Integrated reporting is a hot topic for companies and investors. We interviewed Paul Druckman, Superna Khosla and Jessica Fries to hear how the International Integrated Reporting Council (IIRC) is helping companies that strive for better business reporting.
Integrated reporting is a hot topic for companies and investors. In this interview, Paul Druckman, CEO of the International Integrated Reporting Council, tells PwC about his vision for more investor-friendly company reporting.
Is integrated reporting (IR) about increasing and monetising sustainability information in annual reports? Or is it simply better business reporting?
It’s definitely about better business reporting. We have a very clear definition of integrated reporting and it really is about communicating the strategy of an organisation, together with its prospects and its performance and its governance. It is all about how to create and preserve value in the short, medium and long term and it needs to be a concise communication of value, not just compliance reporting.
It’s very important to understand that investors are our primary audience. We are expecting other stakeholders to have a real interest in it, but we’re focused on investors and that distinguishes us from the sustainability reporting community.
What’s the difference between current reporting and what you would like to see, in five years’ time?
I think we have a compliance mindset in reporting right now. But let’s get out of the reporting cycle that we’re in and look for better reporting. This isn’t about more reporting, we want it to be better. And companies internally have wonderful reporting generally, so let’s actually express that in the external environment so that we can understand the strategy a business has to be able to create value.
What are the other benefits of integrated reporting? Why is it important for business today?
One clear driver is that it enables a business to actually tell its own story. There’s a saying: “don’t let others define you”. At the moment there’s no real place for companies to define what the business is trying to do in management’s eyes. And I think companies want to do that, but all sorts of liability issues put barriers in the way.
Another benefit is taking integrated thinking inside the business. At the board level, organisations do tend to have that strategic oversight of their business, but quite often that integrated thinking and integrated strategy doesn’t come through into the rest of their organisation. With our pilot programme we found that integrated reporting is helping that integrated thinking and strategy to be pushed right down into the business so that it’s clear – because everybody has to work together.
How far have you got with the framework and tools to enable business to take action?
We released the discussion document in September 2011 and we’ve released a prototype of the framework. A full draft for consultation will be published in April 2013 and the v1.0 of the framework is due in December 2013. But all of these are just stepping stones so that people can understand integrated reporting.
So what we’re saying to companies is: be prepared, start the process now because, if you don’t, you will suddenly be confronted with something that you didn’t help to craft and you won’t have the processes inside your business to benefit from it.
What is your one key message for companies, regulators and others?
Get engaged - make sure you understand what integrated reporting is and don’t assume it’s something that it isn’t. Make sure that what we are producing fits with where you want to go, because there’s still the opportunity to influence that. And certainly in May, June, July of 2013, please take the time to respond to the draft framework.
I think you will be really delighted with what it is and the benefits it can bring.
Superna Khosla, relationships director at the IIRC, talks to PwC about the benefits that pilot programme businesses are seeing from moving towards integrated reporting.
What are the benefits of integrated reporting?
It’s been only a year, but something like 80 companies have come through the pilot programme and some have even got to the stage of being able to produce a more ‘integrated report’. Most companies are experiencing significant internal benefits - we are seeing people really focusing in on strategy, for example. And it’s making people think again about some of the key performance indicators (KPIs) that they manage themselves with. It’s making them challenge some of their internal decision-making processes.
Another benefit is that the silos are now beginning to break down and ‘integrated thinking’ is starting to come through. So for example, the finance teams, who are responsible for a lot of the external reporting, are beginning to work more closely with sustainability teams and others who produce important information on some of the more intangible value that is in the company.
And what are the challenges that companies have been experiencing as part of the programme?
The first challenge is that they are actually developing the nuts and bolts of the framework themselves because we only have principles and concepts from the discussion paper to go on. It really is down to a personal commitment from individuals to make this evolution in corporate reporting happen – and it’s fantastic to see the amount of progress they are making. Integrated reporting also challenges people to think about certain areas slightly differently. So materiality is a real challenge for companies. There is the principle and the objective of having concise communications, but what do you choose to leave out without cherry picking? The business model is another example where, internally, people have their strategy, but specifically identifying where the value is coming from and reporting that clearly is tough.
