The role of boards in enhancing the credibility of integrated reports

By Carol A Adams

It is a clear expectation that Board members are financially literate and any Board using a skills matrix will encapsulate this in some way.  But what about an understanding of value beyond profit? Or of the broader risks and opportunities that lead to, or threaten, value creation?

Integrated reports are designed to convey to investors and other readers information about the short, medium and, importantly, the long-term value created by an organisation and the process by which that is achieved.

Value is much more broadly defined than profit or financial gain recognising that an increasingly smaller proportion of a company’s value can be measured in financial terms and included on its balance sheet.

Creating value in the long term requires an understanding of sustainable development issues.  Boards should ask questions regarding the reliability of water and energy supply if needed for manufacturing when they set up a new site.  They should consider whether social unrest due to inequality in a particular area might make it a risky place to do business in.

But very few Boards would include this skill on their skills matrix.  When I interviewed Non Executive Directors of some of the largest companies in the world one talked about their first Board meeting in connection with their integrated report:

“The first meeting actually changed my whole attitude which scared me. Scared is not a bad thing […] scared in the right sense that it actually triggers your mind into action […].”[1]

This interviewee went on to further elaborate how thinking about value creation in broader terms than the financial statements changed his thinking about how to do business, focussing more on the long term and thinking about opportunities and risks.

He was not alone in these sentiments, the point being that this is an important skill that Boards are poorly attuned to needing.

This lack of skills and even awareness of their need has implications for the quality of Board engagement with the integrated reporting process. Yet, the current version of the International <IR> Framework requires their involvement. Further, doing a good Strategic Review in the UK (or OFR in Australia, for example) requires these skills.  Following the <IR> Framework helps Boards and Management understand how they create value and develop the integrated thinking required to prepare a good Strategic Review.

The International <IR> Framework has implications for Board responsibilities:

Responsibility for an integrated report

1.20 An integrated report should include a statement from those charged with governance that includes:

  • An acknowledgement of their responsibility to ensure the integrity of the integrated report
  • An acknowledgement that they have applied their collective mind to the preparation and presentation of the integrated report
  • Their opinion or conclusion about whether the integrated report is presented in accordance with this Framework

or, if it does not include such a statement, it should explain:

  • What role those charged with governance played in its preparation and presentation
  • What steps are being taken to include such a statement in future reports
  • The time frame for doing so, which should be no later than the organization’s third integrated report that references this Framework.”

Apart from having the skills required to think holistically about risks and opportunities and their implications for long term value creation in particular, there are other things Boards can do to ensure the integrity of their integrated reports. Incidentally, it’s worth noting that a couple of male board directors interviewed in the same study said women were particularly good at thinking holistically.

Much of the information in these reports is qualitative and where it is quantitative it is more often than not non-financial (think customer satisfaction survey results for example).  But that doesn’t mean that organisations can’t put in place rigourous internal control processes to ensure information accuracy.  This might be done under the purview of the CFO whose team have a good understanding of processes to ensure data rigour.

Companies can also get an expert to review their processes or, as I have done, to work with them as they develop their statement on how they create value, articulate their business model, the external factors impacting on their ability to create value and other aspects of the Framework.  This role can be seen as that of a ‘critical friend’ challenging the organisation’s thinking and helping to bring considered consensus on the main ingredients of the integrated report.

The Board should be involved at various stages in the process of developing an integrated report either through an established Board sub-committee or an integrated report working group.  The first step in the development of an integrated report ideally should be the value creation statement followed by articulation of the business model.  The Board working group should be involved in that, in approving proposed content and checking for connectivity in the draft.  The whole Board should approve the finished product.

Board strategy days are an opportunity to think about value creation in terms of the multiple capitals (human, natural, intellectual, social and relationship etc) of integrated reporting and to review the key externalities which create risks and opportunities.

External assurance can add credibility to corporate reporting. In the case of integrated reporting you will need to be very clear about what you want to get out of the exercise, that is, what you want assurance providers to do to add credibility. Assurance of integrated reports, like integrated reporting, is new so you need to specify what you want carefully, rather than get what the assurors want to provide.

