In a changing world where stakeholders are demanding that companies behave like good corporate citizens, and act socially responsibly and ethically, the failure of boards to proactively ensure that the companies they represent actually 'walk the ethical talk' could lead to unintended consequences, and ultimately, reputational damage, says Deloitte.

Commenting on the findings of research into the quality of Integrated Reports issued by listed companies since March 2010, as published in the third edition of the Deloitte publication “Integrated Reporting, Navigating your way to a Truly Integrated Report”, Nina le Riche, a Director at Deloitte and member of the firm's Integrated Reporting Team, says South African companies are increasingly embracing the improved 'stakeholder-centric' reporting standards required by King III. The point has now been reached, she says, where companies not using the standards are 'laggards that are becoming increasingly isolated from the mainstream'.

“It is becoming increasingly obvious to most companies that they need to engage in proactive two-way communication with their key stakeholders, which may include shareholders, employees, suppliers and even the communities surrounding businesses. They need to understand the key concerns of each of these stakeholder groups, and ensure they address these concerns, as failure to effectively do so may result in industrial or legal action, and even serious reputational damage.

“Stakeholder engagement and management, as outlined in the integrated reporting standards, should therefore be viewed as a pivotal part of a board's task. Central to the understanding of stakeholder needs should be the realisation that there could be a 'mismatch' between the issues a company sees as being relevant, and the actual concerns of a particular stakeholder group.

“The solution to avoid a possible impasse developing between the company and its stakeholders is the development of focused, two-way communications between a company and its stakeholders with interactions being tailored to meet the needs of each specific group.

“It is no longer enough for companies to outline their ethical approach and achievements in their Integrated Reports. It has to be clearly seen by stakeholders that the professed and advertised corporate value system and standards are applied by the company and that the guidelines are being measurably applied on the ground,” says Le Riche.

Referring to the findings revealed by research conducted into approximately 150 corporate reports, Johan Erasmus, a Director at Deloitte and member of the firm's Integrated Reporting Team, says it is clear that the 'methodology and manner of managing ethics performance' is not yet sufficiently established.

While certain companies are obliged to appoint a Social and Ethics Committee as required in terms of the Companies Act, it should be noted that King III requires all companies to report on the management of their ethics performance.

A Social and Ethics Committee constitutes a formal structure that can facilitate appropriate attention to the soft, but very important, dimensions of how a company actually goes about its business, specifically its value system with regard to ethical standards. “It is important for the members of the Social and Ethics Committee to understand the role and function of this committee vis-à-vis the other board committees. The key function of this committee is to act as the social conscience of the business and to ensure that the company behaves like a responsible corporate citizen. This function should cover all aspects of the business, including its sustainability, impact on the environment, relationship with all its stakeholders, interaction with and impact on the community within which it operates, the treatment of and investment in its employees, its health and safety practices, black economic empowerment, the ethical corporate culture, and so on,” says Erasmus.

Bertie Loots, Head of Deloitte's Integrated Reporting Team, stresses that while it is true that the concept of effectively managing, and reporting on, ethics performance is a new (and somewhat soft) formal requirement, the application of a comprehensive framework covering all the applicable dimensions will assist in complying with the requirements. However, more importantly, it also significantly reduces the likelihood of ethical failure and the attendant potential disastrous consequences for the company and its directors, as has occurred abroad with certain major corporations.

“It is also essential to note that the Social and Ethics Committee must report to shareholders at the Annual General Meeting, and that at least one member of the committee has to attend the AGM to report back to shareholders on the activities of the company.

“Although there is no legislative requirement for the Committee to issue a written report, it is recommended that a written report be included in the company's Integrated Report, Director's Report or its Governance Report, whichever is the most appropriate in the circumstances.

“South African business is entering a new era; an era where various stakeholders can be expected to take a closer interest in how companies conduct themselves. Companies should therefore expect to be taken to task if advertised values and the reality being experienced by stakeholders diverge,” says Loots.

Please click here to read: Integrated Reporting Aug 2012.