Spotlight

Why should you care about the future of work? In short, your employability depends on it. There are huge similarities in the approaches being taken to both the future of work and climate change. It’s out there, we know it’s happening; but we are too busy in our daily work to give it sufficient time and thought, thereby limiting our capacity to adapt before it’s too late. Most readers will be familiar with Stephen Covey’s time management quadrant. The future of work is in quadrant two: not urgent, but important. We tend to focus on the urgent to-do list and the reality of meeting deadlines. In this article, I will outline the importance of investing time in your future employability and explain why everyone should care about the future of work. Why should you care? The average life expectancy of a Fortune 500 organisation is just 15 years, so individuals can no longer assume that employment is for life. Business competitors no longer come from within your industry sector; they mostly sprout up and scale at speed to grab huge market share. Airbnb was not started by hoteliers, Uber was not founded within the taxi industry, Netflix was not started within the media industry. This speed of change will catch you unaware if you are busy with your head down. Accountancy firms compete fiercely to hire entry level graduates. However, they will need fewer graduates in the future as an increasing variety of manual tasks become automated. As accountants, you learned your trade as juniors by conducting audits in industry. You got to see and understand how businesses operate in real life. How will graduates get this experience if and when the work is automated? Change is required in the education and integration of accounting graduates into the future world of work. While Ireland is in the midst of an employment boom, we are witnessing the rise of corporate outplacement programmes as finance and accounting roles become automated. These roles, along with administration and middle management, featured consistently in the Harmonics Global Future of Work Study as the top three roles in decline. The work you did in the past is changing rapidly. Almost every organisation is undertaking a lean transformation or robotic process automation project of routine manual-entry tasks to achieve greater scale, speed and cost efficiency. As an example, Revenue’s move to real-time data as part of its PAYE Modernisation programme eliminates the need for the P30, P45 and P60 forms, along with end-of-year returns. Digits on a spreadsheet are easily mapped into software applications, which takes the pain away and simplifies work. PwC recently launched a digital fitness app for employees worldwide to accelerate and upskill the digital knowledge of its people across a range of domains. Digital acumen is now a lifelong endeavour, which needs to be embraced to stay employable. Big data is valuable and business intelligence dashboards offer real-time data on key business metrics. Artificially intelligent machines will provide answers, but our potential in the future of work is in the questions we ask. Think about a calculator – we’ve all used one to do a quick calculation. The next stage was Googling a simple question to get an instant answer. Now, imagine inputting a complex accounting scenario into a computer programme, and back come your options. In this scenario, massive computational power has replaced manual effort. Indeed, computing is increasing in power and reducing in price – in 2023, it is expected that €1,000 will buy you computational power equivalent to that of the human brain. A recent World Economic Forum report estimated that total work tasks in 2018 were 70/30 in favour of humans over machines. This will evolve speedily to 60/40 by 2022. We are not far off equilibrium in terms of the ratio between human and machine tasks in the workplace, and this demands change on our part. Like our organisations, we too have new competitors for our work – smart machines – and we need to learn how to work with them, rather than compete with them, into the future. The smart machines I speak of are software bots that are learning 24/7 and replicating the work we currently do on our computers. The organisational impact The hierarchical organisation chart that once created vertical career ladders in a functional silo no longer makes sense. This is a major challenge for future organisation design. The organisation chart of the future is organic and constantly evolving. Work architecture needs to be broken up like Lego and reconfigured into human and machine pieces. Organisations are neither resourced nor ready for such an eventuality. Like Lego, the work pieces will need be broken down and reconfigured for every new business challenge. This will lead to the demise of rigid functional silos and will require agile and cross-functional networked systems that evolve to meet specific customer needs. What can you do now? You can prepare by letting go of the past – something we, as humans, find very hard to do. We like routine, certainty and security. Accounting roles are transitioning away from day-to-day number crunching to focus more on interpreting data, building financial models aligned to company strategies/initiatives and project-based work with key stakeholders and other departments. I speak about the nine critical human skills needed in my new book, Future Proof Your Career, which will be available soon on Amazon. The future of work will demand lifelong devotion to the development of critical human skills including critical thinking, communication, creativity, consulting, commercial acumen, collaboration and embracing new cultures – all of which will need to be complemented by ever-changing digital skills. It is not only a skillset shift that is required, but a mindset one. If you have a fixed mindset, resist change and are unwilling to upskill, then your job and your future employability is in jeopardy – but this is within your control.  Finally, I invite you to take part in our global future career readiness research project. It is aimed at working professionals to honestly evaluate how future-ready you are. The Future Career Readiness Index is a powerful instrument that allows you to quickly test your future career readiness in five key areas. It takes less than 10 minutes to benchmark yourself against others in your sector and profession. On completion, you will receive a free downloadable Future Career Readiness report to accelerate your future career. You can access the report at www.futurecareerreadiness.com. My parting career advice is this: disrupt yourself before you are disrupted. John Fitzgerald is Managing Director at Harmonics Group and serves on the Board of OI Global Partners.

