I like to try and understand new developments in a holistic and systemic way, creating a framework and a process that can enable greater understanding and innovative ways of thinking. Integrated reporting is one such recent development.
The annual report is a once a year event, primarily aimed at companies’ shareholders. However, company annual reports are shifting, they’re no longer focussed on financial data alone. More recently providers of financial capital seek for more non-financial information. The providers of financial capital want to understand what issues are material to the value creation prospects of an organisation over the short, medium and long-term. The integrated report (<IR>) is a key global development in meeting this requirement.
This means that the historic processes for compiling annual reports are sub-optimal for effective <IR>. Simply mashing-up the annual report and the sustainability report does not demonstrate that an organisation understands the issues that are material to its viability over different time frames and across the different capital stocks. My experience, coupled with the reports themselves suggests companies are in two camps:
- Those who get it, have built internal capacity and have embedded a process, resulting in a balanced assessment of the organisation’s value creation prospects; and
- Those who have not; panic ensues two months before year end and a dossier of unlinked, unassurable non-financial data and warm fuzzy case studies is often the result
I propose that <IR> is diamond shaped and iterative.
Meaning that the process starts at the top corner, expands out to the horizontal points of the diamond and then contracts back in again to the final corner. The report should be the outcome of a process – an integrated reporting process, which incorporates integrated thinking.
The four corners of the diamond create the boundaries for the report,
- Regulatory requirements need to be met by the integrated report. These vary by geography and they play their part – informing the context.
- The opposite corner of the diamond is governance. Governance is critical. It works hand-in-hand across the entire <IR> process, supports the collaboration efforts and ensures that the end goal is met.
- The requirements of external stakeholders – primarily the target audience for the report, along with the IIRC <IR> framework inform the types of issues that should covered in the report.
- The KPIs communicate the progress that an organisation has made in reaching their stated aims or goals.
The internal section of the diamond suggests that the process is iterative, collaborative and integrated. Perhaps the most critical part of the <IR> is the context in which an organisation operates. This one task requires the net to be cast far and wide, both within the organisation and outside the factory fence. The context sets the scene for all that follows. It is the entry point to the diamond and the fulcrum of the value creation story. The context also can change rapidly. Emergent apps such as UBER have revolutionised urban mobility and challenged the entrenched taxi industry in a very short space of time.
There are critical enablers that sit outside the diamond and support it. Senior leadership need to buy into the process. Without this there will be no buy-in and the report will not display integrated thinking.
Another enabler is collaboration. Those people within an organisation charged with governance, risk, sustainability, investor relations, marketing, brand strategy, and finance (and more!) could all conceivably be involved. Collaboration is deep and difficult, without it, integrated thinking is difficult to achieve.
The two other key enablers are:
- Both internal and external
Once the context is understood and the specific enablers for each organisation have been identified, content can be created. Because deep thought has gone into the process there should be a clear golden thread that hangs the report together – the value creation story. Good <IR>s link:
- The business model, to risks / opportunities and material issues,
- The business model to the value creation story over time and to the strategy
- The companies’ activities (and projected activities) to their impact on the various capital stocks.
- KPIs to monitor performance with a balanced view, reporting both good and bad news
I propose that <IR> is an outcome of a process and not just a glossy marketing magazine that’s purpose is to win awards. If companies don’t embrace and embed an <IR> process they may not leverage the benefits of such integrated thinking. <IR> should:
- Be uncomfortable
- Challenge the organisation and its purpose; and
- Lead to innovation, leverage opportunities and catalyse change within the organisation.
Would you rather understand the threats to your business over different time frames, adapting and capitalising on opportunities to mitigate those threats. Or would you rather be a Kodak or Lehman-Brothers, flagrantly clinging on to out-dated modes of business in the face of rapid changes in context?
Written by: Dave Baxter