By Terrence N. Chimanya

While much of the focus on Integrated Board Reporting has been on the needs of external stakeholders, the necessity for better internal decision making can be significantly improved through utilising the six capitals approach (i.e. financial capital, manufacturing capital, human capital, social and relationship capital, intellectual capital, and natural capital).

A Case Study

In 2011, I worked on an assignment for a United Kingdom based service company to incorporate a governance and sustainability checklist into their strategic planning process, through which the impact of all six capitals was considered as it pertained to the risk of investing or not investing financial capital in order to sustain competitive capability and advantage. The approach was simple and assessed several aspects of each capital as high risk (red), medium risk (amber) or low risk (green). This simple approach quickly identified that there were several areas where lack of sustainable financial investment had increased the level of risk in several non-financial capitals. Company earnings had been consistently in the upper quartile but the negative impact of focusing on maximising financial earnings only quickly showed up through the depletion and increasing risk of non-financial capital sustainability. This simple application quickly attracted the interest of the Group Board and provided help to Executive Management when presenting their business plan for discussion and approval. This approach demonstrated the importance of ensuring that financial resources needed to be applied to build intangible assets even though these did not appear as increases on the balance sheet and impacted financial earnings in the short term.

Call to Action

Business leaders across the globe and indeed in Zimbabwe are starting to realise that whilst the output of Integrated Board Reporting may be a report, the real value lies in the process of reporting – in developing a clear understanding of the business model through which some or all of the capitals are utilised. There is, therefore, an urgent need for internal adoption of the six capitals as a driver for improved decision making around the effective deployment of financial capital through which overall organisational value is created. Without the involvement of management, integrated thinking will probably remain a process of populating a ‘new scorecard’ with metrics that provide greater insight into core aspects of ESG (Environmental, Social/Sustainable and Governance i.e. principally legislated or required by stakeholders and supported by organisation’s such as Institute for Sustainability Africa needs rather than creating a new and enhanced understanding of value creation and sustainability. In addition, Executive Management who is judged on its effectiveness in areas such as cost containment will see the allocation of resources towards integrated reporting as a ‘tax on the business’ further driving up what may be considered unnecessary overhead. Thus the deployment of resources will be around satisfying the ‘minimum possible’ rather than developing a new understanding of a value creation model.

The Real Deal

The Integrated Reporting Framework provides an opportunity for Executive Management to “tell a better story” to its Board, shareholders and other external parties who, otherwise may continue to rely primarily on the business’ financial performance together with what minimal information they can gain to understand what is ‘behind the numbers’. Reporting needs to move beyond a tick box, compliance exercise, and become a real value to the business. Management need to really grasp integrated thinking and reporting. This is about securing the long term sustainability of the business through adopting a new mind set. I have seen examples of Executive Management’s frustration with board directives and decisions that they believe fail to take into account the levels of necessary investment for sustainability in areas such as human capital. Accounting perpetuates this problem through treating all labour related costs as expenses even when they are deployed to create and enhance other capitals such as social and relationship, intellectual and possibly others. Such deployments of financial capital result in apparent depletion of earnings and balance sheet equity even though the “invisible” capitals are being enhanced and developed. The board may come to realise this too late when financial performance declines due to lost competitive advantage. Strategy, risk, performance and sustainability are inseparable.

King IV closes the circle as it references the International Framework underpinned by the same thinking and terminology. It states that for an organisation to win in the long term both executive management, the Board and investors must embrace and adopt integrated thinking. While Integrated Board Reporting will enhance societal understanding of corporate behaviour, only integrated thinking will offer the long term opportunity for better decision making in the interest of both investors and management.