Many companies have latched on to the concept of environmental, social, and governance (ESG) reporting and reported back to stakeholders about their commitment to supporting diversity, social, and environmental concerns and more accountable corporate governance.
The International Integrated Reporting Council (IIRC) was founded in 2010 to support the goal of long-term value creation, and the lessons it has learned in that time include the benefits companies realize internally — not just with external stakeholders — by sharing comprehensive information about their value-creation stories, including the increased importance of human and intellectual capital.
The IIRC’s current thinking is encapsulated in The Conference Board’s July 2019 report, The Emergence of Integrated Reporting. Robert Laux, the council’s North American lead, said integrated reporting can help companies tie together the regulatory reporting they have to do for the SEC and other regulators and the ESG reports they produce for stakeholders. At the same time, integrated reporting initiatives can leverage off the existing regulatory reporting infrastructure and give companies more insight into their operations, employees, and intellectual capital.
Laux said he likes to sort a business’s operations among six classes of capital in the Integrated Reporting Framework (IR Framework). Start with the financial and manufactured capital that is the focus of regulatory filings and U.S. GAAP financial statements. Then move on to the social and relationship capital and natural capital that is the focus of ESG reporting. The four capital classes are bridged by two more — the human capital of a company’s workforce and the intellectual capital employees produce.
“Our multicapital framework tries to get you off of the overemphasis of current financial reporting — what’s produced under FASB rules and SEC rules — and have you think a little bit differently about how can you provide information to senior management, the board, and externally about your human capital and about your workforce, their engagement, and their ability to innovate,” Laux said.
“That’s the kind of picture we’re trying to paint with integrated reporting,” he said.
The IIRC report includes the following seven recommendations for companies that have yet to produce integrated reports, about how they may go about developing them.
Get the support of senior management and directors. CEOs and CFOs typically understand the value of integrated reporting and express great interest in getting started, Laux said. Problems creep in on the next couple of rungs down the executive ladder. Chief accounting officers, chief legal counsels, and internal auditors usually grasp the importance of integrated reporting. But they’re already crunched with demands from regulatory compliance and filing deadlines. But if the board and CEO are firm in their commitment, integrated reporting will become a reality.
“You need to have executive support from the top down to really make this happen,” Laux said.
Tell stakeholders your company’s story about its creation of long-term value. Several options are available for integrated reporting, including the IIRC’s format and the guidance on key performance indicators (KPIs) from groups such as the Sustainability Accounting Standards Board and Global Reporting Initiative. The IR Framework lets companies move away from what Laux calls the quarterly-earnings treadmill and helps them focus on creating long-term value.
“Pick and choose what works for you,” he said.
Pick a reporting schedule that’s different from regulatory reporting deadlines. A staggered reporting schedule evens out the annual workload for companies and other reporting entities and helps them plan around their peak times for filing taxes, SEC reports, and other reporting requirements.
“A lot of backlash we get is — once we talk it through — people say, ‘I’m sorry, I just don’t just have time for this,’” Laux said. “People are just inundated with to-do lists.” He advises companies to experiment with different approaches to scheduling the integrated reporting process and assigning the workload before they make a commitment to it.
Develop a new approach to explain the company’s story. Companies can start by reconsidering how they write the management’s discussion and analysis section of their SEC filings. They can also look to the International Accounting Standards Board and its project to develop guidance for management commentary disclosures. SEC officials have been urging companies for years to go beyond the boilerplate commentary that makes up such a large portion of the disclosures within the typical public company filing, and Laux said a number of companies have taken these recommendations to heart.
Identify the company’s key components for creation of long-term value. “How a company creates value is not a simple story,” Laux said. According to the IIRC, an integrated report needs to include “critical elements [that] address the company’s business model, materiality of issues that affect value creation, and stakeholder engagement.” It’s best to provide context, but also keep it concise.
Do not let excessive caution stop you. Some companies are concerned that by trying to do the right thing and inform the public about their value-creation initiatives, they may inadvertently expose themselves to legal claims or reveal confidential information competitors can use. “Of course, you need to consider those,” Laux said. But experience has taught him that the potential risks are far less than some companies fear, and the likely benefits are far greater than those companies may realize.
Don’t underestimate investor interest. “What we hear a lot of times is, ‘Well, who’s asking for this?’” Laux said. “‘If people aren’t asking for it, why should I do it?’”
Laux added that the best companies don’t wait around for a focus group to tell them what their next product should be. “You try to figure out what they really need or what they really want, even though they might not be asking for it right now,” he said. Integrated reporting isn’t all that different.
— Joseph Radigan is a freelance writer based in New York City. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, the JofA’s editorial director, at Kenneth.Tysiac@aicpa-cima.com.