The state and quality of stakeholder engagement disclosures in sustainability reports : exploring the current practices of European companies

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Amsterdam Business School

MASTER THESIS

The state and quality of stakeholder engagement disclosures in

sustainability reports

Exploring the current practices of European companies

Name: Satu Brandt

Student number: 10475338 Date: 30 January 2015 Version: Final

Study program: MSc Executive Programme in Management Studies – Strategy Track First supervisor: Mr. Lars Moratis

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List of tables

Table 1. The characteristics of the sample... 26

Table 2. Stakeholder Engagement disclosures in G4 Guidelines ... 29

Table 3. Objectives of the stakeholder engagement ... 36

Table 4. Number of sustainability reports issued by the company ... 37

Table 5. Examples of identified motivations to engage with stakeholders ... 40

Table 6. Stakeholder engagement methods for different stakeholder groups ... 42

Table 7. Style of stakeholder engagement... 45

Table 8. Engagement of stakeholders in the reporting process ... 45

List of figures

Figure 1. The five phases of the GRI sustainability reporting process ... 15

Figure 2. Friedman and Miles’ ladder of stakeholder management and engagement .... 20

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Acknowledgments

I would like to thank my supervisor, Lars Moratis, for the useful comments, advice and engagement through the writing process of this master thesis. Furthermore, I would like to thank my colleagues, Chiara Ferracioli and Ásthildur Hjaltadóttir, for their invaluable support and advice in finalizing this master thesis. Also, I would like to thank my family for their continuous support and encouragement throughout the master program; I could not have completed the program without them. Last, but certainly not least, I would like to thank my friends for their unconditional support, encouragement and patience throughout the entire thesis writing process, and especially for all times they reminded me of the truly important things in life.

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Abstract

This research paper analyzes and maps out the current state and quality of stakeholder engagement disclosures in sustainability reports published by European companies. It does this using a stakeholder engagement disclosures analysis tool developed based on the frameworks of Cumming (2001), Friedman and Miles (2006), and Manetti (2011), and the Global Reporting Initiative’s G4 Sustainability Reporting Guidelines. The research investigates the stakeholder engagement disclosures, their compliance with the G4 Guidelines, the effect of reporting maturity, with whom companies are engaging with and why, engagement methods and frequency, and the quality of stakeholder engagement. The question of a gap between theory, standards and practice is also addressed. Content analysis of 55 sustainability reports prepared ‘in accordance’ with the G4 Guidelines, and published by European companies in 2013-2014 was conducted. The research finds that stakeholder engagement is now a common practice among companies, although stakeholders are not always engaged when defining the content of the sustainability report. Generally, the stakeholder engagement disclosures in the sample reports comply well with the G4 Guidelines’ requirements and reporting maturity was found to have an effect on some aspects of the quality of the stakeholder engagement. Besides the more traditional stakeholders, new stakeholder groups, such as socially responsible investors, are emerging. Companies are using multiple methods to engage with their stakeholders, including internet and social media, to define the content of sustainability reports, or for other purposes. The quality of stakeholder engagement is found to be good, with majority of companies on fifth or sixth level of the twelve level ladder of stakeholder management and engagement. The gap between theory, standards and practice is found to be narrowing.

Keywords: Stakeholder engagement; quality of stakeholder engagement; sustainability reporting; GRI G4 Sustainability Reporting Guidelines; Global Reporting Initiative (GRI).

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1. Introduction

“Understanding the economics of markets is important, but at the center of starting, managing, and leading a business is a set of stakeholder relationships that define the business.” (Parmar et al., 2010, p. 433.)

Stakeholder relationships lay at the heart of companies’ operations, which today operate in an increasingly transparent environment; one in which stakeholders are more active and engaged than ever before, and have higher expectations. Internet and social media have empowered stakeholders to demand more information, and to easily express their opinion, both positive and negative. (KPMG, 2013a.) This is reflected in the clear increase of accountability efforts of global large companies1 in the past decades (Kolk, 2003; Kolk, 2008) as well as in the growing body of literature on companies’ duty to demonstrate accountability to their stakeholders (Cumming, 2001).

Sustainability reporting2_{– meaning the reporting on economic, environmental, and social}

impacts and performance – is an important instrument for companies in responding to their stakeholders’ demands for more transparency and information (Hahn and Kühnen, 2013). It is widely used as a stakeholder management tool to communicate to interested stakeholders the company’s sustainability strategy, policies, and resulting performance and impacts (Gray, Kouhy and Lavers, 1995; ACCA and NetBalance, 2007). An increasing number of companies have taken up sustainability reporting, which has truly become a mainstream business practice worldwide (Kolk, 2010; European Union, 2011; KPMG, 2013a). A recent global survey by

1_{While sustainability reports are also issued by other organizations besides companies, the majority of reporters} still are companies and as such the term company is adopted in this research paper to describe companies and organizations alike.

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KPMG on reporting practice among companies shows that among the world’s 250 largest companies, the Global Fortune 250, 93% report on their sustainability performance (KPMG, 2013a).

Stakeholder engagement in general, and as a process to identify material sustainability report content in particular, is increasingly recognized as an important process, but evidence within the sustainability reports is lacking to prove that such engagement is being conducted (ACCA, 2005; Unerman, 2007; van Huijstee and Glasbergen, 2008). In addition, both Perrini (2006) and Manetti (2011) found that although companies consult their stakeholders, they rarely involve them in decision-making on the content of reports. Hess (2008) even found that companies use stakeholder engagement only to manage legitimacy risks. This type of behavior by companies jeopardizes the materiality3_{of the reported information and lowers the credibility}

of sustainability reports as a communication tool for stakeholders. If the report content is not based on stakeholder engagement, how could the sustainability report fulfill the stakeholders’ information needs? Furthermore, as sustainability reporting is “[…] increasingly being regarded as a key form of stakeholder engagement, and the most accepted formal way of communicating sustainability and non-financial information to stakeholders and shareholders” (ACCA and NetBalance, 2007, p. 4), then the lack of information on stakeholder engagement indicates that the target audience may have been forgotten in the reporting process.

