After six years of integrated reporting by listed companies in South Africa, it’s clear that many of the benefits enjoyed are internal to the company. This is because the process of preparing integrated reports has helped embed integrated thinking.
Companies in South Africa cite the “external” benefits of integrated reporting as improved dialogue with stakeholders, better alignment of external and internal reports, and an improvement in balanced reporting and transparency.
Many of the other benefits espoused relate to how the company is managed. Companies talk about increased awareness of the impact of key resources and relationships on financial performance and the company’s future, the focused integration of KPIs relating to the management of key resources and relationships, the breaking down of internal silos and promotion of sharing of information, and a broader understanding of the business model and its components.
These benefits are pretty much what integrated thinking is all about.
The International <IR> Framework contains an official definition for integrated thinking. In essence, integrated thinking is where the key relationships and resources are considered in the decision-making and management of the business, with the awareness that financial performance and business viability are dependent on the good relationships with key stakeholders and the future availability of the resources relied upon.
In today’s connected world with its complexity of interdependencies and trade-offs, a company needs broader information to make more informed decisions. A recent survey of South African executives and non-executive directors of the biggest listed companies to assess the benefits of integrated thinking revealed there had been improved decision-making at the board and management levels as a result of the enhanced information available. Other benefits were improved governance processes and improved risk management.
One of the drivers of integrated thinking within South African companies has been integrated reporting. When asked the question, companies invariably say that integrated reporting has helped embed integrated thinking, with some adding that the impact has been significant. Despite six years of reporting, though, the companies are at various levels of integrated thinking. At a recent meeting of top CFOs, one said he is happy with the degree of integrated thinking, while another confessed they had only achieved a “fair degree”.
The mindset and system changes required for integrated thinking can take time – it is a journey. A prime factor in the speed of the journey is whether or not there is a champion: a strong and enlightened chairman, a chief executive who voices integrated thinking as the way he or she runs the business, or a strategy director who understands the importance of having mutually beneficial relationships with key stakeholders in this connected world.
Embedding integrated thinking should happen at three levels: the board, senior management, and staff members. The board sets the holistic strategy that encompasses the key resources and relationships over the short, medium and long term; senior management implements the strategy and is measured and remunerated against it; and staff members are incentivised to carry out the strategy in the daily operations of the company.
The challenges cited by South African companies in embedding integrated thinking include overcoming silo mentality, the need to improve the reliability of non-financial information reporting systems, and inappropriate KPIs and remuneration which are often set primarily against financial targets. Companies have invested time and resources in getting their non-financial systems on a par with financial systems, with some setting up cross-functional teams to enhance integration and eliminate silos.
On the issue of whether a company can prepare an integrated report without having embedded integrated thinking …. The King Code of Governance for South Africa (King III), released in 2009, required listed companies to prepare integrated reports (the principles of King III fell into the Listings Requirements of the Johannesburg Stock Exchange on an “apply or explain” basis). For some companies this involved a first-time articulation of the business model and its components and widened the range of risks. Importantly, the process got boards involved in setting strategy and direction – hence achieving the first of the three required levels of integrated thinking. The South African experience shows that the integrated report can be a significant catalyst for integrated thinking.
Leigh Roberts, CA(SA), is Chairman of the Working Group of the Integrated Reporting Committee of South Africa, the co-author with Mervyn E. King of “Integrate: Doing Business in the 21st Century (Juta),” and presenter of the “Integrated Reporting Made Simple” series.