ASX 200: reporting more than financials, Australia edges down the Integrated Reporting pathway
There are some encouraging developments in Australian corporate reporting – but we are still behind other parts of the world.
The third KPMG ASX 200 corporate reporting – evolution and integration publication, just out, shows that well over half of top companies are now ‘cutting the clutter’ from their annual reports.
Immaterial information is being removed, reports re-structured and shortened, and clarity of presentation improved to benefit investors and other users.
The survey found:
- 117 ASX200 companies – up from 68 in 2015 – have ‘cut the clutter’ in their annual reports this year
- 107 companies – up from 55 a year ago – are now including accounting policies with the associated notes, making it easier for investors to assess them
- 105 companies (54 in 2015) grouped notes to accounts into more logical categories
- 61 companies (20 in 2015) have used call-out boxes highlighting key areas of investor interest while 14 (3 last year) included graphs or images to illuminate important points
- The average financial report now has 31 notes and 56 pages – consistent with 2015 but a decrease from 35 and 61 respectively in 2014.
Another area where many companies have been ‘de-cluttering’ their reports, relates to executive remuneration – always an area of keen interest.
While the average length of ASX 200 Remuneration Reports has dropped by only one page this year (17 compared to 18 in 2015) our review shows that many companies are describing more clearly how key management personnel are remunerated in the short, medium, and long-term, including highlighting amounts ‘at risk’. They are specifically discussing how remuneration is linked to key strategic initiatives and re-ordering the disclosures to show a more practical and meaningful flow of information.
We believe it entirely appropriate that metrics – both financial and non-financial – which clearly and demonstrably measure execution of a company’s strategy should form a key part of the basis on which executives are rewarded. That can include issues such as operational effectiveness, customer service experience or achievement of diversity targets – as long as the metrics chosen are core to the organisation’s stated strategy.
But our study shows that as well as de-cluttering annual reports, there are more significant changes afoot.
Organisations such as NAB, Lendlease, VicSuper, Australia Post and Cbus have all moved further along what we call the ‘reporting continuum’. They are showing in their reports how they create long-term value.
Excitingly, for those of us who have been in the vanguard of the international move to integrated reporting, examples are now appearing in Australia either of full integrated reports, or the principles being applied. Significant numbers of companies are using their reports to demonstrate, much more clearly than ever before, the drivers of long-term value creation, rather than just focusing on financial performance.
What does this involve? It means presenting the linkages between business models, strategies, risks, performance and outlook.
The primary purpose of an integrated report is to explain to financial capital providers how an organisation creates value over time. The best way to do so is through a combination of quantitative and qualitative information, which is where the International Integrated Reporting Council’s “six capitals” come in.
The six capitals are stocks of value that are affected or transformed by the activities and outputs of an organisation. The IIRC framework categorises them as financial, manufactured, intellectual, human, social and relationship, and natural. Across these six categories, all the forms of capital an organisation uses or affects should be considered.
An organisation’s business model draws on various capital inputs and shows how its activities transform them into outputs, or value. This can, and should be tailored to the company’s own circumstances – and we are now seeing signs of this happening domestically, as well as overseas. Encouragingly too, we are hearing how investors are increasingly seeing the value of this approach.
We are already looking forward to next year’s report and hope to be able to observe further development of corporate reporting in Australia along these lines.