The Integrated Reporting Committee (IRC) of South Africa welcomes the release of an international framework for an integrated report and applauds the International Integrated Reporting Council (IIRC) for its work.

 

The finalisation of the International Integrated Reporting Framework will go a long way to encourage organisations around the world to prepare an integrated report that shows their performance against strategy, explains the various capitals used and affected, and gives a longer term view of the organisation. The integrated report is regarded as the evolution of the traditional annual report because it offers a more holistic view of an organisation than financial performance alone, thus enabling investors and other stakeholders to make a more informed assessment of the organisation and its prospects.

 

South African organisations are acknowledged as among the leaders in this area of corporate reporting with many listed companies and large state-owned companies having issued integrated reports for the past three years. Integrated reporting is one of the recommendations of the King Code of Governance in South Africa 2009 (King III) and as such falls into the JSE’s listings requirements on an apply or explain basis.

 

The IRC will be reviewing the international Framework, considering its applicability in the South African context, and will communicate its view in the first few months of 2014. The IRC anticipates that it will organise a seminar on the Framework for companies and other interested parties (similar to that hosted by the IRC, JSE and IIRC to launch the Draft Framework in April this year) in Johannesburg in the first few months of 2014.  

 

Companies listed on the JSE have faced significant changes in the way they report. The Companies Act has allowed for summarised financial statements to be sent to shareholders, and the listings requirement for integrated reporting (through King III) has resulted in the traditional lengthy annual report being reduced into a concise, understandable report on material connected issues.

 

And the good news for users of company reports – who have faced increasing volumes of financial and non-financial information over the years making it difficult to distil the key information – is that the integrated reports of companies are likely to slim down even further as companies place more of their detailed topic-specific information on their websites with links from their integrated reports.

 

The Integrated Reporting Committee (IRC) of South Africa commissioned a research survey of the 2011 integrated reports of the top 100 companies listed on the JSE. The objective was to examine the status of integrated reporting in South Africa given that most listed companies have produced at least one integrated report with many releasing their second. The research survey was undertaken by the College of Accounting at the University of Cape Town.

 

Professor Mervyn King, the chairman of the IRC, says that the uptake of integrated reporting in South Africa is very encouraging and that South Africa can be proud that it is leading the world in this area. “Integrated reporting is designed to give a better and more holistic view of a company than historical financial statements alone. An integrated report shows the connections and inter-relatedness between a company’s strategy, essential resources and stakeholder relationships, risks and opportunities, performance and its future outlook.”

 

The research found that 78% of the companies had changed the name of their annual report to ‘integrated report’. Dual listed companies, in general, did not call their reports ‘integrated’, but many included integrated information. Five local companies continued to call their report an annual report.

 

Of the companies that produced an integrated report, 60% included a statement that the report had been endorsed by the board, although in many cases this endorsement should have been given more prominence in the report given its importance.

 

The research found that most companies (82%) have not yet availed themselves of the Companies Act concession to publish summarised financial statements, opting to include the full annual financial statements in their reports. This is expected to change, though, as some companies have been held back by the necessity to change their founding documents to allow for summarised financial statements.

 

There is a wide range in the length of the reports. The longest was 456 pages and the shortest was just 46 pages, with the average being 179 pages. The average length of the reports of the 18 companies that included summarised financial information was much shorter at 124 pages. The length of the summarised financial statements ranged from one page (both Kumba Iron Ore and AngloGold Ashanti) to 34 pages (Imperial Holdings) with the average length being 11 pages. This should be compared to the average length of 70 pages for the full annual financial statements.

 

40% of companies make reference in their integrated reports to the availability of detailed sustainability information that can be found either in a separate publication or online. This approach goes some way to achieving the desired conciseness of an integrated report. An area that is crucial to achieving a concise report is the company’s determination of materiality. This aims to ensure that only information important to an assessment of how the company made its money and its ability to sustain value creation is included in the report. These are crucial factors in deciding what information should go into the integrated report or should rather be included in one of the more detailed topic-specific reports. Only eight companies explained their materiality process in their reports.

