Integrated reporting has attracted much attention in the past few years, and South Africa has taken the lead in its development worldwide. An annual survey is published by Ernst & Young regarding the quality of the integrated reports of the top 100 entities listed on the Johannesburg Stock Exchange (JSE).
The study on which this article is based was aimed at determining whether the assessment of an entity’s characteristics can predetermine the quality of the integrated report generated by that entity.
This article focuses on an analysis of the integrated reporting of the top 100 entities listed on JSE for the financial years ending in 2013, 2014 and 2015.
Comparison of categorical variables, mixed-model repeated measures ANOVA and generalised estimating equations were applied to identify the best classificators to distinguish between excellent integrated reporting and those reports where progress could still be made.
The results show that the type of industry the entity finds itself in, the size and profitability of the entity, as well as the composition of the members of the board, have an effect on the quality of the integrated report.
Our results indicated that the type of industry, size of an entity, the profitability and composition of the board of directors, all have an effect on the quality of the integrated reporting. Our evidence will assist current and prospective stakeholders in evaluating the expected quality of an entity’s integrated report, through the evaluation of certain firm characteristics.
Integrated reporting has evolved quite rapidly in South Africa since 2010, leading to the release of the world’s first International Integrated Reporting Framework at the end of 2013. South Africa has contributed significantly to the development of integrated reporting worldwide, starting with the establishment of the King Commission by Nelson Mandela and Professor Mervyn King. The King report has grown from a report disclosing a balanced overview of the business to one defined as ‘a holistic and integrated representation of the entity’s performance in terms of both its finance and stability’ (Druckman
Since 2010, Ernst & Young (EY) South Africa has given all listed and state-owned South African entities the opportunity to have their integrated reports analysed to improve the quality of these reports in the future (Ernst & Young
This study carried out an empirical evaluation of the firm characteristics of the entities that produced an ‘Excellent’ report, as well as the entities that produced a report where progress can be made in the future. This study, therefore, made the following contribution to the accounting literature: Stakeholders are interested in obtaining sufficient information from an entity’s integrated report to facilitate efficient decision-making. Our evidence will assist current and prospective stakeholders in evaluating the expected quality of an entity’s integrated report, through the evaluation of certain firm characteristics.
The purpose of this study was to determine whether the assessment of an entity’s characteristics such as entity size, profitability, generation of cash flow and number of directors can predetermine the quality of the integrated report generated by that entity.
The rest of the article is structured as follows: ‘Literature review’ section provides a critical overview of previous literature regarding integrated reporting in the industry, as well as a description of the different entity characteristics evaluated in the study. ‘Research methodology’ section focuses on the research methodology of the study, followed by a discussion of the findings in ‘Results’ section. In ‘Conclusion’ section, the final section, some conclusions are offered.
We find ourselves living in a day and age where large entities dictate important and often crucial facets of our daily lives. Big supermarkets dictate, directly or indirectly, our eating habits with premiums on select foods. Corporate infrastructure giants dictate our lives by supplying ‘necessities’ such as electricity and communication. One might even go so far as to say that such corporations dictate what society deems acceptable through their use of social and other media (Eccles & Armbrester
The question is: What guides these corporations to lead us in a certain direction? Many believe that the boards of major entities are stakeholder-driven. Academics and commentators may still be arguing about what constitutes a stakeholder. A further question might be whether a ‘Stakeholder Approach’ is feasible. Should we rather say that management is focused on ‘Stakeholder Return’ (Scholes & Clutterbuck
In recent years, the focus has shifted to reporting. Increasingly, markets around the world are focusing their accountability on more detailed disclosures. On the forefront of these disclosures is the principle of integrated reporting. Many economic pundits believe that for an entity to be sustainable, one can not only focus on financial disclosures or only disclose information needed by financial stakeholders. It is rather believed that sustainability requires disclosure of a much broader spectrum of information.
