Integrated reporting step 1 : realize it is not about the report : a qualitative research studying the results of integrated reporting

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Integrated reporting step 1:

realize it is not about the report

A qualitative research studying the results of integrated reporting

Name: Marjolein Evers Student number: 10431497

Thesis supervisor: mw. dr. E.G. van de Mortel Date: 16-6-2016

Word count: 18.749

MSc Accountancy & Control specialization Control

Faculty of Economics and Business University of Amsterdam

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Statement of Originality

This document is written by Marjolein Evers who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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List of tables

4.1 Overview interviews ... 32

5.1 Overview results on the motives for integrated reporting ... 34

5.2 Overview results on the purpose ‘addressing information needs’ ... 36

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Abstract

In this thesis the first results of integrated reporting are explored. Two purposes of integrated reporting are identified: addressing the information needs of all stakeholders and stimulating integrated thinking. This study researches to what extent these

purposes are being fulfilled.

For the purpose of this paper a literature review on sustainability reporting and integrated reporting was conducted, together with a document analysis of integrated reports of eight Dutch and Belgium organizations and eight interviews. These interviews were held with the persons responsible for the integrated report within their

organization. The organizations of the sample were all, but one, involved in the pilot study of the International Integrated Reporting Council (IIRC).

The study showed that integrated reporting is fulfilling its purposes to some extent. It does facilitate integrated thinking, but it remains unclear whether it actually causes integrated thinking. A lot of external factors are at play, and therefore the opinions differ on this matter. As for addressing the information needs of all stakeholders, integrated reporting is contributing to this. Due to the integrated

reporting framework, the researched organizations are increasing the intensity of their stakeholder dialogue and focus on what is material to both them and their stakeholders. The main conclusion of this research is that integrated reporting is often misunderstood, possible due to the name ‘integrated reporting’. Integrated reporting is not about the report itself, it is about the internal processes that lead to and result from the report. The report is merely the outcome of the integrated reporting process. The main necessity in order for integrated reporting to be able to fulfill its perceived purpose is that the practitioners must understand this first, otherwise there is a risk that integrated reporting doesn’t actually contributes to either goal.

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1. Introduction

One of the most pressing issues of our time is climate change. The gravity of this matter has been known for multiple decades; however significant actions resulting from this knowledge are just starting to pop up since the end of the 20th_{century. Considerable}

shifts are necessary in order to put a hold on the rapid acceleration of climate change caused by humans. There are countless initiatives in each sector that try to promote these shifts, including the accounting sector. Some would even suggest that accountants are (or must be) leading the way (Gleeson-White, 2014, pp. xi-xxv). Jonathan Watts spoke the following words at the biodiversity summit in Nagoya in 2010:

“So it has come to this. The global biodiversity crisis is so severe that brilliant scientists, political leaders, eco-warriors, and religious gurus can no longer save us from ourselves. The military are powerless. But there may be one last hope for life on earth: accountants.” (Gleeson-White, 2014, pp. xi-xxv)

One of the roots of the problems that planet earth is facing is that, economically speaking, its services have been taken for granted. Our ecological footprint is out of control and most of the world’s economies are increasingly unsustainable, unstable and unfair, but as the saying goes: “what we don’t measure, does not matter”. A direct consequence from this ‘partial blindness’ is what is called: the economic invisibility of the planet. Our economic system is built on valuing scarcities the highest. For many years we have had plenty of planet (natural resources) and therefore it never got priced (Ring, Hansjürgens, Elmqvist, Wittmer & Sukhdev, 2010, pp. 15-23). Pavan Sukhdev said: “We use nature because she is valuable, but we lose nature because she is free.” (Sukhdev, 2011)

But not only natural capital is an underappreciated capital; also human,

intellectual and social capital is not properly measured and therefore too often left out. This has led us to increasing income inequality and a growing division between poor and rich. But what has accounting to do with these social and environmental issues?

We have moved from the Industrial Age into the Information Age. Tangible assets are no longer the only relevant assets that corporations must take under consideration. The Information Age comes with new intangible valuables like knowledge and data. The new way of valuating becomes clear when looking at corporations like Twitter; a

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money. The wealth of a corporation like Twitter lies in their human and intellectual capital, not in their financial or manufactured capital.

What we as society decide to measure is shown in the accounting standards. So one could argue that the accounting standards have, up to recently, been insufficient and therefore created the opportunity for corporations to leave out the social and natural capital. Robert K. Elliot (1992) wrote about exactly this over 20 years ago (p. 22). He argued that the old accounting systems are breaking down because they are designed in and for the Industrial Age. Where we used to valuate based on money’s worth (so called financial and manufactured capital), we are making a shift towards valuating the

economy and its corporations on those aspects which can deliver for people and planet. In other words: we are uniting the economic system with social and environmental justice in order to create a more sustainable and fair planet. This concept has been presented in many forms already, of which the most famous being: ‘the triple bottom line; People, Planet and Profit’ (Norman and MacDonald, 2004, p. 243) and another format: the six capitals; Financial, Manufactured, Intellectual, Human, Social and Natural Capital (Gleeson-White, 2014, p. xvii).

So the world is changing and the global context in which corporations operate is developing along with it. Shareholders, investors and other stakeholders are demanding clear and unambiguous information about the actions of a corporation, its externalities (both positive and negative) and what their story really entails. Financial measurements alone do not provide sufficient insight. Stakeholder involvement is increasing and the growth in the variation of needs and demands has led to companies rethinking their external reporting practices (NBA, 2015, p. 19). To provide stakeholders with the information that is most relevant for them, reporting of non-financial aspects of a corporation is gaining ground. 95% of the largest 250 corporations are already reporting on their sustainability performance (KPMG, 2011, p. 6).

The latest improvement in corporate reporting is the introduction of integrated reporting. The International Integrated Reporting Council (IIRC) has created a

framework for integrated reporting which was published in December 2013. The integrated report should “provide a holistic view on the company’s ability to create value in a sustainable way and answers the call for an integrated insight in the financial and non-financial impact of a company relevant for its stakeholders” (NBA, 2015, p. 19). The IIRC (2011) also claims that the traditional reporting model was developed for an

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industrial world. Since we moved from the industrial age towards the information age, the world is in need for a reporting model more suited to the 21st_{century, the}

information age (p. 4).

