Table Of ContentIntegrated reporting: the influence of King III
on social, ethical and environmental reporting
About ACCA
ACCA (the Association of Chartered Certified
Accountants) is the global body for professional This study analyses the annual
accountants. We aim to offer business-relevant, first-
reports of 10 major South African
choice qualifications to people of application, ability
and ambition around the world who seek a rewarding companies listed on the
career in accountancy, finance and management.
Johannesburg Stock Exchange
We support our 154,000 members and 432,000 (JSE) to assess the impact of the
students throughout their careers, providing services
required introduction of integrated
through a network of 83 offices and centres. Our
global infrastructure means that exams and support reporting on social, environmental
are delivered, and reputation and influence
and ethical reporting.
developed, at a local level, directly benefiting
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Integrated reporting: the influence of King III
on social, ethical and environmental reporting
Jill Solomon
and
Warren Maroun
The Association of Chartered Certified Accountants, London, 2012
Acknowledgements
We are grateful to ACCA for funding this research and especially to Rachel Jackson (head of sustainability, ACCA) and Paul
Moxey (head of corporate governance and risk management, ACCA) for their inspiration and support throughout this project.
We are also grateful to a number of people who have discussed the report with us, including Professor Michael John Jones
(University of Bristol), Professor Richard Laughlin (King’s College London) and Ioannis Tsalavoutas (University of Stirling) as well
as to delegates at the British Accounting & Finance Association Special Interest Group on Corporate Governance conference
in February 2012 and those at the British Accounting & Finance Association Annual Conference in April 2012, for their helpful
suggestions. Also thanks to John Jones for preparing the manuscript for publication.
About the authors
Jill Solomon is professor of accounting and financial management at Henley Business School, University of Reading (from
September 2012) having previously been professor of corporate governance and accountability at King’s College London,
University of London. Her primary research interests include institutional investor engagement and dialogue, responsible
investment, stakeholder accountability, pension fund governance and sustainability issues in accounting and finance. Before
moving to King’s College in 2009, Jill lectured at Cardiff University and Sheffield University. She gained a PhD from the
University of Manchester in 1996 in International Finance. Jill enjoys an active involvement in the evolution of corporate
governance and accountability both in the academic and practitioner spheres and chairs the British Accounting Association
Special Interest Group on Corporate Governance. She is also a member of the ACCA Governance Risk and Performance Global
Forum. Jill’s best-selling textbook Corporate Governance and Accountability is entering its forth edition in 2013.
Warren Maroun is a chartered accountant (South Africa) and holds a honours degree in taxation and masters degree in
accountancy. He joined PricewaterhouseCoopers in 2006 and the University of the Witwatersrand in 2010 where he serves as a
senior lecturer in financial reporting. He is currently completing his doctorate in accountancy at Kings College London.
ACCA considers this study to be a worthwhile contribution to discussion but do not necessarily share the views expressed,
which are those of the authors alone. No responsibility for loss occasioned to any person acting or refraining from acting as a
result of any material in this publication can be accepted by the authors or publisher.
Published by ACCA, 29 Lincoln’s Inn Fields, London WC2A 3EE.
© ACCA, August 2012
Executive summary
This study analyses the annual reports importance of materiality; an evolving
of 10 major South African companies discourse of risk and risk management;
Contents
listed on the Johannesburg Stock an increasing tendency towards
Exchange (JSE) to assess the impact of quantification; the emergence of new
the required introduction of integrated reporting items; the emergence of new
reporting on social, environmental and sections in the reports; the increasing
Executive summary 5
ethical reporting. The findings paint a integration of social, environmental and
complex picture of this impact, showing ethical information into corporate
1. Introduction 6
both positive and negative effects. governance; integrated reporting as an
evolutionary process; and the evolving
2. The evolution of
There is a significant increase in the assurance of the social, environmental
integrated reporting 7
quantity of social, environmental and and ethical information in the reports.
ethical information reported in the
3. Research method 10
annual reports of the sample The reports are imbued with
companies. Social, environmental and stakeholder accountability rhetoric.
