There are many potential obstacles tothe objective of the Integrated Reporting Council Framework. One of the manyobstacles that infringed on the objective of the Framework was the difficultyby many entity’s in defining what “value creation” from their point of viewactually is. Research has shown that many companies have found it difficult toboth define and measure to any degree of accuracy how they were creating valuewhen preparing an Integrated Report.
An Integrated Report is precise report onhow an entity creates value over the short, medium and long term and shouldincorporate the firms total impact across a number of areas, such as theenvironmental, social, economic and tax impact. An ACCA report on the weaknessesof Integrated Reporting noted that ‘insome cases, organisations gave better explanations of how the organisation createsvalue itself rather than of how it does this for others with some organisationsfinding it hard to distinguish between the two.’ Value Creation is theultimate aim of any organisation. By creating value for Customers, a businesscan sell more goods and services. On the other hand, a company will alsoattempt to create value for its Shareholders through stock price increases.
However, evidence has shown that companies who have adopted IntegratedReporting have difficulty in perceiving what its Customers and Shareholdersdefine as “value.” The failure to properly define or measure value in anIntegrated Report will fundamentally undermine the objective of an IntegratedReport. Ultimately, it will end up in the report not delivering the variousbenefits which are expected by investors. In the end, an Integrated report thathas correctly defined and measured value should lead to a better building oftrust amongst Shareholders whilst also giving important insights into both therisks and opportunities that are facing the firm.There are however, a number ofsolutions to the problems associated with attempting to accurately define andmeasure value. First of all, an Organisation can begin by properly identifyingwho their crucial Stakeholders are.
From here they can engage with theseStakeholders to determine what value means to them in particular. ValueCreation is essentially the backbone of the whole Integrated Report so failureto clearly define and measure it in accordance it with the entity’s crucialstakeholders will severely undermine the objective of the Integrated ReportingCouncil Framework. Ultimately, this is an obstacle that could result in thereport being of subpar quality and performance. Yet, this is far easier saidthan done. The conventional ways of measuring a business’s profit often fail tosuitably gauge value. An ACCA report on Integrated Reporting recommends usingthe “six capital models of integratedreporting as a reference tool for considering how the organisation’s strategyand business model will affect each of these capitals” to accuratelymeasure value.
These six models are financial capital, manufacturing capital,human capital, social and relationship capital, intellectual capital and,natural capital. The entity can then, using what their stakeholders defined asvalue, and the capital models, to determine the company’s strategy, businessmodel, risk management and performance measurement indicators.Another potential obstacle to theobjectives of the Integrated Reporting Council Framework is improper connectivity.Connectivity is one of the most fundamental principles of Integrated Reporting.It was emphasised by many companies who prepared Integrated Reports as one ofthe biggest challenges of implementing the report. An Integrated report shouldcontain good connectivity so as to show the inter-relatedness between allcomponents that are substantial to an organisations ability to create valueover time for its Stakeholders.
This is important as it creates a biggerpicture view of the firm. An ACCA report into Integrated Reporting highlightedthat “almost half the reports reviewedcould be better at showing the connectivity of information, to give a holisticpicture of the combination, interrelatedness and dependencies between thefactors that affect the organisation’s ability to create value over time”. Itwas evident in the ACCA report that a large number of firms were still engagingin silo reporting.
Effective communication requires thebreakdown and bridging of silos within the organisation and altering theorganisations data collection methods which allows for a holistic view of theorganisations ability in creating value in the short, medium and long term. APwC report highlighted that “Standalonesections of reporting often provide excellent communication, but opportunitiesto connect this information to other areas in the report are often missed.” Itis important to note that there are a number of obstacles to a firm’s abilityto effectively integrate its report.Modern communications technology andsystems play a crucial part in an organisations reporting today more so thanever. However, the incompatibility of some of these systems represents a majorobstacle to integrated reporting and thinking in many organisations in today’sday and age. This can include an organisations systems used to manage H.
R,financing, production and so on. The incompatibility of one or more of thesesystems would majorly curb an organisations ability to effectively connect andcommunicate across different areas in the integrated report. Yet, moderntechnology is not without benefits when it comes to effective connectivity inintegrated reporting. The scope of connectivity that is enabled by digitalreports is in stark contrast to the very limited level of connectivity that is facilitatedthrough the use of physical hard copy documents and PDF’s. For example, byusing a digital formant an organisation can easily import and export and wholedifferent ranges of data, themes, languages etc.
The report can also becustomised to the needs of the reader, making it easier for them to interpretand understand. However, it must also be noted that a particular high degree offailure connecting and integrating the report will lead to a report presentingan improper picture of the organisations ability to create value in the short,medium and long term and as such, a report that is of unsatisfactoryperformance and quality. A few possible steps for further improving connectivityof the report would be the use of signposts across the report. These signpostswould then serve the purpose of directing readers of the report to connectedinformation across different areas of the report. Also by thinking about how informationfrom an organisations management, information from board meetings etc arerelevant to the organisations stakeholders would be beneficial in improvingconnectivity. Another issue which poses a threat tothe objective of the Integrated Reporting Council framework is a firm’s abilityto identify and define in detail its performance measures. This was mentionedby organisations as one of their biggest obstacles in putting together anIntegrated Report. Many organisations problem was that they had no problem inbeing able to state what their performance measures were but this was as far asthey were able to go.
A good integrated report should contain a good linkbetween the organisations past performance and its current performance whilstalso providing an outlook on how the current and future performance compares. Itshould also address both the organisations positive and negative effects on itscapital, many organisations tend to shy away from negative aspects whichundermines the objectives of the framework. The use of Quantitative keyperformance indicators is a useful way of increasing comparability across thereport and very useful to indicate whether or not the organisation met itstargets.
However, in order for these key performance indicators to bemeaningful the report has to go some way towards explaining what theirparticular strengths and weaknesses are. A report by PwC on IntegratedReporting states that “56% of the companies did not explain how it measures therelative strength/management of its value adding activities, i.e. operationalKPIs and measures of success, and only 2% provided a benchmark for the readerof the report to measure the relative strength of the key performanceindicators.” The ACCA report suggested that rationality and practice is still immaturein enunciating the value organisations receive arising from non-financialcapitals. Not explaining how an organisation defines its individual performancemeasures dents the objectives of the framework. By making key performanceindicators specific to the organisations line of business and by providingcomparable industry benchmarks, the organisation can improve the quality oftheir indicators. They become far more relevant.
A practical obstacle of the objectiveof integrated reporting is how an organisation transitions from the traditionaltype of annual report consisting of many financial metrics to an Integratedreport whose general purpose is to explain to readers of the report how thefirm creates value over the short, medium and long term. Another practicalobstacle mentioned by various firms is how to correctly approach the board ofdirectors about the Integrated Report. The Board have to accept and embrace theidea Integrated Reporting with open arms otherwise the objective of theframework will be undermined. The Integrated Report essentially represents the sharedjudgement of the board, so to not have the backing of the Board would be detrimentalto the report. Hastily producing a report which then goes to the Board ofDirectors would undermine the objective of the Integrated Reporting CouncilFramework as it would highly increase the Board of Directors likelihood ofapproving a misrepresentative report.
Regular interaction with all board members iskey to this process, even if the task of compiling the report is only confinedto a few board members from a practicality point of view, this should notremove the necessity of interaction with every member of the board.