Moving Forward Towards Integrated Reporting

A study on the level of disclosure on the content elements of the <IR> Framework in the financial services industry

Master's Thesis, 2013

81 Pages, Grade: 8,5












Corporate failures, such as the collapses of Enron, WorldCom and Ahold were partially caused by a short-term focus and a strategic misfit between the corporate strategy and the stakeholder requirements and/or company resources (Grant & Visconti, 2006). With the credit crunch still fresh in mind and a global financial crisis still raging, stakeholders question the ability of existing reporting to provide the relevant insights in the performance of a company (Steyn & De Beer, 2012). Particularly for the financial services industry, where the focus lays on historical financial information, corporate disclosure has been subject to debate (Eccles & Krzus, 2010).

The quality and reliability of financial reports is traditionally assured by generally accepted accounting principles (GAAP) and since 2004 the emergence of International Financial Reporting Standards (IFRS). In the ten years after establishing IFRS, the standard became the generally accepted set of financial reporting standards in more than hundred countries. With the concept of fair value, the call for a more forward looking nature in reporting is only partially answered, and only from a financial perspective.

The concept of Integrated Reporting (<IR>) was formed as a partial response to these developments, built upon the premise that integrated reporting has a strong correlation on the resilience and ability of business to create value in the short, medium and long term (The IIRC & Black Sun Plc, 2012). Integrated reporting aims at a long-term holistic disclosure of company performance, forcing companies to align performance and strategy in terms of governance, sustainability, risks and financials. One of the lessons learnt from the accounting scandals in the past is that this long-term approach enhances economic value for all stakeholders. The concept of <IR> founds its origin in South Africa where in 2009 South Africa’s King III Code of Governance Principles was released requiring companies listed at the Johannesburg Stock Exchange to prepare and publish integrated reports (IOD, 2009). The code, which is enforced by the comply or explain principle, was issued by the Institute of Directors in Southern Africa (IOD), chaired by Mervyn King, and made South Africa the first country to have integrated reporting requirements.

In August 2010, the Prince’s Accounting for Sustainability Project (A4S) and the Global Reporting Initiative (GRI) announced the formation of the International Integrated Reporting Committee (The IIRC, 2010).

The International Integrated Reporting Council (The IIRC), of which Mervyn King is chairman, is a global coalition in which different stakeholders (amongst others regulators, companies, academics, the account profession) participate. The IIRC shares the view “...that communication about business’ value

creation should be the next step in the evolution of corporate reporting...” (The IIRC, 2012a). The IIRC was initiated to provide guidance and aid businesses and investors in the adoption process of <IR> and has the mission to create “...the globally accepted International <IR> Framework...” (The IIRC, 2012a) which is aimed at company disclosure of material information on elements of strategy, governance and performance in an integrated and connected way. This mission boils down to a more balanced approach of disclosure on both financial- and non-financial information elements. The IIRC produced a discussion paper in 2011 (The IIRC, 2011a) which received over 200 feedback responses demonstrating massive support for <IR> and the ambition to develop a global framework.

Only just recently, the consultation draft of the <IR> was launched, which represents the last stage before the IIRC will present the final (1.0) version of the framework in December 2013 (The IIRC, 2013d). The draft provides principle based guidance for both the content (content elements) and the nature (guiding principles) of an <IR>. Furthermore it does provide background information on specific concepts like materiality, the business model and the capitals which are further elaborated in three background papers issued earlier this year (The IIRC, 2013a, 2013b, 2013c)

This research debates that integrated reporting sorts effect on non-financial disclosures. More specifically the corporate disclosures within the financial services industry. The financial industry is commonly recognised for its opacity (Akhigbe & Martin, 2006) and high level of intangible assets (Agrawal, et al., 2006) which make corporate disclosures in this sector an interesting case study to assess the impact of <IR> on. The consultation draft of the <IR> framework will be used as a starting point in assessing whether more mature companies (i.e. South African firms) on the path towards integrated reporting, have a higher level of disclosure than the less mature companies (i.e. the IIRC pilot group and firms not participating in any <IR> initiatives).

The remainder of this paper is organised as follows. Section 2 discusses the literature on the topic of integrated reporting and non-financial disclosures. In Section 3, the methodological framework and the maturity assessment criteria are presented. Section 4 discusses the findings and descriptive statistics. Section 5 presents a conclusion indicating the most important <IR> content elements for improvement. Finally section 6 provides a structured approach towards these areas of improvement aimed at the controller and other business practitioners.


