Integrated thinking, and its close cousin Integrated Reporting, are both gaining global impetus. We asked Fronesys associate Natalya Sverjensky to unpack the virtuous cycle that drives performance.
It is an increasingly mainstream view that reporting has lost its purpose. Companies are focusing on short-term financial performance — because that is what they believe investors are interested in — to the detriment of long-term value creation.
Two things are beginning to help reconnect the dots. Demand is growing from shareholders and stakeholders for the board to articulate a clear strategy for creating longer-term value, as well as the metrics to support it. Alongside this, the rise of non-financials is broadening the reporting landscape.
Now more than ever before, companies and their stakeholders need the practical wisdom to understand and define value creation in a holistic way.
The integrated reporting movement is part of the answer. As defined by the International Integrated Reporting Council, <IR> is a concise communication about how an organization's strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term.
But is adopting <IR> enough? The growing consensus is that integrated thinking and reporting needs to do more than bring clarity and streamline disclosure. It needs to drive decision-making.
Activating the virtuous cycle of integrated thinking and reporting
Companies capture the most value from integrated thinking and reporting when it becomes a virtuous cycle driving performance over the long term. In other words, the process has to go beyond reporting. This means applying the insight from integrated thinking and reporting to influence business strategy and operations.
But it’s easier said than done.
Today, over 2000 companies across the world are on this journey in some way. Members of the Fronesys team engaged a selection of these pioneers in 2015 to take stock of the state of the art. Amongst our insights, one overarching truth stood out: making a new way of thinking become a new way of doing business is hard.
Corporate leaders are facing four complex challenges to embedding integrated thinking across their organizations:
• Value – Short-termism in corporate structure and the wider market environment continues to drive prioritisation of profit over other forms of value creation
• Strategy – Corporate strategy planning processes run independently of insight gathered for reporting, and financial and non-financial priorities are rarely connected
• Execution – Strategic, business and operational goals and metrics are often misaligned and driven by stakeholders with conflicting viewpoints and interests
• Reporting – Reporting processes are divorced from corporate strategy planning, are backward-looking and do not take into account the 80% of a company’s value that is intangible
Levers for change
Firstly, unlocking the virtuous cycle of integrated thinking and reporting starts with asking the right questions:
• Value – How do we create value now and in the future? What is most material to our success?
• Strategy – What do we need to do to align our business model to effectively deliver on our value targets?
• Execution – How do we optimize our operating model to support and execute our business model?
• Reporting – How do we measure, govern and communicate to stakeholders and investors our value creation story?
Secondly, the Fronesys experience shows that what matters even more is the way in which companies seek out the answers.
The International <IR> Framework, which Fronesys leaders played a key role in shaping, owes much of its success to the extensive consultation process undertaken to design it. Hundreds of stakeholders across sectors from every region worldwide were engaged in building the framework. As a result, <IR> enjoys growing momentum from a global coalition of supporters who share an active stake in its success.
If corporate leaders are to embed integrated thinking and reporting in their organizations, they’d be wise to put engagement at the heart of the internal process.