What is the actual value of a business entity? When you’ve been in the annual report business for over two decades this is a question you grapple with every day.
In fact, it was IIRC CEO Richard Howitt who suggested I tell the story of how Smart tackled this problem and developed its own integrated reporting methodology. I am writing that story, but that’s a post for another day.
The International Integrated Reporting Council (IIRC), as you may know, works tirelessly to establish integrated reporting and thinking within mainstream business practice in the public and private sectors. This explains Richard’s interest but his request reminded me that not many people know this story. So here is the brief on our thinking.
It was in the late 90’s that we at Smart, like others in different corners of the world, started realising that only a small fraction of an organisation’s value was captured in its balance sheet. (One of our Chief Officers, Raja Senanayake, has discussed this idea extensively here so I will not digress.) We also saw that the accounts were only a part of the story and didn’t give much of an idea of the future direction of a business. So we started looking at the intangibles… how to identify them, how to measure them and how to report on them. To us, reporting meant, not just the presentation of a simple disparate bunch of non-financial indicators but the telling of a coherent story that looked to the future of the company.
One of our very early attempts in this regard was a supplement on customer capital we carried in the Singer Sri Lanka annual report. This was in 2000 – 17 years ago. It was a story about how this client employed a multi-brand, multi-channel, island-wide strategy and how this was working in terms of growth in customer acquisition, customer retention, penetration of different customer segments, cross selling and so on.
In 2002, 15 years ago, we brought in a chapter called the Business Impact Report in the highly diversified conglomerate Hayleys PLC’s annual report. It took a stakeholder based approach where we reported on the impact that the company was having on its customers, employees, suppliers, business partners and the society and environment. Although it was not labelled as such, this was perhaps the first integrated report from our corner of the world.
At this point we knew that we were onto something important. Without realising it then, we had begun intertwining the sustainability side of the story with the capital formation side of the story. All along we resisted the trend of standalone sustainability reports. In fact our advice to clients was that a standalone sustainability report was contrary to the spirit of sustainability given the extra management time and resources it demanded. Also, it would give the impression that sustainability was something extraneous and not part of the main corporate strategy and management. So, we consistently encouraged clients to discuss sustainability in the main management reviews of the annual report and at best have a short section in the annual report titled ‘sustainability supplement’ to capture the additional bits.
This thinking eventually evolved into the Smart Integrated Reporting MethodologyTM. In 2011, using this methodology, we went on to develop the first annual report which we labelled as an integrated report for a relatively smaller company named DIMO.
We began with the central role of stakeholders who, though external to the firm, are an integral part of the business. Once a client’s most important stakeholders were identified, we encouraged companies to look at both value delivered and value derived. We saw it as the two sides of the same coin.
Value delivered covers everything the company is doing for the benefit of its shareholders, customers, business partners, employees, society and so on. Effectively, it is like the sustainability side of the story. These stakeholders in turn become valuable to the company in driving its future earnings. That’s why they become forms of capital. And that’s the other side of the coin which is value derived.
As the company does not really own these stakeholders, we grouped them as external forms of capital. Then there’s also the internal forms of capital. Mainly: financial capital and institutional capital (such as, brand, systems and processes, ethics, culture, governance, intellectual property, and so on) which are owned or controlled by the company.
With this type of integrated reporting, a separate ‘sustainability report’, becomes an anachronism of the past. This actually makes sense. After all, all key aspects of ‘sustainability’ should be very much business as usual and part of strategic planning and integrated thinking – and reported as such, seamlessly and throughout the integrated annual report.
We also advocate a move away from encyclopaedic annual reports. They waste resources and swamp the reader with clutter. A practical solution in striking a balance between being concise and yet comprehensive is through the optimum use of technology and a judicious mix of the reporting medium – be it paper, plastic, online html, video or even audio.
So far we have helped produce more than 60 integrated reports for clients using the Smart Integrated Reporting MethodologyTM. But this is not the end of our story. The next chapter has already been written and in fact we are already putting it into action.
After taking the trouble to identify a client’s stakeholder groups, we felt it was a shame to present each of them with the traditional printed annual report when in fact most would never open or read through it. So we came up with another innovative product – Annual Report PlusTM.
But that is another story for another day…
Chairman and Founder of Smart Media The Annual Report Company