Reproduced with permission of IESE Business School www.ieseinsight.com/review
DEEP
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TWO DISRUPTIVE IDEAS COMBINED
Integrated Reporting
in the Cloud
By ROBERT G. ECCLES and KYLE ARMBRESTER
A
ugust 2010 marked a turning point
in corporate reporting. That was
when the International Integrated
Reporting Committee (IIRC) was
officially launched to create a globally accepted framework for accounting for sustainability.
According to the press release, the framework
“brings together financial, environmental, social and governance information in a clear, concise, consistent and comparable format – put
briefly, in an ‘integrated’ format. The intention
is to help with the development of more comprehensive and comprehensible information
about an organization’s total performance,
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prospective as well as retrospective, to meet
the needs of the emerging, more sustainable,
global economic model.”
Even before the formation of the IIRC,
some leading companies have been practicing integrated reporting, sometimes referred
to as One Report. The first U.S. company to
do so was United Technologies Corporation,
starting in 2008, followed by American Electric Power and Southwest Airlines in 2009.
European companies practicing integrated reporting include the French insurance company
AXA, the German chemical company BASF,
the Swiss pharmaceutical company Novartis,
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as well as the Dutch waste treatment and recycling company, Van Gansewinkel Group.
According to the Global Reporting Initiative, approximately 160 companies that use
its G3 Guidelines for sustainability reporting
issued an integrated report in 2010. In South
Africa, all listed companies must produce an
integrated report for all year ends commencing on or after March 2010, or else explain why
they have not done so. In France, the Grenelle
II legislation requires all companies, both public and private, with 500 or more employees to
provide nonfinancial information in their annual reports starting from 2012.
Despite these signs that market and regulatory forces are supporting the adoption of integrated reporting in all industries around the
world, the exact definition of what it means to
be doing integrated reporting is still being developed, although the King Report on Governance for South Africa is a good place to start:
“Integrated reporting means a holistic and integrated representation of the company’s performance in terms of both its finances and its
sustainability.”
The IIRC will attempt to pin down a definition when it issues its first draft for public comment in June 2011. Until then, we can at least
identify some common elements, gleaned from
those companies already practicing it.
Moreover, for two decades, we have been
researching and trying to improve corporate
reporting practices through three books, many
articles and case studies, and working with
companies, analysts and investors, accounting firms, NGOs, technology and data vendors,
and regulators and standard setters. With colleagues at Harvard Business School, we are also
developing a new course on integrated business
models and integrated reporting.
What Is Integrated Reporting?
Integrated reporting, or One Report, as the
name implies, provides information on financial and nonfinancial performance in a single
document. It attempts to show the relationship between financial and nonfinancial performance, and how these interrelated dimensions
are creating or destroying value for shareholders and other stakeholders. It may include the
following dimensions:
How much energy does a company use per
unit of production?
To what extent do energy-efficiency programs reduce carbon emissions and lower
the costs of production?
What is the impact of training programs on
improved workforce productivity, lower
turnover and customer satisfaction?
How is better management of reputational
risk through good corporate governance
contributing to the value and robustness of
the company’s brand?
In what ways does meeting the needs of
stakeholders such as employees (e.g., tuition reimbursement programs), customers
(e.g., no-questions-asked return policies)
and the community in which the company
operates (e.g., corporate philanthropy and
time off for volunteer programs) contribute to creating shareholder value, and over
what time frame?
In what ways does meeting the needs of other stakeholders have a negative impact on
shareholder value, at least in the short term,
such as paying a living wage that is above the
market wage being paid by competitors?
These metrics, which are quite different
from the traditional bottom-line ones, require
taking a long-term view in which natural and
human resources are not sacrificed to meet
quarterly earnings.
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EXECUTIVE SUMMARY
Financial reporting for all
listed companies is a longestablished practice, which
more recently has been
complemented by corporate
social responsibility or sustainability reporting. However,
the reporting of nonfinancial
information related to environmental, social and governance
performance remains largely
voluntary. Although still an
embryonic management
practice, the authors believe
that “integrated reporting”
of a company’s financial and
nonfinancial performance into
a single document is about to
take off, as market and regulatory forces push more compa-
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nies to adopt this practice.
