Reporting pre- and post-King III: what's the difference? - ACCA

16 Pages·2012·0.67 MB·English

Reporting pre- and post-King III:
what’s the difference?
About ACCA
This discussion paper summarises
ACCA (the Association of Chartered Certified the findings of the report
Accountants) is the global body for professional
Integrated reporting: the influence
accountants. We aim to offer business-relevant, first-
choice qualifications to people of application, ability and of King III on social, ethical and
ambition around the world who seek a rewarding career
environmental reporting, written
in accountancy, finance and management.
for ACCA by Jill Solomon (King’s
Founded in 1904, ACCA has consistently held unique
College London) and Warren
core values: opportunity, diversity, innovation, integrity
and accountability. We believe that accountants bring Maroun (University of the
value to economies in all stages of development. We aim
to develop capacity in the profession and encourage the Witwatersrand, Johannesburg).
adoption of consistent global standards. Our values are

aligned to the needs of employers in all sectors and we
ensure that, through our qualifications, we prepare It outlines ACCA’s
accountants for business. We work to open up the
recommendations made on the
profession to people of all backgrounds and remove
artificial barriers to entry, ensuring that our qualifications basis of this research.
and their delivery meet the diverse needs of trainee
professionals and their employers.
We support our 154,000 members and 432,000 students
in 170 countries, helping them to develop successful
careers in accounting and business, with the skills needed
by employers. We work through a network of over 80
offices and centres and more than 8,400 Approved
Employers worldwide, who provide high standards of
employee learning and development.
FOR FURTHER INFORMATION
Rachel Jackson
Head of Sustainability, ACCA
[email protected]
www.accaglobal.com/sustainability
© The Association of Chartered Certified Accountants,
A2ugust 2012
Executive summary
Across the world, efforts are currently items of information are repeated, often for transforming corporate behaviour or
under way to develop an internationally excessively, throughout the reports. will not produce empty rhetoric.
accepted framework for integrated
reporting, a form of reporting that While there has been a substantial uplift This report also makes the following
presents typical non-financial reporting in the reporting of social and recommendations.
(for example, environmental, social or environmental information, this uplift is
ethical) in a way that is explicitly related less substantial for ethical information.
1. The way in which information is set
to the financial, strategic, and
out could be more concise to avoid
governance information within an The impact of integrated reporting on
repetition.
annual report. The research outlined in the way that social, environmental and
this report analyses the impact of ethical information is disclosed can be
2. The form of reporting could be
integrated reporting on companies in characterised by the following themes:
extended to incorporate more
the one jurisdiction where it is already the crucial importance of materiality; an
feedback from consultation with
mandatory – South Africa – and evolving discourse of risk and risk
stakeholders regarding social and
suggests lessons that could be learnt by management; an increasing tendency
environmental issues and corporate
those developing the international towards quantification; the emergence
responsiveness to feedback.
framework. of new reporting items; the emergence
of new sections in the reports; and the 3. Organisations should solicit the
The research analysed the corporate increasing integration of social, views of their major stakeholders
reports of ten major South African environmental and ethical about the social, environmental and
companies immediately before (2009) considerations into corporate ethical information (and underlying
and after (2010–11) the introduction of governance structures. policies and practices) that they
mandatory integrated reporting, and report and include these views
came to the following conclusions. The reports are imbued with within integrated reports.
stakeholder accountability rhetoric.
There is significantly more social, Within a couple of years, companies 4. Academics can and should play a
environmental and ethical information have shifted from reporting that is significant role in researching the
reported in the 2010–11 annual reports aimed exclusively at their shareholders framework and its applicability.
of the sample companies than in the to reporting that expounds the
earlier ones. Social, environmental and directors’ claimed belief in stakeholder 5. Academics should and can play an
ethical information appears throughout accountability and stakeholder important role in educating
a significantly greater number of engagement. The introduction of potential managers and users.
sections of the reports for 2010–11 than integrated reporting appears to have
in those for 2009. In the earlier reports, created a new set of priorities for the
this information tends to be restricted directors, expressed through the
to specific sections, usually a reporting.
