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SPECIAL REPORT: The practical challenges of integrated reporting

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Jeff Hubbard highlights the practical challenges of integrated reporting from the point of view of a chief financial officer

I am sure there are not many people who would disagree with the concept of an integrated report  under the aims stated by the IIRC; particularly for organisations that are of public interest.

To preparers, the practical challenge is in embedding the processes of formulating such a report to achieve a balanced view representing the essence of an organisation’s interactions with the various capitals and providing meaningful forward-looking perspectives. In other words, the report should avoid both a “tick box” style and a “one-sided” marketing spin.

My experience is in relation to Liberty Holdings Limited where we have recently completed our fourth integrated annual report. Integrated reporting is still very much in its infancy and we welcomed the release of the International <IR> Framework, issued in December 2013, which provides useful guiding principles.

One of the key practical challenges we continue to face is transitioning a traditional annual report that is focused on financial metrics and related detailed disclosures to a broader report that tells the value creation (or destruction) story of an organisation in an understandable way. Also, accountants love detail and often default to this as an excuse to avoid applying the concept of materiality. Our first integrated report (2010) was over 300 pages including almost 200 pages related to IFRS risk management and financial statement disclosures. We are now planning a report of around 100 pages for the 2014 financial year.

I have summarised below other practical considerations that we have experienced and the related learnings, which hopefully will be of interest to you in your own integrated reporting journey.

WHO SHOULD OWN THE PROJECT OF COMPILING AN INTEGRATED REPORT?

The CFO typically has had the responsibility for the compilation of the annual financial statements, which has generally led to focused teams of CAs(SA) being appointed to fulfil this function. Reporting teams generally run detailed production and oversight processes to meet tight deadlines under the required best governance and accuracy standards. This capability naturally leads to these teams incorporating the challenge of the integrated report (which is the case at Liberty). Interestingly though, preparation of sustainability reports often rests elsewhere, for example with CSI (corporate social investment) executive or stakeholder engagement owners.

To effectively manage the production process of an integrated report, I advocate that one authoritative individual owner be identified. Committee ownership, in my experience, is inefficient and leads to poorer quality and no accountability. I believe this owner should be an executive as the report is ultimately the voice of the board and typically an executive has greater access to board members. In addition, an executive who is exposed to the group’s key business issues is part of the strategy formulation process and has a good financial understanding as an advantage.

CFOs typically fit this role well. However, their natural instinct for detail and a financial bias can detract from “telling the story”. Therefore partnering with all executives in the integrated report process is fundamental.

HOW DO YOU INTERACT WITH THE BOARD?

It’s critical that the board embraces the integrated report as it represents their collective voice, so to speak. Producing a report for a cursory review and approval at the end of a financial year process undermines the essence of the intent and increases the directors’ risk of misreporting. Delegating ownership to a few board members (often the audit committee), whilst practical from a production perspective, should not remove the requirement of interaction with each board member. The chairman of the board should direct the process of engagement. Education is key – at Liberty we utilise planned director information sessions as the forum for this.

Clearly, a well-defined timetable detailing deliverables and dates is very important. Planned regular interaction with all the board sub-committee chairmen in our experience greatly assists in the process. You do, however, have to have a large dose of patience in sifting through multiple views and be receptive to diary change management!

CREDIBILITY OF INFORMATION: THE BALANCE BETWEEN QUALITATIVE VERSUS QUANTITATIVE INFORMATION AND ASSURANCE

The vast majority of financial reported information has for many years been prepared in accordance with an accounting framework (currently IFRS) which has external assurance and is universally understood and accepted. It’s therefore hardly surprising that the requirement for reporting non-financial information brings with it a certain lack of clarity around definitions and assurance. Which metrics to select, should they always be numerical, and to what extent is qualitative information attestable remain largely unresolved from a consistency perspective. Referring to my earlier point around the organisation’s story, this is arguably not necessarily a bad thing – over time the influence integrated reports will have on capital markets will move the direction naturally one way or the other. However, in the meantime, other frameworks such as GRI (G4 Reporting Guidelines) are my suggested defaults to metrics and definitions. My main advice is this: don’t follow the pack and rather focus on what your organisation deems important to measure and comment on – and if the information is not currently either available or reviewed by board governance forums, it can’t be material. Obviously the International <IR> Framework and other frameworks are prompting new thinking and change – however, I recommend that reporting follows when the changes are embedded in day-to-day management.

Assign individual responsibility over metrics consolidation, include non-financial requirements in the financial reporting plan and build systems, where required, to make the process efficient. And  overlay these with logic tests. I am always amazed by the blind faith people have in numbers and not interpreting the meaning thereof and the trend changes.

External assurance should be provided on as many material indicators as practical. However, current external auditing limitations of assurance lead largely to the provision of limited assurance which is questionable in value, in my view. The use of internal audit functions for assurance may provide more comfort in well-governed organisations.

DESIGN AND CONTENT

The old adages of “less is more” and “a picture paints a 1 000 words” (which coincidently is approximately the length of this article) are my top tips.

Reducing the volume of information enables better focus and understanding of the material aspects of the group’s performance, strategy and prospects. Someone once remarked that if you can’t explain your business and value generation in ten minutes, you don’t understand your business.

FORWARD VERSUS BACKWARD INFORMATION

Providing forward-looking information on targets and expected consumption of the various capitals is the main sensitive issue with integrated reporting. And of course there is the restriction on financial forecasts in terms of the JSE’s rules. I am not sure our boards in this country are ready to fully embrace this concept with the perceived vulnerability to themselves and the business.

When management remuneration structures are adapted further to encourage longer-term sustainable value creation, this could be the impetus to providing more forward information.

My advice here is to make absolutely sure the board is comfortable with all forward-looking comments and metrics in the integrated report.

WHO READS THE INTEGRATED REPORT?

At Liberty, the report has been well received by staff members. It appears the business story approach is appealing and the shorter format less intimidating. This has been positive in that our staff better understand the complex business of long-term insurance and the value drivers.

Unfortunately, at this stage we have yet to see noticeable changes in interaction with other stakeholder groups. Slightly surprising appears to be the lack of interest by the regulator and investment analysts. I suspect this is because the information and interaction they receive from other sources is far timelier and currently better meets their respective needs.

Ultimately the test will be what can be derived from the integrated report that distinguishes good companies from poor companies – this is a question we always ask in determining the content of our report.

PLANNING AND CO-ORDINATION

There is one certainty – the quality of the integrated report will be dependent on the extent of planning and coordination. I strongly recommend this should commence immediately the previous reporting cycle ends. Our experience is that compiling the report ends up taking three times longer than you think.

In conclusion, I firmly believe that capital markets in time will reward companies who embrace comprehensive and transparent reporting that leads to no surprises, and increased understanding of the business and its sustainability. I encourage the full adoption of the International <IR> Framework as a credible basis in the ongoing journey of relevant corporate reporting. ❐

Author: Jeff Hubbard CA(SA) is the CFO of  Liberty Holdings Limited

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