Valarie Daunt discusses how the preferences of millennial workers are driving changes in the workplace. When it comes to the attractiveness of a potential employer, the 2018 Deloitte Millennial Survey found that while financial rewards and benefits are the top priority for millennials in Ireland, this is followed by flexibility, a positive organisational structure, opportunities for continuous learning, and well-being programmes and incentives. The changing expectations of our workforces is one of the major forces re-shaping the future nature of work. By 2030, millennials will make up 75% of the workforce. It is therefore time to sit up and take note. So, what trends will we see as a result of these millennial preferences?  From careers to experiences With technological and demographic trends disrupting traditional career paths, organisations need to reconstruct job profiles and career models, and rethink the coaching and development of employees from entry-level staff through to executives. 21st century careers can be viewed as a series of developmental experiences, each offering the opportunity to acquire new skills, perspectives and judgement. In this environment, organisations need to look at alternative ways of upskilling employees to achieve an agile and responsive workforce. Companies leading in this space are finding ways for employees to learn from others as well as providing learning programmes and on-the-job training. Today’s employee seeks responsibility and leadership roles earlier than heretofore, yet many organisations are unprepared for this change. More than one third of Irish respondents to Deloitte’s 2018 Human Capital Trends Survey stated that, in their organisation, career paths generally progress up a traditional hierarchy, with little flexibility to accommodate individual worker interests or desired career paths. More than half (57%) stated that they only occasionally get the opportunity to work on assignments outside their assigned business line or manager and one third stated that their organisations are only somewhat effective at empowering employees to manage their own careers. Given that the wants and needs of today’s workforce are evolving quickly, talent practices need to support employees in developing a suite of adaptable and agile skills that can be deployed across many areas of the organisation. Only 35% of Irish respondents rate their organisations as being ready to build the 21st century career model, despite the fact that 82% rank this as important. Well-being as a strategic priority As the line between work and life blurs, organisations are investing in well-being programmes to drive employee productivity, engagement and retention. However, there is often a significant gap between what companies offer and what employees value and expect. It is no longer enough for organisations to offer traditional benefits and remuneration such as medical assistance programmes and once-a-year reviews. Today, the focus is on providing programmes that not only protect employee health, but actively boost social and emotional well-being. This includes innovative programmes and tools for financial wellness, mental health, healthy diet and exercise, mindfulness, sleep and stress management, as well as changes to culture and leadership behaviours that support these efforts. Expanding well-being programmes to encompass what employees want and value is now essential for organisations to treat their people responsibly – as well as to boost their social capital and project an attractive employer brand. The Human Capital Trends Survey shows that 50% of Irish organisations rate themselves as “ready” or “very ready” to offer holistic well-being programmes while 37% of Irish respondents state that their organisation offers well-being programmes beyond the traditional offerings. From front-line staff right up to executive leadership, there is a consensus that these programmes promote employee productivity and support employee retention. If an organisation wants to keep its most promising talent, it needs to give employees a reason to stay. The hyper-connected workplace Millennials’ preference for a positive organisational structure is interesting, and is no doubt connected to the fact that there are massive changes underway in how we connect. Social media and collaborative communications tools are transforming the world of work. Today, instant messaging tools such as Slack and Trello, which can be tailored for a project team’s use, have introduced new ways of working. They allow ideas to be bounced off colleagues on a regular basis, without having to wait for scheduled team meetings. They can also provide exposure to leaders and experts, which we know appeals to the millennial cohort. In Ireland, as elsewhere, these new technologies and tools are changing how we communicate at work. 68% of Irish respondents to the Human Capital Trends Survey said this is having a positive impact on productivity and 75% envisage increased use of online platforms as a communication channel in the next three to five years. While a majority of respondents rank this trend as “very important”, Irish organisations have displayed a somewhat conservative approach to adopting emerging communication channels and tools, with more than four in 10 either only permitting the use of well-established tools or requiring tools to be carefully reviewed and approved by their IT