A look at Integrated Reporting

SUITS THE C-SUITE By Ma. Emilita L. Villanueva

Business World (06/01/2015 – p.S1/5)

In the world of business and financial reporting, there is an ongoing debate on whether audited financial statements provide sufficient useful information to the various stakeholders, and how such useful information can be provided beyond these financial statements. The phenomenon of globalization and ever-growing connectivity add fuel to this debate, resulting in the increasing pressure and expectation to establish a better linkage between reporting financial and non-financial information, corporate behavior and performance, and investment decision-making.

To address this pressure, companies worldwide have been turning to Integrated Reporting and issuing “Integrated Reports.” But what exactly is Integrated Reporting and what do we expect from an Integrated Report?

In its 2013 publication, 5 Insights for Executives, global services firm Ernst and Young (EY) described Integrated Reporting as providing “context to financial and non-financial information and goals.” It is a way for an organization to connect its strategies with its “commitment to the long-term stewardship of material environmental, social and economic issues.” The International Integrated Reporting Council (IIRC), the organization established to promote Integrated Reporting, defines an integrated report as a “concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.”

BENEFITS OF INTEGRATED REPORTING

One of the benefits of an integrated report is that it provides a holistic view of the company’s short-term, medium-term and long-term values. Producing the integrated report requires a company to align its business practices, its assets — both tangible and intangible, and its financial and non-financial risks with its strategic focus, agenda for sustainability and future goals.

Integrated Reporting can also result in a culture of “integrated thinking” or an increase in communication and connectivity between the different departments, divisions or levels of the company. Producing an integrated report requires collecting material financial and non-financial information from various company departments or levels. It promotes synergy among groups which would have otherwise acted independently from each other. By establishing a culture of “integrated thinking,” companies will see long-term benefits through increased collaboration and efficiencies among these departments or levels. These will, in turn, translate into improvement in the brand value and the company’s bottom line.

For stakeholders, Integrated Reporting improves the quality of information they can obtain from the company. For investors, better quality information will enable them to more efficiently allocate investments and realize higher returns from such investments.

THE INTEGRATED REPORTING FRAMEWORK

Released by the IIRC in 2013 to promote and provide guidance on Integrated Reporting, the framework takes a “principles-based” approach and encourages flexibility in the contents while providing what the integrated report should potentially contain. This framework takes into account the different circumstances of individual companies or entities, while preserving some degree of comparability across these entities to meet the information needs of stakeholders. It does not prescribe specific methods on measurement, key performance indicators or even disclosures of specific matters.

While providing companies the flexibility on measurements and disclosures, the Integrated Reporting Framework lays down the “Content Elements” or those categories of information that should be included in an integrated report. These “Content Elements,” which are closely linked with each other, are the following:

· Organizational overview and external environment — which lay down the organization’s mission and vision; what it does; how it operates and what are the factors that affect the organization’s external environment;

· Governance — which should show how the organization’s governance structure supports its ability to create short-, medium- and long-term values;

· Business model — this section should describe, among others, the organization’s key inputs, business activities, outputs and outcomes. Outcomes may be internal (such as employee morale and revenues) or external (such as customer satisfaction and brand loyalty. It may also be positive or negative;

· Risks and opportunities — these are factors that affect the organization’s value-creation ability;

· Strategy and resource allocation — this section describes the organization’s objectives (where it wants to go) and its strategies (how does it achieve those objectives);

· Performance — this shows if the organization was able to meet its objectives through reporting both financial and non-financial results, key performance indicators, ratios, among others;

· Outlook — this is where the organization will highlight the challenges and uncertainties it will likely encounter in the future, and how these will affect its future performance and business model; and

· The basis of preparation and presentation (taking into account general reporting guidance).

CHALLENGES IN ADOPTING INTEGRATED REPORTING

The issuance of the Integrated Reporting Framework provided the momentum for the adoption of Integrated Reporting around the world. In EY’s April 2015 publication, Reporting (It’s more than the numbers), IIRC Chief Executive Officer Paul Druckman estimated that there are 130 Japanese businesses currently practicing Integrated Reporting. Companies in Europe are also moving towards issuing their first-ever integrated report.

While more companies are joining the bandwagon, this does not necessarily mean the shift to Integrated Reporting has been an easy task. Among the biggest challenges is changing the mind-set that an integrated report should always embody a positive story, which may not be realistic given the unpredictable business environment. Another challenge is ascertaining the consistent credibility of the information in the report.

Yet another challenge is the need to balance the information that stakeholders require and the organization’s ability to provide information in an efficient and consistent manner. Lastly, companies have to contend with “reporting fatigue” and ensure that they do not view the integrated report as just another document produced for compliance purposes. Instead, as Mr. Druckman stressed, companies should view the integrated report as “THE report.”

Much has already been written about Integrated Reporting and the debate on whether it can actually produce the kind of report that stakeholders need. Adopting Integrated Reporting poses numerous challenges and some issues have no clear-cut answers yet. Even companies which have hurdled the difficulties that come with preparation of their first integrated reports, and have subsequently received positive feedback, admit that they are far from issuing integrated reports that will fully serve the information needs of their stakeholders.

For companies that are considering adopting Integrated Reporting, it is crucial that they create a plan with a clear road map, a well-defined strategy, while making sure that they engage all their stakeholders every step of the way. It may be a daunting task but in the end, a better integrated organization that meets stakeholders’ expectations is well worth the effort.

Ma. Emilita L. Villanueva is a Senior Director of SGV & Co.