Cristiano 

Busco · Mark L. Frigo

Angelo Riccaboni · Paolo Quattrone
Editors

Integrated
Reporting
Concepts and Cases that Redefine
Corporate Accountability
Integrated Reporting
ThiS is a FM Blank Page
Cristiano Busco • Mark L. Frigo
Angelo Riccaboni • Paolo Quattrone
Editors

Integrated Reporting
Concepts and Cases that Redefine
Corporate Accountability

Foreword by Sabina Ratti

Editors
Cristiano Busco Mark L. Frigo
J.E. Cairnes School of Business Kellstadt Graduate School of Business
& Economics DePaul University
National University of Ireland Chicago
Galway Illinois
Ireland USA

Angelo Riccaboni Paolo Quattrone

University of Siena The University of Edinburgh
Siena Edinburgh
Italy United Kingdom

This publication was grant-aided by the Publications Fund of National University of Ireland
Galway / Rinneadh maoiniú ar an bhfoilseachán seo trı́ Chiste Foilseachán Ollscoil na
hÉireann, Gaillimh

ISBN 978-3-319-02167-6 ISBN 978-3-319-02168-3 (eBook)

DOI 10.1007/978-3-319-02168-3
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Foreword

Integrated Reporting is arguably the current frontier of corporate reporting. The

demands on corporate reports are growing rapidly in parallel with stakeholder
engagement of a greater in-depth understanding of the companies they have an
interest in. In this context, the recent establishment of the International Integrated
Reporting Council by a number of leading organizations represented an additional,
perhaps decisive, move towards the definition of a globally accepted reporting
framework. Such a framework aims to bring together financial, environmental,
social and governance information to enable stakeholders understand the true
ability of a company to deliver sustainable value and to educate investors to
overcome short-termism in their investment decisions. This, in turn, would further
enhance a company’s ability to make sustainable choices.
The definition of such a framework is everything but easy, though. This is
because corporate numbers and information are quite meaningless without a proper
and full understanding of the complex context which generates them. Let me draw a
comparison with the act of watching a movie. If you watch the last 10 min of a
movie you most likely know how the movie ends, you are aware of its final
outcomes. If this is a romantic movie, you know if the two are still together or
not; while, in the case of an action movie, you most likely end up discovering who
the killer was. But, unfortunately, although you do get to see the final outcomes of
the movie, you still miss a lot to make sense of it. You miss a full appreciation of the
themes of the movie, its significant passage points and the unique and possibly
complex story that has led to this specific final outcome. When you approach most
of contemporary corporate reports, the feeling is similar to the one described above:
it is difficult to fully understand how a number of different, and often stand alone,
indicators have contributed to value creation; it is difficult to appreciate the
complexity hidden behind the numbers. Ultimately, in most of the cases it is
difficult to infer how sustainable value creation can be maintained and further
developed in the future. Integrated Reporting aims to do that!
Because the efforts around Integrated Reporting are still in their early stages,
I really do welcome this edited collection on the topic. When I have read the
contents of this book, this has brought me back to my early days at Eni where,

v
vi Foreword

although my background is molecular biology, I was leading a project tailored to

develop an early form of environmental accounting, as well as to identify a control
system for evaluating the impact of business operations on the environment. I was
working with an interdisciplinary team in search of metrics, solutions and data that
would have eventually allowed the company to perform more efficiently in envi-
ronmental protection, make savings and better understand its business. This expe-
rience has been extremely important for us at Eni. It allowed us to practice
collaboration across disciplines and integrated thinking. This first step was mainly
an internal effort, though. When, later on, we succeeded in incorporating the results
of the dialogue with our external stakeholders, environmental and social reporting
at Eni moved to the next level.
Stakeholders engagement has been of paramount importance in the evolution of
corporate reporting. Systematic engagement with key stakeholders has enabled
corporations to question, and then challenge, a number of things that possibly had
been taken for granted before that. At Eni, after having issued a series of Environ-
mental and then Sustainability Reports we realized that, although the numbers were
allowing a true and fair review of the company’s performance, operations and
management, they were not necessarily relevant to the stakeholders or able to
hint the sustainability of the business. Neither was the simple act of reporting
data relevant per se. What was missing was a broader process of analysis and
communication able to put performance in context, able to represent the strategic
leverages the company was using to build and maintain its ability to produce value
in the long term. Stakeholders’ demands for greater transparency have, in time,
been coupled with an internal reflection on what the company considered its
strategic drivers: nowadays, our integrated reporting aims to respond to this
challenge.
A cultural shift is, though, required to support such a process. A shift of
paradigm rooted on the reorganization of systems, processes and practices in search
of Sustainable Value creation and representation. In this respect, joining the Pilot
Programme of the International Integrated Reporting Council back in 2011 was
very useful to us. Integrated Reporting offers an opportunity to combine
Sustainability and profitability in a single process, in a single document and,
ultimately, in a single story. It is a promising powerful tool to increase the internal
and external awareness, especially among investors, on the way in which the
integrated management of the business is currently practiced.
Significantly, Integrated Reporting aims at offering a long-term view. It is a
dynamic observatory designed and implemented to offer a space where organiza-
tional strategies, objectives, results and outcomes can be illustrated and interpreted
in a combined fashion. The objective is not so much to unpack complexity, rather to
make the users appreciate how the constitutive elements of a complex organization
in a complex environment contribute to Sustainable Value creation over the short,
medium and long term. In doing so, the numbers and information provided in the
Integrated Report aim at representing the way in which Sustainability’s objectives
and multiple perspectives are fully embedded within the Company’s business
model and decision-making processes.
Foreword vii

For the above-mentioned reasons, I do welcome the publication of this book.

Integrated Reporting is in its early stages, and any effort to illustrate, discuss and
eventually question its contents, elements and principles is a much needed and
useful exercise. Integrated Reporting is currently a lively and engaging theme,
worthwhile to be further explored both theoretically and practically around the
globe. Along this line, the usefulness of this book is twofold. First, it provides a
number of insightful chapters attempting to deepen our understanding on specific
concepts and principles. Second, this book offers a collection of best practices
attempting to describe and, in some cases, discuss how a number of companies,
large and small, private or public, are approaching Integrated Reporting in practice.
The trajectory of Integrated Reporting is about to mark an important milestone.
Soon, in December, the International Integrated Reporting Council will release the
first version of its framework. The journey has just recently begun, but Integrated
Reporting is about to enter in a critical phase where its rationale as well as its
concept will be tested, challenged and advanced.
This book is very timely and prepares all of us to do that. I trust you will enjoy
and benefit from reading it.

Sabina Ratti
Eni
Sustainability Senior Vice President
ThiS is a FM Blank Page
Introduction

What is Integrated Reporting? Who is driving the agenda? What are the building
blocks and best practices to date? This book aims to address these questions by
illustrating and debating the rise of and the challenges ahead for this new form of
reporting. The purpose is to participate to the current debate on Integrated
Reporting (IR) by reflecting both on the key concepts, elements and principles
that underpin its adoption and on a collection of cases that describe how a number
of companies, large and small, private and public, are approaching IR in practice.
What is Integrated Reporting? IR is a process that results in communicating—
through the annual integrated report—value creation over time. According to the
International Integrated Reporting Council (IIRC), an integrated report is a concise
communication about how an organization’s strategy, governance, performance
and prospects, in the context of its external environment, lead to the creation of
value over the short, medium and long term. Although providers of financial capital
are the primary intended IR users, an integrated report should be designed to benefit
all stakeholders—including employees, customers, suppliers, business partners,
local communities, regulators and policy makers—interested in an organization’s
ability to create value over time. The key objective of IR is to enhance accountabil-
ity and stewardship with respect to the broad base of six kinds of capital, or
“capitals” (financial, manufactured, intellectual, human, social and relationship
and natural), and promote understanding of their interdependencies. In doing this,
IR is designed to support integrated thinking, decision making and actions that
focus on sustainable value creation for stakeholders.
Who is driving the agenda? Although the journey of IR has started much earlier
than that, 3 years have now gone by since a number of leading organizations,
including the Prince’s Accounting for Sustainability Project and the Global
Reporting Initiative, announced the formation of the International Integrated
Reporting Council (IIRC). During these years the IIRC, a global coalition of
regulators, investors, companies, standards setters, the accounting profession and
nongovernmental organizations, has actively operated to redesign the landscape of
corporate reporting. In April 2013, the IIRC released a Consultation Draft (CD) of
the first Integrated Reporting Framework. The CD focuses on how to prepare and
present an integrated report and what to include in it. The CD was developed based

ix
x Introduction

on an analysis of the responses to the 2011 Discussion Paper “Towards Integrated

Reporting—Communicating Value in the 21st Century”, the publication of a draft
outline in July 2012, and a Prototype Framework in November 2012. Importantly,
the first version of its IR Framework is expected to be released by the IIRC in
December 2013.
What are the building blocks and best practices to date? The CD released by the
IIRC introduces and discusses a number of fundamental concepts, content elements
and guiding principles for the implementation of IR. The fundamental concepts of
IR are represented by the capitals that an organization uses and affects, the
organization’s business model and the creation of value over time. The business
model is the vehicle through which an organization creates value. That value is
embodied in the capitals—sometimes also referred to as resources and
relationships—that the organization uses and affects. The assessment of an
organization’s ability to create value in the short, medium and long term depends
on an understanding of the connectivity between its business model and a wide
range of internal and external factors.
These factors represent the content elements of the integrated report. An
integrated report is built around seven elements that define its content and commu-
nicate the organization’s unique value-creation story. According to the CD these
elements are organizational overview and external environment, governance,
opportunities and risks, strategy and resource allocation, business model, perfor-
mance and future outlook. By linking contents across these elements, an integrated
report can build the story of the business from a basic description of the business
model through the external factors affecting the business and management’s strat-
egy for dealing with them and developing the business. This provides a foundation
from which to discuss the performance, prospects and governance of the business in
a way that focuses on its most important aspects.
Because its intention is to offer an appropriate balance between flexibility and
prescription, the IR Framework is principles based rather than being founded on a
more rigid, rules-based approach. The idea is to recognize the wide variation in
individual circumstances of different organizations yet, at the same time, to enable
a sufficient degree of comparability across organizations to meet relevant informa-
tion needs. For this reason, the IR Framework doesn’t focus on rules for measure-
ment, disclosure of individual matters or even the identification of specific key
performance indicators. Rather, the framework is driven by integrated thinking,
which, as illustrated in the CD, should lead to integrated decision making and
execution towards the creation of value. The purpose of this approach is to stimulate
the active consideration by organizations of the relationships between their various
operating and functional units and the kinds of capital that they use and have an
effect on. The CD introduces and recommends six guiding principles, which
underpin the preparation of an IR, inform its content and affect how information
is presented. The six principles are strategic focus and future orientation, connec-
tivity of information, stakeholder responsiveness, materiality and conciseness,
reliability and completeness, consistency and comparability.
Introduction xi

Part one of the book includes a series of chapters reflecting on some of the key
concepts, elements and principles that underpin IR adoption and that are introduced
in more details in Chap. 1. In particular, after having reviewed the concept of
sustainability (Chap. 2) and the recent trends in corporate reporting (Chap. 3),
a number of guiding principles are then explored in the following chapters. These
principles are connectivity of information (Chap. 4), materiality (Chap. 5) and
stakeholder engagement (Chap. 6). Next, the book further analyse some of the
most significant content elements of IR. In particular, Chap. 7 focuses on the
interplay between strategy and the business model, Chap. 8 on performance mea-
surement and the capitals, Chap. 9 on value creation and cost management, and
Chap. 10 integrated risk management. Finally, Chap. 11 introduces a proposal of
value added calculation within the context of multinational enterprises, and Chap.
12 offers some reflections concerning the adoption of IR in the Public Sector.
Part two of the book presents a collection of cases that describe how a number of
companies, large and small, private and public, are approaching IR in practice.
There is no particular reason that justifies the sequence of the chapters. Cases are
focused on the following Companies: Eni (Chap. 13), Enel (Chap. 14), Vodacom
Group (Chap. 15), Smithfield (Chap. 16), Monnalisa (Chap. 17), Eskom (Chap. 18),
HERA (Chap. 19) and finally, the Auditor General of South Africa (Chap. 20).
Although the adoption of IR (or similar form of reporting) by these companies is not
comparable since each one of them has its own story, motivation and trajectory, all
of these companies represent examples of organizations that are currently
questioning traditional form of reporting to move towards an integrated way to
communicate the story of sustainable value creation.
We would like to thank all the authors of the book chapters: without your
enthusiasm and commitment this book simply would have not been possible. Our
gratitude also goes to Dr. Sabina Ratti, Sustainability Senior Vice President at Eni,
who has been so kind to take care of the foreword of this book.
Finally, we wish to acknowledge the precious support of Elena Giovannoni,
Loredana Smaldore and Fabrizio Granà, who have contributed to the editing
process of the book.
We trust you will enjoy the reading!

August 2013 Cristiano Busco

Mark L. Frigo
Paolo Quattrone
Angelo Riccaboni
ThiS is a FM Blank Page
Contents

Part I Introduction

1 Towards Integrated Reporting: Concepts, Elements and

Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Cristiano Busco, Mark L. Frigo, Paolo Quattrone,
and Angelo Riccaboni

Part II Review of Key Principles, Concepts and Elements for Integrated

Reporting

2 What Is Sustainability? A Review of the Concept and

Its Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Elena Giovannoni and Giacomo Fabietti
3 Annual Reports, Sustainability Reports and Integrated
Reports: Trends in Corporate Disclosure . . . . . . . . . . . . . . . . . . . . 41
Marco Fasan
4 The Connectivity of Information for the Integrated Reporting . . . 59
Sergio Paternostro
5 Materiality and Assurance: Building the Link . . . . . . . . . . . . . . . . 79
Chiara Mio
6 Stakeholder Engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Leonardo Rinaldi
7 “Integrating” Business Model and Strategy . . . . . . . . . . . . . . . . . . 111
Federico Barnabè and Maria Cleofe Giorgino
8 Performance Measurement and Capitals . . . . . . . . . . . . . . . . . . . . 127
Monica Bartolini, Fabio Santini, and Riccardo Silvi
9 Integrated Reporting and Value-Based Cost Management:
A Natural Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Carol J. McNair-Connolly, Riccardo Silvi, and Monica Bartolini

xiii
xiv Contents

10 Approaching Risk Management from a New Integrated

Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Sonia Quarchioni and Francesca Trovarelli
11 The Relationship Between Multinational Enterprises and Territory
in the Integrated Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
Christian Cavazzoni and Francesco Orlandi
12 Towards Integrated Reporting in the Public Sector . . . . . . . . . . . . 191
Luca Bartocci and Francesca Picciaia

Part III Towards Integrated Reporting: Cases and Best Practices

13 The Case of Eni . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207

Domenica Di Donato, Raffaella Bordogna, and Cristiano Busco
14 The Case of Enel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
Chiara Mio and Marco Fasan
15 The Case of Vodacom Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
Fabrizio Granà and Libero Mario Mari
16 The Case of Smithfield Foods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255
Loredana G. Smaldore and Christian Cavazzoni
17 The Case of Monnalisa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
Cristiano Busco, Maria Pia Maraghini, and Sara Tommasiello
18 The Case of Eskom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297
Fabrizio Granà and Francesca Ceccacci
19 The Case of HERA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313
Pasquale Ruggiero and Patrizio Monfardini
20 The Case of the Auditor-General of South Africa . . . . . . . . . . . . . 331
Luca Bartocci and Francesca Picciaia
List of Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347
 Part I
Introduction
Towards Integrated Reporting: Concepts,
Elements and Principles 1
Cristiano Busco, Mark L. Frigo, Paolo Quattrone, and Angelo
Riccaboni

Abstract
Integrated Reporting is a process that results in communicating—through the
annual integrated report—value creation over time. The purpose of this chapter
is to introduce the idea and the logic underpinning Integrated Reporting, shed
light on the reasons that enabled the debate on Integrated Reporting to gain
relevance over the recent years, and illustrate the features of the Consultation
Draft released by the International Integrated Reporting Council on April 2013.
In doing so, we focus our attention on a brief review of the fundamental
concepts, content elements and guiding principles proposed within the Consul-
tation Draft. We end the chapter with some reflections on the challenges ahead
for Integrated Reporting, and on the potential impact of its adoption on the role
of the management accounting function.

C. Busco (*)
School of Business and Economics, National University of Ireland, Galway, Ireland
e-mail: cristiano.busco@nuigalway.ie
M.L. Frigo
Kellstadt Graduate School of Business & Driehaus College of Business, DePaul University,
Chicago, IL, USA
e-mail: mfrigo@depaul.edu
P. Quattrone
University of Edinburgh Business School, Edinburgh, UK
e-mail: Paolo.Quattrone@ed.ac.uk
A. Riccaboni
Department of Business Studies and Law, University of Siena, Siena, Italy
e-mail: riccaboni@unisi.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_1, 3

# Springer International Publishing Switzerland 2013
4 C. Busco et al.

1.1 Introduction

The principles, concepts and elements that characterize the way organizations
report their annual performances are currently being questioned, debated, and
redesigned throughout the world1. This is happening as key notions such as capital
employed, value creation, and accountability are redefined in practice. What should
companies report? What are the types of capital that an organization uses and
affects? To whom are organizations accountable? And again, can we currently
measure, manage and communicate social and environmental impact? Is it really
possible to capture and represent how value is created and sustained over time? The
answers to these questions are almost certainly bedeviling a substantial number of
interested managers, executives, consultants, academics, regulators and additional
stakeholders everywhere around the world.
A possible response to these critical questions is offered by Integrated Reporting
(IR), a process that results in communicating—through an annual integrated
report—how organizations create value over time, and their impact from an eco-
nomic, social and environmental point of view. According to the International
Integrated Reporting Council (IIRC), the IR process has the potential to shed
light on these critical issues as it “brings together material information about an
organization’s strategy, governance, performance and prospects in a way that
reflects the commercial, social and environmental context within which it operates.
It provides a clear and concise representation of how an organization demonstrates
stewardship and how it creates and sustains value”2. For these reasons, the IIRC
encourages and promotes the adoption of the IR as an organization’s primary
reporting vehicle.
Three years have gone by since the Prince’s Accounting for Sustainability
Project (A4S) and the Global Reporting Initiative (GRI) announced the formation
of the IIRC. During these years the IIRC, a global coalition of regulators, investors,
companies, standards setters, the accounting profession, and nongovernmental
organizations, has actively operated to redesign the landscape of corporate
reporting. In April 2013, the IIRC released a Consultation Draft (CD) of the first
Integrated Reporting Framework. The CD focuses on how to prepare and present an
integrated report, and what to include in it. The CD was developed based on an
analysis of the responses to the 2011 Discussion Paper “Towards Integrated
Reporting—Communicating Value in the 21st Century,” the publication of a draft
outline in July 2012, and a Prototype Framework in November 2012.
The purpose of this chapter is to introduce the idea and the logic underpinning
IR, shed light on the reasons that enabled the debate on IR to gain relevance over the
recent years, and illustrate the features of the CD released by the IIRC. In doing so,

1
The contents of this chapter draw on and extend the article by Busco et al. (2013), “Redefining
Corporate Accountability through Integrated Reporting”, in Strategic Finance, n.8, August,
pp. 33–41.
2
Visit http://www.theiirc.org/, accessed on 28 June 2013.
1 Towards Integrated Reporting: Concepts, Elements and Principles 5

after having introduced some of the issues that are leading towards a re-definition of
themes such as accountability or corporate reporting, we focus our attention on a
brief review of the fundamental concepts, content elements and guiding principles
proposed within the CD. The chapter ends with some reflections on the challenges
ahead for IR, and on the potential impact of its adoption on the role of the
management accounting function.

1.2 Redefining Corporate Reporting as Values Meet Value

Creation

In the aftermath of the recent financial crisis and corporate scandals, many people
increasingly perceive the global economic system as busted, and they view business
as one of the major causes of social, environmental, and economic problems. Issues
such as huge national and individual debts, large unemployment rates, growing
disparity across societies, persistent fraud and unethical behavior in managing
public and private organizations, and increasing concerns for the environment
have left large segments of contemporary society frustrated with the existing social
and economic order, particularly with the logic, principles, and practices currently
in place. Among others, the notion and functioning of capitalism, the ultimate
purpose of the business, as well as personal and collective values systems and the
concept of corporate value creation have been questioned and placed under the
spotlight3 (see Mackey et al. 2013; Porter and Kramer 2011; Mourkogiannis 2008).
In this context, the pressure on the private sector to consider the social, environ-
mental, and economic impact of its conduct has grown tremendously as corporate
leaders and entrepreneurs are urged to take the lead in bringing business and society
back together. Values (broadly defined as principles, beliefs, standards, and ideals
that shape our feelings and emotions and help us decide how to act) help to shape
perceptions of how value is created, distributed, and reported. Societal perceptions
of value also help shape individual perceptions of value. Therefore, it isn’t
surprising to see a number of entrepreneurs, corporate leaders, and organizations
moving toward the hybrid ideal (Battilana et al. 2012) where the values embraced
(economic, social, and environmental) influence and are influenced by the way in
which value creation and distribution are accounted for and communicated within a
company’s annual report.
This makes the values embraced and the value created fundamental concepts
around which contemporary corporate reporting can be routed. Unfortunately,
however, the logic, principles, and practices of corporate reporting currently in
place have been transforming annual reports in complex, compliance-driven
documents that mainly are useful for accounting experts only. Much of the

3
See, for example, the emergence and recent popularization of concepts such as “Conscious
Capitalism” or “Shared Value”.
6 C. Busco et al.

information included in current corporate reports is not designed to offer forward-

looking information about strategy, performance, and risk. There’s an increasing
sense among stakeholders—investors, customers, citizens, and the community—
that existing corporate reporting, which is characterized by a strong focus on
financial performance and a lack of information on corporate strategy and nonfinan-
cial performance, is becoming gradually less fit for the purpose. Businesses are
facing capital constraint from a broader range of resources than just finance. This
needs to be accounted for, and communicated to, an expanding series of stakeholders
who are eager to be informed about both values embraced and the value created.
To close this gap, over the last decade a large number of companies have
voluntarily offered reports focused on sustainability and on corporate social respon-
sibility. Also, a number of coalitions (like the IIRC), councils and nongovernmental
organizations focused on improving and broadening the contents of corporate
reporting have emerged. Here we focus on IR as an example of contemporary
managerial innovation where a number of initiatives, organizations, and individuals
began to converge in response to the need for a consistent, collaborative, and
internationally accepted approach to redesigning corporate accountability (Eccles
and Saltzman 2011).

1.3 The Road Towards Integrated Reporting

On the 2nd of August 2010, The Prince’s Accounting for Sustainability Project
(A4S) and the Global Reporting Initiative (GRI) announced the formation of the
IIRC. The IIRC’s mission is “to create a globally accepted integrated reporting
framework which brings together financial, environmental, social and governance
information in a clear, concise, consistent and comparable format” in order to “help
business to take more sustainable decisions and enable investors and other
stakeholders to understand how an organization is really performing”4.
In September 2011, the IIRC released a Discussion Paper titled “Towards
Integrated Reporting—Communicating Value in the 21st Century”. Following an
analysis of the responses to the 2011 Discussion Paper, the IIRC released the Draft
Outline of the Integrated Reporting Framework on the 11 July 2012. According to
the IIRC, this Outline was important to establish, for the first time, the basic
structure of the Framework and was intended to keep stakeholders informed as
the Framework developed. Then, the Draft Outline has been superseded by the
Prototype IR Framework that was released in November 2012.
The Prototype Framework was a working document released to keep
stakeholders informed of progress on the development of the Framework following
the release of a draft outline in July 2012. The IIRC considered the release of the
Prototype Framework as an interim step intended to demonstrate progress towards
defining key concepts and principles that underpin IR, and support organizations’

4
Visit http://www.theiirc.org/about/, accessed on 28 June 2013.
1 Towards Integrated Reporting: Concepts, Elements and Principles 7

ability to produce an integrated report. During the development of the IR

Framework, the Technical Task Force of the IIRC established Technical Collabo-
ration Groups (TCGs) to prepare Background Papers for IR. The TCGs were
coordinated by lead organizations with input from participants from a range of
disciplines and countries. A number of Background Papers were produced ranging
from the principles of materiality and connectivity, to the concepts of business
model, capital(s) and value5. Finally, on the 16 April 2013, the IIRC released a
Consultation Draft of the first Integrated Reporting Framework. Following that, for
the 90 days leading up to 15 July, the IIRC called on all the potential stakeholders to
analyze, challenge and critique the CD.
Since 2011, the IIRC has established a Pilot Programme that underpins the
development of the International Integrated Reporting Framework. According to
the IIRC, the group of organizations participating in the Pilot Programme has the
opportunity to contribute to the development of the Framework and to demonstrate
global leadership in this emerging field of corporate reporting. As highlighted by
Paul Druckman, CEO of the IIRC, “We call the Pilot Programme our “innovation
hub”—made up of people who want to push the boundaries just a little bit further, to
challenge, or at least question orthodox thinking, and to acknowledge the impor-
tance of reporting to the way our organizations think and behave’6. Through the
Pilot Programme the principles, content and practical application of IR are being
developed, tried and tested by businesses and investors. The Pilot Programme will
run until September 2014, thereby allowing participants time to test the Framework
during their following reporting cycle. According to the IIRC, the Pilot Programme
comprises “the Business Network”, with over 90 businesses across the globe from
multinational corporations to public sector bodies, and “the Investor Network”,
with over 30 investors organizations.
Interestingly, on the IIRC web site it is possible to consult the emerging
integrated reporting database7. This database brings together extracts of reports
chosen from publicly available documents (including those produced by the IIRC’s
Pilot Programme organizations), which illustrate emerging practices in the Guiding
Principles and Content Elements.

1.4 Integrated Reporting: Concepts, Elements and Principles

IR is a process that results in communicating—through the annual integrated

report—value creation over time. According to the CD realised by the IIRC, an
integrated report is a concise communication about how an organization’s strategy,

5
A Comprehensive list of Background Papers produced by the Technical Collaboration Groups of
the IIRC is included in the references.
6
Visit http://www.theiirc.org/companies-and-investors/, accessed on 30 July 2013.
7
Visit http://www.theiirc.org/resources-2/other-publications/emerging-integrated-reporting-data
base/, accessed on 30 July 2013.
8 C. Busco et al.

governance, performance, and prospects, in the context of its external environment,

lead to the creation of value over the short, medium, and long term (see p. 8 of the
CD). Although providers of financial capital are the primary intended IR users, an
integrated report should be designed to benefit all stakeholders—including
employees, customers, suppliers, business partners, local communities, regulators,
and policy makers -interested in an organization’s ability to create value over time.
The key objective of IR is to enhance accountability and stewardship with respect to
the broad base of six kinds of capital, or “capitals” (financial, manufactured,
intellectual, human, social and relationship, and natural), and promote understand-
ing of their interdependencies8. In doing this, IR is designed to support integrated
thinking, decision making, and actions that focus on sustainable value creation for
stakeholders.
The International IR Framework is being developed to assist organizations with
the IR process. In particular, the purpose of the Framework is to establish funda-
mental concepts, guiding principles, and content elements that govern the overall
content of an integrated report. This will help organizations determine how best to
express their unique value-creation story in a meaningful and transparent way.
Significantly, the IR Framework doesn’t intend to set benchmarks for such things as
the quality of an organization’s strategy or the level of its performance. The
intended report users will do these assessments based on the information in an
organization’s integrated report.
Next, we begin our journey within the IR Framework as illustrated in the CD.
Our analysis starts with the fundamental concepts proposed within the document.

1.4.1 The Fundamental Concepts of Integrated Reporting

The CD developed by the IIRC recognizes that value is not generated by or within
an organization alone, but is influenced by the external environment (including
economic conditions, technological change, societal issues and environmental
challenges), which provides the context within which the organization operates;
created through relationships with others; and, finally, dependent on the availabil-
ity, affordability, quality and management of various resources (p. 10 of the CD).
For these reasons, IR aims to provide insights about the external environment that
affects an organization, the resources and relationships used and affected by the
organization (which in the IR framework are referred to as the capitals), as well as
about the way in which the organization interacts with the external environment and
the capitals to create value over the short, medium and long term (p. 10 of the CD).
Therefore, according to the CD, the overall purpose of the IR is to communicate and
illustrate a broader understanding of the organizational performance compared to
traditional reporting by describing, and measuring, where practicable, the material

8
The CD refers to “capitals” instead of “capital,” so we continue that use here.
1 Towards Integrated Reporting: Concepts, Elements and Principles 9

elements of value creation, the different type of capitals employed and affected, and
the intertwined relationships between them.
The fundamental concepts of IR are represented by (1) the capitals that an
organization uses and affects, (2) the organization’s business model, and (3) the
creation of value over time. The business model is the vehicle through which an
organization creates value9. That value is embodied in the capitals—sometimes
also referred to as resources and relationships—that the organization uses and
affects. The assessment of an organization’s ability to create value in the short,
medium, and long term depends on an understanding of the connectivity between
its business model and a wide range of internal and external factors (these factors
represent the content elements of the integrated report, and will be discussed later in
the chapter).
As illustrated by the CD, organizations depend on different types of capitals,
which are stores of value that, in one form or another, become inputs to an
organization’s business model (p. 11 of the CD). The six capitals identified within
the IR Framework developed by the IIRC are: financial, manufactured, intellectual,
human, social and relationship, and natural. However, it is important to note that
the IR Framework does not require organizations to strictly adopt the six categories
listed above. Rather, irrespectively of how an organization categorizes capitals for
its own purposes, the types identified above are to be used as a benchmark to ensure
the organization does not overlook a capital that it uses or affects.
The recognition that value is not created by or within an organization alone is
supported by (Frigo and Ramaswamy 2009) in their work on co-creating strategic
risk-return management: “Companies no longer create value and wealth just by
themselves. Customers suppliers, investors, and others play an active role in this
process”10. The concept of the need for a broad spectrum of capitals is reflected in
how they proposed redefining capital and investors: “Defining an investor solely as
someone who provides financial capital underscores the complex mosaic of the
roles in Value Co-creation.”11
The CD defines the business model as a chosen system of inputs, business
activities, outputs and outcomes that aims to create value over the short, medium
and long term (p. 14 of the CD). As illustrated above, the six types of capitals
portrayed by the IR Framework are stores of value that become inputs to a
company’s business model (see Fig. 2). However, these capitals, and their value
do change over time, as they are increased, decreased or transformed through the
activities and outputs of the organization. It’s also important to understand how the
outputs affect outcomes, which represent the ultimate results of the outputs.
Finally, the fundamental concept that lies at the very heart of IR is value
creation. According to the CD, an organization can create and maximize value by

9
See the IIRC report (2013b) “Business Model—Background Paper for IR” for a review on this
concept.
10
See Frigo and Ramaswamy (2009), pp. 3–11.
11
See Frigo and Ramaswamy (2009), p. 7.
10 C. Busco et al.

serving the interests of, and working with, all its key stakeholders, such as
employees, customers, suppliers, business partners, local communities, legislators,
regulators, and policy-makers (p. 16 of the CD). In this way, the CD of the IIRC
emphasizes how value created manifests itself not only in financial returns to
providers of financial capital but also in positive or negative effects on other
capitals and other stakeholders. In particular, since the types of capitals represent
stores of value, the creation of value for an organization and its stakeholders results
from the increase, decrease or transformation of the capitals caused by the
organization’s activities and outputs. Significantly, value is created over different
time horizons and for different stakeholders through different capitals, and it is
unlikely to be created through the maximization of one capital while disregarding
the others (p. 16 of the CD).
In the following section our journey within the IR Framework developed by the
IIRC continues as we describe the key content elements included within the CD.

1.4.2 The Content Elements of Integrated Reporting

An integrated report is built around seven elements that define its content and
communicate the organization’s unique value-creation story. According to the CD
these elements are organizational overview and external environment, governance,
opportunities and risks, strategy and resource allocation, business model, perfor-
mance, and future outlook (see Exhibit 1.1). By linking contents across these
elements, an integrated report can build the story of the business from a basic
description of the business model through the external factors affecting the business
and management’s strategy for dealing with them and developing the business. This
provides a foundation from which to discuss the performance, prospects, and
governance of the business in a way that focuses on its most important aspects.

Exhibit 1.1. The Content Elements of Integrated Reporting.

Organizational overview and external environment:
What does the organization do, and what are the circumstances under
which it operates?
Governance:
How does the organization’s governance structure support its ability to
create value in the short, medium, and long term?
Opportunities and risks:
What are the specific opportunities and risks that affect the organization’s
ability to create value over the short, medium, and long term, and how is
the organization dealing with them?

(continued)
1 Towards Integrated Reporting: Concepts, Elements and Principles 11

Exhibit 1.1 (continued)

Strategy and resource allocation:
Where does the organization want to go, and how does it intend to get there?
Business model:
What is the organization’s business model, and to what extent is it
resilient?
Performance:
To what extent has the organization achieved its strategic objectives, and
what are its outcomes in terms of effects on the capitals?
Future outlook:
What challenges and uncertainties is the organization likely to encounter
in pursuing its strategy, and what are the potential implications for its
business model and its future performance?
Source: “Consultation Draft of the International Integrated Reporting
Framework,” the International Integrated Reporting Council, April 2013,
p. 7).

According to the CD, as for the content element Organizational overview and
external environment, IR shall describe what an organization does and the
circumstances it operates under. This includes the organization’s culture, ethics
and values; ownership and operating structure; principal markets; products and
activities; and the competitive landscape and market positioning. Data on work-
force, revenue, and geographical reach would be included as well, and factors that
affect the external environment would be analyzed, including legal, commercial,
social, environmental, and political factors (pp. 24–25 of the CD). In terms of
Governance, an IR shall provide insight on how an organization’s governance
structure supports its ability to create value in the short, medium, and long term.
This is likely to include, among others, the leadership structure; the strategic
direction and approach to risk management; how culture, ethics, and values affect
capitals; and how remuneration is linked to value creation (p. 25 of the CD).
As for Opportunities and risks content element, an IR shall explore the
opportunities and risks that affect an organization’s ability to create value over
the short, medium, and long term, and how the company is dealing with them. To
fulfill these expectations, IR shall identify the source of internal and external risks,
assess on the likelihood the opportunity or risk will come to realization and its
potential magnitude, and illustrate the steps that are being taken to mitigate risks
(p. 26 of the CD). In terms of Strategy and resource allocation, an IR shall describe
where the organization wants to go, and how it intends to get there. In order to do
that, the IR report shall identify the organization’s short, medium and long term
strategic objectives; the strategies it has in place, or intends to implement, to
achieve those strategic objectives; the resource allocation plans it has in place, or
intends to put in place, to implement its strategy; how it will measure achievements
and target outcomes for the short, medium and long term (p. 26 of the CD).
12 C. Busco et al.

Exhibit 1.2 The intertwined relationship between the content elements and the fundamental
concepts of the IIRC framework (source: CD, IIRC 2013a, p. 11)

In terms of representing the Business model, IR shall illustrate the characteristics

of the key inputs and how they relate to the capitals from which they were derived.
Additionally, the report shall also describe the fundamental business activities, such
as how the organization differentiates itself in the market, how the need to innovate
is managed in the company, and how the business model has been designed to
adjust to possible change (p. 27 of the CD). Through the content Performance an IR
shall describe the extent to which the organization has achieved its objectives, and
how its outcomes have affected the capitals. The state of key stakeholder
relationships shall be described, and links between past, current, and anticipated
future performance need to be reported in the IR. Finally, as for the Future outlook,
the challenges and uncertainties that the organization is likely to encounter need to
be illustrated in the report. The possible effects of these challenges on the business
model and future performance shall be disclosed in the IR as it describes how the
organization is equipped to respond to difficulties it may face.
Exhibit 1.2 offers a representation on the intertwined relationship between the
content elements and the fundamental concepts of the IIRC framework.

1.4.3 The Guiding Principles of Integrated Reporting

Because its intention is to offer an appropriate balance between flexibility and

prescription, the IR Framework is principles based rather than being founded on a
more rigid, rules-based approach. The idea is to recognize the wide variation in
individual circumstances of different organizations yet, at the same time, to enable
a sufficient degree of comparability across organizations to meet relevant informa-
tion needs. For this reason, the IR Framework doesn’t focus on rules for measure-
ment, disclosure of individual matters, or even the identification of specific key
1 Towards Integrated Reporting: Concepts, Elements and Principles 13

performance indicators. Rather, the Framework is driven by integrated thinking,

which, as illustrated in the CD, should lead to integrated decision making and
execution toward the creation of value. The purpose of this approach is to stimulate
the active consideration by organizations of the relationships between their various
operating and functional units and the kinds of capital that they use and have an
effect on. Through the integrated thinking promoted by the IR Framework,
organizations are stimulated to focus on the connectivity and interdependencies
among a range of factors that have a material effect on their ability to create value
over time (see Exhibit 1.3).

Exhibit 1.3. The Guiding Principles of Integrated Reporting.

Strategic focus and future orientation. An integrated report should provide
insight into the organization’s strategy and how that strategy relates to the
organization’s ability to create value in the short, medium, and long term and
its use of and effects on its capitals.
Connectivity of information. An integrated report should show, as a compre-
hensive value-creation story, the combination, interrelatedness, and
dependencies between the components that are material to the organization’s
ability to create value over time.
Stakeholder responsiveness. An integrated report should provide insight into
the quality of the organization’s relationships with its key stakeholders and
how and to what extent the organization understands, takes into account, and
responds to their legitimate needs, interests, and expectations.
Materiality and conciseness. An integrated report should provide concise
information that is material to assessing the organization’s ability to create
value in the short, medium, and long term.
Reliability and completeness. An integrated report should include all mate-
rial matters, both positive and negative, in a balanced way and without
material error.
Consistency and comparability. The information in an integrated report
should be presented on a basis that is consistent over time and in a way that
enables comparison with other organizations to the extent it is material to the
organization’s own value creation story.
Source: “Consultation Draft of the International Integrated Reporting
Framework,” the International Integrated Reporting Council, April 2013,
p. 6.

As illustrated in Exhibit 1.3, the CD introduces and recommends six Guiding

Principles, which underpin the preparation of an IR, inform its content and affect
how information is presented. The six Guiding Principles are: strategic focus and
14 C. Busco et al.

future orientation, connectivity of information, stakeholder responsiveness, mate-

riality and conciseness, reliability and completeness, consistency and
comparability.
As for strategic focus and future orientation, the CD highlights how the execu-
tion of this principle is not necessary limited to the content elements Strategy and
resource allocation and Future outlook. It is also integrated with the presentation of
other contents such as, for example, the opportunities, risks and dependencies
flowing from the organization’s market position and business model; the relation-
ship between past and future performance, and the factors that may change that
relationship; the balance among short, medium and long term interests and
perspectives. Significantly, the CD also stress the importance of an accurate
implementation of the strategic focus and future orientation principles enable an
IR to articulate how the availability, quality and affordability of significant capitals
contribute to the organization’s ability to achieve its strategic objectives in the
future and thereby create value (p. 18 of the CD). Additionally, although the CD
acknowledges that future-oriented information is by nature more uncertain and,
therefore, less precise than historical information, it suggested that uncertainty is
not a reason in itself to exclude such information, provide that the nature and extent
of that uncertainty is accounted for.
Moving to the connectivity of information, this principle is crucial to ensuring
that an IR focuses on the broad picture of the organization’s unique value creation
story; supports the intended report users’ understanding of the different factors that
affect the future of the organization and how they interact; helps to break down
established silos in accessing, measuring, managing and disclosing information,
and to extend the focus of reporting beyond the traditional focus primarily on
financial and historical matters; facilitates the intended report users’ ability to
drill down and interlink information in other documents (p. 18 of the CD).
According to the CD, connectivity of information is strictly associated to integrated
thinking: the more integrated thinking underlies the organization’s unique value
creation story by being embedded into its activities, the more naturally will the
connectivity of information flow into management reporting, analysis and decision
making, and consequently into IR. Ultimately, it is only by connecting the content
elements and the fundamental concepts of the Framework that the IR will be able to
communicate the organization’s value creation story.
Stakeholder responsiveness is the principle that emphasizes the importance of
ongoing, positive relationships with the organization’s key stakeholders because, as
the CD maintains, value is not created by or within an organization alone, but is
created through relationships with others (p. 19 of the CD). Engagement with
stakeholders enables the organization to understand what matters and what is
important to them. According to the CD dialogue with stakeholders shall assist
organizations to understand how stakeholders perceive value; identify future trends
that may not yet have come to general attention but which are rising in significance;
identify material matters, including opportunities and risks; develop and evaluate
strategy; manage risks; as well as, implement activities, including strategic and
accountable responses to material matters.
1 Towards Integrated Reporting: Concepts, Elements and Principles 15

Materiality (and conciseness) is a critical principle for IR. A matter (an event,
issue, opportunity, amount, or even a statement by the organization) is material if,
in the view of senior management and those charged with governance, it is of such
relevance and importance (both in terms of nature and magnitude) that it could
substantively influence the assessments of the primary intended report users with
regard to the organization’s ability to create value (p. 21 of the CD). According to
the CD, in determining whether a matter is material, senior management and those
charged with governance need to consider whether the matter substantively affects,
or has the potential to substantively affect, the organization’s strategy, its business
model, or one or more of the capitals the organization uses or affects in the short,
medium or long term. The CD shed light on the materiality determination process
suggesting how it applies to both positive and negative matters (e.g., opportunities
and risks, and favorable and unfavorable results or prospects for the future), and to
financial and other information (p. 21 of the CD). Interestingly, the CD summarizes
how determining materiality for the purpose of preparing an integrated report
involves at least three steps: identifying relevant matters (i.e., those matters that
have had a past effect, have a present effect, or could have a future effect on the
organization’s ability to create value over time); assessing the importance of those
matters in terms of their known or potential effect on value creation; and, finally,
prioritizing the matters identified based on their importance in terms of known or
potential effect on value creation. Finally, in search of conciseness, an integrated
report avoids redundant information, and be linked to additional detailed informa-
tion to be provided separately.12
The reliability and completeness of information is arguably one of the most
important principles for IR. Reliability, in particular, is enhanced by mechanisms
such as strong internal reporting systems, appropriate stakeholder engagement, and
independent, external assurance (p. 21 of the CD). According to the CD, senior
management and those charged with governance generally exercise judgment in
deciding whether information is sufficiently reliable to be included in an integrated
report. As for completeness, the CD suggests that a complete integrated report shall
include all material information, both positive and negative, being able to illustrate
a company’s unique value creation story.
Finally, consistency and comparability. According to the CD, although the
specific information released through an integrated report will necessarily vary
from one organization to another, they should be presented on a basis that is
consistent over time and in a way that enables comparison with other organizations
(p. 23 of the CD).

12
See the IIRC report (2013c), “Materiality Background Paper for IR” for a review on this
concept.
16 C. Busco et al.

1.5 The Challenges Ahead for Integrated Reporting and the

Possible Impact on the Management Accounting Function

The journey toward IR has just begun. It is a fascinating journey that unavoidably is
likely to face a number of challenges as the first version of the IIRC framework is
about to get finalized and realised. Additionally, it is very likely that the adoption of
IR will require some adjustments of the processes and functions of those
organizations that will choose to issue an Integrated Report. Among others, it will
be interesting to explore how traditional accounting realms, such as Financial vs.
Managerial accounting, will cope with this innovation in corporate reporting.
The fundamental concepts and contents elements of IR seem to imply a reas-
sessment of the internal processes supporting corporate reporting. Within this
reassessment, an interesting question to address, among many others, is: what is
the role of management accountants within IR? In June 2013, IMA (the Institute of
Management Accountants in the US) sent a response letter to the IIRC about the
Framework CD, saying “management accountants are not ‘just technical
accountants’, they are broad-based business thinkers who serve as trusted advisors
inside organizations. Management accountants are ‘at the table’ on all issues
involving strategy and sustainable value creation”. For these reasons, concepts
and contents such as capitals, business models, future outlook, risks, financial and
nonfinancial key performance indicators, to name a few, call for the active partici-
pation and engagement of management accountants within IR.
What could the role of management accountants be as values meet with value
creation within new forms of corporate reporting? The demands placed on manage-
ment accountants have grown significantly in recognition of social and environ-
mental challenges. These demands require a rich supply of information that’s
capable of informing corporate managers of the impacts of their decisions and
enabling them to act. For these reasons, the linkages across the principles, concepts,
and elements of IR seem to call for management accountants to master their
knowledge regarding the organization’s business model to identify and leverage
the key drivers of business value.
Through their expertise, management accountants (at all levels) have the oppor-
tunity to actively integrate the operational, environmental, social, and governance
aspects in place with the financial performance of their organizations. But rather
than simply prescribing specific indicators or measurement methods to be used in
the annual report, management accountants can lead the process of communication
and reporting by designing innovative documents that can capture the interest and
attention of diverse stakeholders. We mean innovative reports where values and
capitals integrate with strategy and business models to generate and distribute
added value in the short, medium, and long term. The innovation, learning, and
growth needed in the continuing development of IR can benefit greatly from the
active participation of management accountants.
Besides the consequences of the adoption of IR for the accounting function, it is
important to highlight how the CD (and, before that, the IIRC paper in 2011) have
offered a number of potential stakeholders the opportunity to analyze, challenge
1 Towards Integrated Reporting: Concepts, Elements and Principles 17

and critique the Framework of the IIRC. In 2011, for example, with a response letter
to the IIRC paper “Towards Integrated Reporting: Communication Value in the
21st Century,” IMA welcomed the development of the IR Framework as “an
opportunity to modernize corporate reporting and corporate culture, unlock data
from corporate silos and restrictive presentation formats, link operational, environ-
mental, social and governance practices to financial performance, and make infor-
mation relevant, meaningful and reliable for management and all stakeholders”.
Yet, although the IR Framework represents a major development in the area of
disclosures to better inform investors and other stakeholders as to the sustainable
value-creation capacity and capability of the enterprise, the design of corporate
reports where the values embraced are blended with the process of value creation
still presents a number of challenges.
As highlighted within the IMA response letter to the CD, there are several issues
and concerns that deserve further consideration in the development of the IR
Framework. Among others, the compelling market need for a single integrated
report from investors and other market stakeholders, as well as the cost/benefit of
the process, aren’t described or articulated in the CD. Second, in light of the
increasingly complex, turbulent, and competitive global marketplace we are cur-
rently experiencing, it’s questionable whether investors and other market
stakeholders would want management teams to disclose (potentially) competitively
sensitive information about their sustainable business model. Third, and of great
importance, there’s a real danger, especially in the early stages of IR development,
that overregulation will stifle innovation, learning, and growth. Mandatory
reporting standards for IR could hamper the development of the framework and,
most importantly, could be inadequate. Are regulators really in the best position to
determine the best metrics to measure and disclose sustainable value creation in
contemporary, highly diversified global markets? The need to face a number of
challenges characterizes every innovative journey. IR is no exception in this
respect, also because, although extremely solid and concrete, the journey has just
begun.

Conclusions
Within this chapter we have tried to illustrate the rationale underpinning IR, shed
light on the reasons that enabled the debate on IR to gain relevance over the
recent years, and illustrate the features of the CD released by the IIRC on April
2013. We opened the chapter questioning whether we can currently measure,
manage and communicate social and environmental impact. We wondered if it is
really possible to capture and represent how value is created and sustained over
time. We suggested that the possible answers to these questions are almost
certainly bedeviling a substantial number of interested managers, executives,
consultants, academics, regulators and additional stakeholders everywhere
around the world.
We emphasised how a possible response to these critical questions is offered
by IR, a process that results in communicating—through an annual integrated
report—how organizations create value over time, and their impact from an
18 C. Busco et al.

economic, social and environmental point of view. In doing so, after having
introduced some of the issues that are leading towards a re-definition of themes
such as accountability or corporate reporting, we have focused our attention on a
brief review of the fundamental concepts, content elements and guiding
principles proposed within the CD. Finally, we have concluded the chapter
with some final reflections on the challenges ahead for IR, as well as advocating
the potential role of management accountants for its design and adoption.
Could BP’s Deepwater Horizon disaster, the discovery of horsemeat in
Tesco’s burgers or even the Parmalat financial scandal be avoided with the
adoption of IR? The answer is no, probably. However, since what a company
reports externally is likely to shape over the long term how its employees behave
internally, as well as the quality of the processes in place, there are definitely
reasons for hoping that tools such as IR will contribute to diffusion and adoption
of a business culture where sustainability is fully engrained in the process of
value creation.

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 Part II
Review of Key Principles, Concepts and
Elements for Integrated Reporting
What Is Sustainability? A Review of
the Concept and Its Applications 2
Elena Giovannoni and Giacomo Fabietti

Abstract
Whereas the concept of sustainability is broadly acknowledged as being multi-
dimensional, its various dimensions have brought to light different discourses
over time and have often been treated separately. In some cases, this separation
has limited the actual implementation of sustainability to its mere rhetoric.
By relying upon a review of the relevant literature which addresses the notion
of sustainability (or of sustainable development), the present chapter aims to
explore this notion by identifying its key dimensions and the intertwining
relationships between them. In so doing, the challenges and opportunities
brought out by an integrated approach towards sustainability are also
emphasised, together with the role played by governance structures, business
models, management, measurement and reporting systems in implementing
‘integrated sustainability’ within organizations. In this context, the contribution
of integrated reporting is explored.

2.1 Introduction

In recent years, the growing concerns for environmental and climate change,
together with issues of poverty, increasing disparity between societies and the
tensions brought by social inequalities, have placed sustainable development
under the spotlight. National and international institutions, policy makers and
cross-country initiatives (see, for instance, the Sustainable Development Solutions
Network—SDSN—of the United Nations launched in 2012), as well as
practitioners (see, for instance, KPMG 2011) and academics (see, among others,
Joseph 2012), have increased the attention given to social and environmental
sustainability worldwide. As emphasised by Gray (2010), whereas everyone

E. Giovannoni (*) • G. Fabietti

Department of Business and Law, University of Siena, Siena, Italy
e-mail: elena.giovannoni@unisi.it; giacomo.fabietti@unisi.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_2, 21

# Springer International Publishing Switzerland 2013
22 E. Giovannoni and G. Fabietti

seems to agree on the importance of sustainable development, its very nature and
meaning is rarely discussed and analysed in an explicit way1. As a result, the actual
implementation of sustainability risks to be limited by the vagueness and ubiquity
of its definition (Dixon and Fallon 1989). For instance, due to the ubiquity of the
notion of sustainability, different discourses have emerged over time, thereby
associating this concept with social responsibility, environmental management, or
business sustainability, which are often treated in separated ways. These different
discourses have also revealed their appeal over corporations, whose role and
responsibility for sustainable development have been questioned.
In response to the increasing pressures coming from national and international
regulations, and from society in general, corporations are gradually pushed towards
the adoption of principles of both social and environmental responsibility within
their strategies, structures and management systems (Werbach 2009). In this con-
text, a sort of ‘sustainability rhetoric’ is emerging in mission statements, internal
codes and external reporting systems. As argued by Gond et al. (2012), in some
cases, this rhetoric was used in the attempt to reconstruct the eroded legitimacy of
companies and did not necessarily involve the actual implementation of (or partici-
pation in) sustainable development. Otherwise, such active implementation and
participation would require organizations to alter their existing practices and to
allow a concrete strategic move towards sustainability (Hopwood 2009).
In the attempt to move beyond the sustainability rhetoric and to pursue an actual
search for sustainable development, a clear definition of this concept and of its key
dimensions is needed, together with the adoption of an integrated approach towards
the notion of sustainability. This need has been advocated by both academics (see
Gray 2010) and cross-country initiatives (such as the SDSN) to overcome the limits
resulting from the separation between social, environmental, and financial
concerns, as well as from an individualistic approach to sustainability. In fact,
sustainable development cannot be achieved through isolated initiatives, but rather
requires an integrated effort at various levels, comprising social, environmental and
financial aspects. As addressed by recent studies on the very nature of
sustainability, “any foreseeable sustainable state will be the result of interactions
between organizations, individuals, societies and states” (Gray 2010, p. 57). From
this point of view, an integrated approach towards sustainability would require
realising the potentials of its key (financial, social and environmental) dimensions
simultaneously, as well as managing the tensions, trade-offs and synergies between
these dimensions (we will define this approach as ‘integrated sustainability’). More
importantly, in managing the tensions of sustainability, a key role can be played by
ad hoc governance structures, business models, management, measurement and
reporting systems, which could be purposefully designed according to an integrated

1
In line with Gray (2010), in this chapter we will use the expressions ‘sustainability’ and
‘sustainable development’ as two analogues. In so doing, we also acknowledge a slight difference
between the two expressions, in which ‘sustainability’ refers to a state, while ‘sustainable
development’ refers to the process for achieving this state (see Gray 2010).
2 What Is Sustainability? A Review of the Concept and Its Applications 23

approach. In this context, the recent debate on integrated reporting is likely to play a
relevant role.
By relying on the previous premises, this chapter aims to explore the concept of
sustainability by identifying its key dimensions and the intertwining relationships
between them. The aim is to identify the challenges and opportunities arising from
an integrated approach towards sustainability, and the role of this approach in
enabling organizations to actually implement sustainability beyond its mere rheto-
ric. In so doing, particular attention will be given to the perspective of companies
and to management systems, practices and processes which could help integrate
social and environmental concerns with the more commercial and financial needs of
the business. As we will see subsequently, whereas these (social, environmental and
financial) dimensions are all part of a broader and integrated notion of
sustainability, their co-existence implies tensions and challenges which need to
be addressed and managed in an attempt to actually implement sustainability.
In order to achieve the goal described above, this chapter relies upon the analysis
of the relevant literature which has addressed the concept of sustainability from the
perspective of companies. By reconstructing the evolution of this debate over time
(see Sect. 2.2), the evolving discourses on sustainability are drawn upon in Sect. 2.3
to identify the key dimensions of this concept and the need for an integrated
approach. Next, in Sect. 2.4, the synergies and tensions between these dimensions
are discussed to outline the challenges and opportunities resulting from integration.
In this context, the potential roles of governance structures, business models,
management, measurement and reporting systems in implementing sustainability
are suggested in Sect. 2.5. In particular, the contribution of integrated reporting is
explored. The main messages of this chapter are then summarised in Sect. 2.62.

2.2 Changing Discourses on Sustainability: Insights from the

Literature

As emphasised by Kidd (1992), the concept of sustainability is not new, it has a

rather long history and it has evolved over time. Importantly, this evolution has
been affected by different “intellectual and political streams of thought that have
molded concepts of sustainability” (Kidd 1992, p. 3). In this section we will rely
upon the relevant literature which has addressed the concept of sustainability
according to different streams of thoughts. The review of these studies permits
the identification of three main discourses that have shaped and characterised the

2
Although this chapter is the result of the joint efforts and collaboration of the two authors, Elena
Giovannoni is the author of Sects. 2.1, 2.4, 2.5 and 2.6; Giacomo Fabietti is the author of Sects. 2.2
and 2.3. This chapter is based on the outcomes of a broader research project entitled “From
governance and risk management rules to performance: roles, tools and enabling conditions in
Italian firms”. The authors gratefully acknowledge the financial support of this research project
provided by national funding within PRIN 2009.
24 E. Giovannoni and G. Fabietti

evolving debate on sustainability3. We will label these as ‘environmental’, ‘social’

and ‘business’ discourses.

2.2.1 The Environmental Discourse

One of the prevailing discourses regarding the concept of sustainability has referred
this concept to the relationships between men and nature (we will label this
discourse as the ‘environmental discourse’). Although the multidimensionality of
sustainability has never been neglected, over the past 30 years it has been often
compartmentalized as an environmental issue (Drexhage and Murphy 2010). In
particular, during the 1970s, the term sustainability began to be widely used in
relation to environmental problems. As shown by Kidd (1992), a number of books
addressing issues of sustainability from an environmental point of view were
published during that period (see, e.g., Meadows et al. 1972). In this context,
growing concern on global environmental problems, and scepticism about the
possibility for reducing industrial pollution significantly, pushed the United Nations
(UN) to address these problems as a “barrier to development” (Kidd 1992, p. 16).
One of the key steps in this direction was the UN Conference on Human
Environment, which took place in Stockholm in 1972. The conference led to the
development of 26 principles, most of which addressed environmental concerns; in
particular, by relying on the concept of carrying capacity (see e.g. Riddell 1981;
WRI/IIED 1986), the third principle stated that “the capacity of the Earth to
produce vital renewable resources must be maintained and, wherever practicable,
restored or improved” (UN 1972, p. 4). The Stockholm conference acted as a
vehicle for the creation of the UN Environmental Programme (UNEP), as well as
for the creation of a number of national environmental protection agencies. Within
UNEP the term sustainability appeared for the first time in the context of the UN
(Kidd 1992). Since its foundation, in 1972, one of the most important aims of UNEP
was the promotion of cooperation and strong leadership in the care of the environ-
ment. In this context, UNEP also stressed the importance of eco-development
(Sachs 1984), defined as the yield of renewable resources and the simultaneous
monitoring of the depletion of non-renewables. UNEP retrieved the concept of
sustainable yield (Tivy and O’Hare 1982) in its definition of eco-development.
In 1980, the International Union for Conservation of Nature (IUCN), World
Wildlife Fund (WWF) and UNEP set up the World Conservation Strategy (WCS).

3
Given the numerous theoretical streams which have approached the concept of sustainability
from different perspectives, it would be impossible to provide a comprehensive review of the
literature which has addressed this notion in only one chapter. More generally, as argued by Kidd
(1992, p. 3) “the literature relating to sustainability is so voluminous that full analysis were not
practical. And if it were practical it would probably not be worth the effort”. Far from attempting
to provide an exhaustive review, in this section we draw on some key studies which have addressed
the concept of sustainability from different perspectives in order to outline some of the key
discourses which have informed the debate regarding this concept.
2 What Is Sustainability? A Review of the Concept and Its Applications 25

The WCS referred to ‘development that is sustainable’ in terms of both

improvements in human life and conservation of natural resources. The primary
aim of the WCS was to promote sustainable development through the identification
of priority conservation issues (Drexhage and Murphy 2010). In this context, the
term conservation stands for “management of human use of the biosphere so that it
may yield the greatest sustainable benefit to present generations while maintaining
its potential to meet the needs and aspirations of future generations” (IUCN, WWF
and UNEP 1980, introduction). In 1987 the final report of the World Commission
on Environment and Development (WCED), titled Our Common Future4, provided
an overview on the state of the environment, as well as the most popular definition
of Sustainable development, as “development that meets the needs of the present
without compromising the ability of future generations to meet their own needs”
(p. 45). The report of WCED represented the “momentum for the landmark 1992
Rio Summit” (Drexhage and Murphy 2010, p. 8). Importantly, the UN Conference
on Environment and Development (UNCED) in 1992, referred to as the Rio Earth
Summit, produced a global action plan for sustainable development. Its
outputs were the Rio Declaration, Agenda 21 and the Commission on Sustainable
Development. Particularly, Agenda 21 provided advice and good practices for the
achievement of sustainable development, by posing major emphasis on environ-
mental aspects (Drexhage and Murphy 2010). Nevertheless, during the subsequent
Kyoto Conference on Climate change in 1997, the poor progress in the achievement
of Agenda 21 goals emerged.
The debate described above was not ignored by corporations. As argued by
Berry and Rondinelli (1998), in the 1960s and 1970s, corporations acted in a
‘reactive’ way when faced with environmental issues, waiting for environmental
crises to occur and then trying to mitigate their evil effects. During the 1980s, given
the growing regulation on environmental protection, in many cases corporations
limited their efforts to the mere compliance with laws and requirements. In the
1990s corporations began to adopt a more ‘proactive’ approach, through which they
started to try to anticipate the environmental effects of their operations and to obtain
a business advantage from the management of environmental performance. Since
then, corporations have gradually attempted to embed environmental issues into
their business culture and management processes by introducing Environmental
Management Systems (EMSs). According to Melnyk et al. (2003, p. 332) an EMS is
“a system and database which integrates procedures and processes for training of
personnel, monitoring, summarizing, and reporting of specialized environmental
performance information to internal and external stakeholders of a firm”. EMSs are
conceived as important for complying with regulations and for waste reduction.
Among these systems, the voluntary environmental management tool (labeled Eco-
Management and Audit Scheme - EMAS), developed by the European Commission
in 1993, embraced a broad range of indicators, including energy efficiency, material
efficiency, biodiversity, emissions, water consumption and waste.

4
This report is also known as the Brundtland Report.
26 E. Giovannoni and G. Fabietti

As illustrated above, from the 1970s to the 1990s, sustainability has been
primarily related to environmental concerns. In parallel, as we will see in the
following sections, the social discourse was also emerging.

2.2.2 The Social Discourse

Whereas the environmental discourse was developing within the sustainable devel-
opment debate, social aspects were not neglected. For example, the WCED’s
definition of Sustainable Development (WCED 1987) focuses on the reconciliation
of the needs of present and future generations. According to Dempsey et al. (2011),
the attention given to inter-generational equity by the WCED definition stresses
social aspects, and particularly the key determinants of social equity, such as social
justice, distributive justice and equality of conditions. In this context, exclusion
from participation in the social, economic and political life of a community was
considered to be at the core of the concept of social equity, since it could lead to
racism and discrimination (e.g. Pierson 2002; Ratcliffe 2000).
In addition to this debate, the social discourse has also developed in the context
of corporations and has been particularly associated with the notion of social
responsibility. Already in 1953, Howard Bowen’s Social Responsibilities of the
Businessman defined the social responsibility of businessmen as “the obligations of
businessmen to pursue those policies, to make those decisions, or to follow those
lines of action which are desirable in terms of the objectives and values of our
society” (p. 6). While Bowen’s contribution represented a milestone in the debate
on social responsibility, during the 1960s, definitions of Corporate Social Respon-
sibility (CSR) began to spread: Davis (1960), for example, argued that CSR refers
to “businessmen’s decisions and actions taken for reasons at least partially beyond
the firm’s direct economic or technical interest” (p. 70). In so doing, he also
suggested that some socially responsible business decisions could be justified by
the long-run economic gains of the firm; Frederick (1960), instead, argued that
“social responsibility in the final analysis implies a public posture toward society’s
economic an human resources, as a willingness to see that those resources are used
for broad social ends and not simply for the narrowly circumscribed interests of
private persons and firms” (p. 60). During the 1980s and 1990s, alternative
approaches to CSR were elaborated, such as stakeholder theory (Freeman 1984),
corporate citizenship (Andriof and McIntosh 2001) and business ethics (Kilcullen
and Ohles Kooistra 1999).
From a UN perspective, after the 1997 Kyoto Conference on Climate change, a
key milestone for addressing social concerns was represented by the Millennium
Development Goals (MDGs) established in 2000 for the period 2000–2015. The
MDGs focused on a set of rights and needs encompassing themes such as poverty,
health and discrimination. Subsequently, according to Drexhage and Murphy
(2010), the following 2002 Johannesburg World Summit on Sustainable Develop-
ment (WSSD) “demonstrated a major shift in the perception of sustainable
development—away from environmental issues toward social and economic
2 What Is Sustainability? A Review of the Concept and Its Applications 27

development” (p. 8). By integrating MDGs with additional socio-economic aspects,

WSSD “did make a constructive change by focusing considerably more attention
on development issues” (Drexhage and Murphy 2010, p. 9).
Importantly, a 20-year follow-up to the 1992 Earth Summit took place in Rio de
Janeiro in 2012 through the United Nations Conference on Sustainable Develop-
ment (UNCSD). The Conference is also known as Rio+20 and was aimed at
securing renewed political commitment for sustainable development, assessing
the progress and implementation gaps in meeting previous commitments, and
addressing new and emerging challenges. Within Rio +20 the UN agreed on the
need for Sustainable Development Goals (SDGs) by emphasising the importance of
both social and environmental concerns and the need for a more comprehensive
definition of the role of business for sustainable development.

2.2.3 The Business Discourse

A third main discourse which has emerged within the debate on sustainability
concerns the relationships between modern corporations and both social and envi-
ronmental matters (we will label this discourse as the ‘business discourse’). As
argued by Gray (2010, p. 57), “Capitalism and its destructive tendencies are
manifest through its greatest creation—the corporation”. Given the depletion of
natural resources that is caused through their activities, corporations are required to
move towards a state in which they “use only resources that are consumed at a rate
below the natural reproduction, or at a rate below the development of substitutes.
They do not cause emissions that accumulate in the environment at a rate beyond
the capacity of the natural system to absorb and assimilate these emissions. Finally
they do not engage in activity that degrades eco-system services” (Dyllick and
Hockerts 2002, p. 133). This situation encompasses not only eco-efficiency
(WBCSD 2000) but also eco-effectiveness (Braungart and McDonough 1998) and
sufficiency (Schumacher 1973).
Moreover, from a business perspective, sustainability has been referred to as the
capability of a corporation to last in time, both in terms of profitability, productivity
and financial performance, as well as in terms of managing environmental and
social assets that compose its capitals. In one sentence, business sustainability is the
business of staying in business (Doane and MacGillivray 2001). Dyllick and
Hockerts (2002) define business sustainability as “meeting the needs of a firm’s
direct and indirect stakeholders [. . .] without compromising its ability to meet the
needs of future stakeholders as well” (p. 131). In this respect, the business discourse
on sustainability has also revealed an inherent paradox between corporations and
sustainability (Gray 2010). On the one hand, given the power of corporations to
exert control over society and to produce large scale innovations, they are increas-
ingly regarded by governments as an unavoidable means through which (social and
environmental) sustainability can be implemented (Hawken et al. 1999; Gray
2010). On the other hand, they are placed at the heart of concerns about the
deterioration of natural resources and the production of social inequalities. This
28 E. Giovannoni and G. Fabietti

(apparent) paradox requires further understanding regarding the relationships

between social, environmental and business discourses.

2.3 Conceptualising the Key Dimensions of Sustainability:

Towards an Integrated Approach

The literature reviewed in the previous section, as well as the three evolving
(environmental, social and business) discourses make it possible to identify and
conceptualise the key dimensions of the concept of sustainability, as well as to
emphasise the need for an integrated approach among the three dimensions. This
need has also been acknowledged by Drexhage and Murphy (2010): we need to take
“sustainable development out of the environment “box” and considering wider
social, economic, and geopolitical agendas” (p. 20). In other words “sustainable
development embodies integration, and understanding and acting on the complex
interconnections that exist between the environment, economy, and society” (p. 6).
The multidimensionality of sustainability has also been reiterated by Rio+20. In
fact, the Rio+20 outcome document, The Future We Want, refers to three
dimensions of sustainable development: economic, social and environmental. It
also refers to good governance as the basis for sustainable development. This idea is
embraced by SDSN, which refers to four dimensions: economic development
(including the end of extreme poverty), social inclusion, environmental
sustainability, and good governance (including peace and security). Also SDSN
stresses the need for an integrated approach to sustainability: this is clearly
expressed by the document entitled An Action Agenda for Sustainable Development
(SDSN 2013), according to which “the challenges addressed by the proposed SDGs
are inherently integrated” (p. x).
The initiatives and documents mentioned above have highlighted the need for an
integrated approach towards sustainability at a systems level. This need has also
been emphasized at the level of the corporation. For instance, in providing
guidelines to companies for sustainability reporting, the Global Reporting Initiative
(GRI) has highlighted various dimensions of sustainability (i.e. economic, social
and environmental dimensions) to be included and disclosed within reporting
activities. In this respect, sustainability reporting should provide reliable informa-
tion on the progress towards sustainability in all its different dimensions. The idea
of sustainability as a multidimensional concept emerges clearly from GRI’s G4
Sustainability Reporting Guidelines—Reporting Principles and Standard Disclo-
sure (2013), which highlights that “a sustainability report conveys disclosures on
an organization’s impacts—be they positive or negative—on the environment,
society and the economy” (p. 3). The multidimensional nature of sustainability
reporting and the need for integration have also been emphasized by the Interna-
tional Integrated Reporting Council (IIRC). According to the Consultation Draft of
The International IR Framework of 2013 (CD), integrated reporting “is a process
that results in communication by an organization, most visibly a periodic integrated
report, about value creation over time” (p. 8); furthermore, the integrated report is
2 What Is Sustainability? A Review of the Concept and Its Applications 29

defined as “a concise communication about how an organization’s strategy, gover-

nance, performance and prospects, in the context of its external environment, lead
to the creation of value over the short, medium and long term” (p. 8). The CD points
out that the integrated report aims to “enhance accountability and stewardship with
respect to the broad base of capitals (financial, manufactured, intellectual, human,
social and relationship, and natural) and promote understanding of the
interdependencies between them” (p. 8). In this way, the CD stresses not only the
need to preserve the various capitals, but also hints at the aim of integration. In fact,
as emphasized within the CD, the integrated report supports “integrated thinking,
decision-making and actions that focus on the creation of value over the short,
medium and long term” (p. 8).
By relying upon the initiatives and documents mentioned above, as well as upon
the analysis of the main discourses which have informed the debate on
sustainability, next we will refer to the concept of integrated sustainability at the
company level. This approach towards sustainability requires that organizations
address all main dimensions of sustainability simultaneously. In simple terms, these
dimensions include: the Financial dimension, in terms of ensuring long term
economic and financial performance; the Social dimension, by creating value for
the society; the Environmental dimension, through a responsible management and
re-construction of natural resources. As we will see in the following section,
integrated sustainability implies the effective management of the inherent tensions
between these different dimensions.

2.4 The Challenges of Integrated Sustainability

Whereas the need for an integrated approach towards sustainability has been
recently advocated by academics, institutions and cross country initiatives, the
implications and challenges involved in implementing this integration have
received little attention. As argued by Gray (2010, p. 53), “Sustainability is not
only a complex and elusive notion, but one which is fraught with potential
contradictions”. Some of these ‘potential contradictions’ stem from the tensions
between the different dimensions of sustainability, which may occur when
attempting to implement all dimensions simultaneously, according to an integrated
approach.
For example, if we consider the financial and social dimensions of sustainability
from the company perspective, whereas some studies have demonstrated that
addressing social performance is good for financial performance, other studies
highlight that conflicts between the two dimensions do exist in numerous
circumstances (see Boyd et al. 2009; Orlitzky et al. 2003). These mixed results
offered by the literature can be explained in light of the tensions between the social
and financial dimensions of company performance. Social performance requires
freedom and flexibility from financial constraints and business logics, in order to
find solutions to social problems. Whereas the pursuit of social performance should
aim at creating value primarily for society as a whole rather than for the individual
30 E. Giovannoni and G. Fabietti

company, the search for financial performance works in the opposite way (Pache
and Santos 2011). Tensions between social and financial performance are also
related to various institutional pressures and stakeholders that converge within
corporations, in which customers, employees, suppliers, beneficiaries, partners,
and investors address multiple social or financial needs (Coda 1988). These
tensions increase during scale-up processes, when social performance has to be
considered while taking into account the financial needs of a larger number of
stakeholders.
Similarly, if we consider the environmental and financial dimensions of
sustainability from the company perspective, several studies have argued that
effective environmental management may lead to increased production efficiency,
cost reduction and improved market reputation with benefits for financial perfor-
mance (see Molina-Azorı́n et al. 2009; Ambec and Lanoie 2008; Miles and Covin
2000). Simultaneously, the search for environmental performance may imply high
costs of compliance (Jaffe et al. 1995), huge investments for re-constructing the
consumed resources and may limit opportunities for growth and for competitive
improvement, at the detriment of financial performance (see, for example, Hull and
Rothenberg 2008). Also, on a large scale, financial performance and commercial
needs may imply the use of technologies for increasing resource consumption, to
the detriment of environmental performance.
Finally, the social and environmental dimensions of sustainability may also
reveal inherent tensions. For instance, a new solution for a more effective manage-
ment of environmental resources may conflict with social needs. In contrast, new
solutions to social problems may conflict with the need to preserve natural
resources. In this context, Gray (2010) draws on Dresner (2002) to suggest the
existence of a ‘sustainability continuum’ between strong and weak sustainability.
On one hand, weak sustainability relies upon the idea that human-made resources
can compensate for the consumption of natural resources. On the other end of the
continuum, very strong sustainability suggests that human life is incompatible with
sustainability. Within this continuum, organizations are likely to play a role in
contributing to weak sustainability to the extent in which they search for solutions
to compensate for the consumption of natural resources.
Far from constituting paradoxes which need to be solved, the relationships
between social, financial and environmental dimensions (highlighted above) repre-
sent tensions which need to be adequately managed when implementing integrated
sustainability. The management of these tensions does not necessarily mean achiev-
ing a stable proportion between all dimensions, but rather addressing all (financial,
environmental and social) dimensions simultaneously and through an integrated
approach. In so doing, the management of tensions becomes crucial for avoiding the
drift in favour of one single dimension to the detriment of the others and to fully
realize the potentials of all dimensions at the same time. As we will argue next, in
implementing integrated sustainability within organizations, a key role should be
played by governance systems, business models, as well as management, measure-
ment and reporting systems. All these systems need to be adequately designed and
practiced within organizations according to an integrated approach.
2 What Is Sustainability? A Review of the Concept and Its Applications 31

Fig. 2.1 Implementing

integrated sustainability: key
levels

Integrated
Governance

Strategy & Business

models

Management, measurement
& reporting systems

2.5 Implementing Integrated Sustainability Beyond Rhetoric:

From Governance to Integrated Reporting Systems

In this section, we suggest that the actual implementation of integrated

sustainability should take place at different organizational levels, ranging from
the level of corporate governance to the strategic and business model level, while
also including the level of management, measurement and reporting (see Fig. 2.1).
At these various levels, structures, processes and systems should be designed and
practiced according to an integrated approach. Far from providing an extensive
analysis of the levels mentioned above, in this section we build on some recent, key
studies which have addressed governance issues, business models, management
and measurement systems according to an integrated and multidimensional
approach. The aim is to suggest how these studies could be extended to include
broader issues of sustainability from an integrated perspective.

2.5.1 Implementing Integrated Governance: Compliance,

Integrated Sustainability, Risk and Knowledge Management

Within the debate on sustainability, governance issues have acquired increasing

relevance. For example, the holistic framework on sustainability proposed by the
Rio+20 outcome document considers good governance as a key element for
sustainable development. This view is embraced by the SDSN, that includes good
governance among the key dimensions of sustainability.
The need to align governance systems to sustainability is also acknowledged at
the company level (Cartwright and Craig 2006). Following recent corporate
32 E. Giovannoni and G. Fabietti

scandals and episodes of managerial misconduct, the corporate governance debate

has pointed to certain corporations whose ways of doing business have been too
profit-oriented and overly focused on the financial aspects of organisational perfor-
mance (see Abdel-khalik 2002; Benston and Hartgraves 2002). In particular, it has
been broadly acknowledged that creating value only for shareholders is not enough
(see, among others, Charreaux and Desbrières 2001; Catturi 2007; Coda 1988).
Rather, value creation is an integrated process that is rooted around a broad
perspective of governance, encompassing the interest of multiple stakeholders. In
the attempt to ensure effective accountability towards different stakeholders,
national and international regulations have largely proliferated. Simultaneously,
following the increasing attention given to compliance issues within the corporate
governance debate, some studies have emphasised that, in order to implement
effective governance, compliance is not enough. In this context, a broader perspec-
tive on governance is suggested; one that combines compliance with the achieve-
ment of financial and non-financial objectives, ethical behaviour, environmental
concerns, and risk awareness (see Seal 2006; Bhimani and Soonawalla 2005; Fahy
et al. 2004). Such a broadened perspective also suggests going beyond formal
structures of governance to consider the actual processes and mechanisms through
which governance principles and practices are operationalised (Mouritsen and
Thrane 2006).
Within this debate, recent studies have suggested an integrated approach to
governance (labelled as ‘integrated governance’); one which encompasses four
main dimensions, namely, compliance, performance, risk and knowledge (see
Busco et al. 2005). From this point of view, integrated governance includes:
compliance to rules and regulations; the achievement of the company’s perfor-
mance; effective risk management; and knowledge management. These dimensions
are strongly related to each other and, as such, should be sought out and managed
simultaneously. For example, actual compliance to laws, rules and
recommendations requires effective knowledge management, which implies the
management of skills, competencies, cultural and ethical underpinnings of the
individuals that comprise the organization. Furthermore, whereas the achievement
of the company’s performance should take place within the boundaries provided by
compliance issues, within the integrated governance system these boundaries
should enable rather than constrain value creation processes. Finally, risk manage-
ment should be based on both compliance to recommendations (see, for instance,
COSO 2004), as well as on effective knowledge management in order to actually
support value creation and the strategic management of company performance.
Although it is within the compliance-driven corporate governance debate that risk
management has acquired growing relevance, regulatory power and legitimacy
(Mikes 2008), risk management should also be considered as a system for
strategizing and performance management (Collier and Berry 2002; Collier et al.
2004). Therefore, a key role is played not only by formal prescriptions and
frameworks for risk management, but also by the relationships between risk
management (compliance) and the effective knowledge management of the differ-
ent groups of experts (accountants, risk managers, internal auditors, directors, top
2 What Is Sustainability? A Review of the Concept and Its Applications 33

Social,
environmental and
financial
Compliance performance

Integrated
Sustainability

Integrated
Governance
Integrated governance

Strategy & Business

models

Knowledge Risk Management, measurement

& reporting systems

Fig. 2.2 Integrated governance [source: adapted from Busco et al. (2005)]

managers, etc.) that comprise the various parts of the organization and of its
governance systems.
The integrated approach to governance described above (and proposed by Busco
et al. 2005) is meant to assist the actual implementation of governance beyond
simple issues of compliance and beyond the mere search for external legitimization
and consensus, which have catalysed the recent debate on corporate governance. In
the attempt to align this approach with the concept of integrated sustainability, the
dimensions of integrated governance could be further developed to include social,
environmental and financial dimensions of sustainability (see Fig. 2.2). In so doing,
integrated governance would result from the simultaneous search for:
– compliance to national and international rules, regulations and
recommendations;
– integrated sustainability, which combines social, environmental and financial
performance dimensions;
– risk management, broadened through a holistic approach to include both quanti-
fiable and non-quantifiable risks, providing managers with a more strategic
perspective, and improving accountability towards all stakeholders within the
strategic decision-making process;
– knowledge management, which should provide the subtle links for combining all
of the previous dimensions by embracing the development of the skills,
competencies, cultural and ethical underpinnings needed to ensure integration.
34 E. Giovannoni and G. Fabietti

2.5.2 (Hybrid) Business Models for Integrated Sustainability

In addition to an integrated approach to the governance system, the implementation

of integrated sustainability requires the definition of ad hoc strategies and business
models that should capture social, environmental and financial dimensions, as well
as their intertwining relationships.
Although new strategies have been recently emerging from the adoption of the
founding principles of sustainable development from corporations, in the resulting
business models charity and social programs have often been merely added to for-
profit models. In this context, sustainability and business performance are managed
separately and represent the objects of two distinct strategies carried out by an
organization. The separation between sustainability and business strategies can
undermine the actual implementation of sustainability, relegating it to ineffective
solutions or to the mere ‘sustainability rhetoric’ in the search for legitimization.
This situation calls for the definition and implementation of new, more effective
business models, in which to ensure an integrated strategic move towards
sustainability beyond its mere rhetoric.
In general, a business model should capture the internal and external patterns of
interactions that shape a company’s value chain, value proposition and value
system. Given the tensions between the business needs of corporations and the
social and environmental dimensions of sustainability highlighted in the previous
sections, the definition and implementation of sustainable business models is a
challenging process. Despite these challenges, new business models have emerged
as forms of ‘hybrid organizations’ (or ‘hybrid business models’), in which social
(and/or environmental) and commercial performance are sought after simulta-
neously through a single, unified strategy (Battilana et al. 2012; see also Battilana
and Dorado 2010—see Fig. 2.3)5. According to recent studies, hybrid business
models are experiencing a rapid growth in a number of sectors (Porter and Kramer
2011; Battilana et al. 2012). Many hybrid organizations originated as forms of
social entrepreneurship and, then they turned into hybrids by searching for auton-
omy from donations and subsidies, as well as by attempting to scale up in order to
reach a larger market. More recently, hybrid business models are growing in new
(and for-profit) sectors, such as consulting, retail, consumer products and IT
(information technology). Hybrid organizations are also emerging among high
tech R&D firms, as a result of the joint efforts and collaboration between industry
and academia (Lamb and Davidson 2004).
As is similar to any hybrid species, hybrid business models face both the
challenges and opportunities that come from the integration of diverse elements
within the same strategy (Phills et al. 2008). On one hand, this diversity is
interpreted as a unique source of innovation. With an approach that is different
from pure social or pure commercial models, in hybrid organizations managers do

5
In general, hybrids have been defined as new phenomena (practices, tools, organizations, etc.)
produced out of two or more elements that are normally found separately (Miller et al. 2008).
2 What Is Sustainability? A Review of the Concept and Its Applications 35

Focus on the value

created for society Social (and
Need for financially environmental)
Integrated sustainable models only
Governance

Strategy & Business

models

Management, measurement
& reporting systems
Focus on the value
created for the company
Need for social and Financial
environmental only
performance (beyond
compliance)

Fig. 2.3 Hybrid business models [source: adapted from Battilana et al. (2012)]

not have to choose between social (or environmental) and financial/commercial

performance. The co-existence of different performance dimensions may allow a
virtuous cycle of long term financial results and reinvestment in the social mission
(Battilana et al. 2012). On the other hand, this co-existence can create tensions
which may challenge the very nature of hybrids by causing a mission drift towards
one dimension to the detriment of the other and of the hybrid nature itself. As
argued by Battilana et al. (2012, p. 51), “Hybrid must also strike a delicate balance
between social and economic objectives, to avoid ‘mission drift’—in this case, a
focus on profits to the detriment of social good”. As a result, hybrid business models
are said to be characterized by an ubiquitous and unstable nature (Miller et al.
2008), which does not allow one-off solutions to take place but rather requires the
continuous search for the ‘hybrid ideal’. According to Battilana et al. (2012, p. 51),
“When organizations combine social mission with commercial activities, they
create unfamiliar combinations of activities for which a supportive ecosystem
may not yet exist”.
Whereas hybrid business models may address some of the challenges of
integrated sustainability, still the management of tensions between the different
dimensions of sustainability, which co-exist within the hybrid, is a critical process.
Similarly, as emphasized in the previous subsection, the relationships between the
different dimensions of integrated governance requires ad hoc management
systems. As we will see later, to support an integrated approach to sustainability,
governance systems and business models need to be assisted by adequate manage-
ment, measurement and reporting systems.
36 E. Giovannoni and G. Fabietti

2.5.3 The Role of Integrated Management, Measurement

and Reporting Systems

The role of management and measurement systems in addressing different (social,

environmental and financial) performance dimensions have been the object of
numerous studies that have, nevertheless, provided mixed results. Some studies
have emphasised that traditional management control systems are limited in the
pursuit of social or environmental performance because they focus managers’
attention on financial concerns (Gond et al. 2012). Other studies have highlighted
that, if designed to include social and environmental matters, management control
systems can help to address social and environmental performance (Henri and
Journeault 2010; Gond et al. 2012). The reasons for such mixed results can be
related to the fact that these studies have mainly concentrated on isolated and
fragmented elements or systems, without considering the broader spectrum of
management controls, which can be involved in the management of different
dimensions of sustainability.
The need for overcoming the fragmentation highlighted above has been
advocated also in the recent debate on integrated reporting. The CD calls for an
‘integrated thinking’ to overcome the traditional ‘silo thinking’ within the perfor-
mance measurement and reporting system, as well as in managing the overall value
creation process. According to the CD, such integrated thinking should encompass
all ranges of factors (from the firm’s capitals, to governance structures, business
models, as well as performance drivers and outcomes) which take part in the value
creation process, as well as the interactions between them. From this point of view,
integrated thinking should be a guiding logic of the (integrated) reporting system.
The logic of integrated thinking described in the CD displays potentials for
providing integrated reporting with a key role in implementing integrated
sustainability beyond compliance. In fact, integrated thinking does not imply the
mere sum or systematization of financial, social and environmental reporting
systems. Nor does it require adding an isolated measurement system for integrated
reporting. Rather, the adoption of integrated reporting should provide an opportu-
nity for a broader re-thinking of all pre-existing systems by suggesting how to
overcome the isolation between them for the purpose of implementing and
practicing integrated sustainability beyond compliance. Therefore, rather than
representing an isolated element disconnected from the other management and
measurement systems, and responding mainly to compliance and legitimizing
needs, the integrated report should be aligned with other measurement systems
(such as the business plan, the balanced scorecard, the budgeting system, the quality
and production efficiency management systems, etc.) and should be conceived of as
an active and constructive element within the process of planning, enacting,
monitoring and communicating integrated sustainability on an ongoing basis and
throughout all organizational levels (see Fig. 2.4).
2 What Is Sustainability? A Review of the Concept and Its Applications 37

Integrated Integrated
Integrated Governance performance
reporng beyond
management and
compliance
measurement
systems –
Strategy & Business Business planning
models

Management, measurement
& reporting systems
Enacng processes of
Connuous monitoring hybridizaon and
and learning to avoid integraon among
‘mission dris’ social, environmental
and financial
performance dimensions

Fig. 2.4 Implementing integrated sustainability: which role for integrated reporting?