The adoption, extent, and quality of sustainability reporting have been the main themes in contemporary studies (Hahn and Kühnen, 2013). While research on sustainability reporting has

3_{Materiality in sustainability reporting refers to the relevance of the reported topics, which are those that “may} reasonably be consideredimportant for reflecting the organization’s economic, environmental and social impacts, or influencing the decisions of stakeholders, and, therefore, potentially merit inclusion in the report” (GRI, 2013a,

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been conducted for example by Kolk (2003; 2004; 2008; 2010), the academic literature on the topics is still limited and in particular research on quality of sustainability reporting has been largely neglected (Hahn and Kühnen, 2013). Only two attempts, namely the research by Cumming (2001) and Manetti (2011), to evaluate the quality of stakeholder engagement in the context of sustainability reporting were identified in the literature review by the researcher.

In order to enable companies and academics to further their recognition and comprehension of stakeholder engagement as a key element of ensuring the quality of sustainability reporting, better understanding of stakeholder engagement practices, and especially their quality, in the context of sustainability reporting is needed. A framework for analyzing stakeholder management and engagement practices has been developed by Friedman and Miles (2006), however, the researcher identified very limited number of research empirically testing the framework and none in relation to using the framework in analyzing sustainability reports.

Motivated by these considerations, and by Friedman and Miles’ (2006) framework in particular, this research paper aims to contribute to the knowledge of stakeholder engagement in sustainability reporting by analyzing and mapping out the current state and quality of stakeholder engagement disclosures in sustainability reports. It will specifically investigate the state of the stakeholder engagement disclosures in sustainability reports based on the Global Reporting Initiative’s (hereinafter GRI) G4 Sustainability Reporting Guidelines (hereinafter G4 Guidelines), published by European companies. By focusing on G4 Guidelines-based reports, this research is not confined by the sustainability reports based on earlier versions – G1, G2, G3, and G3.1 – of the GRI Sustainability Reporting Guidelines, which have been criticized for being box-ticking and PR-oriented (Cohen, 2013, p. 20) and thus not necessarily responding to stakeholders’ information needs. Instead, this research provides, as far as the

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researcher is aware, the first up-to-date overview of stakeholder engagement disclosures in G4 Guidelines-based sustainability reports, which, in theory, are more focused and stakeholder oriented. At the same time, it expands the knowledge base built by the previous studies on sustainability reporting practices, which have focused on analyzing the practices in light of the earlier versions of the GRI Sustainability Reporting Guidelines4.

1.1. Academic relevance

This research paper contributes to the academic discussion on stakeholder engagement in the following ways. Firstly, it helps to address the gap in literature by providing empirical evidence of stakeholder engagement in sustainability reports, including how and with whom companies are currently engaging. It also reveals the motivation and objectives of stakeholder engagement as well as the extent to which companies fulfill the reporting criteria on stakeholder engagement set out in General Standard Disclosures G4-24, G4-25, G4-26 and G4-27 in the G4 Guidelines. As the research is among the first investigating the G4 Guidelines-based sustainability reports, it will establish a foundation for further research into stakeholder engagement in such reports. Secondly, this research will show that the gap is narrowing between theory and standards suggesting that stakeholder engagement is an important part of sustainability reporting, and the practice, which so far has indicated lack of stakeholder engagement. Thirdly, the ladder of stakeholder management and engagement by Friedman and Miles (2006) is operationalized to empirically measure the quality of stakeholder engagement in sustainability reports. This represents the first attempt, as far as the researcher is aware, to evaluate the quality of stakeholder engagement in sustainability reports using the model developed by Friedman and Miles (2006).

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1.2. Practical relevance

This research paper makes the following practical contributions. Firstly, it provides companies with an overview of current methods of stakeholder engagement and how they relate to the quality of engagement. As these results are drawn from a sample of European sustainability reports, they represent best examples in sustainability reporting as the reporting practice in Europe is one of the most advanced ones (van Wensen et al., 2011). Secondly, it assists companies in benchmarking their own practices to those of others. Thirdly, the stakeholder engagement disclosures analysis tool, developed as part of the research to analyze the extent and quality of stakeholder engagement in sustainability reports, provides a checklist for companies to evaluate their own stakeholder engagement approach.

1.3. Research questions

The aim of this research paper is to analyze and map the current state and quality of stakeholder engagement disclosures in sustainability reports. To accomplish this, the following key research questions and sub-questions have been formed:

1. What is the current state of stakeholder engagement disclosures in sustainability reports?

a. Are companies disclosing information on stakeholder engagement and are the disclosures complying with the G4 Guidelines’ disclosure requirements? b. Does reporting maturity affect the state of stakeholder engagement disclosures

and the quality of stakeholder engagement? c. Who are companies engaging with and why?

d. What are the methods used to engage with stakeholders? e. What is the quality of stakeholder engagement?

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2. Is the gap narrowing between theory and standards, which suggest stakeholder engagement is important in sustainability reporting, and the practice, which has shown lack of engagement?

These research questions are complemented by the detailed questions included in the stakeholder engagement disclosures analysis tool (see Annex 1), which is explained in more detail in sub-section 3.2. The research questions are investigated in the context of the sample, which is limited to sustainability reports, based on G4 Guidelines and published by European companies. The quality of stakeholder engagement practices disclosed in the sustainability reports is evaluated based on Friedman and Miles’ (2006) ladder of stakeholder management and engagement.

This research paper is structured as follows. In the next section main concepts of stakeholder theory, stakeholder management and engagement, and their evaluation are explained and placed in the context of sustainability reporting. Following, the sample of G4 Guidelines-based reports and the research method are discussed. The results and analysis of the G4 Guidelines-based reports are subsequently presented. Finally, this research paper provides discussion, conclusion and recommendations for future research.

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2. Theory

Every company has stakeholders – individuals or groups that have a ‘stake’ in the company’s operations, impacts and business outcomes. Stakeholder theory provides a theoretical framework for exploring a company’s relationships with its stakeholders. A company manages these relationships by engaging with its stakeholders and taking into account their interests and concerns. Sustainability reporting is one way to do this.