The starting point for the literature review is the information environment, in specific the information environment related to efficient capital markets. A range of different stakeholders act within this information environment, but this review is aimed at providers of financial capital allocation decisions. As this study focuses on firms within the financial industry, the financial analyst will be used as a proxy for this specific group of stakeholders. This is in line with the focus of the IIRC, who primarily aim at the information needs of investors (The IIRC, 2011a). Ramnath et al. (2008) draw a conceptual framework of the information environment of investors of which an adapted version is shown in Figure 1. With <IR> being the topic under study, this research focuses on financial and non- financial information disclosure. With the dislcosure of financial information largely covered by financial reporting standards (like IFRS and GAAP), the accent will be on non-financial information disclosure.

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Figure 1: The information environment of financial analysts in capital markets (adaptep from Ramnath, et al., 2008)

This literature review is based on three streams of the extant literature: (1) research on disclosure and the information environment, (2) research on developments in non-financial information disclosure and (3) research on the concept of integrated reporting. The chapter will be closed with the research problem and the research questions examined in this study.

2.1 Disclosure and the information environment

To understand the importance of corporate disclosures, one should comprehend the context of the information environment in relation to capital markets. It has been widely debated in the literature that the functioning of efficient capital markets is inextricably related to transparency and corporate disclosure (Lang & Lundholm, 1996; Healy & Palepu, 2001). In efficient capital markets, stock prices reflect all information on the value of a firm, and hence, the quality of the information available, is crucial for the functioning of these markets. As a result of this fact, different official bodies and institutions, varying from accounting boards to market authorities, regulate and monitor markets to support the reporting and disclosure mechanisms. Two of the key issues related to this information environment, namely ‘ the agency problem ’ and ‘ information asymmetry ’ are subjects of corporate governance research (Roe, 2004).

The agency problem (based on the agency theory) describes the (mis)alignment of the interests of both agents (managers) and principals (stakeholders). As the ownership and control of a firm are separated, and hence, the interests of both parties differ, costs can arise due to these conflicting interests (Healy & Palepu, 2001; Roe, 2004). This problem, and the related agency costs, are the essence of corporate governance issues as reduction of these costs is relevant for all involved.

Information asymmetry pertains to the different levels of information available to the stakeholders, explained by Ligtenberg (2010, p. 12) as ‘...the extent to which managers have more insights about the firm and its value, than other external stakeholders...’. This problem, and disclosure related solutions, has been widely studied in the literature (Healy & Palepu, 2001; Harris & Raviv, 2008).

The availability and quality of information arises to be crucial for both key issues. Moreover, Barry and Brown (1985) argue that when the agent has an information advantage over the investor, an information risk premium is required. Lang & Lundholm (1996) and Botosan & Harris (2000) found evidence that there is a positive relationship between corporate disclosure policies and a reduced cost of equity capital. A comprehensive survey of Graham et al. (2005) asking CFOs about voluntary disclosure showed that a transparent reputation and reduced stock information risk are amongst the main benefits. Finally, recent research from Ghosh and Wu (2012) showed that buy-side analysts’ recommendations correlate with firm performance outcomes on both financial and non-financial performance measures.

A wide body of academic literature on corporate governance is built upon the premise that information is a core driver for efficient capital markets, since stock prices reflect all available information, and that good corporate governance contributes by increasing transparency (see for example Roe, 2004). Information is not homogeneous in nature, making some information more costly to process. This difference in nature is referred to in finance literature as hard and soft information (Petersen, 2004), also referred to as quantitative and qualitative (Engelberg, 2008) or financial and non- financial (Orens & Lybaert, 2007, 2010). Intuitively these classifications indicate a difference in numbers versus text, with the latter more costly to process and less comparable. Financial information traditionally consists of a balance sheet, an income and cash flow statement and notes to these disclosures. Non-financial information encompasses the management discussion, environmental and societal disclosures, governance information and other information not disclosed in the financial statements.

Based on the information available the investor community (as depicted in Figure 1) endeavours to answer the question: what is the value of a company? With the past decade focussing on compliance and regulation, rather than the informational value, a vast amount of disclosures (e.g. financial statements, CSR reports, governance reports) became available to the investor community, all providing different insights on this valuation question. However, no unified concise picture of these different insights is presented linking business strategy to different aspects of value creation.

