The Integrated Reporting Movement E-Book

Robert G. Eccles

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Corporate F&A
• Sprache: Englisch

Seitenzahl: 517

Veröffentlichungsjahr: 2014

Beschreibung

An in-depth, enlightening look at the integrated reporting movement The Integrated Reporting Movement explores the meaning of the concept, explains the forces that provide momentum to the associated movement, and examines the motives of the actors involved. The book posits integrated reporting as a key mechanism by which companies can ensure their own long-term sustainability by contributing to a sustainable society. Although integrated reporting has seen substantial development due to the support of companies, investors, and the initiatives of a number of NGOs, widespread regulatory intervention has yet to materialize. Outside of South Africa, adoption remains voluntary, accomplished via social movement abetted, to varying degrees, by market forces. In considering integrated reporting's current state of play, the authors provide guidance to ensure wider adoption of the practice and success of the movement, starting with how companies can improve their own reporting processes. But the support of investors, regulators, and NGOs is also important. All will benefit, as will society as a whole. Readers will learn how integrated reporting has evolved over the years, where frameworks and standards are today, and the practices that help ensure effective implementation--including, but not limited to an extensive discussion of information technology's role in reporting and the importance of corporate reporting websites. The authors introduce the concepts of an annual board of directors' "Statement of Significant Audiences and Materiality" and a "Sustainable Value Matrix" tool that translates the statement into management decisions. The book argues that the appropriate combination of market and regulatory forces to speed adoption will vary by country, concluding with four specific recommendations about what must be done to accelerate high quality adoption of integrated reporting around the world.

Leseprobe

CONTENTS

Cover

Series Page

Title Page

Copyright

Foreword

Preface

Acknowledgments

Chapter 1: South Africa

The Uniqueness Of South Africa

South Africa's Journey to Integrated Reporting

South African Assessment of the South AFrican Experience

Our Reflections on the South African Experience

Notes

Chapter 2: Meaning

Company Experimentation: Examples from the First Integrated Reports

Expert Commentary: The First Reflections on Integrated Reporting

Codification: Creating Common Meaning

Notes

Chapter 3: Momentum

Adoption

Accelerators

Awareness

Notes

Chapter 4: Motives

Companies

Audience

Supporting Organizations and Initiatives

Regulators

Service Providers

Notes

Chapter 5: Materiality

The Social Construction of Materiality

Materiality in Environmental Reporting

Comparing Different Definitions of Materiality

Audience

Governance

Materiality for Integrated Reporting

Notes

Chapter 6: The Sustainable Value Matrix

A Short History of the Materiality Matrix

Issues With the Matrix

The Current State of Materiality Matrices

From the Materiality Matrix to the Sustainable Value Matrix

Notes

Appendix 6A: Comparing the Ford and Daimler Materiality Matrices

Notes

Appendix 6B: Methodology for the Materiality Matrices Review

Note

Chapter 7: Report Quality

The Six Capitals

Content Elements

Special Factors

Assurance

Notes

Appendix 7A: Methodology for Analyzing 124 Company Integrated Reports

Notes

Chapter 8: Reporting Websites

Methodology

Website Category Analysis

Website Feature Analysis

Three Examples

SAP 24

Notes

Appendix 8A: Methodology for Website Coding

Chapter 9: Information Technology

Integrated Reporting Processes

Four IT Trends

Contextual Reporting

(World Market Basket)

Notes

Chapter 10: Four Recommendations

A Very Brief History of Financial Reporting

Balancing Experimentation and Codification

Balancing Market and Regulatory Forces

Greater Advocacy from the Accounting Community

Achieving Clarity Regarding the Roles of Key Organizations

A Possible Scenario

Final Reflection

Notes

About the Authors

Index

End User License Agreement

List of Tables

Table 2.1

Table 4.1

Table 4.2

Table 5.1

Table 6.1

Table 6A.1

Table 6B.1

Table 7.1

Table 7.2

Table 7.3

Table 8.1

Table 8.2

Table 8.3

Table 8.4

Table 8.5

Table 8.6

Table 8.7

Table 8.8

Table 8.9

Table 8.10

Table 8.11

Table 8.12

Table 8.13

Table 8.14

Table 8.15

Table 8A.1

List of Illustrations

Figure 1.1

Figure 2.1

Figure 2.2

Figure 3.1

Figure 3.2

Figure 3.3

Figure 3.4

Figure 6.1

Figure 6.2

Figure 6.3

Figure 6A.1

Figure 6A.2

Figure 6A.3

Figure 7.1

Figure 7.2

Figure 7.3

Figure 7.4

Figure 7.5

Figure 7.6

Figure 8.1

Figure 9.1

Figure 9.2

Figure 9.3

Guide

Cover

Table of Contents

Foreword

Chapter 1

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The Wiley Corporate F&A series provides information, tools, and insights to corporate professionals responsible for issues affecting the profitability of their company, from accounting and finance to internal controls and performance management.

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The Integrated Reporting Movement

Meaning, Momentum, Motives, and Materiality

Robert G. Eccles

Michael P. Krzus

Sydney Ribot

Cover Design: Wiley

Cover Illustration: ©iStock.com/patilankur

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Library of Congress Cataloging-in-Publication Data:

Eccles, Robert G.

The integrated reporting movement : meaning, momentum, motives, and materiality / Robert G. Eccles, Michael P. Krzus, with Sydney Ribot.

1 online resource. – (Wiley corporate F&A series)

Includes bibliographical references and index.

Description based on print version record and CIP data provided by publisher; resource not viewed.

ISBN 978-1-118-99373-6 (ebk); ISBN 978-1-118-99374-3 (ebk); ISBN 978-1-118-64698-4 (hardcover) 1. Corporation reports. 2. Corporation reports–South Africa–Case studies. 3. Social responsibility of business. 4. Sustainability. I. Krzus, Michael P. II. Title.

