Mervyn E. King is one of the world’s pre-eminent experts on corporate governance. Prior to his work on South Africa’s King Committee in 1994, sustainability reporting didn’t really exist. He’s traveled the world—39 countries to be exact—lecturing on the topic and is associated in numerous ways with several other organizations including the Commonwealth Association of Corporate Governance, the World Bank and the United Nations. King is the former chair of the International Integrated Reporting Council (IIRC) and of the Global Reporting Initiative (GRI), and has been a relentless advocate of the sustainability reporting movement. King took the time to talk to the NYSSCPA in advance of his appearance at the Foundation for Accounting Education’s Sustainability Investment Leadership Conference on May 6 in New York City. For more information, or to register for the conference, visit nysscpa.org/ sustainability16.

When and why did the concept of corporate sustainability attract your attention?

The question of sustainability in regard to corporations attracted my attention with the realization that the market capitalization of companies on the great stock exchanges of the world was made up of a greater amount of intangible assets than tangible assets, which were additives in financial statements, according to financial reporting standards.

When you talk about corporate sustainability, how are you defining the word “sustainable” in your mind?

“Sustainable” for corporations is used in its morphed sense. In its primary sense, it means maintaining something, but the word is now also being used in the context of sustainable capitalism, that is, the creation of value but in a sustainable manner, meaning enhancing the positive impacts of how the company makes its money on society and the environment, and eradicating or ameliorating the negative impacts.

You’ve overseen the development of King I, King II and King III reports. If you were to write a King IV, what direction would it take?

The King Committee issued a draft for public comment for the next two months on King IV. The direction we have taken in King IV is principles that every organization should adopt if they want to practice quality governance, and using practices and making disclosures to achieve these principles. This should result in four critical outcomes, namely ethical culture, adequate and effective controls, performance and value creation in a sustainable manner, and trust and confidence in an organization by its NEWSMAKER stakeholders, [in] its good reputation and legitimacy.

What do you think are the three biggest challenges for corporate sustainability, going forward? The biggest challenge for sustainability is for leadership, namely the governing body or the board of a company, to appreciate that it has to change its corporate toolbox. It can no longer use the same tools in developing strategy or in steering the direction of a business in the very changed world of the 21st century. We have population explosion, radical transparency and an increased demand for product because of increased population. Yet, finite assets are being used faster than nature is regenerating them. Consequently, carrying on business as usual is not an option. The challenge is a change of the collective mindset of the board in appreciating that it has to take account of all the resources or capitals used by a company and the ongoing relationship between the company and its stakeholders in developing strategy. The sustainability issue pertinent to the business of the company—such as water is to a beverage manufacturer—should be embedded into its long-term strategy.

There are a number of different bodies that aim to promote corporate sustainability reporting in different ways, among them being the GRI, the IIRC and the SASB [the Sustainability Accounting Standards Board]. To what degree do these different visions compete, and to what degree do they complement each other?

The GRI and the SASB deal with sustainability reporting. The IIRC Framework deals with value creation reporting which embraces both financial and sustainability aspects. The financial statements have to be reported as a matter of law, and most companies today do sustainability reports, whether it is a hybrid form of the GRI Guidelines and the SASB Guidelines, following one or the other. The collective mind of the board must extract the material financial information from the financial statements and the material sustainability issues from the sustainability report and explain them in clear, concise and understandable language in the company’s integrated report, so that the user can make an informed assessment that the business of the company will maintain value creation in a sustainable manner in the long term.

How much of sustainability reporting is about measuring the impact of companies on environmental or societal matters, and how much of it is about helping investors make better financial decisions?

Sustainability results in informing the user, such as an investor, of the so-called intangible assets of a company. As set out above, the intangible assets are now given greater value by investors than the tangible assets that are additives in a balance sheet, according to financial reporting standards. These include things such as reputation, the long-term strategy of the business, integrity, quality governance, the skills and capacity of senior management, etc.

Do you see sustainability ever being integrated into mainstream accounting standards-setting bodies like the IASB [International Accounting Standards Board] and FASB [the Financial Accounting Standards Board], or does sustainability reporting need to stand on its own, separate from purely financial reporting?

Sustainability reporting is more guidelines than standards. Notwithstanding, [the International Federation of Accountants] has appreciated that the so-called nonfinancial assets can be absolutely detrimental to the so-called financial assets. The question to ask is, “Shouldn’t assets merely be described as such and not with a designation ‘financial’ or ‘nonfinancial’?” For example, the evidence that a product is being made by child labor would absolutely destroy the financial value of a company. A country’s politics is not relevant. What is relevant is the tone at the top. There has to be leadership that accepts that a company does not operate in a vacuum. It is operating in the changed world of the 21st century, where natural assets are being used faster than nature is regenerating them. In that context, as Paul Polman of Unilever has said, we cannot carry on business as usual. We have to carry on business as unusual. Any board that does not do that in the changed world of the 21st century is, in my view, failing in its duty of care to the company.

When it comes to auditing sustainability information, what are some challenges that auditors may face that are unique to sustainability, vs. purely financial reporting?

The internal auditor plays a huge role in the assurance of so-called nonfinancial reporting aspects. The [Institute of Internal Auditors] has set very high standards for its members, and I refer you to the IIA’s report on Clorox. The International Auditing and Assurance Standards Board [IAASB] is focused on financial reporting. There is no international standard on sustainability reporting. That is why the independence of the corporate auditing executive, or the head of internal audit, is becoming more and more critical. The assurance by the head of internal audit is important in preparing an integrated report in clear, concise and understandable language, and not in IFRS [International Financial Reporting Standards] or GRI speak.

What are things that CPAs should press for disclosure on in the financials?

Chief financial officers, who are usually CPAs, should, in my judgment, become known as chief value officers. The chief financial officer today, of necessity, is starting to look at value creation through the prism of the six capitals contained in the IIRC Framework. The financial statements, according to FASB standards or IASB standards, can be put online on a company’s website. The collective mind of the board has to spend more time understanding those statements and taking out the material financial information, defined as that information which could impact on value creation, in a sustainable manner, and place it in the integrated report in clear, concise and understandable language, not in FASB or IASB speak, which is not understood by 99 percent of users. cgaetano@nysscpa.org “There has to be leadership that accepts that a company does not operate in a vacuum. It is operating in the changed world of the 21st century...”