Читать книгу The Integrated Reporting Movement - Eccles Robert G. - Страница 10

As South African companies began practicing integrated reporting and issuing integrated reports, the Big Four accounting firms began to study them to identify trends and best practices. After the first mandatory integrated reporting season on an apply or explain basis concluded for 2011, Ernst & Young (E&Y) South Africa published a short report, “Integrated Reporting Survey Results,” examining 25 companies listed on the JSE to interpret their understanding of integrated reporting and its perceived benefits and challenges.56 The next year, the firm began to publish its annual “Excellence in Integrated Reporting” awards as a way to improve best practices by providing special scrutiny of the top 100 companies in terms of market capitalization. PricewaterhouseCoopers (PwC) followed suit, analyzing the top 100 companies listed on the JSE in the period after March 1, 2011, in the second full reporting season after the third King Report on Governance was released, and its analysis even contained screenshots of successful integrated report sections' layouts.57 From 2011 to 2013, Deloitte and KPMG conducted similar surveys, publishing their results along with white papers reiterating the business case for integrated reporting, clarifying best practices, and addressing ongoing challenges. Local accounting firm Nkonki also began to produce an annual awards program covering the largest listed companies.58

Other organizations got involved in reflecting on the South African experience as well. For example, the University of Pretoria's Albert Luthuli Centre for Responsible Leadership collaborated with E&Y South Africa to interview 16 thought leaders, some of whom had been involved for over two decades in corporate governance and corporate reporting, lending nuance to the accounting firms' quantitative assessment of South Africa's integrated reporting experience.59 Chartered Secretaries Southern Africa undertook an annual awards program for integrated reports. The IRC of SA began to release the results of a survey of the top 100 companies listed on the JSE covering general areas, such as the size of the reports. While one can assume that things have progressed in the past year since these reports were published, below we consider trends indicated by the most recent reports and surveys available at the time of this writing.

Report Quality

While Deloitte identified “pockets of excellence,” the consensus among the Big Four remained that no one company could be indicated as exemplary in all aspects of integrated reporting.60 Companies were increasingly engaging with sustainability issues, but there was no overall “Poster Child” Integrated Report due to, among other factors, the lack of definitive reporting guidance. Deloitte's 2012 report alone identified 15 potentially relevant frameworks, regulations, and standards61 relevant to the process. It also addressed such issues as fear of disclosing competitive information related to strategy, board governance, how director remuneration was determined, and overall adjustment of internal controls, assurance, and data collection. Although the E&Y survey respondents demonstrated a solid understanding of the definition of an integrated report and the information it should represent, with all respondents agreeing that an integrated report was not simply a cross-reference between annual and sustainability reports, few disclosed these interdependencies in a useful manner.62

Overall, the following trends were indicated by most of the accounting firms: companies that had not embraced integrated reporting would become isolated; clear ways of telling the company narrative were improving, and companies relied more on visual storytelling and graphics than before; stakeholders were dealt with in greater detail in the reports; and companies were increasingly embedding sustainability issues into their business models. While KPMG estimated it would take up to three years for integrated reporting to become a fully established way of reporting business strategy and performance, the length of the journey depended entirely on a company's commitment to the spirit of King III in general and integrated reporting in particular. In some cases, companies were adopting a “tick-the-box” mentality to integrated reporting and simply outsourcing the production of the report to their audit firm or other consultants at a cost perceived to be high by the companies.

Materiality

Addressing the materiality of KPIs in a fulsome way remained one of the biggest hurdles for companies in their journey to integrated reporting, and it improved the least out of all other factors considered in the surveys from 2011 to 2013. South African shareholder activists like Theo Botha, Director of CA Governance,63 viewed the uptake of integrated reporting as evolving on par with the development of appropriate KPIs that required a comprehensive definition of company-specific materiality. While companies had been culling nonfinancial information for sustainability reports for years, many surveyed described the difficulty of how to decide which material issues were the most relevant as a concern. Furthermore, too many companies failed to explain the methodologies behind the selection of material factors, simply saying things like “material issues are identified by the Board.”64 Deloitte found that only 11 % of client companies disclosed the methodology used to assess materiality, and the link to stakeholder engagement was not clearly presented.65 While deciding what is material enough to go into the report remains a challenge for companies to this day, the process has improved with the benefit of experience.

Disclosure of Nonfinancial KPIs

Integrated reporting was overwhelmingly credited with enabling management to redefine and focus its strategy to ensure sustainability's incorporation into its business model. This could be seen in the elevation of sustainability to the board level in some cases where it was not there before, the push for improved definitions of KPI data for measurement and management, inclusion into project decision-making, and an emphasis on an ongoing dialogue with stakeholders. Nevertheless, while companies had improved their integration of material environmental and social aspects into their overall business strategy, this improvement was not always reflected in their reporting practices. Many nonfinancial factors were still presented without context.66 Companies showed a tendency to disclose nonfinancial KPIs in a separate section of the report without apparent thought for the relevance to their operations or context, resulting in a weak disclosure of the interdependencies between those indicators and company performance in a holistic way.67 Indicators of how green a company is, for example, should only matter if measures like recycling or carbon emissions have a significant impact on business.

