Integrated Reporting: The Brave New World · integrated reporting to ensure the survival of this...
Transcript of Integrated Reporting: The Brave New World · integrated reporting to ensure the survival of this...
29/11/2016
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Integrated
Reporting: The
Brave New WorldBy
Professor Brendan O’Connell, School of
Accounting, RMIT University
President, ICMA Australia
Presentation Structure
• Introduction to IR and what it is
• Examples of IR in Practice
• Potential Benefits of IR
• Potential Issues with IR
• Management Accounting Implications of IR
• Frontiers of IR: Extending to the Balanced
Scorecard Approach
• Frontiers of IR: 5-Star Reporting Index
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Introduction
• Integrated reporting [IR] is the latest reporting
innovation, emerging in 2010 with the formation of the
International Integrated Reporting Council (IIRC).
• The IIRC developed the International /IRS Framework to
“to establish Guiding Principles and Content Elements
that govern the overall content of an integrated report”.
• Not the next generation of sustainability reporting but as
an attempt to promote “a more cohesive and efficient
approach to corporate reporting that draws on different
reporting strands” (IIRC, 2013, p. 2). 3
What is Integrated Reporting
• IR brings together material
information about an
organization’s strategy,
governance, performance and
prospects,
• in a way that reflects the
commercial, social and
environmental context within
which it operates.
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IR Explained
• “integrated reporting combines the most
material elements of information currently
reported in separate reporting strands. . . in a
coherent whole, and
• importantly shows the connectivity between
them and explains how they affect the ability of
an organization to create and sustain value in the
short, medium and long term” (IIRC, 2011, p. 6).
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Continued• It states that it seeks to achieve a reporting framework
that: ‘reflects the use of and effect on all the resources
and relationships or ‘‘capitals’’ (human, natural and
social, as well as financial, manufactured and intellectual)
on which the organization and society depend for
prosperity; and
• It reflects and communicates the interdependence
between the success of the organization and the value it
creates for investors, employees, customers and, more
broadly, society’ (IIRC, 2011, p. 5).
• Next slide some examples of each type of capital as
adopted from Flower (2015: 3). 6
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Type of Capital Internal to Firm External to Firm
Financial Cash, Debts -
Manufactured Factories, machines Public roads,
Schools
Human Employees -
Intellectual Patents, systems -
Natural Livestock,
commodities
Flora and fauna
Social Brands, reputation Cohesive society,
stable government
Types of Capital
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IR Idea• A firm’s integrated report should indicate how the firm,
through its activities, has created value, as measured by the
increase less the decrease in the value of these six capitals.
• Thus the IIRC’s concept of ‘capitals’ covers not only the
firm’s capital in the conventional sense, but also the capital
of society, for example the environment.
• Hence many of the capitals included in the integrated
report are not owned by the firm.
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Continued• Value created by an organization over time manifests itself in
increases, decreases or transformations of the capitals caused by
the organization’s business activities and outputs.
• That value has two aspects – Value created:
• For the Organization Itself, which enables financial returns to
the providers of financial capital;
• For Others (i.e. stakeholders and society at large) - this happens
through a wide range of activities, interactions and
relationships. . .
• for example, the effects of the organization’s business activities
on customer satisfaction, suppliers’ willingness to trade with the
organization. . .
• When these interactions, activities and relationships are
material to the organization’s ability to create value for itself,
they are included in the integrated report’.
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Externalities• ‘This includes taking account of the extent
to which effects on the capitals have been externalized (i.e. the costs and other effects on capitals that are not owned by the organization). . .
• Externalities may ultimately increase or decrease value created for the organization;
• therefore providers of financial capital need information about material externalities to assess their effects and to allocate capital accordingly’ (IIRC, 2013a, paragraphs 2.6–2.8).
• These paragraphs make clear that the IIRCconsiders that the integrated report should cover ‘value to others’ only to the extent that this is ‘material to the organization’s ability to create value for itself’.
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Examples of IR
• The first example is taken from the Annual
Report 2015/16 of People’s Leasing and Finance
PLC.
• This Report is held out to be an exemplar of IR
by:
• http://examples.integratedreporting.org/organis
ation/260
• The second example is taken from the 2015
Annual Report of Standard Bank Group (Sth.
African bank – IR is mandatory there). 11
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Potential Benefits of IR• It may provide forward-looking information.
• it may demonstrate how organisations create and sustain value
• it may reduce reputational risk and enables companies to make
better financial and non-financial decisions
• it may break down operational and reporting silos in
organisations
• It may lead to improved systems and processes
• It may help drive organisational change towards more
sustainable outcomes
• It may help improve resource allocation decision making.
