Organizational Overview and External Environment

While the <IR> Framework asks, “What does the organization do, and what are the circumstances under which it operates?”²² and explains what the answer to this question should include, it intentionally does not prescribe a format for the report.²³ We found no consistent approach in how companies provided this information. It was often mixed with other content elements, like business model and/or performance-related information like financial results, which in some cases were about financial capital. Moreover, when an organizational overview was provided, it appeared in different places. For example, the company might include a link in its online integrated report to another part of the company's website—such as “Corporate Profile,” “Who We Are,” “About Us,” or a “snapshot”—where the user would still have to search for the information of interest.

Governance

The <IR> Framework asks, “How does the organization's governance structure support its ability to create value in the short, medium and long term?”²⁴ In contrast to organizational overview, most companies discussed governance in a single, well-defined section of their report. This is likely due to the fact that most countries have codes and regulations regarding corporate governance that define it as a topic. Nevertheless, we found substantial variation in how companies treated the issue. Some used very lengthy sections of their report—dozens of pages—providing many details about the various elements of corporate governance, such as executive compensation. Longer sections sometimes contained discussions about risk but usually did not address those risks that come from pursuing opportunities. Other companies had very short sections with little detail. Many factors explain this variation in length, from the impact of mandated reporting requirements, companies taking a compliance-only, tick-the-box approach, and simply not knowing how best to discuss this element. Rarely did this discussion explicitly include time frames.

Business Model

The <IR> Framework asks, “What is the organization's business model?”²⁵ As depicted in Figure 7.1, how the organization creates value over the short-, medium-, and long-term is at the core of the <IR> Framework. The <IR> Framework emphasizes that effectiveness and readability can be enhanced by explicit identification of its key elements, a simple diagram with accompanying explanation of these elements' relevance to the organization,²⁶ a narrative flow that is logical given the particular circumstances of the organization, and identification of critical stakeholder dependencies and important factors affecting the external environment.²⁷

As a Guiding Principle, most business model discussions would benefit from increased “connectivity of information.” While some companies combined the description of their business model with a discussion of performance, we did not find a single case in which the company explicitly defined the relationship between its business model and short-, medium-, and long-term value creation. As with governance, we noted substantial variation in the depth with which companies discussed their business model, although we did not find a single example in which a company used the <IR> Framework's recommended features for enhancing effectiveness and readability. Even at the business unit level, some had detailed descriptions that included a discussion of the company's market and strategy, and how the capitals were used in the resource allocation process. Rarely, however, did a company explicitly link the capitals to the capital input/activities/output/capital impact process.

Risks and Opportunities

The <IR> Framework asks, “What are the specific risks and opportunities that affect the organization's ability to create value over the short, medium and long term, and how is the organization dealing with them?”²⁸ Relevant risks and opportunities are those that affect the availability, quality, and affordability of the capitals the company needs to create value over different time frames.²⁹ A comprehensive discussion about either risks or opportunities was rare in the reports we analyzed. On the whole, the discussion was even more scattered in the report, especially for opportunities, than it was for organizational overview and external environment. This could often be attributed to differences in how companies frame these topics. When companies saw risk and opportunity as two sides of the same coin, they discussed them, including their interdependencies, together. Otherwise, opportunities were covered in a variety of places, such as the outlook section (itself a content element) or in discussion relevant to one of the capitals, such as R&D investments. Perhaps driven by regulatory reporting requirements, it was more common for risks to be a stand-alone section. Still, they were also covered in such sections as materiality, governance, or even in a general “About This Report” or “About Us” section.

Strategy and Resource Allocation

The <IR> Framework asks, “Where does the organization want to go and how does it intend to get there?”³⁰ Answering this question includes a statement of strategic objectives for the short-, medium-, and long-term; what the company is doing to accomplish them; resource allocation plans for implementing this strategy; and how it will measure achievements and target outcomes over different time frames.³¹ We found strategy and resource allocation to be one of the most diffuse of the content elements, as it never appeared as a separate section or even as the main topic of a well-defined section by another name. The topics in this content element were typically covered in discussions about the company's business model and performance. Companies varied in the extent to which they were explicit about the six capitals when discussing resource allocation. In some cases, one or more of the capitals was described, but the company was not explicit about the use of this capital as a resource.

Performance

The <IR> Frameworks asks, “To what extent has the organization achieved its strategic objectives for the period and what are its outcomes in terms of effects on the capitals?”³² This includes both qualitative and quantitative information such as indicators with respect to targets and opportunities, with explanations of their significance, implications, and the methods and assumptions used in compiling them; the organization's positive and negative effects on the six capitals; the nature of its relationships with key stakeholders and how the organization has responded to their legitimate needs and interests; and linkages between past and current performance, and between current performance and outlook.³³ For the most part, the reports we reviewed would be better categorized as “combined reports” rather than “integrated reports.” They included the anticipated information on financial and operating performance, often presented well through summaries earlier in the report and with more detail and accompanying explanation. Sometimes later in the report, detail included the business unit or even product level.

