Paul Druckman on ‹IR›: Concise Integrated Reporting is Key to Good Investor Relations
Traditional corporate reporting has been the subject of much criticism, as it has not really been effectively and efficiently communicating the current conditions, issues, and outlook of a corporation’s business with shareholders, creditors, and other stakeholders. A different approach, <IR>, has been designed to fill the gap, and a global movement is underway to make <IR> the norm in corporate communications.
<IR>, which stands for “integrated reporting,” is a process that results in communication, most visibly (though not exclusively) with a periodic integrated report about value creation in the past as well as in the future. An integrated report is a concise communication about how an organization’s strategy, governance, performance, and prospects lead to the creation of value over the short, medium and long term. <IR> is evolving into a global movement, and the International Integrated Reporting Council (IIRC) is developing the International <IR> Framework to facilitate the adoption of <IR> worldwide.
Paul Druckman, CEO of the IIRC, was in Hong Kong conducting a workshop organized by the Association for Sustainable and Responsible Investment in Asia. After the workshop, we have the chance to talk with Paul and understand more about the Integrated Reporting movement. We were also able to follow up via email to learn more after he left.
CFA Institute: Paul, we noticed that the logo for integrated reporting is <IR>, and when one first sees this, investor relations comes to mind. Is integrated reporting actually just part of good investor relations?
Paul Druckman: The support we have received from the investor community thus far has demonstrated they are embracing and pushing forward this evolution in corporate reporting. Investors reported that they would, among others, expect the following benefits from <IR>:
- A clearer and more joined-up picture of a company’s prospects.
- Improved ability to evaluate and gain insight into the long-term outlook of a company.
- Deeper understanding of key risks and opportunities.
- More pertinent information on how long-term risks will affect the business model.
- Better understanding of all sources of capital, not just financial.
- More robust, less marketing-oriented approach to reporting on non-financial issues.
Could you tell us a bit about how the integrated reporting movement got started?
The IIRC was founded in 2010 out of a belief that the current corporate reporting system needed to evolve — although essential, it was not sufficient. A new framework would help organizations communicate better the factors that contribute to value creation in the short, medium, and long term.
Since then, an international cross-section of leaders from the corporate, investment, accounting, securities, and regulatory communities have joined us on our council, working group, and in the IIRC Pilot Programme. Our mission is practical and focused: to create the globally accepted <IR> Framework.
The starting point was the publication in September 2011 of our discussion paper. We have since published the responses, which revealed overwhelming support for the concept of <IR>, but highlighted several practical and technical challenges that we are now seeking to address via the Consultation Draft of the International <IR> Framework, asking investors and stakeholders to critique it and provide feedback. The framework is expected to be released in December.
Why would companies and investors get interested? Is there a business case for integrated reporting?
Integrated reporting is market-led — created by the business and investor communities for the business and investor communities. In practical terms the benefits that are beginning to show for the businesses leading the initiative include:
- Integrated thinking and the breaking down of silos. Bob Laux of Mircrosoft Corporation said, “<IR> provides a holistic method for explaining how the organization is doing, and how . . . it will do in the future. . . . It takes into account the connectivity between factors that have a material effect on an organization’s ability to create value over time.”
- Reporting on non-financial information and putting things in context. Increasingly there is consensus that in order to convey a full story of value creation all resources and relationships [or capitals, in <IR> terminology] need to be communicated.
- <IR> seeks to dramatically reduce the current convoluted and unfocused volume of reporting. As Russell Picot, HSBC Group CFO, highlighted: “Investors are frustrated by the challenge of unraveling hundreds of pages of material.”
- <IR> shifts the focus to strategy and future outlook. Currently, the majority of the information available is historic. Investors must navigate around the next corner with only a rear view mirror. <IR> supports forward investment decision making.
A Black Sun study of the behavioral effects of <IR> within the IIRC’s Pilot Programme community revealed that 98% of the businesses surveyed believe that the shift towards <IR> leads to a better understanding of how the organization will create and preserve value over time. Ninety-three percent agreed that <IR> promotes breaking down silos and better connected business units.
In an experiment PricewaterhouseCoopers conducted with Coloplast, a Danish company, it was found that proper presentation of contextual and non-financial information to investors, similar to what is done under the <IR> Framework, would likely have a positive impact on the stock price.
Integrated reporting has gained much acceptance in Africa, led by the Johannesburg Stock Exchange. There appears to be lots of interest elsewhere too. What is the situation in Asia?
Much of Asia has been very responsive to the move towards integrated reporting, with a lot of businesses and governments/regulators showing interest in this initiative. You can see from the full list of Business Network participants that many are from Asia.
I presented twice to the Asia-Pacific Economic Cooperation Business Advisory Council (ABAC), which is seeking to establish if <IR> could be a major accelerator of long-term investment in strategically important sectors (e.g., infrastructure, energy).
On April 16th in Hong Kong, nearly 70 people gathered for the launch of the International <IR> Consultation Draft event hosted by HSBC and the Hong Kong CPAs. The enthusiasm in the room was great.
In Japan, there is increasing support for corporate reporting reform to reassert a focus on long-term investment and unlock corporate value. The Ministry of the Economy, Trade and Industry has established a Corporate Reporting Laboratory for this purpose.
Li Yong, vice-minister of the Ministry of Finance in China (and a member of the IIRC Council) said, “I firmly believe that with China’s active participation, the concepts of integrated reporting and its good practice will . . . promote further reform of Chinese corporate reports.”
Singapore Stock Exchange and Bursa Malaysia also demonstrated interest in integrated reporting, exploring how to ensure businesses adopt some of the fundamental principles behind the concept.
We talked briefly about CFA Institute’s new initiative — the Future of Finance project. Do you see common grounds for <IR> and the Future of Finance project?
CFA Institute’s Future of Finance project is an exciting initiative indeed, and one very well-aligned with integrated reporting. Our vision is for <IR> to be accepted globally as the corporate reporting norm, benefiting organizations, their investors and other stakeholders by enabling informed investment decision-making that leads to efficient capital allocation and the creation and preservation of value. This helps the advancement of a more sustainable global economy, contributing to the goals of the Future of Finance project.
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
Photo credit: ©iStockphoto.com/CurvaBezier
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