Integrated reporting is more than just an annual report. Integrated reporting is a journey; the report is merely the outcome of another year on this journey. Integrated reporting is a change process that enables organizations to think differently about their business (PwC, 2013, p. 1). The International Integrated Reporting Council (IIRC) defines integrated reporting as:

“A process that results in communication by an organization, most visibly a periodic integrated report, about how an organization’s strategy, governance, performance, and prospects lead to the creation of value over the short, medium and long-term” (IIRC, 2011, p. 7)

This process aims to encourage organizations to consider value creation on each of the six capitals, including social and environmental value creation. It aims to get

organizations to take responsibility on their externalities. In this indirect manner,

integrated reporting (the process) could be a leading asset in tackling the climate issues, and many other issues we are facing.

The ideology behind integrated reporting is promising, but is integrated reporting truly the Holy Grail that the IIRC wants it to be? Integrated reporting faces some challenges and risks. It could, for instance, be relatively easily misused as a tool for marketing and ‘green washing’1_{. The corporations currently working with integrated}

reporting also acknowledge the difficulties in creating a comprehensive, understandable and concise report which meets the information requirements of every stakeholder. And thirdly, the assurance on integrated reports is a whole new thing. Are accountants ready to provide reasonable assurance on integrated reports?

There has been increasing momentum towards better reporting and there is a global dialogue on how to improve the usefulness and transparency of corporate reporting. The aim of this research is to contribute to this global dialogue by reviewing the first experiences of integrated reporting. This research conduct an in-depth

examination of the perceived purposes of integrated reporting and the whether the current integrated reporting practices are achieving these goals, working towards

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reaching its purpose or failing to reach its purpose and why. Consequently, this research seeks to answer the following question:

 To what extent do the first integrated reports fulfill the perceived purposes of integrated reporting?

The sub questions answered in order to answer the main question are:  What is integrated reporting?

 What are the perceived purposes of integrated reporting?  To what extent is IR fulfilling its purposes in theory?  To what extent is IR fulfilling its purposes in practice? 1.2 Research Method

In order to answer the research question this study conducts a qualitative research. This research entails eight semi-structured interviews and an analysis of multiple integrated reports. The sample consists of organizations which have joined the pilot program of the IIRC in 2011. These are the corporations which have been most closely involved with the development of the integrated reporting framework and have the most experience thus far in implementing integrated reporting in their organization.

1.3 Contribution

Research on integrated reporting is still scarce and scattered (NBA, 2015, p. 19). The purposes of integrated reporting have been stated by the IIRC explicitly. The pilot study started in 2011 and the framework has been published officially a little over two years ago, so there is enough data available to start with an initial review of the results of integrated reporting.

There are a number of researches that look into the role of assurance and

stakeholders in sustainability and integrated reporting. However, integrated reporting is more than just reporting. Most research on integrated reporting thus far has focused on the actual report and not on the broader process of integrating reporting. This research aims to look beyond the report. The report is a crucial element, but it is merely the outcome of the integrated reporting process. This study focusses on the internal

processes that occur prior to, and as a result of the creation of the report. To the authors’ best knowledge, this area remains disregarded in the existing literature.

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1.4 Thesis Structure

This thesis is structured as follows: chapter two provides an overview of the existing literature on sustainability, sustainability reporting, integrated reporting and the

current economic landscape. Chapter three focusses on the theoretical frameworks that are applicable to this research. In chapter four the research methodology is elucidated. Chapter five will present and explain the research findings followed by a discussion of the findings. The main conclusions and suggestions for future research can be found in chapter six.

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2. Sustainability and integrated reporting

This chapter will discuss prior literature on the subject of sustainability, accountability, sustainability reporting and integrated reporting (IR). It starts with an introduction to the rise of sustainability. The second section provides an overview of the developments in sustainability reporting and introduces IR. The third section will elaborate on the integrated report and its perceived purposes and the thus far identified challenges. The final section is a recap of this chapter.

2.1 Flaws of the current economic system

The need for sustainability and accountability has been growing for decades, but recently has increased substantially. As mentioned before, the awareness of the magnitude of the environmental, economic and social issues we are facing is growing globally. The different actors in society are all moving towards acting more sustainable and responsible, or at least trying to appear to do so. This was apparent at the COP21 in Paris in 2015, where 195 countries agreed on a climate convention which states that they will collaborate to keep global warming below 2 degrees. At the same time, most multinationals have been investing in sustainability for the past years and this change is continuing to grow. NGO’s are starting to cooperate with for-profit organizations and governments to reach their goals and individual consumers are asking for more responsibility, and therefore accountability, from the firms of which they buy their products and services. Currently there seems to be a consensual momentum for a significant change in the economic system. The planet earth is showing its boundaries, information technology has given stakeholders a change to be more active and engaged than ever before, regulators are promoting (and at times forcing) change and a new generation of corporate leaders appears to acknowledge the need for change. Different researchers have written about the need for basic changes in the

existing global economy based on short-term profits and greed in order to reach a stable and sustainable global economy. Thomas Malthus (1798) is seen as the first to write about the consequences of a growing population on a finite planet in his Essay on

Population (Lovejoy, 1996, p. 266-267). In the book Limits to Growth written in 1972 by D.H. Meadows, D.L. Meadows, J. Randers and W.W. Behrens, a similar conclusion was drawn about the consequences of unchecked growth. They argued that no process can

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continue forever without change. They estimated that the population, given the current growth rate, will run into an environmental constraint and will be limited by famine, war and diseases. Stewart Udall (1980), an American politician and later a federal government official, said:

“All the evidence suggests that we have consistently exaggerated the contributions of technological genius and underestimated the contributions of natural resources (…) We need (…) something we lost in our haste to remake the world: a sense of limits, an awareness of the importance of the earth’s resources.”

