Integrated thinking involves the board of directors as a collective understanding, knowing, and then planning how the company will make its money. In other words, it must determine the company’s business model, embracing its governance, enterprise risk management, strategy, and internal controls. It also will consider how the company will maintain value creation in the longer term in a sustainable manner. To do this, the board has to determine the inputs into its business activities, the outputs from those business activities, and the effects its outputs have on the resources used by the company, more particularly the effect it has on society and the environment—the social and natural capitals.
Every company is dependent on the resources it uses and the ongoing relationships with its stakeholders. A mindset change is needed at the board and senior management level to accept that there is this interconnection and interrelationship between the use of resources by the company and the company’s relationships with its stakeholders. There is, as it were, a symphony of sources of value creation that includes the relationships with material stakeholders on an ongoing basis, 24/7.
No company operates on a basis of financial capital in one building, human capital in another, intellectual capital in another city, for example. All these things are interrelated and interconnected.
Once management is aware of the legitimate and reasonable needs, interests, and expectations of all its material stakeholders, it can strategize on a more informed basis. It needs to be aware of what is occurring in it supply chain, as it is now well known that what happens in a supply chain can destroy value, particularly the value of a company’s intangible assets. For example, if it is found that in the supply chain products supplied to the company were made by child labor, this would adversely impact the market capitalization of the company.
In thinking on an integrated basis, the board needs to identify the sustainability issues material to the business of the company, as water is to the beverage manufacturer, and embed those sustainability issues into its long-term strategy. In this way, it will be discharging its duty of care to the company.
In the IIRC’s Framework of December 2013, integrated reporting, integrated thinking, and the integrated report are defined as follows:
Integrated Reporting: A process founded on integrated thinking that results in a periodic integrated report by an organization about value creation over time and related communications regarding aspects of value creation.
Integrated thinking: The active consideration by an organization of the relationships between its various operating and functional units and the capitals the organization uses or affects. Integrated thinking leads to integrated decision-making and actions that consider the creation of value over the short, medium, and long term.
Integrated report: A concise communication about how an organization’s strategy, governance, performance, and prospects, in the context of its external environment, lead to the creation of value in the short, medium, and long term.
In a talk given by Paul Druckman, chief executive of the IIRC, to the United Nations Economic and Social Council, he described three stages of integrated thinking.
He started with Einstein’s definition of insanity of “doing something over and over again and expecting a different result.” If one believes the corporation need only deal with financial capital issues and fulfill its duty of accountability merely by providing financial statements according to financial reporting standards and duly audited according to International Standards of Auditing, then one is effectively doing, over and over again, the same thing and expecting a different result in the changed world of the 21st century. One cannot from that, for example, determine value creation. In fact, the business model chosen by the company could be destroying value.
The second stage is an acknowledgment that there is a problem by merely complying with the law and doing the financial statements according to the accepted standards. A new solution is required, but it cannot be based on the old thinking. Again, Einstein said: “We cannot solve our problems with the same thinking we used when we created them.” Consequently, a strategy that only considers the financial aspects of a company and does not concern itself with how the company makes its money and how it impacts the various resources used by the company has not embedded sustainability issues into its strategy. And not to do so would amount to a failure of the board’s duty of care to the company.
The third stage is where all six capitals as outlined in the IIRC’s Framework—financial, manufactured, human, natural, intellectual, social, and natural capitals—are considered together with the ongoing relationships with the company’s material stakeholders. It is accepted that there is an interconnection between the resources used and the relationships with material stakeholders. The board concerns itself with how the company makes its money and how that business model impacts the outcomes on those capitals.
It certainly starts to inform decision-making, and once the board spends more time understanding the mass of data being collected by companies, and taking the matters material to the business of the company and putting them in clear, concise, and understandable language in the integrated report, knowledge does not get lost in information.
Value creation could result in increases, decreases, or transformation of the capitals being used, and the outcomes are internal and external. A company’s success depends on its internal financial return, but in the changed world of the 21st century, it also has to depend on the external return on society and the environment.
The Association for Chartered Certified Accountants (ACCA) has said the following about integrated reporting:
Over the last few decades, sustainability issues have slowly become mainstream, and there is a shift from the creation of share value to the generation of shared value. Through shared value creation, a company links its operations to generating long-term value both for its business and for society as a whole and defines its success in terms of internal financial returns and external social and economic results. Ultimately, creating shared value acknowledges both the work corporations need to do to reduce negative impacts on society, as well as, and more fundamentally, how they can be part of progress on global challenges, such as climate change and the enforcement of human rights. Following this shift, there is a new trend of corporate reporting: the integration of financial and nonfinancial concerns into one accounting tool, known as IR.
Black Sun, an independent research house, in interviewing several companies that were pilot programmers in adopting integrated thinking and doing an integrated report, summarized the information received from these companies on the benefits they got from implementing integrated reporting as follows:
Connecting departments. One of the most mentioned benefits of integrated reporting is the opportunity it provides to connect teams from across an organization, breaking down silos and leading to more integrated thinking.
Improved internal processes leading to a better understanding of the business. Changes to systems driven by integrated reporting requirements are providing greater visibility across business activities and helping to improve understanding of how organizations create value in the broadest sense.
Increased focus and awareness of senior management. 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 organization.
Better articulation of the strategy and business model. Better understanding of organizational activities is enabling companies to establish a holistic business model and helping to streamline communications.
Creating value for stakeholders. Organizations are starting to identify ways to measure the value to stakeholders of managing and reporting on sustainability issues.
Excerpt from “The Chief Value Officer: Accountants Can Save the Planet” by Mervyn King with Jill Atkins (Greenleaf Publishing, December 2016). For more information, visit http://www.greenleaf-publishing.com/chief-value-officer.
Mervyn King is chairman of the International Integrated Reporting Council (IIRC) and chairman emeritus of the Global Reporting Initiative (GRI). He is also professor extraordinaire at the University of South Africa.
