Mike Krzus (pictured) is a senior adviser specialising in integrated reporting with BrownFlynn, Cleveland, Ohio-based corporate sustainability and governance consultants. A US Certified Public Accountant, Krzus has long been a prime mover in the push to get integrated reporting onto the corporate agenda.

Question Mike Krzus, you’ve been following integrated reporting since its inception in 2011. Back then there was an idea that the integrated report should eventually contain everything investors need to know about a company. However, I don’t think the idea of “one document” is a commonly held expectation within the IR community any more.

Do you agree that we’ve moved away from the “one report” idea? If so, why the change?

MK: I don’t see companies as having moved away from a literal interpretation of the expression“one report” because that was never the intention of those who worked to establish the International Integrated Reporting Council. In addition, there has been a misconception that the term “one report” meant a single all-inclusive financial and sustainability report ever since One Report, the first book on integrated reporting, was published in March 2010. Bob Eccles and I were clear about what we meant by “one report” in Chapter 1 of that book. We explained that “one report” did not mean only one report and that we expected companies to continue to provide information in many different ways to different stakeholders. 

The content and style of an integrated report will be influenced not only by the International Integrated Reporting Council (IIRC) framework, but also by a country’s legislative and regulatory environment. In addition, an easy to overlook but critical factor in a company’s approach to integrated reporting is its corporate culture. 

Novo Nordisk is generally regarded as an excellent example of integrated reporting. It contains the financial statements and notes, the IIRC framework content elements and robust disclosures about ESG performance. But different regimes means its approach cannot be replicated in other jurisdictions.  We won’t see a common approach to integrated reporting until the framework becomes generally accepted in the same way that US and international accounting standards are today.

Question Integrated reporting is still evolving. What do you think the next steps are in order for it to achieve its aim of being a concise and useful tool for large investors to make investment decisions?

MK: I don’t have a prescription or three magic steps to make an integrated report more useful to investors. This is where stakeholder engagement must come into play. If a company wants to know what they have to do to make their integrated report more relevant and useful to investors, then they need to seek and listen to investor feedback on the report. For example, many integrated reports are graphics-intensive. Graphics are a great way to help people grasp complex information or processes. However, graphics are not easily entered into the models built by analysts. This is not going to be easily resolved. I suspect that companies will need to become more innovative in the ways they provide information and that analysts will need to become more innovative in the ways they consume data.


Question: It’s encouraging to see how many companies are either producing a stand-alone integrated report, or elements within the annual report that respond to the IIRC framework. But commentators have remarked that the concept of connectivity is missing from many reports. What’s your definition of connectivity?

MK: I think of connectivity as an explanation of how financial and environmental, social and corporate governance (ESG) performance affect each other. Instead of getting bogged down in jargon, let me explain how I try to put that definition into practice. Here are three things I want to see in terms of connectivity when I read an integrated report. 

  1. I look for a graphic or narrative that demonstrates a company’s understanding of the relationship between financial and ESG performance. SAP uses a graphic called the “Integrated Performance Analysis” to illustrate how performance on ESG issues affects financial results.
  2. Material risks and opportunities, including global trends, should be discussed in the business strategy section. I want to know how an organization will leverage opportunities and mitigate risks. I want to know the effects of material issues on current performance and future targets.
  3. I want to see a company demonstrate its understanding of the following: Which material issues are capable of driving major innovations and why? How will those innovations impact the business model and strategy? How are discrete initiatives — reducing carbon emissions, using less water, cutting waste —affecting business processes and financial performance?

Question  My own opinion is that accountants are inhibited about making connectivity statements, because they shy away from the cause-and-effect nature of the exercise. What do you think?

MK: One of the reasons companies have a hard time with the concept of connectivity is a belief that a financial valuation of the impact of ESG issues is required. Explaining how a reduction of X tons of carbon at a facility decreases costs in a specific dollar amount is very difficult. In my experience, controls over nonfinancial information have yet to reach the same level of quality as controls over financial information. I believe information quality and reliability is the real factor that inhibits a connectivity presentation. That’s why I advise companies to begin with a narrative or graphical presentation to explain how ESG performance is linked to financial performance.

Question Following your comment above, could you explain further your attitude to natural capital and social capital valuations? Do you think there is a need to quantify the IR capitals in this way?

MK: I am not an advocate of placing a financial value on the six capitals described in the IIRC framework. Absent a viable market to establish pricing of,  for example, “human capital” or “social and relationship capital”, it’s not possible to establish consistent and comparable valuations. Also, I am not aware of any demand from investors to value the six capitals.


Question Australia has a tightly regulated regime that is a disincentive to making forward-looking statements. Do other jurisdictions face legal hurdles to making forward-looking statements?

MK: This question is tough because I am not an attorney with a solid understanding of securities laws. I’ll offer an opinion that there may be a problem with the way people around the world define the term “forward-looking”. I fear that the “Outlook” section of an integrated report might be viewed as a projection, which has a specific accounting definition. I see the “Outlook” as a narrative that addresses how an organization will respond to global trends and other challenges that might arise. A reader, I believe, wants to understand whether the company views issues such as demographic changes, technological advances, and climate change as risks or opportunities; how those issues might affect the business; and what the company plans to do based on what it knows today.

Question Some would say that the way integrated reporting has evolved, it has become a brand aid more than an inspiration for integrated thinking. Do you agree?

MK: There’s too much focus on the integrated report as a document or website rather than on the idea of integrated thinking as the foundation for integrated reporting. Integrated thinking is poorly defined in the IIRC framework. To me, integrated thinking is an understanding of how to balance the profit imperative with addressing environmental and societal issues. 

People should consider both integrated thinking and integrated reporting simultaneously. They need to think about the role of culture and governance in developing the business model, strategy, and tactics; what an organization will learn from stakeholders when they discuss the integrated report with them, and what behaviors integrated reporting can drive.


Question Many companies consider that muscular tax minimization is a duty they owe to their shareholders. Do you think it’s reasonable to expect companies to spell out how they manage their tax exposure in an integrated report? Do you have any sense of how they might do that in accordance with the IIRC’s guidelines?

MK: The IIRC’s framework does not mandate any specific disclosures. The purpose of an integrated report is to provide information to “providers of financial capital”, which I think of as providers of equity capital and debt holders. The integrated report should focus on issues that are material to the ability to create value over time. To the extent that management and the board view tax policy as material to value creation, it should be included in an integrated report. Otherwise, tax policy should be disclosed as required by laws and regulation.

– May 11, 2016