Internal application of IR principles: Generali's Internal Integrated Reporting

Highlights

• We investigate whether and how Integrated Reporting principles can be applied internally.

• We analyse the case of Generali, pioneer in bringing to life the Integrated Reporting internally.

• Our work contributes to both MCS and IR literature.

Abstract

This study analyses the case of Generali, an Italian insurance company that implemented Integrated Reporting (IR) principles internally, creating an Internal Integrated Report (IIR). More specifically, it studies whether and how the internal implementation of Integrated Reporting principles can advance management control systems (MCS). By merging management control systems and integrated reporting literature, we identified several mechanisms that could potentially lead to an evolution of management control systems. The case study analysis of the Generali Internal Integrated Reporting allowed us to compare the hypothetical benefits derived from the literature with actual benefits derived from the Generali case. This work contributes to both management control systems and Integrated Reporting literature. We believe that cross-fertilization between different streams of literature has been particularly successful in this case, as Integrated Reporting is not only about external reporting but it is rather about how firm complexity can be managed more generally.

Introduction

Integrated Reporting (IR) has recently attracted a great deal of attention from companies and policy makers. The International Integrated Reporting Council (IIRC) was founded in 2010 and issued the final version of the IR Framework in late 2013, which provides guidance to organizations wishing to implement IR. From 2011 to 2014, about 100 companies worldwide worked on their IRs, through the Pilot Program launched by the IIRC. Many others have done the same by relying on the IIRC Framework alone. Consulting firms, auditors and investors have also shown significant interest in IR (see PWC., 2012, EY., 2014, KPMG., 2011).

Academic literature has also studied IR over the last few years (see Adams and Simnett, 2011, Abeysekera, 2013, Lozano, 2013, Frias-Aceituno et al., 2014, De Villiers et al., 2014, Higgins et al., 2014, Steyn, 2014, Adams, 2015, Flower, 2015, Lodhia, 2015, Robertson and Samy, 2015, Beck et al., 2015, Perego et al., 2016, De Villiers et al., 2016, Stacchezzini et al., 2016), generally focusing on the external rather than on the internal dimension of IR. According to Perego et al. (2016), much of the embryonic IR-related research has yet to explore how internal performance measurement and reporting systems have been impacted by the adoption of IR. This imbalance in the research is surprising, given that IR concerns not only external reporting, but also management control system (MCS) (IIRC, 2013).

In 2013, the Group Integrated Reporting & CFO Hub function of Generali, an Italian insurance company, published an article on the IIRC blog announcing that it would apply IR principles internally in order to modify its MCS. Thus Generali,¹ after joining the IIRC Pilot Program and publishing its IR, was implementing an Internal Integrated Report (IIR).

This paper merges with and contributes to academic literature on MCS and IR by studying what ways the internal implementation of IR principles can advance MCS.

First, we review IR and MCS literature in order to identify traditional MCS limitations and challenges that could be overcome (or made less severe) through the internal implementation of IR principles. More specifically, we identify four categories of challenges or limitations that may affect MCS: (i) they are costly; (ii) they are not aligned with strategy and organizational culture; (iii) they do not fully allow the understanding of cause-effect relations; (iv) they lack focus on non-financial indicators and their co-existence. We argue that IR principles may overcome (or make less severe) several of these limitations.

Second, we implement a case study analysis focusing on Generali, a pioneer in the internal implementation of IR principles. We gathered empirical evidence from multiple data sources: interviews, field observations and internal documents. The case study describes IIR in detail and provides information on the process that led to its implementation and on the organizational benefits Generali has achieved.

Third, we compare the hypothetical IIR benefits derived from literature with actual IIR benefits derived from the Generali case and we discuss to what extent IIR actually managed to advance MCS. We also try to abstract from the specific case of Generali and look at the IIR construct more generally (“abstract IIR”), in order to infer some generalizable characteristics that are not case-dependent.

This study, by directly engaging with firms rather than by simply relying on the analysis of external reporting, responds to several calls for research on the implementation of internal IR principles (see Steyn, 2014, De Villiers et al., 2014, De Villiers et al., 2016, Perego et al., 2016) and it contributes to both MCS and IR literature. We believe that this cross-fertilization between different streams of literature has been particularly successful, because IR is not entirely about external reporting but rather is also about how firm complexity can be managed by relying on integrated thinking (IIRC, 2013). Therefore, IR principles can be fruitfully applied to MCS. Once companies have fully interiorized IR principles, they may achieve significant benefits from internal IR implementation, especially in terms of MCS advances. This research does not only contribute to academic literature but may benefit organisations that are seeking to undertake IR internally.

The remainder of this work is organized as follows: Section 2 revises the literature on IR and discusses MCS limitations, proposing several mechanisms through which IR principles, when applied internally, could advance MCS. Section 3 explains the methodology employed. Section 4 discusses the Generali IIR case, focusing in particular on four key themes that emerged during the interviews: awareness and proactivity, IR approach, stakeholder engagement and capital definition. In Section 5, we try to abstract from the specific case of Generali and look at the IIR construct more generally (“abstract IIR”) in order to infer some generalizable characteristics that are not case-dependent. Finally, Section 6 discusses the main findings of this work, and connects them to previous literature. Section 7 concludes.