Integrated thinking in action: Governance
Organisations worldwide are increasingly adopting integrated thinking and integrated reporting to help them plan, manage and report on their business in a holistic way. By viewing the entity through a more connected, multi-capital lens, organisations can tell their value creation stories in a way that responds to stakeholder demands for greater transparency and accountability, and more insightful information.
We have listened to integrated thinking journeys around the globe and learned how businesses have adopted a more holistic, cross-functional approach to creating and preserving value over time.
In this blog series, we look at illustrative examples of how companies have applied the six Integrated Thinking Principles, including challenges they faced, solutions implemented, and benefits realised. We’ve covered the first principle, purpose, and the second is governance.
An integrated thinking approach to governance considers how those charged with governance make a distinctive contribution to value creation for the organisation and its key stakeholders. It also considers how strategic execution is enabled by an organisation’s structure, cross-functional teams, decision-making processes, and risk and opportunity management processes.
In application, organisations might consider the following questions relevant to governance:
- How do those charged with governance regularly review their governance structures and processes and identify opportunities to improve them?
- ls the diversity of skills and experience of those charged with governance reviewed to enable them to effectively guide the executive management team and also hold them accountable for the delivery of the organisation’s strategy?
- Does the organisation assess strategic opportunities with the same degree of rigour as strategic risks?
- Do the decision-making processes of those charged with governance assess value creation, preservation and erosion across all the capitals which are material to the decision being taken, and do they balance the necessary trade-offs between the capitals?
- Do those charged with governance ensure that the organisation’s incentive structures are aligned with long-term value creation, including, where practicable, long-term value creation for broader stakeholders?
- Do teams work collectively to deliver the organisation’s strategic objectives and actively break down functional siloes where these exist, fostering connectivity and enabling the organisation to holistically assess, measure and report its progress in delivering its critical success factors through its financial and sustainability-related KPls?
To explore these questions, we’ll look at examples from companies implementing governance as a core part of their business strategy.
Yorkshire Water’s multi-capital approach is supported by its governance structure
Yorkshire Water manages wastewater treatment services and delivers water and environmental services to over five million people and 130,000 businesses. The company provides essential services to the people and businesses of Yorkshire, playing a key role in the region’s health, well-being and prosperity.
As a large institution with an important regional presence and impact on the environment, communities and economy, it is increasingly important for Yorkshire Water to demonstrate the positive impact it generates. Yorkshire Water viewed their integrated thinking journey as an opportunity to respond to the needs and interests of customers, regulators and investors.
Yorkshire Water’s senior management and Board have been supportive of its integrated thinking journey. The approach has enabled them to embed a holistic culture throughout the organisation and to look at short-, medium- and long-term targets.
Governance initiatives that support the implementation of Yorkshire Water’s strategy include the creation of a Social Value Committee and an executive remuneration policy.
The Social Value Committee enables the Board to focus on social purpose and public accountability and to consider social, natural and intellectual capitals. The Committee helps implement the multi-capital approach, known as the six capitals model in the Integrated Reporting Framework, within the company strategy and is supported by Yorkshire Water’s governance structure. A new capital dashboard supports internal reporting and helps the Board and the Social Value Committee analyse and improve the company’s approach.
“This latest progress is further helping the Board to monitor and steer the Company’s strategic direction to protect and grow the value that truly matters to water consumers and stakeholders across Yorkshire. The Committee continues to support and stretch Yorkshire Water’s maturing application of the six capitals and I’m looking forward to us doing more.”
– Dame Julia Unwin / Independent Non-Executive Director and Chair of Yorkshire Water’s Public Value Committee, Interim Chair of People and Remuneration Committee and Member of Nomination Committee and Safety, Health and Environment Committee
The executive remuneration policy also is linked to integrated thinking. For example, executive bonuses are tied to carbon emissions reduction. The remuneration policy is also published in the company’s annual performance report. Liz Barber former CEO at Yorkshire Water stated that “The more we look, the more we find that the capitals help us to cut across silos and push beyond traditional approaches to protect and grow the value Yorkshire Water delivers for its customers.”
Strong governance at Leonardo set the tone for integrated thinking
Headquartered in Italy, Leonardo provides aerospace, defence and security technologies. Integrated thinking has supported Leonardo in fostering connectivity between financial and non-financial aspects of the business. It has been key to developing Leonardo’s holistic delivery on its purpose, to “contribute to the world’s progress and safety by delivering meaningful and innovative technological solutions.”
External pressure from shareholders became an important driver for Leonardo’s initial use of integrated thinking. The company employed integrated thinking as a tool for integrating pre/non-financial and financial information, looking to all the capitals at the centre of its corporate sustainability and long-term value creation strategy.
“We focused on strengthening our governance by creating a sustainability committee at board level that would enable the full integration of sustainability topics within our industrial plan. This process led us with ease to undertake the journey to develop an integrated strategy.”
– Manuel Liotta / Head of ESG & integrated reporting, Leonardo
Given the importance of setting the right tone from the top, Leonardo transformed its corporate governance model, placing a greater emphasis on sustainability issues with specific tasks assigned to a board-level committee (today named Sustainability and Innovation Committee), and strengthening the dialogue at management level with the commitment of the Group Management Committee.
The Group Management Committee, made up of the CEO and high-level executives, ensures the strategy is embedded in all the departments and divisions to develop a well-rounded and shared corporate vision.
Integrated thinking and integrated reporting are mutually reinforcing. Integrated thinking considers holistically the resources and relationships an organisation uses or affects and the dependencies and trade-offs between them as value is created, thereby helping to break-down internal silos. The Integrated Reporting Framework drives high quality corporate reporting and connectivity between financial statements and sustainability-related financial disclosures, bringing together in one place the information that investors need to assess a company’s ability to create value over time. Visit our resource library to learn more, and stay tuned for the remainder of this blog series to see more examples of how other organisations have applied the Integrated Thinking Principles.
Next up: Culture.
The IFRS Foundation, the ISSB, the authors and publishers are not affiliated with the companies referred to in this report. This report is for information only and in no way constitutes any type of advice.