ETHICS REPORTING PRACTICES OF JSE LISTED COMPANIES

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1 ETHICS REPORTING PRACTICES OF JSE LISTED COMPANIES Centre for Professional and Business Ethics University of Pretoria 1. INTRODUCTION The King II Report and Code of Corporate Practices and Conduct urges all companies in South Africa listed on the Johannesburg Stock Exchange Limited (JSE) to submit annual and sustainability reports detailing their corporate governance practices. However, compliance with these prescriptive norms is not necessarily subject to legal scrutiny, and thus listed companies are obliged, rather than compelled, to implement the recommendations of the King II Report and the Code. This implementation is therefore in practice largely a matter between the shareholders and directors of the company. It may be the case that, even though all listed companies must in principle implement and report on their corporate governance practices, such as their compliance with ethical standards, codes, policies and practices, some may only do so as a knee jerk reaction to the King II Report and the Code and merely pay lip service to corporate governance implementation and compliance. 2. AIMS OF THE STUDY The KPMG survey titled 2006 Survey of Integrated Sustainability Reporting in South Africa shows that 70% of the 141 surveyed companies listed on the JSE partially reported on their codes of ethics in This is a significant improvement of 29% from the 2004 survey, which found that over 50% of reports did not even refer to codes of ethics, compared to only 20% in 2006 (2006: 4). This certainly implies that there is a growing ethical consciousness among South Africa s listed companies and that King II compliance is improving. However, questions still remain as to the quality of this ethics reporting. How seriously are ethical standards and policies being taken and to what extent are they being implemented and reported on by these companies? Are codes of conduct merely mentioned because they exist, or are more extensive accounts of the ethics management practices of these companies detailed in their annual and/or sustainability reports? To gain more clarity on the quality of ethics reporting, a qualitative content analysis was carried out of the annual and/or sustainability reports of listed companies that 1

2 participate in the Socially Responsible Investment (SRI) Index of the JSE in South Africa, paying particular attention to how detailed their reporting on ethics policies and practices is. The content analysis specifically determined the following: On what particular ethical aspects do companies tend to report? Is there a general trend to the kind of ethics reporting that takes place? and With how much detail and thoroughness is ethics reported on in the annual and/or sustainability reports of these SRI JSE companies? 3. METHODOLOGY The methodology behind this study began with limiting the research to the JSE listed companies that participate in the SRI Index.. The SRI Index gives a detailed account of the triple bottom line requirements that a company must satisfy in order to qualify as an SRI listed company. These requirements detail the environmental, societal and economic sustainability of the company in question. Thus this study is limited to the SRI Index so as to determine to what extent companies that have already been highlighted as socially responsible actually report on ethics. The findings of the research are derived from the most recently available annual reports and/or sustainability reports of the companies concerned. The findings are somewhat varied because of the qualitative nature of the research. Despite this variety, however, certain broad categories can be discerned within the findings: The first aspect considered is whether there is any ethics reporting at all: does the word ethics or related concepts like moral or integrity appear at any point within the document and, if so, how detailed is the discussion of the ethical dimension? The next consideration is whether a code of ethics or conduct is mentioned in the report and how detailed the discussion of the code is. Finally, the most importance distinction made reflects whether the organisation in question is aware of the importance of ethics and whether the ethos and values of the organisation are reflected in the report. This distinction is based on the overall impression received from the organisation s reporting on ethics and the detail and attention given to the sections dealing with ethics and/or a code of ethics in the report. Organisations that spend less than a paragraph discussing anything ethically related are coded as minimal in their ethics reporting, whereas 2

3 organisations that discuss ethics for more than a paragraph are coded as substantial in their commitment to ethics. This methodology is vulnerable to two critiques, which must be briefly discussed. The first concern is that the designation of a company s ethical commitment as either substantial or minimal is based on a purely arbitrary distinction. The second is that a judgement cannot be made about the ethical commitment of an organisation based only on the written material in its annual and/or sustainability report. To answer the first critique, we could argue that in most reports it is clearly evident that organisations that demonstrate a substantial ethical commitment elaborate significantly on this commitment in their report. They mention various factors such as their whistle-blowing policy, ethics or fraud telephone line, ongoing ethics training facilitation and the presence of ethics officers among their workforce. These companies values or their abridged code of conduct may appear in their annual and/or sustainability reports or they may give an assessment of the ethical climate of their organisations. In contrast, organisations with minimal ethics reporting generally mention very little about their ethical environment in their reports. Generally, if the word ethics or code of conduct appears in these reports they do so only for King II compliance purposes, to satisfy the requirements of external auditors, and very little else is discussed that pertains to ethics. Thus, this distinction between the two levels of reporting which we have labelled substantial and minimal can be made fairly readily. To answer the second critique, that a company s annual report is not a fair or adequate reflection of its ethical commitment, we could point out that the annual and/or sustainability report of a company is the most important and conspicuous shareholder and public document produced by an organisation on an annual basis. Any organisation that is committed to promoting and maintaining the flourishing of ethics should use its report to communicate this to its shareholders and to the public. The annual and/or sustainability report should provide the first impression of the organisation s ethical climate. Thus the annual and/or sustainability report of a company can be taken as a reasonably accurate indicator of that company s commitment to ethics. 3

