by Carol A Adams
This paper sets out the case for integrated reporting and its potential to change the thinking of corporate actors leading to the further integration of sustainability actions and impacts into corporate strategic planning and decision making. It calls for academics to engage with the process and to contribute to the development of new forms of accountings to help ensure this potential is reached. It suggests areas of further research to facilitate this. The paper was written in response to John Flower’s paper titled “The International Integrated Reporting Council: a story of failure.”
The citation for this paper is: Adams, C A (forthcoming), “The International Integrated Reporting Council: a call to action”, Critical Perspectives on Accounting, DOI 10.1016/j.cpa.2014.07.001 The article was submitted on 30th April 2014 and accepted on 2nd July 2014.
Implementing integrated reporting requires the development of new accountings and management processes. And at the time of writing scarcely enough time has passed for the first reports to be prepared which follow it. So whilst it may be of interest to assess the content of the International <IR> Framework (IIRC, 2013a) released in December 2013 against previously stated objectives, it is certainly much too early to assess its success or failure, however that might be measured.
Flower’s focus in critiquing integrated reporting is on the limited extent to which it explicitly addresses sustainability. Yet it is not the main purpose of integrated reporting to do this. Rather, we are perhaps witnessing the early stages of widespread promulgation of a different way of thinking about corporate success and reporting. What integrated reporting becomes as time passes is, to a large extent, dependent on (critical and sustainability) accounting academics as actors in a process that has the potential to lead to profound change.
Adams and Whelan (2009) suggest that research concerned with corporate social disclosure should take as given that changes in disclosure patterns are governed by a concern with profit maximization. The paper suggests that the potential of integrated reporting (or any other driver) to effect change depends on the extent to which it creates a source of dissonance significant enough to change the way managers think within the constraints imposed on managers to maximise profit.
Without idealism (something Flower, appears to be critical of) and worthy intentions integrated reporting would not have got off the ground. Its attempt to encourage mainstream accountants to think longer term, consider what value means, to whom and to acknowledge the role of staff, broader society and the environment in creating it, is bold and surely worthy. There is a role for critical accounting researchers in providing a counter force to those who would try to ensure such efforts result in nothing more than business as usual. Talking amongst ourselves will not do it, yet only a handful of academics submitted responses to the IIRC’s consultation draft. (See http://www.theiirc.org/consultationdraft2013/. Academic respondents are few in number, but include John Flower and myself.)
The extent of support of the professional accounting bodies for a form of reporting which considers value and the business model in anything other than monetary terms is perhaps a little surprising, and itself worthy of further research. The ACCA, CIMA and CPA Australia have already produced integrated reports and the ACCA and CIMA have announced that they are including integrated reporting in their professional syllabi. Following the arguments of Adams and Whelan (2009) this support of professional bodies in itself has the potential to change the way CFOs think, encouraged perhaps by a desire to be respected professionals.
At the time that the IIRC was established, the governing bodies of the Global Reporting Initiative (GRI) did not include investors who were first allocated places on the Stakeholder Council in 2013. (Note: the author is a member of the GRI Stakeholder Council and was a member of the IIRC’s Technical Collaboration Group.) Whilst the GRI had made some progress in encouraging companies to measure historical impacts on the environment, society and economies, it did not set out to encourage businesses or investors to consider the value to business or its stakeholders, of doing so. Further, seventeen years after the formation of the GRI, the integration of sustainability considerations into mainstream decision making, reporting and performance management has arguably been limited or at best slow and patchy (Adams and Frost, 2006; 2008). Corporate initiatives on sustainability were gaining limited traction at senior levels and there is a view, which I share, that integrated reporting can help. For example, the United Nations Global Compact LEAD submission to the Consultation Draft of the International Integrated Reporting <IR> Framework noted:
“The business case for sustainability can often be difficult to measure and share… integrated reporting has the potential to connect financial disclosures with sustainability in a way that makes them more relevant for a broader audience… and that this greater level of integration of reporting practices encourages and supports the integration of sustainability in strategic planning, decision-making and operations.”
To my mind it is the necessity of getting senior executives and Board members to think (long term) about their business model, how they create value and to whom, material issues, risks and strategy together which gives integrated reporting the potential to effect change.
