How integrated reports are gaining ground by stealth

Director resistance sees local corporations adopting it softly

The benefits of integrated reporting – the holistic way of looking at a business that goes beyond the financials to include intellectual, human, social and natural capitals – have been loudly chorused and in some jurisdictions widely embraced.

Evidence is mounting that producing a report that gives greater context to an organisation's operations and offers a more cohesive picture of its prospects than the traditional annual report has clear upsides, not least of which is boosting investor confidence and giving companies greater access to capital for the longer term.?

When the International Integrated Reporting Council (IIRC) released its long-awaited framework to the world in December 2013 optimism was running high. Little more than two years on, the success of integrated reporting is being seen globally.

South Africa is the standout with the Johannesburg Stock Exchange mandating companies comply with the King Code of Conduct which covers the principles of integrated reports – or they must explain why they haven't – and other African nations are paying keen attention. Japan is ramping up its numbers with around 400 integrated reports reputedly being prepared for the current financial year.

Across South-East Asia the pace is picking up with Malaysian Prime Minister Datuk Seri Najib Razak being vocal about the eventual introduction of integrated reports and its Securities Commission encouraging adoption of the framework.

There's also movement among large organisations in China, while the 2014 launch of  <IR> Lab India – a collective of companies, investors, regulators, accounting firms and academics with the purpose of practising and advocating integrated reporting on the subcontinent, chaired by Tata Steel executive director Kouyshik Chatterjee – prompted the Securities and Exchange Board of India to ask for an industry-led plan for adoption of integrated reporting during the next decade.

The UK is leading in 'integrated thinking' with the obligation for many companies now to accompany annual reports with "strategic reports" that share much of the DNA of integrated reports, while the European Parliament has adopted a directive that requires around 6000 public interest entities with 500+ employees to report information related to environmental, social, employee, human rights, corruption and bribery.

Integrated reporting change in the US is being led by large corporations, including Coca-Cola and Pepsico.

‘I don’t think any regulator has in mind the final destination, instead they’re responding to a particular information demand’

ROGER SIMNETT

Treading carefully

Australia, however, is evolving more slowly as corporations tread carefully – with many claiming they are producing integrated reports but failing to mention the framework.

Government, regulators and other standard-setters deliver what Roger Simnett, a scientia professor at UNSW Business School, describes as "integrated reporting by stealth".

"It may not be integrated reporting in name, but it is integrated reporting in nature," Simnett says, while noting that the IIRC actually encouraged an evolutionary approach. 

Signs that integrated reporting has traction in Australia are piecemeal and while they may be consistent with the framework they stop short of adopting its coherent whole.

For instance, the Australian Accounting Standards Board has released Exposure Draft 270 for reporting service performance information. Corporate regulator the Australian Securities and Investment Commission (ASIC) now requires reporting on business strategies and prospects for future financial years under its Operating and Financial Review reporting requirement.

The Australian Securities Exchange (ASX) has best practice guidelines which recommend companies disclose material exposure to economic, environmental, social and sustainability risks and how these will be managed.

The Australian Government also has an objective for reducing red tape that's consistent with integrated reporting.

The main reason for this softly, softly approach is the resistance of Australian company directors, led by peak body the Australian Institute of Company Directors, to the full embrace of integrated reports because forward-looking information is required under the framework. The need for director sign-off has board members running scared of liability.

"It seems they have the best of intentions to put something out there, but they feel they are open to personal liability," says Simnett. Potential risks are in measurement error as social benefits prove difficult to quantify, for example.

"In the US and the UK, there are safe harbours for directors who sign off with the best of intentions and no attempt at trying to mislead or misrepresent, but this is not the case in Australia."

‘Reporting and assurance standards underpinning integrated reporting need to evolve so that we know that what is reported is relevant and reliable, and to gain general acceptance’

ROGER SIMNETT

 Piecemeal changes

Simnett, who has participated since the formative stages of the Integrated Reporting Framework as a member of the International Integrated Reporting Assurance Taskforce, sees upsides and downsides to integrated reporting by stealth. For starters, he points out that, "each additional requirement increases the reporting burden".

On top of this, piecemeal changes put in place some – but not all – of the framework's objectives, failing to deliver the whole story in one report.

"These are definite steps in the right direction but at a cost. I don't think any regulator has in mind the final destination, instead they're responding to a particular information demand. What's missing is the connectivity to tell the whole value creation story for an organisation," Simnett says.

Demands from investors, in particular large superannuation funds, provided much of the initial impetus for the development of the integrated reporting framework. Investors and other stakeholders want to know the benefit to society from a particular company, insists Simnett.

"An integrated report can tell us that a company is doing a great job on preserving the environment or building human capital. It may be growing its staff's knowledge or doing a great job in supporting local communities. It may also be making a great financial return. But all those things need to be seen together."

With the status quo, that information is not easy to come by, he says. "We have to wade through everything and try to put it together."

Some Australian organisations have stepped up. In 2014, accounting body CPA Australia produced an award-winning integrated report. Banking giant NAB, a participant in the integrated reporting pilot program also considers the principles in its reporting, along with Stockland, Mecu, Dexus and SIMS Metal among others, but not all formally harness themselves to the framework.

So does an integrated report by any other name smell as sweet?

An integrated report should be a reflection of what directors talk about, think about and are worried about, says Simnett. emphasising that the directors' sign-off is a credibility enhancing mechanism, thereby avoiding the risk of "marketing spin" that may have once slipped through under the guise of corporate social responsibility.

 Assurance standards

When it came to assurance, the IIRC did not require integrated reports be audited.

"We wanted to encourage organisations to voluntarily adopt the concept because of the benefits, we didn't want a barrier," explains Simnett, adding that "auditing across such a broad range of areas could be very expensive for companies."

In South Africa, the King III Report recommends group-wide integration of controls under combined assurance which brings together the work of internal and external auditors with management and the board's audit committee.

Research on the South African frontrunners shows wide support for integrated thinking from external directors who are getting a more cohesive view of what a company is doing, while internally executives and managers are claiming they need a strong senior executive champion for integrated reporting to take hold.

Among the benefits inside organisations is the breaking down of silos and improved discussion and decision-making, reduced energy costs and better systems. Synergies and efficiencies are also emerging in reporting processes. With a twist on the old adage, there's evidence that what gets reported gets managed.

In Australia integrated reporting is creeping in, despite directors' resistance. In the paper, Integrated reporting and director's concerns about personal liability exposure: Law reform options, Simnett and co-authors Anna Huggins and Anil Hargovan canvass four options to overcome the director liability issue. These range from the IIRC creating a special exemption and reassuring directors in the wording of ASIC's Regulatory Guide to offering them a safe harbour via a statutory amendment to the Corporations Act.

The most far reaching option, as called for by the AICD, is inserting in the Act what's known as the "honest and reasonable director defence" which applies to all acts and omissions by a director so long as he or she acted with honesty (without moral turpitude).

Simnett sees some benefit in letting companies voluntarily explore better corporate reporting, but urges any party introducing new reporting requirements to keep in mind the reporting burden and the big picture of what information is in demand.

While evidence of the benefits of voluntary integrated reporting adoption grows, responsibility for mandatory reporting – if and when deemed necessary – will rest with corporate regulator ASIC or the ASX, concludes Simnett.

"In the interim, reporting and assurance standards underpinning integrated reporting need to evolve so that we know that what is reported is relevant and reliable, and to gain general acceptance."

Companies need time, perhaps a decade, to fully explore their journey to better corporate reporting, he believes.