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.
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By GlobalDataDeloitte 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.
Related article
Disclosures change with integrated reporting: ACCA
