Integrated Reporting (IR) provides a range of information that will presented concisely in a way that it demonstrates the interdependencies regarding relevant information about the organization’s strategy, business model and the context in which the organization operates. Besides, IR can defined more holistically (historic performance) by reference to standard financial metrics and lastly, as an information that allow users to understand the pressures better (including risk) and achieve those performance measures and the sustainability of the business in short-term, medium and longer term.
In addition, focusing not only the financial but also the social and environmental impact of an organisation is increasingly requested by both the investor community and a variety of other stakeholders, such as NGOs, customers, suppliers and new recruits. From the research by PwC, the current reporting model is not able to fulfil these demands. While in many countries corporations are required by law to include significant non-financial information in their reports, this information is often not provided in a coherent way with a clear link between economic drivers, financial information, and social and environmental impacts.
PwC predicts that in the future, the success of companies will depend more and more on their ability to create value without depleting resources of any kind, whether natural, social, human or financial. Meanwhile the stakeholders will increasingly look for information on how companies connect their business strategy with their financial and non-financial performance.
Hence, companies that engage with IR will have a greater access to and transparency of information from a wide range of both internal and external information sources, through integrated processes and the standard of information and able to streamlined their reporting through more reuse of reporting elements, transparency and collaboration on reporting, and analytical concepts used by both internal and external analysts.
Besides, more relevant and understandable information are available for management and stakeholders to enable better decision-making, better allocation of capital and other resources. In addition, it helps the companies to have a better access to capital markets and business partners. Lastly, it improves the competitive advantage through cost savings, operational efficiencies and differentiation. To conclude, IR able to give companies a much clearer picture of their industry, markets and broader environment as well as how to change products and services, business models and positioning to remain sustainable.
From the research of Accounting Today in July/August edition in year 2014, Malaysian companies have not yet fully adopt with integrated reporting (IR) as their choices of reporting. According to ‘The state of integrated reporting in Malaysia’, PwC Malaysia’s analysis of Bursa Malaysia’s top 30 companies’ annual reports against the Integrated Reporting Framework, Malaysian businesses have the basics of reporting covered but they still have a long way to go to truly embrace IR.
Besides, the report from the International Integrated Reporting Council (IIRC)’s found that most of the companies already disclose some of their key elements but however they are still lack of linkage between the elements, where stems from siloes reporting and too much focus on describing the process rather than providing insight. Basically, IR aims is to achieve an “integrated thinking” mindset, as it is a process where companies report on inputs beyond just financial inputs, and focus more on outcomes rather than outputs.
Sridharan (Sri) Nair, the managing partner of PwC Malaysia said that “while there is a growing awareness of integrated reporting among companies in Malaysia, many companies still do not fully appreciate the value it brings to their business. Some may still view it as a compliance-driven add-on which results in more work when preparing their reports”. Besides, the nature of IR itself captures on how the companies will create value tangibly and intangibly over time, which allows the companies to communicate their true worth to their stakeholders. Moreover, it is a significant competitive advantage, which helps companies to focus on true value drivers of their business and articulate their own story instead of allowing the market to define the narration.
For the state of IR in Malaysia, Integrated Reporting Framework suggests that their company report should include these following key elements: organizational overview and external environment, strategy and resource allocation, business model, opportunities and risks, governance, performance and future outlook. “According to PwC analysis, 90% of the companies provide a high level strategic vision but only 33% of the companies include their strategic priorities information in their annual report. Companies growth shows that only 20% of them response to the market trends. 43% include their term of business model but only 7% were explicitly link the model towards the value creation. Only 10% provide insight on corporate governance activities, and 27% report their principal risk. Meanwhile, it is only 40% that linked their key performance indicators (KPIs) to their strategy”.
All of these analysis, shows that how weak are companies in Malaysia imposing IR in their reporting. Hence, as a stepping stone, PwC begin to identify the most critical non-financial risks and opportunities which will form the basis for the company’s value creation. Besides companies shall translate these non-financial factors into a quantifiable format to help track and compare performance over time. These indicators shall distinct between short-term, medium and long-term priorities. Lastly, the company planning need to reflect what the company wants to achieve within their timeframes and their explicit details should be supported and reflected in the company’s mission statement, strategy, KPIs and targets by the stakeholders and it must create value to them.
First of all, we need to know why we need integrated reporting.
The main reason is that capital markets need the right information to be delivered at the right time in the right format and the content that the markets want and believe in. IR also allows capital markets to better understand a company’s performance and strategy planning. In order to bring greater consistency and reliability in the company by taking the first steps toward better business reporting. Through Integrated Reporting, business reporting can improved by efficient capital allocation, streamlined reporting processes, reduced reporting costs and enhanced organizational clarity in terms of business strategy and the business model. The most immediate advantages of a better manage company caused by taking more understanding view of the relationships between financial performance and nonfinancial performance. If investor were being proactive in asking for information regarding financial and nonfinancial performance, IR can help companies in answering investor by creating sustainable strategies that enable them to create value for shareholders as well while contributing to a sustainable society.
