This article was first published in the July/August UK edition of Accounting and Business magazine.
It’s less than eight years since Gordon Brown, then chancellor, binned the idea of a statutory operating and financial review for quoted companies because it would amount to gold-plating an EU directive. Yet pressure to add to narrative reporting requirements has never abated.
The financial crisis amplified demands for people and the planet to receive as much attention as profits. Calls for additional disclosures have come not only at national level but now, ambitiously, through the International Integrated Reporting Council.
As an advocate of enlightened shareholder value, I believe it makes no sense for a business to annoy its customers, employees or suppliers, break the law or poison the environment. Yet companies should not be used as vehicles for public policy and some of the integrated reporting (IR) rhetoric strays into this zone.
But if the clamour cannot be silenced, then the proposed international IR framework has some advantages. It could harmonise the approach to non-financial reporting, taking in other work on narrative reporting, directors’ stewardship and shareholder engagement.
The checklist of questions an integrated report should answer reads like a director’s handbook. The emphasis on a forward-looking and unbiased view is welcome, as is the attempt to connect the dots between financial and non-financial reporting. But 38 pages of exhortation are bound to contain things that will confuse business purpose and make an entrepreneur’s heart sink.
Most irritating of all is the first of the portentous ‘fundamental concepts’, the six ‘capitals’. Life is much simpler if the word ‘capital’ is applied only to the financial variety, which funds the purchase or creation of other assets – including human ones. Here capital is muddled up with equipment, inventory and relationships with suppliers. It also extends to things the company cannot control – nebulous other capitals that ‘belong to stakeholders or to society’. The stress on public interests sometimes belies the statement that providers of capital are the primary audience.
It is also odd that the business model is narrowly depicted as a series of inputs and outputs, like a sausage machine. Where is the understanding that, first, an entrepreneur must identify a demand for sausages and then work out how to supply them at a competitive but profitable price?
Businesses come in many varieties: industrial or service, cyclical or not, mature or immature, fee-based or asset-based. All present specific risks and opportunities that investors do indeed want to hear about. But is it really best to explain this via a complicated matrix of contrived capitals, with internal and external effects, over multiple time horizons?
The six guiding principles are more straightforward and rightly have strategy and the ‘value creation story’ at the top. But some of the detailed requirements are not realistic. Take the disclosure of ‘material trade-offs’. Is a budget carrier really going to say ‘we will get away with irritating our customers so long as our flights are cheap and we don’t crash’? Dream on.
Nevertheless, IR can reach some of the parts financial statements cannot, including an explanation of factors that create or destroy intangible value.
A stripped-down version of the IR framework would have its uses for companies and investors. As it happens, much of the guidance already exists in company law and numerous documents on stewardship and narrative reporting. That includes the rather good OFR guide that Brown dismissed but the UK Accounting Standards Board still published.
Jane Fuller is former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation think-tank