sustainability report and a mention in
the chairman’s statement. While the concept of integrated
reporting should embed sustainability
A striking weakness of the integration in the heart of the primary corporate
of social, environmental and ethical reporting vehicle, the annual report,
information is the way in which certain this does not necessarily imply that the
reporting will either fulfil its potential
REPORTING PRE- AND POST-KING III: WHAT’S THE DIFFERENCE? 3
1. Introduction
The past couple of decades have seen a initialising the first national attempt to strategy and risk management by
steady evolution of corporate social, enforce such reporting. In late 2011, the organisations.
environmental and ethical reporting, newly formed International Integrated
with sustainability reporting undergoing Reporting Committee (IIRC) launched a The aim of this research project is to
particularly significant developments in discussion paper to begin the process show how the introduction of
the last decade. Usually, such of developing an internationally integrated reporting as a requirement
information is presented in stand-alone accepted integrated reporting for JSE listing changed South Africa’s
social responsibility or sustainability framework. largest companies’ reporting of social,
reports, but recently the trend has been environmental and ethical matters by
to integrate social, environmental and The experiences of South Africa – the comparing the annual reports from
ethical performance and risk into the only jurisdiction with mandated 2009 – the last set pre-integrated
main corporate report. integrated reporting – present an reporting – with those of 2010/11 – the
excellent opportunity to learn lessons first set produced post-integrated
A voluntary, company-by-company for the larger IIRC project: what works, reporting.
approach to ‘integrated reporting’ has what does not; how companies
been around for a few years in some approach integrated reporting; and,
places, but integrated reporting has importantly, whether or not integrated
become more formalised since 2010. reporting makes a difference.
In 2010, the Johannesburg Stock If corporate reporting influences
Exchange (JSE) mandated integrated corporate behaviour, then moves
reporting in its listing requirements, towards integrated reporting should
lead to a more integrated approach to
SOUTH AFRICA AND CSR WHAT IS THE IIRC?
The Johannesburg Stock Exchange’s (JSE) introduction The International Integrated Reporting Committee is an
of integrated reporting is based on the organisation representing stakeholders from across the
recommendations of Judge Mervyn King, author of the reporting spectrum, including businesses, investor
King Reports. South Africa has long been recognised as groups, regulators, accountancy firms and organisations,
a pioneer in progressing corporate governance reform, academics and other stakeholders, including
with the first King Report (1994) heralding a new sustainability groups. The IIRC was launched in 2011.
departure in stakeholder accountability. Following More information about the IIRC can be found on the
political, social and environmental challenges, South committee’s website
Africa has taken a lead, through its stakeholder-oriented www.theiirc.org
corporate governance reports, in forcing businesses to
embed social, environmental and governance
considerations into the heart of their operations. King II
(2002) suggested further integration of sustainability into
governance and reporting but in 2009, King III insisted
on integrated reporting for companies listed on the JSE
and, through the JSE listing requirements, companies
are therefore obliged to produce an integrated report.
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WHY INTEGRATED REPORTING? The Integrated Reporting Committee of By incorporating sustainability
South Africa (IRCSA) offers a succinct information into wider corporate
Sustainability reporting has evolved criticism of the current state of reporting, organisations, their
gradually since the 1970s, although reporting, and the separation of shareholders, and other stakeholders
traditional stand-alone reports have financial from other information. can present or assess the material
been criticised by academics. Some see impacts of non-financial risks or
sustainability reports as not much more The string of corporate collapses expectations on the company more
than self-justifying rhetoric (Everett and over the past decade has led many appropriately, presenting a more
Neu 2000; Livesey and Kearins 2002), stakeholders to question the rounded and valuable picture of an
while others are concerned that relevance and reliability of annual organisation’s circumstances.
sustainability reporting has been financial reports as a basis for
‘captured’ by corporations (Eden 1994; making decisions about an Environmental, social and ethical
Livesey 2001, 2002; Owen, Gray and organisation. Reports based largely information is not just information that
Bebbington 1997; Welford 1997). There on financial information do not communicates the reporting entity’s
are also concerns about the lack of provide sufficient insight to enable social conscience: it includes matters
comparability and consistency in stakeholders to form a that may have a material impact on an
non-financial reports (Solomon and comprehensive picture of the organisation’s long-term performance.
Solomon, 2006). organisation’s performance and of Integrated reporting could be a way of
its ability to create and sustain value, showing this impact.