Summary and Conclusions

In this chapter we have highlighted the practical implications of exploring the
key dimensions of sustainability, as well as their interconnections, going beyond
the sustainability rhetoric. By relying upon the evolving debate regarding
sustainability, and upon the different discourses which have informed this
debate, we have emphasised the multidimensional and integrated nature of
sustainability, as well as the tensions between its different dimensions. Rather
than eliminating tensions, effective integration requires a full realisation of the
potentials of all dimensions simultaneously. This process is challenging and, if
we take the perspective of organizations, it should happen at various organiza-
tional levels. In this context, we have built on various studies that have explored
governance, business models and performance management, measurement and
reporting systems through integrated approaches, in order to highlight the
opportunities that these approaches offer for incorporating the different
dimensions of sustainability, and for understanding their management process.
In so doing, rather than offering prescriptive solutions, we have outlined the
following key elements and levels which we believe should be taken into
account in the implementation of integrated sustainability:
– the integrated governance system, whose actual implementation requires the
effective management of compliance; financial, social and environmental
performance; risk management; and knowledge management;
38 E. Giovannoni and G. Fabietti

– the definition of adequate (hybrid) business models, which are required to

address social, financial and environmental performance dimensions
simultaneously;
– integrated management, measurement and reporting systems, which may
allow an integrated approach to sustainability through planning, execution,
monitoring and communication.
Importantly, by drawing upon the elements mentioned above, our analysis
highlights the potential role played by integrated reporting in the implementation
of integrated sustainability. Given the driving principles and content elements
for integrated reporting provided by the CD, we argue that, if adequately
designed and implemented, integrated reporting can play an active and construc-
tive role in managing sustainability beyond compliance. Therefore, integrated
reporting should be conceived beyond mere issues of compliance and legitimi-
zation and should be framed within a broader approach. This approach requires
that companies actually alter their existing practices beyond mere rhetoric and
allow a concrete strategic move towards sustainable development.

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Annual Reports, Sustainability Reports and
Integrated Reports: Trends in Corporate 3
Disclosure

Marco Fasan

Abstract
This chapter aims at providing a comprehensive comparison between Annual
Reports (ARs), Sustainability Reports (SRs) and Integrated Reports (IRs),
focusing on their similarities and differences from an evolutionary perspective.
In particular, it provides an argument for the main limitations AR has faced
during recent years and of the main characteristics of SR, focusing in particular
on the recent G4 guidelines from the Global Reporting Initiative. The IR, as
framed in the Consultation Draft proposed by the International Integrated
Reporting Council, can be considered the cutting-edge and probably the future
of corporate disclosure. It is fundamental to compare it with previous forms of
corporate disclosure in order to properly understand the current debate and to
forecast its future development. IR presents some similarities with AR and SR,
while at the same time introducing some relevant innovations, aimed at
overcoming the limitations of the two traditional forms of reporting. Neverthe-
less, it still needs to undergo some scrutiny in order to become a widespread
disclosure pattern.

3.1 Introduction

Corporate disclosure has been changing significantly in recent years. Integrated

Reporting represents the cutting-edge and probably the future of corporate
reporting worldwide. Scholars (among others, Arnold et al. 2012; Eccles and
Krzus 2010; Frias-Aceituno et al. 2012), policymakers (European Commission
2009) and standard-setters (IIRC 2013; GRI 2013) are looking at this new way of
reporting with great interest and, given the severe limitations and expectations of
Annual Reports and Sustainability Reports, with great hope as well.

M. Fasan (*)
Department of Management, Ca’ Foscari University of Venice, Venice, Italy
e-mail: marco.fasan@unive.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_3, 41

# Springer International Publishing Switzerland 2013
42 M. Fasan

This chapter aims to provide a comprehensive analysis and comparison between

Annual Reports (AR), Sustainability Reports (SR) and Integrated Reports (IR),
focusing on their similarities and differences from an evolutionary perspective. In
order to properly understand the current debate about IR and to forecast its future
developments, it is fundamental to link IR to the other forms of reporting, which are
currently employed.
The second section analyses the current standards of financial disclosure, focus-
ing in particular on AR’s limitations: complexity, lack of non-financial information
and short-termism. The third section discusses the main features of SR, devoting
particular attention to the most important standard of disclosure [proposed by the
Global Reporting Initiative (GRI)]. The fourth section briefly defines the main
characteristics of IR according to the International Integrated Reporting Council
(IIRC) framework.
Finally, the last section discusses similarities and differences between IR, AR
and SR. In particular, it is argued that IR needs to be considered as an evolution of
AR rather than SR, because, according to the IIRC framework, the intended users of
the report are clearly identified as investors and providers of financial capital. Also
the “capitals” (objective, thus referred to the final impact on the company) approach
proposed by the IIRC is quite different from the “stakeholder” (subjective, thus
referred to the single individuals or entities) approach typical of SR. IR presents
some relevant differences as well, when compared to AR: the most important being
the way of interpreting the value creation process and time horizon. IR is long-term
oriented and focuses on the impact of a company’s activities on the capitals and on
the interrelations generated by such actions. This may create a problem for
investors and companies that are short-term oriented, because they may see IR as
a threat rather than as a way to disclose their performance more comprehensively.
Below are some challenges the IIRC will have to face in order for IR to become a
widely employed pattern of disclosure.

3.2 Financial Disclosure and Limitations of Annual Reports

According to accounting standards (both IAS/IFRS and the national GAAPs of the
various countries), the main purpose of ARs is to provide relevant information to
investors in order to allow them to make informed economic decisions (see Revised
IAS 1; Deloitte 2013). The topic is central to the field of accounting, where there is
a vast body of literature analysing the value relevance (defined by Barth et al. 2001,
p. 25, as “the association between accounting amounts and security market values”)
of accounting numbers, identifying the information which investors rely upon most
heavily. Although AR is a tool used primarily by investors, it is also employed by
managers in order to make decisions on resource allocation and, as such, is studied
in the management field as well.
Although AR undoubtedly represents the main way investors gather information
still today, during the last 10 years this form of reporting has proven to have some
severe limitations. Such limitations arise from the inability of ARs to evolve
3 Annual Reports, Sustainability Reports and Integrated Reports: Trends in. . . 43

coherently with change in the economic context without losing reliability and
clarity (see Schroeder 2002; Cox 2007). In the last years, companies’ values have
been influenced to a greater extent by elements that are not properly represented in
ARs, such as the way in which operations’ safety is managed. A striking example is
the 2006 Deepwater Horizon oil spill, which greatly damaged the reputation (and
financial performance) of British Petroleum. In addition, companies have employed
new financial instruments, such as derivatives and credit default swaps, which have
had to be disclosed through ARs, increasing their complexity and decreasing, in
turn, their reliability (see Plumee 2003; Li 2008; Miller 2010). The worlds of
business and society are changing, and traditional reporting has not managed to
successfully adapt to such evolution. As a consequence, AR’s reliability and
capability to provide a true and fair view of the companies’ financial performance
have decreased. Although mainly due to corporate governance failures, the cases of
Enron, Parmalat and, more recently, Lehman Brothers, have decreased the confi-
dence of investors in AR (see, among the others, Baker and Hayes 2004).
The challenges that AR is facing and that have caused its decrease in reliability
and in its capability to provide a true and fair view can be grouped in three broad
categories. ARs are too long and too complex; they do not disclose some informa-
tion (mainly, non-financial information) that investors need; and they do not
provide enough information to allow investors to predict the long-term financial
performance of the company (see Plumee 2003; Li 2008; Miller 2010). Somehow,
they disclose too much financial performance (ARs are often unable to disclose
what is really relevant in explaining the ability of a company to create value in the
long term) and too little non-financial performance (ARs do not disclose nor
measure determinant aspects of company performance).
Already in the late 1990s, Holland (1998) pointed out that ARs were too large
and cumbersome, generating an information overload for unsophisticated users,
who need to process a very large amount of information. One of the most severe
(and most widely debated) limitations of AR is complexity. As business evolves,
new types of transactions emerge that cannot be readily captured by traditional
accounting measures (see You and Zhang 2009). These new transactions (for
instance, stock options awarded to employees) require firms to significantly expand
their disclosure regarding the transaction. In this way, companies have been
accumulating information in their ARs, decreasing their relevancy (see Loughran
and McDonald 2010; Miller 2010). ARs become longer and longer but the disclo-
sure system has been weakened overall. Plumee (2003) and Gu and Wang (2005)
find that analysts assimilate more easily less complex information compared to
more complex information. These empirical findings are rooted in the work by Hirst
and Hopkins (1998), who argue: “research in psychology suggests that information
will not be used unless it is both available and readily processable (i.e. clear)” (Hirst
and Hopkins 1998, p. 48).
The second limitation of AR deals with the fact that it does not provide enough
non-financial information on issues such as management quality, customer satis-
faction, and environmental and social performance. It is commonly believed (see
The Atlantic 2013) that information is relevant only if it can be translated into
44 M. Fasan

monetary terms (i.e. if it cannot be expressed through a monetary number, it is not

relevant). This paradigm is based on the assumption that the market and exchanges
on the market allow the measurement of everything. But in the last few years the
fact that price is the only measure of value and that the market exchange is the only
mechanism regulating values has been severely questioned. Non-financial informa-
tion (which, by definition, is not expressed in monetary terms) is central even for
investors interested only in the financial profitability of firms. In recent years, the
belief that only financial information provides elements on which to predict future
performance has changed. Many studies have analysed the relationship between the
social performance of a company (mostly measurable through non-financial infor-
mation) and its financial performance, finding that some association may exist (see
Pava and Krausz 1996; Orlitzky et al. 2003; Margolis and Walsh 2003). Other
studies—dealing with disclosure rather than with performance—have devoted
increasing attention to the role of non-financial information (NFI) in informing
investors and, more broadly, stakeholders, about a company’s performance (see,
among the others, Amir and Lev 1996; Healy and Palepu 2001; Fifka and Drabble
2012). A widely-cited study by Ocean Tomo (2011) provides evidence confirming
that financial information is not enough for investors and stakeholders to have a
complete understanding of a company’s performance and value.
The third limitation is the limited usefulness of AR in predicting the long-term
performance of a company. ARs are essentially backward-oriented, thus they report
a company’s past financial performance, and they disclose no information about the
future outlook of performance. Many of the studies cited above investigating the
impact of other-than-financial performance on corporate financial performance
recognize that the positive impact of social performance would eventually occur
in the long term. ARs, neglecting non-financial information, lack these important
pieces of information. Not only that, they also lack other KPIs measuring other-
than-financial performance that, though not directly connected to social or environ-
mental issues, are fundamental in predicting the future long-term performance of a
company. This limitation has some important consequences, even on the way the
company is managed. A manager facing the decision whether to cut the company’s
R&D investments, for instance, is more likely to do so if the main benchmark on
which he/she is evaluated is the AR. Investors would eventually recognize this,
decreasing the company’s stock price, but even this control mechanism (the market)
can work only if information about R&D (like all other information about company
performance captured by non-financial information) is more clearly disclosed by
the company (see Hirst and Hopkins 1998).
In summary, business cases, empirical evidence and the recent financial crisis
seriously put in question the ability of financial data to provide adequate informa-
tion on a firm’s capability to create value and to sustain it over time.
Policymakers have taken the issue into serious consideration, such that, in many
countries, companies are now required to complement their ARs with non-financial
information. In April 2013, the European Commission adopted a proposal for a
directive enhancing the transparency of certain large companies on social and
environmental matters (see European Commission 2013). Large companies will
3 Annual Reports, Sustainability Reports and Integrated Reports: Trends in. . . 45

Table 3.1 Annual reports main features

Annual reports
Target Specific stakeholders (shareholders and investors)
Mandatory/voluntary Mandatory
Regulation or guidelines National and international laws and GAAP (or IAS/IFRS)
Comparability High
Industry customization Low
Assurance level High
Scope Financial reporting entity (company or group of companies)

need to disclose information on policies, risks and results as regards environmental

matters, social and employee-related aspects, respect for human rights, anti-
corruption and bribery issues, and diversity on the boards of directors.
Table 3.1 summarizes the main features of Annual Reports. Besides the aspects
discussed above, it is important to point out that comparability among ARs is high,
even if some work still needs to be done (mainly in terms of convergence between
US GAAP and IAS/IFRS). This high comparability is reached at the expense of low
ARs industry customization, as accounting standards do not provide any additional
guidelines for companies operating in specific industries, although companies have
the possibility to include some additional relevant information in the notes. The
assurance (audit) level is high, in the sense that auditing standards and procedures
and the nature of the financial information makes ARs easier to be audited,
compared to SRs or IRs and, finally, the report is limited to legal entities (a
company or group of companies).

3.3 Sustainability Reports

SRs provide “information relating to a corporation’s activities, aspirations and

public image with regard to environmental, community, employee and consumer
issues. Within these headings will be subsumed other, more detailed, matters such
as energy usage, equal opportunities, fair trade, corporate governance and the like”
(see Gray et al. 2001, p. 329). SRs are typically intended to inform a wide range of
stakeholders, from activist groups operating in the community to shareholders and
investors, which may be interested in the social performance of the company as a
predictor of its financial performance (see Klok 2003; Daub 2007). This fundamen-
tal characteristic of SR is evident also in the framework proposed by the GRI, which
organizes the various elements proposed by stakeholder groups. Given the broad-
ness of the concept of stakeholder and, consequently, of the boundaries of the
report, an increasing amount of attention has been placed lately on the definition of
material issues, which are those that might have an impact on the company’s ability
to create value in the long-term. Companies need to carefully evaluate which are the
relevant stakeholders and issues they wish to communicate and therefore which are
the strategic and most important KPIs. This presents the difficult task of defining the
46 M. Fasan

real targets of SRs, which is fundamental in order to avoid SRs becoming too wide
and too complex.
According to KPMG (2011), the vast majority of the 250 largest companies in
the world (95 %) report on their corporate responsibility activities. Among the best
performing countries, in terms of sustainability disclosure’s strong communication
and professionalism over time, there are many European countries and India, which
takes a striking position, showing that the limited number of Indian companies that
report on their sustainability performance take it rather seriously. The Americas
seem to have focused so far on communication rather than corporate responsibility
processes, and according to KPMG this may represent an issue in terms of reputa-
tional risk. In this region, the cases of Mexico and Brazil are striking: 66 % of
Mexican companies included in the 250 largest global firms now report on their
corporate responsibility activities, versus just 17 % in 2008; in Brazil, the percent-
age of companies reporting has now grown, bringing the country up to an impres-
sive 88 %. Finally, Chinese and South Korean companies are demonstrating due
regard to implementing processes and systems to measure and govern corporate
responsibility issues (KPMG 2011). Among the reasons and motivations for
companies to report, reputational consideration continues to drive sustainability
reporting, with innovation and learning motivations rapidly gaining appreciation,
compared to 2008.
ARs are usually viewed to be mandatory, while SRs voluntary. This is not
entirely correct, since different countries’ legislations have different positions on
the issue, with some countries requiring the disclosure of social information by law
while others do not, with the trend being, as the 2013 EU directive shows, to make
non-financial information mandatory more often. The lack of a common worldwide
policy on the compulsoriness of SR derives from the lack of consensus on the issue.
Those that consider SR better suited for the voluntary reporting sphere argue that
the gap between regulators and the industry is too wide, that mandatory SR would
reduce the incentives to innovate, and that legal requirements would fail to recog-
nize and take into account the differences among different industries. Conversely,
others argue that it is necessary to make SR mandatory in order to change corporate
culture, and that voluntary reports are not complete, not easily comparable and do
not disclose negative performance.
To ensure comparability and to avoid “window dressing” solutions, SR needs a
widely-accepted disclosure standard that would provide guidance and foster com-
parability among reports. This is true both in cases where SR is voluntary and where
it is compulsory, because policymakers often refer to internationally accepted
standards in order to guide companies towards the issuance of SRs. The Global
Reporting Initiative (GRI) is a non-profit organization that contributes to the
fulfilment of this need for standard guidelines. It was launched in 1997 and its
standards are widely employed by global companies in order to frame their SRs.
The GRI has recently published the G4 guidelines, the latest evolution of the GRI
framework created in 1999, when the first exposure draft of the Sustainability
Reporting Guidelines was released. The G4 guidelines are divided into two main
documents: the “Reporting Principles and Standard Disclosure” and the
3 Annual Reports, Sustainability Reports and Integrated Reports: Trends in. . . 47

“Implementation Manual”. Each company has the possibility to prepare its

guidelines in accordance with the “Core” option or the “Comprehensive” option,
with the Comprehensive option requiring additional disclosures compared to the
Core option. This approach is an attempt to make the GRI G4 accessible also to
companies implementing their SR for the first time (such as, for instance, Asian
companies or SMEs) and is at the same time a reaction to the critique of being too
challenging for small companies and first-time adopters to implement.
The two pillars of the GRI framework are the reporting principles and elements.
The reporting principles defined by the G4 are the following: stakeholder inclu-
siveness, sustainability context, materiality, completeness, balance, comparability,
accuracy, timeliness, clarity and reliability. GRI elements (both those required to be
disclosed in accordance to the Core option and those to the Comprehensive option)
are divided into the following categories: strategy and analysis, organizational
profile, identified material aspects and boundaries, stakeholder engagement, report
profile, governance and ethics and integrity. The G4 provides companies with the
opportunity to disclose how they specifically manage some particular aspects of
their environmental, social or governance performance through the Disclosures on
Management Approach (DMA). The DMA provides narrative information on how
an organization identifies, analyses and responds to its actual and potential material,
economic, environmental and social impacts. DMA is ultimately the way GRI
balances standardization and customization.
GRI is undoubtedly the most common standard for disclosure of comprehensive
non-financial information in the context of SR. Among the specific reports, special
mention should be made of the Carbon Disclosure Project (CDP), dealing with
environmental disclosure and, in particular, carbon footprint disclosure. This is
important given the increasing economic, social and environmental relevance of
climate change. The CDP is an international, UK-based, not-for-profit organization
providing a global system for companies (and cities) to measure, disclose, manage
and share vital environmental information. In 2008, the CDP published the
emissions data for 1,550 of the world’s largest corporations, accounting for 26 %
of global anthropogenic emissions. The CDP ultimately represents a form of market
self-regulation, attempting to overcome the limitations of the Kyoto Protocol. In
fact, the CDP focuses on companies rather than on countries (which have some-
times been reluctant to develop stringent national requirements on emissions) and
leverages on institutional investors that focus their attention on carbon emission and
energy usage. One of the most challenging topics in today’s environment is to
define which are the boundaries of the reporting entity. Given the central role of the
supply chain, the CDP provides indication on how to collect, manage and disclose
the climate change information of the entities included in the supply chain, which
often accounts for most of the emissions and which can be indirectly managed by
the company. The CDP also focuses its attention on cities and on the supply chain of
governments, allowing them to efficiently manage suppliers’ energy use.
Table 3.2 summarizes the main characteristics of SR, as compared to AR. The
target of SRs is much wider, as it is intended to inform several different groups of
stakeholders. As pointed out above, this challenges the usefulness of SR and
48 M. Fasan

Table 3.2 Annual and sustainability reports main features

Annual reports Sustainability reports
Target Specific stakeholders (shareholders and Several stakeholders (social and
investors) environmental perspective)
Mandatory/ Mandatory Voluntary (with some exceptions:
voluntary Denmark, Sweden, France)
Regulation or National and international laws and Global reporting Initiative (GRI)
guidelines GAAP (or IAS/IFRS)
Comparability High Medium
Industry Low Medium (Sector supplements)
customization
Assurance level High Low
Scope Financial reporting entity (company or Broader than financial reporting entity
group of companies) (supply chain, LCA approach)

stresses the role of materiality. SR is voluntary, with the exception of some

countries and in the context of a continuingly evolving situation. The guidelines
employed by the GRI are the most widely employed standards for disclosure, which
propose “sector supplements”, additional guidelines for specific industries. Because
of this, industry customization is medium. Assurance level is low, in the sense that
non-financial information is more challenging to assure, compared to financial
information. Finally, the scope of SR goes beyond the legal entity and includes
also other entities that are not formally part of the group, for instance, including part
of the supply chain.

3.4 Integrated Reporting

Recently, both the business and the academic world have been devoting increasing
attention to the IR. In August 2010, through the initiative of the Prince’s Account-
ing for Sustainability Project (A4S) and of the Global Reporting Initiative (GRI),
the “International Integrated Reporting Committee” (IIRC) was launched. The
2013 IIRC Consultation Draft defines IR as follows: “<IR> is a process that results
in communication by an organization, most visibly a periodic integrated report,
about value creation over time. An integrated report is a concise communication
about how an organization’s strategy, governance, performance and prospects, in
the context of its external environment, lead to the creation of value over the short,
medium and long term” (IIRC 2013, p. 8). The aim of IR is to provide insights into
the external environment that affects an organization, the resources and
relationships used and affected by the organization (capitals) and the way in
which the organization interacts with the external environment and capitals to
create value.
The IIRC clearly states that the targets of IR are investors and providers of
financial capital. Differently from SR, the framework is not based on stakeholders,
but the focus is rather on the measurement and evaluation of capitals, if they have
3 Annual Reports, Sustainability Reports and Integrated Reports: Trends in. . . 49

an impact on the long-term value creation process of the firm. In the context of the
IIRC framework, the term “capitals” refers to any store of value that an organiza-
tion can use in the production of goods and services. The six capitals the IIRC
framework proposes are the following: financial; manufactured; intellectual; social
and relationship; human; natural. All the capitals are fundamental for the company
to operate, as the capitals are ultimately the input of an organization’s business
model. Through its activity, the company is increasing, decreasing or transforming
the capitals. It is the company itself that identifies the relevant capitals modified by
managerial action according to its perception and decision making process.
According to the IIRC objectives, the IR needs to provide a wide array of
information, able to represent the reporting entity’s long-term value creation
process, which needs to be disclosed in an integrated way. The content elements
that must be included in an IR are the following: organizational overview and
external environment, governance, opportunities and risks, business model, strat-
egy and resource allocation, performance and future outlook. Such elements need to
be contextualized, coherently with the IIRC’s principle-based approach. The guid-
ing principles, and therefore the way such content elements must be disclosed, are
the following: strategic focus and future orientation, connectivity of information,
stakeholder responsiveness, materiality and conciseness, reliability and complete-
ness, consistency and comparability.
Ultimately, IR aims to make it easier for the user to draw insightful connections
between key pieces of information in the context of the investment decision-making
process, to give a clear view of the firm’s strategy and process and to allow long-
term quantifiable risks or opportunities to be taken into account (UBS 2012).
IR aims to provide information mainly to providers of financial capital, even
though the IIRC framework points out that other stakeholders may also find
relevant information in the IR (see paragraph 3.24 of the IIRC Consultation Draft
(IIRC 2013). Nowadays, IR is mostly voluntary, with the pilot program of the IIRC
grouping those companies willing to implement—on a voluntary basis—their IR.
Nevertheless, companies listed on the Johannesburg Securities Exchange (JSE)
were required to adopt Integrated Reporting from years commencing on or after 1
March 2010. An interesting research stream could analyse the changes in corporate
disclosure before and after the issuance of IR, the JSE being an interesting context
to be analysed. IR has a principle-based approach, and this causes, on the one hand,
a low comparability among IRs but, on the other, a high industry (and company)
customization. The principle-based approach also confers more responsibilities to
the top management, and it can potentially hide some opportunistic behaviours. The
assurance level is low, because of the nature of non-financial information. Besides
this, the IIRC framework encourages that information be disclosed also in narrative
form, which is clearly much more challenging to assure, compared to financial
information. Finally, the scope of the reporting, as for SR, goes beyond the legal
entity (Table 3.3).
Terna S.p.a. (the largest independent grid operator for electricity transmission in
Europe) is part of the IIRC pilot program, and it is currently working in the
50 M. Fasan

Table 3.3 Annual, sustainability and integrated reports main features

Annual reports Sustainability reports Integrated reports
Target Specific stakeholders Several stakeholders (social Primarily providers of
(shareholders and and environmental financial capital
investors) perspective)
Mandatory/ Mandatory Voluntary (with some Voluntary (with some
voluntary exceptions: Denmark, exceptions: South Africa)
Sweden, France)
Regulation or National and Global reporting initiative IIRC framework
guidelines international laws and (GRI)
GAAP (or IAS/IFRS)
Comparability High Medium Low
Industry Low Medium (Sector High
customization supplements)
Assurance High Low Low
level
Scope Financial reporting Broader than financial Broader than financial
entity (company or reporting entity (supply reporting entity (supply
group of companies) chain, LCA approach) chain, LCA approach)

implementation of its IR. The company started its “Integrated Report Project 2012”
in order to progress towards “an innovative, concise, transparent and complete
representation of its performance”. In this initial phase of the process, Terna is
working on the content elements proposed by the IIRC (organizational overview
and external environment; governance; opportunities and risks; business model;
strategy and resource allocation; performance; future outlook). Below, the disclo-
sure by Terna of the main content elements will be discussed (Fig. 3.1).
About the business model, which, as recognized by the company as well, is one
of the central elements of the IR framework, Terna argues that the Italian electricity
system supply chain consists of four segments: the production, transmission,
distribution and sale of electricity. Terna ensures the electricity transmission
phase, an essential service to the community but one that does not involve a
commercial relationship with end-users: it is a business to business activity. Spe-
cifically, Terna—through its subsidiary Terna Rete Italia—manages the
dispatching of electricity and the development and maintenance of electricity
transmission infrastructure. These operations are managed under the government-
granted monopoly; the means of payment is determined by the Authority for
Electricity and Gas. Increased operational efficiency—including procurement
management—the timely realization of investments and financial management
optimization all have a positive impact on value creation. Good performance in
response to specific incentive schemes can further improve results.
About the performance content element, the company points out that Terna
continually monitors and measures the implementation of its business model and
the resulting impact on its capital. It then publishes the results in a report, for the
benefit of all interested stakeholders. In this sense, the two most significant reports
are the Annual Financial Report and the Sustainability Report. This element is
3 Annual Reports, Sustainability Reports and Integrated Reports: Trends in. . . 51

Fig 3.1 Terna integrated report project 2012

dedicated to Terna’s financial and sustainability performance, including the impact

on stakeholders—from human resources to local communities—as well as the
impact on the environment and biodiversity. The current framework of reporting
is going to be modified by the implementation of the IR, as Terna AR and SR will
probably converge into the IR, despite being still existing.
Future outlooks aim at pointing out problems, uncertainties and potential
implications for the business model and performance that Terna will have to face
in order to implement its strategy. Terna’s Strategic Plan, with its 5-year outlook,
outlines the objectives, priorities and investments that guide the Group towards the
right tools in order to continue to create value. To achieve this, the company needs
to identify trends that could pose challenges in the medium and long term, and to
find solutions. For example, the evolution of energy usage and the resulting need to
adapt the electricity transmission grid, or even the increasing integration of grid
management across Europe. In the long term, the increased importance of non-
traditional business is expected, including in the creation of value. Focusing on
stakeholders, and maintaining a relationship of trust with them, encourages sustain-
able policies that help to ensure the stability of the business model in the medium
and long term.

3.5 Integrated Reporting: Evolution and Nature

AR, SR and IR ultimately represent different aspects of the evolution of corporate

reporting over the years. The previous sections provided descriptions of the main
characteristics of the three forms of reporting. This section, instead, aims at
52 M. Fasan

comparing the main characteristics of AR, SR and IR, pointing out similarities and
differences, trying to make sense of this evolutionary process in corporate disclo-
sure. IR represents the latest and most advanced stage of corporate reporting
worldwide, but it derives from the evolution of already-existing forms of disclosure
(AR and SR). The understanding of the connections between IR, AR and SR is
fundamental in order to judge the effectiveness of the current IR framework and to
predict its future development.

3.5.1 Integrated Reporting and Annual Reporting

The first issue it will be discussed deals with the origin of IR. Can IR be considered
an evolution of SR? Or rather, does it derive from a broader approach to AR?
Following the considerations made above, IR is a tool that has the potential to
overcome the limitations of both AR (complexity, short-termism, shortage of non-
financial information) and SR (low reliability and trust from investors, disconnec-
tion with financial performance). Nevertheless, there is an important element that
ought to be taken into consideration in this reasoning. The IIRC framework clearly
states that: “an integrated report should be prepared primarily for providers of
financial capital in order to support their financial capital allocation assessments”
(IIRC 2013, p. 8). Even if the subsequent paragraph states that “an integrated report
and other communications resulting from the <IR> will be of benefit to all
stakeholders interested in an organization’s ability to create value over time,
including employees, customers, suppliers, business partners, local communities,
legislators, regulators and policymakers”, the indication of the IIRC framework is
clear in indicating investors and providers of financial capital as the intended users
of IR. This has important consequences also in the way materiality and other
fundamental IR aspects are defined. Because of this reason, IR may be viewed as
an evolution of AR, rather than of SR, even if it captures some aspects of SR,
aiming at providing information to the most “enlightened” markets.
While the intended users of the report is, to some extent, a common element
between AR and IR, the time horizon represents one of the main differences and
also poses some severe challenges to the successful implementation of IR. AR is
focused on the past performance of the company and is short-term oriented, in the
sense that it provides information mainly useful in predicting the short-term
performance of a company. In contrast, one of the guiding principles of IR is
“strategic focus and future orientation”. According to this principle, “the report
should provide insights into the organization’s strategy and how that relates to its
ability to create value in the short, medium and long term” (IIRC 2013, p. 18).
Even if the IIRC framework states that an IR allows providers of financial capital
to assess the ability of the company also in the short term, it is clear that the main
focus of an IR is on the long term. For instance, Unilever, a company joining the
IIRC pilot program, has decided to abolish quarterly earnings guidance (Harvard
Business 2012). IR took a clear position in its long-term orientation, and this also
emerges clearly from the value creation paragraph.
3 Annual Reports, Sustainability Reports and Integrated Reports: Trends in. . . 53

The framework seems to be concerned with “reassuring” all typologies of

investors and companies, both long-term and short-term oriented; both socially
responsible and non socially responsible. In reality, there are some audiences that
are likely not to be happy with IR but that would rather consider it a threat or, in the
best-case scenario, useless. Short-term oriented investors need timely information
on the last-year (last-quarter) performance of a company in order to forecast the
future (short-term) performance of the company. How will these investors react to
IR? Given the definition of value relevance provided above (see Barth et al. 2001),
will these investors find the information disclosed in IR to be value relevant? Or
will they simply ignore IR? Or will they disappear?
Short-term oriented companies may be creating short-term financial perfor-
mance at the expense of some of the capitals. Paragraph 2.43 states that “value
(. . .) is unlikely to be created through the maximization of one capital while
disregarding the others”. This is true only if reasoning with a long-term perspective,
as recognized by the framework itself, which in the same paragraph states: “the
maximization of financial capital (e.g., profit) at the expense of human capital (e.g.,
through inappropriate human resource policies and practices) is unlikely to maxi-
mize value in the long term”. What is the approach of IR towards short-term
oriented companies? Why should a short-term oriented company, which has ceased
to invest in its human capital, disclose its performance according to the IIRC
framework? If applied correctly, the IR would link the increase in financial capital
to a decrease in human capital, and this would have some consequences on the long-
term oriented investors’ predictions of the company’s ability to produce long-term
financial performance. Besides this, the IIRC framework takes a clear position on
those companies increasing their financial capital at the expense of other capitals,
when discussing the value creation issue, basically arguing that such companies
will not be able to sustain value over time.
Another relevant difference between AR and IR is the way in which materiality
is interpreted, which is tackled in the chapter on materiality by Mio.
The IR explicitly recalls some concepts that may be considered similar to those
expressed by Kramer and Porter in their work on value creation (see Kramer and
Porter 2011). In that context, the concept of shared value can be defined as policies
and operating practices that enhance the competitiveness of a company while
simultaneously advancing the economic and social conditions in the communities
where it operates. According to Paragraph 2.37 of the IIRC Framework, “an
organization can create and maximize value by serving the interest of, and working
with, all its key stakeholders, such as employees, customers, suppliers, business
partners, local communities, legislators, regulators and policymakers”. Paragraph
2.38 states: “providers of financial capital are focused on value in the form of
financial returns. Those returns are, however, dependent on inter-relationships
between various types of capital in which other stakeholders have an interest.”
The IIRC takes a strong position on the issue of value creation, basically stating
that it depends on other forms of capital and that it cannot be sustained in the long
term at the expense of other individuals or groups of individuals. This approach also
recalls the instrumental stakeholder theory (see Donaldson and Peterson 1995). In
54 M. Fasan

this sense, it takes a step further, compared to other traditional accounting standards
regulating AR, which are silent about drivers of value creation.

3.5.2 Integrated Reporting and Sustainability Reporting

The IIRC is very clear in stating that IR should comply with the principles-based
requirements identified through its framework. The aim is to balance flexibility and
prescriptions, in order to recognize a wide variation in individual circumstances of
different organizations and industries. This approach, which allows IR to have a
high industry customization but a low comparability, is clear even in the description
and discussion of capitals, which is one of the main elements of the whole
framework. The IIRC states: “not all capitals are equally relevant or applicable to
all organizations” (IIRC 2013, p. 13), thus allowing for a flexible application of the
framework. Conversely, SRs, and in particular those following the GRI approach,
rely on a fixed list of elements that need to be disclosed. The GRI has introduced
two mechanisms in order to mitigate this rigidity: the sector supplements (which
allows companies to have a medium level of industry customization) and the
concept of materiality. The GRI G4 guidelines provide a description of the meth-
odology to be employed in order to identify material aspects, allowing companies
not to disclose some aspects, if not considered to be material. Even with this form of
“mitigation”, the approach of the GRI is fairly rigid, and may be defined as
“customized”, while the approach by the IIRC is really “principle-based”.
Another relevant difference between IR and SR is that the approach proposed by
the IIRC is based on the concept of “capital”, while the GRI is based on the concept
of “stakeholders”. On the one hand, according to the IIRC framework, “capitals are
stores of value that, in one form or another, become inputs to an organization’s
business model. They are increased, decreased or transformed through the activities
and outputs of the organization in that they are enhanced, consumed, modified,
destroyed or otherwise affected by those activities and outputs” (IIRC 2013, p. 11).
On the other hand, the GRI framework is mostly focused on stakeholders. The
elements proposed by the GRI are in fact divided by aspect, thus divided into
categories that are clearly inspired by the different stakeholders’ groups (economic,
environmental, social, human rights, product responsibility, etc.). Not only that, the
G4 framework stresses the stakeholder inclusiveness principle, pointing out that the
organization should identify its stakeholders, and explain how it has responded to
their expectations and interests. The capital approach proposed by the IIRC is
“objective”, rather than “subjective” and much more similar to financial account-
ing. The capitals do not refer to any specific category of stakeholder, and they recall
a more relevant role of the company, which is the real focus of the IR.
The IR aims at reporting on the outcomes, rather than on outputs, further
evolving the SR’s model. According to the framework, the IR should answer the
question: “to what extent has the organization achieved its strategic objectives and
what are its outcomes in terms of effects on the capitals?”. Outcomes are defined as
the “internal and external consequences (positive and negative) on the capitals as a
3 Annual Reports, Sustainability Reports and Integrated Reports: Trends in. . . 55

result of an organization’s business activities and outputs” (IIRC 2013, p. 15). Even
though the aim of the IIRC is to disclose outcomes, the KPIs proposed by the same
framework do not measure outcomes, and, as it is today, IR is not able to measure
the stocks for the six capitals and their variations (flows). For some capitals, IR only
measures some specific aspects, employing such indicators as a proxy for the whole
capital. Clearly outcomes are much more difficult to measure, and this may be a
further evolution and one of the main challenges IR will have to face. While IRs
takes into account the measurement (in terms of stock and flow) of capitals, which
have clear similarities with balance sheets and income statements respectively, SRs
report on the impacts of the company’s activities.

Conclusions
The aim of this chapter was to provide a comprehensive comparison between
Annual Reports (AR), Sustainability Reports (SR) and Integrated Reports (IR),
focusing on their similarities and differences from an evolutionary perspective.
While the first three sections discussed the main features and characteristics of
AR, SR and IR respectively, the last section provided a comparison between
them, pointing out similarities, differences and future challenges to be tackled.
IR is to be considered an evolution of AR rather than of SR, because the
intended users of IR are clearly stated as the “providers of financial capital”
(IIRC 2013). In addition, the way in which IR frames the capitals (much more
“objective” and centred on the firm, compared to the “subjective” stakeholder
approach of SR) leads to the conclusion that IR is really an evolution of AR
rather than of SR.
Future research and attention by standard-setters ought to be spent on the
definition of two issues of paramount importance for IR. The first is the way IR
relates to short-term oriented investors and companies. The IIRC framework
clearly states that financial performance cannot be sustained in the long term
when obtained exclusively at the expense of the other capitals. On the one hand,
short-term oriented companies may consider this approach to be a threat,
because IR is likely to harm the market performance of the company. On the
other hand, short-term investors may consider IR non-material. How is IR
considered by these companies (investors)? Why should they implement (read)
IR? What are the benefits (if any) would they get?
Second, IR aims at providing information on the outcomes produced by a
company. Despite this, it fails to propose a set of KPIs on which a company may
rely upon in disclosing the outcomes of their activity. Further guidance ought to
be provided on this issue, as the communication of the company’s performance
is one of the main objectives of IR and therefore needs to be more carefully
considered.
56 M. Fasan

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The Connectivity of Information
for the Integrated Reporting 4
Sergio Paternostro

Abstract
The purpose of this chapter is to shed light on the guiding principle of connec-
tivity of information which the Integrated Reporting Framework presents as a
way of translating the integrated thinking into action. In doing so, the chapter
moves from the analysis of the main reports that are a source of information for
Integrated Reporting, defining them as “partial” reports because they represent
only a part of the comprehensive value creation story. The ways in which these
reports are aggregated and/or integrated during the process of construction of an
Integrated Report have the potential to affect the level of connectivity of
information. In addressing these issues, the chapter proposes three different
approaches to the construction of an Integrated Report, also providing examples
to illustrate the main features of each approach. Then, the chapter suggests the
need to further explore the role of connectivity for a global and integrated
reporting system.

4.1 Introduction

Connectivity of information is one of the guiding principles of the Integrated

Reporting (IR) Framework. The Consultation Draft of the International IR Frame-
work defines connectivity as:
“The combination, inter-relatedness and dependencies between the components that are
material to the organization’s ability to create value over time” (IIRC 2013a, p. 18).

Thus, in the IR Framework connectivity is seen as a way of translating the

integrated thinking into action (IIRC 2013b). The connectivity concept had already
been included in the Discussion Paper (IIRC 2011), but its relevance has been

S. Paternostro (*)
Department of Economics, Business and Finance, University of Palermo, Palermo, Italy
e-mail: sergio.paternostro@unipa.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_4, 59

# Springer International Publishing Switzerland 2013
60 S. Paternostro

stressed after the public consultation process. This principle is considered essential
in order to make the report more effective in giving a comprehensive vision of a
firm’s capacity for creating value over time.
Paragraphs 3.10 and 3.11 of the IR Framework (IIRC 2013a, pp. 18–19) list the
following components of information between which connections are required:
• content elements: the organization’s overview and external environment, gover-
nance, opportunities and risks, strategy and resource allocation, business model,
performance, and future outlook;
• time: past, present and future;
• capitals: financial, manufactured, intellectual, social and relationship, human
and natural;
• financial information and other information;
• quantitative and qualitative information;
• management information, board information and information reported
externally;
• information in the integrated report, information in the organization’s other
communications, and information from other sources.
In recent decades, both the academic literature and standard setters have sought
to pursue connectivity (more or less implicitly), proposing a number of frameworks
in which various information and reports were integrated. In the academic debate,
Hutton (2004) and Burgman and Ross (2007) have proposed to integrate financial
information with other non-financial information in order to shed light on the main
drivers involved in the value creation process. Pedrini (2007) suggests a Global or
Holistic Report that integrates social and intellectual capital reports. Along the
same line of thought, albeit with different nuances, are the proposals by Cordazzo
(2005) and Branwijck (2012), while the integration between social and corporate
governance reports is the idea proposed by Kolk and Pinske (2010). Instead,
according to Yongvanich and Guthrie (2006), social and intellectual capital reports
should be linked to wider performance measurement systems such as the Balanced
Scorecard. The need to combine heterogeneous information is also claimed by
Eccles and Krzus (2010), who propose to integrate the financial information
included in the financial statement with non-financial information provided by
other reports. In particular, the non-financial information includes (Eccles and
Krzus 2010, p. 84): intangibles, key performance indicators, social and environ-
mental information and corporate governance information. In line with the IR
Framework, Eccles and Krzus state that the integration between information
provided by different reports is needed in order to think in an integrated manner.
As for the standard setters, the Prince’s Accountability for Sustainability Project
(2007) published the Accounting For Sustainability Report: The Connected
Reporting Framework, and then the guide Connected Reporting: A practical
guide with worked examples (2009). This framework combined financial,
sustainability and governance information stressing the concept of connectivity
as it emerges from the name of the framework itself (“Connected reporting”).
Moreover, in 2009 the King Code of Governance for South Africa required the
4 The Connectivity of Information for the Integrated Reporting 61

preparation of an Integrated Report that included financial, economic and social

information (Institute of Directors Southern Africa 2009).
This brief overview highlights the significant role played by the different types
of reports and the several attempts to exploit their potential integration. In this
chapter, these reports will be generally defined as “partial” reports because each of
them is able to represent only a part of the comprehensive value creation process.
According to the IR Framework, these reports contain the original source of
different information that should be included in an Integrated Report within a
holistic perspective in order to ensure the connectivity of information. As stated
in paragraph 1.18 (IIRC 2013a, p. 9):
“Organizations may provide additional reports and communications (e.g., financial
statements and sustainability reports) for compliance purposes or to satisfy the particular
information needs of a range of stakeholders. The integrated report may include links to
these other reports and communications.”

Therefore, the IR Framework identifies a different function for an Integrated

Report and a partial report. The former aims at communicating to the stakeholders
all factors influencing the firm’s ability to create value. The latter has the purpose to
tell a part of the so-called “value creation story” (IIRC 2013a, p. 9) and to provide
specific information dealing with a particular kind of capital (i.e. financial,
manufactured, intellectual, social and relationship, human and natural).
Starting from these assumptions, the aim of this chapter is to explore the
potential role of the connectivity of information in IR. In particular, it will be
investigated the relationship between an Integrated Report and the several partial
reports which are at the basis of its construction. To this purpose, the following
section describes the informative role of the main partial reports that can be drawn
up by an organization. The analysis of each report properly focuses on the
components of the connectivity of information identified in the IR Framework.
Then, the third section proposes three different approaches that can be used to
combine the information included in the partial reports. In particular, the cases of
some Italian companies are discussed in order to illustrate each of these approaches.
Finally, the fourth section discusses the final remarks.

4.2 The Informative Role of the Partial Reports

A shared and comprehensive taxonomy of all possible organizational reports does

not exist. Thus, to the purpose of this chapter, the partial reports that have been
considered are those specified by the International Integrated Reporting Council
(IIRC) in the Discussion Paper in 2011 (IIRC 2011, p. 6), namely Financial
Statement, Management Commentary, Social and Environmental Report, Corpo-
rate Governance Report, and Intellectual Capital Report. According to the IR
Framework, these reports are able to assess all the various forms of capitals
(IIRC 2013a, p. 10). Moreover, they are heterogeneous not only due to the infor-
mation provided but also because some are mandatory and others are voluntary.
62 S. Paternostro

In the following sub-sections, each partial report will be firstly analysed in its
main features and functions. Then, the focus will be on how these reports address
the components of the connectivity of information identified in the IR Framework,
with particular reference to the content elements, time, capitals, financial and other
information, quantitative vs qualitative information.

4.2.1 The Financial Statement

The Financial Statement is a mandatory report with a content that depends on

specific accounting regulation systems. However, in the attempt to describe the
informative content of this report, here the International Accounting Standards
Board (IASB) model has been considered as a reference since it aims at achieving
international accounting harmonization and its adoption is mandatory in a large
number of European countries. The IASB Conceptual Framework (IASB 2010a,
p. 21) states that the aim of the Financial Statement is “to provide financial
information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing
resources to the entity”. According to the IAS standard n.1 (IASB 2011), the
Financial Statement should include the following documents: a statement of finan-
cial position; a statement of profit or loss and other comprehensive income for the
period; a statement of change in equity in the period; a statement of cash flow in the
period; notes; and comparative information in respect to the preceding period. In
summary, the main information requested deals with: assets, liabilities, equity,
income and expenses, contributions by and distributions to owners in their capacity
as owners, and cash flows.
In terms of content elements required in the IR Framework, the Financial
Statement only provides information on performance by the determination of profit
and cash flows. Although Financial Statement contributes to giving an
organization’s overview as requested in the Framework, this overview is limited
to the financial capital. As widely acknowledged (Kaplan and Norton 1996),
quantitative financial information is oriented to the short term period and is not
outward-looking. Thus, the Financial Statement is not able to provide a compre-
hensive picture of all the value creation drivers.

4.2.2 The Management Commentary

The Management Commentary is a document aimed at completing the information

of the Financial Statement by using a more narrative approach. While its publica-
tion is mandatory, the structure it can assume is generally flexible. Because of this
flexible nature, it is difficult to illustrate its content. In this sense, a possible
reference may be found in the IFRS Practice Statement about Management Com-
mentary published by IASB in 2010. Its adoption is not mandatory but it represents
a framework for the presentation of the Management Commentary, which is related
4 The Connectivity of Information for the Integrated Reporting 63

to financial statements that have been prepared in accordance with IFRS (IASB
2010b). In this framework, the Management Commentary is a narrative report that
provides “a context within which to interpret the financial position, financial
performance and cash flows of an entity” (IASB 2010b, p. 5). The main elements
to be considered are: the nature of business; management’s objectives and the
strategies for meeting those objectives; the most significant resources, risks and
opportunities; the results of operations and prospects; the critical performance
measures and indicators that management uses to evaluate performance against
stated objectives.
This report shows a greater informative potential than the Financial Statement
due to its complementary function. The crucial elements indicated in the IFRS
document (IASB 2010b) allow to provide information about several of the content
elements specified in the IR Framework, namely the organization’s overview,
opportunities and risks, strategy and resource allocation, business model, perfor-
mance, and future outlook. In particular, the provision of performance indicators
and forward-looking information is able to bridge time horizons, allowing the
analysis of “past to present” value creation, and also the connection with the future
as required in the IR Framework (IIRC 2013b, p. 5). Therefore, in terms of capitals,
the Management Commentary provides information both on financial capital and
manufactured capital since it contains financial data, as well as operative data.
Notwithstanding, recent research has showed the limits of the Management
Commentary (or the narrative part of the annual report). Firstly, it is often used as
an “impression management” practice (Stanton et al. 2004). Secondly, some studies
shed light on the gaps between the suggestions of the IFRS Practice Statement and
the actual content of the reports realized by the organizations (Argento and Di
Pietra 2010).

4.2.3 Social and Environmental Report

The Social and Environmental Report (also referred to as a Sustainability Report if

the approach is more oriented towards sustainable development) can be described
as a report through which an organization communicates the effects of its decisions
and behaviours to the stakeholders in a well-defined social context. Many scholars
(Medawar 1976; Ramanathan 1976; Guthrie and Parker 1989; Woodward et al.
1996; Ogden and Watson 1999; Toms 2002; Solomon 2007) have studied social
accounting using heterogeneous approaches such as: legitimacy theory, political
economic theory, agency theory, risk society theory, stakeholder theory,
contractualism, and the democratic approach. The same variety is found in practice
due to the voluntary nature of the report and its flexibility. In the attempt to
standardize these reports and to avoid self-referentiality, in 2002 the Coalition for
Environmental Responsible Economies (CERES) published the guidelines Global
Report Initiative (GRI), which have achieved worldwide diffusion. In the online
database of the GRI, there are 12,342 reports registered in compliance with the
guidelines. In 2013, an updated version of the guidelines was published (GRI4). In
64 S. Paternostro

this section of the chapter, this last version will be used as a reference for a brief
overview on the content of the Social Report. According to GRI4 (GRI 2013), the
content of a Social and Environmental Report should deal with: strategy and
analysis, organizational profile, identified material aspect and boundaries, stake-
holder engagement, report profile, governance, ethics and integrity, and indicators.
The indicators regard both economic, environmental and social aspects.
The informative potential of the Social and Environmental Report according to
GRI4 is huge, allowing the provision of information about each of the content
elements of the IR Framework. Only the business model is not fully described
according to what the IR Framework prescribes. The past is considered through the
request for comparability of results over time, while the future is considered in the
strategy and analysis section of the report. The information is mainly non-financial
and is both quantitative and qualitative. In terms of capitals, the Social Report can
describe the social and relationship capital and the human and natural capitals.
Notwithstanding, the guidelines do not contemplate the integration between the
different categories of information. Consequently, they do not provide real connec-
tivity. GRI4 considers the relation between an Integrated Report and other reports,
in particular with the Sustainability Report, by stating: “the integrated report
interacts with other reports and communications by making reference to additional
detailed information that is provided separately. Although the objectives of
sustainability reporting and integrated reporting may be different, sustainability
reporting is an intrinsic element of integrated reporting” (GRI 2013, p. 85). The
Sustainability Report is thus seen as a crucial foundation of the Integrated Report,
but it has a specific and independent (although connected) function.

4.2.4 The Corporate Governance Report

In response to many financial scandals (Lehman Brothers, Xerox, Arthur Anderson,

Enron, WorldCom, Tyco, Parmalat, etc.) that have occurred since the 1990s, in
several countries and at a global level, many reforms of corporate governance have
been realized: Cadbury Committee in the UK, Sarbanes-Oxley act in the USA, the
OECD Principles of Corporate Governance, the Vietti law in Italy, etc. Within this
context, disclosure on corporate governance has received a wide attention to the
extent that it is more and more becoming a possible way of realizing techniques of
“impression management” (Collett and Hrasky 2005).
In spite of this growing attention, at a global level initiatives aimed at
standardizing corporate governance disclosure have not been developed yet.
Indeed, the provision of corporate governance information is ruled by national
laws with different solutions, such as, a specific report with a rigid format; a specific
report with a flexible format; information included in other reports (for example, the
Management Commentary); and full, voluntary disclosure. However, in the OECD
Principles of Corporate Governance (OECD 2004), suggestions to national policy
makers aimed at developing regulatory frameworks of corporate governance are
provided. In these Principles, there is a specific section about disclosure and
4 The Connectivity of Information for the Integrated Reporting 65

transparency where it is highlighted that: “The corporate governance framework

should ensure that timely and accurate disclosure is made on all material matters
regarding the corporation, including the financial situation, performance, owner-
ship, and governance of the company.” (OECD 2004, p. 22). In particular, the
OECD principles enhance disclosure about the following topics: the financial and
operating results of the company; company objectives; major share ownership and
voting rights; remuneration policy for members of the board and key executives;
information about board members including their qualifications, the selection
process, other company directorships and whether they are regarded as independent
by the board; related party transactions; foreseeable risk factors; issues regarding
employees and other stakeholders and governance structures and policies; the
content of any corporate governance code or policy and the process by which it is
implemented.
Some information highlighted in the OECD Principles (e.g. financial and
operating results, objectives, issues regarding employees and other stakeholders)
is already included in other reports. As regarding the specific information on
corporate governance, this is able to cover one of the content elements of the IR
Framework, that is governance, and to improve the representation of the
organization’s overview. Moreover, this type of information aims at describing
the current situation of the organization, even if the disclosure of corporate gover-
nance policies can also open up a view towards the future. In terms of capitals,
disclosure on corporate governance mainly refers to the financial capital. Finally,
the information is both financial and non financial, and both quantitative and
qualitative.

4.2.5 The Intellectual Capital Report

Intellectual capital can be generically understood as the set of intangible assets

available within an organization. The lack of information on intellectual capital in
Financial Statements has long been considered one of the main causes of the loss of
relevance of these reports (Johnson and Kaplan 1987). The most internationally
shared classification of intellectual capital divides it into three sub-categories
(Edvinsson and Malone 1997; Stewart 1997; Sveiby 1997): human capital, rela-
tional capital, and structural or organizational capital. However, the methodologies
for representing intellectual capital are not agreed upon in academic literature and
in practice. Andriessen (2004) found 30 different techniques for evaluating intel-
lectual capital. Among the different methods, the frameworks provided by
MERITUM (2002) and DMSTI (2003) are considered as the most influential
(Guthrie et al. 2003; Lev et al. 2005).
The MERITUM framework is the result of a research project carried out by the
European Commission. According to this set of guidelines, the structure of an
Intellectual Capital Report should include: a vision of the firm, a summary of
intangible resources and activities, and a system of indicators (MERITUM 2002,
p. 22). On the other hand, the DMSTI framework was developed by the Danish
66 S. Paternostro

Ministry of Science, Technology and Innovation. In this framework the Intellectual

Capital Report consists of the following sections: an annual report (with key
information regarding objectives, challenges and results with respect to knowledge
resources); a company description; a knowledge narrative; an intellectual statement
model; management challenges including initiatives and indicators; and accounting
policies (DMSTI 2003, p. 49).
Therefore, with reference to the content elements specified in the IR Framework,
Intellectual Capital Report can provide information about the organization’s over-
view and external environment, strategy and resource allocation, and business
model. The Intellectual Capital Report represents the current organizational situa-
tion in terms of the stock of the available intangible resources, but it can also
provide information about future trends since intellectual capital is considered one
of the main drivers of long term financial performance (Abeysekera 2006).
As for the capitals, this report mainly refers to the intellectual, relationship, and
human capitals. It mainly includes non-financial information, both quantitative and
qualitative.

4.2.6 The Partial Reports as a Source of Information

for the Integrated Report

A summary of how each partial report deals with the components of the connectiv-
ity of information (i.e. content elements, time, capitals, financial and other infor-
mation, quantitative and qualitative information) is shown in Table 4.1. From a
comparative analysis of the informative potential of the reports, it seems clear that a
comprehensive vision of the five components is possible only by taking into
account all the partial reports.
The partial reports represent a source of information for preparing an Integrated
Report. Through the various kinds of information they provide, two guiding
principles of the IR Framework are satisfied, namely stakeholder responsiveness
and completeness. As for stakeholder responsiveness, the IR Framework states: “An
integrated report should provide insight into the quality of the organization’s
relationships with its key stakeholders and how and to what extent the organization
understands, takes into account and responds to their legitimate needs, interests
and expectations” (IIRC 2013a, p. 19). Each report meets specific information
needs derived from different stakeholder categories. For instance, the Financial
Statement satisfies primarily the interest of providers of capital, while the Social
and Environmental Report specifically meets the needs of a broader range of
stakeholders including, for example, the mass media, non-profit organizations and
the local community. Referring to completeness, the IR Framework claims that: “A
complete integrated report includes all material information, both positive and
negative” (IIRC 2013a, p. 22). In this sense, each report stresses a particular aspect
of the organizational activity, and only by collecting all the information they
provide it is possible to consider all the material dimensions. If each partial report
is considered separately it is difficult for them to fully convey their potential in an
4 The Connectivity of Information for the Integrated Reporting 67

Table 4.1 The informative potential of partial reports according to the components of the
connectivity
Quantitative
Financial vs
and other qualitative
Content elements Time Capitals information information
Financial Performance and overview Past Financial Financial Quantitative
statement of the firm and
present
Management Potentially all content Past, Financial and Financial Quantitative
commentary elements present manufactured and other and
and information qualitative
future
Social and Potentially all content Past, Social and Mainly Quantitative
environmental elements present relationship, other and
report and human and information qualitative
future natural
Corporate Organization’s overview Past Financial and Financial Quantitative
governance and governance and human and other and
report present information qualitative
Intellectual Organization’s overview Past, Intellectual, Mainly Quantitative
capital report and external environment, present relationship other and
strategy and resource and and human information qualitative
allocation and business future
model

integrated logic due to the lack of connectivity between reports and between the
information they present.
Connectivity is also linked to two other principles of the IR Framework, namely
materiality and conciseness. The former is related to the possibility to “influence the
assessments of the primary intended report users with regard to the organization’s
ability to create value over the short, medium and long term” (IIRC 2013a, p. 21).
Materiality is ensured only if the information is interpreted through a complete and
integrated vision of the value creation story which allows to explain the main
drivers of performance. On the other hand, conciseness refers to the necessity of
avoiding redundant information (IIIRC 2013a, p. 21). Indeed, the information
included in a partial report can be significant in relation to the specific aims of
that document, but it may not be useful for explaining a company’s ability to create
value in the long term, and so may not be interesting to include in an Integrated
Report.
In particular, the ways in which partial reports can be combined to construct an
Integrated Report will be discussed in the following section.
68 S. Paternostro

4.3 Three Possible Approaches to the Construction

of an Integrated Report

The level of connectivity of information in the construction of an Integrated Report

depends on the ways in which the partial reports are combined. In particular, in this
chapter it is argued that three different approaches can be followed during this
process: a “weak” aggregation (Fig. 4.1), a “strong” aggregation (Fig. 4.2), and an
“integration” in a narrow sense (Fig. 4.3). To better explain the main differences
between these approaches, in the following sub-sections examples from Italian
companies will be used to highlight the main features of different reporting
practices.1 The choice to focus on the Italian context is due to the fact that Italy is
one of the most active countries in the adoption of the IR Framework. This is
witnessed by Italy’s strong presence in the Pilot Program of the IIRC. Indeed,
among the 88 organizations included in the list published online, eight are Italian.
Only the United Kingdom, Netherlands and Brazil have more organizations than
Italy involved in the Pilot Program.

4.3.1 A Weak Aggregation Between the Partial Reports

Within the weak aggregation approach, the Integrated Report is constructed starting
from a main partial report which the organization ‘enhances’ simply adding other
information perceived as secondary (Fig. 4.1). Typically, there are two possibilities.
In a first case, the Integrated Report derives from the Financial Statement that is
‘enhanced’ including social and environmental information. In a second case, the
Integrated Report is instead constructed on the basis of the Social and Environmen-
tal Report to which further financial information is aggregated.
Actually, the final report resulting from this aggregation cannot be considered as
a real Integrated Report for various reasons. First of all, it does not respect the
principle of completeness because the focus remains the same as the original main
report (financial or social). Secondly, there is no connectivity between information
that is only added without any process of integration. This weak approach to the
construction of the Integrated Report could be followed by an organization that
aims at implementing gradually the report or that is adopting a mere technique of
communication strategy.
The examples provided for this approach are the cases of Sorgenia and Guna.

1
The cases selected for this chapter have been conducted within a broader research project to
which the author is currently taking part. Here, only some evidence has been presented in order to
support the specific aim of the chapter. The research has been carried out through qualitative
content analysis applied to the organizational reports of each company, available on their institu-
tional websites.
4 The Connectivity of Information for the Integrated Reporting 69

Fig. 4.1 A “weak” Secondary

aggregation between partial information
Secondary
reports information

Enhanced
Main
Main Report Report
Main Report

Fig. 4.2 A “strong”

aggregation between partial
reports Partial report A

Partial report A

Aggregated
Partial report B Report
Partial report B

Partial report C
Partial report C

Fig. 4.3 Integration in a

narrow sense
Partial report A

Integrated
Partial report B Partial report D
Reporting

Partial report C
70 S. Paternostro

4.3.1.1 Sorgenia2
Sorgenia is an Italian group operating in each stage of the energy supply chain. The
practice of IR began in 2010 with the first Annual Report which included a section
dedicated to the “Company, Environment and Community”. This Annual Report
appears as a typical Italian Financial Statement (Accounts and Management Com-
mentary) with the addition of some information about the external society and
environment. The structure of the report is simple and it contains: some preliminary
information about the group, the Report of the Board of Directors on the perfor-
mance of the group and of the parent company, and the Accounts. The Report of the
Board of Directors is a Management Commentary consisting in four sections:
background information, results of main business activities, other relevant infor-
mation (included some information about risk and governance), and the social and
environmental section. The length of the social and environmental section is about
the 23 % of the report. Between the financial and non-financial information there is
no integration and the sustainability section represents only a supplement to the
main report.
In 2011 the structure of the Annual Report underwent some changes. The
sustainability section (called the “Report on the Value Generated”) became an
independent section from the Management Commentary and it was prepared
according to GRI guidelines. The length of this section was still about the 23 %
of the Annual Report. The structure of the 2012 Annual Report is the same as the
previous version.
From the analysis of these reports it emerges that the connectivity of information
is quite low, even though the provision of both financial and social-environmental
information (e.g. distributed value, information about employees and CO2
emissions) in the preliminary section stresses the multidimensionality of the
company.
In the case of Sorgenia, the Financial Statement has been “enhanced” by adding
social and environmental information that, however, does not allow to understand
how social and environmental aspects affect the organizational capacity to create
value in the long term.

4.3.1.2 Guna3
Guna is a company operating in the production and distribution of homeopathic
medicines. The reporting strategy of Guna is quite different from that one of
Sorgenia. In 2009 Guna started the practice of social accounting, publishing the
first edition of its Social Report. In 2010, it realized an Integrated Report, derived
from the practice of social reporting. The structure of the report is quite original and
it includes the following sections: introduction; understanding the world of Guna;
corporate social responsibility activities and stakeholder relationships; negative

2
The Annual Reports of Sorgenia are available at: http://www.sorgenia.com/sorgenia-the-sensi
ble-energy/investor-kit/annual-reports/
3
Guna’s Integrated Reports are available at: http://www.guna.it/mondoguna
4 The Connectivity of Information for the Integrated Reporting 71

results and future priorities; financial statement (with management commentary);

and attached documents. The construction of the Integrated Report based on the
approach of corporate social responsibility is clear in its introduction, in which the
report is presented as a stage in implementing a social responsibility strategy. The
structure is innovative, above all, because it includes a section about negative
results, which confers reliability to the report that is tailored to the specific
characteristics of the firm (no particular guideline is adopted). The financial state-
ment and management commentary (taking up about 22 % of the report) provide the
information that “enhances” the content of the Social Report. They are at the end of
the Integrated Report without be linked to the other sections. The structure of the
2011 report maintains the same features but the financial section is larger (about
27 % of the report).
Therefore, Guna’s Integrated Report is actually an “enhanced” Social and
Environmental Report through which the company, that has a strong commitment
to social responsibility, launched the message that its strategy does not consider the
financial dimension as being separate from the social dimension. However, the
connectivity of information is low because there is no real integration between
social and financial information.

4.3.2 The Strong Aggregation Between the Partial Reports

Within the strong aggregation approach, the Integrated Report derives from the
aggregation of a number of partial reports (Fig. 4.2). Unlike the first approach, in
this case there is not a “main” report to which secondary information is added, but
instead there is an equilibrium between the different reports. In this approach the
partial reports do not lose their identity and they can be easily recognizable as part
of the Integrated Report. Thus the partial reports do not coexist with the Integrated
Report, but the latter contains them. The information that is derived from the
different reports is not interconnected and the Integrated Report does not provide
a comprehensive synthesis.
The resulting report is a document rich of information that however does not
stress the interdependences affecting the value creation process. In this sense, this
report remains at a level of “aggregation”, within which the whole is equal to the
sum of the parts.
The example provided for this second approach is Sabaf.

4.3.2.1 Sabaf4
Sabaf produces components for gas cooking equipment. The company has pro-
duced a sort of Integrated Report (called Annual Report) since 2005. From 2005 to
2010 the report included: an identity statement, a governance report, a sustainability
report, a management commentary and a financial statement. From the 2011

4
The annual reports of Sabaf are available at: http://www.sabaf.it
72 S. Paternostro

edition, the structure changed, showing an evolution towards a format that is more
similar to the IR Framework. Indeed, the report contains sections on: business
model and strategic approach; international dimension and markets of reference;
corporate governance; risk management; compliance and remuneration; social and
environmental sustainability; management commentary; financial statement; and
remuneration report.
Until the 2010 edition, the Annual Report was a typical “aggregated” report
made up of the different partial reports (each with a balanced length) with low
connectivity between the various sources of information. The only synthesis
between the different information was provided by some highlights regarding
financial, intellectual capital, and social and environmental indicators presented
in the introduction of the report. Instead, from 2011 the level of connectivity has
increased due to the section regarding the business model of the organization. In
this section, the interdependencies related to the drivers of performance are fully
explained. The mission, vision and values of the company are linked to the
productive activity by the four pillars of the Sabaf business model: sustainability,
continuous learning, quality and internationalization.
Sabaf’s reporting system shows an evolution towards stronger connectivity even
though, apart from the section on business model, the rest of the Annual Report
remains a sum of partial reports.

4.3.3 Integration in a Narrow Sense

The approach that best promotes connectivity between information is the one that
relates to the so-called integration in a narrow sense. In this approach, the partial
reports are only a means to provide information that is interpreted differently when
it “enters” the Integrated Report (Fig. 4.3).
In this case, the sections of the Integrated Report are not identified by the partial
reports and not all the information included in the partial reports is inserted in the
Integrated Report. Indeed, the principle of materiality requires that only the infor-
mation relevant to describing the value creation process is reported. Moreover, for
the principle of conciseness it is necessary to avoid overload (IIRC 2013a).
Between the partial reports there are some overlaps (for example, between the
Social Report and the Intellectual Capital Report, or between the Management
Commentary and the Governance Reports, etc.) which can create an excessive
amount of information if the Integrated Report is a simple sum of the various
parts. Therefore, to respect the principle of conciseness (IIRC 2013a, p. 21) the
information contained in partial reports is assimilated within the Integrated Report
without identifying the original source.
Only in this manner, the Integrated Report and the partial reports are fully
autonomous and they have different functions as required by the IR Framework.
Accordingly, the Integrated Report provides a holistic and global evaluation of the
value creation ability of the company, while the partial reports respond to specific
information needs relating to particular aspects of the organizational activity.
4 The Connectivity of Information for the Integrated Reporting 73

Despite a great deal of experimentation, the development of an actual

“integrated” reporting system in organizational practice is still in an early stage
(IIRC 2013a, p. 1). Therefore, it is difficult to find a clear example of an organiza-
tion which approaches IR in this broader perspective. In the Italian context, two
significant cases are Cassa Rurale Treviglio and Terna.

4.3.3.1 Cassa Rurale Treviglio5

Cassa Rurale Treviglio is a cooperative bank that in 2011 started to adopt the
Integrated Report. Since the adoption of this report, the bank decided not to
continue publishing its Social and Environmental Report as though the Integrated
Report was a substitute for it. Actually, the structure of the latter is absolutely
different than the previous edition of the Social Report; therefore, it fully represents
a new kind of report for the bank.
The Integrated Report consists of 12 sections: mission and strategy; governance
and human resources; presence in the territory; bank activity; members of the
cooperative bank; support of local community; environmental policies and
behaviours; relations with cooperative banking system; financial analysis; financial
statement; board of statutory auditor report; board and composition of other bank
bodies.
The Integrated Report is not a sum of reports but an original synthesis deriving
from various sources and in which many sections are fully cross-dimensional. The
choice to create this kind of report is explained in the introduction by the President
of the bank as a decision that is consistent with the values of the organization and
aimed at integrating the economic, social and environmental aspects within the
spirit of a cooperative bank. The connectivity between heterogeneous information
is pursued in almost every section combining different elements. For instance, in
the section regarding the analysis of the results, the added value that was generated
and distributed among the stakeholders is calculated. Again, in the section about the
bank activity, the description of anti-crises policies for the families’ benefit is
included. Finally, in the section regarding the bank’s presence in the territory
there is a mix of financial strategy information and information about social support
for the local community.

4.3.3.2 Terna6
Terna is a company operating in the energy sector and it participates in the Pilot
Program of IIRC. Terna does not publish an Integrated Report but it uses its website
for the so-called Integrated Reporting Project. The use of technology to improve the
connectivity of information is a solution suggested both in the literature (Eccles and
Krzus 2010) and by the IIRC (2013b).

5
The Integrated Reports of Cassa Rurale Treviglio are available at: http://www.cassarurale-
treviglio.it/template/default.asp?i_menuID¼39625
6
The Integrated Report Project is available at: http://www.ternaintegratedreport2011.message-
asp.com/it
74 S. Paternostro

Terna separately publishes two main documents in its reporting system: a

financial statement (with a management commentary) and a sustainability report.
In 2011 (the 2012 version is still a work-in-progress), Terna created an online
platform within a specific website, which was based on the content elements of the
IIRC Discussion Paper (IIRC 2011): the organizational overview and business
model; strategic objectives; operating context; governance and remuneration; per-
formance; future outlook. Clicking on each of these sections, it is possible to select
links to specific parts of the Financial Statement, Management Commentary or
Sustainability Report containing information on each topic. The user can then build
a “virtual” Integrated Report and connect the information according to his/her
information needs. The choice of information is left to the user without being
driven by the company.
The solution is innovative and flexible and it could be further improved by
allowing for the creation of a sort of “customized” report that the user could also
download. In this way, the Integrated Report and the partial reports can coexist in a
reporting system in which both global and specific information needs are satisfied.

4.4 Final Remarks

This chapter has offered some reflections on the centrality of the guiding principle
of connectivity in the IR Framework, focusing on the relationships between the
Integrated Report and the several partial reports which are at the basis of its
construction. Partial reports have been here defined as all the possible reports
drawn up by an organization to represent a specific part of its value creation
process. In particular, this chapter referred to Financial Statement, Management
Commentary, Social and Environmental Report, Corporate Governance Report and
Intellectual Capital Report. These reports have been analysed according to the key-
components of the connectivity of information identified in the IR Framework (i.e.
content elements, time, capitals, financial and other information, quantitative vs
qualitative information). Connectivity can be ensured only if these components are
represented within the Integrated Report. Thus, partial reports play the important
role of providing all the needed information.
Notwithstanding, the ways in which the different partial reports are combined
can affect the actual level of connectivity of information in the Integrated Report. In
this chapter, it has been argued that three different approaches can be identified in
the process of aggregation and/or integration of the partial reports to construct the
Integrated Report, namely a “weak” aggregation, a “strong” aggregation, and an
“integration” in a narrow sense. Only the third approach allows for a real integration
of the partial reports since all the interdependencies between different information
are considered to explain the value creation process. In this case, the Integrated
Report and the partial reports can coexist in a global and integrated reporting
system. Only through the interpretation of information contained in partial reports
is it possible to have a complete vision of the multi-dimensionality of the
4 The Connectivity of Information for the Integrated Reporting 75

organization. Connectivity, through the interpretation of this multi-dimensionality,

makes the concept of integrated thinking evident, as proposed in the IR Framework.
The path towards achieving an integration, in a narrow sense, is difficult and
complex due to the fact that it entails changes in many aspects of organizational
life, from the implementation of new information systems and organizational
structures to the development of new cultural basis. For this reason, a gradual
adoption of the Integrated Report can facilitate this organizational change. In this
sense, the three approaches proposed in this chapter could be considered as three
gradual stages towards the Integrated Report.
Moreover, from the analysis of the two companies that seem to follow an
integrated approach in a narrow sense, some interesting points emerge. Firstly,
the role of technology could be very relevant as in the case of Terna. In particular,
the use of the Web could increase the level of connectivity of information giving
also the opportunity to build up “customized” Integrated Reports. Secondly, the use
of Integrated Report should not be limited only to large and complex organizations
as shown in the case of Cassa Rurale Treviglio. Indeed, the Integrated Report is not
a rigid tool but it can be adapted to the contextual features of each organization.
Although in the IR Framework the concept of connectivity is fully developed
with reference to the information needed to explain the value creation process, more
efforts could be taken to apply the concept of connectivity also to the notion of
performance. In particular, the challenges ahead for corporate reporting should lead
to the redefinition of the notion of performance in an “integrated” perspective.

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Materiality and Assurance: Building
the Link 5
Chiara Mio

Abstract
This chapter provides a comprehensive discussion of materiality and assurance
in the context of Integrated Reporting (IR). On the one hand, materiality has
gained much importance following the introduction of IR, since one of the main
objectives of this innovative form of reporting is to reach conciseness. On the
other hand, assurance may play a crucial role in conferring reliability to the
materiality determination process proposed by the International Integrated
Reporting Council (IIRC) and to the whole process of IR. This chapter provides
a discussion of the state of the art of materiality and assurance in the context of
non-financial information and, more specifically, IR. It also points out some of
the main challenges the IIRC materiality determination process will have to face
in order for companies to implement it correctly. Finally, drawing on the
peculiarities of IR, the chapter points out some issues that will have to be
discussed regarding assurance and its effectiveness. Some insights for future
development of the debate are also proposed.

5.1 Introduction

The recent debate about Integrated Reporting (IR) has pushed the academic and
practitioner discussion to focus on the issue of materiality, given that one of the
guiding principles proposed by the International Integrated Reporting Council
(IIRC) in its framework is “materiality and conciseness.” The Consultation Draft
(CD) by the Council proposes the IIRC’s materiality determination process in order
to allow companies to effectively identify material issues. Because such a process
requires a company to exercise a high degree of judgment, assurance may play a
central role in order to confer reliability to the information disclosed in the IR.

C. Mio (*)
Department of Management, Ca’ Foscari University of Venice, Venice, Italy
e-mail: mio@unive.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_5, 79

# Springer International Publishing Switzerland 2013
80 C. Mio

This chapter provides a discussion of the state of the art in materiality and
assurance, focusing in particular on the peculiarities of these concepts in the context
of IR, as compared to Annual Reports (AR) and Sustainability Reports (SR). It also
points out some issues arising in the definition of materiality by the IIRC and in the
methodology assurance providers ought to follow for IR. Finally, it proposes some
insights for future development of the debate on materiality and assurance in IR.
In more detail, the second section provides an overview of the academic litera-
ture and professional standards on materiality in the context of non-financial
information, focusing on the differences with that of financial information and on
the main standards employed (the Global Reporting Initiative (GRI) G4 and the
AccountAbility AA1000). The third section focuses on IR, discussing the material-
ity determination process proposed by the IIRC and also providing some examples
drawn from IR included in the IIRC examples database. The fourth section points
out some of the main crucial issues of the IIRC materiality determination process,
mainly deriving from the predominant/exclusive focus on providers of financial
capital, which confer to companies a high degree of judgment in identifying
material issues. Assurance may potentially represent a mechanism that may par-
tially provide a solution to such issues, thus increasing the reliability of IR. The fifth
section provides an overview of assurance in the field of non-financial information.
In particular, it discusses the main standards employed for the assurance process
(i.e. ISAE3000 and AA1000AS) and analyses the role the GRI and the IIRC assign
to assurance in the context of Sustainability and Integrated Reporting respectively.
Some examples of assurance from the IIRC examples database are also provided.
Finally, the sixth section points out some of the challenges in materiality and
assurance implementation that will need to be tackled in the future and which, to a
large extent, derive from the peculiarities of IR. In the context of IR, in fact, it is not
possible to rely on quantitative thresholds to determine materiality, the materiality
determination process is to a large extent subjective, IR provides future-oriented
information, performance targets play a relevant role and the boundaries of the
report are difficult to determine. Given these peculiarities and the related
challenges, some insights for future development of the debate are also presented.

5.2 Materiality: The State of the Art

The first definitions of materiality were proposed in the context of financial

reporting, since the first reports disclosed mainly financial information (for a
review, see Messier et al. 2005). In accordance with the user utility theory (see
Faux 2012), a piece of information is considered to be “material” if its omission or
misstatement would influence the economic decision made by the report’s user (i.e.
the investor). If the comparison is kept at a broad enough level of analysis, it is
possible to identify some similarities between definitions in the financial and
non-financial reporting contexts (see Dhaliwal et al. 2011). According to Account-
Ability (2006), non-financial information materiality requires that the Assurance
Provider states whether the Reporting Organization has included in the report the
5 Materiality and Assurance: Building the Link 81

information about its sustainability performance required by its stakeholders for

them to be able to make informed judgments, decisions and actions. This definition
relies on the concept of the “decision usefulness of the information for the intended
report’s user”. Mutatis mutandis, the definition is fairly similar to those found for
the financial context. AccountAbility (2006) focuses on “stakeholders” rather than
“investors” and “judgments, decisions and actions” rather than “investment
decisions”. Nevertheless, the underlying criterion is the same both for the financial
and the NFI contexts: the decision usefulness of the information.
Despite this apparent homogeneity, digging deeper into the definitions and into
the actual implementation of the materiality concept, some crucial differences and
consequences arise. The International Standard on Accounting (ISA) 320 mentions,
among the main characteristics of materiality definitions in financial reporting
frameworks (ISA 2009), that “judgments about materiality are affected by the
size or nature of a misstatement or a combination of both”. In the context of
financial information, the quantitative threshold is very important, as it allows the
assessment of materiality by making a comparison between specific financial
performance items, such as assets or revenues. This approach is particularly useful
to investors, who are interested in understanding the impact of material issues on
the financial capital of a company.
Some authors (Tuttle et al. 2002; Lydenberg 2012) and standards (AASB 2010)
attribute a predominant importance to thresholds in determining materiality. This
methodology is particularly effective (because it simplifies the materiality assess-
ment process) for audit firms, which do not have a deep knowledge of the company
and of its operations and that must rely on quantitative methods to proxy for
materiality as they can only rely on accounting numbers. Such quantitative
thresholds employed for defining financial materiality cannot be employed for
non-financial information (see Guthrie and Parker 1990) for various reasons.
First, non-financial information captures a wider concept of firm value as compared
to financial information. Therefore, when materiality is assessed, the relationship
between the issue to be assessed and firm value as represented by non-financial
information is more difficult to determine, as non-financial pieces of information
present many intersection levels in their definition. Second, even if the impact of a
certain issue on the firm value can be determined, in the field of non-financial
information it is not possible to employ a unique threshold, because the issues
considered may have an impact on different capitals. Non-financial information is
often relevant for many stakeholders, which have different and non-aligned
interests (see Berthelot et al. 2003; Brammer and Pavelin 2004; Patten 2002). To
rely only on financial capital would be a satisfactory approach only for one specific
category of stakeholder (investors). Third, non-financial information cannot always
be expressed in monetary terms. Fourth, non-financial information is often long-
term oriented, meaning there may be some issues that are material despite not
having an immediate impact on the item employed as a threshold. The long-term
impact may be evaluated, but necessarily relying on models, which would need to
make strong assumptions. Fifth, non-financial information is often derived from a
82 C. Mio

life-cycle approach, therefore in order to properly assess it, information about

events and phenomena that are external to the company would be needed.
While non-financial information refers to objects that are often not traded on a
market, financial information refers to a market in which goods and services are
being exchanged and often have a well-defined price. Conversely, objects
represented by non-financial information cannot be “priced” in a market, simply
because an efficient market does not exist. Is it possible to set a quantitative
threshold to determine how many deaths in the workplace are tolerable? How
much is a death in the workplace worth? How much is damaging the reputation
of the firm worth? This is impossible to define, at least by relying on an active
market. More precisely, quantitative thresholds may be determined even for non-
financial information, but their calculation would have to rely on such heavy
assumptions that would make the threshold too discretionary, and these
assumptions would affect both values and methodology. Since a quantitative
value does not exist, it is not possible to apply the thresholds as in the context of
financial information, making it more difficult to separate material from non-
material information. As will be discussed in depth below, these difficulties in
defining thresholds for non-financial information have led assurance providers to
mainly focus on the assurance of the stakeholder engagement and of the materiality
determination process, rather than on the definition of a threshold.
The lack of a clear definition of materiality in the context of non-financial
information, also due to the issues described above, has not represented a major
problem for sustainability reports, since the most widely employed standards do not
focus on the conciseness of the reports, but rather on their completeness (see GRI
2013a, b). With the introduction of IR into the debate, the issue of how to define
materiality gained more relevance. The IIRC argues that “a matter is material if it is
of such relevance and significance that it could substantively influence the
assessments and decisions of the organization’s highest governing body, or change
the assessments and decisions of intended users with regard to the organization’s
ability to create value over time” (IIRC 2013a, b, c, p. 21). The IIRC introduces the
concept of usefulness not only for the external users of the report but also for the
“organization’s highest governing body”. This is coherent with the attention the
IIRC devotes to the process of integrated reporting, which ought to provide relevant
information for the company decision makers and, in some cases, also shape the
corporate governance of the company.
Besides the one proposed by the IIRC, which will be discussed in more detail in
the following section, the other two main standards that provide some guidance on
the issue of materiality are the GRI Guidelines and the AccountAbility AA1000.
The latest version of the GRI guidelines (G4) defines information as “material”
when it reflects the organization’s significant economic, environmental, and social
impact or when it would substantively influence the assessments and decisions of
stakeholders (“relevant topics are those that may reasonably be considered impor-
tant for reflecting the organization’s economic, environmental and social impacts,
or influencing the decisions of stakeholders, and, therefore, potentially merit
5 Materiality and Assurance: Building the Link 83

inclusion in the report. Materiality is the threshold at which Aspects become

sufficiently important that they should be reported” GRI 2013a, b, p. 17).
By considering both internal (i.e. the organization’s mission) and external (i.e.
influence of the organization on other entities) factors, companies ought to define
whether information is material or not, following two parameters: influence on
disclosed assessments and disclosures, and significance on economic, environmen-
tal and social impacts. In the final part of its principles, the GRI also proposes some
tests in order to determine the significance to stakeholders and the significance to
the organization, thus making it clear that both perspectives ought to be considered
(“in defining material Aspects, the organization takes into account the following
factors: Reasonably estimable sustainability impacts, risks, or opportunities (. . .);
Main sustainability interests and topics, and Indicators raised by stakeholders (such
as vulnerable groups within local communities, civil society); The main topics and
future challenges for the sector reported by peers and competitors; Relevant laws,
regulations, international agreements, or voluntary agreements with strategic sig-
nificance to the organization and its stakeholders (. . .)” GRI 2013b, p. 12). The
GRI—which has also proposed the Sector Supplement—has the merit of framing
the issue of materiality in a sector-specific way. According to Eccles et al (2012),
this is an aspect that ought to be improved in the current reporting framework:
“developing sector-specific guidelines on what sustainability issues are material to
that sector and the Key Performance Indicators (KPIs) for reporting on them would
significantly improve the ability of companies to report on their ESG performance”
(Eccles et al. 2012, p. 13).
AccountAbility established a standard for sustainability disclosure under its
AA1000 framework, updated in 2008. AA1000 (2008) determines some criteria
that ought to be met when tackling the issue of materiality. In particular, it proposes
a five-step test in order to determine materiality (AccountAbility 2008). This is
aimed at providing companies with some more information, compared to the
definitions already discussed above. The first test is “direct short-term financial
impacts”. Some non-financial performance indicators (such as carbon emission)
may have a financial impact in the short term and, for this reason, need to be
disclosed. The second test is “policy-related performance”, requiring the disclosure
of those issues that do not have any impact on short-term financial performance but
that are related to policies the company has agreed upon. The third test is “business
peer-based norms”. According to this test, information that the company’s
competitors deem to be material ought to be considered material by the company
as well. The fourth test is “stakeholder behaviour and concerns”, which considers
issues that will impact stakeholders’ behaviour as material. This test is fairly similar
to the definitions proposed following the user utility theory, and is probably the
least insightful of the five tests proposed by AccountAbility (2008), because it does
not add much to the indications provided by the materiality definitions discussed
above. Finally, the fifth test (“societal norms”) requires companies to disclose
issues or matters that are embedded in regulations or that will likely become
regulated in the future. While the GRI Guidelines framework is mostly
“principles-based”, the AccountAbility (2008) framework is “process-based”.
84 C. Mio

Thus, it focuses on the relationship of the company with its stakeholders. On the one
hand, this “process-based” approach is positive because it focuses on the
company’s peculiarities to the highest extent. On the other hand, it lacks
“standardization” of the process outcome.

