A timely global overview of integrated reporting

My review of 19 reports—either integrated reports or the emerging work of IIRC pilot company participants—uncovered a huge array of formats, and a wide range of levels of integration.

The IIRC launched its integrated reporting framework last December, and, at least in the northern hemisphere, most large companies report on prior calendar year performance by the end of March.  This spring, therefore, seemed like a good opportunity to take a look at the current state of integrated reporting from a global perspective.

Nearly all of the reports I looked at are from companies in the IIRC pilot programme.  The one exception is from South Africa.  I chose to include Standard Chartered’s annual report because I wanted to have slightly more geographic diversity and I was interested in taking a look at good examples of recent integrated reports from advanced South African integrated reporters.  (More about the sample of reports reviewed, with links to all reports reviewed, can be found here.)  South Africa has the greatest concentration of integrated reports because the format is required of companies listed on the Johannesburg Stock Exchange.

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A wide range

I found a handful of brilliant reports, reports demonstrating the kind of reporting that goes beyond transparency and disclosure in ways that are not only engaging but, in rare instances, enlightening.  I would single out Gold Fields’ reporting as being unusually eloquent, clear and thorough about the process of value creation for all stakeholders.  BASF, a chemical company based in Germany, has very thoughtful reporting on balancing the needs of society and the environment.

At the other end of the spectrum, there are many companies that think of themselves as being on a long journey.  They are learning and experimenting.  The efforts of some experimenters are instructive for other companies seeking to begin a transition to better, more integrated reporting.

KPMG International is very clear that they joined the IIRC pilot program to watch and learn.  KMPG International is not publicly held, and their reporting is not as detailed or comprehensive as the reporting of listed companies.  However, as KPMG is in the business of advising other integrated reporters, I expected more from the parent company report.  They report on people and environmental data, but have no non-financial KPIs related to their own value creation processes.  This is a missed opportunity to demonstrate leadership in non-financial accounting.

In the early days of IIRC’s pilot programme, a survey of participants found that less than half intended to produce an integrated report by the end of the first two years of the pilot phase.  Indeed, many IIRC pilot programme reporters have made little if any visible progress toward integration.  This is true for the two reports reviewed from companies headquartered in the US, Microsoft and Prudential.

Assessing integration

First, format does matter.  What a company chooses to put in their report sends a very strong signal.  Companies DO have a lot of choice in this matter.  Many of the best reporters are in heavily regulated industries and are listed on multiple exchanges.  These layers of regulation and reporting requirements do not have to be a barrier to good reporting.  Companies can choose to handle legal requirements in one way, while reporting on processes for managing and measuring performance and creating value in a separate report.

Second, a company can have very comprehensive, thoughtful reporting that checks all (or most of) the boxes in terms of best practice.  However, if statements from executives do not exhibit any signs of integrated thinking, the company is still very much on a journey.

In order to assess the connectivity of reported information, I considered the relationship between:

  • chair and executive messages
  • presentation of key indicators and detailed accounting statement
  • strategy
  • remuneration

If elements of non-financial performance are deemed critical to creating value and achieving strategic goals, then these should be clearly linked to strategy.  Remuneration should also link to the objectives of the corporate strategy.

The best remuneration reporting involves highlighting performance objectives, usually in a box or table.  Standard Chartered’s report does this best.  Stockland’s report also has a very good overview of performance criteria linked to remuneration.

The best of the best

The best reports, in my opinion, have 1) a highly integrated format with 2) strong evidence of integrated management and integrated thinking.

Philips and Akzo Nobel are both creating products and business lines that reduce environmental impact, reducing the fuel or energy that their customers need to use.  Both reports are also models of integrated reporting best practice.

Philips has no supplementary financial or sustainability reporting.  The company manages to provide a very strong, well-integrated report for a global, diversified company in 243 pages.  They have even managed to report against the G4 framework, making them one of only four companies reviewed using GRI’s reporting standards in an integrated report.  Philips’ report also includes a very clear discussion of both materiality and boundary issues.

As previously mentioned, Gold Fields’ report does a great job of reporting on the value the company creates for society.  Gold Fields’ has been the largest taxpayer in Ghana for some years.  Recently, the country has substantially increased the corporate tax rate, and Gold Fields’ reporting on this shows a very thoughtful approach to the balance between value creation for shareholders versus society at large.

The reports of Aegon, BASF, Potash and Standard Chartered all demonstrate an impressive degree of integrated thinking, as well as very developed integration of reporting.  I have rated the reports of Akzo Nobel, Gold Fields and Philips slightly higher because the integration of their report formats is so complete.

A truly integrated report, in my opinion, treats non-financial and financial performance information in very similar ways.  Akzo Nobel and Philips have well-developed non-financial statements included with their financial statements.  Both reports include both an assurance statement and an auditor’s report.  Philips has gone so far as to push their auditor, KPMG, to move towards an integrated statement.  Unfortunately, this has not yet been achieved.

Of course, there is no requirement that an integrated report be assured.  If a company truly believes, however, that non-financial metrics are critical to managing, measuring and understanding performance, then their reporting and management systems should reflect a consistent approach to accounting and data management. If financial data needs to be audited to be considered robust, then shouldn’t material non-financial data undergo similar testing?

