The stepping stones towards more forward looking corporate reporting

Posted
26 August, 2014

Why company directors have nothing to lose, and everything to gain, from future oriented disclosure

 I have found it a startling fact that around 60% of Apple’s revenue last year was generated from products that did not exist four years ago – a reflection of the speed and pace of change we are seeing in today’s globally interconnected economy. For businesses to be able to innovate in such an environment, meeting the demands of today’s customers is just not enough anymore. Customers are already looking ahead – the question is: are you? Businesses have to be able to anticipate the needs of a changing and overlapping stakeholder community, including suppliers, customers, employees and investors. Now more than ever, I believe that for a business to be successful, it needs to be forward looking and have a sophisticated understanding of the economic, business and sector trends that can have a powerful impact on its strategy and performance.

When a business talks to its investors, it must surely need to be able to make sense of these trends and their likely impact on performance, not only now but into the future. This is a more subtle, and ultimately more valuable, process than simply producing a set of financial forecasts. It is about understanding the drivers of value within an industry sector, the impact they might have on the organization’s business model and how they could be reflected in the operational decision-making, the hiring of new talent, deploying reserves of intellectual capital and then the communication to external stakeholders. This cohesive and invaluable cycle builds long-term trust in the business, greater resilience to short-term market pressures and investor confidence. It is about enabling businesses to thrive, not just survive.

This year I continue to travel around the world, engaging with investors in different geographies and markets and it is clear that investors want and need more strategic insights from management, not just a focus on the historic financial numbers. Questions that have come up are: What is keeping the board awake at night? Is the business on top of its principal risks? Is it exploiting changing patterns of customer behaviour and reflecting these in its future strategy and business model? How is the business organized to build value today and into the future?

As you might expect, I believe part of the answer is Integrated Reporting. Our Framework is both ambitious and aspirational. It brings about a new benchmark for how businesses could communicate and is as much about creating an environment for management to think more holistically about the business, as it is about the production of “a report”. Those who are already implementing the Framework are as diverse as DBS Bank in Singapore, Tata Steel in India, Unilever in Europe, and Stockland in Australia – as well as globally prominent organisations such as the World Bank. We now have businesses in 26 countries who have tested the Framework, and the reports they have produced are now being critiqued by institutional investors.

Integrated Reporting does not seek to add to existing reporting burdens on business. We continue to work with businesses, investors, regulators and standard setters to bring about a more cohesive and efficient corporate reporting landscape – one that is aligned with the strategic needs of national economies, and their regulatory systems, as they seek to build sustainable growth through long-term investment and increased productivity. Integrated Reporting should be seen as an ally of business in creating long-term value and ensuring this is reflected in the market’s understanding about its strategy, business model and fundamental performance.

But I am aware we also live in the real world. More and more I see it as a world in which complexity has become an excuse for compliance-based disclosure regimes that tie businesses in legal knots rather than release them to communicate properly about their strategy, governance, performance and prospects in a clear, concise and understandable way. In some jurisdictions, the journey towards Integrated Reporting will be more challenging than others, because the regulatory environment may be less permissive in relation to forward-looking information and directors will be cautious to avoid potentially costly litigation. We, as the IIRC, are doing more to encourage the crossing of these hurdles to allow for full implementation of the Framework.

However, I ask you to please make no mistake. The journey towards Integrated Reporting becoming the global corporate reporting norm has begun in earnest, and company directors are doing much more to adopt its principles to enhance the value of their business operations, contribute towards the successful implementation of strategy and build a better understanding between the business and its stakeholders. This could be transformative for the role of company director in the future, positioning them on the bridge of the ship, spotting potential icebergs and steering the crew and passengers away from danger.

Every journey must have a starting point. As a company director, these steps below suggest how you can begin on your journey:

Step One: Conduct a stakeholder mapping exercise. This allows you to understand your business’ principal stakeholders, who they are, their expectations of your company today and their future expectations. Questions for the Board: Are your stakeholders’ needs reflected in your strategy and business model? Are your stakeholders highlighting any risks or opportunities to be managed or exploited? To what extent does your strategy or business model need to be amended to reflect these expectations?

Step Two: In light of the views of your principal stakeholders, and potential changes to your strategy and business model, now is the time to consider the resources required to implement these changes – this could be in terms of R&D expenditure, recruitment to a particular division, new product design or innovation, plant and machinery, etc. Ask yourselves, are the different parts of your business talking to each other to achieve the delivery of a coherent strategy across the business? What more can you do as directors to break down silos to enable a better articulation and execution of your strategy?

Step Three: Communicate your strategy clearly and concisely. How it is responding to changes in your industry or stakeholder needs and expectations, to enhance stability and build a clearer understanding about how your business model is creating value through the use of multiple resources and relationships – your people, their ideas, natural resources, the community in which you do business, etc.

By undertaking these three steps, the business will be preparing itself for future risks and opportunities; it will be more resilient in the face of challenges; and be in a better position to articulate its strategy and key decisions to investors and other stakeholders. Employees will better understand their role and purpose, driving up morale and contributing to higher productivity and performance. At the same time the business will be better placed to engage with its investors, contributing to greater long-term decision-making and behaviour.

These are three suggested first steps on the journey to Integrated Reporting. I invite you to adapt and adopt them. The process will add enormous value not only to you and your business, but also to your stakeholders. I am sure it will provide surprising, as well as invaluable, insights, and trigger discussions within the business that otherwise simply would not have occurred. Our website contains an extensive selection of leading practice in Integrated Reporting from companies in different industry sectors and markets to help guide businesses towards better, more cohesive and valuable reporting. You can use these to steer your course.

For many directors reading this article, you are probably already doing some – or even much – of this. Perhaps it is part of an internal management approach, but is not yet reflected in your reporting. We are not seeking to reinvent the wheel – Integrated Reporting provides the Framework in which you can articulate clearly and concisely information that will most probably already be within the business, but is just not communicated. As Mahatma Gandhi said, “Happiness is when what you think, what you say, and what you do are in harmony.” This is the alignment we wish to bring about through the widespread adoption of the Framework.

As company directors you have nothing to lose, and everything to gain, from embracing this new corporate reporting best practice.