Pilot companies have been alerting us to their challenges, so we have responded by setting up working groups on the five main areas: materiality, the business model, capitals, connectivity, value creation and assurance. We’re putting some papers out shortly to give people some tools in these areas.
So that’s the preparer’s perspective. How are the investors looking at this?
For us the investors are the primary audience for this first version of the integrated reporting framework. So we focus on finding out what gaps they see in current reporting and thinking about how their needs can be met.
We set up an investor network in March this year and 25 institutional investors have signed up to that. They tell us that they want to see how companies perform against their strategy. And they want to know, how strategic objectives actually support the long-term creation of value. So we are taking these messages back to the pilot companies. Only around 20% of the market value of any company today relates to its tangible assets. So what about the 80% of intangible value that investors really need to understand? And what’s the framework for people to report on those?
We have a number of companies in the pilot programme, such as Microsoft and SAP, for whom intellectual capital is very, very important. So the reporting of that capital using a sensible and consistent framework is important for them. And, of course, it’s crucial for the investors to see where their value comes from.
In this interview, Jessica Fries, a director at PwC and a board member of the IIRC, shares her insights on the move towards integrated reporting.
More and more companies are asking questions about integrated reporting and what that means to them. What developments are you seeing on this agenda?
We’ve just finished a review of 150 companies’ reporting from about 25 different countries to assess how far they are moving towards ‘integrated reporting’. It revealed great insights into some of the emerging practices in this area.
What were the particular highlights?
Leading companies are trying to take a longer-term perspective of their business and starting to centre their reporting on their business model and strategy. Using strategy to structure the whole report really helps users understand what the company is all about. And many companies that did this well also provided interesting segment information that was structured around their strategy.
The clearest reporters were also adept at putting their strategy in context – discussing how external ‘mega trends’ were affecting their business and backing that up with some hard numbers. They are clearly considering (and reporting on) how their company is affected by some of the mega trends, such as debt, energy shortages, poverty and climate change, and how they will respond and identify opportunities for the company.
A great example is the companies that were identifying how many of their products could be affected by these mega trends and where they may need to face up to an emerging resource scarcity and change their product strategy in the medium term.
Can you give a specific example of any companies that are really moving it forward?
Yes. Unilever is one of the most recent joiners to the IIRC’s pilot programme and is a good example of a company trying to face up to some of the challenges that their sector faces. They have been grappling with how to make sure that they have the key resources the company needs to succeed and grow. But there’s a real tension between this growth ambition and the recognition that growth can’t be infinite – we’ve only got one planet. Integrated reporting provides them with the right kind of tools to look at what information they need internally to inform their strategy and how they can use it externally to communicate what they are trying to do.
What advice would you give companies starting to look at integrated reporting?
Start by stepping back and thinking about your business model. Ask yourself:
When I speak to investors, that’s exactly how some of them are articulating what they want from reporting. Clearly, focusing on the things that matter to the business is a good basis for effective communication.
Who tends to drive this agenda within organisations?
If you look at the companies moving forward fast, it is being driven at board level. Without that board support you can really struggle because you need to bring different parts of an organisation together in new ways – that’s much harder to achieve from the from the bottom up.
Some CEOs already see integrated reporting as an essential management tool to drive more relevant management information, differentiate their brand and build trust in their business.
“Integrated Reporting (IR) is the language for resilient business. It is the means by which companies communicate how value is created and will be preserved over the short, medium and long term. This information is used principally by investors to support their capital allocation decisions. It involves a set of processes and activities, one result of which is communication, most visibly through a concise, periodic ‘integrated report’, about the way in which an organisation’s strategy, governance, performance and prospects lead to the creation and preservation of value.”
International Integrated Reporting Council