Greater disclosure but little insight under new code

South Africa’s top 100 companies may be putting quantity ahead of quality in their information disclosure under the republic’s new corporate governance code, which includes requirements for more ‘integrated’ reporting. The PwC report, analyses the practices of the Johannesburg Stock Exchange’s (JSE) top 100 companies in the period from 1 March 2011 – the second full reporting season following the King Report on Governance (King III).

The study found that JSE companies disclose large volumes of information but that much of it may not be material. Companies appear to be taking a broad-based approach without providing sufficient detail in important areas. However, most companies had improved both the quality and the level of disclosures provided compared to the prior reporting period.

‘Integrated reporting’, a specific King III recommendation, represents a significant challenge for companies in the study, with most acknowledging that they are only starting out on an ongoing journey. King III looks for reporting to be integrated across all key performance areas in the context of corporate strategy and expects boards to provide forward-looking information. While most entities talk about their vision and objectives, just two thirds discussed their strategic priorities. Fewer than half of all entities disclosed the performance measures management used to monitor the success of their actions, and under a quarter disclosed performance targets and the organisation's progress against them. Three in four companies do not explain the key underlying external drivers for current and future growth.

All companies in the study include sustainability reports, and just over 60% had obtained assurance over the key elements of sustainability reporting. However, less than 40% of entities disclosed their sustainability strategies over the short, medium and long term. Responsibility for the integrated report and for sustainability reporting is not well disclosed by most companies – fewer than a quarter of reports indicate the board and audit committee's role in ensuring the integrity of the integrated report.

More than 90% of the companies report on directors’ remuneration, but only one-third meet the King III requirement to disclose the remuneration of the three top paid employees. But under half of the companies surveyed make the link between the remuneration policy and corporate strategic objectives.

Risk management is another area in which companies typically disclose information at a high level without providing real insight. More than 80% of companies disclose their key risks and risk mitigation approach, but fewer than 10% of entities disclose their risk appetite. Almost three-quarters of all boards of directors accept responsibility for risk management, but fewer than half report on the effectiveness of risk management. Under 25% name their chief risk officer, and a minority of companies say how risk management is aligned with company strategy and integrated into its daily activities.

Zubair Wadee, PwC partner, commented: “While companies have made positive strides in moving towards integrated reporting, it has been an evolutionary rather than revolutionary process. There are clear leaders in this field of reporting who have embraced the concept wholeheartedly, whilst others are taking a more cautious and reactionary approach, driven y what the leaders in this space are doing. Overall the effect is a positive one - reporting in South Africa is moving in the right direction.”