The next sections define what is meant in this paper by ‘stakeholder’ and ‘stakeholder theory’ and continues to discuss the idea of stakeholder management. The concept of stakeholder engagement in the context of sustainability reporting is then discussed, and finally ways to assess the quality of stakeholder engagement are introduced.

2.1. Stakeholder theory and its origin

The concept of a stakeholder and the stakeholder theory gained popularity in the 1980s. The stakeholder concept had appeared in academic and practitioner literature before, but Freeman’s (1984) book Strategic Management: A Stakeholder Approach is generally credited for making it popular. The stakeholder approach to strategic management of companies put forward by Freeman was a response to the managers’ need to better respond to the rapidly changing business environment (Freeman and McVea, 2001). Stakeholder theory evolved from this initially more strategic perspective and was adopted as management approach by many companies (Mainardes, Alves and Raposo, 2011).

Stakeholder theory is based on the idea that the success of a company is dependent on cooperation with its stakeholders, which makes it important for the company to listen to and

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defining the topic exist (Mitchell, Agle and Wood, 1997), the main principle of stakeholder theory is that companies should take into account the interests of all stakeholders who can affect, or be affected by the company (Bucholz and Rosenthal, 2005; Jensen, 2001). The company should manage these relationships by engaging with its stakeholders and by taking into account their interests and concerns. One way to communicate and engage with the stakeholders is through sustainability reporting.

Although there has been a great deal of discussion on the idea of stakeholder theory, it can be seen as a framework of ideas from which different theories can be derived from. It can be thought of as a genre of management theory applicable for a variety of uses that can be drawn from the central idea of stakeholder perspective, one of them being corporate social responsibility or sustainability of companies. (Parmar et al., 2010.) Just as there are many definitions of stakeholders, there are a multitude of stakeholder theories. One of the fundamental distinctions is the classification of normative, instrumental and descriptive stakeholder theory. (Friedman and Miles, 2006, pp. 17-18.) Normative stakeholder theory aims to identify moral or philosophical guidelines for the management of companies. Instrumental stakeholder theory examines the connections between the stakeholder management and achievement of the company’s performance goals, such as profitability or growth. Descriptive stakeholder theory views companies as having cooperative and competitive interest and it is used to describe the specific characteristics of the company, such as the nature of the company, how managers think about managing or how companies are managed. (Donaldson and Preston, 1995.) This diversity in the points of view within stakeholder theory remains its main criticism (Mainardes, Alves and Raposo, 2011). While convergence of the theory has been called for (Jones and Wicks, 1999) a low level of theoretical integration between, as well as within, the normative, instrumental and descriptive stakeholder theories remains (Lépineux, 2005).

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Despite the criticism of stakeholder theory, researchers describe it as the dominant and most useful theory in explaining the sustainability reporting practice (Spence, Husillos-Carqués and Correa-Ruiz, 2010). After all, corporate social responsibility, or sustainability, and stakeholder theory are closely linked and the literature on these two topics is partly built on each other (Kakabadse, Rozuel and Lee-Davies, 2005).

2.2. What is a stakeholder and who are companies’ stakeholders?

The stakeholder concept started to develop already in the early 1960s, when academics at the Stanford Research Institute first introduced the term ‘stakeholder’ and defined it “those groups without whose support the organization would cease to exist” (Freeman, 1984, p. 31) to broaden the concept, and to question the sole focus on a company’s shareholders (Freeman, 1999). Later, Freeman (1984, p. 46) defined stakeholder as “any group or individual who can affect or is affected by the achievement of the organization’s objectives”. Freeman’s definition has been the most quoted one and widely adopted in academic literature (Andriof and Waddock, 2002; Friedman and Miles, 2006). GRI (2013a, p. 92) defines quite similarly in its G4 Guidelines stakeholders as: “entities or individuals that can reasonably be expected to be significantly affected by the organization’s activities, products, and services; and whose actions can reasonably be expected to affect the ability of the organization to successfully implement its strategies and achieve its objectives”. This definition by GRI highlights the consideration of reasonable expectations and significant effect limiting the scope of the company’s consideration of the stakeholders to those it can expect to be impacting and where those impacts are significant. For the purposes of this research paper, the definition of GRI is adopted, as the research is conducted on sustainability reports that are based on GRI’s G4 Guidelines and thus these reports are expected to have adopted the stakeholder definition provided in the G4 Guidelines.

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On the basis of Freeman’s (1984) and other academics and practitioners’ definitions of stakeholders, a company is still left with a broad range of groups and individuals who can affect or be affected by the company’s operations. While the broad definition of stakeholders is useful in the sense that it does not leave out any important groups or individuals, it does not narrow down the range of stakeholders enough for a company to effectively decide who is, or is not, its stakeholder (Preble, 2005). Generally, a company’s stakeholders are considered to be its employees, customers, suppliers, shareholders and investors (Freeman, 1984; Clarkson, 1995; Donaldson and Preston, 1995), and local communities (Friedman and Miles, 2006). Other possible stakeholders of a company are for example trade unions, NGOs, competitors, governments, financiers, media, general public, natural environment, business partners, academics, and future generations (Friedman and Miles, 2006).

A notable contribution to stakeholder management, and to identifying and prioritizing stakeholders, was made by Mitchell, Agle and Wood (1997), who developed a framework of stakeholder identification and salience based on a set of three stakeholder attributes: power, legitimacy, and urgency. The framework suggests that managers give priority to competing stakeholder claims depending on their perceptions of these three key stakeholder attributes. Different combinations of these attributes result in eight stakeholder types, which aim to help the companies understand which stakeholder groups exist and which ones really count. In a later study Agle, Mitchell and Sonnenfeld (1999) found strong support for the attribute-salience relationship.

2.3. Stakeholder management

Stakeholder management is essentially relationship management rather than the management of the actual stakeholder groups (Friedman and Miles, 2006). While stakeholder management

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is not a new phenomenon, managerial emphasis on stakeholder interests, as well as the importance attached to stakeholders, has increased since the 1980s (Poole, Mansfield and Mendes, 2001) following the increased popularity of the concept of stakeholder approach. Stakeholder management is based on the idea that companies should formulate and implement processes in a way that satisfies all groups who have stake in the business. At the core of these processes is to actively manage and integrate the relationships and interests of the stakeholders. (Freeman and McVea, 2001.)

