Outside of Japan, a relatively low number of companies in Asia are currently producing integrated reports, but this month's In Profile interviewee – Jonathan Labrey, Chief Strategy Officer and Head of Asia Pacific, International Integrated Reporting Council – explains why he believes that integrated reporting will become the norm in Asia over the next 10 years.

Thanks for giving us this interview, could we start by discussing your current role at the International Integrated Reporting Council (IIRC)?

‘Absolutely. I started at the IIRC about four years ago and two years ago took on the Asia brief specifically. One of the reasons we wanted to focus on Asia is that we have introduced, as you know, through integrated reporting (IR) this multi-capitals idea of managing the resources and relationships of an organisation. One of those capitals is 'social and relationship capital’ and we have found, particularly in the Asian context, that the idea of putting a value on relationship capital is really something that resonates very strongly with the business community and with the culture here in Asia. If you understand the value of the relationships you have, you can build long-term value. So Asian markets are very interested in how you can use corporate reporting and corporate governance – because they see them as two sides of the same coin – to build and sustain long-term value creation. I worked out in Singapore for six to nine months at the beginning of my Asia brief because the Singapore government has given very strong backing to IR. They want Singapore to be the hub for IR in Southeast Asia by 2020 and have put resources into making that happen.’

How many companies in Singapore are currently producing integrated reports?

‘It's quite a low number – seven or eight, something like that.’

Are they producing officially accredited integrated reports?

‘We don’t have an accreditation system, it is a framework that we put out there for market-led adoption. At the moment we are in the innovation phase. We don’t want to put barriers in place for companies to prevent them from experimenting with IR. All we are encouraging businesses to do is to acknowledge in their reports that they are following the principles of the International Integrated Reporting Framework. There will come a point where we need to build in some kind of accreditation system, but at the moment the only accreditation there is applies to the 100 companies globally in our IR Business Network – they can put in their annual report a logo saying they are following the Framework.’

What other jurisdictions in Asia have embraced the IR concept?

‘Malaysia sees IR as being absolutely critical to building a more sustainable capital market. The prime minister and regulators in Malaysia have embedded IR within their capital market master plan, and since 2014 the government has been calling on businesses to adopt IR. That is a good catalyst. About seven or eight companies are producing integrated reports in Malaysia, but we had a conference there in August last year and, of the roughly 100 companies participating, about half indicated they would be embarking on IR within the next two to three years. The next country to look at would be India. The Chairman of the Securities and Exchange Board of India (SEBI), recently called on the Confederation of Indian Industry (CII) to produce a roadmap on how IR can be adopted as a mainstream practice in India. They will be presenting that roadmap during the course of this year. The CII has also set up an 'IR Lab’, which brings together about 11 companies, including some of the biggest companies in India, which are either producing integrated reports or have signed up to IR. It is a slow process, but it is aligned to a lot of the trends that are happening in India and in many Asian countries where it is recognised that they can leap to best practice in IR and thus avoid having to adopt the complexities of Western corporate reporting systems. If you tried to follow the US requirements, for example, you would need to adopt a very complex regulatory system. But moving on to Japan. In Japan there are now over 200 companies producing integrated reports, making it by far the biggest IR success story in the world outside South Africa. This is all the more remarkable because, unlike South Africa, IR hasn’t been mandated in Japan, it is purely market led. That said, it has had a lot of backing from the government. The Japanese Prime Minister, Shinzo Abe recognised that Japanese companies were undervalued in the capital markets and he set about changing that. He launched a reform agenda which led to corporate governance reforms, a corporate governance code and a stewardship code for institutional investors. He also appointed an academic – Professor Kunio Ito – to do a report into what is holding back long-term investment in Japan's capital markets. One of the recommendations of the Ito Review in 2014 was to promote IR to help companies project their value to international investors. The Ito Review has become something of a boardroom bible in corporate Japan and IR has just taken off. We are predicting that over the next two reporting cycles there will be 400 companies in Japan engaged in IR.’

Can we turn to Hong Kong and Mainland China – what is your view of the Stock Exchange's promotion of environmental, social and governance (ESG) reporting in Hong Kong – will that be a good first step to wider adoption of IR?

‘We have mixed views on this initiative. We will back any moves that are going to get companies to think about their social and environmental footprints, but we are not calling for disclosure for disclosure sake. Investors are interested in knowing how ESG factors are going to impact the business model and strategies of the company. Is the board actually taking this information into consideration? Is the fact that the business is polluting the environment impacting the business model? Is it actually changing the way the business is thinking about its investment in the future?That's important to investors and that is why IR is primarily focused on how ESG information impacts the business model. We don’t want to produce more silo reports. You can end up having a sustainability or a CSR report with a lot of great photos, but without any connection at all to your strategy as a business. Turning to Mainland China – China taking over the G20 Chairmanship this year has been a good opportunity for us – the IIRC – to engage with the government on the IR agenda. In November 2015, my Chief Executive and I went to Beijing and Shanghai. We were invited by EY, they hosted two very significant seminars with about 100 businesses to raise awareness about IR. We also met with the government and they invited us to join the task forces of the B20, the business arm of the G20.’