5.3 Materiality in Integrated Reporting

Before the introduction of IR, the debate on materiality in the context of non-
financial information was certainly less fierce (see Deloitte 2012; IFAC 2011). The
issue was taken into consideration by AccountAbility (2008) and GRI, but it did not
have the relevance it has gathered today. The GRI proposed a list of indicators and
issues the company ought to report on. The more of these indicators a company
manages to cover, the higher the (perceived) report’s robustness and completeness
will be. The problem with this approach is that the indicators may be considered a
fixed list to be complied with, with only few adjustments done according to the
materiality principle. This is particularly evident in the comprehensive version of
the G4 GRI guidelines, which requires all the proposed elements to be disclosed.
Inevitably, in following this approach the issue of materiality loses some relevance,
despite being listed among the “Reporting Principles for defining Content” by the
GRI. Conversely, IR, especially in the IIRC framework, confers a central role to
materiality. The IR “conciseness” is one of the key features stressed by the
framework, and to gather a clear and accepted definition of materiality is, in the
IR context, fundamental and much more important than it was for previous
standards.
The latest (and probably the most complete) framework for the identification of
material issues is provided by the IIRC (2013c) in the “Background paper for
<IR>” about materiality. The IIRC (2013c) stresses the importance of materiality
since it is one of the main principles that ought to guide the creation of an IR.
According to IIRC (2013c), the process leading to the definition of materiality
“requires a high degree of judgment and involves numerous strategic
considerations. This requires senior management and those charged with gover-
nance collectively to exercise judgment to determine which matters are material for
the purposes of <IR> and to ensure that they are appropriately disclosed, given the
specific circumstances of the organization, including the application of generally
accepted measurement and disclosure methods as appropriate” (IIRC 2013a, b, c,
paragraph 1.13).
The IIRC takes a step further towards the identification of who the intended users
of IR are and, as a consequence, to whom a certain matter or information ought to
be considered material in order to be disclosed in the report. According to IIRC
(IIRC 2013a, b, c), “while the communications that result from <IR> will be of
benefit to a range of stakeholders, they are principally aimed at providers of
financial capital, in order to support their financial capital allocation assessment”
(IIRC 2013a, b, c, p. 8). This clarification is embedded into the definition of
materiality, which is the following: “a matter is material if it is of such relevance
5 Materiality and Assurance: Building the Link 85

and importance that it could substantively influence the assessments of providers of

financial capital with regard to the organization’s ability to create value over the
short, medium and long term” (IIRC 2013a, b, c, p. 21). As argued by the detractors
of the user utility theory (see Faux 2012), there may be issues relevant to certain
stakeholders but, at the same time, not relevant to other stakeholders. This creates a
problem for the organization. The decision made by the IIRC to choose the
“providers of financial capital” as the main intended users of the IR helps in
reaching a clearer framework that can be useful for companies and represents a
necessary and “unavoidable” first step towards the identification of material infor-
mation. As argued in the chapter by Fasan, IR may be considered an evolution of
AR, therefore focused on the providers of financial capital (investors) rather than on
the wider category of stakeholders. This makes it easier for companies to reach a
definition of materiality in IR and AR as compared to in SR.
The framework proposes three steps in the “<IR> materiality determination
process”. The first is to identify relevant matters for inclusion in the integrated
report, defined by the IIRC as “those matters that have a past, present or future
effect on the organization’s ability to create value over time”. In order to identify
such issues, the management would need to consider: the organization value
drivers, matters identified during stakeholder analysis and engagement and other
factors internal/external to the organization. It seems clear that this activity depends
on a full understanding of the business model of the firm, which is defined by the
IIRC (2013b) as “the chosen system of inputs, business activities, outputs and
outcomes that aims to create value over the short, medium and long term” (IIRC
2013b, p. 6). The IIRC (2013b) also specifies that: “features that can enhance the
effectiveness and readability of the description of the business model include (. . .)
identification of critical stakeholders and other dependencies, key value drivers and
important external factors” (IIRC 2013b, p. 13). The process of identifying such
“relevant matters” touches upon many aspects of the company business model and
strategy and therefore needs to be tackled by the top managers of the organization.
Also particularly important is the long-term/short-term orientation of the company,
because short-term oriented companies are not likely to disclose much ESG infor-
mation. This approach is tightly linked to the belief (which is in some ways too
optimistic) that the market will reward long-term oriented companies. Unfortu-
nately, actual business cases show how often short-term oriented companies survive
and make profit, since the market and consumers do not punish their short-termism.
The second step is the determination of the importance of relevant matters, in
order to prioritize issues. The IIRC (2013c) proposes two dimensions in order to
assess importance: magnitude of the effect (for matters that have occurred, cur-
rently exist or will occur with certainty); magnitude of the effect and likelihood of
its occurrence (for matters where there is uncertainty about whether or not the
matter will occur). Since the most important phase is the determination of the
potential magnitude of the effect on the organization’s ability to create value over
time, the IIRC proposes some factors which companies ought to consider: quanti-
tative and qualitative factors; the financial, operational, strategic, reputational and
86 C. Mio

regulatory perspective of the effect; the area of the effect; and the time frame of the
effect.
Finally, the third and final step requires the prioritization of material matters,
based on their importance. Therefore IR, as compared to AR, includes other capitals
and stakeholders in the framework, but at the end it is the company that needs to
prioritize the issues derived from this inclusion. Following this approach, there are
material issues generally speaking and material issues according to the company.
The risk is that the company (maybe because of low stakeholder engagement
activity) does not recognize the materiality of some issues, and thus does not
disclose them. Following a more sustainability-oriented approach, the IIRC
would need to require the disclosure of some elements regardless of the materiality
assessment by the company, which is subject to great subjective judgment and to
possibility of mistake or misconduct.
Among the pilot companies now adopting the IIRC framework, some good
examples can be found; the IIRC website provides an “examples database” which
includes some IR examples, intended to provide companies with a range of
emerging reporting practices, with the selection being reviewed by the IIRC’s
Secretariat and Technical Task Force. Among the reports flagged for the “Concise-
ness, reliability and materiality”, there is the Absa IR. According to the IR, the five
material issues that have been identified stemmed from the consideration of: what
stakeholders consider important; core issues and future challenges; relevant laws
and regulations; key organizational values, policies, strategies, goals and targets;
significant risks; critical factors for enabling organizational success; and core
competences of the organization. Some performance indicators have been assured
on a limited assurance basis by two audit firms. The material issues identified are
the following: sustainable financial viability; process and systems effectiveness;
customer experience; our people; and economic equity. Another interesting report
included in the examples database is the IR by Hyundai, which classifies the issues
according to two dimensions: external relevance and internal relevance. The issues
have been divided into three categories: key reporting issues (high external and
internal relevance); main reporting issues (medium external and internal rele-
vance); issues to be monitored (low external and internal relevance). Each issue
is listed below the Hyundai matrix, with reference to the page of the IR where that
topic is discussed.

5.4 Materiality and Assurance in Integrated Reporting

According to the IIRC framework, an issue is material if it could substantively

influence the assessment of providers of financial capital with regard to the
organization’s ability to create value (IIRC 2013a, paragraph 3.23). As recognized
by the IIRC itself, the materiality determination process requires a high degree
of judgment by senior management and by those charged with governance. These
characteristics lead to the possibility for the report’s preparers to leverage on such
5 Materiality and Assurance: Building the Link 87

judgments in order to exclude some issues, which may damage the company in
terms of investors’ expectations about its ability to generate future cash flows.
Suppose three different cases. In the first, a company is deciding whether to
disclose an issue that is relevant for both investors and stakeholders. In this case,
according to the IIRC framework, the company would have to disclose the issue. In
the second case, a company is considering an issue that is relevant for investors but
not relevant for stakeholders. Also in this situation, the issue would have to be
disclosed, even if the representation of the issue, as in the first case, would be
significantly influenced by the perspective of the investors. Finally, in the third
case, a company is deciding whether to disclose an issue that is relevant for
stakeholders but not relevant to investors. In this case, according to the framework,
the issue would not have to be disclosed, given the definition of materiality.
Because of the high degree of judgment involved in this process, there is the
possibility that some issues that are material but could damage the reputation or
performance of the company if disclosed, could be considered not relevant for the
providers of financial capital by the management to be and could be, therefore,
excluded from the IR. Therefore, companies may employ the materiality definition
as a “shield” in order to avoid the disclosure of information that is actually relevant.
This is a serious shortcoming of IR, which may generate a significant gap between
the expectations that IR is creating and the actual completeness of information,
even if the IIRC clearly specifies that the ESG information is not to be abandoned
but rather included in the Sustainability Report. Some concerns need to be raised
about this IIRC methodology, which relies only on the investors’ perspective,
because it is based only on the good faith of the company and on its willingness
to provide an adequate disclosure of the process. In this way, the judgment on the
adequate application of the materiality principle is ultimately left to the report’s
user. And it is relevant to assess whether users are really able to assess each
company’s application of materiality, using only limited and periodic external
information.
In this context of a high degree of judgment, assurance may play a crucial role in
increasing report readers’ confidence that the materiality determination process was
properly implemented and that material issues were not excluded from the report
because of some misjudgement such as the one exemplified above. Clearly, the
assurance providers would face major challenges in determining whether an issue is
really material or not, because they lack detailed knowledge of the firm. In the
context of financial information, this problem has, to a great extent, been overcome
through the employment of thresholds, which are not applicable to IRs assurance.

5.5 Assurance: The State of the Art

This section provides a brief discussion of the characteristics of the two most
important assurance standards for non-financial information disclosure, one more
accounting-oriented than the other, which are respectively ISAE3000 and
88 C. Mio

AA1000AS. Besides this, the role GRI and IIRC assign to assurance in the context
of Sustainability and Integrated Reporting respectively will be analysed.
The International Standard on Assurance Engagement (ISAE) 3000 is a widely
recognized international standard that ensures the quality of assurance work,
including report verification as well as assurance on environmental performance,
corporate governance, internal compliance, stakeholder engagement and other
areas central to corporate responsibility. The standard was developed by the
International Federation of Accountants and is designed to guide accountants,
auditors and assurance professionals as they undertake non-financial audits. One
of the key characteristics of the standard is the distinction it introduces between
limited and reasonable assurance. A limited assurance engagement is one in which
the practitioner reduces the engagement risk to a level that is acceptable in the
circumstances of the engagement but where that risk is greater than for a reasonable
assurance engagement. Usually, limited assurance is in the form of negative
statements (i.e. “nothing suggesting that the content of the report is not reliable
has come to our knowledge”) while the reasonable assurance is in the form of
positive statement (“we found the content of the report to be reliable”). The
standard focuses on the following areas: ethical requirements, quality control,
engagement acceptance, terms of engagement, planning and performance of
engagement, the use of experts, obtaining evidence, the consideration of subsequent
events, documentation and the preparation of the assurance report.
ISAE 3000 defines materiality, coherently with previous literature and audit
standards, as the ability of the information to influence relevant decisions of
intended users (see ISAE3000 2011, paragraph A86). According to the standard,
both quantitative and qualitative factors ought to be considered in the materiality
assessment. Among the qualitative factors, the assurance providers ought to con-
sider the previous communication to users and, if applicable, the nature of observed
deviations from a control (see ISAE3000 2011, paragraph A88).
The AA1000 is a standard introduced by the Institute of Social and Ethical
AccountAbility (ISEA), which aims to provide guidelines for the assurance of
social reports and for stakeholder engagement. Such standards have been issued
with the aim to help organizations understand their responsibilities and the
consequences of their actions. There are two main standards: the AA1000APS
(Accountability Principles Standard), which focuses on the main principles that
should be followed in the reporting process, and the AA1000AS (Assurance
Standard), which deals with the assurance of sustainability reports. The
AA1000AS was introduced in 2003 as the first assurance standard for sustainability
reporting with the aim of reinforcing the credibility and quality of performance in
the sustainability field. This standard is mostly principle-based and, according to
AA1000 (2008), “it provides a means for assurance providers to go beyond mere
verification of data, to evaluate the way reporting organizations manage
sustainability, and to reflect that management and resulting performance in its
assurance statements” (AA1000 2008, p. 6).
The assurance provided according to the AA1000AS has two types: it can be
focused only on the adherence of the organization to the AA1000 AccountAbility
5 Materiality and Assurance: Building the Link 89

principles, or it can also be focused on the reliability of some specific sustainability

performance information. Similar to those for ISAE3000, assurance statements
according to AA1000AS may also have a high or low level of assurance.
The GRI G4 recommends the assurance of the report, but does not pose this as a
necessary requirement (GRI 2013a, b, paragraph 3.3). The G4 also requires the
company to report on the relationship between the organization and the assurance
provider and, in particular, it requires disclosing whether or not the highest gover-
nance body or senior executives are involved in seeking the assurance for the report.
Therefore, it poses management independence and engagement as two of the main
conditions to be met in order to reach a credible assurance. Assurance process
should be conducted by competent groups of individuals external to the organiza-
tion who follow professional standards for assurance or who apply systematic,
documented and evidence-based processes (GRI 2013a, b). Beside this, assurance
providers should be independent from the organization and therefore be able to
reach and publish an objective and impartial opinion on the report, apply quality
control procedures to the assurance engagement, conduct the engagement in a
manner that is systematic, documented, evidence-based, and characterized by
defined procedures.
Similar to the GRI G4, the IIRC framework does not require an external
assurance to be performed on the IR and the external assurance is seen as a
mechanism to increase the reliability of the report (see paragraph 3.31 of the
Consultation Draft (IIRC 2013a, b, c). Even if external assurance has been
provided, the IIRC framework makes it clear that the responsibility still is on
“those charged with governance”, who are the ones that need to exercise the
judgment. According to IIRC (2013a, b, c) “Independent, external assurance may
also provide comfort, in addition to the internal mechanisms, to those charged with
governance” (paragraph 5.20 of the Consultation Draft (IIRC 2013a, b, c). Finally,
the IIRC makes it clear that, while it does provide the reporting criteria against
which organizations and assurance providers assess a report’s adherence, it does not
provide the protocols for performing assurance engagements. It is interesting to
note that the topic of assurance is among the consultation questions proposed by the
IIRC in the consultation Draft, meaning that the issue is considered to be relevant
by the standard-setter. In particular, the questions/comments are: “If assurance is to
be obtained, should it cover the integrated report as a whole or specific aspects of
the report?” and “assurance providers are particularly asked to comment on whether
they consider the Framework to provide suitable criteria for an assurance
engagement”.
Among the reports included in the IIRC examples database, the assurance
statement of most companies refers to ISAE 3000, some companies refer to
AA1000AS, and others have decided to omit an external assurance at this stage.
The Hyundai 2012 IR has been performed according to AA1000AS, at a moderate
level of assurance. The scope of the assurance includes, among other things, the
verification of the sustainability policy, goals, initiatives, practices and perfor-
mance; the processes for defining the boundaries, focus and content of the report;
and the extent to which the principles of materiality, inclusivity and responsiveness
90 C. Mio

are adopted. The assurance statement of the Absa 2012 IR was performed by
Ernst & Young and Pricewaterhousecoopers following the ISAE3000 principles.
The assurance activity included interviews with the management, inspection of
documentation and verification of the processes Absa has in place for determining
material information. Truworths, another South-African based company, does not
include any assurance information in its 2012 IR, and it states: “at this early stage of
integrated reporting the Group has not sought external verification of the content of
the Integrated Annual Report. We are however committed to adopting an assurance
process and will initially seek assurance from the Group’s Internal Audit depart-
ment. Thereafter the intention is to move towards the independent verification of
specific elements of the Integrated Annual Report before progressing to external
assurance of the entire Report.”

5.6 Materiality, Assurance and the Value of Information

This section analyses the role of assurance for IR and, more specifically, for
materiality in the IR context. There are a number of issues both concerning
reporting companies and assurance providers that still need to be discussed and
on which academic literature may offer a significant contribution.
First of all, it is necessary to assess whether companies really need to assure their
IRs. Is the market able to distinguish reliable from non-reliable information
disclosed through IRs, even without an assurance statement? According to the
liberal perspective, the company issuing the IR takes responsibility for the fairness
and reliability of the information disclosed. If the IR was proven not to provide
adequate disclosure, the firm’s reputation would be damaged. Besides, the final
users of the information may be able to understand whether or not to trust the
company by relying on previous experience and other “observable” company
characteristics, such as the effectiveness of its governance system.
On the one hand, this approach considers assurance as not necessary, but on the
other, it oversees the protection of the interests of minority shareholders or of other
stakeholders who have less access to information and who may give credence to
companies not really worthy of trust. This is the reason both academics and
practitioners give value to assurance. According to legitimacy theory (among the
others, see Guthrie and Parker 1989; Wilmshurst and Frost 2000), since the worst
performers on ESG would provide an IR (or SR) before a good performer, the
potential expectation gap would be also greater.
The competing view, which seems to be supported by the IIRC, argues that the
assurance statement does provide IRs with some additional reliability, conferring to
the IR a higher level of credibility that allows users to make their decisions
according to the IR. An interesting research topic would be to examine whether
the assurance provides any additional value to the company and which are the
determinants of such an eventual increase. The incremental value of a company
with assurance, compared to the company without assurance, will probably depend
5 Materiality and Assurance: Building the Link 91

on the level of its intangible assets and on the quantity of ESG information
disclosed in the report.
An assurance provider would have to face some important challenges in assuring
an IR, as indirectly recognized by the same IIRC [see the consultation questions
proposed in the Consultation Draft IIRC (2013a, b, c)]. Such challenges may be
better identified by looking at the five main differences existing between IRs and
ARs, in terms of assurance. Given that IR may be considered an evolution of AR
(see the Chap. 3), IR assurance should also look at the AR auditing process in order
to reach a successful evolutionary pattern.
First, differently from AR, IR assurance providers cannot rely on quantitative
thresholds in order to assess materiality, as has already been discussed above.
Second, the IR materiality determination process is much more subjective if
compared to that of AR. Given a certain company, two different management teams
may identify different materiality aspects, depending on their strategy, and different
understandings of the business model, the future orientation and the relationships
with stakeholders. Despite being totally different, the two approaches may both be
correct because they are both consistent with the strategic approach.
Third, while AR is almost exclusively backward-oriented, one of the guiding
principles of IR is the “strategic focus and future orientation”, and indeed the IIRC
framework requires companies to disclose future-oriented information. The same
framework (see paragraph 3.6) admits that “future-oriented information is by nature
more uncertain and, therefore, less precise than historical information”. This is
particularly true and relevant for the IR assurer, and to assure future-oriented
information is unrealistic.
The fourth difference between AR and IR deals with the fact that in the IR (and
SR) context, the performance targets play a much more important role. By nature,
non-financial information is difficult to evaluate, if provided as “stand alone”. In
order to assess whether the performance of a company has been satisfactory with
reference to a certain KPI, it is fundamental for the IR readers to have a target
against which to compare the actual performance. In this case, the assurance should
be focused on the process leading to the benchmark.
Finally, different from ARs, which rely on a “legalistic” view of the firm, IRs
also need to report on the performance of companies not included in the group
because of lack of legal control. According to the IIRC framework, the company
should take into account, in determining the boundaries of an integrated report,
“opportunities, risks and outcomes attributable to or associated with other entities/
stakeholders beyond the financial reporting entity that have a material effect on the
ability of the financial reporting entity to create value over time” (IIRC 2013a, b, c,
p. 33). The entities to be included in the broader boundaries are not related to the
financial reporting entity by virtue of control or significant influence, but rather by
the nature and proximity of the opportunities, risks and outcomes. Therefore,
virtually all the entities that have some relationship with the company may be
relevant and may be included into the IR. This may create some problems for the
assurer, who would need to virtually examine a huge amount of information—all
the information relative to the entities that have relationships with the reporting
92 C. Mio

company. How can the assurer test whether the supply chain or other entities have
been considered to be included in the reporting entity? This process would be costly
and would need to access some information that, referring to other legal entities,
may be impossible to obtain.
Two issues that should be tackled in order to obtain reliable assurance in the field
of IR, with particular reference to materiality, are hereby proposed.
First, the assurance provider may implement a check of “internal consistency”
between the declared materiality of specific items/issues and the relevance the
management itself gives to them in its current decisions. Clearly this is not an
easy task, as companies may just pretend to give importance to issues such as the
environment, sustainability etc.; or they may organize the company efficiently,
having excellent procedures for evaluating capitals, but not employing them to
make decisions. Following this approach, the assurer may look at some observable
elements that may proxy for the importance and relevance given by the manage-
ment itself to the same issue. For instance, the assurer may look at the time the
board of directors spent discussing a certain issue (or at the number of words related
to that issue in the memorandum of the board of directors meeting). If the board of
directors has devoted a proper amount of time discussing a certain issue it probably
means that the issue is material. If that issue, in turn, is not disclosed in the IR, some
further analysis may be required.
Second, the assurance provider may focus on the process leading to materiality
assessment rather than on the outcome, which, as argued above, is to a large extent
subjective. Thus, the assurer would need to check the process leading to a certain
materiality assessment rather than the materiality assessment itself. For instance,
according to the <IR> materiality determination process, the management needs to
assess the likelihood of the occurrence of a certain event. The assurance provider
may check how the management assessed the probability of the event, in terms of
subjects involved in the process and methodology employed. If no process has been
carried out or the process is demonstrated not to be a due process, then probably the
outcome of the materiality determination process cannot be considered a reliable
one.

Conclusions
This chapter aimed at providing a discussion of materiality and assurance in the
context of IR. The first part of the chapter described materiality in the context of
non-financial information, focusing in particular on the differences existing with
financial information and on the main standards of Sustainability Report (G4 and
AA1000) for its assessment. It then moves on to the IIRC and, in particular, to
the discussion of the IIRC materiality determination process, which presents
some challenges that will need to be tackled in the near future. One of the
possible mechanisms for overcoming (at least partially) such issues is assurance,
in particular where the high degree of judgement that is left to the company in
identifying its material issues is concerned.
5 Materiality and Assurance: Building the Link 93

After discussing the main assurance standards (ISAE3000 and AA1000AS)

now applied to SR and the position of the IIRC and GRI on assurance, some
issues about materiality and assurance are discussed.
The first issue deals with the necessity for companies to actually provide an
assurance to their IR. Is the market able to recognize non-reliable information? Is
the possibility of damaging the company’s reputation sufficient for avoiding
opportunistic behaviour by managers?
The other issue deals with the difficulties an assurance provider will need to
face when assuring an IR, which is a more difficult task as compared to the
auditing of an AR because of some characteristics intrinsic to IR. In the context
of IR, in fact, it is not possible to rely on quantitative thresholds to determine
materiality; the materiality determination process is to a large extent subjective;
IR also provides future-oriented information; targets of performance play a
much more relevant role and it is difficult to determine the boundaries of the
report.
These peculiarities require assurance providers to employ innovative
procedures in order to assure IRs. There are two themes (which are at the
same time possible solutions for an effective assurance) that will have to be
tackled and discussed in future literature.
The first one is the “internal consistency” control, which requires analysis of
the consistency between the relevance actually given by the management to a
certain issue and the coverage (materiality) of that issue in the IR. The actual
relevance may be measured through the observation of some elements that proxy
for the importance and relevance given by the management itself to a certain
issue, such as the time the board of directors spent discussing it or the inclusion
of this issue in the KPIs used as performance measurement linked to
compensation.
Secondly, it should be decided if the assurance provider may focus on the
process leading to the materiality assessment rather than on its outcome, which is
highly subjective. To this extent, some specific IR standards for assuring the
process would be needed.

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Stakeholder Engagement
6
Leonardo Rinaldi

Abstract
One of the main purposes claimed for reporting is the provision of an account to
a range of stakeholders regarding how managers have acted in relation to the
social, environmental, economic and ethical responsibilities these managers and
their corporation feel they have towards stakeholders. Engagement and dialogue
initiatives, therefore, are increasingly recognised as crucial elements of this
accountability process. Only through stakeholder engagement companies can
develop knowledge of what stakeholders believe should be their economic,
environmental, ethical and social responsibilities to discharge. This chapter
addresses this important aspect of corporate life investigating the role of stake-
holder engagement within the reporting process in general, and the Integrated
Reporting in particular. After describing the main traits of stakeholder engage-
ment as of the most recent development in the academic literature, this process is
placed within the context of Integrated Reporting and various theoretical
perspectives that have the potential to prove useful in the interpretation of
stakeholder engagement and dialogue practices are introduced.

6.1 Introduction

The Integrated Reporting (IR) framework aims at stimulating innovation in disclo-

sure mechanisms by bringing “together material information about an
organization’s strategy, governance, performance and prospects in a way that
reflects the commercial, social and environmental context within which it operates”
(IIRC 2011, p. 3). Although it does not explicitly link with existing initiatives, it is
acknowledged as developing from earlier progresses and initiatives in the field of

L. Rinaldi (*)
School of Management, Centre for Research Into Sustainability (CRIS), Royal Holloway
University of London, Egham Hill, UK
e-mail: leonardo.rinaldi@rhul.ac.uk

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_6, 95

# Springer International Publishing Switzerland 2013
96 L. Rinaldi

social and environmental accounting, sustainability reporting (KPMG 2012;

Deloitte & Touche 2012; Ernst & Young 2012). In this regard, this new initiative
has been criticised by some commentator pointing out at the focus on investor
information needs and the de-emphasis of sustainability and accountability in the
IIRC’s recent Integrated Reporting discussion paper (IIRC 2011). For this reason, it
was argued that the Integrated Reporting could be unable to achieve significant
change thus preventing a real transition towards a sustainable economy with
stakeholder oversight enabled by a full recognition of corporate responsibilities
and accountabilities. A possible way forward to overcome this risk could be the
implementation of effective stakeholder engagement schemes. As the Consultation
Draft of the International IR framework maintains.
“An integrated report should provide insight into the quality of the organization’s
relationships with its key stakeholders and how and to what extent the organization
understands, takes into account and responds to their legitimate needs, interests and
expectations” (IIR 2013, p. 19)

The above quotation indicates that engagement and dialogue with stakeholders
are increasingly recognised as crucial elements of IR. In addressing this point the
aims of the chapter are to explain:
– the important function of stakeholder engagement within the reporting process;
– the main traits of stakeholder engagement;
– various theoretical perspectives regarding the interpretation of stakeholder
engagement.
But before addressing these issues, it may be helpful to outline what is meant by
the term. Thomson and Bebbington (2005, p. 517) provide a helpful definition when
they argue that:
“Stakeholder engagement describes a range of practices where organisations take a
structured approach to consulting with potential stakeholders. There are a number of
possible practices which achieve this aim including: Internet bulletin boards, questionnaire
surveys mailed to stakeholders, phone surveys, and community based and/or open meetings
designed to bring stakeholders and organisational representatives together”.

Another outlook on the meaning and role of stakeholder engagement is given by

Accountability1 within the final exposure draft standard on stakeholder engagement
in 2011 (AccountAbility 2011, p. 6):
“Stakeholder engagement [. . .] is the process used by an organisation to engage relevant
stakeholders for a clear purpose to achieve accepted outcomes. It is now also recognised as
a fundamental accountability mechanism, since it obliges an organisation to involve
stakeholders in identifying, understanding and responding to sustainability issues and
concerns, and to report, explain and be answerable to stakeholders for decisions, actions
and performance.”

1
AccountAbility is a global organisation that works with companies to help them facing the most
critical challenges in corporate responsibility and sustainable development. One critical compo-
nent of this practice consists in building effective approaches to stakeholder engagement (for more
details regarding the AA1000 Stakeholder Engagement Standard framework, see http://www.
accountability.org).
6 Stakeholder Engagement 97

The importance of stakeholder engagement was further emphasised by the

United Nation Environment Programme (UNEP) that has highlighted the need to
understand engagement from multiple perspectives and reflect practitioners’ views
(including NGOs, labour associations and trade and industry associations). They
stated that:
“[e]ngagement can help organisations meet tactical and strategic needs ranging from
gathering information and spotting trends that may impact their activities, to improving
transparency and building the trust of the individuals or groups whose support is critical to
an organisation’s long- term success, to sparking the innovation and organisational change
needed to meet new challenges and opportunities” (UNEP 2005, p. 13).

Their finding also seems to suggest that there is “a growing recognition of the
intrinsic value of engagement and, in some cases, the practice of stakeholder
engagement as an element of an organisation’s routine business processes”
(UNEP 2005, p. 8).
After this broad overview of the meaning stakeholder engagement, the next
section will now explore the extent to which these practices are central to the
reporting process.

6.2 The Function of Stakeholder Engagement

Stakeholder engagement is regarded a key element in the earlier development of IR,

that of sustainability reporting (Unerman 2007; Accounting for Sustainability 2008;
Hopwood et al. 2010; AccountAbility 2011). One of the main purposes claimed for
sustainability reporting (SR) is the provision of an account to a range of
stakeholders regarding how managers have acted in relation to the social, environ-
mental, economic and ethical responsibilities these managers and their corporation
feel they have towards stakeholders (Unerman et al. 2007). In addressing this role,
sustainability reporting is a channel of communication from a corporation’s
managers to some of their stakeholders. However, stakeholder engagement in
sustainability reporting is not limited to stakeholders being recipients of unidirec-
tional communication from managers. To develop knowledge and understanding of
what stakeholders believe should be the company’s economic, environmental,
ethical and social responsibilities that the sustainability reporting seeks to address
managers need to engage in dialogue with stakeholders to ascertain their views and
expectations regarding acceptable corporate behaviour and responsibility
(Thomson and Bebbington 2005; Bebbington and Thomson 2007).
The mechanisms behind dialogue and communication are not purely linguistic in
nature. In several cases the semantic content of the statement represents only the
starting point for its interpretation. Question of power, legitimacy and urgency are
also relevant in that symbolic statements may be appropriate to manage
stakeholders (Mitchell et al. 1997). The full understanding of the matter conveyed
through a specific argument requires the interlocutors to reflect upon the aims and
98 L. Rinaldi

the intents behind a specific assertion and the analysis of the process through which
aims and intents takes shape.
For these reasons, stakeholder engagement has increasingly been regarded as an
important part of corporate social, environmental, economic and ethical governance
and accountability mechanisms (Archel et al. 2011; Deegan and Unerman 2011;
O’Dwyer et al. 2011; Brown and Dillard 2013; Barone et al., forthcoming). The
stated prominence of stakeholder interaction is that only consulting with potential
stakeholders organizations can develop knowledge and understanding of their
needs and expectations while addressing these expectations should be the aim of
‘good’ corporate governance and accountability (Unerman and Bennett 2004;
Thomson and Bebbington 2005; Bebbington et al. 2007).
Some commentators argue that if companies are serious about engaging in
effective stakeholder dialogue, they should offer their stakeholders a variety of
channels both to request and obtain information about the companies’ economic,
environmental, ethical and social behaviour, and to provide criticism in a timely
fashion (Owen et al. 2001). The role of criticism is important because not only does
it allow stakeholders to express their views and expectations to the company, but it
can also contribute to problematise companies’ performance and challenge their
practice through an evidence-based strategy (Miller and Rose 1990; Sikka 2006;
Brown 2009).
Achieving these outcomes requires organisations to shift from a business centred
stakeholder engagement perspective based on internally generated content towards
a more independent stakeholder driven approach. In this approach interested parties
can ascertain organisational performance and also contribute to a wider debate by
submitting their own perspectives that can be quickly and conveniently confronted
and contrasted both by the organisation and by other stakeholders.
As such, stakeholder engagement comprises a vast and heterogeneous set of
activities ranging from conversations, to written exchange of ideas, and general
availability to confrontation (Burchell and Cook 2008). Many accounts of stake-
holder engagement focus on principles and mechanisms directed towards design-
ing, implementing and evaluating frameworks to engage with the various
constituency groups (Bebbington et al. 2007; Brown 2009; Belal and Roberts
2010) and assessing the quality of such engagement (Freedman and Jaggi 2006;
Manetti 2011). Nevertheless, stakeholder engagement remains an under-theorised
area (Greenwood 2007).
The next section of this chapter examines the main traits of stakeholder engage-
ment so see how they comply with the functions discussed above.

6.3 Main Traits of Stakeholder Engagement and Dialogue

Numerous scholars have variously conceptualised and analysed the practices of

stakeholder engagement. Such research has resulted in a broad range of engagement
attributes being developed stretching from ‘formal’ (Gray et al. 1995) versus
‘informal’ dissemination (Agyemang et al. 2009) to the ‘explicit’ versus the ‘silent’
6 Stakeholder Engagement 99

character of accounts (Gray 1997) and their ‘shadowed’ or ‘unshaded’ nature (Dey
2007). Other authors have also stressed the written and oral type of dialogue, either
conducted ‘directly’ (Spence and Rinaldi, forthcoming) or ‘mediated’ by an online
system (Sikka 2006; Rowbottom and Lymer 2009; Scott and Orlikowski 2012).
Accounting practitioners have also emphasised the role of stakeholder engagement
practices in effective corporate accountability and transparency (ACCA 2004;
AccountAbility 2007; KPMG 2008; 2011).
Despite this, there is still no widespread agreement on how to envisage stake-
holder engagement and dialogue. Dillard and Yuthas (2013) notice that the growing
emphasis upon the role of dialogue comes from the recent management strategies’
focus upon the identification and management of relationships with stakeholders in
order to minimise reputational risks related to unsustainable practices. This need
was firstly fulfilled through the provision of information about the social and
environmental impact of corporate activities and progressed through forms of
mutual responsibility, information-sharing, and open and interactive two-way pro-
cess of stakeholder engagement.
Arenas et al. (2009) reveal the emotional aspects, perception and assumption
among organisations, NGOs and other stakeholders looking at the entire network of
stakeholder relationships. Since most approaches to stakeholder dialogue do not
explore the broad set of these relationships, it is maintained that the role of
opinions, beliefs and worldviews of stakeholders are essential to understanding
the problems in the advancing of sustainability reporting because stakeholders
and organisations make sense of each other, of themselves and of what constitutes
an appropriate relationship through such mutual perceptions (Kwok and Sharp
2005).
Tsoi (2010) found that local and regional stakeholders in Hong Kong and China
perceive corporate responsibility as fairly significant to the export orientated
businesses and rank stakeholder engagement among the mechanisms able to bring
about improvement in the social and environmental conditions of the firm. In a
similar vein Boesso and Kumar (2009) observe that organisations possess a broader
social obligation that spreads beyond the sole financial interests. A wider set of
responsibilities for which they should report on and held accountable to various
stakeholders. In this regard, stakeholder dialogue initiatives seem to be associated
with the importance of stakeholders for the organisations and the guidelines for
such dialogue aim at building, governing the relations with them. Grenwood
(2007), indeed, transcends the assumption that stakeholder engagement and dia-
logue is always a responsible practice. He maintains that despite engagement and
dialogue processes may be seen as mechanisms for consent, control cooperation,
can involve employee participation and have the potential to enhance trust and
fairness, the assumption that dialogue is directly linked to the responsible treatment
of stakeholders is simplistic.
Having established the main traits of stakeholder engagement, we can now
address its importance within sustainability management and reporting.
100 L. Rinaldi

6.3.1 Importance of Stakeholder Engagement Within

Sustainability Management and Reporting

Organisations’ concerns with sustainable development have led to an interest in

how companies engage and deploy stakeholder engagement initiatives. Elijido-Ten
et al. (2010) analyse a consultation process initiated by a company in order to be
able to construct an account of the corporate social and environmental impact. The
process is aimed at obtaining a better understanding about which stakeholder seems
to be most affected by the distribution, sale and consumption of the company’s
products and at how responsibility within the company could be allocated to
alleviate those impacts. In a similar fashion Habisch et al. (2011) have empirically
investigated engagement practices undertaken by firms in Germany, Italy and the
U.S. Results suggest that despite the increasing attention on sustainable develop-
ment favours stakeholder engagement, these initiatives seem to disregard the level
of involvement and diversity of stakeholder participation. The lack of consensus
around a specific definition of stakeholder dialogue, however, has led to a confusion
as to the appropriate method for understanding and meeting the needs of
stakeholders who are no longer confined to shareholders and employees but include
a wide variety of societal groups (Kelsall 2011).
Another example is that provided by Boesso and Kumar (2009) who emphasise
the role of stakeholder engagement in both “identifying and soliciting the views of
all stakeholders affected by an organization’s activities” (Boesso and Kumar 2009,
p. 163). Given the diverse range of existing and prospective stakeholder’s demands,
it is emphasised that in practice when conflicts among interests of various stake-
holder groups occur priorities among these could be established through an arbi-
trary managerial process rather than through a democratic effort upon a shared set
of social, environmental, economic and ethical responsibilities (O’Dwyer 2003;
Baker 2010).
Against this unilateral manager—stakeholder relation, Burchell and Cook
(2006) argue that a kind of reciprocal engagement could pave the way towards
forms of collective cognition. By focusing upon interaction organizations can react
to the issues and demands rose by stakeholders rather than define for themselves
stakeholders’ needs and expectations. Dialogue, and with it the commitment of
listening and learning from each other, may therefore have the potential to extricate
intertwined economic, social and environmental concerns.
A cooperative effort aimed at empowering individuals to challenge their
perspectives has the potential to move stakeholders and organizations away from
the protection of subjective positions, thus leading to a greater mutual understand-
ing of the complexity of sustainability (Moore 2005; Mitchell et al. 2012). As a
result, the achievement of holistic sustainability requires the recognition and the
integration of a wide range of perspectives and entails an inclusive engagement
framework to facilitate change.
6 Stakeholder Engagement 101

6.4 Theoretical Perspectives for Interpreting Stakeholder

Engagement

To appreciate the centrality of stakeholder engagement it seems important to place

this process within the context of IR. Several scholars have argued that the reporting
process is characterised by a hierarchical staged structure where decisions taken at
each stages are likely to have an effect upon the subsequent stages (Deegan and
Unerman 2011). One of the key stages is represented by the identification (and
prioritization) of the social, economic, environmental, ethical and social
expectations of those stakeholders to whom organizations feel they have a duty of
accountability to discharge.
While there might be a variety of different reasons driving organizations to
engage with stakeholders to ascertain their needs and expectations, the academic
literature examining these motives can be broadly divided into two perspectives
which may be regarded as two opposite ends of a continuum. The first broad
perspective regards engagement as the move to broaden corporate accountability
to include stakeholders. Proponents of this holistic nature of engagement argue that
organizations should be considered responsible for their integrated impact. The
main consequence of such approach is that all stakeholders (not just those who hold
more power) should be considered as equally important and their views ascertained
through a long term, open and mutually respectful relationship.
The other perspective regards stakeholder engagement as a strategic tool aimed
at winning or maintaining the support of those stakeholders who have the power
(usually economic power) to influence organizations’ goal. In this context the views
and expectations of powerful stakeholders are prioritised over the others whereas
the engagement is inspired almost from a purpose of reputation branding process.
Against this background, various theoretical standpoints highlights how stake-
holder engagement can be interpreted as either a holistic or strategic tool. The
former perspective (holistic) will be discussed using the dialogic learning frame-
work advocated by Paulo Freire (1996) as a guide to examine the extent to which
stakeholder engagement provides the possibility for dialogue and mutual learning
between organizations and stakeholders. The latter perspective (strategic) will
adopt Michel Foucault governmentality framework (Foucault 1991) as extended
by Mitchell Dean’s (2009). The analysis of stakeholder engagement initiatives
through Dean’s analytics of governmentality framework, it is argued, has the
potential to provide useful insights into how engagement can be regarded as a
strategic tool to control/govern stakeholders’ perceptions of organizational actions.
The following section will adopt Paulo Freire’s dialogic learning framework as
further extended by Thomson and Bebbington (2005), to interpret the practical
application to stakeholder engagement and dialogue.
102 L. Rinaldi

6.4.1 Understanding Stakeholder Dialogue Through Dialogic

Theoretical Framework

According to Freire (1996) dialogue is a form of learning whereby human subjects

can achieve a truer sense of reality my means of communication. Only through
respectful and cooperative dialogue, he argues, human subjects can be set free from
oppressive subordination.
Freire considered oppressive the process that presupposes two distinct sides
within the learning relationship, an active and a passive side, each of which holding
specific powers and characters. The active side is thought as entirely responsible of
the process, and takes the role of filling-up their counterpart with “correct” and
“truthful” knowledge. As a result, the other side of the process becomes almost a
listening receptacle. For Freire this kind of practice is oppressive and changes the
act of knowing into an act by which subjects are transformed into objects that
uncritically and obediently accept the content others impart to them (Irwin 2012).
Thomson and Bebbington (2005) maintain that while oppression often possesses
a physical nature, it “may also be created and sustained via cultural factors” (p.
513). Individuals need to be liberated from the predetermined understanding of
reality, in order to act free. This happens through reflection upon their conditions in
order to bring about change (Freire 1996). Consequently, a true commitment to
freedom that enable particular aspirations of reform—such as sustainability—to be
constituted is the rejection of the mechanical concepts of knowledge as an empty
vessel to be filled by virtue of a problem-posing concept of learning. Freire argues,
in fact, that problem-posing concept embodies the essence of knowledge and
consists in acts of reasoning rather than transfer of information.
If the process of dialogic learning has the power to create a more enlightened and
sustainable society, then the development of stakeholders as human subjects
requires at the same time the recognition that our understandings is socially
constructed and the challenging of these understandings (Thomson and Bebbington
2005). Interpreting stakeholder engagement using the dialogic learning framework
as analytical lens has the potential to offer a range of useful explanations of the
ways in which organizations engage with stakeholders for their economic, environ-
mental, ethical and social practices and provide an integrated report about these
performance. Organizations that promote a holistic nature of engagement, should
first allow a less objective and verifiable representations of problems raised and
discussed within the process. This has the potential help stakeholders change their
perspectives, expand meanings and understanding, or even identify common
purposes and intersecting interests. In other words, multiplicity of interpretations
though dialogue allow confrontation and problematization of organizations and
stakeholder views, thus creating the premises for a consensus among potentially
mutually exclusive needs and expectations. For example, the acknowledgment that
sustainability is a complex issue and the presence of independent discussant that
introduce of a range of different perspectives at meetings with stakeholders can
create the conditions for stakeholders to take up critical consciousness.
6 Stakeholder Engagement 103

Second, a stakeholder engagement aimed at expanding corporate accountability

towards stakeholders should provide (potentially) unlimited possibilities for
discussions with organizations and the provision of feedback from stakeholders in
light of an increased inclusion and openness to confrontation. For example the
adoption of on-line technology such as video and audio streaming, social network
and other form of bidirectional communication media for the process, would move
in this direction (Gallhofer et al. 2006).
Third, in a holistic engagement process companies should promote an active and
reflective participation in the direction of stakeholders to the organisation. If
companies are serious about promoting mutual learning—that is learning from
stakeholders while at the same time allowing stakeholders to learn from them—
they should move away from a limited the scope or content of engagement. For
example, removing any limitation to the set of stakeholders that are considered
legitimated to take part to the process.
Fourth, and related, a more participative process where potentially everyone is
entitled to engage diminishes the power differential between organizations and
stakeholders (see also, Unerman and Bennett 2004).
As a result, Freire’s conceptualization of a dialogic process is the determination
that it involves respect and cooperation (or partnership), in the sense that dialogue
should not implicate one subject acting on others, but rather “subjects working with
each other” (Freire 1996, p. 56).

6.4.2 Understanding Stakeholder Dialogue Through

Governmentality Theoretical Framework

The other theoretical perspective that can be useful to interpret stakeholder engage-
ment practices is that of governmentality, introduced by Michel Foucault in his
lectures at Collège de France in 1977 and 1978 (2007) and further developed by
various scholars in areas such as sociology and accounting (Miller and O’Leary
1987; Miller and Rose 1990, 2008; Dean 2009). Mitchell Dean (2009) adopted
some of the notions proposed by Foucault and developed a theoretical framework
known as the “analytics of government”. In the following, Dean’s framework will
be explored as a conceptual perspective for understanding the engagement
exercises between stakeholders and organisations as a form of governance, also
providing empirical examples from the academic literature.
The analytics of government investigates the distinct conditions whereby a
program of stakeholder engagement originates, is maintained and changes through
a set of “regimes of practices” put in place by organizations. A regime of practice
could be described as the assemblage of mechanisms that contribute to make ideas
and beliefs applicable in particular times and places. As such, organisations tend to
possess many regimes of practices. They comprise and often connect collegiate
(e.g. committees, representatives, groups, categories) individual (e.g. customers,
employees, managers, suppliers, shareholders) and institutional agents, so that we
often attribute to them the traits of a system (e.g. reporting system, control system,
104 L. Rinaldi

information system, etc.). Regimes of practices are triggered and shaped by a

variety of forms of knowledge (e.g. chemistry, medicine, geography, psychology,
sociology, auditing, accounting etc.) and contribute to describe the object of such
regime. Dean’s framework allows the investigation of these practices along four
entwined but still reasonably independent dimensions: field of visibility, techne of
government, episteme of government and identity formation analytic.
The first dimension of the analytics of government is known as field of visibility.
It consists of the peculiar characteristics and means by which a specific system of
governance seeks to illuminate some object and obscure others. Management flow
chart, tables, and KPIs are examples of items that are meant to define object and
subject of governance. They show how individuals are connected relate to one
another within the organizational space (Dean 2009). For example, performance
indicators concerning stakeholder engagement initiatives can be used as a means to
render visible what companies see as important for the achievement of their ends
and therefore as a technology of governance influencing stakeholders’ perceptions
(Boesso and Kumar 2009). Another example of this conduct is also embodied into
the “CSR identity” organisations build and follow. Bolton et al. (2011) argue that an
instrumental approach to understanding stakeholders, that define who might be
classified as such, has the potential to neglect of some agents as stakeholders. As
consequence, the concealed stakeholders cannot have their voice heard in the
engagement process and, consequently, cannot be accounted for within the
integrated reporting process. Overall, this dimension of the framework seeks to
expose the means by which some aspects are made visible and other are concealed,
thus unveiling how organisations’ power allows control and prioritisation of the
aspects that significant to them within the engagement process.
The second dimension, the techne of government, is interpreted as specific ways
of acting adopted by the organization that rely on specific mechanisms such as
accounting, systems of training and professional specialisms. The technologies of
government practiced by companies can be related to various ends, including
education, regulation, control and normalization (Russell and Thomson 2009).
The educational rationale of government, for instance, is aimed at spreading the
corporate views and leading stakeholders to echo them uncritically. In this regard,
Tsoi (2010) demonstrated that organizations link the effectiveness of dialogue to a
kind of educational practice and occurs when it is time to specify what
‘sustainability’ entails. According to Tsoi, organizations seeks to establish a com-
mon language between them and stakeholder during the engagement process
(arguably that of corporations’). This educational role attributed to stakeholder
engagement is likely to have a big influence upon stakeholders’ perceptions of
social and environmental impacts, up to the point of transforming their overall
identity as stakeholders of the firm. Other governing technologies employed by
organisations consist of forms of internal auditing against self-imposed
specifications. A notable example of this dimension of government is represented
by the Self-Diagnostic checklist that Adams and McNicholas (2007) have found in
their research. The completion of the checklist represented the first step of the
organization towards sustainability reporting and played the role of establishing an
6 Stakeholder Engagement 105

order between compliant and non compliant stakeholder thus creating the premises
for their prioritization. Additionally, it also rendered some areas within the engage-
ment initiatives visible (allegedly arbitrarily selected) thus governable. Overall this
dimension explores how the companies connect the constituted visibilities to the
practices of engagement.
The third dimension of the framework, the episteme of government, is under-
stood as a specific form of thinking that relies on specific expertise, vocabularies
and procedures. For instance, some commentator (Baker 2010; O’Dwyer 2003)
have observed forms of engagement relying on economic cost-benefit analyses
aimed at winning or retaining support of those stakeholders who have power to
influence the achievement of an organisations’ goal. In a similar vein, the develop-
ment and reporting of KPIs to measure the effectiveness of stakeholder engagement
practices (Boesso and Kumar 2009) may portray engagement as a measurable
activity, thus suggesting that particular goals could be established and, subse-
quently, its advancements against a certain level of performance could be
measured.
The identity is the final dimension of the framework. It examines how
stakeholders assume their role during the engagement and the characters associated
with it within the integrated reporting process. For instance, the process itself of
engaging with stakeholders, requires identifying them, assign them a label and an
implicit or sometimes explicit role to play within the process (not necessarily that
stakeholders may see themselves with).
In this regard, Arenas et al. (2009) while examining the new forms of business-
NGOs noticed the use of ‘breadth of focus’ and ‘coordination’ as criteria to
formulate the identity of NGOS and divide them into populations on the basis of
those possessing certain characteristics and those without. By marking the
dissimilarities between the two groups, an ideal-type identity for NGOs is crated
and contrasted against an arguably less appealing type. Similarly, the process of
identity formation can also be seen in combination with the commercial perspective
of organisations. Bui (2010), for example, maintained that notwithstanding the
looseness of the concept of Corporate Social Responsibility to consumers they
are often organised as ‘ethical’, although tags such as ‘green’, and ‘responsible’ are
also quite common association to stakeholders and business practices (Russell and
Thomson 2009).
The examination of the field of visibility, techne, episteme and identity forma-
tion analytics of governance within stakeholder engagement has the potential to
reveal the transformation of the role of such regime of practice. The combination of
the four dimensions of the analytics of government, therefore, may contribute to
increase knowledge and understanding of the governing role of stakeholder engage-
ment within the integrated reporting process.

Summary and Conclusions

This chapter has investigated a range of matters related to stakeholder engage-
ment and its importance for the integrated reporting process. It has outlined the
notion of engagement by clarifying its function, the underlying mechanisms and
106 L. Rinaldi

key characters. It further discussed of the nature of engagement within

sustainability management and reporting processes and provided a review of
some of the latest research by examining the main traits of stakeholder engage-
ment practices to see how they comply with the functions discussed above. It
discussed the problem of interpreting stakeholder engagement by looking at the
motives for engaging with stakeholders. In this regard, the chapter has explored
two perspectives, which may be regarded as two opposite ends of a continuum:
holistic motivation and strategic motivation for engaging with stakeholders.
If “corporate reporting needs to evolve to provide a concise communication
about how an organization’s strategy, governance, performance and prospects n
the context of its external environment, lead to the creation of value over the
short, medium and long term” (IIRC 2013) then engagement initiatives that
remove the obstacles to open and cooperative dialogue between organizations
and stakeholders needs to be conceived and implemented. Else, corporate
reporting may continue to be criticised for concealing economically driven
goals.

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“Integrating” Business Model and Strategy
7
Federico Barnabè and Maria Cleofe Giorgino

Abstract
This chapter explores the potential role of Integrated Reporting in supporting the
relationships between a company’s strategy and the development (i.e. design and
implementation) of its business model. To this aim, we draw on the relevant
literature on strategy and on business models, as well as on the recent guidelines
provided by the International Integrated Reporting Council framework, to sug-
gest a three step process for linking the company’s strategy to the development
of the related business model. An example of such process is presented in the
context of low-cost airline companies.

7.1 Introduction1

During the last twenty years, many academics and practitioners have focused their
attention on the concept of “business model”, hardly agreeing on what it really
indicates (Zott et al. 2011). Despite the growing use of this concept, a clear
definition has rarely been provided. Some scholars considered the concept of
business model coinciding with that of strategy or the first as being a component

1
Although this chapter is the result of a joint collaboration, Federico Barnabè should be considered
the author of the Sects. 7.4, 7.5, and 7.6, while Maria Cleofe Giorgino should be considered the
author of the Sects. 7.1, 7.2, and 7.3.
F. Barnabè (*)
Department of Business Studies and Law, University of Siena, Siena, Italy
e-mail: barnabe@unisi.it
M.C. Giorgino
Department of Business Administration, Finance, Management and Law, University of Milano-
Bicocca, Milan, Italy
e-mail: maria.giorgino@unimib.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_7, 111

# Springer International Publishing Switzerland 2013
112 F. Barnabè and M.C. Giorgino

of the second. Other scholars considered business model and strategy as separate
although interconnected concepts.
Recently, the International Integrated Reporting Council (IIRC) defined the
business model as “The organization’s chosen system of inputs, business activities,
outputs and outcomes that aims to create value over the short, medium and long
term” (IIRC 2013a, p. 6). In so doing the IIRC suggested guidelines on how to
disclose information about the company’s business model into the Integrated
Report (IR). By drawing on the definition of business model provided by IIRC,
this chapter aims to explore the potential role of Integrated Reporting in supporting
the relationships between an organization’s strategy and the development (i.e.
design and implementation) of its business model. To this aim, we draw on the
relevant literature on strategy and on business models (analysed in Sect. 7.2), as
well as on the recent guidelines provided by the International Integrated Reporting
Council framework (Sect. 7.3), to suggest a three step process for linking the
organization’s strategy to the development of the related business model
(Sect. 7.4). An exemplification of such process is presented in the context of low-
cost airline companies (Sect. 7.5).

7.2 The Concept of Business Model

Several scholars have attempted to define the notion of business model, identifying
different components of this notion. For instance, according to Timmers (1998,
p. 2), the business model is an “architecture of the product, service and information
flow, including a description of the various business actors and their roles; a
description of the potential benefits for the various business actors; a description
of the sources of revenues”, while Tucker (2001) has defined the concept as “a
description of how your company creates value for customers that in turn generated
revenue and profits for your company”. According to other scholars, the business
model is “the heuristic logic that connects technical potential with the realisations
of economic value” (Chesbrough and Rosenbloom 2002, p. 529), “the content,
structure, and governance of transactions designed so as to create value through the
exploitation of business opportunities” (Amit and Zott 2001, p. 511), or “an abstract
representation of some aspects of an organisation’s strategy; it outlines the essential
details one needs to know to understand how an organisation can successfully
deliver value to its customers” (Seddon and Lewis 2003, p. 246). By reading
these definitions, the lack of convergence is evident, especially if we consider the
different terms used for referring to the concept of business model (i.e. representa-
tion, architecture, statement, conceptual tool, description, framework, and so on).
In a similar way, several scholars have attempted to identify which the
components or elements of a business model are, reaching different conclusions.
In particular, taking into consideration strategy theory and Porter’s framework
(1985), Hedman and Kalling (2002) have identified five groups of components,
i.e., (a) industry, customers and competitors, (b) product offering, (c) activities and
organisation, (d) resources and competencies, (e) factor markets and suppliers. In a
more comprehensive way, Chesbrough and Rosenbloom (2002) have identified six
7 “Integrating” Business Model and Strategy 113

elements constituting a business model (i.e. value proposition, market segment,

value chain, cost structure with profit potential, value network, and competitive
strategy). Six fundamental components are also included in the scheme proposed by
Morris et al. (2005) and each concerns questions underlying a business model: (1)
How does the organisation create value?—factors related to the offering; (2) Who
does the organisation create value for?—market factors; (3) What is its source of
competence?—internal capability factors; (4) How does the organisation position
itself competitively?—competitive strategy factors; (5) How does the organisation
make money?—economic factors; (6) What are its time, scope, and size
ambitions?—personal/investor factors. In this context, the competitive strategy is
considered a component of the business model; however, other scholars disagree
with this assumption, considering strategy, instead, as an external driver for busi-
ness model creation and evaluation2.
The variety of components that has been theorised for the business model can
make the meaning of the concept even more confusing. To resolve the potential
confusion surrounding this concept, it would be more useful to define “what a
business model does” and what needs it addresses, rather than searching for “what a
business model is” (Doganova and Eyquem-Renault 2009), but also on this topic
there is not agreement: according to some scholars, the business model primarily
provides a transparent representation of the organization’s features for its relevant
stakeholders (Seddon and Lewis 2003); instead, according to other scholars, the
business model is mainly useful to evaluate the organization’s capacity to create
value through its activities (Magretta 2002; Chesbrough 2006).
Moreover, the disagreement and confusion about the concept of business model
have resulted in a considerable variety of modalities adopted for its representation
and disclosure, making the homogenization of these modalities necessary in order to
facilitate comparisons between organisations. Furthermore, since some organi-
sations have various business divisions or operate in multiple market segments, the
disclosure of all business models may be useful in order to support the decision-
making process of the various stakeholders.
Moving forward from the conceptual analysis abovementioned, this chapter
explores the links between an organisation’s business model and its strategy. In
this regard, the concepts of “business model” and “strategy” should be considered
as separate yet related concepts (Zott and Amit 2008; Teece 2010; IIRC 2013a),
with some areas of overlapping3. In this context, we argue that the IIRC framework
could provide guidelines for addressing their intertwined relationships.

2
For instance, Osterwalder and Pigneur (2010) have proposed a scheme based on a set of nine
components (i.e. customer segments, value propositions, distribution channels, customer
relationships, revenue streams, key resources, key activities, key partners, and cost structure),
arguing the necessity of “re-interpreting strategy through the lens of the Business Model Canvas”.
According to this other perspective, strategy is so not included in the business model, rather the
former supports the assessment and management of the latter.
3
On these topics see Ansoff (1965); Andrews (1971); Wernerfelt (1984); Porter (1985, 1996);
Barney (1991); Warren (2002, 2008) and Morecroft (2007).
114 F. Barnabè and M.C. Giorgino

7.3 The Business Model in Integrated Reporting

In the search for disclosure harmonisation, IIRC provided a relevant contribution to

business model reporting. In fact, the reference framework proposed by IIRC
(2013a) included a clear definition of the business model and its key elements. In
particular, according to this framework, “at the heart of the organisation is its
business model”, i.e. its “chosen system of inputs, business activities, outputs,
and outcomes that aims to create value over the short, medium and long term”
(IIRC 2013a, p. 6). The definition identifies four key elements for a business model,
i.e. inputs, activities, outputs, and outcomes. They are strictly interconnected since,
at the beginning, the organisation acquires its capitals or inputs and then converts
them into outputs through business activities. The final phase of the process, related
to the output placement in the market, determines outcomes that affect the initial
situation, causing the regular review of the entire model. The system is then
dynamic and it inevitably connects to other aspects of the organisation, such as
governance, opportunities and risks, external environment, etc.
Figure 7.1 provides a graphical representation of the business model proposed by
the IIRC framework, highlighting its positioning with respect to the other relevant
factors.
Each key element of the business model requires a specific disclosure in order to
communicate its characteristics, relationships and changes over time. Therefore, the
following sections will provide a broader description of the components of the
business model and a disclosure map for their representation in IR.

7.3.1 Business Model Components Within the IIRC Framework

According to IIRC, the first component of a business model coincides with inputs,
i.e. the organisation’s capitals that are suitable to support the achievement of its
mission. Each capital is indeed a holder of value and can contribute to create
other value through the activities realised by the organisation. According to the
IIRC framework, an organisation has six categories of capitals, having specific
interconnections among them (Fig. 7.2).
Specifically, financial and manufactured capitals lay at the core of the diagram
represented above. These capitals are often seen as the organisation’s only real
capitals, since they are the traditional factors of production. The first category
includes all funds available to the organisation. They are usually distinguished in
debt and equity finance, referring to their source. The second category represents the
set of equipment and tools used in the production process. These capitals are
typically distinguished according to their lifetime, which usually impacts also on
their accounting treatment (e.g. inventories are generally divided by plants, following
different rules of valuation, taxation, etc.).
7 “Integrating” Business Model and Strategy 115

Fig. 7.1 Business model functioning and positioning (reproduced from IIRC (2013a), p. 8)

Fig. 7.2 Capitals in organisations (reproduced from IIRC (2013b), p. 3)

The intangible assets of the organisation lay “around” these first two types of
capitals, being strictly interconnected with them. Intangibles are usually divided
into three categories: human, intellectual, and social and relationship capitals.
The first category includes the stock of knowledge, skills, and abilities embodied
in the organisation’s people, including both employees and managers (Coff 2002).
Human capital refers to both explicit and implicit embodied competencies, acquired
through formal education and on-the-job training. Although it is often difficult to be
defined, human capital certainly plays an important role in any organisation, having
potentially important performance implications (Crook et al. 2011).
Intellectual capital, instead, includes other types of intangible assets that provide
a competitive advantage to the organisation. Specifically, this capital usually refers
116 F. Barnabè and M.C. Giorgino

to, on one hand, the value of brand and reputation developed by the organisation,
and, on the other hand, its intellectual property, such as licences, patents,
copyrights, and organisational systems or procedures, but this definition is not
shared among scholars (Petty and Guthrie 2000).
The third category of intangible capitals refers to the organisation’s ability to
establish effective relationships with other economic actors (first of all, its actual
and potential clients) in order to mediate economic transactions, enhancing indi-
vidual and collective well-being (Granovetter 1985; Pennings et al. 1998). In this
sense, social and relationship capital can be formed in different ways and includes
values shared with the community, and loyalty and trust built with the various
categories of stakeholders.
The last input of the business model coincides with natural capital, i.e. the stock
of natural resources or environmental assets (such as air, soil, water, etc.) that
contribute to the development of the organisation’s activities, coming out affected,
positively or negatively (Brand 2009).
Not all abovementioned capitals are owned by the organisation, but each capital
is considered as an “input” since they constitute or affect the business process.
Specifically, there is a continuous flow of capitals between the external environ-
ment and the organisation where such capitals are modified (i.e. increased,
decreased or transformed) due to the business activities (e.g. planning, design and
manufacture of products). In this way, the value of each capital is directly (such as
for labour and raw materials) or indirectly (such as for infrastructure or legislation)
cumulated in order to create new value for all the parties involved. In this sense, in a
business model activities “can be viewed as the engagement of human, physical
and/or capital resources (. . .) to serve a specific purpose toward the fulfilment of the
overall objective” (Zott and Amit 2010, p. 217).
Through business activities, inputs are converted into outputs, i.e. the
organisation’s products or services and potentially by-products and wastes. In
other words, outputs coincide with the organisation’s offering defined in order to
optimise and maximise the value creation (Anderson and Narus 1999). It depends
on many factors such as the customer segments chosen, the available set of inputs
and the process architecture designed. Generally, outputs vary over time in relation
to changes in customer’s needs and according to the organisation’s ability to
innovate and adapt its inputs and business activities.
However, outputs do not represent the final objective of the production process,
since their realisation really aims at generating valuable outcomes, i.e. internal or
external effects on the organisation’s capitals. In principle, outcomes can be divided
into two categories, i.e. techno-economic outcomes, such as product and process
innovation and customer relationship profitability, and psychosocial outcomes,
such as feelings of success and trust (Tikkanen and Alajoutsijärvi 2001). The first
outcomes are more objective than the second ones, but both have an impact on the
organisation’s inputs and on the subsequent new implementation of the business
model.
7 “Integrating” Business Model and Strategy 117

7.3.2 Reporting on the Business Model

In order to better understand the business model structure according to the IIRC
framework, we will rely upon a general example, taking into consideration a car
manufacturer. The inputs of its business model may be all the raw materials used to
produce the finished goods. Example of activities would include the single
operations through which the raw materials are transformed, aggregated or assem-
bled into the manufactured goods. The outputs are represented by the cars sold on
the market. The outcomes lagging behind the outputs may be divided into those that
are internal within the organisation and those that are external and related to a wide
range of stakeholders. In this example, the outcomes to a consumer may be the
mobility, safety and comfort provided and associated with the product, whilst
outcomes that have an impact reaching beyond a single consumer may include
environmental impacts arising from car emissions or traffic congestion.
Each component of the business model structure requires a specific information
disclosure in the integrated report in order to support the decision-making process
of the organisation and provide useful elements for business development. For
instance, IR might aid the understanding of how the organisation creates value
for its stakeholders, what its positioning is in the market segments in which it
operates and what impact its activities produce on the capitals in the short, medium
and long term (IIRC 2013a).
With specific reference to the inputs, IR might provide some quantitative or
qualitative/narrative indicators aimed at measuring the capitals’ availability and
their changes at the end of the business process. These indicators should vary
according to the particular nature of the capital considered and the aspects that
are useful to IR purposes. For instance, whether financial capitals require an
analysis of their entity and the funding model adopted, social capitals need a
description of the relationship structure adopted by the organisation and the actions
programmed in order to develop connections with its stakeholders.
In reference to business activities, IR should, instead, describe all the actions
implemented by the organisation, providing a comparison with the competitors’
activities and valuating their effectiveness and efficiency in relation to the
innovations being implemented as well.
Finally, IR should describe all the products or services provided by the
organisation, constituting its outputs together with contingent by-products and
waste, as well as the outcomes that arise from the process, especially in terms of
the impact on the organisation’s capitals.

7.4 IR for Integrating Business Model and Strategy

The business model is the core element of the organisation’s strategy and it is at the
basis of the decisions, plans and activities that are carried out in order to create
value in the short, medium and long term. Moreover, the business model is not only
118 F. Barnabè and M.C. Giorgino

the starting point for any investor’s analysis, but it is also to be regarded as the key
element linking an organisation’s strategy, governance and performance.
Starting from these considerations, we will combine the literature on business
model analysed in the previous sections with the key contents and principles of IR
as addressed by IIRC. Afterwards, we will propose a three-step process which could
be followed to develop, implement and use IR to support the links between an
organisation’s business model and its strategy.
As shown in Fig. 7.1, the business model draws from the 6 capitals (included in
the IR framework) as its main inputs. These inputs are then transformed into outputs
through business activities. Both business activities and outputs will generate a
range of outcomes that, in turn, will eventually affect the various capitals. From
what we have previously stated, it is clear that a proper and complete analysis of
outputs and outcomes is particularly relevant for a correct understanding of the
effectiveness of the organisation’s strategy and business model. In this regard, IR
plays a role in providing not only actual values of outputs and outcomes, but also
past values and historical trends. Furthermore, such data should be assessed in
comparison to market expectations, strategic objectives and/or other benchmarks
(e.g. competitors’ actual and past performance). This process may eventually lead
to modifying (or on the contrary confirming) the organisation’s business model in
order to better achieve the current strategy and strategic goals, or at a higher level
may even “oblige” the managers to introduce changes in reference to the strategic
objectives that affect the current business model (IIRC 2013a, p. 6).
In summary, the IR framework clearly depicts an overall integrated management
and integrated thinking system where the business model is to be considered as the
core. However, the system extends well beyond the business model and even
extends outside the organisation’s borders, also embedding the organisation’s
mission and vision, its strategy, and the external environment, as previously
shown in Fig. 7.1.
Within this system, strategy should define how to maximise opportunities and
mitigate or manage risks, and set out long term goals and efficient plans that should
be able to achieve such objectives. Shorter term allocation plans are developed and
carried out in order to effectively implement the current strategy and the business
model, which can be viewed as the operational toolkit system meant for pursuing
this goal.
It is relevant to stress that this system is highly dynamic and not static. It is based
on a continuous cycle of planning, execution, performance monitoring and
assessing, review and revision of strategic goals, as well as business model and
decision-making issues. Furthermore, as clearly described by IIRC (2013a, p. 9),
the overall value creation process is to be considered as a cyclical and feedback-
based system “in which the stock of capitals at the end of a period become the
capitals available for use by the business model in the following period”, as
portrayed in Fig. 7.3.
All these elements have a direct or indirect influence on the organisation’s
strategy and on its short, medium and long-term policies and strategies since actual
performance is periodically assessed against target strategic goals. Obviously, this
7 “Integrating” Business Model and Strategy 119

Sharing of Value Sharing of

costs added by value
organisation

Inputs Business Outputs of Outcomes of

business activities business business

Fig. 7.3 Interaction of the business model with internal and external capitals (adapted from IIRC
(2013a), p. 9)

may lead to changes in the business model (or any part of it) and/or potentially in
the organisation’s strategy. Moreover, gaps between actual performance and
desired targets should be analysed in connection to the whole value chain rather
than in exclusive reference to the organisation. This could in turn generate changes
to the overall business model and the modalities in which the value chain is
designed, organised and managed.
In brief, the IR framework entails to consider the various linkages between an
organisation’s business model and its strategy, clearly suggesting their mutual
influence and the need for an integrated thinking approach to decision-making. In
principle, when dealing with specific organisations, business sectors or industries, it
may be consequently useful to design a multi-stage approach to IR that
encompasses the following steps: (a) focus on the concepts of strategy and the
business model in use; (b) identify their main components and relationships, and
understand how they are linked with the external environment; (c) combine all
these elements within the integrated report, receiving an information feedback in
terms of performance metrics and recommendation for future changes.
These three steps entail a sequential approach to strategy development, business
design, and—at a later stage—business (integrated) reporting which is in line with
the suggestions given by the relevant literature on business model. In more detail,
the three phase approach under analysis is suitable to support managers to develop
their decisions and subsequently carry out actions, whereas the IIRC framework
would provide not only the underlying logical infrastructure, but also several
examples about the business model components.

7.5 IR in Action: The Example of Low Cost Carriers

Based on the considerations and information provided above and in order to clarify
how IR may be operationalised, this section focuses on the airline sector; in
particular, attention is placed on “low cost carriers” (LCCs). With this in mind, it
120 F. Barnabè and M.C. Giorgino

is relevant to first provide a broad classification of business models within the

airline sector.
The literature highlights the presence of several business models that can be
adopted when operating an airline company (see Hunter 2006; Wensveen and Leick
2009; Diaconu 2012; Lohman and Koo 2013), with the following being the most
common: Low Cost Carriers (LCCs—based on cost leadership and cost
minimisation) and Full Service Carrier (FSC—the more traditional approach).
Other business models that can be adopted include Holiday Carriers, Regional
Carriers, Traditional Freight Carriers, Integrators, Hybrid Carriers, and Airlines
within Airlines.
As mentioned, this section focuses on the LCC model which has recently
emerged as a profitable method for operating airline companies. In particular,
LCCs have emerged from the mid-1990s as powerful competitors on several
different markets due to both a far-reaching process of deregulation that first
affected the USA and then Europe, and also due to the overall financial crisis that
has had a strong impact on customers’ spending power.
In general terms, the LCC strategy is based on their capacity to focus on cost
minimisation and on reaching a price leadership position within the specific
markets in which they operate. To accomplish this, they usually operate a young
and homogeneous fleet, fly to and from secondary airports with short and frequent
flights, eliminate most of the traditional services and simplify many operational
procedures (e.g. on-line booking is required and no seating reservation is provided).
Following, we will take into consideration the “typical” LCC business model in
order to provide an example of how IR may be used in this specific business sector
according to three steps as abovementioned.
a) Defining the organisation’s strategy and drawing its connections with the
business model.
To pursue this aim, IIRC (2013a) may provide a core set of guidelines to
develop the organisation’s strategy and define its connections to the business
model and its various components.
Thus, the first step of the analysis requires the identification of the main
elements defining the specific LCC strategy and the generation of the business
model in use.
In principle, LCCs pursue the strategic goal of gaining market share through
strategies of cost minimisation and price leadership (Alamdari and Fagan 2005;
Hunter 2006). The LCC business model can be consequently seen as the direct
consequence of this strategy; therefore, although there are some differences,
LCC strategies and business models usually have common elements regarding
the reduction of costs and low-priced fares.
As to the reduction in revenues, the pricing policy of LCCs is usually a very
dynamic one. Very often LCCs sell discounted tickets or tickets at very low
prices, thus acquiring a competitive advantage in comparison to traditional
FSCs. However, the prices tend to rise to a point where they are comparable
or even more expensive than a FSC ticket. To makeup for the lower revenues
resulting from lower ticket prices, LCCs usually charge fees for a series of other
7 “Integrating” Business Model and Strategy 121

services and place specific emphasis on ancillary revenues coming from a

variety of goods and services sold to customers (e.g. food and beverages on
board, priority boarding, seating reservation, extra-baggage, etc.).
As regards the minimisation of costs, LCCs are usually able to reduce
expenses basing their operational policies on the following elements (Alamdari
and Fagan 2005; Hunter 2006):
– standardised fleet, made of relatively new airplanes that are fuel-efficient,
need lower maintenance and provide a higher seat density; relying on a
homogeneous fleet also reduces staff training time and personnel costs;
– elimination of all non-essential features (e.g. reclining seats) which further
allows the reduction of operating costs/activities, including cleaning the
aircraft;
– use of secondary airports, which are usually smaller and less-crowded (with a
consequent reduction in traffic delays, offload service and re-loading the
aircraft), and which charge lower landing fees;
– simplified or reduced services, such as on-line ticket sale and on-line check-
in, no seating reservations; in other words, “no frills—no additional costs”;
– rapid turnaround, with frequent short flights and less time on the ground;
– employment of a multi-role staff;
– “fly point to point” scheme, i.e. no services for flight connections for
passengers or baggage transfer are provided.
Even though LCCs may have different services and operational solutions,
most of the elements mentioned above usually characterize their strategy and
business model. However, as the number of LCCs has grown during the last
15 years, thus also increasing their competition, many companies have
responded by introducing variations to their business model.
Therefore, it is relevant to understand how the external environment, the
organisation’s strategy and the specific business model are mutually related
and influence each other in this sector.
With this in mind, it is essential to highlight at least three elements:
1) the overall air travel industry is characterized by strong competition, in
which LCCs have gradually emerged as strong players alongside the
FSCs;
2) the emergence of LCCs was made possible due to relevant deregulation, in
different time periods and in different geographical areas. In particular, in
the USA this process started in 1978 with the Airline Deregulation Act,
while in Europe such deregulation began only in 1987 and was completed
by the end of 1993 with the so-called “third deregulation package” (see
Diaconu 2012);
3) the opportunity to serve new markets and expand on other geographical
areas (e.g. Morocco destinations) is creating an additional incentive to
further introduce new strategies and diversify from the original LCC
business model. In particular, LCCs are increasingly expanding their
services to medium-haul markets. The result of this change is the so-
called “hybrid business model” (e.g. see Vidović et al. 2013), which
122 F. Barnabè and M.C. Giorgino

combines the traditional LCC cost-reduction solutions with the services

and route structure of a FSC.
b) Identifying the key components of the business model.
As also specified by IIRC (2013a), the main components of an organisation’s
business model are inputs, business activities, outputs, and outcomes. Therefore,
the second step of the analysis requires exploring and providing in depth
examples of the single elements included in the value creation chain of the
specific business model that was adopted. Focusing on LCCs, some examples
are as follows.
• Inputs: the capitals (financial, manufactured, intellectual, human, social and
relationship, natural) identified by the IIRC (2013a) are to be considered the
key inputs to any organisation’s business model. Whereas, some capitals are
quite common to a variety of organisations across various industries and
business sectors, more specific capitals can be identified in reference to
LCCs, such as (Warren 2008):
– Fleet. LCCs usually have a young and homogeneous fleet, based on newer
and fuel-efficient medium-sized planes (e.g. Airbus 319 and 320 or Boeing
737-700/800). Moreover, these planes are usually cost efficient also in
terms of maintenance and personnel costs, and are more affordable in
terms of capital costs as compared to long-haul aircrafts.
– Routes. The routes are a key element for any airline company. LCCs
usually operate short flights, to and from secondary regional airports.
Moreover, no interlining is accommodated, since the business model is
based on a point to point scheme in order to save time, increase the number
of daily flights and reduce costs.
– Staff. LCCs very often hire employees which are assigned multiple tasks,
in order to reduce costs. Employees are consequently assigned not only
cabin duties, but are also required to provide assistance at gate or clean the
aircraft.
– Customers. LCCs usually aim to attract customers which are highly
sensitive to pricing. Customers are also attracted by the number of routes
operated by the company and, to a smaller degree, by other variables (such
as brand strength). Among these customers, a substantial number will be
frequent travellers with the airline.
• Business activities are used to transform inputs into outputs. In doing so, they
are aimed at generating valuable outcomes and eventually creating short,
medium and long term value. The list of business activities related to a LCC
is substantially broad and includes, for instance, all the activities needed to
operate flights, hire and train personnel, open new routes or introduce new
services. In broad terms, other activities which could be listed in this category
include quality controls, relationship management, and service provision.
• Outputs are mainly the key products or services that an organisation
produces, but are also other by-products which create (or erode) value, and
waste. When considering a LCC, examples of outputs include: routes and
flights, services and by-products (usually sold as add-on products and
7 “Integrating” Business Model and Strategy 123

generating ancillary revenues), as well as wastes that result from the different
stages of the production process.
• Outcomes can be defined as the internal and external consequences for the
capitals as a result of an organisation’s business activities and outputs. In
principle, outcomes may be both internal (e.g. reputation and staff morale)
and external (e.g. customer value and environmental impacts).
With reference to a LCC, typical outcomes may be analysed in light of
financial performance results, such as operating revenues, operating margin,
net income, and net income per share. Further indicators are related to the
number of passengers carried during the year, such as the Passenger Load
factor, Revenue Passenger Miles (RPMs), and Revenue Passengers carried.
Moreover, some outcomes are related to the organisation’s staff and its
management, for example, by highlighting the degree of job creation (e.g. the
number of Full-time Equivalent Employees at year-end, compared to previous
years). Further data aim to clarify how the organisation is creating value that is
reinvested, increasing its fleet or modernising the existing aircrafts.
Considering more intangible outcomes, a LCC may be interested in
understanding if (and how) its reputation, brand strength and customer
satisfaction has improved during the previous year. For instance, a typical
way of analysing changes in reputation and brand strength suggests reporting
on accolades and awards received by the company, while customer satisfac-
tion may be assessed by counting the number of complaints made to the
organisation.
Finally, some outcomes that should be analysed include the environmental
impacts generated by LCC flights and economic implications.
With reference to the first issue, it should be noted that the airline industry
is among the most controlled business sectors due to its potentially high
environmental impacts. Moreover, LCCs are numerically the major contrib-
utor to the significant growth in flights in the airline sector. However, at least
in general terms, LCCs are characterised by relatively low CO2 emissions per
passenger kilometer index (RPK) and by fewer overall GHG emissions, by
relying on young and fuel-efficient fleets (and carrying more passengers than
their FSC competitors). In addition, many LCCs are actively trying to reduce
their environmental impacts by developing “green procurement” policies,
recycling materials, and periodically reporting on their environmental efforts
and achievements.
Regarding economic impacts, the presence of LCCs in secondary regional
airports is often seen as having a positive effect in those areas, by contributing
to the development of the regional economy (for some examples see Vidović
et al. 2013, p. 73).
Lastly, some LCCs are very active in the field of human rights, not only by
complying with state laws regarding child or forced labour, but also by
promoting programs aimed at increasing the awareness of suppliers and
customers regarding this problematic issue.
124 F. Barnabè and M.C. Giorgino

c) Drafting the integrated report

In this last stage, the integrated report is drawn up and used for disclosing
how the organisation has performed, and the actual performance is assessed in
comparison to desired outcomes and strategic goals. Therefore, we can see that
strategy and business model should be considered as “distinct disclosure
elements” (IIRC 2013a, p. 5), even though they are clearly related to each other.
Consequently, eventual gaps between goals and actual values may lead to
changes in the business model and/or in the organisation’s strategy and strategic
objectives. For instance, a specific LCC may decide to increase the number of
routes, modernize its fleet, enter into new markets, introduce a new pricing
policy, etc.
Finally, it is also important to note that any change decided by the
organisation should take into careful consideration the relationship with the
external environment and should be made with a long term, value creating
perspective.

