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Integrated Thinking and the Integrated Report

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Prof. Mervyn King's presentation on integrated reporting during the International Federation of Accountants’ Council Seminar, A Fundamental Shift in Corporate Reporting.

Prof. Mervyn King's presentation on integrated reporting during the International Federation of Accountants’ Council Seminar, A Fundamental Shift in Corporate Reporting.

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  • Managing working capital is a key aspect of financial management – generally users have to do their own calculations or sometimes there are ratios included in 5 year financial summaries. More information can easily be presented in a graphic format – which clearly highlights the key information and the trend in information.

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  • 1. INTEGRATED THINKING AND THE INTEGRATED REPORT IFAC 14 November 2012 Presented by Mervyn E King SC
  • 2. THE COMPANY YESTERDAYThe primacy of the shareholdersWealthy familiesSingle focus and bottom lineFinancial reporting – rear view mirrorPrepare as if only user the investment analyst100 years but IASB and FASB Corporate Legal Advisers
  • 3. YESTERDAY’S ECONOMIC MODELYesterday’s economic model was based on two false assumptions that : there were limitless resources in nature and that planet earth had an infinite capacity to absorb waste Take – make – waste Industrial revolution Until middle of 20th century Corporate Legal Advisers
  • 4. THE COMPANY TODAYNew capitalistsStakeholders – inclusive – CSRO’sLegitimate NIE’sMoat of shareholders100 largest economiesNot in a vacuum – a triple contextWhat are the specifics? Corporate Legal Advisers
  • 5. THE CHANGED WORLD Globalfinancial crises Climate change crisis Ecological overshoot Radical transparency Greater expectations from stakeholders Population growth Cannot carry on business as usual Have to learn to make more with less Requires IT and innovation Corporate Legal Advisers
  • 6. DRIVERS FOR CHANGE Corporate Legal Advisers TAPSCOTT
  • 7. COMPONENTS OF MARKET VALUE S&P 500 Physical and financial assets Other assets 17 32 68 80 81 83 68 32 20 19 1975 1985 1995 2005 2009 Corporate Legal Advisers
  • 8. The Global 1000 Top GDP Top 1,000 firms Sales ($B) Employees Population of (current 1,000 firms employees as Time of the (M) of the 15-64 of US$B) of sales as % of period top top OECD OECD % of OECD 1,000 firms 1,000 firms members members OECD GDP working population 1980 2,638.10 20.9 8,547 629 30.90% 3.33% 1990 7,126.30 31.4 18,079 702 39.40% 4.47% 2000 15,821.30 49.9 26,162 767 60.50% 6.51% 2010 31,196.30 66.8 42,809 825 72.90% 8.11%Source: Worldscope; World Federation of Exchanges, http://www.world-exchanges.org/statistics/annual/2010/equity-markets/domestic-market-capitalization, accessed January 2012,Global Financial Data, accessed January 2012. H ARVAR D | B U S I N E S S | SCHOOL Copyright 2012 © Professors Robert Eccles and George Serafeim Corporate Legal Advisers
  • 9. The Information AgeNumber of users, millions Facebook Twitter900800700600500400300200100 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Source: Facebook: http://www.benphoster.com/facebook-user-growth-chart-2004-2010/; Twitter: http://wewillraakyou.com/2012/02/dynamic-chart-shows-twitters-exact-growth/ Corporate Legal Advisers
  • 10. The Power of the Internet Source: PR Daily, http://www.prdaily.com/Main/Articles/8632.aspx Corporate Legal Advisers
  • 11. INTEGRATED THINKING (1) Integrated asopposed to “silo thinking” Every company dependent on relationships and resources Mindset change at board level Agenda item stakeholder relationships Knowledge of stakeholders’ legitimate NIE’s Greater stakeholder expectations Corporate Legal Advisers
  • 12. INTEGRATED THINKING (2)MINDSET CHANGE 12 Corporate Legal Advisers
  • 13. INTEGRATED THINKING (3)Manage and strategize on a more informed basisSupply chain – suppliers stakeholder – code of conduct – impact reputationTraceability and monitoring Corporate Legal Advisers
  • 14. INTEGRATED THINKING (4)Identify sustainability issues material to businessAs water is to beverage manufacturerEmbed sustainability into long term strategyIn context of resources, relationships, risks, opportuniti es and global turbulence Corporate Legal Advisers
