The content elements

An integrated report includes eight content elements that are fundamentally linked to each other and are not mutually exclusive. Based on the information demonstrated in the value creation process, Table 2.1 below provides the details of the content elements that are used to make an initial assessment of integrated reporting by examining the reports of a sample of state-owned entities.

The IR ought to report the eight content elements in conjunction with the guiding principles to empower and capacitate capital providers and other key stakeholders to make decisions about the business’s value and stewardship – the issues that mould its value, its aspirations and plans for the future and how it plans to deliver on its objectives. (KPMG, 2013)

29 Table 2.1 The content elements addressed by the IR Framework (IIRC, 2013a)

2.9.5 Conclusion

Business models for long term value creation are changing at a rapid speed, hence entities need to reassess, and possibly amend, the processes they engage in when reporting on their performance.

To a large extent, there is a growing awareness and perception that traditional corporate reporting is ineffective in dealing with the broader business list of things to be done or addressed in running a business. This awareness has created the need for a better reporting tool such as integrated reporting, which is a more comprehensive framework that incorporates the important elements of traditional reporting and ESG reporting within a single presentation.

First and foremost, integrated reporting incorporates forward-looking information to enable stakeholders to make more intelligent and informed assessments of the future value creation ability of the organisation. It includes both financial and non-financial metrics by linking strategy, risks, opportunities and performance drivers. In the end, IR is a reporting model to present a holistic picture of the entity as it allows both the entity and its stakeholders to make better informed decisions.

30 2.10 Previous research

Since the IR Framework was issued in 2013 and incorporated into the JSE listing requirements for entities to comply with the provisions and principles of King III (which advocates for the preparation of an integrated report), there has been quite a number of academic and practice research studies performed on compliance with the IR Framework and its application in practice. Through the use of content analysis, an increasing number of empirical studies have assessed disclosure practices of IR across various sectors of industries (Solomon & Maroun, 2012; PwC, 2012a; Silvestri & Veltri, 2015).

This part of the limited scope dissertation focuses on seven research projects that were previously done on this topic and discusses how these research projects are relevant and comparable to this study. Although there are other studies, these seven studies were specifically selected as they focus on the relevance of IR, compliance with the principles of the IR Framework, as well as assessing the quality of the integrated reports as presented by different entities using the current guidance in the IR Framework. The previous research studies reviewed are as follows:

• Integrated reporting: The influence of King III on social, ethical and environmental reporting (Solomon & Maroun, 2012)

• The IR landscape: Executive perceptions of integrated reporting (Chartered Global Management Accountants, 2014)

• Realising the benefits: The impact of integrated reporting (Black Sun, 2014)

• Integrated reporting in South Africa: Some initial evidence (Neelam, Subhash, Mahesh &

Anh, 2015).

• Integrated Reporting: A New Era for Public Sector Entities in South Africa (Nkonki, 2014)

• The Free State University’s integrated reporting: A critical consideration (Silvestri & Veltri, 2015)

• Exploring the implications of integrated reporting on organisational reporting practice (Haji &

Hossain (2016)

31 2.10.1 Integrated reporting: The influence of King III on social, ethical and environmental reporting

Introduction

Solomon & Maroun (2012) made an analysis of the annual reports of ten major Southern African entities which are listed on the JSE. The study assesses the influence of the mandatory introduction of IR since the publication of King III. The objective is to examine the effect of the implementation of IR on social, environmental and ethical reporting to be able to determine the extent of any changes in the magnitude and scope of reporting provided since its launch.

The extent of the changes was assessed by identifying the changes in the content, volume and quality of reporting in the integrated reports. The results of this analysis are therefore significant for the advancement of the practice of IR in South Africa and globally. The study adopted an interpretative/critical approach for analysing the content of integrated reports and annual reports pre and post the introduction of IR.

Results and conclusion

The study rated the disclosures on social issues as being far more comprehensive than disclosures on environmental and ethical issues. King III has certainly been successful in influencing the increase in the quality of social, environmental and ethical information in the annual reports of the entities selected. These results convey a message that suggests that social, environmental and ethical issues should be given more emphasis and be disclosed in integrated reports.

32 2.10.2 The IR landscape: Executive perceptions of integrated reporting Background

In July 2014, members of the Chartered Institute of Management Accountants and the American Institute of CPAs participated in short survey designed to improve developments in corporate reporting, the communication of value creation and the potential benefits associated with IR. More than 390 executives provided feedback on the survey questions, and these included Chief Executive Officers (CEOs), Chief Financial Officers (CFO) and COOs (Chief Operating Officers) located in North America, Africa, Asia Pacific and Europe.

Results and conclusion

Ninety-two percent of the respondents agreed that reporting on both financial and non-financial issues best illustrates how business creates value. Ninety-five percent of the respondents believe that the shareholders, providers of capital, customers, creditors, and employees find it beneficial when the integrated reports engage the process of value creation. The respondents felt that it is key for the integrated reports to present a more forward-looking, long-term view of entity’s performance and should reflect how management is able to effectively identify and manage risks.

