When Nelson Mandela calls — Professor Mervyn E King SC on integrated thinking
As chairman of the International Integrated Reporting Council (IIRC) I look forward to sharing with you the IIRC’s vision to align capital allocation and corporate behaviour with the wider goals of financial stability and sustainable development through integrated thinking and reporting at Governance Institute’s 34th National Conference in Melbourne on 4 and 5 December.
Let me start at the beginning. In 1992 I was asked by the Institute of Directors in South Africa to form a committee to draft guidelines on how to direct and how to manage companies for the benefit of the majority of my fellow citizens who had been excluded from the mainstream of the economy because of the apartheid legislation. This was supported by other institutions such as the Johannesburg Stock Exchange, the South African Institute of Chartered Accountants and the Chartered Institute of Secretaries of South Africa. While I was considering whether to do this or not I received a call from Mr Mandela. The call started with ‘How’s my favourite judge?’ He always started like this when he wanted me to do work without remuneration. I told him about the idea of writing guidelines on how to direct and how to manage and he said I was the right man to do it and I should do it. The rest, as they say, is history. I formed the committee and it has now issued its fourth iteration.
The acknowledged benefits of integrated thinking to businesses are widespread and doing an integrated report has significantly spurred integrated thinking in business. A survey by the South African Institute of Chartered Accountants in 2015 found that 79 per cent of non-executive directors included in the survey believe that integrated thinking has increased the quality of dialogue with providers of financial capital and other stakeholders.
Integrated reporting weaves a golden thread through the information of business reports. It links the information that is relevant to providers of financial capital into one clear, concise, integrated story that explains how the range of the use of value creating resources and relationships between a company and its stakeholders are creating value over time. Decision-making and policy formulation are strengthened as a result of enhanced corporate transparency and reporting particularly on environmental, social and governance issues. Through considering the interconnection between the resources and relationships a business uses, the dialogue between investors and businesses naturally shifts to focus on strategy for value creation over the short, medium and long term.
The world is not what it used to be. Business cannot carry on as we used to carry on. The concept of value has changed. Instead of seeing companies as operating in a financial bubble and viewing value through a financial lens of future cash flows and net asset value, stakeholders want to understand how a company makes its money through all of the resources used and relationships with stakeholders (also known as capitals) it uses or affects. From an investor perspective, it is no longer enough to understand the finances of a business; one must understand and assess a company’s strategy, business model, resources used and relationships, as well as risks and opportunities. A reassessment of our understanding of value — its parameters and its effects — has taken place, making sure that business models sing to the tune of a value creation model fit for a resource deprived 21st century.
This is where the integrated reporting phenomenon becomes particularly relevant for governance and risk professionals. One of the key challenges in making integrated reporting work is the need to get ‘buy in’ from management, directors and employees in the company’s different business units. Governance and risk professionals already provide an important information link between all these different groups and they are therefore well placed to participate in the integrated reporting process. I look forward to talking to you about how integrated reporting can enhance your organisation’s long-term health.
Hear more on the future of integrated reporting at Governance Institute’s National Conference.