One of the main supporting arguments for actively managing stakeholders is the enhanced financial performance of the company. Strategic management of stakeholders is seen as increasing the likelihood of marketplace success and thus enhances the financial performance of the firm (Mellahi and Wood, 2003). The development of a close stakeholder network can also provide useful information on the market conditions and consumer needs (Svendsen, 1998). Mismanagement of stakeholders or acting socially irresponsibly could potentially lead to increased legal fees as a result of lawsuits, decline in share prices, reputational damage and lost market opportunities and revenues (Preble, 2005).

Several models exist for stakeholder management. Preble (2005) for example suggests a six-step process model for stakeholder management, which includes: (1) identifying stakeholders, (2) finding out the general nature of stakeholder claims, (3) determining performance gaps, (4) prioritizing stakeholder demands, (5) developing organizational responses, and (6) monitoring and controlling. Freeman (1984) and Frederick, Post and Davis (1988) have proposed similar models. While these models can help companies to understand the process of stakeholder management, a standard, universally applicable model of stakeholder management does not currently exist. Each company is different historically, culturally and structurally, and has its

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own specific stakeholder groups that are also different from each other. (Kakabadse, Rozuel and Lee-Davies, 2005.)

2.4. Stakeholder engagement and its role in sustainability reporting

Stakeholder engagement is a fundamental element of stakeholder management. The third step in Preble’s (2005) stakeholder management model, determining performance gaps, focuses on understanding stakeholders’ expectations and determining if they are different than the company’s. Thomson and Bebbington (2005, p. 517) describe stakeholder engagement as: “a range of practices where organisations take a structured approach to consulting with potential stakeholders”. Unlike Thomson and Bebbington’s (2005) one-way engagement view, Andriof and Waddock (2002, p. 42) take a more collaborative, two-way engagement view and argue that stakeholder engagement is: “trust-based collaborations between individuals and/or social institutions with different objectives that can only be achieved together”. Similarly, AccountAbility (2005a, p. 135) describes engagement as: “an organization’s efforts to understand and involve stakeholders and their concerns in its activities and decision-making processes”. Essentially, stakeholder engagement should be understood as a consultation process, which is strategic and aims to inform the company of the stakeholders’ interests and concerns but also allow stakeholders to participate in the decision-making processes of the company. The stakeholder engagement process should create opportunities for dialogue: the stakeholders raising the issues and the company responding to them (AccountAbility, 2011).

The concept of stakeholder engagement is sometimes used interchangeably with the concept of stakeholder dialogue (Habisch et al., 2011). However, stakeholder engagement is a broader concept than stakeholder dialogue. While dialogue is an exchange of views and opinions to explore different perspectives, needs and alternatives, and characterized by interactive,

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two-way communication, (AccountAbility, 2005b; van Huijstee and Glasbergen, 2008) engagement covers the areas of communication, consultation, dialogue and partnerships (AccountAbility, 2005b). In this research paper the focus is on stakeholder engagement.

Stakeholder engagement has developed from ad hoc, conflict driven engagement with localized benefits, to more proactive and ongoing dialogue with systems in place. Today, many companies appreciate and understand the benefits of stakeholder engagement and see its effect on strategic decisions. They have learned how stakeholder engagement helps them align economic, environmental, and social performance with the core strategy of the company. (AccountAbility, 2005a.) Stakeholder engagement has many benefits. It increases trust, transparency, and accountability of the company (Burchell and Cook, 2006). It can also help the company in recognizing and interpreting the trends in its operating environment, which is especially useful in more complex and uncertain environments (Andriof and Waddock, 2002).

There are different methods for engaging with stakeholders. These include internet bulletin boards, questionnaires mailed to stakeholders (such as supplier surveys), phone surveys, written feedback, focus groups, corporate advisory panels, management or union structures, and community based and open meetings bringing the stakeholders and the representatives of the company together (Thomson and Bebbington, 2005; GRI 2013b). With the increased use of internet, social media has also become an important stakeholder engagement channel. Indeed, there are many different ways to engage with stakeholders and as every company is different, every stakeholder engagement is different. The selection of the method should be based on the needs, capacity and expectations of the stakeholders (AccountAbility, 2011).

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Stakeholder engagement is an inseparable part of sustainability reporting process. The purpose of a sustainability report is to communicate to the stakeholders on the topics they find important and to address the concerns they have raised. A sustainability report is a product of a stakeholder dialogue process (Owen, Swift and Hunt, 2001) and the process of preparing a sustainability report provides a chance for the organization to invite its stakeholders to discuss, and opens up a platform for dialogue. Important international standards such as AccountAbility’s AA1000 Stakeholder Engagement Standard (AccountAbility, 2011) and guidelines for sustainability reporting, for example the GRI Sustainability Reporting Guidelines (GRI 2013a, 2013b), require stakeholder engagement as a compulsory part of the reporting process. Both of these standards place a major emphasis on stakeholder engagement and dialogue specifically, as the most important means to develop meaningful reports (Owen, Swift and Hunt, 2001).

Stakeholders are directly involved or considered in every step of the sustainability reporting process, and as such, they are truly an inseparable part of reporting. Failure to engage with the stakeholders in the sustainability reporting process will likely result in reports that are not relevant to the needs of the stakeholders and thus not useful (GRI, 2013b). To understand why stakeholder inclusiveness and engagement are such crucial elements in sustainability reporting, it is useful to place them in the context of the sustainability reporting process, which, as described by GRI in its additional guidance to the GRI Sustainability Reporting Guidelines, is divided into five phases as presented in Figure 1.

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Figure 1. The five phases of the GRI sustainability reporting process

Source: GRI, 2014a, p. 9.