As described by Ligtenberg (2010), the examination of the efficient market hypothesis and the academic research around corporate disclosures heavily relies on financial and accounting measures which is ‘...a remarkable observation as the efficient market hypothesis is based that markets incorporate all publicly, both quantitative as qualitative, information available immediately... ’ (Ligtenberg, 2010, p. 14). Specifically non-financial information is subject of study in the next paragraph. The articles of Zeff (2005, 2013) are suggested for background information on the developments of financial information disclosure.

2.2 Developments in non-financial information disclosure

Traditionally, firms disclose their performance by means of financial measures (e.g. net profit, earnings per share, return on equity). Criticism on these financial measures is widespread and stems from the short-term orientation (Lev, 2001) and limited (financial) scope (e.g. Bouwman et al., 1987; Previts et al., 1994) of these measures. The academic literature shows that analysts and investors have information needs going beyond financial measures in order to assess the long term value and prospects of a company. The value of non-financial information and measures in this light, has been of crucial importance to these stakeholders because of the forward-looking nature and effect on financial value (Amir et al. 1999; Orens & Lybaert, 2007; Ligtenberg, 2010). The findings of Flöstrand (2006) are noteworthy, as this research shows that the content of analysts’ report on intellectual capital differs between industries (e.g. telecommunications have more intellectual capital information compared to energy). The nature of a firm’s operations, and hence, its source of revenues, appears to determine the value of non-financial information. More specifically, the more volatile and opaque the source of revenues of a firm are, the more value the investor community (e.g. financial analysts) place on non- financial measures (e.g. Orens & Lybaert, 2010; Ghosh & Wu, 2012). The level of intangible assets, used as a proxy for the opacity of a firm, is increasing over the last decades. Graph 1 demonstrates that nowadays only a small percentage of market value can be derived from tangible assets.

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Graph 1: Components of market value by asset class (Ocean Tomo, 2011)

The rise of the importance of non-financial information is accelerated by the shift in asset class. It is therefore not the question if, but rather how and what to disclose with respect to non-financial information. Eccles and Krzus (2010) point to the direction of non-financial disclosure of risk factors, strategic direction, innovation, integrity, governance and environmental performance. According to García-Meca et al. (2005, p. 65) such information “...cannot be included in financial statements because of identification, recognition and measurement problems...”.

The benefits of reduced information asymmetry as a result of greater disclosure as described in the beginning of chapter 2, apply for both financial and non-financial disclosures as long as the information is value-relevant or material (Dhaliwal, et al., 2011). Disclosure of non-financial information not only contributes to a reduction of this information asymmetry, it also allows different stakeholders to assess firm performance, and provides a broader view on the value of the company (Narayanan, et al., 2000). But not only in academic practice the value of non-financial information is recognised. Also related underlying concepts like corporate social responsibility (CSR) and triple- bottom line (TBL) have become important topics among academics and policy makers (e.g. Gray et al., 1995; Skouloudis et al., 2010; Eccles et al., 2011). As indicated by Perrini et al. (2011) the business case for social responsibility in relation to financial performance remains controversial. Although CSR disclosures are becoming common practice in corporate disclosures, the hypothesis that a strong CSR performance will result in higher economic and financial value is not undisputed (e.g. Horvátova, 2010; Salzmann et al., 2005). From a business perspective, a recent global survey under business executives on the topic of sustainability showed the increasing importance of the topic and the relevance for the competitiveness of a firm which was recognised by 87% of the participants of the survey (Kiron, et al., 2012).

However, as described by Eccles et al. (2011, p. 3) no unifying framework for disclosure of non- financial information “...has risen to the level of international Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Standards (GAAP)...”. One of the better known standards being developed for this purpose is the Global Reporting Initiative’s (GRI) Sustainability Reporting Guidelines (G3). Even though this framework provides guidance on reporting on economic, environmental and social performance, it still does not provide a systematic approach to disclose all relevant and material non-financial information. Moreover it also does not provide guidance on how to link financial and non-financial performance. Forward-looking information, being another aspect often related to non-financial information, is also not captured by the G3 standards.

