In an environment of intense scrutiny, organisations globally are moving towards integrated reporting to be more open about their approach to business and their strategy for the future. An increasing number of Australian companies are on board, re-building trust through transparency.
Trust is a core issue facing Australian corporations, with investors, regulators, customers, employees, interest groups and the media looking hard at the claims made by companies about their strategy, business models, performance and prospects.
Every sector faces this challenge, with the 2018 Edelman Trust Barometer once again highlighting that trust is in crisis, with Australian institutions from the general public's perspective being 'distrusted'.
Investors in particular are demanding a better understanding of the long-term strategy a company has in place. They want to see plans to create and preserve value through effective management of business-critical resources – for example customers, employees and suppliers. They want to understand the company’s ability to develop and monetise innovation and technology, and to access and preserve scarce natural resources.
In addition, they want a high level of assurance from appropriately qualified assurance providers that what the company says about its strategy, business model, performance and prospects is fair, balanced and reasonable. This assurance means they have reliable information on which to base their choice to keep investing in the business, or to focus elsewhere.
The good news is, being more open and transparent in reporting to investors and other key stakeholders is a key way to build trust. Progressing to an integrated report can drive that change.
Integrated reporting, sees companies report beyond the financial results of the past 12 months and their financial position at the reporting date, to explain their broader approach to strategy and long term value creation.
An integrated report is a ‘flagship’ report, and includes details on elements such as strategy, business model, availability and use of scarce resources, governance, risks and risk management, performance, and future prospects.
Integrated reporting is founded on ‘integrated thinking’ – which has the business strategy and business model at its core. Integrated reporting lends itself to a strategic and systematic implementation approach, based on a clear business case which specifies a required return on investment.
As mentioned, assurance from independent auditors with integrated reporting expertise is being demanded by investors and required by Boards, as it can add to the credibility of the value story told through the integrated report. This is discussed in detail in Credibility and trust – delivering robust assurance.
Integrated reporting is growing internationally, with around 1,600 companies now on board. More are applying the principles without claiming that they are preparing integrated reports. South Africa is leading the way with scale of adoption.
The UK and Japan are catching up – the UK through its Strategic Report regime, and Japan through its investor stewardship and corporate governance codes. Moves are being made in China, India, New Zealand, France and the EU.
Uptake in the USA and Canada is gathering pace, with integrated reports being prepared by, among others: GE, American Electric Power, Jones Lang La Salle, Prudential (USA), and Vancity (Canada). North American integrated reporting is being driven through the North American Integrated Reporting Committee.
In Australia the pace is slowly picking up. KPMG’s review of corporate reporting trends in the year to the June 30, 2017, revealed that organisations worked to improve their existing annual reports, and whether intentionally or not, have moved closer towards an integrated reporting model.
Seventy-five percent ‘cut the clutter’; 23 percent shared how they are creating longer-term value; 12 percent disclosed specific strategic objectives; 70 percent identified material business risks and how they are being managed or mitigated; and over half included narrative or qualitative disclosures (yet usually without specifically connecting performance to strategic objectives).
There are still large gaps, which reveal opportunities for Australian companies to better communicate their business value stories.
The Australian Institute of Company Directors (AICD) is encouraging directors to consider the principles of integrated reporting, and the Australian Council of Superannuation Investors (ACSI) is also a strong advocate. ACSI’s CEO, Louise Davidson, says:
“Integrated reporting can play a significant role in helping to rebuild trust through its role in catalysing corporate focus and disclosure on matters material to the stakeholders of the business, and also through providing a framework for greater transparency on material non-financial matters.”
In December 2017, ASIC signalled its support for integrated reporting for the first time and called on directors to focus on integrated reporting as they prepare their Operating and Financial Review (OFR):
“Directors may also consider whether it would be worthwhile to disclose additional information that would be relevant under integrated reporting or sustainability reporting where that information is not already required for the Operating and Financial Review.” 1
ASIC also referred to potential assurance on integrated reports in the context of enhanced audit reports:
“Preparers and directors should be mindful that [key audit] matters may relate to … [areas of] the business that should be covered in the OFR. Auditors should describe key audit matters and their work in those areas in a clear and understandable manner, having regard to the broad audience of investors and other users of financial reports.” 2
Adopting integrated reporting helps organisations to produce more meaningful reporting about not only past performance, but also their strategies to create value into the future. This approach can give investors more confidence, in turn resulting in more stable financing, and potentially a lower cost of capital if investors choose to support the strategy.
The business also benefits from having broader information on the company’s status, to support decision-making. Professor Mary Barth from Stanford Graduate School of Business, says that good integrated reporting is positively associated with better stock liquidity and expected future cash flows.
Another benefit is the ability to build a holistic approach to reporting across organisational silos, resulting in a more coherent, consistent message to the market.
It can also mean the whole organisation is: behind the strategy, agrees on the key resources that are critical to long term success (value drivers), understands the reporting metrics used to measure execution of strategy and performance of the value drivers, and is working to mitigate material risks.
In essence, the organisation is aligned and has a stake in protecting the business for the longer term.
A key factor that must be considered in integrated reporting is the ASX Corporate Governance Principle 4. Further guidance from the ASX Corporate Governance council under this Principle will assist Boards in determining their corporate reports portfolio, and especially the scope and content of their flagship report, is in line with the International Integrated Reporting Framework. This would provide real stimulus for change and would quickly position Australian companies and the Australian capital market with global leaders in credible transparency.
The move would significantly help to re-build trust in Australian institutions and their leadership.
For organisations looking to engage integrated reporting to build trust, a comprehensive reporting strategy is the key foundation.
Find out more in Building your reporting strategy.