BENEFITS OF Comprehensive Integrated Reporting F assessment of company value and performance and...

BENEFITS OF 26 financial executive | march 2011 FINANCIAL REPORTING F Comprehensive Integrated Reporting Financial executives are responsible for managing a wide range of infor- mation regarding organizational strategic objectives, governance, risk and performance. It’s a complex task. Accessing, analyzing, managing and communicating the critical information can be a costly, inflexi- ble and often manual, error-prone effort requiring a wide range of methods and documents. Due to internal barriers — most notably, the high cost of information access and reuse — many financial executives often focus more narrow- ly on the information required for regulatory compliance. Unfortu- nately, managing a business on required regulatory compliance information may not be fully aligned with creating long-term cor- porate or personal value. Integrated reporting redefines the scope of information relevant to strategic corporate objectives and provides a broader method of accessing, analyzing, managing and communicating strategic informa- tion both internally and externally. Integrated reporting refers to the integrated representation of a com- pany’s performance, in terms of both financial and nonfinancial results. Companies are providing inte- grated reports as a means to seek new business opportunities, safe- guard reputation, maximize compet- itive advantage and mitigate opera- tions risk. This holistic supply chain approach provides transparent alignment of company strategy with underlying business risks, key per- formance indicators (KPIs), business and risk developments, incentive programs and other relevant internal and external information. (See the diagram on page 30.) Benefits of Integrated Reporting Those familiar with the Indian para- ble about blind men and an elephant might agree it provides a useful par- adigm for many current reporting processes. In the telling, each man’s perspective of the elephant was dependent on what part of the ele- phant they happened to be touching. For example, its side felt like a wall, its tusk a spear, its leg a tree trunk. Many financial executives cur- rently are faced with similarly nar- row perspectives based on distinct information silos or reports, reflect- ing information that is oriented to its specific, largely compliance purpose such as financial, tax, management, © 2011 Financial Executives International |

Transcript of BENEFITS OF Comprehensive Integrated Reporting F assessment of company value and performance and...

Page 1: BENEFITS OF Comprehensive Integrated Reporting F assessment of company value and performance and address- ... the Universal Product Code ... and market oriented disclosures.


26 financial executive | march 2011











Financial executives are responsiblefor managing a wide range of infor-mation regarding organizationalstrategic objectives, governance, riskand performance. It’s a complex task.

Accessing, analyzing, managingand communicating the criticalinformation can be a costly, inflexi-ble and often manual, error-proneeffort requiring a wide range ofmethods and documents.

Due to internal barriers — mostnotably, the high cost of informationaccess and reuse — many financialexecutives often focus more narrow-ly on the information required forregulatory compliance. Unfortu-nately, managing a business onrequired regulatory complianceinformation may not be fullyaligned with creating long-term cor-porate or personal value.

Integrated reporting redefines thescope of information relevant tostrategic corporate objectives andprovides a broader method ofaccessing, analyzing, managing andcommunicating strategic informa-tion both internally and externally.Integrated reporting refers to theintegrated representation of a com-pany’s performance, in terms of bothfinancial and nonfinancial results.

Companies are providing inte-

grated reports as a means to seeknew business opportunities, safe-guard reputation, maximize compet-itive advantage and mitigate opera-tions risk.

This holistic supply chainapproach provides transparentalignment of company strategy withunderlying business risks, key per-formance indicators (KPIs), businessand risk developments, incentiveprograms and other relevant internaland external information. (See thediagram on page 30.)

Benefits of Integrated Reporting Those familiar with the Indian para-ble about blind men and an elephantmight agree it provides a useful par-adigm for many current reportingprocesses. In the telling, each man’sperspective of the elephant wasdependent on what part of the ele-phant they happened to be touching.For example, its side felt like a wall,its tusk a spear, its leg a tree trunk.

Many financial executives cur-rently are faced with similarly nar-row perspectives based on distinctinformation silos or reports, reflect-ing information that is oriented to itsspecific, largely compliance purposesuch as financial, tax, management,

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governance orenvironmental.

For many multinationals,information problems go wellbeyond access to disparate internalsilos. They include inconsistent defi-nitions of commonly used terms —full-time equivalent, sick days,square foot, customer and others. Ofcourse, financial executives are notthe only ones translating disparatedefinitions into common terms.