Although typically framed as “sustainability” or “corporate social responsibility” performance, all reports contained information on nonfinancial performance, with the capitals discussed more in the background than foreground. The degree of detail regarding nonfinancial performance varied widely, as did how prominently it was displayed. For a relatively small number of companies, a modest amount of forward-looking information—targets or projections—was presented in the context of past performance, both financial and nonfinancial. Noticeably lacking in nearly all reports were explanations of how financial and nonfinancial performance related to each other—a grave oversight considering the centrality of “connectivity” as an idea. Also lacking in virtually all reports was any explanation of how past performance and other factors would contribute to future value creation considered for the short-, medium-, and long-term.

Outlook

The <IR> Framework asks, “What challenges and uncertainties is the organization likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?”³⁴ As the company's view on anticipated future changes, outlook should be built on sound and transparent analysis about changes in the external environment in the short-, medium-, and long-term; what effect these will have on the organization; and how the organization is currently equipped to respond to critical challenges and uncertainties that are likely to arise.³⁵

Although a few came close, virtually no company provided all of the information suggested by the <IR> Framework. Further evidence that this was the weakest of the content elements is that only 25 companies scored a 3, compared to 45–50 for all the others. Various formats were used to present the company's view on outlook. Some companies had a specific outlook section, although titles and level of detail varied. Others provided this information throughout the report, sometimes down to the business unit level. A few companies combined performance and outlook into a single section. Companies varied substantially in exactly what information they regarded as important for this element. It was fairly common for companies to discuss trends and challenges. Although less common, a number of companies identified challenges and uncertainties. Probably due to liability and competitive concerns, most companies did not provide targets, forecasts, projections, or even scenarios.

Materiality

The treatment of materiality in the <IR> Framework has been covered extensively in Chapter 5. Since most companies discussed materiality as a risk factor, we focused our analysis accordingly. Although not high in an absolute sense, the materiality scores indicated that companies on average did a better job identifying their material risks than they did in explaining how they handled or mitigated them. Some discussed material risks at the business unit level. The very low score for use of a materiality matrix indicates that disclosure about the process companies used for identifying material risks was generally poor, even if some did discuss the relationship between stakeholder engagement and the identification and management of material risks. Disclosure was even poorer when it came to explaining the company's definition of materiality or if and how it was making progress in managing these risks.

Stakeholder Engagement

Stakeholder relationships are one of the Guiding Principles in the <IR> Framework: “An integrated report should provide insight into the nature and quality of the organization's relationships with its key stakeholders, including how and to what extent the organization understands, takes into account, and responds to their legitimate needs and interests.”⁴³ Different from the actual quality of stakeholder engagement itself, we measured the quality of disclosure about stakeholder engagement. However, we hypothesize that these are closely related to each other; stakeholders will challenge a company that makes excessive claims about its degree of stakeholder engagement.

Other than use of a materiality matrix, stakeholder engagement was, along with connectivity of information, ranked the lowest of the special factors. It was also the only category in which there was no discrepancy between South African companies and the rest of the sample. However, as discussed in the previous chapter, there is a close relationship between stakeholder engagement and identifying material issues. Nearly 90% of the companies receiving the highest score for stakeholder engagement also received the highest score for identifying material risks (Table 7.1). In contrast, 75% of the companies that received the lowest score for stakeholder engagement also scored the lowest for identifying material risks.

Companies that scored high in both categories typically disclosed on them in the same section of their report. Various formats were used to disclose stakeholder engagement, including tables and graphics. Some companies were explicit about following certain standards (e.g., AA1000 from AccountAbility) or best practice frameworks (e.g., from GRI).⁴⁴ In a few cases, companies only provided positive information about the outcomes of stakeholder engagement, raising the question of whether they were following the <IR> Framework's Guiding Principle of Reliability and completeness: “A complete integrated report includes all material information, both positive and negative.”⁴⁵

Providing further support for the previous chapter's argument that constructing the SVM and getting its full value requires effective stakeholder engagement, we also found a strong relationship between company publication of a materiality matrix and its level of stakeholder engagement (Table 7.2). Nearly three-quarters of the companies that received the highest score on the materiality matrix scored the highest on stakeholder engagement—in contrast to only 16% among companies that did not include a materiality matrix in their integrated report. This suggests that producing a materiality matrix enhances disclosure about stakeholder engagement, likely because stakeholder engagement is an important element of constructing the matrix and thus often discussed when the matrix is presented.

