Integrated Reporting Management

Analysis and Applications for Creating Value

Sean Stein Smith

• Publisher: Productivity Press
• Year: 2018
• ISBN:
  9781351015455
• Edition: 1
• Topic: Business
• Subtopic: Management
• Index: Business

Integrated reporting in corporate communication is a process that results in improved communication, most visibly an 'integrated report, ' about value creation over time. An integrated report is a concise communication about how an organization's strategy, governance, performance, and prospects lead to the creation of value over the short, medium, and long term. It represents the integrated summarization of a company's performance in terms of both financial and other relevant information. Integrated reporting provides greater context for performance data, clarifies how relevant information fits into operations or a business, and may help make decision making better in the long-term.

The aim and scope of this book is to provide readers with an overview and analysis of the topics of both integrated financial reporting and a multiple capital model. Analyzing this topic through both a qualitative and quantitative framework, this important business topic is introduced and framed in the context of current market trends, while also including implications for business management professionals. This book provides a thorough examination of the topics of integrated reporting, management ramifications, and opportunities for management professionals. This easy to read and understand book provides numerous take away points, action items and implications. It includes real world examples, sources where more information can be obtained, and direct cause-to-effect examples, making it a valuable resource for readers.

Chapter 1

The Case for a New Type of Reporting

Change is always difficult, and it is even more difficult to plan, implement, and sustain when it pertains to the multifaceted environment facing management teams and organizations. Emphasizing the additional reporting and compliance obligations is not a viable pathway to jump starting this conversation, but it is important that potential stakeholders understand both the components, possible challenges, and the opportunities embedded within the concept of an integrated financial report. Chapter 1 introduces both the idea of integrated reporting and some of the surrounding context, which makes this specific time frame amenable for the adoption of integrated financial reporting. Integrated reporting is a new concept and idea that has recently taken the business landscape by storm, but does build on previous reporting frameworks and conversations. While the specific components of integrated reporting, including the idea of a multiple capital model, represent innovative thinking, the communication of a broader flow of data is not a new idea. What is new, however, and critically important as integrated reporting becomes more mainstream, is that reporting nonfinancial data are becoming standard, versus optional or a nice thing to have (Figure 1.1).

Figure 1.1Integrated reporting.

Issues with Traditional Financial Reporting

As the world and business landscape continue to become increasingly competitive, interconnected, and digitized, there are several fundamental truths becoming apparent to the users of organizational data. First, financial shareholders and nonfinancial stakeholders are increasingly interested in a broader array of operational and organizational data than ever before. This reflects the underlying truth that operational results and information are what ultimately drive the financial performance of organizations, and that by merely focusing on the financial outcomes, analysts and end users only have an incomplete view of the organization. Second, traditional financial reporting, in addition to ignoring much of the operational and organizational information that drive financial performance, takes several months to prepare and disseminate to external users of information. Put simply, traditional and current financial reporting is simply insufficient when trying to fulfill the expectations of stakeholder groups, both internal and external to the organization. Adding to this complexity is the fact that preparing and auditing financial statements can take months and is not currently completed on a continuous basis. Figure 1.2 illustrates, albeit simplistically, the forces often obliging management teams to choose between decisions made for one end-user group versus another, with the associated ripple effects driving the organization forward.

Figure 1.2Stakeholders versus shareholders.

This lag, which for larger corporations can be as long as 6 months, is attributed both to how financials are produced and to the underlying technology systems in place to facilitate this reporting. In a business landscape where markets can move dramatically in a span of several hours, and where information moves at the speed of a click, having to wait several months for financial information is simply unsustainable. Last, but arguably most important, traditional reporting documents and processes only appeal to a relatively narrow set of end users, most commonly shareholders and creditors. Clearly, this is rooted in a logical perspective, as shareholders and creditors provide the capital and market support for management to pursue certain objectives and plans. This clarity aside, however, it is apparent that interested users include a far broader audience that just shareholders and creditors.