A country taking the lead in this regard is South Africa. Through the King Commission, headed by Professor Mervyn King, South Africa has been focusing heavily on this type of reporting. The first report presented by the King Commission is known today as the King I report. The findings in this report led to further investigations, upon which the King II and finally the King III report were published in 2009. The King III report does not constitute legislation, but rather encourages entities to make use of good integrated reporting. The findings in the King III report focus mainly on maximising shareholder information and providing disclosure to enable a user to obtain a better understanding of the entity as a whole.
Integrated reporting attempts to reveal the relationship between financial and non-financial performance and how these interrelated dimensions create or destroy value for shareholders and other stakeholders (Institute of Directors in Southern Africa, IoDSA
Kansal, Joshi and Batra (
Firm size can be represented by total assets, net sales or market capitalisation. These three measures have been used in numerous previous studies to determine the associational relationship between corporate size and the level of disclosure in corporate annual reports (Wallace & Naser
The following hypotheses were tested in order to determine the prevailing situation in South Africa during the period under examination:
It is expected that entities with greater growth opportunities tend to disclose more information than entities with lower growth opportunities (Murcia & dos Santos
The following hypothesis was tested in order to determine the prevailing situation in South Africa during the period under examination:
It is expected from the signalling theory that where entity performance, measured by profitability (profit after tax) and return on investments, is good, entities would wish to signal their quality to investors (Watson, Shrives & Marston
This view is emphasised by Inchausti (
Khlif and Souissi (
Ng and Koh (
The following hypothesis was therefore tested:
The ability of an entity to meet its short-term financial obligations without having to liquidate or cease operations is important for interested parties such as investors, lenders and regulatory authorities in the evaluation of an entity, because the inability of an entity to meet its current obligations may lead to bankruptcy (Wallace & Naser
The cash-generating ability of the entity plays an immense role in the liquidity of the entity. The entity with the better cash-generating ability can be measured in two ways: firstly, as the entity with the ability to generate higher cash flow from operating activities relative to revenue, and secondly, as the entity that succeeds in transforming its profit into cash. The more liquid entity will be in a better financial position to allocate resources to the preparation of useful integrated reports.
The following hypotheses were therefore tested:
Entity governance has long been a topic of interest, and the impact of corporate governance is still largely unknown (Ntim & Soobaroyen
The disclosure of South African entities is largely affected by their ownership (Ntim & Soobaroyen
Larger boards are seen to be less cohesive, and it could be expected that these entities have lower quality disclosure as there are no clear reporting structures or communication channels. On the contrary, larger boards will have increased managerial power and might increase the focus on reporting as the number of executive members on the board is increased. South Africa has a unique corporate environment, and one, therefore, needs to consider characteristics of the environment that might influence the disclosure decisions, such as duel leadership entities (separate CEO and chairperson of the board of directors) and directors of colour (Ntim & Soobaroyen
The following hypotheses were therefore tested:
The EY Excellence in Integrated Reporting Awards survey was selected for the years 2013, 2014 and 2015. This survey ranked the top 100 entities based on their market capitalisation at 31 December of each year. Due to the ranking based on the market capitalisation, the entities included in the 3-year period may vary. The top 100 entities are supposedly the larger entities listed in South Africa and account for approximately 94% of the total market capital, but there is still quite a large difference in the size of these 100 entities. Entities from all sectors were included in the EY survey, but pure holding companies were excluded.
Each of the integrated reports of the entities was given a separate mark, according to a pre-determined mark plan. The mark plan included specific aspects that should be present in an integrated report (Ernst & Young
A final ranking was awarded to the entities based on the average of the adjudicators’ marks. Large variations in the marks were examined in order to make sure that nothing had been omitted. The adjudication process culminated in each entity’s integrated report being classified into one of the four groups: ‘Excellent’, ‘Good’, ‘Average’ and ‘Progress to be made’. Although the adjudicators acknowledged that the degree of subjectivity involved in marking could lead to a different ranking, the conclusion reached stated that there was a clear distinction between those entities with excellent integrated reporting and those where integrated reporting should be improved (Ernst & Young
Building on the above survey, this study accepted the conclusion reached with regard to detailed ranking that might differ as a result of subjectivity in the measuring instrument; however, the classification at the extremes of the classification outcomes, Excellent (EXC) and Progress to be made (PTBM), should be clear. The outcome of the classification of the integrated reports, as being either EXC or PTBM, was therefore used in this study as the dependent variable.