Fifty-seven percent of executives feel that it is important for entities to act transparently and in a manner that engages public trust, thus legitimising the existence of the entity, while 82% believe that it is crucial to consider their responsibilities towards environmental issues. The study reflects that the knowledge and understanding of IR in the corporate space is growing, with this study stating that nearly all the executives (80%) are beginning to realise the potential benefit of the integrated report in bringing success to the business.

33 2.10.3 Realising the benefits: The impact of Integrated Reporting

Background

Black Sun (2014), in collaboration with the IIRC, performed a study by sending to all the IIRC Pilot Programme business participants an in-depth questionnaire which was made up of 23 questions. The objective of this comprehensive study was to analyse the trends in corporate communications and also to find the potential business benefits of adopting integrated thinking in the IR processes. The research was conducted between April and August 2014. Altogether, 66 organisations participated in completing the questionnaire. More than 40% of respondents also participated in follow-up interviews to provide greater understanding of their responses which enhanced the quality of data initially provided.

Results and conclusion

Improvements in decision-making

 Most organisations reported that improved data quality was a current benefit of their IR journey;

 Seventy-five percent of all respondents said that performance information used to manage their organisation had changed during the process of IR;

 Seventy-nine percent of organisations that have issued an integrated report believe that their board benefits through a better understanding of value creation; and

 Nearly all organisations interviewed said that they had either significantly changed what they measured or had plans to do so in the future.

The new reporting format enhances the quality of the information reported in the integrated reports, thus the survey supports the benefits mentioned in this limited scope dissertation for the adoption of IR.

34 2.10.4 Integrated reporting in South Africa: Some initial evidence

Background

Neelam et al. (2015) assess the degree and scope of the disclosures in the integrated reports of four of the six capitals, i.e. human, social, natural and intellectual capital. The sample used in the study is made up of the top 25 entities listed on the JSE by market capitalisation pre (2009/ 2010) and post (2011/2012) the introduction of IR in South Africa. The integrated reports of these entities are content-analysed for any changes in the degree of disclosure of capitals identified above.

This research serves two important objectives. Firstly, it assesses whether the regulatory requirement to produce an integrated report, using an ‘apply or explain’ basis, has led to a greater disclosure of information on the ability of an entity to create value and sustain it. Secondly, this research intends to explain the conduct of JSE listed entities responding to regulation to produce an integrated report where entities have been previously voluntarily presenting disclosures on social, environmental, human, intellectual and natural capital.

Results and conclusion

The results of the study reflect that the introduction of IR in South Africa has led to a rise in the extent and scope of disclosures for human, social, natural and intellectual capitals. The results of the study suggest that JSE-listed entities are implementing a legitimatising strategy while preparing integrated reports.

These four capitals are similar to the six capitals included as part of the disclosure checklist used for this limited scope dissertation, the results open an opportunity for future research by extending the period of the assessment following the introduction of IR to assess the degree and scope of the disclosures in the integrated reports of the four capitals

35 2.10.5 Integrated Reporting: A New Era for Public Sector Entities in South Africa

Background

Nkonki (2014) performed a detailed empirical analysis and provides insight into the extent to which South African SOEs have applied the principles as set out by the IR Framework, to their 2014 integrated reports and annual reports. The objective of the study was to make an assessment of the qualitative nature of the disclosures in the integrated reports to identify whether they complied with the IR Framework. A grading sheet was used to assess their performance with a weighting designated for specific guidelines of the IR Framework.

Results and conclusion

Generally the outcome of the analysis indicates that of the eleven reporting guidelines of the IR Framework, the SOEs attained a score greater than 50% in eight of them, and scored just under 50%

for three of the eleven reporting guidelines. The study performed by Nkonki and its results indicate an improved application of the IR principles, however, there is still a long way to go towards fully applying the IR Framework.

This assessment is the same as that of this limited scope dissertation with the main difference being the disclosure checklist used. The population of companies assessed in Nkonki’s study is similar to the population of this limited scope dissertation. The results of the Nkonki analysis are compared to the results for this study to assess if there are improvements in the application of the IR Framework.

36 2.10.6 The Free State University’s integrated reporting: A critical consideration

Background

Silvestri & Veltri (2015) assessed the integrated report of a South African public university, University of the Free State (UFS), by comparing it against the IR Framework issued in 2013. The aim of the research was to assess whether the UFS integrated report followed the guidelines of the IR Framework by conforming to its requirements and aims in terms of the business model, the guiding principles and the content elements. The research analyses the UFS’s integrated report for the period 1 January 2012 to 31 December 2012.

Results and conclusion

The UFS identified and correctly labelled the content elements as prescribed by the IR Framework, however, it did not provide detailed information or contextualise its meaning. Furthermore, the content of certain sections of the integrated report did not conform to the reporting guidelines of the IR Framework. The information made references to the UFS strategy but was, however, not linked to its effect on the capitals and its effect on the value creation process. The information provided was also backward-looking and there was no reference relating to stakeholder relationships. The report was also not able to provide information on the ability of the UFS to create value over time. The UFS also was not able to give detailed explanations as to how the activities of the University were connected to its outputs. The results indicate that the UFS’s integrated report shows room for improvement. It is possible to make a comparison of the application of the IR Framework to the results of this limited scope dissertation as it assesses the application of IR to state-owned entities.