In the Prepare phase the whole reporting process is planned and the company starts to think about its sustainability topics and impacts, as well as the stakeholders it wants to communicate to. In the Connect phase the company identifies and prioritizes its stakeholders, defines appropriate engagement methods, and finally engages with them to find out what are the sustainability topics and information they consider important. In the Define phase the focus is on defining the material topics to be included in the report and their boundaries, meaning what matters and where it matters, again with the consideration of the topics identified by the stakeholders and the influence they may have on the decisions of the stakeholders. In the Monitor phase the company collects and analyzes the information it needs in order to prepare the content of the sustainability report based on the material topics it has defined, as well as manages the company’s sustainability performance. In the Report phase the focus is on compiling the report and deciding on how it will be presented and communicated in order to reach the target stakeholder groups. (GRI, 2014a.) The stakeholder engagement in the sustainability reporting process resembles the stakeholder management process described earlier, in sub-section 2.3. Prepare Connect Define Monitor Report

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Thomson and Bebbington (2005) argue that disclosure on stakeholder engagement methods in sustainability reports is rare and where descriptions are included, they usually are brief. In general, research shows that evidence within the sustainability reports is lacking to prove that stakeholder engagement is being conducted (ACCA, 2005; Unerman, 2007; van Huijstee and Glasbergen, 2008). This is a critical concern, as Thomson and Bebbington (2005, p. 517) underline: “the quality of reporting […] is intimately linked to the quality of stakeholder engagement”. More evidence on stakeholder engagement and its importance in sustainability reporting can help in bridging the gap between literature and practice, which Habisch et al. (2011) identified in their research. Andriof and Waddock (2002, p. 35) on the other hand criticize stakeholder research for concentrating mainly on “classifying individual stakeholder relationships and influential strategies rather than understanding stakeholder engagement”.

2.5. Assessing the quality of stakeholder engagement

According to the literature, the quality of stakeholder management in general, and stakeholder engagement in particular, can be assessed by critically analyzing a series of elements and factors. Strong, Ringer and Taylor (2001) identify three critical management behaviors that lead to stakeholder satisfaction: timeliness of communication, the honesty and completeness of information, and the empathy and equity of treatment by management. Zöller (1999) suggests that effective dialogue requires the following attributes: symmetrical communication, transparency of benefits and risks, unbiased facilitation, inclusivity, and an early start of the dialogue to facilitate change if needed.

Zadek and Raynard (2002, pp. 11-12) propose three dimensions of quality: procedural quality, responsiveness quality, and the quality of outcomes. Procedural quality refers to the quality of how the engagement was conducted and whether or not it was consistent with the declared

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purpose. The quality characteristics of procedural quality include existence of formalized procedures, possibility of stakeholders to initiate engagement, assurance of empowering stakeholders to raise issues that they are most concerned about, and the legitimacy of the engagement in the sense that stakeholders the company engages with are selected in an unbiased manner. Responsiveness quality is concerned of how the company deals with and responds to the issues raised by stakeholders. The quality of responsiveness can be evaluated by analyzing if the company fully understood the stakeholders’ concerns and if the issues raised were delegated on to the relevant decision makers in the company. Quality of outcomes refers to the tangible evidence on whether or not the company adjusted its policies and practices to align them with stakeholder engagement. Evidence of stakeholder satisfaction also indicates a level of quality of outcomes. Quality stakeholder engagement must engage stakeholders in an active and meaningful manner, which can be linked to decision-making.

A standard for stakeholder engagement and principles guiding good quality stakeholder engagement are offered by AccountAbility (2011) in its AA1000 Stakeholder Engagement Standard. The main emphasis of the standard is on the fact that stakeholder engagement must result in outcomes that the involved stakeholders will value and the process of stakeholder engagement must be communicated in a credible way (AccountAbility, 2011). For the stakeholder engagement process to be successful and to deliver quality and inclusive engagement practice, the company must understand and define why it is engaging (the purpose), what it is engaging on (the scope), and who it needs to involve in the engagement (mandate, ownership, stakeholders) (AccountAbility, 2011, p. 16). For the stakeholder engagement process itself, AccountAbility includes in its standard the following stages: (1) plan, (2) prepare, (3) implement, and (4) act, review and improve (AccountAbility, 2011). The

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process is described as cyclical, suggesting that stakeholder engagement should be ongoing rather than one-off endeavor.

Some research on evaluating the quality of stakeholder engagement, also in the sustainability reporting context, has been conducted. The literature review pointed to two studies in particular: Cumming (2001) and Manetti (2011).

Cumming (2001) evaluates in her paper stakeholder engagement processes by using Arnstein’s (1969) Ladder of Citizen Participation, which was developed to evaluate the public involvement in public policy creation. Arnstein’s (1969) ladder comprises eight levels and it ranges from paternalistic to a more participatory system. Cumming finds that stakeholder engagement is widely perceived as a two-way process of interaction, but most stakeholder engagement falls on the lower levels of three (Informing) and four (Consultation) of the ladder. No cases of stakeholder engagement on the highest levels of the ladder, levels seven (Delegated power) and eight (Citizen control), were found. These findings indicate that while companies see stakeholder engagement as a two-way interaction, in reality they only inform or consult their stakeholders, not truly involving them in decision-making.

Manetti (2011) builds partly on Cumming’s contribution by further investigating stakeholder engagement quality in sustainability reporting with particular reference to the involvement of stakeholders in the decision-making processes of companies and in the creation of a mutual responsibility model. Manetti finds somewhat higher levels of stakeholder engagement and reports that the first five levels of the ladder were reached. The delegation of decision-making power to stakeholders was significant but not convincing. Only in rare cases or to comply with legal requirements did the companies engage on the highest levels of seven (Delegated power)

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or eight (Citizen control), of the ladder. While both of these studies contribute to understanding the quality and the levels of stakeholder engagement, they base their evaluation on Arnstein’s ladder, which is developed for evaluating public involvement in public policy creation.

Friedman and Miles (2006) use Arnstein’s ladder to develop their own model for analyzing the degrees of quality of stakeholder management and engagement practices. While Arnstein (1969, p. 217) admits that the ladder model represents a simplification of reality, Friedman and Miles (2006) propose some modifications to develop the model into a framework for analyzing stakeholder management and engagement practices. However, while Friedman and Miles (2006) provide in their book Stakeholders: Theory and Practice case studies of engagement to illustrate the different levels, they do not empirically test their model.

