Six groups of actors, each with their own motives, comprise the integrated reporting movement: (1) companies, (2) the audience or users of integrated reports and integrated reporting, (3) supporting organizations, (4) supporting initiatives, (5) regulators, and (6) service providers. Each group's motives are a function of whether they are mission-driven, profit-driven, or some combination of the two. Companies are largely profit-driven, although some have a strong mission element as well. Audience includes a diverse set of report users: investors and other providers of financial capital (e.g., debt and project finance), sell-side analysts, rating agencies, employees, customers, suppliers, and nongovernmental organizations (NGOs). With the exception of NGOs, which are by definition mission-driven, these are largely profit-driven and interested in financial information. The mission-driven members are interested in nonfinancial information. One of the challenges a company practicing integrated reporting faces is to educate these different members on the value of taking a more holistic view of the company's performance. Regulators and supporting organizations and initiatives are mission-driven. Regulators can also be considered members of the audience. Finally, service providers are profit-driven.

These actors' relationships with each other make positive action possible. When two actors are both profit-driven, their relationship is one of shared economic self-interest based on resource exchange. From a company perspective, this is true of their relationship with profit-driven audience members and service providers. In profit-driven/mission-driven relationships, the relationship is based on gaining or resisting influence, such as those between companies and supporting organizations and initiatives and companies and regulators. Relationships between different mission-driven organizations are also based on influence, such as those between supporting organizations and initiatives and regulators.

The integrated reporting movement's momentum is a function of the extent to which these actors succeed in providing resources and exercising influence in ways that accelerate adoption and increase awareness. Accelerating adoption can be accomplished both directly by companies and indirectly by shaping the context through laws and codes of conduct in the institutionalization phase of meaning. Examples of the former from a resource perspective are providers of capital creating incentives for a company to produce an integrated report and service providers that furnish advice and technology to help them do so. From an influence perspective, examples would include supporting organizations that seek to encourage companies to adopt integrated reporting as a “best practice” or to “show leadership” or get “brand value” from doing so. Examples of entities that indirectly accelerate adoption include supporting organizations and initiatives that influence regulators, such as securities commissions, and those with some regulatory authority, such as stock exchanges, to require or create incentives for companies to adopt integrated reporting. Finally, there are many ways in which supporting organizations and initiatives attempt to influence each other and regulators in order to codify and institutionalize the meaning of integrated reporting as a way to accelerate its adoption.

Companies

Absent regulation mandating that companies publish integrated reports, the decision of whether or not to produce one lies with each company. Company motivation to produce an integrated report generally stems from the belief that its tangible (e.g., better financial performance) and intangible (e.g., enhanced reputation) benefits will exceed the tangible (e.g., resources) and intangible (e.g., litigation risk) costs of doing so. In making this assessment, executives must be aware of the concept and important related concepts like integrated thinking and materiality. Although this varies by country, most executives we have encountered today have a modest understanding of integrated reporting at best due to the relative youth of the movement. If these executives are sufficiently senior and occupy the right roles—such as chief executive officer (CEO), chief financial officer (CFO), or board member—they can, however, take the next step and make it an item for consideration, debating its costs and benefits.

The litmus test for both advocates and skeptics is whether integrated reporting leads to better corporate performance through integrated thinking, all of which should be ultimately reflected in a company's stock price. Today, it would be very difficult to analyze this contention due to the limited number of companies practicing integrated reporting for any length of time. However, it is possible to gain insights from company experiences to date, as reflected in their perceptions of the costs and benefits of integrated reporting, even though no algorithm exists to net these out into a “bottom line.” Moreover, even experienced companies find it difficult to quantify the costs and benefits of integrated reporting.

Thus far, surveys have shown integrated reporting's benefits as perceived by companies to be modest and largely intangible. An Ernst & Young (E&Y) survey¹ conducted with GreenBiz² asked company representatives to provide their reasons for why it makes sense to voluntarily adopt integrated reporting (Table 4.1). A total of 282 companies in 17 sectors, all with revenues of $1 billion or more, 85% of which were in the United States, responded to the survey. The top three benefits by a wide margin were all intangible: increased external sustainability awareness, improved transparency and data accuracy, and enhanced brand and reputation. These are cited by over 50% of the respondents. By comparison, tangible benefits such as improved reporting efficiency and cost reductions are ranked relatively low, cited by one-third and one-quarter of respondents, respectively.

