On 8 August 2018, Richard Howitt, CEO, IIRC presented at the American Accounting Association Annual Meeting, where he launched the new <IR> Academic Database. A transcript of his speech is shared in full below.
Madam President – Anne Christensen – and distinguished guests, it is an honour to have this opportunity to address the American Accounting Association’s annual meeting in this glorious location, National Harbor.
Bruce Mau opened this conference on Monday with a description of the transparency revolution. We’re opening this final day of the conference, on how accountancy might respond to the challenge of that revolution.
And integration is a key concept to help us.
Anne, in your introduction to the conference, you talked about integrating accounting research and teaching more fully with practice, we’ve also had sessions on integrating the conceptual framework for financial reporting, on how sustainability reporting can be integrated with financial reporting, and on how data analytics can be integrated with accountancy teaching.
In this world where businesses, finance and therefore financial reporting are increasingly connected to fast-moving external trends and to the inter-relationship or connectivity to other external actors and forces, integration – integrated thinking – is essential to meet the challenges we face.
In my speech I want to cover three things:
And let me begin by welcoming the focus on sustainability at this conference but, as Bruce alluded to, say that this is not just about the environment but about societal support for the way we do things – social sustainability too.
And today for the profession, for finance, for business generally, society is losing trust.
The Edelman Barometer showed that drop of trust in business bottoming our this year internationally, but continuing to fall here in the United States.
And as the Chair of the International Integrated Reporting Council argues in his new book: the practice of auditing was developed to establish trust and integrity, and it is time for the profession to re-examine and to return to its roots.
And sustainability is about the business too. Understanding and being able to challenge its own business model.
The average age of an S&P 500 company is under 20 years, down from 60 years in the 1950s, according to Credit Suisse.
How will that shorten further over the careers of the young student accountants of today?
We all know the examples of the companies who have failed to innovate.
The classic business school case of Kodak, which was swept away by the technology it had had a role in developing some years earlier.
It is also true for entire industries. Uber or airbnb – companies that are remodeling the transportation and hotel industries in the same way that Apple has changed our relationship with mobile technology.
It is why we put such an emphasis not just on P&L, but on value-creation.
But where there is a different and evolving concept of what is valuable in the modern world.
So what we value, and how we value it – and the relationship between businesses and their stakeholders – is changing, and this has a profound impact on corporate governance and reporting, including financial reporting.
Although the concept of integrated reporting is relatively new, it comes from a line of thinking very much based here in the United States and from organisations and individuals here in this room.
The Trueblood Committee report, commissioned by AICPA in 1972 to identify the Objective of Financial Statements, said, “This report is primarily concerned with information in financial statements that is useful for making economic decisions.”
It was a key point in identifying that reporting needed to change to maintain its relevance.
Since Trueblood, we have witnessed other important US-led innovations, including Kaplan and Norton’s Balanced Scorecard, which put a new emphasis on strategy and aligning different parts of the operation to that strategy.
And I would cite the work of Professor Michael Porter to develop a framework for Creating Shared Value. This recognized the inter-dependency between the economic success of the business and that of the community.
Integrated reporting has drawn on each of these initiatives and others.
And it attempts to be the first comprehensive framework that links them all together.
And to be the basis of not being just another initiative or tool for business, but of collective effort in the world to change the corporate reporting system itself.
And above all that is a change in the reporting system because of the rise in value of intangible assets for the company.
Evidence also shows that up to the mid-1970s a company’s financial statements presented an accurate assessment of its value and so financial reporting was the principal source of information to enable investors to make well-informed decisions.
Since that time, however, a gap has opened up between the book value and market value of most companies listed on the major global stock exchanges.
Most of you I hope will be familiar with this analysis which shows that only around 20% of the value of the company was found in intangible assets thirty years ago and hence missing from financial statements, but that today the 20% is tangible assets and 80% intangible.
What you may not know is that the latest Ocean Tomo research shows this at 84% and still rising.
Professor Baruch Lev who follows me will discuss this in more detail, but it is the single biggest reason why financial reporting has to change.
And that is why accounting standard setters around the world are acknowledging that financial reporting has limitations.
I was delighted that the SEC’s Deputy Chief Accountant, Marc Panucci, addressed our global IIRC Council meeting in New York City last year, stressing the focus of the SEC on developing a regulatory platform that promotes objectivity, integrity and long-termism in capital market decision-making, principles very much aligned to the movement towards integrated reporting.
The SEC’s draft strategic plan, published in June, develops these themes further with its focus on, “serving the long-term interests of Main Street investors; becoming more innovative, responsive, and resilient to market developments and trends”.
This statement is supported by Larry Fink, the chief executive of the largest equity investor in the world, BlackRock. In his annual letter to company CEOs issued in February 2018, for the third year running, he called on companies to lay out their strategy for long-term value creation”.
BlackRock is one of the many investors who were founding members of the IIRC and the CFA Institute, the global network of over 130,000 financial analysts, explicitly said that integrated reporting is in-line with the BlackRock call.
