Integrated Reporting: Big business is taking action to make reporting fit for the reality of business today – survey finds significant change needed
Some of the world’s largest and most influential companies and investors have come together in a bid to promote more open and useful business reporting.
One hundred businesses across the globe, including Deutsche Bank, The Coca Cola Company, Natura, Unilever and Tata Steel, alongside leading investors, are all taking part in a pilot programme run by the International Integrated Reporting Council’s (IIRC) to test and help develop the integrated reporting framework that aims to give a more informative view of a business. Business leaders from across this pilot programme network will meet in Frankfurt on June 18 and 19 to share insights and provide feedback on the framework, which is out for public comment until 15 July 2013.
‘Integrated reporting’ (IR), an approach for businesses to report on their value creation including financial and non-financial key performance indicators, is gaining traction with some of the world’s largest companies. Companies involved in the IIRC’s pilot programme say that they can now better judge the risks and opportunities of their businesses because IR facilitates a more holistic way of thinking and managing.
According to a report by the IIRC and Black Sun last year, 93% of companies involved in the programme say that IR helps them to overcome silos between departments such as Strategy, IT, Investor Relations, Finance, Sustainability, Corporate Communications and others.
But there is still a long way to go before the reality of company reporting catches up with the ambition, according to a PwC survey of the current reporting of large companies involved in the IIRC’s pilot programme.
The survey examined the reporting of 50 pilot companies that had already published reports by 30 April 2013. It was conducted by the integrated reporting specialists at PwC in preparation for the two-day meeting they are hosting between the IIRC and global business leaders that have already begun to work with the basic principles of integrated reporting in their businesses. PwC is hosting the conference to facilitate sharing experiences about integrated reporting and discussing examples of how companies are applying the principles.
South Africa was the first country to mandate integrated reporting for all listed companies. An integrated report brings together the material information about a company’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context in which it operates.
Zubair Wadee, a Director at PwC, says: “Companies that hope to see the benefits of greater stakeholder confidence and lower costs of capital understand the need for communicating in a well thought through and cohesive manner. The ability of the board to develop the right strategies and business models to succeed is also greatly influenced by the quality of the information delivered internally.”
· 84% of the companies assessed already identify one or more non-financial capitals material to their business operations. But so far only 15% comprehensively report on all material capitals that are relevant to their industry and circumstances in their 2012 annual reports. When this is addressed it will be easier for stakeholders to see how they are creating value from the resources used, and what effect that is having both on the competitiveness of the business and the health of the communities they depend on.
In addition to information on financial and manufactured capital, the IIRC Framework also calls for information on human, intellectual, social and relationship capital as well as natural capital, if material to a company’s value creation.
· About one quarter of the participants are already successful in communicating how the business creates value.
· Half of companies talk about what resources and relationships their business models rely on. Of that 48%, the majority discusses constraints and availability expectations – but very few companies cover all their material capitals in this way, and even fewer support this with data. Reporting effectively on this would build confidence that management has an accurate understanding of the risks to their business and encourage investment.
· 83% discuss future market trends, but only 40% of those link market discussion to strategic choices.
· 96% report their principal risks but only 23% integrate their risks into other areas of their reporting – linking to strategy, business models and KPIs. Improvements here would give more faith in how businesses are managing their risks and making appropriate operational decisions.
· 71% of pilot companies explicitly identify their key performance indicators (KPIs). About 47 % of businesses had some targets for these indicators, but only 17% clearly align KPIs and strategic priorities; and only about a third of businesses make some link between financial and non-financial performance.
· The majority does not yet integrate their financial and non-financial performance in their reporting, which suggests that there is some distance to go on building understanding within business around how organisations create and destroy value (not just creating returns for their shareholders), and further, how this affects their future prospects.
Wadee says: “A substantial number of businesses have been active in pushing forward Integrated Reporting and initiating profound internal changes. Integrated Reporting is the result of integrated management and governance. Businesses that have established ‘integrated thinking’ in their organisation will be successful at Integrated Reporting.”
Paul Druckman, CEO of the IIRC, says: “Corporate reporting is a key tool for communicating with stakeholders an organisation’s unique story of value creation. The reality is that all too often businesses focus their reporting on financial information alone, rather than the full and rich sources of value creation, such as talent, knowledge and natural resources, the management of which are critical to business success.
“The work to move towards integrated reporting is part of a broader move to re-establish the confidence that enterprise can bring to our economy. It’s no coincidence that this week’s G8 meeting, and the related G20 agenda, is focused on business transparency – and that will be a focus for the next two years. Market-led innovation with integrated reporting will help ensure that change achieves its ambition to re-energise capitalism and doesn’t simply become another burden on business.”
Many businesses, not only the ones participating in the pilot programme, already use the structure, content elements, and terminology of the integrated reporting framework as a point of reference. Most businesses appreciate the competition among their peers as a driver for the further development of their reporting.