Whereas the focus of traditional financial reporting is one of backward-looking historical performance, the forward-looking nature of non-financial reporting is another aspect for which no unifying guidelines or frameworks are available. As discussed by Lev (2001), non-financial information offers guidance in estimating the future cash flows that can arise from intangible assets as reported by traditional financial reporting.

The development of a generally accepted framework for non-financial information disclosures (including reporting standards) would be beneficial to the information environment in capital markets in terms of consistency, comparability and assurance (Eccles, et al., 2011). The following paragraph will introduce the concept of integrated reporting as a possible direction for building such a framework.

2.3 The concept of integrated reporting

The concept of integrated reporting (<IR>) combines both financial and non-financial information and includes issues and risks from a range of perspectives including social, organisational and environmental. <IR> is commonly referred to as ‘one report’ (Eccles & Krzus, 2010) in the literature. Within the business environment, <IR> comes forward in the King Code of Governance Principles for South Africa 2009 (King III code) in South Africa and the evolving work conducted by the International Integrated Reporting Council (IIRC) in Europe. Elsewhere in the world other similar examples are evolving (e.g. France by means of the Grenelle II legislation). One of the first moments for the concept to gain attention was the publication of the book by Eccles and Krzus “One Report” in 2010 (Eccles & Krzus, 2010). A chart based on a simple query from Google search results on the search term “integrated reporting” shows that since 2010 the concept has gained momentum (Graph 2). Different (academic) publications have followed since 2010 with the publications of the IIRC and the King Committee in South Africa being the most relevant for understanding the concept.

The exact definition of what <IR> is differs as the subject is still developing. The similar concept, one report, is defined by Eccles and Krzus (2010) as the integration of information about financial and non-financial performance (i.e. environmental, social and governance). The King III code defines <IR> as “...a holistic and integrated representation of the company’s performance in terms of both its finances and its sustainability...” (Institute of Directors South Africa (IODSA), 2009, p. 54).

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Graph 2: Google search statistics on the term "integrated reporting" between 2010-2013

The discussion paper on <IR> presented by the IIRC in 2011, defines <IR> as follows (The IIRC, 2011a, p. 6):

"...Integrated Reporting brings together the material information about an organization’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates. It provides a clear and concise representation of how an organization demonstrates stewardship and how it creates value, now and in the future. Integrated Reporting combines the most material elements of information currently reported in separate reporting strands (financial, management commentary, governance and remuneration, and sustainability) in a coherent whole, and importantly:

- shows the connectivity between them; and
- explains how they affect the ability of an organization to create and sustain value in the short, medium and long term...”

Although it is an extensive definition, important elements of <IR> can be derived from it such as the connectivity of financial and non-financial information, the future orientation and the link between performance disclosures and strategy and the business model of a company. These elements are distinctive of <IR> compared with the G3 guidelines of the GRI.

Drawn upon the definitions above it also becomes clear that <IR> is more than a combination of financial and non-financial information. In essence, <IR> should tell the story of a company, including material financial as non-financial information from the past and present, but also from a forward- looking perspective. It is therefore no compendium of all performance elements available, but an integrated selection of material and relevant information from a financial and non-financial perspective exhibiting a timeframe ranging from short-term to long-term.

The Danish company Novozymes, is generally considered to be the first company presenting an integrated report, which was published in 2002 (Eccles & Saltzman, 2011). Other companies pioneering on the road towards integrated reporting are Novo Nordisk (2004), Philips (2008), American Electric Power (2009) and PepsiCo (2009). Companies from different countries and different industries, but all with a commitment to and history of sustainability reporting.

As described in paragraph 2.1, the availability of a wide range of corporate disclosures (e.g. financial statements, governance report, CSR report) has not led to a concise and unified picture of the true value and performance of a company. At the same time it raises the question if combining all these reports to one single document would provide such an insight. Consistent with the view of the IIRC (2011a) and Eccles and Krzus (2010), the author of this paper does not believe that a combination of these documents into one report would add new insights on the question of what the value of a company is. With markets nowadays heavily regulated, and firms facing compliance pressures from different bodies, the concept of <IR> also cannot replace the other reports as a one-stop-shop by presenting one report. The question should therefore not be on what and how many reports should be presented by a company, but in what way is the company providing an integrated and holistic presentation of its financial and non-financial performance for the past and present, but also providing a future outlook. The size and complexity of the company (Eccles & Krzus, 2010), the regulatory environment (Frías-Aceituno, et al., 2013) and even the cultural system (García-Sánchez, et al., 2013) might impact the final presentation. The <IR> should therefore be seen in a layer context presenting the top layer followed by a second layer of financial and non-financial data and further layers of communications that target specific audiences with varying degrees of detail. A very illustrative figure is provided by Ernst & Young in Figure 2. With the use of technology the <IR> can be linked to other (digital) publications (e.g. full financial statements). The <IR> acts as a primary report providing a clear reference point for other reports or forms of communication.

