In August Paul Druckman will be visiting South Africa for the first time in his capacity as chief executive officer of the International Integrated Reporting Council (IIRC). Leigh Roberts spoke to him
Integrated reporting may well be considered de rigeur in South Africa, but things are quickly catching up in the rest of the world. The global move has been spurred by the release of the International <IR> Framework (the Framework) in December 2013 and in other stakeholder-embracing initiatives of the IIRC.
Q: In South Africa integrated reporting is accepted thanks to its inclusion in the King Code of Governance of 2009 (King III). How accepted is integrated reporting in the rest of the world?
A: As I talk to businesses, investors and regulators around the world I not only hear a resounding call for change, but I see that innovation is happening and is driving the evolution in corporate reporting. Regional networks in key markets such as Brazil, Australia, the European Union, Japan and Russia are spurring the momentum, so I would say we are definitely seeing it becoming more accepted!
The Brazilian <IR> Network brings together over 200 market participants facilitated by the Brazil National Development Bank. In Japan, nearly 50 companies have taken steps towards integrated reporting with the <IR> Network consisting of business and institutional investor representatives. And a corporate reporting lab has been set up by Japan’s Ministry of Economy, Trade and Industry showing a powerful endorsement of the business and economic case for integrated reporting.
The Singapore Accountancy Commission (SAC) has expressed its support and is in the process of building a South East Asian “hub” for <IR> to encourage innovation and adoption in countries such as Indonesia, Malaysia and Vietnam. The Australian Business Reporting Leaders Forum (BRLF) has more than 200 members, including public sector and industry associations, companies, investors and universities. Support is also increasing among major asset owners, including the Australian Council of Superannuation Investors, which was involved in the launch of the new <IR> Pension Fund Network.
In the European Union, legislation was recently approved that will increase the disclosure of non-financial information by 6 000 companies with more than 500 employees. The move was described by the Member of the European Parliament who led the legislative process, Richard Howitt, as “a major step towards integrated reporting by business worldwide”. In the UK, the Financial Reporting Council (FRC) has issued Guidance on the Strategic Report, which the FRC has stated is consistent with <IR>.
Q: What is your strategy to promote integrated reporting around the world?
A: Our priority is to connect with a wider group of early adopters and gain momentum with them as well as the innovators who are leading the way and advocating for <IR> around the world. To do this, we continue to urge regulators to create a regulatory environment that allows integrated reporting to flourish. We also want to overcome the confusion and stigma of ‘another report’ or ‘more reporting’ – <IR> is not part of the overload, it is part of the solution to it. We aim to change the “compliance” mindset in the financial reporting community to combat frustration created by the legal and regulatory environment they’re working in.
We will be demonstrating in practical terms what good <IR> practice looks like and developing a robust business case, and we’ll engage with businesses across different sectors to implement <IR> in a relevant and meaningful way.
We want to get investors to see that they won’t have to wait for one-to-one briefings to get the strategic perspective and material information they need. <IR> allows investors to look at a company through the door of strategy, rather than immersing themselves in data and working back to strategy.
Q: Would you like to see integrated reporting mandated by national regulators or stock exchanges as a means of encouraging the broad take-up?
A: Companies listed on the Johannesburg Stock Exchange (JSE) are into their fourth year of integrated reporting following the principles of King III that recommend integrated reporting and in fulfilling the JSE listing requirements to apply these principles or explain their reasons for deviating from them. We are delighted that the JSE is ahead of the game and that the Integrated Reporting Committee (IRC) of South Africa has announced its endorsement of the framework as guidance on how to prepare an integrated report. However, we recognise that in other jurisdictions we need to work with stock exchanges and regulators to create an environment which allows <IR>, as a market-led initiative, to happen.
We are seeing some positive steps and with stock exchanges starting to see the benefits. In Brazil, the BM&F BOVESPA has announced a much greater alignment with <IR> by encouraging businesses listed on the exchange to declare whether they publish an integrated report or sustainability report, where the reports can be found, or explain why not. And Magnus Böcker, chief executive officer of the Singapore Stock Exchange, has spoken out in support of <IR>.
Q: What is your view of integrated reporting in South Africa and the quality of our reports?
A: South Africa has been a leader in integrated reporting and has pioneered through both the development of King III and the initial Discussion Paper on Integrated Reporting. This thinking has been taken up by businesses and many South African reporters are held in high regard internationally.
The South African IIRC Pilot Programme companies, in particular, have made their mark in the international reporting community. A recent report by KPMG highlights the quality of South African reports stating that: “Many South African reports provide excellent examples of how report readability can be improved. They have the inherent advantage that they are designed around the key business issues rather than compliance obligations, but they also make extensive use of referencing to enable readers to track issues across the report.”
And it’s not just the companies and their reporting. South Africa is fortunate to have the Integrated Reporting Committee, for which SAICA serves as secretariat. This committee has played and will continue to play a pivotal role in driving integrated reporting forward in South Africa. It has all the organisational stakeholders integral to the complete value chain of reporting around one table – a powerful formula!
Q: Internationally, how interested are investors in integrated reports? Are the reports read by investors and is the information gleaned from reports used in their valuations?
