters should be considered in the preparation and audit of financial statements. This is not the standard setters getting on the climate change bandwagon; they are on to something. Many such reports have assumptions and estimates involving the future. Climate matters can lead to shorter useful lives of productive assets, inventory obsolescence, a lower return on capital, and questions around whether a company can continue to operate as a going concern.
Executives of an oil company can value a new well as if they will be getting US$80 a barrel in 2050. A thermal power plant can be depreciated over 50 years. If a company ignores or does not flag up these issues, investors can rightly have reason to believe they are being short-changed. This is something which should concern the auditor; they are after all reporting to the members of the company, not to the management.
Of course, companies may have referenced climate change outside the legal financial statements. Many do. But they do not tell a consistent story across their financial reporting. Companies may concede in their chair’s statement or other forums that climate change is likely to be material, but it is the accounting numbers which determine their bonuses, and there is usually no reference of these concerns there – little evidence of being ‘Paris aligned’ and even of auditors commenting on these discrepancies.
Should we cut the profession some slack? In its defence, one might say that the standard setters’ guidance has not really percolated down to the grass roots yet. Most of these reports were published in the first half of 2021, so perhaps we should not be too hard on the auditors. Perhaps we can wait a few months until June and July 2022 to see what happens in the reports then. But if nothing new happens, the auditors will surely have to raise their game.
This article is published in the March 2022 edition of The Review.
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