Table 4.1 also provides insights into the meaning companies ascribe to integrated reporting. The fact that nearly 40% cited “creating competitive advantage” and “driving collaboration between different parts of the business” suggests that some companies see a relationship between integrated reporting and integrated thinking. However, only one-third or less thought that integrated reporting will improve their communications with investors and enable them to better understand the company, leading to a higher valuation. Except for increased sustainability awareness—and, as noted in Chapter 2, the International <IR> Framework (<IR> Framework) is not couched in “sustainability” terms—more companies cite the internal benefits of integrated reporting than the external benefits. These modest percentages suggest that most companies have yet to be convinced about the full range of integrated reporting's benefits. Until they are, adoption will be slow and momentum will be minimal.³

Similarly, a 2012 survey of 43 organizations in the International Integrated Reporting Council's (IIRC) Pilot Programme Business Network conducted by Black Sun Plc⁴ confirmed the importance of internal benefits, all of which are primarily intangible but most of which are consistent with integrated thinking:

1. “One of the most mentioned benefits of Integrated Reporting is the opportunity it provides to connect teams from across an organisation, breaking down silos and leading to more integrated thinking.
2. Changes to systems driven by Integrated Reporting requirements are providing greater visibility across business activities and helping to improve understanding of how organisations create value in the broadest sense.
3. A shift to Integrated Reporting is increasing the interest and engagement of senior management in issues around the long-term sustainability of the business, which is helping them to gain a more holistic understanding of their organisations.
4. Better understanding of organisational activities is enabling companies to establish a holistic business model and helping to streamline communications.
5. Organisations are starting to identify ways to measure the value to stakeholders of managing and reporting on sustainability issues.”⁵

Unlike the benefits of creating an integrated report, the costs are very tangible, thereby making the decision to adopt integrated reporting a difficult one. Financial and human resource costs include organizing and executing on a process to produce an integrated report⁶ (which includes determining the material issues to be included and necessarily higher levels of stakeholder engagement), investments in technology and control systems to produce sufficiently reliable nonfinancial information on a timely basis⁷ (which can also be thought of as a benefit), the costs of producing an additional report (if it is one), making changes in the company's website to support the integrated report, and educating users about how to get the most benefit out of it. Difficult-to-quantify costs include increasing expectations by the audience and subsequent reputational risk, and legal risk from increased disclosure.

While little empirical evidence exists to confirm the existence or magnitude of these costs and benefits, one could argue that this is beside the point. What is important is that inside the company, management and the board make an informed decision about whether to produce an integrated report or not. Equally important is the fact that some barriers commonly cited to practicing integrated reporting are not seen as significant by most companies. For example, in the E&Y/GreenBiz survey, respondents ranked challenges to preparing an integrated report (Table 4.2). While legal risk is often cited as a reason against integrated reporting, only 18% of respondents considered it the most difficult challenge. Further evidence that legal risk is more of an excuse than a legitimate reason to refrain from producing an integrated report is that there is very little evidence of lawsuits or regulatory enforcement actions against companies for voluntary disclosures. Rather, the problem is one of inaccurate or fraudulent disclosures—or the failure to disclose material items.⁸ All other challenges on the list are cited by 15% or fewer of respondents. With the exception of lack of guidance from standard setters and regulators, cited by only 12% (showing that this is not a significant barrier), all other challenges are internal.⁹

Audience

Perhaps the broadest category of actor, the integrated reporting audience includes shareholders and other providers of financial capital (e.g., bond holders and bank lenders), sell-side analysts, rating agencies, stakeholders of various kinds (including employees, customers, suppliers, and NGOs), potential acquirers, and joint venture partners. In the next chapter, we will simplify the treatment of this group by distinguishing between the “direct audience” of providers of financial capital and the “indirect audience” that includes everyone else. However, this chapter requires more nuanced audience segmentation. For the audience, the significance of an integrated report lies in its potential to help them make better resource allocation decisions or better provide advice that influences the resource allocation decisions of others. For a profit-driven audience, these decisions will be made based on an economic calculus. For the mission-driven audience of NGOs and concerned citizens, these decisions will be in terms of whether to support or confront the company on their issues of concern.