Chief Financial Officers focussing on short term financial gains and cost cutting, supported by accounting and reporting requirements that privilege financially quantified information, have been a stumbling block. They have tended to see social and environmental sustainability initiatives as an unnecessary cost rather than as a moral obligation or a benefit. Further, they have ignored sustainability risks with potentially significant (often long term) financial consequences. At the same time, financial reporting has been capturing a decreasing proportion of what is of value. I recall a speech at a CIMA Global Business Week conference in 2001 by Douglas Flint, then Chief Financial Officer (now Chairman) of HSBC where he recognised the competitive advantage of First Direct, the bank without branches, was in its people, culture and relationships and couldn’t be copied by showing other bankers around their premises. What was of value was intangible. Indeed, Standard and Poor’s stock market index of the top 500 US listed companies in the 1970’s around 80% of a company’s market value could be traced through to the financial statements whereas by 2010 only around 20% can be accounted for by its financial and physical assets (IIRC, 2011). Further KPMG (2012) have argued that there is a mismatch between what is being reported and factors that influence value.
It is in this context that the IIRC was formed.
Much has been written about the role of accountants in making things visible – or not. Critical researchers and social and environmental accountability researchers have argued that accounting can hide and reveal (see, for example Cooper and Puxty, 1996; Hines, 1991; Williams and Adams, 2013). Whilst accountants might not be willing or able to “save the world” (Flower, page XX), if we (or those other accountants) are part of the problem, how will it be saved without our (or their) involvement?
Whilst Flower criticises the composition of the IIRC, those involved believe it would be difficult to argue that they have not run a transparent process (conversation with Paul Druckman, CEO, IIRC). In addition to publishing submissions to the consultation draft on their website, the IIRC published a summary of responses, discussed how they were dealt with and why in documents title Basis for Conclusions (IIRC, 2013b) and Summary of Significant Issues (IIRC, 2013c). They have also published a series of Background Papers developed by Technical Collaboration Teams guided by multi-stakeholder Steering Committees covering a range of topics including the Capitals (IIRC, 2013d), the Business Model (IIRC, 2013e) and Value Creation (IIRC, 2013f). [Note: This author was on the Technical Collaboration Team for the Capitals Background Paper (IIRC, 2013d)] Flower (forthcoming) has not referred to any of these documents, yet they are important in understanding how different voices have contributed to the process.
Flower links a declining focus on sustainability accounting and reporting in IIRC documents to the dominance of accountants on the Council. This is plausible, but the role of the various other organisations concerned with aspects of sustainability accounting and reporting is also worthy of consideration. It might be unwise to assume that accounting firms and professional bodies are the only players acting out of self-interest and self-preservation.
I am puzzled by Flower’s claims that the IIRC has abandoned sustainability accounting and reporting. I do not see this as a significant component of Discussion Paper (IIRC, 2011) and in any case I am unclear why the IIRC would have set, as its core mission, tasks already undertaken by other organisations or why, assuming it did so, it would be criticised for avoiding duplicating such tasks.
Having briefly considered the link between integrated reporting and sustainability accounting and reporting (which Flower argues the IIRC has abandoned), this paper goes on to consider further: the key features of integrated reporting which have the potential (if critical voices engage in its further development) to shift corporate thinking; areas for further academic research; and the role of academics in facilitating change (Adams and Larrinaga González, 2007; Adams and Whelan, 2009; Cooper, 2005).
This article is © Elsevier and permission has been granted for this version to appear here (www.drcaroladams.net). Elsevier does not grant permission for this article to be further copied/distributed or hosted elsewhere without express permission from Elsevier.
The potential to shift corporate thinking
The features of integrated reporting which have the potential to shift the thinking of corporate actors to better align notions of profit maximisation with the wellbeing of society and the environment (following Adams and Whelan, 2009) are its emphasis on thinking long term and encouragement of broader thinking of what is value, the value creation process and the business model. Whilst I would like to see this thinking go much further, it is already a long way from traditional Anglo-American thinking of value as something which can be measured in monetary terms and the business model in terms of money flows. Integrated reports published compulsorily in South Africa (although not yet following the Framework) provide a more holistic way of thinking about the business, than an array of unconnected reports (see EY, 2012).
Flower raises the issue of the integrated report not being the primary report or even necessarily a separate report. I would think it quite possible that this may still be a long term aim of the IIRC, but the Summary of Significant Issues (IIRC, 2013c) points to there being different views amongst responses to the consultation draft.
- The meaning of value and value to whom?
