Peter Shergold | CSI blog

In a previous blog I talked about the importance of qualitative attempts by nations to measure the good life.  It was courageous, I thought, to write about statistics.  Today I’m going to address the issue of integrated reporting.  Braver still, I suspect.  I risk becoming the boring bloke who stands between you and the drinks fridge at a party.

I do so because the issue is fundamental to how companies measure, and report upon, their ability to create and sustain value – not just economic and financial but social, environmental and governance factors.  It’s an idea whose time has come.  Below the radar, the reporting framework for companies is set to change.

I sit on the board of a publicly-listed company.  I know, having to read every page, how long, detailed and complex the Annual Report has become.  Much of its arcane nature is driven by regulatory requirements.  Presentation of strategy tends to get lost behind dense technical jargon.

It’s hard to tell our story in an engaging and informative manner to our shareholders, policyholders and stakeholders.  The narrative gets buried in the voluminous financial statements and their detailed explanatory notes.  Like many companies we end up employing workarounds, providing an alternate measure of ‘underlying profit’ that we believe is a better measure of our corporate performance over time.  The financial reporting predominantly looks backwards:  non-executive directors like myself are only too well aware that discussing future prospects gives rise to potential legal liabilities.

Company reporting, then, tends to be extensive but partial.  It is commonplace that documents on corporate citizenship, social responsibility or sustainability are issued separately from the Annual Report.  The measures of performance are then selected from a widening array of reporting vehicles – from the Global Reporting Initiative framework to the London Benchmarking Group.  This gives rise to three problems.

First, it perpetuates the belief that the reporting measures of societal or environmental value may be chosen to present a company’s performance in the best light.

Second, it suggests that community benefit or sustainability initiatives are simply well-meaning (or self-serving) bolt-ons to the real business of the business presented in the Annual Report.

Third, as Helen Brand, the President of the Association of Chartered Certified Accountants has blogged, “Presenting the information separately, in silos, makes it difficult to build up an overall picture of a business’ long-term value …  We need an integrated approach to reporting.”

Thankfully, a move is underway to do just that:  to streamline company reporting, reduce its costs and – most importantly – provide a clearer picture of organisational performance.  The International Integrated Reporting Committee (IIRC) was set up in 2010 by a large group of distinguished corporate, regulatory, academic and civil society leaders to design a more comprehensive but flexible reporting framework.

The IIRC’s mission is to find ways to better communicate the total value that companies create.  To do so it is necessary to make transparent the six ‘capitals’ on which a company depends (financial, manufactured, human, intellectual, natural and social) and to explain how they are assessed and deployed in a strategic manner.  Among the guiding principles of integrated reporting are the connectivity of information, its future orientation, stakeholder inclusiveness and commitment to conciseness, reliability and materiality.

According to Goran Tidstrom, President of the International Federation of Accountants (and a member of the IIRC), “Financial information is not sufficient.  We have to provide information on sustainability, on social issues and environment, and it has to be done in an integrated way with a financial report.”  Here’s how.

Social capital reporting is meant to recognise a company’s social licence to operate, including the corporate values and behaviours that prevail;  how relationships are conducted with customers, suppliers and business partners;  and the extent to which the business enhances individual and collective wellbeing.

Natural capital reporting is intended to exhibit how a company’s activities impact, positively or negatively, on the ecosystem – water, land, minerals, forests and biodiversity. 

Human capital reporting is designed to capture the alignment of a company’s ethical values and governance framework including, for example, how human rights are recognised.

The IIRC has now issued a comprehensive Discussion Paper on its ambitions.  It’s a good read.

The good news is that some Australian innovators are not waiting.  The new cooperative bank, bankmecu, has already announced that it is to work with the Net Balance Foundation to develop an integrated reporting framework for its 2011-12 Annual Report.  At the bigger end of town NAB’s Annual Report for 2011 already includes a significant section on corporate responsibility as an integral part of its business strategy.

Accounting and applied statistics can seem to be dull disciplines.  The truth is that unless we can measure and report upon the value of social and environmental good created by companies effectively, the momentum for them to create ‘shared’ economic and societal value is likely to slow.  That, at least, is my perspective.  I’d welcome your views.

Peter Shergold is the Macquarie Group Foundation Professor at the Centre for Social Impact (CSI) at UNSW. This blog post first appeared on the CSI blog.