This chapter will present the theoretical framework. In this section, insights of how integrated reporting within South Africa and on an international level has developed will be explained. Furthermore, the reader will be pro-vided with a deeper understanding of underlying theories regarding integrated reporting, value-relevance and the re-lationship towards shareholders. The theoretical framework are intended to explain the fundamental theories, in order to give the reader a comprehensive understanding of the empirical result as well as the concluding results in the following chapters.
The IIRC (2013) identifies larger companies and their investors as the primary focus of their In-tegrated International Reporting Framework. The framework has evolved to create consistent reporting by organizations and accommodate mutual parameters for policy-makers to harmonize reporting standards. In numerous jurisdictions, the requirements for the reporting have advanced independently and resulted in different outcomes. The differences between the jurisdictions ob-struct the compliance of the reporting requirements for companies cooperating on an interna-tional level. Therefore, the performance of organizations becomes incomparable due to lack of one common standard (IIRC, 2011). According to Eccles and Krzus (2010) the existence of standards are important in order to reach an integrated report.
Eccles and Krzus (2010) describes that disclosure of an integrated report implies greater transparency for a company’s performance. A scarce number of innovative companies all over the world have clearly stated that they are now producing one integrated report. This single docu-ment is a tool and a symbolic representation displaying the engagement between a company and its approach to sustainability. The evolution generated by the companies has formed the term One Report. The authors, describing the term One Report, believe that this has become a turning point for the business environment and an upward trend with an increasing scale of integrated reports produced (Eccles & Krzus, 2010)
The Evolution of Integrated Reporting
The traditional corporate reporting model originates from the industrial society prevailing only of financial statements, during the 1960s. The idea to disclose non-financial information, sup-plementing the financial information, became more interesting at this period of time (IIRC, 2011). The focus upon shareholders increased and the financial information was criticized to be a lagging indicator, not providing a realistic picture of a company or predicting its future performance. While companies criticized the financial information, the non-financial information was positively beheld, providing insights of the company’s future performance and intangible assets. To report information to stakeholders on social, environmental and governance was an addition-al idea invented at this time. The supplementary information was often denoted as “corporate social responsibility” or “sustainability” reports with the intention of informing stakeholders and not only the shareholders, which the companies saw as an obligation. The focus to inform stake-holders was of great interest, which ensued that, the information was not always of importance to the shareholders (Eccles & Serafeim, 2011).
In 1980s, the corporate reporting had developed one-step further; including financial statements, management commentary, governance and remuneration, and environmental reporting. Several years later, 1997, John Elkington introduced the term triple bottom line. This meant that eco-nomic, environmental and social performance was disclosed into the company reports (Eccles & Serafeim, 2011). This was the starting point for the Global Reporting Initiative (GRI) with the objective; “to make sustainability reporting standard practice by providing guidance and support to organiza-tions.” (Eccles & Serafeim, 2011, p.75).
During past decades, there has been a significant change in the business environment, where globalization has interconnected various factors driving that change. The level of interdependen-cies in economies and supply chains, high population growth and increased global consumption has led to new repercussions in commercial, social and political areas. Due to the changes in the business environment, the reporting needs to keep the pace in order to reflect the reality of the business. The focus within the reports has shifted from historical financial information towards non-financial future oriented information, reflecting the change of laws, regulations, standards, codes, guidance and stock exchange’s listing requirements. The development has embraced the concept of integrated reporting, which is the new way to inform stakeholders (IIRC, 2011; Ec-cles & Serafeim, 2011).
In 1994, South Africa released its first King Report (King I) on corporate governance, issued by the King Committee on corporate governance under the chairpersonship of Professor Mervyn E King. The Report consisted of recommended standards of conduct and was applicable to listed companies, banks and certain state-owned enterprises. King I focused on the stakeholders’ interest with the attempt to improve the financial, social, ethical and environmental practice (SAICA, 2010).
The main inspiration source for the publication of King I was the Cadbury Report (1992); indi-cating similarities within the recommendations. Several weaknesses within King I led to a second report (King II) published in 2002, aiming for further integration of sustainability reporting. The King II Report was applicable to certain corporations; companies listed on the Johannesburg Stock Exchange, banks, financial and insurance entities and public sectors enterprises governed by the Public Finance Act and the Municipal Finance Management Act. The Report was applica-ble on a voluntary basis giving companies the option to comply or explain (Ntim, 2011; SAICA, 2010).
