Building trust through transparency

Does corporate Australia have a trust problem? In the aftermath of the recent industry investigations and royal commissions of enquiry, it appears that there is a clear need to rebuild trust. Adopting some or all of the principles of integrated reporting is one way organisations can begin rebuilding trust through greater transparency.

 

A fundamental shift

The International Integrated Reporting Council’s (IIRC’s) Integrated Reporting Principles, or <IR> in shorthand, is about more than just reporting – it’s about an ongoing fundamental shift in thinking, practice and behaviour away from the traditional narrow focus on backwards-looking financial reporting. <IR> is about looking towards principles-based transparent communication centred on long-term value creation.

Under section 1A of the <IR> Framework, an integrated report is defined as a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term.

Under the traditional focus on financial measurement and reporting, many companies in the past twenty years have been found lacking regard for broader stakeholder and community expectations. Companies have performed poorly or failed due to unforeseen or previously unreported non-financial factors and risk-taking.

So, the shift has started towards reporting on a much deeper and nuanced level beyond pure financial measures. This includes a wider range of internal, external and increasingly measurable non-financial factors that help influence and define how the organisation successfully creates long-term sustainable value in a considerably broader context. This effectively requires what the IIRC terms integrated thinking.

The focus on entire business purpose, impact and performance is premised in the context of sustainable long-term value creation for a broader stakeholder audience including shareholders/investors, customers, suppliers and the wider community alike. This broad-based Framework should also help improve business and investment decisions due to utilisation of significantly better information, non-financial data measurement, communication and governance.

The quest for brevity and clarity has not changed

The crucial first step in the new reporting context is an ongoing fundamental – to always strive for communication and reporting excellence. In fact, one of the guiding principles of <IR> is Conciseness.

Despite the temptation to significantly increase the volume of content in corporate reports, it’s more important than ever for companies to strive for clear, concise and effective communication that is balanced and unambiguous, and conveys the right information without creating reader fatigue.

That’s the big challenge for organisations in this new reporting world. We again caution against the temptation of information overload, which we have frequently seen since the FY2013 introduction of the Operating and Financial Review (OFR). Information overload negates the goal of assisting clear investor and stakeholder understanding of the company.

Alas, many Boards mistake the need for additional or new information to mean just adding it to the annual report as a compliance exercise. Instead, Boards could be taking the opportunity to cull wordy or irrelevant text and replace it with clear, concise and relevant text, data, diagrams, icons and infographics. This type of clarity and brevity will be essential in the new world of <IR> and, done properly, lays a strong foundation to help build your Investor Brand.

The <IR> journey

Full <IR> status is rarely achieved in one reporting period – the process usually requires a fair degree of planning and stepped implementation. Nevertheless, with the appropriate preparation and process, organisations can begin their <IR> reporting journey without the stress of immediately achieving full <IR> status.

The key elements within the <IR> Journey include:

Starting with a clean slate

It’s best to start the <IR> process with a clean slate and a fresh look at the business and how it operates. Then work out how to best communicate this, rather than starting with the old style of report and merely adding to it – see our five key steps below.

Reviewing the Guiding Principles of <IR>

There are seven Guiding Principles of <IR>, including Strategic focus and future orientation, Connectivity of information, Stakeholder relationships, Materiality, Conciseness, Reliability and Completeness, and Consistency and comparability. Use these Guiding Principles to underpin the preparation of an integrated report.

Ensuring adoption of content elements

There are eight fundamental interlinked content elements including Organisational overview and external environment, Governance, Business model, Risks and opportunities, Strategy and resource allocation, Performance, Outlook, and Basis of preparation and presentation. It does not set performance benchmarks or KPIs.

Identifying value creation

The fundamental aspect of <IR> is to report on how the entity creates enduring value for stakeholders over the short, medium and long term, in contrast to the traditional backwards-looking focus on short-term financial returns.

Essentially, <IR> pulls together information on all of a company’s value drivers – its relationships, resource use, risk management, strategy, governance, and how it is managing its ‘capitals’1 to drive performance and maximise its prospects for a successful and sustainable business well into the future.

Benefits of <IR>

Many companies that have adopted <IR> have commented on the beneficial impacts of rethinking not just how they report, but how they manage and govern their business, along with identification of key relationships and resources used in the business, and the allocation of those resources and relationships.

This requires boards and management to think in depth about their business operations, identify material factors, action changes as necessary, and report on the links between business strategies, resources and inputs, and the consequent outputs that create value for stakeholders. This practice should be overlaid with appropriate governance and measurement/control/assurance processes for the entire business operations, not just the financials.

Where to from here?

The <IR> Framework is principles-based and therefore does not prescribe specific key performance indicators or measurement methods. It allows for variation in circumstances between organisations, which means companies must exercise judgment in determining which matters are material and how they are disclosed.

To qualify for ‘integrated report’ status in accordance with the <IR> Framework, companies are required to fulfil all 19 criteria. The process can be fairly involved, so it may be best for many organisations to build up to a full integrated report over two or three reporting periods.

It can be difficult for an entity to know where to start, so we suggest five key initial steps below to get you underway on your <IR> journey: 
  1. Get senior leadership to buy-in to and support <IR> and the process
  2. Accept that it’s a journey rather than an immediate successful adoption and fulfilment on all 19 criteria in the IR Framework
  3. Identify key relationships and the resources used in the business, the allocation of those capitals and how long-term value is created
  4. Review business strategy and how your business is conducted/managed/governed, ensuring alignment with the capitals and long-term value creation
  5. Cull old and irrelevant information. Start applying the principles of the <IR> Framework, and begin the <IR> reporting journey.

For more practical guidance on how to start your <IR> journey please feel free to get-in-touch with andrew@designate.com.au

 

1 In <IR> terminology, ‘capitals’ are the broad set of resources and relationships that include intellectual, human, social and relationship, and natural capitals in addition to traditional financial and manufactured capital.