Capital ideas afloat in integrated reporting

Participants of a pilot program provide useful insights on integrated reporting.

Bringing all the strands of corporate reporting together will help reduce the risk of short-termism.

Investors assessing the recent reporting season of publicly listed companies will base their opinions of corporate performance largely on a handful of key numbers, all expressed in dollar terms and all dealing with the most recent financial year.

This fixation with the bottom line and the profit and loss statement has existed for 100 years or so and, at its most extreme, has produced a short-term focus for investors that’s been blamed for many failings, from poor corporate governance to the massaging of accounts to please the market and drive the share price – and, with that, executive remuneration.

In recent times, more progressive elements within the accountancy profession have championed the concept of widening reporting criteria. In the past decade the Global Reporting Initiative (GRI) promoted sustainability reporting and introduced the idea of the triple bottom line, now adopted by about 4000 organisations around the world.

More recently, the main impetus has been for integrated reporting – seen by many as a natural evolution of the GRI as principles of sustainability combined with traditional financial reporting to deliver a holistic vision of corporate performance, which goes behind publishing the sustainability report and the financial accounts in the same document. A significant milestone in this evolution was reached in April with the release of the Consultation Draft of the International Integrated Reporting Framework.

The International Integrated Reporting Council (IIRC) has asked for feedback on the framework over the 90 days to 15 July, but has boldly stated it believes that IR will become “accepted globally as the corporate reporting norm, benefiting organisations, their investors and other stakeholders by enabling informed decision-making” and helping corporates better articulate how they create sustainable value over time.

The IIRC vision is for “efficient capital allocation” and the creation and preservation of value, but it also has a number of definitions of capital beyond those normally considered in corporate reports.

Specifically, there are five alternative forms of capital considered in the framework: manufactured capital accounts for machines the organisation uses to produce its goods or services; natural capital such as air, water and land; human capital covering not only people’s skills and experience, but also motivations or rewards to innovate; intellectual capital taking in the intangibles providing competitive advantage; and social capital – defined as the community stakeholders which “enhance individual and collective wellbeing”, which supports the business model.

“Financial accounting, the bread and butter of many accountants, is not broken,” says Alex Malley, former chief executive of CPA Australia and Australia’s first representative on the IIRC. “Nonetheless, some of our measurement and recognition methods tend to be largely focused on past events.

As such, financial accounting is not designed to capture all the dimensions of a business’s activities and their impacts.

“One of the major gaps being addressed through the IR is the range of reporting methodologies that span the financial, non‑financial, governance and management discussion and analysis.

“Each of these has its own objectives and conceptual underpinning, so what we don’t currently have is a methodology that provides a holistic picture of business impact across its many dimensions. This is where the IR comes into its own.”

IR will not only change reporting, but also has the potential to change the corporates themselves as they measure performance with new metrics.

“IR certainly can play some part in transforming corporate behaviour,” Malley says. “It provides a future outlook and better connects internal performance with external reporting. These changes should enable companies to function in a substantially more sustainable manner.”

The framework does not exist in isolation, but alongside a pilot program, launched in October 2011, to which 85 global enterprises and 50 investor groups have signed up. They have provided input that went into the creation of the framework and will also provide feedback during the consultation period.

Several leading Australian and Asian corporates, listed and unlisted, are participating in the pilot. One of the largest is Australian Big Four bank NAB, which – like many organisations in the pilot – had been traveling its own journey towards integrated reporting before joining the pilot process in 2011. “We did our first integrated report in 2010, but although we were bringing the shareholder and corporate social responsibility report together in one document it all felt very separate,” says Janette O’Neill, NAB’s head of corporate responsibility strategy.

“You had business pages, you had CSR pages. But last year we really shifted our thinking and restructured the report around our business model and who we are at NAB in terms of our strategy, our performance and what is our governance and management of risk and CSR is woven through all of that.

“It gives a more holistic view of NAB and we like to see it as a single source of the truth, as it were.”

One of the key points of IR, O’Neill says, is that it is not just to appease external shareholders, but has a powerful impact internally.

"I’m really excited about the changes that have already been made and we are really looking to the IR Framework process to help us understand what best practice might look like." – Janette O'Neill, NAB

“If you are reporting in an integrated way you are thinking in a different way,” she says. “You have to be collaborating across business units to produce IR, so the core message I give to people is around that collaboration, and ensuring that corporate responsibility is talking to group strategy, and finance is talking to strategy and investor relations are involved.”

At NAB, as with many companies involved in the pilot, the message is that IR is a journey, and one that is relatively new.

“You can move to IR in a step by step way rather than being perfect in year one,” O’Neill says. “We are certainly at the early stages and the first couple of years were truly experimental, but I’m really excited about the changes that have already been made and we are really looking to the IR

Framework process to help us understand what best practice might look like.”

