Integrated reporting: can HR step up?
A revolution in corporate reporting is under way as organisations realise business success is about more than just an impressive balance sheet. HR has a vital role to play in integrated reporting, but failure to embrace this opportunity could sideline the function
Annual reports aren't traditionally thrilling reads. The usual format: pages and pages of financials, packaged up with a few glossy photographs of the company's CSR activities and a letter from the CEO in which people are invariably described as 'our greatest asset'. Even with the rise in sustainability reporting, itself often little more than greenwashing, it's been pretty clear that business success is all about the numbers.
But the world is changing. Post-financial crash, the concept that success could be down to more than just profit, and that corporate failure is often down to bad behaviour, is gaining momentum. Statements about the importance of values and culture, once murmurs, are becoming louder, and social media means nothing is secret for long anymore. The act of building sustainable organisations is starting to resonate with companies that are typically short-term focused. And, the idea that businesses must engage with - and give back to - the communities in which they operate is gaining traction.
All that means the way an organisation builds strategy and measures and reports on its success must shift as well. Against this backdrop of major change, the standard annual report no longer looks up to scratch. If business success is about more than just a P&L statement, isn't it time to rip up the reporting rulebook?
The International Integrated Reporting Council (IIRC) certainly believes so. It wants to revolutionise corporate reporting by launching the International Integrated Reporting Framework this year. Integrated reporting (IR) is a more holistic approach to reporting, drawing together strands from across a business and communicating the full range of factors that help, or hinder, an organisation as it attempts to create value. It talks about the short and medium-term, but the focus mainly is on the long-term. In short, says Jonathan Labrey, communications director at the IIRC: "IR is the language of resilient business."
The IIRC's integrated reporting draft framework focuses on six capitals - value-bases that are central to an organisation's business model and success. These are: financial capital, manufactured capital, human capital, intellectual capital, social and relationship capital, and natural capital.
While IR isn't mandatory, the IIRC hopes it will grow organically. "The information that is currently being produced in corporate reporting is deficient in demonstrating how companies are creating value in a changing world," believes Labrey. "We've moved from a manufacturing-based economy to a knowledge-based one. IR seeks to define the drivers of value within an organisation. Around 80% of the value of a business is in the intangibles - people, knowledge and ideas - not the financials. It's about understanding where value lies and who is generating it."
Stated like that, the role HR should play in this reimagining of corporate reporting is thrown into sharp relief. "When you look at the fundamentals of IR, three of the capitals directly relate to HR: intellectual, social and relationship and, of course, human," says Colleen Theron, director of sustainability and CSR consultancy CLT Envirolaw.
"When you mention human capital, you are immediately bringing HR into it. It is essential in how companies work to understand and lever that capital. IR is about guiding principles, strategic focus and connectivity of information: these are all things HR should be involved in."
Labrey goes even further, stating IR will help HR be taken seriously strategically, if it grabs the opportunity. "IR will really help HR get a seat at the table," he says. "It will give it the opportunity to say where the business is going strategically in terms of people." Laurence Collins, director of people and workforce analytics at professional services firm Deloitte, agrees it's a big opportunity for the function. "HR can start making a statement about the value it creates," he says. "How it quantifies this value is the question."
The role of HR in IR
The Chartered Institute of Management Accountants (CIMA) is one of the UK-based organisations involved in the IIRC's pilot programme - a group of global organisations involved in developing the framework by road-testing IR prinicpals and approaches.
Head of corporate reporting Nick Topazio says IR has "significant implications" for how the organisation operates and will help it make better business decisions internally, as well as help external stakeholders with decision-making. "Companies often say 'our people are our greatest resource', but then say very little about that in the report," he adds. "I can't think of any organisations that could continue without people. It needs to be talked about."
Traditionally, only the financial and communication departments at CIMA developed its reports, but Topazio says switching to IR has changed that. "We've had people talking about it who have never been involved before," he says. "It's helped us see how everything relates internally and how the different areas of the business link together."
CIMA's HR director Brad Taylor has played a significant role in the development of its first integrated report. "Sustainable business is not just the money, it's the people element. How engaged are the people in delivering the strategy?" he says. "The role of the HRD is about ensuring people understand the strategy and making sure the organisation is made up of the right job roles for the future. We try to convey through the report how our staff see the organisation and what we are doing to keep things sustainable."
Taylor was involved from the outset, working closely with the chief financial and operating officer to build up a picture of what the report should measure and include in terms of human capital. Lower down the chain, HR business partners work with finance business partners to examine the objectives that line managers are setting and analyse results. From an HR perspective, CIMA's first stab at IR tackled subjects including engagement, succession planning, career development and even executive remuneration.
Addressing CEO and executive pay levels was a "thorny issue", says Topazio. "It took careful navigating, and HR was instrumental in that. It is critical that people understand how key members of staff are incentivised and how that leads to value creation. That's easy for me to say: managing and navigating from policy to the practicalities of dealing with people is more difficult, which is where HR comes in."
Busting 'silo thinking'
In fact, in addition to the need to report on the people dimension of a business, HR has a second, vital role to play: managing across silos to ensure departments collaborate in producing a report. If every department works in isolation, the integrated nature of the report is destroyed. "It's about integrating all the elements into one holistic report, not just having HR or sustainability sitting on the side," says Labrey.
For the HR director personally, Taylor advises working on your internal relationships in preparation. "Sit down with your finance director and really build that relationship," he says. "There needs to be a very close relationship between the FD and the HRD so they are constantly sharing information about how they see the organisation, and thus conveying a consistent message to the external stakeholders. They both have different skill sets and ways of filtering that information."
