This section provides summaries of the empirical chapters and the main finding therein. These studies offer some interesting insights about the reporting practice of the sampled organizations.
8.2.1 Chapter Four: Contents of Integrated Reporting: Evidence from Selected Companies of Japan
The objective of Chapter 4 is to investigate the contents of annual reports of leading listed companies in Japan which is the first specific objective of this thesis. Although preparation of IR is not mandatory in Japan, it would be interesting to investigate ‘what’ the companies are actually reporting to their stakeholders and to ‘what’ extent their reporting practice meet the suggestions of the IIRC Framework. To fulfill this objective, a sample of 20 companies is randomly selected from the first 100 companies of the Nikkei 225 index. This study evaluates the extent and quality of annual reports for the year 2016 against the IIRC Framework. Although it is very difficult to conclude very objectively on the level of compliance of these reports against the Framework, this study has proposed a disclosure checklist to codify the data for analysis. Disclosure checklists (III) and (IV) are related to the analysis of Chapter 4. Disclosure checklist (III) presents information based on sampled listed companies of Japan, such as: (1) the average disclosure scores of each Content Element for the sampled companies of Japan (2) disclosure score by individual company for each item and for each Content Element (3) the total disclosure score for each company based on all Content Elements. On the other hand, Disclosure checklist (IV) shows the
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disclosure quality of each item (there are 43 items in the checklist) rather than each company. It also shows the percentages of companies in the sample who disclosed a particular item. So, Disclosure checklist (IV) is an item-based analysis of data for twenty Japanese companies in the sample.
Disclosure checklist (III) shows that the disclosure scores of the 20 sampled companies of Japan range from 75.68% to 36.49% approximately. Prior studies also found that the compliance rates vary significantly among companies even in the same country ((Marx and Mohhammadali- Haji, 2014). The checklist (III) also reveals that Governance is the highest disclosed category with 80% average disclosure by the sampled companies followed by Organizational Overview and External Environment with 76%
average disclosure. Outlook is the third disclosed category with 75.63% average disclosure. The lowest disclosed Content Element is Basis of Preparation and Presentation followed by Business Model with 47.5% and 48.18% average disclosure respectively by the sampled companies’ reports. Earlier studies found that Organizational Overview and External Environment or Strategy and Resources Allocation are the highly disclosed Elements whereas Materiality and Business Model are the lowest disclosed categories (Wild and Van Staden, 2013; Ahmed Haji and Anifowose, 2016). These findings are consistent to the findings of the present study. However, in contrast to the prior studies, the current one has found significant disclosure on Governance and Outlook by the sampled Japanese companies.
Drawing out from legitimacy theory, this study thinks that the current reporting practice of Japanese companies might be a combination of both symbolic and substantive management. The presentation of business models in these reports seems generic, mainly qualitative and symbolic in nature.
Interdependencies between various capitals a business uses are not discussed clearly or completely. There is a common tendency of using similar terminologies used in the IIRC Framework’s value creation process and Business Model. This could be to demonstrate the company’s compliance with the IIRC Framework as these annual reports have acknowledged this reporting Guideline in their editorial policy sections. On the other hand, Materiality has the most ambiguous and minimal disclosure in general, in the sampled Japanese reports. These reports are usually biased for communicating positive information to the stakeholders with occasional acceptances of failure or negative information. From the viewpoints of legitimacy theory, these are signs of symbolic actions by the management. Apart from the above findings, this study finds substantive disclosure on many Elements such as, Governance, Outlook, or
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Organizational overview and External Environments. For the sampled Japanese companies, the average of the overall disclosure scores is 64.73%. The disclosure practice, in general, is evidencing that the introduction of integrated reporting is shaping the corporate reporting practices in Japan and the companies are gradually aligning their reporting practices to the basic principles of IR.
8.2.2 Chapter Five: Contents of Integrated Reporting: Evidence from Selected Companies of the UK
This chapter fulfills the second specific objective of this thesis. This thesis aims to examine the reporting practice in Japan and in the UK where publication of IR is voluntary. Chapter 4 has discussed on the contents and quality of annual reports of selected Japanese companies. Consistent with that, Chapter 5 has focused on the reporting practice of the UK, a country having strong background of voluntary reporting since long. Without any legal obligation, it would be interesting to observe whether the latest reporting form, that is IR, has exerted any influence on the corporate reporting practice of this country. The sample for this study is 20 randomly selected companies from the Financial Times Stock Exchange (FTSE) 100 list and the annual reports of these companies for the year 2016 are collected from their respective websites. This study has also used the same disclosure checklist used in Chapter 4 as per Content Elements of the IIRC Framework. Disclosure checklist (V) and (VI) have coded data for the present study.
Disclosure checklist (V) shows that the overall disclosure rates vary from 87.84% to 54.05% for the sampled annual reports of the UK. The average compliance rate for the sampled reports is 71.01%.
Checklist (V) also reveals that Governance is the highest disclosed category with 97.78% average disclosure followed by Organizational Overview and External Environment with 85.50% average disclosure. The Content Elements Risks and Opportunities and Outlook have an average disclosure of 83.57% and 82.50% respectively. The lowest disclosed Content Element is Basis of Preparation and presentation with 35% average disclosure only. It is interesting to observe that the findings of this study have some similarities with that of Japan conducted in Chapter 4 of this thesis. Future research, therefore, can investigate the reporting practice of different parts of the world to comprehend whether there is any general trend in the reporting practice of other countries as well.