Since integrated reporting is still in its early stages of adoption, it is difficult to assess its impact on audience resource allocation decisions, just as it is difficult to assess its impact on company resource allocation decisions through the integrated thinking that it engenders. The Black Sun survey described above provides some data on companies' perceptions of audience benefits. Here too the results were modest: 21% of respondents believed integrated reporting benefits analysts and investors and 23% for employees, but only 8% of respondents said private shareholders.¹⁰ Respondents were more bullish about the future benefits of integrated reporting as it develops, with 64% citing benefits to analysts, 49% to institutional investors, and an impressive 95% to employees. The present and future data on employees are consistent with the conversations we have had with executives who said that of all their different stakeholders, employees are among the first to benefit when a company starts practicing integrated reporting because it gives them a better understanding of the company. Executives also believed that this benefits the company since better understanding leads to greater employee engagement and, in turn, more efficient and effective employees.

Two surveys queried investors on whether and how they use nonfinancial information, including data likely to be in an integrated report. E&Y released “Tomorrow's investment rules: Global survey of institutional investors on non-financial performance” in 2014.¹¹ Investors rated the sources for nonfinancial information used in investment decision-making and concluded that annual reports (77%), corporate websites (62%), and integrated reports (61%) are “essential” or “important.” Specific issues that emerged as essential or important to investors are business impact of regulation (86%), minimizing risk (83%), and evidence of improved future valuation with business forecast (71%).¹² Investors were also asked to rate disclosures considered to be “beneficial” to investment decisions. The three highest-scoring disclosures were sector or industry-specific reporting criteria and key performance indicators (65%), statements and metrics on expected future performance and links to nonfinancial risks (64%), and company disclosures based on what they feel is most material to their value creation story (60%).¹³ The importance of focusing on issues that are material to a given audience is underscored by the revelation that 50% of investors who do consider ESG issues when making decisions cite lack of clarity in corporate disclosures about whether information is material.

A November 2012 survey by SustainAbility,¹⁴ Rate the Raters Phase 5, The Investor View,¹⁵ looked into how often investors considered environmental, governance, and social (ESG) data and ranked the importance of ESG issues. Sixty percent of investors considered governance issues “always” or “often,” followed by social (40%) and environmental (35%) issues. The highest rated (“important/very important”) governance issue was ethics (79%). About 75% of the respondents chose customer relationship management as the highest rated social issue, and energy efficiency (59%) was the top rated environmental issue.¹⁶

Despite the limitations on rigorous research into the benefits of integrated reporting to companies and their audience, we can suggest hypotheses, largely taken from the arguments of those who support integrated reporting, about the benefits for different audiences and how this leads to company benefits. An integrated report can provide information to investors interested in a company's ability to create value over the long term based on all relevant capitals, resulting in the company having a greater proportion of stable, long-term investors.¹⁷ Sell-side analysts seeking to provide useful research to such investors will be able to provide better insights based on the information in an integrated report, potentially making them more bullish on the company.¹⁸ Similarly, rating agencies may find an integrated report useful in doing credit analysis for the providers of financial capital who use these ratings to make resource allocation decisions. More accurate credit ratings can result in either a higher or lower cost of capital to the company. Largely based on an economic calculus, employees, customers, and suppliers can use an integrated report to make their own resource allocation decisions, potentially in favor of the company.

A company issuing an integrated report may attract higher quality employees or even equally skilled employees for a lower wage. This can be attributed to both the symbolic value of issuing an integrated report and the information it contains if it provides evidence of the company's ability to create value over the long term, thereby reducing the risk of accepting a job at the company. Integrated reporting, especially when it includes high levels of stakeholder engagement, can increase the overall level of engagement of employees. Research has shown a strong relationship between engagement and productivity.¹⁹

Similarly, customers are unlikely to accept a higher price, and suppliers, a lower price simply due to integrated reporting. However, it can “break the tie” for the same reason as employees, especially if the company significantly engages with them in putting its integrated report together. Customers may give an integrated reporting company a greater “share of wallet,” and suppliers may give the company priority in times of demand shortages. We admit that these arguments make a heroic assumption about corporate reporting as an input into decision-making by employees, customers, and suppliers. That is, they assume that these audience members will take the time and effort to access and understand the information provided in an integrated report.