 

The research found that a wide diversity exists in the nature of the integrated reports. While guidance is available there appears to be some confusion on the shape and format of an integrated report. In January 2011, the IRC issued a discussion paper on a report framework. This paper fed into the discussion paper issued by the International Integrated Reporting Council (IIRC) in September 2011. A final framework is expected from the IIRC in late 2013, with a draft framework being issued early in 2013 which will be open for public comment. The IRC has said that its future local guidance will be in line with that of the IIRC.

The researchers found that while the vast majority of companies switched to calling their reports ‘integrated’, this did not necessarily mean that the report complies with the principles of integrated reporting or that the company practises integrated thinking (connecting financial performance to the key non-financial drivers, for instance natural resources and employee stakeholder relationships, on which the performance depends).

Some of the companies stated in their reports the benefits they had received from integrated reporting, including:

• Santam integrated report 2011

“Integrated reporting has improved our awareness of the opportunities for stakeholder engagement that could benefit the business and contribute to sustainability.” 

 

The research survey made no attempt to evaluate the quality of the 2011 integrated reports issued by the listed companies.

Integrated reporting and disclosure

Prof. Mervyn King presents the findings of PwC‘s ‘Moving from principle to practice: Corporate reporting survey’.

South Africa’s top 100 companies listed on the JSE have made positive progress in their corporate reporting initiatives, yet there remain areas for improvement, according to a report released by Professional Services Firm PwC.

Zubair Wadee, a director at PwC says: "Most companies appear to be comfortable disclosing those matters that have traditionally been a focus area, such as reporting related to audit committees, but appear to be less comfortable in addressing newer areas of governance introduced in the third King Report on Governance for South Africa, 2009, such as IT governance.”

The purpose of PwC ‘s ‘Moving from principle to practice: Corporate reporting survey’ is to assess reporting by entities both in terms of the King III Report, which became effective for all companies listed on the JSE with financial years commencing on or after 1 March 2010, and selected benchmarks arising from current developments in integrated reporting. The survey process involved an analysis of the integrated reports of the top 100 companies on the JSE for their financial periods beginning on or after 1 January 2011. The study focuses on pivotal areas contained in the King III Report, such as boards and directors; ethical leadership; the governance of information technology; the audit committee; compliance with law and rules; and integrated reporting.

South Africa was the first country to mandate integrated reporting for all listed companies. An integrated report brings together the material information about a company’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context in which it operates.

Professor Mervyn King, Chairman of the International Integrated Reporting Committee and non-executive Chairman of PwC’s Business School, says: “Integrated thinking is a revolution in management and board behaviour. The outcome of integrated thinking is the integrated report. All companies depend on a variety of resources and stakeholder relationships to create value and to sustain value creation.

“The world has changed and so must corporate reporting. The users of corporate reports need to make an informed assessment that the company will sustain value creation. The only way in which to do this is by means of a concise and clearly understandable integrated report.”

Wadee says: “There is an increased global focus by investors, regulators, markets and other interested stakeholders on the integrated reports that are being released by listed South African companies. They will be looking at the quality of reports and the trends as they start to evolve.”

Boards and disclosure

The study shows that there is room for improvement in reporting on the actual performance of the board and its committees. Although the board was cited in many cases as a formality, it was not possible to ascertain whether it was actually engaged in any of the listed activities of committees.

While the classification of board members in terms of independence was well disclosed overall, the process of assessing the stated independence of directors was not always adequately explained by companies.

The majority of companies (85%) reported on directors’ remuneration, keeping in line with the requirements for listed companies contained in the King III Report.

Ethical leadership and corporate citizenship

Most entities tended to shy away from reporting on the more progressive areas of the King III Report, for example, the disclosing of actual performance in terms of ethics.

