Integrated reporting encompasses a broad, interconnected, and forward-looking set of information, and promotes more effective decision-making with a view to developing more resilient businesses.
The concept is relevant in a changing business landscape, in which intangible assets account for an increasing proportion of companies’ market value, rendering traditional reporting methods less effective in providing an accurate picture of performance.
Yet many companies have not adopted integrated or nonfinancial reporting.
Here are a few ways companies can adopt integrated thinking and decision-making processes that are fundamental to the creation of an integrated report:
Understand what value means in the context of the organisation and how its business model creates value. A clear description of the business model is essential. Start by identifying key inputs, activities, outputs, and outcomes. Which financial and non-financial resources and relationships are material to the long-term success of the business in terms of value creation? Think broadly, not just about relationships within your supply chain, but about anything you need to maximise customer experience. For example, a mobile app provider may have a direct relationship with the host platform, but it is also dependent upon the functioning of the wider mobile telephony infrastructure. This knowledge helps companies understand the potential impact any change in the future availability of these key inputs might have on their activities.
Develop a clear explanation of the positive and negative impact of trends shaping the company’s current and future operating environment across the different types of capital defined by the International Integrated Reporting Council: financial, manufactured, social and relationship, intellectual, natural, and human.
Identify non-financial metrics that are significant to the success of the business, gather reliable data, conduct meaningful analysis, and report this information to the board as prominently as the key financial metrics. For instance, a property company may disclose the size of its portfolio and any property market trends that might affect the business in the near future.
Relate non-financial metrics to the long-term financial success of the business. Explain why the non-financial factor being measured is important. For instance, training of staff — providing motivating career prospects alongside diversity and inclusion policies — helps to promote a positive working environment that helps to generate more motivated and engaged employees. Such employees are likely to provide a higher level of customer service, leading to greater customer loyalty, improved reputation, new customers, and increased revenues.
Demonstrate to the board linkages between strategy, strategic objectives, performance, risk, and incentives across financial and non-financial information. It’s vital that the whole board, not just the executive members, understands how performance relates to the objectives, how risk relates to performance, as well as the extent to which incentive schemes are geared towards promoting those strategic objectives, creating a virtuous circle.
Be holistic in terms of what you report, and focus on the interconnectivity of different elements. Integrated thinking involves gathering and reporting this information to the board in the first instance. Good internal reporting drives better decision-making, which allows you to report externally in a more integrated way. The external report should provide highlights of what the board has spent its time discussing.
Nick Topazio is head of corporate reporting research at the Chartered Institute of Management Accountants.
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For more best practices on integrated reporting, download Integrated Thinking: The Next Step in Integrated Reporting.