departments. Only 6% identify emerging tools and promote their use among employees. Organisations will need to adopt a holistic approach, taking into account different working styles and introducing rewards to promote take-up while also ensuring that the workforce is prepared and willing to use these tools. An important aspect of this strategy is to audit the tools in the marketplace and ensure that they are satisfactory from a risk and IT perspective before introducing them into the workplace. Once approved, collaboration tools should be embedded in day-to-day processes where possible, so as to actively promote adoption among the workforce. As social media and collaborative communication tools migrate from personal lives to the workplace, organisations must apply their expertise in team management, goal-setting and employee development to improve performance and promote collaboration. For the hyper-connected workplace to improve productivity, procedures, workspaces and leadership styles will need to be capable of capitalising on the power of these tools while at the same time managing any potential negative impacts. Conclusion There are many drivers of change impacting on the future of work, and the preferences of millennials is just one of these drivers. However, the impact will be great and there are some gaps to be bridged. Irish businesses now need to begin taking stock of the implications of these drivers of change. Valarie Duant is Partner and Head of Human Capital Management at Deloitte.

Employers face a host of challenges as they seek to future-proof both their people and their businesses. The future of work can be both exciting and worrying depending on your perspective. Will robots, machines and artificial intelligence take all the jobs? Or will they support workers and produce many new jobs while improving working conditions for all workers? The future rarely turns out the way we imagine. In 1899, the head of the US patent office was quoted as saying: “Everything that can be invented has been invented”, so predictions may make us look foolish. However, that should not stop us considering the opportunities and threats for business and how we can future-proof our organisations. Here are three issues businesses should consider as they prepare for the future of work. Workplaces Technology allows us to work from pretty much anywhere in the 24/7 global workplace. Companies are rapidly moving to agile workplaces and hot-desk environments with more flexible working arrangements. The challenge for organisations has little to do with technology capability; the willingness – or lack thereof – of executive and management teams to support employees who work remotely is arguably a more pressing issue. This is a particular challenge for managers who prefer to see their team in person but, more worryingly, reward those in close proximity and ignore those who work remotely. There is also a reluctance to use the gig economy – a market of independent workers available for short-term engagements – within more traditional organisations. Innovation Hyper-growth companies have one thing in common: an innovative culture. Innovation is something organisations can cultivate, but most companies are risk-averse. Innovative employees take risks and break the rules, and they need to be supported while doing so. Without making mistakes, trying out new ideas and working on new disruptions within their own sector, companies will not be able to build new, innovative products and services. To achieve this, you must have the right people in the organisation and provide continuous learning for staff. Many jobs will go and it is critical that employers encourage their staff to be more flexible and self-directed in their learning so that they can contribute to the company’s ongoing success – even if it means moving regularly within the organisation. Such internal moves can be an excellent way for organisations to share information and work in a less siloed manner. Technology overload The final point relates to the dangers technology can pose for employees. The proliferation of smartphones and screens has led to dysfunctional behaviours. Email, a tool that purports to make us more productive has become a huge burden in organisations. Screen and smartphone notifications interrupt staff on a constant basis, giving them very little time to perform deep and meaningful work. We are busier than ever, but probably much less productive. Even the bedroom is now overrun by smartphone technology, which is spawning a multitude of over-tired and under-productive employees. One insurance company is actually paying a bonus to staff who have 30 good nights’ sleep in a row, as it recognises how critical sleep is to performance. Summary Governments will have to tackle work displacement for older generations as automation, digital platforms and other innovations change the world of work. On the plus side, careers we couldn’t even envisage today will soon become reality and this will provide myriad opportunities for those armed with the right skillsets. Our key job is to support the next generation coming into the workplace – those who were born into the internet and smartphone generation. We need to build on their human skills as these will be critical to their future success. Peter Cosgrove is an expert on the future of work and author of Fun Unplugged, a book to engage children without the use of screens.

The pension industry has struggled to get its message through to younger people, but maybe there’s a better way. BY MUNRO O’DWYER Let’s start at the beginning. What reasons do people give for not saving into a pension? Some believe that they don’t make enough money to save for a pension; they believe that they won’t need a pension; they are prioritising paying down debt; their employer doesn’t offer a pension scheme they can participate in; they are already struggling to manage their finances on a week-to-week basis. There is also a cohort that believes pensions are a con, associated with rip-off fees and rogue financial advisers. Other reasons do get mentioned, but the list above covers more than 90% of individuals. From the pension industry’s perspective, this makes no sense. How can these people not see the benefits of tax relief or the magic of compound interest? Do these people not know that the State pension may be unsustainable? Don’t they understand that one in two children born today will live to be 100? Both sides are simply not talking to each other, certainly not in any meaningful way. Late last year there, was a Twitter post from a financial advisor which stated: “By the time you’re 30, aim to have 1x your annual income set aside for retirement. At 40, 3x; at 50, 6x; at 60, 8x; and by retirement, 10x”. There was lots of variety in the responses, but my favourite captured the disconnect perfectly: “By age 35 you should have double your salary saved. 35 year old me: I’M SUPPOSED TO HAVE A JOB??” The cause of the disconnect Why does the disconnect exist? Very simply, immediate gratification has enormous appeal. Psychologists tell us that humans act upon the ‘pleasure principle’, which is a drive to gratify our needs, wants and urges. In olden times, when people didn’t live very long, such thinking made sense – but we still live with that mental programming. So, back to pensions and why people don’t save. Very simply, sacrifice is a hard sell. For confirmation of this point, ask any politician. Saving into a pension offers a route whereby we are saving for our future selves – a person many of us just don’t connect with. People plan for the near-term but when it comes to who they’ll be in 20 or 30 years, that doesn’t act as a motivator. We are also more consumerist than in the past. Marketing messages promoting the latest technology, clothes, car or other purchase have very strong appeal and come at us from all directions – TV, billboards and now, our phones, iPads and PCs all facilitate a drumbeat of temptations. This all drowns out arguments around compound interest, of course, and income shortfalls in our seventies, eighties and nineties. Generation Y and the millennials So do we simply bemoan Generation Y and the millennials who won’t see things our way and save for a pension? That is just too simplistic. Pensions are not the only barometer of financial responsibility and pensions are not the only savings route that makes sense. There is lots of evidence to show that those in their twenties, thirties and forties can, and do, save for tomorrow. The savings vehicle is just not a pension – it is a home, a car, a wedding, some tangible aspiration. There may not be much that is tangible about a pension for a 35-year old when set against the financial challenges they are facing. Consider the couple in their 30s who see the money they pay on rent every month as a waste and a diversion away from saving towards a house that offers a reasonably solid investment, but also delivers a home for their family. Pensions are very worthy, they are very helpfully tax-incentivised by the State, but they don’t offer that immediate tangible benefit that a step on the property ladder offers. So the first challenge to recognise is that pensions have stiff competition for people in their thirties as demands on income for people in this age bracket are significant – rent, affording a mortgage, childcare, caring for dependants, and that’s before paying for holidays and the latest iPhone. How does the financial services industry react to these nuanced financial challenges? By giving blanket advice to put every spare penny into a pension. From the earliest age possible. And, as the Twitterati called out, this is not always appropriate, nor reflective of the financial circumstance of individuals, and ultimately it is unhelpful and doesn’t achieve the desired objective. 