26 January 2011
A world-first integrated reporting guidance document – anticipated both locally and internationally as part of a growing push for companies and organisations to report on their total performance – was unveiled by Mervyn King in Johannesburg on Tuesday.
The document offers direction to the 400 companies listed on South Africa’s JSE; companies that are obliged to produce an integrated report for their current financial years.
The discussion paper views the integrated report – reporting on total performance and not just financial performance – as an organisation’s primary report, replacing the traditional annual report.
The paper has the backing of a wide range of industry and professional groups in South Africa, including the Association for Savings and Investment SA, the Banking Association SA, Business Unity SA, Chartered Secretaries Southern Africa, the Institute of Directors in Southern Africa, Johannesburg Stock Exchange Ltd, and the SA Institute of Chartered Accountants.
‘New era in corporate reporting’
“We are entering a new era in corporate reporting,” said King, chairman of South Africa’s Integrated Reporting Committee and the King Committee.
King emphasised that the old form of annual report, focusing primarily on financial information and the short-term horizon, was no longer adequate to meet the needs of investors and other stakeholders.
It was for this reason that the King Committee recommended – in the King Report on Governance for South Africa 2009 (King III) – that organisations issue integrated reports, connecting material, financial and sustainability information.
Stakeholders could then make an informed assessment of the long-term sustainability of a business, and how the sustainability issues pertinent to the business had been incorporated into its strategic direction.
In February 2010, the JSE, through its listings requirements, made it compulsory for all listed companies to comply with King III, including the requirement for a company to produce an integrated report for its financial year starting on and after 1 March 2010, or to explain why it was not doing so.
South Africa ‘had to take the lead’
“The problem is that no specific guideline or standard defining the content of an integrated report for listed companies exists in South Africa or elsewhere in the world,” King said on Tuesday.
To address this need, the Integrated Reporting Committee (IRC) in South Africa was formed in May 2010, and invited King to become its first chairman.
Globally, the International Integrated Reporting Committee (IIRC) was formed in July 2010. It aims to issue an international discussion paper later this year, and include integrated reporting on the agenda of the G20 meeting due to take place in November.
Integrated reporting will also be on the agenda of the World Federation of Exchanges meeting in October, and will being discussed at the World Economic Forum in Davos, Switzerland on 27 January.
King said that because of the urgent need for guidance in South Africa, the local committee could not wait for the international discussion paper to be issued. South Africa’s IRC would liaise closely with the IIRC to ensure alignment, he said. King also serves as the IIRC’s deputy chairman.
‘Not just a sustainability report bolted on’
He explained that an integrated report should provide stakeholders with a meaningful and concise overview of the organisation.
“An integrated report is not simply bolting the sustainability report to the financial report,” King said. “It incorporates, in clear language, material information from these and other sources to enable stakeholders to evaluate an organisation’s performance and to make an informed assessment about its ability to create and sustain value.”
Integrated reporting, King added, forced companies to look at longer term horizons and at external factors such as economic, social and environmental impacts. “I believe this will lead to a fundamental shift in the way companies and directors act and organise themselves.
“As companies integrate and connect the financial, economic, social, and environmental aspects into their businesses, they are likely to become more innovative and competitive and recognise new business opportunities,” King said.
“Integrated reporting is an evolution of corporate reporting. It is an idea ‘whose time has come’ because of the crises of our time – the global financial crisis, climate change and ecological overshoot.”
‘Significant benefits for investors’
Integrated reporting offered significant benefits for investors and other stakeholders, as it was a more transparent form of reporting, King added.
“The capital markets in this country should also benefit from the improved presentation of corporate information, greater transparency, and more innovative strategy.
“A responsible investment code for financial institutions (Code for Responsible Investing by Institutional Investors in South Africa) will be released shortly, and will require the institutional investor to make an informed assessment about the sustainability of the company’s business before acquiring its equity. This cannot be done by reading the financial statements alone.”
The company itself should benefit from issuing an integrated report. The benefits could include a lower cost of capital, enhanced brand value and consumer loyalty, and greater trust and reputation among stakeholders.
South Africa’s new Companies Act, not yet effective, allows for summaries of financial statements, in place of lengthy annual financial statements, to be provided to shareholders (although the full annual financial statements must still be available). The Act also permits the electronic distribution of this and other financial information.
An integrated report could include the summarised financial statements required by the Act, thereby affording significant cost savings to the company.
“I have no doubt that all these factors will translate into significant benefits for companies that embrace integrated reporting,” King said, adding that the 400 companies listed on the JSE would be among the global frontrunners in issuing integrated reports.
He stressed that the guidance offered in the discussion paper could be used by any organisation, not only listed companies.
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