Prof. Watson: 5 areas of improvement for integrated reports

A fellow adjudicator of EY’s Excellence in Integrated Reporting awards asked me to identify 5 areas where companies should be focussing on in order to improve their integrated reports. This is my response based on my review of the 2014 integrated reports of the 100 largest listed companies and 10 largest state owned companies.

An Expert Insight by Alex Watson - Richard Sonnenberg Professor of Accounting, College of Accounting, University of Cape Town*

1. Business model
While an increasing number of companies have pretty graphics of their business model, there needs to be more focus on the inputs that the business model relies on, and how the business model uses those inputs to produce outputs and outcomes.

2. What is 'value' to the business?
Integrated reporting (IR) is about value creation, or destruction. Very few companies articulate what value they are attempting to create - with those that do, largely referring to generating returns for shareholders. While IR is reporting through the lens of a financial investor that does not imply that the only goal of the company should be to generate financial returns. If the goals of the organisation is to keep the lights on while supporting black economic empowerment, or preserving jobs in the mining sector that should be made clear.

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3. Better information on outcomes
There appears to be significant confusion between 'outputs' and 'outcomes', despite the fact that both terms are defined in the glossary to the IR Framework. Outcomes are consequences or impacts of the business model, and should include negative as well as positive impacts. While there may be outputs and outcomes for each of the six capitals, there is a no direct link to the inputs to the business model e.g. spending money on training staff will reduce financial capital while increasing human capital in the current year.

4. What are the trade-offs in the business model?
While many companies are increasing the level of disclosure of environmental or social outputs or impacts, there is very little disclosure relating to how trade-offs between different capitals influence the strategy of the company. Many companies disclose how much more efficient their production process has become, but there is little or no disclosure of the impact of that efficiency on other capitals. E.g. how much more is the company prepared to pay to use a system that consumes less water, or emits less carbon dioxide? How much value is placed on job losses when deciding whether to mechanise a process?

5. Don't hide the bad news
Hiding the bad news, reduces the credibility and usefulness of the report. This is particularly noticeable in relation to outcomes, where in many cases only positive outcomes or consequences are presented, whereas many positive outcomes have negative outcomes for different capitals. Readers of the report are aware of many of the challenges that companies face, highlighting those indicates that management are giving them the necessary attention.
While we understand that there are many commercial sensitivities, we do believe that companies could do a better job of communicating the factors that decision makers are taking into account.

*Prof. Watson is also editor of various Financial Reporting textbooks, member of national and international reporting work groups and independent director and audit committee chair of two listed companies. As part of SAICA's Competency Framework Part 1 Working Group she was involved in the latest CA examination changes.