At the heart of <IR> lays the premise that a wide range of factors determine the value of a company. These factors are not only financial in nature, as accounted for in the financial statements, but also non-financial (e.g. natural resources, intellectual capital, people, brand, societal value). As stated by Paul Druckman, CEO of the IIRC, IR “...enables an organization to communicate in a clear, articulate way how it is using resources to generate value in the short, medium and long-term, helping investors to manage risks and allocate resources most efficiently...” (Druckman, 2012, p. 25).

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Figure 2: Integrated reporting connecting financial and non-financial information (Ernst & Young, 2012, p. 5)

Although no empirical evidence so far exists showing the benefits of <IR>, potential benefit areas can be identified. One of the important benefits is described by Philips et al. (2011, p. 27) as “ standardizing 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...”. It enables making an assessment of company value and performance based on a range of different measures and disclosures in a holistic manner. One could argue that <IR> could also have a positive impact on management behaviour, as it is more difficult to manipulate non-financial performance data on the short-term, than it is to manipulate financial data (Brazel, et al., 2008). Eccles and Krzus (2010) stress the benefits from an enhanced clarity about the relationship between financial and non-financial KPI’s and the tradeoffs made to enhance performance. They furthermore argue that, in line with the ideas of Kaplan and Norton, better measurement leads to better management decisions. To support this hypothesis a benchmark chart of the performance of Novo Nordisk versus its competitors (Graph 3) is presented by Eccles and Armbrester (2011). Similar to the puzzling results on the hypothesis that CSR increases economic value, the true benefits of <IR> can only be tested empirically over time.

To support the adoption of <IR> as a concept the IIRC and Black Sun issued a paper on positive changes as a result of <IR> in 2012. Amongst these benefits are connections between departments, improved internal processes, increased focus and awareness of senior management, a better articulation of the strategy and business model and value creation for stakeholders (The IIRC & Black Sun Plc, 2012, p. 3). These potential benefits were the result of a baseline survey and in-depth interviews for 43 companies participating in the Pilot Programme of the IIRC. To read more about potential benefits ahead, pages 22 and 23 of this paper are suggested for an executive overview.

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Graph 3: Performance of Novo Nordisk vs. Competitors (Eccles & Armbrester, 2011, p. 17)

With potential benefits ahead, and a framework and an approach under development, one of the questions still to be answered is who is responsible for <IR>. Academic publications vary widely from the sustainability journals to accounting journals, and from legal to business journals. As discussed above <IR> is not just a single add up equation of all available the reports. When this would be the case, the corporate communications department would be best suited for the job. The literature perceives the role of the CFO (or controller) to be evolving from a financial controller to a strategic business partner (e.g. Dunleavy, et al., 1997; Howell, 2006; Friedman, 2012; ACCA & IMA, 2012). In this role the CFO is no longer solely financially oriented on economic sustainability, but also involved in strategy and hence the overall sustainability of the organisation being an integral part of business strategy. The integration of financial and non-financial information does affect performance measurement and will require the design of new performance management systems. With the finance function traditonally being experienced with the design and use of performance management and measurement systems, they are best suited to coordinate this integration process.

In the balancing of short-term and long-term goals, the CFO and the finance function “...need to be involved in investment decisions with social and environmental as well as financial outcomes...” (ACCA & IMA, 2012, p. 12). This will require a non-skeptical stance of the finance function towards sustainability in relation to economic value. Furthermore stakeholder engagement, translation of strategy to value drivers (both financial as non-financial) and integration of performance measures in data and processes are crucial steps to take. For a discussion on how the maturity of the finance function affects integrated thinking, the article of Campbell et al. (2012) is recommended. Chapter 6 provides insights into the steps to take for the finane function on the road towards integrated reporting.