(Obtained from Meadows, Randers, & Meadows, 2004, p. 203)

Lovejoy (1996) argued that a stable and sustainable global economy exists, but it would require basic changes in the existing global economy based on short-term profits and greed (pp. 277-278). This discussion is being held on many different levels of intensity. The statements range from promoting ‘just a slight adaption to act more considered on the environment and society’ towards calling it the ‘end of capitalism’. Many researches and a multitude of books are being published to catalyze the discussion, like Limits to Growth: the 30-year update by Meadows, Randers and Meadows (2004), The Zeitgeist Movement (2008), Prosperity without Growth by T. Jackson (2009), Six Capitals by J. Gleeson-White (2014), Capital in the 21st_{century by T. Piketty (2013), Caring Economics}

by T. Singer and M. Ricard (2015), Postcapitalism by P. Mason (2015) and many more. The scale of this ‘revolution’ is widely argued. Apart from the magnitude of this change, according to highly respected economists, like Thomas Piketty, the definition of ‘value’ is evolving. J. Gleeson-White (2014) introduces the six capitals that were

mentioned before: manufactured, financial, human, intellectual, social and natural capitals are valuable to us and should therefore all be treated as such, not just the financial and manufactured capital.

Even though most of the actors in society seem to acknowledge the need to move towards more sustainability, accountability and responsibility, there are difficulties with the agreement on how to define and implement these three. The next paragraph will further investigate the different views on sustainability and accountability. This provides some context for the discussions on sustainability and integrated reporting that follows.

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2.1.1 Definition of sustainability

In this section a variation of definitions of sustainability is reviewed and used to create the definition which will be used in this research.

‘Our common future’ is a report from the United Nations World Commission on Environment and Development, better known as the Brundtland Report. The widely cited definition of sustainable development in this report is:

“Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” (WCED, 1987)

The commission of the European Communities (2001, p. 6) defines sustainability as: “A concept whereby organizations integrate environmental and social concerns in their business operations and in their interaction with stakeholders on a voluntary basis.” (Commission of the European Communities, 2001, p. 6)

Searcy and Buslovich (2014) compare five definitions of sustainability (p. 151). Even though the definitions differ, they all emphasize the short- and long-term time

orientations, the importance of stakeholder needs and some form of the ‘triple bottom line’-theory. These characteristics are clearly stated in the definition of Slawinski and Basal (2010), and therefore this is a suited definition and will used in this research:

“Sustainability is the ability of firms to respond to short-term financial, social and environmental demands, without compromising their long-term financial, social and environmental performance.” (Slawinski and Basal, 2010, p. 1)

Sustainability is a global challenge. The main issue with this challenge is that it is of such magnitude, that individual entities do not feel ownership of the problem. As long as there is no feeling of ownership, people will not act to solve any problem. In order to create a sense of responsibility and ownership, the need for accountability for every individual and organization has rose.

2.1.2 Definition of accountability

As mentioned before, in order to move towards a more sustainable society, the actors in society will need to be held accountable for their actions. Gray (2001) defines

accountability as:

“identifying what one is responsible for and then providing information about that responsibility to those who have right to that information.” (Gray, 2001, p. 11)

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Gray, Owen & Adams (1996) describe accountability as:

“The duty to provide account (by no means necessarily a financial account) or reckoning of those actions for which one is held responsible.” (Gray, Owen & Adams, 1996, p. 38)

Both definitions are quite similar. In this research the definition of Gray (2001) will be used. The element of ‘identifying what one is responsible for’ is a crucial part in the transition from financial reports towards integrated reports and therefore this definition is more suited for this research.

Accountability is the basis of the existence of corporate reporting. There are rules and regulations that enforce accountability on corporations considering their financial actions and transactions. Accountability is gaining ground in the other capitals as well; chocolate producers are being held accountable for modern slavery in their cacao plantations, clothing brands are being held accountable for the work conditions of their employees in the factories in developing countries. Society is demanding more

responsibility and accountability. At the same time, an opinion poll carried out by AccountAbility (2006) on the state of accountability showed that people are unsure about who should be held to account for the things that matters the most to them. This is true for local issues but also for global issues like climate change, diseases and poverty. 2.1.3 The role of accountancy

In the opening speech of Jonathan Watts at the biodiversity summit in Nagoya in 2010, Watts is suggesting that accountants might be the one last hope for life on earth, because they have the potential to hold nations and corporations accountable for their impact on nature (Gleeson-White, 2014, p. xiv). This is one way of looking at the role of

accountancy in the changing economic system. The idea is that, in order to get

organization to behave more responsible, they need to feel responsible and this can be achieved when they are held accountable for their actions. Reporting obligations could enforce this accountability. This ‘obligation’ could both be regulatory or stakeholder demanded. This explanation of the role of accounting is from a controlling perspective; accounting prevents organizations from having a negative impact on society, because accounting is a tool society uses to control the organizations. A more philanthropic look at the role of accounting lies in the opportunity it brings organizations to tell their story. Organizations that are involved in creating societal value above just corporate value get

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a chance show the world what they are doing through the corporate reports. Both perspectives result in a positive perceived outcome for society, namely an increase in the so-called societal value creation.

Value creation is a goal for every corporation. Corporations create corporate value, which comprises the revenues, costs and risks. Besides corporate value, there is also societal value. Societal value entails the positive and negative contributions of a corporation on society in the course of doing business, also called the externalities. Corporate value creation has not always aligned with value creation for society as a whole (KPMG, 2014, pp. 4-6). In this report KPMG mentioned a shift, namely that a company’s creation or reduction of societal value increasingly has a direct impact on its corporate value. Due to the increasing stakeholder engagement, transparency,

accountability and expectations from society the so called ‘externalities’ are becoming internalities. John Veihmeyer, the Global Chairman of KPMG International at time of this report described this as ‘the disappearing disconnect between corporate and societal value creation’ (p. 4). KPMG argues that corporations must invest in its people,

communities and the environment, since these are the key ingredients of profitability. “This investment entails far more than corporate philanthropy, CSR of green initiatives. To do well in today’s business environment, you increasingly have to measure, understand and proactively manage the value you create, or reduce, for society and the environment as well as for shareholders.” (KPMG, 2014, p. 4) All the before mentioned arguments explain the role of accounting. Accounting has always been used to measure, understand and manage value. If externalities are indeed increasingly correlated to internalities, accounting must also display this shift.