The independent variables that were tested in this study were selected from previous studies performed on disclosure of information in annual reports of entities as discussed in ‘Firm characteristics’ section. The values of these independent variables were taken from the annual reports of the individual entities that were in the EXC and PTBM categories as classified in the EY survey (Ernst & Young
Description of independent variables.
Variable | Description of independent variable |
---|---|
Log(Rev) | Natural logarithm of the revenue for the year |
Log(A-L) | Natural logarithm of the total assets minus total liabilities as at year-end |
Log(MC) | Natural logarithm of the market capitalisation as at year-end |
Growth in revenue from 1 year to the next as a percentage | |
PAT/R | Net profit for the year (excluding preference dividends) divided by the revenue for the year |
PAT/(TA-TL) | Net profit for the year (excluding preference dividends) divided by the total assets less total liabilities for the year |
CFO/R | Cash flows generated from operations (before dividend expense, but including dividend income) divided by the revenue for the year |
CFO/(TA-TL) | Cash flows generated from operations (before dividend expense, but including dividend income) divided by the net assets as at year-end |
Cash Gen | Cash flows generated from operations (before dividend expense, but including dividend income) divided by the net profit for the year (excluding preference dividends) |
Females on board | The number of female directors |
Executives | The number of executive members on the board of directors |
Dir of colour | The number of directors of colour |
Size | The number of directors on the board of directors |
Non-public/public | The number of private shareholders divided by the number of public investors |
Dual leadership | 1 If the CEO and chairperson of the board are different people, 0 otherwise |
Chairperson of colour | 1 if the chairperson of the board is a director of colour, 0 otherwise |
Government as shareholder | 1 if the government has shareholding in the entity, 0 otherwise |
We looked at the mining, property and finance sectors |
Comparison of categorical variables (such as the mining sector) with integrated reporting was done using cross-tabulation and the chi-square test. Mean scores of the continuous variables (e.g. revenue) were compared between the two groups using mixed-model repeated measures ANOVA. Here the integrated reporting groups and year were treated as fixed effects and the companies as random effects. A generalised estimating equations analysis was conducted to test the combined influence of the continuous variables on the binary (yes/no) outcome of the integrated reporting variable. To further investigate the predictability of the binary integrated reporting variable by all the independent variables, a variable selection procedure was applied to select a subset of predictor variables that best predicted the binary outcome using discriminant analysis.
Classification of the entities.
Variable | Number of observations where the result is no |
Number of observations where the result is yes |
||
---|---|---|---|---|
Number | % | Number | % | |
Excellent reporting | 49 | 34 | 94 | 66 |
Mining sector | 113 | 79 | 30 | 21 |
Financial sector | 117 | 82 | 26 | 18 |
Property sector | 121 | 85 | 22 | 15 |
Dual leadership | 8 | 6 | 135 | 94 |
Chairperson of colour | 58 | 41 | 85 | 59 |
Government as shareholder | 47 | 35 | 86 | 65 |
Results of the categorised histogram.
Variable | Excellent reporting |
||||
---|---|---|---|---|---|
Number of observations with EXC reporting where the result is no for the variable |
Number of observations with EXC reporting where the result is yes for the variable |
||||
Number | % | Number | % | ||
Mining sector | 66 | 58 | 28 | 93 | < 0.01 |
Financial sector | 81 | 69 | 13 | 50 | 0.07 |
Property sector | 86 | 71 | 8 | 36 | < 0.01 |
Chairperson of colour | 48 | 83 | 46 | 54 | < 0.01 |
Government as shareholder | 30 | 64 | 56 | 65 | 0.88 |
and ***, indicate statistical significance at 0.10 and 0.01 levels, respectively, using a two-tailed test.
Based on the results of the corporate governance factors, it is evident that 54% of the entities with EXC integrated reporting had a chairperson of colour to lead the board of directors, while 83% of the entities with a chairperson who was not a person of colour had EXC reporting. This provides statistically significant evidence (
Results of the mixed-model repeated measures ANOVA.