The study suggests that the measurement of the effect of corporate citizenship initiatives is an area in which entities could improve by attaching statistics or financial investments to specific initiatives. ‘Something as simple as disclosing the number of families in a community that could have been affected by an entity’s actions could improve an integrated report,” says Wadee. One of the trends that is evident from the survey is that companies dedicate a significant amount of effort to reporting comprehensively, while not always considering whether those items that have been reported upon are material to the users on the report.

IT governance

As with other areas that are new to King III, most companies provided very little information about the governance of information technology. “This is concerning given the ubiquitous nature of IT in the operations of most entities,” he says. Only two-thirds of all entities surveyed indicated that the governance of IT is a board’s responsibility, while only a handful discussed the importance of IT in relation to the strategy of the company or discussed the implementation of an IT governance framework.

Audit committees

The role of the audit committee has increased significantly in the wake of the King III Report and it appears that most companies have understood the importance of this committee and are being seen to comply with the requirements of the report. There has been an increased focus on ensuring that the appropriate number of non-executive directors serves on the committee (more than 80%). Furthermore, most companies describe the role of the audit committee in risk management.

However, almost a third of audit committees did not provide adequate information relating to the audit committee’s oversight role in the implementation of a combined assurance model, or the appointment and performance review of the chief audit executive.

A refreshing trend has emerged whereby 82% of reports disclosed how the audit committee discharged its duties during the financial period under review. Wadee says that a potential focus area in future will be the appointment of a chief audit executive for internal audit by the audit committee, and oversight of this individual’s performance.

Risk governance

An overwhelming percentage of companies (90%) disclosed their key risks and how they were mitigated. However, only 25% of entities disclosed their risk appetite. “This is disappointing as most companies would presumably have this information readily available.

“While it is encouraging that the vast majority of boards of directors accepted responsibility for risk management and have disclosed how risk management has been aligned with the strategy of the company and integrated into the daily activities of the company, it is concerning that less than two-thirds reported on their assessment of the effectiveness of risk management,” says Wadee. Furthermore, less than a quarter of companies surveyed disclosed who the chief risk officer was.

Internal audit

The majority of companies reported that they had an internal audit function in place. However, the study shows there is some room for improvement in terms of reporting on how the internal audit reports to the audit committee (currently 85% of companies disclose this).

Laws and regulations

The majority of companies provided very little information about compliance with laws, rules, codes and standards. Wadee says that this is concerning, given that all companies operate within legal frameworks that could potentially have a detrimental effect both financially and from a reputational perspective for entities that do not comply with them.

Integrated reporting and disclosure

While most companies explained their vision and objectives in their reports, less than two-thirds of organisations surveyed disclosed the performance measures management uses to monitor the success of its actions. Furthermore, only half of integrated reports disclosed performance targets and the organisations’ achievement in respect of these targets.

Given that most entities express the desire to grow, the report finds it surprising to note that only half of the companies surveyed explain the key underlying external drivers for current and future growth. Also of concern is the neutrality and balance of the disclosures that companies provide. In 85% of reports surveyed, companies disclosed a positive effect, while less than a third of organisations disclosed any negative aspects.

Responsibility for sustainability reporting is also not clearly defined in almost a quarter of reports. Although all of the companies surveyed had a sustainability report, only 43% obtained assurance over the key elements of sustainability reporting, with half of these being assured by the external auditor.

An emerging trend is for companies to produce a separate sustainability report that does not form part of the integrated annual report, while incorporating material sustainability aspects into the integrated report. Although it is encouraging to note that entities value sustainability enough to devote an entire report to it, in some cases the integrated report does not contain enough information about sustainability issues to satisfy the criteria of the King III Report, says Wadee.

Wadee says: “While companies have made positive strides in moving towards integrated reporting, it has been an evolutionary rather than a revolutionary process. There are clear leaders in this field of reporting who have embraced the concept wholeheartedly, while others are taking a more cautious and reactionary approach, driven by what the leaders in this space are doing. Overall the effect is a positive one – reporting in South Africa is moving in the right direction.”

Listen to the podcast of Prof. Mervyn King's presentation of the findings to the survey!