Global businesses should back enhanced corporate reporting

Fiona Zerbst, FAnews Online Editor

Reporting has moved with the times, and the International Integrated Reporting Council (IIRC) wants to forge ahead in the development of the first internationally accepted framework that will see businesses focusing on putting sustainable processes and sy

Companies are urged to present more integrated information – they should show how they manage strategy and critical decisions with regard to both financial and non-financial matters in the business, says Zubair Wadee, a director at PwC. Board members need to take these matters into consideration when they make decisions. “Directors need to ask themselves whether they have all the information they need to make decisions from a holistic perspective,” says Wadee. “The IIRC blueprint will focus on a more cohesive approach to corporate reporting, looking at how companies create value in the short, medium and long term.”

There are still those who question the necessity for integrated reporting, seeing it as a regulatory burden. But integrated reporting can contribute to the financial stability of a company. “Companies that make their performance and prospects visible in a credible and well-structured way will avoid the risk that investors undervalue their organisation,” says Dennis Nally, chairman of PwC International.

PwC has shown that a poorly defined or poorly explained business model can affect a company’s value in the eyes of investors. An experiment with a small group of investors showed their valuations were influenced by company reporting, which is something companies should take note of. A significant percentage of investors recommended ‘sell’ when they did not have any quantified non-financial information and most recommended ‘buy’ when they were presented with more integrated information.

Not more, but better, reporting

South Africa was the first country to mandate integrated reporting for all listed companies. South Africa’s top 100 companies listed on the JSE have made progress in their corporate reporting initiatives, though they appear to be more comfortable with reporting related to audit committees and less so with regard to IT governance – newer areas of governance was introduced in the third King Report on Governance for South Africa 2009.

Although there is some ground to make up in terms of getting to grips with these newer areas, it is not true to say that integrated reporting will result in longer reports. Clarity and conciseness should be features of these reports, which seek to show the interdependency of financial and non-financial reporting.

Investors want to see that companies are stable, reliable and worthy of long-term investment, which means they need all relevant information about how these companies create and preserve value. If this means looking at how companies manage, remunerate, relate to broader society and impact on the environment, so be it.

IIRC seeks comment

The IIRC, which is a collaboration between businesses; investors; regulators and the accounting profession, initiated a pilot project in October 2011, supporting the development of the framework. There are some heavy-hitting global corporate and public sector reporting organisations on board, including Unilever and Microsoft – over 85 companies and 50 investors around the world were involved and five South African companies also took part in the initial pilot: Goldfields; Sasol; Eskom; Transnet and STRATE. The project is, of course, ongoing.

In fact, as Wadee points out, South African companies were a step ahead when the Integrated Reporting Committee (IRC) put out a discussion paper prior to the IIRC’s discussion paper on the topic. “We had already been thinking about what integrated reporting is, in response to the King Report,” says Wadee.

The companies involved in the pilot project said that they believe integrated reporting provides a clearer view of the business model (95%), breaks down internal silos (93%) and increases board focus on what key performance indicators for business should be (95%).

The IIRC is now seeking comment from a wide range of stakeholders on the draft of its International Integrated Reporting Framework. Once they have elicited responses, they will finalise the framework towards the end of the year. To participate, visit http://www.theiirc.org/.

“Companies, investors and all others who value information that helps to demonstrate the sustainability of corporate business models should, as a minimum, contribute their views on the consultation draft framework,” says Nally.

Editor’s thoughts:
As has often been pointed out, laws cannot enforce morality. But this is to miss the bigger impact of integrated reporting – the allocation of capital. Capital markets have been frustrated by the lack of transparency in corporate reporting for some time, not least because it makes financial modelling and analysis tricky. Integrated reporting should promote more efficient capital allocation. How do you feel about integrated reporting? Comment below or email fiona@fanews.co.za.