This speech was delivered by our Chief Officer of Process Development, Mr. Raja Senanayake at an event organised by CA Sri Lanka on the 2nd April 2019. The event was titled, Integrated Reporting: Moving Beyond the Basics.
It has been more than five years since IIRC introduced its IR Framework but integrated reporting has been around for quite some time even before. Hence, it is timely that we go beyond “what is integrated reporting” and discuss how we can take it forward or even better, understand why we should take it forward.
Let me start with an interesting observation. A few years back, a big Sri Lankan listed corporate had over 300 references, 312 to be precise, to the words “sustainability” and “sustainable” and a further 65 references to the word “integrated” in its sector winning annual report. Three years later, the company is in a precarious situation. Today, it is not unusual for some of the annual reports to have on average about 100 references to the word “sustainability” in various contexts and about 25 – 50 references to the word “integrated”. What does this tell us about annual reports – particularly integrated annual reports?
Is integrated reporting becoming a panacea for all corporate ills?
Integrated reporting is nothing but communicating that story of creating value for all the stakeholders of a corporate in the short, medium, and long term. If this is so then, an integrated report cannot do anything more than what the corporate’s underlying business model, strategy, governance, and risk management framework deployed to create value are doing.
Let’s admit one thing at the outset. Given the diversity of audiences and their conflicting interests, producing an effective annual report is not easy. Given that too much information, not well told results in the reader being unable to see the wood for the trees remember that at the same time, too little detail, however well told, gives the impression of information being withheld. Report preparers need to strike that delicate balance between compliance and communication.
In the circumstances, I would like to draw your attention to three important things in relation to integrated reporting during this address:
1. Harping on the past is no longer relevant
2. In relation to performance, context and perspective matters a lot
3. Unsubstantiated claims and failure to live by the claims made are likely to jeopardise credibility and sustainability
Let me explore these points in some detail.
Harping on the past is no longer relevant, because it is no longer business as usual.
Given its origins, annual reports are being prepared with a compliance mindset even today. The vast majority of annual reports we see today do a very good job of work when it comes to compliance – the letter of the law. But, can we say the same thing when it comes to communication and the spirit of the law? Perhaps not.
Primarily due to certain external developments, such as globalisation, digitalisation, exponential technologies like AI, robotics, blockchain, and hydrophonics, unorthodox competition and demographic changes, most long-standing and widely held assumptions we had about markets, competition and even business fundamentals are less valid today. No industry will be immune to these developments.
These developments are challenging conventional business models and having a profound impact on their sustainability. It is no longer business as usual. As a result, they are making the historical financial performance of a corporate less relevant for any assurance about its future potential. Future potential has to be evaluated on its own merits. This is because historical performance deals with only the financial value created which is the net outcome of value delivered to the various stakeholders and value derived from them. But, the emerging developments have made the entire story of delivering value to and deriving value from stakeholders important today. Therefore, companies need to report on those initiatives undertaken to deliver value to customers, employees, investors, business partners, regulators, society, and the environment as well as those initiatives they are planning to implement in the future. And, a comprehensive analysis of each stakeholder will help to ascertain the impact of those initiatives which reflects the value derived.
If it’s no longer business as usual, how can the annual report be as usual? A riot of colours and a surfeit of words will not do the job any longer.
This leads to my second point.
As we have never seen or experienced before, context and perspective to performance matters a lot.
In the past, factors that set the context for performance of a corporate were fairly well known. Corporates knew where the competition was likely to come from. There were barriers to entry. Patterns of demand were known. That one- or two-page write up on the operating environment provided the context to performance. It referred to GDP growth, macro economic variables, regulatory developments and so on. However, those emerging developments that I referred to earlier have a much bigger bearing on the business models and sustainability of businesses. Hence, as much as they dictate how a corporate needs to be strategically managed, they now provide the context as to what needs to be reported in annual reports if they are to be relevant and useful.
As an employee of a corporate, each one of you knows the future potential of your organisation. Because you are privy to the context, perspective, and how the corporate is responding to these developments. You know how robust the business model is, you know the capacity to innovate, you know the strategies deployed to counter the emerging challenges, be they collaborations or co-creations. These now define the ability of a firm to create value in the short, medium, and long term. They define the context and perspective to performance. Other stakeholders know only what has been disclosed to them. Unless well informed, there is a gap between the perceived potential by the market participants and the actual potential of the corporate known only to you.
To simply report on historical performance will not inspire confidence among the stakeholders that the company has a clear sense of where it is trying to go and how it will get there.
A number of guiding principles and content elements have been defined in the IIRC Framework in relation to integrated reporting. A few these elements are, business model, strategy, governance, risks and opportunities, resource allocation, stakeholder relationships, interconnectivity etc. These are in fact more valid and relevant in relation to the operations of a corporate and represents integrated thinking. All these terminologies have arisen from the need for corporates to be sustainable. They are in fact pre-conditions or imperatives for being sustainable.