Summary and Conclusions

This chapter has explored the concept of business model as a fundamental
element at the heart of any organisation. In so doing, the chapter began with a
literature review highlighting some possible definitions of the business model
concept, specifying that it may be influenced by the presence of regional
legislation, corporate governance codes and listing requirements; moreover,
we have discussed the link between an organisation’s business model and its
strategy.
On this basis, the chapter has adopted the definition of business model as
provided by IIRC (2013a), presenting its fundamental components (inputs,
business activities, outputs and outcomes) and discussing its linkages with the
company’s strategy and the external environment.
Consequently, the chapter has described a three-step process which could be
followed to develop, implement and use IR to support the links between an
organisation’s strategy and its business model.
In brief, the chapter has explored the dynamic process through which IR may
assist managers in the development of an integrated decision-making system.

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Performance Measurement and Capitals
8
Monica Bartolini, Fabio Santini, and Riccardo Silvi

Abstract
This chapter focuses on the most important characteristics that Key Performance
Indicators (KPIs) should have in order to reinforce their informative effective-
ness in stakeholders’ decision processes. To this aim, we discuss the role that
KPIs can potentially play within Integrated Reporting (IR)—i.e. measuring the
ability of the company to create value, by increasing or transforming its tangible
and intangible capital. Moreover, given the lack of a generally accepted model
for measuring and communicating the integrated performance of a company, this
chapter introduces a theoretical framework in accordance with IR guidelines and
principles. It provides an innovative perspective that contributes to integrate
internal- and external-oriented performance measurement systems.

8.1 Introduction

Integrated Reporting (IR) provides an effective and concise description of the

ability of a company to create sustainable value and combines information about
governance, strategy, risk, operations, financial and non-financial performance.
Environmental, social, and governance issues are increasingly recognized as
being responsible for filling the gap between the accounting and market value of
firms. It is widely recognized that the firm’s value creation depends on the ability to
manage a diversified set of capitals (financial, manufactured, human, intellectual,
natural, social). Non-financial data disclosed in annual reporting on a voluntary

M. Bartolini (*) • R. Silvi

Department of Management Sciences, University of Bologna, Bologna, Italy
e-mail: monica.bartolini4@unibo.it; riccardo.silvi@unibo.it
F. Santini
Department of Accounting, Business and Law, University of Perugia, Perugia, Italy
e-mail: fabio.santini@unipg.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_8, 127

# Springer International Publishing Switzerland 2013
128 M. Bartolini et al.

basis is usually perceived as being not reliable, not comparable and, therefore,
unable to affect investors decisions.
Despite some companies are developing innovative approaches to strengthen
accountability for these different capital configurations, stakeholders are demanding
more objective and unambiguous data. Therefore, the use of non-financial perfor-
mance measures can establish trust in the communication towards stakeholders,
making the non-financial information more robust. While managers are already
using Key Performance Indicators (KPIs) in their decision-making processes,
analysts and investors could also make greater use of them in the future.
This chapter describes the role in performance management and measurement
systems of a variety of capitals, as defined in the Consultation Draft of the International
<IR> Framework (CD, IIRC 2013a, pp. 12–13) and exhibited in the Capitals Back-
ground Paper for <IR> (IIRC 2013b). After discussing the role that KPIs can
potentially play in IR—measuring the ability of the company to create sustainable
value, by increasing or transforming its tangible and intangible capital -, this chapter
focuses on the most important characteristics that KPIs should have to be useful for
stakeholders’ decision making.
Afterwards, given the lack of generally accepted models for performance measure-
ment within IR, the chapter provides a framework for an Integrated Performance
Measurement System coherent with IR purposes. The framework is structured on four
different value creation dimensions (competitors and best practice, the entire value
chain, innovation and knowledge, internal processes), that should be measured
through the adoption of specific KPIs and disclosed in IR to offer a complete overview
of the company’s ability to create value. Each dimension is observed through a triple
perspective: economic, environmental, and social. Examples of KPIs are provided,
taking into account the GRI’s framework in the Sustainability Reporting Guidelines
G4 (2012).

8.2 The Role of Capitals in Performance Reporting

The CD of the IIRC is based on the understanding that “value is not created by or
within an organization alone, but is: (i) influenced by the external environment
(including economic conditions, technological change, societal issues and environ-
mental challenges), which creates the context within which the organization
operates; (ii) created through relationships with others (including employees,
customers, suppliers, business partners, and local communities); (iii) dependent
on the availability, affordability, quality and management of various resources”
(CD, section 2.1).
In accordance with traditional models of business strategy, the innovative scope
of this notion involves the review of the concepts of “resources” and “value”.
The reference to resources is not limited to those that can currently be employed,
but extends to potential factors that may affect the company’s ability to generate
future income. Current and potential resources are expressed in the concept of
“capitals”, which may take the following forms:
8 Performance Measurement and Capitals 129

• financial (the funds available to an organization);

• manufactured (manufactured physical objects—as distinct from natural physical
objects—that are available to an organization for use in the production of goods
or the provision of services);
• intellectual (organizational, knowledge-based intangibles);
• human (competencies, capabilities and experience, and the motivation to
innovate);
• social and relationships (institutions and relationships within and between
communities, groups of stakeholders and other networks, and the ability to
share information to enhance individual and collective well-being);
• natural (all renewable and non-renewable environmental resources and pro-
cesses that provide goods or services that support the past, current or future
prosperity of an organization).
Organizations employ the capitals “in one form or another as inputs and, through
its business activities, converts them to outputs (products, services, by-products and
waste). The organization’s activities and its outputs lead to outcomes in terms of
effects on the capitals” (CD, Section 2.9). In this fashion, they are “increased,
decreased or transformed through the activities and outputs of the organization in
that they are enhanced, consumed, modified, destroyed or otherwise affected by
those activities and outputs”.
The concept of “Capitals” is also related to the idea of “Value”, which is
interpreted by the CD not only with regard to the functions of financial variables
(variations in financial capital), but also as a “measure of the positive and negative
effects generated across all of these capitals”. This implies a relevant change in
business performance measurement, and shifts the perspective of analysis from the
short to medium-long term.
It should be noted that the consideration of fluctuations in the value of capitals
does not alter the primary firm’s purpose of maximizing the present value of future
income (or market value), to which all firms should aim (Jensen 2002), but rather
represents a logical precondition to ensure the continued focus of management on
the creation of sustainable development conditions for the business. The company’s
ability to achieve this aim can be verified by demonstrating the relationship that
exists between financial and non-financial results, the role of different capitals in
the company’s value creation process, and the manner in which the business intends
to generate and exploit emerging opportunities.
The decision to shift the focus to the role played by the different capitals that
benefit the company has significant consequences.
Although one might assume that each form of capital corresponds with one or
more stakeholders, with a consequent lack of distinction between the two categories,
it should be made clear that there are significant differences between them.
To illustrate this assertion, one can take the example of the difference that exists
between employees (stakeholder) and human capital (capital). On the one hand,
employees represent the current workers, with associated characteristics and company
expectations; on the other hand, human capital can be conceived as composed not only
of employees. The latter regards all people who gravitate towards the company’s field
130 M. Bartolini et al.

of activity, and who may eventually enter into working relations in the future. In this
sense, initiatives such as training the current workforce, and the provision of funding
to local high schools, with the aim of developing certain vocational skills, may have
similar effects in terms of their impact on human capital value. Both are capable of
affecting the ability to generate future income, but only training activities concern
current employees. If the ultimate goal of IR is to illustrate the extent to which the
organization achieves its strategic objectives, and outlines business performance, any
detail which affects human capital value is relevant.
In brief, the two categories of stakeholders and capitals must be treated separately
even though they are interlinked as “some of the capitals belong to the organization,
while others belong to stakeholders or to society more broadly [. . .] the organization
and society therefore share both the cost of the capitals used as inputs and the value
created by the organization” (CD, section 2.9).
The conceptual distinction between stakeholders and capitals also makes it
difficult to ignore the effects that business activity has on the local community
and environment, which is often overlooked when the attention is focused on the
relationship between the organization and social partners. Because of the lack of
trade-off between business success and benefits created for society, which in turn
“create economic costs in the firm’s value chain” (Porter and Kramer 2011, p. 68),
the performance measurement based on changes in the value of financial and non
financial capitals leads management towards the path of social responsibility.
Porter and Kramer (2011, p. 66), also affirmed that “a business needs a success-
ful community, not only to create demand for its products but also to provide
critical public assets and a supportive environment”. In their paper titled “Creating
shared value”, the two authors completely overturn the traditional idea that running
a business in itself creates sufficient social benefits due to the fact that companies
generate employment, investment and taxes (Friedman 1970).
As a means towards achieving a long-term competitive advantage, a firm should
be committed to creating shared value through “policies and operating practices that
enhance the competitiveness [. . .] while simultaneously advancing the economic
and social conditions in the communities in which it operates”. In this sense, “Profits
involving a social purpose represent a higher form of capitalism—one that will
enable society to advance more rapidly while allowing companies to grow even
more. The result is a positive cycle of company and community prosperity, which
leads to profits that endure” (Porter and Kramer 2011, p. 75).
One example presented by the authors is that of Nespresso (a business division
of Nestle), which between 2000 and 2011 recorded an annual increase in turnover
of 30 %. This success, while also the result of improved reliability and quality in the
supply of coffee, has been achieved by working closely with suppliers—mostly
small business owners in extremely poor rural areas of Africa and Latin America—
giving them advice on cultivation practices, guaranteeing bank loans, helping to
ensure the necessary production factors, and encouraging supply of the highest
quality. This has led to an increase in producers’ income and an improvement in the
lifestyle of rural communities.
8 Performance Measurement and Capitals 131

This policy, as well as affecting the current expectations of stakeholders

(suppliers), has produced many other effects: it has guaranteed optimal supply
conditions for the future, stimulated non-agricultural players to engage in similar
activities, strengthened awareness of the Nespresso brand among a population
which has seen an increase in their purchasing power, and improved business
expertise through the development of new initiatives and interaction with local
communities. The effects generated do not only apply to direct stakeholders, but
also offer significant benefits for manufactured, intellectual, social and relationship
capitals. It is for this reason that the authors state that this managerial philosophy
“is not philanthropy but self-interested behaviour to create economic value by
creating societal value” (Porter and Kramer 2011, p. 77).
While the CD proposes a range of reporting options, it can be envisioned that
two possible approaches to the role of capitals may be favoured in practice:
• a focus on internal stakeholders. In this case the capitals would be exclusively
directed to represent the qualitative characteristics of current company
stakeholders (in the case of Nespresso the emphasis would be on the increased
professionalism of suppliers and compliance with related income expectations);
• a distinction between stakeholders and capital. The value created would be
considered in terms of increased current and potential resources that might be
employed in the short and medium-long term in order to maximize future
income.
The latter is evidently more appropriate, and corresponds with the IIRC’s
framework guidelines, although it also tends to amplify the already significant
issues of representation and measurement of created value. The following section
explores the role of performance measurement in IR.

8.3 The Role of Performance Measurement in Integrated

Reporting

Investors and other stakeholders need to understand how an organization creates and
sustains value over time. The description of a company business model explains how
resources (capitals) are used and which activities add value, increasing and
transforming those capitals. It also provides insight into risks and opportunities
arising from external capitals and factors, such as economic conditions, social and
environmental issues, competitive forces and technological factors.
IR has the stated objective of providing an effective and concise description of
the company’s ability to create current and future sustainable value, by presenting
information normally reported in several separated documents as a coherent whole.
Separate and disconnected strands increase the complexity of information and fail
to highlighting critical interdependencies between strategic issues—for example,
governance, strategy, risk, operations, financial and non-financial performance,
value creation along the value chain, etc.
It is widely recognized that a diversified set of tangible and intangible resources
creates value in the short as well as in the medium and long term. For this reason, IR
132 M. Bartolini et al.

should report both financial results and accounting for the social and environmental
effects of a company’s business model, including information on reputation, market
positioning, innovation, employees’ skills and talents, etc. (IIRC 2012). Briefly, IR
should highlight the importance of different capitals for the past and future perfor-
mance of the company.
Capital market players increasingly ask for clarification of the difference
between the accounting and market value of firms, emphasising the role of addi-
tional non-financial data (Anderson et al. 2005; IFAC 2008; Pozen Committee
2008). A survey by the Radley Yeldar commissioned by GRI (2012) on a sample of
investors and analysts reveals that 80 % of the interviewees believe that non-
financial information is very relevant or at least relevant to their investment
decision-making, showing a clear preference for more comprehensive sources of
financial and non-financial information. 84 % stated that it is either very important
or important to make explicit links between different dimensions of performance.
This empirical evidence strongly supports an integrated approach to annual
reporting and, in particular, the connection of financial and non-financial results.
In addition, while Environmental, Social, and Governance (ESG) information is
increasingly used by investors to develop financial valuation associated with a company,
many investors perceive ESG information as being complex, not integrated, difficult to
access and hard to compare. According to a survey by Radley Yeldar (2012), 61 % of a
sample of analysts and investors stated that social information is difficult to compare;
moreover, 41 % believe the same as regard to environmental information. Devinney
(2009) argues that the link between corporate social performance and corporate financial
performance is complex, affected by many contingencies. Nonetheless, from a strategic
point of view, companies neglecting these dimensions underestimate risks and, at the
same time, miss opportunities. As a consequence, measuring ESG factors becomes a key
emerging issue. The perceived accountants’ inability to measure the effect of ESG
factors on financial performance is the most common barrier to enlarge their role in
annual reporting. Accounting rigor in the collection, analysis, and reporting of ESG data
should then encourage the incorporation of ESG factors into a company’s information
system, both for management and external disclosure purposes. If ESG data and analysis
met the same international standards as financial data, investors would be encouraged to
take these factors into bigger consideration in their decision-making. Moreover,
standards on reporting environmental and social performance information would aid
comparability as well. Therefore, the use of non-financial performance measures can
establish trust in the communication to stakeholders of company’s results, making non-
financial information more robust, rather than looking like subjective and non-
quantifiable assertions (PricewaterhouseCoopers 2007a). Stakeholders are demanding
objective and unambiguous data about company business models, governance, risk
management, etc.
In this context, KPIs can play a crucial role. Thanks to KPIs, ESG factors can be
measured and monitored. While managers are already using KPIs to assess their
business, analysts and investors could make greater use of them in the future. KPIs
can translate ESG factors into figure and even attempt to describe their impact on
financial performance. As an example, the UK framework introduces some
8 Performance Measurement and Capitals 133

• Declaration of strategic objectives, from a triple bottom-line

perspective: financial, social, environmental
• Linkages between declared strategic objectives and actions taken
to address them
STRATEGIC
• Identification of intended outcomes for each action
GOALS

• Identification of measures (KPI) for the stated outcomes

• Disclosure of forecasts, targets and basis for comparison for each
KPI
• Disclosure of results for each KPI
• Description of the relationship between selected KPIs and value
KPIs creation

Fig. 8.1 From strategic objectives to KPIs

elements on the possible role of KPIs within Enhanced Business Reporting.

Reporting standard 1 (ASB, May 2005)—concerning the Operating and Financial
Reviews—states that that document should include an analysis using financial KPIs
and, where appropriate, analysis using KPIs on other dimensions, with a particular
focus on environmental and employee information. Trend data should also be
reported to allow an assessing of the management strategic success. As stated in
this document, if used correctly, KPIs can offer concise and solid data as a key
complement to the narrative discussion in company annual reporting. The way KPIs
are used and explained is a critical issue and greatly affects their effectiveness. In
fact, if not properly explained, contextualized and if not consistently used, KPIs can
even result in misleading information.
Furthermore, KPIs could enhance the comparability of the company results
within the industry, if they reflected widely accepted metrics. A survey by
PricewaterhouseCoopers (2007b, p. 21) reports a high demand by investors and
analysts for industry-specific performance data. In particular, they call for interna-
tional standards to be developed to address the comparability issue of data, in terms
of calculation and presentation.
Figure 8.1 shows the process for identifying KPIs for annual reporting. The flow
starts with the identification of the company’s strategic objectives, taking into
account both tangible and intangible aspects, financial and non-financial dimensions.
Strategic objectives should be linked to the expectations of each category of
stakeholders. According to the indications given by the CD’s principle of stake-
holder responsiveness, “an integrated report should provide insight into the quality
of the organization’s relationships with its key stakeholders and how and to what
extent the organization understands, takes into account and responds to their legiti-
mate needs, interests and expectations” (CD, section 3.13). Indeed, an understanding
134 M. Bartolini et al.

of the needs of stakeholders is crucial, not only to ensure their effective contribution,
but also to correctly measure the overall business performance. Stakeholders’
satisfaction (or lack of satisfaction) is reflected in the variation of capitals. The
absence of understanding may lead management to believe that they have created
value, when in reality it is the opposite. To avoid this, it is necessary to establish a
direct dialogue with stakeholders, in order to ensure trust and engagement (Wheeler
and Elkington 2001).
After their specification, strategic objectives should be linked to the actions
taken to address them. The identification of intended outcome for each action
allows managers to translate objectives into concrete intended results.
IR should explain how each stated outcome has been translated into measures,
i.e. KPIs able to quantify the ability of the management to achieve strategic
objectives. While KPIs presented in isolation from strategies and value creation
processes can increase the complexity of business-reporting, a comprehensive set of
values linked to the strategy and supported by a context-giving narration would
constitute a useful way to enhance business model’s disclosures (Buck 2002;
Mouritsen and Larsen 2005).
KPIs should cover short, medium and long-term periods, including
differentiated forecasts and targets. The comparison between estimated data and
real data -with evidence of the degree of accuracy of management forecasts- is of
great importance to stockholders. This comparison allows the transformation of the
IR performance section into an extension and qualification of management earnings
forecasts, which are generally considered to be essential for investment decisions in
financial markets (Anilowsky et al. 2007; Ball and Shivakumar 2008), and respon-
sible for the largest variation in quarterly stock returns (Beyer et al. 2010).
It is interesting to underline the manner in which forecasts effectively condition
investment choices, due to their estimated reliability and the perceived predictive
abilities of managers (Kennedy 1999). In other words, “investors respond more
strongly to forecasts issued by managers with the highest prior forecasting accuracy”,
especially in the case of information uncertainty (Yang 2012). Indeed, correct
predictions, as well as being an effective element in business success (Singh 2013),
are testament to the presence of managers that are aware of business realities and future
prospects, which represents a guarantee for investors. Given the difficulties investors
find themselves, and non-professionals in particular, in verifying the predictive
capabilities of managers, the presence of the deviation between forecasts and final
results in the IR analysis (which may be limited to the principal KPIs) should cause a
notable decrease in information asymmetries in the financial market. This would affect
the quality and completeness of data reported, until now not considered sufficient to
describe the company’s value creation process (Houston et al. 2010).
In order to be useful, KPIs should have some important characteristics. Firstly,
they should be included in the performance measurement systems set up for internal
purposes. According to recent national and international regulations, the reporting
package should clearly align information reported externally with information
reported to senior management for decision purposes. This implies that large part
of the information used/reported by managers to run the business and to evaluate
8 Performance Measurement and Capitals 135

the achievement of the company’s strategy coincides with the capital providers and
other stakeholders’ requirements for efficient decision making.
Secondly, KPIs should be clear and understandable (CD, section 4.31). Thus, IR
should provide any information that enables stakeholders to clearly understand each
KPI disclosed. In particular, the following should be included for each KPI: its
definition and calculation method; its purpose and the reason why it is “key”; and
the source of underlying data and any assumptions.
Thirdly, KPIs should be comparable (CD, section 4.31), over time and between
organizations (at least, within the same industry). So comparability should be provided
at two different levels: (1) inter-firm comparability (PricewaterhouseCoopers 2007a,
p. 21), (2) inter-period consistency.
As for the first level of comparability, generally-accepted indicators provided by
international institutions (like GRI, for instance) could strongly support this need.
Taking into consideration that KPIs tend to be industry and process-specific, the
EBRC (2007, p. 4) suggested the involvement of industry-specific and market-
based committees. As an example, a Gartner/EBRC AICPA’s document (2010)
summarizes the results of a KPIs initiative to identify and develop industry-wide
standard measures that forecast corporate performance. Also standardized
taxonomy—such as XBRL—if available for relevant industry KPIs, would make
it easier for investors and stakeholders to compare and, thereafter, make use of
KPIs in decision-making (Doni and Inghirami 2011). XBRL could also enhance
accessibility of data via Internet.
Considering the second level of comparability (inter-period consistency), IR
should reveal any changes and comparisons between different calculation methods
over different periods, as well as the impact of changes in accounting policies.
Moreover, trend and past data should also be reported (for three or more past
periods) as they provide the reader with a way of assessing the success of manage-
ment strategies.
After discussing results, including the reasons for successes and failures, IR
should adopt a forward-looking perspective, introducing challenges to progress and
plans for the delivery of strategic future objectives, in relation to targets and
projections for each KPI for two or more future periods.
IR should finally offer a description of the relationship between selected KPIs
and financial results, in a narrative form and preferably, when possible, in quantita-
tive terms. As an example, this would require a quantification of the relationship
between KPIs and revenues, expenditures, investments, cash flow, profitability
ratios, etc. This last step would anchor results of single areas of management to
the global business financial performance achieved over the period, especially if
mathematical cause-effect relationships are defined. The focus on capitals of the
CD suggests that IR also discloses a quantitative description, when possible, of
cause-effect relationships between KPIs and the variations of the non-financial
forms of capitals.
136 M. Bartolini et al.

8.4 An Integrated Performance Measurement System’s

Framework

The ability of a company to create financial value can be measured using existing
and generally-accepted standards; but few approaches have been developed to
measure and report business value creation through intangible factors, like creating
knowledge and increasing employees’ skills, supporting public policy, respecting
natural environment, reducing waste and environmental pollution, etc.
Perrini et al. (2009) aims at showing the multiple levels of analysis at which
corporate social responsibility’s performance consequences can be appreciated and
evaluated. The analysis provides a value creation framework based on the following
value drivers: organizational, customer, society, natural environment, innovation,
and corporate governance. According to this model, those value drivers turn into
(1) revenue-related outcomes (such as growth opportunities, competitiveness posi-
tioning, brand equity), and (2) cost-related outcomes (i.e. cost of labor, operational
efficiency, cost of capital, risk management).
Ferguson (2009) explores methods for making more explicit the issues
surrounding corporate responsibility and financial value and provides approaches
for selecting, measuring and evaluating performance. However, they are only
developed for internal purposes, to support strategies, policies and processes.
Epstein and Wisner (2001) suggest a framework based on the Balanced Score-
card to implement sustainability and to measure its effects from a multidimensional
perspective.
Given the lack of a generally accepted model to coherently measure the
integrated performance of a company, this section introduces a theoretical frame-
work, that provides an innovative perspective for both scholars and practitioners. It
is characterized by a comprehensive and complete view of a number of factors
affecting companies’ performance and leads to an integration between internal- and
external-oriented Performance Measurement Systems. While companies can adopt
this framework for management purposes—to assess and orient strategy and their
own behaviour—investors and other stakeholders can use it to clearly read and
appreciate the real quality of management and the ability of the company to create
value.
Figure 8.2 highlights four different value creation dimensions (competitors and
best practice, the entire value chain, innovation and knowledge, internal processes)
that companies should include in their Integrated Performance Management System
(IPMS) to assess their ability to create value. Each dimension can be observed and
managed through a triple perspective: economic, environmental, and social (i.e. the
triple bottom-line). Moreover, each dimension involves all the various forms of
capital (human, social and relationship, natural, intellectual, manufactured, and
financial) on which the organization depends.
What follows is a brief description of the benefits of measuring and reporting to
stakeholders each value dimension. In general, business benefits consist of
maximizing opportunities and minimizing risks.
8 Performance Measurement and Capitals 137

Fig. 8.2 An integrated

performance measurement
system (IPMS) framework

value
chain

competitors &

innovation &
best practice
Economic

knowledge
Environmental

Social

internal
processes

8.4.1 The Value Chain dimension

The analysis of the value chain dimension includes three sub-dimensions:

• The value chain as a whole;
• Customers;
• Suppliers.

8.4.1.1 The Value Chain as a Whole

The focus of this sub-dimension is on the value chain’s economic, social and
environmental performances. It helps to understand the impact on capitals of:
• How the business model works, its dynamics and key relationships;
• The distribution of the value generated among the various value chain actors,
reflecting both their different level of bargaining power, and the customers’
perception about the different content of value inside each activity;
• The reasons explaining companies’ profitability in different stages of the value
chain, characterized by specific competitive factors and levels of competition;
• Opportunities to increase collaboration between businesses within the value
chain and to protect and reinforce relationships with customers and suppliers;
• Opportunities to reduce the environmental impact along the value chain (pollution
due to transportations, packaging, waste of materials, energy and other resources
due to inefficient processes and transaction costs, etc.);
• Opportunities to contribute to the development of organizations in specific
geographical areas (districts, poor areas, developing countries, etc.) or with
particular social relevance.

8.4.1.2 The Customers

In competitive markets it is essential to offer products and services that meet
customer requirements from a multidimensional perspective. Therefore, the
138 M. Bartolini et al.

identification of the most relevant value attributes in the eyes of the customer
becomes essential. Subsequently, these can be translated, into parameters and
KPIs, as leading indicators of the company’s ability to create value by increasing
its capitals through:
• Engaging customers;
• Providing products and services aligned with customers expectations and able to
generate value for them;
• Achieving acceptable levels of customer profitability;
• Controlling the financial risk based on the possibility that customers (or
segments of customers) will not fulfill their financial obligations;
• Building and protecting the corporate brand;
• Mitigating the environmental impacts of products and services and, as a conse-
quence, providing savings and waste reduction for customers (e.g. thanks to
packaging affecting transportations cost, more regulation compliant features, etc.);
• Establishing more valuable and synergistic relationships and partnerships with
customers (e.g. through training activities and/or delivery of safer materials/
products/services).

8.4.1.3 The Suppliers

The supply chain is a relevant driver of competitive advantage and sustainable
performance. By measuring this dimension management can control and report:
• Suppliers’ performance (or of groups of suppliers) in terms of defect rate and
quality;
• The quality of service, in terms of timeliness of delivery, on-time delivery, etc.;
• The cost of the procurement process in terms of total cost of ownership (Ittner and
Carr 1999), which, in addition to the purchase cost of inputs, also considers
purchasing activities’ costs (issuing of orders, receiving of goods, incoming
inspections, etc.), of stocks maintenance (physical space, cost of capital, inspection,
etc.) and other qualitative aspects (like waste, rework, returned goods);
• Suppliers’ sustainability, in terms of their ability to produce recycled input
materials, of environmental impacts of transporting goods and materials, etc.;
• The opportunities deriving from more valuable and synergistic relationships and
partnerships with suppliers;
• Human rights’ performance of significant suppliers and their role in the local
community.

8.4.2 The Internal Processes Dimension

This IPMS’s dimension pursues two main objectives. The first relates to the appraisal
of the operational performance of internal processes in terms of efficiency, which
affects all the various forms of capital available to the organization. As a consequence,
processes’ efficiency is relevant to the creation of economic value and, at the same
time, strongly affects the environmental and social impacts. Thorough this section
some key information can be investigated:
8 Performance Measurement and Capitals 139

• Productivity of internal processes;

• Cost of operations;
• Environmental impacts of technology used, in terms of pollution, emissions,
energy consumption, recycling, etc.;
• Labour practice and working conditions, absenteeism and sickness, gender
balance, child labour;
• Ability to create employment, directly and indirectly;
• Compliance with regulations and voluntary codes concerning the health and
safety impact of internal processes’ activities, products and services during their
entire life cycle.
A second aim is to appreciate the content of value of each company’s activity
performed along its processes. According to this goal, process activities can be
classified in value adding, non-value adding or waste (McNair et al. 2013).
In particular, a better understanding of waste has implications for both management
and stakeholders interested in environmental issues (see Chap. 9). For example,
KPIs related to this aspect could reflect:
• The cost of value, non-value and waste activities and their impact on lead time.
This kind of analysis is strategic in monitoring and controlling the ability of the
company to devote lacking resources to the most valuable activities;
• The cost of different typologies of waste;
• Opportunities of waste reduction;
• Opportunities of reduction of fines and litigation exposure.

8.4.3 The Innovation and Knowledge Dimension

Innovation and knowledge are fundamental values. As a consequence, IPMS should

pay attention to this dimension, in order to detect useful elements for evaluating
current and future competitive advantages and sustainability of the business model.
KPIs can measure the innovative potential of the company in terms of:
• New products/services developed over the reporting period and their economic,
social and environmental effects;
• New technologies/processes/materials introduced in the reporting period;
• The ability of the company to protect innovation through patents and trademarks;
• Product life-cycle efficiency;
• The efficiency of the innovation process;
• The efforts towards innovation (investments, expenditures, etc.).
However this dimension also concerns knowledge management and human
resource management and their impact on:
• Employees’ satisfaction, productivity, and loyalty, maintaining employee moti-
vation, retaining expertise and the best people, attracting the best skilled people,
and providing staff development opportunities;
• Organizational learning;
• Organizational climate, freedom of association, redundancy support;
• Safety in the workplace, respect of human rights and equal opportunities;
140 M. Bartolini et al.

• Impact on the local community (school/educational programs, employee volun-

teer programs, etc.).
Given the creative and non-repetitive contents of innovation and knowledge
management processes, the measurement of this dimension is a real challenge, but
it is also extremely important, given its strong impact on every form of firms’ capitals.

8.4.4 The Competitors and Best Practice Dimension

The Competitors & Best practice dimension is intended to monitor competitors and
their performance and enables comparison and benchmarking processes. Thanks to
this dimension IPMS achieves inter-firm comparability as a key issue in IR. The
company’s performance can be better appreciated comparing to the economic,
environmental and social results of specific competitors or to the entire industry-
sector. This section of the IPMS highlights strengths and weaknesses investigating:
• Profitability and growth of comparable groups of competitors;
• Different cost structures, reflecting alternative process configurations, technology,
customer targets, etc.;
• Alternative strategies and their social and environmental outcomes.
Furthermore, analysis about best practices within and outwith the industry
highlights opportunities to emulate them and catalyzes radical and continuous
improvements.
Basically, the consideration of this dimension involves the provision of compara-
tive data for the other IPMS dimensions presented above, when data is available and,
by nature, industry-driven.

8.4.5 Some Examples of KPIs Grouped for Capitals

Table 8.1 reports some examples of suggested KPIs for each dimension of the IPMS
discussed in the previous section. They follow a triple bottom-line perspective
(economic, environmental, social) and are mainly derived from the framework
provided by the Sustainability Reporting Guidelines G4 (GRI 2012).
Single KPIs can address more than one dimension at the same time, for instance
when industry or competitors’ values are disclosed, filling in the Competitors &
Best practice section of the IPMS.
Table 8.1 also shows how each KPI can be connected to a specific form of
capital; in other words, KPIs can measure the outcome of the organization’s
activities in terms of effects on each capital. As stated in the Capitals background
paper for IR (IIRC 2013b, section 3.5), “Quantitative indicators, such as [. . .] KPI
and in some cases monetized metrics, can be very important in explaining an
organization’s uses of and effects on various capitals”. Nonetheless, the same
document points out that it would not be practicable to expect organizations to
attempt to quantify all capitals, because many uses of and effects on the capitals are
best -and in some cases can only be- reported on in narrative form.
8 Performance Measurement and Capitals 141

Table 8.1 Examples of KPIs for each dimensions of the integrated performance measurement
system (IPMS), from a triple bottom-line perspective

KPIs Value Internal Innovation Competitors

Chain processes & & best
knowledge practice
ECONOMIC PERSPECTIVE
FINANCIAL CAPITAL
Revenues by customers, market, etc.
% of revenues by new products/services
Market share
Profitability ratios
Liquidity and financial position ratios
Value adding operating costs
Payments to providers of capital (return on equity,
EPS, etc.)
Timely payments to suppliers
New markets penetration rate
MANUFACTURED CAPITAL
Investment in new technologies
INTELLECTUAL CAPITAL
Investment in new brands development
No. and value of new patents/copyrights
Etc.
ENVIRONMENTAL PERSPECTIVE
NATURAL CAPITAL
Hazardous waste treated
No. of suppliers identified as having significant
actual and potential negative environmental im-
pacts
% of new suppliers/customers that were screened
using environmental criteria
Total weight of waste disposed by reuse, recy-
cling, composting, incineration, …
Waste reduction over the period
Volume of sills by categories (oil, fuel, chemicals,
etc.)
Total weight of waste disposed by reuse, recy-
cling, composting, incineration, …
Amount of significant air emissions
FINANCIAL CAPITAL
Total monetary value of fines for non-compliance
with environmental laws and regulations
Prevention and environmental management costs
Etc.
142 M. Bartolini et al.

SOCIAL PERSPECTIVE
FINANCIAL CAPITAL
Cost of actions taken to manage risks or opportu-
nities
HUMAN CAPITAL
No. or % of new employee hires during the re-
porting period, by age group, gender, region, etc.
Employee turnover rate during the reporting peri-
od
Injury rate
Occupational diseases rate
No. of incidents for non-compliance with regula-
tions
INTELLECTUAL CAPITAL
Average hours of training by categories
SOCIAL AND RELATIONSHIP CAPITAL
No. of ethical/legal violations
No. of suppliers/customers subject to impact as-
sessments for labour practices
% of suppliers covered by ethical procurement
Negative impacts for labour practices identified in
the supply chain
% of new suppliers/customers that were screened
using human rights criteria
No. of community complaints
Customer satisfaction
Etc.
8 Performance Measurement and Capitals 143

Conclusions
This chapter focuses on the role of KPIs in IR and introduces a framework for
developing an IPMS giving an innovative perspective to both scholars and
practitioners. The framework is characterized by a comprehensive and complete
view of the different performance dimensions and, most of all, it integrates
internal- and external-oriented performance measurement systems. Integration
among different information systems is a major issue in management accounting
studies. «Increasingly, accounting standards are requiring disclosure on the
financial statements of information consistent with that internally reported to
management. This is facilitating an organization’s ability to align certain finan-
cial statement disclosures with internal reporting and Management Commentary
provided to investors» (KPMG 2010, p. 4).
The cost of acquiring/collecting/gathering/integrating information is also a
relevant aspect; this could be reduced using common accounting systems and
technology. Thus, the overlap between KPIs information for annual reporting
and for management accounting is an opportunity to reduce information cost, as
well as to increase its effectiveness (see Chap. 9).
The opportunity to convey measures provided by management accounting
systems towards annual reporting for external purposes has consequences also in
terms of reliability of the data reported, which reflects the faithfulness level and the
degree to which information is verifiable. This requirement is obviously consider-
able for external reporting; in fact, from prior research users turned out to be very
concerned about the reliability of data in annual reporting, in particular with regard
to information with a forward-looking orientation. The CD (section 3.31) states that
“reliability is enhanced by mechanisms such as robust internal reporting systems,
appropriate stakeholder engagement, and independent external assurance”.
The increased attention to KPIs in annual reporting could also have positive
effects on management control systems for internal purposes. In fact, in order to
comply with national and international regulations, management could be forced
to reinforce and improve the company’s management control tools, to formalize
and communicate their strategic priorities, and to produce the necessary measure-
ment data.
Neutrality is also essential, because stakeholders need to believe that the
information provided is not aimed at determining or influencing their decisions.
Guidelines from external independent entities can help to address this issue.

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Integrated Reporting and Value-Based Cost
Management: A Natural Union 9
Carol J. McNair-Connolly, Riccardo Silvi, and Monica Bartolini

Abstract
Integrated reporting systems are the wave of the future from two points of view:
for their support to management decision making processes, and as strategic
information source for annual Integrated Reporting (IR). This chapter describes
Value-based Cost Management (VCMS) as one tool available to the financial
and marketing communities that can be used in the integration effort because it
naturally joins data streams from across the organization to provide a unified
picture of the firm’s performance. Furthermore this chapter shows the twofold
potential contribution of VCMS to IR. First, it supports the management and
monitoring of the company performance with specific regard to customers and
internal processes as fundamental dimensions of an integrated performance
measurement system. Second, the role played by waste in VCMS is argued to
support the sustainability movement and reporting.

9.1 Value-Based Cost Management

Value-based Cost Management (VCMS) is a relatively new tool that has been
added to the financial toolbox for a company. Focused on looking at both revenues
and costs through the lens of customer preferences, VCMS provides new insights
into the way that companies spend their money meeting customer demands. It starts
with a focus on final consumer preferences and works its way through the

C.J. McNair-Connolly (*)

Honorary Principal Fellow, University of Wollongong, Wollongong, Australia
e-mail: cjconnolly126@gmail.com
R. Silvi • M. Bartolini
Department of Management Studies, School of Economics, Management and Statistics, University
of Bologna, Bologna, Italy
e-mail: riccardo.silvi@unibo.it; monica.bartolini4@unibo.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_9, 147

# Springer International Publishing Switzerland 2013
148 C.J. McNair-Connolly et al.

traditional financial model to more closely align financial metrics with those used in
strategy, marketing, and operations.

9.1.1 Value from the Consumer’s Perspective

There are countless articles in the marketing literature about the concept of value
from a customer’s perspective. Moller (2006, p. 914) notes that there have been four
recurring characteristics of value in recent marketing studies: (1) customer value is
a subjective concept, (2) it is conceptualized as a tradeoff between benefits and
sacrifices, (3) benefits and sacrifices can be multi-faceted, and (4) value perceptions
are relative to competition. The author notes that these findings are based on a
comprehensive review done by Ulaga and Eggert (2005, pp. 75–76).
Priem (2007, p. 219) brings the lens of value creation more tightly into the realm
of consumers, noting that “consumers must be an important consideration in
strategy formation, because consumers experiencing benefits are essential to com-
pany success [. . .] value creation, by offering benefits that induce payments from
willing consumers, is a precondition for value capture”. Value creation, then, starts
with the final customer of the value chain—the consumer. In a competitive market-
place each company in the value chain is constrained by the final value placed on
the chain’s products and services by a willing consumer. These firms compete for
the rewards of value creation by attempting to capture the most value within their
chains.
The VCMS at the heart of this chapter ties to literature that emphasizes the
demand side of the value creation puzzle. This is because willing consumers
validate the value of products and services (Priem 2007, p. 219), not the chain of
companies that supply portions of these products and services to the consumer.
Starting from the recognition that the only place true revenues are earned in the
marketplace is when consumers part with their own resources to obtain a good or
service, the VCMS joins the league of strategic and marketing tools that put
customers first in the quest for profit and as preferential stakeholder.

9.1.2 Tying Value to Revenues

How does the VCMS take the consumer-defined concept of value creation and
bring it into the financial domain? It does so by redefining the revenues earned by a
firm in terms of the value attributes, or key points of value creation, that the
consumer identifies with and uses in their selection process. Specifically, the
VCMS creates what are called revenue equivalents, which proportion revenues
earned to value attributes based on how important they are to the consumer’s choice
decision.
An example of revenue equivalents can be seen in Table 9.1. Here we have a
window manufacturer who is trying to understand exactly what aspects of a window
purchase matter the most to consumers. As we see from Table 9.1, the concept of a
competitive price weights very heavily in the consumers’ decisions. This is not
9 Integrated Reporting and Value-Based Cost Management: A Natural Union 149

Table 9.1 Revenue Total sales revenue for window products: $1.5 billion
equivalents
Value attribute Value weighting Revenue equivalent
Competitive price 40 % 600,000,000
Weather tight 15 % 225,000,000
Color 5% 75,000,000
Style 8% 120,000,000
Sizes available 10 % 150,000,000
Warranty 15 % 225,000,000
Service 7% 105,000,000
Totals 100 % 1,500,000,000

market price, per se, but rather the “table stakes” component of price—the amount
of money that the consumer assigns to the basic features of the product or service
(Nagle and Holden 1999).
The other six features of a window that consumers care about are
differentiators—they lead to the ability of a firm to charge more for its product
than the basic commodity window replacement would earn. Here we see that
weather tightness and warranty both make up a large portion of the revenues earned
by the firm—15 % or $225 million each. This amount directs attention in the firm to
how much money it has available to spend to provide these features for its products.
Revenue equivalents lay the baseline for the costing exercise.

9.1.3 Looking at Costs Through a Value Lens

Having tied the VCMS to the top line of the firm (revenues), attention now turns to
the costing side of the economic puzzle. Revenue equivalents tell a firm how much
it can afford to spend to deliver on a specific value attribute if it intends to make any
money on the product. Clearly, costs cannot be equal to revenue or there will be no
profit left in the firm. Let’s say a company wants to earn a 20 % profit on its window
sales. Then all of the costs for producing these windows, marketing them, and
supporting them with internal activities has to be less than or equal to $1.2 billion
for our window company.
This sounds reasonable, but very few companies make this magic 20 %. The why
behind this problem is excess cost. Cost takes on many forms in a company, making
it hard to make a clear linkage between a value attribute and a specific cost element.
It is here that the VCMS makes its second major contribution to the existing cost
management literature (McNair-Connolly et al. 2013). Specifically, the VCMS
model splits the spending of the firm into five categories of cost (value-add;
business value-add indirect, such as invoicing; business value-add future, such as
R&D; business value-add administrative, such as personnel; and waste) and then
ties the value-add dollars of this total to the specific value attributes.
In total terms, a company can see whether it is spending most of its money on the
things consumers directly value or whether more of the funds are going to support
150 C.J. McNair-Connolly et al.

the business itself. In study after study, only 20 % at most of the total spending of
the participating firms in the McNair-Connolly et al. (2013) report was tied directly
to value-added from the consumer’s perspective. The rest of the spending was
spread across the other four dimensions of cost in a wide range of ways. More
successful firms tended to concentrate on business value-add indirect (activities that
impact consumers indirectly) and business value-add future (activities that build
future competencies).
This brief overview of the VCMS approach will hopefully provide the baseline
understanding to now look at how this model integrates with the rest of the firm’s
information datasets to form an integrated reporting system. For a much more
detailed discussion of the model, the reader is referred to McNair-Connolly et al.
(2013). It is to these integration issues that we now turn our attention.

9.2 Integrating VCMS with Other Information Systems

PriceWaterhouseCoopers (2010, p. 3) suggests that the goal of Integrated Reporting

(IR) is to provide a “cohesive and persuasive picture of a business, including the
way it is managed and governed”. The five key elements of this new reporting
approach are an enhanced marketing set of insights, the delivery of the long-term
strategy, the revealing of the behavioral triangle (governance, risk, and remunera-
tion), the dynamics and key relationships underlying the firm’s business model, and
rethinking measurement and presentation in the light of a highly resource-
constrained world (PriceWaterhouseCoopers 2010, p. 3). IR should be useful to
both internal and external stakeholders in assessing the value of the organization or
in making decisions about how to best leverage the firm’s assets to generate
positive, sustainable value (see the Chap. 8).
The value of a free-standing information source, such as the VCMS, is enhanced
if it can be integrated with other sources of information in the firm. To achieve this
objective, though, the information in all affected systems needs to reflect the same
basic beliefs, assumptions, and approaches to measurement. This set of
expectations is actually a strength of the VCMS, which uses activity-based lan-
guage defined in terms of consumer-driven concepts that underlie strategy, market-
ing, product development and process management fields. Let’s now turn to
specifics about this integration.

9.2.1 VCMS and Marketing Databases

The major focus of marketing databases is the firm’s customers. Looking at both
what the customer expects from the company (the value profile) and how well these
expectations are met (satisfaction and loyalty metrics) the marketing database
provides a vital link with the revenue-generating aspects of the firm’s competitive
positioning. Brand loyalty is one of the key value attributes for a consumer product
firm. Finding out how important brand is in the decision process of the purchasing
9 Integrated Reporting and Value-Based Cost Management: A Natural Union 151

Firm Value
Proposition

Customer
Value Profile

Customer
Marketing Satisfaction VCMS
Database Database
Revenue
Equivalents

Value-added
Dollars

Fig. 9.1 The interplay of marketing and VCMS data

consumer helps a company understand what funding should be made available to

build brand image and gain a competitive advantage from this branding.
The VCMS focus on separating out the revenue portion of the firm to match the
consumer’s value preferences tightly links these two systems together. In fact, the
VCMS helps translate financial language into marketing language, providing a
common baseline for the various managers to use when trying to describe, shape,
and act on marketing opportunities. By tying marketing language tightly to the
financial reporting process, the VCMS makes it easier to make decisions regarding
where additional marketing dollars should be spent to yield the greatest benefits.
There are many linkages, therefore, between the marketing and VCMS
databases, as suggested by Fig. 9.1. The VCMS pulls three key pieces of informa-
tion from the marketing database to launch its analysis. Once this data is input into
the VCMS database, two vital pieces of strategic marketing data emerge—the
revenue equivalents, and the value-add cost distribution.
As the figure suggests, then, there are tight ties between the VCMS data and the
marketing insights used to drive company decisions and actions. Moreover, as it has
been noted earlier, the VCMS provides a natural point of linkage between market-
ing and finance, one that can significantly improve communication and reporting
practices. Placing the entire organization into a framework that is driven by the
consumer ties everyone in the organization to the firm’s ultimate goal—to meet or
exceed customer expectations.

9.2.2 VCMS and Operational Databases

An important part of any organization’s dataset is its operational metrics. Reflecting

how efficiently and effectively firm resources are being transformed into value-
added products and services, the operational database of metrics is one of the key
sources of information used to guide internal decision-making and process
improvement. Consisting of metrics of the quality, timely and accurate delivery,
152 C.J. McNair-Connolly et al.

cost, and productivity of the firm’s productive assets, the operational database lies
at the heart of any integrated information system.
The VCMS has a natural tie to the operational database in several ways. First and
foremost, it relies upon activity and capacity analysis (McNair and Vangermeersch
1998) to generate the list of activities that cost is matched to. These activities and
the related capacity data originate in the operational world and have been proven to
be a very valuable source for reformatting internal financial reporting systems to
better align them with operational reality. Since the VCMS relies upon activity and
capacity data, then, it is immediately linked to the facts as they exist in the
operational pipeline where the firm earns the money that the consumer is willing
to pay for products and services that are valued.
A second tie of the VCMS to the operational database, though, lies in the ease
with which process coding is added to the VCMS dataset (Hines et al. 2002; Silvi
et al. 2008). Process management is now considered best practice in the operational
disciplines. With its list of activities and a fully fleshed out process chart such as
that developed by the APQC Benchmarking Clearinghouse (1992), the basics of a
process structure can be detailed for any organization.

9.2.3 VCMS and the Resource Level of Reporting

One of the primary levels of the organization that affects all decisions is the
resource level. Keeping an eye on whether the firm has the right mix of human
skills (i.e. human capital, according to the Capitals background paper for IR by
IIRC 2013a) in the right proportions to meet customer expectations is one such
critical piece of information. This is data that exists in the human resources
database. It is data that is brought to life within the VCMS by its mapping of the
workforce to activities and the value-add cost distribution framework.
Other resources are also picked up by the VCMS analysis. When the operating
budget for a department or process is pulled together, the first question that needs to
be asked is whether the rest of the resources of the group are used up proportion-
ately to the human activity level or whether certain activities consume greater
amounts of non-people resources. This question leads to a simple alteration in the
data collection process, with the responding managers to the VCMS survey simply
breaking out the non-people costs against specific activities.
In this way, then, the VCMS also allows a firm to integrate the data on both its
human and physical resources (i.e. human and manufactured capitals, according to
the IIRC Consultation Draft of the international <IR> framework, IIRC 2013b)
into one unified picture of the types of activities and outcomes these resources
consume. Once again, the VCMS sits in an integrative role, sharing data with
resource-focused departments. In the case of a machine-intensive workplace, the
VCMS relies upon capacity reporting databases to generate its value-add cost
framework. This gives the VCMS two potential resource-focused points of
integration—the activity grid of the organization and the utilization analysis of its
9 Integrated Reporting and Value-Based Cost Management: A Natural Union 153

capacity—in the form of manufactured capital (IIRC, Capitals background paper

for IR, 2013a). As such, the VCMS can be an integral part of any IR system.

9.3 VCMS and Taking the Waste Out: Towards Sustainability

Sustainability requires organizations to provide goods and services in a way that is

profitable and, at the same time, ethical and respecting the environment, individuals
and the communities. This approach to the organization was expanded in the 2009
EABIS report on sustainable value by noting (EABIS 2009, p. 2): “Corporate
sustainability [. . .] is a business approach that creates long-term shareholder
value by embracing the opportunities and managing the risks associated with
economic, environmental, and social development”.
One of the primary drivers of the value creation framework suggested by the
EABIS sustainability project (2009, p. 2) is the role played by wasted resources as
an internal driver of performance. To sustain growth a company has to manage its
total portfolio of capital in such a way that it uses clean technology, prevents
pollution, develops a sustainable vision, and undertakes product stewardship.
Critical to this set of goals is the need to actively manage the waste of resources,
thereby reducing costs and enhancing profits within a sustainability framework.
In every measurement taken to build the VCMS database, an eye is kept on
identifying the various places waste can creep into the company’s structure. Waste,
or muda in the Japanese language, is the focus of all of the continuous improvement
tools currently in use. For instance, Total Quality Management (Ishikawa 1985;
Simpson and Muthler 1990; Morse and Poston 1990; Shank and Govindarajan
1993) targets the waste from defects and seeks ways to drive this form of waste
as near to zero as humanly possible (Six Sigma, Dahlgaard and Dahlgaard-Park
2006). On the lean management (Womack et al. 1990; Womack and Jones 1996a, b)
side of modern management approaches, the waste that is focused upon is move and
queue. One by one the new management techniques seek to ferret out waste. The
various kinds of waste that are targeted are shown in Fig. 9.2.

9.3.1 Waste: The Hidden Gold for Future Sustainable Growth

As noted in Fig. 9.2, there are many places waste can be created in an organization.
One of the most common places waste occurs is in the handoffs between different
functions in a company. Fumbles occur, causing rework and scrap, making an entire
process more costly to operate (Brache 2012).
Integrating the information systems of the organization into one unified set of
measurements helps identify, manage, monitor, and report these areas where
fumbles occur and sets a cost on these errors. Any time excess resources are
consumed within the organization, the waste that results pollutes some aspect of
the environment—it consumes scarce resources.
154 C.J. McNair-Connolly et al.

Excess Unfocused
Move Queue Defects
Complexity Processes

Excess
Redundancy Idle Capacity Setup Overproduction
Variation

“Re” Inadequate Un-Empowered Fumbles/ Poor

Anything Training Workers Errors Communication

Fig. 9.2 The many faces of waste

To gain a sustainable growth pattern, then, an organization has to be actively

managing all the sources of its waste. This waste can be structural in nature or
embedded in the process flow where action takes place (McNair 1994). In terms of
sustainability, then, waste metrics help identify where an organization is at risk
when faced with changing environmental conditions. Waste is a unifying measure
that helps an organization improve profits while at the same time supporting
sustainable growth. Waste is the hidden gold of sustainability.

9.3.2 The Dominant Role of Removing Waste in a VCMS

Waste is one of the five categories of cost collected in the VCMS data collection
exercise. Every activity has some portion of waste in it. Once again setting the
VCMS apart from other forms of activity analysis, each activity can be represented
as having portions of value-add, business value-add, and waste in it. It is not an all
or nothing proposition, nor is it one that is based on internal perspectives on value.
The VCMS, then, links to the sustainability movement because it details the costs of
the organization in terms of how important each portion of spending is to the total
value profile of the firm as defined by consumers and society.
Waste in the VCMS is the source for creating the growth cycle. Instead of simply
dropping the savings from removing waste to the bottom line, the VCMS
encourages firms to reinvest these savings into value-added work, thereby enhanc-
ing the growth potential of the firm. One time cost savings do little to enhance
9 Integrated Reporting and Value-Based Cost Management: A Natural Union 155

sustainability. A reinvestment strategy for savings that come from trimming waste
in the firm’s activities provides a baseline for gaining sustainable growth.
The area of waste is also one that can prove the most difficult to get responding
managers to agree to disclose. While clearly every activity has some portion of
waste that continuous improvement methods can help eliminate, managers are
reluctant to confess to these levels of waste, thinking that doing so will result in
reduced budgets. Under a sustainability approach, this fear is diminished as the
savings from reducing waste become the basis for adding investments in value-add
and business value-add future (R&D). Both of these results benefit the environment
and the firm’s stakeholders.
Taking a new approach to measuring waste once again serves to integrate the
VCMS into the other organizational initiatives, such as lean management. Since
lean initiatives to process management seek to understand waste at the task level,
the implicit task-based data in the VCMS can help to identify the areas where
potential savings are the greatest. Reaping sustainable value and growth is the
ultimate goal of waste reporting in the VCMS.

9.4 VCMS and Performance Measurement for IR

The VCMS data collection exercise offers valuable information about the perfor-
mance of the company, which can be reported to stakeholders to make them
appreciate its ability to create sustainable value. In particular, it contributes to the
appraisal of the operational performance of internal processes in terms of efficiency
(see the Chap. 8), paying attention—at the same time—to the content of value
of each activity. VCMS can gather data and metrics and key performance inditors—
articulated by business, process, department, etc.—organized by the following
categories:
• Activity costs and value, i.e. their distinction in value-adding, business value-
adding indirect, business value-adding future, business value-adding administra-
tive, and waste;
• Cost and value alignment, emphasizing gaps between the activities’ cost and
their importance to the total value profile of the firm as defined by consumers and
society;
• Customer satisfaction and its impact on sales and growth;
• Sustainability, measuring, for instance, waste reduction and the connected
effects on different forms of capital, such as financial (cost reduction, fines and
litigation exposure containment), natural (pollution, emissions, energy con-
sumption, recycling), and manufactured (unused capacity, productivity);
• Processes configuration and its impact on lead time, overproduction, poor
communication, redundancy, excess complexity and the other forms of waste
reported in Fig. 9.2, which affects all the capitals available to the firm, according
to the Consultation Draft of the International <IR> Framework (IIRC 2013b,
section 2.17).
156 C.J. McNair-Connolly et al.

9.5 Concluding Remarks

This chapter has briefly introduced the VCMS model and detailed how it fits into an
integrated reporting system. Taking its primary input from consumer preferences,
the model serves to identify strategic strengths and weaknesses. Because it relies on
activity and capacity data sources, it also links to the tactical and operational levels
of decision-making within the firm.
This chapter has also highlighted how the contribution of VCMS to IR is
twofold. First, it supports the management and monitoring of the company perfor-
mance with specific regard to customers and internal processes as fundamental
dimensions of an integrated performance measurement system. Second, it focuses
on waste reduction. In trying to create a sustainable future, the role of waste needs
to be taken into account. The VCMS recognizes that, while few activities are made
up totally of waste, there is waste embedded to some extent in every activity.
Suggesting that these wasted resources can be recouped and reinvested in the
organization to support future growth ties the VCMS approach not only to the IR
movement but also reflects the growing concerns with creating sustainable value for
the global community and the organization’s primary stakeholders.
Moving forward in the future in cost management, then, will require a new set of
perspectives. While financial accounting will still play a role in communicating
results of operations to the market, new forms of information need to be developed
that more closely and accurately represent organizational actions and outcomes.
The result will be a more robust information database where external reporting
more accurately and fully details the risks and returns resulting from management
decisions and action. VCMS plays a vital role in this natural unions of resources
(capitals) to outcomes, value creation to sustainable growth.
More people should learn to tell their dollars where to go instead of asking
them where they went.
Roger Babson

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Approaching Risk Management from a New
Integrated Perspective 10
Sonia Quarchioni and Francesca Trovarelli

Abstract
In recent years, risk management has acquired increasing relevance within the
organizational realm. Although the Integrated Reporting Framework includes
‘risk’ as one of the content elements of the Integrated Report, its main purpose
does not specifically relate to risk management. Drawing on the evolving
academic debate, this chapter aims to provide an overview of the different
approaches to risk management and to highlight the need for a broader and
integrated perspective. The chapter ends by highlighting the potential contribu-
tion of this perspective to the Integrated Reporting Framework.

10.1 Introduction1

The increasing uncertainty which characterizes the modern ‘risk society’ (Beck
1992) has led to growing interest about risk management (Power 2007). In this
context, organizations are considered as ‘critical agents’ (Hutter and Power 2005)
from a twofold perspective. Firstly, they represent the major providers of risk to the
external community. Secondly, they are large containers of uncertainty, which
needs to be managed appropriately in order to ensure long term value creation.

1
This chapter is based on the results of a broader research project entitled “From governance and
risk management rules to performance: roles, tools and enabling conditions in Italian firms”. The
authors would like to gratefully acknowledge the financial support for the research provided by
national funding within PRIN 2009. Although this chapter is the result of shared research, Sonia
Quarchioni authored the introduction and Sects. 10.2 and 10.3, while Francesca Trovarelli
authored Sect. 10.4. The concluding remarks are the joint work of both authors.
S. Quarchioni (*) • F. Trovarelli
Department of Business and Law, University of Siena, Siena, Italy
e-mail: quarchioni@unisi.it; trovarelli@unisi.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_10, 159

# Springer International Publishing Switzerland 2013
160 S. Quarchioni and F. Trovarelli

As argued by Power (2004a), this broad social movement of ‘risk management

of everything’ has been translated into a growing formalized body of international
frameworks that have prescribed how an organization should cope strategically
with rising uncertainty, as well as create and communicate sustainable value to its
external environment. Generally, these frameworks have enhanced both the impor-
tance of risk management as a mechanism of accountability (Spira and Page 2003)
and the need to consider risk and performance as ‘two sides of the same coin’ (Van
der Stede 2009).
The relevance of the relationships between risk and performance are also
acknowledged by the International Integrated Reporting Council (IIRC), a global
coalition of regulators, companies and professional institutions, which is currently
developing the International Integrated Reporting (IR) Framework. Although this
framework includes risk as one of the content elements of an Integrated Report, its
main purpose does not specifically relate to risk management. Given the increasing
relevance of sharing risk information with all stakeholders, this chapter draws on
the evolving debate on risk management to provide an overview of the different
approaches (Sects. 10.2 and 10.3) and to highlight the need for a broader and
integrated perspective (Sect. 10.4), together with the potential contribution of this
perspective to the IR Framework (Sect. 10.5).

10.2 The Traditional Concept of Risk

Risk has always been of considerable interest in various streams of research. In the
economic literature, Knight (1921) made a basic distinction between the notion of
risk and the notion of uncertainty. In his view, risk refers to those events which are
in some way predictable and statistically calculable, while uncertainty represents
the indeterminate and inestimable halo surrounding the human condition. Also, the
notion of hazard has often been compared to risk and uncertainty. In this context,
hazard usually refers to those adverse phenomena which could harm human society
(Jones and Hood 1996).
The absence of a widely accepted definition of risk possibly explains the lack of
a well-defined approach for assessing and managing risks within organizations. As
argued by Bhimani (2009, p. 3), “this is because ambiguities render viable a
multitude of plausibilities and interpretations and confer legitimacy on redefined
boundaries which delimit organisational actions and objectives in novel ways”.
However, in the attempt to identify the pattern through which the concept of risk
has entered the organizational realm, it is important to highlight that according to
several scholars (see, for instance, DeLoach 2000) modern risk management in
organizations has started with risk analysis. Insurance, indeed, has been the most
popular field in which the traditional risk calculation emerged. The development of
statistical analysis of data and probability theory applied to practical issues
enhanced the use of mathematical models to predict and quantify risk. Particularly,
a milestone in the development of risk analysis is provided by Starr’s (1969)
seminal article on risk and voluntariness (see, Renn 1998). Power (2007) claimed
10 Approaching Risk Management from a New Integrated Perspective 161

that this was the starting point for a subsequent institutionalization of risk analysis
with the growing establishment of new academic and professional associations and
the evolution of techniques for modelling risk, above all in high-reliability
organizations. Within this field, risk was mainly seen as the quantifiable level of
probability for an accident or adverse event to occur. Moreover, as discussed by
Power (2007), the need for quantification itself reflected an overall cultural
approach which highlighted the role of numbers in creating acknowledgment and
trust in given “forms of belief and action” (Porter 1992, p. 640). Indeed, in the
history of organizations, measures have always been an important means of man-
agement, providing individuals with a sense of objectivity and neutrality (Power
2004b).
Pressures for change in the practice of risk analysis within organizations started
to develop in the neo-liberal era (O’Malley 2000). These pressures derived from
changes in the conception of risk in the wider institutional context where “new
managerial and enterprise culture discourses have, in significant ways, challenged
the ‘mathematical’ models of economics” (O’Malley 2000, p. 463). The idea of the
rational individual, whose choices are based upon functional models, could no
longer be acceptable in a competitive environment, within which increasing levels
of complexity and turbulence had undoubtedly amplified the intensity of risk that
each organization had to face. Globalization, digitalization of the markets, political
and financial instability represent only some of the elements which have
characterized the entrance into the new era. Also, the quantitative approach to
risk has been challenged by new emerging conceptions of risk in social theories that
flourished in the early 1990s with the well-known idea of Beck (1992) about the
Risk Society (for a review, see Zinn 2004). Particularly, the idea that risk is
essentially man-made, and thus represents an intrinsic feature of modern society
itself, undermined the utility of the calculative technologies of risk. In this context,
numbers and calculations came to be considered as not able to provide reasonable
elements for decision-making processes any longer. Rather, it is the wider manage-
rial belief system that affects the ways in which managers perceive risk according to
both their individual taste and social norms and expectations (March and Shapira
1987). Thus, risk preferences are essential for understanding the organizational
responses to risk.
The limited and inadequate role of risk analysis for organizational decision-
making processes became particularly evident at the beginning of the 1990s, when
several incidents of corporate failure, financial scandals, and world-wide disasters
affected the whole global market. The shift from risk analysis to risk management
is, therefore, evident. According to Jones and Hood (1996, p. 6), “the term ‘risk
management’ means different things to different people, depending partly on which
of the islands in the archipelago they inhabit”. However, they claim that, like any
other form of management, risk management can be generally described as a
process involving the three fundamental elements of any control system: goal-
setting; information gathering and interpretation; action to influence or modify
human behaviour or physical structures. Specifically, in the business context this
has implied that “risk analysis, the traditional technical home territory of risk
162 S. Quarchioni and F. Trovarelli

management, has been subsumed within a larger accountability and control frame-
work” (Power 2004a, p. 11). The main factors that can be detected behind this shift
and what it actually implies for organizational activity are explained in the follow-
ing section.

10.3 Criticism of Enterprise-Risk Management

Along with neo-liberal principles and new social conceptions of risk, the great
emphasis on control for the integrity of corporate governance systems in the late
1990s had a central role in the changing discourses about risk for organizations. As
outlined in the previous section, financial scandals and episodes of managerial
misconduct provided the reasons for new regulations, to both prescribe stricter
internal control requirements and ensure more transparency of financial informa-
tion for stakeholders. The Cadbury Code (1992), the Hampel Report (1998), and the
Turnbull report (1999) are just some examples of these new regulations that, at least
initially, involved primarily the Anglo-Saxon world.
In particular, these codes and regulations allowed risk management to acquire
more and more prominence in the regulatory area (Scheytt et al. 2006). Indeed,
societal demands for more trustworthiness and transparency of organizational
behaviour created new objects for risk regulation ‘regimes’ (Hood and Rothstein
2001) which dealt with financial controls, good governance systems, and reliable
reporting processes. In Power’s (2007, p. 3) terms, the shift from the “logic of
calculation to that of organization and accountability” gave rise to a new manage-
rial concept of risk management that overlapped mechanisms of internal control
systems.
This shift was also visible in academic management research literature which
abandoned a ‘particularistic view’ of risk (Hagigi and Sivakumar 2009) to focus
towards a comprehensive notion of risk management within control, audit, and
reporting discourses, giving rise to a strand of research which Van der Stede (2011)
refers to with the label ‘accounting risk’. These studies shed light on how
organizations respond to new risk and corporate governance requirements in
terms of struggles between changing internal roles (Fraser and Henry 2007) and
explicit alignment between internal control and risk management (Spira and Page
2003).
Pressures for change towards a wide approach to risk management did not only
come from regulatory forces. Since the mid-1990s professional associations and
consultancy firms started to provide organizations with several blueprints for
managing risks, highlighting the strategic significance of risk management and its
link with performance and value creation processes. Thus, the new wide approach
to risk management was both an attempt to spread a ‘legalistic culture’ in
organizations (Hood 1996) and an effect of the growing provision of general
blueprints (Power 2007).
Typically, these blueprints became a point of reference in the risk management
agenda of every organization. In particular, the Enterprise Risk Management
10 Approaching Risk Management from a New Integrated Perspective 163

(ERM) Framework (COSO 2004) is considered the foremost template for managing
risk implemented within organizations. According to this framework, ERM is
defined as:
“a process, effected by an entity’s board of directors, management and other personnel,
applied in strategy setting and across the enterprise, designed to identify potential events
that may affect the entity, and manage risks to be within its risk appetite, to provide
reasonable assurance regarding the achievement of entity objectives”.

Within this view, risk is not only to be managed to mitigate harm in the context
of a risk society in Becks’ terms and neither to strengthen internal controls in a
world of financial scandals. It should also be managed in a logic of opportunity as
neo-liberal conceptions of entrepreneurship suggest (O’Malley 2000). From this
point of view, Power (2007, p. 68) considered ERM as a wider body of knowledge
under which several standards and frameworks developed, like a sort of “semi-
popular managerial discourse which exists at the interface between regulators,
finance specialists, insurers, and accountants”. From this point of view, ERM
became a new way of considering control and organizational strategy, under
which very different sets of risk practices and techniques flourished.
Specifically, with the ERM a new focus on outcomes, performance and value
creation has invested risk management. The main vehicle has been the professional
world in which the idea of ERM became increasingly prominent. In this sense,
planning and budgeting processes started to be considered the natural settings in
which risk management practices should be embedded in order to improve business
results (Ow 2009), and grant long-term success (Beasley and Frigo 2007). Addi-
tionally, a broad practical body of literature on performance measurement systems
began to focus on the determination of key-risk indicators for business strategy
(Beasley et al. 2010), and to be integrated with pre-existing performance tools
within the organization such as the Balanced Scorecard (Kaplan 2009). Several
normative frameworks encompassing ideas of integrated and holistic risk manage-
ment were also proposed. For instance, Van der Stede (2009) presented the concep-
tual framework for ‘Enterprise governance’ that addressed firms to be aware of the
need for considering risk and performance under the same umbrella, both in the
short and long term. Frigo and Ramaswamy (2009) proposed a framework to be
used by executive teams in their strategic planning processes for evaluating the
impact of events and different scenarios on performance. Along these lines, Frigo
(2008) suggested the ‘Strategic Risk Management’ framework, while Simons
(1999) even proposed a ‘risk exposure calculator’ in order to determine how
much internal risk exists within a company. Finally, after the publication of ERM
in 2004, updated versions of the framework were published in the following years
by the COSO, and well-known consultant bodies continually published reports,
studies, and practical models on risk management. All these models were centred
around a holistic vision of risk, linking its management with planning, control and
value creation processes.
Academic literature also started to consider an integrated view of risk and
performance within the organizational governance system. For instance, Drew
164 S. Quarchioni and F. Trovarelli

et al. (2006) presented an integrated corporate governance model in which five

elements (i.e. Culture, Leadership, Alignment, System, and Structure) are identified
as being fundamental in supporting a strong approach to corporate risks, helping
organizational executives in meeting their strategic objectives. Busco et al. (2006)
proposed an integrated governance framework which shows how risk management
is functional for both a good governance system and a sustainable performance.
Other studies specifically focused on ERM, exploring its main features (Levinsohn
and Williams 2004), and analysing the factors associated with its implementation
(Paape and Spakklé 2012).
Another strand of research has sought to analyze the actual meanings and effects
of the introduction of risk management practices within an organization (Mikes
2009; Arena et al. 2010). These studies have questioned the real reasons behind the
adoption of blueprints regarding how to manage risk, wondering whether it is just a
compliance exercise for facing legislative and social pressures,or if its principles
are embedded in organizational culture. Moreover, these studies highlighted the
significant interconnections that exist between risk management practices (which
are socially constructed) and the overall organizational processes. Indeed, as stated
by Hutter and Power (2005, p. 9), “risk is not independent of management processes
in organizations, but rather, representations of risk, its management and the
organizations that do the managing are co-produced”.
Actually, this strand of research criticizes the definition of standards and norma-
tive schemes, providing organizations with guidelines and ready-made solutions for
implementation problems. Behind this criticism lays a profound reconsideration of
the ERM principles. At the end of the first decade of the twenty-first century, what
for Power (2004a) was the ‘risk management of everything’ became the ‘risk
management of nothing’ (Power 2009). As stated by this scholar, the financial
crisis in 2008 emphasized the limits of ERM. In this context, the RIMS Executive
Report (2009) claimed the need for a wake-up call for ERM, which has not failed as
a business discipline, but rather in its implementation within organizations.
Interestingly, Power (2009) identified three main reasons behind the ERM
failure. Firstly, the notion of a singular risk appetite, intrinsic to ERM principles,
has been too simplistic in organizational reality. Even though ERM appears to
enhance a qualitative approach to risk, the processes of risk management that it
depicts actually depends on an identifiable amount of risk appetite. Instead, the
concept of risk appetite cannot be merely relegated to measurement issues because
it is derived from a complex entanglement between internal processes and role
interactions.
Secondly, despite the fact that ERM has been depicted as a strategic control
system where notions of risk and performance are strictly related, its development
was mainly derived from the broad logic of accounting and auditing during the mid-
1990s. For Power (2009), this entailed a strong ‘legitimacy-driven style’ in
implementing ERM frameworks within organizations. In other words, the per-
ceived need to be compliant with external blueprints and models of organizing
could have led organizations to implement ‘ready-packages’ which are actually
empty inside (Power 2009). As shown by Hood and Rothstein (2001), risk
10 Approaching Risk Management from a New Integrated Perspective 165

management often enhances a ‘culture of blame avoidance’ in organizations,

feeling more confident to defend themselves by demonstrating that they have
followed the rules or fulfilled all social expectations.
Finally, the ERM framework is underpinned by an ‘entity-based embeddedness’
of risks which does not capture the relationships of the firm within its broader social
network. Specifically, Power (2009) argues that the failure of ERM in facing
financial crisis is due to its lack of understanding of the ‘entity interconnectedness’,
which entails the consideration of wider systemic risks. This last criticism opens the
way to a fruitful debate which provides a new knowledge base for rethinking risk
management in the wake of more recent worldwide events. The background for this
debate and the new approach to risk management which emerges will be explained
in more depth in the following section.

10.4 Towards a New Approach to Risk Management

Beck’s (1992) thesis of self-produced risks is still compelling today in a context of

growing uncertainty and increasing scientific and technical knowledge. However,
changes in the nature of threats in the new global scenario require further reflection
on risk as a ‘borderless phenomenon’ (Fischbacher-Smith and Fischbacher-Smith
2009). This notion of risk underpins the idea of a risk society, but it still has not
received much attention in the academic debate. Global crisis, worldwide scandals,
and large-scale disasters have shown that risks are often man-made and that their
level of predictability is increasingly low. However, there is further more relevant
evidence on the fact that risk, both in its roots and in its effects, transcends the
borders of every knowledge discipline and institution. Indeed, structural and cog-
nitive boundaries cannot exist when dealing with risk management.
This has a great impact on ‘organizational encounters with risk’ (Hutter and
Power 2005). The multi-disciplinary nature of risk and the higher level of perme-
ability of organizations which operate in a networked society have affected the
scale of disruptive events. The impact of these events depends on the level of
integration between the extended organization and its environment. Starr et al.
(2003, p. 5) identify these events under the umbrella of ‘interdependence risk’,
which is defined as the “unanticipated risk exposure across the extended enterprise
that is beyond an individual organization’s direct control”. This notion corresponds
to what Power (2009) referred to as ‘interconnectedness’, referring to those risks
which are derived from the level of embeddedness of the organization in wider
social networks.
Thus, risk management models developed up to now under ERM principles
reveal their current inadequacies. Despite calls for being open-minded, ERM did
not actually challenge organizations to internally manage risks emerging from
extended and interconnected systems (Power 2009). Moreover, these models did
not fully consider the potential consequences of those risks for the external
environment.
166 S. Quarchioni and F. Trovarelli

As stated by Power (2009), an increasingly relevant part of the changing risk

management agenda nowadays is Business Continuity Management (BCM).
Although BCM has recently developed in different fields such as IT and emergency
management, its strategic significance for organizations is becoming broader
(Herbane et al. 2004). The Business Continuity Institute defines BCM as (italics
added) “a process that identifies potential impacts that threaten an organization and
provides a framework for building resilience and the capability for an effective
response that safeguards the interests of its stakeholders, reputation, brand and
value creating activities”. Although BCM has often been associated with crisis
management and recovery strategies from major disruptions, the abovementioned
definition highlights that it can provide a new way of interpreting risk management
in everyday life. The underpinning principle of BCM is that a single organization
never acts in isolation from the others and that its activity is strictly interdependent
within the system which it inhabits. In this context, each organization needs to
represent and manage the ‘interconnectivity risks’, recognizing that “security is
only possible as a collective way” (Power 2009, p. 853). Moreover, organizations
experience a growing need to manage resilience issues in the attempt to react, adapt
and gain from new risk environments. The ways in which resilience is conceived
and operationalized within organizations, and its influence on risk management
strategies, deserve more attention.
Defining the concept of resilience is a complex task, as it is difficult to give a
complete description and understanding of all its features. The term resilience is
derived from the ancient Latin word resilio (re and salio) that literally means to
jump back, but it also means, in a figurative sense, not to be touched by something
negative. The available literature on resilience is characterized by a strong multi-
disciplinary approach, fragmentation and a lack of a dominant paradigm.
The notion of resilience is also present within many branches of social sciences
where it takes on various meanings and nuances depending on the context in which
it is inserted and on the moment it is considered. Typically, researchers have
analysed resilience as a concept situated before or after a shock, stressing in this
way the tension between speedy recovery and timely adaptation (Westrum 2006). A
broad definition of resilience is provided by Comfort et al. (2010, p. 9) who claim
that “resilience is the capacity of a social system (e.g., an organization, city, or
society) to proactively adapt to and recover from disturbances that are perceived
within the system to fall outside the range of normal and expected disturbances”.
In this context, the concept of resilience has become widely known also in
organization and management literature. Particularly, the anticipation vs. resilience
divide has been one of the major key areas of debate with specific reference to risk
management (Hood et al. 1992). Recalling the link between risk, resilience and
uncertainty, Wildavsky (1988) suggests resilience as the best strategy and the more
successful management approach to be used from decision makers that have to deal
with great uncertainty, while anticipation is a strategy effective only when threats
and problems are known (Dalziell and McManus 2004). Wildavsky proposes to
create a balance of anticipation and resilience for reducing risk in uncertain
conditions (Comfort et al. 2001). He stresses the virtues of flexibility and
10 Approaching Risk Management from a New Integrated Perspective 167

adaptability of decision makers and suggests the use of elastic, malleable resources,
such as knowledge, communication, wealth and organizational capacity, in order
“to enable us to craft what we need, when we need it, even though we previously
had no idea we would need it” (Wildavsky 1988, quoted in Comfort et al. 2010,
p. 23). Hence, this also enhances the organizational capacity of adaptability to
future change through continuous processes of learning (Comfort et al. 2010).
Although resilience has been under debate in previous years, especially within
crisis and disaster literature, a new focus should be given to this notion in light of
the current economic and security environment. Since an organization’s competi-
tive context has become progressively more uncertain and volatile, resilience gains
importance in practice under two dimensions: operational and strategic. ‘Opera-
tional resilience’ is the ability to bounce back and is a recovery-based resilience
persisting after experiencing a crisis. ‘Strategic resilience’, instead, is the ability to
change without crisis and is a renewal-based resilience, turning threats into
opportunities (Välikangas et al. 2012).
Within this perspective, resilience means being prepared for both the potential
harms and benefits that accompany change, aligning all risk management activities
accordingly. More interestingly, resilience provides a broader view on risk
interdependencies across the ‘extended enterprise’ (Starr et al. 2003) and increases
organizational flexibility. This can have a twofold effect. Firstly, organizations
enhance their ongoing ability to create value through a more integrated approach
to risk management that actually considers organizational life within an
interconnected system. Secondly, the external environment can benefit from this
new way to approach risk, that is necessarily outward-looking and very closed to
notions of sustainability. Here, sustainability assumes the meaning of a framework
for assessing how decisions in the present may impact individuals in the future
within the core concept of ‘futurity’ (Krysiak 2009).
The importance of this new approach will be further discussed in the following
final section. After a brief summary of the development process of risk manage-
ment, we will argue that recent calls for new risk management approaches (follow-
ing for instance BCM principles and the concept of resilience) converge with the
suggestions provided by the IR Framework and its underlying principles.

10.5 Summary and Concluding Remarks

The aim of this chapter has been to provide an overview of the different approaches
to risk management and to highlight the need for a broader and integrated perspec-
tive, together with the potential contribution of this perspective to the IR
Framework.
Whereas risk management in organizations was traditionally linked to risk
analysis and quantification, pressures from governments and new competitive
environments intensified the need to manage uncertainty beyond numbers and
calculations. In this context, several frameworks on how to manage risk properly
for achieving organizational objectives have been widely diffused, reinforcing the
168 S. Quarchioni and F. Trovarelli

inextricable link between risk, performance and value creation. Nevertheless, the
recent financial crisis has shown the limits of some of these frameworks. Currently,
organizations are being called on to assess and manage risks that are derived from a
networked society, in which there are no longer boundaries between organizational
activity and external environment. Thus, risk itself is becoming borderless.
The need for a wide perspective on risk is acknowledged also in the IR Frame-
work, which considers risk as one of the content elements of the Integrated Report.
Particularly, in the IR Framework it is argued that an Integrated Report should
identify the risks that are specific to the organization, “including those that relate to
the organization’s effects on, and the continued availability, quality and
affordability of, relevant capitals” (IIRC 2013, p. 26). The analysis of these risks
allows for a comprehensive vision of the organizational capacity to create value
over time. According to the IR Framework, value is derived from a number of
interactions, activities, and relationships which could affect the increase, decrease
or transformation of the various kinds of capitals (i.e. financial, manufactured,
intellectual, human, social and relationship, and natural) of an organization. The
value creation process develops within a broad picture in which primary attention is
given to the value stored in the different forms of capital embedded in the external
environment and then consumed, modified or destroyed by the organization through
its own business model. This internal activity generates outcomes (internal vs.
external and positive vs. negative) for the capitals affecting, in turn, the external
society. These points highlight a high level of permeability of organizations, which
are an integral part of a more interconnected environment.
From this perspective, the new approaches to risk management emerging from
recent literature may provide useful insights to support the implementation of IR.
Indeed, BCM principles and the concept of resilience are able to address the
complexity of the interconnected systems in which an organization operates.
BCM enhances the need for an organization to manage systemic risks, both
identifying potential impacts and planning appropriate recovery strategies. More-
over, through resilience the organization develops capacity to react, adapt and gain
from changes in new risk environments.
Therefore, recent calls for new risk management approaches appear to converge
with the underlying principles of the IR Framework. In addition, the implementation
of BCM practices within organizations may actually enhance the integrated think-
ing, which is at the basis of IR. Integrated thinking takes into account the
interdependencies between the range of factors (and thus risks) that have significant
effects on an organizations’ ability to create value over time (IIRC 2013). Thus,
BCM has a twofold effect (internal and external) for organizations. On the one hand,
organizations can manage risk properly within a broader picture and plan their
activity accordingly. On the other hand, they can demonstrate and communicate to
all stakeholders that they take a very integrated approach to risk management.
Although these fundamental concepts emerge from the IR Framework, more
efforts should be taken to provide further well-framed insights on how an organi-
zation should manage risks in this new perspective and then disclose its strategy to
its stakeholders. In particular, reinforcing recent academic calls for new approaches
10 Approaching Risk Management from a New Integrated Perspective 169

to risk management, this chapter has offered some insights for encouraging a new
agenda for debate.

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The Relationship Between Multinational
Enterprises and Territory in the Integrated 11
Reporting

Christian Cavazzoni and Francesco Orlandi

Abstract
Multinational enterprises (MNEs) have long used both financial and
sustainability reports to inform stakeholders of the different aspects of their
business. Integrated Reporting, which has been developed as a result of
shareholders’ increasing demands for information, is an innovative tool that
communicates the social and financial aspects of business operations as well
as reporting companies’ value creation processes over time. Integrated reporting
is affected by the nature of a MNE’s stakeholders and influenced by their
territorial origin, which raises aspects of business analysis that must be
investigated in an Integrated Report. This chapter, which begins with a review
of the existing literature on the aforementioned topics, explores the relationships
that exist between business activities and the territory in which it operates,
proposing that MNEs consider analysing specific points when formulating
their Integrated Reports. The link between MNEs and the territory is analysed
with a dual perspective: the local value added, and the MNEs’ relationships with
the economic systems and governments of the country in which they operate.
The authors believe that these two strongly interconnected factors underlie the
social role that MNEs play also to the benefit of the territories in which they
operate. In doing so, they qualify the contents and the use of the Integrated
Report.