37 2.10.7 Exploring the implications of integrated reporting on organisational reporting practice

Background

The study done by Haji & Hossain (2016) made a selection of the top entities from Ernst & Young's (2015) Excellence in Integrated Reporting Awards for the period 2013 and 2014. This assessment was done on South African entities spanning a four-year reporting period (2011-2014). Selecting this period was inspired by two determinants. First, integrated reporting was first introduced in 2009 in South Africa through the announcement of King III. By 2011, most entities were expected to have acquired a basic knowledge of the fundamental principles of IR and have started out their IR journey in the preceding 12-month period. As a consequence of the above, analysing the period 2011-2014 would provide an opportunity to monitor specific improvements of IR practice including those of multiple capitals disclosures.

Results and conclusion

The researchers found evidence that the entities in the study were progressively conforming to the reporting terminology adopted in the existing IR Framework. Nevertheless, after a deeper analysis, the researchers found that the disclosures were at best generic, instead of addressing the specific issues particular to the entity, they lacked substance or contextual meaning and were mostly fabricated in impression-management charm to reflect a sense of integrated reporting adoption. It was observed that entities provided symbolic disclosures, with minimal substantive information in the way an entity’s activities created or destroyed value. The analysis concludes by suggesting that even though there were references to the multiple capitals and the value creation processes espoused by the entities, the adoption and application of the IR practice had not significantly advanced the contextual meaning of IR and fell short of fulfilling the aspirations of IR.

The focus of this study relates to one feature of IR, specifically, the interactions of the six capitals in their value creation process, whereas this limited scope dissertation assesses the quality of the overall disclosures for IR for South African SOEs. The study concludes that there is room for improvement in how entities disclose their information in the integrated reports.

38 2.11 Chapter summary

The world is constantly evolving at lightning speed and the global framework in which businesses operate is also developing and maturing. The financial turmoil of the last decade points to the fact that by exclusively evaluating the performance of an entity through financial indicators, and not looking at the overall performance which includes non-financial performance measures, is not enough to provide understanding into the holistic performance of the entity. This paradigm change demands that those charged with the leadership of businesses not only focus on financial performance for reporting purposes, but also consider reporting on other aspects of business such as the entity’s strategy and how the entity creates value by using an integrated report.

The concept of IR was widely discussed in this chapter and can be summarised as a reporting tool or framework by which financial information and non-financial information is reported and disclosed in

‘one report’. A major benefit of IR is that the entity can put together useful and relevant information and combine it with its business model and strategy in a more comprehensive manner. The IR Framework recognises providers of financial capital as the principal audience of an integrated report, but in the same breath, highlights that as a stakeholder-inclusive process, other communications that stem from IR benefit all stakeholders in providing insight into the entity's ability to create value over time. The IR Framework has sufficient flexibility to allow SOEs to use it to address their communication requirements to their stakeholders as they deem fit.

An important aspect of excellent corporate governance is the application of best practices in terms of corporate reporting and the management of businesses. This is particularly true for South African SOEs which have to comply with the provisions of the IFRS, the PFMA, the Companies Act, King III and many other industry-specific regulations, including having to publish an integrated report. SOEs in South Africa are therefore at the forefront of a leadership role in applying best corporate governance principles and have the responsibility of setting a positive example and helping establish a blueprint for reporting their performance and how they create value to their stakeholders through the application of the IR Framework.

39 In a developing country such as South Africa, where public sector entities are at the forefront of developing the economy of the country, it is important that excellence in corporate governance and reporting principles is applied. This is crucial insofar as all SOEs' stakeholders are kept informed on how these entities create value, including their performance results with limited resources, in as transparent a manner as possible. The ability to communicate how well these entities are able to create value on a sustainable basis and to achieve their strategic objectives is critical to public accountability.

The research studies done previously identify that there is room for improvement in IR. The analysis based on the previous research studies is similar to this limited scope dissertation as this current study makes an assessment of the quality of application of the IR Framework for SOEs. This limited scope dissertation also uses similar assessment techniques in the form of a content analysis. The

research methodology used for this limited scope dissertation is discussed and highlighted in Chapter 3.

40 CHAPTER 3: RESEARCH METHODOLOGY

3.1 Introduction

This chapter explains the research process followed to examine the quality of the integrated reports of the SOEs in how well they have applied the principles of the IR Framework in their IR disclosures.

The process involved reviewing the literature on the topic, developing a disclosure checklist, identifying and selecting the samples of entities to assess and a brief discussion of how a content analysis is performed to assess the level of application of the IR Framework for SOEs. Specifically, this chapter documents the research methodology used to assess the integrated reports, the design of the disclosure checklist used for the assessment of the IRs, how the data was collected, captured

The process involved reviewing the literature on the topic, developing a disclosure checklist, identifying and selecting the samples of entities to assess and a brief discussion of how a content analysis is performed to assess the level of application of the IR Framework for SOEs. Specifically, this chapter documents the research methodology used to assess the integrated reports, the design of the disclosure checklist used for the assessment of the IRs, how the data was collected, captured