At Singapore-based regional bank DBS, Mikkel Larsen – the managing director for tax and accounting policy group finance – also uses the word “journey” to describe his organisation’s engagement with IR.

“It is a process of evolution and for us it’s about taking the first steps and then gradually integrating our report. It’s a long process and being part of the pilot program will give us the ability to give active feedback and influence the development of the framework,” Larsen says.

Part of the process is also about “comparability” with peer organisations, in similar industries, to develop best practice reporting for industry sectors.

“The framework as it is does not outline detailed disclosures. That is deliberate and it means that you need to compare people in the same industry,” he says.

“So what we will do is speak with other companies – especially banks in the pilot program – including NAB, HSBC and Deutsche Bank, about what they are thinking of doing and comparing strategies.”

Larsen acknowledges that there may be some sceptics who, watching the process, will choose to see corporates using IR as a marketing and public relations exercise.

“How can we be sure that this doesn’t just become a selling exercise, because all companies will have some good initiatives to showcase? And how do people know that companies are not just selling the good side?”

“This is an issue which the IIRC is trying to address, and they have set the bar very high, but that also creates a risk that corporates will find it all too hard to adopt and say ‘I just can’t do this’ and I think we all have to be mindful of this possibility.”

Listed Australian property developer Stockland has been a leader in sustainability reporting and corporate social responsibility and has been producing an integrated report for the past five years, combining the financial and sustainability reports.

“IR always seemed like a natural progression for us,” says Diana McEwan, Stockland’s manager of corporate communication.

“We were producing a 150-page sustainability report and a 150-page financial report, so we always saw the move to a more concise reporting framework as something that was important in reaching people.

“And the way it has been framed is resonating a lot with our internal stakeholders who are not traditionally involved in reporting, so it is having an impact internally.”

A colleague of McEwan’s, David Mahony, general manager of financial control, says one of the challenges of delivering the “alternate” view of Stockland through the concise report was the clash between the present and future views of the company. “The financial information is very much focused on the present, while sustainability reporting is focused on what is coming and what is in the future,” Mahony says.

“As a property developer we have to take a long‑term view, so some of our developments might have a 10- to 20-year time frame around theme but the idea of planned liveability within a residential community, which is a key feature and an asset, is not shown on the balance sheet within that 12-month reporting period as a public company.”

The Melbourne-based Bank Mecu is the only unlisted Australian company participating in the pilot. It began life as a credit union in 1957 and became Australia’s first customer-owned mutual bank in 2011.

Managing director Damien Walsh says principles of sustainability and community engagement have always been important to Bank Mecu, so it was important to show the bank’s 125,000 shareholder members that the organisation was prepared to be a leader in integrated reporting.

“The last annual report was our first attempt at an integrated report,” says Walsh. “We ring-fenced the statutory financial accounts and they were very much separate from the sustainability analysis.”

Walsh says Bank Mecu saw the pilot program as an opportunity to “get it on the ground” and move in a direction the bank was already pursuing using its existing competencies. “We’ve had a very positive response from our stakeholders. We have shifted the focus at our annual general meeting, so where we would ordinarily talk about the financial performance, now we use these broader metrics to talk about our performance in other areas and from different points of view.

“It does transform the organisation, but if you are successful in linking your report to your strategy and demonstrating to stakeholders how you can create value over the longer term, it’s an engaging story.”

A key result, Walsh says, has been the positive response from Bank Mecu staff.

“We know from research with our staff that the strongest attributes in terms of their satisfaction, and the desire to see the organisation be successful, is their support for our sustainability position,” he says.

Guiding principles

The IIRC framework is governed by a set of overarching principles that guide the content and presentation of an integrated report.

  • Strategic focus and future orientation: An integrated report should provide insight into the organisation’s strategy and how that relates to its ability to create value.
  • Connectivity of information: It should show the combination, inter-relatedness and dependencies between the components that are material to the organisation’s ability to create value.
  • Stakeholder responsiveness: It should provide insight into the quality of the organisation’s relationships with its key stakeholders.
  • Materiality and conciseness: It should provide concise information material to assessing the organisation’s ability to create value.
  • Reliability and completeness: It should include all material matters, positive and negative, in a balanced way and without material error.
  • Consistency and comparability: Information should be presented on a consistent basis in a way that enables comparison with other organisations if it is material to the organisation’s own value-creation story.

Further reading

Access the following CPA Library items by calling CPA Library on 1300 737 373 or email [email protected]

Integrated Reporting is changing how companies communicate with their stakeholders, by L. Roberts. Accountancy SA, 2012

Sustainability increasingly will become business concern of CFOs, by A. Fellow, Accounting Policy & Practice Report, 2013

This article is from the June 2013 issue of INTHEBLACK.

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