Next Generation Business Problems: Integrated reporting

Next-generation business survival depends on more than the assets normally found on a company’s balance sheet. So, businesses that focus on only managing what they put in the balance sheet may open their investors up to risk.

This is the message of Monash Business School’s Professor Michaela Rankin, Professor of Accounting and Deputy Dean, International.

Next-generation businesses must consider a new way of reporting on their activities and worth, Rankin argues. The field of Integrated Reporting is increasingly prominent as a way to address current financial reporting deficiencies.

“Conventional financial reports are increasingly seen as backward-looking, and are inadequate to inform key users,” say Rankin. Investors are looking for a range of non-financial information to consolidate the financial indicators they traditionally used in their decision-making.

“An integrated report allows an organisation to show the links between strategy, governance and financial performance; it explicitly connects the social, environmental and economic landscapes in which it operates.

Importantly for next-generation businesses, in addition to physical and financial capital, this approach takes account of intellectual capital – arguably the most important form of capital in a knowledge economy. Intellectual capital is currently not explicit in annual reports.”

“Integrated reporting encourages breaking down silos within the business and requiring a company to reflect on how it creates value.” says Rankin. “It’s not just about what we earned this year and what our costs are; it is really about how we use our human, intellectual, social and environmental resources to create value for the business.”

The concept of integrated reporting is well developed in certain global markets, and is especially strong in Europe and South Africa, where listed companies are required by regulation to provide an integrated report to the market annually.

Australia also has a global leader of integrated reporting; NAB has been presenting an integrated report since 2010 and is now one of five Australian businesses contributing to the development of this new global system of reporting.

“Integrated reporting can help both internal and external stakeholders,” Rankin says. Her research with fund managers finds that integrated reporting can be especially useful for smaller, less well-known companies to communicate their value proposition to potential investors. And it does so while allowing them to deepen their own strategic thinking.”

These kinds of issues will become increasingly critical for executives in the future. On the Monash MBA program, participants undertake a series of live consulting projects with local businesses in strategy, entrepreneurship and international business. In developing business strategy and value propositions for their partner firms, the MBA teams analyse the ways the different parts of a business work together and how they reflect their value-creation and value-capturing processes in their financial reporting.