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Benefits of Integrated Reporting for Small Businesses and Not for Profit Organizations (NPOs)

by Matteo Pozzoli, member of the IFAC SMP Committee and Johnny Yong, Technical Manager – Global Accountancy Profession Support (GAPS), IFAC | July 22, 2019 |

Integrated reporting (IR) represents one of the most recent innovative approaches to corporate reporting. One of the important, sometimes underrated, implications of this idea is that IR is not only about drawing up a management report. An integrated report is the output of a value creation journey that starts with integrated thinking, which is an active consideration by an organization of the relationships between its various operating and functional units and the ‘multiple capitals’ that the organization uses or affects. Integrated thinking leads to integrated decision making and actions that consider the creation of value over the short, medium, and long term.

The underlying corollary is that the implementation of IR can lead to change in the entity’s strategic focus and the identification of material issues impacting the entity’s sustainable success over time. In many parts of the world, enterprises apply IR to satisfy non-financial disclosure requirements (see Trends in Disclosing Non-Financial Information). Others adopted an integrated approach voluntarily.

The International Integrated Reporting Council (IIRC) has developed the International Integrated Reporting Framework which, as of today, constitutes an important but non-authoritative, principles based reference for entities wishing to adopt IR. This article considers two specific features: (a) the adoption of IR by small- and medium-sized entities (SMEs) and the role played by small- and medium-sized practices (SMPs); and (b) the development of IR and the contribution from the analysis of the various best practices (as a form of benchmarking), again with specific relevance to SMEs and not-for-profit organizations (NPOs).

The benefits of IR for SMEs and not-for-profit organizations (NPOs)

IFAC, together with the IIRC, published ‘Creating Value for SMEs through Integrated Thinking – The Benefits of Integrated Thinking’ and also explored some of the many benefits that arise from SMEs’ adoption of IR. However, there remains a perception that IR is more appropriate for public companies with a wide range of stakeholders. But, what about private companies and, more precisely, SMEs? They can benefit from an integrated approach: combining an understanding of business strategy with a multi-capital lens while promoting long-term perspectives and holistic enterprise story telling.

For SMEs, communicating the key factors that affect their ability to create value through an integrated report can help build much needed stakeholder trust around past and future performance. An SME could benefit from this change of approach, for example, when it desires to re-position itself in the market, aims to obtain financial resources from capital lenders and investors, decides to investigate a new strategic orientation, aspires to reconsider its business model and/or its organizational structure or aims at investing in corporate social responsibility.

Another important consideration in the application of IR to SMEs concerns the adaptability of such approach for NPOs. Many NPOs are required to produce social reports or other similar reporting. IR is a model that can be adopted by different entities. Even mission driven entities can apply the integrated approach as they are required to optimize the use of available resources and to report on operations to their stakeholders. This is a principle of good governance, which can determine a transparent process and, consequently, promote a virtuous process by which a solid relationship is created with the community the NPO operates within.

The Evolution of IR

The second issue in this article concerns the development stage of IR for SMEs and NPOs. The transition to integrated reporting is likely to take several reporting cycles to achieve, so can be a big commitment for smaller organizations with limited resources at their disposal. It is therefore important that SMEs and NPOs first understand the strong business case for integrated reporting implementation. Considering uncertainty of cost, the perception of increased reporting burden and the potential to improve internal management processes will enable a better understanding of value drivers and ultimately improve communication with stakeholders.

Integrated reporting is principles based and can be applied in a proportionate and scalable manner to all organizations regardless of their size and sector. Producing an integrated report is an iterative process and organizations will learn through experimentation. From this perspective, it seems reasonable that when an SME or NPO adopts the IR Framework, they enrich the good management practices within the organization. These entities need not worry about preparing a report that may fall short of compliance with the IR Framework at the initial stage. It’s worth bearing in mind that IR is a general concept that requires commitment by management for implementation. IR can accommodate different business approaches to produce an ideal output over time. Getting it right for the first time is not critical to IR’s ultimate success. A progressive and forgiving approach towards the implementation of IR could reduce the unnecessary efforts and costs (as well as possible management stress). Practitioners, especially SMPs, can usually support the SMEs or NPOs in this journey.

Examples

The IR Framework includes guidelines and, thanks to the IIRC’s initiatives, an examples database that help contribute to the evolution of good practices in this area of reporting, albeit on a voluntary basis. This goes a long way to support the application of IR, be it for large organizations or SMEs and NPOs.

Included herein are examples of integrated reports by SMEs and NPOs that demonstrate approaches to integrated thinking and reporting taken by organizations in these sectors.

Manufacturing

Monnalisa S.p.aA garment producer for children with head office in Arezzo, Italy. Turnover for 2017 was at Euro 47 million. The average number of employees in 2017 was 264.
Dellas S.p.aA manufacturer of diamond tools for granite, marble and agglomerate based in Lugo di Valpantena, Italy. Turnover for 2017 was at Euro 17 million. The average number of employees in 2017 was 122.
Stafer S.p.aA manufacturer of accessories for the mechanical and automatic handling of the rolling blind in Italy. Turnover for 2016 was Euro 11 million. The average number of employees for 2016 was 60.


Services

Anglo African Investments LtdA diversified technology investment firm based in Mauritius with a turnover of MR 273 million (or US$8 million) in 2017. Total number of employees was 90 in 2017.


Academy/ Foundation (NPOs)

Pasqual Maragall FoundationWith the vision of achieving a future without Alzheimer’s, this Foundation promotes and develops the ultimate biomedical research to contribute to the decisive solutions to the Alzheimer disease. For 2017, it had a budget of Euro 6.6 million with a staff of 75 at the headquarters based in Barcelona.
Arguden Governance AcademyThis Academy was founded in Istanbul with a mission to help improving the quality of governance in public, non-profit, private and international organizations. It recorded a revenue of TL 819,000 (or US$ 155,000) in 2017. The Academy operates through a Board with four full time employees but relies heavily on volunteer support.


Readers are encouraged to share other SME or NPO examples that they are aware of so that the profession as a whole will benefit from such resources.

Readers may also be interested in the following Gateway articles and videos that have been published in the past few years: