IJ has uncovered an inconvenient truth about Japanese corporate reports. Despite considerable expenditures in manpower, time, and cost to improve corporate reporting in English, and despite claims of conforming to the International Integrated Reporting Council Framework (IIRC), Japanese corporate reports receive low marks for quality.

Yoshiko Shibasaka, a Partner at KPMG Japan's Integrated Reporting CoE (Center of Excellence) and Corporate Governance CoE and a well-known expert on corporate reporting in Japan, offered us her views on improving Japanese corporate reporting.

Investment
Japan (IJ):

Today, hundreds of Japanese listed companies prepare and post integrated reports on their official websites in both Japanese and English. Unfortunately, academics who study and compare integrated reports from different countries give Japanese reports very low marks. A typical example is the paper published in March 2019 by a team led by Prof. Robert G. Eccles¹. Its ranking of reports from 10 countries placed Japan in the "low quality" group, along with Brazil and the U.S.

Are you familiar with Prof. Eccles's research?

Shibasaka:

Yes. I was a little shocked when I first read the paper because the same five reports that Prof. Eccles looked at were rated very highly in Japan. At the same time, knowing the current state of integrated reporting in Japan as I do, my professional judgment told me it was a fair assessment. As an expert in this field, I re-read the paper carefully and found I could not fault Prof. Eccles's approach.

IJ:

Why do you think the integrated reports of Japanese companies have been so poorly rated internationally?

Shibasaka:

My KPMG Japan colleagues and I have been aware, for some time, of the weakness in Japanese integrated corporate reports. We conducted a survey on this topic and have published an annual Survey of Integrated Reports in Japan since 2014. According to the latest survey² from March 2019, the number of Japanese companies issuing integrated reports surpassed 400 in 2018.

However, while we have seen a rise in the number of companies issuing reports and an improvement in the content of reports, Japanese corporate society still does not really understand integrated reporting. We have said, for some time now, that integrated reporting involves more than simply conforming to the IIRC Framework. To start with, the Board of Directors at each company must implement "integrated thinking".

Board members must discuss management strategy and future corporate value; they must then consider how these connect with and relate to a wider range of factors inside and outside the organization. Unless a report reflects this kind of integrated thinking, medium- and long-term investors will not utilize it, regardless of it being highly rated or said to be an important source of investment information.

Based on what I have seen, I am sorry to say that many of the reports from Japanese companies are nothing more than "an imitation of an integrated report". For example, we typically read reports that talk about corporate social responsibility (CSR), but fail to mention how those activities relate to others or to corporate strategy.

An integrated report should include multiple-capital descriptions of corporate activities — human, intellectual, social, etc. — to be future oriented, and show how each activity creates value. Admittedly, this places a heavy burden on an organization's reporting team, which must also coordinate with the board, but, this will lead to a better, more integrated report.

IJ:

Do most boards at Japanese companies lack the understanding or seriousness to write an integrated report?

Shibasaka:

I would not go so far. We know there are some top Japanese executives with a deep understanding of integrated thinking and reporting. In those cases, the integrated report is usually compiled by a department fairly close to top executives and the board, such as the corporate planning department. That is becoming increasingly common. But Japan has been slow to adopt this practice, compared to Germany, the Netherlands, and South Africa, whose reporting was judged "high quality" in Prof. Eccles's analysis. Over the last 10 years, we have tried to emulate companies in these countries as they have improved their own integrated reporting.

IJ:

What should Japanese companies do to improve their integrated reports going forward?

Shibasaka:

We wrote three key recommendations in our 2018 survey:

  1. Communicate the value creation story of management and the board;
  2. Detail how management is driven by integrated thinking; do not be manipulated by buzzwords;
  3. Detail current conditions and the state of progress in relation to the value creation story.

In short, each company should focus on implementing its own integrated thinking to tell its own value creation story, rather than decorating a report with generic buzzwords like ESG, SDGs, etc.

I would also like to emphasize that Japanese companies should understand clearly the concept of "materiality", which is not simply "importance", but importance with an impact on corporate management over the short, medium, and long term.

IJ:

Thank you very much.

¹ Eccles, Robert G., Krzus, Michael P. and Solano, Carlos (2019). A Comparative Analysis of Integrated Reporting in Ten Countries. London https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3345590

The authors analyzed 50 integrated reports in English from 10 countries, scoring each report on 23 factors, using a scale of 0 (no relevant disclosure) to 3 (topics are discussed in the context of short, medium and long term). Eccles et al. concluded that the countries could be fairly clearly grouped into three categories of quality: high (Germany, the Netherlands, South Africa), medium (France, Italy, South Korea, U.K.), and low (Brazil, Japan, U.S.).

² https://assets.kpmg/content/dam/kpmg/jp/pdf/2019/jp-en-integrated-reporting.pdf

About KPMG Japan: https://home.kpmg/jp/en/

Yoshiko Shibasaka
Yoshiko Shibasaka

Partner, KPMG Japan Integrated Reporting CoE and Corporate Governance CoE, KPMG AZSA LLC.

 

Yoshiko is responsible for coordination and networking of the KPMG Japan Integrated Reporting Center of Excellence (CoE) and Corporate Governance CoE. She is also involved in projects related to intangibles (intellectual property, intellectual assets, intellectual capital), collaborating with various external professionals (ex. regulation setters, policy makers, institutional investors, analysts, academia, IR persons, management executives) in order to promote business reporting in the knowledge based economy, which are focused on companies’ value creation and competitive advantage. She had worked as a Secretary General for WICI (Word Intellectual Capital/Assets Initiatives) Global until June 2011 since its foundation (2007). Yoshiko also has many experience in Knowledge Management. She had also taken up roles and responsibilities as the deputy CKO for KPMG Japan (2011–2013). Prior to joining KPMG, Yoshiko worked for Tokyo Electron Limited and Arthur Andersen Business Consulting.

Yoshiko graduated from Meiji University with a Bachelor of Arts in Economics, and earned a Master of Arts in International Economics from the School of International Politics, Economics and Business, Aoyoma Gakuin University. She is also a candidate of DBA (Doctor of Business Administration) of Aoyama Gakuin University.

Yoshiko is a co-author of “Knowledge Management” (1999), “Knowledge Management – Best practices” (1999), and “Intellectual Property Management” (2003). She is a co-translator of “the Crickable Corporation” (1999), “Cracking the Value Code” (2000), “Managing in the New Economy” (2001), “One Report“ (2010), “The Integrated Reporting Movement” (2015), and “Chief Value Officer” (2019). She has also contributed many articles on business magazines and newspapers, and has been invited as a speaker to international conferences, symposiums, workshops, etc.