On the other hand, there is evidence especially in the context of growing
that the act of corporate reporting on environmental, social and economic The IIRC describes integrated reporting
sustainability issues has the potential to challenges. as follows.
influence and transform corporate
behaviour although, it is important to Sustainability reports have similarly [Bringing] together material
note, this potential is not always realised suffered weaknesses, usually information about an organisation’s
(Bebbington and Gray 2001; Buhr 2007; appearing disconnected from the strategy, governance, performance
Livesey 2002). To underscore this point, organisation’s financial reports, and prospects in a way that reflects
only 21% of listed companies worldwide generally providing a backward- the commercial, social and
report any sustainability information looking review of performance, and environmental context within which
(Bloomberg 2010). almost always failing to make the it operates. It provides a clear and
link between sustainability issues concise representation of how an
and the organisation’s core strategy. organisation demonstrates
For the most part, these reports stewardship and how it creates
have failed to address the lingering value, now and in the future.
distrust among civil society of the Integrated Reporting combines the
intentions and practices of business. most material elements of
Stakeholders today want forward- information currently reported in
looking information that will enable separate reporting strands (financial,
them to more effectively assess the management commentary,
total economic value of an governance and remuneration, and
organisation. sustainability) in a coherent whole,
(Mervyn King’s Foreword, IRCSA and, importantly, shows the
2011: 1) connectivity between them; and
explains how they affect the ability
of an organisation to create and
sustain value in the short, medium
and long term.
(IIRC 2011: 6)
REPORTING PRE- AND POST-KING III: WHAT’S THE DIFFERENCE? 5
The IIRC has also set out six guiding STATUS QUO
principles to underpin integrated
reporting: strategic focus; connectivity Much of today’s non-financial reporting
of information; future orientation; is driven by regulatory requirements or
responsiveness and stakeholder sector-specific exigencies; even without
inclusiveness; conciseness; and an integrated report, the information
reliability and materiality. would be reported somewhere. For
example, many of the reports examined
The IIRC also suggests a series of for the present research directly quote
benefits that might be achieved the legislation to which certain sections
through implementing integrated of the report are responding. As
reporting, including: another example, South African mining
organisations have long recognised the
• better alignment of reported material impact of employee health and
information with investor needs; safety – on productivity, litigation, etc
availability of more accurate – and have generally reported this
non-financial information anyway, albeit in stand-alone reports.
• higher levels of trust among key Another driving force behind
stakeholders organisations’ engagement in social
and environmental reporting is the
• better resource-allocation decisions, desire to have a reputation as a
including cost reductions; enhanced company with good social and
risk management environmental credentials. Implats and
Bidvest, two of the companies included
• better identification of opportunities in this research, both point out in their
annual reports that they are listed in the
• greater engagement with investors JSE Responsible Investment Index.
and other stakeholders, including
current and prospective employees,
which will improve attraction and
retention of skills
• lower reputational risk
• lower cost of, and better access to,
capital because of improved
disclosure, and
• the development of a common
language and greater collaboration
across different functions within the
organisation.
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2. The research
To assess the impact of integrated The research considered the following
reporting on the reporting practices of factors. LIST OF COMPANIES
South Africa’s biggest companies, this AND THEIR SECTOR
report looks at the last non-integrated • Cumulative change over time
reports and the first integrated reports (CCOT): this measures the • Impala Platinum, mining
of ten companies with primary listings cumulative change in the number of
on the JSE, representing high sections (eg operating review, • Group 5, construction and
environmental or social impact sectors. corporate governance review, etc) in materials
which each item of environmental,
The research examined the prevalence social, or ethical information is • Exxaro, mining
of three groupings of information found for the years examined.
across the reports from different years: • PPC, construction and
environmental, social, and ethical. • The percentage of positive changes materials
Within each group was a list of ‘items’ in the number of sections: this
of information, which changed from measures the percentage of items in • Sasol, oil and gas
company to company depending on each grouping (social,
their industry. The number of sections environmental and ethical) that are • Barloworld, general industrials
in which each item appeared in each reported in an increased number of
annual report was noted. sections over the period examined. • Goldfields, mining
For all the companies, the largest • The percentage of positive changes • Sappi, forestry and paper
number of items appears under the or no change in the number of
‘social’ group, which reflects the historic sections: this measures the • Bidvest, general industrials
significance of social issues for South percentage of items in each
African companies, especially HIV/AIDS grouping that are reported in an • Royal Bafokeng, mining
and matters relating to black economic increased or the same number of
empowerment after the end of sections over the period examined.
Apartheid.