The investment community is now looking for the “what”, “why”, and “how” of a corporate’s story. We need to demonstrate how the company’s strategy is aligned to meet the needs of its diverse stakeholders in the wake of emerging developments that threaten to disrupt the conventional business models.
Integrated reporting is capable of providing that context and perspective.
Pictured L to R: Mr. Asite Talwatte, Chairman, IRCSL, Mr. Raja Senanayake, Head of Process Development, Smart Media The Annual Report Company, Prof. Samanthi Senaratne, Department of Accounting, University of Sri Jayawardenepura, Ms. Ranjani Joseph, Partner, KPMG, and Mr. Hathim Sabry, Senior Manager – Financial Accounting Advisory, Ernst & Young.
Other panelists at the discussion were, Mr. Dilanke Hettiaratchi, Director, Forestpin (Pvt) Ltd, Ms. Aruni Rajakarier, Director, SheConsults (Pvt) Ltd, and Dr. A. A. C. Abeysinghe, Senior Lecturer in Accounting, University of Colombo.
Photo Credit: CA Sri Lanka
Thirdly, unsubstantiated claims and failure to live by the claims are likely to jeopardise the sustainability and the credibility of a corporate.
This means that we need convergence between integrated reporting and integrated thinking. We in fact started the process by putting the cart before the horse. Since what is reported should be what has been done, ideally integrated thinking should have preceded integrated reporting. In fact, the IIRC’s long-term vision is a world in which integrated thinking is embedded within mainstream business practice in the public and private sectors, facilitated by Integrated Reporting (<IR>) as the corporate reporting norm.
But, unfortunately, under continued pressure from the shareholders and the Boards to deliver “15%” more than last year, increasingly, we continue to hear a disturbing trend of unethical, corrupt, and greedy practices even among the top end of the corporates. You may be familiar with the seven deadly sins of greenwashing such as hidden trade-offs, lack of proof, and vagueness in corporate claims on products and in marketing. In the absence of honesty and integrity, the whole stack of cards can come tumbling down. Our recent history is full of examples. The fraudulent deposit accounts scandal at Wells Fargo, the emissions scandal at Volkswagen, the LIBOR scandal at Barclays, Parmalat, WorldCom, and Enron are some recent high profile incidents. Spying, insider trading, accounting, bribery, information leakage… the list goes on. Sri Lanka too has had her share of corporate scandals. All these companies produced annual reports – many produce sustainability reports too. Some are integrated reports. They were “going concerns” in accounting terms. They would have been following rules and regulations at least to the letter of the law. So, what does this signify? There seems to be a disconnect between integrated reporting and integrated thinking.
The applicability of the going concern concept or following rules and regulations to the letter of the law do not any longer guarantee corporate sustainability.
As a result, today, annual reports appear to have unsubstantiated claims and claims that corporates do not live by.
Look at some cliché statements – human resources are our most valuable asset, the customer is at the centre of everything we do, it’s a win-win situation, for the long-term sustainability, thought leaders, out of the box thinking, integrated solutions, best of breed products, best in class processes, user friendly procedures, going green and so on. Sounds familiar? Such statements without quantitative evidence or third party verification have no context and are vague.
For example, a company that states in its annual report that it is customer-centric may still be requiring those customers to sign multiple applications to avail themselves of various products or services, or send SMS after SMS and call after call through the members of the sales force. Where is customer friendliness if I cannot read the terms and conditions of an agreement without a magnifying glass? How can human resource be the most valuable asset if retrenchment is the first option to improve declining corporate performance? How can it be best in class processes if my data privacy is compromised?
Lesson 1 – Substantiate all the claims or run the risk of social media picking them up and doing the damage! Remember anybody can be a stakeholder today!
Lesson 2 – Live by the claims which requires practicing integrated thinking.
Make the annual report relevant. It has a role to play and should work as hard as employees to maintain credibility and sustainability. What do I mean by this? For example building a loyal base of shareholders who will take a long-term view of the business is an imperative for the capital intensive financial services industry today. This can be done only if the corporate has the interests of all its stakeholders at heart.
Based on the facts I shared so far, I would like to conclude with a prediction. That is, unless integrated thinking is practiced by corporates with integrity and in its true spirit, integrated reporting will be misused – to cover up wrongdoings. The annual report is a communication tool and it is very possible that it could end up as the eighth deadly sin of greenwashing! If or when that happens, we all become pimps, prostituting our annual report – trying to make corporates appear whiter than white.
A Chartered Accountant and the Chief Officer Process Development at Smart Media The Annual Report Company