Although the present work is the result of joint work of both authors, paragraphs 1 and 3 are
attributable to Christian Cavazzoni, paragraph 2 to Francesco Orlandi and paragraph 4 is written
by both authors.
C. Cavazzoni (*) • F. Orlandi
University of Perugia, Perugia, Italy
e-mail: christian.cavazzoni@unipg.it; francesco.orlandi1@studenti.perugia.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_11, 171

# Springer International Publishing Switzerland 2013
172 C. Cavazzoni and F. Orlandi

11.1 Introduction

Firms are institutes that operate in the social system, the purpose of which is to
produce and deliver the goods and services required to satisfy the requirements of a
number of individuals. As it attempts to achieve its objectives through a series of
operations, the firm constantly plays a dynamic, interactive role in the social
system. During this process the firm conditions and is conditioned by a bi-unique
relationship of interdependency with the external environment, and by continually
searching for a new equilibrium. It is able to adapt to external changes and stimuli,
which will guarantee its long term survival (Ferrero 1968).
The firm interacts with a group of interest bearers from whom it continually
encourages mechanisms of feedback. These are known as the company
stakeholders, who can be considered to be “any group or individual who can affect
or is affected by the achievement of a corporation’s purpose. Stakeholders include
employees, customers, suppliers, stockholders, banks, environmentalists, govern-
ment and other groups who can help or hurt the corporation” (Freeman 1984, p. 46).
Studies of the stakeholder theory have established some commonly recognised
principles, stating that firms should proactively pay attention to their stakeholders
(Freeman 1984; Harrison and Wicks 2013), that the stakeholder theory has an equal
status to that of the shareholder theory (Friedman 1970), that the stakeholder theory
provides a vehicle for connecting ethics and strategy (Phillips 2003), and that firms
that seek to serve the interests of a broad group of stakeholders have the
opportunities to create more value over time (Freeman 1984; Freeman et al. 2007).
The academic approach behind the stakeholder theory has led to the growing
role of corporate social responsibility (CSR) which has, over time, become widely
recognised in corporate reports (Carroll 1991; Kiernan 2005; Wood 1991). In fact,
the most open-minded organisations have switched from drawing up a financial
report merely to show capital and income to provide a more detailed report to
satisfy their stakeholders’ demands for information. In this context the
sustainability report plays a fundamental role in recognising the function of the
firm within the economic system. Its purpose is to describe the ethical behaviour of
the firm and to highlight how its operations interacts with the external environment,
by contributing to economic development and improving the stakeholders’ quality
of life (Holme and Watts 2006). There is an overlap between social responsibility
and corporate governance (Jamali et al. 2008), because firms are held responsible
not only to internal stakeholders, but also to external stakeholders and society in
general (see Huseynov and Klamm 2012). For these reasons, from the beginning of
the new millennium, social and environmental reports have acquired prominence
and reached a level of importance similar to financial reports.
From a theoretical viewpoint, Integrated Reporting (IR) represents a sort of
synthesis of the two types of documents and also aims to combine the “individual-
ism” of the financial report with the implied “altruism” of the sustainability report.
If the CSR distinguishes, or at least places on separate levels, the achievement of
profit levels and the social function of the enterprise, IR combines these two aspects
11 The Relationship Between Multinational Enterprises and Territory in the. . . 173

as elements which simultaneously contribute to set out the competitive strategies

for the firm.
The objective of IR remains that of highlighting the organisation’s ability to
create value in the medium-long term (Deloitte and Touche 2012; KPMG 2012;
IIRC 2013). Only outwardly does it maintain a predominantly individualistic
concept, as the design of this document requires the firm to widen its analytical
perspective to inform stakeholders of the role played by the firm within the
economic context in which it has been operating. Employment and production are
at the foundation of the wealth of a community and only if both of these are present
in an economic system at the same time, can a firm find a favourable environment in
which to develop. If an enterprise contribute to enhance the social context in which
it operates in terms of per capita income, individual skills, technological develop-
ment and infrastructural services, it is likely to receive a return from its environ-
ment both in terms of demand and of employment quality and productivity.
Over the last few decades, the social and economic context has been
characterised by the following: (i) increasing market globalisation, brought about
mainly by the reduced number of barriers to production mobility and by the
development of Information and Communication Technology tools; (ii) the growth
of social expectations on the firm, which is required to implement a new manage-
ment philosophy which knows how to adapt economic responsibility, understood as
the capacity to produce wealth, and social responsibility (Ceccherelli 1961); (iii)
the growing importance of intangibles as non-physical sources of value and
generators of future profits, which currently are not adequately accounted for in
corporate reports (Baruch 2001).
In a globalised economic system, where social differences tend to weaken,
competition is on a global level and developing countries represent the markets
of the future, it is impossible to develop a theory of the enterprise as standalone
entity, but rather as an open, interconnected system which can only expand under
favourable conditions. Physics reminds us that apparently static matter is actually a
form of energy. Similarly, the enterprise which we imagine as a combination of
productive factors is really the result of a network of relationships between
individuals both inside and out.
Thus, the model of business reporting becomes the tool to display this
relationships by informing the stakeholders about which activities are generating
wealth and which levers the organisation is using to exploit it. In this process, the
firm must try internalise the external environment, i.e. identify those social and
general interests that influence its own processes to create value. Therefore, the firm
uses IR to clarify its strategies, with the sole restriction of protecting its competitive
advantages from competitors (IIRC 2013). The purpose is twofold: (i) providing
financial investors with information concerning the firm’s ability to generate
medium-long term wealth, thus enabling them to evaluate not only the firm’s
accounting results but also the strategies it intends to implement to maintain or
expand its position in the market; (ii) informing the other stakeholders of the role
that the firms plays to improve the environment in which it operates in order to grow
174 C. Cavazzoni and F. Orlandi

its reputation, generate recognition by the social context, and motivate workers,
clients and suppliers interacting with it.
This contributes, amongst other things, to reducing the strong pressure on
managers to maximise short term profit, often at the expense of a reduction in the
medium-long term growth rate (Fuller and Jensen 2002; Michenaud 2008). This
frequently occurs where corporate evaluation is calculated on the base of the firm’s
financial statement rather than on its corporate strategies. As a result, the ability of
IR to effectively convey information to the stakeholders can become an essential
prerequisite for a stable company in the market. This allows positive feedback to be
given which, in turn, may enable the firm to increase its ability to generate value. In
this sense, the process of developing the IR becomes a regular opportunity through
which the firm must:
• identify the internal and external values in which it intends to invest and which it
believes to be closely connected with its ability to create value;
• define its own stakeholders;
• identify the relationships between corporate values and the creation of value
over time;
• build a strategic vision which bonds these elements and guarantees the definition
of a common thought which will identify the behaviour of the organisation;
• formalise these internal processes in a document which is able to explain the
information to the different stakeholders, bearing in mind their different interests
and different learning skills, so as to maximise its usefulness;
• set up a continual feedback process in order to monitor and eventually amend the
fundamental contents of IR according to changes in the social and economic
context.
This process takes on a more linear connotation for firms operating in localised
areas. However, for multinational enterprises (MNEs) with economic activities in
various locations, it becomes extremely complex and relevant. MNES need to
differentiate the information according to the stakeholders’ geographical origin
and, above all, describe and give the reasons for the different behaviour of the
enterprise towards similar stakeholders living in different countries.
Although we are aware that “these large MNEs have been much more active in
sustainability reporting than other firms, which means that evolving patterns
noticeable amongst this panel can help shed light on the diversity of options, as
well as aspects and/or dilemmas that play a role more generally in the way MNEs
address organizational accountability on sustainability” (Perego and Kolk 2012, p.
174), we have approached some of the problems in the reporting of multinational
enterprises operating in distant, disparate, geographical areas, in order to identify
the main variables which may influence the relationship between the enterprise and
area, and to propose some models to report this issue.
The principal parameter used in the analysis is represented by value added. Part
2 of this chapter describes the latter in detail, and introduces the concept of “local
value added”. Then, part 3 is dedicated to illustrating some of the elements
qualifying the relationship between the MNEs and territory.
11 The Relationship Between Multinational Enterprises and Territory in the. . . 175

11.2 The Determination of Local Value Added in Multinational

Enterprises

A manufacturing firm, which begins with a certain quantum of raw materials, and
then engages itself in a conversion process to yield a product with a new utility and
market value which differs from the original cost of materials (Chakraborty 1979),
cannot consider to have concluded its activity until the profit already achieved is
also distributed wisely among those who have collaborated towards its production
(Zappa 1956).
Value added (VA) is possibly the most used indicator to summarise the overall
evaluation of the company system, because it is capable of measuring the global
value generated and distributed among the various parties that have contributed to
its creation (Morley 1978; Mei 1992; Riahi-Belkaoui 1999). While, on the one
hand, VA can offer significant information that will enable corporate performance
to be assessed, on the other hand, it allows quantifying the share of corporate results
among different stakeholder categories. VA is a tool which enables corporate
activity to be appreciated, and consolidates the process of alignment between
company stakeholders (Coda 1995).1
The value added concept can be expressed through the following equation:

VBS ¼ W þ T þ I þ D þ R þ DP: (11.1)

where:
V ¼ value of production (sales revenue plus change in inventory)
BS ¼ bought-in materials and services
W ¼ salaries and wages
T ¼ taxation
I ¼ interest
D ¼ dividend
R ¼ retained earnings
DP ¼ depreciation
Therefore, VA can be quantified on the one hand as the difference between the
value of production and the cost of purchase of materials and services and, on the
other, it represents the total return of the firm earned by all providers of capital,
employees, government and the amount used to maintain and expand assets
(retained earnings plus depreciation—Sarkar and Nandi 2011).
In line with the concepts and the equation illustrated above, value added can be
shown in the Value Added Statement (VAS), consisting of two consequential and
equally balanced tables showing the wealth created by the firm (see Table 11.1).

1
Burchell et al. (1985) also state that value added has the property of revealing (or representing)
something about the social character of production, something which is occluded by traditional
profit and loss accounting. Value added reveals that the wealth created in production is the
consequence of the combined effort of a number of agents who together form the co-operating
team.
176 C. Cavazzoni and F. Orlandi

Table 11.1 Value added statement of shoprite

June 2012 June 2011
R’000 % R’000 %
Sale of merchandise (V) 82,730,587 72,297,777
Investment income (V) 224,425 122,277
Cost of goods and services (BS) (70,135,100) (61,341,791)
Value added 12,819,912 100.0 11,078,263 100.0
Employed as follows:
Employees
Salaries, wages and service benefits (W) 6,930,791 54.1 6,089,252 55.0
Providers of capital
Finance costs to providers of funds (I) 223,563 1.7 125,964 1.1
Dividends to providers of share capital (D) 1,421,598 11.1 1,189,411 10.7
Income tax
Income tax on profits made (T) 1,438,889 11.2 1,346,826 12.2
Reinvested
Depreciation and amortisation (DP) 1,200,106 9.4 1,006,442 9.1
Retained earnings (R) 1,604,965 12.5 1,320,369 11.9
Employment of value added 12,819,912 100.0 11,078,263 100.0
Source: Shoprite holdings integrated report, 2012

These will show the difference between the operational revenue of management
and the costs sustained to buy in new external resources and the allocation them
between the productive factors and the various stakeholders who, by taking part in
the firm’s operations, have contributed to its creation (Pendril 1977).
The value added statement has a fundamental role in the communication process
developed by IR. It provides not only economic, but also social information, by
identifying the portion of wealth to be distributed among the participants in the
company’s operations for their contribution (Prasad et al. 2012). For this reason,
VA is a much broader performance measure than net income, since the latter is only
able to capture the wealth produced for the shareholders.
MNEs are characterised by various, legally autonomous, operational units
scattered in different regions or nations, yet connected by a bond of participation
which draws them into a single economic entity that coordinates and control them.
Value added is capable of providing far-reaching information on corporate
operations, and this makes it particularly useful in reporting information within
an MNE context (Ferrarese 2000; Narula and Dunning 2010; McCann and Zoltan
2011).
The fact that a firm characterised by a specific social and cultural context
operates in territories that are different from its country of origin, inevitably leads
to an alteration of the social and economic environment of the host country, which
may potentially become a source of conflict. Furthermore, the divergence between
the interest of MNEs in maximising their “global” corporate profit, and the interest
11 The Relationship Between Multinational Enterprises and Territory in the. . . 177

that the host countries have in maximising the collective benefits of the operations
in the territory, tends to create contrasts and misunderstandings between the various
stakeholders (Mason 1974; Vernon 1977; Campbell et al. 2011).
The information provided in the report about the value added for the country in
which an MNE operates is of fundamental importance in evaluating the policies
that MNE uses to handle its relationships with different territories, and with parties
belonging to the same category of stakeholders but residing in different countries.
Clearly, this information reveals the operational choices of MNEs, resulting in
the firm being able to boast about its development policy in the countries in which it
operates or, on the contrary, having to “justify” its behaviour towards certain
stakeholders.
Therefore, this means that the MNE must provide a “customised” report for each
country in which it operates, its aim being to measure the economic impact of the
MNE on the territory. This can be shown by calculating the local value added
(LVA) created by the enterprise, which can be compared to a sort of “balance of
payments” of multinational business operations.2
LVA “adjusts” the calculation of the total value added (see the Eq. 11.1) of
wages the multinational pays to overseas stakeholders. Therefore, LVA deducts
from the multinational’s total outputs (local sales plus change in inventory plus
exports) the remuneration for its overseas productive factors and overseas
stakeholders who have contributed to the creation of the value of production (cost
of imported goods and services, sum of wages of foreign capital, amortisation of
immobilisation purchased overseas). It makes it possible to estimate the wealth that
the multinational has “distributed” in the specific area of operation (Rahman 1990).
LVA can be expressed by the following equation:

V  BSF  WF  IF  DF  DPF ¼ BSL þ WL þ T þ IL þ DL þ R þ DPL : (11.2)

where:
V ¼ value of production (local sales plus change in inventory plus exports)
BSF ¼ imports of goods and services
WF ¼ wages and salaries to foreign workers
IF ¼ interest on foreign loans
DF ¼ dividend to foreign shareholder
DPF ¼ depreciation on imported fixed assets
BSL ¼ local bought-in materials and services
WL ¼ wages and salaries to local employees

2
If, at most, corporate operations use only the productive factors from overseas countries com-
pared to that in which the multinational operates, then any “local” sale by the multinational would
represent a “subtraction of resources from the host country”, because it would be paying
stakeholders in another nation. On the other hand, we could conclude that if the production
value was obtained entirely by using “local” productive factors, then any export of the
commercialised product by the multinational would represent an “addition of foreign resources”
into the country, which would pay local stakeholders.
178 C. Cavazzoni and F. Orlandi

Table 11.2 Local value added statement

State A State B State C
Sales revenue (local sales plus exports) (V) xxx xxx xxx
Variation in the inventories (V) xxx xxx xxx
Import of goods (BSF) (xxx) (xxx) (xxx)
Import of services (BSF) (xxx) (xxx) (xxx)
Wages and salaries to foreign workers (WF) (xxx) (xxx) (xxx)
Interest on foreign loans (IF) (xxx) (xxx) (xxx)
Dividends to foreign shareholders (DF) (xxx) (xxx) (xxx)
Depreciation on imported fixed assets (DPF) (xxx) (xxx) (xxx)
Local value added XXX XXX XXX
Local goods (BSL) xxx xxx xxx
Local services (BSL) xxx xxx xxx
Wages and salaries to local employees (WL) xxx xxx xxx
Tax payments (T) xxx xxx xxx
Interest on local loans (IL) xxx xxx xxx
Dividends to local shareholders (DL) xxx xxx xxx
Retained earnings (R) xxx xxx xxx
Local capital consumption (DPL) xxx xxx xxx
Distribution of local value added XXX XXX XXX

T ¼ taxation
IL ¼ interest on local loans
DL ¼ dividend to local shareholder
R ¼ retained earnings
DPL ¼ depreciation on local fixed assets
The distribution of local value added can be represented and analysed qualita-
tively in the information provided by MNEs in order to allow them to demonstrate
how the various components of the economy of the host country have been paid by
the comprehensive operations carried out there by the multinational.
This distribution process can be shown in Table 11.2.
The proposed tables are an example of the quantitative information which can be
extracted from LVA to provide an indication of the social role played by MNEs as
they create and distribute wealth in the territory, pay staff, local shareholders and
the State. However, IR adds to corporate reports by making qualitative information
available to the user making it easier to understand the existing relationships
between so many variables which determine corporate results. Therefore, the role
of social responsibility of MNEs can be enriched to include a better understanding
of the relationship between the enterprise and the territory. These elements will be
discussed in the following section.
11 The Relationship Between Multinational Enterprises and Territory in the. . . 179

11.3 The Relationship Between Multinational Enterprises

and Government. The Tax Component

A discussion of taxation in relation to corporate social responsibility (CSR) is a

delicate proposition. Although the firm has a strong bond with territory in the
countries in which it produces and sells under the maximum authority of its
government, the contribution it makes by paying the taxes of individual countries
reduces the resources available for it to make investments or distribute dividends.
The company limits development, unless compensated by the indirect benefits the
organisation enjoys in the context in which it operates. This potential conflict is
polarised into two totally opposite points of view.
On the one hand, there are those who consider the enterprise to be one of many
individuals in a wider community, of which it is an indistinguishable member to the
extent that the interest of the individual is required for the common good. The most
orthodox versions of this theory recall Aristotle’s philosophical principles and
presuppose an “Aristotelian approach to business ethics” (Solomon 1992a),
according to which the ultimate purpose of productive organisations naturally
tends to coincide with that of the surrounding social context.
On the other hand, there are those following an amoral, utilitarian approach
placing taxes on the same level as other costs sustained by the firm. They conclude
that taxation must be minimised in the same way as any other factor which
decreases income (Hanlon and Heitzman 2010; Hanlon and Slemrod 2009;
Robinson et al. 2010). This assumption gives rise to the axiom that any behaviour
within the boundaries of the law which reduces taxation increases corporate value
and responds to the shareholders’ interests.
The comparison which has developed in the scientific world has found no
synthesis in empirical evidence. In fact, the most recent studies of the relationship
between CSR and aggressive tax have not identified a positive relationship between
the two indicators. On the one hand, some authors have found that more socially
responsible firms try to follow correct tax policies (Watson 2011; Lanis and
Richardson 2012). On the other hand, other researchers have verified that some
firms claiming to be socially responsible adopt forms of fiscal arbitrage (Carroll and
Joulfaian 2005; Preuss 2010; Sikka 2010; Preuss 2012).
However, without having to theorise “humanised” enterprise strategies,
(Andrews et al. 1989) which envisage a careful management of the “social nature
of the persons and their capacity for acquiring virtues that perfect them and, as a
consequence, for growing as human beings” (Melè 2003, p. 82), there are many
reasons for an enterprise to show politically correct behaviour towards social
questions, of which governments should be the bearers.
• Many external stakeholders judge enterprises which implement tax avoidance
very negatively and consider them socially irresponsible (Erle 2008; Schön
2008) as it is in the public interest for the firm to fulfil its tax obligations
correctly. Tax aggressiveness, tax shelters, and tax evasion could, therefore,
seriously compromise corporate image and cause “isolation of the business”.
180 C. Cavazzoni and F. Orlandi

• “There is no business world apart from the people who work in business, and the
integrity of those people determines the integrity of the organization as well as
vice versa” (Solomon 1992b, p. 338), and a management that “cheats the
government” is a management that may also “cheat” its shareholders (Huseynov
and Klamm 2012, p. 804).
• On the other hand, those same shareholders may find tax evasion or tax avoid-
ance inopportune, believing that this exposes the firm to a potentially greater risk
in the long term compared with the actual benefits produced.
• Whereas the firm’s interest in profit may be considered separate from its
surrounding economic context in the short term, this is unthinkable in the long
term, as the growth of the economic system depends on that of the social context
(Coda 1995; Catturi 1989) as the different dimensions of finalism of the enter-
prise, concerning the achievement of economic, competitive and social results,
respectively, are constructed and connected with each other, so as to trigger a
virtual circle which exalts and strengthens correct behaviour (Montrone 2000).
Thus, an enterprise which does not invest in the territory is an enterprise which
does not invest in its own future.
• It is increasingly difficult for enterprises to compete globally without the support
of national governments which place them in the best position to produce
efficiently by implementing infrastructural investments, contra-cyclical eco-
nomic policies, income support for the population, and by maintaining adequate
services for the enterprises (such as an efficient legal system), which guarantee
stable social order.
• Equally, corruption, often very common in developing countries, diminishes
transparency and correctness in competitive processes and can distort the eco-
nomic system, and reward less efficient firms which are more inclined to
unlawful practices or moral hazards.
Therefore, a correct relationship with government authorities appears preferable
not merely for moral reasons, however relevant and commendable,3 but above all
from an economic point of view, as the enterprise contributes via direct or indirect
taxation to the growth of the country system in which it operates. This behaviour
creates economic and social development which, in the long term, can generate
positive feedback, both directly via the support of public services and
infrastructures which benefit production, and indirectly via the creation or develop-
ment of new outlet markets for its products.
In other words, a tax aggressive behaviour constitutes a short term tactic aiming
to temporarily maximise the profits and benefits of current shareholders and
managers, whereas a correct fiscal policy guarantees the future growth of the
enterprise within the economic system.

3
“The philosophical myths that have grown almost cancerous in many business circles, the neo-
Hobbesian view that business is every man for himself and the Darwinian view that it’s a jungle out
there, are direct denials of the Aristotelian view that we are, first of all, members of a community
and our self-interest is for the most part identical to the larger interests of the group” (Solomon
1992a p. 326).
11 The Relationship Between Multinational Enterprises and Territory in the. . . 181

It is, therefore, evident how the relationships between enterprise and government
and between enterprise and taxation, often considered as an expression of social
responsibility, can constitute elements on which to base the information of IR, in
that they demonstrate a link with the medium-long term strategies of the enterprise.
The relationship between enterprise and state can be expressed by numerous
factors involving economic activity. The state provides social capital on behalf of
society in the shape of education, healthcare, transport, social order, legal system
and, as every form of capital expects to receive the requisite return on its invest-
ment, so the state expects to obtain payment by taxing its citizens (Sikka 2010).
On the other hand, the enterprise has specific interests in the activity of public
administration in terms of services, support for internal consumption, implementa-
tion of infrastructures which assist production and the transport of goods and, last
but not least, the upkeep of an adequate level of legality which guarantees economic
activity can run correctly.
However, it must be said that, especially in the short term, the relationship
between state and enterprise can be represented by the communicating channels
in which fiscal planning can reduce or avoid taxation, thus generating immediate,
direct benefits to the shareholders. Subsequently, it imposes a corresponding obli-
gation on the community, which will see a decrease in the resources available to
governments to put their economic and social policies into practice.
It is clear, therefore, that above and beyond the affirmation of the principle and a
desirable, far-sighted long-term vision, taxation and the relationships of firms with
governments constitute a grey area, in which there is a clash between shareholders’
interests to receive profit, directors’ interests to maximise the firm’s income, and
the indirect interests of internal and external stakeholders in the development of the
territory. Furthermore, the analysis of this phenomenon cannot be separated from
the consideration that “directors have no obligation, legal or even moral, to select the
event (out of a choice of more than one) under which their company will pay a
maximum amount of tax and, importantly, that democratic societies do not insist that
they do make such a choice” (Hasseldine and Morris 2013, p. 11) and “stock markets
rarely ask any questions about the social quality of profits” (Sikka 2013, p. 16).
Neither can it exclude the expression of tax-related behaviour as forms of a different
kind of fiscal arbitrage, with profoundly different economic contents and associated
moral judgements: corruption, tax evasion, tax avoidance, abuse of rights, transfer
pricing, and the adoption of economic choices conditioned by fiscal variables.
However, all these pieces, which together form a complex, conflictual picture,
only make the role of IR more important. Its description of tax-related behaviour
will take into account the choices made, how the managers have handled these
opposing interests, and the existing relationships between tax policies and the
strategy of the enterprise.
The information requested fulfils a double purpose: (i) it demonstrates the
economic contribution the firm provides the country in which it operates, by paying
taxes and guarantees transparent fiscal planning policies to highlight the absence of
any tax evasion or avoidance, the movement of income between countries and the
use of tax havens; (ii) it explains how the choices made not only respond to a moral
commitment, but are also part of the strategic vision of the enterprise.
182 C. Cavazzoni and F. Orlandi

Fig. 11.1 Rio Tinto provides

an indication of its total tax
payments by type of tax.
Source: Rio Tinto—Tax Paid
in 2012

IR must, therefore, try to provide an answer to the following questions:

• how does the firm contribute to the development of the country in which it
operates?
• how does the development implemented within the territory link with the ability
of the enterprise to produce medium-long term wealth?
• what strategies does the enterprise put in place to create or strengthen the bi-
unique relationship with the state?
In answer to the first question, enterprises usually show the final data concerning
the taxes paid in each country (Fig. 11.1). However, taxation constitutes only one of
the forms of contribution received either directly or indirectly from the enterprise.
In fact, resources transferred by the enterprise to the state may include:
• income tax, i.e. taxes calculated on the profit produced by its economic activity
in the country;
• income tax paid by workers, in direct proportion to the number and qualifications
of the work force used by the enterprise;
• indirect taxes, mainly VAT and customs duties;
• fees for services, concessions, authorisations granted by the State to the
enterprise;
• direct donations or donations to state-controlled organisations to achieve worthy
aims.
This initial information, often provided by MNEs in absolute terms (Fig. 11.2),
does not, however, express a value judgement on the behaviour and choices of the
enterprise.
Thus, to provide the stakeholders with a better perspective of analysis sustained
by measuring the quantitative terms of the phenomenon, it is possible to highlight
11 The Relationship Between Multinational Enterprises and Territory in the. . . 183

Fig. 11.2 Gold Fields sets

out its contributions to
government by region (US$/
m). Source: Gold Fields
Integrated Annual Review,
2012

the relationships between valued added produced in the country and the direct and
indirect contribution by the firm to state taxation. IR can, therefore be structured to
record:
• the value added created in the country, highlighting the relationships with the
activities of the value chain implemented in each establishment in the territory;
• the share of value added produced in the state which is destined to support the
government under various forms of contribution;
• the interventions the enterprise carries out in the social system, replacing state
intervention (Table 11.3).
This perspective not only provides proof of the taxes paid, but also correlates
them with two fundamental economic processes: the activities of the value chain
implemented within the state and the value added produced by each activity.
However, payment of taxes does not exhaust the information concerning the
relationships between the enterprise and the territory in which it operates. This can
be supplemented with some particularly significant aspects which qualify the firm’s
behaviour. In fact, when we speak of the state as a stakeholder, we must remember
how this organisation is, in turn, the expression of a multitude of underlying
interests which do not conclude simply by collecting taxes, but stem from the
role played by the state in the social and economic system.
In this sense, an additional qualifying aspect of the enterprise-state relationship
is the adoption of models of behaviour which contrast the use of forms of corruption
by the managers. The firm will use IR to provide information on these subjects
concerning the contents of its code of ethics, its support of initiatives aiming to
contrast these practices and the actions undertaken to discourage such behaviour.
There are several initiatives of this kind. The World Economic Forum has promoted a
Partnering Against Corruption Initiative that is a global, multi-industry, multi-stakeholder
anti-corruption initiative set up to raise business standards and to contribute to a competi-
tive, transparent, accountable and ethical business society.4

4
http://www.weforum.org/issues/partnering-against-corruption-initiative
184 C. Cavazzoni and F. Orlandi

Table 11.3 Distribution of local value added by value chain

State A State B GROUP
Contribution of activities to value added
Primary activities
Inbound logistics xxx xxx xxx
Operations xxx xxx xxx
Outbound logistics xxx xxx xxx
Marketing & sales xxx xxx xxx
Service xxx xxx xxx
Support activities
Firm infrastructure xxx xxx xxx
Human resource management xxx xxx xxx
Technology xxx xxx xxx
Procurement xxx xxx xxx
Value added XXX XXX XXX
Payments to government
Income taxes (xxx) (xxx) (xxx)
Indirect taxes and duties (xxx) (xxx) (xxx)
Property tax (xxx) (xxx) (xxx)
Royalties (xxx) (xxx) (xxx)
Employee taxes (xxx) (xxx) (xxx)
Other contributions (xxx) (xxx) (xxx)
Interventions replacing the government (construction of (xxx) (xxx) (xxx)
hospitals, schools, kindergartens)

Then again, the European Union has recently come to an agreement on the wording of the
new Accounting Directive, introducing a principle of transparency for payments by the
extractive industry to the Governments of countries holding mineral resources. The
obligations envisaged by the Directive are very similar to those in the Dodd-Frank Act in
the United States and include all types of firms, compared to the American model which
referred to companies quoted on the stock market. This will enable citizens to know “how
much money their governments receive for their natural resources and how this money is
used” (Kaufmann D., president of Revenue Watch 20125).

IR can use this information to explain how the company diffuses the principles
and models of behaviour within its organisational structure, how it informs its
managers of existing legislation in the various countries, and of the procedures to
monitor compliance with internal directives by its directors and, more generally
speaking, the results it obtains in its fight against unlawful practices.
Numerous firms have adopted IR to provide information regarding the risks of
corruption, especially those enterprises operating as concession holders for the
extraction of natural resources which are most open to these phenomena (Fig. 11.3).

5
http://www.revenuewatch.org
11 The Relationship Between Multinational Enterprises and Territory in the. . . 185

Fig. 11.3 Bam Group

proposes to share turnover
according to Corruption
Perception Index Country.
Source: Royal Bam Group,
Sustainability report, 2012.
The Corruption Perception
Index (CPI) is calculated
annually by Transparency
International

The analysis of country risk factors (Fig. 11.4) should be accompanied by a

description of the behaviour adopted to oppose the various forms of corruption.
To fulfil this role, IR must highlight the functions given to the systems of internal
audit, the operations of the control department, the warning situations recorded by
the alert systems, any breach discovered and the reactions of the organisation to this
type of behaviour (Table 11.4).
The additional element which clearly qualifies the relationships between enter-
prise and state is the existing economic and financial relationship between the
associated entities present in the various countries. This phenomenon, which for
the sake of convenience we will define as “transfer pricing”, stems from the policies
adopted by the firm regarding the exchange of goods, the payment of royalties and
dividends, the payment for infra-group services and funding, and for the placement
of relevant activities in terms of value added in Countries with low taxation.
These internal transactions in MNEs are continually on the increase and cur-
rently exceed 30 % of the entire international trade (United Nations, October 2012).
They generate true flows of wealth which move “mysteriously” across transnational
borders without a trace, since they disappear mainly within a single economic or
legal individual.
Furthermore, the policies concerning transfer pricing not only determine the
level of taxation of the enterprise in a particular country, but also demonstrate the
wealth created and distributed in a territory as opposed to that transferred to other
associated entities of the organisation. As regards IR, this information could lead to
186 C. Cavazzoni and F. Orlandi

Fig. 11.4 Gold Field provides the following classification of the host country governance and
growth indicators. Source: Gold Fields Integrated Annual Review, 2012

Table 11.4 Activities fulfilled by Snam internal audit

2010 2011 2012
Total number of audits fulfilled 51 48 55
Reports received 26 22 17
. . . of which related to the Internal Control System 10 8 10
. . . of which related to the accounting system, auditors, fraud – – –
. . . of which related to corporate responsibility ex D.Lgs. 231/2001 – – –
. . . of which related to violations of anti-corruption law – 1 –
. . . of which related to other subjects (Code of Ethics, mobbing, theft, 16 13 7
security)
Archived reports due to the absence of evidence or untrue evidence 16 11 13
Reports resulting in disciplinary or administrative action and/or submission to – 5 2
the Court
Reports under examination 6 6 2
Source: Snam Sustainability report, 2012

MNEs constructing an internal Balance of Payments in which the wealth produced

and distributed in each country replaces imports and exports. The data acquired
from the model concerning the Local Value Added Statement proposed in para-
graph 2, together with a summary of these movements using a specific report, make
it possible to identify the Local Added Value created and distributed for each
associated entity compared to the value added transferred to other countries
(Table 11.5).
The results of these dynamics within MNEs can be summarised to highlight the
flows of wealth moving between associated entities (Fig. 11.5).
We should point out that many States adopt regulations which oppose forms of
fiscal arbitrage and require transactions between countries to be assumed “on an
arm’s length basis”. Nevertheless, even though it operates in full compliance with
tax regulations, the company often shows significant margins which enable it to
place or transfer valued added amongst its branches. In addition, these regulations,
inspired by the OECD model (OECD 2010), do not radically influence the
behaviour of the enterprise. However they normally protect only the government
authorities, forcing the enterprise to tax an income which has been recalculated
11 The Relationship Between Multinational Enterprises and Territory in the. . . 187

Table 11.5 Balance of State A

local value added
Local value added created in State A XXX
Workers xxx
Suppliers of goods and services xxx
Local minority shareholders xxx
Lenders xxx
Government xxx
Depreciations and amortisations xxx
Others xxx
A distribution of value added in State A XXX
Parent MNEs (xxx)
Indirect taxes and duties (xxx)
Foreign minority shareholders (xxx)
Foreign lenders (xxx)
Foreign governments (xxx)
Others (xxx)
B value added transferred to foreign States (XXX)
(A–B) Balance of local value added XXX

Balance of LVA
Balance of LVA

Balance of LVA

Balance of LVA

Fig. 11.5 Local value added flow

according to different transfer prices, whereas no influence is exerted on the

effective transfer of wealth between branches of the MNEs.
On the contrary, IR, which includes a further breakdown of LVA, must take into
account the policies of transfer pricing not merely from a physical viewpoint, but
also in terms of social commitment to the growth of the countries in which
production takes place. It should highlight how internal management choices
influence the distribution of local value added.
The different levels of analysis of the enterprise–state relationship, which we
have attempted to highlight, must in the long run find their synthesis in the
definition of the strategies adopted by the enterprise to increase its value over
188 C. Cavazzoni and F. Orlandi

time. This final descriptive stage is the definitive qualification of IR, as it outlines
the relationships between the behaviour of the firm, its choices of fiscal planning
and its value creation processes, by taking on the role to disclose corporate
competitive strategies.
Thus, once the various forms of relationships have been identified between its
behaviour towards the country system and the processes to create value this may
encourage, IR will have to place corporate choices within a much wider strategic
vision. The latter will have to highlight how and why the firm intends to invest a
good reputation from a culture of legality into the social and economic growth of
the territories in which it operates and in its relationship with local governments.

Conclusions
In this chapter, we have attempted to examine some of the problems regarding
Integrated Reporting for enterprises with branches in different companies
(MNEs). Commencing from an analysis of the literature on the subject of
corporate social responsibility which has partially dealt with these topics, we
have tried to identify the relationships between MNEs and territory which may
influence IR.
For this purpose, we considered local value added to constitute the economic
aggregate, which best summarises the overall activity and the existing
relationships between the various components of the corporate system,
representing a fundamental tool to measure the effects of the management
choices made by firms on territory.
However, the relationship between MNEs and local interests presents numer-
ous facets which, on the one hand, influence the interpretation of the LVA and,
on the other, introduce further factors for the analysis of these dynamics. In this
sense, the chapter focuses its attention on three particular areas of interest: the
fiscal component, transfer pricing and the absence of unlawful practices.
We actually believe that these are the characteristic features which determine
the relationship between MNEs and the state, and the contribution played by the
firm to the economic development of the context in which it settles. Thus, the
disclosure proposed on these topics within IR, goes beyond the “numbers”
contained in financial statements or the “good intentions” of sustainability
reports. It is able to report the strategic choices of MNEs concerning these
dynamics by evaluating the role of the value creation process, and providing
its stakeholders adequate information in order to strengthen the company’s
image in the global market.

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Towards Integrated Reporting in the
Public Sector 12
Luca Bartocci and Francesca Picciaia

Abstract
During the last 20 years, social, political and economic changes have impacted
on the accountability concept in the public sector. In this context, public
organizations are requested to improve their reporting processes, and disclose
more accurate and complete information about their activities and results. In
April 2013 the International Integrated Reporting Council issued the Consulta-
tion Draft of the International Integrated Reporting Framework, with the aim of
contributing—among other things—to the initial integration of information
regarding different forms of “capital” involved in the value creation processes
of an organization. While primarily designed for private companies, the Consul-
tation Draft can also be extended to the public sector. For this reason, in order to
discuss the possibility to improve the level of accountability of public sector, this
chapter intends to provide an introductory analysis on the applicability of the
International Integrated Reporting Framework to public institutions.

12.1 Introduction

The changes that have affected the public sector over recent decades have deeply
impacted the relationship between public administrations and citizens. Due to the
spread of New Public Management (NPM), public organizations have seen the role
of citizens change through the years, from “a vague, textureless component of the
environment of public administration” to a service user to be treated as a customer
(Radin and Cooper 1989, p. 167). For this reason the evaluation of the performance
of the administration and individual representatives should be based on the results
achieved. More recently, following the Public Governance (PG) approach, citizens
are conceived as partners of the public administration, participating in the decision

L. Bartocci (*) • F. Picciaia

Faculty of Economics, University of Perugia, Perugia, Italy
e-mail: luca.bartocci@unipg.it; francesca.picciaia@unipg.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_12, 191

# Springer International Publishing Switzerland 2013
192 L. Bartocci and F. Picciaia

making, production, monitoring and evaluation processes of the public services

supplied (Vigoda 2002).
These cultural changes have also affected the idea of accountability (Behn
1998). This has changed and continues to change the way in which public
institutions become accountable, and also the expectations and demands for trans-
parency made by citizens. New reporting instruments, as evidenced by the spread of
environmental sustainability and social responsibility reporting systems, offer the
opportunity to facilitate public administration in meeting citizen’s needs. Citizens
now have the possibility to be informed about aspects of public activities that
cannot be described by traditional financial reporting alone.
In this scenario, the Consultation Draft (CD) of the International Integrated
Reporting Framework, issued in April 2013 by the International Integrated
Reporting Council (IIRC), represents a potential point of reference for the public
sphere. The need to develop forms of integration between different types (social,
environmental, sustainability based, etc.) of reporting systems has emerged in both
government-owned companies and, with some specific attributes, in non-market-
oriented public institutions.
The objective of this chapter is to provide a preliminary analysis of the
opportunities to apply the CD guiding principles and content elements to public
administrations. To achieve this purpose, the chapter is structured as follows. In
order to highlight the limitations of traditional reporting, the second section briefly
outlines the evolution of the concept of accountability in the public sector. The third
section deals with the principal forms of non-financial reporting that public
organizations have implemented in recent years. Then, the fourth section offers a
reflection on the way in which the content of the CD may be reinterpreted within the
context of the public sphere. The paper ends with some suggestions concerning the
implementation of Integrated Reporting (IR) in the public sector.

12.2 Reporting as an Accountability Medium in the

Public Sector

Even if widely discussed in the literature, the concept of accountability still presents
considerable problems of interpretation. In general, accountability indicates the
aptitude of subjects (accountee or steward) to account for their actions, and for their
actions in relation to another person or group of people (accountor or principal).
Therefore, the basis of the idea is inspired by agency theory: there is a relationship
between a subject, who acts in the interest of another, and towards whom he has
some form of obligation to make himself accountable (Stewart 1984). According to
Roberts and Scapens (1985, p. 447), the nature of the accountability relationship is
not only informative, but also justifies the “giving and demanding of reasons for
conduct”.
The concept of accountability presents clear points in common with that of
responsibility. Some researchers (i.e.: Hoskin 1996) have highlighted how the
notion of accountability is superordinate, all-encompassing and more systemic
12 Towards Integrated Reporting in the Public Sector 193

than that of responsibility. In particular, accountability involves a delegation of

responsibility that requires formal verification, and entails the need for reporting
(Guarini 2003). Other authors (i.e.: Lindkvist and Llewellyn 2003) claim that the
concept of responsibility is endowed with ethical content, and is morally superior,
since it may contain ideological and idealistic values. Conversely, accountability
remains strictly procedural and operational by nature. The key point is that the
activity of reporting is generally recognized as an essential requirement of being
accountable.
The recent spread of approaches inspired by NPM and PG has impacted the idea
of accountability,1 resulting in:
• changes in codes of accountability;
• changes in the object of reporting;
• a more active role played by citizens, and a greater emphasis on external rather
than internal accountability.
Gray and Jenkins (1993, p. 559) define an accountability code as a “system of
signals, meanings and customs which binds the principal and steward in the
establishment, execution and adjudication of their relationship”.
The basis of each code of accountability would be a different combination of
rationalities. The changes experienced in the public sector have reduced the
importance of financial codes (traditionally prevailing and oriented to the pursuit
of probity, compliance and efficiency) in favor of managerial codes (more focused
on technical, economic rationality and responsibility for the efficiency of the
services provided) and professional codes (more focused on social rationality,
attention to quality and the appropriateness of services provided).
The spread of NPM has consequently promoted an evolution of the logic of
accountability, while also affecting the contents of the accountability relationship
itself. The concept of managerial accountability indicates the responsibility of
public officials (typically in a managerial role) to make themselves accountable
for their performance as well as for the levels of efficiency in their organization. In
this way managerial accountability can be distinguished from the political dimen-
sion of accountability: a distinction can be made between elected policy-makers,
responsible for achieving institutional goals, and managers, to which are delegated
tasks regarding the administration and regulation of resources, in compliance with
stated objectives.
More recently, the idea of accountability as a form of democratization and
empowerment of communities has become more common, with the active (direct
or indirect) involvement of citizens in the accountability process. Among the many
terms used in this regard, one of the most common is social accountability. The
distinctive element of this concept is the fact that the community is both recipient
and active subject in processes of accountability. This involves an extension of the
idea of accountability, oriented not only towards parameters of effectiveness and

1
An overview of the main approaches taken in the public sector and their development is provided
by Steccolini (2004, pp. 330–333).
194 L. Bartocci and F. Picciaia

efficiency, but also to compliance with socially shared values. As highlighted by

Kickert (1997, p. 34):
“Without denying whatsoever the great importance of effectiveness and efficiency in the
public sector, other norms and values play a role as well; values such as liberty, legality,
legitimacy, equity and social justice”.

The emergence of the social dimension also implies a shift from a form of
“vertical” structure to “horizontal” relations between the parties involved in the
accountability relationship. There are intermediate bodies that allow communica-
tion and interaction between citizens and public administrations. In this way, power
is more widespread and relations are more equal (Bovens 2005). This leads to a
“flattening” and downward enlargement in relations, introducing a horizontal
dimension of accountability.
These changes have also posed some questions regarding the capacity of the
Annual Report to be the fundamental tool of accountability in public institutions.
What is at stake, is not so much the centrality of the Annual Report within the
process of communication and disclosure, but the opportunity to connect it with
other documents that are different in terms of contents and preparation. The major
criticism relates to the citizens’ lack of interest for the information typically
contained in annual financial reports. Some researchers (i.e.: Jones 1992) demon-
strate that the number of people who actually make use of the information contained
in public administration financial reports is very small compared to the potential
audience. This is due both to the typology of published information, which excludes
important informative profiles (Guthrie and Farneti 2008), and the high complexity
and limited accessibility of these documents. The risk is that the Annual Report is of
interest for internal users only (Brusca Alijarde 1997). Furthermore, the informa-
tion requirements that are useful in decision making may not necessarily be the
same as the requirements for accountability (Patton 1992).
Steccolini (2004) demonstrates how the Annual Report of Italian provinces and
municipalities cannot be regarded as an effective medium of accountability. The
author hypothesizes the existence of a vicious circle in the relationship between
citizens and local government annual reports: citizens’ lack of interest in the report
would discourage those in charge of preparing the document to make the necessary
improvements and introduce voluntary forms of disclosure. Therefore, it is possible
to comment that the inertia of preparers, whose principal concern is the compliance
with legal requirements, may further contribute to the disenfranchisement of
citizens, who are not inclined to read and utilize the report. Other studies (i.e.:
Ryan and Walsh 2004) argue that external stakeholders prefer other, less institu-
tional, forms of information and reporting. From this perspective it would not seem
sufficient to enrich financial reports with other qualitative information and non-
financial indicators, but rather it may be necessary to find other “ad hoc” means to
attract the attention of citizens and convey information more effectively. This is the
road that many public institutions have embarked on in recent years.
12 Towards Integrated Reporting in the Public Sector 195

12.3 New Trends in Reporting

The forms of non-financial reporting that have gradually developed over the last
few years are numerous and varied. In many cases, these reports originated in the
private sector, and were subsequently transposed into the public sphere; in other
cases, however, they emerged from practices that have been developed to meet the
reporting needs of public institutions. In general, these cases relate to voluntary
disclosure, although in some countries national regulators have issued specific rules
over time.2
While it is difficult to undertake a complete mapping of the phenomenon, it is
possible to classify the non-financial reports adopted in the public sector in the
following four categories:
• documents that arise from the logic of strategic monitoring and control, such as
the balanced scorecard and mission reports;
• documents regarding social and environmental responsibility, such as social
reports, environmental reports and sustainability reports;
• documents that report intangible assets, such as intangibles reports and intellec-
tual capital reports;
• other documents associated with the completion of particular budgetary cycles,
such as gender reports and participatory reporting.
The first category of these instruments deals with the activities of strategic
monitoring and control of the performance of an organization. These are often
“introductory” documents to more complex accountability practices. They include
the balanced scorecard (BSC) and mission reports.
Introduced in the 1990s by Kaplan and Norton, the BSC aims at integrating
traditional financial indicators with other kind of information, in order to translate
mission and strategy into a coherent set of performance measures. The approach
pursued is holistic by nature, allowing for the re-alignment of the strategic and
operational levels of management (Kaplan and Norton 1992). The BSC represents
the main dimensions of value creation in an integrated form, and constitutes one of
the most effective approaches for guiding an organization (including public ones) in
the definition of its strategic priorities. While not originally developed as an
external communications tool, the use of the BSC has repeatedly been the
stimulating factor for a multidimensional analysis of activity and the subsequent
adoption of instruments of non-financial disclosure (Farneti and Guthrie 2009).
The mission report is an instrument developed in public and non-profit
organizations to highlight and report on social result achieved, verify the mission
and activities undertaken, and define objectives and actions consistent with institu-
tional functions and their effectiveness and efficiency. It is a document of a
political-institutional nature, which aims to communicate results to stakeholders
to fulfill accountability requirements. The mission report is closely connected to

2
As an example, a Directive of the Ministry of Public Administration on social accountability in
public administrations was adopted in Italy in 2006.
196 L. Bartocci and F. Picciaia

documents of a financial nature, and re-interprets information consistently with the

mission and the strategic plan (Hinna 2004; Propersi 2004).
The second group of documents concerns information provided to stakeholders
on the social and environmental impact of activities. These documents are adapted,
with appropriate modifications, from the experiences of for-profit organizations.
They serve to clarify the relationship between public policy formulation and its
implementation, and become a particular medium through which the activity of the
organization is reinterpreted.
In particular, social reports are intended to highlight the impact on the commu-
nity as broken down into categories of relevant social groups. This stands as an
expression of a broader approach to social issues that, similarly to Corporate Social
Responsibility (CSR), contributes to integrate ethical concerns within the strategic
vision of the business. The preparation of the social report is conceived as a phase of
the broader and more articulated management cycle. Various models of social
responsibility management have been developed, such as the SA8000, AA1000,
and ISO26000 standards. Essentially, the social report is a document which gives an
account of the mission and strategies of the organization, its projects, actions taken
and results produced with regard to different categories of stakeholders. In the
public sphere the objective is to report value produced to citizens, especially in
terms of services provided and citizens level of satisfaction.
The environmental report is an instrument that allows for the reporting of the
environmental policies implemented across the organization, and accounts for
spending related to environmental goals. It describes the main issues, the strategic
approach of the organization, and the actions implemented for the protection of the
environment. There have been numerous initiatives for the development of an
accounting system capable of representing environmental issues. Among these,
the CLEAR (City and Local Environmental Accounting and Reporting) project can
be recalled as it is specifically intended for public administrations. Funded by the
European Union for the implementation of environmental budgeting by a sample of
local authorities, this method is based on the notion of environmental accounting as
a governance process, involving a system of indicators to measure the commitments
and targets set periodically by the institution, that will subsequently be summarized
in a periodic report.
The extension of the concept of social and environmental responsibility to the
protection of future generations has led to the development of the sustainability
report. This report attempts to integrate financial, social and environmental
activities, their results and their external impact. The sustainability report derives
from the approach known as triple bottom line (Elkington 1997), according to
which the annual financial result (single bottom line) appears in itself to be insuffi-
cient for an adequate measurement of business performance. For this reason, it is
suggested to integrate financial data with social and environmental information.
The sustainability report presents itself as a tool for strategic planning and control,
through the analysis of the entire work of the institution and a subsequent evalua-
tion which aims to confirm the ability to manage the balance between the variables
considered. Among the various guidelines produced at the international level, the
12 Towards Integrated Reporting in the Public Sector 197

most commonly used are those issued by the Global Reporting Initiative (GRI), a
project launched in 1997 in order to provide reference standards in the field of
sustainability. The GRI Framework is now a universally accepted model,
irrespective of size of operation, sector of activity or country of origin. Although
these guidelines are applicable to all organizations, in 2005 the GRI released a pilot
version of a supplement dedicated to public agencies, and in 2010 it published a
specific document for government agencies (GRI Reporting in Government
Agencies).
An independent stream of research attempts to assess, account and report the
management of intangible resources (Cañibano et al. 2000). Also in this case the
need to address this issue initially emerged in the for-profit sector, and in particular
with regard to knowledge-based businesses. Subsequently the world of non-profit
organizations has also been affected by similar problems and, more recently, the
situation has spread to public institutions. In particular, the main focus of attention
is the evaluation of intellectual capital. Models of representation of intellectual
capital differ in terms of recognized constitutive elements (Bontis 2011). Typically
these are identified in relational capital (attributable to existing relations with
external parties and the reputation of the organization), human capital (regarding
the knowledge and skills of personnel), and organizational capital (in terms of
know-how and the ability to create a collaborative environment).
The final category of documents is the result of approaches aimed at innovating
public administration budgeting and reporting according to the logic of gender and
participation.
Gender reports provide an assessment of policies with respect to certain social
groups, and highlights the actions taken in pursuit of equal opportunities. Although
the first studies on the subject go back more than 20 years (Sharp and Broomhill
1990), it was only in the late 1990s that these ideas became widespread. This type of
analysis consists in the reclassification of activities carried out, alongside items of
revenue and expenditure, for areas directly and indirectly related to gender (the
focus was initially on the female gender, but more recently consideration has been
given to other “sensitive” categories such as the elderly, young people and
immigrants). The theoretical basis of the report is the idea that economic policies
are not neutral, but reflect the existing distribution of power in society.
Participatory budgeting is an tool that refers to the broader approach of “partici-
patory democracy”, i.e. the inclusion of various local actors in the decision-making
processes of public institutions. The participation process can take several forms
(public meetings, focus groups, technical committees, e-voting, etc.) to consult
citizens or to achieve a form of shared deliberation regarding the use of a portion of
the resources available in the budget. The inclusion of citizens has important
political, social and technical significance, and is particularly emphasized in visions
of PG. Citizen participation can also be extended to public services delivery, in
mechanisms of evaluation and monitoring of activity, as well as reporting. Partici-
patory practices have the potential to contribute to the enhancement of the account-
ability of an organization.
198 L. Bartocci and F. Picciaia

12.4 Bringing Integrated Reporting into the Public Sector:

An Analysis of the IIRC Consultation Draft

The development of non-financial reporting has led to new means of integrating

different forms of information content and the various instruments used. In 2010,
14 % of the initiatives registered in the GRI’s publicly available Sustainability
Disclosure Database was self-declared as “integrated”.3 This percentage reached
20 % in 2011. A survey sponsored by the GRI (2013), as conducted on a sample of
231 integrated reports published in 2012, demonstrates that IR is coming into use
also in the public sector. In particular, at least seven reports published by public
institutions qualified as integrated in 2012 (3 % of the total, as opposed to 1 % in the
previous year).
The CD illustrates that the “Framework is intended primarily for application by
private sector, for-profit companies of any size but it can also be applied, adapted as
necessary, by public sector” (CD 2013, p. 8).
This is a document of a conceptual nature, which is intentionally limited to the
expression of a set of principles intended to drive the process of integration, without
entering into the merits of technical measures for its implementation. In light the
potential extension to the public sphere of the model published in the CD, this
section intends to offer some comments concerning the possible applications.
The CD is essentially written with a view to informing and promoting an
understanding of the dynamics of value creation. In this sense the business model
is of crucial importance. This can be understood as the system of organization and
management of activities that produce or destroy value (CD 2013, p. 14). An
additional concept introduced by the CD is that of the six capitals, which are
conceived as instruments that enable the creation, accumulation and diffusion of
new value.
The concept of value in the public sector was initially proposed and developed
by Mark Moore (1995, p. 28), who suggested how “the aim of managerial work in
the public sector just as the aim of managerial work in the private sector is to create
private value”.
There is neither a precise agreed definition of public value, nor a specific method
of evaluation. Moore (1995) identifies several standards for capturing public value.
These standards are: the capacity to achieve mandated objectives efficiently and
effectively; the capacity to defend the long-term general public interest against
politicians that pursue short term consent; the analytical evaluation of single
policies and programs; the satisfaction of citizens understood as customers. There-
fore, it seems clear that public value is the result of several factors, in which the
social environment, strategic choices and structure all play a role. From this point of
view, the CD, with its division of assets in diverse capitals, can provide a consider-
able contribution to highlighting specific factors and processes in value creation.
The basic idea is that the value created is calculated by taking into account the sum

3
See http://www.database.globalreporting.org
12 Towards Integrated Reporting in the Public Sector 199

of the variations in the individual capitals. For this reason, within IR it is necessary
to analytically map the elements that constitute the different capitals, and highlight
the interaction between them.
The business model could be described as an “activity model”. This is clearly
affected by the specific institutional arrangements of the public institution in
question. In particular, there will be differences among forms of local government
(some with legal powers and the ability to raise taxes), institutions of an instrumen-
tal nature, such as agencies (with functional tasks in the service of a superordinate
institution), and other organizations (which provide services of general interest in
particular sectors such as education and training, culture, research, etc. In general
terms, three main areas of public institution activity can be recognized: traditional
government activities, social service provision, and utility delivery. The latter two
forms of responsibility may be exercised directly or through contracting solutions.
Such decisions are relevant in the definition and description of an “activity model”.
In any case, a correct assessment can only be made in the light of the way in which
the institution intends to interpret its mission and vision. As a result, it will be
closely connected with the strategic plan.
With reference to the capitals, it can be said that the various concepts identified
in the CD will also be of potential interest for the public administration. It should
also be noted that the document explicitly recognizes that “not all capitals are
equally relevant or applicable to all organizations” (CD 2013, p. 13), confirming the
flexible nature intended to be conferred to the Framework.
The following observations intend to offer an analysis of the different capitals
included in the CD, and speculate on their adoption in the public sphere. For the
purposes of reporting on financial capital, funding should be particularly
highlighted, providing guidance on taxation decisions, the degree of financial
autonomy of the institution, and the extent of future constraints on the sources
used. An important piece of information concern debts, and is capable of offering
insights on duration, guarantees, amortization schedules, and the interest rate. In the
same way, an appropriate information framework should be provided regarding the
allocation of spending, highlighting decision making processes and the results
achieved. This type of information calls for a close connection with the annual
financial report.
The concept of manufactured capital might be reinterpreted. In doing so, it may
be more accurate to make reference to “available assets”. The assets of a public
entity can take on different forms, and may also be subject to binding legal regimes.
It follows that not all assets are inclined to release value and, more generally, not all
assets can be used as an instrument for the strategic objectives of an institution. It is
therefore important to have information systems available to provide details of the
composition, value and manner in which assets can be used.
The analysis of intellectual capital is not yet widespread in the public sector.
This appears to be the type of capital that has, up to now, been paid the least
attention (Guthrie et al. 2012). Among the various points raised by the CD, it seems
that special consideration should be given to the issue of organizational capital,
200 L. Bartocci and F. Picciaia

while less weight might be given to information on intellectual property, as this is

not yet widespread in the public sphere.
In contrast, human capital is of paramount importance, as it is the primary and
fundamental resource of the public sector. A relevant question in this area of
reporting is the focus on the ethical dimension and, therefore, the models of ethics
management and certification that may be adopted. In this regard, aiming to
contrast corruption, national legislation may combine specific disclosure and trans-
parency requirements.
The theme of social capital is closely connected to the social function that public
institutions perform. The CD provides a conceptualization of social capital that
focuses on the relational skills of an entity, relationships that aim to improve the
spirit of collaboration with stakeholders and the legitimacy of the organization in
the community. The associated difficulties are well known, even in the public
sphere, and the development of social responsibility management, social auditing
and social reporting models has made great progress in recent years. The impact on
natural capital is another profile to which many governments have been committed
for some time. As a consequence, advanced and complex models of environmental
reporting have now been developed. It should be noted that the CD does not
expressly refer to sustainability, which it would appear beneficial to include.
The above comments highlight the importance of the interaction between the
different information systems that underlie the specific reports on each form of
capital. It can be asserted that the public institutions that develop an integrated
report prepare the release of the document after having already put in place “ad
hoc” reporting forms based on appropriate information systems.4
The underlying idea of the CD is not to create a system that necessarily replaces
existing reporting documents, but to foster connections between them and enhance
their informative capacity. The CD strikes an appropriate balance between relevant
thoroughness and conciseness, meeting the specific and in-depth information needs
of stakeholders with access to appropriate sources of information. This latter aspect
is of particular importance today, and is in line with the evolution of the idea of
public sector accountability. In this regard a particularly important role should be
given to the possibilities provided by ICT (CD 2013, p. 35). One route that some
governments are taking is the promotion of open data experiences, designed to
increase the degree of transparency and communication. IR can represent a process
capable of giving a special impetus to such practices.
With regard to the objectives of the CD, it should be noted that the document
puts great emphasis on the internal, as well as external, benefits of “integrated
thinking”. This is of particular importance in public organizations, where the highly
compartmentalized organization can lead to fragmentation and dispersion of the

4
A brief analysis of the experiences available in the GRI database confirms that the experiences
that define their own reports as “integrated” have been engaged in the adoption of forms of
sustainability, environmental and social reporting for some years. In the GRI Sustainability
Disclosure Database there are 529 sustainability reports published in 2013 by public institutions
85 out of whom are self-defined as integrated reports.
12 Towards Integrated Reporting in the Public Sector 201

overall strategy. This problem is of particular importance during crisis, where

difficulties in public finances suggest that activities be streamlined to save money.
In relation to the issue of the external users of IR, it can be noted that, following
the typical perspective of companies operating in financial markets, the approach
proposed in the CD is too focused on the interests of the shareholders. A related
issue is the importance of mechanisms for citizen involvement, where forms of
consultation and participation in decision making by citizens have been activated.
(CD 2013, pp. 19–20).
The CD guiding principles and content elements are in line with those developed
by other frameworks for “ad hoc” reporting. It is appropriate, however, to pose a
question regarding the identification of the reporting boundary. The choice
suggested in the CD is to make the financial reporting entity a central element of
the reporting boundary (CD 2013, p. 33). This criterion may not necessarily be
suitable for the public sector because entities that are not tied by control
relationships or dominant influence may still provide information that is socially
relevant and worthwhile for inclusion.

Conclusions
Recent calls for accountability in the public sector have led to the use of
alternative forms of reporting, which typically focus on contents that go beyond
the financial aspect. Sometimes organizations implement different reporting
processes that end up being disconnected. This aspect can create confusion
within the organization, and reduce the effectiveness of internal and external
reporting.
The CD has the opportunity to make an important contribution to the public
sector in the logic of more complete and effective communications. The analysis
conducted in this chapter suggests that, although with some adjustments, the
document also responds to the requirements of various forms of public
administration.
The main strength of the IIRC approach is to promote integrated thinking,
which can lead “to integrated decision-making and actions that consider the
creation of value over the short, medium and long term” (CD 2013, p. 9). The
need to counteract traditional “silo thinking” is particularly acute in the public
sector.
From an external perspective the model should allow for the overcoming of
barriers between different categories of stakeholders, thus encouraging their
involvement in processes of accountability. Indeed, one of the major limitations
of traditional financial reports is that they are generally intended for internal use.
This limit has also been found in some cases of non-financial reporting (Farneti
and Guthrie 2009). In the logic of the CD, reporting should provide information
that can be easily assimilated by external stakeholders on “connectivity and
interdependencies between the range of factors that have a material effect on an
organization’s ability to create value over time” (CD 2013, p. 9).
The theme of IR has already been promoted by the GRI and, as such, it is easy
to imagine that it would be perceived as an evolution of the sustainability report,
202 L. Bartocci and F. Picciaia

and used by organizations with many years of experience. In reality, the frame-
work does not anticipate “barriers to entry”, and leaves open the possibility that
other forms of “ad hoc” reporting will persist. In general, IR can be portrayed as
a system in which specific models of management, auditing and reporting
interact, and may offer a database where stakeholders can extract information
on specific aspects of interest.
One specific question concerns the nature of the document and the subject
responsible for its preparation. Mission reports have become popular in some
countries. These documents, although technical in their nature, perform a func-
tion of political accountability. “Ad hoc” forms of reporting are more focused on
a particular object of accountability (relationships with certain categories of
stakeholders, environmental impact, etc.), and despite having a profound politi-
cal significance, have a more technical background. These are often promoted by
management, in accordance with their political representative (for example, the
commissioner of reference). IR requires an increased capacity for interaction
between all organizational sectors of an institution and, above all, between the
political and the managerial realm.
The preparation of an integrated report requires a close integration between
information systems and planning and control systems in the institution
concerned. In particular, internal control systems must be redesigned, evaluating
their ability to provide elements that are useful towards integrated thinking and
communication. In this sense, from an organizational point of view, it is the
board of executives that acts as a driving force and supervises the management
of information integration processes.
A further aspect concerns the theme of the assurance of reporting by the
appropriate international bodies. Currently, the most renowned assurance
standards of non-financial reporting are ISAE 3000 and AA1000AS specific
for companies. However, in the public sector there is a lack of specific
references, also due to the more limited scope of the phenomenon. In this case
it is best not to accelerate the process. Non-financial reporting, and even more
IR, constitutes a voluntary exercise that should not be so rigid that it becomes
meaningless. Introducing obligatory rules of assurance in a premature fashion
would most likely encourage formal and cerimonial adoption of the regulation.
As pointed out by Ackerman (2005, p. 21), a “central element of the account-
ability equation is to understand that it is a process and not a state”. Therefore, it
is not a question of simply providing a report that respects certain formal
guidelines, but of activating a process where becoming accountable is
internalized. Farneti and Guthrie (2009), in their study about what motivates
public and non-profit organizations to adopt sustainability reporting, demon-
strate that the primary purpose is to improve the reputation of the organization
and legitimize its activities. In order to guarantee that IR is not just a temporary
fashion, or a simple communication exercise, it is essential that it affects the way
in which an organization operates and its impact on the outside world. Overall,
the ultimate question is not whether IR is useful, but rather how it will be
operationalized.
12 Towards Integrated Reporting in the Public Sector 203

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 Part III
Towards Integrated Reporting: Cases and Best
Practices
The Case of Eni
13
Domenica Di Donato, Raffaella Bordogna, and Cristiano Busco

Abstract
This chapter focuses on Eni, the sixth largest integrated energy company by
market value in the world, characterised by a strong position on the oil and gas
value chain from the upstream phase of hydrocarbon exploration to the down-
stream phase of product marketing. The purpose is to shed light on Eni’s recent
advances in corporate reporting. Therefore, after having briefly illustrated Eni’s
distinctive approach to sustainable value creation, the chapter focuses on the
structure and the contents of Eni’s 2012 Annual Report. Issued in May 2013,
Eni’s 2012 Annual Report is an Integrated Report, prepared in accordance with
the principles included in the prototype Framework developed by the Interna-
tional Integrated Reporting Council. The analysis presented in the chapter
highlights the most innovative contents and elements of the report, and focuses
on the connections between issues such as the company’s business model, the
competitive environment and strategy, the integrated risk management model,
and the corporate governance system. The review of the report continues with a
brief illustration of the section regarding the Consolidated Sustainability State-
ment. In particular, sustainability represents one of the fundamental drivers of
Eni’s business model, to the point that sustainability has always been conceived
as part of the company’s strategy, rather than a separate and distinctive element.
The illustration of Eni’s 2012 Annual Report continues with a discussion of the
ways in which Eni has interpreted and then operationalized the principle of
connectivity of information. Some concluding comments are offered at the end
of the chapter.

D. Di Donato (*) • R. Bordogna

Eni, San Donato Milanese, Italy
e-mail: domenica.di_donato@eni.com; Raffaella.Bordogna@eni.com
C. Busco
School of Business and Economics, National University of Ireland, Galway, Ireland
e-mail: cristiano.busco@nuigalway.ie

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_13, 207

# Springer International Publishing Switzerland 2013
208 D. Di Donato et al.

13.1 Introduction

The objective of this chapter is to illustrate and discuss the recent evolution of
corporate reporting in Eni, a major corporation in the oil and gas industry.1 In
particular, the focus of the analysis is placed on how the company’s distinctive
approach to sustainable value creation has been affecting the structure and the
content of the latest two Annual Reports. Significantly, Eni’s Annual Report for
2012 is an Integrated Report (IR), prepared in accordance with the principles
included in the prototype Framework developed by the International Integrated
Reporting Council (IIRC).
According to the IIRC, an integrated report is a concise communication about
how an organization’s strategy, governance, performance, and prospects, in the
context of its external environment, lead to the creation of value over the short,
medium, and long term.2 Although providers of financial capital are the primary
intended IR users, an integrated report should be designed to benefit all
stakeholders—including employees, customers, suppliers, business partners, local
communities, regulators, and policy makers—interested in an organization’s ability
to create value over time. The key objective of Integrated Reporting (IR) is to
enhance accountability and stewardship with respect to the broad base of six types
of capital, or “capitals” (financial, manufactured, intellectual, human, social and
relationship, and natural), and promote understanding of their interdependencies.3
Through this approach, IR is designed to support integrated thinking, decision
making, and actions that focus on sustainable value creation for stakeholders.
With these objectives in mind, the chapter is structured as follows. First, the
company profile of Eni is briefly illustrated. Then, Sect. 13.3 presents the
company’s approach to sustainable value creation. Section 13.4 describes Eni’s
recent journey towards Integrated Reporting. Then, the chapter focuses on the most
original features of the company’s Annual Report for 2012 and, specifically, on
issues such as the company’s business model, the competitive environment and
strategy, the integrated risk management model, as well as the Consolidated
Sustainability Statement. Section 13.6 explains how Eni has dealt with the principle
of connectivity of information. The chapter ends with some concluding comments
in Sect. 13.7.

1
The authors wish to acknowledge the fundamental guidance received from Dr. Sabina Ratti,
Sustainability vice President at Eni.
2
See p. 8 of the IIRC Consultation draft of the international IR framework, 2013.
3
The IIRC Consultation Draft refers to “capitals” instead of “capital,” so we continue that use
here.
13 The Case of Eni 209

13.2 Company Profile

Eni is the 6th largest integrated energy company by market value, active in 90
countries in the world, with a staff of approximately 78,000 employees. It has net
sales from operations of €127 billion. The company boasts a strong position in the
oil and gas value chain, from the hydrocarbon exploration phase to product market-
ing. Its strong presence in the gas market and in the liquefaction of natural gas, its
skills in power generation and refinery activities, strengthened by world class
competences in engineering and project management, enables the company to
catch opportunities in the market and to develop integrated projects. Eni has a
significant position in some of the world’s most attractive mining areas. It explores
and produces hydrocarbons in Italy, Africa, the North Sea, the United States, Latin
America, Australia and in a number of other areas of high potential, such as the
Caspian Sea, the Middle and Far East, India and Russia. Africa is one of the core
regions since, in 2012, it accounts for 55 % of total hydrocarbon production.
In the European gas market, Eni is involved in securing energy supplies through
a unique and integrated business model. It operates in the supply, trading and
marketing of natural gas and LNG, and in the generation and sale of electricity.
In Italy, Eni is the first operator in the refining business, with five refineries, and is a
leader in the distribution of petroleum products. Finally, through Saipem, Eni is
leading contractor for the supply of engineering, procurement, project management
and construction. Eni is one of the largest international engineering and construc-
tion companies, serving the onshore and offshore oil and gas markets.

13.3 Eni’s Approach to Sustainable Value Creation

Being sustainable, for an energy company, means to achieve economic growth and
to enhance reputation through a distinctive approach that is also a catalyst for
external development, by promoting respect for individuals and for the environ-
ment and, in general, by creating opportunities for local people and businesses.
Sustainability in Eni is not a specific area of activity but represents a business
approach in itself. This is not a new approach for the company. In the 1950s, Enrico
Mattei, Eni’s first chairman, adopted an innovative way to start oil and gas activities
and guarantee access to resources. In particular, Mattei pioneered a way of manag-
ing relations between international oil companies and producing countries based on
long term cooperation, on the transfer of knowledge and skills, and on mutual
development.
Next, a series of examples concerning the way in which Eni operates, to create
sustainable value, are illustrated. In particular, attention is placed on one of the
main sectors of activity, i.e. exploration and production.
In the following examples we consider three of the main drivers which charac-
terize Eni’s distinctive business approach, which are as follows:
• to be local—this means working side by side with the host countries and
communities to reach mutually beneficial objectives. The unique model of
210 D. Di Donato et al.

integration with host countries is the key to consolidating, protecting and

expanding Eni’s presence over time;
• to maintain and develop in-house competences—these competences have
supported exceptional performance in exploration, and in reservoir management
and maintenance;
• to manage and mitigate risks throughout the operation—this characterizes every
aspect of Eni’s business, starting from asset selection to the design and develop-
ment of the projects.

13.3.1 To Be Local

To be local means “to fly a double flag”, that of the host Country, with its
opportunities, challenges and development aspirations, and that of an International
Oil Company (IOC), with the managerial, technological expertise, and the
standards of a major company. To be local means, first of all, hiring local staff, as
well as offering them the opportunity to grow and progress in their carrier. In
Africa, for example, 80 % of Eni’s people are local, with responsibilities that range
from operational to managerial. To support this approach, Eni invests heavily in
training.
Additionally, to be local also means favouring the growth of local suppliers to
support the economic development of the host countries. In 2012, Eni created
opportunities through projects for almost 7,000 local suppliers in Africa and Asia
for a total amount of nearly 10 billion euro. Finally, to be local suggests considering
the possible business opportunities which, at the same time, will contribute to the
development of local communities.
In Africa, for example, Eni has been the only IOC to make a unique and radical
decision: to use produced gas for the domestic market, thus providing the local
population with access to electricity. In Nigeria and Congo, Eni invested a total of
about 300 million dollars (Eni share) in power generation projects, building, only in
Nigeria, about 700 MW of capacity. Because of these projects, today Eni power
stations in these countries account for 20 % and 60 % of domestic electricity
production respectively, with a massive reduction of gas flaring in both Countries.
On one hand, this approach protects the interests of the stakeholders and
shareholders, and on the other hand it preserves investments and production growth.
Right from the outset, the implementation of this approach has lead to a number of
successes in Africa, where Eni has achieved the leading position, among IOC, in
terms of geographical footprint, production and reserves. Significantly, in this
region, production growth has been around 5 % a year since the turn of the century,
and is expected to be around 3 % over the next decade.
13 The Case of Eni 211

13.3.2 To Maintain and Develop In-house Competences

Aiming to maintain and develop in-house competences, Eni develops and further
enhances the abilities and knowhow of its people. In doing so, first of all Eni is
strongly focused on developing and adopting its own technologies and on
maintaining in-house competencies. In exploration, this means centralizing the
process of technical decision making, which leads to concentrating attention on
the best opportunities for exploration on a worldwide basis, and increasing effi-
ciency of the overall process. Turning to development, this leads to delivering new
projects on time and on budget.
In addition, by leveraging a solid internal base of competences, Eni has reduced
execution risks and delivered excellent results in terms of exploration and produc-
tion. For example, over the past 5 years, around 7.5 billion barrels of oil equivalent
(boe) of new resources have been discovered, which is more than double, compared
to the company’s 2012 cumulated production of 3.8 billion boe.

13.3.3 To Manage and Mitigate Risks

To manage and mitigate risks Eni is required to identify strategies, introduce

procedures and opt for investments that are able to minimize the probability of
accidents to people and reduce the impact on the environment. The operational risk
poses the biggest potential threat to upstream activities, in environmental, financial
and reputational terms. Because of this, Eni is committed to maintaining the
industry-leading results on operation safety and, in particular, is strongly committed
to achieving zero blow-outs.
The strategy for preventing major drilling accidents is based on strong
competencies for improving processes, distinctive technologies and a
performance-based contract approach. Regarding the safety of well operations,
Eni’s centralized control of all critical wells are monitored by the headquarters in
real time. On technologies, Eni has developed a proprietary and distinctive portfo-
lio, which allows the achievement of higher standards of safety and well perfor-
mance. Eni is also working on the improvement of the HSE performance of its
suppliers, introducing a new HSE incentive scheme in the contracts, promoting
those contractors with outstanding HSE behaviour, measured through ad hoc KPIs.
The continuous efforts to mitigate operational risks to people, assets and the
environment are a crucial part of activities, and have led to two important results:
the decreasing trend of the injury frequency rate, and zero blow-outs during the last
9 years.
212 D. Di Donato et al.

13.4 The Diffusion of Integrated Thinking

The prerequisite for a sustainable business is integrated thinking. As the IIRC

framework states, integrated thinking is the consideration, by the company, of the
relationship between its various operating and functional units and the capitals used
and affected. This implies that all forms of capital, from financial to manufactural,
human, environmental, intellectual and social, find a proper place in all decision
processes and that their proper management plays a role in the creation of value
over time.
Thanks to integrated thinking, people who work in the organization, are able to
see things in a broader perspective, taking into account the achievement of eco-
nomic and financial results as well as the impact of business activities on people,
environment and society, or furthermore, by considering, new opportunities that
can be generated in areas close to those specifically managed. This holistic view
stems from different factors that affect or that can be affected by business decisions.
Let’s take into consideration, for example, the project of transforming the Porto
Marghera refinery into a biorefinery. In 2012, the demand for oil and gas products
suffered a strong slowdown, down by 10 % in Italy and by 3 % in Europe.
In 2009, 11 refineries were closed in Europe and another 15 risk closure in the
next few years. The Green Refinery projects were encouraged by the European
scenario for bio-fuels and strongly linked to the environmental policy of the
European Union aimed at the reduction of greenhouse gases. This project derives
from a very innovative idea that intends to substitute the traditional model of
refinery with a green cycle for the production of high quality biofuels from biomass.
Project development aims at employing state-of-the-art technologies and will
reposition Eni in the refinery industry, while seizing the opportunities provided
by the green inclusive economy. The biorefinery will also be a way of sustaining
employment in the territory of Porto Marghera, giving people new and
technologically advanced skills, and, at the same time, contributing to the reduction
of environmental damage.
This project is the result of a process started during the last few years that is
aimed at a viewpoint of operationalized sustainability in the principle business
processes.
The most important is the planning process. At the beginning of every planning
cycle all the company functions are asked to identify areas of improvement and new
activities that could be realized in a future 4-year plan, in order to contribute to
sustainable value creation over time. This process is derived from prior analysis of
the external context and the evolution of sustainability issues in the international
scenario, from the consideration of stakeholder expectations, from financial market
request analysis, and last but not least, from the outputs of integrated risk assess-
ment and related mitigation plans. At the end of this preliminary process, the Eni
CEO issues specific operational and economic guidelines for sustainability, so that
all functions reach their strategic targets. On the base of these guidelines, all
managers have MBOs for the first year of the plan that contribute variable
remuneration.
13 The Case of Eni 213

Another important process that is defined in an integrated way is risk assessment

and management. Thanks to this integration, all risk events are considered and
evaluated with impact metrics that do not concern only the financial and operating
side but also the social, environmental and reputational side. In the past, the various
risk factors were evaluated separately by each function; but now a unique monitor-
ing and reporting system evaluates the overall risk level, highlighting the most
relevant risks, independent from their financial or non financial nature.

13.5 Eni’s Journey Towards Integrated Reporting

Eni began the process of integration in corporate reporting in 2010, when the
publication of a stand-alone sustainability report (which was in its fourth edition)
was discontinued. The primary reason for this decision was the opportunity offered
by the IR to represent Eni’s integrated thinking approach thoroughly. In addition,
there were also external factors influencing the decision, such as the evolution of
laws and regulations, both domestically and internationally (ESG directives on
transparency of accounting practices in Europe, SEC guidelines and Dodd-Frank
Act in the United States, Grenelle II in France) that required increased integration
of non financial and financial information. Additionally, few events happened in
2010, which seriously strained the reputation of some big corporations. Among
others, in the oil and gas industry the devastating accident of the Deepwater
Horizon platform in the Gulf of Mexico, showed with great clarity the impacts
generated by a non optimal management of non financial aspects on business results
and definitely on the company’s reputation. This highlighted how much the com-
petitive level of a company resides in its ability to run a sustainable business.
Therefore, Eni realized that a new approach was needed for communicating its
business model and performance to stakeholders. The idea was to develop a
reporting tool in order to illustrate how integrated management of financial and
non financial aspects helps manage risks, reduce costs, and seize new opportunities
for attaining sustainable value. This was a big challenge for Eni at the time because,
in that period, no framework on integrated reporting existed. Furthermore, many
other companies around the world had not published an integrated report yet.
Faced with this need for change, in 2010 it was decided that the integrated report
for Eni should be the actual Annual Report, considered the main document of the
company primarily dedicated to the financial community. For this reason, the
Annual Report was seen as the best tool for communicating Eni’s integrated
thinking, first to financial capital providers, and then to all other stakeholders.
Significantly, it was clear that Eni opted to achieve the integration into its
Annual Report rather than into the Sustainability Report or, alternatively, through
a third document. In the 2010 reporting year Eni started preparing its integrated
report, abandoning the stand-alone sustainability report and exploring, within the
Annual Report, the possibility for better illustrating the connections existing
between financial and non financial information. In so doing, a selection of the
main sustainability issues that drive Eni’s value creation processes was complete.
214 D. Di Donato et al.

The first step towards integration began internally. An analysis of the

sustainability data collection system was carried out in order to identify a series
of indicators that were relevant for operations to be included in the profile of the
year. In addition, a section describing specific sustainability outputs and projects
that were more relevant for economic and financial performance was also included.
The result of this first process led to the 2010 Annual Report, which can arguably be
considered a combined report.

13.5.1 The Participation in the IIRC Pilot Program

On August 2, 2010, The Prince’s Accounting for Sustainability Project (A4S) and
the Global Reporting Initiative (GRI) announced the formation of the IIRC. The
IIRC’s mission is “to create a globally accepted integrated reporting framework
which brings together financial, environmental, social and governance information
in a clear, concise, consistent and comparable format” in order to “help business to
take more sustainable decisions and enable investors and other stakeholders to
understand how an organization is really performing” (see the IIRC web site).
According to the IIRC, the IR process has the potential to shed light on these
critical issues as it “brings together material information about an organization’s
strategy, governance, performance and prospects in a way that reflects the commer-
cial, social and environmental context within which it operates. It provides a clear
and concise representation of how an organization demonstrates stewardship and
how it creates and sustains value”.4
In 2011 Eni adhered to the Pilot Program launched by the IIRC. This choice was
based on the belief that this program could help Eni share the knowledge and best
practices on reporting that it had acquired in the previous year of experience. At the
same time, this choice offered Eni the opportunity to learn other companies’ best
practices, as well as to participate in the process of defining new guidelines aiming
at redesigning corporate reporting. Thanks to the participation in the Pilot Program,
two of the main corporate departments involved in the integrated reporting process,
i.e. the Administrative and Sustainability departments, defined a common plan in
drafting the report, with milestones and activities to be performed in the following
2 years.
In these 2 years, specific changes to the structure of the Annual Report were
identified in order to redesign it and align its contents with the key elements and
guiding principles of the “Consultation Draft of the International IR framework”
recently finalized by the IIRC. To complete this task, a work group, composed of
people from different departments, was created. The functions involved were
strategic planning, administrative, sustainability, investor relations, corporate gov-
ernance and integrated risk management. This led to an ongoing improvement and
refinement of the 2011 and 2012 Annual Reports. Thanks to the diverse

4
Visit http://www.theiirc.org/, accessed on 28 June 2013.
13 The Case of Eni 215

competences of the different people involved in working group, Eni succeeded in

summarising and combining three different components (strategy model, a struc-
tural model and sustainability model) in one single representation—the integrated
Business Model (which will be illustrated later in the chapter).
The main changes featuring the last two editions of the Annual Report were the
introduction of a strategic focus and a future orientation, the representation of the
integrated Eni business model, the description of the integrated risk management
systems as well as the connectivity of information. For the first time a section on
strategies was included in the Annual Report. Thanks to this section, the Integrated
Annual Report does not merely represent performances from the past but shows the
relationship between past performances and future goals and perspectives,
highlighting the main factors that might change such relationships. The future
orientation was adopted to better explain the ability of the company to create
value in the short, medium and long term. With respect to connectivity—as
illustrated later in chapter—the Annual Report shows Eni’s value creation story
by focusing on the interdependences between capitals and processes. Finally, the
new structure of the document was identified and approved. The main changes
concerned the first 25 pages of the overall document that is represented in Fig. 13.1.

13.6 Eni’s 2012 Integrated Annual Report

Approved by its board of directors in May 2013, Eni’s Annual Report for 2012 is an
IR prepared in accordance with the principles included in the prototype of the
International IR Framework developed by the IIRC. Eni 2012 IR aims at
representing financial and sustainability performance, as well as underlining the
existing connections between competitive environment, group strategy, business
model, integrated risk management, and the corporate governance system.
The integrated approach of the report is clear from the very beginning of the
document, which opens with a section labelled “profile of the year”. Significantly,
within this section, financial as well as operating and sustainability aspects are
blended to offer an integrated picture of the company. In doing so, financial
highlights such as sales, profit or dividends, are disclosed and commented next to
operating and sustainability data such as employees injury frequency rate, oil spills
or percentage of female managers, to name only a few.
Interestingly, after the letter to the shareholders, the report offers an illustration
of Eni’s business model, which is arguably the fundamental content of any
integrated report. As suggested early in this chapter, Eni claims that the company’s
market position and competitive advantages derive from its strategic decision-
making process, which is consistent with the long-term nature of the business
(see p. 11 of the 2012 Eni IR).
216 D. Di Donato et al.

Fig. 13.1 The structure of Eni’s 2012 Integrated Annual Report

13.6.1 Eni’s Business Model

The creation of sustainable value is pursued through a business model focused on

assets and strategic guidelines distributed along the entire value chain. The model is
characterized by activities conducted within a framework of clear and rigorous
governance rules complying with the highest ethical standards, with an integrated
corporate risk management system, sustained by continuous interaction with all
stakeholders. The combination of the above mentioned features with six distinctive
drivers—integration, cooperation, innovation, excellence, inclusiveness and
responsibility—guides investment choices and allows strategic targets to be pur-
sued. Eni’s Business Model is illustrated in Fig. 13.2.
Within the implementation of the Company mission and the running of day-to-
day operations, Eni’s efforts are inspired by these key drivers:
– Cooperation in the development of the territories where Eni works, expressing
the ability to understand local needs and the willingness to contribute to their
fulfilment;
– Integration of all activities along the energy supply chain, as a source of crucial
synergies for facing market challenges and ensuring a competitive advantage;
– Innovation as key element for accessing new energy resources, improving
recovery from the subsoil and the efficiency of its use, ensuring respect for
and responsible use of natural resources;
– Excellence in running operations, which hinges on making use of best practices,
quality systems, advanced technology and safety systems to ensure full respect
for the community and the environment;
13 The Case of Eni 217

Fig. 13.2 The Eni business model

– Inclusion of all Eni’s people, with their broadly expressed diversity, which
combines with health and safety protection in the workplace, as well as their
personal development and involvement in the company’s goals;
– Responsibility in terms of commitment to transparency in the business manage-
ment, in the fight against corruption, and in the respect for human rights in every
sphere of our work, being requisites for effective contribution toward the
development of countries and societies.
Leveraging on these distinctive drivers, as well as on its strategic assets, Eni has
designed its strategies of growth along the following guidelines:
– increasing profitable oil and gas production in the upstream, also by capturing
opportunities in high risk/high reward plays in frontier exploration basins,
notably the recently acquired leases in Mozambique;
– strengthening its competitive position in core areas;
– establishing and consolidating strategic partnerships with key host Countries,
leveraging the “Eni co-operation model” that integrates the traditional business
of hydrocarbon exploration and production and sustainable activities;
– increasing the volume of operated production; operatorship will enable Eni to
deliver on-time schedules and cost budgets and better manage the technical risk
by deploying Eni standards and technologies in drilling and completion;
218 D. Di Donato et al.