HG4028.B2

658.15′12–dc23

2014029756

Foreword

True leaders aim to take people to a place they have never been, and they have a plan to get them there.

For those among us who dream of leading our companies toward economic, environmental, and social sustainability, “integrated reporting” is a key part of the plan to get us where we need to go.

This is why Robert Eccles's and Mike Krzus's The Integrated Reporting Movement is such an important book; it arms today's leaders with reasons to continue the movement's momentum.

More than a trend, a public relations (PR) incentive, or just “the right thing to do,” sustainability is about growth and innovation. It's about winning the war for talent and winning in the marketplace. It recognizes that, today, people care as much about a company's purpose, values, and global impact as they do about its products, packaging, and prices. Integrated reporting is a big idea because, as a methodology, it helps create the strategies, the business models, the cultures, and the thinking that lead to a more sustainable business—and a more sustainable world.

From my own front-row seat as a chief executive officer (CEO), I've been a proud champion of the movement that Professor Eccles and Mike Krzus so thoroughly describe and enthusiastically support. SAP is a global technology company with 66,000 employees and more than 260,000 customers. As we went from having a stand-alone sustainability strategy to creating a corporate strategy that is sustainable (a huge difference), we began presenting our financial and nonfinancial results in a single report. This bold shift is helping us achieve several goals:

First, it enhances transparency and accountability at a time when customers, shareholders, and business partners are demanding more of each.

Second, it allows us to more fully live up to SAP's core vision—to help the world run better and improve people's lives—as well as fulfill our responsibilities as a global corporation by ensuring we substantially address serious issues, such as the threat of climate change.

Third, it lets us tell one, more unified story.

Fourth, integrated reporting helps tackle another big, budding movement: the desire to run simple.

One of the most intractable problems of our time, especially for CEOs, is complexity. I hear it every day. Businesses large and small are under siege. The demand for more insight into how companies do business is overwhelming. Meanwhile, doing business is more complicated than ever due to the explosion of data, multiple channels of communication, paralyzing layers of management, and the choke of sprawling technical infrastructures. Amid all this complexity is a craving to simplify everything.

When it comes to sustainability, one choice is simple: Combining financial and nonfinancial reporting in one place beats back complexity by reducing redundancy and increasing efficiency. In today's economy, less means more.

Integrated reporting also unleashes a new competitive advantage. No company can help its customers navigate the changing world unless it does so itself. Early adopters of integrated reporting are better positioned to serve their clients than those that ignore or resist the movement. At SAP, lessons learned as we go down this path combine with the power of information technology to help our customers track their own energy consumption and greenhouse gas emissions as SAP does—companywide, averaged per employee—as well as begin to link that data to revenue and profit margins.

In that way, sustainability is not solely about reporting. More exciting is the fact that economic, environmental, and social actions are linked, and their connections have the potential to create amazing value. The challenge for today's leaders is not just to operate, but to innovate by identifying how actions in one area can affect another.

At SAP, we believe that social investing—employee volunteering, financial gifts, technology donations—links to greater employee engagement, productivity, and the ability to acquire new customers, especially in emerging markets. Reducing our greenhouse gas footprint with renewable energy sources or reducing our employees' travel, for instance, is not only good for the environment: we believe it can positively affect our people's overall health, our ranking as a top employer, and our customers' loyalty, as well as grow revenue as more companies require this of their suppliers.

Looking ahead, the integrated reporting movement is poised to speed up, fueled by innovation. It will be easier to execute and embrace as cloud computing, analytics, and in-memory technologies simplify companies' ability to track, assess, compare, and share data. As always, the best companies will change before they absolutely have to.

I've always believed that the only way to achieve audacious outcomes is to set audacious goals. And audacity is at the heart of sustainability. As leaders, we are our records. Our leadership will be defined by the people we touch and what we leave behind. So as you read this important book, reflect on what it means for your legacy, your people, your company, and our world.

Bill McDermott,Chief Executive Officer, SAP

Preface

Many exciting developments have taken place since we published the first book on integrated reporting (One Report: Integrated Reporting for a Sustainable Strategy) four years ago. The International Integrated Reporting Council (IIRC) was formed in 2010 and the Sustainability Accounting Standards Board (SASB) in 2011. Global Reporting Initiative (GRI) released its G4 Guidelines in 2013, the same year the Climate Disclosure Standards Board (CDSB) updated its Reporting Framework and announced plans to expand the scope of its Framework to include other natural resources and the IIRC published “The International <IR> Framework” (<IR> Framework). Other important events include the launch of the UN-sponsored Sustainable Stock Exchanges Initiative (SSE) in 2009 and the Corporate Sustainability Reporting Coalition (CSRC), sponsored by Aviva Investors, in 2011.

For these and many other reasons, we decided that now was the time to take stock of the integrated reporting movement. We very consciously use the term “movement” to describe what is happening with integrated reporting today. Its members include companies, investors, supporting organizations and initiatives, and firms that supply products and services to help companies produce an integrated report. With the exception of South Africa, no country has made any kind of regulatory intervention in support of integrated reporting. The bulk of adoption today is being accomplished through a social movement. The people and organizations involved see integrated reporting as an essential, but certainly not sufficient, mechanism to help companies create more sustainable strategies to support investors making longer-term investment decisions that, together, will support the creation of a sustainable society. Just as financial reporting played a critical role in creating the capital markets we have today, integrated reporting, supported by sustainability reporting, will help create the capital markets and society we need for tomorrow.

Chapter 1 is a case study on the emergence of integrated reporting in South Africa. Members of the movement are well aware of the country's leadership here, but they may not know the full story of how this country became the first and only one so far to require integrated reporting on an “apply or explain” basis. Chapters 2 through 4 review the state of the integrated reporting movement today. Although the topics in these chapters will be familiar to those involved in the promotion of integrated reporting, we examine them through the lens of a movement. Chapter 2 posits four overlapping phases for how meaning has evolved, starting with company experimentation, through early commentary, up to codification, and ending with the recent start of institutionalization. Chapter 3 examines the movement's momentum in terms of adoption, acceleration, and awareness, and Chapter 4 analyzes the motives of the different types of actors involved.

