THE adoption of integrated reporting standards by JSE-listed companies is moving away from being mere box-ticking exercises to satisfying investors’ demands for greater transparency and ethical behaviour.
This is the conclusion of a survey that audit firm Deloitte released this week after reviewing the quality of annual reports more than 150 JSE-listed companies produced. The King 3 report on corporate governance describes an integrated report as one that provides a comprehensive overview of a company from both a financial and a nonfinancial perspective.
The Deloitte survey says there have been varying degrees of compliance, with some companies, including banking groups Absa and Nedbank, and cellphone company Vodacom, representing "pockets of excellence". Other companies whose integrated reports Deloitte commended were Anglo American Platinum, Barloworld, Massmart and Standard Bank.
Deloitte says there was a marked improvement in the overall quality of integrated reports that have been submitted to the JSE since March last year up to February this year. But there has been no definitive overall best practice in producing them.
"There continues to be improvement and steady progress, and those ignoring the requirement to produce integrated reports are now a small minority," says Bertie Loots, head of Deloitte’s integrated reporting team.
Absa group financial director David Hodnett says publishing an integrated review of the group’s business is a journey rather than a process. Each year brought new insights on how to improve reporting to the group’s stakeholders.
Shareholder activist Theo Botha has in the past criticised Absa and Standard Bank for inadequate disclosure of performance targets of key executives.
Mr Botha is a constant thorn in the flesh of executives of listed companies at their annual general meetings. He has had running battles with the chairmen of their boards over poor disclosure, particularly on the issue of executive remuneration.
But Mr Hodnett says Absa shareholders see the group’s efforts to be more transparent. "The key was ensuring that we showed how our One Absa strategy drives our performance relating to the most important issues raised by our stakeholders.
"We trust that our stakeholders will see the progress we have made over the year and how Absa is positioned to meet the challenges that we face."
Mr Hodnett believes Absa’s integrated reporting is opening channels for more transparent communication with investors and other stakeholders. "We will continue to find ways of communicating our responses to issues of interest to stakeholders," he says.
Vodacom says its adoption of integrated reporting has resulted in it becoming more transparent and forthright in its disclosure. "We purposely adopted a more conversational tone in the report and did our best to cut out the buzzwords and jargon," says spokesman Richard Boorman.
"Each section of the report clearly highlights how we’re doing in terms of delivering on our strategy — both the good and the bad. The idea is that the report should be accessible to all stakeholders rather than one specific group."
Mr Loots says that at present there is no one company in South Africa that can be singled out as having a report that excels in all aspects of integrated reporting. One company might cover stakeholder engagement "with distinction" while another might be outstanding in reporting on sustainability and its implications for the business.
This showed that companies were yet to discover how best to embed integrated reporting into their business strategies. Further, companies seemed to struggle to quantify their commitment to a value-based system of running a business that frowned upon unethical behaviour.
Mr Loots believes this is critical in the light of the recent corporate failures and scandals such as the collapse in 2008 of investment banking group Lehman Brothers and the recent Libor interest rate-fixing scandal in the UK.
Paying lip service to enforcing ethical standards was a "recipe for disaster". "You need to report on ethics performance, and companies are not (yet) getting that right," Mr Loots says.
According to Deloitte, there is a lack of disclosure by companies on how effective they consider their risk management structures to be. Boards of directors should determine the risk policies of their companies. On the other hand, executives were expected to design and implement a risk management plan within the parameters set by the board.
"In this regard, the disclosures of surveyed companies paint a bleak picture," says Deloitte. "According to the results from the analysis, boards would do well if they paid more attention to the pivotal role they need to pro-actively play to ensure effective risk management," it says.
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