– consolidate the profitability of our downstream operations through network

upgrading, expansion of non-oil activities and growing selectively outside
Italy; in particular Eni intends on refocusing the chemical business,
strengthening the product mix of the company by developing higher value-
added products and effectively and efficiently managing operations in order to
lower the break-even point;
– maximizing asset flexibility mainly in refinery activities; the flexibility of Eni’s
refinery plants will allow taking advantage of the availability of discounted
crudes on the marketplace, also leveraging on the ability of the infrastructures
to process heavy and extra-heavy crudes.
Eni believes that founding its way of operating on the key elements described
above has reinforced its own business culture over recent decades. This can be
considered the company’s source of a long enduring competitive advantage.

13.6.2 Eni’s Competitive Environment and Strategy

The illustration of the business model is followed by an analysis of the external

competitive environment. In particular, the IR identifies a number of industrial
challenges (in terms of both market dynamics and an increasing requirement to
conduct operations in a sustainable manner) and describes the actions and
initiatives that Eni implemented during the year to face those challenges, the
performance for the year, and the performance outlook at the end of the
2013–2016 business plan (see pp. 14–15 of Eni’s 2012 IR). For example, one of
the most important challenges was the increasing competitive and regulatory
pressure on the European energy market. The actions Eni implemented in 2012
were directed towards renegotiating long-term gas supply contracts in Europe,
strengthening its position in the gas and liquefied natural gas (LNG) market outside
Italy, re-launching efficiency programs at European industrial sites, selecting new
initiatives in green refinery and bio-chemistry, and retaining and strengthening the
customer base.
Eni’s integrated report continues by illustrating the strategy for the 2013–2016
4-year period, highlighting the priorities of profitably increasing oil and gas pro-
duction; recovering profitability in the downstream gas sector; improving efficiency
in downstream oil, chemicals, and general services supporting business activities;
and retaining global leadership in engineering and construction by focusing on the
most technologically advanced and innovative segments. It is worthwhile to note
that within Eni, sustainability is conceived as part of the strategy rather than a
separate element. Therefore, sustainability represents one of the drivers that enable
Eni to achieve its business goals. Next, the integrated report then offers additional
details on the strategy at divisional levels across the oil and gas value chain:
exploration and production, gas and power, refining and marketing, chemical,
engineering and construction (see pp. 16–19 of Eni’s 2012 IR).
For example, in Exploration and Production, Eni confirms its strategy of organic
growth focused on exploration and reserve replacement as major drivers for value
13 The Case of Eni 219

creation. Average production growth is expected at a rate of more than 4 % in the

2013–2016 period. The main driver for growth will be the start-up of new fields. A
further driver of production growth is technological innovation, which is aimed at
developing drilling techniques to be applied in complex environments and
monetizing gas reserves. Over the next 4 years, Eni will make capital expenditure
of approximately €1.1 billion, of which €400 million in the Exploration and
Production Division. Among other things, to manage the risks of “project delivery”
Eni intends to in-source critical engineering and project management activities, also
by redeploying to other areas key competences, which will be freed with the start-
up of certain strategic projects, and increase direct control and governance on
construction activities.
From the above examples, it is evident that business goals are achieved through a
set of different drivers that are both financial and non financial.

13.6.3 Eni’s Integrated Risk Management Model and Process

The section on risk management follows that of strategies in order to give a deeper
understanding of the effective ability of the company to manage the main risks
related to the achievement of strategies and goals.
Eni has developed and adopted an Integrated Risk Management model that
targets to reach a comprehensive and selective view of the company’s main risks
and a strengthening of company awareness, at any level, regarding the impact of
risks on long term value creation.
In this section, there are two main aspects of Eni’s integrated approach that
should be highlighted.
The first one is about the very comprehensive nature of Eni’s Risk Management
System which includes all the different risks that can affect the business. The model
entails an articulation of risks by country, regulatory development, environment,
finance, strategy and operations. The basic feature of the IRM model is the
integrated and cross-sectional assessment of risks according to rankings of proba-
bility (from remote to probable) and impact (from negligible to extreme). In
assessing impact, management evaluates both quantitative parameters (i.e. reduc-
tion in results of operations and cash flows, and operating-productive impact) and
qualitative aspects (impact on the company’s reputation, on social, environmental,
health and safety aspects).
The second aspect to be considered is risk governance that attributes a central
role to the Board of Directors. The Board, with the support of the Control and Risk
Committee, outlines the guidelines for risk management, so as to ensure that the
main corporate risks are properly identified and adequately assessed, managed and
monitored.
220 D. Di Donato et al.

13.6.4 Eni’s Corporate Governance and Remuneration Policy

This section describes how the organization’s governance structure supports the
company’s ability to create value in the short, medium and long term.
Eni considers effective corporate governance to be a foundation stone of its
business model. Corporate governance represents a prerequisite for pursuing Eni’s
mission while ensuring compliance with standards of fairness and cost effective-
ness. The governance system is designed to support the relationship of trust
between Eni and its stakeholders and, supplementing Eni’s business strategy, to
help achieve stable results and create sustainable value over a long-term period.
The section “Governance” opens with the description of Eni’s Corporate Gov-
ernance structure and the main roles and responsibilities held by the board members.
In particular, responsibilities connected to strategic decision making and monitoring
are illustrated, with a focus on those related to the most important strategic,
operational and organisational activities. It describes how the Board has a central
role in the areas of internal control and risk management, as well as in setting the key
corporate governance guidelines. The Board has also retained the exclusive power to
set sustainability policies and agree upon the results to be presented at the
Shareholders’ Meeting, demonstrating how sustainability is fully integrated within
Eni’s long-term value creation processes. This section shows how the implementation
of best governance practices go beyond legal requirements. Some examples are the
Board Induction as well as the Board and peer reviews. The way that remuneration
and incentives are linked to value creation in the short, medium and long term is also
described.
Consistently within the IIRC framework conciseness principle, this section
contains a very brief overview of Eni’s Corporate Governance System. Additional
and broader information is available in the Corporate Governance Report 2012,
published on the company website in the section on Governance. In addition, a
specific Remuneration Report is also available on the company website with all the
necessary information.

13.6.5 Eni’s Consolidated Sustainability Statement

In order to have a full picture of the company and to prove that sustainability results
play an important role, as well as the economic and financial results, starting from
the 2011 annual report, Eni has introduced Consolidated Sustainability Statements
that include tables and notes on sustainability performance, in accordance with the
“Sustainability Reporting Guidelines, version 3.1” issued by the GRI (Global
Reporting Initiative) and the related “Oil and Gas Sector Supplement”, with
particular reference to the principles of materiality, completeness, stakeholder
inclusiveness and sustainability contexts.
This is not a specific requirement of the IIRC framework, but rather it is the
company’s decision to give an enhanced view of the company on all the different
forms of capital that could be affected or managed by corporate activities.
13 The Case of Eni 221

The Consolidated Sustainability Statements collect all the sustainability

performances for the last 3 years at group level which are representative of the
effective integrated business model in action. For instance, there are environmental
results that are compared to operational results, or the link is reported between
financial and non financial performance. The reduction in energy consumption, for
example, is quantified in terms of cost or CO2 emission reductions. There is the
effort to show how a sustainable business can lead to the reduction of impacts on
different forms of capitals. It is also illustrated how a sustainable business is the
prerequisite for seizing new opportunities. Finally, it is worthwhile to highlight how
Eni calculates and reports value creation for stakeholders. The configuration chosen
in Eni’s integrated report is that of “overall added value net of amortization and
depreciation”. Net overall added value is divided among employees (direct remu-
neration consisting of wages, salaries, and provisions for termination benefits and
indirect remuneration consisting of social welfare contributions); the public admin-
istration (income taxes); financial backers (medium/long-term interest paid for
availability of borrowed capital); shareholders (dividends distributed); and the
company (quota of reinvested earnings). The net added value distributed in 2012
was €22,475 million and was divided as follows: 52 % to the state and public
administrations through taxes on the income of Italian and overseas businesses,
22 % to human resources, 18 % to shareholders, 4 % to the company system, and
4 % to financial backers (see p. 236 of the 2012 Eni Integrated Annual Report).
All the information included in this section has been certified by an independent
auditing entity in order to report on the quality and level of performance.

13.6.6 Connectivity of Information

In line with the contents, elements and principles included in the IIRC Framework,
in each of the sections included in the 2012 IR Eni has attempted to operationalize
the principle of connectivity of information. In particular, the attention towards
connectivity of information has gone beyond the need for showing how
sustainability is embedded within the individual organizational processes, to
include the integration mechanisms across the entire Eni management system.
Eni has interpreted the principle of connectivity by focusing on the broad picture
of the company’s value creation story. To achieve this goal, Eni’s 2012 IR includes
a detailed description of how the company strategy, governance, performance and
prospects concur to create value over time. The interdependences between the
industrial challenges featuring the external environment, the actions in place, the
performance of the year, and future targets are illustrated and analysed in the IR.
The fundamental purpose is to break down the established silos in accessing,
measuring, managing and disclosing data and information. Overcoming informa-
tion silos has allowed Eni to increase awareness and knowledge of the dynamic of
value creation. This is useful for both the internal top management, in order to
refine the decision-making process, and for the external stakeholders, including
capital providers, in order to make better investment decisions.
222 D. Di Donato et al.

An informative discussion of the performance of the year and the related targets
for the future, can provide the intended report users with useful information for
assessing the reliability of what has been reported concerning the present period, in
relation to future trends. In addition, the connection between the external context
and Eni strategy enables report users to understand how different factors affect the
future of the organization and its capability for creating value over time. Eni’s 2012
IR, as an example, shows how the increasing requirement to conduct sustainable
operations lead the company to develop new technologies for minimizing the
environmental footprint and water consumption in order to achieve leadership in
the oil and gas sector.

Conclusions
Aiming to offer a fair understanding of Eni’s journey towards IR, the chapter
begins by discussing the Company’s distinctive approach to sustainable value
creation. Significantly, at the outset it is highlighted that in Eni sustainability is
not a specific area of activity but represents a business approach in itself. It
means managing risks: political, operational and financial. But more than that, it
is a lever to support long term value creation . This approach has been embedded
in the Company’s culture since its foundation, when Eni’s first chairman, Enrico
Mattei, in order to be more competitive pioneered a way to manage relations
between international oil companies and producing countries based on long term
cooperation, on the transfer of knowledge and skills, and on mutual
development.
Due to the complexity of the environment in which a company operates, to
achieve a sustainable business, an approach based on the excellence of the
sustainability management system is not sufficient. An integrated thinking is
needed. This requires the existence of a holistic view capable to encompass the
multiple factors that affect or that can be affected by business decisions. In
particular, forms of capital such as financial, manufactured, human, environ-
mental, intellectual and social have been identified as the main “stock of value”
whose management plays a role in the creation of value over time. For this
reason Eni adopts in its different processes an integrated thinking that starts from
the two main processes: planning and integrated risk management. Thanks to
those integrated processes, projects are defined taking into account all the
capitals that could be affected by the organisation and different kind of risks
are valuated considering all the impact generated.
The IR is the best opportunity to reinforce the sustainable value creation
approach as well as reinforce an integrated thinking thoroughly. Thanks to this
approach the established silos in accessing, measuring, managing and disclosing
data and information are broken down and the company ability to create value in
the long term is illustrated. This is a great opportunity to explain how
sustainability is embedded in the business, and to offer capital providers a
solid understanding for their decision of investments.
In light of these reasons Eni began the process of integration in corporate
reporting in 2010, when the publication of a standalone sustainability report
13 The Case of Eni 223

(which was at its fourth edition) was discontinued. The Annual Report was
considered the main document to be integrated as it is the institutional document
that addresses primarily the financial community with the goal of representing
how the company creates value. It is the document that already adopts the right
language to tell the story of the business.
To achieve the IR Eni adhered to the Pilot Program launched by the IIRC and
in accordance to the IIRC framework restructured its Annual Report. The third
edition the new Annual Report offers a discontinuity with the traditional finan-
cial reporting because it discloses on the future and not only on past perfor-
mance, on financial and non financial results as well as on all the connection
existing between issues such as the company’s business model, the competitive
environment and strategy, the integrated risk management model, and the
corporate governance system.
The work done until now on IR offers a deeper knowledge on the dynamics of
value creation, and improves not only the internal management system but also
the external communication process. This work, which is still in progress, will
lead Eni to further refine and improve the way to communicate with its
stakeholders.

Reference
IIRC (2013) Consultation draft of the international <IR> framework. http://www.theiirc.org/
consultationdraft2013. Accessed 10 Jul 2013
The Case of Enel
14
Chiara Mio and Marco Fasan

Abstract
The aim of this chapter is to provide a discussion of the business case of Enel,
which is an International Integrated Reporting Council (IIRC) pilot program
company currently evolving its corporate disclosure towards Integrated
Reporting (IR). The relevance of pilot company business cases has been
recognized by the IIRC, which defined their experience as “invaluable”. On
the one hand, Enel did modify its corporate reporting system coherently with the
IIRC guiding principles by including considerable non-financial information in
its annual report, reducing the length of its sustainability report and improving its
materiality determination process and business model analysis. On the other
hand, it will be interesting to see how the company applies other aspects of the
IIRC framework, such as the six-capital structure and the way in which reporting
boundaries are defined. The analysis done in this chapter may be of interest to
companies, standard setters and scholars wishing to enhance their knowledge on
how companies are currently evolving their corporate disclosure systems
towards IR.

14.1 Introduction

Standard setters, academics, practitioners and also policymakers around the world
are currently discussing and working towards the evolution of the Integrated
Reporting (IR) framework. At the same time, companies are currently facing the
challenges of actually implementing IR, experiencing difficulties and, sometimes,
finding possible solutions to open issues. The International Integrated Reporting

The authors wish to thank Marina Migliorato, Csr manager of Enel S.p.a. for her valuable
contribution.
C. Mio (*) • M. Fasan
Department of Management, Ca’ Foscari University of Venice, Venice, Italy
e-mail: mio@unive.it; marco.fasan@unive.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_14, 225

# Springer International Publishing Switzerland 2013
226 C. Mio and M. Fasan

Council (IIRC) pilot program currently includes over 90 companies around the
world, which have decided to take the path towards integrated reporting. The
experiences of these companies are invaluable elements that need to be capitalized,
as recognized by the IIRC itself: “the IIRC Pilot Program is a major contribution to
<IR> (. . .) their (pilot program companies’) feedback on the application of the
guiding principles and content elements outlined in the 2011 Discussion Paper is
invaluable to inform the development of a practical Framework” (IIRC 2013b, p. 4).
This chapter aims to analyse the case of Enel, which is an IIRC pilot program
company currently evolving its corporate disclosure towards IR. According to Enel
(2013b), “the company is willing to integrate the various aspects of its report, in
order to give all stakeholders a comprehensive assessment of the Group’s activities
and results. In this light, Enel is gradually including information on sustainability in
its report on operations with the publication and discussion of the selected quanti-
tative sustainability indicators provided below” (Enel 2013b, p. 103).
In particular, this analysis will focus on the sustainability strategy of the com-
pany and on the evolution of its main disclosure documents (the Annual Report—
AR—and the Sustainability Report—SR—in particular), with an IR perspective.
The analysis confirms that Enel’s reporting system, although still based on the SR in
2012, has to a certain extent already changed according to IIRC guidelines. For
instance, the number of pages in the 2012 SR was drastically reduced compared to
2011 ( 37%), in coherence with the IIRC focus on conciseness. The materiality
determination process, which is one of the main pillars of the IIRC framework,
requires “those charged with governance” to determine the impact of the issues on
the ability of the company to create value. The approach employed by Enel in its
2012 SR presents some differences compared to the IIRC framework, but neverthe-
less the company involves functions and people with a high degree of responsibility
in the process, in coherence with IIRC indications. The 2012 Enel SR also signifi-
cantly improved the definition of the business model compared to 2011, in coher-
ence with the IIRC framework, which sees the business model as one of the main
elements (see IIRC 2013c).
In some other cases, the evolution towards IR is still unfolding, and it will be
interesting to see how the company reacts to the new guidelines expressed in the
IIRC Consultation Draft (CD) and to the upcoming international IR framework
version 1.0. For instance, Enel is already disclosing information about IIRC
capitals. Such information is embedded in different reports and it is not organized
by capitals, as in the IIRC approach, although the IIRC itself does not require a
strict adoption of the language and classification proposed in its documents. Some
significant efforts towards the engagement with the supply chain have been made.
The chapter is organized as follows: the second section provides a brief over-
view of Enel’s history, identity and governance; the third section describes the
evolution and the current situation of Enel’s sustainable strategies; the fourth
section focuses on corporate disclosure and in particular on AR and SR, pointing
out similarities and challenges as compared to the IIRC framework; the fifth
section, finally, discusses the materiality determination process and stakeholder
14 The Case of Enel 227

engagement process of Enel, which represent two of the main strengths of its
corporate disclosure system.

14.2 Enel Group: History and Identity

Enel is a multinational group based in Italy and one of the main integrated players in
the power and gas markets of Europe and Latin America, operating in 40 countries
across four continents and serving 61 million customers overall. In 2012, the
company earned 84,889 million euros in revenues, with an increase of 6.8 % as
compared to 2011 and the net profit of the group was 2,075 million euros. The net
capital employed amounted to 96,106 million euros as of December 31, 2012, and
was financed by a total shareholders’ equity of 53,158 million euros and net
financial debt of 42,948 million euros. As of December 31, 2012, Enel Group
employees totaled 73,702 (see Enel 2013b).
Enel S.p.a. was established in 1962, and its objective was to perform electricity
production, import and export, transportation, processing, distribution and sale in
the Italian market. In 1976, as a consequence of the oil crisis, Enel planned to build
both new power plants and hydroelectric pumping plants, in order to reduce
dependence on oil. During the 1980s, the growing interest in public opinion towards
environmental issues led Enel to start the production of renewable energies and at
the same time determined the abandonment of nuclear energy, as a consequence of
the 1987 referendum on nuclear power. In 1992, Enel became a joint-stock com-
pany, and this operation represented the first step towards the upcoming
privatization. 1999 represents a fundamental year in the history of Enel, as the
1999 Bersani Decree liberalized the electricity sector. Thus, Enel had to separate
production, transmission and distribution, creating three different legal entities in
the Italian market: Enel Produzione, Enel Distribuzione and Terna respectively.
1999 was also the year of Enel’s privatization and stock market debut on the Italian
Stock Exchange and the New York Stock Exchange. Since 2001, Enel has increased
its propensity towards foreign investment, with the acquisition of Spanish and US-
based electricity companies. The implementation of a more comprehensive sustain-
able strategy started in 2002, through the issuance of the Enel code of ethics. The
following year, Enel was admitted to the list FTSE4Good Europe 50, and in 2004, it
was included in the Dow Jones Sustainability Index (DJSI). In recent years, Enel’s
attention to sustainability issues has been confirmed by its increased focus on the
renewable energy and zero emission objectives. Enel Green Power, leader in the
renewable energy field, has been listed since 2010. In the same year, the first ever
industrial hydrogen plant and the thermodynamic power plant Archimede were
opened, together with a few plants for carbon capture and storage technology.
Enel has about 1.3 million retail and institutional investors. Enel’s most impor-
tant institutional shareholder is the Italian Ministry of Economy and Finance, which
holds 31.24 % of the company’s shares. On the one hand, although the company is
subject to the de facto control of the Ministry of the Economy and Finance, the
above-mentioned Ministry is not in any way involved in managing or coordinating
228 C. Mio and M. Fasan

the company, since the company makes its management decisions on a fully
independent basis. On the other hand, in implementing the provisions of the legal
framework on privatizations, the company’s bylaws assign certain special powers
to the Italian government (represented for this purpose by the Ministry of the
Economy and Finance), which are exercisable regardless of the number of shares
owned by the aforementioned Ministry. The company board of directors is divided
into several different committees: the control and risk committee, the compensation
committee, the related parties committee and the nomination and corporate gover-
nance committee.

14.3 Enel’s Journey Towards Sustainability

The core business of the company is relevant both from an environmental and a
social perspective so, as was briefly discussed in the previous paragraph, Enel has
always devoted a considerable amount of attention to such ESG issues, especially in
the last few years.
The sustainability policy of Enel relies on an ethical system, which is composed
by four main pillars (see Enel 2013a, b). The first one is the code of ethics, which
was adopted in 2002. It expresses the ethical commitments and responsibility in
conducting business and corporate activities. The code is not only valid for Enel,
but also for all the companies in which Enel has an equity interest and that are for
this reason required to comply with it. The second pillar is the Compliance Model
that meets the requirements of the Legislative Decree 231 of June 8, 2001, which
introduced into Italian law a system of liability for companies for certain types of
offences committed by its directors, managers or employees on behalf of or to the
benefit of the company. Similarly to the Code of Ethics, in 2010 Enel also approved
specific guidelines in order to apply the principles of the Compliance Model to all
the other foreign subsidiaries of the group. The third pillar is a zero tolerance of
corruption plan, which is a move marking Enel’s participation in the Global
Compact (a 2000 UN program of action) and the PACI—Partnering Against
Corruption Initiative (an initiative promoted by the World Economic Forum in
Davos in 2005). Finally, the fourth pillar is a human rights policy, which requires
appropriate due diligence processes such as, for example, the Human Rights
Compliance Assessment (HRCA) in all the countries in which the Group is present
and the integration of ESG issues in the risk management process.
The Enel sustainability plan focuses on the issues that the materiality analysis
has defined as most important, and it identifies the specific objectives and/or targets
which Enel will take on for each commitment. The main commitments of the
company deal both with financial performance and with environmental and social
performance. From an IIRC perspective, such commitments will have an impact on
financial capital as well as the other five kinds of capital. The first commitment is
the creation of economic-financial value, to be reached through, among other
things, protection of margins and cash flows, growth on expanding markets and
in renewables, increased efficiency and debt reduction. Other commitments
14 The Case of Enel 229

include: growth in renewables, energy efficiency (also through investments in smart

grids, smart cities and electric transportation), access to electricity, governance
(also through an increase of female presence on the boards), ESG risk management
(also through the development of methodology and processes for the assessment of
ESG risks at the group level), correctness and transparency (also through the
development of a dedicated software system to collect and monitor qualitative
and quantitative data on sustainability at Group level, from a One Report view-
point); mitigation of emissions; efficient use of water; biodiversity; global environ-
mental management; responsible relations with communities; respect for human
rights; quality for customers; people development; diversity and equal
opportunities; occupational health and safety; responsible supply chain.

14.4 The Corporate Disclosure System

The following table summarizes the main documents constituting Enel’s overall
corporate disclosure, from an IR perspective. The six capitals (the term “capitals”
refers to any store of value that an organization can use in the production of goods
and services) the IIRC framework proposes are the following: financial;
manufactured; intellectual; social and relationship; human; natural. According to
the framework, it is fundamental to possess all the capitals for the company to
operate, as the capitals are ultimately the input of an organization’s business model
(Table 14.1).
The financial capital is analyzed and discussed in detail in the Annual Report,
where the report reader can find much information on the stock and financial
performance of the company in particular. Over the years, Enel has included
more and more sustainability information in its Annual Report (more specifically,
in the “Relazione sulla gestione—Management Commentary”). This process of
integration is due to the fact that the firm is following the Modernisation Directive
but also due to its willingness to move towards the IR framework. The AR therefore
includes also a great deal of information on human capital, its organizational
structure and on the policies for human resources management (from selection to
training). It is also possible to find a focus on the compensation policy of the firm,
with particular reference to stock incentives plans and stock options plans.
Issues related to human resources and to remuneration, despite being disclosed
in the AR, are more carefully tackled in the corporate governance report attached to
the AR and in the sustainability report. Also, social capital is analyzed in the AR,
but it is described in more detail in the sustainability reports and in the environ-
mental report. In particular, the environmental report describes more carefully the
environmental issues included in the SR, in terms of environmental governance and
results. The report also includes information about Enel personnel who have
responsibilities in the environmental field and about assets constituting the
manufactured capital of the company (such as plants), their environmental impact
and their certifications. The environmental report follows the GRI indicators. Enel’s
disclosure on the capitals does not employ the six-capital terminology proposed by
230 C. Mio and M. Fasan

Table 14.1 Enel corporate disclosure system and the IIRC framework
IIRC capitals Enel denomination Enel documents
Financial capital Synthesis of the financial performance of the Group Annual report
2012 results Sustainability report
Manufactured capital Annual report Annual report
Processes and products Environmental
report
Environmental Sustainability in Enel Annual report
capital Environmental strategy Sustainability report
Environment Environmental
report
Human capital People Annual report
People and community Sustainability report
Human resources dedicated to the environment Environmental
report
Social capital Industrial relations Annual report
Community Sustainability report
People and community Environmental
report
Intellectual capital – –

the IIRC yet, but, even if it is not organized by capitals, the information is available.
It should be underlined that IIRC does not require a strict adoption of language and
classification proposed in its documents: IIRC pushes companies to deal with their
own specific approach. And Enel successfully selects its own way.

14.4.1 Enel 2012 Annual Report

As pointed out above, the Enel AR includes some non-financial information, both
because it is required to do so by the Modernisation Directive and because it
represents a step towards IR. For instance, Enel’s AR provides a summary of
results, including both financial and non-financial information, including indicators
such as: average efficiency of thermal plants, injury frequency rate and verified
violations of the code of ethics (Enel 2013a, b, p. 18). Besides this, there is a whole
section of the AR, starting at page 99, discussing the Enel sustainability policy. The
section is divided into several chapters: human resources and organization, cus-
tomer, society, climate strategy and environment, research and innovation.
The main risks and uncertainties that have been identified are the following:
risks connected with market liberalization and regulatory developments, risks
connected with CO2 emissions, market risks (risks connected with commodity
prices and supply continuity, exchange rate risks, interest rate risks), credit risks,
liquidity risks, country risks and, finally, industrial and environmental risks.
The AR was audited by Reconta Ernst and Young, which relied on the auditing
standards recommended by CONSOB (the Italian Stock Exchange regulatory
14 The Case of Enel 231

agency). In accordance with such standards, Reconta obtained the information

necessary to determine whether the consolidated financial statements were materi-
ally misstated and whether such financial statements could be relied upon. The
auditing process included the examination, on a test basis, of evidence supporting
the amounts and disclosures in the financial statements, as well as assessing the
appropriateness of the accounting principles applied and the reasonableness of the
estimates made by directors. In the opinion of Reconta, the consolidated financial
statements of the Enel Group were prepared in accordance with international
financial reporting standards and give a true and fair view of its financial position.
Also the non-financial sustainability information included in the AR is therefore
fully verified.

14.4.2 Enel 2012 Sustainability Report

Sustainability reporting plays a central role for Enel, given the primary role of the
company in the global market. Enel, as many the other international corporations, is
subject to scrutiny from investors, institutional investors and other organizations
rating its ESG activity. In particular, the ability of the company to raise capital from
institutional investors considering ESG aspects in their investment decisions is
greatly influenced by its social disclosure. Socially Responsible Investing (SRI),
defined as “(. . .) the practice of directing investment funds in ways that combine
investors’ financial objectives with their commitment to social concerns such as
social justice, economic development, peace or a healthy environment” (Haigh and
Hazelton 2004, p. 59), currently holds a significant portion of the company’s shares
(14.6 %, according to the 2012 Enel SR). Because of these reasons, SR plays a
central role in a company’s disclosure and management, as shown by previous
literature (see Berthelot et al. 2003; Brammer and Pavelin 2004; Healy and Palepu
2001).
Although Enel is part of the IIRC pilot company program, it has issued, since
2002, its own SR. This coheres with the indications by the IIRC, which view the SR
and IR as complementary (see IIRC 2013a, b, c, p. 2). In other words, Enel chose to
implement the innovation in its reporting to the greatest extent in its SR, despite
working on the AR as well by increasing the non-financial information included in
it. The SR requires a constant commitment to measuring and reporting on corporate
responsibility from a company, following the famous motto by Peter Drucker “if
you can’t measure something, you can’t manage it”.
In drafting the SR, since 2006, Enel has followed the guidelines of the GRI-G3
international standard of the Global Reporting Initiative (GRI), coupled since 2008
with the EUSS (Electric Utility Sector Supplement) for the electricity industry, and
since 2011, with G3.1. Ever since their adoption, Enel has applied the guidelines at
the highest level recognized by the GRI (A+). Besides following the GRI
guidelines, the 2012 SR also conforms to the principles of inclusiveness, materiality
and responsiveness indicated in AA1000APS (AccountAbility Principles Standard)
issued in 2008 by AccountAbility (see Enel 2013a, b).
232 C. Mio and M. Fasan

The process leading to the issuance of the SR is structured in different phases, as

it is analysed and assessed by the Control and Risks Committee and the
Appointments and Corporate Governance Committee which, with the support of
the Audit Department, verify the completeness and reliability of the report; the SR
is then approved by the Board of Directors and finally presented at the Annual
General Meeting, together with the Group Annual Report.
It is interesting to note that the 2012 Enel SR, in coherence with indications from
the IIRC, is significantly shorter as compared to the 2011 Enel SR, as the total
number of pages decreased from 306 to 194 ( 37 %). Such reduction is particularly
relevant because it has involved the financial data as well. Also, this reduction is
aligned with is one of the guiding principles of the IIRC, i.e. conciseness. This
principle states that: “an integrated report includes concise information that
provides sufficient context to make it understandable, and avoids redundant infor-
mation. The organization seeks a balance between conciseness and the other
Guiding Principles, in particular completeness and comparability. In achieving
conciseness, an integrated report can be linked to additional detailed information
that is provided separately” (see IIRC 2013a, b, c, paragraph 3.29). Coherently with
this increased conciseness of the report, the SR discloses the highlights of the
sustainability performance at the beginning of the report, pointing out: total net
production, net renewable production, electricity volumes sold, gas volumes sold,
electricity transported, average number of electricity and gas customers, number of
employees, workforce of contractors, EBITDA, EBIT, revenues and SRI funds in
institutional shareholdings.
The scope of the SR includes these “companies included on a line-by-line basis
in the scope of consolidation of the Annual Report at December 31, 2012. The
associated companies (which in the Annual Report are valued using the equity
method) and the other entities over which Enel exercises significant influence
(including joint ventures) are included in the calculation of the data, where avail-
able, in proportion to Enel’s equity interest and are mentioned in the text where they
produce significant impacts” (Enel 2013a, b, p. 121). According to the IIRC, “an
integrated report identifies its reporting boundaries and explains how it has been
determined. Determining the boundaries for an integrated report involves two
aspects: the boundaries used for financial reporting purposes (i.e., the financial
reporting entity); and opportunities, risks and outcomes attributable to or associated
with other entities/ stakeholders beyond the financial reporting entity that have a
material effect on the ability of the financial reporting entity to create value over
time” (see IIRC 2013a, b, c, paragraph 5.25). Even if some significant efforts have
already been made by Enel in the sense of framing the report’s boundaries
according to the IIRC framework, this is a crucial challenge both for Enel and for
other entities involved in the IR pilot program.
A particularly important piece of information in the IR context is the information
about the business model. In the 2011 Enel SR this information was not present,
even if it did contain some information about the organizational model of the
company. The 2012 Management commentary includes a detailed description of
the business model, which is a central element in the IR framework. According to
14 The Case of Enel 233

the IIRC: “An organization’s business model is its chosen system of inputs,
business activities, outputs and outcomes that aims to create value over the short,
medium and long term” (see IIRC 2013a, b, c, paragraph 2.26). A clear understand-
ing of the business model is fundamental for the company to be able to define
material issues and to coherently frame its strategy from an IR perspective. Even in
this case, the evolution of the Enel reporting has been coherent with the principles
of the IIRC.
One of the main shortcomings of Sustainability Reporting is its (perceived) low
reliability, which requires companies to provide the market with some form of
control of the SR in order for it to be value-relevant. At Enel, the Internal Audit and
an independent auditor review the SR for completeness and accuracy. Besides this,
since 2012, the SR is checked not only by the Risk and Control Committee but also
by the Corporate Governance Committee and is submitted to Enel Spa’s Board of
Directors for its approval before being presented at the Shareholders’ Meeting.
Besides this “internal” form of control of the process leading to the issuance of
the SR, the 2012 Enel SR was also assured by Reconta Ernst and Young, which
carried out a limited assurance (see Enel 2013a, b, p. 191). The directors of Enel
Spa are responsible for the preparation of the report in accordance with the
inclusivity, materiality, and responsiveness principles set out in the AA1000APS
and for the data on sustainability performance. The guidelines and principles
employed by E&Y are those provided by the ISAE3000 framework and are in
accordance with the criteria established by the AA1000AS, Type 2, concerning
both the nature and adherence to the AA1000APS and the evaluation on the
reliability of data on sustainability performance. The procedures employed in
order to assure the report were: interviews with the departments responsible for
the topic reported in the sustainability report; on-site verification of data and
interviews with personnel involved in the data collection and management process
for production sites selected; and analysis, on a sample basis, of the documentation
supporting the preparation of data and information on the sustainability
performance.

14.5 Materiality Analysis and Stakeholder Engagement

Two of the most advanced aspects of the 2012 Enel SR refer to the materiality
analysis and to the description of stakeholder engagement. The 2012 Enel SR
devotes a whole section to the discussion of the analysis of materiality (see Enel
2013a, b, p. 23), which aims at mapping and calibrating the issues and expectations
of stakeholders, and the means and processes with which the company responds to
such expectations. The analysis of materiality was conducted on the basis of
AA1000SES guidelines for the stages of mapping and prioritizing stakeholders
and analysing the results, and of the criteria of AccountAbility and of the GRI G3.1
for the definition of key issues and the application of the principle of materiality.
The materiality matrix has, on the horizontal axis, the “priority of intervention
according to stakeholders” and, on the vertical axis, the “impact on sustainability
234 C. Mio and M. Fasan

Fig 14.1 Enel materiality matrix 2012

strategies”. Therefore, looking at the horizontal axis, the issues for which
stakeholders request more commitment from the Group in terms of investments
or formalization of commitments and policies are placed on the right hand side of
the matrix, while the issues on the left-hand side are those to which stakeholders
give a low priority. On the vertical axis, there are the issues with the potential to
significantly impact, both immediately and in the near future, Enel’s sustainability
strategies.
In the upper part of the matrix are, therefore, the issues on which, as part of the
Group’s strategic objectives, a high level of investment is planned for coming years,
while those in the bottom part are significant at divisional/departmental level
(Fig. 14.1).
An analysis of the issues represented in the matrix allows us to point out that the
governance issues are considered among the most relevant, both in terms of
creation of financial value and in terms of improvement of the transparency
standards and stakeholder engagement. The environmental issues, on the other
hand, are issues that Enel has been tackling for many years, and therefore they
are of great importance in the long-term sustainable strategy and in the definition of
the business model itself.
According to the IIRC, the materiality determination process ought to be carried
out by “those charged with governance”: “those charged with governance have
ultimate responsibility for how the organization’s strategy, governance,
14 The Case of Enel 235

performance and prospects lead to value creation over time. They are responsible
for ensuring that there is effective leadership and decision-making regarding <IR>,
including the identification and oversight of the employees actively involved in the
<IR> process (e.g., those involved in identifying material matters, and in
collecting, accumulating, measuring and reporting material information)” (see
IIRC 2013a, b, c, paragraph 5.17). According to the Enel 2012 SR, “the impact of
the issues on Enel’s sustainability strategies was determined by involving the
Strategic Planning Unit and other company departments for analyses on specific
issues, and reflects the strategic guidelines defined by the 2013–2017 Industrial
Plan, the objectives of the departments/divisions and the commitments taken on by
the Group through policies and conduct criteria.” (Enel 2013a, b, p. 119). There-
fore, from this perspective, Enel is already involving the subjects that will ulti-
mately be responsible for the strategy of the company in the materiality
determination process, and this is another aspect that moves towards the IR
framework.
The IIRC also makes clear “to whom” the issue ought to be material, that is, the
providers of financial capital. From this perspective, the Enel SR has a different
approach, as it considers the materiality for the stakeholders themselves and
according to its impact on the sustainable strategy.
Connected to the materiality determination process is the stakeholder engage-
ment process, which is fundamental in order to point out the main issues the
company ought to look at. According to the IIRC CD: “engagement with
stakeholders occurs regularly in the ordinary course of business (e.g., day-to-day
liaison with customers and suppliers or broader ongoing engagement as part of
strategic planning and risk assessment). It may also be undertaken for a particular
purpose (e.g., engagement with a local community when planning a factory exten-
sion). The more integrated thinking is embedded in the business, the more likely it
is that a fuller consideration of stakeholders’ legitimate needs, interests and
expectations is incorporated as an ordinary part of conducting business” (IIRC
2013a, b, c, paragraph 3.18). According to the SR, Enel did organize numerous
initiatives to listen to, involve and talk to key stakeholders. Besides this, a
structured analysis of the positions independently expressed by ‘authoritative’
stakeholders was undertaken, such as national and transnational institutions,
authorities, stakeholder associations, and multilateral bodies on sustainability
issues. Enel cites among the examples of sources considered in the stakeholder
engagement process: customer satisfaction and customer complaints, climate
surveys and internal communication, dealings with analysts and investors,
questionnaires from sustainability rating agencies, dealings with representative
and category associations, institutional relations at national and local level, union
relations, media monitoring and surveys.

Conclusions
The aim of this chapter was to analyze how one of the IIRC pilot program
companies (Enel) is evolving its corporate disclosure system, from an IR
perspective. The company states, in its 2012 AR, its willingness to integrate
236 C. Mio and M. Fasan

the various aspects of its report, in order to give all stakeholders a comprehen-
sive assessment of the Group’s activities and results. This is confirmed by the
fact that the AR includes substantial non-financial information, both because of
the Modernization Directive but also because of the willingness of the company
to integrate different dimensions of the report.
Some evidence indicates that Enel has already taken some steps towards the
IR framework. The number of pages of the 2012 SR was drastically reduced as
compared to 2011 ( 37 %), in coherence with the IIRC focus on conciseness.
The materiality determination process (despite relying on different criteria, as
compared to those proposed by the IIRC) involves functions and people with a
high degree of responsibility in the process, in coherence with IIRC indications.
Also, compared to 2011, the business model is defined much more clearly, this
being one of the main pillars of the IIRC framework.
In other cases, the evolution is still in process, and it will be interesting to see
how the company reacts to the new guidelines expressed in the IIRC Consulta-
tion Draft (CD) and to the upcoming international IR framework version 1.0.
Enel is already disclosing information about the IIRC capitals, although such
information is embedded in different reports and not organized by capitals, as in
the IIRC approach. How will the company frame its IR, in coherence with this
capital approach? Enel did try to go beyond the boundaries of the legal entity, in
order to include in the reporting process also the supply chain. The company
made a significant effort in order to provide information and to educate the
supply chain, thus assuming a role of leadership in engaging with its suppliers in
a sustainability perspective. The future challenge will be to employ such full
range of information in the whole corporate reporting.

References
Berthelot S, Cormier D, Magnam M (2003) Environmental disclosure research: review and
synthesis. J Account Lit 22:1–44
Brammer S, Pavelin S (2004) Voluntary social disclosures by large UK companies. Bus Ethics A
Eur Rev 13(2/3):86–99
Enel (2013a) Sustainability report. http://www.enel.com/en-GB/doc/report_2012/enel_
sustainability_report_2012.pdf. Accessed 22 Jul 2013
Enel (2013b) Annual report. http://www.enel.com/en-GB/doc/report_2012/annual_report_enel_
2012.pdf. Accessed 22 Jul 2013
Haigh M, Hazelton J (2004) Financial markets: a tool for social responsibility? J Bus Eth 52
Healy P, Palepu K (2001) Information asymmetry, corporate disclosure, and the capital markets: a
review of the empirical disclosure literature. J Account Econ 31(1/3):405–440
IIRC (2013a) Consultation draft of the international <IR> framework. IIRC, New York. http://
www.theiirc.org/consultationdraft2013. Accessed 22 Jul 2013
IIRC (2013b) Pilot Program (2012), Yearbook. IIRC, New York. http://www.theiirc.org/wp-
content/uploads/Yearbook_2012/sources/indexPop.htm. Accessed 22 Jul 2013
IIRC (2013c) Business model—background paper for <IR>. IIRC, New York. http://www.
theiirc.org/wp-content/uploads/2013/03/Business_Model.pdf. Accessed 22 Jul 2013
The Case of Vodacom Group
15
Fabrizio Granà and Libero Mario Mari

Abstract
In 2009, the King Report on Corporate Governance in South Africa provided
local companies with guidelines on how to develop an Integrated Report. Since
2010, Integrated Reporting has become compulsory for all companies listed on
the Johannesburg Stock Exchange Limited. Given the diffusion of Integrated
Reporting in South Africa, this chapter aims to illustrate the structure of the 2013
Integrated Report of Vodacom Group, a South African private telecommu-
nications company. The analysis is based on the content elements and guiding
principles proposed by the Consultation Draft released by the International
Integrated Reporting Council in April 2013. In doing so, this chapter compares
the Integrated Report of Vodacom with the international recommendations on
Integrated Reporting in order to explore their adaptability to a private company
in the telecommunications industry.

15.1 Introduction1

Integrated Reporting guidelines were first proposed in 2009 by the King Report on
Corporate Governance in South Africa (King III), which provided principles
for preparing an Integrated Report (IR). Since 2010, Integrated Reporting is

1
Although this chapter is the result of a joint effort, Sects. 15.1 and 15.2 can be assigned to Libero
Mario Mari. The following sections related to the description of the Content Elements (15.3,
F. Granà (*)
School of Business and Economics, National University of Ireland, Galway, Ireland
e-mail: f.grana1@nuigalway.ie
L.M. Mari
University of Perugia, Perugia, Italy
e-mail: liberomario.mari@unipg.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_15, 237

# Springer International Publishing Switzerland 2013
238 F. Granà and L.M. Mari

compulsory for all South African companies listed on the Johannesburg Stock
Exchange (JSE) Limited (KPMG 2012). King III is a key step of the regulating
process in corporate governance in South Africa, which started in 1994 (King I) and
was improved in 2002 (King II), in accordance with standards agreed at the United
Nations World Summit on Sustainable Development in Johannesburg. Importantly,
King III provides a series of principles and recommendations based on the so called
“apply or explain”2 approach, and describes the IR as a way to present quantitative
and qualitative information about the positive and negative impacts of business
activities in the social, environmental and economic contexts in which companies
operate (Institute of Directors Southern Africa 2009, p. 4). In compliance with King
III, South African companies are obliged to disclose qualitative and quantitative
information about their short, medium and long term value creation process in order
to “enable stakeholders to make a more informed assessment of the economic value
of a company” (Institute of Directors Southern Africa 2009, p. 12).
In parallel with the publication of King III, in 2011, the International Integrated
Reporting Council in the UK (IIRC) published a discussion paper aimed at propos-
ing shared guidelines for the development of IR (Abeysekera 2013; IIRC 2011). In
accordance with the principles proposed in the discussion paper of the IIRC, an IR
“brings together the material information about an organization’s strategy, gover-
nance, performance and prospects, and . . . reflects the commercial, social and
environmental context within which it operates” (Abeysekera 2013, p. 3; IIRC
2011, p. 6). Two years later, on April 16th 2013, the IIRC presented the Consulta-
tion Draft (CD) of the International IR Framework, with the aim to provide an
international guide of principles and content elements to develop a successful IR
(IIRC 2013).
Given the importance of the Integrated Reporting concepts in South Africa and
abroad, this chapter illustrates the structure of the 2013 Integrated Report of
Vodacom Group, a South African private telecommunications company. After
providing a brief description of the company’s business history and the socio-
economic landscape in which it operates (Sect. 15.2), Sects. 15.3 and 15.4 describe
in detail the structure of the 2013 IR of Vodacom, analysing its development in the
light of the content elements and guiding principles proposed in the CD of the IIRC.

15.3.1, 15.3.2, etc.), the Guiding Principles of the IR of Vodacom (15.4, 15.4.1, 15.4.2, etc.) and
Discussion and Conclusions can be assigned to Fabrizio Granà.
2
“Apply or Explain”—King III provides corporate governance standards in the form of
recommendations and principles rather than compulsory rules (“Comply or explain” approach
used in King II). This means that companies are advised to structure a statement whether they
comply with the standards or not (KPMG 2009).
15 The Case of Vodacom Group 239

15.2 The Case of Vodacom: Company Profile

Vodacom Group Ltd (Vodacom) is a mobile communications and investment

holding company, located in Johannesburg and listed on the JSE. Vodacom was
established in 1993 as a joint venture between three multinational firms Telkom,
Vodafone and VenFin. Respectively they owned shares of 50 %, 35 % and 15 % of
the subscribed capital. In 2006, Vodafone, one of the world’s largest mobile
communications companies by revenue and Information Systems listed on the
JSE,3 acquired VenFin holding. In 2009, Vodafone had a majority shareholding
(65 % of shares), obtaining part of the stakes owned by Telkom, which decided to
sell its remaining holding by listing it on the JSE.
After its establishment in 1993, Vodacom provided GSM Mobile services in
South Africa, introducing the first pre-paid SIM-card in Africa. Thanks to its
quality-oriented vision, Vodacom was one of the first mobile communications
companies in South Africa, and now provides mobile network connections to
51.7 million clients (private and public). Since 1995, Vodacom has extended its
operations from South Africa to Lesotho,4 Tanzania,5 Democratic Republic of
Congo (DRC),6 and Mozambique. Vodacom also offers business managed services
to enterprises in over 40 countries across Africa.
Two main innovative services differentiate Vodacom from its competitors:
1. The launch of its pre-paid SIM-card service in 1996.
2. The reduction price plan on mobile phones and calling tariffs, which opened the
market to low income customers.
Today, Vodacom embraces all mobile communications segments offering a
wide range of telecommunications services and products.7
Sections 15.3 and 15.4 define the main content elements and guiding principles
of the 2013 IR of Vodacom, analysing in detail the IR in light of the guiding
principles and content elements proposed within the CD of the IIRC.

15.3 The 2013 IR of Vodacom: Content Elements

When Vodacom published an IR for the first time in 2011, it was placed in the top
ten telecommunications sector’s IRs of the “Nkonki Top 100 Integrated Reporting
Awards”. In 2012, Vodacom’s IR was awarded first place in the telecommu-
nications sector “Nkonki Top 100 Integrated Reporting Awards” and was also
ranked in the top ten Ernst and Young’s “Excellence in Integrated Reporting

3
JSE Limited is the largest stock exchange in Africa.
4
Joint venture with Lesotho Telecommunications Corporation in 1995.
5
Vodacom acquired a 10-year GSM mobile service licence in collaboration with the telecommu-
nications company Planet Communication Ltd in 1999.
6
Joint venture with three DRC wireless web networks service providers in 2001.
7
http://www.in.reuters.com/finance/stocks/companyProfile?symbol¼VODJ.J
240 F. Granà and L.M. Mari

awards” (Vodacom 2013, p. 2). The 2013 IR is the third such report published by
Vodacom.
In accordance with the 2011 discussion paper of the IIRC and G3.1 guidelines of
the Global Reporting Initiative (GRI), Vodacom’s IR provides information about
the past, present and future strategic priorities of the company and its ability to
create value. Interestingly, the IR contents page is structured in two parts,
illustrating the link between the contents of the IR (Overview; Our business;
Strategic Review; Financial Review; Corporate Governance and Administration)
and those described in the online version of the IR. In order to provide a complete
description of the information disclosed in the IR and facilitate stakeholders’
interpretation of financial and non-financial data, the IR of Vodacom indicates
links to the company’s website, which gives access to annual financial statements
since 2003. Online statements include stakeholders’ engagement reports and addi-
tional video-interviews with top Vodacom executives.8 Furthermore, the IR
contents page illustrates the icons used throughout the report to connect the
information reported and to help the reader in finding new documents and
identifying the most relevant positive and negative performances achieved during
the year.
The IR of Vodacom is divided into six sections:
1. The “Overview” section provides an introduction to the relevant matters
illustrated throughout the report, some premises on the financial and non-
financial performances achieved during the year and interviews with the Chair-
man, CFO and CEO of the company.
2. The “Our Business” section gives information about the external environment,
business activities and strategic objectives of Vodacom, and illustrates in brief
the company’s value, culture and governance structure.
3. The “Strategic Review” section describes the strategic objectives of Vodacom
analysing its performance during the year, the most relevant financial and non-
financial KPIs and future expectations of the company.
4. The “Financial Review” section contains a summary of the financial situation of
the company, its income and cash-flow statements for 2012–2013.
5. The “Corporate Governance” section describes the company’s risk management
and remuneration policies.
6. The “Administration” section provides external assurance statements and cor-
porate information. The glossary and notice of the annual general meeting are
also parts of the administration section.
The next part analyses the content elements presented in the IR of Vodacom in
light of the 2013 CD.

8
http://www.vodacom.onlinereport.co.za/vodacom_ir_2013/
15 The Case of Vodacom Group 241

15.3.1 Organizational Overview and the External Environment

Information about “Organizational Overview and External Environment” content

element is spread throughout the first two sections of the IR (“Overview” and “Our
Business” sections) and provides a comprehensive description of Vodacom’s main
external environment relationships, ownership and operating structure.
In line with the “Organizational Overview” content element described in the CD
(IIRC 2013, p. 24), the “Overview” section of Vodacom’s IR provides some
introductory information about the development of the telecommunications market
in Africa and highlights future opportunities. In the “Chairman’s statement” in the
“Overview” section of the IR, Vodacom’s Chairman, Peter Moyo, affirms that the
increasing mobile usage throughout the African countries in which the company
operates led Vodacom to improve the quality of its network connections and supply
more voice and data services at a lower price (Vodacom 2013, p. 8).
In line with section 4A/4.7 of the CD (IIRC 2013, p. 24), the “Our Business”
section of the IR describes the company’s competitive landscape and market
position. The “Our Business” section highlights how the continuous growth of
smartphones and tablets in the global market is expected to increase the number
of new mobile customers to 3 billion in 2017 (Africa counts for 20 % of this
growth). The “Our Business” section also gives information about the company’s
competitive landscape, underlining how the competition among device
manufacturers and operating system developers has increased (Vodacom 2013,
p. 9). Vodacom’s competitors have differentiated their services delivering “non-
traditional” services such as mobile financial services.9 The “Our Business” section
of the IR also illustrates the principal activities, products and services offered by
Vodacom to private and public customers. Customer oriented services are mainly
voice (mobile and fixed), messaging (SMS, MMS) and data (mobile internet access)
available in contract, top up or prepaid form10 (Vodacom 2013, p. 18). The IR
describes Vodacom’s “non-traditional” services, such as mobile payment services
(M-Pesa) and long-term insurances products and services, which are supplied both
in South Africa and internationally.11 Furthermore, Vodacom provides customized
network and cloud facilities to private and public firms. In line with the “Organiza-
tional Overview” content element of the CD, the “Our Business” section of the IR

9
Mobile financial services are financial services delivered using a mobile phone. Two categories
can be distinguished: (1) Mobile Banking services; (2) Mobile Payment services. Mobile Banking
services enable bank clients to connect to their bank accounts using a mobile phone. Mobile
Payment services offer a broad set of services that are not provided by a bank, but in which a bank
is always involved. http://www.microfinancegateway.org/gm/document-1.9.48603/AFI_
Policynote_%20Mobile%20Financial%20Service_EN.pdf
10
Contract services give customers the opportunity to pay via monthly debit order; prepaid
services enable customers to exploit the service paying whenever they need to, without being
locked into a contract, and the top up is a combination of contract and prepaid benefits (Vodacom
2013, p. 18).
11
http://www.itweb.co.za/index.php?option¼com_content&view¼article&id¼54823
242 F. Granà and L.M. Mari

provides information about Vodacom’s governance and leadership structure, which

consists of a unitary Board with 12 directors, ten of whom are non-executive
directors (five dependent non-executive directors and five independent non-
executive directors).
Some premises about key developments made to sustain the cultural, social,
governance and risk management aspects of the company are also summarised in
the IR’s “Our Business”. Following the recommendations given in the “Organiza-
tional Overview” section of the CD, Vodacom’s IR emphasises the importance of
building trustful relationships between employees, customers, industry players,
business partners, regulators and governmental authorities, to drive the business
to success (Vodacom 2013, p. 22). In accordance with section 4A/4.7 of the CD, the
“Overview” section of Vodacom’s IR contains charts of the most relevant KPIs in
2012–2013, highlighting how Vodacom “creates value for company’s
stakeholders” (employees, Governments, financial providers).
In line with the “External Environment” content element of the CD (IIRC 2013,
p. 25), the “Our Business” section of the 2013 IR gives information about
Vodacom’s external environment, international investment and relationships with
international Governments, describing where the company operates and which
countries are the most profitable. Although South Africa still retains the most
profitable market with more than 30.3 million customers and a mobile penetration
growth of 144 % in 2012, over the last few years, increasing mobile market
competition has led Vodacom to improve its network investments in high
performing international markets (Mozambique, Tanzania, DRC and Lesotho),
differentiating the products and services it offers (Vodacom 2013, pp. 20–21). In
line with section 4A/4.9 of the CD (IIRC 2013, p. 25), Vodacom’s IR stresses the
necessity to build reliable and continuative relationships with local (South African)
and international governments in order to increase its network connection spec-
trum, roll out the Long Term Evolution (LTE)12 programme and better comply with
the BBBEE13 code and licenses fees regulations.
After a brief description of the internal and external context in which the
company operates, the IR of Vodacom describes strategic activities and objectives
of the firm.

15.3.2 Business Model

In line with section 4E/4.23 of the CD (IIRC 2013, p. 27), the “Our Business”
section of the IR describes Vodacom’s business model using a chart of the vision,

12
Long Term Evolution (LTE) is commonly referred to as 4G, providing a faster and more
efficient data transfer speed than 3G/HSPA and increased network capacity (Vodacom 2013,
p. 94).
13
Broad-based Black Economic Empowerment (‘BBBEE’) is a programme launched by the South
African Government to redress the employment inequalities by giving disadvantaged groups
opportunities previously not available to them (Vodacom 2013, p. 93).
15 The Case of Vodacom Group 243

Fig. 15.1 Vodacom’s business model (Source: adapted from Vodacom’s IR, 2013, p. 16)

purpose, direction and strategic objectives that the company aims to achieve. This
chart communicates both internally and externally “what Vodacom lives for”. Since
its establishment, Vodacom’s mission is to maintain its position as market leader of
the telecommunications sector in South Africa, improving the quality of the
services it offers and providing better customer experiences. The “reason to get
up in the morning” (how Vodacom defines its vision) is based on the necessity to
continually increase the number of new network connections. Furthermore,
Vodacom aims to improve customer service and product experience (Vision),
provide high quality services and network connections (Purpose), and build trusting
and reliable relationships among the group’s stakeholders (Way), in order to
(Fig. 15.1):
• Deliver unmatched customer experience.
• Drive data, new services and new opportunities.
• Make processes and businesses more efficient.
• Build a diverse and talented team.
• Transform society and build stakeholder trust.
Regarding section 4E of the CD (IIRC 2013, p. 27), Vodacom’s IR provides an
overall picture of the company’s business model. The “Strategy Review” section
specifies the inputs employed, activities performed to achieve listed strategic
objectives and outputs and outcomes during 2012. The IR explains how Vodacom’s
profitability growth over time depends on its ability to diversify the services
provided, improve the company’s competitive position and operate efficiently
244 F. Granà and L.M. Mari

through simplified and standardised processes and smarter distribution (Vodacom

2013, p. 32). In line with the “Business model” section of the CD, the IR of
Vodacom gives some information about the company’s ability to adapt to change
(section 4E/4.22) (IIRC 2013, p. 27). For instance, the “Strategic Review” section
of the IR highlights how Vodacom and local and foreign governments are investing
in rolling out the broadband services to all customers (local and foreign) in order to
reduce socio-economic imbalances and increase countries’ GDP (Vodacom 2013,
p. 37).
In accordance with section 4E/4.22 of the CD, the “Strategic Review” section of
Vodacom’s IR provides information about the results achieved throughout the year
disclosing financial and non-financial data. This “Strategic Review” section
highlights that, in 2012, 40 % of Vodacom’s non-South African revenues were
generated from financial and assurance services, which have impacted on the
company’s reputation and communities’ and the broader society’s perception of
the value delivered (Vodacom 2013, p. 30).

15.3.3 Strategy and Resource Allocation

In line with the “Strategy and Resource allocation” section of the CD (IIRC 2013, p.
26), the “Overview Section” of the IR provides a general description of Vodacom’s
strategic focus. The “Overview section” of the IR describes the main “material
issues” defined by Vodacom’s top management as the “most likely to affect the
company stakeholders’ assessments of Vodacom’s ability to create value over
time” (Vodacom 2013, p. 5). Five material issues have been identified:
1. Network quality: improving the quality of network infrastructure to differentiate
customer experience and to comply with Government and regulatory quality
standards.
2. Reliance on the South African Market: increasing investment in existing
markets, exploiting unknown opportunities outside current markets and devel-
oping new profitable products and services.
3. Competition: maintaining leadership in the South African telecommunications
market and beating the competition by delivering a differentiated service
experience.
4. Relationships with Governments and Regulators: aligning strategic decisions to
the government and regulator requests in order to acquire new licences in the
markets in which Vodacom operates.
5. Talent and Succession: developing employees’ technical skills necessary to
differentiate Vodacom’s expertise and local knowledge.
The company’s ability to create value in the short, medium and long term is
based upon the achievement of five strategic objectives as described in Sect. 15.3.2.
The “Strategic Review” section of the IR illustrates step by step each strategic
objective describing the activities performed during the 2012–3. In accordance with
section 4D/4.20 of the CD (IIRC 2013, p. 26), the IR highlights the external
15 The Case of Vodacom Group 245

opportunities, organizational capitals employed, financial and non-financial

performances and the short, medium and long term orientation of Vodacom.
In line with the CD, the “Strategic Review” section of the IR provides detailed
information about what differentiates Vodacom from other competitors, how it
fosters innovation and which capitals have been employed. It also explains that in
order to deliver “unmatched customer experience” (Vodacom’s first strategic
objective), Vodacom created new service approaches, investing in IT systems to
support all possible customer interactions (stores, call centres, Twitter, Facebook
and e-mail) (Vodacom 2013, p. 27). Due to the limited presence of financial
services in Africa, increased foreign Small and Medium Enterprises (SMEs) and
Multi-National Companies (MNCs) integration in the African market, large
investments have been made in the provision of financial and assurance services
for customers and customized Information Communication Technology (ICT)
services for companies (Vodacom 2013, p. 31). Furthermore, substantial
investments in network infrastructure (R9.5 billion in 2012 alone) and network
capacity expansions (adding 1,752 3G and 1,406 2G sites across the group) have
been made at a local and international level, especially in markets in which mobile
penetration is slightly below 40 % and with a good 0 GDP (Vodacom 2013, p. 30).
Significant improvements have also been made in Vodacom IT and billing systems
to increase their efficiency and effectiveness (Vodacom 2013, p. 33).
Section 4D/4.20 of the CD (IIRC 2013, p. 26) recommends that international IRs
provide information about the external environment’s response to company’s
strategies. In doing so, the “Strategic Review” section of the IR of Vodacom
describes the company’s sustainability policies to invest in efficient technologies,
minimising the company’s environmental footprint and network maintenance in
comparison to the previous years (Vodacom 2013, p. 33). Furthermore, this section
also gives insights into the company’s social responsibility to “promote safe and
fair working conditions and the responsible management of environmental and
social matters” (Vodacom 2013, p. 37). In line with the “Strategy and Resource
allocation” content element of the CD, the “Strategic Review” section of the IR of
Vodacom highlights the importance of fostering employee engagement and moti-
vation in order to develop internal wealth and careers. Workforce skills develop-
ment is considered relevant to improve the company’s innovation process and to
offer differentiated services and products (Vodacom 2013, p. 35).
The IR’s “Strategic Review” section also identifies the company’s outcomes and
performances in 2012–3 and highlights the most significant KPIs for each strategic
objective described.

15.3.4 Performance

In line with the “Performance” content element of the CD, the IR highlights
quantitative financial and non-financial indicators and compares them to past
performance (IIRC 2013, p. 28). Furthermore, the contextualization of quantitative
performances offered in the IR provides an overall representation of the value
246 F. Granà and L.M. Mari

creation of Vodacom. The “Overview” section of the IR illustrates the performance

achieved in the past 3 years through the use of charts that show the company’s most
relevant KPIs (Financial, Economic, Social-Employees, Social—Communities,
and Environment). Furthermore, in line with section 4 F/4.28 of the CD (IIRC
2013, p. 28), the “Overview” section of the IR describes the relationships with the
company’s stakeholders highlighting the value distributed during the year
(Vodacom 2013, pp. 3–6).
The interview with the CFO presented in the “Overview” section of Vodacom’s
IR gives some insights into the company’s financial position. Vodacom’s CFO,
Ivan Dittrich, affirms that positive financial performances registered in 2012
(10.9 % EBITDA growth for Vodacom South Africa and 2 % expansion in the
Group’s EBITDA margin), are the result of investments made in renewing the
company’s radio access network, transforming IT and billing systems to extract
additional process efficiencies, improving the business intelligence system,
standardizing and simplifying processes to support cost management and strategic
achievements (Vodacom 2013, p. 13). The “Financial review” section of the IR also
provides a summarized description of the operating results of Vodacom over the
last 3 years, distinguishing between South African and international performance.
In line with the “Performance” content element of the CD, the “Strategic
Review” section of Vodacom’s IR also highlights non-financial indicators. For
instance, considering Vodacom’s first strategic objective, the company’s brand
reputation is measured through annual reputation surveys and analysis of the Net
Promoter Score (NPS)14 (Vodacom 2013, p. 27).

15.3.5 Governance

The IR of Vodacom provides information about the company’s leadership structure,

top management responsibilities, remuneration and incentive policies. In accor-
dance with the “Governance” content element of the CD (IIRC 2013, p. 25), the
“Overview” section of Vodacom’s IR contains two charts which show the board of
directors and the leadership structure of the company. In line with section 4B/4.11
of the CD, the “Corporate Governance” section of the IR contains a chart of the
main responsibilities of the board of directors of Vodacom, describing in particular
the actions taken to drive and monitor the company’s strategic direction, ensuring
the effectiveness of internal control and improving relationships with company
shareholders (Fig. 15.2).
Vodacom’s board of directors fosters shareholders’ relationships, communicat-
ing strategies and activities performed during the year. A planned investor
programme is described in the “Corporate Governance” section of the IR of
Vodacom and includes (Vodacom 2013, p. 72):

14
The NPS measures the level of customer satisfaction by how likely customers are to recommend
Vodacom’s brand to people around them. (Vodacom 2013, p. 27).
15 The Case of Vodacom Group 247

Fig. 15.2 Responsibilities of Vodacom’s Board of Directors (Source: adapted from Vodacom’s
IR, 2013, p. 69)

• Formal presentations of annual and interim results.

• Briefing meetings with major institutional shareholders after the release of
results.
• Hosting investor and analyst sessions.
The stakeholder engagement report is not included in the IR and it is instead
provided online.
Following section 4.12 of the CD, the “Corporate Governance” section of the IR
provides detailed information about Vodacom’s remuneration policies. The
description of the remuneration policies is divided in two parts:
1. The remuneration policy for executive directors and prescribed officers,
delineating the short term and long term incentives plan.
2. Quantitative information about payment accruals and awards for the year ended
31 March 2013 (Vodacom 2013, p. 65).
The “Corporate Governance” section of the IR of Vodacom also provides
quantitative and qualitative information to describe policies used for short-term
and long-term remunerations and incentives, including a table with the remunera-
tion of executive directors and prescribed officers.
248 F. Granà and L.M. Mari

15.3.6 Opportunities and Risks

The “Corporate Governance” section Vodacom’s IR provides information about the

company’s risk management, describing the actions taken to detect and minimize
the recurrence of risks (Vodacom 2013, pp. 66–67). In accordance with the
“Opportunities and Risks” content element of the CD, the “Corporate Governance”
section of the IR provides precise information about the major risks encountered
during the year, circumstances of recurrence of the risks and counter-attack actions
taken to minimize their impact. In line with section 4C/4.17 of the CD (IIRC 2013,
p. 26), the “Corporate Governance” section of the IR explains how Vodacom
manages its risks, appointing a specific Group Risk Management Committee
(GRMC) which is responsible for two main functions (Vodacom 2013, p. 65):
1. Filtering and approving the list of strategic, high and critical risks.
2. Overseeing and monitoring various projects and structures designed to manage
specific identified risks.
Furthermore, the IR describes Vodacom’s risk management on three different
levels (the Line Manager at operational level, the Risk Group and the Risk Man-
agement Committees within each operation). A chart shows the specific steps taken
by the GRMC to define, assess, classify and monitor the risks incurred (Fig. 15.3).
As different from Vodacom’s risk management description, the company’s
opportunities are not disclosed in the “Corporate Governance” section of the IR,
but instead are described in the IR’s “Strategic Review”. In light of point 4C of the
CD, the IR of Vodacom identifies specific opportunities for the company through
the description of the company’s strategic objectives. In line with the
“Opportunities and Risks” section of the CD (IIRC 2013, p. 26), the IR’s “Strategic
Review” analyses the activities performed and capitals (financial, intellectual,
human, social and natural) employed in the company’s value creation process,
highlighting opportunities associated with the achievement of its strategic
objectives (IIRC 2013, p. 26). For instance, in line with section 4C/4.15 of the
CD, the “Strategic Review” section of Vodacom’s IR describes how the company’s
relationships with the South African government have an impact on its ability to
create value over time. In compliance with South African Government targets,
Vodacom is still improving its spectrum of connectivity with the aim to deliver
broadband access to the entire South African population by 2020 (Vodacom 2013,
p. 37).
Sources of opportunities are also briefly summarized in the “Chairman’s state-
ment” in the IR’s “Overview” section.

15.3.7 Future Outlook

Even though Vodacom’s future outlook is not explicitly described in a specific

section of the IR, information about the company’s short, medium and long term
orientations are described in the “Overview” and “Strategic Review” sections of the
report. The Chairman’s statement in the “Overview” section of the IR, describes
15 The Case of Vodacom Group 249

Fig. 15.3 Vodacom’s risk management process (Source: adapted from Vodacom’s IR, 2013,
p. 65)

Vodacom’s African mobile and internet service as a “watershed” and one of the
present and future objectives for the company.
Having described the main content elements of the IR of Vodacom, the next part
analyses the 2013 IR on the basis of the six guiding principles proposed by the CD.

15.4 Analysis of the CD’s Guiding Principles in Vodacom’s IR

Following the guiding principles presented within the CD, the IR of Vodacom
attempts to provide a “total picture of the company’s value creation story” (IIRC
2013, p. 18), connecting the content elements analysed in the previous parts.
250 F. Granà and L.M. Mari

This section analyses the main guiding principles that underpin the preparation of
Vodacom’s IR.

15.4.1 Connectivity of Information

Throughout the IR of Vodacom qualitative and quantitative information are

connected together tracing the storyline of the company’s value creation process.
In line with the “Connectivity of information” principle proposed in the CD (IIRC
2013, p. 18), the “Overview” section of Vodacom’s IR integrates in a single chart
the most relevant KPIs of the factors that have affected and will affect the
company’s value creation (financial, economic, social-employees, social-
communities, environment) (Vodacom 2013, p. 3). In accordance with section
3B/3.8 of the CD, the IR’s contents page illustrates the icons used to facilitate
users in understanding the most relevant information. The icons are used to
highlight additional documents and to “quickly spot” the company’s positive and
negative performances during the year. In line with section 3B/3.10 (IIRC 2013, p.
18), the “Strategic Review” section of Vodacom’s IR integrates quantitative and
qualitative information describing the capitals employed to achieve the company’s
strategic objectives and the most significant KPIs for each of the strategies
illustrated. The connection between financial and non-financial information is
also highlighted in the “Overview” section of the report. The interview with the
Vodacom’s CFO provides insights into the relationships between the increased
EBITDA margin and the activities performed to improve the efficiency of the
connections provided, standardize the company’s production processes and trans-
form the company’s IT and billing systems.

15.4.2 Materiality and Conciseness

In line with the “Materiality and conciseness” principle (IIRC 2013, p. 21), the IR’s
“Overview” pays great attention to material matters that Vodacom’s stakeholders
want to know. Five material issues are identified (Network quality, Reliance on the
South African market, Competition, Relationships with governments and
regulators, Talent and succession), and are briefly described highlighting market
opportunities and risks that affect the organization’s strategic path. In accordance
with section 3D/3.25 (IIRC 2013, p. 21), the most relevant matters for Vodacom’s
stakeholders are identified by the company’s top management, the Audit committee
and the Risk and Compliance committee, to be those material factors that “are most
likely to affect stakeholders’ assessment of the company’s ability to create value
over time” (Vodacom 2013, pp. 4–5). Interestingly, Vodacom’s Board and Execu-
tive Committee and its stakeholders meet annually to summarize the material issues
relevant to the strategic objectives of the company. As explained in the IR’s
“Overview” the material issues “create the storyline of the report of Vodacom”.
15 The Case of Vodacom Group 251

The IR’s “Overview” highlights the necessity to provide even more concise
information by focusing on issues considered significant to company’s
stakeholders. Furthermore, the “Overview” and the “Corporate Governance”
sections of Vodacom’s IR underline that the stakeholder engagement table is
available online (Vodacom 2013, p. 2; Vodacom 2013, p. 72). In accordance with
the “Conciseness” principle of the CD, the use of bullet points and numbering lists
facilitates the reader in understanding the most relevant data reported.

15.4.3 Stakeholder Responsiveness

In line with the “Stakeholder responsiveness” principle of the CD (IIRC 2013, p.

19), Vodacom’s IR gives great importance to the relationships with its stakeholders.
The IR’s “Overview” section describes the main material issues for the company as
“those that are most likely to affect stakeholders’ assessments of Vodacom’s ability
to create value over time” (Vodacom 2013, p. 5). Regarding section 3C/3.18 of the
CD, the “Overview” section gives information about the annual meeting with
the company’s stakeholders. The IR’s “Overview” also provides information
about the value created and the value distributed during the year to all company’s
stakeholders (employees, investors, governments, customers). In the “Strategic
Review” section of the report, information is provided about how the company
uses its capitals to satisfy the expectations of customers, shareholders, social
(employees and communities), and environmental stakeholders, clearly describing
the past performances and the company’s future orientation. In accordance with
section 3D/3.15 of the CD, the IR’s “Strategic Review” gives information about the
most significant actions taken to renew telecommunications networks and supply a
service which, as much as possible, meets customer expectations (Vodacom 2013,
pp. 27–28).
Furthermore, the “Strategic Review” section of Vodacom’s IR provides detailed
information about the decisions and actions taken to meet strategic objectives and
stakeholders’ requests. In particular the company operates to:
1. Promote innovative IT systems to support customer interaction with the com-
pany (Vodacom 2013, p. 27), and to reduce its environmental footprint
(Vodacom 2013, p. 33).
2. Engage with tax regulation authorities and reduce the import costs of the devices
sold (Vodacom 2013, p. 35).
3. Provide training and development programmes for employees at all levels of the
business (Vodacom 2013, p. 34).
4. Comply with local and international Government regulations and restrictions to
be successful in commercial operations (Vodacom 2013, p. 15).
5. Sustain health and education programmes by exploiting the company’s techno-
logical resources in the countries in which it operates (Vodacom 2013, p. 37).
However, the IR’s “Overview” underlines that “given that the legitimate
concerns of Vodacom’s stakeholders define the content boundary for the IR and
that they inform strategic decision-making as a matter of course at Vodacom”, the
252 F. Granà and L.M. Mari

stakeholder engagement report is not provided in the printed version of the IR, but
is available online (Vodacom 2013, p. 2).

15.4.4 Consistency and Comparability

In line with the “Consistency and comparability” principle of the CD, results are
compared over time. The “Financial review” section of the IR gives a summary of
Vodacom’s operating results, financial and cash-flow statements, briefly illustrating
the most relevant financial results of the past 3 years. Furthermore, in light of the
“Comparability” principle of the CD (IIRC 2013, p. 23), the IR of Vodacom
provides a 5 year overview of the company’s income statement, financial position
and cash-flow statement, and benchmarks operating results and the financial state-
ment on the basis of the South African and International contexts in which it
operates.

15.4.5 Reliability and Completeness

In line with section 3E/3.31 of the CD, Vodacom’s IR provides information about
the company’s external assurance and robust internal reporting systems (IIRC 2013,
p. 21). The IR of Vodacom also provides forward-looking statements which have
not been reviewed by the company’s external auditors.
Regarding the “Completeness” principle of the CD (IIRC 2013, p. 22), the IR of
Vodacom includes material information and highlights both positive and negative
performances during the year.

15.4.6 Strategic Focus and Future Orientation

The IR of Vodacom gives great emphasis to the strategic focus of the company. In
accordance with the “Strategic focus and future orientation” principle of the CD,
the IR’s “Overview” section provides a general description of Vodacom’s strategic
objectives, which are also illustrated in detail in the “Strategic Review” section of
the report. A complete analysis of the company’s market opportunities, strengths
and weaknesses of its business activities is illustrated in the “Strategic Review”
section, also giving information about past performances achieved and future
oriented actions. However, Vodacom’s IR does not reserve a specific section of
the report for the description of the future outlook of the company.
15 The Case of Vodacom Group 253

Discussion and Conclusions

This chapter analyses the IR of Vodacom in light of the content elements and
guiding principles proposed within the CD of the IIRC. In compliance with King
III, Vodacom’s IR aims at disclosing relevant information about the company’s
material issues and strategies that influence the financial (shareholders and
investors), social (communities and employees) and environmental landscapes
in which the company operates. The integration of financial, social and environ-
mental information provides a retrospective and prospective overview of the
company’s performance. In particular, the chapter describes how Vodacom’s IR
adapts South African and international recommendations on Integrated
Reporting to provide a comprehensive overview of the company’s value creation
process and business model disclosing relevant, concise and connected qualita-
tive and quantitative information. Following the narration of the value creation
story, the IR of Vodacom describes the company’s past, present and future
strategic priorities, providing information considered relevant to meet social,
financial and environmental stakeholders’ requests (IIRC 2012). Moreover,
additional references to interlinked reports, notes and communications, which
accompany the reader throughout the report and make the data clearly
understandable, demonstrate the IR’s ability to provide a comprehensive vision
of the company.

References
Abeysekera I (2013) A template for integrated reporting. J Intellect Cap 14(2):227–245
IIRC (2011) Towards integrated reporting: communicating value in the 21st century, discussion
paper. IIRC, New York. http://theiirc.org/wp-content/uploads/2011/09/IR-Discussion-Paper-
2011_spreads.pdf. Accessed 12 Jun 2013
IIRC (2012) Understanding transformation: building the business case for integrated reporting.
http://www.theiirc.org/resources-2/other-publications/building-the-business-case-for-integrated-
reporting/. Accessed 12 Jun 2013
IIRC (2013) Consultation draft of the international <IR> framework. http://www.theiirc.org/wp-
content/uploads/Consultation-Draft/Consultation-Draft-of-the-InternationalIRFramework.pdf.
Accessed 12 Jun 2013
Institute of Directors Southern Africa (2009) King code of governance for South Africa. http://
www.ecgi.org/codes/code.php?code_id¼262. Accessed 10 Jul 2013
KPMG (2009) Corporate governance and king 3. http://www.kpmg.com/ZA/en/IssuesAndInsights/
ArticlesPublications/Tax-and-Legal-Publications/Documents/Corporate%20Governance%
20and%20King%203.pdf. Accessed 23 Jun 2013
KPMG (2012) Integrated reporting: performance inside through better business reporting. Issue 2.
http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/integrated-reporting/
Documents/integrated-reporting-issue-2.pdf. Accessed 23 Jun 2013
Vodacom (2013) Integrated report. http://www.vodacom.co.za/cs/groups/public/documents/
vodacom.co.za_portal_webassets/vodacomir2013.pdf. Accessed 25 Jun 2013
The Case of Smithfield Foods
16
Loredana G. Smaldore and Christian Cavazzoni

Abstract
This chapter analyses the Integrated Report of Smithfield Foods, a North Ameri-
can company operating in the food industry. The purpose is to examine the
content elements and principles of this company’s Integrated Report in light of
the guidelines provided by the Consultation Draft issued by the International
Integrated Reporting Council. The aim is to compare the structure of this report
with the guidelines of the Consultation Draft, in order to discuss their applica-
bility and adaptability to companies operating in the food industry.

16.1 Introduction1

The “buzz around integrated reporting” (GreenBiz Group and Ernst and Young
2013, p. 29) has been gradually increasing over the last few years, particularly
attracting the attention of regulators, investors, companies, NGOs, the accounting
profession and standard setters. As a result, the International Integrated Reporting
Council (IIRC) was established and issued a Consultation Draft2 (CD) for the

1
Although this chapter is the result of a joint effort, the paragraph 1 (Introduction) can be assigned
to Christian Cavazzoni. The paragraph 2 (Smithfield Foods, Inc.: Company Background) and the
paragraph 4 (Smithfield IR vs. the IIRC Consultation Draft ) can be assigned to Loredana G.
Smaldore. The paragraph 3 (Smithfield’s Integrated Report) is the joint work of both authors.
2
The Consultation Draft was published by the IIRC in April 2013. It was developed
following the analysis of responses to the 2011 Discussion Paper “Towards Integrated
L.G. Smaldore (*)
School of Business and Economics, National University of Ireland, Galway, Ireland
e-mail: l.smaldore2@nuigalway.ie
C. Cavazzoni
University of Perugia, Perugia, Italy
e-mail: christian.cavazzoni@unipg.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_16, 255

# Springer International Publishing Switzerland 2013
256 L.G. Smaldore and C. Cavazzoni

international Integrated Report (IR) framework, whose initial version is due to be

published in December 2013. The guidelines proposed by the CD are not supposed
to follow a strict “rules-based” approach. Rather, they leave room for adaptation
and personalization, to allow “businesses to tell their story on their own terms”
(KPMG 2013, p. 2). These guidelines are structured into fundamental concepts,
guiding principles and content elements. In addition, the CD outlines specific topics
to take into account during the preparation and presentation of the IR.
The fundamental concepts are mainly related to the various capitals (financial,
manufactured, intellectual, human, social and relationship, and natural) of the
organization, the business model and the process of value creation over time
(IIRC 2013, p. 6). The capitals constitute the resources used by an organization
within its process of value creation according to its strategies and business model.
Moreover, the IR has to disclose information on value creation in the short,
medium and long term according to the following content elements: Organizational
overview and external environment, Governance, Opportunities and risks, Strategy
and resource allocation, Business model, Performance, and Future outlook (IIRC
2013). In so doing, the IR should follow the guiding principles of Strategic focus
and future orientation, Connectivity of information, Stakeholder responsiveness,
Materiality and conciseness, Reliability and completeness, and Consistency and
comparability (IIRC 2013). The CD also suggests the following topics during IR
preparation and presentation: Frequency of reporting, The materiality determina-
tion process, Disclosure of material matters, Involvement of those charged with
governance, Credibility, Time frames for short, medium and long term, Reporting
boundary, Aggregation and disaggregation, and Use of technology (IIRC 2013).
The alignment with these principles should stimulate organizations to recognize
and integrate the fundamental concepts of capitals, business model and value
creation within their IR.
The present chapter aims to illustrate and analyze the 2012 IR of Smithfield
Foods Inc,. a multinational company operating in the food sector. The purpose is to
explore the extent to which the guidelines of the CD are applicable and can be
eventually adapted to the context of the food industry and to a multinational
company.3
The following section illustrates the background of Smithfield Foods Inc., and its
business. Next, the contents of the report are described and compared with the
concepts, principles and elements of the CD issued by the IIRC. Finally, the last
section summarizes the key features of the 2012 IR of Smithfield Foods Inc.

Reporting—Communicating Value in the 21st Century”, the publication of a draft outline in

July 2012 and a prototype framework in November 2012.
3
The IR of Smithfield Foods, Inc. is publically available at http://www.smithfieldfoods.com/our-
company/our-mission-values/download-integrated-report/.
16 The Case of Smithfield Foods 257

16.2 Smithfield Foods, Inc.: Company Background

Smithfield Foods Inc.4 (hereafter Smithfield), a global food company founded in

1936, began its business as a pork processing operation called The Smithfield
Packing Company (Smithfield 2012). Through a series of acquisitions starting in
1981, it has become the world’s largest pork and hog producer, as well as the
market leader in numerous packaged meats categories in the United States
(Smithfield 2012). The company’s principal executive offices are located in the
United States but the company also operates in Poland, Romania, the United
Kingdom and Mexico. Smithfield operates in four segments: Pork, Hog Production,
International and Corporate, comprised of diverse subsidiaries, joint ventures and
other investments. In particular, the fourth segment provides management and
administrative services that support the others (Smithfield 2012).
The mission statement of the company is as follows: “Smithfield Foods is
determined to be an ethical food industry leader that excels every day at bringing
delicious and nutritious meat products to millions of people around the world in a
manner that sets industry benchmarks for sustainability” (Smithfield 2012, p. 10).
The company boasts twelve core brands (Smithfield, Farmland, John Morrell,
Gwaltney, Armour, Eckrich, Margherita, Carando, Kretschmar, Cook’s, Curly’s
and Healthy Ones), a workforce of approximately 46,050 employees worldwide
(Smithfield 2012, p. 25) and annual revenues of about $13 billion (Smithfield 2012,
p. 10). Smithfield is also publicly traded on the NYSE under the ticker symbol SFD.
Interestingly, in the year 2012 Smithfield published its first IR.

16.3 Smithfield’s Integrated Report

The purpose of this paragraph is to describe how Smithfield creates and sustains
value in the short, medium and long term, as it is disclosed in the company’s IR. In
doing so, we illustrate the factors that provide information that is material to assess
the organization’s ability to create value over time (IIRC 2013, p. 21) and we also
compare Smithfield’s IR with the concepts, principles, elements of the CD issued
by IIRC. Therefore, subsequently we illustrate all sections of the IR in the sequence
that they appear in the report. Then, we analyse these sections in light of the
concepts, principles and elements of the CD (the principles, elements and the
other topics of the CD which illustrate the fundamental concepts of the report are
indicated in italics).

