Over the past two decades South Africa has gained much international recognition for its achievements in corporate governance due to its prominent and innovative roles towards sustainability and integrated reporting movement (Rensburg and Botha, 2014). Because of the various political, social and environmental challenges, South Africa has taken a lead, through its stakeholder-oriented corporate governance reports, in making businesses to embed social, environmental and governance considerations into the core of their operations (Solomon & Maroun, 2012).
1. Organizational overview and external environment: What does the organization do and what are the circumstances under which it operates?
2. Governance: How does the organization’s governance structure support its ability to create value in the short, medium and long term?
3. Business model: What is the organization’s business model?
4. Risks and opportunities: What are the specific risks and opportunities that affect the organization’s ability to create value over the short, medium and long term and how is the organization dealing with them?
5. Strategy and resource allocation: Where does the organization want to go and how does it intend to get there?
6. Performance: To what extent has the organization achieved its strategic objectives for the period and what are its outcomes in terms of effects on the capitals?
7. Outlook: What challenges and uncertainties is the organization likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?
8. Basis of presentation: How does the organization determine what matters to include in the integrated report and how are such matters quantified or evaluated?
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South Africa’s challenging role in corporate reporting movement is partly linked with the country’s political history and transition from apartheid to multi-racial democracy in 1990’s (Visser, 2005). The threat of disinvestment and sanctions during the apartheid period caused many local and international companies to respond to measurement and reporting initiatives on social transformation issues (e.g., black economic empowerment and employment equity, environmental and health and safety reporting practices in mining and other heavy industries). One of the prominent initiatives was the Sullivan Principles, set up for United States multinationals with affiliates in South Africa (KPMG et. al., 2013). The Sullivan Principles were a code of conduct against desegregation of races in the workplace, equal and fair employment practices, and improving the quality of life of employees’ lives outside of the workplace.
Some other influential factors were corporate governance requirements and the Johannesburg Stock Exchange (JSE) Socially Responsible Investment Index (SRI Index). Another important driver was the Public Investment Corporation (PIC) Corporate Governance Rating Matrix, which focused on the disclosure of environmental, social and governance performance and developed jointly by the PIC and the Centre for Corporate Governance in Africa at the University of Stellenbosch Business School. The PIC is the single biggest investor on the JSE and one of the largest investment managers in Africa (KPMG et. al., 2013).
According to Ackers and Eccles (2015), the Treadway Commission in the USA (in 1987), the Cadbury Report in the UK (in 1992) and the initial King Code (King I) on Governance for South Africa (in 1994), provided pioneering corporate governance initiatives that extended beyond the financial and regulatory dimensions conventionally associated with corporate governance.
Prior to 1990s most of the businesses in South Africa were family oriented and corporate governance were almost non- existent. The 1990s was a period of great political and social transition for South Africa and the first democratic election was held in 1994. During this time, various social actors began to debate on South Africa’s future developmental trajectory and potential roles for the state and private sector to address the legacy issues of apartheid. Although South Africa’s participations to United Nations activities was still suspended, it is argued that the outcomes of the United Nations Conference on Environment and Development held in Rio de Janeiro in 1992, had a great impact on stimulating environmental and social initiatives in South Africa (Clayton, 2015). Since 1994, measurement and reporting on social
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transformation issues (e.g., black economic empowerment and employment equity) have become rooted in legislation. The focus on mining and other heavy industries has also had a positive effect on environmental and health and safety reporting practices (KPMG et. al., 2013).
The King Committee was commissioned in 1993 by the Institute of Directors in Southern Africa (IoDSA) in the midst of huge political and economic turmoil. Its directive was to promote the image of corporate governance in South Africa as the economy was re-entering global markets. Professor Mervyn King, a former corporate attorney and judge to the Supreme Court of South Africa, was the Chairman of the committee. The King Committee issued the first King Report on Corporate Governance (King Code I) in 1994. The King Code I placed emphasis on inclusivity and importance of stakeholders as well as financial and regulatory aspects of corporate governance (Rossouw et al., 2002). While King Code I was a principles-based voluntary requirement, in 1995 Johannesburg Stock Exchange (JSE) made the core principles of King Code I as part of their listing requirements on a “comply or explain” basis. This worked as a critical step in the evolution of corporate governance in South Africa (Eccles et al., 2012).
