Director, Chief Financial Officer, Diesel & Motor Engineering PLC
Research in Natural Sciences has produced an extensive amount of detail about the extremely complex human anatomy. Has research in social sciences relating to businesses produced a similar amount of knowledge about the anatomy of a corporate? Let us explore.
The Anatomy of a Corporate
A corporate entity is a very complex system featuring resources, forces, drivers, interdependencies, links, dynamics, interactions, cultures and many more facets, operating in an environment where change is a norm. Management of such an entity or a system requires knowledge on workings of these subsystems and their interplay. Until the emergence of integrated reporting ten years ago, it was not common for organizations to institutionalize management of these subsystems and interplays, although some of these aspects were managed in silos. Management of human resources and relationships with customers are two examples. However, after the advent of integrated reporting, businesses have started to look at these relationships as a capital stock that provide inputs for value creation.
Value Creation is key
During the past ten years, the IIRC has fostered and formalized integrated reporting as a methodology to connect the organization’s ability to create value to its worth and capability. The link between value creation and the capitals, at least six of them, has been introduced to the world of corporate reporting through the International <IR> Framework. Integrated reporting also encourages and promotes managing all aspects of value creation, devoid of polarity towards what is monetized. Afterall, success and the value of an entity depends on more aspects than its current financial performance and position.
The Board Agenda
Traditionally, most boardroom resources are expended on reviewing and making decisions on capitals that are monetized and on matters relating to governance and compliance. For example, financial statements, budgets, financial reviews, statements of compliance, matters relating to corporate governance and related party transactions have become some of the key items on a board agenda. This leads us to the question whether our boardrooms dedicate adequate time and resources to other capitals and their providers. i.e. intellectual capital, relationship capital, human capital, natural capital and manufactured public capital.
It is well accepted that these capitals contribute inputs required for value creation. Stakeholders are the key providers of these capitals. Therefore, effective management of capitals and stakeholders are key to optimizing value creation. This requires synchronized and institutionalized processes and practices from the boardroom to the employee at the shop floor.
Tools to manage complexity
A deep dive into possible reasons some boardrooms are being filled with financial numbers, predominantly historical, is necessary. So is the need to look at whether the present body of knowledge and the tools available to the board are adequate to deal with the complex nature of the corporate anatomy.
Development of tools to comprehend, capture, connect and communicate value creation would improve the effectiveness of integrated thinking and consequently integrated reporting. Perhaps academic research may help to fulfil this need. Exponentially growing technology in areas such as IoT, AI, big data and augmented reality may help formulate these tools at an organizational level.
Revolution in waiting
Integrated reporting has been a great catalyst in bringing a range of drivers of value creation to the boardroom. It has promoted integrated thinking and helped organizations truly understand the anatomy of their own entity. The true benefits of integrated reporting and integrated thinking will be felt when decisions are made across an organization based on value creation, as opposed to a short-term view of profitability. Attainment of such a state will be a revolution in corporate management and reporting. The IIRC is well on course.
Integrated reporting and Sustainable Development Goals
The role to be played by corporates in attaining the Sustainable Development Goals (SDGs) is significant. The SDGs seek ethical and responsible behaviour from corporates, thus providing a unified platform for corporate responsibility and a line of thinking to model their values, behaviours and strategies. The International <IR> Framework, by promoting integrated thinking and a multi-capital approach, focusing on the long term, helps corporates to formulate their business case for responsible behaviour and sustainable development. This will eventually become a part of the entity's brand equity, strategy and the board agenda.
Time to appreciate
As the IIRC celebrates its tenth anniversary, it is opportune to look back with appreciation of the responsibility that the IIRC has shouldered in unveiling and articulating the corporate anatomy in a form that supports value-based decision making and reporting. To enlist key players in the corporate world and stakeholders in such a short period is truly remarkable. The benefits that integrated reporting could deliver to businesses and their stakeholders, has created an abundance of interest amongst business leaders and investors. Thus, an interesting phase of corporate reporting has begun.