Variable | PTBM |
EXC |
|||
---|---|---|---|---|---|
Mean | Standard deviation | Mean | Standard deviation | ||
Log(Rev) | 3.79 | 0.66 | 4.47 | 0.56 | < 0.01 |
Log(A-L) | 4.04 | 0.49 | 4.41 | 0.62 | < 0.01 |
Log(MC) | 4.35 | 0.46 | 4.72 | 0.53 | < 0.01 |
Growth | 0.69 | 2.51 | 0.11 | 0.15 | 0.04 |
PAT/R | 0.63 | 1.09 | 0.15 | 0.22 | < 0.01 |
PAT/(TA-TL) | 0.16 | 0.08 | 0.17 | 0.20 | 0.68 |
CFO/R | 0.14 | 0.14 | 0.19 | 0.19 | 0.34 |
CFO/(TA-TL) | 0.12 | 0.16 | 0.27 | 0.26 | < 0.01 |
Cash Gen | 0.60 | 0.92 | 0.76 | 6.44 | 0.86 |
L:TA | 0.36 | 0.20 | 0.51 | 0.24 | < 0.01 |
Females on board | 0.11 | 0.11 | 0.21 | 0.07 | < 0.01 |
Executives | 0.29 | 0.14 | 0.23 | 0.09 | < 0.01 |
Dir of colour | 0.22 | 0.23 | 0.41 | 0.18 | < 0.01 |
Size | 11.41 | 3.76 | 12.38 | 2.59 | 0.08 |
Non-public/public | 0.01 | 0.02 | 0.17 | 0.50 | 0.04 |
, ** and *** indicate statistical significance at 0.10, 0.05 and 0.01 levels, respectively, using a two-tailed test.
Our results also found entities ranked as EXC might not be more profitable than those ranked as PTBM. Based on our sample over the 3-year period, it is evident that PTBM entities are significantly more profitable than those that fall in the EXC category. However, entities with excellent reporting do generate more cash flow as the cash flow variables in this category are greater compared to the entities in the PTBM category.
When looking at the corporate governance characteristics, it is evident that the entities in the EXC category have significantly more females and more directors of colour (black, Indian and coloured), with significantly less executive directors on their board. This finding is consistent with the results of earlier literature of Ntim and Sabooroyen (
The results of the generalised estimation equations (
Results of the generalised estimation equations.
Variable | Regression coefficients |
Model effects | ||
---|---|---|---|---|
Estimate | Standard error | Wald | ||
Mining sector | 2.05 | 2.12 | 0.93 | < 0.01 |
Financial sector | −6.64 | 2.04 | 10.55 | 0.21 |
Property company | −5.66 | 1.79 | 10.02 | < 0.01 |
Chairperson of colour | −2.26 | 1.44 | 2.45 | < 0.01 |
Government shareholder | −1.46 | 1.10 | 1.77 | 0.74 |
AurAALog(Rev) | 1.96 | 2.19 | 0.80 | < 0.01 |
Log(A-L) | 6.59 | 2.67 | 6.12 | 0.96 |
Log(MC) | −6.35 | 2.57 | 6.12 | 0.69 |
Growth | −10.41 | 3.96 | 6.93 | 0.11 |
PAT/R | −4.60 | 2.37 | 3.76 | 0.17 |
PAT/(TA-TL) | 17.40 | 4.90 | 12.57 | 0.42 |
CFO/R | 21.51 | 5.44 | 15.64 | 0.04 |
CFO/(TA-TL) | −5.61 | 3.54 | 2.52 | 0.16 |
Cash Gen | −0.14 | 0.07 | 3.99 | 0.17 |
L:TA | 9.62 | 2.66 | 13.06 | < 0.01 |
Females on board | 16.68 | 5.86 | 8.11 | < 0.01 |
Executives | −13.95 | 7.00 | 3.98 | 0.10 |
Dir of colour | −5.44 | 3.71 | 2.14 | 0.09 |
Size | 0.01 | 0.18 | 0.00 | 0.58 |
Non-public/public | 7.52 | 2.88 | 6.80 | 0.01 |
, ** and *** indicate statistical significance at 0.10, 0.05 and 0.01 levels, respectively, using a two-tailed test.
