sustainability (5)

What is integrated reporting?

From the Building Smarter Companies Video Blog

 
In this episode, Mary Adams shares the mega-trends challenging traditional financial management and introduces the concept of integrated thinking and reporting. 

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A U.S. View on Integrated Thinking and Reporting

In the last month or so, I’ve attended a program on Integrated Reporting and another on Integrated Thinking in New York, both organized by Skytop Strategies. Skytop has been boldly moving forward with an agenda of programs designed to bring together a diverse group of integrated thinkers in the U.S.

I’m excited that there is a growing community in the U.S. And it’s fun to compare and contrast the movement here with what I saw at the IIRC Convention in London. First of all, it’s important to note that, while the U.S. community is watching the integrated reporting movement closely, it is not following the model faithfully (not that anyone is—the idea is to allow diverse experimentation around the world). And in the U.S. it’s less about the reporting side of things. In fact, if you look at the IIRC examples database for North America, you’ll see just ten listings. To date, only Clorox and Smithfield Foods specifically call their publications “Integrated Reports.” Other companies bring integrated thinking to their traditional and/or sustainability reports. And many more (in U.S. and abroad) have their own names like net positive (King Fisher), net good (British Telecomm), total contribution (Crown Estate), shared value (Nestle) and net-works cycles (Interface). Others included core capacity, accountability, systems thinking.

So reporting is just one part of the story. (Many would say that reporting is just a catalyst to drive integrated thinking and that the thinking is the ultimate goal). In his keynote at the Skytop Integrated Thinking Symposium, Ralph Thrum framed this by talking about moving beyond the “license to operate” perspective of sustainability and CSR to a concept of thrivability and a “license to grow.” I like this because it gets to the area where I have always used these ideas: to use integrated thinking to drive growth and innovation.

My contribution was on a panel about what’s missing in existing guidance. I had laid out my position in Integrated Thinking: What's Missing that the roots of the movement really come from people trying to unite two completely different conversations—traditional and sustainability. . It was clear in both London and New York that this is still the driving dynamic. But these two are missing the internal sustainability view that takes into account the non-traditional, intangible assets that drive a company’s value creation capabilities.

It’s still early days for this movement. But I’m excited by what Skytop is doing. I met some great people and heard a lot of honest assessments by people on the frontlines striving to integrate thinking across their organizations. Skytop has lots more programs coming up including a deep dive on preparing an integrated report hosted by VMWare in January that will include a presentation by Clorox on how they developed their report.

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An integrated view of sustainability

10468399680?profile=originalRecently, I had a great conversation with two people in the corporate sustainability office of a NY-based company. They have been on a journey toward changing their actions and their communications to become more sustainable from an environmental and social perspective. They were talking to me because they wanted to extend their practices to not just think about externalities but also what they called “internalities,” things like processes, change management and lean thinking. They saw this as an important advance in their sustainability thinking from primary focus outside their organization to an “internal sustainability” focus. They also said that one of their challenges continues to be that, as much as they focus on nonfinancial results, “financial will always trump how we make decisions.”

For me, this is the essence of the challenge that integrated reporting addresses: Until there is a reliable information set that is as trusted and consistent as the financials, the financial results remain the ultimate metric of success even though everyone agrees that financials fail to capture a lot of the critical drivers of profits and corporate value.

Many in the market still consider integrated reporting to be the marriage of the financial and the external sustainability perspectives. But this combination doesn’t give the full picture. To understand the full picture and have a truly integrated perspective, we need a view to both short-term financial and long-term sustainability (both external and internal). The <IR> framework provides a sound theoretical connection between the capitals and value creation. But it’s hard to see in practice.

For me, the starting point for application of these ideas has to be a model of a company’s specific drivers of financial and corporate value. This is one of the reasons that I continue to advocate for the use of a canvas-style format approach to mapping value creation. The approach that I’ve been using is the Value Creation Worksheet. I made a version of it available as an open tool on my website awhile back. Please check it out, contribute to its improvement and/or let me know if you have other suggestions on how to move this idea forward.

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Integrated Thinking: What’s Missing?

10468399662?profile=originalI’m happy to be speaking on a panel Thursday at Skytop Strategies’ Symposium on Integrated Thinking. The panel is called Drivers of Integrated Thinking: What’s Missing from the Existing Guidance.

Sounds pretty esoteric right? Well it’s actually a hugely relevant conversation. Today, every company in the U.S. produces financial statements. And many produce some kind of sustainability statements (for the largest 250 companies in the world, the figure is over 95%). A lot of money and thought is invested in these two perspectives. But they are isolated in their own ghettos and most people have a hard time reconciling the two.