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Potential Issues with IR• Criticised for its focus on financial capital providers to
the detriment of the information demands and needs of
other key stakeholders.
• It is targeted at large, publicly listed companies,
excluding small to medium-sized organisations, and
those in the government and non-government sectors.
• In regards to the six capitals, the “subjective” concepts
of stock and flow of capitals create difficulties for
organisations “to explain some of their capitals beyond
insubstantial narratives” (Cheng et al., 2014, p. 98). 26
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Potential Issues with IR (Cont.)• Question about the assurance aspects of integrated
reporting and whether the International /IRS Framework
provides suitable criteria and appropriate subject matter for
reports to be assured.
• Questionable whether, in the absence of assurance,
organisational stakeholders will be interested enough in
integrated reporting to ensure the survival of this new
corporate reporting form and therefore whether the “mass
implementation of integrated reporting is likely to
eventuate” (Burritt, 2012, p. 391).
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Management Accounting
Implications of IR• Despite its potential to enhance management
decision-making as outlined earlier, there is little
evidence to date that this has occurred in practice.
• Stubbs and Higgins (2014) using interviews with
organisations in varying stages of implementing IR
found that there was no evidence that IR was
challenging the underlying DNA of the organisation.
• There was no evidence that integrated reporting
initiatives led to changes in the intangible elements
of the organisations (core beliefs, values, norms or
mission/ purpose). 28
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Management Accounting
Implications of IR• Nor was there evidence that a shift to integrated reporting reflects
a people centred and environment-centred organisation with a
focus on stewardship of all capitals.
• However, there was some evidence of cross-functional teams and
broadening out of constituencies involved in the reporting
process.
• Haji and Hossain (2016) in a study of South African companies’ IR
found that there was no improvement in the underlying substance
of organisational reports even though the terminology of IR had
been adopted by firms.
• Enhancing corporate reputation and organisational legitimacy
seem to be the main motivators for IR at present rather than using
it as a key tool for reform or management decision-making (Haji
and Hossain 2016).
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Financial PerspectiveGoals Measures
“How efficient is our deployment of resources ?”
Internal Business PerspectiveGoals Measures
Customer PerspectiveGoals Measures
“How do customers see us?”
Innovation and
Learning PerspectiveGoals Measures
Direction
Strategic
Direction
“How can we continue to improve and add value?”
“What must we excel at?”
• The Balanced Scorecard is a conceptual framework for translating an organisation's vision into a set of performance indicators distributed among four perspectives.
• An Integrated Reporting Balanced Scorecard will enable management to have a vision of the strategic implications of implementing integrated reporting in their organisations.
Frontiers of IR: A Potential Way Forward -
Extending the Balanced Scorecard Concept
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Financial
Goals & Measures
Intellectual
Goals & Measures
Manufactured
Goals & Measures
Natural
Goals & Measures
Integrated
Social
Goals & Measures
Human
Goals & Measures
Balanced Integrated Reporting
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Measures of “Hard Capital”
Measures of “Soft Capital”
Measuring the Impact of
Integrated Reporting• IIRC requires a firm to report on the effect on its activities on
society and on the environment only to the extent that there is a
material impact on its own operations.
• However, there is no one number to indicate/ summarise the net-
change in value within each of these six capitals, as many of the
‘pillars’ that makes up a particular capital cannot be added (apples
& oranges problem).
• Firms have to use “subjective” concepts of stock and flow of
capitals – this create difficulties for organisations “to explain some
of their capitals beyond insubstantial narratives”.
• An early attempt to obtain a single-number to rate the various
strands of corporate reporting will now be looked at.32
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• As demonstrated IR Reports do not result in one number
(financial or otherwise) that can encapsulate the value created
by all the” capitals”.
• What was required, therefore, was an approach to truly
integrate and evaluate the initiatives taken in the multiple-areas
of economic, environmental, social, governance and
empowerment (which must ultimately form the totality of an
organisation’s value enhancing initiatives) and obtain one-
number.
• As initiatives in these multiple areas are reported by public
companies, the 5-STAR Reporting IndexTM was developed and
prescribes a process and metrics for a holistic approach to
value-based reporting.
• This approach, developed by the ICMA sponsored Institute for
the Advancement of Corporate Reporting and Assurance
(IACRA), combines the reporting in the above 5-areas into one-
number for the ranking of all publicly listed companies.
Another Potential Way Forward
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5-STAR Reporting approach is to collect and classify the information
presented in annual reports, corporate web-pages and other publicly
available information in the 5-Reporting areas of Economic,
Environmental, Social, Governance and Empowerment along the lines
of a control framework as follows:
• Primary Stakeholder Expectations
• Objectives
• Strategies
• Implementation
• Results
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The 5-Star Reporting Index
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• The objective of the 5-Star approach is to rate the quality and comprehensiveness (and therefore the understandability) of publicly available information to multiple stakeholders.
