Integrated reporting represents the future of how companies will report financial and non-financial performance, and the companies that quickly move to adopt this practice will enjoy a reputational advantage across a variety of public audiences. Moreover, the level of public engagement required by integrated reporting will help companies better manage risk and adapt to the rapidly changing nature of how news and information is shared.
No longer are companies solely expected to turn a profit. Rather, companies must show how they are able to create sustainable value. The only way for a company to demonstrate sustainable value is by communicating that it is acting in a responsible manner and that it has the resources — financial, human, reputational, supply chain, etc. — to meet today’s demands without jeopardizing its ability to generate future profits.
Key to those communications is the demonstration of how value creation is part of the daily operations of the company. As Harvard Business School Professor Robert Eccles says, “If you really think that how you’re managing environmental, social and governance issues is at the core of what you do, if those things are core to how you create value, you need to explain [those efforts]. It’s not, ‘here’s my financial report and here’s my green strategy.’ Or, ‘here’s my financial report and here are my human rights policies.’
Integrated means that you’re not thinking of these larger efforts as simply an appendage, but in terms of how they support the company’s value creation strategy” (Get Ready: Mandated Integrated Reporting Is The Future of Corporate Reporting, MIT Sloan Management Review, March 13, 2012).
The only way to communicate how all of those larger efforts drive value creation is through an integrated report. According to the International Integrated Reporting Committee: “Integrated Reporting demonstrates the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, Integrated Reporting can help business to make more sustainable decisions and enable investors and other stakeholders to understand how an organization is really performing.”
Conversely, Deloitte recently published a very insightful paper entitled “Integrated Reporting: A Better View?” that, among other things, mentioned what integrated reporting is NOT:
• An accounting of trees saved, carbon offsets purchased, or funds donated;
• Reporting for reporting’s sake;
• A sustainability report appended to a financial report; or
• A marketing, advertising, or PR initiative that obscures a more balanced view of the company’s performance (including more negative news).
In other words, an integrated report is a complete and honest assessment of how the company is striving to achieve sustained value creation while promoting its reputation.
There is a reputational advantage for those companies who are early adopters to integrated reporting. Because integrated reporting is in its infancy and there is no recognized framework, those companies that engage in it will have a significant influence on what the framework for integrated reporting will look like. In other words, by acting now, companies will be able to define the terms of the debate, and their competitors will be forced to react and adapt to that.
Moreover, there is a reputational protection element. Integrated reporting is very much a two-way communications process in which threats can be identified before they pose a reputational risk. As Professor Eccles noted in his MIT Sloan Management Review interview, “Integrated reporting is as much about listening as talking. If you look at companies that are really sophisticated at this…engagement is a big part of it.”
That type of two-way engagement is becoming more important than ever because the very nature of communications and news is changing. As Deloitte’s report pointed out: “Today, any number of non-governmental actors can take up an issue and create havoc for a company, especially in the current networked world of Facebook, Twitter, LinkedIn, and other social media.”
To accurately and fully demonstrate value creation in a challenging public environment, companies need to engage with stakeholders in communicating corporate performance, and integrated reporting is the best tool by which to do that.
Robert Ludke is senior vice president, integrated reporting and sustainability, Hill+Knowlton Strategies