  • 15. INTEGRATED THINKING (5)Some numbers….Integrated ESG information into investment decisions 79% of asset owners 95% of investment managers(Source: UNEP Finance Initiative, UN Global Compact) Corporate Legal Advisers
  • 16. INTEGRATED THINKING (6)Tipping point to embed sustainability in core business strategies? (Acc. to CEO’s) Customers demand sustainable products  89% Educational reform to change mindsets  88% Accurate long-term valuation (incl. sustainability metrics)  86% Shareholders place more value on sustainability information  85% Boards hold directors accountable for practices  84%(Source: UN Global Compact and Accenture) Corporate Legal Advisers
  • 17. INTEGRATED THINKING (7)Financial Manufactured Human Intellectual Natural Social Corporate Legal Advisers
  • 18. All organizations depend on a variety of resources and relationships for their success. These resources and relationships can be conceived as different forms of “capital”.Source: Incite Sustainability 2.0: A Guide to Competing in a Changing World Corporate Legal Advisers
  • 19. INTEGRATED THINKING (8) Management of risk Risk matrix informed by the levels of dependence on the resources and relationships Levels of risk tolerance more informed – opportunities Risk management plan more informed Risk responses more appropriate Corporate Legal Advisers
  • 20. INTEGRATED THINKING (9)ImpactsLeverageOf company’s business modelKPI’s and KRI’s fall under financial or non- financial? Corporate Legal Advisers
  • 21. INTEGRATED THINKING (10)UnileverLong term plan – re-engineerProductions and productsRenewable power, recyclable materials, zero waste to landfill, consumer and supplierLifebuoy and Pureit Corporate Legal Advisers
  • 22. INTEGRATED THINKING (11)Understanding, knowing and then planning: How the company makes it money? How the company will sustain value creation in the long term? Corporate Legal Advisers
  • 23. INTEGRATED THINKING (12)Companies consist of interacting, interrelated and interdependent operations, functions, relationships and resourcesTake account of: the connectivity between these factors the changed world in which the company operates impacts leverage Corporate Legal Advisers
  • 24. INTEGRATED THINKING (13)Stakeholders expect that:1. The company has not profited at the expenseof the environment, human rights, a lack ofintegrity or society;2. There are adequate controls in place tomonitor and manage material risks andopportunities; Corporate Legal Advisers
  • 25. INTEGRATED THINKING (14)3. Remuneration is linked to overallperformance which includessocial, environmental and financial aspects;4. There is an interactive communication withthe stakeholders who are strategic to thecompany’s business; and5. The company is conducting a sustainablebusiness Corporate Legal Advisers
  • 26. INTEGRATED THINKING (15) Resources Opportunities Business Risks Model How? Stakeholders Corporate Legal Advisers
  • 27. THE OPEN KIMONOReporting influences behaviourIntegrated reporting – King IIIIIRC – formation 2010Informed assessmentDischarge of fiduciary duty by trustee Corporate Legal Advisers
  • 28. SYSTEM OF REPORTINGIsthere one?Bolt on a division’s report to anotherChairman’s statementIntegrated report has a systemThe collective mind of the boardFR impact on NF and how material sustainability embedded into strategy to sustain value creation Corporate Legal Advisers
  • 29. INTEGRATED REPORT Corporate Legal Advisers
  • 30. DRIVERS FOR INTEGRATED REPORTINGState ofplanetThe customer of todayThe new capitalistThe identity & reputation of companiesCompetitive advantage – management more informedMarket forces - external Corporate Legal Advisers
  • 31. PURPOSE OF INTEGRATED REPORT?Clear and understandable statement on “the state of play”Financial Report only part of “state of play”Nothing of impacts on society and environmentCannot make an informed assessment of the sustainability of a business Corporate Legal Advisers