4. Research findings 12
ethical information appears throughout Within a couple of years companies
in a significantly greater number of have shifted from an approach to
5. Concluding discussion 51 sections of the reports for 2010/11 than reporting aimed primarily at shareholders
of those for 2009. In the earlier reports, to one that expounds the directors’
References 54 this information tended to be restricted ‘belief’ in stakeholder accountability
to specific sections, usually a and stakeholder engagement. The
sustainability report and a mention in introduction of integrated reporting
the chairman’s statement. Subsequently, appears to have created a new set of
a striking weakness in the integration of priorities for the directors, expressed
social, environmental and ethical through the reporting.
information is the way in which certain
items of information are repeated, often The present study recognises that the
excessively, throughout the reports. emergence of integrated reporting
There has also been a substantial presents new opportunities but also
increase in the reporting of social and new challenges for the sustainability
environmental information compared reporting agenda. While the existence
with ethical information. of an integrated report should embed
sustainability reporting in the heart of
From an interpretative analysis of the the primary corporate reporting vehicle,
reports a number of themes have been the annual report, this does not
extracted, characterising the impact of necessarily imply that the reporting will
the introduction of integrated reporting fulfil its potential for transforming
on social, environmental and ethical corporate behaviour or will not result in
reporting. These included the crucial empty rhetoric.
INTEGRATED REPORTING: THE INFLUENCE OF KING III ON EXECUTIVE SUMMARY 5
SOCIAL, ETHICAL AND ENVIRONMENTAL REPORTING
1. Introduction
There has been a steady evolution in forcing businesses to embed social, South Africa provides an environment
social, environmental and ethical environmental and governance within which integrated reporting may
reporting over the past four decades, considerations into the heart of their be viewed in practice, for the first time.
with the development of sustainability operations. King II (2002) suggested The findings of this study are therefore
reporting growing significantly in the further integration of sustainability into important not only for the progression
last decade. Since the turn of the governance and reporting but in 2009, of integrated reporting in South Africa
century there has been an increasing King III insisted on integrated reporting but also for the development of
emphasis on transcending stand-alone for companies listed on the JSE and, integrated reporting in the UK and
social, environmental, social through the JSE listing requirements, elsewhere. If, as has been stipulated,
responsibility and sustainability companies are therefore obliged to corporate reporting influences
reporting such that companies are produce an integrated report. The corporate behaviour, then changes in
expected to achieve integration of International Integrated Reporting reporting through the shift to an
sustainability and governance Council concluded a series of meetings integrated report may result in changes
information within the annual report. in Brazil in November, 2011, marking a in behaviour within the corporate
Such integration is deemed essential if new phase in the initiative to develop community in South Africa.
businesses are to embed stakeholder an internationally accepted Integrated
accountability into the heart of their Reporting Framework.1
operations in a meaningful way.
The present study analysed the content
There has been some level of of a sample of integrated reports,
integration in reporting by UK produced since the publication of King
companies, on a voluntary basis, III, from among the largest listed
spurred on by the development of the companies on the JSE and compared
Accounting for Sustainability (A4S) them with the reports produced in
Connected Reporting Framework in 2009. The aim was to explore the
2007. The first national attempt to impact of the introduction of integrated
enforce integrated reporting across all reporting on social, environmental and
listed companies was, however, that ethical reporting within the annual
introduced in 2010 by the Johannesburg reports of South African companies in
Stock Exchange (JSE), which mandated order to assess the extent of any
integrated reporting through its listing increase in the quantity of reporting, as
requirements via compliance with the well as to provide a qualitative overview
King III Report (2009). South Africa has of changes in the reporting since its
long been recognised as a pioneer in introduction. ‘Impact’ here means any
promoting corporate governance evident and significant change in the
reform, with the first King Report (1994) content, style, quantity and quality of
heralding a new departure in reporting that can be gauged from the
stakeholder accountability. As a result analysis. The findings lead to policy
of political, social and environmental recommendations for further
challenges, South Africa has taken a developments in integrated reporting
lead, through its stakeholder-oriented as well as establishing a route for
corporate governance reports, in further research.
1. Following the meetings, the Committee has
now become the International Integrated
Reporting Council (IIRC).
