Читать книгу The Integrated Reporting Movement - Eccles Robert G. - Страница 9

In 1990, the Republic of South Africa emerged from the shadow of 42 years of apartheid into an uncertain future. The ruling white-controlled National Party began negotiations to dismantle the system of racial segregation that had allowed it to enforce white supremacy and Afrikaner minority rule at the expense of a black majority since 1948.13 Nelson Mandela, a Xhosa attorney and organizer of resistance against that system, was released from prison and his political party, the African National Congress (ANC), was legalized by the last State President of apartheid-era South Africa, F.W. de Klerk. While the path to democracy seemed secure by the mid-1990s, South Africa's social triumph was projected onto a backdrop of fiscal unknowns.

By 1989, 155 American educational institutions had fully or partially divested from South Africa and 22 countries, 26 states, and more than 90 cities had taken binding economic action against companies doing business there.14 Between 1985 and 1988, the United States, Japan, Great Britain, Israel, and a number of European countries enacted legislation or initiated trade restrictions with South Africa.15 Around the same period, the country – the world's largest gold producer – saw a precipitous drop in the price of gold from $850/oz. in 1980 to $340/oz. by 1992. Coupled with political unrest and sanctions, this drop resulted in South Africa's withdrawal of its last gold reserves from the International Monetary Fund in 1986, just as pressure from the sanctions intensified.16 Net capital movement out of the country between 1985 and 1988, the most intense years of divestment political pressure and sanctions, totaled over R23.9 billion, causing a dramatic decline in the international exchange rate of the South African rand and, consequently, a rise in the price of imports. Inflation was rising at a rate of 12–15 % per year.17

Even measures like the 1973 Companies Act,18 which the South African government adopted in its eagerness to attract foreign investment, did not prevent the extensive flight of private capital that occurred as a result of anti-apartheid pressure.19 Foreign direct investment, at 34 % of gross domestic product (GDP) in 1956, had dropped to 9 % by 1990 (Figure 1.1), and the depleted South African economy cast corporate accountability deficiencies into sharp relief.20 What remained were a few large companies – often, family corporations operating in a culture of cronyism and impunity.21 While the language of reconciliation spoken by politicians like Nelson Mandela lent the postapartheid state moral credence, the basic unreliability of the South African business environment and economy posed a critical challenge to the new government's legitimacy.22

Figure 1.1 Foreign Direct Investment in South Africa as a Percent of GDP

Source: Fedderke, J.W., and Romm, A., 2006, Growth Impact and Determinants of Foreign Direct Investment into South Africa, 1956–2003, Economic Modelling, 23, 738–60.

King I

Based on the Companies Act of 1973, corporations were allowed to withhold information from their auditors on the basis of “national interest.”23 Such opaque business standards, when combined with the political turmoil of the early 1990s, fostered an atmosphere of uncertainty for foreign investors. While Great Britain lifted the first economic sanction against South Africa in 1990, the last would remain until 1994. Meanwhile, the new government had difficulty attracting foreign capital, likely due to lack of experience,24 as repugnance to a fairly stable apartheid system was replaced with nervousness about the State's political and economic solvency. To mitigate some of this uncertainty, the Institute of Directors in Southern Africa (IoDSA)25 resolved to reinterpret business practices to prepare the South African economy for exposure to international markets by establishing the King Committee in 1992. Named after Mervyn King, a former corporate lawyer and Supreme Court judge selected as its chair, the King Committee sought to develop corporate governance standards that adequately reflected the values of postapartheid South Africa.26

Published in 1994, the first King Code of Corporate Governance Principles (King I) went beyond the reigning standard of corporate governance, the U.K.'s Cadbury Report,27 to advocate total transparency. Key topics included who should be on a company's board, the role of nonexecutive directors, and the categories of people who should fill this role – none of which had ever been addressed in South African business history. “King I” also advocated for disclosure of executive and nonexecutive directors' remuneration, set guidelines for effective auditing, and encouraged companies to implement a Code of Ethics to demand “the highest standards of behavior.”28 King I did not, however, call for sustainability reporting.

