After Mr. Nelson Mandela was released from jail in 1990 he would often call me. We had known each other from before he went to jail. Whenever the conversation opened with, “How’s my favourite Judge?” I knew he had plans, and I knew a lot of work was coming my way. Mr. Mandela and I shared a vision for enhanced corporate governance, and the direct result of this vision is that South Africa is now consistently cited as a global leader in corporate governance.
So how did we do it? The Institute of Directors in Southern Africa asked me to form a committee, which assumed my name. In 1994, the first “King Report on Corporate Governance” (King I) was issued. It proposed a new, inclusive approach to governance that recognized the role and relevance of a company’s stakeholders. In 2002, King II was released with a focus on sustainability reporting and risk management. It had become clear that financial reporting was critical, but on its own was not sufficient. By definition, the information was historical and, to use an automotive analogy, we were reporting on information letting our users look into rear view mirrors but driving cars with no windscreens. At the same time there was pressure on companies from civil society and other sources to report on sustainability, ISO standards, carbon disclosure, governance structures, remuneration and more. These are also crucial elements for a business to report on – but cannot be treated in silos.
This pressure led to the thinking in King III, released in 2009, that as a management runs a company on an interconnected and interrelated basis through the resources used and the relationships with its stakeholders, the company should report on this basis. At this time others were beginning to think along the same lines, leading to a meeting at St. James’s Palace hosted by His Royal Highness The Prince of Wales in December 2009, at which the “who’s who” of corporate reporting paved the way for the evolution of corporate reporting: Integrated Reporting.
Integrated Reporting weaves a golden thread through the information of business reports. It links the information that is relevant to providers of financial capital into one clear, concise, integrated story that explains how the range of their key resources and relationships are creating value over time. Decision-making and policy formulation are strengthened as a result of enhanced corporate transparency and reporting. Through considering the interconnection between the resources and relationships a business uses, the dialogue between investors and businesses naturally shifts to focus on strategy for value creation over the short, medium and long term.
I am Chairman of the International Integrated Reporting Council (IIRC), a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs. The IIRC’s vision is to align capital allocation and corporate behaviour with the wider goals of financial stability and sustainable development through the cycle of integrated reporting and thinking. It is the global authority on Integrated Reporting, striving to be market-led and evidenced-based, acting as a global centre of excellence for corporate reporting reform. In 2013, the IIRC issued the International <IR> Framework.
The Framework was the culmination of three years’ development and consultation. It drew on the learnings of integrated reports in South Africa, among other sources. Since 2010 companies listed on the Johannesburg Stock Exchange (JSE) have been required to prepare integrated reports because the principles of King III (which include the preparation of integrated reports) fall into the Listings Requirements on an apply or explain basis. Today, five years on, in South Africa it’s not only the listed companies that prepare integrated reports – unlisted, state-owned entities and NGOs prepare integrated reports as a discipline to ensure good governance and improved reporting.
The acknowledged benefits of Integrated Reporting to businesses in South Africa are widespread. There is no doubt that Integrated Reporting has significantly spurred integrated thinking in business. A recent survey by the South African Institute of Chartered Accountants found that 79% of non-executive directors included in the survey believe that integrated thinking has increased the quality of dialogue with providers of financial capital and other stakeholders.
And one of acknowledged benefits supported by the survey is that Integrated Reporting has resulted in better decision-making and improved internal management. As others learn of the benefits this enhanced approach to corporate governance and reporting has brought to South African businesses, more and more in other African countries and across the globe are moving towards Integrated Reporting.
The world is not what it used to be. Business cannot carry on as we used to carry on. The concept of value has expanded. Instead of seeing companies as operating in a financial bubble and viewing value through a financial lens of future cash flows and net asset value, stakeholders want to understand how a company makes its money through all of the resources and relationships (also known as capitals) it uses or affects. From an investor perspective, it is no longer enough to understanding the finances of a business; one must understand and assess a company’s strategy, business model, resources and relationships, and risks and opportunities. A reassessment of our understanding of value – its parameters and its effects – is taking place, making sure that business models sing to the tune of a value creation model fit for the 21st century.
Mervyn E. King is a Senior Counsel and former Judge of the Supreme Court of South Africa. He is Chairman of the International Integrated Reporting Council, Chairman Emeritus of the Global Reporting Initiative, and a member of the Private Sector Advisory Group to the World Bank of Corporate Governance.