4
The information and data about the company in this chapter have been extracted from the official
website of Smithfield Foods, Inc. (http://www.smithfieldfoods.com) and from its 2012 Integrated
Report.
258 L.G. Smaldore and C. Cavazzoni

16.3.1 Overview of the Report

The cover page of Smithfield’s IR states the following: “We combine Leading
Brands and a Commitment to Sustainability to produce Good Food. Responsi-
bly®”. (Smithfield 2012). From this first message, some concepts behind the IR
may be identified. “Leading brand” refers to one of Smithfield’s capitals, in
particular, intellectual capital. A “commitment to sustainability” reveals the intent
and engagement of the company to sustain value creation over time. “Food” refers
to the core business of the company. Finally, the adverb “responsibly”
communicates the sustainable approach to value creation. This claim already sets
out to convey Smithfield’s integrated thinking, which involves capitals, value
creation, and the business model illustrated in the IR.
Smithfield’s 2012 IR is structured as follows. The first three pages (of which
only the page that illustrates the Map of Operations is included in the Table of
Contents) present an overview of the IR. They illustrate the countries in which
Smithfield’s operations are located, some financial highlights and information
about the preparation of the report, along with a section made up of forward-
looking statements. The Table of Contents of Smithfield’s 2012 IR lists the sections
that compose the report, as follows: Chief Executive Officer Letter, Ask the Chief
Sustainability Officer, Our Business Journey, Value Creation, Governance and
Management, Animal Care, Employees, Environment, Food Safety and Quality,
Helping Communities, International Operations, and Our Family of Companies.
Information about Management and the Corporate (common stock data, holders,
dividends etc.) is also reported at the end of the report. A separate part of the
Table of Contents lists the maps, diagrams, and the tables included in the IR. In this
respect, it is interesting to note that between the sections Ask the Chief
Sustainability Officer and Our Business Journey the report illustrates a recap of
some of its key performance indicators, the Key Data Summary, and a recap of the
Key Commitments in Smithfield. The last section, Our Family of Company, is
followed by tables and graphs which report the 10-Year Financial Summary and the
Cumulative Total Return Comparisons.
The first three pages of the report give a snapshot of the organizational overview,
graphically reporting the geographical extent of its operations, over 12 countries in
America and Europe. This is followed by a table which illustrates a concise
overview of the financial performance achieved by the company during the previ-
ous 3 years. This element is reported by drawing upon the principles of conciseness
and consistency, and conveying reliability of information.
The first few pages also reveal the report’s aim, though it is not to couple the
annual and sustainability reports (Dobkowsky-Joy and Brockland 2013), rather it is
to combine the financial results with company’s sustainability reporting (Smithfield
2012). Within Smithfield, this integration relies on six elements called "pillars".
The first five pillars concern the strategy for sustainability. They are: animal care,
employees, environment, food safety and quality, and helping communities, which
also identify the capitals that the business uses and that are affected. The sixth
16 The Case of Smithfield Foods 259

pillar, value creation, interconnects the sustainability strategy with Smithfield’s

business results.
The future outlook is communicated from the beginning of the report through
“forward-looking information and statements” which relate to the company’s plans
and strategies. Smithfield’s risks and uncertainties are also identified, including live
hogs, raw materials, fuel and supplies, food safety, livestock disease, live hog
production costs, product prices, competitive environment and related market
conditions, indebtedness, etc. (Smithfield 2012). The content elements future out-
look and risks are illustrated, therefore, through the principle strategic focus and
future orientation.
Moreover, the third page of the report states the following: “this report contains
“forward-looking” statements within the meaning of the federal security laws”
(Smithfield 2012). This quote from the report reveals Smithfield’s consideration
of the topic disclosure of material matters while preparing the IR.
The reporting boundary, that consists of the company units in which Smithfield
has a majority (51 % or more) interest (Smithfield 2012), is also communicated on
the third page of the report. Furthermore, the recall of external links and sources of
further information defines the level of aggregation and disaggregation of infor-
mation within the report. The report focuses on elements that are deemed material
in order to explain the sustainability strategy of the company and value creation
over time. Smithfield suggests that for further information the reader should visit its
website, which highlights the company’s dedication to sustainability commitments5
and use of technology.

16.3.2 Chief Executive Officer Letter

The report opens with a letter written by Smithfield’s President and CEO that
addresses some of the topics included within the IR. The company’s 2012 financial
performance, innovation strategy, opportunities and risks and the future outlook for
growth are illustrated here, in line with the principles of strategic focus and future
orientation, conciseness and drawing upon a narrative approach.
In this letter, the CEO describes value creation within the company as the
creation of jobs; tax payments; educational programs; the donation of food to
communities in need; the conversion of waste into energy; the good health of
animals raised for products; and financial performance (Smithfield 2012). The
CEO’s letter conveys the idea of governance in support of the IR, as well as the
reliability and credibility of the data within the IR.

5
See http://www.smithfieldcommitments.com
260 L.G. Smaldore and C. Cavazzoni

16.3.3 Ask the Chief Sustainability Officer

This section reports an interview with the Chief Sustainability Officer (hereafter
CSO), who is also the Executive Vice President, about sustainability in Smithfield.
In line with the principle of completeness of information, the CSO illustrates the
relationships between sustainability and business performance measurement
systems to ensure stakeholder responsiveness. The CSO also mentions the
sustainability commitments of the company, such as worker safety, environmental
compliance, antibiotics policy, greenhouse gas (GHG) emission reductions, pack-
aging reduction projects, and sow gestation conversion (Smithfield 2012). Similar
to the letter by the CEO, the interview with the CSO conveys the reliability and
credibility of information within the IR, as well as the support offered by the
governance system.

16.3.4 Key Data Summary and Key Commitments

The interview with the CSO is followed by a recap of the pillars of sustainability
(animal care, employees, environment, food safety and quality, and helping
communities). In particular, the quantitative performance (and the related KPIs—
Key Performance Indicators) of the previous 5 years (2008–2012) is illustrated in
the table, Key Data Summary (Smithfield 2012, p. 6), illustrated in Fig. 16.1.
The table also identifies the pages of the report where indicators are explained in
more detail. By summarizing the key elements of the company’s sustainability
performance, the table is aligned with the principles of materiality and conciseness
of information.
As already mentioned, Smithfield’s simultaneous achievement of (social and
environmental) sustainability and business performance is built on six pillars. The
first five pillars of sustainability, along with the company’s capitals, are
interconnected with the sixth pillar, value creation, which aims to “drive growth
and improve shareholder and stakeholder value” (Smithfield 2012, p. 9).
The five pillars, along with the pillar of value creation, are organized in Key
Commitments synthesized in a scorecard with their qualitative and quantitative
goals, targets and results. A snapshot of this scorecard is illustrated in Fig. 16.2
which shows two of the six key commitments, specifically, animal care and
employees.
By identifying the goals and targets of the Key Commitments (see the first two
columns of Fig. 16.2), the scorecard incorporates the company’s strategy and
resource allocation and future outlook through the principle of strategic focus
and future orientation. Finally, by concentrating and organizing the Key
Commitments within a table, the materiality and conciseness principles are
fulfilled.
Moreover, symbols outlined in the target columns (see Fig. 16.2) express the
status of goal achievement in relation to the targets (achieved, on track, needs
16 The Case of Smithfield Foods 261

Fig. 16.1 Performance of the five sustainability pillars over the past 5 years. (Source:
Smithfield’s 2012 integrated report, p. 6)

improvement), conveying a sense of reliability of information as they track the

current status of the goals. These symbols are illustrated in Fig. 16.3.

16.3.5 Our Business Journey

This section describes the company’s organizational overview and external envi-
ronment, strategy and resource allocation, opportunities and risks, and future
outlook, all corresponding to the content elements suggested by the CD. These
elements contribute to illustrating the Smithfield’s business model through the
262 L.G. Smaldore and C. Cavazzoni

Fig. 16.2 Smithfield’s goals and targets, 2011–2012 results of animal care and employees
commitments. (Source: Smithfield’s 2012 integrated report, p. 7)

Fig. 16.3 Symbols used to show the status of goal achievement in relation to the targets of the
Key Commitments. (Source: Smithfield’s 2012 integrated report, p. 7)

guiding principles of materiality, conciseness and strategic focus and future orien-
tation. The historical context of the company is also illustrated here, including its
mission statement (see paragraph 2) and core values, such as producing safe, high
16 The Case of Smithfield Foods 263

quality and nutritious food, creating value for stakeholders, being an employer of
choice, leading in animal care, protecting and reinvigorating the environment,
making positive impact on communities, etc. This section also deals with the
company’s principal activities and current brands, acknowledging the pork segment
as being the heart of the business. The company’s success in executing growth
strategies is summarized in chart form (see Smithfield 2012, p. 11).

16.3.6 Value Creation

The description of the business provided by the section Our business journey is
followed by an in-depth analysis of value creation in Smithfield. This concept not
only gives the title to a section of the report, but it also constitutes the background of
the following sections, as they deal with the driver elements for value creation and
sustainability in Smithfield. The report illustrates the sustainability elements which
drive the value creation process, and how this process identifies, uses and affects the
capitals of the company. Value creation in Smithfield is the result of a continuous
enactment of six programs that may be considered the drivers of value creation for
internal and external stakeholders. As illustrated in Fig. 16.4, these programs are:
“Encourage competitiveness and innovation, Integrate business into the commu-
nity, Mitigate operational impacts and risks, Create access to the growing influen-
tial consumer segment, Develop human capital, Promote sustainable business
model” (Smithfield 2012, p. 14). Interestingly, the interconnections between these
programs and value creation show how “an authentic commitment to sustainability
enhances financial performance in the long-term, both through savings, risk miti-
gation and adding value” (CIMA 2011, p. 1).
The report further investigates the sustainable programs that are considered
material for value creation, listing the elements in which Smithfield works for the
enactment of each program. As shown in Fig. 16.5, the elements that influence the
programs of value creation are “Governance and Management, Animal Care,
Employees, Environment, Food Safety and Quality, Helping communities, and
International Operations” (Smithfield 2012, pp. 14–15). It is interesting that these
elements include the five pillars of sustainability.
The information in the table in Fig. 16.5 is aligned with the principles of
reliability and completeness, consistency and comparability, materiality and con-
ciseness. It is also worthy to note how this table illustrates the connectivity between
value creation and value drivers, activities, capitals and stakeholders of the
company.
Finally, this section also suggests visiting the YouTube website where videos
showing the sustainability initiatives implemented in Smithfield can be viewed,
which shows an innovative approach to reporting through the use of technology that
also allows the connectivity of the report information with that on the YouTube
website.
After this section, the report illustrates each of the elements that are considered
crucial to value creation, namely Governance and Management, Animal Care,
264 L.G. Smaldore and C. Cavazzoni

Fig. 16.4 Smithfield’s programs for value creation. (Source: Smithfield’s 2012 integrated report,
p. 14)

Employees, Environment, Food Safety and Quality, Helping Communities and

International Operations.

16.3.7 Governance and Management

This part of the report deals with the role of governance and management in
Smithfield, as “foundations for trust, transparency and progress” (Smithfield
2012, p. 16). It is interesting to note that, in order to monitor and manage
sustainability, the company has established sustainability committees (one for the
board of directors and one for top executives across the company) and a new
position of responsibility, the Chief Sustainability Officer.
Figure 16.6, an extract from the report, illustrates the organization of
sustainability governance within the company.
This section also deals with the management of sustainability issues, identified
after a materiality determination process and inspired by stakeholder
responsiveness. This section also refers to one of the capitals used for value
creation, the social and relationship capital, which involves the management of
relationships with suppliers. This capital is reinforced through sharing norms,
common values and behaviours with the suppliers. In that respect, Smithfield has
also implemented the Suppliers Code of Conduct.
Despite the risks mentioned in previous sections, the organization’s tangible and
intangible, existing and emerging risks are further dealt with in this section of the
report after a materiality determination process, based on the likelihood and impact
of each risk. In particular, the risks may involve fluctuations in the commodity
prices for hogs and grains; outbreaks of disease among, or attributed to, livestock;
health risks related to products of the food industry in general; and environmental
regulations and related litigation (Smithfield 2012, p. 17).
16 The Case of Smithfield Foods 265

Fig. 16.5 Smithfield’s programs for value creation. (Source: Smithfield’s 2012 integrated report,
pp. 14–15)
266 L.G. Smaldore and C. Cavazzoni

Fig. 16.6 Sustainability governance in Smithfield. (Source: Smithfield’s 2012 integrated report,
p. 17)

Additionally, the section on Governance and Management also deals with

Smithfield’s stakeholders, listing who they are and how they are related to the
company.
16 The Case of Smithfield Foods 267

16.3.8 Animal Care

The Animal Care section communicates the main targets and goals for animal care
in Smithfield, such as eliminating the use of gestation stalls for pregnant sows on
company owned farms; improving transportation for hogs; and developing markets
for alternative feed grains and animal care targets (Smithfield 2012). Smithfield’s
future outlook concerning animal care is addressed through the principles of
strategic focus and future orientation.
Drawing upon the connectivity between animal care and value creation, the
section illustrates how animal care may have effects on the capitals of the company.
The capitals that are identified in this section are influenced by reputation (intellec-
tual capital), relationships with customers and consumers (social and relationship
capital), and production levels (manufactured and financial capital). Further con-
nectivity of capitals occurs when talking about sorghum, a new grain crop used to
feed hogs. Specifically, the report highlights the positive relationship between this
newly available natural capital and the financial capital, due to the lower cost of the
new crop. Moreover, the latter aids environmental sustainability, affecting—again
in a positive way—natural capital, with lower water demand and reduction of water
and soil pollution. Business growth and positive financial capital performance also
imply further value creation of social and relationship capital, as grain suppliers
increase their levels of production.
Animal care and well-being are described as great opportunities for the growth
of the company and its stakeholders, through the creation of markets for thousands
of grain farmers across the US and internationally. The external and internal
assessments of animal care and quality are also illustrated in this section, thereby
adding credibility and reliability to Smithfield’s business and value creation pro-
cess. Credibility is also reinforced by including a perspective from a consultant in
charge of evaluating Smithfield’s overall systems of animal care (see Smithfield
2012, p. 22).
To fulfil stakeholder (restaurant customers) responsiveness regarding animal
care, programs and actions have been undertaken concerning the housing of
pregnant sows. This part of the report also refers to the external environment, by
mentioning Smithfield’s compliance with the U.S. Food and Drug Administration’s
new regulatory guidance relating to the use of antibiotics in food production.

16.3.9 Employees

The report dedicates a full section to employees—a pillar of sustainability and

human capital. As illustrated in the IR, Smithfield pays constant attention to
protecting their safety, health and their ethical workplace environment. In order
to increase the value of human capital, Smithfield applies competitive wages, robust
benefit packages, with tuition reimbursement and educational scholarships. The
report also refers to its Human Rights Policy and Employee Injury Prevention
Management System in order to increase the credibility of the company’s
268 L.G. Smaldore and C. Cavazzoni

responsiveness to employees’ needs and expectations. This section also illustrates

how the encouragement of safety training as well as employee health and wellness
both lead to a reduction in the number of work-related injuries.
To be complete and reliable, the IR has to ‘tell the true story’, with its negative
and positive outcomes. In this respect, it is worth noting that also negative facts are
included in the report, such as the occurrence of one employee fatality in 2011.
Nevertheless, a serious commitment to avoiding similar events in the future has
been declared by the company, again communicating its future outlook.
This section demonstrates the connectivity and interrelatedness between the
employees and value creation, in particular, between human and financial capitals.
It translates the value of employees into monetary terms (salaries, wages, and
benefits), as well as the actions undertaken for their safety training. This informa-
tion communicates to the report’s users, especially shareholders, how financial
capital has been employed and invested in initiatives aimed at increasing the
value of employees.
Finally, the result of a study conducted by the University of Missouri Extension
states that Smithfield operations help to sustain more than 5,200 jobs in Missouri
(Smithfield 2012). This illustrates how Smithfield increases social and relationship
capital through its stakeholder responsiveness.

16.3.10 Environment

The environment is a pillar of sustainability in Smithfield. The section Environment

opens with a presentation of future outlook in this field, reporting in a concise way
the several environmental goals and targets concerning water and energy use, GHG
emissions, and solid waste to landfill. The environment is one of the external
stakeholders of Smithfield, as well as the source of its natural capital.
In this section, environmental performance is linked to financial performance in
several way (connectivity of information). In particular, it is shown that investments
in the management of natural capital (water, energy etc.) result in lower operating
costs (impact on financial capital) and in stakeholder value creation (impact on
social and relationship capital). Moreover, the effective management of natural
resources allows the identification of opportunities for increasing the value of
intellectual capital (in terms of increased reputation), as well as converting
elements of manufactured capital (hog manure, solid waste, and bacon grease)
and natural capital (land not used for crop production or hog raising) into renewable
energy (natural capital).
Moreover, this section provides tables with the key objectives for environmental
performance by 2016 (to the benefit of consistency and comparability, and reliabil-
ity of information). An example of a table referring to water use is reported in
Fig. 16.7.
16 The Case of Smithfield Foods 269

Fig. 16.7 Water use

performance from 2008 to
2012 vs. the goal by fiscal
2016. (Source: Smithfield’s
2012 integrated report, p. 28)

16.3.11 Food Safety and Quality

Food Safety and Quality constitute another pillar of sustainability for Smithfield
and also a source of its value creation. The culture of food safety and quality is
continuously conveyed to the employees in Smithfield. The section Food Safety and
Quality mentions some episodes of success, such as the achievement of certification
by all relevant facilities, as well as an unpleasant event, the Portobello mushroom-
flavoured pork loins that were recalled from the market because some of the product
may have contained an undeclared allergen, conveying a sense of reliability and
completeness of information (Smithfield 2012, p. 33). The connectivity between the
sustainability pillar of food safety and quality and value creation is also detailed in
this part. Furthermore, the following statement: “producing safe, high-quality food
builds value for our business, our investors, and our customers, including the
restaurants and retail chains that sell our products” (Smithfield 2012, p. 33),
summarizes and reinforces the sense of connectivity in Smithfield. In addition,
this claim shows how the company deals with stakeholder responsiveness.

16.3.12 Helping Communities

Smithfield sustains value creation within the environment and society, producing
positive impacts in the areas where employees work and live. The related goals and
targets (following the element future outlook) are clearly illustrated in the section
Helping Communities. Drawing upon integrated thinking and the connectivity
principle, this section recognizes relationships between the capitals and the support
provided to communities. In particular, helping communities increases human
capital (through assistance to the communities that the employees belong to), social
and relationship capital (through assistance to local communities and families
which cannot afford food), intellectual capital (good reputation), and financial
capital. Moreover, initiatives undertaken in hunger relief, education, health and
270 L.G. Smaldore and C. Cavazzoni

wellness all have the potential to improve the social and relationship capital
between the company and local government, community groups, and corporate
partners.
Finally, the section Helping Communities also reports the financial capital
employed to sustain some initiatives aimed at supporting communities, such as
food and cash donations. This approach shows how part of the available financial
capital of Smithfield has been invested into social capital.

16.3.13 International Operations

The company owns six international operations and aims to transfer its
sustainability principles to them. The section International Operations mainly
refers to operations conducted in Europe where Smithfield has about 10,000
employees (reporting boundary and level of aggregation). How international
operations deal with the five pillars of sustainability along with the pillar of value
creation is also illustrated in this section.
Moreover, value creation processes within the international operations and their
effect on (financial, social and relationship) capitals in Romania and Poland, as well
as their past environmental performance are illustrated.

16.3.14 Our Family of Companies

Finally, Smithfield’s IR illustrates its ‘family of companies’, both graphically and

in a narrative way. In particular, a description of the business model is provided in
this section. The three segments named Pork, Hog Production, and International in
Smithfield are illustrated by following the elements of organizational overview and
external environment. Some of the companies belonging to those segments are also
described here, reporting information about their headquarters, president, number
of employees, fiscal 2012 sales, core brands, supporting brands and facilities. Their
recent sustainability achievements are reported, conveying reliability about
sustainability plans.

16.3.15 10-Year Financial Summary and the Cumulative Total

Return Comparisons

A 10-year financial summary (2003–2012) of the company’s performance

(Smithfield 2012, pp. 48–49) is contained within the report. Moreover, data and
graphs, provided by Zacks Investment Research, regarding both the 5-year and 10-
year cumulative total return of Smithfield stocks are reported (fulfilling the
principles of credibility, consistency, comparability, reliability).
Throughout the report, the time frame of plans is often indicated. In relation to
the frequency of reporting, this is the first annual IR that Smithfield has released but,
16 The Case of Smithfield Foods 271

on the third page of its IR, Smithfield states: “We expect our reporting will continue
to progress over time, and we welcome feedback on how we might improve our
approach” (Smithfield 2012).

16.4 Smithfield IR vs. the IIRC Consultation Draft

All companies need better business reporting which should illustrate a more
comprehensive picture of the organization that goes beyond mere financial perfor-
mance (KPMG 2013) and that stimulates integrated thinking, decision-making and
actions when creating value in the short, medium and long term (IIRC 2013).
Therefore, an IR is a document that sets out to fulfil these expectations and that
gives shareholders the opportunity to assess not only the quality of the results
achieved in the past, but also the validity of corporate future strategies.
In preparing the report, Smithfield has been inspired by recommendations made
by the IIRC published in 2011. The alignment with the content elements and
guidelines is shown on the inside back cover of the report where a map of the
report with the elements recommended in 2011 is provided. A snapshot of this map
is shown in Fig. 16.8.
Also, the comprehensive picture of the company provided by Smithfield’s IR is
in line with the CD and shows how the guiding principles and content elements of
the CD are applicable within, and can be adapted to, a company operating in the
food industry sector. Next, in Table 16.1, we summarise the main results of the
analysis undertaken in this chapter. More specifically, the table maps the sections
where the content elements of the CD are addressed within the report, along with
the guiding principles that characterize their exposure. Also, the last column in
Table 16.1 reports what capitals Smithfield uses and in which section of the report
they are dealt with.
From the analysis undertaken in this chapter, it is evident that the report is
aligned with the IIRC guidelines, which are also flexibly adapted to the company’s
characteristics. In so doing, it conveys a sound interconnection between the funda-
mental concepts of IR, such as capitals, business model and value creation in the
specific context of a company operating in the food industry. In particular, when
presenting the value creation process through sustainability pillars, Smithfield’s IR
discloses the company’s capitals, its stakeholders and the features of its business
model. In doing so, the Smithfield IR also communicates the capacity of the
company to recognize the interconnections between its capitals through the process
of value creation. Moreover, the connectivity between capitals, how they are
invested or increased, along with their performances, is enriched with examples
throughout the report.
Smithfield’s IR also shows the factors that serve as material for the company’s
value creation, as well as the interconnections and interdependences among them. It
is also interesting to note how the sustainability elements and business initiatives
are often translated into value creation in financial terms.
272 L.G. Smaldore and C. Cavazzoni

Fig. 16.8 Mapping of Smithfield’s 2012 Integrated Report compared with the content elements
recommended by the IIRC in 2011. (Source: Smithfield’s 2012 integrated report, on inside back
cover)

Several images enrich the report. The portrait of the CEO, as well as the portrait
of, and the interview with, the CSO convey the idea of how governance is closely
related to sustainability issues. The photographs of their faces also gives a sense of
credibility and reliability to what is reported throughout the document. Further-
more, the tables and graphs showing both qualitative and quantitative performance
support the text and make its content more reliable. This reliability is also
reinforced through quotes from the people who work for, collaborate with and are
involved in Smithfield’s business.
Also, the exposure of various KPIs and future targets across the report, provide
an easy, visual understanding of the key issues, facilitating users’ comprehension
(Dobkowsky-Joy and Brockland 2013). It is also worth noting the modalities for
aggregation and disaggregation of information within the report, which address
both the completeness and conciseness of information.
Finally, Smithfield’s IR tells the story about its business, value creation and
sustainability process, in line with the information requirements expressed in the
CD, while also maintaining the company’s peculiarities. It manages to do so by
continuously focusing “on what is strategically important and material to under-
standing an organization’s capacity to create and sustain value in the short, medium
and long term” (PWC 2012, p. 5). The overall result is a continuous balance
between following prescription and flexible adaptation to the company’s particular
characteristics.
16 The Case of Smithfield Foods 273

Table 16.1 Mapping of Smithfield’s 2012 integrated report with the content elements and
guiding principles of the consultation draft, issued by the IIRC in April, 2013
Section within
Smithfield’s IR Content elements Guiding principles Capitals
(First three Organizational overview, Conciseness, consistency,
pages of the performance, future outlook, reliability, strategic focus
report) risks and future
Sect. 16.3.1 orientation, materiality
Sect. 16.3.2 Performance, strategy, Strategic focus and future
opportunities and risks, orientation, conciseness,
future outlook, governance reliability
Sect. 16.3.3 Performance, governance Completeness, stakeholder
responsiveness, reliability
Sect. 16.3.4 Performance, strategy and Materiality and
resource allocation, future conciseness, strategic focus
outlook and future orientation,
reliability
Sect. 16.3.5 Organizational overview and Materiality and
external environment, conciseness, strategic focus
strategy and resource and future orientation
allocation, opportunities and
risks, future outlook, business
model
Sect. 16.3.6 Business model Reliability and
completeness, consistency
and comparability,
materiality and
conciseness, connectivity
Sect. 16.3.7 Governance, risks Stakeholder Social and
responsiveness, materiality relationship
Sect. 16.3.8 Future outlook, Strategic focus and future Intellectual, social
opportunities, external orientation, connectivity, and relationship,
environment, business model reliability, stakeholder manufactured,
responsiveness financial, natural
Sect. 16.3.9 Future outlook, business Stakeholder Human, financial,
model responsiveness, reliability social and
and completeness, relationship
connectivity
Sect. 16.3.10 Future outlook, performance, Conciseness, connectivity, Natural, financial,
opportunities, business model consistency and, social and
comparability, reliability relationship,
intellectual,
manufactured
Sect. 16.3.11 Business model Reliability and
completeness,
connectivity, stakeholder
responsiveness
Sect. 16.3.12 Future outlook, business Connectivity Human, social and
model relationship,
(continued)
274 L.G. Smaldore and C. Cavazzoni

Table 16.1 (continued)

Section within
Smithfield’s IR Content elements Guiding principles Capitals
intellectual,
financial
Sect. 16.3.13 Performance, business model Social and
relationship,
financial
Sect. 16.3.14 Organizational overview and Reliability, connectivity
external environment,
business model
Sect. 16.3.15 Performance Consistency and
comparability, reliability

References
CIMA (2011) Tomorrow’s balance sheet. http://www.cimaglobal.com/Documents/Thought_lead
ership_docs/balance-sheet-final-report.pdf. Accessed 08 Jul 2013
Dobkowsky-Joy A, Brockland B (2013) The state of integrated reporting. Innovation and experi-
mentation in the merging of ESG and financial disclosures. http://framework-llc.com/wp-
content/uploads/2013/03/FrameworkLLC_StateOfIR_Rev0313.pdf. Accessed 07 Jul 2013
GreenBiz Group and Ernst and Young (2013) 2013 six growing trends in corporate sustainability.
An Ernst and Young survey in cooperation with GreenBiz Group. http://www.ey.com/Publica
tion/vwLUAssets/Six_growing_trends_in_corporate_sustainability_2013/$FILE/Six_grow
ing_trends_in_corporate_sustainability_2013.pdf. Accessed 25 Jun 2013
International Integrated Reporting Council (2013) Consultation draft of the international < IR >
framework. http://www.theiirc.org/wp-content/uploads/Consultation-Draft/Consultation-
Draft-of-the-InternationalIRFramework.pdf. Accessed 02 Jun 2013
KPMG (2013) Integrated Reporting The Journey to better business reporting. http://www.kpmg.
com/Global/en/IssuesAndInsights/ArticlesPublications/In-the-Headlines/Documents/ITH-
2013-06.pdf. Accessed 25 Jun 2013
PWC (2012) Integrated Reporting The Future of Corporate Reporting. http://www.pwc.de/de_DE/
de/rechnungslegung/assets/integrated_reporting.pdf. Accessed 02 Jul 2013
Smithfield Foods, Inc. (2012) Smithfield 2012 integrated report. http://www.smithfieldfoods.com/
media/12902/smithfield-integrated-report-2012.pdf. Accessed 2 Jun 2013
The Case of Monnalisa
17
Cristiano Busco, Maria Pia Maraghini, and Sara Tommasiello

Abstract
This chapter focuses on Monnalisa, a medium-sized Italian company that
operates in the fashion industry. The purpose is to illustrate the way in which
Monnalisa has gradually redesigned its Annual Report. To do this, after having
introduced the company’s background information, the evolution of corporate
reporting in Monnalisa is briefly reviewed. During the last decade Monnalisa has
progressively engaged with its key stakeholders in order to develop an Integrated
Report that now combines the European Union format of an Annual Report
with the triple bottom line reporting that characterises sustainability reports.
In particular, since 2009 the information and the key performance indicators
presented within Monnalisa’s annual Integrated Report reflect a combination of
the requirements of the key stakeholders together with the main strategic
objectives of the company. The current structure and some insights into
Monnalisa’s Integrated Report are illustrated and discussed in the chapter.

C. Busco (*)
School of Business and Economics, National University of Ireland, Galway, Ireland
e-mail: cristiano.busco@nuigalway.ie
M.P. Maraghini
Department of Business Studies and Law, University of Siena, Siena, Italy
e-mail: maraghini@unisi.it
S. Tommasiello
Jafin – Monnalisa, Arezzo, Italy
e-mail: s.tommasiello@jafin.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_17, 275

# Springer International Publishing Switzerland 2013
276 C. Busco et al.

17.1 Introduction: Monnalisa’s Background Information

Monnalisa is a medium-sized company located in Arezzo, Italy. Founded in 1968

by Mr. Piero Iacomoni, Monnalisa designs and sells garments and accessories for
children.1 The clothing sector has always played an important role in the economy
of the region surrounding Arezzo. This has provided significant opportunities for
the company in terms of networking and available know-how. To distinguish his
company from the competitors, Mr. Iacomoni decided to focus on a high-quality
segment of the market, offering coordinated articles of clothing (the so-called
total look concept).
Since its foundation, each line of products developed by Monnalisa has been
characterized by the search for a high level of style, creativity, differentiation and
production quality. Despite the increasing turbulence of the market environment,
during the past 10 years, Monnalisa has experienced considerable growth in turnover
(revenues—from 2000 to 2010 Monnalisa’s turnover has tripled), which reached
about 36 million euros in 2010. Significantly, 90 % of Monnalisa’s customers come
from Europe (54 % from Italy). In 2013, the company employed about 65 people.
Monnalisa’s traditional and core business is to create and sell high-end fashion
garments and accessories for girls from new-borns right through to teenagers.
Monnalisa bases its business on four main brands: Monnalisa Bebé, suitable for
ages 3–6 months; Monnalisa Girls, for ages 2–12 years; Chic Monnalisa, for those
4–16 years of age; Jakioo, a trendy brand for 6–16 years and two newer brands,
Ny&lon, a sportive brand for 3 months to 16 years of age, and Hitch-Hiker for boys
3 months to 12 years of age. Recently, Monnalisa has diversified its business by
partnering with furniture and accessories manufacturers to market products for little
girls’ bedrooms, such as white-washed bed frames and furniture with a vintage
flavour, cabinets with soft spirals, sinuous chairs and lamps.2
The mission of Monnalisa is to create value and values over time by offering a
fashionable, high quality, high identity product for both clients (the retailers) and
consumers. According to the company’s Annual Report this mission should be fulfilled
through a flexible, reliable and customized service; a dynamic and challenging work
environment; an ongoing and profitable relationship with suppliers; and a sustainable
company policy for the territory. The vision to be accomplished by Monnalisa
embraces (1) to excel in innovation, creativity and practicality to gain new markets;
(2) to drive a diffused managership inside the company to take on the challenges of the
small and medium family enterprises successfully; and (3) to expand worldwide, both
productively and commercially, while maintaining the company values and identity, to
spread a culture of social responsibility. The fulfilment of the mission and the
achievement of the vision should be sought by adhering to the four company values:

1
Monnalisa is both the name of the company and the brand name of clothes designed and sold by
the company. For the web site of the company please see http://www.monnalisa.eu
2
This work extends previous contributions on Monnalisa. Please see Busco et al. 2012a, b; and
Giovannoni and Maraghini 2013. See also Giovannoni et al. 2011.
17 The Case of Monnalisa 277

– Respect: for skills and competencies, diversity, pace of life and work;
– Dialogue and participation: meaning a stimulating work environment, connection
with the territory, and growth together with the related industries and services;
– Fairness: meaning the acknowledgement of everyone’s dedication to their
relationship with Monnalisa, and also transparent decisions;
– Responsibility: towards customer satisfaction, efficient and effective use of all
resources as well as transparent reporting of policies and strategies.
The purpose of this chapter is to explore how Monnalisa has gradually redesigned
its Annual Report throughout the last decade to develop an Integrated Report (IR).
To do this, after the second section where the company’s organizational structure and
value chain is introduced, Sect. 17.3 focuses on the evolution of corporate reporting
in Monnalisa. Next, Sect. 17.4 summarizes Monnalisa’s journey towards Integrated
Reporting where the role of stakeholder engagement is emphasised. The current
structure and some insights into Monnalisa’s Integrated Report are illustrated and
discussed in Sect. 17.5. The chapter ends with some concluding thoughts.

17.2 Value Chain and Organizational Chart

Similar to the majority of the companies operating in the fashion industry, Monnalisa’s
business and value chain is structured and managed around two collections of clothes
per year, one for the autumn–winter season, and the other for the spring–summer. Each
collection kicks-off with a collection briefing, a meeting where the heads of the
Design, Sales and Marketing, Production, and Finance Departments identify and
finalize the broad plan for the collection by listing the number of lines, as well as the
categories of products (for example shirts, skirts or shoes) that will be featured in
the forthcoming collection. Next, within Monnalisa, research and design of the
collections, preparation of the prototypes and development of the samples are carried
out by the Design Department (see the organizational chart represented in Fig. 17.1).
The collections are then presented to retailers through show rooms and fashion shows,
as well as a network of independent sales agents who sell for Monnalisa during the two
main sales campaigns, allowing the collection of orders and the first feedback on the
creations.3 In this context, a key role is played by the Sales and Marketing Department,
which is responsible for providing accurate sales forecasts for the sales campaigns, and
for collecting feedback and comments from retailers and consumers on the style of the
clothes. This information is communicated by the Sales and Marketing Department to
the Design Department (for style projects), as well as to the Production Department for
production planning.4

3
Traditionally Monnalisa sold its products through independently owned single brand and multi-
brand shops, and department stores. Only recently has Monnalisa started to sell its products
directly to the final consumer through its web-site and the first company-store in Arezzo.
4
Production is planned according to the orders collected during the sales campaigns.
278 C. Busco et al.

Fig. 17.1 Monnalisa’s organizational structure and value chain

Like a number of other companies of a comparable size operating in the fashion

industry, Monnalisa has a flexible production structure. The purchases of raw
materials, as well as their storage and fabric cutting are carried out internally by
the Production Department. In contrast, all the transformation phases from raw
materials to work-in-progress, and sometimes to finished products, are outsourced
to small suppliers (named Façonists5) mostly located in central Italy. Components,
work-in-progress and finished products are then delivered to Monnalisa’s premises
in Arezzo, where the Production Department is responsible for the control and
management of the logistic flow, the assembly of components and work-in-progress,
the quality and safety control of the garments, and their storage and distribution to
national and international markets. All post-sales activities are carried out by the
Sales and Marketing Department.

5
The relationship with Suppliers (of fabric and accessories) and Façonists is managed by the
Production Department (although suppliers and Façonists are not involved in cross-functional
teams). Around 50 % of the suppliers have a long-term relationship with Monnalisa, which is
renewed collection by collection. This percentage increases up to 90 % for the Façonists.
17 The Case of Monnalisa 279

Next, we describe the recent evolution of Monnalisa’s annual reporting activities

both in terms of content and structure, and highlight the choices of the company in
terms of communicating results, as well as the process of value creation to its
stakeholders. In particular, to explore Monnalisa’s journey towards IR, we focus
our analysis on reports after 2005, the year in which Monnalisa decided to discontinue
the traditional reporting format that separated, into two different documents, the
financial and social-environmental results.

17.3 The Evolution of Corporate Reporting in Monnalisa

Published for the first time in 2003, the social and environmental report released by
Monnalisa was originally divided into three main sections: corporate identity,
financial performance, and social performance (offering information related to the
relationships with the key stakeholders of the company, i.e. employees, customers,
suppliers, shareholders, lenders, local institutions, local community, and the environ-
ment). However, it is with the 2005 report that Monnalisa introduced a substantial
innovation in its way of communicating annual results to its stakeholders. In particular,
in the 2005 report the company integrates, for the first time, the disclosure of financial
and social-environmental performances. Within this report financial, social and envi-
ronmental information are strongly integrated with each other on the assumption that
the company’s financial performance depends directly on the social responsibility
policies that are implemented, and vice versa.
Due to this innovation, Monnalisa was awarded with the Italian annual report
Oscar in 2006, a prize that is given to companies that distinguish themselves for
excelling in corporate reporting.6 Building on this acknowledgement, the 2006
annual report suggested that Monnalisa focus on intangibles. At the time,
Monnalisa felt the need to communicate, and make evident to stakeholders, what
is an invisible and not always fully perceived and acknowledged value. As a result
of this need to unveil and discover the intangible, the company accompanied the

6
Since 1954, the Annual Report Oscar has been assigned to companies that have carried out the
best economic, social responsibility and environmental communication. The award has been
created and administered by FERPI—The Italian Federation of Public Relations—under the
Patronage of the President of the Italian Republic. This prize is the only national award recognised
by the Italian economic-financial community as promoting a culture of transparent and exhaustive
reporting. In particular, the motivations that were released by the jury in 2006 in support of
awarding Monnalisa were the following: “The report is clear, complete, transparent and well
structured. The integration of documentation providing all the necessary information both of an
economic-patrimonial and socio-environmental nature was particularly appreciated. In this latter
area, proposed objectives and results obtained have been clearly highlighted with an interesting
focus carried out with suppliers that has permitted both dialogue with subcontractors and a
complete control of the entire production. The document is exhaustive and proportioned, with
clear graphics, preceded by an index which facilitates easy consultation. The successful effort put
into improving the communicative and informative impact of the report from year to year emerges
clearly”.
280 C. Busco et al.

financial statement with a narrative that offered an account of the people, the ideas,
the values, and the resources of trust, which distinguish and make Monnalisa unique
in comparison to any other company.
On its 40th anniversary since its inception, Monnalisa presented the 2008 Annual
Report by giving its employees the opportunity to have their say. This was possible
through the adoption of a double method: interviewing and, by means of a suggestion
box, gathering ideas that each employee had regarding the past and future of the
company. Additionally, with its suppliers, Monnalisa decided to discuss a shared
topic which could be summarized with the question “What can we do together (we, at
Monnalisa and you, the suppliers) about environmental issues?”. The company’s
commitment to reporting its environmental performance was confirmed and
strengthened. Impact analysis of every production process stage has been
maintained, turning subsequently to field experts for a third-party evaluation of
this impact on the surrounding environment. Finally, the 2008 Annual Report
presented an extended analysis of corporate risks, divided into “remote/possible”
and “external/internal”.
The 2009 annual report was characterised by a very innovative layout. In this
document, for the first time, the economic, social and environmental performance
were reported and illustrated by using a particular lens: the areas of interest and the
perspectives of the stakeholders. The identification of these interests and
perspectives started in 2003 as Monnalisa began a process of engagement and
dialogue with stakeholders. During meetings and open sessions with the key
stakeholders, some major issues and areas to be monitored emerged. This also led
to a clearer identification of the objectives to be achieved in order to satisfy the
needs of the stakeholders. This process, which unfolded over the last 10 years, was
realised on the basis of the principles of materiality and correspondence of the
AA1000 international standards. These standards suggest combining the
stakeholder’s requests with the mission and the values of the involving company.
Overall, seven issues were identified. They currently represent the chapters of the
IR, as well as its key of interpretation. These seven issues are: maintain a strong
identity, guarantee economic sustainability, guarantee a high quality, excel in
innovation, promote valorisation, communicate and involve in a transparent and
effective way, and contribute to the development of the territory.
In 2011, for the second time, Monnalisa was awarded the Italian annual report
Oscar. In this case, the process of integration was considered a fundamental element
for awarding Monnalisa’s annual report.7 As the jury commented, Monnalisa’s
2010 IR is an “excellent example of integrated reporting in which economic and
sustainability information exist together and find the right space. The document is
complete, analytic and integrated with all the elements of corporate social

7
“A success that honors me, and the combination of talent working in Monnalisa at all corporate
levels. This award represents a recognition for the commitment we pursue in communicating to
stakeholder our results and values with transparency and correctness” commented Piero Jacomoni,
President of the CDA and founder of Monnalisa, when he received the Annual Report Oscar in
2011.
17 The Case of Monnalisa 281

responsibility. The document is also complete relating to the relationship with all
the stakeholders . . . The innovation section is particularly interesting as a means for
creating value”.
As discussed above, since 2009 the information and the key performance
indicators presented in Monnalisa’s IR reflect a combination of the areas of interest
and the perspectives of the key stakeholders within the main strategic themes and
objectives of the company. This is an IR that includes the EU format of the Annual
Report as well as the triple bottom line reporting that characterises sustainability
Reports. However, integration goes beyond the simultaneous publication of these
two documents, as it includes the real connectivity of all information related to the
issues identified. This allows an understanding of the relationships between strate-
gic objectives and the capacity for creating and maintaining value over time,
keeping in mind external factors that influence the company, including risks as
well as relations the organisation has with its multiple stakeholders.
The structure and insights of Monnalisa IR are illustrated in the next section.8

17.4 Monnalisa’s Integrated Report

As illustrated in the previous section, it seems possible to affirm that the current
structure of Monnalisa’s IR has been jointly created during the last decade through
conversations and engagement with its key stakeholders. As emphasized by the
President and founder of the company, “the Integrated Report is driven by our
mission, values, vision and strategic agenda and complemented by the expectations
of our stakeholders”. In particular, as highlighted above, conversations and engage-
ment with stakeholders lead to the identification of seven issues and areas of interests
that currently represent the chapters of the IR, as well as its key of interpretation.
In the following pages we illustrate some of the insights into these key issues as they
are presented and discussed within Monnalisa’s IR. In particular, we will be focusing
on: maintain a strong identity; guarantee economic sustainability; excel in innovation
and promote valorisation of human and relational capital; communicate and involve in
a transparent and effective way; contribute to the development of the territory.

17.4.1 Maintain a Strong Identity

According to Monnalisa’s IR, the identity of a company is what makes it stand out
in comparison to others. In particular, Monnalisa wishes to stand out and be a leader
in its field of business thanks to the strong identity of its products. Maintaining this
identity is the result of an approach, which stems from a strong set of values seen as
the guide for the decisions and choices the company makes. In particular, the
identity is strengthened within the company by:

8
For a better understanding on the idea and logic of Integrated Reporting see KPMG 2013;
PWC 2012; International Integrated Reporting 2013.
282 C. Busco et al.

Fig. 17.2 Monnalisa’s group structure

– carrying out the entrepreneurial activity coherently with the mission and the
values;
– operating to guarantee a transparent, clear and effective corporate governance
system;
– developing and improving the structure and process of production, for better and
more efficient results;
– consolidating the approach to sustainability as the key element on which company
choices and activities lie.
Monnalisa sits at the centre of a group of five companies (see Fig. 17.2): Babalai is
responsible for and carries out style, creation and design of prototypes and
collections. Penta Service carries out fabric control, storage of raw materials and
fabric cutting. Monnalisa & Co. manages single brand stores (Arezzo, Florence,
Milan and Forte dei Marmi). Jafin is the financial company of the group, responsible
for all financial and administrative services, as well as human resources for the
group. P.J. manages the company real estate. Fifty-one percent of the shareholder’s
equity of Monnalisa S.p.A. is held by the Iacomoni family and forty-nine percent
by the holding company of the group, Jafin. Since February 2010, when the founder,
Mr. Piero Iacomoni, formally retired, the company has been managed through
17 The Case of Monnalisa 283

a Management Committee, chaired by the Managing Director, and includes the

heads of every function. The purpose of the Management Committee is to execute
the strategy formulated by the Board of Directors (chaired by Mr Iacomoni). The
Board of Directors’ main task is to determine the strategies and development policies
for Monnalisa.
The distribution of Monnalisa products is carried out as follows:
– wholesale: independent multi brand stores;
– wholesale/retail: single brand in partnership;
– corporate/retail: direct single brand;
– e-business retail: on-line sales aimed at the end consumer.
Overall, the retail distribution channels counts for approximately 32 % of the
company turnover, with 42 single brand stores, to which is added the on-line store and
the shop in shop that can be found in the best department stores (Harrods,
La Rinascente, Galeries Lafayette, etc.). These distribution channels, for which a
“concept store” has been developed that is more in line with the company identity,
requires ongoing personnel training and the presence of systems capable to collect
and analyse data, enabling the company to understand in a deeper and faster way
the dynamics of supply and demand, in order to steer company policy. However, now
the strong point in distribution is the wholesale channel, which is very widespread
and exclusive. As of today, there are about 1,000 retail customers, and in the
extra EU area they count for approximately 43 %. Several customer-oriented services
have been implemented to strengthen this relationship and to encourage a shift from
a supplier-customer to a supplier-partner mentality. This is the spirit behind the
“Monnalisa space” contracts, through which a number of services to clients are
provided, such as, for example, internet access to a specific warehouse for re-
assortment.
As for the production process, Monnalisa’s business and value chain is structured
and managed around two collections of clothes per year, one for the autumn–winter
season, and the other for spring–summer. The sales projections based on the
outcome of the sales campaign enable the company to plan purchases in advance,
and then to schedule production according to sales agreements. Aiming to satisfy the
clientele’s requests at its best, Monnalisa has set up an extremely flexible production
structure, which allows the effective control of the organization’s critical areas in
terms of production and delivery. All the transformation phases from raw material to
finished product are outsourced to small laboratories, primarily located in central
Italy. Creation and design of the collection, preparation of the prototypes and
development of the stylistic project are carried out by Babalai. Support and control
of the marketing and sales network remain internal, as does the purchase of raw
materials and marketed items, control and management of the logistic flow of the
external production and quality control, storage, shipment and post sales activities of
finished goods. Penta Srl uses innovative technology to guarantee high quality
workmanship, and carries out fabric control, storage of raw materials and fabric
cutting. Fabric that has been cut, together with trimmings and accessories, is then
sent to the sewing, embroidery, printing and dyeing stations for the following
284 C. Busco et al.

Fig. 17.3 Monnalisa’s stakeholder map

production phases. Finally, the finished product goes back to Monnalisa where it is
stored for the client.
While carrying out its activities, Monnalisa engages with multiple entities and
organizations who connect with the company for a variety of reasons, and therefore
contribute interest together with the company for pursuing its mission and for
achieving its vision. Monnalisa has various types of relationships with its stake-
holders, which are graphically presented in a “stakeholder map” (see Fig. 17.3). In
this map, the stakeholders are arranged in concentric circles in relation to their
greater (inner circle) or lesser (outer circle, the largest) level of partnership with the
company itself. As anticipated above, in 2003 Monnalisa began a process of
engagement and dialogue with many of these stakeholders. This process has led
to the identification of the current structure of the IR. During meetings and open
sessions with key stakeholders, major issues and areas to be monitored have
emerged. This has led Monnalisa towards a clearer identification of the objectives
to be achieved to satisfy the needs of the stakeholders, as well as its planned
economic, social and environmental objectives.

17.4.2 Guarantee Economic Sustainability

Within this section of the Integrated Report, a detailed presentation and analysis of
the economic, financial and patrimonial situation of Monnalisa is offered.
In addition, the calculation and distribution of added value, as well as the “risk
per stakeholder map” is illustrated. The statement of added value produced is
generated by following the Guidelines of the Italian Study Group on Company
Reports. The purpose is to highlight the added value created and distributed among
the various company stakeholders. However, in developing this statement, it was
decided to consider affiliated companies, subcontractors and agents as recipients of
the added value created by the Company, rather than as a source of internal costs.
Figure 17.4 illustrates the way in which Monnalisa distributes the added value that is
produced.
17 The Case of Monnalisa 285

Fig. 17.4 Distribution of added value

Fig. 17.5 Risk analysis regarding shareholders, company and banks

Additionally, within this section, a risk analysis that Monnalisa underwent was
developed by using the stakeholder approach. Once the eight main interest bearers
were chosen, the relationship with Monnalisa was analysed for each of them, with
the result of outlining the risks to which each one was subjected. The risks were
then classified according to nature (internal or external) and possibility of occur-
rence (probable, possible, remote). For each risk, the management levers (the areas
where it is important to act in order to limit the risk and its consequences), the
measures to contain the risk (concrete actions that diminish the risk and/or its
consequences) and the indicators to measure the effectiveness of the actions
286 C. Busco et al.

taken, are highlighted (see Fig. 17.5 for a risk analysis regarding shareholders,
company and banks).
The risks that are estimated as probable are internal and refer to the excessive
reliance on specific suppliers and to the absorption of liquidity for the expansion of
credit as turnover increases. In order to reduce these risks, on one hand Monnalisa
carries out an intense activity of worldwide scouting for new suppliers and
creates long-lasting partnerships with its traditional suppliers. On the other hand,
it constantly monitors its working capital, trying to keep a balance between
its various components (credits, debts and inventory) in terms of volume and
turnover.
However, the main risk, in terms of significance of the possible consequences of
the risk, is external and is represented by reputational risk. That is, the possibility
that the Monnalisa collections may not satisfy the client’s tastes (the retailer or/and
of the final consumer) before or after the purchase. It is evident how the market is
the real test-bed for a company which bases its raison d’être on innovation, research
and creativity. Even more so in the fashion market, which is characterised by a
short shelf-life and by frenetic and continuous offers of new products and brands.
In order to monitor, manage and limit the reputation risk, Monnalisa operates as
follows:
– careful management of the product and company image (brand, product and
company communication). For these reasons, public relations has been internalised
in the attempt to enhance control over communication and deliver more effective
messages when communicating externally;
– scrupulous quality control of the product (internally and at the suppliers’ premises);
– attention to the safety of the product and of the materials used.

17.4.3 Excel in Innovation and Promote Valorisation of Human

and Relational Capital

Monnalisa considers innovation as an important source of competitive advantage.

The ability to innovate should be preserved and improved as one of the key elements
of the company’s intangible assets. Monnalisa perceives innovation as both the
ability to design and develop new products that will bring to light the knowhow
and creativity of its employees, and as a means for finding sustainable solutions while
respecting the social and environmental context. For these reasons, the Integrated
Report illustrates performance as it relates to innovation and style, as well as
innovative actions regarding some of the production and relational process phases.
However, to fully appreciate the contents of the “excel in innovation” section of
the report, it is worth illustrating the way in which creativity and innovation within
Monnalisa are carried out within the Design Department. The research, design and
development process includes a number of activities generally structured around
the following five phases: (1) research, (2) design, (3) paper pattern drafting,
(4) prototyping, and (5) sampling (see Fig. 17.6).
17 The Case of Monnalisa 287

Fig. 17.6 The research, design and development process in Monnalisa

(1) The research phase: here the stylists try to become familiarized with markets
and trends, trying to sense where fashion will be going during the next season.
The sources of information can vary, ranging from their own feelings to
inspirations coming from the market based on trade shows; from their own
contacts and networks in society to the industry trend reports that try to
anticipate the styles, colours, and fabrics that are likely to be popular in the
coming seasons; and finally, from their visits to textile and accessories
manufacturers (raw material suppliers) to see and evaluate the possible
fabrics, colours and patterns to be eventually included in the design of the
collection.
(2) The design phase: once stylists have selected fabrics, colours and patterns,
the actual design phase starts. In this phase, the stylists sketch preliminary
designs. Initially, designers use pencils for their sketches, but then translate it
into digital blueprints with CAD (Computer-Aided Design) systems. Digital
blueprints allows stylists to see sketched designs of clothing on virtual
models and in different colours and shapes, thus reducing the time for
possible refinements and adjustments in the later phases of prototyping and
sampling.
(3) The paper pattern drafting phase: the technical aspects of the designs, which are
extremely important in preparing for the production stage and for instructing the
288 C. Busco et al.

third-party Façonists, are addressed in this phase. The paper pattern is the
drawing on paper of the basic silhouette, indicating all the different parts and
features of a garment (for example, in a teen-age girl’s shirt, the neckline, the
sleeves, the pockets, the cuts, the lengths, the draperies). The paper pattern is
then cut to shape and placed on the fabric to guide the cutting.
(4) The prototyping phase: a number of prototypes are built using different
materials or with small changes to the original pattern in order to experiment
with various alternatives and styles. These prototypes are then tried on a human
model for the first time to see how they fit and look, and decide whether
adjustments are needed. This process leads to the selection of the models that
will actually be listed and offered for sale.
(5) The sampling phase: once the final adjustments and selections of the models have
been made, the design phase ends with the development of multiple sizes of
samples for the same article. This activity is complex in that not all the elements
of an article become larger in the same proportion and in a predetermined
manner for developing the different sizes. Finally, the various samples of
the articles, using the actual materials, are produced and marketed to retailers
directly through fashion and trade shows, as well as through independent sales
agents.
Even if described as linear, the fashion research, design and development
process is iterative in its nature. Fabrics, colours and patterns can be re-assessed
in light of new information generated throughout the various phases of the
process or collected from other internal and external sources. Notably, as the
creative process unfolds, the Design Department is expected to interact constantly
with other functions such as Sales and Marketing, Production, and Finance,
which participate in the development of the collection, offering their support and
evaluation on the implications of the company’s performance for the products being
developed.
Within Monnalisa, stylists are free to interact and explore their perceptions of
social trends and moods. The aesthetic conception of the product, applied research,
and the creation of the garments represent the creative engine of the company.
In particular, the research and development activities, consisting of a steady
formal and informal exchange between the design and the other departments
(especially marketing), include spotting fashion trends, colours and themes to be
developed in every line; researching, selecting and creating materials, fabrics and
appliqués; creating sketches for prints, embroidery, appliqués on printed fabrics;
researching, selecting and realizing specific accessories for each item and its
packaging.
The adoption of the intellectual capital framework in 2005 has helped Monnalisa
to develop and systematize a set of performance indicators concerning creativity and
the capacity to innovate, but also individual abilities, motivation, and collaboration
within the company (a sample of these performance indicators are illustrated
in Fig. 17.7). Although, at present, these indicators are not formally tied to compen-
sation, the aim of the Company is to refine this system of control and performance
evaluation to be in a position to implement a structured scheme of incentives in the
17 The Case of Monnalisa 289

Key factor
Key factor Performance indicator
(second level )

Training - Training investment per-employee

investment - Training investment/Total revenues
Training
Specialized - number of trained employees
training - # of training sessions
Opening to new
Attractiveness - # of new employees younger than 30
resources

Employees - % of employees who consider the system

Internal climate
satisfaction of performance measurement useful

- # of employees who have accomplished

Professionalization Variety of skills
different tasks within the company

New customers - # of visitors to the stand at fashion weeks

Visibility
Brand - # of countries where the brand is
registered

Shipments quality - # of shipments by order

Reliability
Post-sales service - # of employees in the marketing
department devoted to post-sales activities

Technologies E-commerce - # web-orders

development

Creativity Turnover of the - Average age of the stylists

stylists

Design R&D - Design R&D investment/Total Revenue

Fig. 17.7 A sample of KPIs Used to Monitor the Human Capital in Monnalisa
290 C. Busco et al.

foreseeable future. For example, Monnalisa has recently developed software that
allows HR to feed the indicator “number of employees who have accomplished
different tasks” by tracking the length and the specific duties of job rotation
processes.

17.4.4 Communicate and Involve in a Transparent and

Effective Way

As illustrated throughout this chapter, stakeholder engagement plays an important role

in Monnalisa’s development process and communication strategies. Dialogue with
and participation of stakeholders enables Monnalisa to communicate information in a
different way (i.e., through a new and integrated structure of the annual report), and
to identify the content that is relevant—i.e. “material”—to the needs of both the
company and the stakeholders themselves. Among the mechanisms of engagement,
are inter-functional workgroups and focus groups, with relevant external stakeholders
playing a significant role.
Since 2009, inter-functional workgroup meetings are organized every week to
discuss coordination all across the value chain. Together with an internal bimonthly
newsletter that updates Monnalisa’s employees as to the status of the business and
of the main projects, these meetings prove to be extremely important for sharing
and communicating information within the organization. As argued by a stylist,
“it is important for us to be educated about the cost implications of our creations,
to be aware of the financial consequences that could be dictated by design”. The
inter-functional workgroups allow managers to spot early warning signals. As
emphasized by a production manager, “last week during one of our weekly meeting
the creative director talked about the most appropriate combinations of straps,
colours and accessories for the next collection. . . it is always fascinating to listen
to stylists sharing their ideas and discussing their sources of inspiration, however,
after few minutes, I could not stop thinking about the production challenges
associated with those new creations”.
Within Monnalisa, ad hoc focus groups with the relevant stakeholders represent
additional ways to manage the interplay between sources of innovation, and
systems of performance management and measurement. In 2009, for instance,
following the outcome of a workshop with suppliers and the local community on
environmental issues, the company launched an innovative research project on the
theme of ecological t-shirts. “The idea is to produce a t-shirt made of organic
cotton on which four endangered animals are printed: a panda, a Siberian tiger, a
sea horse and an arctic fox. The organic cotton used for the t-shirt would come
from land farmed according to the principles of organic agriculture, without using
either genetically modified seeds or synthetic pesticides, which are generally used
(according to industry surveys confirmed by meetings with key suppliers) in
conventional cultivation with negative consequences for the environment. Pack-
aging would be entirely made of recycled materials and come with an educational
game which gives more information on the four animals and their habitats.
17 The Case of Monnalisa 291

To reduce the impact on the company, the game would not be printed in colour but
children can have fun completing it with an included set of ecological crayons”,
suggests one of the stylists. This project was co-created with suppliers, customers,
as well as the local community (namely the Florence Polimoda Fashion Institute).
Interestingly enough, creative exploration was facilitated and guaranteed through-
out the project, but all the stakeholders had also the environmental, social and
financial conditions that should have characterized the production of the new
t-shirt clearly in mind. Focus groups enabled creativity and control to be
reconciled in practice through ongoing social interaction that stimulated
innovation, as well as monitored the other performance dimensions concerning
the various interests at stake.
In 2010, with the aim of improving the alignment among performance
indicators in the Integrated Report, Monnalisa’s employees were asked to gather
informally and express their understanding of certain strategic objectives through
a series of pictures, which were included in the report. The “photo-stories”
workout proved to be extremely important for capturing and representing the
main objectives of the company, especially those related to intellectual capital
and to relations with stakeholders. These objectives are generally the most
difficult to digest, since their practical consequences may be distant and not
immediate. Additionally, not every individual within the organization has the
experience or the background knowledge to understand the interplays across
functions and their consequences for the company as a whole and its
stakeholders. The effort of trying to convey individual perceptions through a
photo story helped Monnalisa’s employees to shed light on a number of critical
issues characterizing the cause-and-effect relationship among the performance
indicators used to monitor the result across the internal value chain. Again, from
creative design to production and distribution, all functions were called upon for
increasing their awareness of the overall integrated management system of the
company.

17.4.5 Contribute to the Development of the Territory

Monnalisa wishes to be a sustainable enterprise contributing to the economic and

social development of the territories in which it operates. Additionally, Monnalisa
aims at reducing the environmental impact derived from its activities.
Contributing to the growth and well-being of individuals and society depends on
the capacity of enterprises to offer long-term employment within the area they
operate. For this reason, the section of the IR titled “Contribute to the develop-
ment of the territory” presents a picture of the composition and solidity of the
work force employed by Monnalisa, as well as of the suppliers that work with and
for the company.
Moreover, although the type of production process and the location of the
company do not involve specific physical risks linked to the change in climate,
Monnalisa is actively involved in limiting its environmental impact that is directly
292 C. Busco et al.

linked to climate change. In particular, in order to reduce the environmental impact

derived from its activities to a minimum, Monnalisa has developed a system to
monitor its main areas of consumption. This will enable the company to take action
when the data exceed the parameters considered appropriate. Among others, the
following aspects are monitored and reported in the Integrated Report: business
trips and deliveries (people mobility and goods mobility); fuel, water and power
consumption; raw material consumption for packaging; and green house gas
emissions (direct and indirect). A full list of GRI-G3 indicators is offered in
Appendix A.

Conclusions
This chapter has focussed on Monnalisa, a medium-sized Italian company that
operates in the fashion industry. The chapter aimed at exploring Monnalisa’s
recent trajectory towards Integrated Reporting. To do this, after a brief illustration
of the company’s organizational structure and value chain, we offered a review of
the evolution of corporate reporting in Monnalisa.
The purpose has been to illustrate the way in which Monnalisa has gradually
redesigned its Annual Report. We have highlighted how during the last decade
Monnalisa has progressively engaged with its key stakeholders in order to
develop an Integrated Report that now combines the European Union format
of an Annual Report with the triple bottom line reporting that characterises
sustainability reports. In particular, we stressed how since 2009 the information
and the key performance indicators presented within Monnalisa’s annual IR
reflect a combination of the requirements of the key stakeholders together with
the main strategic objectives of the company.
We have illustrated and discussed a number of key issues that were generated
by stakeholder engagement, and that today represent chapters of Monnalisa IR.
In particular, we focused on the following: maintain a strong identity; guarantee
economic sustainability; excel in innovation and promote valorisation of
human and relational capital; communicate and involve in a transparent and
effective way; contribute to the development of the territory. These issues
represent a distinctive feature of Monnalisa’s approach to Integrated Reporting,
as well as the ground for its future development.
17 The Case of Monnalisa 293

Appendix A: GRI-G3 Indicators adopted by Monnalisa

(2011 Annual Report)
294 C. Busco et al.
17 The Case of Monnalisa 295
296 C. Busco et al.

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work. http://www.theiirc.org/wp-content/uploads/Consultation-Draft/Consultation-Draft-of-the-
InternationalIRFramework.pdf. Accessed 02 June 2013
KPMG (2013) Integrated reporting the journey to better business reporting. http://www.kpmg.com/
Global/en/IssuesAndInsights/ArticlesPublications/In-the-Headlines/Documents/ITH-2013-06.pdf.
Accessed 25 June 2013
PWC (2012) Integrated reporting the future of corporate reporting. http://www.pwc.de/de_DE/de/
rechnungslegung/assets/integrated_reporting.pdf. Accessed 02 July 2013
The Case of Eskom
18
Fabrizio Granà and Francesca Ceccacci

Abstract
From 2010, South African companies listed on the Johannesburg Stock
Exchange Limited have been required to prepare and present the Integrated
Report (IR). Given the increasing relevance of integrated reporting in the
South African context, in which the preparation of the IR is compulsory for
many companies, this chapter examines the experience of Eskom, a South
African electricity supply company. The aim is to analyse the IR of the company
during the period 2011–2012 in light of the content elements and guiding
principles presented in the Consultation Draft published by the International
Integrated Reporting Council. Therefore, this chapter sheds light on the applica-
bility and/or adaptability of international recommendations on IR within a public
company in the electric power industry.

18.1 Introduction1

On the first of March, 2010, the King Report on Corporate Governance in South
Africa (the so called King III) provided local companies with indications on how to
prepare an Integrated Report (IR). Since then, South African companies listed on
the Johannesburg Stock Exchange Limited (JSE) have been required to prepare and

1
Although this chapter is the result of a joint effort, the Sect. 18.1, paragraphs related to the
description of the Content Elements of the IR of Eskom (Sects. 18.3, 18.3.1–18.3.6) and Discus-
sion and Conclusions can be assigned to Fabrizio Granà. The Sect. 18.2 (The case of Eskom:
F. Granà (*)
School of Business and Economics, National University of Ireland, Galway, Ireland
e-mail: f.grana1@nuigalway.ie
F. Ceccacci
University of Perugia, Perugia, Italy
e-mail: francesca.ceccacci@unipg.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_18, 297

# Springer International Publishing Switzerland 2013
298 F. Granà and F. Ceccacci

present the IR (Abeysekera 2013; KPMG 2012). The King III describes Integrated
Reporting as “a holistic and integrated representation of the company’s perfor-
mance in terms of both its finance and its sustainability” (Institute of Directors
Southern Africa 2009, p. 54). The IR has also been defined as an innovative way of
examining and presenting the company’s financial results by illustrating how
business activities have had a positive or negative impact on the social, environ-
mental and economic contexts in which the company operates (Institute of
Directors Southern Africa 2009, p. 11). In so doing, the IR should give information
on both short term needs and long term value creation (Institute of Directors
Southern Africa 2009, p. 12). Rather than strict rules, the King III provides
guidelines on how to prepare an IR based on the “apply or explain approach”
(KPMG 2009).
At an international level, the importance of shared standards for integrated
reporting has been also discussed by international standard setters, companies and
accounting bodies. In 2011, the International Integrated Reporting Council (IIRC)
published a discussion paper specifying the main principles that a successful IR
should apply (Abeysekera 2013; IIRC 2011). According to this discussion paper, IR
should communicate how companies achieve their strategic objectives integrating
financial, environmental and social information, and giving a retrospective and
prospective vision of the company’s performance as a whole (Piermattei and
Ventoruzzo 2011). Importantly, in April 2013, the IIRC presented the Consultation
Draft (CD) of the IR Framework, the first official international guide of principles
and content elements necessary for drawing up an IR (IIRC 2013).
Given the increasing relevance of integrated reporting in the South African
context, where the IR is compulsory for many companies, this chapter analyses
the experience of Eskom, a South African electricity supply company. The aim is to
analyse the IR of the company during the period 2011–2012 on the light of the
guiding principles and content elements presented within the CD, published by the
IIRC.2
After a brief overview of the environmental, social and economic contexts in
which Eskom operates, Sects. 18.3 and 18.4 analyse in detail the main content
elements and guiding principles of the 2011–2012 IR in light of the guidelines
provided by the CD. The aim is to explore whether, and how, these guidelines can
be applied and eventually adapted to the specific context of a public electric power
company.

Company Profile) and paragraphs related to the description of the Guiding Principles of the IR of
Eskom (Sects. 18.4, 18.4.1–18.4.6) can be assigned to Francesca Ceccacci.
2
The 2011–2012 Integrated Report of Eskom analysed in this chapter is publicly available on the
company website: http://financialresults.co.za/2012/eskom_ar2012/integrated-report/index.php
18 The Case of Eskom 299

18.2 The Case of Eskom: Company Profile

Eskom was established in 1923 and is currently the main electricity supplier in
South Africa. Wholly owned by the South African government since 2002, Eskom
generates and transmits electricity to various customer companies, which in turn
redistribute electricity to businesses and households. Eskom generates and
transmits electricity to about 3,000 industrial customers, 1,000 mining customers,
50,000 commercial customers and 84,000 agricultural customers.3
Being a South African public company, Eskom must comply with the
regulations issued by the National Energy Regulation of South Africa (NERSA)
and the National Nuclear Regulator. Eskom also operates under the jurisdiction of
the Department of Environmental Affairs, provincial and local governments, which
take care of the South African public and environmental interests.4 Furthermore,
Eskom is subject to the NERSA electricity tariffs plan and to the Government’s
Integrated Resource Plan 2010. The latter established the future electricity genera-
tion priorities in South Africa.5
Over the last few years Eskom has reorganized the functional structure of its
businesses, identifying three main functional divisions (Fig. 18.1—see Eskom
2012, pp. 24):
• Line functions that run the business and the value creation process (Generation,
Transmission, Distribution, and Group Customer services).
• Service functions which manage Eskom’s assets and optimise value chain
activities (Human Resources, Technology and Commercial, Finance and
Group Capital).
• Strategic functions that provide broader strategic support to the group (Enter-
prise Development and Sustainability).
The head office of Eskom is in Johannesburg and operates through its brand
offices located all over South Africa. In December 2008, Eskom established an
office in London to control the quality of the equipment manufactured for the
“Capital Expansion Program”6 . Even though a large part of the business activities
are performed in South Africa, Eskom has invested beyond South African
boundaries (within the so called Southern African Development Communities),

3
Ranked among the top twenty utilities in the world by generation capacity, Eskom generates
enough electricity to provide 95 % of the electricity requirements in South Africa and 45 % of the
overall electricity consumption in Africa. Eskom sells electricity directly to approximately
138,000 business customers and supplies electricity to 4.7 million residential customers, equal
to 40 % of all residential customers (including prepaid customers) in the country. http://www.
eskom.co.za/c/article/223/company-information/
4
http://www.globalelectricity.org/en/index.jsp?p¼256
5
http://www.globalelectricity.org/en/index.jsp?p¼256
6
By 2018, Eskom’s Capital Expansion Program aims to increase electricity demand and diversify
Eskom’s energy sources. Through the exploitation of new power plants, Eskom is planning to
increase its generation capacity by 17,120 MW and its transmission lines by 4,700 km. See http://
www.eskom.co.za/c/article/223/company-information/
300 F. Granà and F. Ceccacci

Chief Execuve Office of the chief execuve

Group Technology Finance and

Human Enterprise
Generaon Transmission Distribuon Customer and Group Sustainability
Resources Development
Services Commercial Capital

Line Funcons Service Funcons Strategic Funcons

Fig. 18.1 Eskom’s line, service and strategic functions (Source: adapted from Eskom 2012,
pp. 24)

building additional power stations and power lines to meet the increased demand
for electricity and to diversify the energy sources of the company.7 Among the
different Eskom subsidiaries it is worthwhile to acknowledge the following:
• the Eskom Enterprises group which provides support for the capital expansion
programme for all Eskom Holding SOC Limited divisions;
• Escap SOC Limited which manages and insures Eskom’s business risk;
• Eskom Finance Company SOC Limited grants home loans to Eskom employees;
• The Eskom Development Foundation NPC, a non-profit company that manages
Eskom’s corporate social investment.
Following the prescriptions of GRI and King III, Eskom published its first IR in
2012 (Eskom 2012). The following two sections (3–4) analyse the structures of
Eskom’s IR in 2011–2012 in light of the content elements and guiding principles of
the CD.

18.3 Eskom’s IR in 2011–2012: Content Elements Analysis

Recently, the reporting system of Eskom combined sustainability and financial

information in the attempt to meet the information needs of a wide number of
stakeholders. Being a member of the IIRC pilot programme (Eskom 2012, pp. 9)
and publishing its first IR for 2011–2012 (from April 2011 to March 2012), Eskom
adopted the main guiding principles and content elements described in the IIRC
2011 discussion paper. Moreover, Eskom formed an “Integrated Reporting Steering
Committee” which is responsible for removing barriers to inter-departmental col-
laboration and for ensuring coherence in the IR system (Eskom 2012, pp. 8). In line
with the IIRC content elements, Eskom’s 2011–2012 IR is divided into the follow-
ing nine sections:
1. “Leadership Overview” describes the top management view of the environment
in which Eskom operates, the achievements for the year and the strategic
objectives;

7
http://www.eskom.co.za/c/article/223/company-information/
18 The Case of Eskom 301

2. “About the company” illustrates the nature of the company’s business and legal
structure, strategic objectives and values;
3. “Corporate Governance” describes the composition of the board and the execu-
tive management committees, and specifies the board of directors’ responsi-
bilities and remuneration policies;
4. “Operating Context” details the principal material issues, opportunities and risks
encountered throughout the year;
5. “Value Chain Performance” describes the value creation process and the main
results achieved, as well as the impact of material issues;
6. “Service and Strategic Functions” provides information about the management
and the monitoring of financial performance, safety, quality management, skills,
transformation and employment equity, regulation and legal, supplier development
and localisation, group IT, delivery unit, research and technology, environ-
mental management, climate change and corporate social investment;
7. “Financial Performance” summarises the financial results of Eskom for
2011–2012;
8. “Future outlook” describes the future strategic priorities of Eskom over the next
5 years;
9. “Appendices” shows charts of the key non-financial indicators for each material
issue described throughout the report, and the stakeholders’ engagement matrix.
Furthermore, information about the sustainability responsiveness of the com-
pany is provided.
Subsequently, we analyse the sections mentioned above in light of the content
elements proposed by the CD (i.e. organizational overview and external environ-
ment, governance, opportunities and risks, strategy and resource allocation, busi-
ness model, performance and future outlook).

18.3.1 Organizational Overview and External Environment

In line with the CD, Eskom’s IR gives a brief overview of the mission and vision of
the company, as well as of the external environment in which it operates. Particu-
larly, the IR provides an analysis of the most relevant issues determined in accor-
dance with company stakeholders’ requests, including the company’s core
objectives and strategic activities at the base of the value creation process of the
firm (Eskom 2012, pp. 8–9).8
Before describing the organizational context in which the company operates, the
introductory section of the IR introduces Eskom’s value chain activities and
discloses the performance achieved during the year in terms of volume of electricity

8
Because of the public nature of the company, Eskom’s IR speaks to a wide range of stakeholders,
which include employees and unions; the government and parliament; lenders, analysts and
investors; customers and regulators; industry experts, academics and the media; business groups,
civil society and non-governmental organizations (NGOs); and suppliers and contractors (Eskom
2012, pp. 10).
302 F. Granà and F. Ceccacci

generated (GW/h). To make the report easier to read, the introductory section of the
IR shows a navigation panel in which icons are used to indicate the material
issues—the most relevant issues relating to stakeholders—(Eskom 2012, table of
contents).
In addition to the information provided in the introductory section of the report, a
large part of the information relating to the culture, competitive landscape and
external environment of the company is briefly introduced in the “letter from the
Chairman” and in the “report of the CEO” (the leadership overview section). In the
“letter from the Chairman”, Zola Tsotsi, (Eskom’s Chairman) has acknowledged
that, being a state owned company, Eskom cannot merely rely on commercial
objectives and needs to take care of the “overall value added to the lives of the
public” (Eskom 2012, pp. 12). From this point of view, Eskom’s main goal is to
“provide sustainable electricity solutions to stimulate the economy and improve the
quality of life of the people of South Africa and of the foreign regions” (Eskom
2012, pp. 12).
In particular, the “report of the CEO”, describes the financial, sustainable, social
and human capital investments made from 2011 to 2012 and introduces the main
operational challenges for the company in the short, medium and long term. In this
context, the social and environmental investments made in promoting the
government’s “New Growth Path”9 are highlighted, together with the strategies
for improving the company’s competitive advantage and increasing the efficiency
of human and operational skills (Eskom 2012, pp. 17). Similar to the “letter from
the Chairman”, the “report of the CEO” gives information about organization’s
strategic activities in 2011–2012 and also the 2012–2013 strategic priorities.
Finally, the section “About the company” completes the overview of the com-
pany and of its external environment by describing the company’s divisional
structure, culture, ethics, values and strategic objectives.

18.3.2 Governance

Within Eskom IR, an ad hoc section (titled “Corporate Governance”) is devoted to

the description of the content element “Governance”. Based on the concept of
“Effective Ethical Leadership” (Eskom 2012, pp. 28), the corporate governance
section of the IR provides an insight into the responsibilities and actions taken by
the company’s board of directors to monitor its strategic direction, governance and
sustainability. After a description of the appointed committees (Executive

9
In 2010 the South African Government released the Framework of the New Economic Growth
Path with the aim of enhancing growth, employment creation and equity (http://www.info.gov.za/
aboutgovt/programmes/new-growth-path/).
Eskom contributes to this by supplying reliable, sustainable and cost effective energy to fuel
South Africa’s power-intensive core industries (Eskom 2012, pp. 54,)
18 The Case of Eskom 303

management committee, Audit and risk committee, Investment and finance com-
mittee, Tender committee, Social ethics and sustainability committee and People
and governance committee), the IR gives concise information about the board’s
responsibilities to comply with government regulations, manage the risks that could
hinder the company’s assets integrity, promote innovation and guide the value
creation process (Eskom 2012, pp. 30–33).
In accordance with section 4B/4.11 of the Governance content element of the
CD, Eskom’s IR gives information about the relationship with the South African
Government (Eskom’s sole shareholder) and how it influences the strategic orien-
tation of the company. Every year, Eskom and the Minister of Public Enterprises
(Government Representative) meet together in order to establish the performances
and targets to achieve in accordance with the Public Finance Management Act of
South Africa10 (Eskom 2012, pp. 35). Furthermore, the IR describes Eskom’s
compliance with local and international regulations.
Taking into account point 4B of the CD, Eskom’s IR discloses quantitative and
qualitative information about the remuneration policies of the company (IIRC
2013, pp. 25; Eskom 2012, pp. 38–40). Remuneration policies of Eskom aim at
attracting and retaining skilled and high-performing employees. To be able to
engage the most qualified workforce, Eskom has established a series of remunera-
tion principles by which the company strives to:
• keep its market position stable;
• provide market related remuneration structures;
• maintain external competitiveness to attract and retain key skills;
• follow the lead-lag market approach;
• ensure internal equity through defensible differentials in pay and benefits;
• remunerate employees in accordance with their employment level.
Further detailed information is also provided about the non-executive, executive,
management and employee total remuneration for 2011 (Eskom 2012, pp. 40).

18.3.3 Strategy and Resource Allocation, the Opportunities

and Risks

In the “Operating Context” section of the IR, Eskom provides detailed information
about the strategic objectives of the firm, agreed on in September 2011, highlighting
the resource allocation plans and the main risks encountered. In line with the
content elements “Strategy and resource allocation” and “Opportunities and
risks” outlined in the CD (IIRC 2013, pp. 26), the “Operating Context” section of
Eskom’s IR illustrates the material issues and risks that in the view of the top
management and stakeholders of Eskom “can potentially affect the company’s

10
The Public Finance Management Act (PFMA) is one of the most relevant legislations in South
Africa and encourages good financial management to maximize service delivery, efficiently and
effectively exploit the limited resources employed. http://www.treasury.gov.za/legislation/PFMA/
304 F. Granà and F. Ceccacci

achievement of its strategic objectives” (Eskom 2012, pp. 42). A table on page 42 of
Eskom’s IR links “the strategic objectives of the firm and the issues considered
material to the value chain, key performance indicators and the company’s stake-
holder engagement” (Eskom 2012, pp. 42).
The eight “material issues” relevant to the company’s value creation, correspond
to the strategic objectives that the company aims to pursue. The following three
main “material issues” are at the base of value creation in Eskom and for this reason
are called “building blocks” (Eskom 2012, pp. 26):
1. set up the company for success;
2. ensure the company’s financial sustainability;
3. become a high performance utility.
Directly linked to the “building blocks” listed above, the other five material
issues are as follows:
1. leading and partnering to keep the lights on;
2. reducing the company’s carbon footprint and pursuing low-carbon growth
opportunities;
3. securing future resource requirements, mandates and the required enabling
environment;
4. implementing coal haulage and the road-to-rail migration plan;
5. pursuing private sector participation.
In the “About the company” section, Eskom’s IR illustrates the company’s
purpose, values and material issues through the picture of a Greek temple façade.
The top of the temple (the pediment) represents the purpose of the firm and the
columns represent the material issues. These issues are built upon the three building
blocks and the company’s culture and values, which are represented by the base of
the temple (Fig. 18.2).
“ZIICSE”—Zero Harm, Integrity, Innovation, Sinobuntu (i.e. caring), Customer
satisfaction, Excellence—is the acronym used to describe the most relevant values
for top management, which support the key strategic initiatives (i.e. to provide safe
and innovative electricity solutions, to maintain the integrity of the electricity
infrastructures and to improve the quality of the services delivered in the socio-
economic environment in which Eskom operates).
In line with the request of section 4D/4.20 of the CD to disclose how strategies
“are influenced by/respond to the external environment” (IIRC 2013, pp. 26), the
“Value Chain Performance” section of Eskom’s IR describes the performance
achieved throughout the generation, transmission and distribution of electricity in
South Africa and highlights its impact on the environment and the social commu-
nity in which the company operates.
In line with the “Opportunities and risks” content element of the CD, the
“Operating Context” section of the IR highlights the likelihood of opportunities
and risks for each material issue. After having explained the main causes of risk, the
IR describes the actions taken to minimise and mitigate them (e.g. “A project to
coordinate a comprehensive, synchronised maintenance and refurbishment plan is
under way. . . to improve plant and grid efficiency while reducing the possibility of
plant failure”) (Eskom 2012, pp. 48). In compliance with the global and South
18 The Case of Eskom 305

Our Purpose:
To provide sustainable electricity
soluons to grow the economy and
improve the quality of life of people in
South Africa and in the region
Accomplish
Escom’s purpose

3. Securing
2. Reducing
future 4.
1. Leading our carbon
resource Implemenng
and footprint and 5. Pursuing
requirements, coal haulage
partnering pursuing private sector Execute
mandate and and the
to keep the low-carbon parcipaon strategic pillars
the required road-to-rail
lights on growth
enabling migraon plan
opportunies
environment

2nd building block:

1st building block: 3rd building block:
Ensuring our
Seng ourselves up Becoming a high- Get
financial
for success performance ulity foundaon right,
sustainability
build
capacity

ZIISCE: Zero Harm, Integrity, Innovaon, Sinobuntu, Customer

Sasfacon, Excellence

Foundaon: a focus on long-term naon building, electricity for all,

new growth path iniaves, and balance the triple boom line elements:
commercial, environmental and socioeconomic roles

Fig. 18.2 Eskom’s purpose, strategic objectives and values (Source: adapted from Eskom 2012,
pp. 26)

African best governance practices, Eskom’s IR highlights the importance of

providing adequate and timely plant maintenance controls in order to reduce safety
risks. In this context, considering for example nuclear electricity generation, Eskom
adopts the following three-tier system of nuclear safety governance (Eskom 2012,
pp. 34):
• top tier: social, ethics and sustainability committee;
• middle tier: nuclear management sub-tier, which gives recommendations on
nuclear policies, standards and benchmarks;
• safety review committees, which evaluate the nuclear safety issues with the help
of company experts.
306 F. Granà and F. Ceccacci

18.3.4 Business Model

Eskom’s IR does not reserve a specific section to the description of the company’s
business model, but focuses on the value chain activities in the section “Value
Chain Performance”. The main activities described in this section as follows
(Eskom 2012, pp. 58):
• construction (managed by the service functions);
• primary energy consumption (managed by the service functions);
• generating electricity;
• transmitting and distributing;
• customer service;
• service and strategic function key issues (health, safety, environmental and
quality issues are addressed in this section);
• financial performance.
The section “Value Chain Performance” accurately describes each activity of the
value chain, identifying the company’s key resources employed, the outputs pro-
duced and outcomes achieved (operational highlights), the most significant
challenges and opportunities for each activity (operational challenges), and the
company’s future focus (future focus areas). In line with section 4E/4.22 of the CD,
Eskom’s IR gives high attention to the internal and external key outcomes of the
value chain activities of the company.
The “Value Chain Performance” also provides information about costs and
revenues from the transmission, distribution and sale of electricity from 2010.
Further non-financial data are also provided about the company’s infrastructure
and technical performance, comparing the actual achievements to the targets
budgeted for 2012 and to the results of the previous year.