In doing so, companies will
face a number of challenges,
which the authors say can be
efficiently dealt with via cloud
computing. The disruptive
idea of integrated reporting
combined with the disruptive
innovation of cloud computing will enable companies to
make much more informed
decisions about how they are
using financial, natural and
human resources to meet
both financial and nonfinancial
performance objectives. The
result will be more sustainable
company strategies that will
contribute to a more sustainable society.
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Three Benefits of Integrated Reporting
Every company should, and eventually will have to, practice integrated reporting. The extent to
which this is motivated by internal benefits, external benefits and managing regulatory risk will
vary by company, industry and country.
1. INTERNAL BENEFITS
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A better understanding of and consensus about the
material metrics for measuring performance.
Clearly articulated statements about the relationship between financial and nonfinancial performance, which go beyond simply stating that “good
environmental, social and governance performance
is good for our shareholders.”
A more holistic view of the company’s strategy and
performance by people in the company’s functions
and business units.
Identification of where internal measurement and
control systems can be improved.
Better risk management.
Process and production efficiencies.
Better engagement with current and prospective
employees and other stakeholders.
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3. MANAGING REGULATORY RISK
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2. EXTERNAL MARKET BENEFITS
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Meeting the needs of mainstream as well as growing
numbers of socially responsible investors.
Inclusion on sustainability indices, which are increasingly appearing on stock exchanges.
Ensuring that data vendors have accurate nonfinancial information, which is now part of the basic
subscription services of Bloomberg and Thomson
Reuters, and is of increasing interest to analysts and
investors.
Satisfying the expectations of individual consumers
and business customers, who are making sustainability an important element in their buying decision.
Giving the company credibility in requiring better
information from its own vendors in order to reduce
supply-chain risks.
Enhancing the company’s reputation and brand, especially if it is one of the first in its sector or country
to do this.
Lowering reputational risk, due to better communications with all stakeholders and a better understanding of their expectations.
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Catching a new wave of legislation, which is likely to
spread throughout the globe over the next decade.
Responding quickly to new reporting guidelines
as they are issued by securities’ regulators.
Complying with new stock exchange regulations and
filing requirements.
Having a seat at the table, as new frameworks and
standards get developed.
The Business Case
Why are companies doing this, even when not
required to do so? After all, the higher level of
transparency that integrated reporting provides introduces risks to the company’s stock
price if the company fails to deliver on its stated
targets. Integrated reporting also takes effort,
especially when producing a report for the first
time. It requires collaboration across disparate
groups, from finance to marketing to business
units. This collaboration comes at a cost, including the cost of these groups not spending
time on their traditional responsibilities.
In spite of this, companies are voluntarily
adopting integrated reporting for three main
reasons: internal benefits, external market benefits and managing regulatory risk (see “Three
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Benefits of Integrated Reporting”).
Even if integrated reporting is only adopted internally for management and the board,
companies perceive immediate benefits. After
all, it is the job of the board, which represents
the owners (i.e., shareholders) of the company,
to ensure that it is engaging in a dialogue with
its stakeholders for the sake of the company’s
long-term economic performance.
Granted, the external market benefits are
harder to measure, given how few companies
have been practicing integrated reporting, and
most of them for only a year or two. But we believe these benefits will grow stronger over time
as the company, its stakeholders, analysts and
investors learn how to use nonfinancial information and incorporate it into their financial
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models, thereby transforming them into new
business models.
Finally, one cannot ignore the mounting
legislation and other forms of regulation, as exemplified most recently in South Africa, which
we see as part of a global trend. To support integrated reporting being a listing requirement
for all companies on the Johannesburg Stock
Exchange, a working group of practitioners has
just issued a document for public comment between January and April 2011, as part of moves
there to codify integrated reporting (www.
sustainabilitysa.org). If the IIRC succeeds in
getting integrated reporting on the agenda of
the G-20 meeting being hosted by France in
November 2011, member countries will be devoting more attention to this issue.
In addition, through the Sustainable Stock
Exchanges – an investor-led initiative convened by the United Nations-backed Principles
for Responsible Investment Initiative (PRI),
the U.N. Conference on Trade and Development and the U.N. Global Compact – a group
of PRI signatories are encouraging the top 30
exchanges to work on improving sustainability
reporting, and ultimately integrated reporting,
among their listed companies.