6
2. The evolution of integrated reporting
Social and environmental (sustainability) The potential shift from sustainability The IIRC states that:
reporting has evolved gradually since reporting to integrated reporting
the 1970s, with an accelerated growth in presents a significant opportunity for Integrated reporting brings together
reporting since the turn of the century. companies to embed social and material information about an
There is now a vast academic literature environmental issues into the primary organization’s strategy, governance,
exploring the evolution of sustainability corporate reporting mechanism. An performance and prospects in a way
reporting and its predecessors. Social integrated report should ultimately that reflects the commercial, social and
and environmental reporting may be replace all other forms of corporate environmental context within which it
viewed as a means of legitimising a reporting and should represent the operates. It provides a clear and concise
company to its stakeholders, as primary vehicle for communicating with representation of how an organization
companies seek to persuade society shareholders and other stakeholders demonstrates stewardship and how it
that they have stakeholders’ interests at (IIRC 2011). The evolution of integrated creates value, now and in the future.
heart and that they share common reporting has accelerated substantially Integrated reporting combines the most
objectives (Deegan et al. 2000; Deegan in the last few years and from that material elements of information
2002, 2007; Mathews 2004). The evolution have emerged specialist currently reported in separate reporting
academic literature has to some extent terminology and a series of definitions strands (financial, management
taken a jaded view of sustainability of integrated reporting. King III (2009) commentary, governance and
reporting, with some authors defines integrated reporting as ‘a remuneration, and sustainability) in a
interpreting corporate attempts to holistic and integrated representation coherent whole, and importantly: shows
legitimise business activities as little of the company’s performance in terms the connectivity between them; and
more than rhetoric. Sustainability of both its finance and its sustainability’. explains how they affect the ability of an
reporting may be perceived as the organization to create and sustain value
outcome of ‘social constructivism’ An integrated report is not simply an in the short, medium and long term
where the discourse within the accounts amalgamation of the financial (IIRC 2011: 6, emphasis added).
is constructed for rhetorical and statements and the sustainability report.
political purposes (Everett and Neu It incorporates, in clear language, The IIRC has recently produced a
2000; Livesey and Kearins 2002). material information from these and discussion paper with the aim of
other sources to enable stakeholders to creating a forum for international
There are also concerns that evaluate the organisation’s performance institutional collaboration in order to
sustainability reporting may have been and to make an informed assessment establish a roadmap for the further
‘captured’ by corporations in an about its ability to create and sustain evolution of integrated reporting (IIRC
attempt to gain hegemonic control value. An integrated report should 2011). The IIRC (2011) sets out a number
(Eden 1994; Livesey 2001, 2002; Owen et provide stakeholders with a concise of guiding principles that should
al 1997; Welford, 1997). An important overview of an organisation, integrating underpin integrated reporting. These
outcome of research into social and and connecting important information are: strategic focus; connectivity of
environmental reporting is the belief about strategy, risks and opportunities information; future orientation;
that the ‘act’ of corporate reporting on and relating them to social, responsiveness and stakeholder
sustainability has the potential to environmental, economic and inclusiveness; conciseness, reliability
influence and transform corporate financial issues. By its very nature an and materiality.
behaviour but that this potential may integrated report cannot simply be a
not always be achieved (Bebbington reporting by-product. It needs to flow
and Gray 2001; Livesey 2002; Buhr from the heart of the organisation and it
2007). Despite the significant and recent should be the organisation’s primary
growth in sustainability reporting, the report to stakeholders. (Mervyn King’s
latest evidence suggests that only 21% Foreword, IRCSA 2011: 1, emphasis
of listed companies worldwide report added).
any sustainability information
(Bloomberg 2010).
INTEGRATED REPORTING: THE INFLUENCE OF KING III ON 2. THE EVOLUTION OF INTEGRATED REPORTING 7
SOCIAL, ETHICAL AND ENVIRONMENTAL REPORTING
The guidance produced by sustainability-related information is Many of these points are reiterated in
PricewaterhouseCoopers (2009) deals notoriously difficult to establish. Placing IIRC’s discussion paper (2011), which
with compliance with King III but also a financial value on materiality for outlines the current inadequacies in the
includes some guidance on social and financial risks is a complex process but various disconnected strands of
environmental accounting (see pages establishing materiality and materiality corporate reporting such as
61–3 on integrated reporting). This thresholds for traditionally ‘non- sustainability reporting. Stakeholders
guidance provides some assistance to financial’ risks, which are hard to require a coherent and consistent
companies attempting to produce quantify, is far more challenging if even reporting framework. Lack of
integrated reports. possible. comparability and consistency in, for
example, sustainability reporting has
The board should ensure that The rationale underlying the been identified by the institutional
appropriate systems and processes are introduction of integrated reporting investment community (Solomon and
put in place in order to produce a report was outlined succinctly by the Solomon 2006).