Chapter 5 focuses on materiality—a core, albeit elusive, concept in integrated reporting and reporting in general. Chapter 6 looks at efforts companies have made to operationalize it through a “materiality matrix.” To the extent that this book attempts to break new conceptual ground, this is the work of Chapter 5, where we introduce the idea of an annual board “Statement of Significant Audiences and Materiality” (Statement) and 6, where we describe the “Sustainable Value Matrix” (SVM) as a tool for translating this statement into management decisions. Through the Statement, the company makes clear its purpose vis-à-vis providers of financial capital and other stakeholders. The SVM provides guidance to management on reporting, stakeholder engagement, resource commitments, and opportunities for innovation.

In Chapter 7, we assess the quality of integrated reporting prior to the publication of the International <IR> Framework through a careful analysis of the self-declared integrated reports of 124 companies. In Chapter 8, we do the same for the corporate reporting websites of the largest 500 companies in the world. These two chapters set the stage for Chapter 9, which discusses the role of information technology (IT) in integrated reporting and how it can be used to promote integrated thinking. We believe that the movement needs to be more cognizant of the importance of IT, and this chapter seeks to place this topic at the center of the conversation.

In our final chapter, we make four recommendations for what needs to be done to ensure the success of the movement. The first concerns the role the IIRC can play in certifying the quality of integrated reports. The second describes how best to marshal market and regulatory forces to spur the adoption of integrated reporting, and our last two recommendations focus on organizations, clarifying the role of accounting firms and professional accounting associations and emphasizing the need for the major NGOs supporting the movement (CDP, GRI, and the SASB) to collaborate as much as possible.

As we submit this book to our publisher in May of 2014, how do we feel about the integrated reporting movement? Cautiously optimistic. That said, the future is not predetermined. It is there to be shaped. We will continue to do everything we can to support the movement in our own modest way, and we encourage all who care about creating a sustainable society to do the same.

Acknowledgments

We could not have written this book without the help of many other members of the integrated reporting movement, starting with Sydney Ribot. A research associate at the Harvard Business School who is also working on a narrative web TV series about globalization in Istanbul, she contributed to every chapter and appendix in this book through research, writing, critiquing, editing, and the final polishing before the book could be called done. Sydney also took the lead on Chapter 1, “South Africa,” where we would also like to thank Leigh Roberts for making sure we told the South African story accurately. As someone deeply involved in the movement in South Africa and on a global basis as well, Leigh was well positioned to do that for us.

There were other chapters where we depended upon extensive contributions by others, starting with Tim Youmans, an independent researcher, and Andy Knauer, a research associate, both at the Harvard Business School. Tim and Andy had joint responsibility for Chapter 5, “Materiality,” and 6, “The Sustainable Value Matrix.” Tim had the lead on the former and gets credit for having the insight that materiality should be linked to corporate governance by making its determination a responsibility of a company's board of directors. Tim also gave us excellent feedback on the many drafts of the other chapters. Andy conducted a thorough analysis of the materiality matrices of 91 companies that served as the data backbone for this chapter, no doubt making him one of the world's experts on this topic. He also helped with all of the other quantitative analysis described in the book. Without his technical skills, we would not have been able to garner the insights we did from the data he and others worked so hard to gather.

Chapter 7, “Report Quality,” simply would not have been possible without the extraordinary efforts of David Colgren (President and CEO at Colcomgroup), Brad Monterio (Managing Director at Colcomgroup), and Liv Watson (Director of New Markets at Workiva, formerly WebFilings). In spite of demanding day jobs, they managed to spend hundreds of hours collectively gathering and analyzing data based on the integrated reports of 124 companies. They were also instrumental in producing Chapter 9, “Information Technology.” Neither of us has the expertise to have written this chapter on our own. We are also grateful to Jyoti Banerjee of the International Integrated Reporting Council (IIRC) and Peter Graf and Thomas Odenwald of SAP for their feedback on a draft we thought was pretty close to done. We were wrong, and they set us on the right path. Jyoti called the chapter “not ready for prime time,” and when we challenged him to help us get it ready, he readily agreed to do so. Without his involvement, this chapter could very well have ended up on the cutting room floor. Instead, it survived and gave us the opportunity to introduce his idea of “contextual reporting.”

Chapter 8, “Reporting Websites,” would not have been possible without the indefatigable efforts of Barbara Esty of the Harvard Business School's Baker Library. She singlehandedly coded up the corporate websites of 500 companies—a daunting task. In doing so, Barbara probably became the world's expert on reporting websites and we relied heavily on her for help in interpreting the data she gathered.

Steve Waygood and Louise Haigh of Aviva Investors and Aviva, respectively, are important players in the integrated reporting movement, and we relied upon them for their insights in many areas, especially public policy initiatives and nongovernmental organization (NGO) campaigns important to integrated reporting. We have and continue to learn a great deal from them about such initiatives. In our view, Steve is one of the most important people today supporting the movement from a regulatory and campaign perspective. A “thinker” as well as a “doer,” Steve has also made contributions to the integrated reporting movement through his own writing. We look forward to working with him, Louise, and their colleagues at Aviva Investors and Aviva in the years ahead in support of the movement.

Our book describes five “supporting organizations,” and we are grateful to representatives of each for their feedback on our descriptions of their organizations and their role in the movement. Thus, we would like to thank Nigel Topping of CDP, Allen White of the Global Initiative on Sustainability Ratings (GISR), Nelmara Arbex and Ernst Ligteringen of Global Reporting Initiative (GRI), Paul Druckman and Lisa French of the IIRC, and Amanda Medress and Jean Rogers of the Sustainability Accounting Standards Board (SASB). We look forward to working with all of them in the years ahead, including Ernst. We suspect that even though he is retiring as CEO of GRI, he will remain an important member of the movement. We would also like to thank him for the great contributions he has made to sustainability and integrated reporting and wish him well in his new endeavors.

