Does your corporate reporting help to create value, or is it just another look in the rearview mirror?
Corporate reporting is essential in the effective functioning of the market economy, enabling shareholders and investors to assess the performance of a business across all aspects of activity, establish its value and exercise effective oversight. For capitalism to succeed, our corporate reporting system must be as dynamic as the financial markets themselves. And it can be if those preparing reports recognise the true potential of those reports.
For many organisations, reporting is too focused on past financial performance. But this doesn’t need to be the case. Organisations and finance departments can gain a competitive advantage by not constraining themselves to only reporting what their financial reporting standards dictate.
However, traditional financial reporting fails to fully recognise the value of intangible assets, which are a vital component of long-term value creation. It’s critical for companies to focus on a broad range of resources and relationships when making decisions, and it’s this multi-capital reporting that investors need.
The answer is integrated reporting, which takes a broad view of the interests of the company’s stakeholders and its value creation potential. Short-term value creation indicators are not always tangible or financial in nature but can be manifest in non-financial or intangible ways such as customer satisfaction, reputation, brand loyalty and brand awareness.
Integrated Reporting <IR> has evolved to respond to the need for a new reporting paradigm that reflects the rapidly changing business environment where for many businesses intangible and non-financial assets have become the most important determinants of long term value creation. Thus leading to calls for change in the way businesses report and communicate their value creation stories.
The benefits of <IR>
<IR> can be regarded as just another reporting convention or a different way to meet growing compliance requirements. But <IR> is far more than just a reporting framework. It helps a company:
- Create value – better understand and connect the disparate sources and drivers of long-term value to enable better strategy formulation, decision-making and implementation through their business model.
- Tell your story – of how value is created more effectively, both internally and externally, in a succinct way. This helps organisations win trust and secure their reputation by encouraging better relationships with investors, employees and other stakeholders.
- Contribute to more efficient capital markets:
o CIMA research indicates a positive association between integrated report quality and both stock liquidity and firm value. Furthermore, evidence suggests that the association between integrated report quality and firm value is mainly driven by increasing expected future cash flows.
Furthermore, 12 international institutional investors with US $2 trillion assets under management have confirmed that their investment processes require information on business models, strategy, and the resources on which these rely. They confirm their belief that better reporting on the key resources of a business, which Integrated Reporting can deliver, is important to their understanding of businesses and their allocation of capital. They also believe that the management processes reflected in this reporting can drive the development of more sustainable and stable businesses in the longer term.
The role of an organisation should be to responsibly create value over the short, medium and long term. This requires connectivity across the broad range of resources and relationships (International Integrated Reporting Council (IIRC)’s six capitals) that an organisation utilises to create value. This integrated thinking should be extended to how the value created is shared amongst the various stakeholders in terms of dividends, share price appreciation, interest payments, pay, supplier payments, taxes, community initiatives and charitable donations. <IR>, underpinned by integrated thinking, provides the insight needed across a broader information set while looking to the future, drawing on the organisation’s business model within the context of its external environment.
<IR> is far more than just another reporting framework; it helps organisations create value, tell their story and contribute to more efficient capital markets. Broader, multi-capital reporting is the future of corporate reporting and should be the foundation of internal reporting focused on long-term business success.
If you want to know more about <IR> and integrated thinking, the CGMA Fundamentals of Integrated Reporting Certificate Program can help you understand the benefits of Integrated Reporting for your organization, develop your knowledge of the IIRC’s International Framework and prepare you to successfully implement Integrated Reporting.