Back in November 2016 our London roundtable meeting included a presentation from the International Integrated Reporting Council (IIRC), and commentary from a member that is required to produce an integrated report. Looking back, the concept was unfamiliar and therefore difficult – and so perhaps it was naïve of us to ask for members to volunteer to submit themselves to an integrated reporting process. As no-one stepped forward we decided to produce one on ourselves – the Thinking Ahead Group.
We have now published our third integrated report (the reports can be found on the member website under these links: 2016, 2017, 2018). We think we are getting better at understanding what we do, and at writing the reports. We also think it is a valuable exercise. Even if no one else reads the report, it forces us to consider what we do, and how we might improve – how we might try to create more value. That said, we are a small team and what we do isn’t that complex. Even so, collating the data to support our value creation story seems harder than it ought to be. In other words, we strongly believe in the value of the integrated reporting approach, but we recognise that considerable effort would be required for a large organisation to start down this road.
What is integrated reporting?
Integrated reporting, <IR>, aims to be the vehicle an organisation chooses to use, to report on its value creating activities. It brings together material information about an organisation's strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates. It leads to a clear and concise articulation of the value creation story which is useful and relevant to all stakeholders (covering multiple capitals, multiple stakeholders, multiple time horizons).
Based on our own experience since that original introduction to the concept three years ago, some of the challenges and benefits we observe are:
Issues with <IR>
- Intangible information means subjectivity, in presentation and interpretation.
- Information in an integrated report may be hard to verify. Assurance for non-financial information is still in its infancy.
- The report may not truly reflect business reality if the group doing the reporting is separate from the business (leading to a ‘saying-doing’ gap).
- There can be a temptation to pad out reports, hindering investors’ understanding of the true drivers of the business.
- If the report becomes merely a PR exercise, its value is severely limited.
Why bother with <IR>?
- <IR> encourages more integrated thinking and hence better strategy, although to our knowledge there is no empirical evidence of <IR> companies outperforming peers.
- Further, there is the argument that better informed providers of capital lead to a lower cost of capital.
- At core, however, some organisations will be more aligned with the multi-stakeholder, multi-capital, multi-time horizon philosophy of the <IR> framework and view reporting this way as simply ‘doing the right thing’.
- <IR> fosters trust in a business through its recognition of its connection and responsibilities to wider society, hence supporting the entity’s social licence to operate.
It’s integrated thinking that really matters
Clearly the IIRC would like to achieve world domination with their reporting framework. To us it is not the brand on the framework that matters. It is the mindset. For us, an appropriate mindset means one that sees:
- money as just one of the capitals necessary to operate a business
- the running down of a non-financial capital as just as risky as running out of money
- a wide set of stakeholders as having a legitimate interest in the operations of the business
- value accruing and/or being destroyed over multiple time horizons not just the most recent year [reported profits for the banking sector in 2007 look less impressive after taxpayer bailouts].
Our past work on long-horizon investing, sustainability and value creation all lead us to consider wider and longer framing to be essential. We can no longer view a one-year, finance-only result as meaningful – there is too much information missing.
In addition, we believe the zeitgeist is shifting such that society will increasingly expect corporations to take greater responsibility for a wider set of issues affecting a bigger group of stakeholders. A multi-capital, multi-stakeholder, multi-time horizon approach to reporting seems to be the natural way to go.