By Tom Hanlon
Integrated reporting is the new kid on the block of business reporting and communications with shareholders and stakeholders. And Mike Krzus, of Mike Krzus Consulting, has been at the forefront of this new wave of business reporting from its inception.
Integrated reporting (IR) considers a range of both tangible and intangible factors that impact a company’s value. Krzus’s website notes that IR can be used to “reinforce policies and values linked to trust and market performance,” and “identify the threats and opportunities most likely to affect your organization’s ability to create value for shareholders and society.”
Krzus recently spoke to students at a Department of Accountancy Lyceum about the purposes and benefits of IR.
“Today, the average company has a life of about 18 years,” Krzus said. “In 1930, companies had an average life of about 90 years. When you talk about true sustainability, you might ask, will Apple be here in 80 years?”
What a company needs for long-term sustainability, Krzus said, is integrated thinking, which is the core concept of IR. “A company has to balance the imperative for long-term sustainability for both shareholders and society with the demands for short-term competitiveness and profitability,” he said. “Can any business create value for its shareholders without taking into account its effect on society?”
The need for IR
Krzus identified four drivers of change that resulted in a need for IR:
- The 2008 recession. “This changed the perception of trust in businesses,” Krzus noted. “Prior to 2008, people trusted a company when they saw growth, quarter after quarter, and when they saw CEOs who were charismatic, outspoken, a great leader, a Jack Welch kind of character. Those attributes are still important, but they are no longer at the top of the list.”
- The Net generation. “This is you,” Krzus said. “A smartphone has more computing power than the desktop I had in the 1980s. The way you consume information, the way you use eBooks and social media… your generation is driving change.”
- The Internet. “The Internet is amazing in its transparency,” Krzus remarked. “News is instantaneous around the world. For some companies, you can take their financial or sustainability report and analyze it yourself. The Internet encourages transparency.”
- A change from tangible assets as a pillar of market value to intangible assets. “This has flip-flopped in the past 30 years,” Krzus noted. “It used to be that tangible assets were the focus. Not now. The value is not in hard assets that produce products, but in the brainpower of the people who innovate to create new products and services. You will be the assets of the company. How do you place a value on human capital?”
Shifting to long-term thinking
Krzus said that companies need to shift not only from focusing on tangible to intangible assets, but from short-term to long-term thinking.
“What companies need to do is attract capital that has a long-term focus. Companies can’t be expected to manage based on next quarter’s earnings. If businesses are going to survive for 90 years the way they did in the 1930s, they've got to have long-term thinking.”
Another change businesses need to make, Krzus said, is going from a view of the world from shareholders to stakeholders. “Shareholders are critically important; they do provide capital,” he noted. “But can a company sustain their earnings for 90 years without considering the environmental and societal impacts on their business? We need to start thinking about what is the role of the corporation in society.”
At the heart of IR, Krzus said, is helping companies look at how it creates value for both shareholders and society. “Integrated reporting is trying to change the equation,” he said. “It’s trying to take away the short-term focus.”
The benefits of IR
Krzus outlined the benefits of IR: • IR can help stakeholders see that you are paying attention to what’s important in today’s marketplace.
- It can be used to break down silos and drive better communication between departments.
- It can improve understanding about creating long-term value.
- It can increase focus and awareness of senior management around long-term sustainability.
- It can reinforce the corporate culture that creates value.
“Integrated reporting forces conversation between people who normally don’t talk to each other,” Krzus said. “I know too many CFOs who don’t have a clue as to the name of their sustainability director. Too many finance people who don’t know who’s in operations. Integrated reporting has the ability to lower the walls so people can start talking to each other.”
Integrated reporting, Krzus added, is about being open, honest, and transparent. It’s about creating long-term value for shareholders while considering the effects of a company’s work on society.
“The point I’m trying to make is that reporting matters,” Krzus said. “It provides a way to see how the company sees itself – I think it’s a window into the soul of the corporation.”