A: Investors are interested in what we are doing and what <IR> seeks to achieve. The IIRC investor network is an important channel for peer-to-peer dialogue within the investor community and for testing ideas, and also, in ensuring that the framework was market-ready. The network is working with industry leaders who are driving change around the traditional approaches and behaviours of fund managers. The network is mobilising fund managers’ involvement: finding out what they want and need while encouraging the industry to take a long-term perspective.
Investors with a longer-term perspective are already finding information disclosed through <IR> useful if it looks at issues that are material or could become so. A great example is in Australia, where support is increasing among major asset owners.
I am confident that the right signals are being seen in the market. The evidence is building demonstrating that <IR> will promote longer-term investment leading to greater market stability. I highlight research led by George Serafeim published in January 2014 by Harvard Business School. The research, drawn from a sample of 1 066 US companies practising degrees of integrated reporting, concluded that more integrated reporting is associated with a more long-term investor base and that integrated reporting is positively associated with the percentage of shares owned by dedicated investors and negatively with the percentage of shares held by transient investors. This suggests that firms practising <IR> not only attract dedicated investors but also become unattractive for transient investors.1
Q: Even if investors do consider integrated information, short-termism and performance bonus incentives seem to rule the day on their investment decisions?
A: This is something that is going to take time – no doubt. For investors, the world has been driven by short-term returns and incentives for so long, aided by technology and the reality of quarterly reporting. So integrated reporting is ambitious because it requires investors to break out of this mind-set and think about the long term as well as the short and medium term. But the potential upside is great and those who adopt early stand to reap the greatest benefit.
I think there will always be some form of “short-term” performance bonus. However, there needs to be a shift in the incentives associated with long-term performance. Importantly, the performance bonus incentive should have a material link to the various capitals associated with the business. This will send a strong signal to investors that business must consider the impact on the respective capitals on their financial stability and their ability to create value over the short, medium and long term.
Andrew Haldane, Executive Director for Financial Stability, Bank of England, has stated that the overwhelming predominance of short-termism in markets compounded by a system ill-suited to integrate and account for externalities simply removes many of the broader systemic risks from the financing and investment equation.
Q: Pension funds as long-term investors have prime motivation to see companies issue quality integrated reports. Is the IIRC working with the industry?
A: In the wake of the global financial crisis pension funds are increasingly focusing on their stewardship role. They have a duty to invest the money entrusted to them by their beneficiaries in the longer term. To discharge this duty of care, pension funds need to make an informed assessment that the businesses they invest in can sustain value creation in the short, medium and long term. Fundamentally, <IR> supports this need and the concepts of integrated thinking and reporting are therefore critical to the decision-making process of pension funds.
The <IR> Pension Fund Network’s purpose is to support its participants in producing integrated reports and engaging with pension funds new to <IR> as well as international and national industry bodies. Participants will discuss practical solutions for pension funds to apply the framework within the context of current industry-related regulation, and will provide structured feedback to the IIRC to inform our continued programme of technical developments.
Q: Tell us about your drive to encourage integrated reporting in the public sector.
A: At present we are creating an <IR> public sector pioneer network to support public sector organisations as they move to build trust and improve accountability. The Chartered Institute of Public Finance and Accountancy has undertaken a preliminary analysis of the issues involved in applying <IR> in the public sector, concluding that <IR> principles can be readily applied. This is a sentiment echoed by the public sector organisations already reaping the benefits of <IR> through their participation in the IIRC pilot programme. The framework will help public sector organisations fulfil their desire to present a more complete, coherent and transparent view of how and where their resources are used.
Q: What do you see as are the three top benefits to a company of preparing an integrated report and what are the main challenges?
A: First, <IR> helps to establish the basis for more meaningful engagement with investors, better enabling them to fulfil their stewardship role. Second, as factors beyond financial transactions influence the long-term performance of business and economies, <IR> enables businesses to express clearly and concisely how their strategy creates value in a transparent, cohesive and interconnected way. Third, <IR> leads to the breakdown of silos within the organisation, revealing more about the value chain and principal risks faced by the business. This greater transparency helps to reduce the cost of capital by providing more insight into the leadership team’s future outlook and how value will be created over time.
There are indeed some challenges. Some businesses starting on the <IR> journey are realising that they don’t have clarity around their business model and hence articulating it succinctly and simply is challenging. The focus on materiality and cutting unnecessary information from the report is a process that needs time to embed. Demonstrating connectivity and achieving a balance between the various capitals and their significance is a challenge for some. However, I am constantly receiving feedback from businesses that the process of <IR> itself, based on integrated thinking, is leading to connectivity within the organisation.
We will be highlighting leading practice in integrated reports and in the implementation of integrated thinking on the road to producing integrated reports. Our examples database (www.theiirc.org) continues to grow with examples of best practice across the world and of how businesses are addressing key concepts such as value creation and the capitals.
We are working with partner organisations on a number of other technical topics and will release a paper looking at assurance of the integrated report in the near future.2 (The international project team was led by IRBA’s Sustainability Standing Committee.) ❐
Note
The research can be found at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2378899.
Author: Leigh Roberts CA(SA) is Project Director: Integrated Reporting at SAICA