Of course, the business case for integrated
reporting does not require legislation or regulation. Those companies that have already started
practicing integrated reporting are experiencing the benefits before it becomes a regulatory
ABOUT THE AUTHORS
Robert G. Eccles is Professor
of Management Practice at
Harvard Business School and
coauthor of the book One
Report: Integrated Reporting
for a Sustainable Strategy with
Michael P. Krzus. Since 1989
he has focused on corporate
reporting – and more recently
integrated reporting – from a
research, managerial practice
and public policy perspective.
He received two S.B.’s from
the Massachusetts Institute of
Technology, and an A.M. and
Ph.D. from Harvard University.
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Kyle Armbrester (Harvard
Business School MBA Class
of 2012) is a cofounder with
Eccles of Glenelg Partners,
a company that is building
an ecosystem of business
partners to help companies
implement integrated
reporting through cloud
computing. For almost 10
years, he has worked in the IT
strategy space, with a focus on
system implementation and
communications management.
He received an A.B. from
Harvard University.
requirement – and when it does, they will be
better positioned to meet those requirements,
because they will have a platform on which to
build. Those companies that have done nothing to prepare will have to rush to meet the new
requirements, resulting in higher costs, lower
quality and fewer benefits.
The ultimate goal of integrated reporting
is a higher share price. This is not to say that
integrated reporting alone can account for a
company’s superior financial performance.
But it would be naïve to assert that integrated
reporting has nothing whatsoever to do with it.
A company’s share price is based on its overall performance and investor expectations that
its performance will continue to be good and
improve over time. This requires a sustainable
strategy. Integrated reporting is a good discipline to ensure that a company has a sustainable strategy in the first place, that it is able to
communicate the results of that strategy, and
that it will make the changes necessary as the
world and stakeholder expectations change.
Moreover, integrated reporting provides a
high level of transparency, so that the company
gets full credit for its performance by making it
easy for analysts and investors to get the information they need.
In this sense, we argue that integrated reporting is the best way for a company to create
value for shareholders over the long term. The
Danish health-care company, Novo Nordisk,
serves as an excellent example. Figure 1 shows
the company’s stock price performance compared with competitors and the NYSE Arca
Pharmaceutical Index. Novo Nordisk’s stock
price appreciation has clearly been superior,
starting in 2004 when it launched integrated reporting, and accelerating dramatically in 2006
and through the end of 2010. In addition, longterm financial targets that it set for itself have
been met or exceeded (see Figure 2). While we
cannot prove that integrated reporting is the
sole cause of this superior performance, we do
believe it is a contributing factor. At the very
least, for those who have reservations about
greater transparency, this shows that it doesn’t
necessarily hurt a company’s stock price.
Technology as Enabler
Integrated reporting must be considered alongside today’s world of social media and instant
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communications, which makes it virtually impossible to keep information in one channel
from crossing over into others. Given this, the
stakeholder-specific approach to external communications is becoming less viable. Therefore,
unlike the separate and parallel conversations
that companies have traditionally maintained
with their different stakeholders, integrated
reporting necessitates a common conversation
involving multiple parties.
Put simply, One Report cannot mean only
one report. This process involves far more than
merely producing a single, static document that
is posted on the company’s website on an annual basis. As the Web is a space for dialogue
and engagement, a company should leverage its
website to provide more detailed information
Novo Nordisk vs. Competitors
FIGURE 1
SINCE LAUNCHING INTEGRATED REPORTING IN 2004, NOVO NORDISK’S
STOCK PRICE APPRECIATION HAS BEEN SUPERIOR COMPARED WITH
COMPETITORS AND THE NYSE ARCA PHARMACEUTICAL INDEX.
300%
300%
250%
NOVO NORDISK
200%
150%
100%
50%
0%
-50%
2006
2007
2008
2009
Long-Term Financial Targets
2010
FIGURE 2
TARGETS THAT NOVO NORDISK SET FOR ITSELF
HAVE BEEN MET OR EXCEEDED.
I N D I C AT O R
Operating Profit Margin
Growth in Operating Profit
Return on Invested Capital
Cash to Earning (3-yr. avg.)
