With IR, organizations explain how they interact with six “capitals”, i.e., financial, manufactured, intellectual, human, social and relationship, and natural. So, as well as reporting on financial information, such as return on equity and earnings per share, they may also disclose information on a wide range of other areas that are relevant to their business, such as customer satisfaction, investment in equipment, technology patents, employee engagement, female representation in senior positions, partnerships with external organizations and carbon dioxide (CO2) emissions.
At the heart of the concept is the belief that reporting in an integrated way will counteract the short-termism among businesses, investors and the capital markets that provoked the damaging financial crisis of 2008-09.
Changing reporting for the better
“The roots of the financial crisis lay in a lack of integrated thinking, a failure to think in the long term,” Howitt argues. “Those who got into trouble thought they could reap all the benefits and simply pass the risk on to someone else. They didn’t analyze how that risk might come back to haunt them and they didn’t think outside the narrow confines of their short-term, quarterly financial business model.”
In the immediate aftermath of the crisis, he continues, “we were trapped in narrow short-termism that blotted out the necessary debates about the long term,” as politicians and regulators enacted a flood of new regulations designed to increase transparency quickly.
Over the past few years, the debate has started to center on the long term again – something the IIRC has helped to promote through its involvement with initiatives that promote long-term investment strategies, such as Focusing Capital on the Long Term and the Coalition for Inclusive Capitalism.
A political pedigree
The IIRC itself is a coalition of businesses, investors, nongovernment organizations, accountancy bodies, regulators and standard setters. Howitt officially began working for the organization in November 2016, but his involvement with it stretches back to 2010, the year the IIRC was founded. At the time, he was the Labour Member of the European Parliament (MEP) for the East of England, having been first elected in 1994, and the European Parliament’s rapporteur on corporate social responsibility (the person tasked with reporting back to the main Parliament on what was being done in that area). He had also connected with individuals trying to effect change in corporate reporting through his work as an ambassador for HRH The Prince of Wales’s Accounting for Sustainability Project, which was launched in 2004 to help embed sustainability within organizations.
“I already knew Paul Druckman, who became the IIRC’s first Chief Executive,” Howitt recalls. “He was the Chair of the Sustainability Committee of the Federation of European Accountants and we had traveled on the Eurostar together many times and discussed the case for integrated reporting.”
At Druckman’s request, Howitt agreed to become a voluntary ambassador for the IIRC. He attended meetings with the companies that piloted the first integrated reports and represented the IIRC at several international meetings. In 2013, he was at the London launch of the International Integrated Reporting Framework – part of an event that took place in 13 time zones within a 24-hour period.
In his day job as an MEP, Howitt also played a lead role in shaping the 2014 EU Non-Financial Reporting Directive, which came into force on 1 January 2017 and requires large companies to report on the social, environmental and human rights impact of their activities.
“If I die today, they can put the directive on my gravestone because I’m so proud of it,” says Howitt with a broad smile. “I proposed it, I helped negotiate it and I talked a lot with Paul about it. I believe it is a very important stepping stone toward integrated reporting. It’s aimed at large companies alone, many of which welcome it, and it’s not about burden. It’s about taking existing frameworks and applying them more efficiently.”
As a close confidante of Druckman and a supporter of the IIRC, Howitt admits that he was surprised when he learned that Druckman was standing down. Although the IIRC subsequently asked Howitt to apply for the CEO job, he insists that “they didn’t just give the job to me. They had a very strong short list and I feel I’ve got the job on my merits. It really is the only job I could have considered leaving my past career for. The IIRC has such an exciting and important mission.”
The task ahead
Surveying the task ahead of him, Howitt believes that, while much progress has been made with IR, there is still a long way to go until the IIRC achieves its aim of making it the global norm. “We’re trying to change a global practice. That’s incredibly ambitious, but it’s right. It’s about improving and reforming the existing system of reporting so that it is more streamlined, and reducing cost and burden, while making it more material and more meaningful to the business and its strategy.”
He continues: “Half of the benefit of integrated reporting is integrated thinking – getting connectivity within the company, bringing people and their perspectives together in a way that hasn’t been done before, and getting the company thinking about and understanding how it interacts with all six capitals that it affects.”
At present, IR is in what the IIRC describes as the “Breakthrough Phase” – the early adoption of IR by reporting organizations around the world. “We’re still raising awareness about integrated reporting, and getting exemplars and champions to adopt it and send messages about its importance,” says Howitt. “We hope that, in a year or so, the breakthrough will have happened and we can move toward attaining global adoption.”
According to the IIRC, around 1,500 companies are already using or referencing IR, including giant US conglomerate General Electric, which produced its first integrated report in 2016. The 40 biggest French companies, the CAC 40, are looking at producing integrated reports within the next three years, according to Howitt, and many of the world’s leading investors are clamoring for more businesses to follow suit.
“Japan and South Africa are probably the leading examples in the world for adopting integrated reports at the moment,” says Howitt. For example, in Japan, the Department for Business has a laboratory for integrated reporting and more than 300 Japanese companies are already producing integrated reports.