CMA Excellence in Integrated Reporting Awards competition 2021: Judges Report

Presented by Prof. Graham Terry, IR Ambassador IIRC

It is my great honour and privilege to deliver the judges report for the CMA Excellence in Integrated Reporting Awards 2021. This is a short overview of our findings. A longer version together with examples will be made available by the institute in the near future. Firstly, I would like to congratulate Professor Watawala and the CMA Institute for running this competition, and for all the work that they do to promote integrated reporting and thinking in Sri Lanka. Sri Lanka has become one of the most advanced countries in applying integrated reporting and the CMA institute has done much to facilitate this.

I would also like to thank my colleagues on the judging panel, ably led by Prof. Ho Yew Kee for their input into the report and for the time and effort that they expensed in marking and evaluating the integrated reports. Also, a big thanks to the evaluation panel who did all the hard work in compiling the short-list of reports.

Each year of this competition, we have witnessed improvements in the quality of integrated reports submitted for consideration. In last year’s Judges Report we commented on the improvement in the way in which organisations described their value creation story, and how the various content elements connected to form a truly integrated report. This trend has been reinforced and enhanced this year. Many reports have shown a marked improvement in how they described their value creation story.

We saw a more focussed approach to the assessment of the external environment (or operating environment). Organisations linked the key issues identified to risks and opportunities and strategy and fewer organisations provided meaningless general overviews of the economy, social conditions and political situation this year. It is pleasing to see more organisations recognising the growing impact of digitalisation, climate change and other sustainability issues on their performance.

As we have said before, Sri Lankan organisations were quick to embrace and report on how they were addressing the UN Sustainable Development Goals. In the past, organisations may have seen these as avenues for corporate social responsibility contributions. However, more and more organisations are now understanding how these issues (such as climate change) affect organisational performance over time. Organisations are therefore focussing on the key issues that affect their ability to create value and addressing them in their strategies. This is a strong indicator of enhanced integrated thinking.

In January 2021, the International Integrated Reporting Council published a revised Framework. There were relatively few changes to the original framework issued in 2013. Perhaps the most important matter related to the business model. Around the world many organisations failed to present their business models in a clear and understandable way. For example, organisations confused outputs and outcomes and many focused on stakeholder outcomes instead of capital outcomes. I am afraid to say this applied to many organisations in Sri Lanka.

A pleasing trend we noted this year, is how governance disclosure is moving away from detailed reporting on structure and compliance to providing insight into how the governance structures are supporting value creation. The detail is more appropriately presented in governance reports or on websites. This development is another indicator of how organisations are better understanding value creation and integrated thinking.

Most boards now take responsibility for the integrity of their integrated reports. This enhances the credibility and reliability of reports, because it is assumed that boards will not allow flawed reports, signed by themselves, to be issued. The revised Framework encourages organisations to supplement the acknowledgement of responsibility by the board with process disclosures describing the measures taken to ensure the integrity of the report. It was pleasing to see some organisations adopting the change this year.

One of the most important guiding principles in the Framework is ‘strategic focus and future orientation’. As we have reported before, organisations in Sri Lanka have been happy to share their strategy and discuss broad future plans, but most focussed on the short term. However, more organisations are expanding their horizons to cover the short-, medium- and long-term aspects of strategy, external environment, capital procurement and outlook.

We also saw much improved information about outlook which is a very important element when assessing the organisation’s ability to create value in the future. Organisations reported on various aspects of outlook, including a general overview, strategy, the capitals and risks and opportunities.

When it comes to stakeholder relationships the Framework’s objective is for organisations to provide insight into the nature and quality of key relationships. Several organisations do this well and include metrics to demonstrate the quality of relationships. However, some still use paternalistic language to describe (often in great detail) what the organisation is doing,(for example – for employees), without any measure of the quality of the relationship. This style of reporting indicates an authoritarian culture which raises questions about the ability of the organisation to create value over the long-term.

Each year, in our report we urge organisations to disclose more information about the executive remuneration policy. More organisations are doing this, but it is interesting that few link remuneration to broad value creation, preferring to focus on financial performance. If organisations are serious about sustainable value creation, we believe that it is important to reward on the basis of broad value creation, rather than purely on financial success.

We saw some improvements in the depiction of the integrated reporting boundary this year. For example, more organisations are presenting diagrams to clarify how the boundary has been drawn. Several organisations still present a vague description of the boundary, which leaves the reader of the report confused about what risks and opportunities have been left out. For example have risks associated with the supply chain been included?

On several occasions in the past, we have urged organisations to strive to reduce the length of their reports. The objective of the integrated report is that it should be a concise communication that is easy to read and understand. Last year we saw a fairly significant reduction in the average length of reports, however this year the results were mixed. Some were shorter and others longer. Many reports still include excessive detail about compliance, governance, risks, financial performance and the capitals. This unnecessary detail will only discourage stakeholders from reading the report and recognising the important aspects.

Before ending, I would like to make a comment about state institutions. Currently, we only receive a few applications from state institutions, mainly banks. State institutions like private organisations have struggled during the COVID pandemic, but as we are seeing, many of the privately owned organisations that have adopted integrated thinking and reporting have been able to adapt to the circumstances and deliver value. In our opinion because they are embracing integrated thinking and reporting they are better equipped to deal with the challenges of these times. Using the principles of integrated thinking, organisations are able to refine their business models and strategies to enhance their strategic focus. Integrated thinking also leads to integrated decision-making and a more efficient allocation of resources. We have seen that by implementing integrated thinking and supplementing it with integrated reporting, organisations are better able to create value for themselves and their stakeholders. In the case of state institutions this means for customers, consumers, employees, suppliers, government and the community. We would like to encourage state institutions to adopt integrated thinking and reporting for the good of your wonderful nation.

On behalf of the panel of judges, I would like to congratulate all the winners and organisations that submitted their reports for consideration this year. We believe that as organisations travel on this journey to enhance their reports and refine their integrated thinking, they derive huge value for their businesses and a better understanding by their key stakeholders as regards strategy and performance.

Prof. Graham Terry