The concept of <IR> has been operationalised by means of the King III code in South Africa and the current development of the IIRC on their Integrated Reporting Framework. The remainder of this paragraph will focus on the developments of <IR> in South Africa, the emergence of the IIRC and the development of the <IR> Framework by the IIRC.

2.3.1 The King code

In July 1993 the King Committee on Corporate Governance was founded by the Institute of Directors in Southern Africa (IODSA). This committee was chaired by Mervyn E. King, former South African judge at the ICC International Court of Arbitration in Paris (King, 2013). The repeal of apartheid was reflected in political, social and economic changes in South Africa. The end of apartheid also meant the end of the international boycott, resulting in an increased level of international competition for corporates. The King I report, presented by IODSA in November 1994, was primarily aimed at the enhancement of corporate governance (the inclusive approach to corporate governance), using a comply or explain principle enforced by the listing rules of the Johannesburg Stock Exchange.

In March 2002, the King II report was presented by the IODSA. The King II Code, recommended that a company should annually disclose on economic, environmental and social issues. Although it was allowed to report these issues together with the financial report of a company, many South African companies chose to present a separate sustainability report. King II referred to the G3 guidelines of GRI on disclosure of economic, environmental and social performance, introducing the triple bottom line concept, as described in the previous paragraph. The King II report was internationally recognised for its constructive contribution to good governance principles and the inclusive approach chosen (Klijnsmit, 2011).

The concept of <IR> is currently being enforced in South Africa by the King Report on Governance 2009 (King III code). This code defines integrated reporting as “a holistic and integrated representation of the company’s performance in terms of both its finance and its sustainability” (IRC, 2011, p. 1) and became mandatory from the 1st of March 2010 for all companies listed on the Johannesburg Stock Exchange (JSE). The code urges companies to comply or to provide reasons for non-compliance (“comply or explain” principle). King III is build around the pillars of (1) leadership, (2) sustainability, and (3) corporate governance / citizenship and encompasses disclosure on different (governance) aspects which are relevant for the success of a business (IODSA, 2009). The King III code recommends an integrated approach to the above by linking financial performance with strategy, governance risk and sustainability. Chapter 9 of the code specifically depicts the concept of <IR>, and was followed up by a discussion paper on <IR> in early 2011 (IRC, 2011). This discussion paper was issued by the Integrated Reporting Committee (IRC), not to be confused with the IIRC, which was founded later in 2010. In the discussion paper, the chairman Mervyn E. King introduces the concept of integrated thinking stating that companies producing an integrated report “...for the first time will have to take a new look at themselves and their business models. Through the process of integrated reporting they will be encouraged to explore new and potentially innovative opportunities in their products, services, processes and markets. Integrated reporting, if effectively embraced, has the ability to improve strategic decision-making, improve performance and enhance reputation among stakeholders...” (IRC, 2011, pp. 1-2) .

Makiwane (2012) found an improvement in the level of reporting (measured by a set of 111 indicators) after the code became mandatory for JSE listed firms. The level of integrated reporting in particular improved between the years 2009 and 2011, although the level of harmonisation and interrelation between the elements of integrated reporting remained weak.

2.3.2 The International Integrated Reporting Council and the Integrated Reporting Framework

The Prince of Wales Accounting for Sustainability Project (A4S) was, together with GRI, one of the predecessors of the IIRC (Accounting for Sustainability, 2012). In August 2010 A4S and GRI announced the formation of the IIRC uniting representatives from corporate, academic, accounting and regulatory practices. The aim of the IIRC is the development of an International Integrated Reporting Framework that: “...draws together other reporting strands and communicates the full range of factors that materially affect the ability of an organization to create value over time...” (The IIRC, 2012a).

The IIRC, an international cross-section platform, acts as a body to oversee the creation of a globally accepted <IR> Framework and is chaired by Professor Mervyn E. King, with Paul Druckman being the CEO. In 2010 and 2011 the IIRC organised different events and meetings around the globe on the topic of <IR>, resulting in the launch of the <IR> Discussion Paper (“Towards Integrated Reporting: Communicating Value in de 21st Century”), and establishing the <IR> Pilot Programme. As concluded in paragraph 2.2 no formal standard-setting or regulatory body was available that was responsible for creating standards for <IR>. The IIRC aims to fill up this space by developing the Framework.