In contrast, it is not a heroic assumption to posit that potential acquirers and joint venture partners would be influenced by the information contained in an integrated report. These decisions involve substantial, long-term resource commitments. Today, acquirers, including private equity firms, have already made ESG issues an important part of their due diligence process.²⁰ An integrated report would not only place these issues in a financial performance context, but it would also address other issues based on all six capitals that affect a company's ability to create value over the short-, medium-, and long-term. Since the success of the partnership will depend upon how well the partner will be able to perform over these periods of time, such information is equally useful to potential joint venture partners.²¹ In turn, a strong integrated report can make a company attractive to an acquirer or joint venture partner. It can also make it attractive as a buyer of another company.

While providers of financial capital comprise the primary audience of an integrated report, NGOs focused on environmental and social issues can also find it valuable. The report will enable them to see the company's view on whether their issue is part of its value creation strategy and how it is managing the capitals of interest to the NGO. Based upon the report, an NGO can decide if and how it wants to engage with the company, including shaping the content of the integrated report itself and the process by which it is constructed. Since NGOs' focus tends to be fairly narrow, they have a tendency to ignore the fact that companies are subject to multiple, often-conflicting, pressures from providers of financial capital and their many stakeholders. By having a more holistic understanding of the company's strategy and performance, the NGO can engage more effectively with the company, whether in private or through a public campaign.²² Given the severe resource limitations typical of most NGOs, this is important. While an integrated report can provide these NGOs with useful information, NGOs must develop the skills to read and understand it in order to reap this benefit. From the company's perspective, it will be able to engage more effectively with NGOs to understand and address their agenda if the NGO has a holistic view of the company and is practicing some degree of integrated thinking itself.

More generally, we hypothesize that any member of the audience can achieve the same benefits of integrated thinking gained by a company during its report production process by learning how to understand an integrated report. Whatever its motives or the nature of its relationship with the company, the report audience will have a deeper understanding of how to meet its own long-term objectives. In fact, integrated reporting can be the basis of greater engagement to the benefit of both the company and its audience. Trade-offs will always remain, but at least they will be mutually understood. For this reason, companies practicing integrated reporting are well-served by making an effort to help their audience understand how to use and benefit from their integrated report. They should not assume this will automatically happen—an assumption being made by companies when they complain, “we aren't getting any credit from our investors for our integrated report.”

Supporting Organizations and Initiatives

Two types of mission-driven actors are influencing the momentum of the integrated reporting movement: supporting organizations and supporting initiatives. Both believe that integrated reporting will benefit society through better resource allocation decisions by companies and markets in order to create a more sustainable society—and more sustainable companies. In the previous chapter, we discussed the most important supporting organizations and initiatives. Here, we simply want to raise the issue of how these organizations and initiatives work together—or not—as each attempts to create system-level change.

The basic question is whether supporting organizations should collaborate with or compete against each other. An important argument in favor of collaboration is that it will eliminate, or at least reduce, confusion in the marketplace. Companies already complain about the “alphabet soup of acronyms” created by the various supporting organizations, asking if they somehow fit together or if the company has to choose one or two of them. While less affected, investors raise this question as well. To the extent that regulators are the targets of influence attempts by these organizations, they too will want to know if choices need to be made and if doing so will put them in the crosshairs of competing organizations and initiatives. A further argument for collaboration is that by reducing this confusion, each actor will actually enhance its ability to achieve its own separate mission, as well as to support integrated reporting, which all claim to believe in.

The argument in favor of competition holds that by “letting many flowers bloom,” the most effective organization or initiative will “win” in the market and regulatory spheres. This framing is similar to that of those who support and do not support, respectively, convergence in accounting standards²³—a framing based on two premises. The first is that there actually is competition, just as in product markets, and that the better product will get the biggest market share or at least, that each “product” will find its appropriate market niche. The second premise is that the resources spent on collaboration by these severely resource-constrained organizations and initiatives are better spent focusing on their main mission.