Friedman and Miles’ (2006) ladder of stakeholder management and engagement comprises of 12 distinct levels that illustrate degrees of the quality of stakeholder management and engagement (see Figure 2). Despite presenting levels in the model, Friedman and Miles (2006, p. 162) note that stakeholder relations are likely to be conducted at different levels at different times and depend on the stakeholder groups and other factors, thus level 12, for example, cannot directly be interpreted to present the ideal of stakeholder management and engagement.

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Figure 2. Friedman and Miles’ ladder of stakeholder management and engagement Stakeholder

management tool and nature of response

Intention of engagement Level of influence

Style of dialogue and associated examples De gre es of stake hold er powe r P roa cti ve or r esponsi ve /t rusting 12. Stakeholder control Majority representation of stakeholders in decision-making process F orming or a gre eing t o d ec isi ons Multi-way dialogue, e.g. community projects 11. Delegated power Minority representation of stakeholders in decision-making process Multi-way dialogue, e.g. board representation 10. Partnership Joint decision-making power over specific

projects

Multi-way dialogue, e.g. joint ventures

De gre es of invol ve ment 9. Collaboration Some decision-making power afforded to stakeholders over specific

projects

Multi-way dialogue, e.g. strategic alliances

8. Involvement

Stakeholders provide conditional support; if conditions are not met support is removed. The organization decides the

extent of conformity Ha ving an influe nc e on de cisi ons Multi-way dialogue, e.g. constructive dialogue De gre es of toke nism R esponsi ve /neutr al 7. Negotiation Multi-way dialogue, e.g. reactive bargaining 6. Consultation

Organization has the right to decide. Stakeholders can advise

B eing hea rd be for e a de cisi on Two-way dialogue, e.g. questionnaires, interviews, focus groups, task forces,

advisory panels 5. Placation

Appease the stakeholder; stakeholders can hear and

be heard, but have no assurance of being

heeded by the organization

4. Explaining Educate stakeholders Two-way dialogue, e.g. workshops Non -pa rtic ipation Autoc ra ti c/cynic al

3. Informing Educate stakeholders

Know ledge a bout d ec isi o ns One-way dialogue, e.g. verified corporate

social reports 2. Therapy

‘Cure’ stakeholders of their ignorance and preconceived beliefs

One-way dialogue, e.g. briefing sessions,

leaflets, magazines, newsletters, green glossy social corporate reports, or other publications 1. Manipulation ‘Misleading’ stakeholders, attempting to change stakeholder expectations

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Levels one and two, Manipulation and Therapy, relate to most basic forms of stakeholder engagement where the company disseminates information for example through newsletters, internet, sustainability reports or other publications. The communication is one-way. The company decides what to publish and when, while the stakeholders are unable to influence the practice. Manipulation refers to controlling and attempting to change stakeholder expectations and opinions. Therapy, on the other hand, refers to ‘curing’ the stakeholders by imposing them to self-laudatory corporate information in order to change their beliefs and to align their thinking with the company’s views. (Friedman and Miles, 2006, pp. 164-165.) At these levels using sustainability reporting as a communication channel is usually based on ‘greenwashing’ strategy of intentionally displaying only positive information and omitting the negative. While for example external assurance helps in confirming the legitimacy of the information the company is reporting on, it is not easy to differentiate ‘greenwash’ from ‘realistic’ sustainability reporting that reflects actual performance (Kolk, 2004, p. 61).

Level three, Informing, is one-way communication from the company to its stakeholders in order to be open and transparent. Sustainability reporting falls into this level as well, but when companies use it for informing their stakeholders they are aiming to present a balanced view of negative, positive and neutral information. In addition, the companies aim to assess performance against targets, present data for all operations, report on economic, social, and environmental issues, and have their report externally assured by independent third-party. Based on this, stakeholders should be able to assess the company’s performance with reasonable accuracy. (Friedman and Miles, 2006, pp. 167-168.)

Level four, Explaining, refers to stakeholder engagement for example in form of workshops. Although workshops are a form of two-way communication, their objective often is to inform

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stakeholders of decisions that have already been made, before publically announcing them. Explaining is part of the levels of tokenism. Token engagement gives the stakeholders the possibility to voice their opinions, but it does not guarantee that they are being heard. This can be challenging for setting up the workshops, as the stakeholders may feel powerless to influence the situation. Companies then need to encourage participation and give stakeholders a level of ownership on the matter and make it seem more relevant to them. (Friedman and Miles, 2006, pp. 169-170.)

Level five, Placation, involves two-way communication before the decision has been made. Examples of placation are advisory panels, task forces, and focus groups. The company can gain useful insights on the decision-making process from the stakeholder groups, and the stakeholder groups get to voice their opinions, although the company keeps the right to decide on its actions. The challenge with advisory panels, task forces, and focus groups is ensuring a balanced representation and that all relevant groups are represented. (Friedman and Miles, 2006, pp. 170-171.)

Level six, Consultation, is an example of the company actively soliciting stakeholder feedback through surveys or interviews. Consultation is often conducted as a part of stakeholder engagement in sustainability reporting process. Although the company would likely not invest time and resources in consultation unless it plans to take the results into account in strategic actions, it does have the right to decide how to use the feedback. (Friedman and Miles, 2006, pp. 171-172.)

Level seven, Negotiation, is an engagement activity, which takes place before a final decision. The negotiations may be conducted directly, for example between a company and its supplier,

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or indirectly through a third party, for example a trade union representing the employees. Stakeholders have some power to influence the decision-making by continuing to support the company provided that the support is conditional depending on the outcome of the negotiation. (Friedman and Miles, 2006, p. 172.)

Level eight, Involvement, has more balanced power than level seven, negotiation, and is therefore placed higher on the ladder. Stakeholder roundtables are an example of involvement. Other ways of involvement are for example the purchase of the company’s shares in order to voice opinion at the annual general meeting, or otherwise actively and positively engage with the company in constructive dialogue to influence its behavior and decisions. (Friedman and Miles, 2006, p. 173.)