At Interserve, a support services multinational with 50,000 employees, finance and sustainability director Tim Haywood works alongside HR director Catherine Ward to develop an integrated report. And collaboration right across the organisation has been crucial. "It will only work if everyone buys into it and delivers," says Haywood. "Bringing this plan to life has been a huge collaborative project. It's brought about cross-silo working to address common issues."
"Working on something that seeks to define the greater purpose of the organisation beyond the financial and thinking about how that translates to their discipline has been really positive in getting people to work outside their immediate teams," adds Ward. "It's really helped cross-organisational understanding and insight."
Talking value and risk
Gluing the separate parts of an organisation together is a huge part of HR's role in IR, says Martin Baxter, executive director, policy, at the Institute of Environmental Management and Assessment, the environment professional body. "HR should help people think beyond their traditional silos, think about the value they create and understand the risks across the value chain," he explains.
He cites the example of the 2011 Japanese tsunami halting UK car production. "Help people see the external changes coming and prepare for them - build resilience," he advises. "HR can help evaluate the skills the organisation has in relation to IR. Do people have the ability to look externally to consider risks and opportunities? Embed that kind of thinking into skills training."
Theron, who does a lot of her work in the arena of human rights and business, says the sustainability aspect of IR means HR needs to become more educated about human rights. She makes the point that while IR is not mandatory, other legislation, such as G4 Sustainability Reporting and October's changes to the Companies Act around sustainability, means organisations will soon have to provide data around issues such as sustainability and human rights, or explain why not.
"There is a need for HR to become educated," she says. "Sustainability isn't just green issues or CSR. HR needs to have an understanding of the company's activities through a human rights lens. Look at your work in emerging markets: HR is often the link between agencies and the business. Organisations need to become more transparent and more integrated in their thinking. External stakeholders are taking more of an interest in how you act as a company. HR needs to be equipped and it needs to offer training."
That means thinking about working conditions in the supply chain, and perhaps introducing labour codes for contractors and agencies.
Can you handle the data?
It's a lot to consider, and the initial - and major - challenge for HR is to get on top of something it has traditionally struggled with: data. "The challenge for the HR department is to improve its analytical ability," says Taylor.
"A lot of HR information is grounded in what has already happened - how many days' absence someone has taken, for example. But that's only part of the picture. We need to know what the right things to be measured are and make sure we are getting consistent information from the business. There's a lot of data we could use, so it's filtering it down and choosing only the most important bits."
Ward from Interserve agrees that analytics is a challenge, even when HR is sitting on a data goldmine. "You need to keep perspective," she advises. "Data mining requires you to define the data you need and think ahead to the outcomes you want to measure. People can get lost in that. You need to keep looping back up to the big intention and then back down to the thing that will help us deliver. Keep everyone focused on the big goals so they don't get lost in the process."
For Taylor and his team, it's looking at employee survey data, pulse survey data, data around promotions, moves and secondment to measure talent development, and the impact of training. Data is also benchmarked using measures like Investors in People guidelines. A lot of work needs to be done with line managers to ensure they are reporting correctly. "There's a lot of managing stakeholder relationships across the organisation to make sure it all matches up," says Taylor.
"There is a real awareness within HR that analytical and measurement capability is something of a development area," says Deloitte's Collins. "It comes back to data quality, and there are a lot of requisites to be put in place before we get consistency."
Research from Integrated Reporting and Assurance Services (IRAS) in South Africa - where integrated reporting is mandatory for Johannesburg Stock Exchange-listed companies - finds organisations are appearing to struggle with non-financial, people-related data. IRAS's 2013 Review of Sustainability Reporting in South Africa reveals only 17% of the 331 companies surveyed provided HDSA (historically disadvantaged South Africans) employment data and only 17% provided lost time injury data. While 80% of the companies disclosed the number of employees they have, two-thirds failed to mention the number of contractors.
However, Labrey from the IIRC says a lack of reams of hard data shouldn't put organisations off experimenting with IR. "Metrics aren't everything," he says. "Some things can be measured easily, other areas are more difficult, but that doesn't mean they should be ignored. Where metrics work, that's great, but it's not about creating data for data's sake. Quality narrative reporting can be as valuable."
Seizing the opportunity
With the IIRC's finalised framework due to be published this December (companies have been giving feedback about the draft framework over the course of the year), it's still early days for IR. The potential impact on HR is still something of an unknown. In fact, Unilever, one of the largest companies involved in the pilot and a vocal supporter of the concept, told HR it wasn't able to offer comment on IR and HR.
But even at this early stage, the danger exists that HR could risk being shut out of another strategic process, when it could - and should - be playing a leading role.
"Looking at IR through an HR lens, there is already a clear gap appearing between what other functions are reporting and what HR is reporting," says Collins. "HR is reporting on staff turnover and absenteeism, because that's all it can measure, not because it's really valuable to shareholders."
And if this is the extent of HR's role in corporate reporting? Collins offers a worrying prediction: "Unless HR acts now, the gap is going to get wider and the responsibility for HR metrics is going to be taken away and given to a more strategic finance function," he warns. "If anything, IR will highlight the gap between what the organisation wants to report on, and what HR is able to report on. IR will help HR understand strategy, but HR needs to be contributing to and shaping that strategy, not just responding to it."
If HR can step up to the plate and get it right, however, it could harness the biggest development in corporate reporting in recent history - taking the function to a whole other level. "HR is an area of real focus and development in the reporting space," says Labrey. "There's been a lot of focus on getting financial reporting right. Sustainability was the next area. The next phase will be human and intellectual capital - that's where exciting things are going to be happening." Now it is up to HR to seize the opportunity.