Financial reporting has long been the bedrock of company reporting, widely used by stockholders and others to understand company performance and outlook.
But in a world where corporate actions and relationships within communities are far more visible, integrated reporting is gathering steam. Integrated reporting goes well beyond the numbers to communicate how companies are creating value. On the assumption that accountability and stewardship are important governance concepts, includes the impact of business strategy on manufactured, intellectual, human, social and natural capital in addition to financial capital.
The International Integrated Reporting Council (IIRC) is one of the flagship organizations spearheading this initiative. Global members include investors, companies, accounting professionals and regulators. The IIRC’s mission is, “To establish integrated reporting and thinking within mainstream business practice as the norm in the public and private sectors.”
American companies participating include The Clorox Company, Coca-Cola and Smithfield. The Coca-Cola report, for example, discusses water stewardship goals, including reducing water use by 20 percent and expanding wastewater treatment.
The beverage company is proactively displaying concern for resource use and the environment. The meat giant Smithfield also focuses on sustainability in their report, going beyond the environment to express commitment to employees, food safety, animal care and communities.
The IIRC created a principles-based approach to provide both flexibility and completeness in integrated reporting. The seven principles are:
- Strategic focus and future orientation – The company’s strategy and outlook and how value will be created through inputs (capitals)
- Connectivity – The relationship between mission, objectives, goals and strategies, with the aim of creating value
- Stakeholder relationships – Addressing the challenges of balancing the conflicting needs and values of various stakeholder groups, such as the public, communities, stockholders and employees;
- Materiality – Including information that materially affects the company’s ability to create value
- Conciseness – Clear and concise communication
- Reliability and completeness – Complete and honest information, just as in financial reporting
- Consistency and comparability – As in financial reporting, comparable information that is presented consistently over time
Specific performance measures are not prescribed in reporting, but using a mix of qualitative and quantitative metrics is suggested. In a caveat, these measures aren’t used to quantify the monetary value of an organization. An example might be the reduction in Coca-Cola’s water use.
Attaining the goal of 20 percent will probably improve operating margins but there isn’t a direct correlation between this initiative and the monetary value of the stock or firm. Attaining the goal will give credibility to the company’s pursuit of sustainability and wise stewardship of resources. Such moves foster goodwill, which in turn can enhance image.
The IIRC recommends that performance measures be connected to financial information in some way, focus on material issues and are consistent with industry benchmarks. Measures need both internal and external contexts to make the case that value is created through company strategy.
The concept of creating value rests on the notion that companies produce benefits beyond stockholder value, or purely financial returns. An report gives insight into how the company is creating value through interactions with the external environment, stakeholders and the various types of capital available.
Integrated reporting is a developing field and, as such, has been subject to criticism. Companies complain that such reporting is too burdensome, complex and hard to implement.
On the other hand, it can be looked at as a critical piece of corporate social responsibility. Integrated reporting provides accountability and metrics to demonstrate the effectiveness of social or green initiatives. The accusation of “green washing” has been a backlash to companies with unverified claims of sustainable practices.
Paul Druckman, CEO of International Integrated Reporting Council, suggests three simple steps to begin the integrated reporting process.
1. Conduct a stakeholder mapping session to discover their needs and expectations – now and in the future. Evaluate how well current strategy addresses these and adjust if necessary.
2. Identify the resources needed to implement the updated strategy.
3. Communicate the strategy, especially how it responds to stakeholder needs and builds value and relationships. Druckman claims companies using are more resilient and productive and better able to engage investors.
Case studies and additional resources are available on www.integratedreporting.org.