WORKSHOP on INTANGIBLES, INTELLECTUAL CAPITAL & EXTRA-FINANCIAL INFORMATION

an Untilled Field

Ian BallInternational Integrated Reporting Council

September 2014

NGOsCompaniesInvestorsAccountingStandardsettersRegulatorsChair: Prof Mervyn KingCEO: Paul DruckmanWho is the IIRC?

Business NetworkInvestor NetworkIIRC Pilot Programme

Why : More than financials

The Framework

The Framework: Core features

Content Elements

Fundamental Concepts

Guiding Principles

Value Creation for the organization and for others

The Capitals

The Value Creation Process

The Framework: Fundamental ConceptsThe Value Creation Process

The Framework: Core features

Content Elements

Fundamental Concepts

Guiding Principles

The Framework: Guiding PrinciplesStrategic focus and future orientation

Connectivity of information

Stakeholder relationships

Materiality

Conciseness

Reliability and completeness

Consistency and comparability

Underpins preparation

Informs content

Presentation of information

Judgement is needed

Questions to be answered

Unique story

Connections apparent

Not a set sequence

Not isolated, standalone sectionsThe Framework: Content elementsOrganizational overview and external environment

Governance

Business model

Risk and opportunities

Strategy and resource allocation

Performance

Outlook

Basis for preparation and presentation

General reporting guidance

Emerging DatabaseBuilding the Business Case for Background Papers for IIRC Pilot Programme YearbooksThe Framework journey so farBasis for ConclusionsSummary ofSignificant IssuesThe Framework journey

Emerging DatabaseBuilding the Business Case for Background Papers for IIRC Pilot Programme YearbooksThe Framework journey aheadBasis for ConclusionsSummary ofSignificant IssuesFramework Development

Guidance and Practice

Thought leadership

Academic community

Databases

Evidence Base

Votorantim link to their Report 2012

South Africa endorses the Framework

Sasol annual integrated report 2013

set for take-off in Singapore

DBS Bank Annual Report 2013

promoted by G100 and major Superannuation Funds

Stockland Annual Review 2013

Brazilian Stock Exchange calls for Report or Explain on Integrated Reporting

Ita Unibanco Integrated Report 2013

European Commission hails as step ahead

Eni Annual Report 2013

crucial part of Japans Revitalization Strategy

Lawson, Inc. Integrated Report 2013

Harvard Business School study hails as enabler of financial stability

Prudential2014 Proxy Statement

India: Lab backed by CII

We have established a task force consisting of cross functional members representing the key functions of the organization to develop this integrated report.

This task force will develop understanding of the process of value creation in terms of the financial, manufactured, human, intellectual, social and natural capitals.

The concepts of connectivity and value creation will improve the organizations systemic thinking and increase its efficiency with the changing environment.

UK Guidance on Strategic Report consistent with

HSBC Annual Report 2013

Malaysian Prime Minister declares business take up of

The World Bank implement

Recommendation to G20 on

Where do intangibles fit?Why the untilled field?Does the field have well-defined boundaries?What count as good examples?How do we identify the best measures?The unique story/comparability trade-offIntellectual capital, human capital and social and relationship capital does the categorization work?

Final CommentsAttribution theoryIn reportingIn relation to outcomesPublic sector applicationInitial focus of Pioneer networkRegulationNot yet

Eni

Eni

Omron on intellectual property

InternationalIntegrated ReportingCouncil

The International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs.

Together, this coalition shares the view that communication about value creation should be the next step in the evolution of corporate reporting.The International Integrated Reporting Framework has been developed to meet this need and provide a foundation for the future.

The IIRC is chaired byProfessor Mervyn King,andPaul Druckmanis Chief Executive Officer.

The IIRC is the global authority on . Its mission is clear: to enable integrated reporting to be embedded into mainstream business practice in the public and private sectors.