35% private sector pension coverage in Ireland proves the point. Taking a fresh perspective So what is effective? For a start, I believe that we need to meet people where they are in terms of their personal financial circumstances. We need to be smart about what we are trying to do. Many people who would benefit the most from support have a relatively low average level of investible assets, which means that it simply isn’t cost-effective for most advisers to spend time with them to develop or maintain a financial plan – so don’t make this the ambition. Technology can help. Financial apps that can process the range of variables that make up an individual’s financial behaviours are needed. The mantra can’t be that saving for a pension is “right” and that not saving for a pension is “wrong”. Prompts are needed to improve individuals’ financial behaviours, prompts that are grounded in sound data-driven logic and behavioural theory, and these technologies have emerged over the past number of years. Pensions can often feel like a very big commitment. A short while Googling “pension contribution rates” will lead to eye-watering amounts being required to deliver even a modest income in retirement. I would propose a different approach. I would argue that the best way to set goals is to make them so small that they’re fail-proof. Start there, and build on those initial (small) successes. Do that, and you create a domino effect that can help you reach more ambitious goals faster. Learning a new language We are about to embark on a new departure for pensions in Ireland. Auto-enrolment (AE) is planned to be introduced from 2022 and the philosophy is that AE will “nudge” young savers into a pension and inertia will keep them there. The UK is past this point and there are some great examples of communications that are being developed in that market. Last month, the Association of British Insurers launched a “Love Your Pension” campaign, with key messages around the fact that it’s your money; that a small change leads to a big difference; that when you save, your employer tops it up; that the Government tops it up too and it’s worth waiting for. Pensions have a really valuable role to play in supporting individuals to save, but those individuals have complex, messy financial lives and these factors need to be taken into account. Only then will we see significant success. Munro O'Dwyer is a Partner at PwC Ireland.

SMEs in the Republic of Ireland can access four major tax relief regimes, which is laudable, but there remains room for improvement in each.   Over the past few years, Ireland has introduced, expanded or streamlined many new tax reliefs and regimes with the stated aim of encouraging research and innovation, providing alternative sources of finance and improving the environment for entrepreneurship. While the government of the day will laud these new initiatives as being beneficial to Irish small- and medium-sized enterprise (SME), it is often the case that the initiatives are not taken up in any great numbers or are used primarily by multinationals operating in Ireland. In this article, the author considers why these targeted tax incentives are not achieving the expected take-up among Irish SMEs – and what could be done to rectify this. Is it a question of education, perception or restrictions within the tax incentives themselves? Employment and Investment Incentive Scheme The Employment and Investment Incentive Scheme (EIIS) is an extremely important source of finance for start-up and early-stage SMEs as for many of these businesses, the friends and families of the business owners may be one of the few sources of finance available. The EIIS is a successor to the old Business Expansion Scheme (BES) and while it covers a larger variety of trading activities, it is less generous in the tax relief available. This is because, under the EIIS, the income tax relief is spread over two tranches – 30% relief in the year of investment and 10% after three years of trading. Furthermore, the second tranche of relief is not guaranteed and is dependent on the company increasing employee numbers during the investment period. Compared to BES, lower numbers of companies have availed of the EIIS. This has been attributed to factors such as the spreading of income tax relief over four tax years and the €150,000 annual investment limit applicable to each EIIS investor. Unhelpfully, recent changes to the EIIS have further reduced the attraction of EIIS for SMEs. Finance Act 2015 incorporated the EU General Block Exemption Regulation (GBER) rules into EIIS legislation. Some of the most significant restrictions included in these provisions are: The company must be trading for less than seven years. Where such a company has previously raised EIIS funding and wishes to raise a second round, the second round must have been envisaged in the business plan submitted for the first round – before the GBER rules were in force. To add insult to injury, Revenue has taken a very prescriptive approach in this regard; and If the company has traded for more than seven years, it must be entering a new geographical market with a new product or service, or have previously raised EIIS/BES funding within the first seven years of trading. More recently, Finance Act 2017 introduced new “connected party” rules, which make the tax relief unavailable to any investor and their associates (including relatives, which are broadly defined) who already hold shares in the company before EIIS funding is introduced. Previously, income tax relief was available