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GLOBALLY, South Africa is held up as a trailblazer when it comes to the practice of Integrated Reporting (IR) and indeed, the research is indicating that there are very real bottom line benefits to businesses that do this.
But there is still a surprising amount of confusion around what IR entails and businesses are failing to capitalise on the immense benefits and opportunities it presents.
IR emerged in the wake of the global financial crisis of 2008, which spawned a movement that wanted to hold business accountable for the impact it had on communities, societies and people across the planet. The International Integrated Reporting Council (IIRC), which went on to spearhead the development of IR around the world, was launched at the 2009 Accounting for Sustainability conference
In South Africa, there was quick uptake of the concept, and the Integrated Reporting Committee of South Africa was founded in May 2010 to develop guidelines on good practice in integrated reporting and to promote awareness. The Johannesburg Stock Exchange’s Listing Requirements soon stipulated that listed companies must produce integrated reports in compliance with the recommendations of the King Code of Governance of 2009.
Five years down the line, it is clear that these reports are gaining in strength. EY’s 2016 Excellence in Integrated Reporting Awards highlights the fact that more companies are producing reports that are successfully focusing on future strategy and articulating the way in which a business creates value.
However, there is enormous scope for improvement, they say. To up their game, South African companies would benefit from focusing on the following three priorities when embarking on their integrated reporting.
1. Put the focus on value creation, not just numbers
IR is not an add-on to the annual and financial report, but an entirely separate document that builds on the information in these two critical documents and is designed to tell a more holistic story of the business, specifically about the sustainability of its practices and operations and a description of how the organisation creates value for itself and for others over time.
Value has two interrelated aspects: value for the organisation in the form of financial returns to the providers of financial capital; and value for other stakeholders and society at large. The organisation should clearly define what value means to it early on in the report and this should form the thread that runs throughout.
2. Explain the organisation’s strategy
The main purpose of an integrated report is to improve the quality of information available to shareholders and other stakeholders on a company’s real situation. It is a form of communication that includes broader and more relevant information that is beneficial especially to investors and those involved in capital allocation decisions.
A key part of this is to explain the organisation’s strategy. Strategy essentially guides how the organisation will use the capital at its disposal to create value, the dependency of the business model on the different capitals, how it will manage the trade-offs between the various capitals, how it will utilise the opportunities that have arisen, and how it will manage the risks and so on.
Strategies are not simply broad goals, aspirations, objectives, ideals or a vision. A strategy is more detailed than this. It requires an explanation of a set of coherent actions. Detailed strategies describe how the organisation intends to achieve its broader strategic objectives.
3. Tell a good story
Finally, an integrated report should lay out the organisation’s strategy and value creation story in a way that is engaging, with a connected and coherent storyline. A format that works for many, is to start with an introduction that outlines the scope, boundary and other preliminary issues, followed by an explanation of the organisation - its mission, vision, profile, external environment and business model.
After this the stakeholders can be identified together with their legitimate needs and concerns. It should then be explained how these needs and concerns have been filtered and used to establish the organisation’s material issues and overall strategy. The report can then continue with the necessary detail which can be presented by capital, stakeholder, material issue or division, whichever it is felt will tell the value creation story the best.
What is also important is that companies need to tell a balanced story, reflecting “warts and all”. An IR is not intended to be a publicity document, but should focus on the internal and external challenges, risks and problems relating to the organisation. Many companies focus only on the good news, but not telling the complete story undermines the credibility of the report and those charged with governance.
And lastly, as with any good story, the IR should leave its readers with a clear picture of what is to come. Where an annual report looks back, an integrated report looks forward, explaining how the company will deal with the challenges posed by economic and environmental factors and how it is aiming to deliver value to shareholders and other stakeholders in the future.
So why does this all matter anyway?
Quite aside from the initial objective of integrated reporting to hold businesses accountable for their impact on people and the environment, there is tremendous benefit to organisations that commit to IR and do it well. Studies have shown that companies that adopt integrated reporting practices actually outperform those that do not, and also have more long-term investors.
A report by the IIRC and Black Sun surveyed 66 companies around the world and found that integrated reports helped to build stronger relationships and improved understanding with stakeholders.
Another study by KPMG and the National University of Singapore found that through communication and transparency, the application of integrated reporting allowed companies to tell their own stories, preventing analysts from making assumptions on their behalf. This particular study also found that companies that disclosed more than just financial information started to outperform other companies who did not.
It is also believed that capital markets are likely to reward companies that adopt integrated reporting guidelines as this will help them rethink and integrate their strategies and business models more in line with stakeholder expectations.
IR is the way of the future. It is changing the way we think about capitalism and the world of business – not in terms of how much money an organisation is making, but what value it is creating. By getting business managers and CEOs to think about their company in terms of its sustainability, they naturally begin to see their operations in these terms and begin to relate differently to their staff, their products or services and the communities they serve.
By encouraging leaders to think in an integrated way, the emphasis moves from short-term profits to long-term value creation. The result is better, more integrated and more sustainable businesses that are able to weather the storms that come their way and are more equipped to be successful in the long run as well.
* Associate Professor Mark Graham is the convenor of the UCT GSB’s Understanding Integrated Reports short course that is held on 5-6 June 2017. For more information contact 0860 UCT GSB or email execed@gsb.uct.ac.za.