To make nonfinancial disclosure more useful for decision-making, E&Y suggested that mention of measures per unit produced or consumed, along with a comparison to industry norms, would give the KPIs greater meaning.68 Noting that stated KPIs were not always relevant to business strategy, KPMG suggested that benchmarking was helpful in determining what the most relevant KPIs were and linking them to strategic imperatives.69 As of 2013, PwC observed that while 55 % of the 40 JSE-listed companies surveyed had identified one or more material capitals, only 6 % effectively communicated their holistic performance.70 Likewise, PwC found that 81 % of the JSE's top 40 companies' reports could improve in their definition of KPIs and the provision of a rationale for their use. However, 71 % of KPIs were quantified, indicating progress in the process of disclosing nonfinancial factors in a comparable, easily understandable way.71 Although “silo reporting” was still evident, with KPIs sealed off in separate sections regardless of relevance to strategy, companies that considered the connections between KPIs and strategy found that their report content naturally addressed the most material issues affecting business value.72

Disclosure of Risks

While E&Y's 2013 “Excellence in Integrated Reporting” survey referred to risks that “will affect the businesses' ability to create value”73 rather than dividing them into financial and nonfinancial risks, much like disclosure of nonfinancial KPIs, nonfinancial risk disclosure had often increased without being adequately linked to strategy or performance. While companies demonstrated an improved level of disclosure for items like the amount of money spent training staff or bursaries to build future capacity, the lack of links back to goals and strategies was disappointing to the accounting firms. Most companies surveyed had improved in presenting a balanced view of risks, but it was unclear how companies linked those risks to strategic objectives or how those risks translated into measurable KPIs. Many risks mentioned were generally applicable to any company in South Africa.74 Few companies highlighted business opportunities arising from nonfinancial risks or linked risk disclosure of nonfinancial factors to International Financial Reporting Standards (IFRS) disclosures in statutory annual financial statements. While 97 % of companies surveyed by PwC reported on principal nonfinancial risks,75 only 52 % integrated them into other areas of their reporting and only 10 % of companies supported risk disclosure with quantitative information like KPIs. A mere 13 % provided thorough insights into the dynamics of their risk profiles and how they could change over time.76

Director Remuneration and Board Transparency

Disclosure of director remuneration, introduced by King III, remained contentious. While PwC77 observed that 51 % of companies provided clear alignment between KPIs and remuneration policies, and Deloitte78 conceded that disclosure had improved, it was clear that not many companies were assessing the effectiveness of the board as emphasized by King III. Moreover, detail regarding remuneration was scarce, and the way remuneration was aligned to facilitate the delivery of strategic objectives was not often addressed. E&Y found that little to no information was provided on how the variable portion of short-term bonuses was determined. When KPIs determining bonuses were discussed, there was seldom any sign of how those indicators translated to rand amounts or whether they were for previous or current accrual periods. Most of the information for director compensation was likewise convoluted.79 Indeed, many companies were more comfortable reporting on board charters and terms of reference rather than actual activities undertaken by the board over the year. Only 16 % of those surveyed by PwC described the activities of the board.80 “Some companies have battled with what to include in their report about governance. The information that is most relevant is that which reflects how governance affects the value creation ability of the business,” said Roberts.81

Disclosure of Forward-Looking Information

Although an area that had improved since the first reports, companies were loath to disclose too much forward-looking information. This was especially true when it came to environmental, social, and governance (ESG) factors. While Deloitte found that companies disclosing KPIs generally included historical trends and future targets – an increase from 75 % inclusion to 80 % inclusion from Period 1 to Period 2 for fiscal 2011 – future performance projections still suffered from a lack of completeness. Only one-third of those surveyed by Deloitte set measurable nonfinancial targets linked to strategy and stakeholder concerns.82 Similarly, PwC found that only 13 % of companies surveyed provided effective communication on future outlook. Only 10 % provided future targets for KPIs. While 90 % discussed future market trends, only 61 % of companies linked them to strategic choices, and expected market rates and growth were, more often than not, not quantified. Nor was there much explanation of which factors would impact those trends in the future. However, 68 % of companies did identify the time frame in which future viability had been considered.83

