king’s counsel* - pwc · 6.11 statement by the company secretary 5 6.12 terms of reference of...

March 2010

Inside

Content Page

Introduction 21.

What is an integrated report? 22.

Responsibility for the integrated report 23.

Should assurance be provided over the entire 4. integrated report? 2

Discharging the responsibility for preparation of the 5. integrated report 2

Contents of an integrated report 36.

6.1 Interaction of contents of an integrated report with the manner in which the report is presented 3

6.2 Annual financial statements 3

6.3 Directors’ report 3

6.4 Directors’ statement of responsibility 3

6.5 Management and directors’ commentary 3

6.6 Report of the audit committee 4

6.7 Risk disclosures 4

6.8 IT reporting 4

6.9 Sustainability report 4

Examples of sustainability-related disclosures for different industries 5

6.10 Remuneration report 5

6.11 Statement by the company secretary 5

6.12 Terms of reference of committees 5

6.13 Ethics statement 5

Contacts 6

Other Steering Point publications 6

“The achievement of best practice in sustainability and integrated reporting is only possible if the leadership of a company embraces the notion of integrated sustainability performance and reporting.” – King III

Business SchoolCorporate Governance Series

King’s Counsel*

Integrated ReportingSteering Point

*connectedthinking

All references in this document to the Companies Act are to the Companies Act, 2008 (which constitutes the redraft of the Companies Act, 1973) which was assented to and signed by the President on 8 April 2009. The Act will come into operation on a date which is yet to be fixed by the President.

2 PricewaterhouseCoopers

1 Introduction

The King Committee on governance issued the King Report on Governance for South Africa – 2009 (the “Report”) and the King Code of Governance Principles – 2009 (the “Code”), together referred to as “King III”, on 1 September 2009.

The issuance of King III was necessitated by the new Companies Act of South Africa and the changes in international governance trends that have emerged since the release of the second King Report on Corporate Governance for South Africa (King II) in 2002.

An important aspect of King III has been the focus on the preparation of an integrated report. This publication discusses some of the key concepts to consider in preparing an integrated report and identifying where the responsibility for the integrated report lies. It also provides a framework for the content of the report.

This Steering Point publication does not address every one of the disclosure requirements of King III, but is rather intended to provide a high-level overview of the contents of an integrated report. The separate Steering Point publication dealing with the disclosure requirements of King III should be used to assess whether the appropriate disclosures have been made.

2 What is an integrated report?

King III defines an integrated report as “a holistic and integrated representation of the company’s performance in terms of both its finances and its sustainability”.

In essence the integrated report should tell the story of the company. This includes historical financial information and operating reviews as well as information which is forward looking, gives strategic direction and discusses targets, risks and opportunities to be addressed in the medium-to-long term. It should highlight both the positive and negative impacts of the company’s interaction with its stakeholders during the course of the year and would cover economic, social and environmental performance.

It is important to note that the integrated report is the culmination of a process that begins with corporate values, strategy and the decision-making philosophy of the company. The board has responsibility not only to shareholders, but also to other stakeholders, who make up the business, social, civil as well as natural environment in which the company operates. It is for this reason that the board’s approach to decision making should be comprehensive and balanced and this should be reflected in the integrated report.

Essentially, the report must show the substance of the activities of the company over the reporting cycle through policies, systems and processes which deliver reliable, comparable and complete information. The integrated report should also provide forward-looking information, which enables users to make informed decisions.

To the extent that negative aspects have been reported on, the integrated report should also demonstrate the actions

that the company will take in order to rectify such situations. This is important since it demonstrates that the company acknowledges that there is an area of concern and shows that, having recognised a shortcoming, the company is willing to address the issue, thus showing a commitment to good governance.

3 Responsibility for the integrated report

The board bears the ultimate responsibility for the integrity of the integrated report. However, the board may be assisted by various committees in its preparation. King III specifically tasks the audit committee, a committee of the board, to be involved in overseeing the integrated report.

King III requires the audit committee to be “responsible for evaluating the significant judgments and reporting decisions affecting the integrated report made by management, including changes in accounting policies, decisions requiring a major element of judgement and the clarity and completeness of the proposed financial and sustainability disclosures.”

The audit committee therefore recommends the financial statements for approval to the board and also has an oversight role in sustainability reporting. Its role here is one of approving the sustainability issues in the integrated report by comparing and assessing the disclosures contained therein in the context of the remainder of the annual report and in ensuring that “the information is reliable and that no conflicts or differences arise when compared to the financial results.”