to EIIS investors who held less than 30% of the company, and even this restriction was relaxed where the total value of the EIIS investment was less than €500,000. These new restrictions may neutralise the EIIS for many SMEs that are badly in need of this alternative source of funding. Research & Development tax credit While the lower and likely diminishing take-up of EIIS by SME companies can be attributed to stifling legislative restrictions, the same cannot be said of the Research & Development (R&D) 25% tax credit. The tax credit regime was significantly simplified with the removal of the “base year” and incremental allowable amounts from 1 January 2015. In addition, Finance Act 2012 introduced the concept of the qualifying company surrendering some or all of the R&D tax credit to a “key employee”. The continuing concern for all companies claiming R&D tax credit (and SMEs in particular, as they have less resources to deal with penalties and interest in the event of getting it wrong) is the uncertainty around what exactly constitutes “qualifying” R&D activity. Some relief for small business on this issue was set out in Revenue’s eBrief 17/17. This stated that, where a small or micro enterprise is in receipt of Enterprise Ireland/IDA grants for its R&D activity and the value of the R&D tax credit claim in an accounting period is less than €50,000, Revenue will accept that the activities are “qualifying” under the relevant tax legislation. There is an acknowledgement that these thresholds are too low and will only give comfort in a small number of cases, but there is no indication that this concession will be expanded. While the idea of the surrender of the R&D tax credit to key employees is a fine one, this aspect of the regime has had little take-up from SMEs. This is perhaps because the key employee must not be a director of, or have a “material interest” in, the company (i.e. hold at least 5% of the company’s shares). As SMEs typically have a small pool of overlapping shareholders, directors and key employees, most will breach this condition. Another issue that limits the incentive for R&D activity are the maximum spending caps in relation to outsourcing: Outsourcing R&D work to third parties is restricted to 15% of the in-house R&D expenditure or €100,000 (whichever is greater); and Outsourcing R&D work to universities is restricted to 5% of the in-house R&D expenditure or €100,000 (whichever is greater). These limits contradict international best practice, which typically encourages collaboration between innovating businesses and/or education. They also disproportionately affect SMEs as, with fewer resources, a collaborative approach may be the only way for an SME to progress. Knowledge Development Box A relatively new incentive introduced in Finance Act 2015, and one that is not yet widely known about, is the Knowledge Development Box (KDB) regime, which complements the R&D tax credit and is the second phase of incentives around research and innovation. The R&D tax credit is available in respect of the spend on “qualifying R&D activities” while the KDB regime applies a reduced 6.25% corporation tax rate on profits arising from the exploitation of a “qualifying asset” derived from these same R&D activities. While this regime is regarded by many as being targeted at multinationals, it is in fact Irish SMEs that may benefit the most from it. The KDB regime is most beneficial to companies that carry out most or all of their underlying R&D activities in Ireland, which of course would apply to Irish SMEs. There are also two aspects to the “qualifying asset” requirement that work for Irish SMEs: Within the mainstream KDB regime, a “qualifying asset” includes inventions that are patented as well as computer programs. Irish tech companies that carry out their R&D activities in Ireland and are entitled to an R&D tax credit may therefore be entitled to the reduced 6.25% corporate tax rate on future profits; and There is an SME-specific KDB regime, which applies to companies and groups with annual turnover not exceeding €50 million and KDB profits not exceeding €7.5 million. The definition of “qualifying asset” for these companies includes computer programs as well as novel or useful inventions that do not have to be patented. Key Employee Engagement Programme Finance Act 2017 saw the introduction of the KEEP scheme, which was presented as a tax-efficient way to incentivise key employees within SME companies. The scheme allows for the tax-free grant of share options to an employee (as long as the options are granted at market value), followed by capital gains tax (CGT) on gains arising on the ultimate sale of the shares by the employee. As the KEEP scheme only commenced at the beginning of this year, there are several excessive legislative restrictions and practical issues. Many commentators and representative bodies have lobbied the Department of Finance and Revenue on these issues to make the new scheme fit-for-purpose. Some