Integrated Reports Voluntary Filing
On May 31, 2010, South Africa established the Integrated Reporting Committee (IRC) under the chairmanship of Professor Mervyn King. The founding members of the committee are The Association for Savings and Investment SA, Business Unity South Africa, Institute of Directors SA, Johannesburg Stock Exchange, and The South African Institute of Chartered Accountants.
The purpose of this committee is to “issue guidelines on good practice in integrated reporting” because starting on June 1, 2010, all 450 companies listed on the Johannesburg Stock Exchange will be required to publish an “integrated report” or explain why they are not doing so. The press release announcing the formation of the IRC noted that it “will work with the new International Integrated Reporting Committee (IIRC) in promoting the international harmonization of guidelines on integrated reporting. The IIRC is a global collaboration that includes IFAC (International Federation of Accountants), the Global Reporting Initiative (GRI), and the Prince’s Accounting for Sustainability Project among many other organizations.”
Integrated reporting is based on a view of the corporation as having a role in society that is broader than creating short-term wealth for shareholders. Wealth creation must be done with a long-term view that recognizes the impact a company’s operations have, both positively and negatively, on the environment and society. This requires appropriate principles of corporate governance, which also need to be reported on in the integrated report, and that “The board should ensure that the company is and is seen to be a responsible corporate citizen.”
South Africa is the first country to mandate integrated reporting for all listed companies. We believe that every major capital market must follow its lead soon, and that ultimately this needs to be the universal global practice. A powerful mechanism for making this happen is the adoption of “voluntary filing programs” in leading capital markets such as Brazil, China, India, the United Kingdom, and the United States, although every country should consider implementing such a program. In this article we will briefly summarize developments in South Africa which led to the formation of the IRC, make the general case for integrated reporting, report on some recent developments in this social movement, discuss the challenges in achieving a broad and rapid adoption of integrated reporting, explain how voluntary filing programs can make a major contribution to this, and urge stock exchanges and governments to take up this challenge to the extent they have the authority to do so.
The King Report and King III
The IRC is the next logical development of the recommendation made in the King Report on Governance for South Africa 2009 published by the Institute of Directors under the leadership of Mervyn King. The King Report accompanied the publication of the King Code of Governance for South Africa (King III).  should have sufficient information to record how the company has both positively and negatively impacted on the economic life of the community in which it operated during the year under review, often categorised as environmental, social and governance issues (ESG).Further, it should report how the board believes that in the coming year it can improve the positive aspects and eradicate or ameliorate the negative aspects, in the coming year.” An integrated report “
Until now, the common practice for recognizing the dual roles companies have as both economic institutions and corporate citizens has been for listed companies to publish a required financial report and a voluntary corporate social responsibility (CSR) or sustainability report on its environmental, social and governance performance, as described in One Report: Integrated Reporting for a Sustainable Strategy. This voluntary reporting on “nonfinancial” performance is a positive step in changing behavior and creating more responsible financial, human, and natural resource allocation decisions by executives, shareowners, and society at large. However, separate reporting of financial and nonfinancial performance fails to ensure that a company is properly exercising both of its roles.
Sustainable Strategies for a Sustainable Society
Creating a sustainable society requires truly sustainable strategies by all of its companies, both public and private, as well as its countries (instead of just measuring GDP), cities, other branches of government, educational institutions, and all other organizations. A sustainable strategy is one that enables a company to create economic value over the long term while contributing to the long-term sustainability of society. Companies that create negative externalities—such as through pollution, waste, excess use of scarce natural resources, energy inefficient operations, abusive labor practices, and poor supply chain management—are not contributing to a sustainable society. And as social awareness continues to grow about how fragile long-term sustainability of our society has become, consumers and investors will abandon those companies that are failing to properly exercise their role as corporate citizens. Once the domain of socially responsible investors (SRIs), metrics indicating a sustainable strategy are now part of the research compiled by mainstream firms like Bloomberg, Thomson Reuters/Asset4, and RiskMetrics while NASDAQ is partnering with the specialist research firm CRD Analytics to develop indices that integrate ESG issues.
GRI Goals for 2015 and 2020
Integrated reporting is both the best way for reporting on sustainable strategies and a mechanism for ensuring that one exists. Integrated external reporting requires integrated internal management across financial, environmental, social and governance measures of performance. Towards that end, Ernst Ligteringen, CEO of the Global Reporting Initiative (GRI), established two bold goals for his organization and its stakeholders at the organization’s biennial conference in Amsterdam on May 26-28, 2010. “GRI advocates that by 2015 all large and medium-sized companies in OECD countries and fast-growing emerging economies should be required to report publicly on their ESG performance, or if they don’t, explain why. Secondly, GRI proposes that ESG reporting and financial reporting need to converge over the coming decade. GRI advocates that a standard for integrated reporting should be defined, tested and adopted by 2020.” In achieving this second objective the “GRI is working with leading global organizations in financial markets, accounting, corporate responsibility, ESG reporting, and civil society to establish the International Integrated Reporting Committee.” This committee is being formed in collaboration with the Prince of Wales Accounting for Sustainability Project and one of its goals is to put the topic of integrated reporting on the agenda of the G-20 meeting being hosted by France in 2011.
