( Discussion Memo for Katerva Award Conference in Tokyo in March, 2012 )
You don’t know what you’re missing
Finally IFRS is going to be the
single unified standards for Financial Statement in the near future.
As I said in my speech this
morning, the business leaders are expected to report societal purpose and how
such purpose connects to or integrate into business.
On top of financial standards
global unification, there is the reality that the tangible assets included in
financial statements reflect a steadily diminishing component of shareholder
value.
Based on the study by Ocean
Tomo, tangible assets represented 83 percent of market value in 1975 and they
represented only 20 percent in 2010 in S&P 500 companies.
Current financial statements do
not represent the “true” value of company.
Aside from financial statements,
today, companies produce an increasing array of reports; Governance issues
including executive pay are sometimes reported on, as well as at least some of
the impacts of the business on society and the environment.
But these are often reported to
different audiences, in different formats and at different times. In this
context, the idea of simplifying all the reporting under a consistent
banner—integrated reporting—is very attractive.
The
International Integrated Reporting Committee (IIRC), which was formed in 2010
under the support by the Prince of Wales Accounting for Sustainability
Project and the Global Reporting Initiative. In addition to business
executives and investors, representatives from the major accounting bodies,
standards setters and security regulators sit on this committee.
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The International Integrated Reporting Committee announced Discussion
Paper on Integrated Reporting in Septemer 2011.
The basic idea
Integrated reporting is a
process, not a product:
For the stakeholder, the report
is intended to increase the understanding of the company—its management,
strategy and operations, and its perils and prospects.
The benefit
of integrated reporting is that it allows a company to better understand,
manage and report on multiple dimensions of value. We believe this can help
companies make better decisions and to manage businesses in a way that creates
shared value.
How does integrated reporting relate to other reporting
frameworks?
1.
Environmental and societal
impact reporting standards, however, are less well developed. An early
incarnation, environmental reporting, took hold in the 1980s for a variety of
reasons:
Some companies were driven by
progressive environmental practices; others may simply have wished to portray
themselves in that manner; and many others were likely spurred by litigation—or
the threat of litigation—that surrounded industrial waste sites, environmental
disasters and the like.
Early efforts were mostly
sporadic and fragmented, such as inserting brief sections on environmental
issues into annual reports, with no linkage to strategy or performance and no
attempt to obtain independent assurance.
2.
A decade later, as reports were
broadened to include other social issues, they became known as corporate social
responsibility, citizenship or sustainability reports. In both their earlier
and later forms, these reports were often published separately from financial
reports.
Standardization, however,
remains elusive. The closest thing to a uniform sustainability reporting
framework is the Sustainability Reporting Guidelines (GRI Guidelines) by the Global Reporting Initiative (GRI), which is
a sustainability reporting framework widely used around the world.6.
The GRI Guidelines are a voluntary standard and lack any regulatory mandate.
According to the GRI, more than 4,000 professionals around the world
have been trained in the use of the GRI Guidelines, which are available in 25 languages. Yet despite this
progress, out of more than the estimated
63,000 multinational corporations around the world, only a fraction
produces sustainability reports.7
The Corporate Register, a
UK-based organization collecting reports from all regions, sectors and
companies of all sizes, states that more than 4,700 sustainability reports were issued in 2010, up from
approximately 3,200 in 2007.8
At the GRI’s website, fewer than
2,000 reports explicitly stating
that they were created using the GRI Guidelines were registered in 2010.
Beyond the GRI Guidelines a
proliferation of competing sustainability-related frameworks, principles, codes
and management systems has arisen. The list includes AccountAbility’s AA1000 principles for managing and reporting
sustainability performance; the Connected Reporting Framework;
Social
Accountability International’s SA8000 for
managing labor practices; International Standards Organization’s ISO26000 on
sustainability management; the Greenhouse Gas Protocol; and many more.
Add in a regulatory patchwork—the US Security and Exchange Commission’s
Management Discussion and Analysis (MD&A) disclosure rules; the UK’s Enhanced Business Review requirements;
the EU’s Modernization Directive 2003
(now adopted by all member states) to include nonfinancial key performance
indicators in the annual report;
What Might an Integrated Report Looks Like
According to the IIRC:
Integrated
Reporting brings together the material information about an organization’s
strategy, governance, performance and prospects in a way that reflects the
commercial, social and environmental context within which it operates. It
provides a clear and concise representation of how an organization demonstrates
stewardship and how it creates value, now and in the future. Integrated
Reporting combines the most material elements of information currently reported
in separate reporting strands (financial, management commentary, governance and
remuneration, and sustainability) in a coherent whole, and importantly:Shows
the connectivity between them; and Explains how they affect the ability of an
organization to create and sustain value in the short, medium and long term.
Guiding principles underpinning
the preparation of an integrated report:
l
Strategic focus:
l
Connectivity of information:
l
Future orientation:
l Responsiveness
and stakeholder inclusiveness:
l
Conciseness, reliability and
materiality:
The elements of an integrated
report as suggested by the IIRC in the discussion paper are:
l
Organizational overview and
business model:
l
Operating context, including
risks and opportunities:
l
Strategic objectives and
strategies to achieve those objectives:
l
Governance and remuneration:
l
Performance:
l
Future outlook:
Leading Practices
Only one country has mandated
comprehensive, fully integrated reporting to date: South Africa, where listed companies must abide by the
King III Code on Corporate Governance by providing an annual integrated report
in addition to audited financial and sustainability reports (or explain why
they are not providing the report).
In line with the expectation
that integrated reporting should be a journey that South African companies have
been encouraged to embark on from March 2011 onwards, analysis of the South
African experience to date has not revealed any comprehensive examples of an
integrated report. Deloitte South Africa recently carried out a high-level
analysis of listed company reporting practices and concluded that, on average,
companies are less than half way along the journey toward integrated reporting.
Those companies that had embraced the concept of integrated reporting are,
however, well progressed and scored between 60 and 75 percent against the
Deloitte South Africa criteria.
Conclusion
There is no short-term outcome of
global uniform standards for integrated reporting. It is an on-going process; companies
should keep challenging to create better integrated reporting on top of
mandatory financial reporting based on the existing guideline including IIRC
guideline and GRI guidelines.