Mervyn King explained this approach to corporate governance as a way to understand a company's worth in a more comprehensive manner, saying, “The board should take account of the needs, interests, and expectations of the stakeholders…their duty being the best interests of the company for the total maximization of the total economic value of the company, not just book value.”29 South Africa began to address the “shareholder vs. stakeholder” polemic debated so vigorously around the world today. In his quote, King makes clear that the duty of the board is to the company, not to its investors or any particular stakeholder group. While this is true in many parts of the world, there is a common perception, especially in the United States – and in spite of the law's lack of affirmation on this point – that directors are responsible for putting shareholder interests first.30

Although the report advocated a principles-based approach,31 the JSE made elements of the King Code a listing requirement in 1995 on a “comply or explain” basis.32

King II

Following large-scale corporate governance failures in the United States, the United Kingdom, and at home, the second King Code of Corporate Governance (King II) was released in 2002. King II included sections on risk management, the role of the board, sustainability, and the suggestion that companies create an internal audit charter.33 In a corporate context, “sustainability” was interpreted as a focus on “those non-financial aspects of corporate practice that…influence the enterprise's ability to survive and prosper in the communities within which it operates, and so ensure future value creation.” Defined as the essence of corporate social responsibility, it means “the achievement of balanced and integrated economic, social, and environmental performance,” or what is commonly called the “triple bottom line.” The report clarified that these sustainability – or nonfinancial – issues should not and cannot be treated as secondary to established business mandates, noting, “It should also be pointed out that the reference to these issues as ‘non-financial issues’ is for ease of reference. There is no doubt…that these so-called non-financial issues have significant financial implications for a company.”34

The concept of integrated reporting began to take shape in King II through the notion of an “integrated sustainability report.” A chapter devoted to integrated sustainability reporting reviewed the stakeholder-inclusive model. The spirit of Ubuntu, an African values system, was suggested as a natural foundation for effective corporate governance. Reuel Khoza, Chairman of AKA Capital and The Nedbank Group and Chair of the Integrated Sustainability Reporting task team for King II, articulated the connection, saying, “The guiding principle of Ubuntu can be stated in one sentence: ‘Ubuntungubuntu.’ In English you can put it as, ‘I am because you are, you are because we are.’ We are interrelated beings, we operate best when we care about one another.”35

As discussed above, King II linked a focus on sustainability to company survival over the long term. Thus, King II articulated relationships between good corporate governance and transparent reporting, transparent reporting and sustainability, and sustainability and corporate performance, especially over the long term. These elements remain at the center of the integrated reporting debate today.

In the years after King II was published, sustainability appeared with great frequency in the national dialogue. While still not enforced by legislation, key aspects of King II's code were further validated when the JSE developed a set of criteria to measure the “triple bottom line” performance of companies, making explicit reference to King II. The move to create a Sustainable Stock Index made South Africa both the first emerging market, and its stock exchange the first worldwide, to bring sustainability issues to the fore through a structured index. In 2008, the passage of the National Framework for Sustainable Development by the Cabinet of South Africa lent government support to the concept of sustainability.36

King III

Corporate governance visionaries, however, remained unsatisfied with the treatment of sustainability in King II, and King himself believed its placement of sustainability in an eponymous chapter had led companies to isolate it inappropriately from strategy and corporate governance. To underscore the importance of sustainability's integration into business strategy, the group revised the code to include the crucial recommendation that companies combine material financial and nonfinancial data in a single, integrated annual report. King I and II had already achieved the Committee's goal of placing South Africa at the vanguard of international corporate governance, and a third report would allow them to push the envelope again. Furthermore, changes in international governance trends, as well as the passing of the new Companies Act No. 71 of 2008, made a third report necessary.37 In 2009, the third King Code of Governance (King III) was released, and it was applicable from March 2010 onward.

Departing from King I and King II, King III changed from a “comply or explain” to an “apply or explain” approach in the effort to be more flexible in the application of its now 76 principles. That is, King III was applicable to all public, private, and nonprofit entities, but those entities could opt out voluntarily by explaining why some of those principles were not applicable to their operations. The principles-based approach, rather than a rules-based one, was intended to allow companies to adapt those principles to their own situation to allow for a much wider scope of interpretation than a “comply” or explain approach. Still, many felt it would hinder King III's success unless companies had active shareholders to force them to account for their behavior. Because the United Nations (UN) – backed Principles for Responsible Investment (PRI)38 believed there was not enough guidance in South Africa for institutional investors to behave as active asset owners, the King III Committee recommended the creation of a code according to which institutional investors should set their expectations in order to ensure companies apply the principles and suggested practices effectively.39