We interviewed a number of people for this book, all of whom contributed important insights. For this we would like to thank Nelmara Arbex, Jyoti Banerjee, Aron Cramer, Peter DeSimone, Alexandra Dobkowski-Joy, Jane Diplock, Paul Druckman, Louise Haigh, Bob Herz, Yan Hui, Anthony Miller, Jeanne Chi Yun Ng, Kathee Rebernak, Richard Sexton, Yoshiko Shibasaka, Susanne Stormer, Nigel Topping, Mike Wallace, Steve Waygood, Allen White, Christy Wood, and Ying Zhang. In terms of data, we got help from Satu Brandt and Ian van der Vlugt of GRI for data on the number of sustainability and integrated reporting companies as discussed in Chapter 3 “Momentum” and from Christina Salomone, Scott Dill, and Susanne Stormer of Novo Nordisk for data on their website usage. We would also like to thank Pippa Armbrester for quick and careful copyediting and Pranay Bose for a careful analysis of reporting by some large pharmaceutical companies, which analysis we now want to use in a separate publication, and Eric Hermann of Workiva, formerly WebFilings, for his graphical expertise that was much needed for some of the figures. Stacey Rivera, our development editor, provided just the right mix of discipline and support to ensure the timely delivery of a book that met her quality standards.

We appreciate financial support from the Harvard Business School for some of the research on which this book is based. We would also like to thank fellow movement member Professor George Serafeim, also of the Harvard Business School, for his intellectual contributions and moral support in so many ways. He too is someone we look forward to working with in the years ahead in terms of both ideas and actions.

Finally, words alone cannot express the gratitude we have to our wives Anne Laurin Eccles and Marilyn Mueller Krzus for their love, encouragement, and moral support. Since this is our second book, they knew full well what lay ahead for them until the book was done. Now that it is, we look forward to giving them back at least some of the time they gave to us.

Chapter 1South Africa

In 2011, South Africa became the first country to require integrated reporting on an “apply or explain” basis.1 In 2014, it remains the only country to have done so. Since the Johannesburg Stock Exchange (JSE) added King III to its listing requirements—which as of 2011 have included integrated reporting—some 4502 South African companies have been filing reports that present both financial and nonfinancial information3 in a meaningful way. While a variety of proposals related to sustainability and integrated reporting have been submitted in countries of the European Union,4 and while an initiative by the World Federation of Exchanges slated for discussion in 20145 would require some form of nonfinancial reporting,6 no other country has shown signs of implementing such a far-reaching requirement.

Those not deeply entrenched in the topics of corporate governance and reporting are often surprised to learn that South Africa is the first country where integrated reporting was given a widespread mandate. Indeed, in 20 years the country's corporate governance code went from being undeveloped to regarded as an international vanguard. The governance principles that would launch South Africa's integrated reporting journey coincided with the country's first multiracial elections in 1994. In codifying values of stakeholder inclusivity—the idea that nonshareholder interests and expectations should be taken into account during strategic decision-making—those principles testified to a burgeoning democracy's effort to create structural and corporate transparency where, previously, corruption had prevailed. Because integrated reporting's meaning in South Africa—for companies, investors, and the country as a whole—must be seen in the context of its evolution from corporate governance principles, and because the movement has gathered more momentum in South Africa than any other geography, we will describe the motives of the key individuals and groups that led to this recommendation, ultimately reviewing the results of this country's experience.

The Uniqueness Of South Africa

The particularity of South Africa's circumstances begs the question of how much momentum the country's decision has created for the adoption of integrated reporting on a global basis. One might suppose the adoption of integrated reporting by a midsized country (population of 51 million in 2012)7 with a divisive history says little about the integrated reporting movement's prospects for the rest of the world. It is unlikely that a developed country would be motivated by the same set of reasons to improve its corporate governance.

As the increased trust thought to accompany integrated reporting could signify easier entry into foreign markets directly, through joint ventures, or through acquisitions, however, other developing countries may have similar incentives to attract foreign investors and make their large companies credible players on a global stage.8 Although this suggests integrated reporting can play a role in establishing the legitimacy of the State and its economy in times of turmoil and change, it certainly does not mean that it always will. In countries where the legitimacy of the State and its business community are more secure, companies and countries may see fewer benefits of integrated reporting—particularly when taking into account its costs and risks.

Yet, while South Africa's unique circumstances may have led it to be the first country to adopt integrated reporting, one could argue, as South Africans Mervyn King and Leigh Roberts have in Integrate: Doing Business in the 21stCentury,9 that the underlying forces that put integrated reporting on the agenda are the same worldwide. Central to the development of South Africa's code of corporate governance, King now occupies a similar role on the global integrated reporting stage as Chairman of the International Integrated Reporting Council (IIRC). As a member of the Integrated Reporting Committee of South Africa (IRC of SA) and the Technical Task Force of the IIRC, Roberts was deeply involved in the development of integrated reporting in South Africa. They see integrated reporting as one of “four corporate tools” to manage companies in a changing business environment. “Integrated thinking” is suggested as the most important, with the other two being stakeholder relationships and good corporate governance.10 We will discuss the relationship between integrated reporting and integrated thinking in detail in the next chapter, “Meaning.”

