Values have Value

Today the International Integrated Reporting Council (IIRC) is collaborating in the signing of an agreement to set a new standard for corporate disclosure jointly drawn up with the Brazilian Government and the Brazilian Development Bank. IIRC Chief Executive Richard Howitt was present at the signing ceremony in Brasilia and this article is an edited version of the speech he gave, demonstrating how integrated reporting helps companies to deliver greater transparencyAccording to OGP’s Articles of Governance, transparency occurs when “government-held information (including on activities and decisions) is open, comprehensive, timely, freely available to the pub... More.

The International Integrated Reporting Council is a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs working to align capital allocation and corporate behaviour to wider goals of financial stability and sustainable development through the cycle of integrated reporting and thinking.

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As many companies, regulators and supervisory bodies understand, integrated reporting is emerging as a leading practice in the world for corporate reporting and to advance principles of transparency in the interests of better business in a better world.

This article is not the time to explain in detail about integrated reporting itself. 

But I will restate three of its basic principles:-

It is not about more reporting but reforming existing reporting.  It connects up the different functions of the company to the business strategy.

The aim of integrated reporting is long-term value creation for the business, but with a broader understanding of the concept of value; based on what we define as ‘six capitals’ – financial, natural, manufactured, intellectual, social and relationship, and human.

Third, although this requires a change of mindset in reporting – what we call ‘integrated thinking’ – it leads to reporting which is more concise and understandable to those inside the business, to those who invest in it and to other external stakeholders of the company.

It is the future of corporate reporting – a future of greater transparency.

Now transparency is often presented as coming from outside the business, a demand for companies to be accountable to wider society. It is associated with a world of twenty-four hour rolling news and a social media in which every citizen can become an instant public commentator.

This is a world of engaged investors, ethical consumers, active trade unions, investigative journalists and vocal interest groups.

There are free capital flows across international borders, where investment can be withdrawn at the touch of button on a computer keyboard, half way across the planet. This is a world where a company’s consumer sales, brand value and stock price built up over many years, can plummet in minutes over rumours or false reports.

Either a company is willing to tell its own story in this new world, or it is content to let others do it for them. Lack of transparency is a risk to the company.

But the message of integrated reporting is to say that leading businesses have begun to see that transparency can also be an opportunity, the pressure for which can come from inside the company too. Companies who undertake integrated reporting find this disclosure is not a threat to the competitive advantage of the company.

In the information society where reputation is part of the 80 per cent ‘intangible’ value in the company, it is a precious source of value creation instead. The transparency that comes from integrated reporting enhances the reputation of the company, the confidence of investors, the loyalty of employees and helps to restore the trust of citizens in business.

Today, it is trust which is the commodity most at risk.

It is at risk in current discourse in Brazil, where the new agreement on corporate disclosure is being signed. In truth, this is equally true in economies around the world.

The recent Edelman survey found the biggest drop in trust in business ever recorded, in 28 countries globally. At the World Economic Forum this year, it was the prevailing topic of discussion. This is because loss of trust has a real cost. It is a cost to the individual business, which fails to adapt to this new climate of openness and scrutiny.

This lack of trust also prevents consumers from spending and a return of confidence necessary for fully-fledged economic recovery. Therefore, it is a real cost to the business – and a cost to all in business.

This is evidenced in the rise in support for anti-corporate sentiment and for economic nationalism, which threatens the open markets and trading relations in which business has thrived in recent years. It threatens the disappearance of what has been called the ‘social license to operate’.

Now the forces behind this are powerful and will not be overcome by any one initiative on any one day. But the agreement on disclosure signed in Brazil today, is its own powerful statement that the trend of loss of trust can be reversed. 

I was honoured to be invited to oversee the signing ceremony, demonstrating that the application of integrated reporting can be integral to the restoration of trust in business. Integrated reporting helps build trust amongst stakeholders and is a bulwark against unfair or unjustified criticism of the company’s conduct.

When businesses think about broader issues such as their employees or their supply chains and managing and measuring how these are working and contributing to the long term success of the company, companies naturally become more robust. 

Integrated reporting means the senior management and Board have a more holistic view of the activities of the company and its value chain. There are fewer hiding places for misconduct or malpractice.

Integrated reporting says companies mean so much more than just short-term, narrow financial return. We say that companies have purpose. Value has values and values have value. Only its absence leaves a vacuum in which fraud and corruption can flourish.

The International Framework (para 3.14) sets this out as follows: “An integrated report enhances transparency and accountability, which are essential in building trust and resilience, by disclosing how key stakeholders’ legitimate needs and interests are understood, taken into account and responded to through decisions, actions and performance, as well as ongoing communication”. 

The new agreement on disclosure in Brazil appeals to companies to understand this for themselves, but then communicate it to others too.

It is no coincidence that our partner in this exercise is the Brazilian Development Bank, BDNES. A pioneer of integrated reporting, the Bank chairs the Brazilian Commission for integrated reporting, which has overseen the adoption of integrated reporting to now 120 companies and organisations in Brazil. As a development bank, it has harnessed the power of finance to raise standards across the country’s economy. 

An academic study shows of the half of all listed companies to whom BNDES has provided financial support, the intervention has led to greater transparency and higher standards of corporate governance. It shows that change can work.

The lead role undertaken by the Government’s Ministry of Transparency, is equal proof of how Brazil has been a global leader in integrated reporting. It is the country which hosted the UN Summit on Sustainable Development, which called on businesses to “integrate sustainability information in their reporting.”

The Brazilian stock exchange was one of the first two in the world to call on their companies to undertake integrated reporting. Brazil was in the top three countries in the world for the early pioneers of integrated reporting – the highest in the Americas. It is a country which has put the ‘six capitals’ of integrated reporting in to their corporate governance code. Brazil brought in law 13 (303), which is seeing the country’s important state-owned enterprises adopt integrated reporting for themselves.

This is a Brazil, in which the signing of the new agreement simply demonstrates the country’s next phase of leadership on corporate disclosure. It is why I flew half way around the world to support today’s event. I wanted to mark Brazil’s global leadership in the past and appeal for that commitmentOGP commitments are promises for reform co-created by governments and civil society and submitted as part of an action plan. Commitments typically include a description of the problem, concrete action... to be maintained in the future.

The International Integrated Reporting Council’s commitment is to continue to work with Brazil and with all our partners around the world, to make our own contribution to setting a new global norm for corporate disclosure.

To speakers of the English language, this is summed up in the phrase: “Don’t put your head in the sand.” Pertinently, the same phrase translates almost exactly into a popular saying in Brazil: “Não enterre a cabeça na areia.”

Transparency works in all countries and in all cultures.

That is the example which today’s agreement signed in Brasilia hopes that others everywhere will follow.