Level nine, Collaboration, is close cooperation between the company and its stakeholders and it is characterized by the attempt to pursue mutually beneficial goals. Strategic alliances are a typical example of collaboration. With the focus on joint outcomes, in a strategic alliance the skills or resources brought in by the parties are expected to complement and benefit all. Strategic alliances can be developed around a sponsorship, or product endorsements, development or licensing. It can also be, for example, an alliance between an environmental organization and a company. (Friedman and Miles, 2006, p. 174.)

Level ten, Partnerships, is characterized by more substantial joint activities and processes, and a greater risk. Examples of partnerships are joint ventures, social partnerships, and joint committees, and they may be formed, for example, with customers, suppliers, or environmental groups. High level of trust, shared values and norms are needed for this type of stakeholder

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engagement, in which the decision-making power is shared with the stakeholder. (Friedman and Miles, 2006, pp. 175-176.)

Level 11, Delegated power, refers to instances where stakeholders are truly empowered to make decisions (Friedman and Miles, 2006, p. 176). An example of delegated power is the German Codetermination Law (Mitsbestimmung), which gives employees the right to be consulted and to participate in the company’s decision-making (Page, 2011).

Level 12, Stakeholder control, can occur only if stakeholders obtain full, or at least the majority, managerial power in a company. Examples of stakeholder control are rare. Community or neighborhood organizations in which the stakeholders have full management capacity are likely the only occurrences of full stakeholder control. (Friedman and Miles, 2006, p. 176.)

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3. Research sample and method

Empirical studies on sustainability reporting generally use document analyses, interviews, surveys, models, and experimental studies as the research methods. Document analyses are most popular method and the number of research papers based on content analyses of sustainability reports has increased considerably over the years. (Hahn and Kühnen, 2013.) This goes hand in hand with the increase in sustainability reports published by companies (GRI, 2013a), which allows easy access to data and makes the content analysis a practical research method. The sample is usually drawn from databases and sustainability reports using the same reporting guidance are chosen for comparability reasons. Often the guidance used is the GRI Sustainability Reporting Guidelines, which are today widely regarded as the de facto standard in sustainability reporting (Brown, de Jong and Levy, 2009; Kolk, 2010). In the following sub-sections the sample, method, and limitations of the research are discussed in detail.

3.1. Sample

The sample was drawn from GRI’s publically available Sustainability Disclosure Database and consists only of the reports available in the Database on 23 June 2014 – 13 months after the G4 Guidelines were published by GRI. This sample cutoff date was selected to be able to research the practices of the first companies using the G4 Guidelines in their sustainability reporting. This allows establishing a foundation for further research into stakeholder engagement disclosures in reports based on the G4 Guidelines.

To limit the sample, several criteria were introduced. The final sample comprises of sustainability reports from companies that are based in Europe, use GRI’s G4 Guidelines in their reporting, declare an ‘in accordance’ option (one of the two available ones, either Core or

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criteria the sample was limited to 55 sustainability reports. The detailed characteristics of the sample are presented in Table 1.

Table 1. The characteristics of the sample

TYPE OF THE COMPANY N %

Cooperative 1 2% Non-profit 2 4% Partnership 1 2% Private 46 84% Public institution 2 4% State-owned 3 5% Total 55 100%

SIZE OF THE COMPANY

Small and Medium Enterprise 4 7%

Large 35 64%

Multinational Enterprise 16 29%

Total 55 100%

SECTOR OF THE COMPANY

Automotive 2 4%

Chemicals 4 7%

Commercial services 5 9%

Construction and construction materials 4 7%

Energy and energy utilities 8 15%

Financial services 6 11%

Forest and paper products 3 5%

Household and personal products 1 2%

Logistics 2 4% Media 2 4% Mining 1 2% Non-profit/services 2 4% Public agency 2 4% Real estate 2 4% Retailers 1 2% Technology hardware 1 2% Telecommunications 2 4%

Tourism and leisure 2 4%

Other sectors (not specified) 5 9%

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COUNTRY OF THE COMPANY Austria 2 4% Croatia 1 2% Denmark 1 2% Finland 6 11% France 1 2% Germany 4 7% Greece 1 2% Italy 4 7% The Netherlands 10 18% Poland 4 7% Portugal 1 2% Spain 5 9% Sweden 6 11% Switzerland 6 11% United Kingdom 3 5% Total 55 100%

Source: GRI’s Sustainability Disclosure Database, 23 June 2014.

Although there are several limiting criteria to the sample, such as region and language as described earlier, it does represent the current state of G4 Guidelines-based sustainability reporting by companies in Europe. The sample represents 37% of the total population of reports by companies in all regions using the same sample criteria. Reports from 15 different European countries are included in the sample, with reports from the Netherlands (10 reports or 18%) being the majority and reports from Finland, Sweden and Switzerland (6 reports or 11% each) following closely behind. In terms of size and operating sector, most of the reporting companies in the sample were large companies (35 companies or 67%) operating in energy and energy utilities (8 companies or 15%), or financial services sectors (6 companies or 11%). In total, 18 sectors are represented in the sample while the sectors for five companies have not been identified in GRI’s Sustainability Disclosure Database. Most of the companies in the sample are privately owned (46 companies or 84%), but the sample includes also two not-for-profit

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The research paper focuses on sustainability reports based on GRI’s G4 Guidelines for three main reasons. Firstly, as explained earlier in this paper, while research on sustainability reports based on older versions of the GRI Guidelines has been conducted; little is known of the reporting practices of companies basing their reports on the G4 version of the Guidelines. Secondly, G4 emphasizes the materiality concept and stakeholder engagement, and new requirements in disclosing information on these two topics have been introduced (KPMG, 2013b; GRI 2014b). Thirdly, this research paper aims to help in providing a baseline for future research on the G4 Guidelines-based reports.

In order to qualify as a G4 Guidelines-based report, sustainability reports should make use of the G4 Guidelines and be ‘in accordance’ with one of the two options, Core or Comprehensive. The G4 Guidelines include two different types of Standard Disclosures, General Standard Disclosures and Specific Standard Disclosures. The General Standard Disclosures are applicable to all reporting organizations, but the number of required disclosures depends on the ‘in accordance’ option chosen, Core or Comprehensive. General Standard Disclosures include four Stakeholder Engagement disclosures, namely disclosures 24, 25, 26 and G4-27 as presented in Table 2 and these are mandatory for both ‘in accordance’ options.

