Integrated Reporting Needs a US Strategy
With the release of the International Integrated Reporting Council (IIRC)’s Framework in December 2013, many global organizations are realizing the value of integrated reporting. Yet, many corporations in the US are hesitant to adopt it without a clear value strategy for internal users, investors, and other market constituents.
Of the 100 companies that joined the IIRC’s Pilot Programme, only eight are headquartered in the US: Cliffs Natural Resources, Edelman, Jones Lang LaSalle Incorporated, Microsoft Corporation, PepsiCo Inc., Prudential Financial, Inc., The Clorox Company, and The Coca-Cola Company. Of those eight, it appears only two attempted to incorporate integrated reporting this past year. Why is it that integrated reporting, whose fundamental goal is to transform corporate reporting for better decisions, is so underdeveloped in the world’s largest and most developed economy?
A US Approach
Some enterprises in the US simply don’t know if integrated reporting is worth the investment and are unsure how to fully commit. IMA® (Institute of Management Accountants), recently named a full voting member on the IIRC Council, believes that while the US approach needs to be aggressive, it must also consider the current reality of perceived disclosure overload, as well as the potential for litigation and reputation risk. The marketing approach should differ for internal and external reporting to address these concerns.
For internal reporting, an emphasis should be placed on how integrated reporting helps enable better decisions in the value chain by focusing on integrated performance indicators. Perhaps the greatest benefit of integrated reporting comes from integrated thinking, which is defined by the IIRC as "the active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects." Integrated thinking begins with the tone set by the C-suite and board of directors. From there, it permeates the entire organization and its supply chains, fostering a collaborative, strategic management approach to operating the business. Companies can leverage their culture of integrated thinking to drive integrated management, processes, controls and monitoring, assurance, and, eventually, reporting, thereby influencing the creation of value over the short, medium, and long term.
While internal reporting has improved markedly over time, external disclosures remain focused on the short term. Financially oriented, complex, and voluminous, they are disconnected from a company’s overarching strategy. A 2012 EY study looked at a cohort of multinational corporations and found that over the past two decades, the number of pages devoted to financial footnotes and management discussion and analysis (MD&A) had quadrupled. If extrapolated to the next two decades, more than 500 pages would be dedicated to footnotes and MD&A!
For external reporting, the marketing strategy should initially deemphasize a single integrated report as the end goal, focusing instead on the six capitals (financial, manufactured, intellectual, human, social and relationship, and natural) as a means for enterprises to better “tell their unique story” of sustainable value capacity and value creation to investors, data intermediaries, analysts, and other stakeholders.
While integrated reporting is still in its infancy, I can point to a couple good examples of success. Take HSBC, one of the largest banking and financial services institutions in the world. In the long-term sustainability section of the company’s 2013 Annual Report, HSBC draws connections to the economic, environmental, and social landscape in which it operates. The company lists key stakeholders, dependencies, and sources of differentiation, all of which set the scene for its strategy and business model discussions. Or consider Tullow Oil, an independent oil and gas exploration and production group. In its report, the company identifies seven key areas that highlight the performance indicators used to measure success along with associated principal risks. In addition, it presents a highly transparent and concise performance section that details how the company's key performance indicators are used to help measure strategic progress.
To advance the cause of integrated reporting in the US, we must start with the call to action, clearly state the end in mind for target groups, and commit to education, research, and conversation—a conversation IMA, IFAC®, the IIRC, and other professional bodies must have to enrich organizational capability and public interest.