While the analysis of King and Roberts would suggest that integrated reporting is as relevant elsewhere as in South Africa, exactly how its adoption might best be aided remains unclear. The authors' four tools, much like the five forces they cite as changing the investor environment, are useful to companies all over the world even as their strength varies by country.11 The nine problems with corporate reporting they identify are similarly applicable.12 The remaining instrumentalist questions are concerned with scope and strategy. Should the focus be on improving corporate reporting per se, which is how it is largely being defined in other countries? Or should integrated reporting be part of a larger context, such as a code of corporate governance, as it was in South Africa? What is the right combination of market and regulatory forces? The South African strategy was what might be called “soft regulation” due to the “apply or explain” basis and the central role of the JSE, in contrast to the hard regulation of a pure mandate supported by the country's securities commission. These questions will be addressed in our final chapter. Here, we present South Africa's particular journey in order to glean what can be learned from the only country in which integrated reporting is mandatory.

South Africa's Journey to Integrated Reporting

In 1990, the Republic of South Africa emerged from the shadow of 42 years of apartheid into an uncertain future. The ruling white-controlled National Party began negotiations to dismantle the system of racial segregation that had allowed it to enforce white supremacy and Afrikaner minority rule at the expense of a black majority since 1948.13 Nelson Mandela, a Xhosa attorney and organizer of resistance against that system, was released from prison and his political party, the African National Congress (ANC), was legalized by the last State President of apartheid-era South Africa, F.W. de Klerk. While the path to democracy seemed secure by the mid-1990s, South Africa's social triumph was projected onto a backdrop of fiscal unknowns.

By 1989, 155 American educational institutions had fully or partially divested from South Africa and 22 countries, 26 states, and more than 90 cities had taken binding economic action against companies doing business there.14 Between 1985 and 1988, the United States, Japan, Great Britain, Israel, and a number of European countries enacted legislation or initiated trade restrictions with South Africa.15 Around the same period, the country—the world's largest gold producer—saw a precipitous drop in the price of gold from $850/oz. in 1980 to $340/oz. by 1992. Coupled with political unrest and sanctions, this drop resulted in South Africa's withdrawal of its last gold reserves from the International Monetary Fund in 1986, just as pressure from the sanctions intensified.16 Net capital movement out of the country between 1985 and 1988, the most intense years of divestment political pressure and sanctions, totaled over R23.9 billion, causing a dramatic decline in the international exchange rate of the South African rand and, consequently, a rise in the price of imports. Inflation was rising at a rate of 12–15% per year.17

Even measures like the 1973 Companies Act,18 which the South African government adopted in its eagerness to attract foreign investment, did not prevent the extensive flight of private capital that occurred as a result of anti-apartheid pressure.19 Foreign direct investment, at 34% of gross domestic product (GDP) in 1956, had dropped to 9% by 1990 (Figure 1.1), and the depleted South African economy cast corporate accountability deficiencies into sharp relief.20 What remained were a few large companies—often, family corporations operating in a culture of cronyism and impunity.21 While the language of reconciliation spoken by politicians like Nelson Mandela lent the postapartheid state moral credence, the basic unreliability of the South African business environment and economy posed a critical challenge to the new government's legitimacy.22

Figure 1.1 Foreign Direct Investment in South Africa as a Percent of GDP

Source: Fedderke, J.W., and Romm, A., 2006, Growth Impact and Determinants of Foreign Direct Investment into South Africa, 1956–2003, Economic Modelling, 23, 738–60.

King I

Based on the Companies Act of 1973, corporations were allowed to withhold information from their auditors on the basis of “national interest.”23 Such opaque business standards, when combined with the political turmoil of the early 1990s, fostered an atmosphere of uncertainty for foreign investors. While Great Britain lifted the first economic sanction against South Africa in 1990, the last would remain until 1994. Meanwhile, the new government had difficulty attracting foreign capital, likely due to lack of experience,24 as repugnance to a fairly stable apartheid system was replaced with nervousness about the State's political and economic solvency. To mitigate some of this uncertainty, the Institute of Directors in Southern Africa (IoDSA)25 resolved to reinterpret business practices to prepare the South African economy for exposure to international markets by establishing the King Committee in 1992. Named after Mervyn King, a former corporate lawyer and Supreme Court judge selected as its chair, the King Committee sought to develop corporate governance standards that adequately reflected the values of postapartheid South Africa.26

Published in 1994, the first King Code of Corporate Governance Principles (King I) went beyond the reigning standard of corporate governance, the U.K.'s Cadbury Report,27 to advocate total transparency. Key topics included who should be on a company's board, the role of nonexecutive directors, and the categories of people who should fill this role—none of which had ever been addressed in South African business history. “King I” also advocated for disclosure of executive and nonexecutive directors' remuneration, set guidelines for effective auditing, and encouraged companies to implement a Code of Ethics to demand “the highest standards of behavior.”28 King I did not, however, call for sustainability reporting.

Mervyn King explained this approach to corporate governance as a way to understand a company's worth in a more comprehensive manner, saying, “The board should take account of the needs, interests, and expectations of the stakeholders…their duty being the best interests of the company for the total maximization of the total economic value of the company, not just book value.”29 South Africa began to address the “shareholder vs. stakeholder” polemic debated so vigorously around the world today. In his quote, King makes clear that the duty of the board is to the company, not to its investors or any particular stakeholder group. While this is true in many parts of the world, there is a common perception, especially in the United States—and in spite of the law's lack of affirmation on this point—that directors are responsible for putting shareholder interests first.30

Although the report advocated a principles-based approach,31 the JSE made elements of the King Code a listing requirement in 1995 on a “comply or explain” basis.32

King II

Following large-scale corporate governance failures in the United States, the United Kingdom, and at home, the second King Code of Corporate Governance (King II) was released in 2002. King II included sections on risk management, the role of the board, sustainability, and the suggestion that companies create an internal audit charter.33 In a corporate context, “sustainability” was interpreted as a focus on “those non-financial aspects of corporate practice that…influence the enterprise's ability to survive and prosper in the communities within which it operates, and so ensure future value creation.” Defined as the essence of corporate social responsibility, it means “the achievement of balanced and integrated economic, social, and environmental performance,” or what is commonly called the “triple bottom line.” The report clarified that these sustainability—or nonfinancial—issues should not and cannot be treated as secondary to established business mandates, noting, “It should also be pointed out that the reference to these issues as ‘non-financial issues’ is for ease of reference. There is no doubt…that these so-called non-financial issues have significant financial implications for a company.”34