The Pilot Programme of the IIRC compromises both businesses (the business network with over 85 business participating) and investors (with over 30 institutional investors participating) supporting the development of the <IR> Framework. The pilot group acts as an innovation hub not only pointing at the shortcomings of corporate reporting, but also to challenge the developments of the framework (The IIRC, 2012b). The pilot programme will run until September 2014 and, with the ambition to present the final <IR> Framework in December 2013, will therefore also benefit from participant feedback during the following ex post reporting cycle.

The discussion paper presented in 2011 discusses the rationale behind <IR>, providing initial guiding directions for the development of the framework and next steps towards its creation and adoption (The IIRC, 2011a). Over 200 companies submitted their responses and comments on the framework before the end of 2011 which were processed by the IIRC in the refinement of their proposals (The IIRC, 2011c). In the discussion paper the building blocks of <IR> are presented, later on referred to as content elements and guiding principles (see Figure 3).

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Figure 3: The fundament of the <IR> framework (The IIRC, 2012b, p. 3)

These building blocks show similarities to the multilevel framework presented by Perrini et al. (2011, p. 69) which focuses on efforts, drivers, and outcomes. The framework aims to make visible “ the organization uses different capital (financial, manufactured, human, intellectual, natural and social), its impact on them, and their interdependence...” (The IIRC, 2011a, p. 8).

The business model and the ability to create value in the short, medium and long term are the central themes presented in the discussion paper. The business model is a crucial theme for <IR>, and was recognised as such, as in 2013 an additional background paper was issued on this topic (The IIRC, 2013a). As no generally accepted definition of this concept was available, the background paper provides, on the basis of a literature review, guidelines on the process by which an organisation creates value. The business model encompasses both external and internal factors, as well as the resources and relationships used and affected by an organisation, in the process of creating value. This concept was visualised by a figure which became emblematic of <IR> and is presented in Figure 4. The idea of the measuring of and the reporting on material components of value creation of a firm should result in a better understanding of past, present and future value of a company. For an explanation of the different capitals the author refers to the background paper on the capitals issued in 2013 by the IIRC (The IIRC, 2013b). For a description of the content elements and guiding principles, the author refers to appendix IV of this paper and the consultation draft issued in 2013 (The IIRC, 2013d).

The content elements and guiding principles as presented in the discussion paper were the primary subject to gain feedback on for the IIRC, as these are the building blocks of the final framework. These building blocks were clarified by illustrative examples of so called “good practice”.

Although the IIRC received a lot of feedback on these elements, in essence the elements did not change significantly in the consultation draft of the <IR> Framework presented in 2013.

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Figure 4: The business model and value creation (The IIRC, 2011a, p. 10)

In the discussion paper, the IIRC chose to take an approach describing what <IR> is not, and how it is different from traditional reporting rather than providing specific guidelines. Table 1 shows the differences as recognised by the IIRC as an introduction to the guiding principles and content elements of Figure 3.

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Table 1: How is integrated reporting different (The IIRC, 2011a, p. 9)

The steps which followed after the presentation of the discussion paper of September 2011 were the development of a draft outline of the framework (presented on the 11th of July 2012), which was followed by a prototype of the <IR> framework (released the 26th of September 2012).

The feedback from these consultation rounds and the continuous feedback from a business perspective provided by the Pilot Programme, ultimately led to the final Consultation Draft of the International <IR> Framework, which was presented on the 16th of April 2013. Until July 15th, the IIRC is calling all stakeholders across the world to read the draft and to challenge and critique it, in order to get the feedback they need to come up with a final 1.0 version of the Framework later this year (December 2013). The year 2014 will be the year where this 1.0 version can be tested in practice.

With the <IR> Framework reaching the final phase of its design, the content elements and guiding principles, as defined in the Consultation Draft, are not expected to be subject to significant changes. Considering the changes in the Consultation Draft pertaining to previous versions of the framework, the changes in the content elements were only minor and limited to wording and the order of presentation.

Although some companies participating in the IIRC Pilot Programme are already presenting Integrated Reports, it remains unclear if the concept of Integrated Reporting significantly enhances non-financial disclosures. As discussed, to the knowledge of the author, only very limited research is available on the effect of <IR> on corporate disclosures. This thesis endeavours to establish if the changes in the rulebook will also change the game.

This leads to the central research problem:

Does Integrated Reporting lead to a higher level of disclosure on non-financial reporting, as measured by a set of non-financial reporting criteria used on the basis of the Consultation Draft of the Integrated Reporting Framework?