The meaning attributed to ‘value’ and value to whom is critical in shifting the extent to which business, society and the environment co-exist in a mutually beneficial way. Flower is critical of the IIRC’s concept of value because it is ‘value for investors’ and not ‘value for society’. Like Flower, I would also prefer it if business embraced the notion of ‘value for society’, but this will not happen unless it is seen as being aligned to ‘value for investors’. The International <IR> Framework links the two in paragraphs 2.4 – 2.7:
“2.4 Value created by an organization over time manifests itself in increases, decreases and transformations of the capitals caused by the organization’s business activities and outputs. That value has two interrelated aspects – value created for: The organisation itself which enables financial returns to the providers of capital; Others (i.e. stakeholders and society at large).
2.5 Providers of financial capital are… also interested in the value an organization creates for others when it affects the ability of the organization to create value for itself…
2.6 The ability of an organization to create value for itself is linked to the value it creates for others…
2.7 …This includes taking account of the extent to which the effect on the capitals have been externalised…”
The IIRC’s Value Creation Background Paper (IIRC, 2013f) prepared by EY with guidance from a multi-stakeholder expert steering committee reveals differences, tensions and contradictions in the meaning of value. A range of perspectives are considered with the perspective of providers of financial capital considered in noting (page 11):
“Providers of financial capital equate value creation with the potential for future cash flows and sustainable financial returns, but this also takes into account the importance and limitations of different forms of capital for value creation.”
In the context of climate change it is surely clear that it would be unacceptable not to publicly report material emissions (whether in an integrated report or elsewhere). Global failure to reduce emissions to a point which will avoid a situation where the planet becomes uninhabitable to people, including providers of capital, would mean zero financial returns. At points in time prior to this the impact of climate change on financial returns to providers of capital of any one particular company might be very difficult to predict. It is reasonable to expect that strategies of corporations with material emissions will increasingly be influenced by the global necessity of reducing them.
Elsewhere the IIRC’s Value Creation Background Paper states that an integrated report should explain the increases and decreases in the pool of capitals and how and to what extent value has been created for others. Unfortunately this clarity is not reflected in the final Framework, but opposition to such a requirement is hard to fend off given the underdevelopment of accounting approaches.
The IIRC’s Value Creation Background Paper (IIRC, 2013f) acknowledges that stakeholder concerns and actions can influence financial returns and that the impacts may not be immediate or direct. The fact is that the impact of stakeholder actions and concerns may not be measureable in financial terms for a long time if at all. Nevertheless, countless examples have demonstrated that they present a considerable risk if not addressed. By requiring the disclosure (para 4.23) of risks affecting the organisations ability to create value over the short, medium and long-term the Framework at least encourages the consideration of such impacts and how they are dealt with.
The IIRC’s Value Creation Background Paper (page 11) goes on to say: “Integrated reports should enable providers of financial capital to assess whether, to what extent and how an organization’s use of, and outcomes for, all of the capitals adds to financial value.” This will be interpreted by some as meaning business as usual – if you can’t measure it in monetary terms, it’s not important.
Perhaps rather than focussing on blaming the dominance of the accounting profession in the process, we should consider our failure as accounting academics, critical of current accountings, to engage with organisations to help develop new accountings (see Adams and Larrinaga González, 2007; Adams and Whelan, 2009).
Unilever, an IIRC pilot company, is an example of a seemingly increasing number of companies acknowledging the need to think differently about business success:
“… the biggest challenge is the continuing threat to ‘planetary boundaries’; resulting in extreme weather patterns and growing resource constraints. These have increasing impact on our business… We remain convinced that businesses that both address the concerns of citizens and the needs of the environment will prosper over the long term… As… [the Unilever Sustainable Living Plan] becomes embedded, there is growing evidence that it is also accelerating our growth.”
Unilever, Annual report and accounts 2012 p 4.
As I note in Adams (2013, p 52), in order to credibly articulate their value creation story, organisations should: “disclose how they define value and the relevance of stakeholder views and the six capitals to their concept of value; disclose what steps they have taken to maximise value creation according to their definition; seek external assurance to demonstrate that they are working to create value as they define it”.
- The role of the capitals
I share Flower’s disappointment with the limited disclosure requirements concerning movements of the capitals in the Framework (IIRC 2013a), but it is difficult to see how it could have been achieved in a meaningful way given the current underdevelopment of such accountings. The focus of integrated reporting is to consider how an organisation creates value – rather than on measuring impacts – and accountants and sustainability practitioners and researchers have to date given little attention to how this might be done under a multiple capital model. Part of the work of the IIRC’s Capitals Technical Collaboration group was to identify innovative examples of reporting on the capitals and it was clear that reporting was not yet sufficiently developed to be able to identify best practice. How would you put a value on, or disclose transformations of say, social and relationship capital or natural capital? This might be something for researchers to consider. In the meantime, the capitals are intended to broaden thinking about the value creation processes and risks. Measuring impacts of the organisation on the capitals should be addressed in its sustainability report or online sustainability disclosures (GRI, 2013).