18.3.5 Performance

In line with the “Performance” content element (section 4F) of the CD, IR discloses
financial and non-financial indicators to provide information on how positive and
negative performances impact on the value creation activities of the firm (IIRC
2013, pp. 28). Particularly, the “Value Chain Performance” section combines
financial and non-financial indicators on the basis of the value chain activities
performed and the main future opportunities for the company. In this context
financial and non-financial information is provided through three different charts
(Eskom 2012, pp. 59–61):
• The capital expenditures chart, describing the capital expenditures per value
chain division (Construction, Generation, Transmission and Distribution)
excluding capitalised borrowing costs (Eskom 2012, pp. 59).
• The capital expansion projects progress, explaining the resources employed in
each of the South African region in which the company operates (Eskom 2012,
pp. 60).
18 The Case of Eskom 307

• The projected power station completion schedule, illustrating the timeline of the
project accomplished on the basis of the regions and the source of energy
exploited (Eskom 2012, pp. 61).
In compliance with the requests of the Minister of Public Enterprise, Eskom’s IR
also provides a table of the yearly performance objectives, measures and indicators
agreed with South African Government (Eskom 2012, pp. 36). To clearly illustrate
and recap the most relevant non-financial KPIs, Appendix A shows a table of the
KPIs listed according to each material issue described throughout the report. The
appendix shows a concise analysis of results of the past 5 years and reports the
targets to be achieved by the end of the 6-year corporate strategic plan (2016–2017)
(Eskom 2012, pp. 144–151).
Also, the “Financial Performance” section of the IR briefly summarizes the
company’s financial situation giving information about sales and revenues for the
year, operating costs and the Group’s cash-flow statements (Eskom 2012, pp. 100).

18.3.6 Future Outlook

Eskom’s IR also describes the company’s future priorities by presenting a chart of

the future orientation approved by the top management and the company’s
stakeholders. In the section “Financial Outlook”, a five-year plan shows the
objectives to be achieved by 2016–2017. The main strategic objectives are classi-
fied according to the capitals involved in the company value chain (Fig. 18.3).
Based on the 2011–2012 material issues described throughout the report,
Eskom’s IR also identifies five main material issues to be accomplished for the
year 2012–2013 (Eskom 2012, pp. 142), as follows:
1. ensure that employees have a safe working environment;
2. ensure a constant power supply by cutting down on unplanned closures of power
stations;
3. ensure financial sustainability;
4. deliver high quality capacity expansion programmes;
5. foster the firm’s innovation process to achieve operational excellence.
The five year plan shows the strategic orientation of Eskom, which focuses on
fostering intellectual and human resource skills, socio-economic performance and
environmental sustainability of the operations through the value creation processes.
After having described the most relevant content elements within the 2011–2012
Eskom’s IR, next we analyse the report in light of the CD’s guiding principles.

18.4 Analysis of the Guiding Principles in Eskom’s IR

As discussed in the previous sections, the CD proposes a series of guiding principles

necessary for the organization of the content elements and the information
disclosed within an IR.
308 F. Granà and F. Ceccacci

Top 5 performing ulity

Towards a vision

Accelerate electrificaon

Opportunies to grow
Engage in the region
the organisaon
Pursue low -carbon growth
(IRP allocaon)

Five-year priories Reduce environmental

footprint in exisng fleet
Ensure financial
Maximise socioeconomic sustainability
contribuon
Fix performance

Deliver capacity Be a catalyst for

expansion private
sector parcipaon
Improve operaons
Secure resources,
implement coal
Build strong skills haulage and the road-
to-rail migraon plan

Keep the lights on Ensure internal

company
transformaon
Focus on safety

Focus areas for

Manage fire -fighng 2012/13

Fig. 18.3 Eskom’s future outlook (Source: adapted from Eskom 2012, pp. 141)

18.4.1 Connectivity of Information

In line with the connectivity of information principles of the CD, Eskom’s IR

provides an overall understanding of the content elements and of their intercon-
nections throughout the value creation process of the firm (IIRC 2013, pp. 18). The
connectivity of the information is continuous, linking together qualitative and
quantitative information and highlighting the interactions between the different
capitals involved in the value creation process. This interaction is supported by a
navigation panel, presented on the contents page of the IR, which illustrates the
icons used throughout the report and symbolizes each of the material issues
discussed. Furthermore, the navigation panel links the data contained in the various
sections of the IR, facilitating understanding, conciseness and reliability of the
information provided.
According to section 3B/3.11 of the connectivity principle, the “Value Chain
Performance” section of the IR illustrates financial and non-financial indicators
integrating them with the description of the most relevant activities in the value
chain and giving a comprehensive picture of company’s value creation over time.
Furthermore, on the basis of the connectivity principle of the CD (Section 3B/3.10),
the section “Value Chain Performance” combines data of past (operational
18 The Case of Eskom 309

highlights), present (operational opportunities) and future (future focus areas)

activities for each part of the company’s value chain. This structure facilitates IR
users in understanding the performance achieved in the past and during the year,
having an accurate picture of the company’s future actions for each value chain
activity (Eskom 2012, pp. 58–83).

18.4.2 Stakeholder Responsiveness

The IR highlights the need to build “extensive, on-going stakeholder” relationships

(Stakeholder responsiveness principle) with a wide range of stakeholders (Eskom
2012, pp. 16). Owned by the South African government, Eskom maintains regular
contact with government departments (including the Department of Public
Enterprises, the Department of Energy, the Department of Water Affairs and the
National Treasury) local governments and trade unions (Eskom 2012, pp. 16).
The stakeholders’ engagement in the IR is crucial for determining which issues
are considered “material” for the top management of Eskom and its stakeholders. In
line with section 3C/3.18 of the CD (IIRC 2013, pp. 20), Appendix B of the IR gives
information about the material issues discussed with the company’s stakeholders
(Eskom 2012, pp. 152).

18.4.3 Materiality and Conciseness

Eskom’s IR gives great attention to the materiality and conciseness of information

disclosed, dedicating a specific section (Operating Context) to the description of
material issues. Throughout Eskom’s IR, qualitative and quantitative issues relating
to business operations and strategic objectives of the company are linked together to
enhance the comparability and the conciseness of the information provided.
Also, the section “Value Chain Performance” summarises the past activities
(operational highlights), present (operational opportunities) and future actions
(future focus areas) indicated in a bullet point list. The bullet points facilitate the
reader in understanding and visualizing the most relevant information about the
outcomes achieved throughout the year, the resources employed and the future
expectations of the company (Eskom 2012, pp. 58–83). The conciseness of the
report is also highlighted by the continuous reference to information available on
the company’s website.

18.4.4 Reliability and Completeness

In line with the guiding principle of completeness of the CD (section 3E), the
“Value Chain Performance” section of Eskom’s IR provides positive and negative
information about company’s activities. For example, the IR gives detailed
310 F. Granà and F. Ceccacci

information about the employees’ mortality rate and about the actions taken to
reduce the possibility for further accidents to occur (Zero Harm value).
The idea of reliability of information is enhanced by the external independent
assurance statements reported in the Appendices, as well as by the stakeholders’
engagement matrix which shows the level of involvement of stakeholders in the
preparation of the IR.

18.4.5 Consistency and Comparability

The consistency and comparability of the information provided is one of the

guiding principles of the report, which links indicators of different natures (finan-
cial and non-financial) and compares the results achieved throughout the years. The
“Financial Performance” section of the IR reports the key figures of the firm’s
balance sheet, income statement and cash-flow statement, comparing results with
the previous year’s achievements. The consistency of the non-financial data
provided in the IR is visible in Appendix A, which compares non-financial KPIs
of the past 5 years (Eskom 2012, pp. 144–151).
The comparability of the information is notable in the sections “Value Chain
Performance” and “Service and Strategic Functions”, which analyse financial and
non-financial indicators in the form of ratios over the years. The comparability
principle proposed in the CD is also visible in the description of the construction
activity of the Eskom’s value chain, in which a chart compares the power stations’
performance throughout the regions of South African.

18.4.6 Strategic Focus and Future Orientation

Eskom’s IR discloses significant strategic information, illustrating in detail the

opportunities and risks of each strategic objective (Eskom 2012, pp. 42–56). The
“Value Chain Performance” section gives information about the availability and
quality of the capitals employed, presenting the results achieved during the year
2011–2012.
Furthermore, considering point 3A/3.4 of the CD, the section “Future Priorities”
of Eskom’s IR provides information about the firm’s future orientation, unveiling
Eskom’s strategic priorities that are to be achieved by 2016 and describes the
activities and the capitals involved for achieving strategic objectives (2012–2013).

Discussion and Conclusions

This chapter analyses Eskom’s IR in light of the content elements and the
guiding principles suggested in the 2013 CD of the IIRC. It is interesting to
note that Eskom’s IR gives particular attention to the description of the
organization’s material issues and strategic objectives, which are annually
decided in accordance with the principal stakeholders of the company. Eskom’s
past and present performance and future strategic priorities are continuously
18 The Case of Eskom 311

described throughout the report, highlighting positive and negative information.

The use of the interlinking navigation panel contributes to connect data and to
transform the IR into a fluent narration of the most relevant elements that have
affected the company’s value creation process. This process is explained, dis-
closing financial and non-financial KPIs and comparing them with the previous
year’s achievements. Qualitative and quantitative information are both
illustrated, tracing the storyline of the firm’s value creation.
Furthermore, the IR clearly shows the values and culture (ZIICSE) which
inform the strategic orientation of the company. In the achievement of the
strategic purpose, the values underpin the material issues which are relevant
“to provide sustainable electricity solutions to stimulate the economy and
improve the quality of life of people in South Africa and in the region”
(Eskom 2012, pp. 16).

References
Abeysekera I (2013) A template for integrated reporting. J Intellect Capital 14(2):227–245
Eskom (2012) Shift performance, grow sustainably: integrated report. Available at http://
financialresults.co.za/2012/eskom_ar2012/integrated-report/index.php. Accessed 27 June 2013
Institute of Directors Southern Africa (2009) King code of governance for South Africa. Available:
http://www.ecgi.org/codes/code.php?code_id¼262. Accessed 10 July 2013
IIRC (2011) Towards integrated reporting – communicating value in the 21st century, discussion
paper. New York: IIRC. Available at http://theiirc.org/wp-content/uploads/2011/09/IR-Discus
sion-Paper-2011_spreads.pdf. Accessed 12 June 2013.
IIRC (2013) Consultation draft of the international <IR> framework. Available: http://www.
theiirc.org/wp-content/uploads/Consultation-Draft/Consultation-Draft-of-the-
InternationalIRFramework.pdf. Accessed 12 June 2013
KPMG (2009) Corporate governance & King 3. Available at http://www.kpmg.com/ZA/en/
IssuesAndInsights/ArticlesPublications/Tax-and-Legal-Publications/Documents/Corporate%
20Governance%20and%20King%203.pdf. Accessed 23 June 2013
KPMG (2012) Integrated reporting: performance inside through better business reporting. Issue 2.
http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/integrated-
reporting/Documents/integrated-reporting-issue-2.pdf. Accessed 23 June 2013
Piermattei L, Ventoruzzo F (2011) Dall’Integrated reporting all’Integrated management. Harv Bus
Rev 11:62–66
The Case of HERA
19
Pasquale Ruggiero and Patrizio Monfardini

Abstract
In the raising complexity of the environment within which companies have to
currently operate, the drawing up of integrated reporting seems to be one of
the most challenging and demanding tasks for any company, which have to
deal both with an increasing number of powerful stakeholders and provide its
managers with increasingly complex and useful information. The present chapter
analyses the approach and the experience of the HERA Group. We will outline the
business features, its evolution since operations began and the similarities and
differences of the HERA Sustainability Report with the Integrated Reporting
framework. This case study is an important and informative example of how
integrated reporting is a useful tool for governing particular kind of firm such as
HERA. It is owned by both private investors and public administrations whilst
operating in the public services sector.

P. Ruggiero (*)
Brighton Business School, University of Brighton,
Brighton, UK
Department of Business and Law, University of Siena, Siena, Italy
e-mail: p.ruggiero@brighton.ac.uk; ruggiero@unisi.it
P. Monfardini
Department of Economic and Business Sciences, University of Cagliari, Cagliari, Italy
e-mail: monfardini@unica.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_19, 313

# Springer International Publishing Switzerland 2013
314 P. Ruggiero and P. Monfardini

19.1 Introduction1

“Today, there are growing expectations that businesses do more than simply turn a
profit. They must operate (and be perceived to operate) in a manner that is responsible,
ethical and sustainable, that minimises negative impacts on the environment, that takes
into consideration the varied needs of a spectrum of stakeholders, and that positively
contributes to the communities in which they operate and the planet generally”. These
words have been used by Brendan Sheridan (2012: p. 1), Director of the Financial
Reporting Technical Services in Deloitte, to define the growing complexity that
organisations have to face when they operate. In the accounting and management
field, integrated reports are increasingly considered as one of the most important
instruments through which the aforesaid objective can be accomplished. All the
information contained in an integrated report can be useful within the organisation
for managerial purposes at the different organisational levels as well as outside the
organisation for various key stakeholders. For decision-making purposes, it seems
important to provide managers with tools that enable them to see the whole simplified
“picture” of all the different results an organisation is achieving. Similarly, any external
stakeholder needs to know the overall results of the organisation in order to better invest
resources and to be able to assess organisational performance (Monfardini et al. 2013).
Looking at the flow of information, Schaltegger and Wagner (2006) have classified
organisations’ performance management, measurement and reporting systems as
‘outside-inward’ and/or ‘inside-outward’ driven. The former are based on issues
stemming from the public debate and define measurement and management activities
on these issues; the latter starts from the business strategy and the analysis of the
relevant issues for the effective implementation of the strategy. According to this
classification, it seems possible to clearly define a boundary between an organisation
and the environment within which it operates and by which is influenced. Furthermore,
both the aforesaid approaches seems to assign to performance management, measure-
ment and reporting systems a functionalistic role aiming at representing the reality
outside or inside the organisation in order to carry out more efficient and effective
decision making. Despite these interpretations, the actual situation is much more
complex. A first problem is related to the nature of an organisation. Until a recent
past, an organisation has been considered the way through which people act together in
order to be able to produce goods and services at a lower cost level (Williamson 1985).
Differently nowadays, single organisations are no more considered as being able to
produce goods and services suitable to satisfy the increasing complexity of customers’
needs and demand. Organizations are called on to work in a more cooperative than
competitive way (Nahapiet and Ghoshal 1998). Both in the public and the private
sector, networks are considered the new organisational model suitable for
implementing more efficient and effective value production processes (Powell 1990).

1
The authors are very grateful to the HERA company, especially to Dott. Filippo Bocchi—
Director of the Corporate Social Responsibility Department—for the support provided during
the drawing up of the case study.
19 The Case of HERA 315

The growing number of interacting actors and the possible adoption of moral
hazard behaviours by them could increase the transaction costs instead of decreasing
them. In this context, accounting systems, especially management accounting ones,
are increasingly considered a tool able to foster and facilitate the relationships at the
inter-organisational level between two or more actors having a positive impact on
transaction costs (Barretta and Busco 2011; Mouritsen and Thrane 2006; Hakansson
and Lind 2004; Dekker 2004). Therefore, management accounting systems have to
play a multitude of roles in an ever increasingly complex situation. The boundaries
between an organisation and its environment of reference become difficult to be
defined. Relationships among actors are more and more different in nature and
variable in time (Birnberg 1998).
In the public sector the aforesaid environmental complexity is clearly highly
present. The increasing collaboration between private and public sector organi-
sations in producing and providing public services makes the environment highly
variable and unpredictable (Goldsmith and Eggers 2004). Many are the reasons of
such variability and unpredictability, as well as the difficulties in defining the
concept of value being produced (Moore 1995) and the potentially contrasting
interests of the different organisations involved in public services production and
provision processes (Barretta and Ruggiero 2008; Barretta et al. 2008). Furthermore,
organisations with a private legal status owned by public administrations and private
investors are in charge of producing and providing public services. In these kinds of
organisations, even two different value systems could clash within the same
organisational structure. In front of this complexity and of the different roles
management accounting systems are called to play in the aforesaid reality, many
scholars and professionals consider the integrated reporting as a new tool able to
cope with the potential problems that could derive from the increasing complexity
within which public organisation or public owned organisations have to live.
Because of all these features, the aims of this chapter are to present, analyse and
discuss the integrated reporting system that an Italian multi-utility has developed
along the last 11 years. To this end, in the next sections after a brief overview of the
company, the structure and the contents of the Sustainability Report are presented,
discussed and compared with the provisions contained in the Consultation Draft
(CD) of the international Integrated Reporting Framework (IR). Successively a
discussion of the case proposed and some final remarks are presented.

19.2 The Integrated Reporting System in HERA

19.2.1 The HERA Group: An Overview

Hera is one of the main multi-utility operating in Italy providing services to about
three million of customers dwelling in 240 municipalities located in ten Provinces
(Ancona, Bologna, Ferrara, Firenze, Forlı̀-Cesena, Modena, Ravenna, Rimini, Pesaro
and Urbino) in the Centre-North-East of the Italian peninsula. In particular, the HERA
group operates in different service sectors: energy, water and waste management.
316 P. Ruggiero and P. Monfardini

Fig. 19.1 HERA reference

territory. Source: HERA
business plan 2012–2016

The group was established at the end of 2002 through one of the most important
business combination operation ever realised within the Italian public utilities
sector. The business combination involved 11 local public service concerns. After
its establishment, the company was partly privatised by placing the 44.5 % of the
share capital on the Milan Stock Exchange. During the following years, the group
has continued to grow by incorporating other companies, operating in the energy,
water and waste management sectors, located in the territorial area where the group
provides the public services (Fig. 19.1).
Coherently with its strategic planning 2012–2016, in 2013 the HERA group has
concluded the incorporation of the AcegasAps Holding (the largest multi-utility in
North-Eastern Italy) becoming the second multi-utility in Italy. In 2012 the whole
group has 6,629 employees and it generates 4,223 of indirect employment.
The HERA organisational structure is different from other multi-utilities. The
HERA group is characterised by the existence of a financial holding at the top of the
organisational structure. This choice aims at achieving a more efficient and effective
business and operational integration. The Holding is structured in Central Divisions
to set-up, support and control the activities carried out by the different organisations
that are part of the group. The divisional structure should guarantee an integrated
group perspective and favours the exploitation of synergies. The holding also has
General Divisions which steer and coordinate the strategic areas of relevant
19 The Case of HERA 317

Table 19.1 HERA main financial results

Financial
data (mln €) 2002–2012 2012 2011 2010 2009 2008 2007 2006
Revenues +15.5 % 4,492.7 4,105.7 3,666.9 4,204.2 3,716.3 2,863.3 2,311.5
Ebitda +13.2 % 662.0 644.8 607.3 567.3 528.3 453.4 426.7
Ebit +15.8 % 335.4 334.5 315.4 291.3 280.7 220.6 231.3
Profit before +11.0 % 213.4 221.2 205.6 162.6 188.9 142.5 179.2
tax
Income +7.4 % (79.1) (94.5) (63.6) (77.6) (78.6) (32.6) (79.0)
taxes
Net profit +13.9 % 134.4 126.8 142.1 85.0 110.3 109.9 100.2
Minority +16.2 % 15.7 22.2 24.8 13.9 15.5 13.7 10.1
profit
Hera net +13.6 % 118.7 104.6 117.2 71.1 94.8 96.2 90.1
profit
Source: HERA website, accessed July 2013

businesses and also guarantee the operational management of the Group’s activities
through dedicated business lines. To this end within the Operations General Man-
agement area three divisions were established, each of them focused on one of the
HERA’s core activity sectors.
In addition, the Customer Technical Division has been established, aiming at
offering a unified view of the technical service provided to final customers. Finally,
because of the strong linkage of the group with the territories within which the
activities are carried out, seven local areas have been established to ensure the
strengthening and the development of relationships with local stakeholders.
Two committees have been set up for managerial purposes at the holding level:
• the Management Committee: responsible for analysing and sharing policies,
strategies and operational planning decisions, while fostering integration between
the various functions;
• the Steering Committee: responsible for monitoring the business performance
and the level of accomplishment of the different projects planned within the
Balanced Scorecard (BSC) system.
The group has shown an increasing positive trend in its economic and financial
results during the last years.
Since 2006, as a result of the strategy carried out the HERA’s revenues are almost
doubled. The Ebitda has raised by approximately 50 %, the Ebit has increased by
approximately 40 % and the net profit has increased by approximately 30 %.
Because of the results shown in the Table 19.1, the HERA group has also had a very
important performance on the Stock Exchange in 2012. Differently from the trend of
the utility sector companies showing a negative performance of approximately 10 %,
the HERA group has had a performance of approximately 12 %, exceeding the stock
market performance (8.4 %).
The HERA group is composed of various firms operating in different public service
sectors and it is owned by public administrations for the majority of the share capital
318 P. Ruggiero and P. Monfardini

Fig. 19.2 The Hera holding organizational structure. Source: HERA website (accessed July 2013)

(189 municipalities own the 61.8 % of the share capital, made up of 1,340,383,538
ordinary shares) but also by private investors who account for approximately 40 % of
the share capital. Because of the economic sector within which the group operates and
the structure of the ownership, the HERA’s top management have to meet the requests
coming from groups of interest characterised by different values and objectives. This
situation is complex not only for managerial work, but also for the definition of an
information system suitable to satisfy the various information needs of the different
actors involved in or affected by the HERA group activity.
Since its establishment in 2002, the HERA group decided to disclose more
information than those necessary to be complaint with the current legislation.
A report able to give more information than the financial-based ones was considered
the best way in order to produce more suitable information for the managerial
decision-making process, and also to better communicate with the different
stakeholders. As written in the 2010 Sustainability Report (p. 5), this report “is a
primary tool for reporting on its activities and results in the economic, environmental
and social fields, as well as a fundamental tool for providing information to and
dialoguing with stakeholders. [. . .] provides the principles which guide our actions,
the performance achieved, the objectives reached compared to stated and future
objectives, the results of our dialogue with stakeholders and projects in the field”.

19.2.2 The Organisational Aspects of the Sustainability Report

The production of the Sustainability Report has been so pervasive in HERA to

produce a deep impact on the organisation. In particular, the publication of the
19 The Case of HERA 319

Sustainability Report has had an impact on the organisational structure of the firm at
the holding level and in the producing and disclosing process of the information
contained in the report.
From the first point of view a specific organisational structure of the HERA
holding has been devoted to the drawing up and to the issuing of the Sustainability
Report. Only after 3 years from its establishment and the disclosing of two reports, in
May the CSR Organisational Unit was established in a staff position to the Chief
Executive Officer. From 2010 the Organisational Unit has been transformed in a
Department aiming to ensure that the social responsibility principles are an integral
part of corporate planning and management processes. Specifically, the CSR Depart-
ment is in charge of defining and proposing corporate guidelines concerning corpo-
rate social responsibility, reporting on sustainability, ensuring the continued
development of the integrated balanced scorecard system with sustainability
strategies, and proposing and managing the execution of social responsibility
projects. Since the end of 2010, the department has been structured in three different
units: the BSC System Management, Sustainability Reporting and CSR Projects.
From the procedural viewpoint, it is worthwhile to highlight that the Sustain-
ability Report is not the mere ex-post result of the combining process of all the
information collected by the organisational structure in charge of producing the
report. In HERA it seems more correct to speak of an integrating reporting process
than a mere document containing integrated information. As showed in the report
and on the company website, the Sustainability Report is the final result of a process
that starts from the stakeholders and finishes by providing them with the integrated
information. As written in the 2012 Sustainability Report (pp. 20–21), “the Mission
and Charter of Values expressed in the Code of Ethics dictate the guidelines for
corporate conduct and underlie each corporate action and relationship. A shared
Mission, Charter of Values and Conduct established in the Code of Ethics is the
strategic and cultural framework in which the Business Plan takes shape, results are
reported in a transparent way through the Sustainability Report, and economic
planning is carried out annually. The Balanced Scorecard system makes it possible
to differentiate the corporate strategy and social responsibility policies into specific
operational projects managed by managers and middle managers and periodically
monitored. These projects are an integral part of the management bonus system.
This virtuous cycle of social responsibility within Hera is characterized by numer-
ous initiatives of stakeholder involvement that allow for the examination of legiti-
mate claims and their opportune insertion as part of the corporate policies and the
relative implementation instruments” (Fig. 19.3).
In order to soundly integrate the financial and non-financial aspects related with
the implementation of the different projects and the company sustainability strategy,
some indicators relative to the sustainability strategy have been included in all the
different documents. These are part of the planning system such as the strategic plan,
the budget and the Balanced Scorecard and, at the same time, the same indicators are
included in the pay for performance system of the HERA’s managers. In particular,
the remuneration policy of the company is based on three main principles. According
to the first principle, managers’ remunerations are defined according to the level of
320 P. Ruggiero and P. Monfardini

Fig. 19.3 The strategy-

operation management cycle
in HERA. Source: HERA
sustainability report (2012:
p. 21)

remuneration in the external market, with the aim of ensuring that the company has a
comparable remuneration package, but always taking into consideration the objec-
tive of both retaining executives and keeping costs down. The second principle is to
ensure that the pay grade matches the difficulty of the job. The third principle is to
provide constant updates of job evaluation methods, with a view to ensuring uniform
and consistent salary analysis and comparisons. Specifically, the implementation of
these principles resulted in a series of concrete decisions being taken to:
• link the annual executives’ and managers’ bonus plan with the Balanced Score-
card system, being approved annually by a specific committee;
• limit the maximum bonus at a maximum 30 % of the gross fixed annual salary
for general managers and 48 % for executive directors;
• limit upside the difference between the maximum bonus and the performance-
related bonus at a maximum of 20 %.
Also a specific committee was established in order to apply and control the
implementation of the aforesaid principles and decisions: the Remuneration Com-
mittee. This committee is in charge of making proposals to the Board of Directors
regarding both the remunerations of the Chairman, the CEO, General managers and
the adoption of general criteria for determining fees for management (without
prejudice to the fact that the CEO is tasked with defining policies and levels for
remuneration of management).
To define and compute the remuneration of managers holding specific offices,
the committee has set a maximum limit in order to discourage the taking on of
burdensome commitments and to further strengthen the independence of the man-
agement. The committee is composed of four independent, non-executive
members, including one representing the minority shareholders.
Finally, the document has included the accounts of all the companies in the Hera
Group, consolidated using the line-by-line method in the Group’s consolidated
financial statement. A specific paragraph is dedicated to this issue in order to
show all the differences in the scope of the document compared with those of the
previous years.
19 The Case of HERA 321

19.2.3 The Content of the Sustainability Report

Even if the Sustainability Report is drawn up by 2002, this paragraph presents the
structure and the content of the Sustainability Report published for the 2012 financial
year. The 2012 report is the last published and its content is very similar to those
published in the previous years. At the beginning of the 2012 report there is an
additional section that shows the HERA’s results achieved during the last 10 years.
As stated by the CEO during the presentation of the report at the public meeting in
Modena on the 27 of June 2013, the inclusion of this additional section aims to give
stakeholders an overview of the projects and results carried out during that period.
Furthermore, this additional section aims at assuring the public administrations that
own the majority of the HERA share capital about the linkage of the group with the
territory that the public administrations are in charge of governing.
The rest of the document has a structure that is near similar from previous years.
This unchanged structure has not to be interpreted as a fault because it results from
the adoption of a specific standard of reference: the AA1000. The main aim of this
standard is to make any company transparent about the effects of its policies,
decisions, actions, products and performances by involving “stakeholders in
identifying, understanding and responding to sustainability issues and concerns,
and to report, explain and be answerable to stakeholders for decisions, actions and
performance” (Accountability UK 2008: p. 6). To reach these objectives, any
company has to define a strategy that is contemporarily based on a “comprehensive
and balanced understanding of and” able to “response to material issues and stake-
holder issues and concerns”; fix goals and standards suitable for evaluation purposes
to be compared with the strategy implemented; disclose reliable information to all
those subjects have based their activity on the aforesaid corporate strategy and
actions. According with this standard, all the information disclosed in the document
should respect three principles: inclusivity, materiality and responsiveness. The first
principle states “the participation of stakeholders in developing and achieving an
accountable and strategic response to sustainability” through “collaborating at all
levels, including governance, to achieve better outcomes”. The materiality principle
specifies that reporting information regards “issue that will influence the decisions,
actions and performance of an organization or its stakeholders”. The third principle
is relative to “how an organization demonstrates it responds to its stakeholders and is
accountable to them” (Accountability UK 2008: pp. 10–14).
Other standards have been used to draw up the 2012 Sustainability Report. The
standard G3.1 of the Global Reporting Initiative and the GBS Guidelines, have been
used to specifically define the content of the report. The first standard defines the
principle and the content a sustainability report should apply and disclose. The
principles of the GRI standard adopted are similar to those declared in the AA1000
(materiality, stakeholder inclusiveness, completeness, balance, etc.). In terms of the
content of the report, the GRI refers to issues more strictly related with the concept
of sustainability. According with the standard, “a sustainability report should
provide a balanced and reasonable representation of the sustainability performance
of a reporting organization—including both positive and negative contributions”
322 P. Ruggiero and P. Monfardini

(GRI 3.1, 2011: p. 3). To reach this objective, any sustainability report should give
information on an organisation’s economic, environmental, and social perfor-
mance. The GBS standard focuses on the principle for drawing up the social
balance sheet. In particular, after having defined an organisation’s identity and
mission and stakeholders, the standard stresses the necessity to disclose the value
added produced by the organisation and its distribution among the different
stakeholders. Compared to the other two, this standard is more accounting based
(Gruppo Bilancio Sociale 2013).
Coherently with the aforesaid standards, the HERA Sustainability Report is
structured in five sections. In summary, “the first two sections of the report provide
an account of how the company was created, its identity, mission, corporate
strategies, sustainability policies and the key indicators for assessing economic,
environmental and social sustainability. The third section describes the methods
applied for the dialogue with stakeholders. The fourth section highlights corporate
economic returns by means of the methodology based on value added allocated to
stakeholders proposed by the GBS. The next sections provide an account of the results
achieved for each class of stakeholder, given as performance ratings of a qualitative
and quantitative nature and related to the objectives set forth in the previous report
and achievement of these. In each section, the stakeholder listening, dialogue and
involvement initiatives are indicated” (HERA Sustainability Report 2012: p. 6).
After a brief presentation of the whole document and the principles and
guidelines adopted for drawing it up, in the first and second section of the document
the history of the company and its mission and values are depicted. Mission and
values are then made more practical by singling out some operational principles.
These principles are very important because they have been created with the
participation of the HERA group’s entire workforce, were approved by the Board
of Directors of HERA and are taken into consideration when the other document of
the planning and budgeting system are drawn up, i.e. Business Plan, Budget, BSC.
In particular, with reference to the last above mentioned document, a specific sub-
section is devoted to disclose the sustainability strategy of the company and its
operationalisation through the BSC (Fig. 19.4).
As stated in the HERA Sustainability Report, “each year, the strategic map,
updated based on the contents of the business plan, provides a summary of the
strategic objectives of the Group and its commitments to stakeholders set forth in
the Sustainability Report. To achieve the 29 strategic objectives for the purpose of
increasing the company’s long term value, 42 priority projects were selected during
the 2012 budgeting process. These were assigned to members of the Executive
Committee. Of these projects, four fell within the strategic macro-area of ‘Involve-
ment of personnel, professional development, dialogue with stakeholders,’ six
within the strategic macro-area of ‘Optimisation of organizational model and
software,’ five within ‘Commercial and tariff policy development’, six within
‘Improvement of quality, environmental impact and company image’, nine within
‘Development of plants, raw materials and complementary business activities,’ and,
lastly, 12 projects within ‘Efficiency and rationalization’” (HERA Sustainability
Report 2012: p. 16).
19 The Case of HERA 323

Fig. 19.4 Strategic map of the Hera Group 2013–2016. Source: HERA sustainability report (2012:
p. 21)

After having shown the strategy map of the whole company, a paragraph is
dedicated to specifically single out and discuss the strategic objectives that have the
greatest impact on sustainability. All the information provided in the first two
sections of the document result in a table containing the KPI from the economic,
social and environmental perspective. These indicators refer to a time span of
8 years in order to give the reader of the document more fruitful information
about the trend of those indicators and summarise their value at the end of the
reporting year.
The third section of the document describes the corporate governance system of
the company, highlighting the different boards and commissions operating within
the company and describing their members and responsibilities. A wider analysis is
dedicated to the company risk management system. In particular, the Quality, Safety
324 P. Ruggiero and P. Monfardini

Fig. 19.5 Example of HERA stakeholders and relative dialogue and consultation initiatives.
Source: HERA sustainability report (2012: p. 41)

and Environmental Management System and Major regulatory developments most

impacting sustainability and the businesses managed are presented.
The fourth section is entirely dedicated to single out who the company’s
stakeholders are and what the main issues each of them have. This initiative has
been carried out in order to create dialogue with stakeholders and consult them (see
Fig. 19.5).
In the next section of the report, accounting information is disclosed. The first
piece of information sets out the Consolidate Income Statement and the Balance
Sheet. In addition, information of interest for the territories of reference of the
company is showed. In particular, the following information is disclosed:
• operating investments (non-financial) per sector of activity;
• financial equity investments and acquisitions;
• environmental costs and investments.
In the last part of this section, the value added and its distribution among the
company’s stakeholders singled out previously are displayed. The information about
the value added and its distribution are important because “firstly it enables quantifi-
cation of the wealth generated by the company, and accounts for how this wealth was
generated and how it is allocated to stakeholders; it is therefore useful for compre-
hending the economic impacts the company produces. Secondly, through this report it
connects the Sustainability Report with the Financial Statements. In this sense,
production and allocation of value added provides an instrument by means of which
we can reconsider the corporate Financial Statements from the vantage point of
stakeholders” (HERA Sustainability Report 2012: p. 52).
19 The Case of HERA 325

Fig. 19.6 Distribution of value added to stakeholders. Source: HERA sustainability report (2012:
p. 41)

Finally, in this accounting based section some information about the distribution
of the value added to the stakeholders localised in the company’s territory of
reference are provided (Fig. 19.6).
The next seven sections provide information regarding the different stakeholders
singled out in section four. In particular, in the different sections the following
stakeholders are considered: the workforce, the customers, the shareholders, the
financial institutions, the public administrations, the local communities, the envi-
ronment and the future generations. For each typology of stakeholder are provided
information about the communication tools used and the activities carried out in
order to communicate with them. This information also outlines the effects on
stakeholders stemming from company strategies and activities. For example, in the
workforce section, information is provided on the turnover, the diversity and equal
opportunities, the training and professional development, the rewards and bonuses,
the health and safety, the industrial relations, the internal communication, the
recreational associations and the staff morale.
Information tailored on the typology of stakeholder is provided at the beginning
of all sections, except those dedicated to the financial institutions and the public
administrations. These sections are drawn up using a common content structure
consisting of information about the objectives and performance and the breakdown
of the stakeholders.
In order to be more informative about the group’s future activities and objectives
and to provide an evaluation on the activities carried out during the last financial
year a specific visual disclosure frame is adopted. In particular, a three cells table is
displayed, each cell respectively titled: “What we said we would do. . .”, “What we
have done. . .” and “We shall. . .”. The first cell shows the objectives of the company
defined in the previous financial year as objectives to be reached by the end of the
year which the report refers to. The second cell contains the description of all the
activities the company has carried out during the year to reach the aforesaid
objectives and the results achieved. In the third cell, information about the future
activities to be met in order to fill the gap between the objectives to be reached and
the performance obtained are displayed (Fig. 19.7).
In addition to all the information contained in the Sustainability Report, much more
information is provided through the company website. In particular, a specific web
address has been devoted to the presentation of the Sustainability Report. On the
326 P. Ruggiero and P. Monfardini

Fig. 19.7 Hera’s objectives and performance relative to local communities. Source: HERA
sustainability report (2012: p. 187)

website it is possible to find all the information contained in the printed version of the
document and links to the different sections of the company website, especially the
social responsibility, investor relations and the corporate governance sections. In these
sections of the company website, more detailed information about the different topics
showed in the report are provided. HERA’s efforts have been awarded as the best
company in Italy for online corporate social responsibility (CSR) communications
(see the websites http://www.gruppohera.it and bs.gruppohera.it—accessed on
July 2013).

19.3 Discussion

In this section an analysis and discussion of the HERA Sustainability Report is

proposed by comparing the document with the provisions contained in the IR,
especially those contained in the Sect. 19.4 (content elements) of the framework.
19 The Case of HERA 327

From a general point of view, the HERA Sustainability Report is very similar to
an integrated report. In fact, the HERA Sustainability Report outlines different
viewpoints (economic, social and environmental), the company’s strategy and
results. But because of the particularity of the economic sector where the company
operates in and the strong presence of public organisations as shareholders of its
share capital, the report is particularly focused on showing information about issues
that could affect or have already affected its stakeholders. This feature is not in
contrast with the provision contained in the IR. All the company’s stakeholders are
equally considered and accounted for whereas the IR states that “an integrated
report should be prepared primarily for provider of financial capital in order to
support their financial capital allocation assessments” (IICR 2013: p. 8). Because of
the aforesaid peculiarities, the accounting information showed in the report is
focused on the value added and its distribution among the stakeholders instead of
stressing the production of profit or the increase in the shares value. In general,
always because of the aforesaid peculiarities, the report is less concentrated on the
financial information and more on the quantitative but non-financial information
relative to the effects that the company activity produces on its stakeholders. These
are the reasons why the report has been nominated Sustainability Report and not
Integrated Report although it can be assimilated to an integrated report from many
points of view. Beside the report’s name, the importance in HERA in providing
integrated information is testified by the board of directors’ approval of the docu-
ment contemporaneously with the approval of the Financial Statements.
Moreover, the way through which the comparability principle is respected in
drawing up the report deserves to be highlighted. Even if along the years the
information contained in the report could refer to different and not fully comparable
issues, in the second section of the report, a table containing 28 consistent KPIs is
provided. This makes the report not only integrated as containing information about
different aspects, but also flexible and stable at the same time. In fact, these
consistent KPIs are: relative to the economic, social and environmental aspects of
the company activity; used as indicators also in the other documents of the planning
and control system; made more informative through the disclosure of all the
information contained in the other sections of the report.
Moving to the comparison of the fourth paragraph of the IR with the content of
the HERA’s report, it is possible to assess the wide compliance of the report with the
framework of reference. As provided by the framework, at the beginning of the
HERA’s report, the following information is provided: the organisation’s materiality
determination process, the governance body with oversight responsibility for the
reporting and the reporting boundary and how it has been determined. After this
information, coherently with the IR, an organisational overview and the governance
structure of the company are displayed. The information about the external environ-
ment is not displayed in a specific paragraph, but are disseminated along all the
sections dedicated to the different company stakeholders. In these sections, it is also
possible to find the information about many of the different capitals and the business
model the IR analytically refers to respectively in the sections 2B and 2C. Even if not
in a specific section of the document, the business model, especially its outputs and
328 P. Ruggiero and P. Monfardini

outcomes, is many times explicated because it has to be implemented in different

business sectors that are regulated by national and supra-national laws. A shortage in
the information provided on the business model is about the interconnections and
potential synergies stemming from the company operating in different public service
sectors. Similarly to the business model, the information about the different HERA’s
capitals are disclosed in the specific sections dedicated to each stakeholder. With
reference to the HERA’s capitals, an important aspect to highlight is internal
structure of the perspectives utilised in the BSC strategy map. As showed in the
Fig. 19.4, all the typologies of actions to be carried out in order to implement the
company strategy and reach the planned objectives have been classified in a way that
recall the different capitals the organisation has at disposal. For example, the action
named “infrastructure portfolio development” is related with the “Manufactured
capital”, the other action, “Improvement of image and continuous focus on reputa-
tion”, is related with the intellectual capital while the action “increase customer
satisfaction” is related with the social and relation capital. This structure of the BSC
strategy map could be a good starting point for a better and more structured
presentation of the information about the HERA’s capitals as required by the IR.
To be more compliant with the IR, two issues need to be better disclosed: the
opportunity and risks and the future outlook. With reference to the former, in the
HERA Sustainability Report, some information about the risks the company has to
face are disclosed. A section dedicated to the risks of the company is provided on
the company website but it should also be included in the HERA Sustainability
Report. The future outlook section is the one that needs more development. At the
moment, as declared during the meeting in Modena where the report was presented
to the public, this aspect of the document has not been fully developed mainly
because it is contained in the 5-year strategic planning document that is updated on
a rolling based procedure.
Finally, it is particularly interesting that the company website is used in order to
integrate and disclose complementary information to those contained in the report.
In order to make the consultation of the website easier, a specific web address has
been use in order to provide a web environment within which only the information
contained in the report are displayed and only the links to other specific information
are made available. In this way the company has been able to be selective in
providing information and to avoid to any potential web-reader of the report to
face the overload of information generates by the openness of the web technology.

19.4 Final Remarks

In the raising complexity of the environment within which companies have to operate
and the increasing typologies and amount of stakeholders involved by a company, the
drawing up of an integrated reporting is one of the most challenging and demanding
tasks for any company. Stakeholders need more and more information to make any
decision and companies are called to meet this information need. Drawing up an
integrated report pulls many problems to the surface. Some of these problems concern
19 The Case of HERA 329

the integration of the information contained in the integrated report with those
contained in the other documents used by a company as part of its planning and
control system and the consistency, materiality and completeness of the information
disclosed. These aspects are even more important in a company providing public
services in regulated sectors and owned by both public and private subjects.
The case presented in this chapter demonstrates the possibility to make convergent
all the potentially contrasting interests involved in a company as that analysed. An
integrated report could be a useful tool through which reach the aforesaid objective.
To this end some suggestions may be drawn from the HERA case-study:
• Insert some measures to be used also in the top management remuneration system
in order to create a strong involvement of the management in caring about the
aspects disclosed in the report. To this end is also important to use some of the
indicators contained in the integrated report in the other documents that are part of
the company’s planning and control system. This linkage among many
documents make the integrated report more a final result of a continuing process
than an assemblage of information at the end of the financial year (Durden 2008);
• Insert a set of information consistent along the years in order to make possible
comparisons without reducing the flexibility of the integrated report in giving
different information according with the contingency;
• Provide a strong top management support to the integrated reporting process. In
the case study presented in the chapter a specific department has been established
in the organisational structure of the parent organisation and the report is
approved by the board of directors together with the Financial Statements.
These are the main aspects that seem to have fostered the adoption and wide
spreading of the integrated report within and outside the company. Besides all this
aspects, it is necessary to remember that an integrated report, as any other accounting
document, cannot be considered as a simple tool that is unable to influence the
development of the reality within which a company operates. The information
provided by an integrated report and the structure of power stemming from its
existence impact the way through which a company and its stakeholders operate.
Therefore, in the future, researchers will certainly have to analyse the different roles
played by the integrated report(ing).

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The Case of the Auditor-General of
South Africa 20
Luca Bartocci and Francesca Picciaia

Abstract
Recent social, political and economic changes have led to an evolution of the
concept of public sector accountability. Greater awareness among citizens and the
demand for greater transparency among public officers have led to new forms of
reporting. Practices in use among private companies have been adapted to public
organizations, leading to the spread of social, environmental, sustainability,
intellectual capital reports, and more recently integrated reports. In this context,
whereas the Consultation Draft of the International Integrated Reporting Frame-
work (2013) was designed to provide guidelines on integrated reporting mainly to
for-profit enterprises, it is also extendable to the public sector. This chapter
examines the case of the Auditor-General of South Africa (AGSA), a public
institution which published its first integrated report in 2012. The aim is to explore
the integrated report of AGSA in light of the guiding principles and content
elements provided by the Consultation Draft.

20.1 Introduction

Over the past 20 years, social, political and economic changes have led to an
evolution of the concept of accountability in the public sector. Initially, this concept
was focused on managerial accountability, with a particular emphasis on results,
followed by a subsequent extension of the application of performance measures to
non-financial profiles (Parker and Gould 1999). At the same time, forms of direct
citizen involvement in decision-making and reporting were activated, fore-
shadowing a horizontal dimension of accountability (O’Donnell 1999). Greater
awareness among citizens, and the demand for greater transparency among public
officers led to new forms of reporting. Practices already in use in the private sector

L. Bartocci (*) • F. Picciaia

Faculty of Economics, University of Perugia, Perugia, Italy
e-mail: luca.bartocci@unipg.it; francesca.picciaia@unipg.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3_20, 331

# Springer International Publishing Switzerland 2013
332 L. Bartocci and F. Picciaia

were adapted, and this led to the spread of social, environmental, and intellectual
capital reports (int. al.: Ball and Grubnic 2007; Campedelli 2005).
A noteworthy contribution to the spread of new reporting practices was made by
the Global Reporting Initiative (GRI) which released a pilot version of a supple-
ment dedicated to public agencies in 2005 and published a document for govern-
ment agency reporting in 2010. The approach promoted by the GRI is a
development of the triple bottom line, an approach which supports the integration
of activities, results and effects, from an economic, social and environmental
perspective (Elkington 1997). The underlying idea is that global reporting should
be carried out with particular emphasis on sustainability, in terms of the balanced
use of available resources, compatible with the ability of future generations to meet
their own needs (Farneti and Guthrie 2009). In the public sector this approach is
based on three different levels of disclosure: organizational performance, public
policies and implementation measures, and context or state of the environment
(GRI 2010).
The spread of a plurality of reporting practices has the potential to create both
internal and external critical issues within the public sector. From an internal point
of view, the most critical element is the traditional “silo thinking”, in which various
activity profiles, and also individual reporting initiatives, are conceived separately,
and often managed by different administrators that do not interact. In terms of
external accountability, the proliferation of multiple reporting instruments, often
complex and difficult to read, is likely to further disenfranchise citizens that
lack specific technical expertise, and are not motivated to take a close interest in
such reports.
The proliferation of reporting procedures has also impacted the private sector, with
negative consequences for the accountability of companies and their relationship with
stakeholders. It is on this basis that the International Integrated Reporting Council
(IIRC) has, since 2011, promoted a process for the development of a Framework for
the preparation and presentation of integrated reports. The Consultation Draft on the
International Integrated Reporting Framework (CD) was published on April 15, 2013,
with 3 months set aside to solicit comments. The basic concept of this model, designed
for for-profit enterprises, but also expressly extendable to other sectors, is that
stakeholders need to have access to information on the value-generating factors. In
this sense six capitals are identified, which constitute instruments for both the creation
and depositing of value (CD 2013, pp. 11–14). The total value created or destroyed
over a period is provided by the sum of (positive or negative) changes for each capital
considered (CD 2013, p. 16). In this context, the business model assumes a central role,
in terms of the organization and management of inputs, activities, outputs, and results.
Another fundamental idea is the concept of integrated thinking, a global approach that
allows for the understanding and traceability of interactions between all factors and
processes of an organization, geared towards the creation of value (CD 2013, p. 9).
The CD provides a series of guiding principles, identifies relevant contents, and sets
out certain requirements concerning the preparation and presentation of integrated
reports. Not all capitals need to be represented, and adaptations and modifications
20 The Case of the Auditor-General of South Africa 333

may be made to the guidelines, in view of the specific characteristics of an organiza-

tion (CD 2013, p. 11).
To facilitate the preparation of the CD, a pilot program was launched involving a
number of companies. GRI was one of the promoters of the creation of the IIRC.
The document “The Sustainability Content of Integrated Reports – a Survey of
Pioneers” was published by GRI in 2013, and contains a first survey of integrated
reporting, albeit concentrating on the theme of sustainability. The GRI database1
has collected 1,730 reports, over several years. 46 of these reports, self-declared as
integrated reports, are published by public agencies.
This fact demonstrates a potential interest in integrated reporting (IR) in the
public sphere. This chapter examines the case of the Auditor-General of South
Africa (AGSA), which published its first integrated report in 2012. The AGSA is a
public institution not included in the pilot cases promoted by the IIRC, which
initially consisted entirely of for-profit enterprises. As the AGSA did not participate
in the preparatory phase of the CD, it was unable to benefit from the related
guidelines in the preparation of its report2. The GRI guidelines were, however,
followed in preparing part of the AGSA report. Moreover, the King Code of
Governance Principles (King III Code), issued by the King Committee on Corpo-
rate Governance in 2009, set out certain obligations for South African listed
companies in terms of disclosure and the integration of information. The AGSA
IR was intended to comply with the indications of the King III Code, although this
was not a formal requirement.
This chapter analyzes the AGSA Integrated Annual Report 2011–2012 (AGSA
IR) through a comparison with the guidelines of the CD. The aim is to verify the
applicability of the CD to the public sector. After describing the institutional and
organizational aspects of the AGSA, and presenting a general outline of the report,
this chapter explores the underlying logic and structure of the integrated report in
light of the guiding principles and contents of the CD.

20.2 AGSA Profile

The Auditor-General (AG) was established on 31 May 1910, as a result of the South
Africa Act of 1909. It came into operation on 12 May 1911, with the passing of the
Exchequer and Audit Act 1911 (Act No. 21 of 1911). In 1992 the Amendment Act
(Act No. 123 of 1992) granted the AG full independence from government, giving
the organisation the requisite autonomy to execute its mandate, without favour or
prejudice.
AGSA functions were later redefined in the 1996 Constitution. Chapter 9,
Section 188, of the Constitution of the Republic of South Africa, establishes that

1
See http://www.database.globalreporting.org
2
The CD was published in April 2013, while the AGSA IR was presented to the South African
Parliament on 30 September 2012.
334 L. Bartocci and F. Picciaia

Table 20.1 AGSA’s organization

“the Auditor-General must audit and report on the accounts, financial statements
and financial management of:
a) all national and provincial state departments and administrations;
b) all municipalities, and
c) any other institution or accounting entity required by national or provincial
legislation to be audited by the Auditor-General”.
In addition, the AGSA may audit and report on the accounts, financial statements
and financial management of any institution funded by the National Revenue Fund,
or a Provincial Revenue Fund, or by a municipality, or any institution authorised to
receive money for public purposes.
The AGSA is a state institution that supports constitutional democracy and,
according to the Public Audit Act (PAA, Act No. 25 of 2004), it is the supreme audit
institution, with full legal capacity, is independent and impartial, and must exercise
its powers and functions without fear, favour or prejudice (PAA, Section 3).
From an organisational standpoint, the AGSA can be seen as a line and staff
organization (see the Table 20.1).
The AGSA is headed by the AG, who is appointed for a period of not less than 5
years, and no more than 10, and shall not thereafter be eligible for re-appointment3.
Beneath the AG is the Deputy Auditor-General, assisted by three staff offices, and
working with an independent ethics office and eight operational branches. These are
divided into two different categories: three of these are distinguished by function

3
The incumbent AG, Mr. Terence Nombembe, was appointed with effect from 1 December 2006.
He served as Deputy Auditor-General for 5 years prior to his appointment, and his contract runs
until 1 December 2013.
20 The Case of the Auditor-General of South Africa 335

(Chief Operations Officer; Audit Support; Specialised Services), while the others
have territorial responsibilities.
The AGSA is accountable by law to the National Assembly, according to section
181 of the Constitution and section 3 of the PAA. In particular, the AG must submit
an annual report to the National Assembly on their activities and the performance of
their functions, their overall regulation of the administration, the annual report,
financial statements, and an audit report on these statements.

20.3 Outline of the Integrated Annual Report 2011–2012

The AGSA published its integrated report for the first time in 2012. The period
covered by the document runs from 1 April 2011 to 31 March 2012. The integrated
report constitutes a unique and comprehensive document that has replaced the
traditional Annual Report. The fundamental aim of the IR is to improve the quality
of accountability “in a manner that enhances and refines our story of institutional
sustainability” (AGSA IR, p. 12). As declared by the AG, Mr. Terence Nombembe:
“we are therefore proud to demonstrate that we indeed lead by example in practising
what we preach to our auditees” (AGSA IR, p. 11).
The principal idea underlying the IR is to present information beyond merely
financial information. While the concept of “capitals”, as proposed in the CD, is yet
to be clearly defined in the AGSA IR, financial data is accompanied in the report by
information concerning other aspects, such as: the management of human resources;
the results of the corporate social investment program; and the economic, social and
environmental impact of AGSA activities.
Another relevant aspect of the AGSA IR is the implementation of a logic of
strategic evaluation and monitoring, with the aim of highlighting the organization’s
aptitude to generate value in the medium to long term. As stated in the document:
“performance reported in this report is measured against the objectives and target set
in the Strategic plan and budget 2011–2014” (AGSA IR, p. 15), and “all business
units remain focused on the imperative of long-term sustainable value creation for
our stakeholder” (AGSA IR, p. 23). The description of the business model of the
organization is also highlighted in the document, as required by the CD.
Another key point declared in the report is the attention of AGSA towards
stakeholders. The document lists and illustrates the interactions with institutional
stakeholders during the year (AGSA IR, p. 16). Nevertheless, the IR focuses mainly
on institutional stakeholders (primarily the Parliament to which the report is
addressed by law), while a greater consideration of other stakeholders, in particular
citizens, would be desirable.
As regards the reporting boundary, the document “reflects the performance,
financial, social and environmental information for the entire organisation of the
AGSA, including its head office in Pretoria, its provincial offices in Western Cape,
Gauteng, Free State, Limpopo, Eastern Cape, Mpumalanga, KwaZulu-Natal, North
West and Northern Cape, as well as our United Nations office in New York. No
336 L. Bartocci and F. Picciaia

specific limitations were imposed on the scope and boundary of this report” (AGSA
IR, p. 23).
The document is divided into seven sections. The main contents are as follows:
• Report of the Auditor-General and Deputy Auditor-General’s review;
• Organisational overview, business model and operating context;
• Performance review for 2011–2012;
• Sustainability performance review;
• Key strategic priorities for 2012–2013;
• Governance, remuneration policies and auditing reports;
• Annual financial statements and GRI index.
An independent external auditor certified key information relating to the
sustainability performance of the AGSA. The auditor also reviewed the financial
statements and the organization’s performance information. This was undertaken in
accordance with ISAE 3000, issued by the International Auditing and Assurance
Standards Board. The related independent assurance report can be found in
Section 6 of the AGSA IR.

20.4 Analysis of Content Elements

The CD identifies the content elements to be described in the integrated report.

These are defined as relevant and necessary elements, in order to ensure adequate
information and the satisfaction of stated objectives. These are: organizational
overview and operating context; governance; strategy and resource allocation;
opportunities and risks; business model; performance; future outlook. These
elements are closely interrelated, and must be presented in a manner that highlights
their connections and interconnections. The aim of this section is to examine the
contents of the AGSA IR in light of the relevant elements referred to by the CD.

20.4.1 Organisational Overview and External Environment

Among the important elements that should be contained in an integrated report, the
CD suggests the description of organizational profiles and the external environment
in which the company operates. The main purpose of this information is to describe
the organizational structure, its culture, the core values, the mission and vision
(internal profile), alongside the factors that can affect the organization’s ability to
create value by interacting with the external environment (external profile). This
information is largely contained in Section 2 of the AGSA IR, which illustrates the
purpose and functions of the institution, its independent nature, and its regulation by
the Constitution and the PAA. The purpose of the AGSA is to achieve the best
results, in terms of efficiency and effectiveness. A description of operations follows,
highlighting that the institution is present in the entire territory of the State, and that
the organizational structure is characterized by a “line and staff” structure, with
operational tasks divided by function and geographical areas.
20 The Case of the Auditor-General of South Africa 337

Furthermore, the introduction to the document describes the mission, vision and
value system of the AGSA. The mission of the organization is “to strengthen our
country’s democracy by enabling oversight, accountability and governance in the
public sector through auditing, thereby building public confidence”, while the
vision is “to be recognised by all our stakeholder as a relevant Supreme Audit
Institution that enhances public sector accountability” (AGSA IR, p. 3).
The introduction also contains a reference to the values of the institution; in
other sections, these values are related to concrete actions, primarily oriented to the
promotion of social integration and equal opportunities. The attention given to
social integration and equal opportunities is also motivated by the unique history of
South Africa and its vicissitudes with regard to the struggle for racial integration.
There is a special focus in the AGSA IR on the operating context, which regards
the different environments in which the institution operates, and its ability to
influence them. A distinction is made between external and internal environments.
In particular, this section illustrates the key material issues in depth, in the follow-
ing areas:
• political context, in terms of the government’s goals and objectives for the
country;
• economic context, in terms of the implications of the new public infrastructure
drive; continued application of the AGSA funding model; improved collection
of municipal debt; effective retention strategies and competitive remuneration
packages; continued focus on fruitless and wasteful expenditure in South Africa;
continued implementation of the trainee auditor scheme;
• social context, in terms of continued application of B-BBEE4 initiatives;
continued display of good citizenship and support to the auditing profession;
analysis of the social context of external and internal stakeholders; effective
engagement and surveying of both the internal and external environment;
• environmental context, in terms of further development of skills for environ-
mental auditing and reduction of the environmental footprint.
The description of the operating context of the AGSA IR is aligned with the CD,
allowing for an adequate assessment of the environmental factors that may affect
the organization’s activities.

20.4.2 Governance

The governance framework of AGSA is defined by the Constitution, which establishes

the institution’s structure, principles, and key functions (see the Table 20.2).
Unlike a for-profit company, which is free to establish the most suitable form of
governance in support of the creation of value, in the case of AGSA the structure,
guiding principles and key functions are predetermined by the Constitution, and

4
Broad-Based Black Economic Empowerment (B-BBEE) is a form of economic empowerment
initiated by the South African government, with the aim of distributing wealth across a broad a
spectrum of South African society.
338 L. Bartocci and F. Picciaia

Table 20.2 AGSA’s framework

cannot be modified. Still, the integrated report provides details on the governance
system of AGSA. Particularly, the document describes the functions of each office,
the calendar of their meetings, the issues addressed during these meetings, and
the attendance of individual members, so as to show the degree of effective partici-
pation, and the manner in which decisions were made. To complete the information
on the governance system, this section contains a report on remuneration policies,
which states that “the AGSA’s approach to the remuneration of employees and
senior manager is similar in that remuneration in both cases is informed by compre-
hensive salary market benchmarks” (AGSA IR, p. 117). In this context, the crucial
factors for the level of remuneration are:
• “paying for performance and, where applicable, scarcity of skills;
• cost-to-company offers that are competitive;
• affordability;
• observing governance requirements applicable to reward and recognition”
(AGSA IR, p. 117).

20.4.3 Opportunities and Risks

In line with the provisions of the CD, the AGSA IR must contain information on the
opportunities and risks that may affect the ability to create value over time and, in
particular, on the origins of these opportunities and risks, the manner in which the
organization evaluates their emergence, and the extent of their effects on perfor-
mance. The “Report Profile” section declares that “a start was made to identify
material sustainability issues, in addition to those already covered in the five
commitments, focusing on the risks and opportunities in the operating context of
20 The Case of the Auditor-General of South Africa 339

the AGSA. This was done by means of structured meetings and workshops with
relevant senior management” (AGSA IR, p. 23).
These elements, however, appear to be only hinted at, and there is a lack of real
analysis of their relationship with the performance of AGSA. One reason for this
marginalization can be attributed to the nature of the institution that, as a public body
that is strictly regulated by law, is particularly “constrained” in its administration,
and thus unlikely to be influenced by opportunities and risks.

20.4.4 Strategy and Resource Allocation

Strategic goals are well described in the integrated report. In particular, five
objectives that “guide all our actions” (AGSA IR, p. 33) are reported. These are:
• Simplicity, clarity and relevance of messages in all communication with internal
and external stakeholders;
• Visibility of leadership to all internal and external stakeholders;
• Strengthening human resources to achieve a skilled, high-performing and
diverse workforce;
• Leading by example in all internal processes;
• Funding operations in an economical, efficient and effective manner.
The first objective complies with the institutional objectives of the AGSA,
and refers to improving auditing. A series of initiatives during the financial year
improved the quality of communications, such as the introduction of an AGSA
“house style” for the production of simple, clear, and relevant documents.
The strategic goals No. 3 and 4 concern human resources management and
engagement with stakeholders. In this respect, the integrated report describes the
activities oriented to the management and improvement of human capital, such as
training, wellness programs and health issue awareness. Support for young students
through the provision of scholarships and training courses are also described.
Another important strategic goal is to “lead by example”, in continually improving
the quality and timeliness of all reports, adhering to standards of clean administration.
The final strategic goal regards funding activities. The report offers a reasonably
accurate analysis of the results for the period, and a comparison between what was
achieved and budget estimates (see the Table 20.3).
The strategies adopted by the organization, while described in a rather complex
fashion, do not clearly correlate with the plans adopted for the allocation of
resources. The description is qualitative, and lacks quantitative indicators.

20.4.5 Business Model

The business model is defined by the CD as the system adopted by the organisation
to manage inputs, business activities, outputs and results, to create value over time.
It represents the heart of an organization. This element should be described in the
integrated report in a manner that highlights the principal types of input, significant
business activities, outputs, and key results obtained, both internally and externally.
340 L. Bartocci and F. Picciaia

Table 20.3 Comparison between performance measures and targets

AGSA’s Target Actual
commitment Performance measure 2011–2012 performance Comments
Simplicity Percentage clarity of message on root 100 % 100 % Achieved
of our causes in all our reports
reports
Visibility of High-quality, value-adding stakeholder 100 % 100 % Achieved
leadership interactions are conducted and escalated,
where necessary
Strengthen Culture index Industry 3.71 Exceeded
human norm: 3.2
resources Leadership index Industry 3.76 Exceeded
norm: 3.2
Staff engagement index Industry 4.01 Exceeded
norm: 3.2
Funding % net surplus 3.76 % 4.79 % Exceeded
% debt collected within 30 days (Nat. A 75–80 % 67 % Partially
to F, Gauteng & WC) achieved
% debt collected within 30 days 65–70 % 45 % Partially
(Limpopo, KZN) achieved
% debt collected within 30 days (NW, 55–60 % 37 % Partially
FS, NC, EC & MP) achieved
Creditors payment terms 45 days 31 days Exceeded
Lead by Achieve dean audit report on the AGSA Clean audit Clean audit Achieved
example report report
Achievement of identified B-BBEE Level 4 Level 3 Exceeded
rating
% adherence to quality standards Regularity 70 % Partially
audits: 86 % achieved
Non-audit: 3 100 % Achieved
rating
% compliance with statutory and PFMA 94 % Exceeded
legislative deadlines reports: 90 %
MFMA 96 % Exceeded
reports: 90 %
Annual 100 % Achieved
report: 100 %
Strategic 100 % Achieved
plan: 100 %
Investigation 66 % Partially
reports: 95 % achieved
Performance 100 % Exceeded
audit reports:
95 %

In the integrated report, the AGSA declares that it is a “self-funding organisation

that bills its auditees (clients) based on time worked at published tariffs. This
business model allows us to pay for our indirect expenditure and achieve a minimal
20 The Case of the Auditor-General of South Africa 341

surplus of 4 % to finance our human capital resources and capital expenditure”

(AGSA IR, p. 27).
As already noted with regard to governance, the lack of any further specification
on the business model may be accounted for by an extreme rigidity in organi-
zational structure, which is laid down by law and, therefore, cannot be modified by
top management.

20.4.6 Performance

In addition to financial capital, a focus on human capital and investment directed

towards its improvement emerges from the reading of the IR, alongside natural and
social capital in a wider sense. This fact confirms the sensitivity of the AGSA
towards issues regarding integration, support projects for education, vocational
qualifications, and environmental protection.
As regards performance during the period, economic and financial results are
illustrated in Section 7, which reports the annual financial statement, prepared in
line with the requirements of the International Financial Reporting Standards and
the PAA 2004. The reports and statements set out in this section comprise the
annual financial statement:
• Deputy AG’s responsibilities and approval (according to PAA, the Deputy AG is
responsible for the preparation and fair presentation of the annual report);
• Report on independent auditor;
• Statement of financial position;
• Statement of comprehensive income;
• Statement of changes in equity;
• Statement of cash flows;
• Accounting policies;
• Notes to the annual financial statements.
The “imbalance” in favour of financial reporting is motivated by the fact that the
integrated report replaces the traditional Annual Report, making it necessary to
concentrate on the mandatory information required by the applicable standards.
Non-financial information is described in Section 4 (“Sustainability Performance
Review”), which analyzes the social and environmental impacts of the activities of
the institution. Interestingly, the document states that “integrated reporting is not just
about combining financial and non-financial information on one report, but reflects
the manner in which the management of sustainability issues is embedded in the
fabric of organisation” (AGSA IR, p. 91). The aim is to provide information on the
direct and indirect impact of institutional activities on the social and environmental
context, through the description of the activities carried out and the measurement of
value created through an analysis of the value added (see the Table 20.4).
Information about other areas of non-financial reporting can also be found in
Section 4, with regard to social, environmental and sustainability issues in a broader
sense. Again, the information is mainly qualitative, including descriptions of
energy-savings initiatives (see the Table 20.5), rather than in the form of KPIs.
342 L. Bartocci and F. Picciaia

Table 20.4 Value added analysis

2012 2011 2010
% Rmil % Rmil % Rmil
Revenue – 2,074 – 1,850 – 1,645
Paid to suppliers – (891) – (757) – (699)
Value added by operation – 1,183 – 1,093 – 946
Interest income – 71 – 57 – 42
Total value added – 1,254 – 1,150 – 988
Applied as follows:
Paid on internal and external 1.12 % 14 1.13 % 13 1.32 % 13
empowerment
Corporate social investment 0.16 % 2 0.09 % 1 0.10 % 1
Bursaries—external 0.96 % 12 1.04 % 12 1.22 % 12
Paid on employees and internal 87.88 % 1,102 84.26 % 969 85.22 % 842
empowerment
Salaries, wages and benefits 85.33 % 1,070 82.09 % 944 82.19 % 812
Employee wellness 0.24 % 3 0.09 % 1 0.20 % 2
Study assistance—internal 0.72 % 9 0.69 % 8 0.61 % 6
Training 1.59 % 20 1.39 % 16 2.22 % 22
To pay providers of capital 0.80 % 10 0.87 % 10 0.81 % 8
Finance cost 0.80 % 10 0.87 % 10 0.81 % 8
Re-invested in the business 10.20 % 128 13.74 % 158 12.65 % 125
Depreciation 2.31 % 29 2.17 % 25 2.63 % 26
Retained income 7.89 % 99 11.57 % 133 10.02 % 99
Total value added 100 % 1,254 100 % 1,150 100 % 988

Part of the information on sustainability performance is set out in the section on

strategic goals. The GRI index (level C+) at the end of the IR is of particular
interest, as it “guides the reader to the page(s) where information relating to GRI
parameters and performance indicators can be found [. . .] and also indicates
whether the level of detail on a parameter or performance indicator is partial or
more or less complete with reference to the requirements of the GRI guidelines and
performance indicator protocols” (AGSA IR, p. 191).

20.4.7 Future Outlook

The CD includes a section regarding future prospects. This section should highlight
the problems and uncertainties that may have to be dealt with in the implementation
of strategic guidelines, and analyzes the potential applications for the business
model and future performance. An attempt in this direction is presented in
Section 5 of the AGSA IR, in which future prospects are illustrated, so as to
facilitate a comparison between what has been done and how much remains to be
done in the following period. This analysis, however, is short-term oriented,
20 The Case of the Auditor-General of South Africa 343

Table 20.5 Energy saving’s initiatives

Initiative Description Benefit
Virtual servers Standardisation of server environments to Increased efficiency
virtual server technology in its regional of server usage and
and head office data centres; through considerable
virtualisation a single server is used for reduction of the total
several applications energy consumption
Chillers for cooling on the Compressors switch off when the outside Energy savings
roof of the Head Office temperature is lower than the required because the
building with fresh air- office room temperature of 23  C. The compressors do not
dampers water pumps and air-handling units keep run
running and outside colder air is used to
decrease the water temperature
Timers and low-energy Timers are set so that office lights switch Energy savings as a
globes to control lights off between 18:00 and 21:00 at night and result of the lights
switch on at 06:00 the next morning. The being switched off
lights have an override switch to keep during the night
power on for another hour after it has been
pressed
Light sensors and motion Light sensors and motion detectors were Expected significant
detectors in offices installed in some of our offices. The savings on electricity
motion detectors ensure that the lights are usage is the long run
switched on when a person enters the
office and lights will switch off
automatically after a set period of time
after the person has left

addressing only the financial year 2012–2013. The description of these actions is
rather general, and ignores the implications for the performance of the institution.
As regards the process of reporting and accountability, the willingness of the
organization to continue on the path of IR is highlighted.

20.5 Guiding Principles Analysis

The AGSA IR is structured according to the IR approach, in order to highlight the

creation of value over time. Although there is no explicit indication of guiding
principles, different standards have been followed in the preparation of this docu-
ment. These can be differentiated in terms of their objectives:
• IR guidelines (King Report III, GRI Guidelines);
• Standards for financial reporting (IFRS, PAA indications);
• Standards for the assurance process (ISAE 3000).
344 L. Bartocci and F. Picciaia

With regard to the first category, a central role is played by the King Report III.
This standard adapts an “apply or explain” approach5. The King III comprises nine
chapters, which give emphasis to three key elements of leadership, sustainability,
and good corporate citizenship (ubuntu). In chapter nine, the Code also
recommends that organisations produce an integrated report in place of an annual
financial report, along with a separate sustainability report, and that companies
produce these sustainability reports according to the GRI Guidelines. In the case of
the AGSA IR, the application of the GRI Guidelines (version 3.1) (GRI 2011) is self
declared, as part of a process of gradual implementation of non-financial reporting.
The financial information is prepared in accordance with the IFRS and the
indications of the PAA. The latter, in section 41, establishes that “the financial
statements must be in accordance with South African Statements of Generally
Accepted Accounting Practice or other international best practice approved by
the oversight mechanism”. In this case, IFRS is considered appropriate for the
representation of the financial and economic performance of the institution.
The AGSA IR is also subjected to a process of assurance by an independent
body, in order to safeguard the credibility of sustainability and performance infor-
mation. The adopted standard is ISAE 3000, which also supports the reliability of
non-financial information.
According to the CD, the preparation of the integrated report must be based on
certain guiding principles that guide the content of the report and how the information
is presented. These are: a strategic focus and future orientation; connectivity of
information; stakeholder responsiveness; materiality and conciseness, reliability and
completeness, consistency and comparability.
With regard to the first principle (strategic focus and future orientation), the most
significant strategic areas are illustrated in the AGSA IR. Section 4 (“Sustainability
Performance Review”) opens with the most relevant non-financial issues, and
indicates the pages that deal with these issues. This principle, however, is applied
only partially, as the integrated report lacks a description of the correlations and
interdependencies between the components necessary to create value over time.
The principle of “stakeholder responsiveness”, which concerns the presence of
detailed information on the quality of relationships with stakeholders, and the
description of the manner in which the organization understands, considers, and
meets their expectations and needs, is only partly followed. While relationships and
activities with different stakeholders are described in several sections, little is said
about the involvement and participation of citizens.
The last three principles (materiality and conciseness, reliability and complete-
ness, consistency and comparability) pertain to the more formal aspects of the

5
The “apply or explain” approach is characterized by a focus on the ratio of principles and the way
in which principles and recommendations can be applied, rather than compliance with precise
dictates drawn up on the basis of the principles. This means that, in following this approach, the
Board of Directors might opt in its decision making—in particular cases and in order to protect the
interests of the institution—not to comply with a recommendation, or to apply it in a different way,
while still maintaining the underlying principle behind the same recommendation
20 The Case of the Auditor-General of South Africa 345

presentation of information, in order to allow the user to make informed value

judgments with regard to the organization. In this context, the AGSA IR suffers
some limitations that arise from the fact that this is the first year of application. The
scarcity of quantitative data may explain the number of descriptive sections, and
this fact does not facilitate understanding of the document, and renders some
information redundant. With regard to the reliability of information, the presence
of an external independent certifying body allows for a certain degree of security
regarding the absence of material errors, and the reliability of the data reported.

Conclusions
The 2011–2012 Annual Report represents not the first IR experience of AGSA,
but also one of the first in the public sphere. Undoubtedly, the initiative has been
influenced by the environmental context in which the institution operates.
In fact, South Africa has paid particular attention to themes of non-financial
reporting. With the introduction of the new King III Code, government requires
a multidimensional and integrated assessment and communication of
company performance.
In general, the analysis of the AGSA IR demonstrates a high degree of
consistency with the approach proposed in CD. Most requirements and
instructions contained in the IIRC Consultation Draft are, at least formally,
present in the AGSA IR. This alignment with the CD can be explained in light
of the close cultural proximity between the proponents of the renewal of the
South African Governance Principles Code and the IIRC6.
Despite this alignment, a clearer definition of capitals and the business model,
as outlined in the CD, would be appropriate, along with the use of more
quantitative information and KPIs. Also, the concept of “integrated thinking”
seems restricted to the display of cross-references between the various parts of
the report; there is a lack of a real mapping of stakeholders and of an in-depth
analysis of the opportunities and risks faced by the institution, as required by the
CD. Finally, the methodology for developing the IR could be described in more
detail (AGSA IR, p. 23). Overall, the CD shows potential to make a valuable
contribution to further improving the IR process within AGSA.
More in general, the analysis done in this chapter confirms the great potential
of IR in the public sphere, as well as the important contribution that could be
provided by the CD for public administrations that wish to implement.

6
As is widely known, Professor Mervyn King, as well as being the Chair of the Committee that
promoted the famous South African Corporate Governance Code, is also the Chairman of the IIRC
and the Chairman Emeritus of the GRI.
346 L. Bartocci and F. Picciaia

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List of Contributors

Federico Barnabè, Ph.D is Associate Professor in Business Administration at the

Department of Business Studies and Law, University of Siena (Italy). Previously,
Federico has been visiting scholar at the University of Bergen (Norway). You can
reach Federico at federico.barnabe@unisi.it

Luca Bartocci, Ph.D is Associate Professor of Public Sector Accounting and

Management at the University of Perugia (Italy). He got his Ph.D. degree at the
University of Pisa (Italy). You can reach Luca at luca.bartocci@unipg.it

Monica Bartolini, Ph.D is Assistant Professor at the Department of Management

Sciences at the University of Bologna (Italy) and lecturer in Financial Accounting
and in Management Accounting in several master programs. During the Ph.D.
period, she was visiting scholar at the Cardiff University (UK). You can reach
Monica at monica.bartolini4@unibo.it

Raffaella Bordogna is Sustanabily Reporting manager in Eni. You can reach

Raffaella at Raffaella.Bordogna@eni.com

Cristiano Busco, Ph.D is Established Professor and Chair of Accounting at the

School of Business and Economics of the National University of Ireland, in
Galway. Previously, Cristiano has hold positions at Babson College, the
Manchester Business School (U.K.), University of Southern California and the
University of Siena, Italy. You can reach Cristiano at cristiano.
busco@nuigalway.ie

Christian Cavazzoni, Ph.D is Associate Professor of Accounting and Business

Administration at the Department of Accounting, Business and Law of the Univer-
sity of Perugia (Italy). You can reach Christian at christian.cavazzoni@unipg.it

Francesca Ceccacci, Ph.D is Assistant Professor of Economics and Business

Management at the Department of Accounting Business and Law at the University
of Perugia (Italy). She attended the Ph.D. in Marketing at University of Roma “La
Sapienza” (Italy). You can reach Francesca at francesca.ceccacci@unipg.it

C. Busco et al. (eds.), Integrated Reporting, DOI 10.1007/978-3-319-02168-3, 347

# Springer International Publishing Switzerland 2013
348 List of Contributors

Domenica di Donato is Sustainability Planning, Reporting and Professional Com-

munity manager in Eni. You can reach Domenica at domenica.di_donato@eni.com

Giacomo Fabietti is Ph.D.student in Business Administration and Management at

the University of Siena (Italy). You can reach Giacomo at giacomo.fabietti@unisi.it

Marco Fasan, Ph.D is Assistant Professor at the Ca’ Foscari University of Venice.
Marco has obtained his Ph.D. at LUISS Guido Carli University of Rome with a
thesis on CSR and Performance Measurement and he has also been a visiting
scholar at The University of Miami (FL). You can reach Marco at marco.
fasan@unive.it

Mark L. Frigo, C.M.A., C.P.A., Ph.D is director of the Center for Strategy,
Execution and Valuation and the Strategic Risk Management Lab in the Kellstadt
Graduate School of Business and Ledger and Quill Foundation Distinguished
Professor in the Driehaus College of Business at DePaul University in Chicago,
Ill. You can reach Mark at mfrigo@depaul.edu

Maria Cleofe Giorgino, Ph.D is Lecturer of Business Administration at the

University of Milano-Bicocca (Italy), where she teaches Financial accounting.
Previously, Maria Cleofe has hold a research grant from the University of Siena
(Italy). You can reach Maria Cleofe at maria.giorgino@unimib.it

Elena Giovannoni is Assistant Professor in Business Administration at the Uni-

versity of Siena (Italy). In the past, she was visiting lecturer and Marie Curie
visiting fellow at the Manchester Business School (UK) and visiting lecturer at
NUI Galway (Ireland). You can reach Elena at elena.giovannoni@unisi.it

Fabrizio Granà is a Ph.D. student in Management Accounting at the School of

Business and Economics of the National University of Ireland, in Galway. You can
reach Fabrizio at f.grana1@nuigalway.ie

Maria Pia Maraghini is Assistant Professor in Business Administration at the

University of Siena (Italy). You can reach Maria Pia at maraghini@unisi.it

Libero Mario Mari, Ph.D is Full Professor of Business Administration and

International Financial Accounting and Director of the Department of Accounting
Business and Law at the University of Perugia (Italy). You can reach Mario at
liberomario.mari@unipg.it

Carol J. McNair-Connolly is an internationally recognized expert in cost

management. She has authored nine trade books and numerous articles on various
aspects of the relationship and development of cost management and the
new technologies that define modern management practice. Holding a MBA and
Ph.D. from Columbia University, Dr. McNair-Connolly currently is an Honorary
List of Contributors 349

Principal Fellow at the University of Wollongong. You can reach CJ at

cjconnolly126@gmail.com

Chiara Mio is Full Professor at the Ca’ Foscari University of Venice, where she
teaches Management Control, Business Planning and Sustainability Performance
Measurement and Environmental Accounting and Corporate Social Responsibility.
Chiara is Deputy Chairman of the Sustainability Party at FEE—Fédération des
Experts Comptables Europeens in Brussel and since 2009 she is the delegated to
“Sustainability and Csr” at Ca’ Foscari University. You can reach Chiara at
mio@unive.it

Patrizio Monfardini, Ph.D is Lecturer of Business Administration at the Univer-

sity of Cagliari (Italy). Previously, Patrizio has hold a research grant from the
University of Siena (Italy) and has been visiting scholar at the University of
Kristianstad (Sweden) and Zeppelin (Germany). You can reach Patrizio at
monfardini@unica.it

Francesco Orlandi is a Ph.D. student in Business Administration and Manage-

ment at the Department of Accounting, Business and Law of the University of
Perugia. You can reach Francesco at francesco.orlandi1@studenti.unipg.it

Sergio Paternostro, Ph.D is research fellow at the University of Palermo, Italy.

Previously, he has been research fellow at the University of Siena (Italy), visiting
research scholar at the University of Castilla La Mancha (Spain), and visiting
research student at the IESE Business School, Barcelona. You can reach Sergio at
sergio.paternostro@unipa.it

Francesca Picciaia, Ph.D is Assistant Professor of Financial Accounting at the

Department of Accounting, Business and Law, University of Perugia (Italy). You
can reach Francesca at francesca.picciaia@unipg.it

Sonia Quarchioni, Ph.D is a research fellow at the University of Siena, Italy.

Previously, she has been visiting research student at the London School of Eco-
nomics and Political Science, UK. You can reach Sonia at quarchioni@unisi.it

Paolo Quattrone, Ph.D is Professor and Chair of Accounting, Governance and

Social innovation at the University of Edinburgh Business School. Before joining
Edinburgh, he was Professor of Accounting and Management Control at IE Busi-
ness School, Madrid, Reader in Accounting at the Saı̈d Business School, and
Official Student (i.e. Fellow) of Christ Church, at the University of Oxford. You
can reach Paolo at Paolo.Quattrone@ed.ac.uk.

Angelo Riccaboni, Ph.D is the Rector of the University of Siena and Professor of
Management Control Systems. He was Visiting Scholar at USC (Los Angeles),
INSEAD, LSE, University of Wales at Bangor (UK), Columbia Business School
350 List of Contributors

and DePaul University Chicago. Angelo is member of the Leadership Council of

the UN Sustainable Development Solutions Network and Chair of Med Solutions,
the UN SDSN Regional Center for the Mediterranean. You can reach Angelo at
angelo.riccaboni@unisi.it

Leonardo Rinaldi, Ph.D is Lecturer in Accounting at the School of Management

at Royal Holloway University of London and a member of the Centre for Research
Into Sustainability (CRIS). Before joining Royal Holloway’s School of Manage-
ment in September 2006, he worked at the University of Florence, Italy. You can
reach Leonardo at leonardo.rinaldi@rhul.ac.uk.

Pasquale Ruggiero, Ph.D is Senior Lecturer in Management Accounting at the

Brighton Business School (UK) and Assistant Professor in Business Administration
at the University of Siena (Italy). Previously, Pasquale has been visiting scholar at
the London School of Economics and Political Science (UK). You can reach
Pasquale at p.ruggiero@brighton.ac.uk and ruggiero@unisi.it

Fabio Santini, Ph.D is Assistant Professor of Management Accounting at the

Department of Accounting, Business and Law, University of Perugia (Italy). You
can reach Fabio at fabio.santini@unipg.it

Riccardo Silvi is Associate Professor of Management Accounting at the School of

Economics, Management and Statistics of the University of Bologna (Italy) and
member of the Department of Management of the same University. You can reach
Riccardo at riccardo.silvi@unibo.it

Loredana G. Smaldore is a Ph.D. student in Management Accounting at the

School of Business and Economics of the National University of Ireland, in
Galway. You can reach Loredana G. at l.smaldore2@nuigalway.ie

Sara Tommasiello is Chief Financial Officer and CSR Manager in Jafin—

Monnalisa. You can reach Sara at s.tommasiello@jafin.it

Francesca Trovarelli, Ph.D student in Business Administration and Governance,

is a research fellow at the University of Siena, Italy. You can reach Francesca at
trovarelli@unisi.it