In reality, collaboration and competition will coexist. The real issue will be striking the right balance between the two. This is already the case today—with a tilt, in our view, toward “competition.” We believe that the movement and its specific organizations and initiatives would benefit from more collaboration. It is our view that, on balance, the gains to each will exceed the costs. Of course, each supporting organization must make its own decisions about the nature and degree of collaboration with others. Some degree of competition will always exist—such as for funding, for companies to serve as pilots, and for investor and regulatory support. However, if “co-opetition,” a game theory–based theory of strategy, can exist in the profit-driven product markets, it can also exist in the mission-driven sector, even though competition here sometimes makes the product markets look tame.²⁴

Regulators

In a corporate reporting context, regulators' role is to ensure that investors are getting the high-quality information they need in order to make informed decisions. At a system level, regulators are responsible for ensuring orderly markets. Exactly what these regulations are, the form in which they are issued (such as rules vs. principles-based), and which organization is responsible for making and enforcing them varies by country. In the United States, for example, this is the role of the Securities and Exchange Commission (SEC).²⁵ All countries with a capital market have an SEC-equivalent and are members of the International Organization of Securities Commissions (IOSCO).²⁶ In some countries, such as South Africa, the stock exchange has substantial regulatory powers. In others, such as in the United States, it has less.²⁷ Any regulator that chooses to mandate integrated reporting, whether in a “hard” (you must do this) or “soft” (comply or explain) way, would do so out of a determination that integrated reporting would enable it to more effectively fulfill its legislated mandate. A regulator choosing to do so would have some degree of freedom, perhaps a great deal, to define what integrated reporting means in its jurisdiction.

Getting regulatory support will be difficult in the short term, especially in countries like the United States Consider the remarks made by U.S. SEC Chairman Mary Jo White in October 2013 where she expressed skepticism about whether the benefits of additional disclosure about environmental or social matters (both likely to be discussed as risks or opportunities in an integrated report) outweigh the costs associated with mandating such disclosure.²⁸ White specifically mentioned rulemaking petitions seeking additional disclosures about environmental matters and companies' equal employment practices, noting that the SEC concluded, “disclosure of such non-material information regarding each of the identified matters would render disclosure documents wholly unmanageable and increase costs without corresponding benefits to investors generally.”²⁹ White also asked whether more disclosure makes it difficult for investors to focus on information that is material and most relevant to their decision-making. White's remarks indicate that the SEC is not convinced about the materiality of environmental and social issues that might be addressed in an integrated report and is likely to view integrated reporting with skepticism if it is seen as just arguing for more disclosure. The real crux of the matter here is “materiality,” the subject of the next chapter.

While unlikely, a regulator could mandate integrated reporting and use the <IR> Framework as the basis of its regulation, including whatever monitoring and enforcement it deems necessary. Since every regulator exists in a web of previously established reporting requirements and guidelines, it would be hesitant to replace them, or even part of them, with integrated reporting because of the sheer cost burden this would place on the corporate community. Simply making integrated reporting an additional requirement would also add costs and potentially create confusion about how it exists with current required reports—contextual pitfalls of which the IIRC is well aware. Because listed companies have regulatory filing requirements, it recognizes that companies may face legal prohibitions to disclosing certain information.³⁰

Any regulator supportive of integrated reporting would most likely incorporate its broad principles, even if not the term itself, into existing reporting regulations. Whether or not it drew from aspects of the <IR> Framework, if the regulator used the term, it would then be putting its own “meaning stamp” on integrated reporting. Such is the power of the State. Views will differ on the consequences of the State exercising it. For example, in the admittedly far-fetched scenario that the SEC were to issue a new regulation for an amended “Integrated Form 10-K” by stating that companies should use Sustainability Accounting Standards Board's (SASB) standards for guidance on materiality for nonfinancial information, some would see it as a major accelerator of the movement because the SEC does not lightly decide lightly to issue new reporting regulations. Others would consider it as a step backward for the movement—a misappropriation of the term that muddles its meaning in perhaps damaging ways. Another likely concern is that integrated reporting in the United States would become a compliance exercise and achieve none of the benefits of integrated thinking.