Accounting can be used to measure, understand and manage value in the broadest sense, to give society a tool to hold corporations accountable for their actions and to give

corporation a tool to share their story. 2.2 The developments in corporate reporting

In the 1970s there was a widespread interest in corporate social responsibility which resulted in the first experiments with social accounting (Gray, 2008, p. 1). Gray mentions that between the 1970s and 1990s social and environmental reporting did exist, but never made it into the profession of accounting. By 1990, however, social accounting was re-emerging. Firstly in the non-profit sector and later also in the corporate sector (p. 1).

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In the early 1990s, Dr. Allen White created a framework for environmental

reporting. As a reaction on this framework, the Global Reporting Intitiative (GRI) was set up in 1997 to further develop this framework. This resulted in GRI’s Sustainability Reporting Standards that are now the world’s most widely used standards on sustainability reporting and disclosure.

The difficulties with defining sustainability and accountability also hold for defining sustainability reporting. The terms corporate social responsibility (CSR), environmental, social and governance (ESG) reporting and social and environmental reporting are all terms used for similar activities as sustainability reporting. The World Business Council for Sustainable Development defines sustainability reporting as:

“Public reports by companies to provide internal and external stakeholders with a picture of the corporate position and activities on economic, environmental and social dimensions.” (WBCSD, 2002, p. 7)

According to Searcy and Buslovich (2014) the key of sustainability reporting is that the report contains qualitative and quantitative information of interest to stakeholders on the company’s key sustainability issues and initiatives (p. 149).

In a study of KPMG (2011) was found that 95% of the largest 250 companies worldwide report on their sustainability issues and activities in some form. In most cases, sustainability reporting is a voluntary activity (Searcy and Buslovich, 2014, p. 151). With the absence of mandatory requirements of sustainability reports, most businesses are using sustainability reporting guidelines, like the guidelines from the Global Reporting Initiative or the guidelines from AccountAbility.

Sustainability reports are reports that are created alongside the financial reports. In order to unite the six capitals (or three p’s; planet, people, profit) it is argued that we should not threat them separately, but that integration is necessary. In 2010 the

International Integrated reporting Council (IIRC) was formed and created a framework for a new form of corporate reporting: the integrated report. The next section will provide an introduction in the concept of integrated reporting, followed by its purpose and challenges.

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2.3 Integrated reporting

The IIRC is a co-creation of two leading organizations in sustainability accounting; The Prince’s Accounting for Sustainability Project (A4S) and the before mentioned Global Reporting Initiative (GRI). According to Flower (2014) in the speech given upon

presentation of the IIRC, the IIRC spoke of the idealism that accounting is to be given the task of ‘saving the planet’ by updating the reporting and decision making systems to meet the challenges of the 21st_{century (p. 2).}

The IIRC was formally formed in August 2010. The governing body of the IIRC, the council, consist of 40 member including the heads of the IASB, FASB, IFAC and IOSCO, CFO’s of major multi-nationals, accountancy professionals, preparers and

regulators and representatives of organizations that promoted social and environmental accounting (IIRC, 2011, p. 28).

The IIRC first published a Discussion Paper in which they set out what integrated reporting was perceived to accomplish. In the discussion paper the IIRC answers the questions ‘What is Integrated Reporting?’:

“Integrated Reporting brings together material information about an organizations strategy, governance, performance and prospects in a way that reflects the

commercial, social and environmental context within which it operated. It provides a clear and concise representation of how an organization demonstrates

stewardship and how it creates and sustains value.” (IIRC, 2011, p. 2)

According to Gleeson-White (2014) integrated reporting seeks to address two of the most urgent problems of our times: turbulent stock markets and a turbulent earth. The IIRC explains:

“IR has been created to enhance accountability, stewardship and trust as well as to harness the information flow and transparency of business that technology has brought to the modern world.” (Gleeson-White, 2014, pp. 174-176).

2.3.1 The perceived purposes of IR

The IIRC believes that the strength of integrated reporting is twofold: meeting the information needs of a broad range of stakeholders and the holistic thinking it aims to encourage (2011, p. 2-7). In this section both purposes of integrated reporting will be reviewed.

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2.3.1.1 The information needs

In the Discussion Paper the IIRC mentions that the core objective of the Framework that they were to develop is ‘to guide organizations on communicating the broad set of information needed by investors and other stakeholders to access the organization’s long-term prospects in a clear, concise, connected and comparable format’ (IIRC, 2011, p. 2). The problem that integrated reporting is set out to solve is that business have become more complex and gaps in traditional reporting more prominent. New reporting requirements have been added and therefore the financial reports developed to be longer and more complex with standalone sustainability reporting. The reporting landscape is according to the IIRC a ‘landscape of confusion, clutter and fragmentation’ (IIRC, p. 4). The IIRC is set out to integrate the four different strands of reporting: traditional financial statements; management commentaries; governance and

remuneration reports and sustainability reports (p. 6). The IIRC stated in the Discussion Paper that they seek to achieve a reporting framework that:

“Communicates the organization’s strategy, business model, performance and plans against the background of the context in which it operates; provides a coherent framework within which market and regulatory driven reporting requirements can be integrated; is internationally agreed; reflects the use of and effect on all of the resources an relationships or “capitals” on which the organization and society depend for prosperity; and reflects and communicates the interdependencies between the success of the organization and the value it creates for investors, employees, customers and, more broadly, society.” (IIRC, 2011, p. 5)

An integrated report is, according to CEO Paul Druckman, a matter of businesses to tell their story (or strategy) by addressing six different capitals; financial, manufactured, intellectual, human, social and relationship, and natural capital.

Flower (2014) combines the different aspects of the Discussion Paper and concludes:

“The basic idea is that a firm’s integrated report should indicate how a firm, through its activities, has created value, as measured by the increase less the

decrease in the value of these capitals. (..) Thus the IIRC’s concept of ‘capitals’ covers not only the firm’s capital in the conventional sense, but also the capital of society, for example the environment.” (Flower, 2014, p. 4)

The before mentioned arguments are about the broadness of information provided by integrated reporting while still having a comprehensive format. In conclusion:

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integrated reporting seeks to communicate the organization’s strategy and performance in a clear way. It does so by reflecting on how the organization has created (or

decreased) value, whereby value in the broad sense of the word is meant; value of all of the six capitals. By doing this the organization is supposed to meet the information needs of capital providers and other stakeholders.

