Magazine article

Shareholders are continuing to press for more clarity in Australian corporate reporting, including detail on strategy and ESG issues. companies will notice some positive changes when their Operating and Financial Reports arrive in the inbox or the mail this year. A growing number of Australian boards are adopting the principles of integrated reporting, responding to investor demand for greater clarity on the drivers of longterm value. Plus, it is helping management and boards to save time and cut the volume of reporting.

So far, the list includes the likes of National Australia Bank, Urbis, Lendlease, Stockland, Australia Post, Macquarie Group, BHP, Bank Australia, as well as industry superannuation fund CBUS. They’re among more than 1500 companies worldwide improving the quality and relevance of the information this way including GE, Coca-Cola, Diageo and Danone.

Concerns remain about liability risks for directors making forward looking statements, a long-standing AICD issue and a barrier to the full adoption of integrated reporting in Australia. The AICD is, however, encouraging boards to consider flexible and voluntary use of integrated reporting principles.

Integrated reporting emphasises an organisation’s strategic focus and future orientation. It aims to provide an integrated picture of how an organisation’s business model and strategy, governance, performance and prospects lead to creation of value over the short, medium and long term. It helps frame the drivers that are important to future value creation through the interdependencies of inputs (the resources and relationships the organisation uses or affects such as financial, manufactured, intellectual, human, social and relationship, and natural capital).

“The best way to describe it is: what is the future resilience of a company in a very changing world?” says Pauline Vamos MAICD, CEO of Regnan Australia, which assesses environmental, social and corporate governance (ESG) risks of ASX200 companies on behalf of institutional investors.

Research highlights better stock liquidity and lower cost of capital for companies that explain how they create and preserve longterm value.

While some fund managers and hedge funds are interested in quick gains, superannuation funds and asset managers such as CalPERS (California Public Employees’ Retirement System), BlackRock, Vanguard and Fidelity are demanding an end to short-termism.

BlackRock CEO Larry Fink, in his 2016 annual letter to S&P500 company CEOs asked them to inform shareholders of their strategic frameworks for long-term value creation and affirm that their boards had reviewed those plans.

Academic research now highlights the market benefits for organisations that move away from being centered on regulatory “tick-a-box” reporting towards better explaining how they create and preserve long-term sustainable value.

A recent paper by Professor Mary Barth at Stanford University Graduate School of Business found integrated reporting is positively associated with stock liquidity and firm value. [1]

It found investors in companies using integrated reporting revise their estimates of future cash fows as a result of better understanding of the firm's capitals and strategy, and that future flows also increase because of improved internal decision-making by managers.

Roger Simnett of UNSW Business School found that for smaller listed companies the improved information provided to investors lowers the company’s cost of equity capital. [2] This is consistent with the notion that investors are willing to accept a lower rate of return as a result of reduced information risk.

Australia is behind other jurisdictions when it comes to adopting the reporting framework, says Liz Prescott, Australian-based Technical Director of Projects and Stakeholder Support at the International Integrated Reporting Council (IIRC).

Integrated reports are required in South Africa and inform the UK’s reporting framework. In Japan, Prime Minister Shinzo Abe’s support for it has been part of the country’s economic reform program, while the Securities and Exchange Board of India (SEBI) has asked the country’s top 500 companies to produce integrated reports.

Prescott expects the rate of adoption in Australia to accelerate over the next 12–18 months. She says directors considering going down this reporting path should be sure they have the right indicators to monitor performance against strategy.

“A greater focus on non-financial value drivers, such as intellectual capital, human capital and social and relationship capital encourages more emphasis on leading rather than lagging indicators. You can’t tell where you’re headed looking in a rear-view mirror, so the systems capturing non-financial information need to be as robust as a financial system,” she says.

[1] The Economic Consequences Associated with Integrated Report Quality: Capital Market and Real Effects, Mary Barth, Steven Cahan, Li Chen, Elmar Venter (April 2017).

[2] Does Integrated Reporting Matter to the Capital Market? Shan Zhou, Roger Simnett, Wendy Green; Abacus, Volume 53, Number 1 (2017).

How They’re Doing It

Macquarie Group

Macquarie Group’s most recent annual report and investor presentation encapsulates many elements of the long-term value reporting framework. Michael Coleman FAICD, chair of the Macquarie audit committee, says the board asked, “what do we think our shareholders and stakeholders want to know and how might we best present it?” Macquarie would not call it an integrated report, but “to a large extent, it follows the same sorts of principles and gives a very detailed report of the way in which the business operates,” says Coleman, who also chairs the reporting committee at the AICD.

Some investors and stakeholders have welcomed the new report format, but the broader investment community hasn’t said too much, says Coleman.

He did note that the Australian Council of Superannuation Investors had rated Macquarie’s level of sustainability reporting as “leading”.

Lendlease

Global developer Lendlease moved to adopt principles of integrated reporting a year ago, keen to better articulate how it created value for its stakeholders through financial and non-financial means. The company produced its first annual report with reference to the Integrated Reporting Framework in 2016 through its Operating and Financial Review. In doing so, it was able to reduce its reporting portfolio by two reports, saving substantial management and board time. This helped provide a much clearer story of value and eliminated six weeks of report preparation.

Lendlease said the consolidated information source “should assist our stakeholders in understanding our business model, strategy and performance”. The integrated report “provides a simple and clear way for us to share the value creation story”, writes Lendlease chair David Crawford FAICD in his chair’s report.

AICD policy position

Integrated reporting can offer useful principles for communicating on strategy, business model and governance, risks, performance and outlook.

The AICD encourages directors to consider the aims and principles of the Integrated Reporting Framework (IRF) in corporate reporting as relevant to their organisation and stakeholder needs.

Flexible, voluntary adoption of relevant content elements of integrated reporting may help directors seeking to improve the quality and usefulness of information reported to the stakeholders.

The IRF suggests content elements that companies could adopt in reporting, as relevant. Many of these content elements are similar to guidance produced by ASIC for the Operating and Financial Review (OFR) [a requirement for listed companies] or can be effectively adopted within the OFR framework.

The AICD does not recommend adoption of the full framework due to directors’ liability concerns with forward-looking statements and the need for a directors’ compliance statement under this formal framework.