4 Should assurance be provided over the entire integrated report?

The financial statements of companies are subject to an audit and assurance will therefore have been obtained over the historical financial aspects. The integrated report, however, deals with more than just the financial impact of the company and therefore an assessment should be performed of the level of assurance required over other aspects of the integrated report. King III states that the audit committee should “recommend independent assurance over the sustainability reporting to the board”, be that in the form of an external or internal assurance provider. External assurance providers would usually provide a greater degree of independence than internal assurance providers.

5 Discharging the responsibility for preparation of the integrated report

As is the case for the preparation of the annual financial statements, the preparation of the integrated report requires careful thought and planning. In order to produce the required information, King III recommends that a company have controls in place in order to enable it to verify and safeguard the integrity of the integrated report. This would include having processes in place to facilitate the review and authorisation of the information and final content of the integrated report, including review by the audit committee and authorisation by the board.

Intergrated reporting 3

6 Contents of an integrated report

An integrated report typically contains:

Annual financial statements;•

Directors’ report;•

Directors’ statement of responsibility•

Management and directors’ commentary; •

Report of the audit committee;•

Sustainability report;•

Risk disclosures;•

IT reporting;•

Remuneration report;•

Statement by the company secretary;•

Terms of reference of committees; and•

Ethics statement.•

Some entities might present each of the abovementioned sections as separate reports, whilst others may combine these into other statements. The assessment of the most appropriate format for the integrated report as a whole will require the board to exercise its judgment, based on what the company considers important to report. This assessment will typically be based on its strategic objectives and the manner in which the different structures and committees within the company operate.

King III is clear that the integrated report may not necessarily be presented as a single document: “While a truly integrated report should be presented in one document, it can be presented in more than one document. If the integrated report encompasses more than one document, the documents should be made available at the same time and disclosed as an integrated report.” – King III

6.1 Interaction of contents of an integrated report with the manner in which the report is presented

Any of the above may also be contained within a separate statement.

6.2 Annual financial statements

The annual financial statements are governed by the requirements of the Companies Act. They are usually prepared in terms of International Financial Reporting Standards, South Africa Statements of Generally Accepted Accounting Practice or relevant frameworks for smaller entities. As such, the frameworks in place are well established and the content and format of these statements are largely the same in most organisations. The contents of the annual financial statements are therefore not expected to materially change as a result of the application of King III in the integrated report.

6.3 Directors’ report

The directors’ report is governed by the requirements of the Companies Act, 2008. Section 30(3) of the Companies Act requires the annual financial statements to include a report by the directors that discusses the state of affairs; the business; and profit or loss of the company, or of the group of companies, if the company is part of a group. The directors’ report must also discuss any matters material to shareholders in terms of the company’s state of affairs and any prescribed information.

6.4 Directors’ statement of responsibility

The directors bear responsibility for strategic direction and ultimate performance of the company. An important aspect of this is the functioning of the internal control environment. King III recommends that the board should report on the effectiveness of the system of internal controls in the integrated report. In order for the board to be in a position to make this statement, internal audit should, on an annual basis, provide the board with a written assessment of the effectiveness of the system of internal controls and risk management. This statement of responsibility includes the responsibility for the internal financial controls described in the section related to the audit committee report (discussed later).

6.5 Management and directors’ commentary

The integrated report should provide sufficient information to allow stakeholders to make an informed decision. In order

Contents Location in integrated report

Annual financial statements Annual financial statements

Directors’ report Annual financial statements

Directors’ statement of responsibility

Separate statement

Management and directors’ commentary

Chairman’s statement

CEO’s statement

Directors’ report

Report of the audit committee

Governance statement

Sustainability report Governance statement

Sustainability report

Chairman’s statement

CEO’s statement

Risk disclosures Governance statement

IT reporting Governance statement

Remuneration report Directors’ report

Annual financial statements


Remuneration report

Statement by the company secretary

Separate statement

Terms of reference of committees


Ethics statement Governance statement


to achieve this, management and the directors, usually in the form of the chairman’s and CEO’s reviews, should provide commentary that sheds light on the activities of the entity during the year across all aspects of its economic, social and environmental performance. This may be provided within the CEO’s and chairman’s report and may also be contained within each of the individual sections that deal with these issues. For example, the discussion around sustainability performance may be included within the chairman’s report or within the sustainability section. In all cases, adequate cross-referencing would be required.