The concept of integrated reporting began to take shape in King II through the notion of an “integrated sustainability report.” A chapter devoted to integrated sustainability reporting reviewed the stakeholder-inclusive model. The spirit of Ubuntu, an African values system, was suggested as a natural foundation for effective corporate governance. Reuel Khoza, Chairman of AKA Capital and The Nedbank Group and Chair of the Integrated Sustainability Reporting task team for King II, articulated the connection, saying, “The guiding principle of Ubuntu can be stated in one sentence: ‘Ubuntungubuntu.’ In English you can put it as, ‘I am because you are, you are because we are.’ We are interrelated beings, we operate best when we care about one another.”35

As discussed above, King II linked a focus on sustainability to company survival over the long term. Thus, King II articulated relationships between good corporate governance and transparent reporting, transparent reporting and sustainability, and sustainability and corporate performance, especially over the long term. These elements remain at the center of the integrated reporting debate today.

In the years after King II was published, sustainability appeared with great frequency in the national dialogue. While still not enforced by legislation, key aspects of King II's code were further validated when the JSE developed a set of criteria to measure the “triple bottom line” performance of companies, making explicit reference to King II. The move to create a Sustainable Stock Index made South Africa both the first emerging market, and its stock exchange the first worldwide, to bring sustainability issues to the fore through a structured index. In 2008, the passage of the National Framework for Sustainable Development by the Cabinet of South Africa lent government support to the concept of sustainability.36

King III

Corporate governance visionaries, however, remained unsatisfied with the treatment of sustainability in King II, and King himself believed its placement of sustainability in an eponymous chapter had led companies to isolate it inappropriately from strategy and corporate governance. To underscore the importance of sustainability's integration into business strategy, the group revised the code to include the crucial recommendation that companies combine material financial and nonfinancial data in a single, integrated annual report. King I and II had already achieved the Committee's goal of placing South Africa at the vanguard of international corporate governance, and a third report would allow them to push the envelope again. Furthermore, changes in international governance trends, as well as the passing of the new Companies Act No. 71 of 2008, made a third report necessary.37 In 2009, the third King Code of Governance (King III) was released, and it was applicable from March 2010 onward.

Departing from King I and King II, King III changed from a “comply or explain” to an “apply or explain” approach in the effort to be more flexible in the application of its now 76 principles. That is, King III was applicable to all public, private, and nonprofit entities, but those entities could opt out voluntarily by explaining why some of those principles were not applicable to their operations. The principles-based approach, rather than a rules-based one, was intended to allow companies to adapt those principles to their own situation to allow for a much wider scope of interpretation than a “comply” or explain approach. Still, many felt it would hinder King III's success unless companies had active shareholders to force them to account for their behavior. Because the United Nations (UN)-backed Principles for Responsible Investment (PRI)38 believed there was not enough guidance in South Africa for institutional investors to behave as active asset owners, the King III Committee recommended the creation of a code according to which institutional investors should set their expectations in order to ensure companies apply the principles and suggested practices effectively.39

Structurally, the concept of integrated reporting developed in King III emphasized “a holistic and integrated representation of the company's performance in terms of both its finances and its sustainability” to be remarked upon annually in a single report.40 How to represent these elements was subsequently defined in explicit, if aspirational, terms.41 On a higher level, King III emphasized that integrated reporting was not just about year-end disclosure but integrating sustainable practices into company operations all the time—a phenomenon that has come to be referred to by many, including King, Roberts, and the IIRC, as “integrated thinking.” This meant that the skill sets and responsibilities of audit committees would need to expand to account for nonfinancial considerations. Furthermore, emphasis was placed on “the principle of materiality, which links sustainability issues more closely to strategy, as well as the principle of considering a company's broader sustainability context.”42 Although King III acknowledged the helpfulness of international frameworks and guidelines like Global Reporting Initiative's (GRI's) G3 Guidelines, it suggested that companies should also develop criteria based on their unique circumstances. King III also advocated independent assurance of sustainability reporting and disclosure.43 In recognition of the King Codes' pioneering nature, Kofi Anan, the Secretary-General of the UN, invited King to chair the UN Committee on Governance and Oversight.44 Shortly thereafter, the King Reports were translated into Japanese.45

Meanwhile, the IRC of SA,46 established in May of 2010, was created to develop integrated reporting guidelines for South African companies. In January 2011, its “Framework for Integrated Reporting and the Integrated Report Discussion Paper” (IRC of SA Discussion Paper)—the first attempt at integrated reporting codification—was released.

The Integrated Reporting Committee of South Africa's Discussion Paper

The IRC of SA Discussion Paper outlined three categories of principles for the integrated report. The first included principles to define the scope and boundary of the report.47 The second pertained to the way in which the report's content was selected and the dependability of the information that comprised it: companies must ensure that the information they provide is appropriate (relevant), material, complete, neutral, and free from error. Thirdly, the information presented should be comparable and consistent, verifiable, timely, and understandable.48 The IRC of SA Discussion Paper also suggested specific elements of the report. It was to include a profile outlining its scope and boundary and an organizational overview discussing business model and governance structure. The company operating context was to be explained by including information on material issues, impacts and relationships, and identifying risks and opportunities. Strategic objectives and targets were to be covered along with the Key Performance Indicators (KPIs), Key Risk Indicators (KRIs) that would track performance, and a demonstration of the competencies required to pursue the objectives. The IRC of SA Discussion Paper also emphasized that the account of organizational performance, financial and nonfinancial, should include a list of objectives and targets, along with a discussion of whether or not they were achieved. Companies were to state future performance objectives and internal activities along with the structures required to achieve them, remuneration policies should be brought to light, and an analytical commentary on the company's current state and anticipated performance in the context of strategic objectives was to be described.

