More regulation in corporate reporting could boost transparency
What should corporations publicly report on their approach to, and performance on, nonfinancial issues such as opposing corruption, as well as other environmental, social and governance (ESG) matters? And should the information they provide on these matters be independently verified?
These questions are raised by the recent publication of “Transparency in Corporate Reporting: SA 2020”, a joint project of Corruption Watch, the National Business Initiative and the Overseas Development Institute (ODI), a London-based global think-tank on international development.
Our report focuses on corporate reporting on the following:
- anticorruption programmes;
- organisational transparency relating to subsidiary, associated and affiliated entities; and
- country-by-country reporting of key financial data for all operations outside SA.
Using publicly available information in annual reports and on their own websites, we scored and ranked 100 companies in SA, against a questionnaire drawing on anticorruption non-governmental organisation Transparency International, and on the Global Reporting Initiative (GRI), the sustainability reporting standards system that itself draws heavily on the King Code. Fifty-one of 64 questions focused on anticorruption.
Our sample was not random. All but two or three companies had some engagement with reporting transparency on the issues of interest. Some had been part of an earlier Transparency Reporting on Anti-corruption (Trac) study in 2016, others had referenced the GRI in their reports. There are JSE-listed firms, foreign-based multinationals, foreign companies, privately owned SA companies, and state-owned enterprises. All were given an opportunity to comment on their provisional score, and about a third of them did.
The five best-reporting companies — RMB Holdings, City Lodge, Exxaro, FirstRand and Standard Bank — scored more than 85%. But the average for the full group of 100 was just 59.5%, while the unlisted privately owned companies failed, with a paltry 26.7%.
Trac results also show that while companies are reasonably good at developing detailed anticorruption policy (average score 74.8%), they are not as good at telling us how they manage their anticorruption policy (63.6%), and are quite poor (36.1%) in reporting adequately on anticorruption activities, such as numbers of employees and other stakeholders trained, or number of incidents of corruption uncovered.
One individual question worth mentioning is the very poor performance — less than 45% across the sample — regarding whether anticorruption policies explicitly barred political contributions to individuals or organisations. We encourage readers to look at the detailed results for the individual company and industry group scores.
One of two general points emerging from our report is that regulation may be needed to specify what companies should be required to report. Standards systems such as GRI have been vital in expanding the scope of reporting and its depth. But, like King, they are voluntary, leaving companies to pick and choose the issues they actually report on, and in what detail. Is it time to reopen the discussion on whether the corporate governance codes such as King should be voluntary? Or should reporting on a specified set of nonfinancial performance matters of public interest be required, as for financial issues?
The very poor performance of large unlisted companies on anticorruption and other environmental, social & governance (ESG) challenges provides one motivation. This is a matter of great concern not only to their owners, but also to other stakeholders, including employees, customers and suppliers, as well as the government and the public. A large company’s decision to stay private and forego access through JSE listing to significant pools of capital limits its reporting obligations on its financial performance. But is this a sufficient reason for it to escape transparency on nonfinancial ESG issues of broader societal concern?
Our country-by-country (CBC) reporting results underline the value of regulation. CBC transparency is crucial to companies being good corporate citizens, paying full taxes and other payments to governments in all jurisdictions. The 14 mining companies far outperformed the rest on CBC, scoring 76% against 31%. We attribute this huge difference to effective multi-stakeholder networks, such as the Extractive Industries Transparency Initiative, creating global political pressure to ensure mining companies meet their fiscal obligations, especially in low-income countries. Trac shows such pressure works; in other sectors it could be provided by government regulation.
A second transparency challenge on ESG issues is that what is reported is not necessarily factual. Self-reporting creates the possibility that stakeholders will point to untruths. But auditing — mandatory for financial statements — is a stronger guarantee of truthful reporting, though it too is not foolproof. The 2019 Brydon Report, the UK government’s recent independent review of auditing, recommended expanding auditing to ESG issues in that country. Introducing independent verification of anticorruption and other ESG reporting would not only provide assurance of the information, but also contribute to standardising what is reported and how.
We recognise that better transparency through reporting is just one step, not the whole story, in the fight against corruption in and by business. But transparency is a crucial first step, because having to report on an issue, especially if detailed reporting is expected, encourages companies to focus more on their actual performance on that issue.
Other essential actions include expansive training programmes for all stakeholders, risk assessment and control systems, and collective action with other corporations — and indeed with other types of organisations across society.
• Lewis is executive director of Corruption Watch SA. Gelb leads on private sector development at ODI London. The “Transparency in Corporate Reporting: SA 2020” report was produced by Corruption Watch, ODI and the National Business Initiative and can be accessed from corruptionwatch.org.za.
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