DRIVING VALUE
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Integrated Reporting – Telling the Value Creation Story

May 1, 2020
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Integrated Reporting – Telling the Value Creation Story

By MIA Professional Practices & Technical

Part 2: Addressing the Content Elements  

This article, the second in a two-part series, focuses on the common findings arising from the Integrated Reporting <IR> Awards adjudication of the National Annual Corporate Report Awards (NACRA) 2018 and 2019, analysed by the Content Elements in the Framework. The first part addressed the Guiding Principles in the Framework.

To facilitate the drawing up of a holistic integrated report, the Integrated Reporting Framework (Framework) puts forth eight interlinking Content Elements to be included in an integrated report. The Framework expresses these Content Elements that are aligned to the value creation process of an organisation in the form of questions rather than as checklists to accord flexibility in telling the organisation’s story.

The Content Elements are not meant to serve as a standard structure with a requisite sequence. They enable each organisation to exercise judgement in applying the Guiding Principles of the Framework to articulate the necessary disclosures or coverage areas that shed light on an organisation and to present the integrated report in a manner that makes the connectivity of the Content Elements apparent.

The coveted Platinum Award for the <IR> Awards 2019 went to Sime Darby Property Berhad, setting the benchmark in integrated reporting. Petronas Chemicals Group Berhad clinched the Gold Award while Axiata Group Berhad garnered the Silver Award. As for the IR Awards 2018, the prominent winner was Sime Darby Berhad for the Platinum Award. The Gold and Silver Awards went deservedly to Sunway Real Estate Investment Trust and Petronas Gas Berhad, respectively. Commendation should also be given to participants that have commenced their journey of producing integrated reports.

The Integrated Reporting Steering Committee hopes that the common findings from the adjudication of the <IR> Awards 2018 and 2019 analysed by the respective Content Elements will guide preparers of integrated reports in enhancing the quality of their integrated reports and first-time adopters in getting started.

In discussing the observations, examples of good practices are featured, referring to the annual reports of the <IR> Awards winners above.

Organisational Overview and External Environment

Observations: In articulating an organisation’s overview and external environment, there can be improvement in the disclosure of significant factors impacting the external environment that affect the organisation’s ability to create value in the short, medium and long-term and how the organisation responds to them. These factors, such as stakeholders’ needs, macro and micro economic conditions, market forces at play, technological advancement, societal issues and environmental challenges, may affect the organisation directly or indirectly.

Examples of good practice: Petronas Chemical Group Berhad’s Annual Report 2018 pages 10, 11, 13, 20-22, 63-65.

The Group discloses information on both its organisational overview and external environment in a succinct and informative manner. It links the external environment and outlook to its core business and articulates how the company responds to them. It also has a diagrammatic depiction of its integrated product value chain.


Governance

Observations: Better reporting under the lens of value creation would entail linking the overall organisation’s leadership structure and the skills, background and diversity of the directors to value creation over time.

Examples of good practice: Sime Darby Property Berhad’s Annual Report 2018 pages 118, 119, 123.

The disclosure of the Board and senior leadership composition illustrate maturity in its governance structure and framework with many senior members with various and diverse backgrounds, including healthy diversity in gender and ethnicity as well as age and tenure. There was a commentary on the Board’s upholding of good governance to sustain long-term performance and create economic value to shareholders while aligning it to the interest of other stakeholders. There was a mention of how the diversity of the Board has a positive value-add impact on the Group and enables in-depth deliberations during Board meetings. The leveraging of the differences in perspectives, industry experience, knowledge and skill helps the Group retain its competitive industry edge.


Business Model

Observations: Features that can enhance the effectiveness and readability of the description of the business model are explicit identification of the key elements of the business model and having a simple diagram to highlight these key elements and their relevance to the organisation. Better reporting would be to also connect these elements to strategy, risks and opportunities and performance.

Examples of good practice: Axiata Group Berhad’s Annual Report 2018 pages 31 to 38.

There are sufficient disclosures of the key elements of the Group’s business model encompassing the value creation process and stating clearly the inputs, business activities, outputs, outcomes and value created. In addition, there is a clear connection to other Content Elements such as strategy, risks and opportunities.


Risks and Opportunities

Observations: Disclosures on key risks and opportunities should be a reflection of the material enterprise matters, including environmental, social and governance issues, that are specific to the organisation, including those that relate to its effects on the relevant capitals.  An organisation should also explain the likelihood of each risk occurring and its magnitude. This can be illustrated in a risk matrix or heat map. There can also be better articulation of specific steps to mitigate or manage key risks or to realise key opportunities.

Examples of good practice: Sime Darby Property Berhad’s Annual Report 2018 pages 36, 37, 40-47.

There is clear identification of risks and opportunities by capitals and disclosure of information on how they affect the organisation’s ability to create value. These matters are linked to their source (including those stemming from the external environment), stakeholders, strategy and measures taken to address them.


Strategy and Resource Allocation

Observations: It would be desirable to see reports with better linkage between the organisation’s strategy and resource allocation plans and how it relates to the business model, external environment and capitals.  Furthermore, a reporting entity should be able to explicate how the organisation develops and uses its intellectual capital and how it works on differentiating factors that give the organisation a competitive advantage.

Examples of good practice: Sime Darby Berhad’s Annual Report 2017 pages 10, 55, 62, 69 76, 77 and 89.

The Group presented an overview of its strategic priorities. Thereafter, in the respective Division Operations Review section, the Group described the key strategic priorities, related external factors, risks and challenges encountered and the anticipated challenges in the pursuit of its strategic objectives and highlighted the priorities for the following period.


Performance

Observations: It is generally observed that there can be better correlation between key performance indicators or targets with strategy, risks and opportunities and actual past and present results and between the current performance and the organisation’s outlook.

Examples of good practice: Sunway REIT’s Annual Report 2017 pages 30-33, 52-77.

The Group’s performance with a mix of qualitative and quantitative measurements for each business segment is linked to the four goals set by the Group. There were clear performance indicators with historical data to provide context. The key stakeholders’ relationships and needs are linked to performance and their significance and implications are graphically illustrated. Linkages between past, current performance and prospects were also disclosed in the report.


Outlook

Observations: There can be better narrative on the challenges and uncertainties that the organisation would likely encounter in pursuing its strategy and the potential implications for its business model and future performance.

Examples of good practice: Sunway REIT’s Annual Report 2017 pages 25, 33, 101 and 103.

The Group disclosed its strategies to optimise its capital structure and cost of capital against risks. The company also demonstrated awareness of the impact of external environmental factors and narrated how it took pre-emptive measures upon identifying various macroeconomic, business, human capital, cyber and operational risks. In addition, the outlook for each sector in the investment portfolio was discussed in the “Detailed Market Report” section.


Basis of Presentation

Observations: There can be better clarity in how an organisation determines the matters to be included in the integrated report and how such matters have been collated, quantified and evaluated.

Examples of good practice: Petronas Gas Berhad’s Annual Report 2017 pages 2, 80, 81.

The Group disclosed the reporting boundary, materiality determination process and specified the summary of the significant framework and standards to evaluate material matters.


Established by the Institute in 2014 upon the recommendation of the Securities Commission Malaysia, the Integrated Reporting Steering Committee (IRSC or the Committee) focuses on creating awareness and promoting <IR> in Malaysia.

The <IR> Awards category was introduced in the NACRA in 2017. The key observations identified during the review of the NACRA 2018 and 2019 submissions have been segmented using the Content Elements from the <IR> Framework as a basis for discussion.

To access additional materials on Content Elements, the Framework or to learn more about <IR>, please visit https://integratedreporting.org/.