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Integrated Reporting (IR)

IIRC Newsletter - February Edition ... is here to stay... and the evidence is building

Burgess COMMENTARY

Peter Burgess

IIRC Newsletter - February Edition ... is here to stay... and the evidence is building

Integrated Reporting can deliver permanent and important change to the global economy. There is an emerging consensus about the issues facing international markets. Increasingly evidence demonstrates that can provide a myriad of benefits to the economy and business alike in order to tackle these issues.

For to achieve its full potential, evidence must show - beyond doubt - that it is capable of delivering such real, permanent and positive change. Businesses need compelling reasons to adopt and investors need a rationale for demanding it. In addition, policy makers will want to understand how can contribute to solving major systemic problems identified by organizations such as the International Monetary Fund and the World Economic Forum.

In this newsletter we look at just a few of the specific examples of analysis and market developments that support the rationale for .

crucial part of Japan’s ‘Abenomics’

“Integrated Reporting that shows the entirety of corporate activities makes investors and other stakeholders come to fully understand the overall value to be created by the company.” That was the conclusion of the Expert Committee on Desirable Market Economy System, led by high profile business leader Yoshimitsu Kobayashi, President and CEO of Mitsubishi Chemical Holdings. This is a powerful endorsement of the business and economic case for , and is consistent with academic evidence showing that companies which practice attract long term investors.

The report continued, 'Through Integrated Reporting, diversified information necessary for analysing and evaluating companies is disclosed in a concise way... If investors and other stakeholders come to fully understand the overall value to be created by the company as a result of its efforts for Integrated Reporting, etc. this will help the company's medium and long-term growth.' Identifying and implementing policy and market mechanisms that foster long-term investment is a key pillar of 'Abenomics', Prime Minister Abe's multi-layered plan to revive the Japanese economy. Integrated Reporting has a crucial role to play in bringing this about by enabling businesses to communicate how they create value over time to providers of financial capital. IIRC plays an important role in Christine Lagarde’s “hyper-connected world”

Managing Director of the International Monetary Fund, Christine Lagarde, has spoken of, 'the breakneck pattern of integration and interconnectedness that defines our time”, bringing with it tensions in economic sustainability and global interconnections. is an important mechanism for driving the new way of thinking and behaviour needed in the ‘hyper-connected’ world that Lagarde has described. It focuses businesses on communicating the environment they work in, and its strategy for the future.

Lagarde said that these changes must be addressed not only through 'hard' governmental routes, but through networks of non-governmental organizations, “they can move quickly and they can wedge open the doors of dialogue” she said, calling this a “new multilateralism” for addressing challenges. The IIRC is deeply embedded in this 'multilateralism'; it is a collaboration of business, investors, governments and global regulators, which Lagarde identified as so crucial in times of change.

The IIRC has always believed in the power of market-led innovation and through forming this powerful multilateral coalition has developed a technically robust Framework, tested across markets. World-renowned businesses are now using the International Framework as a tool to pave their way through the world that Christine Lagarde identified “of integrated supply chains, where more than half of manufactured imports, and more than 70 percent of total service imports, are intermediate goods or services.”

“A management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half hour.” Google Owner’s Manual

IIRC Pilot Programme Businesses, The Coca-Cola Company and Unilever, are amongst other multinational businesses, such as Google and National Grid, that have signalled the end for Quarterly Reporting in order to halt short-term relationships with investors.

Steve Holliday, CEO of energy company National Grid PLC, told the Business in the Community Leadership Summit this month that quarterly reporting encouraged short-term thinking and behaviour, stating, “Chief Executives and investors must move beyond financial value as the only recognised metric of business success.”

The IIRC welcomes the news that businesses are taking this decision. Evidence points to the fact that companies issuing more guidance exhibit a shorter-term oriented investor base. Through Integrated Reporting investors will receive quality information with a future oriented focus, including information about industry developments, trends and market conditions.

IIRC Pilot Programme business, Coca-Cola, discontinued its quarterly Earnings Guidance back in 2002, its then CEO and Chairman Douglas Daft stated, 'Our shareowners are best served by this because we should not run our business based on short-term 'expectations'. We are managing this business for the long-term.'

Unilever CEO, Paul Polman, a long-time advocate of Integrated Reporting, spoke in firm words when announcing Unilever’s approach to reporting, “If you buy into this long-term value creation model, which is sustainable, then come and invest with us. If you don’t buy into this, I respect you as a human being, but don’t put your money in our company.”

US firm, KKS Advisors, have released a paper concluding, “there is little evidence supporting regular issuance of guidance”, stating, “We propose an action plan for CEOs that want to abandon Earnings Guidance while minimizing any short-term stock price effects. Moreover, we recommend a new framework of corporate communication Integrated Reporting and Integrated Guidance.” Read the paper here.

Major study hales as enabler of financial stability

Research drawn from 1,066 US companies practicing degrees of Integrated Reporting concluded that, ' is associated with a more long-term investor base'. The Harvard Business School research, led by George Serafeim, entitled Integrated Reporting and Investor Clientele indicates that businesses that are on the journey towards Integrated Reporting, and are starting to efficiently communicate with investors about how they make value over time, are attracting more stable investment.

The implications for sectors of the economy, such as pharmaceuticals, infrastructure and IT, which require long-term investment, is significant. As the report concluded, ' is positively associated with percentages of shares owned by dedicated investors and negatively with percentages of shares held by transient investors.'

The research also is consistent with the IIRC's belief that the process of is a journey for businesses, and it can take several reporting cycles to achieve the desired results. However, businesses can take advantage of its benefits throughout the journey and not just at its conclusion.

This research was conducted by George Serafeim, Assistant Professor of Business Administration at Harvard Business School. Read the paper. is here to stay: the era of isolated capitals is over

is here to stay. As we reported last month, it has already been embedded into the education syllabus of a global accountancy institute, and this month the Chartered Institute of Management Accountants has also announced its decision to ensure students are examined on .

This move, combined with the evidence and analysis emerging, demonstrates the durability of ’s underlying concepts.

The era of isolated capitals, disconnected from strategic risks, business performance and financial stability, is over. All of the capitals are strategic to the long-term performance of businesses and economies, and it is critical to account for them in a cohesive, interconnected way to better manage risks, and strengthen the prospects of long-term improvements in performance.

As Christine Lagarde has stated, this is an interconnected global economy, and that means new thinking and new mechanisms to address challenges that can no longer be addressed in the isolation of one institution or jurisdiction. The power exercised by coalitions, such as the IIRC, that are embedded in the market is as valid as that of established institutions. Regulation is insufficient in itself to bring about meaningful change to the quality of corporate reporting, but it can encourage innovation in the market and should not be ignored as a catalyst for over the long-term.

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