The reader of an integrated report surely, as a starting point, wants to know how a company defines value and to whom and have confidence in that statement. So one of the most important roles of assurance of an integrated report, beyond the role currently fulfilled by financial audit and sustainability assurance engagements, is to provide user with information which allows an assessment as to whether the company concerned is working to maximise value creation according to its own definition.   How is it balancing short, medium and long term thinking?  Is it incorporating all material external factors into its analysis of risk and opportunity to inform strategy? These are important questions to readers of an organisation’s integrated report.

Boards and management might want an assurance engagement to tell them how well the organization is tracking towards integrated thinking and what are the next steps we need to take to maximise long term value creation (broadly defined) for all our stakeholders.

So in summary, Board can enhance the credibility of integrated reports, by:

  • having the people on the Board who understand a broad range of risks including social and environmental risks
  • including people who can think in an integrated way on the Board
  • governing internal controls over non-financial and qualitative data
  • drawing on the skills of experts to guide and critique
  • linking strategy development with the integrated reporting process
  • engaging external assurors paying particular attention to the scope of the engagement.

This article was first published by Board Agenda

Carol Adams PhD CA FAICD is a Professor at Durham University Business School, UK and consults on corporate reporting.

[1] Published in Adams, CA, (2017) Conceptualising the contemporary corporate value creation process, Accounting Auditing and Accountability Journal 30 (4) 906-931 http://dx.doi.org/10.1108/AAAJ-04-2016-2529

 

Losses, tributes and carrying on

By Carol A Adams In the last issue of the Sustainability Accounting, Management and Policy Journal (SAMPJ) for 2017, we pay tribute to two editorial board members who died in June. Malcolm McIntosh (1953-2017) and David Campbell (1963-2017) strove … [Continue reading]

Responsible investing and the Sustainable Development Goals

By Carol A Adams As institutional investors try to work out what the Sustainable Development Goals (SDGs) or Global Goals mean for them and how they fit with their work on the Principles for Responsible Investment (PRI) and Environmental, Social … [Continue reading]

UK Financial Reporting Council consults on non-financial reporting

by Carol A Adams The UK's Financial Reporting Council (FRC) has responded to the incorporation of the EU Directive on non-financial information into the UK Companies Act by amending its guidance on the Strategic Report.  UK companies with more … [Continue reading]

Cbus Annual Integrated Report 2017 and the SDGs

by Carol A Adams The Cbus Annual Integrated Report 2017 articulates how the pension fund contributes to the Sustainable Development Goals (SDGs) acknowledging the important role of long term investors.  The report identifies six SDGs which Cbus … [Continue reading]

New approach for businesses seeking to contribute to the SDGs

by Carol A Adams My report outlining a new approach supporting businesses looking to contribute to the achievement of the Sustainable Development Goals (SDGs) has been published today by the International Integrated Reporting Council (IIRC) and … [Continue reading]

Just released: the IIRC’s 2016 Integrated Report – a review

By Carol A Adams The International Integrated Reporting Council (IIRC) has today released its 2016 Integrated Report.  A little late in the year perhaps but it makes up for it in other ways. Right at the beginning the report covers two issues … [Continue reading]

Narrative reporting for financial reports – risk and governance

This second post on narrative reporting for financial reports, focuses on contemporary discussions on: Risk reporting (market, credit, liquidity and estimation risks) Governance reporting Environmental, Social and Governance (ESG) Risk … [Continue reading]

Contemporary issues in narrative reporting for financial reports – the business model

by Carol A Adams There are some interesting contemporary debates in narrative or non-financial reporting.  As ICAS notes  that the term non-financial reporting refers to information which is included in those parts of corporate reports outside the … [Continue reading]

Sustainability Accounting, Management & Policy Jnl accepted into SSCI (Social Science Citation Index)

by Carol A Adams, Founding Editor and Editor-in-Chief Thanks to the Editorial Team, authors, reviewers and the publisher, Emerald, the Sustainability Accounting, Management and Policy Journal (SAMPJ) has been accepted into SSCI (Social Science … [Continue reading]