REPORTING PRE- AND POST-KING III: WHAT’S THE DIFFERENCE? 7
MEASURING INTEGRATION A CHANGING APPROACH TO RISK MATERIALITY
The CCOT score for each of the items One key theme that emerged from the The integrated reports were
was almost entirely positive. This means research is the growing focus on risk characterised by more frequent
that the environmental, social, and and risk management throughout the references to materiality compared with
ethical items that the research examined reports looked at, particularly the risk earlier reports – mandated by the JSE
appeared in more sections after the implications of traditionally ‘non- reporting requirements – as well as risk.
introduction of mandatory integrated financial’ information. It appears that Even so, the reports do not explain in
reporting than they did in the year the organisations examined have had a any detail how materiality decisions are
before. Overall, the CCOT scores were growing realisation that non-financial made or what materiality actually means
higher for the social group, with ethical issues have financial implications; this in the given context.
CCOT scores being the lowest. implies a more developed
understanding of the potential risk One common social item detailed as a
The increased number of sections in associated with mismanaging social, material risk in the research was South
which the items appear does suggest environmental and ethical issues. Africa’s shortage of skilled workers, with
that the switch to integrated reporting several companies outlining their
has succeeded in giving social, Group 5’s approach to sustainability approach to human capital
environmental and ethical information reporting, for example, conveys an development. The best-practice
greater presence throughout the attitude of genuine commitment to the approach to materiality came from
corporate report as a whole and has in integration of these issues into the core Exxaro’s 2010 report, which included a
many cases resulted in the inclusion of risk-management strategy. section on ‘Material Issues’ that
important items of social, environmental illustrates the social and environmental
and ethical impact in core sections such Another key point to take from Group issues that the company deems to be
as the operating review rather than 5’s approach is the treatment of material and to have a financial impact.
being limited to a ‘sustainability review’. sustainability issues as issues grounded
The findings suggest that social in materiality and risk; these are key
environmental and ethical information is components of integrated reporting.
no longer marginalised but integrated
into the heart of the primary reporting Exxaro, Goldfields, and Bidvest each
tool. also highlighted climate change risks as
part of their sustainability report.
As a percentage, the increase in the
number of sections in which social items
appeared ranged from 35% in one
company to 85% in another. Items in the
environmental group saw percentage
increases ranging from 19% to 100%. In
some cases, however, there was no
increase in the spread of ethical items
throughout the integrated report; it
seems companies have focused on social
and environmental reporting rather than
looking at the entity’s practices in
respect of such things as bribery,
corruption and transparency. On the
plus side, instances where items were
reported in fewer sections of the
integrated report than was the case in
earlier reports were exceedingly rare.
8
‘Materiality’ does seem to present a QUANTIFICATION NEW REPORTING ITEMS AND
challenge for organisations though as it SECTIONS
can be difficult to establish for Throughout the reports, over time,
traditionally ‘non-financial’ factors. there was increasing use of non- Many of the non-financial items for which
Exxaro’s board attempt to explain how financial key performance indicators the researchers were looking were not
they made their materiality decisions in (KPIs), such as the fatal injury frequency actually present in the reports until after
the company’s 2010 report: rate. Financial data relating to capital integrated reporting was introduced.
expenditure on social and New sections appeared too, with a
Three years ago the group reviewed environmental projects or policies were greater diversity of sections that
how it manages key risks and issues also increasingly reported over the time emphasised sustainability-related issues in
of sustainability. During our period examined. Implats, for example later reports. These included sections
evaluation we found that both our included financial data on the on ‘Planet’ or ‘Environment Reviews’.
management of these issues, as well company’s socio-economic policies, The inclusion of whole new sections
as the gathering of information and including housing, training, and health, could, however, represent a limitation of
subsequent reporting were and its environmental policie, in the the CCOT measure.
somewhat disconnected from how notes to the financial statements of the
we were managing and monitoring 2011 and 2010 reports. Nonetheless, no Regardless of this potential issue with
our strategy. We therefore company included social, ethical or sections, the inclusion of new items is
commenced a process of environmental information in its latest promising. On social reporting, Impala
integrating our processes and ten-year reviews, indicating the relative and Sasol do not give details on HIV/
systems to ensure a holistic newness of such information. AIDS in their 2009 reports but provided
approach to risk and its impact on information in their later reports. On
our business…This model indicates ethical information, Impala and Exxaro
how sustainability forms a core part do not discuss transparency in their
of our operations…In a further step 2009 reports but do in later reports.
