South Africa’s Top 40 companies listed on the JSE have been leading the pack in their financial reporting initiatives for many years. However, this mantle may be at risk if they don’t start innovating and making decisions in an integrated manner, according to a report released by PwC today.
While many organisations have improved the quality of their reporting, a communication gap still exists between reporter and investor and other stakeholders. “We believe every organisation will reach a critical point at which further improvement requires substantial change. We think that the next level of stakeholder dialogue will only be achieved by those businesses that fully embrace the concept of integrated thinking and reporting,” says Zubair Wadee, PwC Assurance Partner.
Reporting on governance and outlook are, amongst others, areas where there are significant opportunities for companies to improve effective reporting. These are some of the findings from PwC’s ‘Integrated reporting: Where to next?’ survey. The survey involved an analysis of the integrated reports of the Top 40 companies listed on the JSE during the review period covering the 2014 calendar year. The assessment was based on PwC’s integrated reporting model and linked to the content elements of the International Integrated Reporting Committee’s (IIRC) International <IR> Framework.
The findings of the survey were grouped by content element and then evaluated according to three broad categories: clear opportunities to develop reporting; potential to develop reporting; and effective communication.
This year, reporting on strategy and resource allocation delivered the most effective communication. Reporting on performance showed the most improvement from last year. While governance showed a significant improvement since the last survey, it still appears to be lacking overall.
The purpose of this survey is to assist management in focusing on how they can create value for stakeholders, how they monitor and manage that value creation process and how they ultimately report their performance externally. PwC has developed a roadmap for managing and measuring the broader value drivers that form the basis of integrated reporting. This roadmap identifies three fundamental foundations that should underpin an organisation’s effort towards integrated reporting: understanding material issues for a business, based on investor and other stakeholders’ input; understanding how an organisation creates value for all its major stakeholders; and monitoring the indicators that capture the impact of an organisation’s strategy and operations. The roadmap sets out five stages to introduce and embed integrated reporting into an organisation.
Emerging themes in South African integrated reporting
Identifying material issues is the first stage on the PwC roadmap for integrated reporting. This is achieved by looking to the outside world to develop an understanding of the strategic risks and opportunities arising from the changing external environment, the organisation’s competitive position and global megatrends. According to the survey results, South African reporters appear to still be grappling with the concepts of materiality in the context of the integrated report. Only 36% of companies explained how they identified the material issues for future viability for their businesses. “In order to implement integrated reporting, businesses must develop processes for listening to investors and other stakeholders. This will assist management to gain insight into material issues and to understand where value can be created and what should be reported on,” adds Wadee.
An organisation’s business depends on identifying and responding to megatrends – long-term macro-level shifts in the external landscape. The survey results show that 64% of companies explain the key underlying drivers of market growth for the current and prior periods, but that only 53% explain the impact of external drivers on future growth.
In recent years there has been a shift towards a more integrated manner of reporting. However, many companies have made cosmetic changes in their reporting rather than fundamental shifts in the way in which they make decisions. A true commitment to integrated thinking requires alignment of an organisation’s internal processes with its strategy. While integrated reports are expected to have a strategic focus, only 39% of the reports surveyed made a clear statement of what the company’s strategic vision is, with the balance of reports remaining ambiguous on this point.
Measuring the success of an organisation’s strategy is dependent on identifying the right performance indicators – the key indicators that inform strategy. Just over half (53%) of reports surveyed clearly identified the performance measures that were selected to monitor progress against strategy. The remaining reports demonstrated deficiencies in identifying key measures of success.
An organisation’s business model is the perfect medium with which to explain exactly what the organisation does, how it makes money and creates value. Defining the inputs, processes, outputs and outcomes of the organisation’s business model further enables it to explain how it creates value. Internal outcomes could include employee morale, organisational reputation, revenue and cash flows. External outcomes on the other hand include customer satisfaction, tax payments, brand loyalty, and social and environmental effects of the organisation itself or of its broader value chain. According to the survey, only 39% of companies discuss the impact of their activities on external non-financial capitals. And only 39% of companies integrate the management of their non-financial capitals into their core-strategic business priorities.
Thinking about tomorrow, today
One of the most challenging differences between traditional financial reporting and integrated reporting, is that integrated reporting is not static. Organisations are expected to report on a moving target: what the future may hold and how they plan to adapt their strategy in response to changes. “This can be a daunting task for organisations that are primarily equipped to report on what happened in the past,” adds Wadee. Reporting on the outlook remains an area of reporting where companies tended to miss the mark. Overall, only 8% of reports surveyed demonstrated effective reporting on future outlook.
Another common misconception about financial reporting on outlook is that organisations are expected to predict events that will occur in the future. “This is not the case – organisations aren’t expected to commit to a detailed picture of their performance in future periods. They are rather encouraged to evaluate how the external environment might change in the short, medium and long term, how these changes may affect the organisation, and the resources the organisation has in place to respond,” says Wadee.
Concludes Wadee: “While we have seen some progress on the reporting front, there is still much work to do to on the path to integrated thinking. South Africa is considered to be a leader in the field of integrated reporting. We believe that integrated reporting can help businesses achieve a better dialogue with investors and other stakeholders, and so support the growth of more stable, thriving economies.”