Listed companies in South Africa that are mandatorily required to produce an integrated annual report are embracing the change, according to a report by Deloitte.
Deloitte South Africa’s third edition of report, Integrated Reporting: Navigating your way to a truly Integrated Report, compared reports of about 150 Johannesburg Stock Exchange (JSE) listed companies from between September 2011 and July 2012.
Mandatory Integrated Reporting (IR) for South Africa’s JSE listed companies came into force in early 2011 on the back of regulation in the King III report on corporate governance and the report has found the overall quality of IR since then has continued to improve.
Deloitte made comparisons between those companies with year ends between March 2011 and May 2011 (Period 1), those with year ends between June 2011 and September 2011 (Period 2), and those with year ends between October 2011 and February 2012 (Period 3).
The Big Four firm reports the average improvement score over the three periods has enhanced from 42% in Period 1, to 51% in Period 2 and 53% in Period 3. The arithmetic average scores for the top ten IR have increased from 60% a year ago to 71% in the latest evaluation round.
The companies which were scored the highest by Deloitte are those of financial services, the extractive industries and consumer business. The subject area that showed the biggest increase from Period 1 to 3 is “demonstrating commitment and management quality”, which is mainly attributable to the necessary frameworks and governance structures having been put in place in most cases.
Deloitte SA director and member of the firm’s IR team Nina le Riche said South African companies are “increasingly embracing the improved ‘stakeholder-centric’ reporting standards required by King III”.
“The point has now been reached, she says, where companies not using the standards are “laggards that are becoming increasingly isolated from the mainstream”.
The report suggests, in order to ensure IR works, a change in mindset and significant effort is required to move from an “average report to a report that properly demonstrates that integrated thinking is embedded in the organisation”.
In order to demonstrate a “truly integrated and sustainable manner of running an organisation” the company must:
- enhance the overall strategic management process by demonstrating the embedding of the linkages between the strategic objectives of the business and its stakeholder engagement process, its enterprise risk management system, key performance indicators (both financial and non-financial) and the remuneration policy and practices.
On remuneration disclosure, Deloitte believes work still needs to be done to better integrate with the execution strategy and should be presented in a clearer and “more digestible fashion”.
Cause for concern
There are some concerns the report points to such as many companies have not yet effectively embedded sustainability issues in their business strategy and operations. The lowest score remains in the area of properly addressing the sustainable development agenda-specifically also the lack of meaningful employee involvement in embedding a sustainable business strategy in organisations.
Also Deloitte adds the integrated reports it reviewed are “still too long to facilitate effective and efficient communication to key stakeholders”.
“We believe the fundamental reason for this is twofold – insufficient prioritisation of stakeholder concerns and a lack of effective ownership of the Integrated Report at board level,” Deloitte states.
Ethics performance is also not as well reported on or adequately assured as it should be and the methodology and manner of managing and reporting on ethics performance is not yet sufficiently well established either.
The Big Four firm warned that despite progress being made with the implementation of the combined assurance model, companies are “still placing too much emphasis on the first line of defence” such as management self-assessment.
“Adopting this approach in areas where the processes and systems are not yet well embedded detracts from the overall credibility of the report. Based on practical experience gained in working with clients in this area over the past year, we are concerned that the resultant potential unintentional misrepresentation of especially key non-financial information may in certain circumstances lead to liability for board members,” Deloitte concluded.
An Integrated Report is the combination of non-financal and financial information into one annual report.