Business Vision’s Naomi Majid takes a look at successful corporate governance in South Africa to determine why it’s working, and if it can be emulated across other economies.
MORE than 20 years have passed since former Supreme Court of South Africa judge Mervyn King was asked to draft South Africa’s first ever corporate governance. Working essentially with a blank slate, King’s first report in 1994 represented a pivotal opportunity to educate the newly democratic South African public on the workings of a free economy.
Now in its third edition – ‘King III’ (which came into effect in 2010) – it has become the gold standard in corporate governance, dictating the mechanisms, processes and relations by which organisations are controlled and directed.
Since King I in 1994, the world has witnessed a number of high-profile corporate collapses, a global economic crash and, most recently, a clutch of UK high-street names go into administration taking with them thousands of jobs. Not surprisingly, each event has provoked renewed interest in corporate governance.
In the two decades since apartheid ended, and amid growing concern at the role of business in society, South Africa is evolving as a leader in corporate social governance and sustainability. This is due to robust legislation – such as the requirement that companies must comply with King III in order to be listed on the Johannesburg Stock Exchange (JSE). And, crucially, the enshrined concept of integrated reporting, introduced in 2002 by King II.
The journey to integrated reporting
The concept of CSR (Corporate Social Responsibility) reporting isn’t new. Businesses embraced CSR back in the 1980s – but CSR reports often generated a mixed reception. Whilst they did foster positive corporate initiatives, for some companies the process devolved into a tick-box PR exercise.
Once again, it was Mervyn King to the rescue. By 2002, King was pushing for revisions of King I to include sustainability, the role of the corporate board, risk management and what he calls integrated reporting (IR), which would demonstrate an organization’s strategy, governance, and performance in creating value in the short, medium and long term.
The thinking was that integrated reporting would put an end to the ‘silo mentality’ by requiring a holistic understanding of multiple factors – some financial, others not, such as intellectual capital, reputation, or environmental impact. The watchwords were responsibility, accountability, fairness and transparency. Essentially, directors would be expected to act in a socially responsible manner. And the board should consider the interests of all stakeholders, not simply its shareholders. Internal audit should be risk-based and companies should remunerate directors and executives fairly and responsibly.
Largely, King III has worked remarkably well. A survey by KPMG in 2013 revealed that 90% of companies in South Africa had submitted reports – more than in US or Germany – and the reason is partly down to regulation. In a report the same year, Paul Druckman, CEO of the International Integrated Reporting Council (IIRC), said: “Striking the balance between regulation and market-led integrated reporting is something that I believe has supported South Africa’s uptake of integrated reporting.”
The success of King III may also be partly due to the approach of JSE itself, which eased the transition into that first round by not being overly critical of the way companies embraced IR; companies could dive in without fear of failure.
Professor Mark Graham, head of the College of Accounting at the University of Cape Town, and one of the adjudicators for the 2013 EY Excellence in Integrated Reporting Awards, said, “Overall, we were pleased to see that the majority of companies are making progress on the journey towards producing an integrated report that complies with the spirit of King III and the developing guidance that is being provided by the International Integrated Reporting Council.”
Reviewing the same awards, Graham had some reservations about the transparency of risk disclosures within integrated reporting, stating in a review: “In some cases, the risk section of the integrated report merely lists the main or generic risks facing the business, and we would suggest that this does not go far enough to help the reader’s understanding of the risk profile of the business…we found that those integrated reports that defined, explained and prioritized risks, and perhaps used some form of ‘heat map’ to categorize the intensity of the various risks, extremely informative.”
A slight decline in integrated reporting…
By 2015, Professor Mark Graham, again for the EY Awards, reported mixed results. The number of JSE-listed companies deemed “excellent” had declined to 31, from 35 in 2014; 12 companies moved up while 18 moved down; and 27 companies had aimed their integrated report at investors (in 2014, it was 13). Average page length continued to decline and 50 companies included summarised financials, compared with 46 in 2014.
More worryingly, some organizations failed to produce an integrated report at all and, those submitted were noted for a lack of substance, questionable materiality, lack of connection between strategy and risk, and a tendency to concentrate on the positive, with few meaningful KPIs. Above all, Professor Graham found that executive directors’ remuneration was still poorly handled. Also, some organisations showed little evidence of integrated thinking.
On the plus side, there was better innovation in layout, improved materiality, increased use of cross-referencing and navigation tools, better use of tables and graphs, less ‘boilerplate’, more reference to the various ‘capitals’ (financial, manufactured, intellectual, human, relationship and natural), improved business models, and better internal cohesion. There was also less repetition – which was a criticism of the earlier rounds of reporting.
What we can learn from King
Business today has the benefit of a growing library of literature on integrated reporting, and uptake of integrated reporting is also on the rise globally, with companies like KPMG stepping up to the mark.
South Africa is still currently the only country where integrated reporting is mandatory, but several European nations, including Norway, Sweden and Denmark, all require sustainability reporting to varying degrees. In France, Grenelle II – the country’s strongest governmental mandate in support of sustainability reporting – came into effect from 2013, with large listed companies expected to comply in their 2012 reports and smaller companies expected to comply with their 2014 annual reports.
Most experts agree that to create a truly sustainable society, the public sector, private sector and the third sector have to work together to adopt integrated reporting.
Can it come soon enough? Well, there are plenty of economists who would be willing to suggest that King III could have saved BHS.