Challenges to the 2020 Goal for Integrated Reporting
There are a number of significant challenges to achieving the ambitious goal of having a standard for integrated reporting in place by 2020. Like all standards, this will require the collaboration of many groups including companies, analysts and investors, standard setters for financial (e.g., the Financial Accounting Standards Board and the International Accounting Standards Board) and nonfinancial (e.g., the GRI and the Climate Disclosure Standards Board) information, stakeholders and members of civil society and, ultimately, regulators and even legislators. Four challenges are especially important in order for nonfinancial information to have the same level of reliability and relevance as financial information and for both to factor into the decision making process inside and outside companies.
First, standards for nonfinancial information need to be established. Here the GRI has made substantial progress with its G3 Guidelines, which are the cornerstone of its Sustainability Reporting Framework, including sector supplements that identify nonfinancial indicators of particular relevance to a given industry. While these guidelines are being rapidly adopted on a voluntary basis by companies (only a few countries such as Denmark, France, and Sweden require sustainability reporting), work needs to be done to ensure that the metrics recommended for a nonfinancial indicator are useful to analysts and investors. This requires comparability at least across all companies in a sector in order for the nonfinancial metrics to be incorporated into the models built by sell and buy-side analysts. In some cases, such as carbon emissions, the standard may be applicable across all sectors, as is the case for accounting standards.
Second, a framework for a truly integrated report needs to be established since currently none exists. As a result, the early pioneer companies that are issuing integrated reports are facing a significant challenge, but they are also making a substantial contribution to our knowledge about what an integrated report should look like. Within the next year, the 450 companies listed on the JSE, which cover a broad range of industries, will produce integrated reports, thereby providing a wealth of empirical data on patterns, potential best practices, and common areas where improvement is needed. The mission of the IRC is to use this information as input to the global effort being undertaken by the IIRC.
Third, these frameworks need to more explicitly incorporate how the Internet can be leveraged. Integrated reporting is not simply issuing One Report as a static paper document. It involves using the Internet to provide information of particular interest to shareholders and other stakeholders. The Internet is also an important tool for improving dialogue and engagement with all stakeholders in order to ascertain their expectations regarding the company, what information they want, and how well the company is doing in providing it. Integrated reporting is as much about “listening” as it is about “talking.”
Fourth, audit methodologies need to be developed for nonfinancial information that are as rigorous as they are for financial information and that cover both paper-based and Internet-based content. Today “audits” of nonfinancial information are really a weaker form of assurance that says the auditor found nothing wrong versus financial audits with their assertion that that the report was done right. More rigorous audits of nonfinancial information will require standards for nonfinancial information of the same quality as financial information. Ultimately all stakeholders, including shareholders, will expect an “integrated audit” of an integrated report that provides an affirmative opinion that the company has provided a “true and fair” view of its combined financial and nonfinancial performance.
The Contribution of Voluntary Filing Programs
While most countries are probably not ready to follow South Africa’s lead to require integrated reporting, all countries can adopt a voluntary filing program. By this we mean creating a mechanism for companies to provide on a purely voluntary basis an integrated report of what they consider to be the material financial and nonfinancial measures of performance and how they are related to each other. As in South Africa, each country would be able to develop insights that will be valuable in creating a single global framework for integrated reporting. If the 450 companies in South Africa were joined in the next two or three years by three or four times that number of companies from all over the world, an enormous empirical database would be created that would be very useful in developing this framework by 2020 or even sooner. Such a database would make it possible to see common patterns across countries and industries, specific practices that vary by industry, practices that are truly on the leading edge that should be adopted by all companies, areas where most companies are struggling so that further research could be done, and how the Internet is being used for both reporting as well as dialogue and engagement.
Implementing Voluntary Filing Programs
Exactly how a voluntary filing program would be implemented will vary by country according to its particular statutes and regulatory frameworks. For example, in the United States the Securities and Exchange Commission (SEC) could use the mechanisms it created for a voluntary filing program in XBRL (Extensible Business Reporting Language), which is now being phased in as a required filing format, to implement one for integrated reporting. Companies would want protection from any legal liabilities, as was the case for the XBRL. Such a program would be a good opportunity for the SEC to address two major concerns of companies listed in the U.S., which are shared by companies all over the world: the growing complexity of financial reporting and how to respond to the increasing demands of shareholders and other stakeholders for nonfinancial information. Through a voluntary filing program companies would have the opportunity to send a message to the SEC about how both financial and nonfinancial reporting can be improved.
The Role of Stock Exchanges in Voluntary Filing Programs
The role that stock exchanges can play will vary according to the laws of the country in which they are based, but in all cases they can make an enormous contribution in accelerating the rapid and broad adoption of integrated reporting by all entities to ensure a sustainable society. In some cases, the stock exchange will have the authority itself to design and implement such a program. In other cases, the exchange can encourage the appropriate regulatory body in its country, such as the securities regulator, to do so. In all cases, a voluntary filing program will require the collaboration of stock exchanges, regulatory bodies, companies, analysts, investors, and accountants as is being done by the IRC in South Africa. The stock exchange can also play the role of aggregator of these reports and organize working groups to study themes in order to generate insights for the IIRC that will be useful in developing a single global integrated reporting framework.