2.3.1.2 Integrated thinking

A second perceived purpose of integrated reporting is to encourage organizations towards integrated thinking. The IIRC (2011) claims that research has shown that reporting influences behavior. They therefore believe that integrated reporting can encourage holistic thinking and changes the way organizations think about the concept of value, also called integrated thinking. “Integrated reporting changes corporate behavior through integrated thinking.” (IFAC, 2015, p. 4). Integrated thinking entails having a comprehensive approach to value creation in the short, medium and long term. Integrated thinking is defined as:

“The active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects” (SAICA, 2015, pp. 8-9).

It is argued by Churet and Eccles (2014) that integrated reporting is just “the tip of the iceberg: the visible part of what is happening below the surface; integrated thinking.” (p. 8). So the actual change in behavior arises from integrated thinking, which in its turn arises from integrated reporting. Therefore integrated thinking is considered crucial in order for integrated reporting to reach one of their main purposes; encourage

corporations to act more responsible and sustainable. Adams (2015) mentioned that the features of IR that have the potential to cause integrated thinking are the emphasis on the long term and the encouragement of broader definition of value, the value creation process and the business model (p. 26).

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2.3.2 Guiding principles of IR

In order to reach the purposes of IR, the IIRC created seven guiding principles.

According to Soh, Leung & Leong these guiding principles “match the search for proper balance between flexibility and prescription, materiality and relevance, conciseness and demand for information” (Soh, Leung & Leong, 2015, p. 38). In this section, the seven guiding principles will be discusses.

 Strategic approach and future orientation

An integrated report should provide better understanding of the strategy and value creation in the short, middle and long term.

 Consistency and comparability

The information in the integrated report must be consistent over time and presented in such a way that comparison with other organizations is possible.  Stakeholder relationships

Stakeholder dialogue is considered extremely important. Therefore the

integrated report must show how and to what extent the organization knows and understands the needs and interests of the stakeholders.

 Materiality

An organization must provide insight into the material topics for both them and their stakeholders. This includes all matters that substantively affect the

organization’s ability to create value.  Conciseness

An integrated report must find the balance between reporting too much and too little information. Avoid the inclusion of immaterial information.

 Reliability and completeness

The integrated report must include all material impact, both positive and negative in a balanced way.

 Connectivity of information

In order to provide a holistic view of the organizations’ value creation, the interdependencies between the factors that create and decrease value (all six capitals) must be shown.

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These seven guiding principles each contribute to one, or both, of the broadly defined purposes of integrated reporting. In what way these are related can be found in figure 2.1.

Figure 2.1 Schematic overview of the purposes and guiding principles of IR

+ +

Perc e iv e d p u rp o se s G u id in g pri n cip le s Integrated reporting Addressing information needs of all stakeholders Stimulate integrated thinking Strategic focus & future orientation

Consistency & comparability

Reliability & completeness Conciseness

& Future orientation Materiality Stakeholder relationships

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2.3.3 The main challenges of Integrated Reporting

Integrated reporting is presented as the next big thing that will solve many reporting issues currently at hand. But at the same time IR faces major challenges as well. Flower (2014) and Thomson (2015) both argue that the IIRC has already failed. When the IIRC was founded, one of the main aims was the promoting of sustainability accounting. According to Flower (2014) IIRC seems to have abandoned sustainability accounting based on two arguments:

- The IIRC focuses on the value for investors and not the value for society.

- The IIRC doesn’t oblige firms to report on any harm inflicted on entities outside of the firm when it has no subsequent impact on the firm itself. This includes harm done on the environment (p. 1).

Thomson (2015) agrees with Flower on this matter and compares IR with earlier proposed reforms to financial reporting. He argues that these earlier proposed initiatives have failed to substantively reduce the negative social and environmental impacts of corporations and that IR appears to be “déjà vu all over again”. (p. 19) In a survey on integrated reports from EY in 2014 some other challenges of integrated reporting are mentioned. One of which being the risk of greenwashing. Even in the reports that were ranked as being ‘excellent’ of ‘good’ there is still an element of greenwashing (p. 20). Both sustainability reports and integrated reports are being used as a tool to increase transparency, but also as a marketing tool, a way to show the world how excellent the organization is performing. This would not be an issue, if the

organization is indeed sharing their whole and honest story in the report and thus is indeed performing excellent for society. The problem of greenwashing isn’t limited to integrated reporting. Greenwashing is an issue in every form of social reporting. The challenge here lies within the complexity of materiality. What should be included and excluded from the report? A clear example of this managerial discretion is found in the social report 2001-2002 from British American Tobacco (BAT). BAT used the

AccountAbility AA1000 framework for their social report and supported the process with the GRI guidelines for categories and aspects to report upon. In these guidelines there is a category ‘Products and services’ which is concerned with the major social issues and impact associated with the use of an organizations’ products and services (GRI, 2002, p. 35). The main product of BAT is cigarettes, a product well known for its negative impact on society. BAT chose to omit this section in their social report. For a

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company like BAT, users of the report will still be able to come up with this negative impact regardless of including or excluding it from the report. But when companies are less straightforward, who will tell whether all material issues are included in a voluntary report? The voluntary character of these reports makes it easier to leave out negative factors and to emphasize all sorts of positive factors. In the survey conducted by EY was found that organizations conducting integrated reporting continue to include non-financial (positive impact) issues that are ‘clearly not material to their businesses’ (p. 20).

Another mentioned challenge is the lack of hard data in the form of key performance indicators (p. 17). Some corporations have trouble to come up with

measures for the capitals other than the financial and manufactured. These new capitals require a new way of thinking which can only be developed over time. Therefore

integrated reporting is not just a set of rules, but it is a journey towards change. A

similar response was given by Adams (2015) to react to the critique of Flower (2014) on the integrated reporting framework. Adams argues that implementing IR requires the development of new accounting and management processes and therefore it was simply too early to judge on the success or failure of IR in the year following the presentation of the framework (p. 23).

This research aims to answer to what extent the first integrated reports fulfill the perceived purposes of integrated reporting. According to the objective of the IIRC the transition from conventional reporting towards integrated reporting should lead to changes in the decision making process, internal and external communication process, materiality and risk identification all aimed at broadening the idea of value (including all the six capitals) and better information for capital providers and other stakeholders. The remaining chapters will describe the theories used and the method of this research followed by an analysis of the results and a conclusion.

