Many global corporates follow integrated reporting fundamentals
‘Integrated reporting’ demonstrates the linkages between an organisation’s strategy, governance and financial performance and the social, environmental and economic context within which it operates.
Importantly, integrated reporting includes information to allow shareholders to make a more informed assessment of the future of a company. United Technologies Corporation, American Electric Power, Southwest Airlines, Clorox, Germany’s BASF, Denmark’s Novo Nordisk, Brazil’s Natura and the Netherlands’ Philips have voluntarily started this practice, according to Superna Khosla, Relationship Director, International Integrated Reporting Council (IIRC).
“Adopting this practice can have a strong influence on corporate behaviour and ethics. Integrated thinking is the active consideration by an organisation of the relationships between its various operating and functional units and the capitals that the organisation uses and affects. Integrated thinking leads to integrated decision-making and actions that consider the creation of value over the short, medium and long term,” she said at the Round Table Discussion hosted by CA Sri Lanka recently.
Integrated thinking can be contrasted with traditional “silo thinking”. It takes into account the connectivity and interdependencies between the range of factors that have a material effect on an organisation’s ability to create value over time, she said.
“An integrated report results in a broader explanation of performance than traditional reporting by describing, and measuring where practicable, the material elements of value creation and the relationships between them,” Ms. Khosla said, adding that in particular, it makes visible all the capitals on which value creation (past, present and future) depends, how the organisation uses those capitals and its effects on them.
Insight into the organisation’s strategy
An integrated report should provide insight into the organisation’s strategy, and how that relates its ability to create value in the short, medium and long term, she added.
Adopting a strategic focus and future orientation in an integrated report includes clearly articulating how the continued availability, quality and affordability of significant capitals contribute to the organisation’s ability to achieve its strategic objectives in the future and thereby create value.
An integrated report should show, as a comprehensive value creation story, the combination, inter-relatedness and dependencies between the components that are material to the organisation’s ability to create value over time.
“An integrated report presents the total picture of the organisation’s unique value creation story (i.e., how its strategy, governance, performance and prospects create value and supports the intended report users’ understanding of the different factors that affect the future of the organisation and how they interact,” Ms Khosla said.
She said that such reporting assists to break down established silos in accessing, measuring, managing and disclosing information, and to extend the focus of reporting beyond the traditional focus primarily on financial and historical matters.
“It also facilitates the intended report user’s ability to drill down and interlink information in other communications depending on their needs.”
An analysis by the organisation of its actives in the past-to-present period can provide the intended report users with useful information to assess the plausibility of what has been reported concerning the present-to-future period. The explanation of the past-to-present period may also be useful to the intended report users in analyzing the quality of management.
Connecting information
Both quantitative and qualitative information are necessary for an integrated report to properly represent the organisation’s unique value creation story as each provides context to the other. Including Key Performance Indicators as part of a narrative explanation can be an effective way to connect quantitative and qualitative information.
The connectivity of information and the overall usefulness of an integrated report are enhanced when it is logically structured and well presented, written in clear and understandable language, and includes effective navigation devices, such as clearly delimited (but linked) sections and cross-referencing, Ms Khosla said. She said that an integrated report should provide insight into the quality of the organisation’s relationships with its key stakeholders and how and to what extent the organisation understands, takes into account and responds to their legitimate needs, interests and expectations.
“An integrated report should provide concise information that is material to assessing the organisation’s ability to create value in the short, medium and long term, while including concise information that provides sufficient context to make it understandable, and avoids redundant information.” She added that such reporting should include all material matter, both positive and negative, in a balanced way and without material error.
Both good and bad
A complete integrated report includes all material information, both positive and negative. To help ensure that all material matters have been identified, consideration is given to what organisations in the same industry are reporting on as certain matters within an industry are likely to be material to all organizations in that industry.
If material information is not included in an integrated report, the intended report users may incur costs in obtaining information through other sources or may make sub-optimal decision as a result of not having that information.
“The organisation considers what advantage a competitor could actually gain from information in an integrated report, and balances this against the legitimate information needs of the intended report users. If material information is not disclosed because of competitive harm, this fact and the reasons for it are to be explained in the integrated report,” Ms Khosla said, adding that the information in an integrated report should be presented on a basis that is consistent over time and in a way that enables comparison with other organisations to the extent it is material to the organisation’s own value creation story.
Reporting policies are followed consistently from one period to the next unless a change is needed to improve the quality of information reported. When a significant change has been made, the organization explains the reason for the change, describing (and quantifying if practicable and material) its effect.
“When information in an integrated report is similar to or based on other information published by the organisation, it is prepared on the same basis as, or is easily reconcilable with, that other information,” Ms Khosla added.
Insight
An integrated report provides insight about such matters as an organisation’s leadership structure, including the diversity and skills of those charged with governance, its specific processes used to make strategic decisions and to establish and monitor the culture of the organisation, including its “tone at the top” and attitude to risk along with particular actions,” she said. She said that actions charged with governance have taken to influence and monitor the strategic direction of the organisation and its approach to risk management are also highlighted.
How the organisation’s culture, ethics and values are reflected in its use of and effects on the various capitals, including its relationship with key stakeholders and Whether, and if so how, the organisation is implementing best governance practice that go beyond legal requirements are also highlighted.
“Such reporting provides a coherent, consistent, and, by definition, integrated message to the entire world, so a company isn’t saying one thing to shareholders and another thing to stakeholders,” Ms. Khosla said. She noted that having separate messages in today’s day and age is very difficult. “It leads to better clarity on the part of the company about the relationships between financial and non-financial performance.”
It’s important to let go of things. We find it hard to need news papers reading 400 page annual report is near impossible.
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