Question

QUESTION 4 (INTEGRATED FINANCIAL REPORTING) (30) Lately it is globally expected of companies, especially listed companies, to include in their annual report not just aspects related to the company’s financial performance but also information of relevance to all its stakeholders – the so-called “stakeholder inclusive approach”. This type of reporting is often referred to as “integrated reporting”, “triple bottomline reporting” or “sustainability reporting”. YOU ARE REQUIRED TO: Discuss your understanding of how each of the following frameworks defines the integrated reporting concept, and what it recommends or prescribes in terms of integrated reporting: 4.1 King III and IV reports on Corporate Governance. (15) 4.2 International Integrated Reporting Framework. (15) Your answer should not address International Financial Reporting Standards (IFRS) or Companies Act requirements. Some mark allocation includes (½ marks).

Answer 1

INTEGRATED FINANCIAL REPORTING:

Lately it is globally expected of companies, especially listed companies, to include in their annual report not just aspects related to the company’s financial performance but also information of relevance to all its stakeholders – the so-called “stakeholder inclusive approach”. This type of reporting is often referred to as “integrated reporting”, “triple bottomline reporting” or “sustainability reporting”.The reason for this thematic review is the development towards integrated reporting in the external reporting of listed companies and the demand from users for more non-financial reporting.

The company’s key stakeholders, for example:

• Shareholders—addressing the company’s business model and corporate governance, including disclosing the role of the board in risk management, in sustainability reporting and in evaluating performance.
• Employees—addressing diversity, health and safety, training and mentoring, employee relations, and wages and benefits.
• Customers—addressing customer service and privacy.
• Suppliers—addressing labor standards and whether suppliers are required to implement their own programs.
• Communities—addressing corporate philanthropy and charitable contributions, community investment and partnerships, volunteerism and the environmental impact of operations.
• Governments and Regulators—addressing lobbying, public policy and the effects of and compliance with environmental regulations.

All the companies include a report on governance and risk, but the information given on the tone at the top, the corporate culture, competences and management remuneration could be improved considerably Governance, corporate culture and stakeholders All companies provide information on governance. This is no surprise, as listed companies are obliged to comply with the corporate governance code. As a result of the ‘apply or explain’ principle, standard texts are often used. This means that the informative value of the governance paragraph is usually limited and it forms an isolated element in the annual report. Less than half the companies provide information on the strategic decision-making process. Around 30% of the companies provide information on the tone at the top and the corporate culture. Approximately half the companies provide information on their stakeholders. This information is frequently superficial, and amounts only to a statement that there is an ongoing dialogue with the various stakeholders. Information on who the stakeholders are and the issues discussed with them is absent in the majority of cases.

Competences and remuneration A minority of the companies provide information that allows users to form an opinion on the competences of the management in relation to the company’s business activities. Significant improvements can still be made here by providing information on a broader layer of management. Companies could, moreover, provide information on how managers complement each other, and information showing that this is the right management team for the company’s current phase of development. This information is currently lacking. The information provided on the top management (the executive board) and the supervisory board usually consists only of a summary list of ancillary and other functions performed by the individual directors. 14 With respect to the remuneration policy of executive directors, it is often clear in many cases that the variable remuneration is partly based on criteria other than financial ones. However, it is not always clear to what extent environmental and social measures are included in the criteria. There is limited transparency with respect to non-financial measures in the remuneration of senior management. Only a small number of companies actually quantify these measures. Risks, opportunities and legislation Nearly all companies report on significant risks. More than 70% also report on their significant opportunities. The methods used to identify risks are described in 70% of cases. More than 80% report on how risks are monitored and include a description of the mitigating measures in place. The relationship between risk and the company’s ability to create value is described in only a very few annual reports. None of the companies provide quantitative information to substantiate the risks recognised. More than 30% also report significant legislation and regulations.