The Disclosure Revolution 

The movement toward more integrated transparency begins with integrated thinking.

 

By Brad J. Monterio 

 

 

The first step to integrated reporting begins with the realization that it’s simply the next stage in the evolution of corporate reporting. Much discussion about integrated reporting today is evidenced by blogs, articles, white papers, webinars, conferences, Congressional testimony, regulatory guidance, laws, and more. A Google search reveals more than 6,780,000 current entries on integrated reporting. Topping that list is the International Integrated Reporting Council (IIRC), the London-based organization working to define a globally accepted framework for integrated reporting.

 

IIRC defines integrated reporting as “a new approach to corporate reporting that 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 take more sustainable decisions and enable investors and other stakeholders to understand how an organization is really performing.” Through this lens, one might argue that not only can integrated reporting “help,” but that it also is the responsibility of corporate organizations to share this information with all of their stakeholders so that they grasp the true impact of the company and whether or not it is building economic value.

 

In simpler terms, integrated reporting is at the nexus of financial and nonfinancial reporting and represents the strategic combination of the two. The financial information includes what you might expect: data that indicates the financial and operational performance of the organization. Output from the financial reporting system includes the income statement and balance sheet—very familiar territory for investors, analysts, regulators, media, and the public. Financial reporting is fairly consistent and mature, albeit with some need for better transparency and reliability that is being solved today through the use of the XBRL (eXtensible Business Reporting Language) data standard by regulators around the world, including the U.S. Securities and Exchange Commission.

 

Less familiar and more nascent is nonfinancial information—data about environmental, social, and governance (ESG) practices. What is related and perhaps better known is corporate responsibility, which until more recently, was often undermined by detractors calling it everything from greenwashing to public relations stunts, lacking any meaningful substance or linkage with financial value. But the social role of the corporation is becoming more familiar to stakeholders, along with its neighbors in environmental and governance/risk/compliance practices.

 

Which Came First?
Integrated reporting—and any resulting integrated report(s)—is an outcome of a process. If we begin at the beginning, it starts with integrated thinking. In a December 2011 comment letter submitted by my XBRL committee of the Institute of Management Accountants (IMA) to the IIRC in response to its discussion paper Towards Integrated Reporting—Communicating Value in the 21st Century, we stated, “For integrated reporting to deliver real value to the organization, the process must begin with integrated thinking—a consistent tone at the top, where the board and senior leadership commit to being a sustainable business and following good ESG practices; they define a corporate culture and mission focused on embedding strategies to be sustainable and economically viable for the long term.”

 

For integrated reporting to become a reality, the proper tone and culture must be baked into the company’s DNA—in other words, its leaders have to believe in and do what they say. Stakeholders are perceptive enough to see through any thinly veiled efforts to appear like a responsible corporation; the proof is in a company’s actions. Boards and management teams set the proper tone and lay the foundation for the next steps.

 

Integrated thinking leads to integrated management—the operationalization of the company’s sustainable thinking—as well as the removal of internal silos and barriers to collaboration. Instead of teams such as operations, marketing, sales, and executives working in parallel or even at cross purposes, integrated management means they work collaboratively to reach their goals through integrated processes. Integrating processes, systems, and controls means data is shared accurately and reliably (using the XBRL data standard) across teams for better, more informed decision making. It allows the company to identify, measure, monitor, and report more effectively on operational and ESG practices for internal management reporting as well as external reporting to stakeholders.

 

Better informed decisions lead to better risk management. Better risk management contributes to greater economic value and satisfied stakeholders. Satisfied stakeholders can lead to better communication with the company. Better communication means the company has more insight into material issues from the perspective of its stakeholders. Only when integrated thinking, management, and processes are solidly embedded within the organization can it move to an integrated reporting process and, ultimately, a series of usable, interlinked, or interconnected reports (as opposed to only a single, integrated report).

 

As our IMA comment letter to IIRC continued, “As key stakeholders of any company, analysts and institutional investors today are sending a strong message to CEOs, CFOs, finance professionals, and boards of directors that their nonfinancial performance is just as important in determining their attractiveness to the market as financial metrics. They are looking today for integrated reports—interlinked reports showing operational, supply chain, and ESG data. This is not simply the stapling together of an annual report and a CSR or sustainability report; rather, this is about companies integrating best ESG practices within their internal operations and measuring the performance of their supply chain and providing information on those integrated practices in an aggregated and highly reusable structured data (i.e., XBRL) format. This is not just about the company’s own operational and ESG performance; it is about that of upstream and downstream supply chain participants. The journey toward integrated reporting represents a fundamental shift in a traditional [corporate] reporting paradigm...”



Integrated Reporting in Practice
Right about now, you might be asking: “What companies are doing integrated reports?” Many larger public companies around the world already realize they can gain not only market advantage through integrated reporting, but can achieve greater economic success. One example is Novo Nordisk, the global healthcare company. The company has been conducting integrated reporting well before the topic became hot. Visit the company’s website and look at its interactive online reports.

 

In addition to companies producing integrated reports for competitive reasons, others will make the shift once they are required to do so. For example, some countries have begun voluntary or mandatory integrated reporting programs through securities regulators and stock exchanges. Legislative bodies are also mulling integrated reporting requirements for public companies.

 

Understanding material issues from stakeholders is a crucial part of integrated reporting, but it’s not the only challenge to making it a reality.

 

• Frameworks, best practice, continuous learning, and education are needed. Integrated reporting frameworks and best practices associated with measurements of ESG indicators are needed. Similar to how there are comparability challenges with financial information, nonfinancial measures need to be clearly defined to be useful to stakeholders. XBRL could help ensure comparability of this information.

 

• Simplicity is key. The simplicity of measures and disclosures is another factor to be considered as a framework is developed. Complexity often leads to confusion, inconsistency, lack of understanding, and, ultimately, resistance to implementing an integrated reporting framework. The simplicity of the framework is essential in order to lower barriers to adoption.

 

• Stakeholder engagement goes beyond shareholders. Stakeholders are not limited to just shareholders; they include employees, supply chain partners, community members, regulators, analysts, media, and others. The more engaged these stakeholders are in a company’s practices, and the more companies shift away from one way, monologue-type communications to more of a “multi-logue” approach with these groups, the better the impact on those stakeholders, the environment, community, and marketplace.

 

• Independent verification/assurance builds trust. Independent assurance should be given around integrated reports, particularly where non-financial, ESG type information is concerned. How this will be done is still to be determined, but interest is growing among accountants, since they already provide independent assurance around financial reports.

 

Any transformation confronts obstacles that can be overcome. Although the journey may be long, the question should not be if you will take the first step, but rather when.

 

Brad J. Monterio is a board member of the Institute of Management Accountants and chair of its XBRL Committee. He is also managing director of Colcomgroup, Inc. and an organizational stakeholder of the Global Reporting Initiative. He can be reached at bmonterio@colcomroup.com.