Further, the ability to understandand act on external market drivers(competitive, economic, technologi-cal, etc.) is important to managingbusiness risks and opportunities.

The common lack of a compre-hensive approach to relevant, consis-tent, quality internal and externalinformation obscures the holistic pic-ture company financial executivesseek to effectively manage the sus-tainable performance of their busi-ness and respective investments.

Integrated reporting movesbeyond today’s common “elephantview” of individual company finan-cial attributes toward a more com-prehensive assessment of companyvalue and performance and address-es a broad range of financial, value,social and strategic disclosures.

The primary benefit of integrated

reporting is a more holisticview of information relevant to

the company and its value proposi-tion and strategy. As outlined in OneReport: Integrated Reporting for a Sus-tainable Strategy, by Robert G. Ecclesand Michael P. Krzus, this approachpromotes a wider perspective of theinformation vital to a company’slong-term strategic objectives. As aresult, financial executives havean opportunity to transform cor-porate processes and enhancelong-term corporate value.

Information standardiza-tion provides new informa-tion-processing capabilitiesthat facilitate the more com-prehensive integrated report-ing approach yielding benefits,including:>>Greater access to and transparen-cy of information from a wide rangeof both internal and external infor-mation sources, to improve analysisin both the short and long term;>>More automated and streamlinedassembly and review processes,eliminating pervasive manualassembly and review systems;>> More transparency, reuse andcollaboration on reporting andanalytical concepts used by bothinternal and external analysts,



disparate information sources,

financial executives can eliminate

the narrow perspectives of the

elephant and the blind man parable —

and “see” beyond merely

information silos or reports.






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enhancing process agility;>>More relevant information avail-able for management and stakehold-er decision analysis of both the shortand long term; and>>Wider collaboration on reportingstandards and disclosure conceptsproviding a broader dialogue onreporting standards as suggested bythe International Integrated Report-ing Committee (IIRC) and the WorldIntellectual Capital Initiative (WICI).

An Elephant in the Grocery StoreFinancial executives around theworld currently work in environ-ments that often require significantmanual effort to access and repur-pose information from a wide rangeof disparate internal enterpriseresource planning systems, consoli-dation applications and spread-sheets. Internal company reportsreflect information from their systemof origin and are often too narrow orare manually assembled and therebyeither too expensive or untimely tobe valuable for decision-making.

Similar to the blind men in theanalogy above, many financial exec-utives and their stakeholders canonly cost-effectively access partialinformation relevant to their analy-sis. Limited access is often createdby a range of proprietary informa-tion silos, manual report assemblyprocesses and disclosures reportedin content specific documents.

Further, common manual reportassembly processes create inherentopacity for those seeking to moreeffectively manage information rele-vant to corporate strategies andinternal and external compliancerequirements.

The capability to more effectivelyaccess, manage, analyze and reportinformation is dramaticallyimproved by supply chain informa-tion standardization. One standardi-zation example — the application ofthe Universal Product Code (UPC)to grocery store products — signifi-cantly enhanced transparency andprocess improvements for all supplychain participants from vendors to

distributors to retailers to consumersto analysts.

Unlike the physical grocery shop-ping processes, standardized busi-ness information is intangible andcan be assembled using automatedprocesses. If grocery store productswere intangible, consumers couldpull their shopping list of productsdirectly into their carts withoutgoing through the store. Further, theUPC exposes standardized productinformation that can be used for abroad range of purposes including:>> Standardized definitions forproduct comparisons and analysis;>> Automated inventory manage-ment impacting retail pricing, prod-uct placement and procurementschedules;>>Consumer check out; and>>Relationships between productssuch that consumers can better under-stand which menu options might beavailable or optimized on a particularday or within a specific store.

(This last example certainlywould have helped the blind men tomore comprehensively understandthe elephant parts — not just the onethey were touching.)

Likewise, the improved accessand reuse enabled by informationstandardization can assist financialexecutives in more effectively ac -cessing, analyzing and reporting ofthe comprehensive informationstrategically relevant to long-termcompany performance and value.

Using standardized informationprocesses, internal (and potentiallyexternal) consumers can “pull” rele-vant information into their integrat-ed report from across a wide rangeof disparate information sources.