The IRC of SA Discussion Paper also devoted a fair amount of attention to the topic of materiality, noting in its discussion of the second principle that it is defined differently for financial and nonfinancial information. For financial information, the IRC of SA Discussion Paper used the common definition: “For financial information, materiality is used in the sense of the magnitude of an omission or misstatement of accounting data that misleads users and is usually measured in monetary terms. Materiality is judged both by relative amount and by the nature of the item.”49 For nonfinancial information, the IRC of SA Discussion Paper observed, “In the context of sustainability, materiality is a more difficult measure to define and a great deal of judgment is required.”50

Recommending assurance on sustainability disclosures by an independent third party under the oversight of the audit committee, the IRC of SA Discussion Paper noted that “the organisation's board should ensure the integrity of the integrated report.”51 Using a metaphor that has since gained considerable traction among members of the integrated reporting movement, it also observed that “Developing the ideal integrated report will be a journey for many organizations and so too will the extent and level of assurance.”52

While companies were not required to follow the principles and elements in the IRC of SA Discussion Paper, and the JSE did not attempt to assess the extent to which they were doing so, it likely had credibility in the corporate community due to the impressive multistakeholder group that prepared it. The members of the Integrated Reporting Committee and the Integrated Reporting Committee Working Group included senior representatives from individual companies and investors, company and investor associations, accounting firms and the accounting association, the stock exchange, nongovernmental organizations (NGOs), and academics.53 After this groundbreaking publication was released, the International Federation of Accountants (IFAC) launched a revised edition of its sustainability framework, discussing the specifics of sustainable business operations—like stakeholder engagement, goal setting, carbon foot printing, KPIs, and the nature of integrated reporting.54 The IRC is now promoting the international harmonization of integrated reporting by working with the IIRC55 and, in March of 2014, the IRC of SA endorsed the International Integrated Reporting Framework (published in December 2013) as guidance for how to prepare an integrated report.

South African Assessment of the South AFrican Experience

As South African companies began practicing integrated reporting and issuing integrated reports, the Big Four accounting firms began to study them to identify trends and best practices. After the first mandatory integrated reporting season on an apply or explain basis concluded for 2011, Ernst & Young (E&Y) South Africa published a short report, “Integrated Reporting Survey Results,” examining 25 companies listed on the JSE to interpret their understanding of integrated reporting and its perceived benefits and challenges.56 The next year, the firm began to publish its annual “Excellence in Integrated Reporting” awards as a way to improve best practices by providing special scrutiny of the top 100 companies in terms of market capitalization. PricewaterhouseCoopers (PwC) followed suit, analyzing the top 100 companies listed on the JSE in the period after March 1, 2011, in the second full reporting season after the third King Report on Governance was released, and its analysis even contained screenshots of successful integrated report sections' layouts.57 From 2011 to 2013, Deloitte and KPMG conducted similar surveys, publishing their results along with white papers reiterating the business case for integrated reporting, clarifying best practices, and addressing ongoing challenges. Local accounting firm Nkonki also began to produce an annual awards program covering the largest listed companies.58

Other organizations got involved in reflecting on the South African experience as well. For example, the University of Pretoria's Albert Luthuli Centre for Responsible Leadership collaborated with E&Y South Africa to interview 16 thought leaders, some of whom had been involved for over two decades in corporate governance and corporate reporting, lending nuance to the accounting firms' quantitative assessment of South Africa's integrated reporting experience.59 Chartered Secretaries Southern Africa undertook an annual awards program for integrated reports. The IRC of SA began to release the results of a survey of the top 100 companies listed on the JSE covering general areas, such as the size of the reports. While one can assume that things have progressed in the past year since these reports were published, below we consider trends indicated by the most recent reports and surveys available at the time of this writing.

Report Quality

While Deloitte identified “pockets of excellence,” the consensus among the Big Four remained that no one company could be indicated as exemplary in all aspects of integrated reporting.60 Companies were increasingly engaging with sustainability issues, but there was no overall “Poster Child” Integrated Report due to, among other factors, the lack of definitive reporting guidance. Deloitte's 2012 report alone identified 15 potentially relevant frameworks, regulations, and standards61 relevant to the process. It also addressed such issues as fear of disclosing competitive information related to strategy, board governance, how director remuneration was determined, and overall adjustment of internal controls, assurance, and data collection. Although the E&Y survey respondents demonstrated a solid understanding of the definition of an integrated report and the information it should represent, with all respondents agreeing that an integrated report was not simply a cross-reference between annual and sustainability reports, few disclosed these interdependencies in a useful manner.62

Overall, the following trends were indicated by most of the accounting firms: companies that had not embraced integrated reporting would become isolated; clear ways of telling the company narrative were improving, and companies relied more on visual storytelling and graphics than before; stakeholders were dealt with in greater detail in the reports; and companies were increasingly embedding sustainability issues into their business models. While KPMG estimated it would take up to three years for integrated reporting to become a fully established way of reporting business strategy and performance, the length of the journey depended entirely on a company's commitment to the spirit of King III in general and integrated reporting in particular. In some cases, companies were adopting a “tick-the-box” mentality to integrated reporting and simply outsourcing the production of the report to their audit firm or other consultants at a cost perceived to be high by the companies.

