While South Africa has blazed a trail on integrated reporting, there is still much work to be done.
When, in 2014, South Africa’s Integrated Reporting Committee officially endorsed the integrated reporting framework as a requirement for companies listed on the Johannesburg Stock Exchange, the move was widely applauded internationally. Noting that listed companies had already been following the principles for several years – following the King III report in 2009 – Ian Jameson, Johannesburg-based senior project manager at the International Integrated Reporting Council (IIRC), suggested that its willingness to comply placed South Africa on a pedestal. South Africa has led the field in the number of integrated reports registered on the Global Reporting Initiative database and is world leader in terms of the strength of its auditing and reporting standards, according to the World Economic Forum’s Global Competitiveness Report – a mantle it has held since 2010.
But what do investors think of South Africa’s pioneering position? According to a new ACCA report written by Professor Jill Atkins of the UK’s Henley Business School and Warren Maroun of the University of the Witwatersrand, Johannesburg, South Africa’s institutional investment community has welcomed integrated reporting, despite some concerns, and views it as an improvement in disclosures for investment decision-making.
South African institutional investors’ perceptions of integrated reporting found that, compared with more developed economies, the progress in South Africa’s attitude to environmental, social and governance (ESG) issues is slow. ‘The pendulum has started to swing,’ noted one of the 20 respondents, but change remains at an early stage due to a continued reliance on purely financial information.
‘Nevertheless, the interviewees provided substantial evidence that the South African institutional investment community is beginning to understand more clearly how ESG issues can be material,’ the report found. Investors acknowledged the link between social, ethical, environmental and governance issues and financial materiality as a core element in integrated reporting, and thereby the overall long-term sustainability of the company. Integrated reports also provide a basis for individual investors to dig deeper into companies’ activities, the interviewees agreed, enabling a clearer picture of both its business model and inherent risks.
There was consensus that South Africa is indeed a global thought leader, paving the way first in governance and stakeholder accountability, via the King Reports, and now in reporting, via integrated reporting. Integrated reporting, it is assumed, represents a means for South Africa to legitimise its corporations within the global community. Regulation 28 – which now insists that the institutional investment community takes ESG issues into account – is seen as a significant driver of adoption of integrated reporting.
The Code for Responsible Investing in South Africa (CRISA) published in 2011, making South Africa only the second country in the world to develop a set of guidelines for responsible investment and institutional investor activism, was cited as another driver of integrated reporting, but its adoption seems to be somewhat piecemeal in practice. Overall, the authors gleaned that it is ‘probably reasonable to conclude from this empirical evidence that South Africa has gained a substantial reputation in the global arena for high standards of governance and stakeholder accountability, owing to corporate governance codes of practice as well as corporate efforts to practise good governance.’
There was ‘unanimous endorsement’ of integrated reporting as an improvement which adds accountability and value for companies. Further, the interviewees ‘were in no doubt’ about the decision-making usefulness of integrated reports for investing. As a developing nation, it also gives South Africa a competitive edge.
Atkins also pointed to concerns that too much rule-following/box-ticking could potentially stifle integrated reporting. There was an impression that reports were lacking in consistency, and concerns that integrated reporting could lose its intended focus on substance over form.
One investment analyst said that reports were simply too long – up to 450 pages in some cases. Another saw the potential for ‘impression management’, whereby a company’s good news is exaggerated and its bad news downplayed.
Other concerns included a lack of financial literacy among trustees and the potential for the audit community to ‘capture’ the process as a money spinner.
Overall, though, Atkins said the research confirmed the views expressed by Mervyn King, chairman of the IIRC, that integrated reporting is by no means finished, but is on a journey.
‘The research provides key findings to inform policymakers in further developing integrated reporting, and arguably represents a first step towards engaging the South African institutional investment community in the process of improving integrated reporting by South African listed companies,’ Atkins concluded.
‘Further research is crucial if integrated reporting is to continue developing and ultimately provide a more holistic, more decision-useful and more stakeholder-accountable vehicle for corporate reporting.’
Peta Tomlinson, journalist
This article first appeared in ACCA's Accountancy Futures journal, issue 9, September 2014.