Mark Hoffman is the Director of Integrated Reporting at KPMG
Integrated reporting became a requirement for Johannesburg Securities Exchange (JSE)-listed entities with effect from years commencing on or after 1 March 2010. This was by virtue of the King Code of Governance Principles for South Africa 2009 (King III) being a JSE listing requirement. King III recommends that organisations should adopt Integrated Reporting, albeit on the Code's ‘apply or explain' basis. In order to facilitate the adoption, the Integrated Reporting Committee of South Africa (IRCs) released a framework discussion paper on 25 January 2011.
The experience of our clients to date has indicated that once they fully understand the underlying principles and objectives of Integrated Reporting, most see clear benefits in adopting it. The consensus is that current annual reports are disjointed, cumbersome and do not convey clear, understandable key messages to stakeholders. These are sentiments that are not unique to the South African market place.
In South Africa we believe that the adoption of a meaningful Integrated Reporting process will typically be a journey of three to five years for many organisations. This approach is quite plausible given the ‘apply or explain' approach of King III. That said, organisations should begin work now to realise the benefits as soon as possible.
After a walk-through of the elements and principles of Integrated Reporting, most management teams felt reassured by how easy the framework is to understand and how practical it is to implement, often referring to it as ‘Business 101'. The natural flow of the elements provides a linked view of the business that focuses on material and relevant aspects communicated in a way that a wide range of stakeholders can understand.
In our experience theextent to which the elements and principles are adopted in early reports depends very much on the level of sophistication and maturity of the organisation in areas including:
Organisations often discover shortcomings in these underlying processes that they need to address when embarking on the implementation of their Integrated Reporting process.
The business case
Whilst organisations are obliged to adopt Integrated Reporting in its entirety there are often aspects of the principles and elements that are particularly appealing from a business case perspective. This means they can prioritise and focus on those areas that have clear business case benefits for the organisation and its stakeholders. Some of the emerging business case themes include:
The challenges and realities
Integrated Reporting requires buy-in and commitment from the top, which can only be achieved through the clear communication of a compelling business case for its adoption. The team responsible for implementing the Integrated Reporting process, and ultimately the reporting itself, needs to be representative of all the relevant disciplines within the business. Very often one of the key challenges is to ensure that the multi-disciplinary team combines and coordinates its efforts in building an effective Integrated Reporting process.
The experiences of our South African clients show that implementing Integrated Reporting is an organisational change, and not an event in itself. Organisations need to recognise up front that it is not just about producing an Integrated Report. Rather, it is about developing an effective integrated management and reporting process for the business. This typically requires a zero-base, innovative approach that involves all disciplines within the business and effective engagement with stakeholders.
There are challenges to be overcome along the way, as the South African experience shows. Some management teams were naturally uncomfortable about the thought of disclosing certain strategies, performance measures and targets, and were concerned about divulging information to competitors, creating expectations and the regulatory requirements on forecasts and forward-looking statements. Others did not have the processes in place to gather information on the non-financial performance measures that are often used to track progress against strategies and took steps to address these shortcomings. They found, however, that the benefits of improved performance measurement justify this type of intervention from a business perspective.
Some of the early examples of reports that follow many of the principles of the Integrated Reporting Framework, released locally and internationally, have typically included these challenges:
That said, much of the work already carried out will be an invaluable guide for other first-time adopters. The challenges noted seem to be typical growing pains. In fact, they are included in many organisations' adoption strategies as up-front objectives that they need to deal with.
The way forward
South African organisations have shown a positive start in the adoption of Integrated Reporting. Though we are in the early stages of the first cycle, the majority of organisations are demonstrating meaningful progress in adopting the principles and elements of the approach. The concept of Integrated Reporting is new to stakeholder groups as well. It will take time for these groups to achieve consensus on their material issues and reporting needs, which will naturally develop and evolve over time.
The unique aspect of Integrated Reporting is that, while frameworks and guidance have been issued, it is ultimately the corporate reporting community, the sectors within that community and their stakeholders that will define:
Integrated Reporting will be an evolving and engaging process that is ultimately driven by corporate reporters through interaction with their primary stakeholders. This contrasts with the regulated compliance-based reporting culture that corporates have become accustomed to over the years. We are confident that the positive start Integrated Reporting has enjoyed in South Africa will bring about continued development of the concepts in practice and benefits for corporate reporters and their stakeholders.