Whatever one's view, this scenario raises an interesting dilemma for the movement in terms of the costs and benefits of regulatory support. Those seeking regulatory backing must accept the fact that, in doing so, the regulator will impose its own meaning on “integrated reporting.” Should this happen in many countries, it is likely that there would be many meanings, just as there were many country Generally Accepted Accounting Principles (GAAP) not so long ago.³¹ How similar or different these meanings turn out to be would be a function of when these regulations took effect and how widespread adoption already was by companies. If many companies in many countries were already practicing integrated reporting, more or less according to the <IR> Framework, these country-based meanings would be more similar than if regulation occurred before substantial adoption had already taken place.

This is a moot point today. Outside of South Africa, no legislation or regulation in any country mandates integrated reporting—even on a “comply or explain” basis. While the supporting organizations discussed above are, to varying degrees, seeking government support for what they are doing (some of this in the public domain and some not), acquiring overt support from the State is difficult and takes time and resources. It also inevitably involves lobbying, as the mere existence of an initiative guarantees the existence of those who oppose it. Because the impact of regulation is pervasive in that all companies must comply, the State is typically cautious in its decisions as it attempts to balance conflicting demands when issuing new regulations. The effectiveness with which companies comply is a function of the quality of the regulation, along with how effectively it is monitored and enforced.³²

Service Providers

Helping companies prepare and publish their integrated report, profit-driven service providers include accounting firms and others who provide assurance on sustainability reports, consulting firms who help companies prepare and publish integrated reports (including the advisory practices of accounting firms, boutique sustainability consulting firms, and public relations firms), and information technology vendors who provide software and services that are useful in producing an integrated report. Service providers vary in terms of whether they are “meaning makers” or “meaning takers.” “Meaning makers” seek to influence the definition of integrated reporting and an integrated report, and how each should be accomplished. “Meaning takers” seek to understand the existing consensus on meaning so that they can design and deliver products and services

The Big Four accounting firms, along with boutique consulting firms deeply involved in the movement, tend to be “meaning makers.” As experts on the topic of corporate reporting, they feel compelled to offer their own point of view on integrated reporting through white papers, webinars, and conferences. In doing so, they consciously or unconsciously shape the meaning of the concept. In contrast, IT firms tend to be “meaning takers.” Their business models are based on designing software and services to help companies accomplish a task. In the reporting world, these tasks are typically defined by regulation and these firms provide products and services to ensure that their customers are in compliance with them, a mentality most IT firms apply to integrated reporting. As its meaning becomes clearer—and the more detailed and prescriptive the better—the better able they are to design the requisite software and services.

All of these service providers see an economic opportunity in integrated reporting. Whether larger assurance fees for an integrated audit, consulting fees, or sales of software and services, we do not denigrate this motive. It remains an incentive that can help create a market for integrated reporting. In order to create and grow this market opportunity, service providers must develop a deep understanding of integrated reporting, first selling the merits of the concept to their clients before they can “make the pitch” on how they can be helpful. In their product development and marketing efforts, these organizations can learn things that are useful to supporting organizations and initiatives, and even regulators, such as through benchmarking and identifying “best practices.” That said, most service providers are “market followers” rather than “market leaders” in that they wait for other forces (typically a combination of client demand and regulation) to develop the market for them to serve.

It is unlikely that service providers will see integrated reporting as simply a revenue-generating opportunity without any real degree of conviction in its merits. These service providers must make their own resource allocation decisions about which new markets to create and pursue. Because there is hardly a market for integrated reporting today beyond South Africa, investments here must be considered risky ones with a long-term payoff. Unless a service provider “believes” in integrated reporting—although not to the extent of economic irrationality—it is not going to make these investments. These investments can be substantial, ranging from cash and soft dollar support to supporting organizations and initiatives (e.g., secondments, office space, and hosting meetings and conferences) to cash and soft dollar investments made for product and service development. In taking on this risk, the service provider also incurs the opportunity cost from not investing these resources in other opportunities. More intangible investments include putting the service provider's brand behind the concept.

Service providers may also see the costs in producing their own integrated report as an investment. By showcasing their integrated report, they signal that it can be done, demonstrate their belief in the concept, and establish a “moral high ground” for recommending it to their clients along with how they can help them implement it. Suggestive of this, the large software firm SAP published its first integrated report in 2012. In its second integrated report, one of its prominent features revised its approach to materiality.³³ We now turn our attention to this fundamental but elusive concept.