3.5 Various Corporate Governance Codes, Acts, Laws, Regulations and
3.5.14 The International Integrated Reporting Council (IIRC), Integrated
Based on the success of Accounting for Sustainability (A4S), the IIRC was launched in 2012. The IIRC published the International Integrated Reporting (<IR>) Framework in December 2013. The IIRC is a global coalition of various regulators, investors, companies, standard setters, the accounting profession and non-governmental organisations (NGOs) previously chaired by Prof. Mervyn King. It is a global not-for- profit organisation incorporated in England and Wales, and headquartered in London.
Together, this coalition shares the view that communication about value creation should be the next step in the evolution of corporate reporting. The International <IR>
Framework has been developed to meet this need and provide a foundation for the future.
The International <IR> Framework has been developed to be consistent with a number of corporate reporting trends taking place across the globe. A range of market drivers are currently not being satisfied because of complex and dated reporting methods.
These drivers include opportunities afforded by new technology, and the need for transparency, inclusiveness and more information that is material to modern business.
The IIRC’s vision is to align capital allocation and corporate behaviour to wider goals of financial stability and sustainable development through the cycle of integrated reporting and thinking. To facilitate this vision, the International <IR> Framework has been created to include principles-based guidance and content elements to govern and explain the information within an integrated report.
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According to the IIRC (2013), the Framework was released following extensive consultation and testing by businesses and investors in all regions of the world, including the 140 businesses and investors from 26 countries that participated in the IIRC Pilot Programme. This inclusive, market-led approach means that the Framework has been developed by business as a response to the new wider value-creation model businesses have in the 21st century. The value creation model is discussed later in this chapter.
The aims of the International <IR> Framework are to:
• “Improve the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital;
• Promote a more cohesive and efficient approach to corporate reporting that draws on different reporting strands and communicates the full range of factors that materially affect the ability of an organization to create value over time;
• Enhance accountability and stewardship for the broad base of capitals (financial, manufactured, intellectual, human, social and relationship, and natural) and promote understanding of their interdependencies; and
• Support integrated thinking, decision-making and actions that focus on the creation of value over the short, medium and long term” (IIRC, 2013:2).
Most of the concepts used in King IV™ are based on the work conducted for the International <IR> Framework. This is acknowledged by Prof. Mervyn King (cited in King IV™ Report on Corporate Governance for South Africa, 2016:3), who states that:
There are greater expectations from stakeholders than ever before. Activism by civil society and shareholders have rocked companies over the last few years.
The Millennial Generation (Millennials), roughly those born since 1980, is now the most numerous age cohort. Their concerns are beginning to set the global agenda. Millennials have shown that they are concerned about the global environmental crunch much more than the global financial crises. They are consequently attracted to companies who have integrated the six capitals into their business models. (The six capitals, as set out in the International
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Reporting Council’s (IIRC) Integrated Reporting <IR> Framework, are financial, manufactured, human, intellectual, natural, and social and relationship capital.) Integrated report definition
The IIRC’s International <IR> Framework (IIRC, 2013:7) defines the integrated report as “…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.”
3.5.14.1 The categories and descriptions of the Six Capitals
The IIRC’s International <IR> Framework categorises and describes the Six Capitals.
Figure 3.1 depicts the categories of the IIRC’s Six Capital model.
Figure 3.1: The categories of the capitals (The Six Capitals) Source: King (2016).
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Figure 3.1 shows the Six Capitals as per the <IR> Framework. As stated earlier, conceptually King IV™ is based on the fundamental concepts of the <IR> Framework, including the Six Capital and Value Creation models. The fundamental concepts of the Six Capitals are unpacked below:
• Financial capital – The pool of funds that is:
o available to an organisation for use in the production of goods or the provision of services; and
o obtained through financing, such as debt, equity or grants, or generated through operations or investments (International Integrated Reporting Council, 2013:11).
• Manufactured capital – According to the IIRC’s International <IR> Framework (International Integrated Reporting Council, 2013:11), manufactured capital consists of manufactured physical objects (as distinct from natural physical objects) that are available to an organisation for use in the production of goods or the provision of services, including:
o buildings;
o equipment; and
o infrastructure (such as roads, ports, bridges, and waste and water treatment plants).
