Integrated Thinking & Reporting Requires Trusted Advisors: Guiding Your SME Clients
The International Integrated Reporting Council’s International Integrated Reporting Framework defines integrated thinking as: “The active consideration by an organization of the relationships between its various operating and functional units and the ‘multiple capitals’ that the organization uses or affects. Integrated thinking leads to integrated decision making and actions that consider the creation of value over the short, medium, and long term.”
The Framework defines integrated reporting as “a process founded on integrated thinking that results in a periodic integrated report by an organization about value creation over time and related communications regarding aspects of value creation.”
Thus, integrated reporting is expected to communicate concisely an organization’s strategy, governance, performance, and prospects that lead to value creation over time. IFAC believes that accountants should consider using integrated reporting as a basis or framework for strategic advice to their small- and medium-sized entity (SME) clients or employer (see the recent Global Knowledge Gateway article for more).
The Trusted Advisor
Who better than a professional accountant, as the trusted advisor, to take on this integrated thinking mission? Normally, no external stakeholder knows a company better than its professional accountant, who is equipped with a deep understanding and knowledge of the client’s business. Why not make more use of that knowledge and understanding to the client’s benefit?
With integrated thinking, clients can better understand their own business. And, a better understanding of the business inevitably leads to better decision making and better business outcomes. Communicating this understanding from this new way of thinking has been known to break down internal “silos,” ensuring information flows fully and freely between different parts of a business.
When that happens, clients will start to look at the business with a new pair of eyes—and so will the rest of the world. Their business might perform better not only in the short term but over time, as integrated thinking yields sustainable, consistent, long-term value creation. Today, most people realize that there are few businesses that are sustainable without innovating and effectively managing the limited resources at their disposal. And, it is not only about the bottom line. Suppliers demand eco-friendly delivery, staff demand eco-friendly business travel, banks demand long-term thinking, etc. It is time for SMEs to think integrated, and perhaps also to consider reporting on information other than historical figures in their balance sheet or income statement.
Clearly, in the near future, the value of companies will go beyond financial capital. Intellectual, human, social, natural, and manufactured capitals are equally essential to understanding how companies can increase their value in a sustainable manner.
As the professional accountant and trusted advisor, you can help them.
How? A good first step is to identify which of your clients may fit with this kind of non-traditional thinking. Not all companies are ready or will benefit from it.
What kind of clients should you look at? Clients that might be receptive to integrated thinking and, ultimately, integrated reporting are likely to be those that have a wide network of stakeholders, both external and internal. Examples on the external side include society at large, local communities, banks, and suppliers. Internal stakeholders include staff, in particular the millennial workforce who are increasingly preferring employers with value-creating business models. The need to attract and retain talent may be a good reason to start this integrated-thinking process.
Integrated reports implicitly require the adoption of integrated thinking. Innovative clients or entities willing to propose a structural change to their modus operandi might be amenable to introducing an integrated approach to the way they operate.
Here are just a few examples for you to consider when reviewing your own client list to identify those that can benefit from integrated thinking and integrated reporting.
Companies and Entities Providing Public Services
Entities managing kindergartens, schools, etc. or those providing health care or care services for the elderly or handicapped, including, in some jurisdictions, entities organized as social enterprises are typically small- or medium-sized, have many stakeholders, and also have some level of dependence on contributions from society at large.
What if, together with their income statement, they also communicated, for example, how many children have been taken care of, the cost per child, how many teeth have been examined? The objective is to inform stakeholders about what the company does apart from making (or losing) money, but in a more measurable way. Integrated thinking might not only help enhance processes within the entity, but also help demonstrate to stakeholders how it aspires to create value for the community in which it operates, and therefore, its importance.
Companies providing public utility services (for example, drinking water, electricity, gas, heating, public transportation, and waste collection and treatment) in many parts of the world are still relatively small local companies or, regardless of their size, have a multitude of stakeholders in the local communities in which they serve.
Professional Services Firms
Knowledge-based companies that sell services could benefit from being able to measure and communicate how many hours of education and training per year their employees undertake, and at what cost. This information may be of particular interest to future clients and employees. Integrated thinking may also help them explain their business model to potential investors or other capital suppliers.
Freight companies could communicate how much energy is consumed in a year and match that figure with the direct cost and how this was eventually used to create value. To improve the ratio of cost to consumption, drivers could be trained in eco-friendly driving and other fuel-saving tips, which could be measured and reported to customers and other stakeholders.
While these examples primarily cover the SME sector, let’s not forget the not-for-profit organizations. These organizations generally have a wide network of donors, volunteers, and community partners, as well as local/regional/national governments that constitute their stakeholders. Communicating how they create value and strive to make the best and most out of every cent is of fundamental importance to help them develop, collect new funds, and secure finances.
Ultimately, all businesses and not-for-profit organizations that aim to respond meaningfully and responsibly to their stakeholders (internally and externally) and, in the process, drive value creation for the short, medium, and long term will find integrated thinking to be the way forward. This thought process, which is captured in integrated reporting, will be invaluable for sustainability in the years to come.
As part of the integrated thinking process, accountants, as trusted advisors, can also contribute to the UN Sustainable Development Goals, especially goals 12 & 13, responsible consumption & production and climate action (see IFAC’s 2030 Agenda for Sustainable Development: A Snapshot of the Accountancy Profession’s Contribution for more on how the accountancy profession can and should contribute to achieving the Goals).
For more information on SMEs and integrated thinking, please see Creating Value for SMEs through Integrated Thinking: The Benefits of Integrated Reporting.