The Integrated Reporting Movement

Meaning, Momentum, Motives, and Materiality

Robert G. Eccles, Michael P. Krzus

• Publisher: Wiley
• Year: 2014
• Print ISBN: 9781118646984
• eBook ISBN: 9781118993743
• Edition: 1
• Topic: Business
• Subtopic: Decision Making
• Index: Business

An in-depth, enlightening look at the integrated reporting movement

The Integrated Reporting Movement explores the meaning of the concept, explains the forces that provide momentum to the associated movement, and examines the motives of the actors involved. The book posits integrated reporting as a key mechanism by which companies can ensure their own long-term sustainability by contributing to a sustainable society. Although integrated reporting has seen substantial development due to the support of companies, investors, and the initiatives of a number of NGOs, widespread regulatory intervention has yet to materialize. Outside of South Africa, adoption remains voluntary, accomplished via social movement abetted, to varying degrees, by market forces. In considering integrated reporting's current state of play, the authors provide guidance to ensure wider adoption of the practice and success of the movement, starting with how companies can improve their own reporting processes. But the support of investors, regulators, and NGOs is also important. All will benefit, as will society as a whole.

Readers will learn how integrated reporting has evolved over the years, where frameworks and standards are today, and the practices that help ensure effective implementation—including, but not limited to an extensive discussion of information technology's role in reporting and the importance of corporate reporting websites. The authors introduce the concepts of an annual board of directors' "Statement of Significant Audiences and Materiality" and a "Sustainable Value Matrix" tool that translates the statement into management decisions. The book argues that the appropriate combination of market and regulatory forces to speed adoption will vary by country, concluding with four specific recommendations about what must be done to accelerate high quality adoption of integrated reporting around the world.

Chapter 1
South Africa

In 2011, South Africa became the first country to require integrated reporting on an “apply or explain” basis.¹ In 2014, it remains the only country to have done so. Since the Johannesburg Stock Exchange (JSE) added King III to its listing requirements—which as of 2011 have included integrated reporting—some 450² South African companies have been filing reports that present both financial and nonfinancial information³ in a meaningful way. While a variety of proposals related to sustainability and integrated reporting have been submitted in countries of the European Union,⁴ and while an initiative by the World Federation of Exchanges slated for discussion in 2014⁵ would require some form of nonfinancial reporting,⁶ no other country has shown signs of implementing such a far-reaching requirement.

Those not deeply entrenched in the topics of corporate governance and reporting are often surprised to learn that South Africa is the first country where integrated reporting was given a widespread mandate. Indeed, in 20 years the country's corporate governance code went from being undeveloped to regarded as an international vanguard. The governance principles that would launch South Africa's integrated reporting journey coincided with the country's first multiracial elections in 1994. In codifying values of stakeholder inclusivity—the idea that nonshareholder interests and expectations should be taken into account during strategic decision-making—those principles testified to a burgeoning democracy's effort to create structural and corporate transparency where, previously, corruption had prevailed. Because integrated reporting's meaning in South Africa—for companies, investors, and the country as a whole—must be seen in the context of its evolution from corporate governance principles, and because the movement has gathered more momentum in South Africa than any other geography, we will describe the motives of the key individuals and groups that led to this recommendation, ultimately reviewing the results of this country's experience.

The Uniqueness Of South Africa

The particularity of South Africa's circumstances begs the question of how much momentum the country's decision has created for the adoption of integrated reporting on a global basis. One might suppose the adoption of integrated reporting by a midsized country (population of 51 million in 2012)⁷ with a divisive history says little about the integrated reporting movement's prospects for the rest of the world. It is unlikely that a developed country would be motivated by the same set of reasons to improve its corporate governance.

As the increased trust thought to accompany integrated reporting could signify easier entry into foreign markets directly, through joint ventures, or through acquisitions, however, other developing countries may have similar incentives to attract foreign investors and make their large companies credible players on a global stage.⁸ Although this suggests integrated reporting can play a role in establishing the legitimacy of the State and its economy in times of turmoil and change, it certainly does not mean that it always will. In countries where the legitimacy of the State and its business community are more secure, companies and countries may see fewer benefits of integrated reporting—particularly when taking into account its costs and risks.

Yet, while South Africa's unique circumstances may have led it to be the first country to adopt integrated reporting, one could argue, as South Africans Mervyn King and Leigh Roberts have in Integrate: Doing Business in the 21^st Century,⁹ that the underlying forces that put integrated reporting on the agenda are the same worldwide. Central to the development of South Africa's code of corporate governance, King now occupies a similar role on the global integrated reporting stage as Chairman of the International Integrated Reporting Council (IIRC). As a member of the Integrated Reporting Committee of South Africa (IRC of SA) and the Technical Task Force of the IIRC, Roberts was deeply involved in the development of integrated reporting in South Africa. They see integrated reporting as one of “four corporate tools” to manage companies in a changing business environment. “Integrated thinking” is suggested as the most important, with the other two being stakeholder relationships and good corporate governance.¹⁰ We will discuss the relationship between integrated reporting and integrated thinking in detail in the next chapter, “Meaning.”

While the analysis of King and Roberts would suggest that integrated reporting is as relevant elsewhere as in South Africa, exactly how its adoption might best be aided remains unclear. The authors' four tools, much like the five forces they cite as changing the investor environment, are useful to companies all over the world even as their strength varies by country.¹¹ The nine problems with corporate reporting they identify are similarly applicable.¹² The remaining instrumentalist questions are concerned with scope and strategy. Should the focus be on improving corporate reporting per se, which is how it is largely being defined in other countries? Or should integrated reporting be part of a larger context, such as a code of corporate governance, as it was in South Africa? What is the right combination of market and regulatory forces? The South African strategy was what might be called “soft regulation” due to the “apply or explain” basis and the central role of the JSE, in contrast to the hard regulation of a pure mandate supported by the country's securities commission. These questions will be addressed in our final chapter. Here, we present South Africa's particular journey in order to glean what can be learned from the only country in which integrated reporting is mandatory.

South Africa's Journey to Integrated Reporting

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 ba...

Table of contents

• Cover
• Series Page
• Title Page
• Copyright
• Foreword
• Preface
• Acknowledgments
• Chapter 1: South Africa
• Chapter 2: Meaning
• Chapter 3: Momentum
• Chapter 4: Motives
• Chapter 5: Materiality
• Chapter 6: The Sustainable Value Matrix
• Appendix 6A: Comparing the Ford and Daimler Materiality Matrices
• Appendix 6B: Methodology for the Materiality Matrices Review
• Chapter 7: Report Quality
• Appendix 7A: Methodology for Analyzing 124 Company Integrated Reports
• Chapter 8: Reporting Websites
• Appendix 8A: Methodology for Website Coding
• Chapter 9: Information Technology
• Chapter 10: Four Recommendations
• About the Authors
• Index
• End User License Agreement