towards providing stakeholders with
an understanding of our key risks Similarly, Barloworld and Royal
and how we manage them, this year Bafokeng Holdings do not mention
we increasingly aligned the content accountability in the earliest of their
of our integrated report with the reports. In their environmental
needs and interests of stakeholders reporting, after 2009 Impala include
and with management’s view on our climate change and biodiversity, Exxaro
key risks and material issues. publish information about renewable
(Group 5 2010: 52) energy, and both PPC and Barloworld
report on recycling.1
Carbon offsetting is an issue that arises in
later reports, with Exxaro and
Barloworld’s 2010 reports both
mentioning these organisations’ car
rental agreements with Avis. Reporting
on carbon footprints appears to be in
development, with Exxaro’s 2010 report
asserting that the company’s data
management and reporting was
‘steadily maturing’.
1. Note that it cannot be assumed that these newly
appearing items did not feature in reports
predating the sample assessed for this research.
REPORTING PRE- AND POST-KING III: WHAT’S THE DIFFERENCE? 9
STAKEHOLDER INCLUSION INTEGRATING SOCIAL, of mutual respect among
ENVIRONMENTAL, AND ETHICAL employees; Being accountable and
One of the most important changes ISSUES INTO CORPORATE responsible for our actions as a
seen in the reports is a shift towards GOVERNANCE Company and as individuals; Being a
more stakeholder-orientated reporting; good corporate citizen in the
this is very noticeable in the chairman’s In the later reports, board structure and communities in which we live and
statement and chief executive’s review board performance are increasingly work. (Implats 2011)
(or equivalents) discussed in relation to KPIs on social
and environmental factors in a way that Nonetheless, there is a relatively lower
The latest, integrated, reports include portrays integration as part of the presence of environmental information
lengthy rhetoric about a claimed belief company’s governance process. For in the corporate governance sections of
in links between stakeholder example, the performance of the CEO later reports. These issues tend to be
accountability and long-term value or is reported in relation to the company’s discussed elsewhere.
wealth creation. There is also a performance on safety and stakeholder
discourse of care for stakeholders engagement indicators, perhaps To summarise, an important
emerging in the integrated reports, and embodying the essence of integrated development in the reporting is that a
a greater level of attention is given to reporting. number of mechanisms of governance
stakeholder engagement than in earlier and accountability are now beginning
reports. The introductory sections to Group 5’s to be used to enhance social and
2011 report state that safety environmental accountability in the
This focus on stakeholder engagement performance is embedded in the companies studied, including:
does present a change from earlier company’s remuneration structures and remuneration structures (through the
reports. It may be the case that long- performance appraisal. inclusion of non-financial KPIs to
established beliefs are only now being determine remuneration); performance
made explicit in reports, having Our senior management evaluations (through the use of non-
previously been implied, but it is a remuneration is linked to performing financial KPIs to assess individual
change nonetheless. against both financial and non- performance); remit of directors (to
financial measures, further driving include performance against social,
Symptomatic of this emerging the centrality of sustainability. We environmental and ethical targets); the
stakeholder rhetoric is the growth of also implemented a group creation of a Safety, Health, and
‘Vision and Values’ statements and scorecard measuring ratios across Environment committee; and the
other similar statements of ethos. people, planet and performance to inclusion of social, environmental and
Implats’ 2010 report, for example, give an integrated view to the ethical issues within the companies’
assures us that: reader of how we perform across systems of internal control and risk
the board. management.
The risk management process is (Group 5 2010: 52)
continuous, with well-defined steps. Linked to this increase in governance
Risks from all sources are identified Safeguarding the health and safety mechanisms is the emergence of new
and once they pass a set materiality of our employees, and caring for the roles and responsibilities within the
threshold, a formal process begins environment in which we operate; companies under study. For example, in
in which causal factors and Acting with integrity and openness the later reports particular people are
consequences are identified and the in all that we do and fostering a designated with responsibility for
correlation with other risks and workplace in which honest and open environmental concerns and for
mitigating controls is reviewed. communication thrives; Promoting stakeholder engagement.
(Exxaro 2010: 24) and rewarding teamwork,
innovation, continuous improvement
and the application of best practice
by being a responsible employer,
developing people to the best of
their abilities and fostering a culture
10