Making the case for integrated reporting

This article as first published in the January 2016 China edition of Accounting and Business magazine.

A report on a recent benchmarking exercise by PwC Malaysia has found that only a small number of top Malaysian public listed companies (PLCs) have made a concerted effort to improve their corporate reporting and embed content from the Integrated Reporting (IR) Framework into their businesses.

According to PwC Malaysia’s assurance leader Pauline Ho, who led the benchmarking exercise, which surveyed Bursa Malaysia’s top 50 companies: ‘These are the companies that will start talking more about their strategies and try to link these to their priorities, as well as describe their business model and how this will help deliver value and achieve their objectives over the longer term.’

The IR framework provides companies with a starting point for driving integrated thinking and reporting in an integrated way. Following its issuance in December 2013 by the International Integrated Reporting Council (IIRC), two Malaysian companies, Sime Darby and Felda Global Ventures, publicly announced that they would adopt the IR framework as part of their corporate reporting.

Broad framework

But, says Ho, ‘It will be a while yet before we see more traction…it is a journey. What’s important is that companies look at IR beyond just a mere corporate reporting exercise. While it is called integrated reporting, ultimately it is a framework (not only focused on reporting) and it’s not very prescriptive. There are content elements and guidelines that are recommended with a view to helping companies articulate what their value creation activities are. This will help ensure that their stakeholders will be able to benefit or see the company grow over a period of time.’

IR is the means by which broader value drivers, which are managed internally, are communicated to investors and other stakeholders. It’s meant to provide a more complete picture of a company, and is achieved when it shows how everything links together – for instance, how governance interacts with remuneration and risk, when strategy is designed to capitalise on the opportunities presented by a changing market environment, and when strategic priorities align with key resources, relationships and key performance indicators.

In PwC’s 17th Annual Global CEO Survey, Fit for the Future: Capitalising on global trends, 75% of the CEOs polled said measuring and reporting the total impact of the company’s activities across social, environmental, fiscal and economic dimensions contributes to the long-term success of their organisation. PwC also reported that academic studies are starting to find evidence that issuing an integrated report will positively influence the valuation of a company and make it more likely to attract a longer-term investor base. According to PwC, further research by Black Sun, a corporate communications consultancy, shows that companies that have embarked on the IR journey have seen clear benefits, including better understanding of business opportunities and risks, improved decision making and more collaborative thinking about targets and goals by the board and strategy departments.

Closer to home, the Malaysian Institute of Accountants (MIA) has said that IR is a ‘game changer for corporate reporting that enables investors to make informed decisions, and organisations to better attract sustainable capital and financing’.

A chance to gain insight

Ho, who is a member of the MIA’s IR steering committee, notes that ‘When we engage with investors they do say that information currently available in annual reports is very historical, rear-view mirror information. So they do agree that if companies were to share the elements in IR, such as the company’s strategy and resource allocation and governance, and link that to performance, they would be able to gain better insight into the company,’ she says, adding that ‘getting that investor buy-in is important’.

However, progress has been slow. Having analysed the state of corporate reporting of Bursa Malaysia’s top companies over the past two years (top 30 in 2014 and top 50 in 2015), Ho says what’s been consistent in PwC’s benchmarking exercises is that most companies have not even started the IR journey.

‘When we started benchmarking for the first time in July last year, many companies had just heard about IR because it had cropped up in the media and gained some traction at forums organised by the Securities Commission; so companies have heard something, but none said they were doing anything in that regard,’ she says.

Malaysia has yet to make IR compulsory and at this juncture Ho believes it’s unlikely. ‘The MIA recently conducted a survey with ACCA and one of the questions posed was if IR should be mandated; it would be interesting to see the results for that,’ says Ho.

PwC’s study of PLCs showed that historical reporting continued to be the focus, with companies reluctant to provide insight into future plans. It was also found that although there were cosmetic changes to images and fonts, in many cases the content had simply been rolled forward from the previous year. This was especially evident for governance reporting.

‘There’s a lot of description of what’s done based on requirements, as opposed to what the board discusses, the risks the company faces… [Including] this will make a company stand out because it’s specific. When investors read it they understand why the company is focusing on certain areas, what the risks and opportunities associated with these areas are. All this will help the company’s internal alignment as well,’ says Ho.

Another key theme the study uncovered is that silo reporting is still prevalent. PwC concedes that although standalone reporting sections offer good communications and disclosures, there are opportunities to connect this information to other areas of the annual report.

So what is preventing companies from starting on the IR journey? One of the biggest challenges, says Ho, is that they fear they will be giving away competitive information. Another concern is clarity. ‘There is also the issue of conciseness…in terms of how to tell the story in a concise manner, how to distil what is material…that’s a challenge,’ she says, adding that discussion of the material issues that affect stakeholders is a crucial element.

Not a once-a-year exercise

Where companies are keen to embark on IR, PwC believes it has a role to play. As a starting point it recommends a gap assessment. ‘This is to see where they are in terms of reporting, and then we dig deeper to see whether the gaps they have are the result of not having the information or an unwillingness to disclose the information,’ says Ho.

The tool for this exercise has been used in PwC UK for the past 10 years, says Ho. ‘It was introduced as value reporting initially by PwC UK, but many of the concepts are similar to the fundamentals of integrated reporting,’ she explains.

The crucial next step is a roadmap, she continues. ‘This breaks things into modules for companies to think about. For example, in engaging with stakeholders, companies should think about what the material issues for stakeholders are in relation to the company and see how these tie in with its goals,’ she adds.

It’s important to remember, too, that IR is not a once-a-year exercise. ‘To come up with data for an integrated report, you have to be doing it the whole year…so the whole mindset needs to change. You need a change agent to help push that through and there must be buy-in from the top – the CEO and the board must agree that this is a journey they want to take. Otherwise you won’t have the resources and you may find that other departments are not cooperating.

‘But the education process to gather the buy-in is important…someone from the strategy, corporate communications or finance department can be the lead in being that change agent. And even if a company doesn’t come up with an integrated report, the fact that the different departments engage with each other in order to understand each other better and understand how things connect to achieve the overall strategic objectives has its benefits,’ she says.

She adds that when companies embark on the IR journey, more often than not they find that there are gaps in their data collection, and that’s when they start to fix some of those gaps. ‘When they say, “This is my strategy and I have five priorities,” they may not have the right measurement for each of the priorities.

Without putting it down they may not have necessarily thought 
through the process. So it challenges companies to think about what are important measures and when this has been set up, it can be used as a dashboard to monitor how they are doing…after all, to come up with an integrated report the company needs to see how it is doing throughout the year,’ she says.

Ho adds that small and medium enterprises can also gain from preparing an integrated report. ‘Family-owned SMEs will benefit from IR in that when the next generation takes over it will help to know what are the values that are important. And having the strategy to transition to the next generation is also important for the people who work in the company.’

‘But it’s important to remember that IR is not prescriptive. And companies cannot copy other reports because once you copy the report loses its authenticity…you cannot use other people’s story to tell your story,’ she says.

Sreerema Banoo, journalist