As to Flower’s concern that integrated reporting is not sustainability reporting, the Capitals background paper (IIRC 2013d) explains the difference between the two as follows (page 17):
“5.12 While experience in sustainability reporting may prove invaluable to some on their journey toward <IR>, there are key differences between the two forms of reporting, particularly in the context of the capitals. It is worth noting that sustainability reporting:
• targets a wider stakeholder audience than does <IR>, which focuses primarily on providers of financial capital, particularly those with a long term view
• focuses on impacts on the environment, society and the economy, rather than on the effects of the capitals on value creation over time, as in <IR>.
As such, sustainability reporting is less likely to focus on the connectivity between various capitals or the strategic relevance of the capitals to value creation, and is more likely to include many disclosures that would not be material for inclusion in an integrated report.”
Credibility of integrated reports and the role of assurance
An issue which does need to be addressed is the assurance of integrated reports. As Flower points out (referring to Adams, 2004 and Boiral, 2013), there is a degree of incompleteness with respect to material issues in sustainability reports, something G4 (GRI, 2013) seeks to address. Without assurance standards which address materiality processes, this will incompleteness will occur in integrated reports too. For example, Sasol’s 2012 integrated report was ranked 5th in EY’s Excellence in Integrated Reporting Awards 2013 (EY 2013) but, despite being in the extractive industry, there is no mention of contemporary concern about a carbon bubble – the potential for devaluation of companies due to being unable to extract carbon in the future. This raises questions about the credibility of Sasol’s apparently highly regarded integrated report.
Potential avenues for research
The decision to prepare a first integrated report should lead to changes in: decision making processes; informal and formal communication processes; materiality and risk identification processes amongst others. Understanding the extent of these changes is important in considering the value of integrated reporting – itself an important factor in determining future guidance, policy and regulation. Understanding the factors which impact on the take up of integrated reporting is also important. Further research might explore:
- Process of determining materiality and identifying risks for integrated reports.
- Internal communications/ “integrated thinking”/ breaking down silos.
- Factors that determine uptake of <IR> including qualitative factors such as role of leadership/ leadership style.
- Changes to internal systems, processes and decision making on adoption of <IR>.
- Accounting for transformations in the capitals.
- The role of the multiple capitals concept in identifying risks and opportunities.
- Implications of <IR> uptake for sustainability management and reporting practices.
- Role and take up of <IR> in public and not-for-profit sectors.
- The political landscape – relationships with other frameworks, Stock Exchange requirements, national regulation.
- The impact of <IR> on decision making and outcomes.
- Analyst responses to integrated reports.
- Approaches to assurance of integrated reports.
This paper has discussed some key distinctions between sustainability reporting/disclosure and integrated reporting. It has outlined the case for integrated reporting and benefits to organisations and other stakeholders of the integrated thinking needed to develop an integrated report. It supports the current non-mandatory status of integrated reporting given that the accountings involved are insufficiently developed. It notes that Flower’s concerns about regulation relate to material sustainability impacts which are covered in a sustainability report, rather than an integrated report. This author agrees that reporting on material sustainability impacts should be mandatory (see for example Adams, 2004).
Flower argues that the IIRC’s proposals will have little impact on reporting practice, yet they already are having an impact. Over a hundred businesses have paid to be involved in the pilot programme, many others are adopting elements of integrated reporting and internationally regulation is increasingly requiring disclosure of, for example, strategy, risks and business model information in annual reports and Operating and Financial Reviews. The ideas in integrated reporting will evolve. I believe that to a large extent, their impact on reporting practice depends on those critical of the status quo both engaging with practice and ensuring their voices are raised and heard – as Flower is doing.
This article is © Elsevier and permission has been granted for this version to appear here (www.drcaroladams.net). Elsevier does not grant permission for this article to be further copied/distributed or hosted elsewhere without express permission from Elsevier.
NOTICE: this is the author’s version of a work that was accepted for publication in Critical Perspectives on Accounting. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version will be published in Critical Perspectives on Accounting DOI 10.1016/j.cpa.2014.07.001
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