Stakeholder Engagement

Stakeholder relationships are one of the Guiding Principles in the <IR> Framework: "An integrated report should provide insight into the nature and quality of the organization's relationships with its key stakeholders, including how and to what extent the organization understands, takes into account, and responds to their legitimate needs and interests."43 Different from the actual quality of stakeholder engagement itself, we measured the quality of disclosure about stakeholder engagement. However, we hypothesize that these are closely related to each other; stakeholders will challenge a company that makes excessive claims about its degree of stakeholder engagement.

Other than use of a materiality matrix, stakeholder engagement was, along with connectivity of information, ranked the lowest of the special factors. It was also the only category in which there was no discrepancy between South African companies and the rest of the sample. However, as discussed in the previous chapter, there is a close relationship between stakeholder engagement and identifying material issues. Nearly 90% of the companies receiving the highest score for stakeholder engagement also received the highest score for identifying material risks (Table 7.1). In contrast, 75% of the companies that received the lowest score for stakeholder engagement also scored the lowest for identifying material risks.

Companies that scored high in both categories typically disclosed on them in the same section of their report. Various formats were used to disclose stakeholder engagement, including tables and graphics. Some companies were explicit about following certain standards (e.g., AA1000 from AccountAbility)

TABLE 7.1 Stakeholder Engagement and Identifying Material Risks

or best practice frameworks (e.g., from GRI). In a few cases, companies only provided positive information about the outcomes of stakeholder engagement, raising the question of whether they were following the <IR> Framework's Guiding Principle of Reliability and completeness: "A complete integrated report includes all material information, both positive and negative."45

Providing further support for the previous chapter's argument that constructing the SVM and getting its full value requires effective stakeholder engagement, we also found a strong relationship between company publication of a materiality matrix and its level of stakeholder engagement (Table 7.2). Nearly three-quarters of the companies that received the highest score on the materiality matrix scored the highest on stakeholder engagement—in contrast to only 16% among companies that did not include a materiality matrix in their integrated report. This suggests that producing a materiality matrix enhances disclosure about stakeholder engagement, likely because stakeholder

TABLE 7.2 Stakeholder Engagement and the Materiality Matrix

engagement is an important element of constructing the matrix and thus often discussed when the matrix is presented.

Connectivity of Information

While all of the Guiding Principles are important, for us "Connectivity of information" lies at the heart of integrated reporting. It is through showing connectivity, or the relationships between different aspects of corporate performance, that a report transitions from a "combined report" to an "integrated report." According to the <IR> Framework, "An integrated report should show a holistic picture of the combination, interrelatedness, and dependencies between factors that affect the organization's ability to create value over time."46 This requires integrated thinking to facilitate the connectivity of information flow into internal reporting, analysis, and decision-making so that the results are reflected in the external integrated report.47

As it is difficult to achieve in a paper format and almost equally hard to evaluate, connectivity of information received a fairly low score for the entire sample. To trivialize the concept, connectivity of information refers to the notion that "everything is related to everything else." This is illustrated in Figure 7.5, which shows that the explanation of connectivity of information in the <IR> Framework includes all of the six capitals and substantive content elements (except for Basis of preparation and presentation and General reporting guidance). Thus, a company has to make choices about what connections to make and in what priority and sequence. Since all content elements are related to each other, the company can justifiably discuss the others when focusing on any specific one. In fact, as shown in Figure 7.6, in

FIGURE 7.5 Connectivity of Information, Content Elements, and the Capitals

FIGURE 7.6 Relationships of the Content Elements to Each Other in the International <IR> Framework

discussing each content element, the <IR> Framework explicitly refers to many other elements. If the integrated report were organized by content element, each of which discusses other relevant content elements, this would lead to substantial repetition and would violate the Guiding Principle of Conciseness.48 However, the same problem would exist if the report were organized in another way. Since a paper report proceeds in a linear fashion in spite of many interrelationships among different pieces of information in the report, there will always be a tradeoff between concision and connectivity. The solution, we will argue in Chapter 9, is to use information technology as a way of assuaging the limitations of a paper format presentation.

We found the most common attempt to provide connectivity to be in the discussion of the company's business model, risks and opportunities or, to a lesser extent, in strategy and resource allocation. The rarest instance of all— and, to us, the "Holy Grail" of integrated reporting—was a clear articulation of how performance in one dimension affected performance on another. Major obstacles to this include understanding these cause-and-effect relationships and having the data to test hypotheses about them, the latter further limited by the lack of standards. In order to ascertain their robustness, these relationships must be tested across a number of firms.