Interview with Henning Drager (IIRC)

Interview with Henning Drager, IIRC Relationships Manager (Russia, Ukraine & Caucasus), September 17^th, 2012

How popular is IR in Ukraine and all other countries?

If you mean “popular” measured by the number of companies with which we have signed up so far – the answer is no. Only Rosneft and ROSATOM have come onboard but we are hopeful to secure many more in the coming years.

But if we are talking about the interest in IR and trying to find a way to bridge the very, very cumbersome IFRS financial reporting with a big sea of non-financial reporting standards, yes there is clearly an interest. And it’s not only interest from companies, but also from academia, students of accounting and also from the professional bodies such as ACCA. In Ukraine, the Baltic countries and in Russia we see positive movement toward think outside the tradition box and look towards expanding the skills of accountants and financial professionals.

What can be the difficulties and challenges in these countries to adopt IR?

I think the number one challenge is that the government departments of these countries responsible for this don’t really understand the risk implications of looking medium to long term, including non-financial risks. It’s only few enlightened companies or few enlightened professional associations that are picking this up. So the stumbling block is to get the people who regulate and may be make it mandatory to get engaged and may be even think about mandatory reporting without having more reporting burdens on the already struggling companies. That to me is the number one challenge.

In contrast the number one opportunity is that increasing globalization will require us to sing from the same hymn sheet on the future corporate reporting terms, which mandate all companies, whether they are small and medium sized to massive big companies to report more than just their financial risks and opportunities, but incorporate all of them. And here we arrive at the ultimate aim for IR, to have one set of reporting standards which are global, sector-based and comprisable between Ukraine, US, South Africa, Russia and others. That is the opportunity. To have one instead of several standards to ease the reporting burden for сompanies instead of ever more complex.

Do you think that these standards should be voluntary or mandatory?

I personally think we need to move to a mandatory commitment. Once the PP members including ROSATOM have indicated what works and what doesn’t work in terms of financial and non-financial reporting cycles we are getting to a kind of semi-established IR framework. We will ask G20 ministers, either in Moscow next year or in Australia in 2014 give the IIRC permission to move to a mandatory standard omission, basically having this framework and making it mandatory for all globally listed companies and all stock exchanges. There is a second phase being trying to figure out how we target all SMEs, because it doesn’t matter if all the world’s biggest companies are reporting IR, if SME are not doing it, then taken together we are looking at 90% of world GDP. And if SMEs don’t report on an IR way then we are right to question the effect we might have.

So, yes, mandatory, absolutely. The market itself will never do it if it is voluntary. But it needs to be in a way that is fair to ROSATOM and to other PP members, so they don’t have an additional layer of burden. If you adopt IR, an existing reporting requirement of equivalent size needs to replace it. This will be the challenge but also the opportunity.

And it should be global. And it is also a challenge, because for example you in Russia have different corporate governance, transparency and reporting laws, than Germany, who is part of the European Union, whether they are much more progressive and advanced. But I think we need to move globally on this. There are however voices within IIRC saying, we need move down the voluntary path first.

Is it possible that there will be several countries that will be first to make IR mandatory?

It will be EU countries, either EU in general or our PP member countries: France, Italy, Spain, Portugal, UK, Denmark, Sweden, Ireland. It will come from them first. And also probably Brazil, definitely South Africa, they have already done it, they are leaders, so we should look towards South Africa for inspiration and learning. I don’t think it will be Russia, but once EU does it, Russia may sign up, US will come aboard, and once they come aboard, the rest of the world will do it, minus China.

When is it possible that IR will become mandatory?

The discussion that we have been having decided that it is 2020, so it’s just over seven years. That’s very ambitious so maybe 2025 is probably more realistic. I think if we don’t get it by 2025, we might as well give up. Because with the challenges we are facing (climate change, growing population, resources scarcity, etc.) if we don’t have this reporting framework in place in the next 13 years we might do as well continue the status quo, because then we’ve tried failed.

What is your personal opinion about the integrated report – should it be just one document or several?

There is a school of thought and they have also written a book about it called One Report, Professor Eccles, from Harvard Business School. Even though he is saying one report, he doesn’t mean one form of communication. He says half the report should also have a strong and visible online and offline presence. This means if I am activist, if with Greenpeace and I want to know what ROSATOM is doing about nuclear disposal issues, show me the pages that I need to look at, don’t necessarily give me the full IR. I want to know only this much. Instead of having a physical representation of one report, you need to have a good online portal, which shows you exactly what you want to know as a stakeholder. So, I think, one report – yes, if you want give integration of sustainability issues more prominence – good, but then target it to you stakeholder groups, and that can be not only one report, that is one message. But give them all the opportunity to have a much wider and deeper look on what your activities are producing. And be honest about the negative impacts as well, it’s ok. IR will help companies to become more open, more friendly towards and also not so afraid about being honest toward critique.

What are the next steps of developing the standard? Are you going to work with indicators?

The number one priority is that we get the evidence based from our PP members, to see what the opportunities and challenges are within your reporting, because that’s the number one thing we need to address. How can you win over you colleagues internally to IR, if you don’t know what the challenges and possible solutions are? It might be ignorance, it might be a comfortable status quo, or might be too much money. So first and foremost you have to engage in an awareness raising job.

But secondly, our technical committee, once all PP members feedback on            the process – will consider what is working, how you align you reporting cycles, and you might even produce first integrated report. Thirdly could this be a benchmark for you sector? And once we have looked it up and work together with you, we will then work with you, the regulator in your country to say, we’ve now put down a good benchmark, it can be improved, but we would ask you, the regulator to let the rest of the industry, whether they can implement some of the changes in their reporting structure. Then we ask the industry to come together as one to see whether you can develop some key performance indicators and baselines. So you can start comparing, for example, different nuclear providers. Once that happens in Russia, with more PP members are coming on board, we hope it will happen in other countries, so we’ve got that sector covered. And then we can go to the global regulator and we can say: “This is what we’ve done, we’ve technically verified it, we think it’s a good benchmark and on basis of that we would like to introduce IR as a mandatory reporting requirement for all globally listed companies on all stock exchanges.”

Can IR help in solving global problems?

No but it can make a very useful contribution. How? You can’t manage what you can’t measure. What IR tries to do is to address the short coming of the current reporting model, which says mandatory IFRS financial reporting, voluntary non-financial reporting. IR alone cannot solve global problems, but it can establish a kind of “debit-credit account” of corporate impacts, to allow governments to create a national account of impacts combined with the domestic sector. This includes carbon footprints, water footprints and the traditional IFRS metrics. If we don’t start reporting on more than financial factors, we are blind on one eye, because we have no idea what the positive and negative impacts might be and what medium to long term risks are looming because of it. IR is about capturing all impacts, however painful that might be to companies and have a forward looking plan to realise the opportunities and minimise the risks. In that sense IR is a very material contribution to solving the greatest sustainability challenge we have ever faced namely climate change.