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PERFORMANCE
2009
LONG-TERM
TARGET
29.2%
20.7%
47.3%
111.5%
30%
15%
50%
80%
of interest to particular stakeholders, along
with tools for analyzing this information, while
at the same time gathering valuable feedback
on its strategy, objectives, performance and reporting transparency.
The Brazilian cosmetics and fragrances
company, Natura, and the Dutch health-care
and lighting company, Philips, are doing this. So
is SAP, which now includes an interactive comment section in which readers of its sustainability report can engage in dialogue on specific
topics, such as carbon disclosure, directly with
SAP employees. The previously mentioned
Novo Nordisk has also leveraged the Web to its
advantage (see “Novo Nordisk: A Pioneer in
Integrated Reporting”).
The Integration Challenge
Once a company has made the commitment to
practice integrated reporting, it faces a number
of technology and data challenges that need to
be addressed. The principal technology challenge is having the systems in place for gathering and reporting nonfinancial information
and, ultimately, integrating that with financial
information.
Systems for financial reporting are well
developed. Companies have years of experience in installing, using and upgrading the
systems provided by Oracle and SAP, with
management and maintenance of those systems supported by Cognizant Technology
Solutions, Infosys, Tata Consultancy Services
and Wipro, among others. Consequently, financial reporting systems are quite accurate
and robust, even if at times unwieldy due to
their sheer size and complexity.
Systems for nonfinancial reporting, on the
other hand, are much less developed. Major
software companies are just beginning to enter
this market, if at all. Although some companies
have been quick to identify and seize the emerging opportunities in the market for nonfinancial reporting, most are small, private ones that
typically focus on a niche application, such as
carbon emissions, and are primarily intended
for internal reporting purposes. Adding the capabilities for external reporting, particularly to
meet regulatory requirements, requires an additional layer of functionality, and few have the
resources to provide a comprehensive solution
to large companies at scale.
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Integrated Reporting in the Cloud
Novo Nordisk: A Pioneer in Integrated Reporting
N
ovo Nordisk is one of the leading companies
practicing integrated reporting today. When it first
announced its intention to merge financial and sustainability reporting into one document in 2004, “most
reactions were skeptical,” says Susanne Stormer, vice
president of Global Triple Bottom Line Management.
“There were quite a few stones in the road before we
fully broke the barriers.” You may be facing your own
obstacles and skeptics, but don’t let that stop you. Here
are some lessons from Novo Nordisk.
EMBED RISK MANAGEMENT IN GOVERNANCE SYSTEMS
Novo Nordisk has a Risk Management Board comprising senior managers from all parts of the value chain
and chaired by the CFO. It reports to the Board of
Directors. This structure is designed to ensure that risk
management is embedded in the governance system.
Each quarter, all major business areas have to report
their most significant risks, both financial and nonfinancial, along with their plans to manage those risks.
MAINTAIN HUMAN CONTACT
A JOURNEY STARTS WITH A SINGLE STEP
Novo Nordisk reports financial and nonfinancial information in one inclusive annual report, which is available
in both Danish and English as a searchable PDF file
on its website. The auditor, PricewaterhouseCoopers,
signs an Independent Assurance Report that covers
Novo Nordisk’s commitment to “sustainability and
stakeholder engagement embodied in the principles of
inclusivity, materiality and responsiveness.”
Stormer acknowledges they need to go further,
but they face some challenges, not least the fact that
there exists, as yet, no universally agreed standard for
nonfinancial performance. “We have embarked upon
a process to ensure that the internal control environment for nonfinancial data is as robust as what we have
in place for financial data. Hopefully, within a year, our
financial and nonfinancial data management processes
will be fully aligned.”
MAKE THE LINKS TO THE EXTENT THAT YOU CAN
Besides the traditional information – financial growth,
profitability, return and cash generation – Novo Nordisk
reports on its social performance (primarily in relation
to its employees and patients) and environmental performance (including carbon emissions resulting from
its energy usage and water consumption). The company reports both when it is and when it is not meeting
targets in both areas.