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3. Theories

Drivers of the change that is occurring in the economy have been mentioned in the previous chapter. The process of integrated reporting both is a way to encourage integrated thinking and to showcase the outcome of that integrated thinking. There is a multitude of reasons why corporations could embrace integrated reporting. Most of these reasons can be grouped within existing theories. The purpose of this chapter is to provide an overview of the key components of agency theory, stakeholder theory and legitimacy theory and how these theories apply to this subject.

3.1 Agency and stakeholder theory

Agency theory addresses the problem of information asymmetry between principals and agents. The idea is that the principle delegates certain tasks to the agent. Since the agent will perform the task, he/she will have all the information concerning the execution of this task and the principle won’t. The agency theory relies on the assumption that the interests of the principle(s) and the agent(s) diverge. The theory predicts a conflict between the principle and the agent because the agent will always choose self-interest over the interest of the principle, and the principle is not capable of controlling every aspect of the performed task to prevent the agent from doing so. Therefore, in order to get the agent to perform the way that is of best interest to the principle, the principle will need to align the incentives of the agent with his own (Eisenhardt, 1989, pp. 57-60). The agency theory originally emerged as a theory explaining the relationship between managers and stockholders. Hill and Jones (1992) argued that the agency theory can be applied more broadly, namely on the relationship between managers and a firm’s stakeholders (pp. 131-132). Another ‘principle’ could for example be the

stakeholder ‘society’. A way to align the incentives of society with those of the management of an organization is by offering tax discounts on investments that

contribute to pollution containment. The government is the spokesman of the society in this example (pp. 138-139).

A theory closely related to the agency theory is the stakeholder theory. Stakeholder theory is the idea that the success of a company is dependent on the collaboration of its stakeholders. A company’s stakeholders entail ‘any group or individual who can affect or is affected by the achievement of an organization’s

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to involve all stakeholders’ interests in the business. Stakeholder theory is in a way the extensive version of agency theory. Agency theory is mainly focused on the shareholders as principle, where stakeholder theory argues that the interest of every stakeholder should be included in a business.

Stakeholder theory receives significant attention in research about corporate accounting, but according to Key (1999) there is no theoretical logic which explains the relationship between corporations and their stakeholders. Even Freeman (1984), one of the founding fathers of stakeholder theory suggests that it should be called an ‘approach’ instead of a ‘theory’. But despite these criticisms, stakeholder theory has the potential to explain the change in corporate behavior considering stakeholders as opposed to the traditional economic model of corporations (Belal, 2002, p. 24).

Within the stakeholder theory, two branches have been identified: the ethical (the normative stakeholder accountability model) and the managerial (stakeholder management model) (Belal, 2002, p. 12). The ethical branch is about dealing with the interest of every stakeholder, regardless of their size and power. The managerial branch is about dealing with the interest of the most powerful stakeholders. In figure 3.1 is the input-output model. This is often viewed as the old model of business. Next to it is the stakeholder model, this model shows the equal importance of every stakeholder. Figure 3.1 Input-output model (left) and the stakeholder model (right)

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According to Belal (2002) the reality mostly lies somewhere in between both of these models. Stakeholder involvement is gaining ground, but within corporate stakeholder management there often is a prioritization of stakeholders and their interests (p. 10-14). Integrated reporting is also somewhere in between these two models. The main focus in on the shareholders, so not all stakeholders are considered equally important. But there is certainly attention for the interests of the other stakeholders as well. Mitchell, Agle and Wood (1997) propose a model to identify and prioritize the different stakeholders. They distinguish between three attributes that stakeholder can own: legitimacy, power and urgency. According to this model, entities with no

legitimacy, power or urgency aren’t stakeholders.

Power is defined as: “a relationship among social actors in which one social actor can get another social actor to do something that that social actor would not otherwise have done.” Legitimacy is defined as: “a generalized perception or assumption that the actions of an entity are desirable, proper or appropriate within some socially constructed system of norms, values, beliefs and definitions.” Legitimacy combined with power is what the authors call authority. Urgency is defined as: “calling for immediate attention.” (Mitchell et al., 1997, pp. 865-866)

When all this is put together the model of figure 3.2 is formed. In this model the most salient stakeholders are those that possess all three attributes. After these

stakeholders, come those with two attributes and the latent stakeholders are those with one attribute (Mitchell et al., 1997, pp. 872-874).

Figure 3.2 Stakeholder identification

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Integrated reporting is closely linked to the agency theory. Through an integrated report, the agents (de managers) can communicate their actions and decisions to the principle (the stakeholder). The financial reports also do this, but the perceived gain of the integrated report over the financial report is that is encloses information on a broader scale of the acts of the agents.

Integrated reporting was set out to combine the sustainability reports and the financial reports into one report. The ‘principles’ when looking at the financial report are the shareholders. The ‘principles’ when looking at the sustainability report are the planet and society. A logical conclusion would therefore be that the ‘principles’ when looking at an integrated report are all of the above. However, as argued by Flower (2014), the integrated reporting framework explicitly names the shareholders as the most important user of the integrated report. The framework also encourages

organizations to start with identifying the different stakeholder groups. Therefore the model of stakeholder identification in figure 3.2 could be a usable tool for organizations. 3.2 Legitimacy theory

Legitimacy theory suggests that organizations attempt to operate within the norms and values of society in return for approval of their consistence (Deephouse and Carter, 2005, p. 331). These norms and values are time and place specific. Suchman (1995) argues that it is therefore critical that corporations are responsive to changing norms and values of their society (p. 573). The author defines legitimacy as:

“ The generalized perception or assumption that the actions of an entity are desirable, proper or appropriate” (Suchman, 1995, p. 573).

Legitimacy theory entails the concept that corporations need a social license to exist. This license is a sort of social contract between the corporation and society. Deegan and Blomquist describe this as: “the need for organizations to act in compliance with the multitude of explicit and implicit expectations that society has about how the organization should conduct its operations” (Blomquist, 2006, p. 346).The authors add that when an organization fails to answer to these expectations from society, the society will

eventually stop the existence of that organization. This can be done by consumers who stop buying their products or regulators who prohibit or fine the undesired actions of the organization (p. 134).