6.6 Report of the audit committee

The audit committee is required by King III and section 94(7)(f) of the Companies Act to include a written statement in the integrated report. The statement covers many issues, ranging from whether the committee considered the external auditor to be independent, to its role in oversight over the integrated report. The area where King III has generated the most discussion has been the requirement for a statement by the audit committee as it relates to the internal financial controls of the company. King III requires the audit committee to conclude and report yearly to the stakeholders and the board on the effectiveness of the company’s internal financial controls.

PricewaterhouseCoopers (PwC) has released a Steering Point publication dealing specifically with internal financial controls to address some of the pertinent aspects relating to this area. However, the debate currently continues as to whether the report of the audit committee on internal financial controls gives positive or negative assurance. Positive assurance requires the audit committee to make a positive statement about the effectiveness of the internal financial controls. For example, the audit committee might report that the internal financial controls have been designed to detect material misstatement and are operating as designed. By giving negative assurance the audit committee would report that nothing had come to its attention to indicate that the internal financial controls were not operating effectively.

6.7 Risk disclosures

Most companies will have developed risk management processes that are appropriate to their organisations. King III recommends that the board disclose its views on the effectiveness of these processes. An important component of that risk management process is the identification of risks. In this regard, King III recommends that the board include disclosure in the integrated report of risks that “may threaten the long-term sustainability of the company”.

Boards will also have determined both the risk appetite and risk tolerance of the entity. The risk appetite is reflective of the exposure to risk or potential adverse impact from an event that the board is willing to accept/retain. Risk tolerance reflects how much risk the entity accepts as part of normal management practice. King III recommends that, in instances where the risk appetite exceeds, or deviates materially from the limits of the company’s risk tolerance, this should be disclosed in the integrated report. To the extent that sustainable development risks are significant to the company, these should also be included.

King III also recommends that the integrated report include disclosures related to “any undue, unexpected or unusual risks... taken in the pursuit of reward as well as any material losses and the causes of the losses”. This disclosure should be made with due regard to the company’s commercially privileged information. In disclosing the material losses, the board should endeavour to quantify and disclose the impact that these losses have on the company and the responses and interventions implemented by the board and management to prevent recurrence of the losses.

6.8 IT reporting

The board should take the necessary steps to ensure that there are processes in place to ensure complete, timely, relevant, accurate and accessible IT reporting – firstly from management to the board, and secondly, by the board in the integrated report.

Please refer to the Steering Point related to IT governance for a greater understanding of IT reporting responsibilities under King III.

6.9 Sustainability report

In the same way that King III no longer has a separate chapter on sustainability, but has instead dispersed its sustainability-related requirements throughout all chapters of the report, it is suggested that within the framework of “annual reporting”, each section contains information on both financial and non-financial performance of the entity. As such, the sustainability content can either be scattered throughout the governance, operating and financial reviews or comprise a consolidated section, which is cross-referenced to other sections within the report. It is important to note that only material sustainability matters should be reported. Material sustainability issues are those matters that are important in the context of the strategy and operations of the company and that therefore have an added significance.

As a starting point, the material corporate risks and opportunities across economic, social and environmental spheres (for example, transformation, greenhouse gases, black economic empowerment, the impact of HIV/Aids) should guide the basic sustainability content of the integrated report. This should be augmented by considering broader industry issues as well as those raised by material stakeholders, which could be local or global in nature.

The Global Reporting Initiative’s (GRI) G3 Guidelines are recommended by King III as a reference for a generic sustainability reporting framework. In addition, the GRI has published useful industry sector supplements which provide a more tailored approach to reporting on industry issues. The way in which individual companies give thought to and apply the integrated reporting framework will determine how they differentiate themselves from their competitors.

The essential links between governance, strategy, risks and opportunities, key performance indicators and ultimately sustainable development, should be made clear in the way the integrated report is presented. The reporting of these activities should flow from the manner in which the company operates. What has become evident is that reporting of key performance indicators (KPIs) that bear little relevance to


the company, unstructured and non-strategic community investments and green initiatives do not add to the integrity of the integrated report and shareholders’ perceptions of the company. Investors may perceive the integrity of reporting in the integrated report to be reflective of management’s commitment to good corporate governance and transparent reporting.

