The quest for forward looking information disclosure

CPA Australia is playing an active role in developing an integrated reporting breakthrough that will not only lead to greater sustainability, but allay Australia’s lingering concerns over directors’ liability.

In many jurisdictions, financial reporting is highly certain and regulated through statutory or similar rules. However, the same cannot be said for fledgling frameworks which derive from ideals of sustainability and are based on a more holistic approach.

The Integrated Reporting (<IR>) Framework, launched by the International Integrated Reporting Council (IIRC) in December 2013, falls into the latter category.

In addition to efforts to bring to market a robust <IR> framework, there is a wide range of collaborative actions now taking place that have the related purpose of engaging regulators and corporate boards.

One of the more ambitious and innovative is a campaign titled “Statement of Significant Audience and Materiality”. Also of note is the promulgation by the IIRC of a breakthrough strategy (2014–17) which, in conjunction with a range of strategic themes, also has the intention of building strong and positive relationships with policymakers and regulators. Its aim is to improve the visibility of <IR> and to garner the support of governments to accelerate adoption in ways that meet each market’s specific needs, laws and customs.

So, where does Australia stand in relation to what many argue are seismic shifts in our expectations of corporations and how they engage through disclosure regimes?

First, is Australia’s regulatory environment so uniquely problematic as to leave us, individually and collectively, at the margins of international developments?  Second, will there be real economic consequences if we lag behind?

Related: Is the jury still out on integrated reporting?

The following provides a response to the first question. On the second, however, time will judge.

Australia’s legal landscape 

In the world of sustainability practice and reporting, Australia is something of a curiosity. On the one hand, Australia has fostered innovation, yet on the other, there is deep-seated and dogged resistance to deeper penetration.

The emergence of <IR> has brought these contrasts into stark relief. In one corner, there are many Australian companies that will remain at the forefront of improved corporate reporting and sustainability practice. This, for example, is demonstrated by the strong Australian representation on the IIRC Pilot Programme Business Network, and its continued leadership in a number of categories of the Dow Jones Sustainability Index.

But at the same time, there are doomsayers who worry aloud that <IR> threatens further turmoil as a result of vexatious stakeholder intrusion into the sanctity of the corporation.

The major barrier to the steady adoption of <IR> in Australia is its perceived potential for company and director liability arising out of forward-looking or prospective integrated reporting information. In other words, there is fear that a person or persons relying on the information might claim for a harm that ought to have been made good by the errant discloser.

Unfortunately, determining whether these risks are real or illusory is not straight-forward. It involves a range of technical issues, along with our attitude to the law and how participants conduct themselves within the dynamics of legal relationships and their regulation. To a certain extent, such considerations set Australia apart from other jurisdictions where <IR> is seeking to take hold. But they are by no means insurmountable.

One of numerous ways of understanding law is to see it as an interrelationship of rights, wrongs and remedies. Arguably, if the focus is on “wrongs” and “remedies” without regard to underlying “rights”, an adversarial approach to legal relationships will result – one with an overwhelming emphasis on guilt and liability. There is a case to suggest that such an approach currently influences the understanding and application of corporate law in Australia.

Another way to understand the law is to see it as divided between private and public law; the former being the body of laws that deal with relationships between individuals – contract law being the most obvious – while the latter (for example, criminal and taxation law) addresses relationships between the state and individuals.

At a basic level, corporate law is a branch of private law in that it regulates relationships between individuals, both natural and legal persons, under conditions of limited liability and corporate personhood. However, increasing statutory complexity and expanding scope has taken corporate law way beyond this simple definition.

In fact, corporate law has ceased to be seen primarily as a basis for the recognition of “rights” and means for facilitating private dealings to do with wealth and value creation. Instead, it is now regarded with distrust because of its web of “wrongs” that might trip up the unwary or foolhardy.

An integrated report that meets the IIRC’s International <IR> Framework’s guiding principles and content is clearly a “document of the company”, against which the corporate and wider legal circumstances cannot be disregarded.

Further, as a result of remedial attributes that draw on sources outside of the strict confines of corporate law as it was originally conceived, it is looked upon as a vehicle for enabling individuals to pool their financial resources and defray the risks of a commercial venture.

Indeed, the Corporations Act’s financial services and market provisions, as well as their consumer protection orientation, are a pointed example of complexity and the incorporation of purposes additional to the legislative intention of their enactment. It is therefore little wonder that Australia has become one of the most class-action litigation-funded jurisdictions in the world, and that initiatives such as <IR> are treated warily.

The corporations act: key considerations

The liability regime and corporate disclosure

A failure arising from a particular set of circumstances can lead to breach of both specific and general duties and draw directors – individually and collectively – into a maze of liability. The subsequent imposition of penalty and disqualification rules are often cited as deterring aspiring individuals from taking on company directorships.

Disclosure regimes

These are wide-ranging and can be either periodic – annual and half-year financial reports – or episodic insofar as they relate to a particular event. Prominent examples of the latter are listed company continuous disclosure requirements and the product or prospectus content of various forms of fundraising.

Misleading and deceptive statement and conduct rules

These draw on trade practice law principles and operate through both the Corporations Act and Australian Securities and Investments Commission Act.

The case law which considers all three of the above in combination is limited and highly complicated in terms of both factual circumstances and legal arguments presented. Nonetheless, a frequent theme and point of contention is directors’ statements or disclosures of a prospective nature.

The consumer protection emphasis within corporate law – particularly in a fairly adversarial context – creates an environment which is risk-averse when it comes to disclosures that are not highly ordered and predictable.

It is through these terms that we start to understand the tendency to jump from the highly specific circumstances of leading corporate liability cases, to the general misgiving many company directors and their advisers have about meeting anything more than minimum black-letter law requirements.

From a director’s standpoint, operating within the confines of a rules-based disclosure regime at least gives some level of certainty about what should be disclosed, what the liabilities might be if there is a failure, and available defences.

In comparison, an integrated report that meets the IIRC’s International <IR> Framework’s guiding principles and content is clearly a “document of the company”, against which the corporate and wider legal circumstances cannot be disregarded.

Granted, when causality factors are taken into account, the likelihood of a company’s specific <IR> falling foul of the Australian legal regime may be remote. Even so, there is still enough uncertainty to impede widespread uptake.

In time, however, this might be overcome through individual, and then collective, leaps in faith. Alternatively, perhaps there will be considered accommodations within the existing legal frameworks and associated guidance.

The situation as it stands and possible paths forward are elaborated on in a series of papers available on CPA Australia’s website.

Certainly CPA Australia does not stand separate from significant international endeavours pursuing the positive transformation of corporate practice, performance and reporting.

CPA Australia is currently working with Professor Robert Eccles, Harvard Business School and IIRC Council member, on the project “Statement of Significant Audiences and Materiality”. The project surveys the legal context and rules concerning corporate stakeholder and reporting duties across the G20 and 10-to-15 other major economies.

Although responses are primarily being prepared by law firms, CPA Australia has been invited to undertake the Australian component in the development of this highly significant initiative.

Working with groups such as the United Nations Global Compact, United Nations Environment Programme Finance Initiative (UNEP FI) and IIRC’s <IR> Banking Network, the objective is to encourage company boards in all jurisdictions to adopt a non-binding statement of significant audiences and material relationships, to which their actions and reporting is complementary.

Such international endeavours are vital in driving individual action, a collective response and an understanding of local legal context – all of which is essential to the goals we share with Professor Eccles for an integrated reporting breakthrough and creation of a sustainable society.

John Purcell is Policy Advisor Corporate Regulation at CPA Australia.

October 2021
October 2021

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