The new integrated reporting from BAE Systems scores well but could be more transparent

BAE Systems sets a high bar for organisations contemplating integrated reporting. The company’s 2012 annual report is blessedly concise, rationally organised, and easily navigable. It handily targets many of the content elements and guiding principles in the International Integrated Reporting Council’s (IIRC) draft integrated reporting framework. BAE even details the various capitals feeding into and emerging from its business model, referencing key resources relevant to intellectual, human, and manufactured capital flows.

The IIRC Content Element most strikingly fulfilled is that of governance. BAE’s report incorporates excellent and non-boiler-plate descriptions of company oversight and accountability structures. Illustrative diagrams alongside the text enable readers to skim or dig deep, as desired. Of particular interest is a one-page letter from the BAE corporate responsibility board committee. In it, the committee (established in 2005) points out that “all CR matters mentioned have been incorporated into the company’s core performance management processes, and therefore, have the same visibility as financial measures of performance”.

Risks, opportunities and challenges receive much the same treatment, with clear depictions of risk assessment processes and executive/board oversight. BAE discusses significant changes in the defence sector, from economic pressures (including potential impacts of US sequestration), to military draw-downs due to resolution of global conflicts, to drivers for BAE to seek additional customers beyond the US/UK markets (which constitute the bulk of sales). The company also highlights cyber security as a growth area, given the increasing sophistication of virtual warfare.

The “principal risks” section of the report is especially well designed to support readability. Each risk is clearly outlined, alongside potential impacts and mitigation efforts. Some cracks in the integration façade appear here, however, given that “non-financial” matters don’t seem to reach the level of principal risks. Thus, although BAE identifies ethics, safety, diversity and inclusion and the environment as priority non-financial issues, it is a matter of speculation whether all risks were assessed equally, or whether BAE purposefully excludes non-financial risks from consideration here. Commentary on this topic would be welcome in future reports.

Unconnected thinking

Another integration hiccup is BAE’s use of the terms “financial” and “non-financial”, creating a barrier to connected thinking and action. BAE states that “non-financial risks cannot readily be assessed in financial terms, and, therefore cannot be reflected reliably in the financial statements.” Yet, there doesn’t seem to be much effort on the company’s part to value corporate responsibility impacts, even in areas that readily lend themselves to quantification.

Ethics is one such area. BAE names ethics a priority – not surprising given the company’s past compliance breaches. BAE reports ethics indicators such as enquiries to its hotline and dismissals relating to unethical behaviour. Of potentially much greater interest to shareholders is the financial impact of ethics-related activities: fines levied against the company; monies spent to investigate, defend, and remediate breaches; investment in employee training; and so forth. With past fines reaching tens of millions of dollars, financial accounting of this “non-financial” issue would seem to be material indeed.

Finally, one of the only truly frustrating aspects of the report was BAE’s consistent lack of specificity on targets related to its “total performance” strategic framework, which encompasses customer focus, programme execution, financial performance and responsible behaviour. BAE defines general objectives for each category, but sets only vague related targets such as “sustain revenues”, “increase business”, and “continue to develop a diverse workplace”. Specific targets are even harder to find in the corporate responsibility review section, with progress across safety, diversity, and environmental “maturity matrices” referenced – yet details are left completely opaque.

Too many questions remain. What was the target baseline? Is performance moving quickly enough? Are stretch goals in place to create long-term value? It is impossible to tell, given BAE’s lack of transparency. If BAE’s status as a global defence, aerospace and security company militates against full disclosure due to security concerns, the company should state that clearly.

Notwithstanding these criticisms, BAE’s integrated reporting is to be commended. By determining its own path of disclosure and focusing intently on critical issues, BAE has succeeded in producing a concise rendering of its performance relevant to all stakeholders.

Snapshot

Follows GRI?             No, although GRI “reference tables” have been produced for previous reports.

Assurance?                  Yes; both limited and reasonable assurance based on ISAE 3000; performed by Deloitte.

Materiality analysis?   Not evident, although BAE alludes to “stakeholders and materiality”.

Goals?                         Yes; clearly defined objectives.

Targets?                       Vaguely stated; in some instances not disclosed.

Stakeholder input?      Generic statement only (“Stakeholder feedback informs the group’s strategy and approach to managing CR.”)

Seeks feedback?         No

Key strength:              Excellent and in-depth descriptions of governance and accountability.

Chief weakness:          Lack of transparency on non-financial targets and “maturity matrices”.

Pleasant surprise:         Concise and rational presentation of information.

Level of integration:   4 (on a scale of 1–5, with 5 “fully integrated”).

Aleksandra Dobkowski-Joy is a principal at Framework LLC.

Aleksandra Dobkowski-Joy  BAE Systems  BAE Systems CR report  CR report review  CR Reporting  sustainability report 

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