By referring to Integrated Reporting – Performance insight through Better Business Reporting – Issue 1 of KPMG, South African organizations have shown a positive start in the adoption of Integrated Reporting. They have seen the clear benefits in adopting the principles of IR. But full implementation could take three to five years for many organizations, so which they need take more time achieve this new reporting style. Many companies in South Africa feel that these principles have helped them better understand and manage the IR business. Implementation of IR is not a single event because it may require organizational change at all levels and challenges that will need to be overcome include the efficient gathering of non-financial information.
Theoretical concepts or integrated reporting principles that are embedded in the Mazars Insurers Reports:
i. Strategic focus and future orientation.
An IR should provide comprehensive information and insight into the organization’s strategy, future outlook and the effects on the capitals. If these elements are partially covered in the current financial report, then they are often not developed or simply mentioned in traditional CSR reports. According to The International Integrated Reporting Council (IIRC), adopting a strategic focus and future orientation includes clearly articulating how the continued availability, quality and affordability of significant capitals contribute to the organization’s ability to achieve its strategic objectives in the future and create value.
ii. Connectivity of the information
This area of improvement more concerns inter-relatedness between the factors that affect the organization’s ability to create value in future time. More integrated thinking is needed to embed into an organization’s operation to create more connectivity of information flow into management reporting, analysis and decision making. According to The International Integrated Reporting Council (IIRC), the key forms of connectivity of information include the connectivity between the content elements, the past, current and future information, the capitals of the company, financial information, quantitative and qualitative information, management information, board information and information reported externally, information in the integrated report, information in the organization’s other communications, and information from other sources. The connectivity of information and the overall usefulness of an IR is enhanced when it is logically structured, well presented, written in clear and understandable.
From Mazars Insurers Reports, material information is relevant information regarding anything that has a remarkable impact on the value creation process of the company, and therefore, is likely to interest stakeholders. The materiality determination process is important in preparing and presenting IR. First, we need to identify the relevant matters which have effects on the company’s ability to create value. Next, not all relevant matters are material, so we need to evaluate the importance and prioritizing important matters. Lastly, information to disclose need to determine and also the reporting boundary which related to the financial reporting entity and risks, opportunities and outcomes that companies might be facing.
iv. Conciseness and readability
Integrated reports distinguish themselves by the IR conciseness and the clarity of the IR content. This principle can be related to the materiality principle which companies only focus on significant matters. An integrated report includes sufficient content to understand the company’s strategy, governance, performance and prospects without any less relevant information.
CSR in Malaysia received influence from the west as more multinational companies are formed, corporate contributions became more structured and link to corporate strategy. Frameworks for implementation of CSR initiatives were developed by Malaysia government’s increasing focus on CSR.
From Ruth Yap: Corporate Social Responsibility in Malaysia. It became compulsory for companies listed on Bursa Malaysia to disclose the (IR) CSR activities or practices in the year 2007. The idea of CSR was expanded even further as the government Introduced tax incentives to businesses that implement broad CSR programs. Most of the companies are also eager to have their brand name mentioned by the press, which are not actually committed to the CSR programs. Bursa Malaysia noted this problem has since then called for long-term programs with increased levels of involvement and performance measurement rather than individual donations.
Let’s compare Malaysia with developed country like Japan. Japanese companies in Malaysia have been involved with various CSR activities over the years. Companies such as Toyota, Nippon Paint, Fujitsu and Sony are putting on-going CSR effort to promote environmental conservation through education. All these CSR programs by Japanese related corporations have been received and accepted well by the local people in Malaysia. The relationship between Japan and Malaysia has strengthened over the years. Advanced technology, good values and work ethics of the Japanese Society is absorbed and transfer to Malaysia. It is hoped that Malaysia will one day be able to achieve the status of a developed country with the assistance of Japan.
Next, we talk about another developing country, Philippine. By referring to Lala Rimando: How CSR evolving in the Philippines, most of the CSR activities is still mainly philanthropy and event-driven, but employee volunteerism has become more important in the CSR designs. Companies in Philippines still are mainly putting efforts on environment sector because top management still support and push on it. Due to the poor and traditional communication skill, the results assessment of the CSR project is weak and need for further improvement. Moreover, the main motivation for companies to engage in, report, and communicate about their CSR is “Goodwill”, but business economics in the Philippines are more motivating in financial support.
After comparing with Japan and Philippines, the companies in developed countries like Japan is more affordable to enhance environmental prospect and well planned in conducting CSR. Developing countries like Malaysia and Philippines, the focus will be more on company strategy so that CSR is conducted to enhance the strategy plan. Many companies scored very low in the environmental domain in Bursa Malaysia’s survey of listed companies. CSR activities aimed at preserving that environment do not give as much weight in Malaysia as the environment has been secondary compared to the economic benefit of businesses.