*The IIRC Pilot Programme underpinned the development of the International Framework. The group of organizations participating in the IIRC Pilot Programme contributed to the development of the Framework, and demonstrate global leadership in this emerging field of corporate reporting. The Pilot Programme is the IIRC innovation hub made up of organizations who want to push the boundaries just that little bit further, to challenge, or at least question orthodox thinking, and to acknowledge the importance of reporting to the way our organizations think and behave. The Pilot Programme is made up of over 100 organizations in its Business Network and over 35 investors in the Investor Network

Examples of organizations in the Businesses Network:China Light PowerDeutsche BankHSBCUnileverMicrosoftHyundai Engineering and Construction

Examples of the Investor Network:DWS Investments (Deutsche Bank)Goldman SachsHermesGovernment Employee Pension Fund of South AfricaNatixis Asset Management

Some of the Pilot Programme have formed Regional Networks that give them the ability to evaluate the cultural and local impact of implementing with others in their region.

*-The Standard & Poors stock market index of the top 500 publically traded American companies.

-This graph demonstrates that:

- In the 1970s 80% of a companys market value could be traced through to the tangible assets in the financial statements.Today, only around 20% of a companys market value can be accounted for by its financial and physical assets.

Other factors, such as relationships, intellectual and human capital, make up an increasing proportion of a companys value.

enables the clear and concise communication of value creation, allowing investors to evaluate how all relevant capitals that a business uses and affects are incorporated.

The IIRC is not trying to monetize everything (which is a common misperception), but rather is trying to ensure investors have the information they need to assess the ability of an organization to create value over time. *The Framework has 3 core parts:

Fundamental concepts that explain the foundations or conceptual underpinning of , Guiding Principles that inform the content of an integrated report and how information in the report is presented, and Content Elements, which are essentially categories of information that are to be included in an integrated report.

Fundamental Concepts: An integrated report aims to provide insight about the resources and relationships used and affected by an organization these are collectively referred to as the capitals in this Framework. It also seeks to explain how the organization interacts with the external environment and the capitals to create value over the short, medium and long-term. *An integrated report explains how an organization creates value over time. Value is not created by or within an organization alone. It is influenced by the external environment, created through relationships with stakeholders and dependent on various relationships. An integrated report therefore aims to provide insight about:The external environment that affects an organizationThe resources and the relationships used and affected by the organization, which we refer to as capitalsHow the organization interacts with the external environment and the capitals to create value over the short, medium and long term.The external environment, including economic conditions, technological change, societal issues and environmental challenges, sets the context within which the organization operates. At the core of the organization 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 organizations activities and its outputs lead to outcomes in terms of effects on the capitals. Continuous monitoring and analysis of the external environment in the context of the organizations mission and vision identifies risks and opportunities relevant to the organization, its strategy and its business model.The organizations strategy identifies how it intends to mitigate or manage risks and maximize opportunities. It sets out strategic objectives and strategies to achieve them, which are implemented through resource allocation plansThe value creation process is not static; regular review of each component and its interactions with other components, and a focus on the organizations outlook, leads to revision and refinement to improve all the components.*I will now quickly run you through the Guiding Principles and Content Elements*Guiding Principles underpin the preparation of an integrated report, informing the content of the report and how information is presented

These Guiding Principles are applied individually and collectively for the purpose of preparing and presenting an integrated report; accordingly, judgement is needed in applying them, particularly when there is an apparent tension between them (e.g., between conciseness and completeness).

A Strategic focus and future orientationB Connectivity of informationC Stakeholder relationshipsD MaterialityE ConcisenessF Reliability and completenessG Consistency and comparability*The Content Elements are questions that should be answered in in a way that best expresses the organizations unique value creation story, and makes the connections between the Content Elements apparent

They are not intended to appear in a set sequence, and they are not isolated they are fundamentally linked to each other and are not mutually exclusive. *1.The Discussion Paper September 2011 This paper launched the IIRC and the intention of developing an International Framework into the market place.

2. Prototype Framework November 2012The first working draft of the Framework was released as a Prototype following the release of a draft outline in June 2012

3. Consultation Draft April 2013This was released on 16 April 2013, and was followed by a public consultation period, where organizations and individuals responded with feedback to help shape the direction of the Framework

4. Along the way we have also released a number of other resources including: a summary of the comments received on the Discussion Paper; background Papers on Materiality, the Capitals, the Business Model, Value Creation and Connectivity; two IIRC Pilot Programme Yearbooks, research (with Black Sun) on building the business case, and for those who want to see how flesh is being added to the bone of the Framework, a database of emerging practice.

