THE SIX CAPITALS
The <IR> Framework places great emphasis from both an integrated reporting and integrated thinking perspective on how companies use the six capitals
FIGURE 7.1 "The International <IR> Framework" Value Creation Process
Source: International Integrated Reporting Council. "The International <IR> Framework," p. 13, theiirc.org/international-ir-framework/, accessed April 2014.
(financial, manufactured, natural, human, intellectual, and social and relationship) "to create value over the short, medium and long term."4 Although previously discussed in Chapter 2, this is illustrated again in Figure 7.1.5
For all six capitals, the average score for the 124 companies was 2.0, with 25 of them receiving a 3 on all six capitals. For each capital, a majority of the companies received a 2 or 3 rating: financial (85.5%), manufactured (67.7%), natural (82.2%), human (83.1%), intellectual (71.8%), and social and relationship (80.7%). South African companies averaged 2.3, while the average score for the other companies was 2.0. We consider the disclosures made by CEMIG,6 Lassila & Tikanoja,7 Singapore Stock Exchange,8 Inditex,9 Telekom Slovenije,10 and AngloGold Ashanti11 to be excellent examples of reporting on each of the capitals.
There was not a great deal of variation in the average score by type of capital—a range of .33 from lowest to highest (Figure 7.2). Likely due to the fact that 17 of these companies were in financial services, manufactured capital received the lowest (1.83) score. It is simply not relevant for the sector. Human capital and natural capital received the highest scores at 2.16 and 2.15, respectively, suggesting that most companies see them as important to their value creation process.12 Intellectual capital also ranked low (1.93). Although
FIGURE 7.2 Average Score by Capital
admittedly difficult to measure, the same is true for human capital, suggesting that many companies did not see it as an important capital.
With a total average of 2.29 vs. 1.98 for the rest of the sample, South African companies scored higher on all six capitals. The difference was especially large for manufactured (2.29 vs. 1.72) and intellectual capital (2.29 vs. 1.84). The former is a result of a high percentage of South African companies (54%) relying on manufactured capital due to the fact that they operate in the energy, food and beverage, metal products, mining, pharmaceutical, and telecommunications sectors.13
CONTENT ELEMENTS
The average score for the seven content elements we evaluated was 2.1, about the same as for the six capitals, with 2 5 companies receiving a 3 on all seven. Again, a majority of companies received a 2 or 3 rating for each content element: organizational overview and external environment (86.3%), governance (83.1%), risks and opportunities (71.8%), strategy and resource allocation (78.2%), business model (78.2%), performance (86.3%), and outlook (71.8%). We consider the disclosures made by Banco do Brasil,14 Umicore,15 Kumba Iron Ore,16 Aviva,17 BAE Systems,18 Société Générale de
FIGURE 7.3 Average Score by Content Element
Surveillance,19 and Syngenta20 to be excellent examples of reporting on each of the content elements.
In the average score by content element, a difference of .30 from lowest to highest (Figure 7.3), little variation was noted. Opportunities and risks (2.03) and future outlook (1.93) were the two lowest scores. These low scores may indicate the inherent lack of clarity in discussing future-oriented issues and the accompanying anxiety companies have in doing so—especially in litigious environments.
South African companies scored higher on all content elements. With a total average of 2.35 vs. 2.06 for the rest of the sample (a difference similar to that of the scores on capitals), governance (2.50 vs. 2.11) had the highest score, virtually tied with organizational overview and external environment (2.46). Given how integrated reporting in South Africa came out of the King III code for corporate governance, the governance score is not surprising. Even in South African companies' two lowest-scoring elements, risks and opportunities (2.29 vs. 1.97) and outlook (2.21 vs. 1.86), their absolute score was still higher than that of the other sample.
When we supplemented this simple quantitative analysis by comparing the intention in the <IR> Framework with the patterns we saw in company practice, we found that even when the company described a particular content element in a fulsome way, the information was often scattered throughout many different parts of the report. Terminological inconsistencies were also rife. Thus, while companies received fairly high scores by each factor on average, nearly all of these reports needed substantial improvement in terms of the <IR>
Framework's Guiding Principles on the connectivity of information and report presentation:
The connectivity of information and the overall usefulness of an integrated report is enhanced when it is logically structured, well presented, written in clear, understandable and jargon-free language, and includes effective navigation devices, such as clearly delineated (but linked) sections and cross-referencing. In this context, information and communication technology can be used to improve the ability to search, access, combine, connect, customize, re-use or analyse information.21
While a small number of the reports we studied were "logically structured, well presented, written in clear, understandable and jargon-free language," very few succeeded in providing "effective navigation devices, such as clearly delineated (but linked) sections and cross-referencing." Almost none used information and communication technology "to improve the ability to search, access, combine, connect, customize, re-use or analyse information." As a result, deciphering how "the pieces fit together" in these integrated reports required more energy than necessary.
