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It takes two to tango: improving communication and engagement between audit committees and investors

Improving audit committee – investor communication

Investors and audit committee chairs discuss ways to improve non-GAAP reporting.



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At the International Corporate Governance Network’s joint conference with the International Integrated Reporting Council in London on 7 December 2016, KPMG hosted a discussion between audit committee chairs and investors on communication between the two parties: is there enough communication, and how could it be improved?

Adrian Stone, Head of Audit at KPMG in the UK, chaired the discussion and opened by observing that in the UK “there has been quite a lot of effort, collectively, to increase dialogue between investors, audit committees and auditors.” However, there is a sense that there is still a way to go.

Alan Ferguson, Audit Committee Chair for four companies including two FTSE100 companies, underlined the extent to which audit committees in fact have very limited direct communication with investors. He said: “In terms of direct investor discussion between myself and investors, it’s zero I’m afraid.”

However, Alan Ferguson did acknowledge that “there is a lot more written dialogue now between audit committee chairs and investors.” What audit committees are looking for is more feedback from investors on it: “It would be really helpful as an audit committee chair to understand whether we are getting that right, in terms of the information we’re providing; is it useful?”

So does this mean that investors are not fully engaging – or just that they have what they need?

Peter Butler, Founder Partner Emeritus, GO Investment Partners LLP, stressed that “it takes two to tango.” Both sides need to engage with each other but, as Peter noted, there are resource contraints, both within companies and within investment houses. Some investors may struggle with the technical issues involved with an audit, he said – and suggested that a system where recently retired audit partners train investors on a consultancy basis could be a good solution. Another suggestion raised during the discussion was to have secondments both ways between the audit community and investors.

For Mirza Baig, Head of Stewardship Investment at Aviva Investors, there needs to be a ‘pull’ for investors to discuss audit-related issues specifically. “It may be a part of a broader pull…a governance session and you’ve got the remuneration committee chair there, the company chairman, the audit committee chair, and there’s a broader discussion…then there’s enough substance to actually warrant more of the larger investors coming to it.”

For all that, Simon Bentley, Senior Independent Director at Sports Direct International Plc, was in no doubt that if a company is under the spotlight, investors will not hesitate to engage and start a dialogue.

“We’re in the news all of the time,” he said, “so I can assure you I can’t make the statement that I haven’t seen any investors. You must be joking! It is entirely the opposite. I see people all the time at their request. If people want to be in touch it’s very easy, and as long as there’s willingness, which there certainly is in our company, to be giving the feedback and so on, then that’s exactly what we do.”

He added: “I’ve never known investors to be shy in terms of wanting to ask questions to get answers.”

If one can take encouragement, then, that investors have avenues of communication open to them and will engage when they need to, what aspects of the dialogue are most important, or are in need of adjustment?

Simon Bentley asserted that it’s essential for audit committees to report fully in the audit committee report on the processes of risk assessment and verification they have been through “to give people an understanding of the extent of that review, the program, what’s being done, the follow-up when you’ve done the testing…If there’s silence from investors having read that, that simply means they’ve read it, they get it, they’re happy. If there isn’t, they ask the questions.”

Mirza Baig observed that, on the investor side, there is a “need for rebalancing away from remuneration”, which tends to be an area that preoccupies investors. They need to keep a wider focus on governance issues and look at how the audit committee is fulfilling its responsibilities. 

Mirza Baig also praised audit committees for extending the range of areas they look at, but questioned whether they were going into enough depth with each one: “As the list gets longer, a key question that we have as investors is, ‘does this mean you’re actually spending only ten minutes on one of these subjects?’ I don’t know what you’ve spent most of your time on. I think that’s a really critical part of the dialogue.”

Clearly then, ongoing communication to increase understanding on all sides remains essential.

For Iris Lether, Senior Sustainability Analyst at Triodos Bank, communication needs to be on specific issues, not just engagement for the sake of it. She said: “We have very much an ESG perspective in investing, so that will be my question for an audit committee. How do you incorporate ESG information? How do you deal with the integrated reporting framework? Is that on your agenda?”

Stephen Davis, Associate Director and Senior Fellow at Harvard Law School Program on Corporate Governance, said that while jurisdictions such as the UK and the Netherlands have made great advances in reporting, other countries remain some way behind – but that is likely to change: “We’re at the beginning of an enormous, probably an epic transitioning in reporting…My guess is that as investors see the real value in enhanced reporting, they’re going to demand increasingly that be a model that is adopted worldwide and not just within select markets. Once it becomes part of the value proposition, investors have an incentive to devote the resources and skills to it.”

Tom Duffy, Chief Operating Officer, Global Audit and an audit partner for KPMG in the US, agreed that expectations are evolving, “There’s certainly more work to be done, but we can learn some lessons in the US about how things are done here in terms of transparency…As we think about our value as auditors, if we don’t get in front of this and enhance the communication between the audit committee and the investing public, then we run the risk of being irrelevant in the longer term. And we can’t allow that to happen.”

If this gives reasons for optimism for the future, Adrian Stone underlined that there can be no letting up in efforts to increase interaction and engagement: “It’s nice to know that Europe is at the vanguard of this, and we’re pushing things along, but clearly there’s still a lot to be done. We need to keep trying to take things to the next level.”

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