Gold Fields has taken a different approach, but has achieved the same objective.  The company’s integrated report is a high level overview of all performance.  It includes no detailed accounting statements and neither an assurance statement nor an auditor’s report.  Detailed performance information is reported in supplemental reports.

Reports that are very good

The development of robust non-financial accounting is, I believe, a hallmark of true integration.  For those companies that have not developed non-financial statements or non-financial accounting notes, moving detailed financial statements into a separate report is, I think, the best option for providing a truly integrated overview of corporate strategy and performance.

Aegon’s report is very engaging.  It also portrays a good understanding of integrated thinking and shared value creation.  While Aegon has developed a type of non-financial statement which comes after their financial statements, their integrated report includes an assurance statement but not an auditor’s statement. (Aegon also produces a standalone sustainability report.)  National Australia Bank, which provides a good consolidated overview of all performance data in an integrated format, also includes an assurance statement, but not an auditor’s report, in their annual review.

The reverse is true for the integrated reports of BASF and Standard Chartered.  The reports of both companies include excellent non-financial KPIs, but no non-financial statements and no assurance reports.  These companies do, however, include auditor’s statements.

Reporting detailed financial statements with no non-financial statements creates reports a lack of balance and harmony between the front and back of the reports.  The BASF and Standard Chartered reports are, in many respects, very thorough and even impressive. In my personal opinion, however, both reports would be improved by creating more structural alignment between the treatment of financial and non-financial data.

Integrated data management expands the role of the audit committee.  In an outstanding or very good report, I would expect to find evidence that the audit committee reviews non-financial performance data. Of course, if the audit committee has concerns about non-financial performance, or the achievement of non-financial objectives, I would expect to find this reported in other sections of a company’s report.

Marks and Spencer’s report details its audit committee’s involvement in overseeing non-financial performance, noting Audit Committee discussions about the possible failure to meet certain commitments or objectives.  While the Audit Committee should review all performance related data, it is disappointing that the risk of not achieving these commitments or objectives is not discussed more clearly elsewhere in Marks and Spencer’s report.  There is only a vague reference to how challenging the targets are, but no detail about specific risks to achieving the targets.

Conciseness—or lack thereof

HSBC’s report is nearly 600 pages, the majority of which is financial reporting. SAP’s report has many good elements, including key aspects of the IIRC integrated reporting framework and GRI’s G4 standard, but at well over 400 pages, the report is also overly long.

In addition to being long, SAP’s report PDF has no table of contents or index and is organized in a confusing manner.  I had trouble finding the financial statements.  In the online content, the link to the financial statements is buried in a long list of performance content, far below the link for reporting on water and waste.

Finally, while SAP’s report has many elements of a very integrated report, including non-financial accounting notes, it lacks non-financial metrics relating to core business activity. As a software company, SAP’s environmental footprint is not as interesting as its management of intellectual capital and its impact on clients’ productivity.  (If these are covered in the report, I was unable to find them!)  While productivity can be hard to measure, client satisfaction is one place to start.

Of the reports reviewed, the two Australian reports were the most concise.  National Australia Bank’s annual review was the shortest, coming in under 40 pages.  Both provide good models of concise integration.

Value creation models

In the reports reviewed, there was a great deal of value creation language, as well as discussion of shared value creation.  The reports of Gold Fields and BASF are particularly good examples of this.  I failed, however, to find good examples of reporting on value creation over time.

I did not see any company using the ‘six capitals’ language preferred by the IIRC framework. Akzo Nobel has done the best work in terms of trying to capture the value creation in the six different types of capitals.

Most of the companies I have ranked in the top half of the sample included a business model in their report.  Akzo Nobel’s was the most elaborate and, I believe, comes closest to the intent of the IIRC’s integrated reporting framework.  Some of the business models were highly conceptual; others resembled organizational charts. To explain how HSBC’s business works, the company’s report contains what I can only describe as a graphic representation of a balance sheet.

Integrated thinking:  the missing link

Unilever has very good, business-relevant, non-financial metrics.  I would even say they are leaders in this area.  Unfortunately, while they claim that sustainable living is the objective of their business, many of the details about their ‘Sustainable Living Plan,’ and information about corporate sustainability performance, are not in their integrated report.  This information is reported in a supplemental sustainability report, which comes out a month or more after the release of the integrated report.

Unilever’s business diagram, even the version used in investor presentations, puts sustainable living at the heart of its business.  It is not yet at the heart of its reporting.  Like Marks and Spencer, Unilever has done a great job of branding and communicating sustainability objectives.  A perusal of the two reports shows, however, that these branding initiatives have not penetrated management systems.  Neither company explicitly links performance of sustainability objectives to executive pay.

It is obvious that integrated reporting involves a learning curve.  Many of the reports reviewed in this project are from companies that have been working on integrated reporting for six years or more.

