Integrated Reporting - An Irreversible Tipping Point

This momentous shift in required reporting has thrown South Africa and the JSE, and indeed, integrated reporting, into the public eye. Undoubtedly, what some previously considered a nascent or even fringe movement has reached an irreversible tipping point that will have far-reaching effects on business planning and reporting both inside and outside of South Africa.

The concept of Integrated Reporting – or “One Report”, as defined by Harvard Business School Professor Robert G. Eccles and Grant Thornton Partner Michael P. Krzus in their seminal book One Report: Integrated Reporting for a Sustainable Strategy – essentially means providing information on financial and non-financial performance in a single document. The report should attempt to draw relationships and conclusions on how these interrelated performance dimensions are creating, preserving or destroying value for shareholders and other stakeholders.

After the publication of One Report and the King III Report in South Africa, an international movement headed by Prince Charles' Accounting for Sustainability (A4S) and the Global Reporting Initiative (GRI) created the International Integrated Reporting Committee (IIRC) in 2010. Despite the formation of this committee, however, and the growing consensus among accountants, business leaders, investors and policy makers that integrated reporting is a good thing for business, there is still no global standard or framework.

This is why the work done in South Africa under the leadership of Professor Mervyn King, author of King III and Chairman of the Integrated Reporting Committee of South Africa, will have a tremendous impact on this growing and rapidly evolving international movement. Within South Africa, the framework provides the first guidance for integrated reporting, which will prove helpful to the JSE's listed companies. The benefits to these companies, in terms of enhancing their ability to create value for shareholders over the long term, as well as the benefits to South Africa's economy as a whole through increased attractiveness to foreign investors, will be immense. Integrated reporting will also help create a more sustainable society in South Africa and, eventually, the world.

The South African guidelines will also help push forward the international debate on integrated reporting. Companies interested in integrated reporting are grasping for a framework for doing so since one does not exist. The IIRC has done much to build awareness about the need to achieve global consensus, but the lack of agreement to date has threatened momentum in the movement.

The publication of the JSE's draft guidelines restores that momentum by providing an example of one of the world's leading stock exchanges taking integrated reporting seriously, an achievement whose ramifications are already being felt. Indeed, inspired by the JSE's leadership, Aviva Investors, one of the leading global asset managers, published in February an open letter to the CEOs of global listing authorities and stock exchanges to demand that sustainability reporting become embedded within listing rules. A paradigm shift is in the making.

Some have challenged the JSE's draft guidelines and the process by which they have been developed. Undoubtedly there will and should be a vigorous debate on specific guidelines during the three month public comment period. Many have also challenged the guidelines on the basis of the difficulty the stock exchange will face in ensuring their implementation, which will be difficult given their principles-based approach. The drafters of the published guidelines do not deny these challenges but recognise that the draft guidelines are but a first step towards achieving a framework based on a global consensus.

To quote Mervyn King during the press conference announcing the guidelines' release, “This is a journey that we are all embarking on together.” The forthcoming debate over specific provisions and implementation should not be confused with the debate over the value of integrated reporting.

Having attained the backing of a wide range of prominent industry and professional groups in South Africa – including the SA Institute of Chartered Accountants, the Chartered Secretaries Southern Africa, the Banking Association SA, the Association for Savings and Investment SA, and the Institute of Directors in Southern Africa – the pertinent question is no longer whether integrated reporting has merit but rather, how best companies can pursue integrated reporting.

Thirteen thousand kilometres away from Johannesburg in Boston, Massachusetts we take great interest in South Africa's achievement. As current MBA students at the Harvard Business School we are helping to reshape the curriculum at the business school by developing an innovative course in the MBA and executive education programme focused on integrated reporting and sustainable business models with Professors Robert Eccles and George Serafeim. Additionally, the new Dean of HBS, Nitin Nohria, has said that “integrated reporting is an idea whose time has come”, and has committed to publishing an integrated report at HBS, the first of its kind by a university. Our efforts to promote integrated reporting have been greatly helped by the JSE's leadership on this important issue.

Some Q&As to Consider
By Leigh Roberts CA(SA)

Q: What is the difference between an annual report and an integrated report?
A: The answer is a lot! In my opinion, an integrated report is described best by using the metaphor of an octopus. The head of the octopus is the integrated report. It tells the high-level story of the company's strategy, activities and performance reflecting how sustainability issues impact on the company's operations and how the company's operations impact on the environment and society.

This report will be read by a wide range of stakeholders that need to assess the company's longer term sustainability and to assess, on an informed basis, whether the board is adequately dealing with sustainability issues. So back to the octopus … each arm of the octopus can be viewed as a detailed report or area of additional information of the company, for instance, the annual financial statements (AFS) is one arm, the sustainability report or detailed information another, the corporate governance report another, and so on. Each of the arms can be fashioned to meet the specific needs of a particular stakeholder group, for instance, the AFS to investors.

It may also be useful to look at ‘real life' integrated report. Novo Nordisk offers a good example; the Danish-based healthcare company is into its seventh year of integrated reporting (http://annualreport2010.novonordisk.com/downloads/download-annual-report-2010-pdf.aspx).

Q: Can you take excerpts from the AFS and the sustainability report and call it an integrated report?
A: This is unlikely to achieve the intended outcome of an integrated report. The reason being that both of these detailed reports usually offer a particular stream of information that is seldom linked back (or integrated) with either the company's strategy or the information contained in the other detailed report. The integrated report needs to offer users information with which they can make an assessment of the company's ability to create and sustain value over the longer term (i.e. its longer term sustainability). And because we live in a time of changing social dynamics (witness the remarkable changes in the middle East) and competition for natural resources, a company's long-term viability is dependent on these issues.

Q: What does all this mean for audit and assurance?
A: The implications are currently being debated. The issues are numerous and include the scope of combined assurance, assurance on sustainability issues, and the form of the audit and assurance report(s) the integrated report itself. Adding interest to the scenario is that there is not much international guidance around. The audit profession in South Africa, whether it likes it or not, may well be at the global forefront in dealing with the assurance implications of integrated reporting.

Kyle Armbrester and Tiffany Clay are candidates for MBAs at the Harvard Business School and Leigh Roberts From SAICA.