5. Alongside the Framework we released two documents: Basis for Conclusions and a Summary of Significant Issues*There is much still to do on the road to :

Although there is a brand new Framework, the IIRC will continue its technical work. There will be projects that provide guidance for early adoptersThere will be projects designed to position the IIRC as a thought leader in the market. The IIRC will be getting academics engaged on the issues important to the communityThe IIRC will develop databases that showcase the best progress being made by those on the journey and provide resources that others can access. Laying out the business case for will be the foundation of our engagement with businesses and investors, and will inform our engagement with policy-makers*Although this diagram was not included in Votorantims Annual Report, they have separately published this diagram to demonstrates that the Annual Report focuses on Integrated Reporting. *I will now run through some examples of how businesses are applying *In March 2014, the Integrated Reporting Committee (IRC) of South Africa, whose influential members include the Johannesburg Stock Exchange, endorsed the International Framework as good practice guidance on how to prepare an integrated report.

Since 2010, Johannesburg Stock Exchange (JSE) -listed companies have been required to commit to integrated reporting by complying with the principles of the King Code of Governance of 2009, known as King III or to explain why they are not able to do so. Now, the International Framework has been endorsed in South Africa as the best tool to use when meeting this obligation. *Sasol presents an evolution of their business model which concisely provides an overview of the process through which the business goes to generate the end products, all the way through to marketing. Key to this business model is the identification of inputs natural gas, coal and crude oil and describing the process through which they are transformed. Interestingly, Sasol also identifies supporting elements which sustain our integrated business model which included GHG emissions, water, corporate governance, and research and innovation. By highlighting these aspects the reader is able to grasp not only the key processes by also the vital resources. *The Singapore Stock Exchange is committed to producing an integrated report. In this years annual report the CEO Magnus Bocker wrote, To enhance the quality of our stakeholder communication, we are committed to the adoption of Integrated Reporting for our annual reports.

The Singapore Accountancy Commission has published its first integrated report. Together with ISCA they are doing much to create awareness and conditions for adoption in Singapore and, longer-term, across South East Asia.

The inaugural meeting of the Singapore Business Network was also held earlier this month. Designed to support adopters, stakeholder engagement, as well as recognition of early adopters of ; the Singapore Business Network has assumed a practical approach, focussed on spreading the uptake of and contributing to the international agenda.

*At the beginning of the 2013 Report, DBS provides an accessible and informative four page section dedicated to explaining how the company creates value. Within just the first few pages of the Report the reader is left with in-depth knowledge of DBS and a clear sense of the ways in which the bank delivers value, beyond pure financial value.

The section works as a road map, enlightening the reader on what DBS does, why DBS does what it does, where the business operates, how DBS performs its business and finally, how the business measures progress made against the companys strategy. In addition, DBS provides an insight into what it is internally which drives the company, covering the role competent leadership, effective risk management and the companys values play, to tell a holistic story of DBSs business. * In July 2014, the Australian G100, the main CFO forum in Australia, published a paper offering broad support for . The papers authors recognised the opportunities offered by to enable directors and management to clearly articulate and better communicate performance and value-adding activities to shareholders. They said that The development of the Framework, which focuses on strategy and performance, has the potential to provide a consistent basis which should result in improvements in corporate reporting. The report also highlighted the importance of giving companies room to innovate: It is important that companies have the flexibility to adopt innovative approaches to reporting and that regulatory and legislative barriers to experimentation are removed.

The Pension Fund Network was initiated in Australia where 13 of the biggest Australian Superannuation Funds including, AustralianSuper and VicSuper are working together towards producing integrated repor. This years VicSupers report stated, We believe using Integrated Reporting as a new lens to look at our business is already starting to change the way we think.

