Memo on Integrated Reporting "Discussion Paper" announced in Septemer 2011

( 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.

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.