You'll see this in action if you go to a public company’s website. There is a section for investor relations where you can find the traditional financial reporting. There is usually a completely separate section for sustainability reporting (often harder to find). And there are rarely cross-links to take you, for example, from the financial to the sustainability reporting.It’s almost like alternate realities for the same company. Which makes sense on one level—the two kinds of reporting serve different purposes and have different stakeholders. But it begs the question for many—why are these two separate? And, at a deeper level, why is the thinking behind these two perspectives separate? And how can they be connected? This is the goal of integrated thinking. And for the companies taking on this challenge, it's the goal of integrated reporting.


Here’s the key point I want to bring to the discussion:

Traditional + Sustainability ≠ Integrated Reporting/Thinking

What do I mean by this? Traditional reporting/thinking is basically focused on how a company created (or not) shareholder value in past periods. Sustainability reporting/thinking is how the company created (or not) stakeholder value in past periods. But to be truly integrated, we need to ensure that a company ensures its own survival—creates corporate value—while meeting the needs of its shareholders and stakeholders. I’ve increasingly been using the phrase “sustainable value creation” to describe this, which is defined as:

Using the capitals (tangible, intangible and natural) available to a company in a way that creates value for shareholders and stakeholders today…and that also preserves/enhances the company’s ability to create value in the future.

In light of this definition, what’s missing from the various forms of guidance influencing integrated thinking? In my view, we’re missing a way for companies to take responsibility to their capitals, for building and maintaining an infrastructure that gets better every year. In our industrial past, explaining this was the job of the balance sheet. In fact, the tangible capitals on the balance sheet explained over 80% of corporate value. Today, they only explain 16%.


It’s like the instruction we receive on a plane: put your own oxygen mask on before you help others. Companies have to create value for shareholders and stakeholders in a sustainable way. And by the way, (with the exception of short-term traders) shareholders and stakeholders want that to happen too.


I look forward to discussing how to accomplish this at the Symposium!

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Over the decade or so that I have been focused on intangible capital, there has been a parallel conversation going on about sustainability. These are two broad fields with many players and approaches but I’ll try to generalize the two (excuse the shorthand versions):

  • Intangible Capital – also known as IC, Intellectual Capital, Innovation Capital, Digital Capital – Focused on the changes in the core operating assets of organizations that have occurred as we move from an industrial to an IT-fueled, knowledge-based economy.
  • Sustainability – also known as ESG (Environmental, Social and Governance) and Triple Bottom Line (People, Profits, Planet) – Focused on the fact that the industrial approach of not considering the human, societal and environmental effects of corporate actions are endangering our collective future.

Both conversations are about the path to prosperity—measured in both financial and nonfinancial ways. But there hasn’t been too much attempt to unite the two views. One notable exception is the IIRC (International Integrated Reporting Council). 


I admit that I resisted the IIRC approach for a long time. For one thing, we at Smarter Companies have been more focused on innovation and value creation than on corporate reporting, which appears to be the IIRC’s primary focus. And I feared that combined the two made it harder to tell the stories of each of these different fields of study—mixing apples and oranges. It’s kind of ironic because I have often talked about the new design constraints for modern businesses (many of which were related to environmental and social concerns), but I wasn’t able to make that connection. But I’ve increasingly seen the need to find a way to talk about the connection between our mission and that of my colleagues interested in sustainability, especially because IC is about the gift of new knowledge resources that we humans have been given at the moment we need them most. IT and IC hold the key to greater sustainability.

In December, the IIRC released their latest framework document. The framework is written in a purposely vague way as the intention is to start a conversation rather than legislate a solution (an approach I agree with). What spoke to me most in the report was this diagram explaining how organizations create value using what they call the “Six Capitals” (with my overlay of the IC knowledge factory):

10468397453?profile=originalI think this graphic does provide a framework for integrated thinking about corporate value creation that includes both IC and sustainability thinking. And it’s given me a way to talk with colleagues about the intersection between our respective work.

At Smarter Companies, we focus on three of the six capitals: Human, Relationship and Intellectual (which we call Structural Capital—read here to see why we avoid the word intellectual). We use an additional category we call Strategic Capital that actually corresponds really well to their central box with business model, external environment and culture. These four categories make up what we call the “Knowledge Factory” in the book Intangible Capital.


The Knowledge Factory is how organizations use Manufactured Capital and generate Financial Capital. It’s also how organizations build or destroy Natural Capital. So all of the capitals are important and contribute an integrated whole. So I say good for the IIRC for trying to get us all to think holistically. Maybe this is a base we can all build upon.


What do you think? Is there a convergence here that will help us advance both fields?

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