Integrated Reporting – Corporate Strategy and Long-Term Value

Financial Reporting Brief July 2019

This month’s article, 'Integrated Reporting: Corporate Strategy and Long-term Value' comments on developments in Integrated Reporting and its potential for a wider reach.

Our Quarterly Financial Reporting Brief comments on international accounting developments in relation to business combinations and insurance, the focus on climate-related disclosures and integrated reporting, changes to FRS 102 and guidance in a number of areas including half-year reporting, dividends, revenue and improved financial reporting for smaller listed companies. Inline XBRL digital reporting is being introduced in the EU.

Integrated Reporting – Corporate Strategy and Long-Term Value

Six years on from the release of the International Integrated Reporting Framework in 2013 it is of major interest to reflect on how it has developed and whether it is achieving its objectives. People may wonder whether Integrated Reporting (IR) is the preserve of large multinational global organisations only or whether it has a more extensive reach.

In reflecting on the developments since 2013, a wide range of material has been published by the International Integrated Reporting Council (IIRC) and many others. Some recent publications include:

Insights into Integrated Reporting 3.0: The drive for authenticity – published by the Association of Chartered Certified Accountants (ACCA)
Purpose and Profit – Value of Value: The new long-term horizon for business leaders - published by the IIRC with the Association of International Certified Professional Accountants (AICPA)
A Comparative Analysis of Integrated Reporting in Ten Countries – an independent publication

Consideration is then given to whether there is an extensive reach and the possibility of potential benefits for SMEs.

Experts at the IIRC Global Conference which took place recently concluded that alignment around the wider concept of value creation is the only viable future for accountancy. The strongly expressed view is that the reporting landscape is converging around value creation, climate change, the UN Sustainable Dvelopment Goals (SDGs) and the importance of integrated thinking and reporting for delivering this much-needed change in corporate reporting internationally.

Insights into Integrated Reporting

The ACCA report is based on findings from the most recent review conducted in 2018 on reports voluntarily submitted by 48 Business Network participants in Integrated Reporting.

The overall theme of balance and authenticity is deemed of high importance, emphasizing that reporting in a balanced and complete way is vital if readers are to view IR as more than mere marketing. Companies should reflect how they create value over time and need to be mindful of avoiding pitfalls at both ends of the scale, and to aim to:

Show balance in reporting both positive and negative performance with equal prominence, and to report on performance against strategic objectives with clarity showing how they plan to deal with future risks and opportunities; and
Avoid the possible natural level of reluctance among executives to make claims that might be considered too ambitious before the desired levels of performance have been achieved.

The IR movement emerged to help restore trust and confidence in company disclosures. In times of low corporate trust, authenticity – being honest about the organisation’s mistakes and challenges – is increasingly important for the credibility of corporate reporting and integrated reports.

A key message of the report is to encourage the marketplace to recommit to the underlying drivers of integrated reporting: to give a complete insight into the quality of strategic thinking that drives long-term value creation.

The ACCA report presents good practice ideas and excerpts from ten integrated reports which have demonstrated authenticity in different ways.

Purpose and Profit

The report published by the IIRC, AICPA and Black Sun is based on the views and opinions of almost 100 business leaders as at March 2019 from a survey of executives across the Globe that seeks to understand trends and challenges in measuring, disclosing and understanding the value that companies create.

Some of the key messages highlighted in the survey are:

With environmental concerns rising in a globalized world, consumer and investor trust now comes at a premium and organisations are expected to combine profits and purpose;
Short-term capitalism must change to long-term, sustainable growth and businesses need to lead the way;
Executives globally acknowledge that future success relies on consideration of stakeholder perceptions and wider value creation;
Executives and investors alike desire longer-term perspectives on strategic planning;
Integrated thinking is becoming mainstream, but needs board support to progress further.

The report proposes ten questions for executives to help develop their value creation stories which is a core fundamental of IR, as follows:

Have you explained the state of play?
Who are you, what is your purpose, mission and vision?
Does your business explain how you create value?
What makes your business unique?
Where is your business going?
How will you get there?
Do you measure what gets managed?
What are your challenges?
Is action linked to reward?
Have you provided a complete picture of value?

