IR you reporting optimally?
ME PoV Fall 2016 issue
The Capital Markets Authority (CMA) in Kuwait recently launched guidelines that provide listed companies with a head start for driving Integrated Reporting in a clear and concise manner.
According to Chapters 11 and 12 of the 15th Rulebook, companies are required to either comply with the provisions of adopting Integrated Reporting (IR), or explain to investors in their next governance report why they have not done so.1 Globally IR, which has gained significant attention over the last decade, is mostly being adopted on a voluntary basis. The following briefly outlines what IR entails and how beneficial it can be for companies to navigate through a transition from traditional financial reporting to an integrated reporting system.
What is integrated reporting?
To date, there is not one agreed upon definition for IR but the CMA does provide some guidance and overview for companies to start reporting in an integrated way:
In chapter 11, article 8 of Rulebook 15, the CMA refers to IR “as an effective tool for achieving strategic goals of the company and hence to create corporate values [..] as this will assist members of the board of directors and executive management to take decisions in a practical and proper manner, imminently leading to achievement of shareholders’ interest.” Additionally, this would provide the stakeholders visibility on the company’s aspirations and plans for the future.
Further, the CMA has issued a set of guiding principles to substantiate the creation of an integrated report as “a minimum of important characteristics”:
- The company’s focus on strategy;
- General overview on the company structure and business model;
- Risks facing the company;
- Future expectations and directions;
- Conciseness, accuracy, and tangibility in presenting information;
- Regularity of the reports.
The corporate landscape has been evolving ever since the economic crisis that brought to surface that financial reporting alone will not provide enough insight to satisfy investor and stakeholder concern. IR can be an effective tool for instilling long-term value creation of a company. This direction focuses on driving a more comprehensive and meaningful way of reporting about all aspects of an organization’s performance and future potential for internal and external stakeholders. Not only does it integrate ﬁnancial aspects of performance with sustainability aspects, it also recommends forward-looking elements to reporting as well as the reporting of historical performance.
In other words, IR aims to help organizations improve shareholder value by developing successful and enduring relationships with its customers, employers, suppliers and the communities in which they operate. Apart from financial and manufactured capital, businesses these days depend on broader sets of relationships, so-called “capitals” in the IR terminology, that include intellectual, human, social and natural capitals. It is a process of thinking through your business and aligning your organization’s strategy and business model for long-term sustainable value creation.2
Why is it important?
IR helps organizations to tackle the specific concerns of long-term investors by providing material information about an organization's strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context in which it operates. Consequently, it leads to a clear and concise articulation of the company’s value creation story, which reports to a wider stakeholder group that may have an interest in the company or society at large.
Not only does IR focus on financial performance of an organization but also on a broader spectrum taking into account social, environmental and economic elements. Organizations that adopt IR tend to have a more holistic decision-making approach that leads to more financial stability and sustainability of the business in the long run.
There is a multitude of benefits associated with integrated reporting–both within an organization and from an external perspective:3
- Encouraging the organization to think in an integrated way;
- Clearer articulation of strategy and business model;
- A single report that is easy to access, clear and concise;
- Creating value for stakeholders through identification and measurement of non-financial factors;
- Linking of non-financial performance more directly to the business;
- Better identification of risk and opportunities;
- Improved internal processes leading to a better understanding of the business and improved decision-making process;
- Attracting long-term investments into an organization if IR or just IR principles are being adopted within the published reports.4
Looking ahead in the region
In the Middle East stakeholders are becoming increasingly aware of the need for sustainability and are growing ever more concerned about the non-financial impacts that organizations have on the societies and economies in which they operate. Add to this the swift and expansive development in the region that has made the issue of sustainability more essential than ever. Key drivers of sustainability in the region include corporate social responsibility policies, energy efficiency and regulatory compliance.
Many regional governments such as the UAE and Qatar have developed short- and long-term national visions with sustainability as a key pillar critical to their success. They include introducing sustainability regulations, promoting the use of renewable energy and green technology, promoting social development, economic diversification and reducing dependence on the oil and gas industry.
The number of sustainability reports published by organizations in the region have significantly grown on a yearly basis since 2010. Certain organizations in the region have slowly moved toward integrated reporting over the past couple of years. These include organizations from diverse sectors including transport, oil and gas, healthcare and financial services. Moreover, there are now national reporting frameworks/guidelines such as the UAE’s Estidama and Qatar’s Sustainability Development Industry Reporting (SDIR.)
In short, IR is expected to bring enormous benefits both, internally and externally to an organization. Internally, IR is likely to improve conversations between the board and management, better decision-making through the early breakdown of silos and increasing respect and understanding between departments. Additionally, a broader perspective on how organizations create value subsequently leads to changes in strategy, resource allocation and management systems.
Externally, IR is evidenced to have a strong impact on improving engagements with external stakeholders. Furthermore, understanding and articulating the connections between value created for organizations and value created for others is a particular challenge for nearly all organizations which leads organization to significantly change what they measure.
With all these dynamic developments in sustainability awareness and implementation, it is inevitable that we see a major increase in integrated reporting adopted and reports published in the region. Organizations that truly consider sustainability and the opinion of their stakeholders should aim to implement integrated reporting sooner rather than later.
By Rami Wadie, Partner, Risk Advisory, Corporate Governance leader, Deloitte, Middle East
- Rule of ‘comply or explain’- a requirement for a company to comply with a code of corporate governance or explain any non-compliance.
- See “A Director’s guide to Integrated Reporting,” Deloitte LLP, page 1, 2015
- See “Insights – Integrated Reporting,”Deloitte UK, www2.deloitte.com/uk/en/pages/audit/articles/integrated-reporting.html
- See George Serafeim, “Integrated reporting and investor clientele,” Harvard Business School working paper, number 14-069, February 2014 (revised April 2014), hbs.edu.
- “The International IR Framework”, The International Integrated Reporting Council, December 2013