Here in the U.S., Focusing Capital on the Long-term (FCLT Global) and the CECP Strategic Investor Initiative are two of our key partners in leading efforts to encourage a longer-term focus in business and investment decision-making.
Here in the U.S. those efforts have seen a challenge to the obsession with quarterly earnings, this year seeing the joint call by Jamie Dimon, Chairman and CEO of JP Morgan Chase and Warren Buffett, CEO of Berkshire Hathaway, for an end to quarterly earnings guidance.
A call now supported by major employers represented in the Business Round Table.
When that happens, things are really changing.
So we are entering an era of multi-capitalism.
Not simply the financial and manufactured capital, which have historically formed the basis of financial reporting.
But the six capitals of the integrated reporting framework.
Looking to the future as well as to the past.
Helping to orient a business towards the long-term, because the issues they throw up, to take but one example of how to train and retain talent or ‘human capital’, tend to be more forward-looking value identifiers rather than more transactional, historic information.
And note that this is wider again than ‘ESG’ which has become shorthand for the transformation which is taking place, but which itself misses out important value-drivers for the company.
Intellectual capital arguably being the most important of all, in this new age.
And this is something which is not just being said on a conference platform, but has become a global movement.
The IIRC itself, since its formation in 2011, represents a powerful coalition of international businesses, investors, leaders in the accountancy profession, academics, regulators, standard setters and NGOs – all with the purpose of advancing integrated reporting as the next stage in the evolution of corporate reporting globally.
Our framework is not a standard but a set of principles, based on three fundamental concepts: that a company should explain how it creates value, its business model and, in doing so, make reference to the resources and relationships it uses – the capitals.
It is these concepts, which are now being adopted by US companies including such names as Clorox, Dow Chemical, GE, Prudential, Southwest, Pfizer, Adobe, Sales Force, as well as 1,600 businesses in over 60 countries around the world.
Our new US community, with its dedicated website and resources, is a meeting place for companies wishing to share best practice in the evolution of reporting in the US.
Companies such as Intel, which wanted to tell “one story” spread across the company’s different reports.
PepsiCo, whose ‘Performance with Purpose’ strategy led them to develop an integrated dashboard of material issues on which to run the business.
Or Jones Lang Lasalle – which conducts a materiality survey annually, and its results help inform the reporting content.
This work is spearheaded by our North American lead Bob Laux, former financial comptroller of Microsoft, and a permanent presence to develop integrated reporting with companies across the USA.
It is integrated reporting that is helping companies transform not just their reporting but their business: a transition from compliance, short-term, financial-only reporting, to communication, with a long-term focus, about value creation in its fullest sense.
So this ‘Octopus diagram’ which helps summarise integrated reporting has circumnavigated the Board Rooms of companies around the world.
Helping companies to analyse the risks and opportunities associated with each of the six capitals – where they are material to the business. Feeding this in to business model and business strategy. Leading to outcomes not just outputs, for the capitals and for the business itself.
Far from being ‘non-financial’ or separate from strategy, the multi-capitals are integral to the financial success for the enterprise and critical to explaining the strategy to investors and other stakeholders.
In a world where there is no single source of value, but instead multiple, connected ‘capitals’ that inter-relate, creating and destroying value over different time horizons, it is vital that we get our response to this right.
If we accept the new reality that there is no single source of value in today’s global economy, then businesses, investors and the accountancy profession face a big choice – a choice between disintegrated governance, thinking and reporting – information presented in silos, without connections, consistency, integrity or oversight; or integrated governance, thinking and reporting.
Integrated reporting presents a global framework which provides the glue to the disparate threads of information relevant to value creation in a modern economy.
And part of the mission of integration is not to replace or compete with other reporting frameworks, but to foster collaboration between them and work towards their alignment.
Which is why we convened the global Corporate Reporting Dialogue, with what we regard as the four principal sustainability reporting frameworks in the world, but crucially together with the two major financial accounting standard-setters, and in which US FASB has participated with observer status from the outset.
We will be turning up the volume on this work in the coming months, as we are in the final stages of preparing a major three year-project in which each of the sustainability frameworks will align initially with the recommendations of the Financial Stability Board TCFD Task Force, but ultimately much further and at each stage assessing preparedness for integration with financial reporting.
FSB Chair Mark Carney first coined his term ‘tragedy of he horizons’ at a meeting on integrated reporting. And the task force’s clear recommendations for integrated risk management and for alignment of the frameworks, together with the fundamental shift it heralds that climate is a financial not just an ecological issue – means we have reached a tipping point in the journey to integrated reporting.
And that is a turning point for the accountancy profession itself.
Much of this analysis is shared and draws on the work of my distinguished co-speaker, Professor Lev.
His book presenting this analysis was famously called “The End of Accounting”.
At the same time the Chair of the global IIRC Council was publishing a book for CFOs on integrated reporting: “Accountants Will Save the World.”