The report finds that despite a small improvement since the previous survey a couple of years ago, the majority of executives still lack the management and reporting information needed to understand and interpret the true value of drivers of their business. The story of how value creation is achieved and sustained is important, not only for executives, but for a wide range of stakeholders. The integrity of the value creation story is essential to building trust in organisations.

Comparative Analysis

The Analysis is based on a survey of five companies from each of ten different countries with regard to evaluating five areas of disclosure – Materiality, Risks and Opportunities, Strategy and Resource Allocation, Performance and Outlook. The process found that countries could be fairly clearly grouped into three categories of quality of disclosure:

High – Germany, Netherlands and South Africa
Medium – France, Italy, South Korea and the United Kingdom
Low – Brazil, Japan and the United States

The report comments that the quality of integrated reporting has not improved since their last studies were carried out in 2015 and that there is a wide gap in the quality of reports around the world. The report expresses the view that a major reason for this is that given the absence of generally accepted and enforceable standards for integrated reporting, companies are free to self-declare that they have published an integrated report, even if in doing so they demonstrate a misunderstanding of the concept and a lack of adherence to the IR Framework Guiding Principles and Content Elements.

The report puts forward a number of recommendations on creating a global task force to compile best practices, the creation of a global database and the need for explicit recognition that IR is far more than producing a paper or electronic document with a need to understand best practices for reporting in much more flexible, user-friendly and compelling ways.

Integrated Reporting for SMEs

The Report published recently by the European Federation of Accountants for Small and Medium-sized Enterprises (SMEs) and Auditors ‘Integrated Thinking and Reporting for SMEs: The Why and How’ strongly expresses the view that there is a clear, concise and persuasive case why SMEs and their stakeholders, from owner managers through to end consumers, stand to benefit greatly from considering integrated thinking and integrated reporting.

Possibly the most important guiding principle of the IR Framework, and the one that really sets IR apart, relates to connectivity and more creative, dynamic thinking. If a compelling and candid story of an SME’s value creation is to be understood and communicated, then the capitals, the external environment, and the significant internal value and performance drivers need to be considered together. IR identifies the capitals as financial, manufactured, intellectual, human, social and relationship, and natural.

With "integrated thinking,” SMEs can make better decisions that result in better outcomes. Integrated thinking is a connected view of the SME, including its use of and effect on all the capitals central to its business model and future strategies, that would enhance strategy planning, execution, and evaluation. Integrated thinking helps SMEs gain a deeper understanding of the mechanics of their business. This will help them assess the strengths of their business model, spot any deficiencies, and address them quickly. These insights facilitate a forward-looking stance and sound strategic decision making. This may sound familiar to SMEs already using elements of an integrated reporting approach in substance if not in form or name.

Just like financial capital, when other capitals are properly understood and managed, they can continue to release value over time, while simultaneously growing in their capacity to continue to drive value in the future.

In addition to improving internal management processes, IR can also lead to other significant benefits, including:

Creating greater trust and credibility with customers, suppliers, other stakeholders, and society. This is increasingly important in light of government agencies and not-for-profit organizations searching for commercial partners that can not only supply the goods and services that they need, but also do so sustainably;
Maximizing the potential to transfer, sell, or hand over the business by providing a better basis for valuation; and
Securing financing at a reasonable cost. Among other things, many lenders will want to know how financial capital has been deployed in the past and future intentions, based on a holistic strategy and a well-rounded business plan.

Conclusion

It is a matter of great importance for companies to explain how their organization creates value for their key stakeholders in the long term. This is not just the preserve of large global organisations, it must remain in sharp focus for all entities.

In a recent article we commented on the UN’s Sustainable Development Goals and, in recent weeks, the UN and the IIRC have signed an updated Memorandum of Understanding which will lead to enhanced cooperation to integrate the SDGs into the corporate reporting cycle.