Integrated Reporting Makes Its Debut
The promise of integrated reporting that combines financial reporting with a host of other factors, including sustainability, governance and community involvement, finally appears to be on the horizon.
The International Integrated Reporting Council launched its consultation draft on its International Integrated Reporting Framework at a series of events around the world on Tuesday. The draft framework is still open for comment, and the IIRC is hoping to receive a lot of feedback on it (see IIRC Releases Draft Framework for Integrated Reporting). But the plan is for the framework to be in place by the end of the year. The actual implementation will take place after that, according to IIRC CEO Paul Druckman, who spoke at the final launch event of the day at NASDAQ’s Times Square headquarters in New York on Tuesday evening. NASDAQ OMX's BWISE unit is providing training in integrated reporting, according to NASDAQ vice chairman Meyer "Sandy" Frucher, who hosted the event.
The framework is organized around the concept of reporting on “capitals,” including financial, manufactured, intellectual, human, social and relationship, and natural capital. Under each of these headings are a series of disclosures that a company might make. For example, intellectual capital might include intellectual property such as patents, copyrights, software, rights and licenses, while natural capital could include air, water, land, minerals and forests. The principles-based framework avoids being overly proscriptive. Instead of having too many “shoulds” in terms of the information that companies can provide, there are plenty of “coulds,” along with questions that could be asked to elicit the kinds of details that would provide more information to shareholders and other stakeholders in a company about whether it represents a good investment and is making a positive impact in other ways.
Wisely, the IIRC is not trying to compete with other groups that have been working to establish standards in the areas of corporate sustainability. Druckman hopes to use the types of reporting already being developed by the Global Reporting Initiative, the Sustainability Accounting Standards Board and Prince Charles’s Accounting for Sustainability project. The Prince of Wales himself personally urged Druckman to get involved in sustainability reporting, and Druckman chaired the Prince's A4S project, which eventually led him to work with the IIRC after IIRC chairman Mervyn King convinced him over a round of drinks to take the CEO role at the fledgling group.
The accounting profession has long been involved in trying to come up with a way to go beyond financial reporting to embrace other factors affecting a company. The American Institute of CPAs formed a special committee on financial reporting in 1991 to examine the relevance and usefulness of business reporting. The committee, which became known as the Jenkins Committee, named after its chairman, Edmund Jenkins, eventually issued a report in 1995. AICPA president and CEO Barry Melancon spoke at the launch event in New York and pointed out that a later committee, the Elliott Committee, also examined the idea of enhanced business reporting. He sees integrated reporting as something that might complement enhanced business reporting.
“It’s very important that the United States embrace this,” he said.
A number of companies have already started to do that. Kathryn Caulfield, vice president of global corporate communications in corporate responsibility and crisis management at the Clorox Company, discussed the positive responses the bleach maker had received to its enhanced reports. The company had come under criticism for its efforts to promote products that claimed to be better for the environment and had some environmental organizations accusing it of “greenwashing.” In response, Clorox highlighted its environmental efforts in a 2010 sustainability report that was timed to coincide with the release of its annual report. That received a more positive response from stakeholders and the media, so the company included the information within the annual report the following year, and that prompted a phone call from Clorox’s biggest institutional investor applauding the company for providing the information. Last year, Clorox decided to present the information in a multimedia format on the Web, along with an executive summary of the report, and that too brought a positive response from the investor community, particularly in Europe.
Among the investor groups interested in integrated reporting is Rockfeller & Co. Yvette Garcia, chief administrative officer and general counsel at the company, which grew out of the Rockefellers’ family office and family members' interest in environmental issues, sees the potential for integrated reporting to highlight these and other issues, helping investors better assess a company beyond just the financials. However, the transition will take a long time.
Mark Ohringer, global general counsel and corporate secretary at the office management company Jones Lang LaSalle, believes integrated reporting still has a long way to go before it can become a reality. Meanwhile, he has been trying to include more information about company ethics and other areas in Jones Lang LaSalle’s reports, as its corporate clients are interested in working with a company that will be around to manage their offices for extended multi-year engagements. He believes that integrated reporting can bring together the business side, HR and legal personnel, as well as the sales and financial people, helping companies spot early warning signs so they can avoid the kinds of disastrous corporate meltdowns that can hurt investors, workers and the public.
The IIRC’s framework aims to tell a more complete story about a company than just its financial statements, and in many cases the integrated reports will have a unique look rather than taking a check-the-box approach. Some companies have already made an effort to create integrated reports, such as the German business software giant SAP, which devoted a Web site to the report.
“The emphasis is on how companies communicate how they create value, with an emphasis over the long term,” said Brendan LeBlanc, executive director of Ernst & Young’s Climate Change and Sustainability Services practice group, who is a member of the IIRC Working Group that developed the consultation draft.
The primary audience is investors, but the wider audience could include the people who work for the companies, as well as the communities that surround them and are ultimately affected by their products, services and actions.