Investors & auditors carry wrong thinking into companies

How investors and auditors bring wrong thinking into companies

Dear readers of GermanBoardNews,

it sounds as if a profound conflict is brewing. Financial investors have threatened the Big 4 to vote against their reappointment at general meetings in future, Manager Magazin reported at the beginning of the month. PwC & Co. would finally have to ensure that “climate-related risks are adequately considered and disclosed in annual financial statements”.

I wonder, however, whether an alliance between investors and auditors is not being formed in order to persuade companies to provide ever more detailed information?

At first glance, this would not be dramatic. After all, it is of course important that companies create transparency in dealing with a challenge of the century. Not only shareholders but also other stakeholders should know which emissions companies are responsible for and how they are making progress in reducing them. After all, corporate dithering entails both economic and social-ecological risks.

When climate indicators are misleading

However, I see the risk that auditors and investors are now increasingly adopting a “check-the-box” approach to corporate thinking. In other words, they are defining measures and target figures that have to be ticked off – come what may.

However, this kind of thinking does not do justice to corporate reality and complexity. For example, decision-makers can make great strides in climate protection that auditors neither understand nor appreciate – if, for example, they are fixated on key performance indicators that only cover parts of the value chain. Conversely, such a focus can of course lead to the wrong people being rewarded.

I am therefore convinced that supervisory boards and companies are increasingly called upon to push for the right measure. The demand for transparency through key figures must not lead to a fixation on numbers. Because that leads to losing sight of the big picture and entrepreneurial leeway being reduced to a minimum.

Learning from the South African King IV Code?

It would therefore be important to adopt an “apply-and-explain” mindset. This means that instead of rigid specifications, principles and goals should be defined that companies must adhere to or strive to achieve – but in their own way (“apply”). In return, however, decision-makers must explain exactly how they intend to achieve their goals.

This, by the way, is the basic idea behind the innovative South African Corporate Governance Code (“King IV”), which I consider to be one of the best sets of rules in the world. To be sure, King IV can certainly be seen as the result of an alliance between investors and auditors. After all, both groups played central roles in drafting it.

But they resisted the temptation to formulate a kind of lengthy checklist – and instead defined concise principles for responsible corporate governance. The German code falls far short of this. Moreover, investors now want to establish further check-the-box standards beyond the code (and apparently instrumentalise auditors in the process, see above).

How nice and important it would be if entrepreneurial thinking were more widespread in both groups. For starters, I recommend reading King IV.

Sincerely

Your Peter H. Dehnen