  • 32. Guiding Principles Strategic focus: An Integrated Report provides insight into the organization’s strategic objectives, and how those objectives relate to its ability to create and sustain value over time and the resources and relationships on which the organization depends. Connectivity of information: An Integrated Report shows the connections between the different components of the organization’s business model, external factors that affect the organization, and the various resources and relationships on which the organization and its overall performance depend. Future orientation: An Integrated Report includes management’s expectations about the future, as well as other information to help report users understand and assess the organization’s prospects and the uncertainties it faces. Responsiveness and stakeholder inclusiveness: An Integrated Report provides insight into the organization’s relationships with its key stakeholders and how and to what extent the organization understands, takes into account and responds to their needs. Conciseness, reliability and materiality: An Integrated Report provides concise, reliable information that is material to assessing the organization’s ability to create and sustain value in the short, medium and long term. Corporate Legal 32 Advisers
  • 33. Content Elements Organizational overview and business model: What does the organization do and how does it create and sustain value in the short, medium and long term? Operating context, including risks and opportunities: What are the circumstances under which the organization operates, including the key resources and relationships on which it depends and the key risks and opportunities that it faces? Strategic objectives and strategies to achieve those objectives: Where does the organization want to go and how is it going to get there? Governance and remuneration: What is the organization’s governance structure, and how does governance support the strategic objectives of the organization and relate to the organization’s approach to remuneration? Performance: How has the organization performed against its strategic objectives and related strategies? Future outlook: What opportunities, challenges and uncertainties is the organization likely to encounter in achieving its strategic objectives and what are the resulting implications for its strategies and future performance? Corporate Legal 33 Advisers
  • 34. EVOLUTION AND REVOLUTIONThe integrated report is evolvingIt is an evolution in corporate reportingIntegrated thinking is a revolutionA revolution in the approach to managing environmental and societal issuesOverwhelming support for integrated thinking Corporate Legal Advisers
  • 35. How are companies Doing? Annual reports now Integrated Report Detailed financial and sustainability information on line New Companies Act – section 29(3) Abridged financials Companies using diagrams, graphs and graphics All participants in the IR journey Some examples Corporate Legal Advisers
  • 36. Vodacom
  • 37. Standard Bank
  • 38. USE OF SYMBOLS AND COLOURS Corporate Legal Advisers(ADCOCK)
  • 39. CONVEYING KEY RELATIONSHIPSNet working capital days- Accounts receivable- Inventory- Accounts payable Multiple years Arrow to indicate trends Colour usage to distinguish(ALTRON) 39 Corporate Legal Advisers
  • 40. BUSINESS MODEL – HOW WILL IT ADD VALUE? Corporate Legal Advisers(BAT)
  • 41. WHAT IS MATERIAL TO STAKEHOLDERS(VODACOM) Corporate Legal Advisers
  • 42. CASE STUDIES UnileverP &G SAB Miller Siemens – sustainability should be viewed not from the viewpoint of risk and compliance only but that which drives business expansion Walmart Corporate Legal Advisers
  • 43. DUTY OF CARECentro judgment – AustraliaWhat do you know or ought you to know?What are you aware of or ought you to be aware of? Corporate Legal Advisers
  • 44. SOME CONCLUSIONS Tell your stakeholders what you do, do what you tell them, and write it down in your Integrated Report Companies cannot solve 21st century problems with the same mindset their boards used when they created them We cannot solve 21st century corporate challenges with 20th century decision making or reporting Corporate Legal Advisers
  • 45. INTEGRATED REPORT Reporting influences decision making A concept, fit for purpose Whose time has come Because of the changed world Financial, natural, human, society, manufacturing, intellectual capital Critical interdependencies The decade of stupidity 2000 – 2010 The decade of change 2010 -2020 Corporate Legal Advisers
  • 46. THE FUTUREMindset changesAdvanced ITThe net generationSustainable capitalismCivil society – great expectationsIntegrated reports and financial stabilityOne certainty - change Corporate Legal Advisers
  • 47. IDEASMan and nationsHelen Keller: “The only thing worse than being blind is having sight and no vision”We have the lightWhy grope in the dark? Corporate Legal Advisers
  • 48. THANK YOUProf Mervyn E King SC