of the major issues include: The requirement for a Revenue-agreed share valuation method, given that the scheme relates to shares in private companies often with no external market; The practical issue of creating a market for these shares so that a KEEP employee has a method of selling the shares and realising a gain. Calls have been made to allow the employer company to buy back the KEEP shares and for the KEEP employee to secure CGT treatment on that buy-back by the buy-back being regarded as a “benefit” for the company’s trade; Under the current rules, a “qualifying individual” must not hold more than 15% of the employer company shares. This restricts the usefulness of the KEEP scheme for SMEs which, as we noted earlier, will have a small pool of shareholders and key employees; and Calls have been made to extend CGT entrepreneur relief on disposals of KEEP shares, thereby reducing the CGT on €1 million gains arising to 10%. Conclusion This article has focused on the four major tax regimes available to SMEs in the Republic of Ireland – EIIS, R&D tax credit, KDB regime and KEEP – and we have seen that some of these regimes are specifically targeted at SMEs. While there is always more for practitioners to do in terms of educating clients on the availability of reliefs, many of the legislative changes and/or administrative practices within Revenue in recent years have reduced the effectiveness of these reliefs. It is a case of what the right hand giveth, the left hand taketh away. With Brexit looming, this approach is damaging to Irish SMEs – which are the lifeblood of our economy – and does not sit with the Government’s stated aim of encouraging entrepreneurship in this country. Kerri O'Connell FCA is Principal at Obvio Tax Services and author of Small and Expanding Businesses: Getting the Tax Right.

Integrated reporting isn’t just for large entities. It can also help SMEs develop and grow in a strategic manner. It is generally recognised that the financial picture is only one facet of the performance of a business and that there are risks and opportunities associated with broader issues such as social, environmental and economic challenges. To give a simple example, a business’ financial report may show high profits, but if the organisation is also creating pollution and likely to be regulated out of business in the future, it is not a good long-term investment. Rather than providing a mere snapshot of historical performance, Integrated Reporting (IR) seeks to provide a more complete and accurate picture of the performance of the business and how it will continue to create value in the short-, medium- and long-term by bringing together financial information with other information that is material to the organisation’s success. The IR framework refers to different capitals – manufactured, intellectual, human, social and relationship, and natural as well as financial – recognising that value is not stored only in the financial. In looking to provide the broader range of measurements that contribute to longer term value and the role the business plays in society, it takes account of intangible as well as tangible assets. Ocean Tomo’s 2015 Intangible Asset Market Value Study demonstrated that 84% of the S&P 500 market value was accounted for by intangible assets, so their impact cannot be ignored by anyone seeking to understand the true value of a business. The benefits of IR IR provides benefits within the organisation and to external stakeholders. It allows for the uniqueness of the organisation, enabling the business to tell its story of value creation. Doing so provides better quality information and a far more complete picture of material issues to a greater range of stakeholders (e.g. customers, suppliers, employees, communities, legislators and regulators, as well as the providers of financial capital). Stakeholders can gain a deeper understanding of the company’s strategy and performance, and how value is being created. The quality and breadth of material information also enable better understanding of risk and interdependencies for both internal decision makers and other stakeholders. With the growing emphasis on ESG (environmental, social and governance) investment, there is a strong argument that IR may help attract investment. Better quality information also allows for a more efficient allocation of capital. Integrated reporting requires integrated thinking, and that prompts management into integrated decision-making about what is truly material in creating value in the short-, medium- and long-term, thereby making the business more resilient. IR also encourages management discipline. You manage what you know is going to be measured, so IR helps drive the performance and management of what is really important for business success for the longer term. The aim of IR is not just the report. Far more important is the integrated thinking and better decision-making that it encourages in management. We have seen