Stakeholders’ Perceptions on Integrated Reporting

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From institutional theory perspective, Dragu and Tiron-Tudor (2013) also examined the correlation between voluntary adoption of IR and the external political, cultural and economic factors. Content analysis of the annual integrated reports of the 58 companies from IIRC Pilot Program is conducted for this purpose. Although political and economic factors were found to be positively related, surprisingly culture as represented by National Corporate Responsibility Index couldn’t explain the adoption of IR.

The researchers argued that small sample size can be a reason for this inconsistent result.

Materiality is one of the guiding principles in IIRC Framework and plays a central role in integrated reporting by identifying the important and relevant issues for concise communication with the stakeholders (IIRC, 2013a). Accordingly, Fasan and Mio (2016) in their study focused on the disclosure and determinants of materiality based on a sample of IIRC Pilot Program Companies. The study showed that industry affiliation of companies and board characteristics such as board size and diversity can explain the variation in materiality disclosure. In contrast to previous studies, it found that high environmental impact companies such as oil and gas, basic materials have less disclosure than other industries. It also documented that country level legal environment is not significant in materiality disclosure. The authors argued that globalization of business environment have reduced the impact of country level legal differences in materiality disclosure. In a recent international study, Gerwanski et al., (2019) further examine the determinants of materiality disclosure quality (MDQ) in integrated reports.

They construct a unique MDQ index based on IIRC Framework. Based on a sample of 359 firm-year observations from 117 companies in Europe and South Africa, the study shows that experience in publishing integrated reports, female directors, and assurance of non-financial disclosure have significant influence in MDQ in integrated reports.

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The results of the study suggest clear changes in organizational behavior and business practices through explicit consideration by managers of interdependencies between financial, social and environmental matters, as well as incorporating these into strategic objectives, strategic planning and decision-making, because of the integrated reporting compliance regime.

However, in another study Rensburg and Botha (2014) found that very few stakeholders use the integrated reports as their main source of financial and investment information, and that these reports are seen as additional information. Their national online survey in South Africa revealed that annual and interim financial reports by companies are still the mainstay for corporate financial information.

One of the key challenges of current practice is to determine the content, format and structure of the integrated reports. Given the lack of authoritative guidelines, at present companies are following “trial and error” approaches to advance the practice. However, to be effective an integrated report should include the material information that are also valued by stakeholders. It means that both preparers and users of reports have consensus regarding the contents, format and structure of the reports. Using mixed research method including analysis of integrated reports and questionnaire survey, Naynar et al., (2018) examined the expectation gap between preparers and stakeholders regarding the contents of integrated reports in South Africa. The study found that certain disclosure themes are reported by companies, however, are not found to be equally important to the stakeholders. It also showed that users’ perceptions about material information are affected by the level of their sophistication. Sophisticated users with their high level of educational and professional experience in IR preferred “complex” disclosure on management performance and role of auditor in ensuring accountability to the stakeholders.

Unsophisticated respondents, on the other hand, considered current IR as overly complicated and argued for “simplified disclosures, explanations and illustrations” to make the report useful for their decision making.

While the above studies examined the South African context, recent studies also informed stakeholders’

perception of other countries. Adhariani and De Villiers (2019) conducted a questionnaire survey to understand the perception of preparers and other stakeholders about IR in Indonesia. The study reported that stakeholders have limited knowledge on IR. The respondents, however, perceived that IR can accrue

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several benefits including promoting integrated thinking, better communication with stakeholders, and improving transparency and governance in corporate reporting. Interestingly, although IR is assumed to provide information primarily to investors, benefits related to capital market were perceived to be low in Indonesia. The respondents identified several challenges of implementation of IR including costs of preparation, lack of appropriate information system, and fear of divulging market and/or price sensitive information. Finally, the preparers were inconsistent in their opinion. Although they perceived IR is beneficial but are reluctant to implement in practice.

Slack and Tsalavoutas (2018) investigated the decision usefulness of IR to mainstream equity market participants. The study was based on 22 interviews of equity analysts and fund managers based in London and are working for international companies. The participants have raised significant questions about the usefulness of IR. Majority of them considered that statutory annual report can provide the required information necessary for their decision making. The study also identified several limitations of integrated reporting: lack of familiarity of integrated reporting at the operational level, absence of measurement criteria and qualitative nature of reporting, difficulties to ensure comparability and consistency in reporting, lack of relevance of multiple-capitals of IIRC Framework in investment decision, and lack of regulatory requirement of integrated reporting and associated assurance practice. The interviewees finally argued that short termism culture of capital market is another main reason for lack of interest in IR.

Although “integrated thinking” is fundamental for publishing an integrated report, Feng et al., (2017) argue that concept of integrated thinking is not clearly defined in IIRC Framework. They conducted a study based on semi-structured interviews with key IR stakeholders in Australia to explore how the concept is operationalizing in practice. Given the lack of guidance by IIRC, there was no consensus among the interviewees in the meaning of IR. The study identified several aspects that need to address to operationalize the integrated thinking: commitment of board in integrated thinking agenda, mid-level management role to communicate integrated thinking at the operational level, setting up cross-functional teams to involve the organizational functional units in integrated reporting, using of materiality determination process and multiple-forms of capital, and connectivity among integrated thinking, strategy, and capitals. Finally, the authors call for more additional studies to investigate the key concepts of IR and

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the impacts of those on organization. Given the different socio-political context and higher adoption of IR, the authors particularly urge to investigate the practice in Japan.

McNally et al. (2017) also conducted interview survey to explore challenges of implementing IR in South Africa. The study showed that in most of the organizations IR is imposed by the top-level management without making required changes in accounting system, sustainability management, and necessary infrastructure. Given IIRC Framework adopts a principles-based approach, companies are uncertain about the contents of an integrated report. The interviewees have identified several challenges of current IR practice including doubt about the usefulness of IR, lack of coordination among the organizational units, insufficient stakeholder engagement, lack of systematic approach of determining material issues, difficulties in quantifying sustainability information, weak integration between corporate strategies, sustainability initiatives, and integrated reporting.

Hsiao and Kelly (2018) also documented Taiwanese investors’ reluctance to include sustainability information in their investment decision. Interview results also showed that investors prefer private sources of information and are not aware about integrated reporting. The investors have identified several concerns regarding integrated reporting: difficulties in quantifying non-financial performance and assess the impact of non-financial performance on financial performance, uncertainty about reliability of non-financial and future oriented information, and biasness in information disclosed to use integrated reporting as impression management tool.

Stubbs and Higgins (2018) fill-up the gap in IR research by examining the users’ perception on the regulatory reforms in integrating reporting. The study conducted 22 interviews with key IR stakeholders including regulators, standard setters, industry organizations, accounting firms, and financial investment stakeholders. Majority of the participants were in favor of voluntary nature of IR rather than mandatory regulation. They argued that IR is now in an evolving stage and insufficiently develop to have mandatory regulation. They also noted that regulation will increase the reporting burden on companies and develops a ‘tick-the box’ culture to make integrated report a compliance-oriented report. Proponents of voluntary approach believe that voluntary IR would ensure the flexibility necessary to experiment innovative reporting practice that would make the integrated reporting future reporting norm. However, the

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respondents welcomed regulations on certain aspects including determination of ‘materiality’ and assurance of non-financial information. On the other hand, interview participants, especially financial stakeholders preferred mandatory regulation for IR. They argued that in the absence of regulation, companies would not the interested to adopt IR. Based on the experience with sustainability reporting, they noted that regulations can ensure extensive disclosure and accountability of companies for their financial, social, and environmental impacts.