Disclosure of Risks

While E&Y's 2013 "Excellence in Integrated Reporting" survey referred to risks that "will affect the businesses' ability to create value"73 rather than dividing them into financial and nonfinancial risks, much like disclosure of nonfinancial KPIs, nonfinancial risk disclosure had often increased without being adequately linked to strategy or performance. While companies demonstrated an improved level of disclosure for items like the amount of money spent training staff or bursaries to build future capacity, the lack of links back to goals and strategies was disappointing to the accounting firms. Most companies surveyed had improved in presenting a balanced view of risks, but it was unclear how companies linked those risks to strategic objectives or how those risks translated into measurable KPIs. Many risks mentioned were generally applicable to any company in South Africa.74 Few companies highlighted business opportunities arising from nonfinancial risks or linked risk disclosure of nonfinancial factors to International Financial Reporting Standards (IFRS) disclosures in statutory annual financial statements. While 9 7% of companies surveyed by PwC reported on principal nonfinancial risks,75 only 52% integrated them into other areas of their reporting and only 10% of companies supported risk disclosure with quantitative information like KPIs. A mere 13% provided thorough insights into the dynamics of their risk profiles and how they could change over time.76

Director Remuneration and Board Transparency

Disclosure of director remuneration, introduced by King III, remained contentious. While PwC77 observed that 51% of companies provided clear alignment between KPIs and remuneration policies, and Deloitte78 conceded that disclosure had improved, it was clear that not many companies were assessing the effectiveness of the board as emphasized by King III. Moreover, detail regarding remuneration was scarce, and the way remuneration was aligned to facilitate the delivery of strategic objectives was not often addressed. E&Y found that little to no information was provided on how the variable portion of short-term bonuses was determined. When KPIs determining bonuses were discussed, there was seldom any sign of how those indicators translated to rand amounts or whether they were for previous or current accrual periods. Most of the information for director compensation was likewise convoluted.79 Indeed, many companies were more comfortable reporting on board charters and terms of reference rather than actual activities undertaken by the board over the year. Only 16% of those surveyed by PwC described the activities of the board.80 "Some companies have battled with what to include in their report about governance. The information that is most relevant is that which reflects how governance affects the value creation ability of the business," said Roberts.81

Disclosure of Forward-Looking Information

Although an area that had improved since the first reports, companies were loath to disclose too much forward-looking information. This was especially true when it came to environmental, social, and governance (ESG) factors.

While Deloitte found that companies disclosing KPIs generally included historical trends and future targets—an increase from 75% inclusion to 80% inclusion from Period 1 to Period 2 for fiscal 2011—future performance projections still suffered from a lack of completeness. Only one-third of those surveyed by Deloitte set measurable nonfinancial targets linked to strategy and stakeholder concerns.82 Similarly, PwC found that only 13% of companies surveyed provided effective communication on future outlook. Only 10% provided future targets for KPIs. While 90% discussed future market trends, only 61% of companies linked them to strategic choices, and expected market rates and growth were, more often than not, not quantified. Nor was there much explanation of which factors would impact those trends in the future. However, 68% of companies did identify the time frame in which future viability had been considered.83

Reasons cited for the lack of disclosure were fear of regulatory reprisal and creating expectations that could be used against management in the future, as well as the simple fact that corporate reporting has traditionally been focused on past performance. In its 2011 assessment, KPMG suggested substantial cultural change was necessary to achieve a truly forward-looking perspective corroborated by a consideration of past performance against strategy and strategic perspectives, and that companies could guard against liability by wording their future performance goals and expectations carefully.84 "This was a scary area for companies first stepping out on their integrated reporting journey," said Roberts. "But over the years disclosure has improved, with companies realizing that it was not about giving a profit projection; rather, the focus lay in transparency regarding the significant relationships and factors with the power to affect the future value creation ability. Companies have been quite inventive, using ratios, waterfall graphs, commodity reviews, and other clever ways to show true relationships."85