moves towards broadening the range of reporting such as the EU Directive on Non-Financial Reporting, which requires larger organisations to disclose information relating to environmental matters, social and employee aspects, human rights, anti-corruption and bribery, and diversity in the board of directors. Since it is anticipated that IR will become the norm over time, it makes sense for all businesses to be early adopters, develop the processes and skills required to report in this manner, and realise its benefits sooner rather than later. The challenges of IR A business may not be capturing all valuable data. Legacy systems often fail to capture data that, with our integrated thinking hats on, we see as necessary for the proper long-term management of the material issues and the determination of strategy. So managers need to review measurement systems and determine the metrics they need for the future. This challenge is, of course, a benefit since without the right data, the managers and board will not be enabled to make good decisions about strategy. Comparability and consistency of metrics across a number of years is sometimes challenging. This can be related to legacy measurement and capturing of data, as previously described, or it can be related to changes within the business, which may require explanation to help readers get behind the surface data. For example, increased emissions for manufacturing per tonne could be due to a business getting more orders last year for units of a complicated product which utilises more energy in the manufacturing process rather than poor management of energy, which might be the initial interpretation. The greater focus on the more complicated product may not be an industry norm, thus making comparisons with industry benchmarks difficult and again requiring explanation to create clarity for the report reader. Organisations that currently prepare an annual report often have a well-oiled system for doing so. The challenges of integrating a much greater range of data, which comes from a variety of sources within the organisation and is possibly collected for the first time, should not be underestimated. Even in organisations that currently publish a corporate social responsibility (CSR) report or sustainability report, it is my experience that combining data in one report to meet a required annual report deadline can be very difficult. Connecting the dots to develop a holistic picture of the inter-relatedness and dependencies between the factors that affect the business’ ability to create value requires the collaboration and input of individuals throughout the organisation – not just in finance. People need training to understand IR and what organisations seek to achieve with it. They often need help to step out of a siloed mentality and leave behind their need to put a positive ‘spin’ on information and metrics arising from their area of responsibility. IR demands that material matters are reported in a balanced manner, both positive and negative, which precludes cherry-picking what you will report in any given year. The focus on stakeholder relationships in IR often proves challenging. Despite the positive narrative from organisations about their engagement with stakeholders, many businesses lack evidence and data to support the extent to which they understand, take into account and respond to the needs and interests of their stakeholders. Or they focus on too narrow a range of stakeholders, perhaps giving lots of attention to customers but excluding other legitimate and important stakeholders such as suppliers or local communities. Is IR useful for SMEs? The simple answer is yes. SMEs can gain all the benefits described above – better ability to tell their unique story; better communication with a broader range of stakeholders; attraction of investment; better management decision-making and discipline; and enhanced understanding of risk and how value is created. There are other potential benefits for SMEs. Compared with large businesses, SMEs are often more reliant on their connections with specific stakeholder groups such as the local community, specialised suppliers or providers of finance. IR forces a focus on stakeholder engagement and enables a much better sharing of information with stakeholders, which builds trust and understanding. SMEs can be seen as high-risk or assessed only by their most recent financial performance, which can be a significant barrier to development. IR gives the business an opportunity to counter this by presenting a fuller picture of how it is creating value, reducing risk and how it intends to do so in the longer term. With smaller management teams and less siloed structures, many SME management teams are actually more adept at collaborating effectively and engaging in IR thinking than those from bigger organisations. Gráinne Madden is a corporate responsibility and business ethics specialist, and lectures in corporate responsibility to MBA students.