How companies create long term value for their shareholders is made clearer with integrated reporting

Nick Ridehalgh, Partner, CFO Advisory

Integrated reporting has taken a lot longer to emerge in Australia than in many parts of the world.

But a KPMG report, ASX 200 Corporate Reporting in Australia, suggests the tide may finally be turning.

A quarter of the country’s 200 biggest companies now use the principles of integrated reporting – in which they explain how long-term value is created – in their financial communications.

The report – now in its fourth edition – reveals a significant rise in companies moving away from just detailing past financial performance in their 2017 annual reports, and instead describing how their boards and management are working to create sustainable value for investors and other stakeholders.

In 2017, we have seen steady progress in companies adopting the principle of integrated reporting – 25 percent up from about 14 percent a year ago.

With integrated reporting, companies provide more detail and clarity over the broader health of the organisation and the challenges and opportunities it faces in the future, rather than just a summary and discussion on historic financial results. Integrated reports provide a clearer understanding of how the organisation creates and preserves sustainable value focusing on governance, resource use and exposure, short, medium and longer term risk to value and how they are being addressed as well as strategic performance and future outlook.

In traditional reports, the reader is not given sufficient information to assess a company’s ability to execute its strategy in the future and whether past earnings are likely to be sustainable in the medium to long term.

There has been a groundswell of movement over the past 12 months – the Australian Institute of Company Directors now support the principles of integrated reporting. The G100 has been supportive for quite a while.

But crucially Australian investors have started to join their international counterparts in recognising the importance of integrated reporting in their capital allocation decisions. This includes Cbus and VicSuper. Investment association ACSI are also strongly in favour.

We are still a long way behind other countries – globally, 1,600 companies now prepare integrated reports. The International Integrated Reporting Council believes, globally, we now are moving from ‘break-through’ to ‘adoption’ phase.

There is an increasing global trend, as promoted by the investor-led International Corporate Governance Network, that integrated reporting is a key tool of good corporate governance and effective investor stewardship.

While many of these overseas companies are adopting the full model of the IIRC, the Australian examples tend to use the IIRC’s integrated reporting principles rather than full compliance with the framework.

But either way, it is encouraging that more Australian companies are providing evidence in their 2017 reports of improved internal strategic alignment and better engagement with customers, employees and other stakeholders arising from integrated reporting.

Some findings of the report include:

  • Over 50 percent of organisations have moved on from purely talking about financial position and performance, and are now also including narrative disclosure on non-financial performance. But mostly this is without specifically connecting it to strategy or strategic objectives – the leading reporters are also showing performance against targets, budgets and using measurable KPIs.
  • 78 percent include a high-level discussion of strategy, giving an idea of where the organisation is heading in the short and/or medium term. This year 12 percent of organisations disclosed specific objectives which underpin their high level strategies to give the reader insight into how they intend to deploy their strategy.
  • 70 percent of organisations are now identifying their material business risks as well as explaining how they are being managed or mitigated by the organisation, including 3 percent who are connecting the risks to other parts of the report.

While it is encouraging to see a majority detailing their key business risks, we now need to see more following the leading reporters. Those organisations show the alignment of material business risks to strategic objectives, key value drivers and the concerns of stakeholders, which were identified through the organisation’s stakeholder engagement process.

That is the essence of real integrated reporting and that is where we need to ultimately get to.

The report also shows that over 75 percent of the ASX200 have ‘cut the clutter’ in their financial reports – removing immaterial information and restructuring reports to make them clearer for users. This is up from 58 percent a year ago but really should now be regarded as the starting point on a move to better business reporting.

We strongly encourage all companies to consider how they can further improve their reporting and move towards integrated reporting, adopting a more strategic focus, with business benefits in mind.

Add Comment