Since King Code I, significant changes that have been occurred in both domestic socio-political and international context prompted the revision of corporate governance code in South Africa (Rossouw et al., 2002). Accordingly, King Code II was published in March 2002 based on the principle that “there is a move away from the single bottom line (that is, profit for shareholders) to a triple bottom line, which embraces the economic, environmental and social aspects of a company's activities” (Collier, 2009, p.17).
Following the World Summit on Sustainable Development in 2002 held in Johannesburg and other contemporary developments in the arena, King II included some new areas of consideration like risk management, internal auditing, and integrated sustainability reporting. The code brought significant progreess in corporate reporting in South Africa. In 2003, 85% of the leading companies had included sustainability issues in their annual reports which was almost absent during 1990s (Visser, 2005). KPMG (2004) further concluded that non-financial reporting in South Africa reached to its peak in 2004.
The Companies Act for South Africa was revised in 2008 replacing the earlier 1973 Act. Accordingly, King Code III was released in 2009 with much stronger emphasis on leadership, sustainability, and corporate citizenship (IoDSA, 2009). Unlike the previous two, King III was applicable to public, private,
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and non- profit entities, and was based on an "apply or explain" approach, rather than "comply or explain".
While the latter required companies to adhere to principles outlined in King I and King II, the former approach allowed companies to adapt the code to their specific situation and then explain the ways in which they adapted it and why.
King III discussed all the key issues from King I and King II, including ethical leadership and corporate citizenship, boards and directors, auditing, risk management, compliance with codes and standards, and governing stakeholder relationships. However, King III placed renewed emphasis on the importance of ethical values and leadership, and introduced new topics and concepts such as shareholder approval of remuneration policies, directors' performance evaluation, business rescue, and alternative dispute resolution as a crucial element of good governance.
Integrated sustainability reporting was a noticeable component of King II, where companies were advised to combine both financial and non-financial considerations into a single, integrated annual report. The understanding of integrated reporting was further emphasized in King III. The publication of the King III Code of Governance in 2009 has changed the concentration of listed companies in South Africa to integrated reporting, although the early attempts of such reporting was merely combining financial and non-financial information in one report.
To develop a framework for IR, The Integrated Reporting Committee (IRC) of South Africa was formed in May 2010 under the chairmanship of Professor Mervyn King. The organizational members of the IRC are: Association for Savings & Investment South Africa (ASISA); Banking Association South Africa, Business Unity South Africa (BUSA), Chartered Secretaries Southern Africa, Institute of Directors in Southern Africa (IoDSA), Institute of Internal Auditors; Government Employees Pension Fund, Johannesburg Stock Exchange Ltd, Principal Officers Association, and The South African Institute of Chartered Accountants or SAICA. In 2011, IRC of South Africa (2011) published the Discussion Paper on
“Framework for Integrated Reporting and the Integrated Report”. Among other issues, the report explained the principles for preparing IR in terms of report scope, report content, and report quality. It also suggested eight content elements to be addressed in the integrated report. In 2010, International Integrated Reporting Council (IIRC) was initiated and Professor Mervyn King was selected as the IIRC's
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Deputy Chairman, evidencing South Africa's obvious role in persuasion of integrated reporting globally.
Later in March 2014, IRC of South Africa endorsed the International Framework of IR developed by IIRC.
All companies listed on the Johannesburg Stock Exchange (JSE) have been required to produce an integrated report for financial years starting on or after 1 March 2010, in line with the requirements of King III. Being among the first countries requiring integrated reports with their listing requirements based on the King Report on Governance for South Africa (2009), companies started applying their corporate thinking to this concern. With little guidance from King III, the discussion paper on the Framework for Integrated Reporting and the Integrated Report issued by the Integrated Reporting Committee of South Africa was a very useful document for preparers.