Examples of sustainability-related disclosures for different industries

Automotive

Economic Environmental Social

Brand management

Climate strategy Occupational health and safety

Innovation management

Operational eco-efficiency

Stakeholder engagement

Banks


Brand management

Climate-change governance

Code of ethics in investments/financing

Anti-crime policy/measures

Operational environmental footprint

Standards for suppliers

Communication technology


Brand management

Electromagnetic fields

Digital inclusion

Privacy protection Climate strategy Stakeholder engagement

Heavy construction


Customer relationship management

Building materials Occupational health and safety

Non-financial project evaluation

Transport and logistics

Standards for suppliers

6.10 Remuneration report

Executive pay is an area that appears to be permanently in the spotlight. Whilst this will probably always be the case, boards need to ensure that they have acted in the best interest of the company and its shareholders and followed governance best practices in deciding on remuneration. Essential to this is the remuneration philosophy established by the company, which determines the most appropriate manner in which to reward executives. The manner in which remuneration policies and practices are communicated to stakeholders is the last, and some would argue the most important, piece of the puzzle.

King III recommends that the integrated report include an annual remuneration report that explains “the remuneration

policies followed throughout the company with a special focus on executive management, and the strategic objectives that it seeks to achieve, and should provide clear disclosure of the implementation of those policies”. Section 30(4) of the Companies Act also imposes specific disclosures related to remuneration.

In order to demonstrate to shareholders its commitment to transparency and a responsible approach to remuneration issues, King III suggests the disclosure of:

Formal remuneration policies that have been adopted; •

The philosophy behind remuneration assessments; •

The criteria for remuneration setting; •

The remuneration components; and•

The composition and role of the remuneration committee.•

6.11 Statement by the company secretary

The company secretary has an increased role to play in light of King III. However, there are limited disclosure requirements for the company secretary in the integrated report.

Section 88(e) of the Companies Act requires the company secretary to provide a statement in the company’s annual financial statements certifying whether the company has filed the required returns and notices in terms of the Companies Act, and whether all such returns and notices appear to be true, correct and up to date.

If the company secretary is removed from office by the board of the company, section 89(2) of the Companies Act allows the company secretary to include a statement in the integrated report relating to that financial year that sets out the company secretary’s contention as to the circumstances that resulted in the removal.

6.12 Terms of reference of committees

King III recommends that the terms of reference of committees, their structure and members be disclosed in the integrated report. This information may be contained in a number of places in the annual report or may be encapsulated within a single report that discusses the performance and terms of reference of the various committees. For example, the terms of reference related to the risk committee may be disclosed together with the terms of reference of all other committees or integrated into the risk management section of the integrated report.

6.13 Ethics statement

The perceptions formed about a company and its adherence to upholding sound ethical practices go a long way to enhancing public confidence about the credibility and integrity of the board and the company. King III recommends that the company assesses its ethics performance and include a statement detailing its performance during the year in the integrated report. The ethics performance assessment is important because it provides “internal and external stakeholders with relevant and reliable information about the quality of the company’s ethics performance”.

King III also recommends external assessment and “independent assurance of the company’s ethics performance” as this “enhances the credibility of the information provided to stakeholders”.


Contacts

Alison RamsdenDirector – Sustainable Business Solutions+27 (11) 797 4658

Yvette LangeSenior Manager – Sustainable Business Solutions+27 (11) 797 4430

Brendan DeeganAssurance Leader+27 (11) 797 5473

Zubair WadeeDirector – National Office+27 (11) 797 5875

Shirley-Ann BauristheneDirector: Risk Advisory ServicesTel: +27 (31) 271 2007E-mail: [email protected]

Ganief Galiel Senior Manager - Risk Advisory Services+27 (21) 529 2272

Other Steering Point publications

King III at a glance

Internal audit

Internal financial controls


King III – a higher education perspective

King III – a municipal perspective - at a glance


IT Governance

King III and related legislative requirements

Disclaimer: This document is not intended to constitute legal or professional advice. The purpose of the document is to provide readers with a guideline of certain provisions of King III and the Companies Act, 2008 but is not a substitute for reading the detailed provisions of King III and the Companies Act, 2008.

pwc.com © 2010 PricewaterhouseCoopers Inc. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. PricewaterhouseCoopers is an authorised financial services provider.

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