Graham Terry, Senior Executive for Strategy and Thought Leadership with SAICA, shared his reflections on the development of integrated reporting and the importance of sustainable development in South Africa during an interview with business journalist Bruce Whitfield and EY Senior Researcher, Jess Schulschenk, on 6 March 2012. The video interview is included above, and reflections from both this and the longer research interview are given below. These findings were made possible by the Gordon Institute of Business Science (GIBS) and form part of the ongoing Corporate Governance Research Programme with the Albert Luthuli Centre for Responsible Leadership (University of Pretoria) supported by Ernst & Young.
Graham Terry is at the forefront of thought leadership on corporate sustainability and integrated reporting, both in South Africa and internationally. With the introduction of integrated reporting as a core principle within King III, the nature of corporate reporting in South Africa underwent a dramatic change. Terry argues that King III calls for a change in the behaviour of companies towards increased corporate citizenship – something that is critical but also very difficult to implement.
Understanding Corporate Sustainability
Corporate sustainability is ultimately a concept that just makes sense. Terry sees it to be about both the company and society’s future in the short, medium and long term, and balancing resource constraints within this context:
“Accountants are not very good at looking forward, we tend to look backwards. Whereas King is saying look forward. From a company’s perspective if you are focusing on the long term, it changes your strategy going forward and I think that is a major implication.”
Terry identified the changing dynamic of strategy in the context of sustainability challenges and opportunities going forward: “The key thing is to actually understand what is happening and to adapt strategy to take that into account. Companies must look long term as well because if you are looking long term your strategy can be vastly different because you want to be around here in twenty or thirty years time. The environmental and social issues are going to become more and more important as we are going into the future so you need to be aware of what those impacts are and be aware of what those drivers are and are going to dictate”. The challenge remains for companies to internalise sustainability issues and inform strategy accordingly. King III points to the importance of this and provides a starting point by pushing companies in the direction of integrated reporting. The intensifying drivers around social and environmental issues in years to come will certainly provide a further push.
When comparing South Africa’s corporate governance principles internationally, Terry feels we have a solid framework from which integrated reporting has emerged and a context in which to place it. For many other countries starting to engage with integrated reporting, they are struggling to build the foundation on which to drive integrated reporting, and strategy.
The early days of Integrated Reporting
Terry reflected how “today probably 80% or more of a company is around non financial issues and we don’t have the kinds of processes to measure that information, it's still very much in its infancy”. He is excited about the potential of integrated reporting, given that so much of a company is linked to its intangible assets. What holds tremendous value is when companies start to identify problem areas through their integrated reports and start to tackle these – when effective reporting drives strategy as opposed to just being an outcome. Terry reflected that the process of stating objectives, setting KPIs and reporting back on those on an annual basis is going to make it difficult for companies to “pull wool over the eyes of the stakeholders”.
How well are we doing?
“In terms of integrated reporting, it's far more complex than people explain it to be. It's easy to set principles but when you start to get into it, it becomes very difficult because there are conflicting principles and one would expect that, I mean what do you put in the report and what do you leave out?”
Terry cautioned that it is going to take some time to create a framework for implementing integrated reporting. For now, there are some companies that are applying the principles well and others less so. There is agreement on the fact that there certainly is a high level of awareness about integrated reporting, but mixed success in realising effective integrated reporting, and even less so to date on integrated thinking. In speaking to the JSE, there are probably about 20 or 30 companies that are doing it properly whilst some are hardly doing anything at all other than changing the names of their existing reports.
Terry acknowledges that companies with a track record of producing sustainability reports and the resources to invest in integrated reporting have fared better to date. Others might just find that the journey takes a little longer. Many South African companies have operated in traditionally dirty industries, and are leading the way today in terms of sustainability commitments and reporting through measures to reduce their impact where ever possible.
What to look out for going forward?
Terry placed strong hope in the Code for Responsible Investing in South Africa (CRISA) for bringing investors to the table to start engaging on key sustainability issues. He felt that investors need to start interrogating the risks involved in not having a sustainable business – “the consequences of not following this route is detrimental”.
As with some of our other thought leaders, we asked Terry for his radical vision for the future, and what to look out for on the way there:
“Communities are going to get much more involved, because when you are looking at resources and what is likely to happen. I guess South Africa is in an interesting position because we have a lot of poor people in this country and a lot of people expecting the new government to have progressed further than they have. We’ve got all of those questions so it's perhaps more pronounced here than in Europe or the US. As the population increases globally, resources are not increasing at the same rate, or not at all and in more instances we are actually running out of things so as a result of that you are going to value those resources to a greater extent. So communities naturally are going to get more involved and you are going to see more legislation and as a result of that, companies are going to have greater obligations not only to their owners but society. We’ve got huge poverty problems in this country and unless we address those adequately, we are going to have political problems”.
Terry is the author of Green: Why corporate leaders need to embrace sustainability to ensure future profitability and his newest book, Green II, is coming out soon.