• This was done using the following approach:
• Step 1 : Content Analysis of Publicly Available Information
• Step 2: Judge Ratings of Content (Rating between 0-5 of the Reporting on each criterion (strand) of the Control Framework)
• Step 3: Development of Criterion Weights
• The ICMA conducted 16 research symposiums in 12 countries (343 respondents) to determine stakeholder perceptions regarding the weights to be used.
• E.g. Actual Implementation was given a higher weight than just stating a strategy that required future action).
• Step 4: Multiply the Content analysis judge rated scores with the
Criterion Weights to obtain a Group score for each Reporting area (i.e. Rate x Weight)
• Step 5: Add the Group scores in each Reporting area to obtain a 5-Star
score for the company (e.g. Max score 25 = 5-Stars)
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The 5-Star Approach
5-STAR RATING: AUSTRALIAN COMPANY ANALYSIS
COMPANY ANALYSIS
Company
Economic
Reporting
Rating
Environme
ntal
Reporting
Rating
Social
Report
ing
Rating
Corpor
ate
Gover
nance
Rating
Empo
werm
ent
Report
ing
Rating
Overall
Rating
Star
Rating
AGL ENERGY LIMITED (AGK) 3.32 2.52 3.30 2.90 0.00 12.04 ***
ANSELL LIMITED (ANN) 3.64 2.76 3.48 3.25 0.00 13.13 ***
ASCIANO GROUP (AIO) 3.64 3.42 3.36 1.80 0.00 12.22 ***
ASX LIMITED (ASX) 3.64 1.08 1.20 2.85 0.00 8.77 **
AUSTRALIAN WORLDWIDE EXPLORATION LIMITED (AWE) 2.36 1.62 0.72 2.30 0.00 7.00 **
BENDIGO AND ADELAIDE BANK LIMITED (BEN) 2.80 1.62 3.30 3.80 0.12 11.64 ***
BILLABONG INTERNATIONAL LIMITED (BBG) 3.08 2.46 2.04 3.30 0.00 10.88 ***
BORAL LIMITED (BLD) 2.64 2.94 2.58 4.15 0.20 12.51 ***
BRAMBLES LIMITED (BXB) 4.00 2.40 6.00 4.50 0.68 17.58 ****
CENTENNIAL COAL COMPANY LIMITED (CEY) 2.68 1.56 0.60 1.55 0.00 6.39 **
CFS RETAIL PROPERTY TRUST (CFX) 3.16 4.98 1.02 4.25 0.00 13.41 ***
COCHLEAR LIMITED (COH) 3.24 0.96 2.46 4.30 0.20 11.16 ***
COMPUTERSHARE LIMITED (CPU) 3.80 2.58 3.12 4.30 0.20 14.00 ***
CONNECTEAST GROUP (CEU) 3.04 3.00 3.36 4.00 0.00 13.4 ***
CONSOLIDATED MEDIA HOLDINGS LIMITED (CMJ) 2.92 0.24 0.96 4.15 0.00 8.27 **
CROWN LIMITED (CWN) 2.72 4.62 3.84 4.75 0.68 16.61 ****
FAIRFAX MEDIA LIMITED (FXJ) 3.40 2.46 2.52 3.95 0.20 12.53 ***
FOSTER’S GROUP LIMITED (FGL) 2.56 2.16 0.96 3.55 0.36 9.59 **
GOODMAN FIELDER LIMITED (GFF) 3.40 1.14 0.00 1.95 0.20 6.69 **
HARVEY NORMAN HOLDINGS LIMITED (HVN) 3.00 0.60 0.00 4.00 0.20 7.80 **
ING OFFICE FUND (IOF) 2.56 3.78 0.00 4.40 0.20 10.94 ***
INSURANCE AUSTRALIA GROUP LIMITED (IAG) 3.36 4.20 3.78 4.20 0.20 15.74 ****
JAMES HARDIE INDUSTRIES N.V. (JHX) 4.00 3.24 4.74 3.95 0.40 16.33 ****
JB HI-FI LIMITED (JBH) 3.40 3.60 2.82 5.00 0.00 14.82 ***
Recent Australian
Results
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5 Steps to a Better Ranking
1. Higher weighting for voluntary disclosure of
environmental, social, governance and empowerment
data.
2. Higher weighting for implementing activities.
3. Providing quantitative measures to show progress and
results is highly rated.
4. Good and bad news disclosures treated equally
(disclosure is what matters).
5. Providing separate discussions for each of the “bottom
lines” makes for greater transparency and easier
analysis. 37
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