to stakeholders that gives a complete Integrated Reporting Committee of
picture of a company’s financial and South Africa (IRCSA) as follows. A series of benefits arising from
non-financial profiles in such a way that integrated reporting are summarised by
the report is holistic and reliable. In The string of corporate collapses over the IIRC (2011: 21), namely: better
order to comply with the the past decade has led many alignment of reported information with
recommendations of the Code stakeholders to question the relevance investor needs; availability of more
reporting should be integrated across and reliability of annual financial reports accurate non-financial information for
all areas of performance, reflecting the as a basis for making decisions about an data vendors; higher levels of trust with
choices made in the strategic decisions organisation. Reports based largely on key stakeholders; better resource
adopted by the board, and should financial information do not provide allocation decisions, including cost
include reporting in the triple context of sufficient insight to enable stakeholders reductions; enhanced risk management;
economic, social and environmental to form a comprehensive picture of the better identification of opportunities;
issues. The board should be able to organisation’s performance and of its greater engagement with investors and
report forward-looking information ability to create and sustain value, other stakeholders, including current
that will enable stakeholders to make a especially in the context of growing and prospective employees, which
more informed assessment of the environmental, social and economic improves attraction and retention of
economic value of the company as challenges. Sustainability reports have skills; lower reputational risk; lower cost
opposed to its book value (Executive similarly suffered weaknesses, usually of, and better access to, capital
guide to King III, PricewaterhouseCoopers appearing disconnected from the because of improved disclosure; and
2009: 61, emphasis added). organisation’s financial reports, development of a common language
generally providing a backward-looking and greater collaboration across
From the above discussion the crucial review of performance, and almost different functions within the
elements that can be identified as always failing to make the link between organisation.
determining the content of integrated sustainability issues and the
reports are materiality, a focus on risk, organisation’s core strategy. For the
risk management, strategy and the most part, these reports have failed to
need for forward-looking information. address the lingering distrust among
The IIRC stresses the need for all civil society of the intentions and
reported information to be material in practices of business. Stakeholders
nature, ‘...only the most material today want forward-looking information
information should be included in the that will enable them to more effectively
integrated report’ (IIRC 2011: 4). In assess the total economic value of an
practice, the materiality of organisation (Mervyn King’s Foreword,
IRCSA 2011:1).
8
King III became effective in March 2010, In effect, the JSE listing requirements South Africa; Banking Association South
‘the changes relating to the third King mandate the use of an integrated Africa; Business Unity South Africa;
Report on Corporate Governance must report because King III refers to the Chartered Secretaries Southern Africa;
be complied with in respect of all need for integrated reporting. Institute of Directors in Southern Africa;
financial years commencing on or after Alternatively, one would have to explain Institute of Internal Auditors;
1 March 2010’ (JSE Listing how the requirements for integrated Government Employees Pension Fund;
Requirements). Companies not primarily reporting are otherwise being met. The Johannesburg Stock Exchange Ltd;
listed on JSE are not required to JSE has encouraged disclosure through Principal Officers Association and; The
produce an integrated report.2 As in the the requirement for listed companies to South African Institute of Chartered
UK corporate governance context, a comply with the King Codes on Accountants.
‘comply or explain’ approach has been Corporate Governance that have, since
adopted. King II in 2002, required sustainability
reporting. From 2010, however, the JSE
In addition to complying with IFRS became the first exchange in the world
[International Financial Reporting to require listed companies to move
Standards], Section 30 of the Act and towards integrated reporting as
paragraph 3.84 of the Listings required in King III (Morales and Van
Requirements, issuers are required to Tichelen 2010). Finally, King III contains
disclose the following information in the a ‘catch-all’ requirement in the sense
annual report (in the case of 8.63(a) and that all companies with a sufficiently
(l)), and in the annual financial large stakeholder group should comply
statements (in the case of 8.63(b)–(l) with it and hence prepare an integrated
and (m)): (a) the King Code: (i) a report.
narrative statement of how it has
applied the principles set out in the In South Africa, the Companies Act
King Code, providing explanations that (2008) became effective in 2011,
enable its shareholders to evaluate how replacing the earlier 1973 Act. It
the principles have been applied; and mandates certain aspects of
(ii) a statement addressing the extent of governance and discusses the need for
the company’s compliance with the certain companies to have sustainability
King Code and the reasons for non- and audit committees. The Integrated
compliance with any of the principles in Reporting Committee (IRC) of South
the King Code, specifying whether or Africa was formed in May 2010 under
not the company has complied the chairmanship of Professor Sir
throughout the accounting period with Mervyn King to develop and promote
all the provisions of the King Code, and guidance on good practice in
indicating for what part of the period integrated reporting. The
any non-compliance occurred (JSE organisational members of the IRC are:
Listing Requirements). Association for Savings & Investment
2. This detail was checked with Professor Wainer,
who chaired the GAAP Monitoring Panel at the
JSE and who confirmed that where a company has
a dual listing, the company follows the listing
requirements for the stock exchange where it has
the primary listing. This means that companies,
such as Anglo American, that are primarily listed
on the LSE do not have to comply with producing
an integrated report.
