Front-end your humility, and other lessons learned from audit

Trust in institutions has plunged over the past twenty years. The community’s belief in political structures, in banks, in religious institutions, in corporations – has dropped.

In the corporate world this drop in trust has corresponded with increased expectations about corporate behaviour. Boards understand investors want their companies to act ethically and responsibly.

This desire for better transparency and higher standards of honesty is well established when it comes to customers, regulators, and institutional investors. What the new KPMG Acuity research confirms is the desire is acute among retail investors as well.

In my experience as an auditor, the overwhelming majority of corporations are keen to meet society’s raised expectations. Boards understand the stocks of goodwill they once relied upon to get through turbulent times is running dry. The great shock absorber of trust has been removed and that leaves corporations exposed.

But making the shift towards greater transparency and honesty is not as easy as it might first appear. In reality, an effective transition requires not just good intent, but diligent and focused efforts. So where can these efforts be made?

Think beyond compliance

Corporations need to be aware that the onus now lies squarely on them to not only disclose what is legally required, but to actually conceive of what else might be relevant to report.

The lens that needs to be applied is ‘what is the right thing to do?’ But don’t expect this to neatly align with the existing compliance lens.

Empathy is key here. Boards questioning their management teams need to put themselves into the shoes of the customer, the community stakeholder, and the investor.

Sit down, be humble

Asking the right questions is the first step. The next is to be honest and forthright in your answers.

Company reporting procedures have traditionally been weighted toward justifying behaviours, rather than building trust. But in the modern context, if serious problems exist the likelihood is a humbling moment lies somewhere down the track.

Front-ending that humility to a pre-crisis setting makes much more sense than saving the big mea culpa for the eye of the storm.

Furthermore, owning up quickly to a problem or mistake is a critical facet of building trust. People are naturally inclined to believe those who display vulnerability and authenticity.

So if a company shows not just the good, but also the bad and the ugly, it mitigates risk.

Conversely, if you just spin shiny stuff, it will naturally come as a surprise to investors when crisis strikes. That’s when big, disruptive fluctuations in share price tend to occur.

Often when a company is in crisis the accusation that ‘we should have been told about this earlier’ can sting harder than the root problem. This is also when reputational risk can turn to class actions.

Tell your story well

Reporting continuously, honestly, and humbly is vital. But companies committed to securing trust can’t stop there. The risk of information overload in a bid to be transparent and trustworthy is one directors should also be conscious of.

Boards and management have an obligation to communicate effectively and ensure the most relevant information is prioritised and understood. The responsibility for action can’t lie entirely with directors, however, boards need to focus on ensuring a culture of transparency permeates the organisation. This is perhaps the hardest task of all, but there are practical places to start.

Historically, boards tend to interact with just senior executives. But many directors are now wanting to get more connectivity, deeper into the business. So people well below senior leadership are coming to present to the board, which is an extremely positive development.

Engaging in deeper analysis on people surveys is also key. If there’s low engagement in a section of the business, for example, we know that generally corresponds with a greater risk of that section not complying with policies and procedures. Boards need to be vigilant about those dark spots, because they have the potential to tarnish the entire transparency initiative.

Another important way boards can enhance transparency – and one that is close to my heart – is to support their auditor accessing information. Good auditors have inquiring minds, good emotional intelligence, and broad experience. They occupy a unique position, because they spend time within an organisation talking to people at all levels.

When I hear a client say: “don’t just tell me the numbers are OK, tell me what else I should know,” it’s music to my ears.

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