Connectivity of Information

While all of the Guiding Principles are important, for us “Connectivity of information” lies at the heart of integrated reporting. It is through showing connectivity, or the relationships between different aspects of corporate performance, that a report transitions from a “combined report” to an “integrated report.” According to the <IR> Framework, “An integrated report should show a holistic picture of the combination, interrelatedness, and dependencies between factors that affect the organization's ability to create value over time.”⁴⁶ This requires integrated thinking to facilitate the connectivity of information flow into internal reporting, analysis, and decision-making so that the results are reflected in the external integrated report.⁴⁷

As it is difficult to achieve in a paper format and almost equally hard to evaluate, connectivity of information received a fairly low score for the entire sample. To trivialize the concept, connectivity of information refers to the notion that “everything is related to everything else.” This is illustrated in Figure 7.5, which shows that the explanation of connectivity of information in the <IR> Framework includes all of the six capitals and substantive content elements (except for Basis of preparation and presentation and General reporting guidance). Thus, a company has to make choices about what connections to make and in what priority and sequence. Since all content elements are related to each other, the company can justifiably discuss the others when focusing on any specific one. In fact, as shown in Figure 7.6, in discussing each content element, the <IR> Framework explicitly refers to many other elements. If the integrated report were organized by content element, each of which discusses other relevant content elements, this would lead to substantial repetition and would violate the Guiding Principle of Conciseness.⁴⁸ However, the same problem would exist if the report were organized in another way. Since a paper report proceeds in a linear fashion in spite of many interrelationships among different pieces of information in the report, there will always be a tradeoff between concision and connectivity. The solution, we will argue in Chapter 9, is to use information technology as a way of assuaging the limitations of a paper format presentation.

We found the most common attempt to provide connectivity to be in the discussion of the company's business model, risks and opportunities or, to a lesser extent, in strategy and resource allocation. The rarest instance of all—and, to us, the “Holy Grail” of integrated reporting—was a clear articulation of how performance in one dimension affected performance on another. Major obstacles to this include understanding these cause-and-effect relationships and having the data to test hypotheses about them, the latter further limited by the lack of standards. In order to ascertain their robustness, these relationships must be tested across a number of firms.

Website Content

Focused on the content of an integrated report and the relationship between integrated reporting and integrated thinking, the <IR> Framework has relatively little to say about the different channels and formats for providing or gathering information and for stakeholder engagement. That is, the Internet and the role of technology are not addressed in great detail. In its discussion defining the meaning of an integrated report, the <IR> Framework merely notes that the integrated report can be an “entry point” to more detailed information, such as the use of hyperlinks for web-based reports.⁴⁹

Since the next chapter is devoted to corporate reporting websites, here we will merely identify some of the ways in which the companies in our sample were leveraging the Internet. For the most part, they were quite modest, much like the examples in the previous chapter. PDF reports always included a link to the company's website, but specific topics in most of these PDF reports were not linked to exact sections of the website where the content was discussed in greater detail.⁵⁰ In some cases, the online version of the integrated report included links to supplementary information, like more detailed data or further explanation of a topic. This sometimes helped to illustrate the connectivity of different pieces of information. A few companies enabled users to construct their own custom report by choosing which sections of the integrated report to assemble. Although this feature was not available at the individual data item level, in some cases the user could download data in blocks. Finally, some companies put their materiality matrix on their website. Some only put it on their website. A few included the interactive capabilities discussed in the previous chapter. One of the most interesting examples, discussed in more detail in the next chapter, was SAP's completely digital integrated report, which enables the audience to better comprehend the company's view on the connectivity of different types of performance information.

CEO Letter

Although the <IR> Framework says virtually nothing about a letter from the CEO or any other company official, we studied this item as a proxy for integrated thinking. To what extent was integrated thinking reflected in the opening letter from a senior company official that always accompanies an annual or integrated report? Although not always signed by the CEO, every report we examined contained some type of letter. Some letters were signed by the Chairman of the Board or even the CSO. When the latter was the case, it gave the impression that the integrated report had evolved out of a sustainability report rather than a financial report. Putting aside the fact that very few of these letters explicitly used the term “integrated report” or “integrated reporting,” the general quality of integrated thinking demonstrated in these letters was poor.

Although better letters attempted to explain how “CSR” or “sustainability” was core to the company's strategy and/or beliefs (i.e., not a stand-alone initiative), these assertions were rarely supported by much information. Those who made this statement sometimes claimed that by being a more sustainable company, they would contribute to a more sustainable society. This too appeared in general terms with little data to back up the claim from a company or society perspective. Some letters accomplished even less than this, mentioning “sustainability programs” or “CSR initiatives” without any attempt to link them to the core strategy and operations of the company. Since these opening letters set the tone for the reader, they are a strong signal of just how integrated the report really is. Conversely, the quality of the letter will be a function of the quality of the integrated report. That said, regardless of the letter's quality and that of the integrated report it accompanies, these paper documents are only one way in which the company communicates to its audience. These must be viewed in the broader context of how companies are using the Internet for their corporate reporting websites, the subject of the next chapter.