Integrated thinking – more relevant, more joined-upFollow @PwCclimateready
Alan McGill, Performance Assurance Partner, and Mark O’Sullivan, Corporate Reporting Director, discuss stakeholder demands for more relevant information and integrated thinking as the Integrated Reporting framework is launched.
There’s increasing pressure for management teams to provide clear, unambiguous information about more than just their financial performance. The idea is nothing new, but with business leaders seeing the effects on their business of the big, mega trend issues such as population growth and access to natural capital, it’s taking hold. Now more than ever, there’s a demand from management and stakeholders for broader information sets and critical data right across the value chain.
Stakeholders want to know what will impact on a business’s ability to create value and destroy it eg. to know about the external drivers affecting their business, their approach to governance and managing risk, how the business model really works etc.
So the time is right for the launch of the Integrated Reporting (IR) Framework by the International Integrated Reporting Council (IIRC).
The draft IR framework has been in the public domain for some time now, and has the support of over 100 leading businesses and more than 50 investor organisations from 25 countries. Written by business for business, it looks at various capitals with value creation in mind – what’s creating value and what’s destroying it. The IR capitals cover a cross section of business activity:
- Financial (the funds for use in production of goods)
- Manufactured (the physical goods for use in the production of goods, eg buildings, equipment)
- Intellectual (knowledge based intangibles eg systems, procedures, brands)
- Human (people’s competencies eg capabilities and experience)
- Social and relationship (relationships between groups of stakeholders, communities etc)
- Natural (environmental resources that provide goods and services)
It recognises that it’s pointless to collect information just for external reporting purposes alone. An integrated report should be viewed as the ‘back end’ of the process of integrated thinking. It’s the final presentation of your company’s business model, its value creation strategy and financials, all connected, and looking both backward and forward. So, what you collect needs to not only be useful and relevant, but find its way into the right dashboards, analyses, KPIs etc to help support the future direction of your business.
But the Integrated Reporting framework isn’t too heavy on how you get the information needed to perform that ongoing act of integrated thinking with accuracy and comparability. And, in addition, conventional measurement techniques mainly focus on inputs and outputs presenting only half the story. For example, measuring the money and resources invested in delivering an education programme to a community and the number of hours of teaching provided. Rarely do they consider the outcomes and impacts eg. improvements in job prospects as a result of the programme, or jobs secured, or contribution to the economy as new workers spend their additional income. This is because their significance is not fully understood and they are not measured by conventional techniques. Emerging impact measurement techniques address these shortcomings by developing an understanding of the relationship between businesses’ inputs and activities, their outputs and their longer term outcomes and associated impacts. So there is still some way to go before we see standardisation.
However, PwC developed a total impact framework earlier in the year called Total Impact Measurement & Management (TIMM) that puts a value on the social, environmental, economic and tax impacts of a business so management can compare the total impacts of their strategies and investment choices and compare the trade-offs. It puts a value on outcomes and impacts as well as inputs and outputs to present the full picture, the total impact. It’s not a reporting tool or an industry standard though, but a framework for decision making. It gives business leaders the data they need to make informed choices about the strategic decisions they face. There is no requirement to report the outcomes externally, it’s designed to be used for internal purposes with the board or to perhaps share with stakeholders. But, the TIMM framework has the versatility to be used to supply the data needed for Integrated Reporting or reporting more broadly – in fact, PwC (UK) used it to create its Corporate Sustainability report.
Integrated thinking and TIMM are complex things to do, but putting relevant aspects of your business activity and impacts in monetised terms allows you to assess what affects what, which things are most strongly connected, which stakeholders are affected and so on.
Mervyn King, IIRC Chairman, recognises that there is a fit between TIMM and IR. When he wrote the foreword to our TIMM white paper Measuring and managing total impact: A new language for business decisions, he described it as “a huge step forward in assisting companies in thinking on an integrated basis and enabling them to do business in the 21st century. It also helps to change mind-sets to take a holistic perspective and move towards Integrated Reporting”.
It’s interesting that the basic premise behind both TIMM and IR are the same, to understand what’s important to your business’s longevity and long term profits, but they approach it from different perspectives and hopefully meet in the middle! IR is more externally focused to support reporting to stakeholders and TIMM more internally orientated to support decision making. Both play to the need for business to think holistically across their value chain and are mutually supportive.