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This study has some interesting findings. Firstly, the sampled annual reports have made substantive disclosures on many aspects such as, Governance, or Risks and Opportunities or presenting KPIs. On the other hand, these reports have also made minimal and mainly qualitative disclosure on Contents such as, Business Model or Materiality. This thesis uses the lens of legitimacy theory to explain such practice by organizations. According to Ashforth and Gibbs (1990), organization can use a mix of legitimation strategies depending on its intention to extend, maintain, or defend legitimacy. The current study thinks that the situation for listed companies of the UK might be an example of maintaining legitimacy where non-adoption of IR would not damage their legitimacy. Secondly, the UK’s regulatory requirements regarding disclosure of annual report or contents of the annual reports for listing companies might be influenced by the basic principles of the IIRC Framework. Deloitte (2015) also observed significant similarities between the IIRC Framework and the Strategic Reporting Guidance. To maintain legitimacy in the eye of the regulators, these companies need to make certain disclosures. This could be one possible reason for the sampled companies of the UK to achieve a moderate compliance against the IIRC Framework as well. Whether certain types of performance expectations are determined by market, normative, legal, or political forces, most of the firms need to fulfill those expectations to ensure their legitimacy and maintain support from its important constituents. Organizations pursue their legitimacy through various substantive and symbolic practices (Ashforth and Gibbs, 1990).
In conclusion, in spite of limited application of some key aspects of integrated reporting, such as Business Model, Materiality or linkages between financial and non-financial information, the sampled corporate reports of the UK have demonstrated a modest compliance against the propositions of the Framework.
These reports show great potentiality to align more in the future with the propositions in the IIRC Framework.
8.2.3 Chapter Seven: Corporate-Level Determinants of Integrated Reporting: Evidence from Japan
This chapter serves the third specific objective of this thesis, that is, to understand the factors influencing the adoption of integrated reporting. The findings of the first study (in Chapter 4) of this thesis show that the annual reports of Japanese companies follow the guidelines of the IIRC Framework to a modest level.
Both the contents and quality of annual reports, as well as the number of Japanese companies which are
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following IIRC guidelines voluntarily, are increasing (KPMG in Japan, 2018). This study aims to identify determinants of IR adoption by Japanese listed firms. Existing literature have investigated country-level features such as political and legal systems, economic development, cultural characteristics, and company-level features such as size, profitability, or industry and board characteristics (Vaz et al., 2016;
Jensen and Berg, 2012; Frias-Aceituno et al., 2014). However, none of these studies have examined the possible determinants of IR adoption for Japanese firms. This study, therefore, extends the existing integrated reporting literature by focusing on Japan. To fulfill this objective, the effects of some selected company-level features upon IR adoption have been examined, namely company size, profitability, investors, industry and board characteristics including board size, and board independence. Using logit regression analyses, the influence of these factors on IR adoption is tested by developing nine related hypotheses. The sample for this study is Nikkei 225 companies listed in the Tokyo Stock Exchange. After excluding banks and other financial institutions, the final sample becomes 169 companies. Annual reports of these companies have been collected from the websites of individual companies. Corporate Governance data are collected from the Nikkei NEEDS CGES of 2017 and corporate characteristics related data are taken from the NEEDS Financial Quest database. In absence of any broadly agreed upon definition of IR (Hughen et al., 2014); the present study sets its own criteria to identify which annual reports can be considered as an IR. Based on those criteria the contents of 169 reports have been examined and finally, a total of 96 companies’ annual reports are chosen as IR for the year 2017.
This study finds that the average adoption rate of integrated reporting is 56.80%. The findings show high dependence on debt financing of these firms and significant stakes of foreign owners in these companies.
In line with other studies (Jizi, 2017; Lim et al., 2007; Wang and Hussainey, 2013), this study finds that board independence has a significant and positive influence upon IR adoption. Consistent with other empirical studies on sustainability reporting (Saka and Noda, 2013) and integrated reporting (Frias-Aceituno et al., 2014), the present study also finds that corporate size is positively associated with adoption of IR. Larger firms usually disclose more voluntary information to reduce higher agency cost and information asymmetry associated with those firms (Frias-Aceituno et al., 2014). On the other hand, this study finds negative and/or insignificant relationships between IR adoption and some other variables.
The results indicate that board size has a negative and insignificant relationship with integrated reporting adoption. Prior studies (Akhteruddin et al., 2009) found that larger boards can reduce information
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asymmetry and provide more voluntary information than the smaller ones. However, ineffective communication and lack of coordination in the decision-making process may outweigh this benefit (Kilic and Kuzay, 2018). The present study finds that institutional shareholding, cross shareholding, and foreign shareholding have no significant association with IR adoption in Japan. Prior studies (Saka and Noda, 2013; Wang and Hussainey, 2013) also confirm similar findings. These powerful investors might have access to other private and public sources of information. Finding insignificant relationship between foreign shareholding and IR adoption decision is against many earlier studies (Tanimoto and Suzuki, 2005) in sustainability reporting. One possible explanation for such insignificant relationship could be foreign shareholders’ preferences for short term profit rather than long term sustainability of the investee companies (Suzuki, et al., 2010). Moreover, being in an evolving stage, IR might not be considered as credible source of information to these stakeholders. In line with some recent studies (Kilic and Kuzay, 2018), this study fails to prove any significant relationship between industry affiliation and IR adoption. It means that the gap in the disclosure practices between environmentally sensitive and environmentally non-sensitive industries is reducing (KPMG, 2017). Finally, ROI has a negative and insignificant effect on the adoption of IR implying that less profitable companies may attempt to save their reputation in the market by disclosing more voluntary information or to divert the attention of the market from their poor financial performance (Neu et al., 1998).
This is a cross sectional study based on the data of one year for the Nikkei 225 companies. Therefore, the findings of this study should be interpreted with caution. Nevertheless, these findings could give useful insights to the academia, the regulators and others concerned on the effects of some selected corporate characteristics on integrated reporting disclosure in Japan.