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Home > Auditing Viewpoints > Why Integrated Reporting Is The Way Ahead For All Stakeholders

Auditing Viewpoints

Why Integrated Reporting Is The Way Ahead For All Stakeholders

by Jonathan Labrey

An International Integrated Reporting Framework

The International Integrated Reporting Council (IIRC) was founded by global leaders from the financial reporting, business, investment, and NGO communities, who agreed that a transformation in corporate reporting was essential to understand and communicate the value of companies in the 21st century.

The question for the coalition was whether it was possible to develop a new model of corporate reporting that could show how a business was creating value over the short, medium, and long term. It recognized that businesses need a reporting environment that is conducive to understanding and articulating their strategy, which helps to drive performance internally and attract financial capital for investment. It also asserted that investors need to understand how the strategy being pursued by a company creates value over time.

Integrated reporting (IR) is consistent with numerous developments in corporate reporting that are taking place within national jurisdictions across the world. It is intended that the International Integrated Reporting Framework released in December 2013 will provide principles-based guidance for companies and other organizations that wish to prepare an integrated report. This will provide impetus to greater innovation in corporate reporting globally to unlock the benefits of IR, including the increased efficiency of the reporting process itself.

The framework is the fruit of three years’ extensive consultations with businesses and investors around the world. It will be used to accelerate the adoption of IR across the world, where it is currently being trialed in over 25 countries, 16 of which are members of the G20, the group of nations focused on strengthening the global economy.

Changing Business Models and the Switch to Long-Termism

IR is also consistent with the fact that corporate strategic thinking is itself becoming much more centered on the customer. A very clear example of this is United States-based General Motors deciding that its business model should change in response to customers’ expectations and demands. GM realized that with the rising costs of fuel, and new awareness of and concern for climate change, the consumer demand for smaller vehicles was likely to continue to grow.

GM knows that changing its business model and investing in new technology to make smaller, more fuel-efficient vehicles will affect its short-term financial performance. But it recognizes that if it wants to be around in 20 years it has to respond to changing consumer demands and buying patterns. GM, in other words, is making a conscious decision to sacrifice some short-term profitability for long-term sustainable growth.

GM, of course, is not unique in this. Since the turn of the millennium the model of looking at financial performance alone has been increasingly viewed as unsatisfactory. Both the increased global focus on climate change and a series of high-profile reputational disasters for major household names, such as BP, has demonstrated that a company’s reputation and other “intangibles” are at least as important as financial results.

One of these intangibles, human capital, is on the agenda of the B20 during 2014. The B20, a gathering of business leaders from the G20 countries, produces proposals for presentation to the heads of state and governments of the G20. Australia has taken over the presidency of the G20/B20 from Russia for 2014 and has announced its intention to focus on the four key issues of financing growth, human capital, infrastructure and investment, and trade. The message now is that business needs to look at the interconnectedness of what it delivers and does, and it needs to communicate this clearly so that its stakeholder base can have the confidence to invest in it for the long term.

One such business leader, the chairman of Unilever, Paul Polman, has gone on record saying that he does not want the volatility that comes with short-term investments. He wants and values long-termism, and this is one of the strong outcomes from the 2008 global financial crisis. Volatility is now widely seen as destabilizing markets and knocking a great deal of value off good companies. At the IIRC we believe that there are steps that can be put in place to help create long-termism in investment decision-making.

Mitsubishi Corporation board chairman Yorihiko Kojima has just delivered a report to the cabinet office in Japan that looks at ways of moving Japan’s capital markets from a fixation on short-term judgments about corporate value to an approach that focuses on the long term. One of the recommendations that the Mitsubishi chairman has come up with is to introduce integrated reporting into Japan’s corporate reporting requirements. The prime minister, Shinzo Abe, has said that he will take these recommendations into the next meetings of the G8 and the G20.

Participation in the IR Framework Pilot Program

Mitsubishi is not an isolated example of the support for integrated reporting. Now more than 100 major businesses—including some of the world’s largest companies, such as Microsoft, PepsiCo, and Hyundai—and more than 50 investor organizations are taking part in the IIRC pilot program, and all have helped to define and develop the International IR Framework.

Within the United Kingdom’s FTSE 100 the IIRC has very strong commitment from the likes of HSBC, Marks & Spencer, Sainsbury’s, and ARM Holdings. In this country we are also working with the Financial Reporting Council (FRC) to ensure that the government’s strategic reporting initiative is consistent with developments in integrated reporting.

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Further reading

Books

  • Goleman, Daniel. Focus: The Hidden Driver of Excellence. New York: Harper Collins, 2013.
  • Hall, Peter A., and David Soskice. Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. Oxford, UK: Oxford University Press, 2001.
  • King, Mervyn, and Leigh Roberts. Integrate: Doing Business in the 21st Century. Claremont, South Africa: Juta & Company, 2013.
  • Meyer, Christopher, with Julia Kirby. Standing on the Sun: How the Explosion of Capitalism Abroad Will Change Business Everywhere. Boston, MA: Harvard Business School Publishing, 2012.
  • Mount, Ferdinand. The New Few, Or A Very British Oligarchy: Power and Inequality in Britain Now. London, UK: Simon & Schuster, 2012.

Articles

  • International Integrated Reporting Council (IIRC). “The international <IR> framework.” IIRC, London, December 2013. Online: http://tinyurl.com/ochqrqg

Websites

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