OPINION: The trust-building tool Steinhoff, Tongaat et al could have used better
Integrated reporting (IR) is becoming a buzzword globally, and with good reason.
As we’ve learnt from South Africa’s annual EY Excellence in Integrated Reporting Awards, these reports, done well, inspire confidence that a company has a better, more coherent grasp of who they are, where they’re going, and how they’re going to get there – and this often seems to translate into better performance too. There is growing evidence of the link between IR and greater liquidity and higher cash flows within organisations.
It is worth bearing in mind here that neither Steinhoff nor Tongaat Hulett, whose share price nose-dived recently, have traditionally fared well when it comes to IR.
It starts with trust - which is tanking
A large part of the power of IR is that it is a tool for building trust. And trust, according to more than half of the CEOs surveyed by PwC in the 17th Annual Global CEO Survey, is an important factor in an organisation’s ability to grow and prosper.
Too bad, then, that trust seems to be a dwindling commodity in the world today. Last year, Harvard Business Review Analytic Services reported that nearly two-thirds of global senior executives believe trust among people, businesses and other institutions is in decline and 23% believe this decline is significant.
The reasons for the decline are attributed variously to cyber-security exploits leading to misuse of corporate or personal data; scandals and indictments of prominent businesspeople; and the intentional release of misleading or inaccurate information, and its subsequent spread via social media networks.
We just can’t trust what companies are saying and doing any more – including in their financial reporting. "Investors are increasingly skeptical about the accuracy and transparency of information being reported to the market," writes Larissa Clark, professional practice director at EY, in the forward to 2019 Excellence in Integrated Reporting Awards. This is where IR can play a key role. Better, more holistic and trusted reporting is an integral part of rebuilding trust.
The myopic view
Integrated reporting – abbreviated by the International Integrated Reporting Council (IIRC) as – was developed as an immediate and direct response to the 2008 global financial crisis.
That meltdown has served as a painful reminder that all too many companies take a myopic view of their business, regarding financial bottom lines as the be all and the end all of their enterprise. Investors came to the rude awakening that annual reports and balance sheets on their own no longer cut it. "In the wake of the crisis, the desire to promote financial stability and sustainable development by better linking investment decisions, corporate behaviour and reporting has become a global need," notes the IIRC.
An integrated report is meant to fill the gaps that exist in current reporting. As the Integrated Reporting Committee of South Africa put it, "An integrated report aims to provide a holistic picture of the combination, inter-relatedness and dependencies between the factors that affect the organisation’s ability to create value over time."
To boil that down, integrated reporting demands that companies recognise and manage responsibly all the six ‘capitals’ – the financial; the manufactured; the intellectual; the human; the social and relationship; and the natural – that it deploys in the creation of value.
Today, IR has the support of a global network of regulators, investors and companies under the umbrella of the IIRC.
SA an early adopter
South Africa was one of the first adopters of IR. That’s in large part thanks to the King III (2009) and IV (2016) Reports on Corporate Governance for South Africa, which sought to offer local industry and investors more protection against ill economic winds that may blow the country's way from foreign shores.
And despite those conspicuous back-of-the-packers such as Steinhoff, South African companies have consistently been providing stand-out integrated reports across all sectors – from banking and retail to mining and property developers. That was highlighted again just recently in a ten-country comparative study by Oxford University, in which South Africa was awarded the highest overall score – eclipsing Brazil, France, Germany, Italy, Japan, The Netherlands, South Korea, the UK and the US.
Today South Africa and Brazil are the only countries in which integrated reporting is mandatory for listed companies, although more and more countries and companies are beginning to recognise the value it adds. Notably, IR has been wholeheartedly embraced and now forms a key component of ‘Abenomics’, the series of economic policies designed to boost the Japanese economy. In 2017, the EU also issued a directive encouraging more than 6000 large listed companies as well as banks and insurers to start reporting on an integrated basis.
This bodes well for the quality and standard of integrated reporting globally. And South Africa, as the early adopters of IR, can show the way.
We can only hope that the growing improvement and adoption of IR in South Africa and more broadly, will have a positive knock-on effect on the global economy. The world has endured yet another difficult year including corporate scandals, an uncertain operating environment and an escalation of the climate crisis. In the face of this onslaught, corporate leaders are having to rethink the models of value creation that drove their prosperity in the previous century, and IR offers them a framework within which to do this. At the heart of it is the question of trust – and more precisely regaining the lost trust of society and consumers.
As Prof Mervyn King, a key proponent of IR says: "When you lose trust and confidence in the company, value is destroyed very quickly."
Mark Graham is an Associate Professor at the UCT Graduate School of Business. He will be speaking on the topic of Integrating Reporting at Leaderex, which takes place from 3-4 September at the Sandton Convention Centre.