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3.3 Conclusion on the results in theory

The agency theory can be applied to the integrated reporting by viewing the integrated report as a way to reduce the information gap between the principle (shareholders or other stakeholders) and the agent (the organization) (Magnaghi and Aprile, 2014, p. 1327). If integrated reporting truly contributes to integrated thinking, once could argue that the process of integrated reporting is helping to align the incentives of the agent (corporation) and the principle (society).

Within stakeholder and legitimacy theory, a corporation is perceived as being an element of society. When applied to the concept of integrated reporting, stakeholder theory is a basis for understanding the importance of involving stakeholders in the developments of their reports. Integrated reports are aiming at investors as their main audience, but at the same time seek to serve the information needs of other

stakeholders. In order to create such an all-encompassing report, stakeholder identification and involvement is a necessity.

Legitimacy theory is about an organization’s social license to exist. By being transparent about the organization by providing an integrated report will contribute to the right to exist of the organization. From the other perspective, integrated reporting could become one of the expectations forced on a corporation by society and thus making it a condition for a ‘social license’.

This research seeks to answer the question as to what extent the first integrated reports are fulfilling the perceived purposes of integrated reporting. The perceived purposes identified are:

 Integrated reporting will meet the information needs of capital providers and other stakeholders:

 Integrated reporting encourages and leads to integrated thinking (considering all of the six capitals)

According to the agency theory, IR will have a positive influence on closing the

information gap between the agent and the principle and will therefore have a positive influence on the goal of meeting information needs of capital providers and other stakeholders.

When the information provided to the stakeholders improves, the organization will have to justify parts of their business that weren’t known to the shareholder before.

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According to the legitimacy theory the organization will have to make certain that these parts of their business are also appropriate according to society and will therefore contribute to encouraging integrated thinking.

When an organization broadens their definition of value and starts considering all six capitals, the organization will answer to a larger number of stakeholders about more elements of the organization. Therefore according to stakeholder theory,

integrated reporting is expected to improve transparency and accountability. An overview of the links between de the guiding principles, the purposes of IR and their expected effects derived from applying the theories can be found in figure 3.3.

Figure 3.3: The research model

+ +

Legitimacy theory Agency theory Agency theory Agency theory Stakeholder theory Legitimacy theory Agency theory Legitimacy theory Legitimacy theory Stakeholder theory Integrated reporting Addressing information needs of all stakeholders Stimulate integrated thinking Strategic focus & future orientation

Consistency & comparability

Reliability & completeness Conciseness

& Future orientation Materiality Stakeholder relationships Connectivity of information P e rc e iv e d p u rp o se s G u id in g pri n cip le s

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4. Research Methodology

In the previous chapters the relevant literature and theories have been discussed. This section will provide the research methodology, hence the key activities that have been executed in this research. In order to answer the research question this study conducts a qualitative research. Firstly, the fundamental elements of qualitative research will be discusses, followed by the research methods and a description of how this research was undertaken.

4.1 Qualitative research

“Research is an organized and systematic way of finding answers to questions” (Collins, 2010, p. 10). There are broadly speaking two main methods for research: qualitative and quantitative. “The label qualitative method has no precise meaning in any of the social sciences. It is at best an umbrella term covering an array of interpretive techniques which seeks to describe, decode, translate, and otherwise come to terms with the meaning, not the frequency, of certain more or less naturally occurring phenomena in the social world” (Van Maanen, 1979, p. 520).

Qualitative research is focused on words, point of views from participants and processes, as opposed to quantitative research. In a quantitative research the focus lies on the numbers and the point of view from the researcher. Qualitative research

emphasizes a better understanding of the processes and experiences in a natural environment. A possible downside of qualitative research in this research is that one could argue that the relatively small sample size could decrease the possibility of generalizing the results, but in order to get a deeper understanding of the social actors, qualitative research is suited. Following from this and taking into consideration that the focus of this research is with providing an understanding of to what extent integrated reporting is fulfilling its perceived purposes, qualitative research is the more

appropriate research method.

Qualitative research is based on data which is collected through interviews, observation and document analysis. This research entails the collection of data through the analysis of documents and interviews. The interviews are semi-structured, which means that the interview contains a set of topics and questions that function as the basis for the interview. This type of interview will allows the interviewee with enough space

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to elaborate, while staying focused around the chosen topics in order to be able to compare interviews. In these interviews, the preparers of integrated reports have been able to share their experiences, opinions, perceptions and extensive knowledge on the subject of integrated reporting.

4.2 Research design

The sample chosen for this research is chosen for its availability of rich and detailed information. As written by many, including the IIRC itself, integrated reporting is a journey. Therefore it takes multiples years for an organization to be able to make the transition from a financial report to an integrated report. Since integrated reporting hasn’t been around for long, this research includes corporations which have been involved in integrated reporting the longest. In 2011 a pilot study for integrated

reporting started with 75 organizations. These organizations have been involved with IR intensively from the beginning, so they have enough experience with the process of integrated reporting to be able to reflect upon this process.

The participants were recruited by starting with the Dutch organizations that have joined the pilot study. The main reason for this decision is for the practicability of the research in a short period of time. One Belgium organization joined the sample, because the Sustainability manager of that organization was identified as an expert of integrated reporting on the GRI Global Conference in Amsterdam. Later one extra Dutch participant, that hadn’t joined the pilot study, was recruited due to fact that they have been extensively praised as a frontrunner in their integrated reporting practices. In total, eight interviews were conducted. These included seven interviews with the person responsible for the integrated report; CSR Managers, Sustainability

Partners/Managers, a Chief Operations Officer, and one interview with a Sustainability Manager responsible on advising other organization on their integrated reporting practices. An overview of these interviews is provided in table 4.1

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Table 4.1 overview interviews Interview

Code

Organization Title Duration

(min)

Language

I1 Schiphol airport CSR Manager 51 Dutch

I2 Aegon Sustainability

Manager

51 English

I3 Rabobank CSR Manager 57 Dutch

I4 Deloitte Sustainability Manager 46 Dutch I5 Solvay Sustainability Officer 57 English I6 Big 4 accounting firm COO 52 Dutch I7 PwC Partner Sustainability & IR 34 Dutch I8 Consumer service organization

Financial Controller 47 Dutch

These interviews were semi-structured. Six interviews were conducted in person and two in conference calls. For the semi-structured interviews an interview guide was constructed which can be found in appendix A. The interview guide is based on a review of the literature and the research model as identified in figure 3.3. The interviews

started with generals questions about the organization and why they joined the pilot study of the IIRC. These were followed by questions on each of the seven guiding principles and to conclude the interview some opinions about IR in general and in the future. All the interviews were conducted in a five- week period in May and June 2016. On average, each interview took 50 minutes. All interviews are digitally recorded and transcribed. The transcripts were used for analysis together with the document analysis.