4 4. FINDINGS The general findings of the qualitative analysis will first be presented. Thereafter, specific features will be highlighted, namely explicit mention of a code of conduct, explicit mention of the King II Report, and indication of a company s level of commitment to ethics, that is, whether minimal or substantial General reporting Of the 55 SRI JSE companies currently listed for 2007, all report on ethics, if a mention of a code of conduct is made the criterion for ethics reporting. However, 8 (14.5 %) of the SRI JSE companies only do so for King II compliance purposes, since they do not discuss their code in any detail. The King II Report requires that a listed JSE company have a code of conduct, so the fact that these 8 SRI JSE companies mention a code somewhere in their reports is an expected feature, but does not necessarily imply that the companies have a strong commitment to ethics. What is promising about the studies findings is that over half the SRI JSE companies do report substantially on their ethical climate. The reporting is difficult to quantify because of the qualitative nature of the analysis, but two broad categories can be identified, as mentioned above: companies that are substantial in their ethics reporting discuss significantly more aspects of the ethics mechanisms and company ethos than companies who are minimal, which tend to limit any discussion on the ethics, values or code of conduct of the company to less than a paragraph or even a few sentences. The figures are as follows (see figure 1): 34 (62%) of the SRI JSE companies are substantial in their ethics reporting; and 21 (38%) are minimal, in that their ethics reporting is not detailed. 4

5 Ethics reporting in SRI JSE companies 70% 60% 62% 50% 40% 30% 20% 10% 0% 38% substantial ethics reporting minimal ethics reporting Figure 1: Ethics reporting in selected SRI JSE companies 4.2. Explicit mention of a code of conduct As has been discussed, the code of conduct is mentioned by all 55 SRI JSE companies somewhere in their annual and/or sustainability reports. This study has determined, from a qualitative position, the extent to which the code is discussed in these reports, and the findings are as follows (see figure 2): 23 (42%) of the companies heavily emphasise the importance of their code of conduct, which forms an important part of their ethics reporting; 13 (23%) of the companies discuss their code of conduct in some detail; and 19 (35%) mention the code of conduct but do not discuss it. Discussion of the code of conduct in SRI JSE companies 45% 42% 40% 35% 30% 25% 20% 23% 35% Heavily emphasised Discussed 15% 10% Briefly mentioned 5% 0% Figure 2: Mention of code of conduct in report 5

6 15 (27%) of the SRI JSE companies publish their code of conduct in their annual report, usually as an abridged or paraphrased version of their full code. All these companies come from the substantial group. The remainder, 40 (73%) do not publish their code in the annual report (see figure 3). Publication of code of conduct in SRI JSE annual and/or sustainability reports 80% 70% 60% 50% 40% 30% 20% 10% 0% 27% 73% Published Not published Figure 3: Publication of code of conduct in report 4.3. Explicit mention of the King II Report In terms of following King II recommendations, the study finds that 45 (82%) of the SRI JSE companies mention the King II Report for compliance and auditing purposes and 10 (18%) do not mention the Report because their annual reports are international reports. However, these companies follow other compliance recommendations inline with their specific country of origin, if they are not based in South Africa Explicit mention of other ethical aspects Certain companies are fairly extensive in their ethics reporting, mentioning the following aspects of ethics: 25 (45%) of the companies in this study mention having an ethics or fraud hotline; 8 (15%) mention that disciplinary action will be followed if their code is violated; 7 (13%) explicitly mention that training on the code of conduct is done for all new employees; 3 (5%) specifically mention having an ethics committee; and 6

7 3 (5%) mention the appointment of an ethics officer. This information was obtained through a close reading of the annual and/or sustainability reports in question and may not be an exact representation of the organisations analysed in this report Level of commitment to ethics This factor is perhaps the most significant finding of this study. It reflects how seriously companies on the SRI JSE Index take their ethics reporting; is their reporting simply a knee-jerk reaction to King II recommendations, or does it reflect a serious commitment to ethics and ethics reporting? As expected, extensive qualitative analysis reveals (see figure 4) that: 34 (62%) of the companies in the study are ethically conscious and report on the ethical climate of the organisation, and all of these companies come from the substantial group; while 21 (38%) of the companies are considered to be reporting as a knee-jerk reaction to King II compliance and could certainly re-evaluate the importance they ascribe to their ethics reporting. SRI JSE companies' ethical commitment 70% 60% 50% 40% 30% 20% 10% 0% 62% 38% Ethical aware Knee-jerking Figure 4: Ethical commitment of selected companies A clear correlation can thus be seen between the extent of a company s ethical reporting and its ethical consciousness or commitment. Companies that report substantially on ethics generally provide a discussion of the importance of ethics in 7

8 their organisation, their code of conduct and other ethical aspects of the organisation. Companies that can be considered as knee-jerking are aware of their ethical obligation in terms of King II and mention their code of conduct but can substantially improve their reporting of ethics. 8