In September 2009 the King Report on Governance (King III) and the King Code of Govern-ance Principles (King III Code) was published, referred to as the first national attempt to release a code of corporate governance with requirements on integrated reporting (IoDSA, 2013). King is the aftermath of the evolution within the corporate governance in South Africa creating business opportunities within the country. The core philosophy evolves around sustainability, leadership and corporate citizenship, which has extended the scope of corporate governance. Therefore, King III has become a milestone in the development of corporate governance in South Africa and has attempted to be at the forefront of governance internationally (PwC, 2013). The moving trends in international governance and the new Companies Act in South Africa is the motive for why it was essential to emit King III (SAICA, 2010).
The King III (2009) Report stresses the importance for companies to annually report their im-pact on the economic environment where they operate, encouraging the disclosure of both nega-tive and positive effects. Additionally, the companies are advocated to report on how to increase the positive effects respectively decrease the negative effects on the economic life within their community (PwC, 2009)
The third King Report’s governance framework is based upon an “apply or explain” approach, meaning that the companies can choose to apply to the recommendations or explain their devia-tions. The possibility to implement what is best suited for the company is contingent, being beneficiary for the company (ACCA & Net Balance Foundation, 2011). The framework does not emphasize, “one size fits all” solutions, rather it is based on principles. The size, nature and complexity of every organization is taken into consideration, therefore the principles can be al-tered in accordance to the company. “One size fits all” is predominant in the United States and has led to several pitfalls, since the differences mentioned above are not considered. Hence, King III follows an “apply or explain” approach these downsides can be limited in South Africa (PwC, 2013).
King III is applicable to all forms of entities without constrains regarding manner or form of the corporation, in contrast to King I and II. The application of the King Code of governance for South Africa 2009 (King III Code) should lead to a good governance practice in every entity, were the principles are elaborated (King III Code, 2009). The vision that the interaction of gov-ernance, strategy and sustainability should not be separated is one of the indispensable principles of King III (IoDSA, 2013). The disclosure of how the company applies to or explains the King Code will give the stakeholder a broader opportunity to share their opinions regarding the governance of the company (Deloitte, 2009; King III Code, 2009)
In March 2010, all listed companies at Johannesburg Stock Exchange were obliged to comply with the King III Report, the enforcement of reporting requirements are mandatory and full dis-closure of non-financial matters is a part of the listing rules. The Companies Act no 71 of 2008 was enforced on the first of May 2011 in accordance with the King III and King III Code (King Code, 2009; King III, 2009). The GRI is acknowledged by King III to be the accepted inter-national standard for reporting non-financial information. This reporting initiative is the result of the King Report on Governance for South Africa 2009 (Solomon & Maroun, 2012).
The board is responsible for guaranteeing that systems and processes are executed in the right order to create an informative report to the stakeholders. King III (2009) suppresses that every entity’s performance should be integrated; reflecting choices made by the board, in the reporting context of the “triple bottom line”. The board also has the responsibility to create forward-looking information, which will empower the stakeholders with enlightenments about the com-pany’s economic value (PwC, 2009). Furthermore, King III (2009) advocates that both the prin-ciples in the Code and the best practice recommendations in the Report should be applied by all divisions of the company. The importance of each principle is equal and should therefore be ap-plied correspondingly, in order to govern a holistic governance approach (PwC, 2009).
To achieve compliance with King III, the Code and the Report, insignificant application is not sufficient. The information regarding sustainability and the statutory financial information is re-quired to be integrated in the Integrated Report, in accordance with King III. King III (2009) declares that an integrated report should encompass forward-looking information and be re-leased annually. The integration of other aspects within the organization and the sustainability in-formation should be processed and achieved throughout the year, not solely assembled at the end of the year (King III Code, 2009; PwC, 2009).
The responsibility for the integrity concerning the integrated report accrues the board. The board collaborates with the audit committee in order to assure that no conflicts or alterations arise in the reporting. The responsibility of the audit committee has mainly been to examine the financial reporting, but recently their responsibility has broadened, including sustainability re-porting. King III emphasizes that integrated reporting necessitates more than an “imposition” of the triple bottom line; hence, sustainability reporting should be incorporated in the organization. To epitome; the preparation of an integrated report is time consuming for the company and re-quires resources (King III Code, 2009; PwC, 2009)
International Integrated Reporting
Framework of IIRC
In August 2010, the International Federation of Accountants, the GRI and the Prince’s Account-ing for Sustainability Project founded IIRC, with the aim to create a globally accepted integrated reporting framework. The IIRC organization consists of a wide group of representatives, inves-tors, firms and organizations, academics, regulators, accounting, sustainability groups and other stakeholders (IIRC, 2013).