Manufactured capital is often created by other organisations or businesses, but includes assets manufactured by the reporting organisation or business for sale or when they are retained for its own use.
• Intellectual capital – According to the IIRC’s International <IR> Framework (International Integrated Reporting Council, 2013:12), intellectual capital is organisational, knowledge-based intangibles, including:
o intellectual property, such as patents, copyrights, software, rights and licences; and
o organisational capital such as tacit knowledge, systems, procedures and protocols.
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• Human capital – According to the IIRC’s International <IR> Framework (International Integrated Reporting Council, 2013:12), human capital is people’s competencies, capabilities and experience, and their motivations to innovate, including their:
o alignment with and support for an organisation’s governance framework, risk management approach and ethical values;
o ability to understand, develop and implement an organisation’s strategy;
and
o loyalties and motivations for improving processes, goods and services, including their ability to lead, manage and collaborate.
• Social and relationship capital – According to the IIRC’s International <IR>
Framework (International Integrated Reporting Council, 2013:12), “social and relationship capital” refers to the institutions and the relationships within and between communities, groups of stakeholders and other networks, and the ability to share information to enhance individual and collective well-being.
Social and relationship capital includes:
o shared norms, and common values and behaviours;
o key stakeholder relationships, and the trust and willingness to engage that an organisation has developed and strives to build and protect with external stakeholders; and
o intangibles associated with the brand and reputation that an organisation has developed or an organisation’s social licence to operate.
• Natural capital – According to the IIRC’s International <IR> Framework (International Integrated Reporting Council, 2013:12), “natural capital” refers to all renewable and non-renewable environmental resources and processes that provide goods or services that support the past, current or future prosperity of an organisation. Natural capital includes:
o air, water, land, minerals and forests; and o bio-diversity and eco-system health.
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The IIRC’s International <IR> Framework stresses that not all capitals are equally relevant or applicable to all organisations. While most organisations interact with all capitals to some extent, these interactions might be relatively minor or so indirect that they are not sufficiently important to include in the integrated report. It is therefore recommended that the board of directors or organisation’s executive use their discretion in this regard.
3.5.14.2 Role of the capitals in the Framework
According to the IIRC’s International <IR> Framework (International Integrated Reporting Council, 2013:12), the Framework does not require an integrated report to adopt the categories identified above or to be structured along the lines of the capitals.
Rather, the primary reasons for including the capitals in this Framework are that they should serve as:
• Part of the theoretical underpinning for the concept of value creation; and
• A guideline for ensuring that organisations consider all the forms of capital they use or affect.
The IIRC’s International <IR> Framework (International Integrated Reporting Council, 2013:12) specifies that organisations may categorise the capitals differently. For example, relationships with external stakeholders and the intangibles associated with brand and reputation (both identified as part of the social and relationship capital discussed earlier) might be considered by some organisations to be separate capitals, part of other capitals or as cutting across a number of individual capitals. Similarly, some organisations may define intellectual capital as comprising what they identify as human, “structural” and “relational” capitals.
Regardless of how an organisation categorises the capitals for its own purposes, the aforementioned categories are to be used as a guideline to ensure that the organisation does not overlook a capital that it uses or affects.
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3.5.14.3 Value creation for the organisation and for others
As stated earlier, the value-creation model is one of the pillar concepts of King IV™.
One of the founding members of the IIRC, as referred to earlier, is the South African Professor, Mervyn King, and this could be the reason that King IV is conceptually based on the IIRC’s International <IR> Framework.
According to the IIRC’s International <IR> Framework (International Integrated Reporting Council, 2013:10), value created by an organisation over time manifests itself in increases, decreases or transformations of the capitals caused by the organisation’s business activities and outputs.
Figure 3.2 depicts the value created for the organisation and for others.
Figure 3.2: Value created for the organisation and for others
Source: The IIRC’s International <IR> Framework (International Integrated Reporting Council, 2013:10).
Figure 3.2 demonstrates value created for the organisation and for others. That value has two interrelated aspects – value created for:
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• The organisation itself, which enables financial returns to the providers of financial capital; and
• Others (i.e. stakeholders and society at large).
