South African reflections on integrated reporting

Read Paul Druckman’s recent post in The Accountant. For other blogs and articles please see The Accountant website

IIRC’s chief executive Paul Druckman speaks of the comments received so far to the first-ever International Integrated Reporting Framework with a special focus on South Africa’s efforts to lead the way in integrated reporting

Since we launched the Consultation Draft (CD) of the International integrated reporting (<IR>) Framework, the feedback we have received both formally and at events across the world has been encouraging and given me much food for thought.

In my travels and numerous engagements I have often been asked about the South African approach to integrated reporting and to what extent there is alignment or contradiction with the International Integrated Reporting Council’s (IIRC) perspective.

In my response I always try to focus on the following elements, which I think give clarity to the fact that the South African approach is in support of the IIRC’s thinking. We are very fortunate to have the intrinsic learning from South Africa and we are ensuring that these lessons are reflected on and included in the International <IR> Framework.

The South African Discussion Paper, released by the Integrated Reporting Committee (IRC) in 2011, provides companies with additional understanding on the process of developing an integrated report. We have already incorporated the key elements of this Discussion Paper into the current Consultation Draft <IR> Framework released by the IIRC in April this year.

One distinction in the South African perspective is that the “primary audience” has a broader stakeholder focus, as opposed to the IIRC’s perspective of the primary audience being the providers of financial capital.

I believe that we are placing too much emphasis on the terminology, which is simplistic. I am confident that through sound introspection of the business model, using a materiality lens, it will bring to bear the interest of the shareholders and the company’s ability to create value in the short, medium and long term.

South Africa example
Striking the balance between regulation and market-led integrated reporting is something that I believe has supported South Africa’s uptake of integrated reporting. In South Africa listed companies are required to submit an integrated report on a comply or explain basis.

However, what is encouraging is that there are also non-listed companies that are seeing the benefit of publishing an integrated report to engage with their providers of financial capital. I must add that I personally believe that for integrated reporting to be truly successful it must be a market-led initiative. In so doing, the ability to create and sustain value will be self-perpetuating.

To add context to the South African journey it is worth looking back on how and why it evolved in that country. South Africa is unique – we only have to reflect on a small part of the history to understand why. South Africa entered a new democratic era in 1994, when Nelson Mandela was elected as its new president. I recall one of his telling quotes that has stuck with me over the years: “A good head and a good heart are a formidable combination”.

This is character strength that I foresee being needed in current leaders of companies who will be able to take the step towards integrated reporting. I also believe that these companies will be the ones generating sustained value for investors.

Path to integrated reporting South Africa has had time to engage with integrated reporting. The political turn of events in South Africa in 1994 also provided the trigger that brought about greater focus on transparency, equality and disclosure of information. It was at this juncture that President Mandela asked Professor Mervyn King to establish the King Commission. Little did anyone know that this was going to be the first of the great King trilogy on corporate governance guidance.

The first King report, coined later as “King I”, emphasised at that early stage that companies needed to disclose a balanced view of the business. In 2002, King II took it a step further to suggest that companies should have an “integrated approach”, which involved
all relevant stakeholders and was responsive to a range of aspects, including social and environmental issues affecting the company.

In 2009, with the financial crisis still fresh in everyone’s minds, King III was borne amidst a backdrop of significant mistrust between investors, business and society.

However, even with the doom and gloom of the day there was still a positive sentiment that King III was an improvement on King II and took South African companies further in their journey of integrated reporting and greater transparency. It defined integrated reporting as “a holistic and integrated representation of the company’s performance in terms of both its finance and its sustainability”.

The release of King III was shortly followed by the establishment of the South Africa’s Integrated Reporting Committee (IRC), which was put together to look at best practice on integrated reporting and develop appropriate guidance.

The need for this guidance was brought about by the Johannesburg Stock Exchange’s mandatory instruction that all companies listed had to adopt integrated reporting on an “apply or explain” basis.

Importantly, the IRC’s Discussion Paper, which is also a principle-based approach to integrated reporting, has been instrumental in the development of the International <IR> Framework. According to the IRC’s Discussion Paper, “The IRC shares information with the international body, the IIRC. The IRC’s aim is to ensure that local guidance is in line with international guidance issued by the IIRC.”

I am confident that by having Professor Mervyn King himself as chairman of the IIRC, as well as a good representation of IIRC Pilot Programme businesses and investors in South Africa, we are well poised to ensure that the best practice and lessons from their integrated reporting experiences has been (and will continue to be) incorporated in the International <IR> Framework development process.

Integrated reporting, as I have said before, it is a global movement and South Africa is aligned and firmly part of this movement.