Financial executives realizing thatthey are consumers before they areproducers of information are the firstto benefit. Such a consumer-centricorientation places a premium on thecomprehensive nature, context andrelevance of information for bothinternal and external consumers.

Regulators, investors, analysts,creditors and companies are capableof pulling public company disclo-sures they deem relevant directly

into their individually unique analy-sis or integrated report. In this con-text, integrated reporting is not onlya reporting option but rather a newanalytical capability that providesmore timely, comprehensive andeffective insights.

Compliance Migration to The InternetRegulators around the world aremigrating their compliance process-es from paper to the Internet, whichcommonly includes a transitionfrom unstructured, such as html,PDF and Word, to structured, stan-dardized formats (e.g. eXtensibleBusiness Reporting Language, orXBRL) that are designed to enhanceboth production and consumptionprocesses. This Internet compliancetransition facilitates enhancementsin the reporting process for financialexecutives, depending on their im -plementation approach.

Some executives perceive theseregulatory changes as incrementalrequirements and thereby “bolt on”the requirements to the end of theirexisting compliance processes, thusadding cost and time. Others regardthese regulatory changes as oppor-tunities to “build in” standardiza-tion earlier in their processes. As aresult, they automate and streamlinetheir report assembly and reviewprocesses, leading to cost and timeimprovements of 25 percent to 50percent, or more.

In realizing the benefits of thebuilt-in implementation approach,executives are afforded better access,reuse and analysis of the compre-hensive information contained with-in a broad range of internal andexternal systems. This includesinformation relevant to strategicobjectives, governance, businessrisks and related executive compen-sation, KPIs and corporate socialand market oriented disclosures.

Similar to how the UPC standard-ized grocery store productsstreamlining inventory and salesprocesses, the XBRL standard appliedto a broad range of company systems,reports and information enhances

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access, reuse and analysis by financialexecutives across a broad range ofreporting needs.

Southwest Airlines: An Inte-grated Reporting Case StudySouthwest Airlines Co., a major Dal-las-based domestic airline, annuallyissues the Southwest Airlines OneReport. This integrated report wasborn of market discussions of indus-try issues by the company’s reputa-tion management team, and hasbeen developed and enhanced overthe last five years. “We needed totell our story. It’s not a new story, wejust haven’t ever told it.” says Mar-ilee McInnis, Southwest’s communi-cations manager.

What was initiated in 2007 as sep-arate reports on financial, manage-ment and environmental disclosureswas integrated into the One Reportin 2009.

“Southwest is a company thatfocuses on a sustainable operation inevery aspect of our business. We area corporate citizen that maintainscustomer service while still meetingour fiduciary responsibility” saysMarcy Brand, the airlines director ofInvestor Relations. “Our team hasmade a commitment to communi-cate our direction to the market andour One Report is a great mediumfor that.”

Focusing on shareholders, em -ployees and customers as theprimary audience for Southwest’sintegrated report, the company ini-tially targeted fuel and water use,issuing the Southwest EnvironmentalStewardship Report.

This separate report focused onuse, management, recycling of com-pany resources and the improvementsmade to company infrastructure,such as planes, operational and main-tenance processes and groundequipment that are designed to opti-mize resource usage.

In 2009, following a continuousimprovement process and dialoguewith targeted stakeholders, the com-pany integrated various disclosureareas — financial, nonfinancial,environmental, suppliers, social and

community, among others — into itsOne Report, while also expandingand refining the areas to meet stake-holder needs.

To address some of the incremen-tal shareholder information needs, itbecame clear to company manage-ment that they were not going to beable gather all of the relevant data orimplement the additional humanand financial resources overnight.Company senior management sup-port was critical in addressing theresource requirements and processchanges necessary to collect, analyzeand manage the incremental infor-mation needed for the Southwestintegrated report.

In some cases, due to the opacityof existing processes and systems,temporary manual work-aroundswere required to collect and analyzedata from the underlying systems.However, in planning for additionaldata, management found that itcould incrementally manage andreport on important areas, including

employee training oucomes and vol-unteerism.

Southwest realized benefits fromintegrated reporting through morecomprehensive and effective infor-mation processes.

