The real value company

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The real value company

Wednesday, 13 March 2019 | Hima Bindu Kota

The real value company

Creating and sustaining an organisation's business model, in the short and long-term,  requires it to interact with external factors, its relationships and use of resources

India has a huge railway network — its full track length can circle the equator one-and-a-half times while the total distance it covers daily equals three and half times the distance to the moon! It carries more than 25 million passengers every day, more than the entire population of Australia. It is also the world’s ninth largest employer, serving even the farthest locations in India. However, the Railways incurred a loss of Rs 4,000 crore in the last three years. Does that mean it is not valuable as an organisation and does not add to the GDP and growth of our economy? The answer is no. It is, in fact, a very valuable company but the worth is not reflected in the reporting. Here comes the significance of Integrated Reporting (IR), which brings about improved cohesion and efficiency in the corporate reporting process as it allows a business to incorporate its value creation in a holistic manner, the outcome of which is efficient and productive allocation of capital.

Integrated Reporting is able to bring in the value generated by a business by integrating the financial and non-financial performance of a company in a single report. This helps in providing a greater context to the non-financial data such as how the company performs on environmental, social and governance (ESG) parameters, how sustainability is embedded in the core business strategy and so on. It is important to note that Integrated Reporting doesn’t only mean merging financial and sustainability reports into one report. Its true meaning is to link sustainability strategy to business strategy and help the company and its stakeholders identify the non-financial priority areas.

For some years now, the limitations of the current reporting practices have been felt by both the investors and other stakeholders and there has been a significant drive towards more transparent, relevant and comprehensive reporting practices. In India, the Companies Act 2013, Corporate Social Responsibility Legislation, SEBI Listing Requirements, Business Responsibility Reporting and so on are some of the key regulatory developments that are focussed on improving the quality of disclosures and increasing business accountability towards societal issues.

SEBI has taken a step forward in this direction by its circular dated February 2017, where it has encouraged the top 500 companies to adopt the Integrated Reporting framework. The circular delivers on the IOSCO Principle 16 that states, “There should be full, accurate and timely disclosure of financial results, risks and other information that is material to investors’ decisions.” SEBI recommends that Integrated Reporting may be adopted on a voluntary basis from the financial year 2017-18 by the top 500 companies, which are required to prepare Business Responsibility Report (BRR). The information may be provided in the annual report separately or by incorporating in Management Discussion & Analysis or by preparing a separate report (annual report prepared according to framework). Subsequently in 2017, SEBI formed the Kotak committee to help improve corporate governance in listed companies.

Apart from regulators, corporates have also started to understand the importance of the change in reporting practices to not only focus on financial capital but to demonstrate the value created by the entity while operating within its economic, social and environmental system. The intended change requires an in-depth understanding of all the building blocks of the value creation process of business to enable corporates to develop a reporting model, which gives an insightful picture of its performance and is considered sufficient to assess the quality and sustainability of their performance. In India, information on emissions management, water conservation, energy reduction, human rights and similar topics are included in the annual report or published in a separate Sustainability Report (SR). The transition from CSR to SR focussed on moving from philanthropic social impact to stating the impact on natural and human capital. This is inclusive of all materially relevant capital, connecting them to business risks, decisions and outcomes in the short, medium and long-term.

Drivers for adoption of Integrated Reporting comprise both pull and push factors. Stakeholder groups such as investors, customers and so on can demand greater level of disclosure. On the other hand, regulations and compliance standards such as those by stock exchanges, government regulatory bodies and so on can act as another driver for adoption of Integrated Reporting.

The International Integrated Reporting Council (IIRC), the global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs, has given a series of six principles and content elements for preparing an integrated report:

1. Organisational overview and business model: What is the business model of an organisation and how does it create and sustain value in the short, medium and long-term?

2. Operating context, including risks and opportunities: What are the circumstances under which the organisation operates, including the key resources and relationships on which it depends and the key risks and opportunities that it faces?

3. Strategic objectives and strategies to achieve those objectives: Where is the strategic orientation of an organisation, and how is it going to achieve it?

4. Governance and remuneration: What is the organisation’s governance structure and how does it support the strategic objectives of the organisation and relate to its approach to remuneration?

5. Performance: How has the organisation performed against its strategic objectives and related strategies?

6. Future outlook: What opportunities, challenges and uncertainties is the organisation likely to encounter in achieving its strategic objectives, and what are the resulting implications for its strategies and future performance?

The creating and sustaining the business model of an organisation, in the short, medium and long-term,  requires the businesses to interact with external factors, its relationships and use of resources.

In doing so, businesses consider six capitals: financial capital, which is the pool of funds available to the organisation; manufactured capital, manufactured physical objects, as distinct from natural physical objects; intellectual capital, which is the intangibles that provide competitive advantage; natural capital that includes water, land, minerals and forests and biodiversity and ecosystem health; and social capital, which is the relationship established within and between each community, group of stakeholders and other networks to enhance individual and collective well-being. It also includes an organisation's social licence to operate, in addition to the human capital.

This Integrated Reporting, then, will include a lot more information about how the company fits within the environment and society and how it creates long-term value. The focus will move from being merely concerned with reporting the past in financial terms to considering the past and short, medium  and long-term futures in a connected strategic manner. It will be tailored to the reporting entity’s specific circumstances and likely have a greater degree of transparency.

According to IIRC, the integrated reports can be developed on the basis of certain guiding principles.

1. Strategic focus: An Integrated Report provides insight into the organisation’s strategic objectives, and how those objectives relate to its ability to create and sustain value over time and the resources and relationships on which it depends.

2. Connectivity of information: Connections between the different components of the organisation’s business model and external factors.

3. Future orientation: Assessment of expectations and prospects. 

4. Responsiveness and stakeholder inclusiveness: Insight into the organisation’s relationships with its key stakeholders and how it responds to their needs.

5. Conciseness, reliability and materiality: It provides concise, reliable information that is material to assessing the organisation’s ability to create and sustain value in the short, medium and long- term.

We have the responsibility to leave a better future to the next generation  when we are witnessing a transition to a sustainable society from a consumer one, where there is a requirement for companies to determine their strategies within the framework of the development criteria.

The management should monitor and manage both financial and non-financial elements across the whole value chain (from design and supply chain to operation and from consumer purchases to the end of the product life-cycle) rather than focussing on financial performance only. The goal is to ensure that financial and non-financial data are integrated.

(The writer is Assistant Professor, Amity University)