The Integrated Reporting Movement. Eccles Robert G.

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СКАЧАТЬ 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 СКАЧАТЬ