In 2011, Ernst & Young (E&Y) published its first "Integrated Reporting Survey Results," which surveyed 25 companies (64% of which responded) listed on the JSE and included companies operating in the financial services, mining and metals, retail, healthcare, telecommunications and transport sectors to depict their understanding of IR. The value of IR, both from an internal and a stakeholder perspective were widely understood. 100% of respondents were of the opinion that IR is a good idea, while 86% of respondents believed that stakeholders would obtain more value from an integrated report than the traditional annual and sustainability report and 85% indicated that there were internal benefits associated with business. The respondents were in opinion that main value is that it focuses companies on their material issues and impacts relevant to stakeholders. The respondents exhibited a good understanding of what an integrated report is; none of them thought that an integrated report is simply the product of integrating and cross referencing between the annual and sustainability reports, rather it is a great way to challenge the company strategy to ensure that sustainability is reflected (93%). Whilst 36% of respondents agreed that a separate integrated report will be published along with other separate reports e.g.
Annual Financial Statements and detailed Sustainability Report, 43% disagreed and 21% were uncertain or neutral.
The Ernst & Young’s Excellence in Integrated Reporting Awards 2012 was their first survey of integrated reports from South Africa’s top 100 companies and top 10 state-owned entities to encourage excellence in
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the quality of integrated reporting to investors and other stakeholders. It was understood that preparers of 2011 integrated reports had to face a challenging environment, particularly those with March and June financial year ends with limited guidance, and few published examples to draw ideas from. It was evident that many companies involved in the process and consequently produced integrated reports that provide a clear message of the value adding potential of the company. Many companies appeared to have a “wait and see approach”, with few changes to the existing reporting practices to comply with the requirements.
The latest initiative of King Committee, King IV report on corporate governance for South Africa was published in November 2016. Based on the philosophical underpinnings of King III, the report emphasized on integrated thinking and IR as a key principle of corporate governance. The new code has moved from “apply or explain” to “apply and explain” basis. It implies that organizations are now required to apply 17 principles of corporate governance set out by the code and explain how these principles are applied (Dumay et al., 2017). The report also advocated the International Framework of Integrated Reporting developed by IIRC. Johannesburg Stock Exchange (JSE) also requires companies to prepare and publish reports based on King IV from October 2017.
Ernst & Young’s (2018) latest report “EY’s Excellence in Integrated Reporting Awards 2018” observed the current practice of integrated reporting in South Africa. Based on top 100 companies listed in JSE, the survey showed that 47 companies published “excellent” or “good” integrated reports. Figures 2.6, 2.7, and 2.8 show the trend of quality of integrated reports in South Africa based on three categories:
“excellent”, “good”, and “average and progress to be made”. Ernst & Young’s (2018) survey found significant improvement in several aspects of integrated reports including narrative disclosure on value creation, strategy to create value, increased disclosure on organizational opportunities, and better understanding on the difference between outputs and outcomes. The survey also identified the areas of weaknesses in current reporting practice such as defining value creation only from financial point of view, disclosure on corporate governance are boilerplate and compliance driven, lack of trade-off between different forms of capitals, insufficient emphasis on balanced reporting, poor connectivity between various content elements of IR.
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Figure 2. 6: Trend in “Excellent” Integrated Reports in South Africa
Source: Ernst & Young’s (2018, p.14)
Figure 2. 7: Trend in “Good” Integrated Reports in South Africa
Source: Ernst & Young’s (2018, p.14)
27 28 29 31
28 27
23
0 5 10 15 20 25 30 35
2011 2012 2013 2014 2015 2016 2017
29 30
35
27
33 32
24
0 5 10 15 20 25 30 35 40
2011 2012 2013 2014 2015 2016 2017
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Figure 2. 8: Trend in “Average and Progress to be made” Integrated Reports in South Africa
Source: Ernst & Young’s (2018, p.14)