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Integrated Reporting: Human Capital and SMEs

Posted on 07-02-2023

D’ANGELO LUCIA – Forlì Campus

Integrated Reporting: Human Capital and SMEs

Over the last twenty years, companies have changed their external communication in response to the social and environmental challenges they face. Beyond the idea that the value created by a company depends only on financial factors, the IR Framework, published by the IIRC, provides that in an Integrated Report is represented the entire value created by all corporate capital. The report correlates financial and non-financial variables in order to highlight the ability of each capital to bring value.

The Integrated Report can also be seen as an evolution of the most widespread Sustainability Reports, but it has its own characteristics aimed at providing untraceable information, not even in financial statements. The most distinguishing element is the consideration of a wider time span: the medium to long-term allows to understand the process of creation, preservation and erosion of the value of the enterprise over time. Moreover, the IR Framework strongly recommends the adoption of a multi-capital approach which consists in determining first the creation of value contributed by each capital, and then the aggregate sum of these. However, in practice, the ability of value creation of some capital is not always easy to identify. Above all, human capital includes intangible elements such as knowledge, education, skills and experiences of employees and managers.

In order to be the best representation of what previously mentioned, the IR Framework has established some guiding principles and minimum elements (described in the first chapter) which must be respected for the preparation of the Integrated Report. It also should be noted the importance of the underlying integrated reporting systems, the result of integrated thinking that must necessarily be developed in every company that intends to write an integrated reporting.

The second chapter examines the ability of human capital to create value, as it is considered increasingly important for the success or failure of a business. After analysing all the components of human capital, we will particularly focus on the motivation to innovate, which only in recent years has been introduced in the literature and which has become increasingly fundamental for the contribution of value to the company. In fact, the same business model can be seen as the result of professional and integrated thinking of those who have to make direction and decisions on accounting processes. Therefore, for workers to be motivated, it becomes necessary to align their personal goals with those of the organization. However, such alignment is possible if companies assume obligations to protect employees’ needs. One of the most useful tools for this seems to be flexible remuneration mechanisms. However, if companies do not consider the long run in such mechanisms, it could discourage managers from investing in training. In the same chapter, a focus is made on the use of the Integrated Report in small and medium-sized enterprises in Italy. The final considerations drawn are not the same for all enterprises, since the group of SMEs considered is composed of heterogeneous companies, both in terms of dimensions and in terms of stakeholders.

In the third chapter, a quantitative assessment is made on the application of the Integrated Report among the companies listed in the Euronext Growth Milan. We also specify what steps could be taken to achieve satisfactory Integrated Reporting.

In summary, the Integrated Report was born with the need to empower companies on ESG issues, but it is too often used as a tool to improve corporate reputation. It should be highlighted how it can bring benefits, especially to the company itself, which is thus encouraged to periodically reassess, with a critical sense, its way of doing business.

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