How many companies are producing integrated reports in Mainland China?

‘At the moment we have only identified one company doing IR which is CNG, the nuclear power company.’

In our article on IR in Hong Kong (CSj October 2015), we found that, while a low number of organisations were actually producing integrated reports (at that time only four companies were doing so), the fundamental concepts of IR were having a significant influence on the market – it seems that, ex Japan, this pattern is repeated around Asia?

‘Yes. This is our challenge. We are living in a numbers game and people want to know how many companies are actually doing an integrated report, or how many markets are actually regulating for it, and both figures are quite low. South Africa and Brazil are the only markets where IR is a comply or explain requirement, but, as you say, IR is influencing companies’ thinking below the headline numbers. Some companies don’t like formalities and have opted to evolve with their annual report – they have adopted all the principles without calling it an integrated report.’

How far do you think IR is going to go in Asia – do you think it could become the standard model for corporate reporting?

‘I think we are just breaking through now and IR will become the norm over the next 10 years. There are two major incentives for companies. Firstly, companies engaged in IR have a much greater sense within the business, not just of the financial performance, but the whole strategic performance of the business. They also have a better dialogue with their investor community because they have a much better understanding of what's happening, so they can talk about that. The other major incentive is the external one – you can attract a longer-term investor. Most of the evidence coming out of Nanyang University in Singapore, and the University of Singapore Harvard Business School shows that you can actually have a better dialogue with those who are investing in you and build value over time. You will have fewer short-term traders and this reduces volatility.’

Do you think IR is also better aligned with changing stakeholder expectations of the role of businesses in society?

‘Absolutely. Professor Michael Porter's concept of 'creating shared value' shows that businesses, when they start thinking about their impact on society, can become part of the solution to the big problems facing us, such as employment, inequality, training and environmental problems. In the past businesses were seen as part of the problem, but they can create a 'shared value' model which may not be exactly the same thing as IR, but is certainly aligned with it.’

What is your view of the notion that IR is too complex for most companies to adopt?

‘If companies can follow the International Financial Reporting Standards, they can do IR.’

You don’t think that IR is setting the bar unrealistically high for the majority of companies?

‘I don’t think it is. I think it is an evolution rather than a revolution in how companies should be doing their reporting. If you agree that we are living in an interconnected and complex world; a world of more complex supply chains; a world of greater transparency where people are demanding more information and information that is in context; if you accept that, broadly speaking, the corporate reporting system is not fit for purpose because it has been built up through silos, so you have financial reporting, governance reporting and sustainability reporting all with their own standards and no one has thought holistically about how all of this comes together; if you accept that kind of rationale, then IR has to be the logical answer. IR recognises the different capitals companies use to create value and it recognises how interconnected they all are. It also recognises that this has to be something that connects back to the capital markets because our capital markets have become far too short-term. Risks in businesses have not been spotted early enough and therefore escalated to the boards of those businesses. Boards have been disempowered from the whole corporate reporting process – it has become a corporate communications exercise rather than being about the management of the business and the understanding of the business. The board needs to take responsibility for the story of the business and the strategy of the organisation. You have got companies with multiple strategies, companies that can’t explain their business models and then they wonder why they are not valued properly by the capital markets. We have found when we talk to companies in Asia that, quite often, you will get the internal audit, company secretarial, finance, strategy, HR, corporate communications and sustainability teams, all coming in and introducing each other for the first time since they have never actually met. And they are all working on the same strategy and often have all been producing chapters of their annual report for years, but never has anyone thought of bringing them together to ask what is the nature of the business and what connects us all together.’

You mention the company secretarial team – CSj readers will be particularly interested in what sort of role the company secretarial team should be playing in the IR process.

‘Yes. Our Chairman Mervin King from South Africa has pointed out that the role of the company secretary is changing and it is changing for the better. It has changed from a backroom function to being a strategic function within the business. And the more issues of risk management become vital to boards, the more the role of the company secretary will be enhanced within the business. So, within that context, I think the company secretary can play an important role ensuring that strategy remains within the agenda of the board, because the board's agenda can become so full of compliance issues, operational issues and so on. But the company secretary also plays a key part in IR and integrated thinking because, as I mentioned, one of the first steps is to start connecting all the different factors that go into managing risks and identifying the core value of the business. This comes back to the idea that corporate governance and corporate reporting are actually two sides of the same coin. I don’t think that we can separate governance and reporting any more, we have to have a focus on both and that also is where the role of the company secretary comes in.’ Jonathan Labrey was interviewed by Kieran Colvert, Editor, CSj. More information on the work of the International Integrated Reporting Council is available at: http://integratedreporting.org. CSj would like to thank Brian CK Ho, Sustainability Leader (China South, Hong Kong and Macau), Climate Change and Sustainability Services, Ernst & Young, for his help in arranging this interview.