Malaysia: Integrated Reporting in Malaysia - basics covered, but a long way to go

22 Jul 2014

The right elements are there, but the lack of linkage between the elements in annual reports is hampering meaningful stakeholder communication.

PwC Malaysia’s analysis of the annual reports of the top 30 listed entities in Malaysia against the Integrated Reporting Framework has revealed that Malaysian companies have a long way to go before they can be deemed to be demonstrating integrated reporting. Experts say, however, that there is a general understanding among companies that integrated reporting is a more effective form of reporting. They also point out that the context of the survey is important – the Framework had only been released recently, leaving them little time to consider the impact to their reporting. Neither did they know that their reports would be subject to benchmarking against principles that have not yet been adopted in the country.

Integrated reporting brings together material information about an organisation’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context that it operates in.

It’s a process that results in clear communication of how an organisation creates value over time. According to the International Integrated Reporting Council (IIRC), integrated reporting is a demonstration of “integrated thinking” – a process through which companies report more than simply the financials, focusing on true value drivers of their business instead which helps them articulate their true value to their stakeholders.

Though legislation like the new narrative reporting requirements in the UK has not been adopted by Malaysia, there is a belief that integrated reporting will enable entities to “share the story” of their business and provide a better picture of their worth to investors.

This belief is reflected in a survey that shows that many companies listed on the Bursa 30 index (the biggest Malaysian companies by market capitalisation) are disclosing some of the key elements from the Integrated Reporting Framework in their report – but linkage between these elements is poor meaning that information is ‘siloed’ and not integrated.

Paul Druckman, CEO of the IIRC, recently said that he is disappointed with the uptake of integrated reporting in Malaysia as there were no Malaysian companies participating in the IIRC Pilot Programme. It would be somewhat premature to conclude that the results of the analysis support Mr Druckman’s view. However the results of the analysis do indicate that Malaysian companies are not providing enough insight into market trends and how these trends influence their business decisions. While 90% of Malaysian companies discuss market trends, only 20% of those companies link this discussion to the strategic choices they make in response to these trends.

The Framework’s requirement to be specific about opportunities and risks is one of the lowest scoring areas for Malaysian companies. Two-thirds of Malaysian companies in the analysis do not disclose any risks facing the business at all, and of those companies that did disclose their key risks, none of them provided any insights into the potential impact and probability of the risks materialising, or how their risk profile has changed over time.

At an event to launch ‘The State of Integrated Reporting in Malaysia’, the resulting thought leadership from this analysis, in July 2014, some business leaders shared their concerns over markets’ and regulators’ view on the lack of independent verification of non-financial information going into annual reports. But such concerns do not explain the absence of good linkage between the information already included in the report.

“What’s needed is a change of mindset” said Pauline Ho, PwC Malaysia Assurance Leader. “Companies need to move away from using annual reports as a compliance document and instead focus on using it as a platform to communicate their long-term value in a clearer and more succinct manner”.