Communicating authenticity through Integrated Reporting

The need for transparency

7 October 2016
By Tay Choon Ling, Executive Director, Pwc Malaysia

In this digital age, investors are demanding for more transparency to aid their decision making. To entrust their assets to the stewardship of the organisation, some level of trust is required in the organisation.

In the PwC Global CEO Survey 2015, more than half of the respondents worldwide cited a lack of trust in business as a barrier to their organisation’s future growth. Being a trustworthy organisation increases the propensity of investors to invest in that organisation, according to Bottazzi, Da Rin & Hellmann. Their 2011 study used a dataset of 750 European venture capital investments made between 1998 – 2001 and they found that trust has a significant effect on the investment decisions of venture capital firms, even after controlling a host of other variables, including geographic differences as well as differences in information, languages, legal systems, and taste based preferences.

We have all seen various stories in the news of late, on the loss of public trust. Hence, it is more important than ever for organisations to communicate not just what they can deliver but to do so with authenticity.

What does it mean to communicate with authenticity

Whilst there are many avenues for communicating to investors, for the purpose of this blogpost, we will be discussing the annual report, specifically how corporate reporting is prepared using principles from the Integrated Reporting <IR> framework. Like it or not, the annual report remains one of the key documents used by investors.

<IR> provides a consistent framework to communicate both the tangible and intangible values of an organisation. It is aimed at providing a holistic picture, including how the organisation demonstrates stewardship and how it creates and sustains value for its stakeholders.

The goal would be to articulate the organisation’s story in a way that maximises investor confidence in the quality of the organisation’s stewardship. <IR> is a journey, a continuous improvement process in corporate reporting, beyond just quick wins.

Key considerations for companies who are beginning their <IR> journey

  • Transparency does not equal more information: It is about reporting the right information and presenting it concisely. Having a clear view of the organisation’s value creation process is key to communicating this. 92% of <IR> preparers see increased understanding of value creation as a current benefit [1]. A jumble of KPI/data and lack of robust analysis may suggest a lack of management focus. In a 2014 PwC study [2], 82% of investors agree that they are more confident with their analysis when companies present information clearly and concisely.
  • Explain the organisation’s business model, clearly linking to its overall strategy, not just short term but also the longer term view. Only 14% of investment professionals feel that organisations generally disclose enough information on their future strategic plans to allow them to feel comfortable with the judgements they need to make for their analysis [3].
  • Risk reporting: Ineffective risk reporting could be seen as being not upfront about risks for fear of giving away vital competitive information. Investors are aware that every business has its risks. It is essential that organisations communicate their point of view on the organisation’s risks and its mitigating factors.
  • Measuring the right KPIs: KPIs are useful when linked to strategy. Be mindful that operational KPIs are just as important as financial ones. This allows investors to understand how management measures the achievement of its strategies, both short and long term. Consistent measurement is important to provide investors with confidence that the data being measured is reliable and that the organisation is clear on what it needs to achieve.

Where do Malaysian organisations stand?

We have for the past 3 years, benchmarked the top companies in Bursa Malaysia on how they are performing in their corporate reporting. Based on our 2016 benchmarking exercise, we note that some companies are making progress in several areas:

  • Providing insight on Corporate Governance activities beyond boiler plate terms of reference
  • Clearer linkage of KPIs to strategy, and business model to value creation
  • Inclusion of strategic priorities, enhancing the credibility of vision statements

However, most businesses still treated reporting as a compliance exercise.

With the right implementation, organisations can stand to benefit from consistently and concisely communicating their value proposition. As reporting becomes more integrated, investor confidence would follow, enhancing trust in the business

 

 

[1] Realizing the benefits: The impact of Integrated Reporting, Black Sun, September 2014

[2] Corporate performance: What do investors want to know? Powerful stories through integrated reporting, PwC, September 2014

[3] Corporate performance: What do investors want to know? Powerful stories through integrated reporting, PwC, September 2014

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