You may say: they can’t both be right!
But in fact the analysis is largely the same: that there are fundamental and existential questions to the profession.
From my standpoint, I do certainly see a profession that is adapting to this new economic reality. It was the largest six accounting networks that wrote to the G20 in 2015 arguing that a change to accounting standards and corporate reporting were needed to facilitate long-term infrastructure investment. It is accounting firms globally providing assurance to companies on so-called ‘non-financial’ information that is gaining salience in capital markets. And it is the accounting professional bodies internationally that are changing their education curricula to ensure the next generation of financial professionals learn about and train in disciplines such as business model, value creation and the multiple capitals.
And it is a privilege to work with IFAC, its member bodies and the global accounting firms to create the worldwide movement for integrated reporting, which last year saw IFAC produce its position paper that integrated reporting is not ‘a future’, but ‘the future’ for corporate reporting.
The accountancy profession – IFAC, the major global accountancy institutes, the ‘Big 4’ firms at very senior level, all play an active role in the global IIRC Council.
That is true here in the United States too.
Barry Melancon, Chief Executive Officer of the AICPA, chairs our Board of Directors, whilst Jeff Thomson, CEO of IMA is a leading member of the Council and a close friend and adviser to me and to Bob.
Look at the membership: IOSCO, UNCTAD, the World Bank and the World Economic Forum included.
This is about system change.
And the thinking in the World Economic Forum itself on the ‘Fourth Industrial Revolution’ must not be isolated or segregated from these other debates – but integrated too.
It has informed many of the debates here this week.
It is technological change which is making transparency the new normal; which provides far greater opportunity for analysing and presenting the ‘connectivity’ which is at the heart of integrated reporting; and which makes strategy the key differentiator for business.
Integrated reporting seeks to anticipate the future information needs of our economy – it is a solution for tomorrow, not just today.
The pledge of the Sustainable Development Goals is to ‘leave no-one behind’.
That could apply equally to technological change.
Indeed the integrated approach is that both should stand together, indeed that technological change should be a tool to serve the objective of sustainable development.
That has important implications for the accountancy profession and its educators – to avoid creating new ‘silos’ in the profession itself.
This new system must be based on fundamental principles – connectivity, transparency and inclusion:
Critically, the application of these principles must be evidence-based, trialled and tested.
Which brings me to the last part of my speech: aimed at the research community in particular.
This is not a ‘zero sum’ game.
The integrated approach is not a cost or a burden to the business, but a route to business success.
And it is research which demonstrates these conclusions and which has reached its own ‘tipping point’.
Today, to coincide with this conference, I am delighted to announce that we are today launching the <IR> Academic Database, a resource comprising over 200 pieces of research, representing the most comprehensive collection of scholarly investigation into the impact of integrated reporting in the world.
The database will be the focal point for academic research on integrated reporting in the future and provides opportunities for further study, complementing the IIRC’s virtual Academic Network, which we launched in December 2015. The database can be accessed at: www.iracademicdatabase.org
We encourage academics to use this database. It is open to everyone to access and upload research.
We encourage businesses and accountants who advise them to read the research.
Research published last October jointly authored from Stanford University concluding that firms who undertake integrated reporting have higher valuations.
A study in the Journal of Business Ethics this year which finds that market forces are driving integrated reporting to become the new reporting norm.
The earlier study by Nanyang University showing that companies adopting integrated reporting benefit from a higher share price performance.
The new database going live right now shows these are not isolated or unreliable results, but that there is now a compelling evidence base supporting the business benefits of moving to integrated reporting.
Obviously I invite all of you and all members of the American Accounting Association to use the database and to join our growing Academic Network.
But I also invite you to help us to raise awareness of this new evidence base.
Integrated reporting is about a change of mindset.
You – the researchers and educators of the accountancy profession from the United States and across the world – have a vital role to play in giving your own thought leadership to this new integrated approach.
I hope some of you will choose to work with us to meet future research needs on integrated reporting, and we offer active opportunities for any of you to work with us to meet those needs and add to the evidence base.
I hope some of you will join the business schools and universities around the world who are ‘integrating integration’ in to your teaching.
And at a conference entitled ‘Pathways to a Sustainable Future,’ this is the right place to advance this case.
The High Level Expert Group on Sustainable Finance established by the European Union described integrated reporting as “the ultimate ambition”.
Target 12.6 of the Sustainable Development Goals explicitly calls for the integration of sustainability in corporate reporting.
Integrated reporting does not guarantee a sustainable future, but there will be no sustainable future without it.
And leadership from the accountancy profession is fundamental to achieving it.
The accountancy profession has been at the heart of economic, industrial, business and professional development for almost two centuries. It is the public interest spirit, independent judgement and, above all, a commitment to secure progress for the good of our economy and society throughout the value chain, that lead me to a straightforward conclusion: that, in the end, accountants do have a role in helping to save our world.