2.4 Research questions

This paper will focus on two aspects of integrated reporting – (1) maturity of disclosure on the content of the report, measured as the availability of specific content elements of the CD of the <IR> Framework, and (2) the forward-looking nature of the report, measured by forward-looking statements. With only a sample size limited to 6 cases (firms) and 12 observations (reports), the problem will be examined using research questions rather than hypotheses. A larger sample size is crucial to guarantee the statistical validity of rejecting or accepting hypotheses.

To form the research questions a conceptual framework, presented in Figure 5, is used. This figure represents the journey towards <IR> over time. The y-axis shows the level of integrated thinking, the x-axis shows the development of reporting over time. The size of the bubbles shows the relative reporting size.

Whereas in the history of reporting, companies only disclosed financial information, showing no level of integrated thinking, non-financial reporting (e.g. the management discussion and governance report) found its way into the annual report. Due to regulatory (e.g. IFRS / GAAP) effects, the size of the financial reports (i.e. financial statements) increased significantly over time. The introduction of sustainability reporting (CSR reporting), showed the next step towards integrated thinking. With most companies presenting separate CSR reports and annual reports, the final step is the stage of integration. The <IR> could serve as the primary report in a holistic communication model, linking financial statements, CSR reporting and other forms of disclosure to this report through electronic communication (i.e. the website of the company). The <IR> could either be a totally integrated report, replacing all other forms of reporting, or could be a compact report, suited for different stakeholders, with (electronic) references to additional disclosures (e.g. full financial statements are separately available for regulators and financial analysts).

illustration not visible in this excerpt

Figure 5: Conceptual framework of reporting maturity

2.4.1 Maturity of disclosure on the content of reporting

The assessment of disclosure on non-financial information, which the content elements of integrated reporting are, is relatively new in financial and academic practice. Amongst those taking a qualitative approach towards disclosure are Orens and Lybaert (2007) who found that the disclosure of voluntary non-financial information by listed firms is increasing over time. Ligtenberg (2010) assessed non-financial information in company disclosures as well, and found that after the passage of Sarbanes-Oxley, cross-listed firms became more transparent in their disclosures than their non cross- listed equivalents. It is expected that firms which are more mature on the path towards <IR> show a higher level of disclosure on the content elements of the <IR> Framework. The first research question is formulated as follows:

Q1: To what extent does the level of maturity towards Integrated Reporting influence the level of disclosure on the content elements of the Consultation Draft of the Integrated Reporting Framework in the reporting of companies in the financial services industry?

2.4.2 Forward-looking nature of reporting

The future orientation of a report is a distinctive element of integrated reporting. Research in economic and accounting academic practice often takes a quantitative approach in assessing the forward-looking nature of a report. For example, Li (2006) finds evidence that there is a link between future returns, and the risk sentiment of annual reports). Aljifiri and Hussainey (2007) took a qualitative approach and found that profitability has a significant correlation with the forward- looking information in annual reports of companies in the United Arab Emirates. The forward-looking nature of the reports under study will be subject of the following research question.

Q2: To what extent does the level of maturity towards Integrated Reporting influence the forward- looking nature of the reporting of companies in the financial services industry?

2.4.3 Areas for improvement

A master thesis in partial satisfaction of the degree of Executive Master in Finance & Control is characterized by the element of choice in the research questions. As this paper is a general study on an actual phenomenon (integrated reporting) heading for the business practice of the controller, it is not a case study for a specific company. The element of choice will therefore be incorporated in the third research question. This specific research question will be the basis for chapter 6, to formulate a structured approach for companies in the financial services industry.

Q3: What are the most important areas for improvement for companies moving towards Integrated Reporting, based on the content elements of the Consultation Draft of the Integrated Reporting Framework?


Excerpt out of 81 pages


Moving Forward Towards Integrated Reporting
A study on the level of disclosure on the content elements of the <IR> Framework in the financial services industry
TiasNimbas Business School
Executive Master of Finance & Control
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ISBN (eBook)
ISBN (Book)
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3963 KB
Integrated Reporting, non-financial disclosures, financial services industry, value driver tree, performance management
Quote paper
Diederik Ligtenberg (Author), 2013, Moving Forward Towards Integrated Reporting, Munich, GRIN Verlag,


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