As noted, South Africa is a pioneer in integrated reporting and the only nation with mandatory requirements. The initial adopters of integrated reporting ought to distinguish the interaction be-tween financial and non-financial disclosure, in order to make the information understandable and clear in their communication with stakeholders. Systems, data collection and several factors in the corporation should be linked in an integrated report, indicating an evolving reporting mechanism. Moreover, IIRC can gain knowledge from South Africa and share the successes and setbacks regarding their integrated reporting (Solomonn & Maroun, 2012).
IIRC published a discussion paper in 2011 with the intention to initiate the practice of an inter-nationally accepted integrated reporting framework. The IIRC (2011) describes integrated report-ing as five guiding principles; strategic focus, connectivity of information, future orientation, re-sponsiveness and stakeholder inclusiveness, conciseness, reliability and materiality. The principles should interconnect with the six content elements; organizational overview and business model, operating context, including risks and opportunities, strategic objectives and strategies to achieve those objectives, governance and remuneration, performance and future outlook. The content elements should be linked to each other in order to reach an integrated report, involving the principles. The presentation of the elements should make the interconnections between them apparent. According to the IIRC this integrated reporting framework containing these elements and principles are the building block of integrated reporting (IIRC, 2011).
Moreover, Göran Tidström, President of the International Federation of Accountants and member of the IIRC, stated that “Financial information is not sufficient. We have to provide information on sustainability, on social issues and environment, and it has to be done in an integrated way with a financial re-port.” (Tidström, 2013). IIRC attempts to create a global framework that accommodates com-plexity as well as supporting the development of reporting in the future. In collaboration with numerous different organizations, for instance, International Accounting Standards Board (IASB) and the US-based Financial Accounting Standards Board (FASB), IIRC strives to achieve this globally accepted international integrated framework (IIRC, 2011).
Over the past five years, there has been a shift from shareholder towards stakeholder; according-ly, organizations seek to legitimize themselves to a broader range of the society. On the contrary, IIRC affirmed its emphasis towards shareholders accountability; leading to that this “stakeholder engagement” approach can oppose IIRC (Solomon & Maroun, 2012). Although IIRC asserts that the reporting must be adjusted to the organizations today, who’s value of the business con-sists of intangible assets rather than tangible (Fraser, 2012). The new reporting requirement re-garding integrated reporting that IIRC has developed, is not intended to increase the burden of reporting, the goal is rather to provide their stakeholders with better information and resource allocation decisions (UNGC, 2010). Lastly, the framework will guide organizations to prepare an integrated report aiming to reach a mindset of integrated thinking (IIRC, 2011).
IIRC’s Pilot Programme
The IIRC Pilot Programme is a study conducted and developed by the International Integrated Reporting Framework. The participants of the Pilot Programme consists of a group of organiza-tions, which have the possibility to conduce with decisions regarding the development and rep-resentation of global leadership, in the new and emerging field of corporate reporting (IIRC, 2013).
[“We call the Pilot Programme our ‘innovation hub’ – made up of people who want to push the bounda-ries just a little bit further, to challenge, or at least question orthodox thinking, and to acknowledge the importance or reporting to the way our organizations think and behave”, Paul Druckman, CEO, IIRC (Druckman, 2013).]
It is the investors as well as the business environments responsibility to decide throughout the Pilot Programme whether the principles, content and the application of integrated reporting are being tested and developed. The first version 1.0 of the Framework will be published in Decem-ber 2013, and the Pilot Programme will be effective until September 2014, in order for the par-ticipants to have time to test the framework during their next reporting cycle. This will facilitate the IIRC to evaluate the eventuations and complete their process regarding integrated reporting. The Pilot Programme is amended to guide and help organizations on how to implement inte-grated reporting, incorporating two approaches, the Business Network and the Investors Net-work. The first approach, the Business Network; has a quantitative approach of eighty organiza-tions worldwide from multinational corporations to public sectors. The second approach, Inves-tors Network; accounts for over thirty institutional investors internationally (IIRC, 2013)
1.3 Research Question
1.6 Proceeding Outline of the Thesis
2 Theoretical Framework
2.1 Integrated Reporting
2.2 King III
2.3 International Integrated Reporting
2.5 Prior Disclosure Studies
3.1 Research Approach
3.2 Statistical Procedures
3.3 Quality of Method chosen
4 Empirical Findings
4.1 Collected Data
4.2 Data, Disclosure Index
5 Result and Analysis
5.2 Mann-Whitney U-test
5.3 T-Test and Descriptive Statistics
5.4 Pearson and Spearman Correlation
5.5 Linear Regression Analysis
5.6 Summary of Results and Analysis
6.1 Introductory Conclusion
6.2 Empirical and Statistical Conclusions
6.4 Suggestion for Further Research
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