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The analysis of documents consists mostly of the integrated reports from the corporations chosen for this research. The analyzed reports are all the integrated reports published by the participants. In total this includes 23 reports, one from 2011, two from 2012, six from 2013, six from 2014 and eight from 2015. Besides the reports, also previous conducted interviews and written experiences from the corporations have been analyzed.

Most of the organizations had already started creating some form of a combined report prior to the pilot study of integrated reporting. Due to the different starting points of the sample-organizations, it is infeasible to compare the reports from before the pilot with after pilot-reports and draw reasonable conclusions from it. Therefore in this research the different published reports which are claimed to be integrated reports will be analyzed to see whether there is a noticeable growth in the integrated reporting practice and possible alteration of the strategy. In this analysis the reports are judged based on the identified perceived purposes of integrated reporting to see if the reports are improving to assess whether integrated reporting is indeed a journey.

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5. Research findings

This section will present the research findings organized according to the perceived purposes in the research model in figure 3.1. This section starts with an introduction to the motives of the researched organizations for their initial transition towards

integrated reporting. The second and third section will discuss the current status of integrated reporting practices on the basis of the two perceived purposes of integrated reporting. The fourth section will focus on the future of integrated reporting and integrated thinking. A discussion of the research findings can be found in the fifth section.

5.1 Motives for IR

Table 5.1: Overview results on the motives for integrated reporting.

Result Participants* I/D**

Reasons to join the pilot study of the IIRC

Already had some form of merged report, so the logical next move

Already had some form of an integrated strategy, reporting needed to catch up Interesting development, no previous integrated reporting/strategy

3/8 2/8 3/8

I

First year of a form of an merged report

Before the pilot At the time of the pilot After the pilot

3/8 3/8 2/8

I&D

First year of publishing an integrated report

2011 2012 2013 2015

According to themselves it is not yet an IR

1/8 1/8 4/8 1/8 1/8 D

Noticed an increase in the demand for transparency in the last 5-10 years

Yes 8/8

I

* These numbers represent the number of interviewees who gave that answer or of whom this answer was

found in the document analysis

** This column shows whether the result is found in the document analysis or came from the interview or both.

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In table 5.1 an overview of the results on the search for the motives to start with

integrated reporting can be found. From the interviews it became clear that most of the interviewed organizations that joined the pilot study of the IIRC where already moving towards integrated reporting in a way before joining the pilot. Some were acting in anticipation of the developments of the IR framework; some were already acting on some parts on the integrated reporting process and joined the pilot mainly because the framework suited their organization. Three of the eight organizations, however, started looking for ways to begin with the move towards integrated thinking or reporting when the framework was developed. It all came together around the same time. One

participant also pointed out that they thought they were already moving towards integrated thinking, but in retrospect they realize that they actually weren’t. All of the interviewees recognized that there has been a growing request for transparency amongst all stakeholders. “The world is becoming more transparent. Everything is instantly posted on Twitter or Facebook and people are expecting an answer directly.” (I4, lines 89-90)

There seems to be different interpretations of integrated reporting. When asked about the purpose of integrated reporting the answers vary from “The purpose is to tell your story in an integrated manner”(I2, lines 83-814) to “making sustainability a

fundamental part of the strategy of an organization” (I4, lines 57-59). The difference in interpretation is also evidenced by the differences in the actual reports, within and outside the organization. One participant, for instance, decided that only four of the six capitals were relevant for their business, while in 2015 they are bringing in a fifth capital (I6, lines 359-360). Another organization is often praised for being a frontrunner on integrated reporting, while they themselves don’t even call their report an integrated report, “because they are just nog there yet” (I8, line 210). So neither the definition, nor the reporting practices are clear.

It appears that most organizations do agree and realize that integrated reporting is more than just a report. They all acknowledge that it takes time to get to a decent integrated report, it is not just a ‘tick-the-boxes’-exercise: “Every year we believe that we have created the best possible annual report. When we review the report half a year later, we realize that there is definitely room for improvement. (..) which makes it a true learning process.” (I1, line 76-84)

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5.2 Addressing information needs of all stakeholders

Six of the seven guiding principles of integrated reporting are directly linked to addressing the information needs of the stakeholders. Each of these will be shortly discussed based on the results from the interviews and the document analysis. An overview of the results can be found in table 5.2.

Table 5.2: Overview results on the purpose ‘addressing information needs’.

Result Participants* I/D**

Strategy included in the report Yes 8/8 I&D

Strategy included in the ‘pre-integrated reporting’-reports

Yes

Yes, but limited

3/8 5/8

I&D

Strategy communicated based on the

six capitals No 8/8 I&D

The leading format of the report Six capitals

Materiality matrix Strategy pillars 0/8 5/8 3/8 I&D

Is it same format every year? No, we are struggling with that question

Yes, more or less 5/8 3/8 I

Number of pages of the IR online

33 62 80 140 198 226 228 D

The different reports published in

2015 Only an IR IR + Annual report

IR + Transparency report

IR + Financial report + Sustainability report + Transparency report

2/8 3/8 1/8 2/8

D

Is there a role for assurance in IR? Yes 8/8 I

Are current assurance practices for IR

good enough? Yes Don’t know

It still needs to improve

2/8 2/8 4/8

I

Is negative impact communicated Yes 8/8 I&D

Would you say that IR contributes to greater transparency?

Yes

No, not compared to extensive sustainability & financial reports

7/8 1/8

I

* These numbers represent the number of interviewees who gave that answer or of whom this answer was

found in the document analysis

** This column shows whether the result is found in the document analysis or came from the interview or both.

Integrated reporting step 1 : realize it is not about the report : a qualitative research studying the results of integrated reporting