Corporate Reporting blog

The Integrated Reporting Framework: “what’s in it for me?”

It’s a busy time in the reporting world: the International Integrated Reporting Council (IIRC) has just launched the consultation draft of its integrated reporting framework – or IR - for comment. It’s now time for businesses and investors to get stuck in, to give some feedback and help shape the future of corporate reporting!

The new framework outlines how businesses can better explain how they create, sustain and increase their value, in the short and long term. In essence, IR is designed to be a better way of communicating your performance and prospects – a job that, if done well, can have wide-reaching effects.

The draft framework is structured around clarity and relevance of information, and contains detail on fundamental concepts, guiding principles, content elements and preparation and presentation of information.

Since the global environment has become more challenging in recent years, the power of regular financial reporting to properly inform and to assuage worry has dwindled. As an external output, IR means that investors are better able to assess business risk and capital cost. The 85 global organisations testing it report significant benefits too. They say it’s encouraging joined-up thinking and improving the relevance of information about themselves to inform their decision making – clearly, this reduces the chance they’ll develop the wrong strategy, or take risky decisions.

IR is a voluntary initiative – so why should companies, already burdened with financial reporting, take on something else? Well, PwC has tried IR too – our Dutch colleagues are road-testing the principles, and here’s what they had to say:

“We like the dialogue with our own people, and we like to see that integrated thinking in our organisation is improving. We love the discussion with our clients and we like thinking about creating true value for society. As a result of integrated reporting, we have more insight into the value drivers and risks of our organisation.”

PwC also ran an experiment with investors aiming to uncover what types of information motivated their decisions. We discovered that the more quantified, relevant, non-financial information investors had, the more comfortable – and by a significant margin – they were to recommend buying a company’s stock.

We think that there are definite and lasting benefits to integrated reporting. We expect IR to become the norm and believe that, over time, it will actually lessen the reporting burden.

You can hear more about the value and importance of IR in our interviews with the IIRC CEO, Paul Druckman, and Richard Sexton – PwC global assurance leader elect.

Please do let the IIRC know what your think and share your views here - for this market-led framework to work, we'll all need to debate the issues and let the IIRC know both what's working well and what's not.

Strategy – have a backbone

As part of our ‘Building Public Trust’ initiative, we’ve been having an exciting discussion about what’s ‘game changing’ for business and their communications with stakeholders. Strategy was the first topic we discussed and we have summarised our thinking in a short paper on the main issues: Strategy – have a backbone.

Strategy: empty word or meaningful action?

There’s a real danger that ‘strategy’ can be an empty word – something just used to describe general aims that might be relevant to investors. The leaked US Department of Defence memo ‘banishing’ the term ‘strategic communications’  in December last year,  is an interesting illustration. The term was becoming redundant for some, and was confusing for others.  Management decided that all communication should be strategic, and so the term went.

Clearly, the word still has great value in the business community. But it seems that if you’re going to talk about strategy, it pays to be clear.

And today’s reporting on strategy does not seem to be clear enough to manage risks effectively and satisfy investors and others going forward. Our recent survey shows that only 27% of FTSE 350 companies explain the actions they take to deliver their strategic priorities; and less than half provide any targets or timeframes to achieve even a single priority. Many also struggle to align their KPIs to their strategy.

What gets measured gets done

As you’d expect, bringing strategy to life is greatly helped by setting up relevant measures to monitor and manage how people and the business overall are progressing towards the strategic goals. It turns out that the old adage is true: ‘what gets measured gets done’.

The right metrics enable better planning and forecasting. When performance can be measured against forecasts that derive directly from strategy, it’s so much easier to reward and encourage the behaviours that will achieve those goals.

In a global environment where  distrust and uncertainty are easily triggered, reporting on strategy is no longer about broadcasting what you do, it’s about making it clear how you create value in sustainable ways  that can withstand the weight of both scrutiny and regulation. It’s about explaining your plan, the assumptions that underpin it and the ways you’ll be measuring your success, so that employees know their role and investors understand your focus.

The short paper – Strategy: have a backbone – includes some questions to help you consider how your organisation measures up and ideas on where to focus.

Please do share your thoughts on this topic – can you access the information you’d like on the strategy of the organisations you are involved with?  (as an employee, employer, supplier, investor or other interested party)

Do you explain what makes your business tick? 50% don’t

I’ve spoken to a lot of people about this and they all tend to agree that business information, reporting and assurance cannot stand still. Information that we rely on has to keep up with the dramatic changes businesses are undergoing as they adapt to fast-moving global issues, economic uncertainty and new technology. And companies also have to respond to demands for clear and relevant information from stakeholders – ignoring these demands destroys trust and generates unnecessary risk.

We’ve found that some companies are responding to this challenge – mainly because of the benefits it brings to their business. Take a look, for example, at British Land’s ambitious approach to corporate reporting. Management has committed to identifying, measuring and managing the wider effects of the company’s activities and this has become a real driver of value for the business.

But our research – Trust through transparency – has found that there is a worrying gap between the most effective communicators and those whose reporting has not kept pace with new requirements, emerging practice and stakeholder demands. And by ‘reporting’ I mean all communications about a company’s performance, not just the annual report. Investors and others have told us that at best they ignore poor reporting – but it can cause them to raise questions about the quality of management and influence their valuations.

Business model reporting
The is one area worth clarifying in your reporting. Our research into FTSE 350 companies found that 77% use the term ‘business model’ (or similar) in their reporting, but 16% of those have no further information at all and only half provide meaningful insight into what really makes their business tick.

Remuneration reporting
As we expected, all companies identify their key performance indicators and a good proportion – 78% – make some reference to these being connected with executive remuneration. But only 25% provide sufficient information for readers to be able to make a direct link between the performance outcomes of the business and how management are rewarded.

Governance reporting
With increasing scrutiny of how companies are run by their boards and management, it is worrying to see just 49% of the governance reports referring to the culture and values of the company. Only 34% clearly explain what the board and its committees have actually been doing during the year.

Company reporting – what’s clear and what’s not
It’s not a sense of altruism that drives the best reporters. They do it to communicate effectively with stakeholders and retain their trust. The last thing businesses or capital markets need is the risk of an overnight loss of trust from unseen issues. Just because ‘trust’ doesn’t feature on the balance sheet, it doesn’t mean it can be overlooked.

Source: PwC, 2012 survey of FTSE 350 reporting – Trust through transparency [click image to enlarge]

You can read the full report on the link below:

http://www.pwc.co.uk/audit-assurance/publications/trust-through-transparency.jhtml

This is certainly food for thought as many organisations with December year ends focus on communicating clearly with their stakeholders over the next couple of months.

Wishing you a very happy Christmas and a New Year full of inspiring communication.

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