Takeda, the only Asian company included, has been working on integrated reporting since about 2008.  The company’s IIRC pilot programme involvement is prominently noted at the beginning of their report, which includes many elements of an in integrated report, including an integrated presentation of key performance indicators and detailed explanations about stakeholder input to the reporting process.  However, the language used in the report, as in HSBC’s, indicates a lack of integrated thinking.  (I write more about HSBC’s report in a related article about integrated reporting by sector.)

Takeda’s report is divided into two major sections, one for creating corporate value and one for maintaining corporate value.  In the second section, Takeda’s CSR activities are explained.  Takeda does not seem to manage, or report on, the value it creates for society. In Takeda’s case, this oversight highlights a lack of integrated thinking that stands out because many of its pharmaceutical industry peers are quite advanced in this area.  (GlaxoSmithKline, Novo Nordisk and Roche are good examples, although the reports of these companies were not reviewed as part of this exercise.)

Integrated reporting should be the outcome of integrated thinking; integrated thinking involves a broad understanding of how core business activities create value for all stakeholders in both the short- and long-term.  Potash’s report is one that demonstrates mastery in integrated thinking.  The company is the world’s largest producer of fertilizer, but explains its business in terms of food security–the benefit it creates for society.

One of the best places to look for integrated thinking is in a company’s discussion of strategy.  Some companies clearly design their strategy with customers in mind.  National Australia Bank is a good example of this.  Reflecting the way they manage relationships with customers, they report customer satisfaction broken down by different customer groups.  Other company strategies are primarily about financial growth and rewarding shareholders.  This is generally balanced by a commitment to reduce negative impacts in the process of growing the business.

Risks and opportunities

All the reports included risk information, although this takes different forms.  Companies that demonstrate integrated thinking are more likely to also report information about opportunities.

SAP has a report on opportunities within their integrated report. BASF’s report includes a particularly strong section on risks and opportunities section, which includes detailed forward looking outlook information.  While one aim of integrated reporting is to provide better forward looking information, very few reports include this.  BASF’s outlook reporting is quite comprehensive, and includes an outlook for the industry as well as geographic regions.

The best reporters provide a good overview of the external environment and their competitive landscape.  This provides necessary context for reporting on risks and opportunities.  Gold Fields’ radically restructured their business in 2013, and they did a great job of explaining how the external environment played a role in decisions about their organizational structure and how the business is managed.

The need for comparability

Comparability is a key element of the IIRC’s integrated reporting framework. For reporting to be truly useful to report users, information must be comparable, particularly within industries.

According to Marks and Spencer’s report, their goal is to become the world’s most sustainable retailer.  The company intends to do this through the implementation of what they call Plan A, which is described in their report in the following ways:

  • “our eco and ethical programme;”
  • “products now have a Plan A quality – such as Fairtrade, organic or made from recycled material;”
  • “over five million customers participated in Plan A activities this year;”  and
  • in the company’s business model, Plan A forms the foundation and is labeled “how we do business.”

Because Plan A includes so many things, it is difficult to determine if what Marks and Spencer is doing is material or strategic.  Data relating to implementation of the program is impossible to compare with that other retailers, so it does not explain Marks and Spencer’s progress towards its goal of becoming the most sustainable retailer.

Akzo Nobel’s sustainability strategy is also branded (Planet Possible), but it has easy-to-understand, transparent goals for ecologically responsible products, employee engagement and resource efficiency.  These objectives allow for comparisons to the performance of industry peers.

Works in progress

I was interested in the reports of Petrobras and Repsol because I think integrated reporting is particularly important in sectors such as oil and gas.  I had difficulty finding the reports for these companies.  When I finally discovered their integrated reports, they were labeled as management reports, or, in the case of Petrobras, ‘Report of the Administration.’

The reports of both Petrobras and Repsol are essentially combined reports, meaning they have very good financial and non-financial information but the two types of information are not integrated in a meaningful way.  Repsol’s report has a section called ‘Different ways of creating value,’ but this is, essentially, a sustainability section.  Still, having good reporting on all aspects of performance—and reporting all of it at once—are important steps toward integrated reporting.  And these companies are doing very good reporting.  Both companies have good non-financial metrics and well-developed reporting on strategy, risks, and governance.  Repsol’s tax reporting was particularly robust, with breakouts of tax payments by country.

The other reports in the ‘progress’ category are at much earlier stages of the journey toward integration.  Microsoft’s report, like Prudential’s, is essentially an executive letter stapled to the front of a legal document.  Microsoft does a separate report on corporate citizenship, but I see no overlap with the annual report.

More to come

Because integrated reporting is such a complex subject, I’ve broken further observations about these reports into segments, to be published over the course of the next week:

  • A timely global overview (this article)
  • About the sample of reports reviewed
  • 2013 integrated reporting: by region and sector
  • 2013 integrated reporting:  non-financial KPIs
  • Integrated reporting formats

 

 

 

 

Comments

  1. I found this article of real value, thank you Susan for your insight and obvious expertise.
    We should remember that the advances made have been off the back of the Consultation draft of the Framework as it would have been impossible to build in the final Framework due to its release in December 2013 – let’s look at this again in 2014 and compare.
    I am enthused by the progress.

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