Viewed in this broader context, the issues and concerns that routinely affect the auditing and reporting process are merely the tip of the proverbial iceberg. Stakeholders, both financial and nonfinancial in nature, increasingly expect information to be reported in a continuous manner, and to also reflect the current status of the organization. Traditional financial reporting, as it is currently constituted, simply will not fulfill the expectations and requirements of stakeholders moving forward. Prior to delving into the expectations of stakeholders in a globalized business environment, it is imperative to highlight some of the other issues and topics driving the dissatisfaction with the status quo as it relates to reporting information to the marketplace. Unfortunately, the issues and gap between market expectations and reporting information are not only linked to the specific information embedded within the reporting framework, but also the impact current reporting has on stakeholder engagement.

Traditional reporting, in addition to the time lag and delay between when the transaction occurs versus when the information is reported, is also a process that occurs periodically. Even for the largest corporations, which have quarterly or other periodic reporting requirements, these reports are usually only filed on a monthly or quarterly basis, which leads to the reality that only some information is analyzed and sifted through on a continuous basis. With ever larger amounts of information and data flowing in and out of organizations, simply examining data on a quarterly basis, for example, would appear to be insufficient in the current marketplace and ultimately lead to subpar decision-making. The argument can be made that, in such an environment, information and the ability to effectively leverage this information form the core of new competitive advantages in the global business landscape moving forward.

Stakeholder Expectations

In addition to the benefits of more integrated and real-time reporting, from an internal management perspective, there is also the reality that the variety of stakeholders interested in organizational performance increasingly expect real-time and comprehensive information. It is readily apparent that, especially in the aftermath of the financial crisis, stakeholders expect organizations to generate earnings, but also to do so in a sustainable manner. This is not to say every stakeholder is interested in environmental information to a similar extent, but rather, stakeholders are increasingly focused on whether or not the financial results generated by the organization will be sustained in the medium to long term. Linking directly to this requirement (where organizations create value and financial performance on a consistent basis) is the concept and idea that management professionals should shift from a quarterly basis of financial performance to a longer-term perspective.

This shift in perception and evaluative tactics, however, is nothing new, innovative, nor a recent iteration based on feedback from the financial crisis; it is something that may even seem intuitive for stakeholder groups and users of organizational information. That said, it is important to recognize that while these facts and understandings of organizational performance may seem like common sense, they are not in alignment with many management practices, nor with the methods by which organizations are routinely evaluated. Taking this into account, the differentiation between how management professionals should generate value and lead the organization internally, and what external tools should be used presents both a challenge and opportunity. A fundamental challenge, framed within the context of current financial reporting, is that even though management professionals need to develop talent, products, and services to sustain growth, such an approach may lead to lower short-term returns in the present.

While the prerogative of management is, in the strictest sense, to maximize shareholder value, the specific ways in which this value is maximized has become an even livelier topic of debate since 2007–2008. In essence, and using as reference the number of organizations that suffered negative consequences as a result of placing short-term results ahead of longer term performance, there appears to be a trend in the market toward generating value in both the short and longer term. This is not merely a minor concern, or an item only being brought to the attention of management by a small subset of stakeholders; rather, it is one of the highest priority items on the management list of many large institutional shareholders. Specifically, there are trillions of dollars in assets invested in a variety of environmental, social, and governance (ESG) indices, which is as clear as any indicator that these issues are gaining increasing amounts of attention. Such financial commitment and allocation of resources represents a clear and unequivocal indication of the importance being placed on sustainability and nonfinancial data from both an operational and financial perspective.

Such an increased interest in environmental, social, and governance items is, of course, a matter related to the bottom line, but is also an indicator and trend linked directly to stakeholder expectations. Taking a step back and viewing this from a longer-term perspective, it is important to acknowledge just what types of organizations and institutions are part of this stakeholder community. While stakeholders and financial shareholders are both interested in how the organization performs from a financial perspective, the stakeholder environment is also comprised of a large number of organizations that have different goals and objectives. Financial resources are not exclusively allocated to financial institutions and shareholders; an increasing variety of institutions include pensions, endowments, and other nongovernmental organizations have assets invested with assets managers. These assets, and the multiple objectives associated with these investments, also produce a situation in which financial and non-financial returns must be balanced. While financial performance is, of course, important for the management professionals of these different institutions, there are other concerns arguably equally as important.

