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Corporate Reporting

Eyes on South Africa as new standards in coporate reporting evolve

Thu, 14 Jun 2012 11:51

Investors, and business and political leaders will be following new trends in corporate disclosure and reporting in emerging markets such as South Africa with great interest, when delegates from all over the world meet in Rio de Janeiro at the United Nations Conference on Sustainable Development (Rio+20) from 20 to 22 June 2012 to discuss government and business accountability for pressing societal and environmental issues as well as current economic trends.

This is evident from a new report published jointly by the Centre for Corporate Governance in Africa at the University of Stellenbosch Business School (USB), the United Nations Environment Programme (UNEP) and Deloitte.

Making Investment Grade: The Future of Corporate Reporting, which will be released at the UN Conference on Sustainable Development in Rio, contains a collection of contributions from twenty internationally recognised experts in the fields of corporate reporting, investment and governance.

These contributions focus on new trends in corporate reporting and communications worldwide. The report includes the views of the Global Reporting Initiative (GRI) and the International Integrated Reporting Council (IIRC), as well as those of leading analysts from the investment, accounting, sustainability and policymaking communities.

South African experience and research into integrating conventional financial reporting with sustainability reporting highlight key lessons for international companies. This includes an acknowledgement of the role of reporting in broader strategic planning, as well as a focus on multi-faceted reporting systems, including digital communications.

This is according to Dr Cornis van der Lugt, senior research fellow at the USB’s Centre for Corporate Governance in Africa and Geneva-based consultant, who contributed to and co-edited the report with Daniel Malan, director of the Centre. Van der Lugt noted the timeliness of the report, as delegates at the Rio Conference are set to debate topics such as the role of business in greening national economies, better informed governance, regulatory reform, and new ways of more effectively capturing the link between sustainability actions and the financial performance of corporations.

Contributions to the report from corporate governance luminaries such as Mervyn King, Bob Eccles and Bob Garratt address select questions such as the role of company boards in reporting; the necessity for one or multiple reports; the identification of material issues; the identification of the target readership of reports; the governance of the reporting process; and the further convergence between annual financial and sustainability reporting in future.

The report highlights the latest developments in mandatory and voluntary requirements in countries such as Denmark and the United States, as well as developments in emerging markets such as Brazil and China. Of special interest in the case of South Africa is the application of the King III Code of Governance and the ‘Apply or Explain’ requirement for companies listed on the Johannesburg Stock Exchange (JSE) to produce integrated reports annually – a first in the world.

At the Rio Conference, a coalition of investors and other organisations will be calling on governments to introduce a ‘Comply or Explain’ approach, requiring the integration of material sustainability issues into annual reporting. The GRI itself is promoting a ‘Report or Explain’ approach to sustainability reporting, building on the experience in countries such as Sweden and Denmark where mandatory requirements for sustainability reporting have been introduced for state-owned and listed or large companies.

Other emerging markets of the BRICS (Brazil, Russia, India, China and South Africa) countries and developed economies are looking to South African corporations as a case study on which to model or revise their own reporting approaches. The South African experience with reporting integration shows the need for improved collaboration between finance or investor relations departments and sustainability or social responsibility departments.

Contributions to Making Investment Grade highlight related messages from benchmarking of reporting and sustainability communications in the USA and France, where experts have noted the need for stakeholders to become more data literate and for finance or sustainability experts to become, respectively, more sustainability or finance data literate.

“The report shows that those who expected the integrated report to replace all other forms of reporting will be disappointed,” Van der Lugt points out. “Rather, our research shows that multiple reports and communication tools, notably the use of digital and broader online communications targeting different market segments or stakeholder groups is the most likely way forward.

Typically, one can expect the integrated report to be the strategic executive summary at the top of the communications pyramid, followed by annual financial and sustainability reports at the second level, and other forms, for example online or web 3.0 communications at the third level.”

According to Van der Lugt, the contributions from international experts signal a growing assumption that the integrated report predominantly targets the finance and specifically the investment community, while sustainability reporting will continue to display environmental, social and governance (ESG) information that contains less financial information yet data critical to other groups of stakeholders.

What both sustainability and integrated reporting have in common is an interest in more strategic and longer-term, forward-looking information. Greater accountability to all citizens as pension holders, and thus investors, is also a common goal.

Making Investment Grade also shows that rather than reporting format, the nature of information content including the link between business logic and sustainable developmental context is of greater importance. The international debate on reporting, including the shortcomings of conventional financial reporting and seeming lack of mainstream investor interest in ESG information, is also pressing reporting organisations to reflect and communicate more specifically about their business model and strategy, quality of governance, and the fulfilment by boards of directors of their responsibilities.

“Much more has to be done to link boards and owners through areas such as the quality of communication between them and the quality of board debate and decision-making,” states Bob Garratt, chairperson of the Centre for Corporate Governance in Africa and professor at the USB, in his contribution.