Roadmap to BenefitsThe roadmap to realizing benefitsfrom integrated reporting — whilerelatively straight forward — is notnecessarily a simple one. It requires acomprehensive approach, includingcoordination across a wide range ofbusiness segments, processes, infor-mation silos and internal groups.

Understanding the corporatestrategy drivers is an initial step; it’seasy to say but difficult to do. Man-agement’s assessment should incor-porate core values and the resourcesrequired for delivery. These resourceswould include critical companyprocesses; customer, employee, ven-dor and community attributes; sup-ply chain processes; and market,competitor and other external forces.

Reaping the Benefits of Integrated ReportingAsk yourself...

External ReportingAre key components of whatmakes my business successful missing from our reporting?

Would I invest in my company basedon what is presented externally?

Is the market value of my companya fair reflection of the business?

Does the quality of our reportingmake us more vulnerable thanpeers to a hostile takeover bid?

Does my company's reportingshow clear alignment betweenstrategy, remuneration and KPIs?

Internal ReportingIs too much time spent producing the numbers, rather than gaining real insight?

Is reporting flexible enough torespond to change?

Do we have the market insight andnonfinancial information needed tostay ahead or are we too dependenton historical, financial information?

Do we have transparent perfo-mance measures with clearaccountability for them?

Do we have a complete, timely pic-ture of what’s going on in the busi-ness financially and operationally?

Today, every management team needs to be able to put themselves in theshoes of a skeptical outsider, such as an investor, a new recruit, a customeror a supplier. If done well, integrated reporting can secure capital andcredit, help win the war for talent and build strong business relationships.

Source: PwC:

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Assessing relevant informationfrom across these comprehensivestrategic areas is one of the most dif-ficult tasks for managers. It requiresestablishing common definitionsfor critical information and poten-tially rethinking the associationbetween strategy drivers and theunderlying processes and relatedperformance metrics.

This often requires a better, moreholistic approach to company keyperformance indicators — those thatare integrated into the company’slong-term strategy for value creationacross all stakeholders. This assess-ment moves beyond traditionalbusiness intelligence and risk man-agement approaches.

Traditional information manage-ment solutions may not provide theagility, scalability and scope to eco-nomically permit this more compre-hensive information managementprocess. Physically connecting dis-parate information systems creates acostly and rigid information process-ing environment that is simply notadequate or agile enough to supportboth internal and external supplychain information sources.

Information standardization pro-

motes more seamless exchangesacross both internal and external sup-ply chain information stores, enablingconsumers to pull information theydeem relevant to their specific andparticular needs. This source stan-dardization offers an Internet-styledenvironment of interoperable sys-tems, facilitating improved informa-tion access, analysis and reportingprocesses. These process enhance-ments can lead to:>>Easy information access across allrelevant systems lowering informa-tion reuse and systems maintenancecosts;>>Consumer-centric reporting andanalysis;>>Social or collaborative reportingand analysis processes that improvecoordination across organizationalbusiness segments and informationsilos; and>> Comprehensive assessments ofinformation highly relevant to inte-grated reporting.

A More ComprehensiveApproachIntegrated reporting provides a broadassessment of company value andperformance and addresses a compre-

hensive range of financial, value,social, environmental and strategicdisclosures over long-term periods.This approach aligns the informationimportant in managing sustainablecorporate value creation for all stake-holders. As a result, the integratedreport provides a clearer more com-plete picture of the company.

Standardized information em-powers financial executives and oth-er consumers to more effectivelyaccess, manage, analyze and reportinformation they deem relevant.This more transparent environmentempowers financial executives tomore effectively manage informa-tion relevant to sustainable valuecreation for all stakeholders.

Integrated reporting and infor-mation standardization offers finan-cial executives and their stakehold-ers the ability to obtain incrementalinsights and process enhancements.Realizing these benefits is an oppor-tunity for financial executives toenhance their corporate and person-al value propositions.

DAVID PHILLIPS, CA ([email protected]), a partner with PwC LLP inthe U.K., is the firm’s International Corpo-rate Reporting lead; LIV A. WATSON

([email protected]) is director ofResearch and Development for AccountA-bility in New York; and MIKE WILLIS,CPA ([email protected]), is a part-ner with PwC in the U.S. and ChairmanEmeritus of XBRL International.

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Source: PwC,

Integrated Reporting Model

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