Materiality

Addressing the materiality of KPIs in a fulsome way remained one of the biggest hurdles for companies in their journey to integrated reporting, and it improved the least out of all other factors considered in the surveys from 2011 to 2013. South African shareholder activists like Theo Botha, Director of CA Governance,63 viewed the uptake of integrated reporting as evolving on par with the development of appropriate KPIs that required a comprehensive definition of company-specific materiality. While companies had been culling nonfinancial information for sustainability reports for years, many surveyed described the difficulty of how to decide which material issues were the most relevant as a concern. Furthermore, too many companies failed to explain the methodologies behind the selection of material factors, simply saying things like “material issues are identified by the Board.”64 Deloitte found that only 11% of client companies disclosed the methodology used to assess materiality, and the link to stakeholder engagement was not clearly presented.65 While deciding what is material enough to go into the report remains a challenge for companies to this day, the process has improved with the benefit of experience.

Disclosure of Nonfinancial KPIs

Integrated reporting was overwhelmingly credited with enabling management to redefine and focus its strategy to ensure sustainability's incorporation into its business model. This could be seen in the elevation of sustainability to the board level in some cases where it was not there before, the push for improved definitions of KPI data for measurement and management, inclusion into project decision-making, and an emphasis on an ongoing dialogue with stakeholders. Nevertheless, while companies had improved their integration of material environmental and social aspects into their overall business strategy, this improvement was not always reflected in their reporting practices. Many nonfinancial factors were still presented without context.66 Companies showed a tendency to disclose nonfinancial KPIs in a separate section of the report without apparent thought for the relevance to their operations or context, resulting in a weak disclosure of the interdependencies between those indicators and company performance in a holistic way.67 Indicators of how green a company is, for example, should only matter if measures like recycling or carbon emissions have a significant impact on business.

To make nonfinancial disclosure more useful for decision-making, E&Y suggested that mention of measures per unit produced or consumed, along with a comparison to industry norms, would give the KPIs greater meaning.68 Noting that stated KPIs were not always relevant to business strategy, KPMG suggested that benchmarking was helpful in determining what the most relevant KPIs were and linking them to strategic imperatives.69 As of 2013, PwC observed that while 55% of the 40 JSE-listed companies surveyed had identified one or more material capitals, only 6% effectively communicated their holistic performance.70 Likewise, PwC found that 81% of the JSE's top 40 companies' reports could improve in their definition of KPIs and the provision of a rationale for their use. However, 71% of KPIs were quantified, indicating progress in the process of disclosing nonfinancial factors in a comparable, easily understandable way.71 Although “silo reporting” was still evident, with KPIs sealed off in separate sections regardless of relevance to strategy, companies that considered the connections between KPIs and strategy found that their report content naturally addressed the most material issues affecting business value.72

Disclosure of Risks

While E&Y's 2013 “Excellence in Integrated Reporting” survey referred to risks that “will affect the businesses' ability to create value”73 rather than dividing them into financial and nonfinancial risks, much like disclosure of nonfinancial KPIs, nonfinancial risk disclosure had often increased without being adequately linked to strategy or performance. While companies demonstrated an improved level of disclosure for items like the amount of money spent training staff or bursaries to build future capacity, the lack of links back to goals and strategies was disappointing to the accounting firms. Most companies surveyed had improved in presenting a balanced view of risks, but it was unclear how companies linked those risks to strategic objectives or how those risks translated into measurable KPIs. Many risks mentioned were generally applicable to any company in South Africa.74 Few companies highlighted business opportunities arising from nonfinancial risks or linked risk disclosure of nonfinancial factors to International Financial Reporting Standards (IFRS) disclosures in statutory annual financial statements. While 97% of companies surveyed by PwC reported on principal nonfinancial risks,75 only 52% integrated them into other areas of their reporting and only 10% of companies supported risk disclosure with quantitative information like KPIs. A mere 13% provided thorough insights into the dynamics of their risk profiles and how they could change over time.76

Director Remuneration and Board Transparency

Disclosure of director remuneration, introduced by King III, remained contentious. While PwC77 observed that 51% of companies provided clear alignment between KPIs and remuneration policies, and Deloitte78 conceded that disclosure had improved, it was clear that not many companies were assessing the effectiveness of the board as emphasized by King III. Moreover, detail regarding remuneration was scarce, and the way remuneration was aligned to facilitate the delivery of strategic objectives was not often addressed. E&Y found that little to no information was provided on how the variable portion of short-term bonuses was determined. When KPIs determining bonuses were discussed, there was seldom any sign of how those indicators translated to rand amounts or whether they were for previous or current accrual periods. Most of the information for director compensation was likewise convoluted.79 Indeed, many companies were more comfortable reporting on board charters and terms of reference rather than actual activities undertaken by the board over the year. Only 16% of those surveyed by PwC described the activities of the board.80 “Some companies have battled with what to include in their report about governance. The information that is most relevant is that which reflects how governance affects the value creation ability of the business,” said Roberts.81

Disclosure of Forward-Looking Information

Although an area that had improved since the first reports, companies were loath to disclose too much forward-looking information. This was especially true when it came to environmental, social, and governance (ESG) factors. While Deloitte found that companies disclosing KPIs generally included historical trends and future targets—an increase from 75% inclusion to 80% inclusion from Period 1 to Period 2 for fiscal 2011—future performance projections still suffered from a lack of completeness. Only one-third of those surveyed by Deloitte set measurable nonfinancial targets linked to strategy and stakeholder concerns.82 Similarly, PwC found that only 13% of companies surveyed provided effective communication on future outlook. Only 10% provided future targets for KPIs. While 90% discussed future market trends, only 61% of companies linked them to strategic choices, and expected market rates and growth were, more often than not, not quantified. Nor was there much explanation of which factors would impact those trends in the future. However, 68% of companies did identify the time frame in which future viability had been considered.83

Reasons cited for the lack of disclosure were fear of regulatory reprisal and creating expectations that could be used against management in the future, as well as the simple fact that corporate reporting has traditionally been focused on past performance. In its 2011 assessment, KPMG suggested substantial cultural change was necessary to achieve a truly forward-looking perspective corroborated by a consideration of past performance against strategy and strategic perspectives, and that companies could guard against liability by wording their future performance goals and expectations carefully.84