Expectations and objectives from the perspective of stakeholder management include the reality that, in addition to achieving short-term financial objectives, the organizations which are the focus of investment funds must also generate sustainable returns over medium and long-term periods of time. The ability of a management team to consistently deliver satisfactory returns, from a financial and operational perspective, allows the stakeholders making investments to fund their individual objectives while also satisfying fiduciary responsibilities in relation to contributed funds. The increasing influence of stakeholders, both from an investment point of view and how organizations engage with the marketplace at large, is also linked to a growing trend in how organizations are evaluated. Simply achieving short-term (quarterly or otherwise) financial results is not enough to generate value in a marketplace focused on a more holistic and comprehensive view of organizational performance.

Tying in Integrated Reporting

There is no one clear-cut answer, no panacea, and no proverbial silver bullet to address the multifaceted and complex issues facing management teams, organizations, and stakeholders in a business environment that requires a larger variety of information. Integrated financial reporting, although offering no guaranteed solution to assist with these issues, does provide a platform from which management can conduct these conversations and enact appropriate changes. A fundamental flaw in many of the current reports linked to ESG data and information is a lack of consistent and comparable information. Many different platforms and reporting tools are available in the marketplace, including other competing frameworks linked to sustainability of information; however, with the number of options available there is also a possibility that some information is overlooked, misreported, or not reported in a comparable manner from one period to the next.

Simply acknowledging the fact that there is significant pressure on management teams and professionals to create value over the medium and long term, however, is not a business case or business plan. When a management concept or idea is introduced, regardless of how this specific idea will influence and drive management decision-making, it must be supported by business benefits. Reporting, compliance, and other back-office activities are already time consuming and resource draining activities for organizations, so layering on additional compliance requirements will not be met with enthusiasm across industry lines. In order to succeed, and achieve broader adoption and implementation, there must be a direct linkage and connection between integrated reporting and the performance of organizations. If this connection is not evident, or cannot be explained and reported to different stakeholder groups, this initiative and concept will simply not succeed.

Of course, and specifically when it comes to analyzing the ripple effects of integrated reporting in the broader marketplace, it may be difficult to establish correlation or causality. In other words, are the organizations that have implemented integrated reporting to date succeeded because of this implementation or were they able to adopt a more robust reporting framework due to financial success and resources? It is beyond the scope of this research and book to provide a definitive answer on this subject, primarily because this area and its implementation are still relatively nascent in nature. What this research and book hopes to provide, rather, is a comprehensive review and analysis of both current trends in integrated reporting. Included in such an analysis is an introduction to the topic, a review of underlying trends and support for this framework, as well as analyses of market leaders currently using integrated reporting in the marketplace.

An important point that should be emphasized when conducting an analysis of integrated financial reporting, especially versus current existing options and frameworks, is that several characteristics differentiate integrated reporting framework from other options. First, and perhaps most important to the growing conversation around the importance of organizational information, is the multiple capital model embedded within the integrated reporting framework. Creating a framework to consistently and effectively report different types of information and data, both for internal and external users, may very well be how organizations succeed and indeed thrive in the global marketplace moving forward. The specific framework and information framework embedded within integrated reporting sets this framework apart from other options in the marketplace.

Fundamental characteristics of quality information, whether represented from an ESG, operational, or financia...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Contents
• Preface
• Introduction
• Author
• 1. The Case for a New Type of Reporting
• 2. Why Integrated Reporting
• 3. The Current State of Integrated Reporting: Applications and Insights
• 4. Leaders and Support for Integrated Reporting
• 5. Integrated Reporting: Implementation Challenges and Opportunities
• 6. Implementation of Integrated Reporting: External
• 7. Accounting Implications for Integrated Reporting
• 8. Integrated Reporting and Revenue Opportunities
• 9. The Value Proposition of Integrated Reporting
• 10. Connecting Integrated Reporting to Technology Trends
• 11. The Future of Integrated Reporting
• Index