The International Integrated Reporting Council (IIRC) which is a global coalition for the regulators, investors, companies, standard setters, the accounting profession and NGOs. Then the bodies and the parties around the world who have the interested at the companies will communicate about the value creation in the companies and thus the evolution of corporate integrated reporting and it go beyond the financial information. It enables us to explore a broader area and the view in decision making situation for the focus on accounting information towards stakeholders’ need. There are few shortcomings or weaknesses in integrated reporting in general. The shortcomings in the reporting have given hint to us to improve the integrated reporting in the future for the better information to stakeholders of the company. We need to know that the clear communication, greater exposure of the transparency and a broader view of the value businesses bring to society is the most important part in presenting the integrated report of the companies.
The process of Integrated Reporting help the report’s user to expose to the integrated thinking that results in a periodic integrated report by an organization about value creation over time and related communications regarding aspects of value creation.
In the Mazars Report, we can find out that there are certain weaknesses or shortcomings in integrated reporting nowadays. Firstly, it is hard to quantify and evaluate the performance of the companies. As we know that, some of companies try to associate pre-financial key performance indicators to major issues faced by the organization. Furthermore, the integrated reporting are vary from one companies to another in term of their strategy and the choices on typology of information disclosed.
Besides that, the weakness of risk and opportunities disclosure or information in the integrated reporting should be improved. The stakeholders or any user of the report find that it is hard to get or lack of the details of critical analysis and mitigations measures. Next, the connection of strategy and resource allocation plans is still in improving as we can see this content in the integrated reporting only obtained the score of 2. Thus this will become one of the weaknesses in the integrated reporting in the Mazars Report.
According to the Australia-based analyst, Tanya Branwhite who has made the opinions of the integrated reporting which was obscured the true financial performance of the business as the increasing in theoretical approach. Then the increasing in applying the theoretical approach due to the frequent in revising and changing in accounting standards by International Accounting Standards Board (IASB). In the article, we can realise that the increasing in complexity that the financial information for example, off‐balance sheet accounting, financial instruments, valuation of mark‐to‐market, and other issues which have been introduced into the financial reporting. The complexity of the integrated reporting make the stakeholders or investors hard to understand the financial performance of a business and they even need to spend more time in interpreting of what is being reported in making the financial decision.
Due to the complexity of the reporting, the companies’ integrated reporting is not necessarily standardized and consistent in presenting the true operating performance of the business. Besides that, it makes the users or investors hard to compare across the industries and companies in the market in making the investment decision. So they may not be able to see the true position of each company and make the wisest decision at the crucial time due to incomparable.
Based on the opinions from Paul Druckman, we should focus on what our shareholders and stakeholders’ need so we need to give a truer and full picture of what is happening in the company through the integrated reporting. Thus we should reduce the burden, size and complexity in integrated reporting as it will be more effective in communicating a broad picture of and organisation’s long term value.
The International Integrated Reporting Council (IIRC) defines integrated reporting as “a process that results in communication by an organization and it show the periodic integrated report vividly. Integrated reporting will identify and have an overview on the strategy, corporate governance, performance, and prospects of the respective company that will lead it to the creation of value over the short-term, medium and long-term.” which is in the point of view of PwC.
We, policy makers, non-government organizations, professional bodies and companies are supported by our business and the investors who have the interested at our business and willing to invest and finance us in order to sustain the business. So we are in the effort to build the evidence base and thus ensure the integrated reporting are worth for them to look at and place it at the heart of the evolution of corporate reporting. There are certain ways forward to place it in the heart of the business society.
According to the Mr. Druckman, there are few reasons why it is so part and parcel for the companies and the investors to pay attention on integrated reporting. The reasons will be the major ways forward to place the “IR” within the heart of the business society. Firstly, integrated report leads to integrated thinking which means that IR may help in looking into the business and connection of the business and strategy as a whole. Then stakeholders are rarely silent which mean that the stakeholders may be the most powerful when the companies need the help in certain economic situation. Thus, IR should be transparency and the stakeholders may help in mitigating the risk. Integrated reporting needs integrated communication. Then only IR can help in communicating with the stakeholders, shareholders and customer.
The issue of social contract will be one of the major forces in placing IR within the heart of the business society. Social contracts which is the expectation of the shareholders, stakeholders, customers and society on a business of the companies can provide the best and their needs to them. So the companies have the responsibilities and accountabilities on disclosing and informing what they had done and how they do through integrated report. To be sustained in the future, the companies need to provide a true and fair integrated report to the public or interested users.
Besides that, to place the integrated reporting within the heart of the business in the society, you need to understand the drivers that affect you, now and in the future. We also need to understand the key issues that the investors and shareholders look at. Then we need to be able to provide a fuller assessment of non-financial performance alongside financial reporting which will be beneficial to the interested parties. Then, the companies also need to highlight the significant events that are happened in the business and the material issues either in terms of non-financial or financial data. The companies also need to be alert to their strengths, weaknesses; opportunity and threats surround the business. So they need to always be ready to prepare for the changes in strategy of the business to be able to put IR within the heart of the business society. After that, you also need to take time to prepare for the integrated report and communicate it internally and externally.
Finally, the companies need to be aware of the limits, benefits and cost of integrated reporting. This will be the major way forward for policy makers, non-government organizations, professional bodies and companies to consider in placing Integrated Reporting within the heart of the business society.
...(download the rest of the essay above)