*The section, Responding to challenges and opportunities is a good attempt at identifying both short and long term external factors that will impact Stocklands performance, and how the company intends to manage them. The corporate governance section of the report discusses the companys approach to risk management and refers readers to the website for copies of the Risk Management Policy. *In April 2014, Brazilian Stock Exchange BM&FBOVESPA backed by encouraging listed companies to produce integrated reports.

BM&FBOVESPA recommended to listed businesses that they adopt the Report or Explain principle by either reporting on their non-financial impacts, or explaining why they have not done so. This expression of support from BM&FBOVESPA demonstrated its belief that will bring with it opportunities for Brazilian business. BM&FBOVESPA is a long-time supporter of the IIRC and was involved in the development of the International Framework through the Brazilian Network.

*Ita Unibanco provides a clear insight into the companys capitals. To guide readers, the report uses navigation icons, which represent the companys capitals throughout. The report also provides its own interpretation of the six capitals, based on the International Framework, and the relation of those capitals to the organizations business model. Each features a dedicated section offering contextual information, key statistics and a succinct explanatory narrative.

Relatively few organizations explain the role of manufactured capital in value creation (pages 40-41). Ita Unibanco offers a useful overview of the organizations branch infrastructure, a progress update on the companys new data center and installation of biometric readers at all branches. From this, report readers gain an appreciation of how upgrades to manufactured capital position the company for the long term.

*In April 2014, the European Commission singled out as the future of corporate reporting.The European Commission passed legislation that will require around 6,000 European entities to disclose on non-financial and diversity information. In April, a memo about the new Directive published by the EC recognised that the new rules dont go so far as to require integrated reporting, but described as a step ahead. The memo went on to say, The commission is monitoring with great interest the evolution of the Integrated Reporting concept, and, in particular, the work of the International Integrated Reporting Council.

*Enis report brings together a diagram, supporting captions and clearly-structured table to communicate the companys strategic guidelines, value drivers, assets and business activities. The company structures its discussion around the six capitals presented in the International Framework.One of the tables strongest features is its distinction between value created for the organization and value created for the organizations stakeholders. With its layout and use of bullet points, the discussion is informative, simple and succinct.

*In June 2014, Japanese Prime Minister Shinz Abe published his Japan Revitalization Strategy (JRS) the third part of his wider plan to boost economic growth. The new Strategy called for a market dialogue to understand how corporate reporting reform, and Integrated Reporting specifically, can help to refocus businesses and investors on long-term value creation.

The JRS, described as the third arrow of Abes reforms, is an ambitious package of reforms aimed at restoring both domestic and international confidence in the Japanese economy as a place to invest. The Strategy was welcomed as it brings further flexibility to some areas of the market, as well as heralding the introduction of a new corporate governance code by 2015.

Integrated Reporting has a crucial role to play in both of these aspects as it encourages constructive communication and understanding both internally and with providers of financial capital.

*Lawson introduces its business model in the section of Message from CEO as a basis for the discussion on how to achieve managements commitment, 20% of Return on Equity (ROE). The content is clear, concise and logically structured.

The explanation on Lawsons advantage is followed by this diagram. The vision is based on the customer-driven corporate culture, and is positioned in centre place. Three components are identified as a differentiator and a viable driver of its business model.

Each component is explained in the following pages, demonstrating its interaction with each other. Capitals shown in the diagram are further explained in the narrative part to supplement information in the diagram. *Research drawn from 1,066 US companies practicing degrees of Integrated Reporting concluded that, " is associated with a more long-term investor base". The Harvard Business School research, led by George Serafeim, entitledIntegrated Reporting and Investor Clienteleindicates that businesses that are on the journey towards Integrated Reporting, and are starting to efficiently communicate with investors about how they make value over time, are attracting more stable investment.The research found that is positively associated with percentage of shares owned by dedicated investors and negatively with percentage of shares held by transient investors. This suggests that businesses practicing not only attract dedicated investors but also become unattractive for transient investors.This research is consistent with the IIRC's belief that the process of is a journey for businesses, and it can take several reporting cycles to achieve the desired results. However, businesses can take advantage of its benefits throughout the journey and not just at its conclusion.

