Innovation Profile: PwC
Creating the thinking corporations of the 21st century
Kevin Egan: “Relevant, reliable and timely information beyond the purely financial is vital if informed decisions about risks, business models, strategies and governance are to be made.”
There is a growing belief in the business world that company reports should go beyond pure financial information and include much more information about all aspects of the organisation’s operations and the impact these have had on performance.
“Relevant, reliable and timely information beyond the purely financial is vital if informed decisions about risks, business models, strategies and governance are to be made,” says PwC assurance practice leader Kevin Egan.
“And research is showing that getting this information and its communication right can secure capital and credit, help win the war for talent, and build trust in businesses.”
Indeed, trust is a central issue in the debate about what has become known as integrated reporting.
“When we look back at the impact of the global financial and economic crises, it is clear that big business needs to rebuild trust not only in relation to the public but also among its stakeholders and providers of capital,” Egan notes.
“This has led businesses and stakeholders to look for a reporting model which goes beyond financial information.”
The limitations of reporting which is confined to financial information are plain to see.
“The reason integrated reporting has gained some momentum is because current reporting is too narrow and at best static or backward looking.
“It addresses historic performance in terms of whether a business made a profit or a loss and if it has created cash or absorbed it.
“ It has very little predictive value and is not very transparent. What is needed is a reporting model which looks at how organisations operate in the short, medium and long terms, and how they make use of different capitals.”
Egan explains the relatively new concept of multiple capitals as it relates to business. “Traditional capital is usually understood as equity, debt, and fixed assets such as buildings, machinery and so on.
“However, organisations should also report on their dependence on and use of human capital, their investment in and protection of intellectual capital, their use of natural capital in terms of natural resources, and their use of social capital – after all, every organisation exists within the society in which it is located.”
By reporting on these various capitals and the interrelationships and interdependencies within them, an organisation can get a much more complete and holistic view of its performance and how it creates value.
This is what lies at the heart of integrated reporting and some of the world’s largest and most influential companies have come together to promote it.
Chaired by former Bank of England governor Mervyn King, the International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs which share the view that communication about businesses’ value creation should be the next step in the evolution of corporate reporting.
The IIRC’s overall objective is to create the globally accepted framework that elicits from organisations material information about their strategy, governance, performance and prospects in a clear, concise and comparable format.
The council’s aim is for integrated reporting to be accepted globally as the corporate reporting norm.
As part of the development of this work 100 businesses from around the world as well as leading investors are taking part in a pilot programme run by the IIRC to test and develop the framework.
“This initiative is built around the notion that good reporting and business strategy go hand in hand,” says Egan. “Integrated reporting aims to improve accountability and company stewardship, and support strategic thinking and decision-making.
“Companies involved in the pilot programme say that they can now better judge the risks and opportunities facing their businesses because integrated reporting facilitates a more holistic way of thinking and managing.
“The organisations involved with the IIRC hope that it will help generate a higher level of investor trust and confidence and ultimately lead to a lower cost of capital.”
According to Egan, the draft framework which has been issued by the IIRC is not a prescriptive formula.
“It’s an overarching set of principles which assist in explaining the complex interdependencies that drive and shape current and future performance.”
The framework doesn’t set out precisely how items are to be reported but says what should be included.
A typical integrated report might involve information on the structure of the organisation, its governance, the opportunities open to it, the risks facing it, its strategy for availing of the opportunities and mitigating risk, and how it allocates resources.
All of that information is then brought together in a report on the business model adopted to drive future performance and value creation.
“This is not really a new idea,” Egan points out. “People have been talking about things like this for quite some time. After all, greater understanding of and focus on key performance indicators, along with better quality data collection, will lead to better business decisions.
“Of course there will be some resistance to it. Organisations will have concerns about how much transparency is appropriate. There is also the question of how comfortable they will be with providing forward-looking information that they think might be useful to competitors.
“But in most instances competitors will already be aware of the issues that might be included in an integrated report and more transparency, particularly for the providers of financial capital, may help lower the cost of capital over time.
“There is reason to believe that the whole concept of integrated reporting will now start to move at pace and we will see it being adopted by more and more organisations.
“It will certainly make annual reports more usable and accessible and, hopefully, make for better managed more intelligent corporations.”