The Role of Governments
Governments can also play a role in the adoption of integrated reporting by decreeing that all entities in their jurisdictions should report or explain how their operations impact a community socially, environmentally, and economically. While the IIRC is developing standards and guidelines based on the actual experience of companies, all entities can use guidelines such as those contained in King III and GRI’s G3 Guidelines. In order to limit litigation, they should also empower courts to apportion blame between auditors, managers, boards or any stakeholder when there is a corporate failure.
With the groundbreaking decision of the Johannesburg Stock Exchange to require its listed companies to issue integrated reports, the adoption of this next phase in corporate transparency is gathering momentum. For exchanges, regulators, and governments that are not ready to join with the Johannesburg Stock Exchange, voluntary filing programs are a meaningful way to contribute to the body of knowledge that will be analyzed by the IIRC and others to establish a single global framework for integrated reporting. Shareholders and stakeholders are more and more aware that companies’ nonfinancial actions have a lasting impact on communities, the environment, and society. Companies, through integrated reporting, should demonstrate how their financial and nonfinancial performance is a part of a sustainable society.
 SAICA. “An integrated report is a new requirement for listed companies from June this year,” https://www.saica.co.za/tabid/695/itemid/2344/language/en-ZA/An-integrat..., accessed June 2010.
 Institute of Directors in Southern Africa. King Report on Governance for South Africa 2009, p. 22.
 Institute of Directors in South Africa. King Code of Governance for South Africa 2009.
 Ibid., p. 12.
 Eccles, R., & Krzus, M. (2010). One Report: Integrated Reporting for a Sustainable Strategy. New York: John Wiley & Sons, Inc., chapters 3 and 4.
 We distinguish between shareowners, also called asset owners, that have a long-term view and fiduciary responsibilities and share traders, also called day traders, who buy and sell stocks over very short time frames with little to no attention to their nonfinancial or even financial performance.
 See Eccles and Krzus, chapter 5, for a fuller discussion of sustainable strategies for a sustainable society.
 Justmeans. “GRI announces its 2015 and 2020 goals and launches G3.1 public comment at first day of Amsterdam Global Conference,” http://www.justmeans.com/press-releases/GRI-announces-its-2015-and-2020-..., accessed May 2010.
About Robert Eccles
Robert G. Eccles first joined the faculty in 1979 and received tenure in 1989. He left in 1993 for a career in the private sector and rejoined the faculty in September of 2007 as a Senior Lecturer. Right after receiving tenure, Dr. Eccles started doing research on corporate reporting, a topic which remains of great interest to him from a research, managerial practice and public policy perspective. He has written three books on this subject, The ValueReporting Revolution: Moving Beyond the Earnings Game (with Robert H. Herz, E. Mary Keegan and David M. H. Phillips) and Building Public Trust: The Future of Corporate Reporting (with Samuel A. DiPiazza Jr.). and One Report: Integrated Reporting for a Sustainable Strategy (with Michael P. Krzus). He is also a founder of the social movement Web site http://www.integratedreporting.org.
Dr. Eccles teaches the MBA elective "Leading Professional Service Firms," as well as the executive education program of the same name and the new executive education program “Building Client Management Capabilities in Professional Service Firms.”
Dr. Eccles received an S.B. in Mathematics and an S.B. in Humanities and Science from the Massachusetts Institute of Technology (1973) and an A.M. (1975) and Ph.D. in Sociology (1979) from Harvard University
About Mervyn King
Mervyn King is a Senior Counsel and former Judge of the Supreme Court of South Africa. He is Professor Extraordinaire at the University of South Africa on Corporate Citizenship, Honorary Professor in the Department of Marketing and Communication Management at the University of Pretoria, Visiting Professor in the Rhodes Investec Business School, has an honorary Doctor of Laws from the University of the Witwatersrand, is Chairman of the Committee responsible for publishing the King I, II and III Reports on Corporate Governance, President of the Advertising Standards Authority, First Vice President of the Institute of Directors Southern Africa and Deputy Chairman of the Securities Regulation Panel which oversees all mergers and acquisitions in South Africa.
He is Chairman of the Global Reporting Initiative in Amsterdam and a member of the Private Sector Advisory Group to the World Bank on Corporate Governance. He is the Chairman of the Asian Centre of Corporate Governance and Chairman of the United Nations Committee on Governance and Oversight.
He is presently the Chairman of Strate, the settlement arm of trades in equities, money market instruments and bonds in South Africa. He has chaired and been a director of companies listed on the London, Luxembourg and Johannesburg Stock Exchanges.
He has consulted, advised and spoken on legal, business, advertising, sustainability and corporate governance issues in 43 countries and has received many awards. He is the author of Transient Caretakers and The Corporate Citizen.