*The key innovation here is that Prudential saw the value in including this information in its Proxy Statement to investors. Whereas other companies include the information in their integrated reports, Prudential have stated that they believe this information about their value creation model is important to communicate to investors. *CFOs of some of India's largest companies are part of a new Indian Lab which will drive business adoption and support practical implementation of in an Indian business and regulatory context. Over 20 leaders from business, academia and regulators met in Mumbai on 19 August 2014 to launch the Indian Lab, an initiative brought about by the collaboration between the IIRC and the Confederation of Indian Industry (CII).Koushik Chatterjee, CFO of Tata Steel, chairs the Lab, which includes some of India's leading CFOs. The multi-stakeholder Lab will ensure businesses and investors have access to a pool of expertise to share knowledge and tap into the experiences of companies adopting in other markets.*Although is relatively new in India, many businesses are committed to working towards producing an integrated report, such as the Kirloskar Group, an Indian conglomerate, that made this statement. *In October 2013, new requirements came into effect for UK businesses above a certain size to publish additional information in a strategic report, published as part of their annual report. In June 2014, the UK Financial Reporting Council (FRC) published new guidance aimed at helping businesses comply with these changes. According to the FRC, following their guidance will not only help companies comply with the change in regulation, but also should result in reporting that is consistent with the International Framework.

The FRCs statement is a reflection of the common principles that underpin both the new strategic report requirements, which require companies to better articulate the strategic factors that underpin longer-term performance, and the International Framework.*The How we create value section uses a diagram and narrative to explain HSBCs role in a broader economic and societal context. Through straight-forward language and an almost conversational style, this section explains to readers how the business generates income. The reports Long-term sustainability section provides HSBCs own interpretation of long-term corporate sustainability, a concept for which there are arguably as many definitions as there are companies. HSBCs definition draws connections to the economic, environmental and social landscape in which it operates. The discussion proceeds to list key stakeholders, dependencies and sources of differentiation, all of which set the scene for the strategy and business model discussions that follow.*Listed Malaysian businesses have responded to a statement by the Malaysian Prime Minister by declaring their intention to produce integrated reports. Malaysian Prime Minister Datuk Seri Najib Razak told business leaders in Kuala Lumpur that the first of the companies listed on Bursa Malsyia will be practicing by 2016.

Previously, the Malaysian Prime Minister, Datuk Seri Najib Razak, has backed the countrys commitment to exploring avenues to enhance the quality of information available to the capital market, including, the eventual introduction of integrated reporting.

In April, Malaysias Securities Commission gave the strongest signal yet that it wants Malaysian businesses to adopt the International Framework. At an event hosted by the Securities Commission, Goh Ching Yin, the Commisions executive director, lauded as a one stop information shop bridging the divide between financial, sustainability and other forms of reporting.

*Chairman of the Financial Stability Board, Mark Carney will discuss at an event held in conjunction with the annual World Bank meeting in October 2014.

Carney, who is also Governor of the Bank of England, has announced he will use the event to present on to an audience of central bankers, finance and development ministers and private sector executives. IIRC Chairman Paul Druckman will facilitate the panel, which will also include Betrand Badr, Managing Director & Group CFO of The World Bank Group. The World Bank will produce its first integrated report in 2015, and Badr has spoken of the benefits he sees in . He said, Integrated Reporting does more for an organisation than just facilitate the creation of a holistic report of overall performance. It fosters and embeds integrated thinking everyone has a common understanding and speaks the same language.

*In a June 2014 report commissioned by the B20, the business forum that advises G20 governments, the six largest global accounting networks have endorsed as a key innovation that will make corporate reporting more conducive to long-term investment.

The report found that investors needed a longer-term and broader perspective on shareholder value creation and picked out as a potential solution. The report was a response to a growing gap between the need for new infrastructure estimated to be worth US$500 billion annually and the available funding. , the report said, has the potential to support better investment evaluation models, resulting in better investment decisions and unlocking funding. The B20 called upon G20 Finance Ministers to "assess and address any practical, legal or statutory barriers to improved corporate reporting [...] in order to make corporate reporting more conducive to infrastructure and other long-term investment."

***