Structurally, the concept of integrated reporting developed in King III emphasized “a holistic and integrated representation of the company's performance in terms of both its finances and its sustainability” to be remarked upon annually in a single report.40 How to represent these elements was subsequently defined in explicit, if aspirational, terms.41 On a higher level, King III emphasized that integrated reporting was not just about year-end disclosure but integrating sustainable practices into company operations all the time – a phenomenon that has come to be referred to by many, including King, Roberts, and the IIRC, as “integrated thinking.” This meant that the skill sets and responsibilities of audit committees would need to expand to account for nonfinancial considerations. Furthermore, emphasis was placed on “the principle of materiality, which links sustainability issues more closely to strategy, as well as the principle of considering a company's broader sustainability context.”42 Although King III acknowledged the helpfulness of international frameworks and guidelines like Global Reporting Initiative's (GRI's) G3 Guidelines, it suggested that companies should also develop criteria based on their unique circumstances. King III also advocated independent assurance of sustainability reporting and disclosure.43 In recognition of the King Codes' pioneering nature, Kofi Anan, the Secretary-General of the UN, invited King to chair the UN Committee on Governance and Oversight.44 Shortly thereafter, the King Reports were translated into Japanese.45

Meanwhile, the IRC of SA,46 established in May of 2010, was created to develop integrated reporting guidelines for South African companies. In January 2011, its “Framework for Integrated Reporting and the Integrated Report Discussion Paper” (IRC of SA Discussion Paper) – the first attempt at integrated reporting codification – was released.

The Integrated Reporting Committee of South Africa's Discussion Paper

The IRC of SA Discussion Paper outlined three categories of principles for the integrated report. The first included principles to define the scope and boundary of the report.47 The second pertained to the way in which the report's content was selected and the dependability of the information that comprised it: companies must ensure that the information they provide is appropriate (relevant), material, complete, neutral, and free from error. Thirdly, the information presented should be comparable and consistent, verifiable, timely, and understandable.48 The IRC of SA Discussion Paper also suggested specific elements of the report. It was to include a profile outlining its scope and boundary and an organizational overview discussing business model and governance structure. The company operating context was to be explained by including information on material issues, impacts and relationships, and identifying risks and opportunities. Strategic objectives and targets were to be covered along with the Key Performance Indicators (KPIs), Key Risk Indicators (KRIs) that would track performance, and a demonstration of the competencies required to pursue the objectives. The IRC of SA Discussion Paper also emphasized that the account of organizational performance, financial and nonfinancial, should include a list of objectives and targets, along with a discussion of whether or not they were achieved. Companies were to state future performance objectives and internal activities along with the structures required to achieve them, remuneration policies should be brought to light, and an analytical commentary on the company's current state and anticipated performance in the context of strategic objectives was to be described.

The IRC of SA Discussion Paper also devoted a fair amount of attention to the topic of materiality, noting in its discussion of the second principle that it is defined differently for financial and nonfinancial information. For financial information, the IRC of SA Discussion Paper used the common definition: “For financial information, materiality is used in the sense of the magnitude of an omission or misstatement of accounting data that misleads users and is usually measured in monetary terms. Materiality is judged both by relative amount and by the nature of the item.”49 For nonfinancial information, the IRC of SA Discussion Paper observed, “In the context of sustainability, materiality is a more difficult measure to define and a great deal of judgment is required.”50

Recommending assurance on sustainability disclosures by an independent third party under the oversight of the audit committee, the IRC of SA Discussion Paper noted that “the organisation's board should ensure the integrity of the integrated report.”51 Using a metaphor that has since gained considerable traction among members of the integrated reporting movement, it also observed that “Developing the ideal integrated report will be a journey for many organizations and so too will the extent and level of assurance.”52

While companies were not required to follow the principles and elements in the IRC of SA Discussion Paper, and the JSE did not attempt to assess the extent to which they were doing so, it likely had credibility in the corporate community due to the impressive multistakeholder group that prepared it. The members of the Integrated Reporting Committee and the Integrated Reporting Committee Working Group included senior representatives from individual companies and investors, company and investor associations, accounting firms and the accounting association, the stock exchange, nongovernmental organizations (NGOs), and academics.53 After this groundbreaking publication was released, the International Federation of Accountants (IFAC) launched a revised edition of its sustainability framework, discussing the specifics of sustainable business operations – like stakeholder engagement, goal setting, carbon foot printing, KPIs, and the nature of integrated reporting.54 The IRC is now promoting the international harmonization of integrated reporting by working with the IIRC55 and, in March of 2014, the IRC of SA endorsed the International Integrated Reporting Framework (published in December 2013) as guidance for how to prepare an integrated report.