However, Stormer recognizes that what’s missing –
and this is true of nearly all companies doing integrated
reporting – is a clear explanation of the relationship
between financial and nonfinancial performance. “This
particular aspiration is yet to be realized,” she says,
recognizing the difficultly of monetizing or assessing
environmental and social impacts as costs or benefits
to society. But she adds, “To the extent we can, we
want to do so.”
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Novo Nordisk practices engagement through memberships in industry and business associations, advocacy
organizations and think tanks. But there are other
simple ways that companies can express their commitment to engagement, such as doing what Novo Nordisk
does in the “Get in touch” section of its website: It lists
15 specific individuals with their names, e-mail addresses and direct-dial telephone numbers to whom
questions and comments can be addressed on a range
of topics. People are also invited to send an e-mail to
the named program director responsible for reporting
and accountability. This is in marked contrast to most
companies’ websites, where an unnamed person in
“Investor Relations” is listed to contact.
MAKE A GAME OF IT
Another way that Novo Nordisk engages with stakeholders is through a series of “interactive challenges”
on its website. One challenge may be to find cost-effective solutions to reducing carbon emissions; another
is convincing a country’s health minister to invest in
diabetes treatment and prevention. Each game serves
to illustrate the trade-offs that managers face.
SURVEY SAYS…
Before exiting the Novo Nordisk website, visitors are
asked to evaluate the site and whether their expectations were met. They are also asked to submit demographic data, which enables the company to analyze
the assessment according to these variables. The
survey concludes with a question of how well the site
demonstrates that Novo Nordisk is the world’s leading
company in diabetes prevention and care – thereby
reinforcing its mission – and a request if the user would
be willing to be contacted for future surveys.
See more at www.novonordisk.com/sustainability
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How the Cloud Can Help
Enter cloud computing, which, like integrated
reporting, is another big new idea, but also a
fairly simple one. We believe cloud computing
can facilitate the rapid and broad adoption of
integrated reporting by making it possible for
companies to skip the step of installing systems
for nonfinancial reporting.
Think of cloud computing as buying software tools and data on an as-needed basis, the
same as you do with electricity, with the ability
to turn it on and off at will. No up-front capital
investment is required, and users can scale up
to get however much more they need.
Elements of cloud computing, such as software as a service and low-cost data centers,
have been around for many years. But a combination of new technology trends and business
needs have recently converged to make cloud
computing – again, like integrated reporting –
an idea whose time has come.
Cloud computing makes it easier for companies to adopt integrated reporting through a
low-cost service offering developed by working
with many companies. A company can simply
purchase the computing capacity it needs for its
current requirements. This enables it to start
modestly, and then increase in scale and sophistication over time.
Since cloud computing is flexible, a company does not have to shift all of its reporting to
the cloud overnight, but can mix and match IT
functions. The cloud also enables a company to
benchmark its own information against that of
its competitors that have their data in the cloud.
This is a major advantage over internal applications based solely on the company’s own data.
Addressing the Concerns
Of course, care must be taken to ensure that
only the company sees its own information
and that the identities behind the other information remain anonymous. This is one of the
biggest concerns voiced over cloud computing:
data privacy.
However, advances in the tools for managing
the hardware and software resources and data
in the cloud are growing more sophisticated by
the day, thereby tightening security and ensuring that a company’s information is secure from
unwarranted access and manipulation by others.
Vendors themselves have a strong incentive to
guarantee that this happens: Those who develop
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robust integrated reporting solutions and associated services for clients have the opportunity to
lock in these customers.
A second major challenge concerns the
standards for nonfinancial information. Just as
there is no globally accepted framework for integrated reporting as yet, nor are there globally
accepted standards for measuring and reporting nonfinancial information.
Instead, many groups, typically NGOs, are
working to develop these standards, often for
specific metrics, such as carbon emissions or
water consumption, and sometimes in competition with each other. This echoes the notso-distant past when each accounting firm had
its own set of accounting standards. The nonfinancial standard-setting community urgently
needs to address this issue, lest it become its
own worst enemy and hinder the broad adoption of sustainability and integrated reporting.