Reasons cited for the lack of disclosure were fear of regulatory reprisal and creating expectations that could be used against management in the future, as well as the simple fact that corporate reporting has traditionally been focused on past performance. In its 2011 assessment, KPMG suggested substantial cultural change was necessary to achieve a truly forward-looking perspective corroborated by a consideration of past performance against strategy and strategic perspectives, and that companies could guard against liability by wording their future performance goals and expectations carefully.84 “This was a scary area for companies first stepping out on their integrated reporting journey,” said Roberts. “But over the years disclosure has improved, with companies realizing that it was not about giving a profit projection; rather, the focus lay in transparency regarding the significant relationships and factors with the power to affect the future value creation ability. Companies have been quite inventive, using ratios, waterfall graphs, commodity reviews, and other clever ways to show true relationships.”85

Characteristics of the Report

Company report preparers overwhelmingly felt that it was impossible to provide the amount of detail stakeholders would want in a single integrated report if that report were to remain clear and organized. Journalists like Ann Crotty feared that the reporting structure had succumbed to a gradual “densification” in which a checklist approach led to documents of 400 pages. However, analysis by the accounting firms showed that companies were slowly learning how to balance transparency with accessibility of reporting documents.86 Although all the accounting firms conceded that overall reports were still “too long,” there was evidence that companies were trying to shorten their reports. While 35 % of companies initially surveyed by E&Y in 2011 believed that an integrated report would be less than 50 pages and 44 % were neutral, most respondents envisaged the next integrated report as being between 50 and 80 pages.87

In the following two years, the goal shifted to producing an integrated report between 80 and 120 pages. Graham Terry, Senior Executive at The South African Institute of Chartered Accountants (SAICA), noted that, in the application of integrated reporting, some principles would necessarily conflict with each other. Further, little guidance existed for what should or should not be included in the report.88 Left to their own devices, some report preparers found that the most effective way to incorporate all of King III's requirements without producing information overload in the integrated report was to refer to other, more detailed documents with explicit links to the full IFRS financial statements and other detailed information like the sustainability report – a strategy Deloitte observed worked well when those links were clearly highlighted.89 E&Y noted that companies that appeared to have started from scratch in determining what and how to report often produced shorter and more effective reports.90

Although nearly all companies agreed that other reports were necessary, responses varied on exactly where and how information was being distributed. One hundred percent of the top 100 JSE-listed companies disagreed that integrated reporting was merely cross-referencing between annual reports and sustainability reports. This did not mean that other reports would disappear. During the first cycle of mandatory integrated reporting, 36 % of companies reported a belief that a separate integrated report would be published alongside a sustainability report and the annual report on financial statements, 43 % disagreed, and 21 % expressed no strong belief that an integrated report should be published separately alongside the financial statements.91 Mohamed Adam, a member of the King Committee, and Jo-Anne Yawitch, CEO of National Business Initiative,92 noted that companies tended to get distracted by form (one report vs. multiple reports) when they should be focusing on the substance of the report itself.93

All accounting firms noted an increase in the use of graphics, charts, and images in conveying overviews of information. Heat maps for materiality were especially useful, and E&Y noted the increased use of waterfall charts94 that explained the factors influencing movement in key measures such as profit over time.95

Internet Use

Although most companies initially made little use of the Internet in their integrated reporting efforts, all members of the Big Four firms and many South African thought leaders noted ways in which a more effective use of the Internet could ease the growing pains of integrated reporting. When it came to improving the treatment of materiality, Nigel Payne, a professional Non-Executive Director, suggested that those preparing an integrated report “need to be aware about the five or six things that are cooking at the moment” and put the details of these issues on the website. That is, thoughtful use of the company's integrated reporting site and the potential incorporation of Extensible Business Reporting Language (XBRL)96 could assuage concerns about report length and content; by posting longer, more detailed documents on their website that need only be referenced in a concise integrated report, the company did not sacrifice completeness of information for clarity.

E&Y found in 2013 that many companies had improved in their use of navigation aids, icons, and other forms of cross-referencing to connect information across the report and that they had put detailed sustainability, corporate governance, and risk disclosure information on their website. While companies offered a few “quick reading”97 options, some had begun to use XBRL98 to tag information relevant to different stakeholders.

Auditing and Assurance on Nonfinancial Information

While companies surveyed had not sought uniform “reasonable”99 assurance on nonfinancial information by an independent auditor, many agreed that it was desirable, and an increasing number of companies were seeking independent assurance on particular KPIs. E&Y noted that although more ESG indicators had received some form of external assurance, how those indicators were chosen did not always align with the material concerns of the business. E&Y suggested that the most material KPIs should receive the greatest consideration, as they were most relevant to the long-term sustainability of the business. Whether financial or nonfinancial, these KPIs selected for assurance based on materiality makes the business case for incurring the costs attached to the independent assurance of those indicators.100 Achieving credibility of nonfinancial information was paramount and, from 2012, the topic of assurance of nonfinancial KPIs began to receive more attention from reporters.101 That same year, an international group of accounting and legal experts led by the country's Independent Regulatory Board for Auditors was formed in South Africa to address the development of an appropriate assurance process over integrated reporting.102