Providers of financial capital are interested in the value that an organisation creates for itself. They are also interested in the value that an organisation creates for others when it affects the ability of the organisation to create value for itself, or relates to a stated objective of the organisation (e.g. an explicit social purpose) that affects their assessments.
The IIRC’s International <IR> Framework (International Integrated Reporting Council, 2013:10) specifies that the ability of an organisation to create value for itself is linked to the value it creates for others. As illustrated in Figure 3.2,
this happens through a wide range of activities, interactions and relationships in addition to those, such as sales to customers, that are directly associated with changes in financial capital. These include, for example, the effects of the organization’s business activities and outputs on customer satisfaction, suppliers’ willingness to trade with the organisation and the terms and conditions upon which they do so, the initiatives that business partners agree to undertake with the organization, the organization’s reputation, conditions imposed on the organization’s social licence to operate, and the imposition of supply chain conditions or legal requirements.
Accordingly, when these interactions, activities and relationships are material to the organisation’s ability to create value for itself, they are included in the integrated report.
This includes taking into account the extent to which effects on the capitals have been externalised (i.e. the costs or other effects on capitals that are not owned by the organisation).
Companies such as Standard Bank Group have adopted the value-creation concept, showing in simple terms how value is created. This will be discussed in detail in Chapter 4.
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The value-creation process in simple terms describes how an organisation’s business model factors in the inputs from the Six Capitals and converts them into outputs such as products and services. Figure 3.3 shows the conversion process.
Figure 3. 3: The value-creation process
Source: The IIRC’s International <IR> Framework (International Integrated Reporting Council, 2013:13).
Figure 3.3 shows how the value-creation process works in an organisation. The value- creation process is unpacked below.
The external environment
According to the IIRC’s International <IR> Framework (International Integrated Reporting Council, 2013:13), the external environment, “including economic conditions, technological change, societal issues and environmental challenges, sets the context within which the organization operates. The mission and vision encompass the whole organization, identifying its purpose and intention in clear, concise terms.”
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Those charged with governance, i.e. boards of directors, are responsible for creating an appropriate oversight structure that supports the ability of the organisation to create value.
Inputs, outputs and outcomes
The <IR> Framework argues that at the core of the organisation is its business model, which draws on various capitals as inputs and, through its business activities, converts them to outputs (products, services, by-products and waste). The organisation’s activities and its outputs lead to outcomes in terms of effects on the capitals. The capacity of the business model to adapt to changes (e.g. in the availability, quality and affordability of inputs) can affect the organisation’s longer-term viability (International Integrated Reporting Council, 2013:13).
Business activities
According to the IIRC’s International <IR> Framework (International Integrated Reporting Council, 2013:13-14), business activities include the planning, design and manufacture of goods or the deployment of specialised skills and knowledge in the provision of services. The <IR> Framework states that encouraging a culture of innovation is often a key business activity in terms of generating new goods and services that anticipate customer demand, introducing efficiencies and better use of technology, substituting inputs to minimise adverse social or environmental effects and finding alternative uses for outputs. Outcomes are the internal and external consequences (positive and negative) for the capitals as a result of an organisation’s business activities and outputs.
Mission, vision, risks and opportunities
The IIRC’s International <IR> Framework (International Integrated Reporting Council, 2013:14) posits that continuous monitoring and analysis of the external environment in the context of the organisation’s mission and vision identify risks and opportunities relevant to the organisation, its strategy and its business model.
100 Strategy and resource allocation
The organisation’s strategy identifies how it intends to mitigate or manage risks and maximise opportunities. It sets out strategic objectives and strategies for achieving these objectives, which are implemented through resource allocation plans (International Integrated Reporting Council, 2013:14).
Performance
The organisation needs information about its performance, which involves setting up measurement and monitoring systems to provide information for decision-making.
Outlook
The IIRC’s International <IR> Framework (I International Integrated Reporting Council, 2013:14) states that the value-creation process is not static. Regular review of each component and its interactions with other components, and a focus on the organisation’s outlook lead to revision and refinement, with the aim of improving all the components.