Entities that have chairmen of colour on their board are more likely to present excellent integrated reports. Significant results were obtained for only three of the financial indicators. Entities with larger revenue as well as those with larger total assets to liabilities are more likely to have excellent integrated reports. Significant results at a lower level were obtained for the cash flow generation of the entities.
With regard to the corporate governance characteristics, significant results were only obtained for the number of females on the board as well as the number of non-public shareholders. This is an indication that entities that have more females as well as non-public shareholders on their board are more likely to present excellent reporting.
Results of the general discriminant analysis.
Effect | Value | ||
---|---|---|---|
Intercept | 0.69 | 56.42 | 0.00 |
Growth | 0.96 | 0.62 | 0.43 |
L_TA | 0.96 | 5.26 | 0.02 |
Log(A-L) | 0.86 | 19.95 | 0.00 |
CFO/(TA-TL) | 0.92 | 10.63 | 0.00 |
Dir of colour | 0.88 | 16.83 | 0.00 |
, ** and *** indicate statistical significance at 0.10, 0.05 and 0.01 levels, respectively, using a two-tailed test.
Summary of the results on our hypothesis.
Effect | Value |
---|---|
H1a | Accepted |
H1b | Accepted |
H1c | Accepted |
H2 | Accepted |
H3 | Accepted |
H4a | Rejected |
H4b | Accepted |
H4c | Rejected |
H5a | Accepted |
H5b | Accepted |
H5c | Accepted |
The study reported in this article was conducted to determine whether the assessment of an entity’s characteristics, such as entity size, profitability, generation of cash flows and number of directors, can predetermine the quality of the integrated report generated by that entity.
Our investigation has shown that the type of industry an entity finds itself in does have an effect on the quality of the integrated report produced. Our results confirm that an entity whose business has an effect on the environment will produce a more detailed integrated report legitimising its business, compared with an entity that does not affect the environment.
When investigating the financial characteristics of an entity and their effect on the quality of the integrated report, it was seen that larger entities (determined by the revenue for the year, net assets, market capitalisation and total assets compared with total liabilities) have better resources to allocate to the integrated report and therefore produce a better report.
It was also found that entities that are more profitable tend to produce integrated reports that need progress to be made and that cash flow plays an important role in obtaining resources for the integrated reporting process, as those entities with greater cash flow tend to produce integrated reports of a higher quality.
Our results for the corporate governance characteristics showed that entities with more females and directors of colour provided better integrated reports than their counterparties. These entities also had fewer executive directors on their board. It was, however, interesting to note that the entities with less public shareholding had better integrated reports, which contradicts findings reported in earlier literature.
Our study experienced some limitations that should be considered. The entities we tested in our sample are only the entities which fell in the EXC or PTBM categories of the EY Excellence in Integrated Reporting Survey, thus limiting the number of industries that were tested to three: property, mining and financial. It also limited the number of entities used in our sample as there are two more categories (average and good), which also contain a large number of entities. These categories were, however, not considered.
It is suggested that future research flowing from this study could include a study on all the entities in the EY survey, covering all the categories mentioned above. More industries could also be included in the data, which might provide a clearer picture of the reporting style of different industries. Future studies could also extend the variables used in this study to introduce a more holistic view of entities and their reporting styles. As integrated reporting becomes more prominent in our society, further research questions could include: How do stakeholders react to integrated reporting and the quality of the report itself? How is the decision-making process of stakeholders affected when entities do not produce integrated reporting at all compared with situations where integrated reports are delivered – does the quality of the report have a significant impact in this instance? Since integrated reporting is still a relatively new area whose research has not yet been saturated, there is ample scope for future research.
We thank Maricia Krige, Wilna Bruwer and Prof. Martin Kidd (Stellenbosch) for their assistance with the article.
The authors declare that they have no financial or personal relationships that may have inappropriately influenced them in writing this article.
The authors contributed equally to the existing research on integrated reporting by determining characteristics which might enhance the quality of integrated reporting.