By Paul Druckman – Chief Executive Officer at the International Integrated Reporting Council
As the World Economic Forum (WEF) points out each year in its annual Global Risks Report, company boards deal with a multitude of interconnected risks. Over time, the profile of these risks has changed and in 2015 they include water scarcity, skills shortages, risk of financial crisis and migration challenges.
In other words, business risks are a proxy for the acute challenges we face as a society. Adding to the difficulty of managing these risks, WEF has highlighted that they are interconnected – they cannot be isolated and managed in a silo. This poses a particular challenge for boards: how to identify and manage risks that cut across the business environment and do not fit easily within the departmental hierarchy of the organisation.
Allied to this, in the wake of the global financial crisis, there has been an increasing need for boards to build (and in some cases re-build) trust in their businesses with all their stakeholders and to demonstrate their contribution towards long-term economic stability.
There is also now an increased need to promote financial stability and sustainable development. Boards are beginning to recognise that much can be achieved if investment decisions are made on the basis of long-term value creation, especially if corporate behaviour is aligned to this aim. Evidence has shown that there is a clear link between investment decisions, corporate behaviour and reporting. And, as the board’s governance role expands, so Integrated Reporting (IR) has become a key tool in the jigsaw.
Integrated thinking is increasingly seen as a necessary requirement for delivering long-term value creation by businesses building connectivity across organisations, breaking down internal barriers and enhancing decision making. Telling the company’s performance story is an important part of the board’s responsibilities. Explaining strategy and the business model is essential to present clearer and more complete information to investors and other stakeholders.
So, as the board’s governance role expands, IR is increasingly also being used as a tool to understand and communicate value creation in its broadest context.
Benefits of IR
Our recent research has highlighted the practical value of IR in the context of today’s fast-moving markets and the international trends that are combining to encourage IR adoption.
This shows increasing evidence of the benefits boards can gain from adopting IR. The latest IIRC study, conducted by corporate communications consultancy Black Sun, identifies both external and internal benefits. Among organisations piloting the IR Framework, 91 per cent have seen a positive impact on external engagement with stakeholders, including investors, 92 per cent have a better understanding of value creation and 79 per cent report improvements in decision making. Companies need to tell their stories in a meaningful, concise and comparable way. At the same time, boards need to build trust in their businesses with all their stakeholders and demonstrate their contribution towards long-term economic stability.
Of late, there has been a general loss of confidence in the ability of corporate reporting to provide investors and wider stakeholders with the information they need to understand the value they are creating. Recent evidence shows that IR will help to tackle the key challenges for businesses, such as the need to build trust and to look at a wider picture, so that they can fill in the ‘missing gaps’ in their reporting. IR helps a company to create value, build trust and to tell its story. At the same time it becomes a valuable management tool.
We are finding that IR is very much on the rise globally and is moving into the mainstream of board thinking – and this is backed up by several studies. In preparing their strategy and plans, companies are proving that IR adoption can provide the missing links. IR offers companies a complete overview of all the relevant information about a business, which can then be put into context alongside its strategy and business model and provide a more holistic view of performance.
For example, a study among investment professionals conducted by PwC, found that a large majority (87 per cent) of respondents felt that clear links between a company’s strategic goals, risks, key performance indicators and financial statements were helpful for their analysis.
Decline in trust
More and more business leaders now recognise the need to consider and report on wider business issues. According to a PwC report, 74 per cent of CEOs have said that measuring and reporting the total impact of their company’s activities across social, environmental, fiscal and economic dimensions contributes to long-term success.
“Unlike reputation, which is based on an aggregate of past experiences with a company or brand, trust is a forward-facing metric of stakeholder expectation,” according to public relations consultancy Edelman. The 2014 Edelman Trust Barometer, based on a substantial global survey, has found that trust in business has stabilised – while trust in government has fallen – but since 2008, the factors seen as building trust in business have changed. Survey participants now place greater importance on engagement and integrity-based attributes, such as treating employees well (59 per cent), listening to customers (59 per cent) and exhibiting ethical and transparent practices (56 per cent).
It is apparent that these factors now carry more importance than operational-based attributes, including financial performance (36 per cent). Edelman’s research suggests that CEOs can build trust in themselves and their companies by communicating clearly and transparently (82 per cent), telling the truth regardless of how unpopular it is (81 per cent) and engaging regularly with employees (80 per cent).
In July 2014, members of the American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA) took part in a survey to help develop a better understanding of the IR value proposition.
Out of a total of around 400 responses from across the globe, 94 per cent of C-Suite executives said that it is important that they can explain how their business creates value through their corporate reporting. Eighty-seven per cent of all executives agreed that being able to bring together financial and other important relevant information to explain value creation would help to strengthen relationships with investors and creditors. So, confidence among boards is on the up, as IR adoption becomes more the norm.
It is promising to see that boards are increasingly pursuing long-term strategies that integrate wider sources of value creation. This will incline them towards an IR approach so that it will be a normal part of boardroom thinking to report organisational performance in relation to long-term value creation – a board practice that will naturally make IR aligned.
The future of reporting
Today, with momentum growing, there are more than 1,000 businesses worldwide who are using Integrated Reporting as a key mechanism for presenting their value creation story. We have also developed a unique council of stakeholders from across the corporate reporting landscape, including companies, investors, professional organisations and influencers.
IR is helping businesses to think holistically about their strategy and plans, make informed decisions and manage key risks to build investor and stakeholder confidence and improve future performance. This has meant there has been a marked improvement in the quality of information available in a report. Equally, the actual process of reporting has become more productive. There is now a better understanding of the factors that materially affect an organisation’s ability to create value over time. This will bring significant benefits to the process of capital allocation and access to finance.
It is clear that whether Integrated Reporting should happen or not is no longer a question. We should look forward to how best it can be implemented across the board to benefit business in the 21st century.
About The Author:
Paul Druckman is Chief Executive Officer, International Integrated Reporting Council. The IIRC
The IIRC’s vision is to align capital allocation and corporate behaviour to wider goals of financial stability and sustainable development through the cycle of integrated thinking and reporting. The IIRC is a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs. Together, this coalition shares the view that communication about value creation should be the next step in the evolution of corporate reporting. The IIRC, as the global authority on <IR>, strives to be market-led and evidence based, acting as a global centre of excellence for corporate reporting reform.