INTEGRATED REPORTING: THE INFLUENCE OF KING III ON 2. THE EVOLUTION OF INTEGRATED REPORTING 9
SOCIAL, ETHICAL AND ENVIRONMENTAL REPORTING
3. Research method
A sample of ten companies were The research adopted a predominantly report was produced by considering
selected to represent high interpretative/critical approach to how many sections (eg chairman’s
environmental or social impact sectors; analysing the content of integrated statement, corporate governance
all are primarily listed on the JSE. See reports and of annual reports review, operating review) of each report
Table 1 for a summary of the companies preceding the introduction of contained discussion of each item. This
analysed and their industry integrated reporting. Merkl-Davies et approach avoids positivist counting of
classification. In total four mining al. (2011) make a distinction between ‘mentions’ or sentences or paragraphs
companies, two companies from three forms of textual analysis, ranging and instead provides an image of how
construction and materials, one petro- from the scientific analysis that draws on effectively each social, environmental
chemical company, one forestry and a positivist research methodological and ethical item is ‘integrated’ into the
paper company and two companies approach (counting words, sentences, report as a whole. This provides an
classified under General Industrials paragraphs and coding) through indication of the extent of integration of
were selected. The sample was drawn ‘interpretive text analysis’, to ‘critical this information into the annual report,
from the top 100 companies on the JSE text analysis’. Merkl-Davies et al. (2011) as it provides an indication of the
and each company’s statements were explain that social constructivist and spread/scope of social, ethical and
checked for its listing details. For critical text analysis approaches do not environmental information throughout
example, as one company stated, adopt a positivist scientific approach the reports rather than simply some
‘Implats has a primary listing on the JSE and therefore do not follow a rigid set measure of quantity. It was considered
in South Africa (IMP), a secondary listing of procedures. Linked to this, critical that the number of items themselves
on the LSE, United Kingdom (IPLA) and textual analysis does not require the would indicate the level of integration
a Level 1 American Depositary Receipt gathering of data from large samples in of social, environmental and ethical
programme (IMPUY) in the United order to ‘represent a population’. As information in the annual report. As a
States of America’ (Implats Distinctly discussed in earlier methodological result of this approach to the analysis
Platinum 2011: 3). literature, small samples can be several measures have been calculated
analysed in order to respond to general as follows:
research questions, with the findings
Table 1: Summary of reports used in providing unique insights into the • cumulative change over time
analysis research question (Fairclough 2003). In (CCOT) measures the cumulative
a social constructivist approach to change (increase/ decrease) in the
Company Industry textual analysis, the analysis does not number of sections in which each
rely on the use of quasi-scientific item of environmental, social and
Impala Platinum Mining
codings but rather rests on the ethical information is recorded over
Group 5 Construction and materials researcher as the ‘measurement the two/three years examined
instrument’ (Merkl-Davies et al. 2011).
Exxaro Mining The way in which the text appears (to • % positive changes in number (N) of
the researcher) to ‘create reality’ is sections measures the percentage
PPC Construction and materials
drawn out of the analysis. of items in each grouping (social,
Sasol Oil and gas environmental and ethical) that are
The reports sampled were analysed by reported in an increased number of
Barloworld General industrials
interpretatively drawing out items of sections over the period
Goldfields Mining social, environmental and ethical
information reported by the companies, • % positive changes or no change in
Sappi Forestry and paper
through a process of reading and the number (N) of sections measures
Bidvest General industrials re-reading all the reports. The eventual the percentage of items in each
lists of specific items differed between grouping (social, environmental and
Royal Bafokeng
Holdings Mining companies, illustrating the differences ethical) that are reported in an
in emphasis between the companies, increased or the same number of
and the effect of industry grouping. A sections over the period.
simple ‘measure’ of the degree of
integration of each item within the
10
Description:The Association of Chartered Certified Accountants, London, 2012. Integrated reporting: the influence of King III on social, ethical and environmental reporting.
