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The Bruce Column — Integrating the thinking

23 Jan 2012

The idea of an agreed system of integrated reporting creates much enthusiasm. But there are challenges ahead in terms of agreeing a structure and creating a regulatory framework to ensure that it works. Robert Bruce reports.

Just before the end of last year a roundtable was held in London on the day that the last of the responses to the International Integrated Reporting Council’s initial consultation paper were due. That paper had outlined the concepts underlying an integrated reporting system. Put simply, the aim was to encourage and enable business reporting to reflect the links between an organisation’s financial performance and its social, environmental and economic context and performance, and to place the effects centre stage. The purpose was to ensure that this wider perspective was what informed decisions and future strategy.

There are two sides to the process of trying to bring about this change. The first is to harness the enthusiasm and the positive outcomes of efforts made so far to use the underlying principles of integrated reporting. The second is to face up to the difficulties and challenges of bringing the process to some kind of global implementation.

First, the enthusiasm. At the roundtable event it was palpable. Professor Mervyn King, who chairs the IIRC, and who is a former judge of the Supreme Court of South Africa and Chairman of the King Committee on Corporate Governance, personifies it. South Africa has been a pioneer in integrated reporting’s application. All companies listed on the Johannesburg Stock Exchange are mandated to produce an integrated report under a ‘comply or explain’ principle. Integrated reporting is now part of the South African Code of Responsibility. The trustees of pension funds are charged with the need to look at long-term sustainability. And, from the beginning of this year, trustees can be sued if they do not do this.

King read out some comments he had been sent by the team which had produced the report for the communications company Vodacom in South Africa. For King the significant part was not in the methods by which it had been achieved. The process had been successful and useful. For him the importance lay in the comments which suggested that integrated reporting was bringing about a management revolution. Vodacom had created an integrated reporting committee to oversee the production of the report. And as integrated reporting requires information and thoughts from all over the company rather than just from the traditional financial reporting stream it reflected cross-company inputs. ‘Remarkably’, said the comments, ‘some of us had never sat around the same table before’. And that is what is changing the perspective. Widen out the information base on which you base your corporate strategy and that strategy will inevitably change. And breaking down corporate information silos will always be productive.

For King all of this provides something which traditional reporting cannot. He reflected on the various demonstrations and activities around the world which erupted last autumn and which reflected a public unease with the way business and wider society were perceived to connect. ‘They are saying the operation of companies and society isn’t working’, he said. Integrated reporting would go some way to assuaging the critics, he suggested. It would be much more obvious through a wider system of integrated reporting that an organisation was operating as ‘a good corporate citizen’. And institutional investors would follow that.

There were, he suggested, two great challenges in these days of economic uncertainty. The first was the need for financial stability and the second was sustained value creation by business. ‘The one cannot happen without the other’, he said.

Lord Sharman, Chairman of insurance giant, Aviva, weighed in. Long-term sustainability of the business was even more important when customers in its pensions business could be with the company for 50 years. It had to be a long-term business. He had no doubt about the need for integrated reporting. ‘Reporting non-financial issues should be reported to the same high professional standards as financial information’, he said. ‘People don’t want more information. They want better information’.

It is in the field of those high professional standards where the challenges for integrated reporting lie ahead. And certainly observers of the reporting scene realise the need for some sort of process of bringing the whole system together. Various new disclosures, new reports and reporting responsibilities have, in recent years, been bolted on to the basic reporting model of the traditional financial statements, with all the associated management commentary on the financial position and performance of the business along with corporate social responsibility reports and sustainability reports. It's a sizeable jigsaw out there for an investor or stakeholder. To many people the idea of one report with the material risks, opportunities, strategy, objectives, items of performance and position across all the capitals utilised by a business, whether recognised in the financial statements or not, seems a sound and sensible idea. But this is not always clear in the discussion paper published for comment by the IIRC in the autumn of 2011.

One problem is simply one of terminology. Paul Druckman, the IIRC Chief Executive, admits to being surprised by this but takes it on board. ‘One of the big things which has come out of the process is that we need to be careful about language’, he said. ‘It can confuse the market’. For example, he cites the use of the term ‘exposure draft’ as an outcome of the discussion paper. ‘It is not going to be an “exposure draft” in the same terms that standard setters would use’, he points out.

There is also confusion about regulation. And after careful analysis of the 200 plus comment letters received the issue of whether the primary stakeholders should be investors or regulators must be grappled with.

Much of this is inevitable. To get the concept off the ground the initial discussion paper needed to concentrate on the high level ideas and the detail tended to get left behind at this stage. But it is the detail which respondents to the discussion paper will have worried about. Grasping a high level concept is fine. What immediately crops up are the ‘What if?’ and ‘How can?’ questions. Druckman is also keen to learn the lessons from the South African experience of applying integrated reporting. ‘There is an expectation gap around what can be done in a short period of time’, he says. ’Integrated reporting is a catalyst which should follow from a management which is thinking in an integrated way. If management isn’t thinking in that way then it just becomes lots of KPIs which don’t mean much to the business.’

Meanwhile up to a hundred companies will set out on pilot programmes. And a two-year roadmap has been drawn up. There should be a draft framework in place by the end of the year and a formal framework, which people can follow, by 2013 or early in 2014. A technical taskforce is being set up to deal with the detail around which so much of the arguments in the comment letters centre. There will also need to be hard work around policy and awareness so that change can be brought about.

And there is, of course, politics. An example cropped up in Professor Mervyn King’s words at the roundtable event. He talked about the latest European Commission efforts to split audit firms into entirely separate firms, one dealing with ‘pure’ audit and one with other services. ‘The European Commission is split’, he said. ‘The left hand deals with integrated reporting. The right hand wants to split audit from services. But companies will need professional advice on integrated reporting and they will need more than just an audit for integrated reporting assurance. The European Commission looks at the failure of the banks through the lens of the financial statements’. In other words politics was failing to see that integrated reporting needs an integrated assurance approach. It was a small but fundamental example of the problems of implementation up ahead. Integrated reporting is in the right place at the right time. But the hard grind to ensure it succeeds has hardly started.

Robert Bruce
January 2012

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