Some of the standards being developed by
such groups as the Global Reporting Initiative
(GRI), the Climate Disclosure Standards Board
(CDSB) and the DVFA/EFFAS (the Society of
Investment Professionals in Germany together with the European Federation of Financial
Analysts Societies) are well on their way for
broader adoption. Vendors of cloud computing solutions for sustainability and integrated
reporting can start by incorporating these standards into their service offerings and working
with clients to collect and store the necessary
transaction data in the cloud. This would provide significant economies of scope, since the
expertise developed by the cloud vendor would
be applied across a large number of clients. This
saves the company from having to develop deep
internal capabilities itself.
Considerable Benefits
Economies of scope are particularly important for small- and medium-sized enterprises.
Many wish to implement sustainability and integrated reporting, but simply do not have the
scale and resources to do so in a cost-efficient
manner. Through cloud computing, integrated
reporting can be adopted by companies of all
sizes, including private ones whose investors
or banks may require this information.
The same goes for companies in emerging
markets that do not have the same degree of
sustainability and IT infrastructure as their
more developed counterparts. And in some
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jurisdictions where there are restrictions on
data movement, cloud services can be located
in other physical locations.
Earlier we emphasized that integrated
reporting is about much more than a single,
static, paper document that contains the company’s material financial and nonfinancial
performance information; it is about using
the Internet to provide more detailed information and tools for stakeholders to analyze
this and other relevant contextual information, and improve dialogue and engagement
with all stakeholders. Cloud computing facilitates this in numerous ways. For example, data
sets or data elements hosted online can be installed directly into the company’s integrated
report website. Soon, emerging standards for
nonfinancial information will make it easier
to compare sustainability performance data
across various companies’ websites.
Finally, there is a societal benefit from the
application of cloud computing to integrated
reporting. Ultimately, a global set of standards for nonfinancial information that has
the same institutional legitimacy as the standards for financial information needs to exist.
Here, too, cloud computing can play a role.
Standards are often the codification by
regulators of what has become common
practice. In partnership with such groups as
the GRI, CDSB and DVFA/EFFAS, cloud computing vendors can speed up the emergence of
standards for nonfinancial information that
are mandated and enforced by regulators.
A further advantage of this approach to
regulation, which is based on active experimentation and use by companies, is that it responds to the needs of shareholders and other
stakeholders, while also being feasible for
companies to adhere to it. Uninformed regulations, such as those put in place following
a crisis, are often expensive, cumbersome to
implement and fail to adequately address the
problem they are intended to solve.
report, along with making sure the corporate
website facilitates dialogue and engagement
with shareholders and other stakeholders.
Apart from the first one, all can be facilitated
through cloud computing.
The CEO, with the support of the board of
directors, must be fully committed to integrated reporting. Without CEO support, it
simply cannot happen.
The CEO must put a specific individual in
charge of managing this process, including
the development of the necessary systems
for reporting on nonfinancial information.
The material financial and nonfinancial
performance metrics critical to the company’s strategy must be identified.
Explicit causal models of the relationships
between financial and nonfinancial metrics
must be developed and, to the extent possible, verified with data.
The content of the first integrated report
needs to be determined, along with an action plan for how this report will evolve
over the next few years, as the company improves its internal measurement and control systems for nonfinancial information.
The necessary development needs to be
done to the company’s website, so that it is
as integrated and engaging as possible to all
stakeholders who use it.
The company must engage with and seek
feedback from all of its stakeholders about
what it can do to ensure that it has a sustainable strategy and to improve its integrated
reporting practices.
Once a company starts doing integrated reporting, there is no going back. For that reason,
a commitment to integrated reporting should
not be made lightly. But it is one that every company needs to make – the sooner, the better.
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TO KNOW MORE
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Getting Started
Integrated reporting is both a commitment
and a journey. It cannot happen overnight. If a
company is not yet issuing a corporate social responsibility or sustainability report, it probably
needs to start here. The following seven steps
can be used as a guide for how a company can
prepare for and begin producing an integrated
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Eccles, R.G., and M.P. Krzus. One Report: Integrated
Reporting for a Sustainable Strategy. New York: John
Wiley & Sons, 2010.
Eccles, R.G., B. Cheng and D. Saltzman. The
Landscape of Integrated Reporting: Reflections and
Next Steps. Boston: Harvard Business School,
2010. http://www.smashwords.com/books/
view/30930.
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