Everyone is talking about integrated reporting,
and our research shows an appetite for more integrated
disclosure but limited understanding of the detail.
Everyone is talking about integrated reporting. For a few years it’s been a hot topic for many Investor Relations and Communications teams as they consider their reporting plans and interest has accelerated since the publication of the International <IR> Framework by the International Integrated Reporting Council (IIRC) back in December 2013.
By Clive Bidwell, Client Services Director, MerchantCantos
This article appeared in the Investor Relations Society’s 'Informed’ magazine, Spring 2016 issue.
The IIRC’s framework is a global initiative that urges companies to consider a more holistic view of value creation and performance. Across the world, integrated reporting is gaining traction and its part of the listing requirements in some countries. The IIRC believes that over time integrated reporting will become the norm. But for UK companies, a recent update of reporting requirements under the Companies Act and the subsequent guidance from the Financial Reporting Council (FRC) on the Strategic Report is currently the go-to source for best practice direction.
The IIRC’s guidance shares much common ground with the FRC’s – both in the spirit and the detail. They promote similar principles – all of which are welcomed by investors, who see reporting quality as a sign of a well-run company. A recent poll of investors carried out by PwC showed that 80 percent felt the perception of management is affected by reporting quality. In the same survey, 87 percent stated a desire for clear links between strategic goals, risks, KPIs and financials – a characteristic advocated by both the IIRC and the FRC.
Leading investors reinforce the need for a more holistic approach to reporting. Saker Nusseibeh, CEO, Hermes Investment Management commented “We look at the value that a company as a whole is producing. <IR> offers a means by which to ask the right questions.” And Andrew Ninian, Director, Corporate Governance and Engagement at The Investment Association observed that “reporting needs to get back to how a company makes its money in a responsible way, how everything relates back to strategy and how you manage risk aligned with that strategy.”
MerchantCantos’ own investor research showed appetite for more integrated disclosure but limited understanding of the detail of <IR> among mainstream investors, who also stated that they did not have plans to demand compliance with the <IR> framework in the foreseeable future.
Beyond best practice
Integrated reporting is not simply a series of recommended incremental improvements to UK reporting best practice, or even a selection of new areas to address. It’s not another reporting initiative, it’s a step change providing Boards and organisations with the right information to make informed strategic decisions.
Underpinning the IIRC’s framework is a requirement for companies to display a deeper understanding of how they create value for influential stakeholders and manage the resources and relationships (or ‘capitals’ to use the IIRC’s terminology) that contribute to the value creation process. The framework demands that companies go further than the FRC’s guidance in articulating their business models, encouraging companies to report in terms of inputs and outputs of the capitals (and their interrelationships) as well as the outcomes they deliver for the company and its stakeholders.
Challenges of integrated reporting
The capital concept is a sticking point for many companies, as it requires more than just a refinement to reporting. It may require a fundamental rethink of how a company is organised, operates and makes decisions.
In today’s global environment of volatility, uncertainty and eroded trust, many companies need to create a better understanding among increasingly well-informed stakeholders that their business models and strategies are sustainable in the short, medium and long terms. Reporting needs to do a better job of conveying the underlying condition of the company. A company may show strong growth and returns on capital, but its fortunes may look less healthy when assessed on other metrics that are equally influential to its longer-term sustainability and performance.
Communication of the capitals can also be a challenge, introducing language to which companies’ stakeholders (and investors) may not yet be accustomed. Some companies are using the concept of capitals but using different terms (such as ‘resources’ or ‘value’) to address this.
Benefits of integrated reporting
At a recent seminar on integrated reporting hosted by MerchantCantos, Sarah Grey, Markets Director of the IIRC explained how integrated reporting is improving the way organisations think about, plan, and report on their businesses. Sarah shared the experiences of some of the companies across the world that have implemented integrated reporting and how it is helping these companies arrive at a more holistic understanding of the value they create for stakeholders, producing better dialogue with external stakeholders, and enabling better informed and connected internal decision making – integrated thinking.
The IIRC appreciates that it is early days for integrated reporting, and that some organisations would prefer to see how early adopters fare before embracing it in earnest. The IIRC refers to the period from 2014 to 2017 as the Breakthrough Phase, in which it aims to achieve a meaningful shift towards early adoption of its International <IR> Framework.
With few precedents to monitor, many companies are unclear about how they should approach integrated reporting and what exactly they should be aiming towards. At MerchantCantos, we’ve been working closely with clients to demystify the integrated reporting landscape and clarify the opportunities, benefits and challenges. We start by assessing an individual company’s reporting against a range of criteria, and gauge where they sit on the integrated reporting spectrum before highlighting where their ambitions could lie and how they should progress.
Of course not all companies want to be among the pioneers, but for those with the appetite for integrated reporting we believe there are three fundamental points to consider.
First and foremost an Investor Relations or Communications team requires buy-in, both from the different contributors around the business, and the C-suite. Creating an integrated report is not a solo mission. The spur can come from an IRO, or indeed the CEO, but making it happen requires a concerted team effort, all with a shared belief in the goals, requirements and benefits.
Secondly, any drive towards integrated reporting requires an agreement on ambitions and timeframes. How far does a company want to progress in integrated reporting, and how fast does it expect to get there? Does it want to comply with the IIRC’s framework, or simply interpret the guidance to suit its business? How ‘integrated’ is the company and is full adoption realistic? What resources does it have to commit to it now and in the future? And how will an integrated report influence other components of the company’s corporate reporting suite, in particular the sustainability report?
Lastly, any move to a more integrated report is likely to necessitate significant change. There will be many issues to address so it is important for each company to prioritise those areas that it needs to tackle first, both in terms of communication, and more fundamentally, real changes in the company’s operations and reporting practices.
Integrated reporting is a long-term exercise. It doesn’t happen overnight, or indeed in one reporting cycle. The IIRC recognises this and has stipulated that companies can progress to a fully compliant integrated report within three years of their declaration to do so.
The ultimate goal of integrated reporting is to improve your reporting, helping stakeholders to understand you better and value you more fully and accurately. But at a fundamental level it can improve your business and help you understand the context in which you operate and create value.
Perhaps it’s time for the talking about integrated reporting to turn to action.
Clive Bidwell, Client Services Director, MerchantCantos
Clive leads MerchantCantos’ corporate reporting offer, including orchestrating the communication agency’s detailed research and hosting client-facing events in collaboration with groups such as the IIRC. He has helped many companies improve the effectiveness of their reporting, and has directed many award-winning reports including the Best FTSE 100 annual report at the Investor Relations Society’s 2015 Best Practice Awards.