The value of integrated reporting in South Africa

Abstract

listing requirements on 01 March 2010. The JSE, in a guidance letter dated 27 June 2013, clarified that, although the production of an integrated report was not a mandatory principle in terms of the JSE listing requirements, listed companies were advised to adopt integrated reporting on an ‘apply or explain’ basis. The introduction of King IV has further increased the requirement for integrated reporting by adopting an ‘apply and explain’ basis for the principles in the code (IoDSA 2016). Background: South Africa is currently the only country in the world where its largest stock exchange has adopted integrated reporting on an ‘apply and explain’ basis, through the implementation of the King Code for Corporate Governance (King IV). However, there exists significant uncertainty regarding the value of adopting integrated reporting. Aim: The objective of this study is to establish whether organisations, perceived to produce higher-quality integrated reports, achieve better financial performance or if the value of integrated reporting lies in improving organisational legitimacy and managing stakeholders’ impressions. Setting: The sample consists of the Ernst & Young (EY) ranked companies listed on the Johannesburg Stock Exchange (JSE) from 2011 to 2020. Method: The study examines whether the quality of integrated reporting is associated with various financial performance measures, namely liquidity, solvency, profitability, and market performance, using multinomial logistic regression. Results: The multinomial logistic regression model is weak and indicates no direct relationship between integrated reporting quality and financial performance. An investigation into specific variables in the model indicates that top-performing companies, in terms of integrated reporting quality, tend to have significantly lower price-to-book value ratios and higher return on equity values. Companies with the best quality integrated reports also appear to be larger in terms of market capitalisation than those companies who prepare integrated reports of lesser quality. Conclusion: The results of the study do not record a significant relationship between integrated reporting quality and financial performance. The results indicate that larger companies listed on the JSE produce better quality integrated reports. This may be an indication that companies produce integrated reports, not for their financial value-adding benefits but to maintain organisational legitimacy and to manage the impressions of stakeholders.