Integrated thinking creating value for all the stakeholders

Companies need to have a decision-making approach that takes into account the greatest possible quantity of elements and information.. This need has led to the creation of an effective tool that allows considering every variable when making a choice: Integrated Reporting is advantageous for companies and their investors.

Implementing a successful decision-making activity first requires selecting (and therefore using) all the relevant information for this purpose. Instead, companies often deal with major issues through decision-making processes that are compartmentalized. This way, primarily the information the individual decision maker possesses is used, which may concern a specific business function, without extending the scope of information collection to other functions. Or only the most accessible information is used (for example, the economic-financial effects of a certain decision), at the expense of data that is equally relevant but more difficult to find (for example, the effect that the entry in a given market can have on the corporate reputation).

This is why there is a need for an integrated approach to both the activities of decision-making and the definition of strategy. In other words, integrated thinking, an approach that takes into account the connections and interdependences between the many factors that affect an organization’s ability to create value over time has to be implemented. This integrated approach should permeate all the stages of strategy definition: from the sharing of values by all stakeholders to the definition of strategic objectives, the relative key performance indicators (including non-financial ones), and performance targets.

Integrated Reporting (IR) is the right tool for achieving these goals; in response to requests from a variety of subjects, the International Integrated Reporting Council (IIRC) has created an international framework that provides drafting guidelines. According to the IIRC, IR is “concise communication that illustrates how the strategy, governance, performance, and prospects of an organization allow creating value in the short, medium, and long term in the context in which it operates.” As shown by the definition, IR is designed to provide a complete picture of the company, without increasing the size of the report, but rather, actually curbing it. According to the interpretative scheme proposed by the IIRC, a company uses six different types of capital in its business. In addition to the economic-financial capital, which nevertheless remains central, a company uses natural, social, intellectual, human, and manufacturing capital. At this point, consider the central role of human capital: how could any company operate without it? The people who work for a company are an asset of paramount importance, yet the information that is dedicated to them in the traditional budget is minimal. Similar reasoning applies to a company’s reputation. A recent study showed that 80% of the stock market value (i.e. market capitalization) of the 500 largest US companies depends on its intangible assets, among which its reputation plays a leading role. So, in this case as well, the traditional budget does not allow understanding the changes and the possible threats to the corporate reputation. Furthermore, IR can also lead to significant advantages in terms of investor relations. The current competitive environment in which companies are operating is characterized by the increasing availability of information that investors can use to make decisions concerning investments. While on the one hand, this feature is definitely appreciable, on the other, it must be carefully managed by companies. First of all, there is a risk of the investors’ information overload: beyond a certain threshold, large amounts of information are no longer useful, but on the contrary, destructive. This phenomenon is related to the limited ability to absorb and process information and to distinguish what is important from what is not. The second challenge is related to the fact that, even for businesses, the first impression is the one that ‘counts’, that is to say, the one that gives a significant boost to the nature of the subsequent reporting. Therefore, information should be organized and communicated in a coherent and effective manner. The traditional tools of business communication have evolved over the years, but not enough to meet the challenges of the new competitive environment that has been briefly outlined above. They take into account the traditional financial budgets, drawn up in accordance with the directives of the Civil Code or the international accounting standards:these are very long documents (for larger companies, a few hundred pages), that look to the past and with a lot of information that is not relevant, and which are based on the formal logic of compliance rather than on the desire to substantially communicate the company’s performance. In other words, financial investors do not generally gain sufficient information about a company and its ability to create value over the medium to long term just by reading the traditional budget. This is an acknowledged problem of some importance, since the ultimate goal of corporate reporting is precisely that of providing investors with information of relevant value. These limitations of the traditional system of reporting are acknowledged not only by academic literature, but also by the policy makers. A recent European directive (directive 2015/95/ EU) established that the budgets of large companies must include information of a non-financial nature regarding environmental, social, and governance issues. Member States (including Italy) have two years to implement the Directive. The objectives of IR are undoubtedly very challenging and not easy to implement. In Italy, more and more companies are working to develop their own IR. In recent years, there has been significant progress, but the road to achieving true IR is still long. In particular, it is necessary to develop better systems for measuring capital (thus, thinking about how it would be possible to measure the human, natural, and social capital...). This challenge, along with many others, requires the cooperation of companies, standard setters, policy makers, and academics.

(Abstract from Autostrade per l'Italia's Magazine "Agorà")