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Table 2. Stakeholder Engagement disclosures in G4 Guidelines Disclosure Description of reporting requirements

G4-24 Provide a list of stakeholder groups engaged by the organization. G4-25 Report the basis for identification and selection of stakeholders with

whom to engage.

G4-26 Report the organization’s approach to stakeholder engagement, including frequency of engagement by type and by stakeholder group, and an indication of whether any of the engagement was undertaken specifically as part of the report preparation process.

G4-27 Report key topics and concerns that have been raised through stakeholder engagement, and how the organization has responded to those key topics and concerns, including through its reporting. Report the stakeholder groups that raised each of the key topics and concerns.

Source: GRI, 2013b, pp. 43-44.

In these disclosures the company should provide an overview of its stakeholder engagement during the reporting period. Additionally, Profile Disclosure G4-31 asks to disclose information on whether there is a possibility for stakeholders to provide feedback on the report.

3.2. Method

Qualitative research method and content analysis approach are used in this research to analyze the G4 Guidelines-based sustainability reports. Content analysis as a research method, the analysis framework and the research process are discussed next.

Content analysis is a frequently used research method to capture and organize the data in research focusing on analyzing corporate disclosures (Guthrie et al., 2004). It is a useful method because it allows the analysis and comparison of trends and patterns in reports (Stemler, 2001; Guthrie et al., 2004). Abbott and Monsen (1979, p. 504) define content analysis

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and literary form into categories in order to derive quantitative scales of varying levels of complexity”. In content analysis the text is coded into different groups, or categories, based on the pre-determined criteria. The analysis often assumes that frequency of the topic indicates its importance. (Krippendorff, 1980.)

Content analysis is a research method used to make replicable and valid inferences from data to their context (Krippendorff, 1980). Reliability in content analysis involves the reliability of the coded data set and the coding instrument (Milne and Adler, 1999). Furthermore, Krippendorff (1980, pp. 130-132) lists stability, reproducibility, and accuracy as types of reliability for content analysis. In order to draw valid analysis and conclusions from content analysis both the data set and the coding instrument must be reliable (Milne and Adler, 1999).

The major limitation of content analysis is the subjectivity involved in coding (Frost and Wilmshurst, 2000). Also the inclination to use a large sample to be able to draw statistically significant findings is a problem, as this discourages the more in-depth and quality focused analysis. Replicability requirement is also a limitation, as it requires fixed and objective categories and procedures. The expectation to contribute to theory and practice is another limitation. If the coding categories are based on the material being analyzed, the findings will not be generalizable. However, if the coding categories are based on the theory background, the findings will lack the uniqueness of the material being analyzed. (Krippendorff, 1980.)

Despite the limitations of content analysis, it is a powerful data analysis method. The main benefits of content analysis are that it is systematic, replicable and useful in analyzing large volumes of data (Stemler, 2001). In the context of researching reports it allows analysis of trends (Stemler, 2001; Guthrie et al., 2004). Content analysis was chosen as the research

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method for this research paper for two main reasons: (1) it best fits the purpose considering the aim of this research paper to analyze trends and map out the state and quality stakeholder engagement disclosures in sustainability reports, and (2) its benefits outweigh the limitations.

An analysis framework, the stakeholder engagement disclosures analysis tool (see Annex 1), was developed for this research paper to guide the content analysis of the sustainability reports. The analysis tool is based on the research questions set out in this research paper, and the research and analysis frameworks by Cumming (2001), Friedman and Miles (2006), and Manetti (2011). In addition, the G4 Guidelines’ Stakeholder Engagement disclosures G4-24, G4-25, G4-25 and G4-27, and Report Profile disclosure G4-31 have been used in the development of the analysis tool. The content analysis of the sustainability reports in this research paper is framed by the aim of mapping the state of stakeholder engagement disclosures and the quality of stakeholder engagement in G4 Guidelines-based reports. This is done to enable the evaluation regarding the extent to which companies disclose their stakeholder engagement practices publically and to analyze at which level of the Friedman and Miles’ (2006) ladder of stakeholder management and engagement their practices are.

The research process started by the researcher preparing an Excel-file containing information on all of the 55 companies included in the sample as well as all the questions and answer options included in the stakeholder engagement disclosures analysis tool. The researcher carried out content analysis of each individual sustainability report included in the final sample to carefully review their content in order to answer the questions included in the stakeholder engagement disclosures analysis tool. The researcher read through and analyzed the stakeholder engagement sections (disclosures G4-24, G4-25, G4-26, G4-27 and G4-31) and any other related sections of the reports, which included information on stakeholders or

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stakeholder engagement. Often this was the content of disclosure G4-18 on identifying material aspects and boundaries, as stakeholder considerations are its key element. The researcher answered the questions included in the analysis tool based on the information provided in these sections. Predetermined answer options were included for all questions in the analysis tool. Half of the questions also asked for additional information, which was collected in the form of direct quotes from the sustainability reports.

In addition to the answers to the questions in the analysis tool, the researcher also collected notes on the impressions on the reports’ fulfillment of the G4 Guidelines’ disclosure requirements, and the quality and readability of the stakeholder engagement disclosures in the sustainability reports. In order to answer the research question related to compliance with G4 Guidelines’ disclosure requirements the researcher checked if the disclosure points of the disclosures G4-24, G4-25, G4-26, G4-27 and G4-31 were fulfilled. This was done by comparing the disclosures in the report with the disclosure points presented in the G4 Guidelines. The degree of fulfillment was then evaluated on a three level scale: low, medium, high, in order to draw conclusions on the fulfillment of the G4 Guidelines’ disclosure requirements. The researcher is knowledgeable of the G4 Guidelines through work and practice of sustainability reporting and this assisted in making the evaluation on compliance with the G4 Guidelines.

To evaluate the quality of stakeholder engagement on Friedman and Miles’ (2006) ladder of stakeholder management and engagement several questions of the analysis tool were used. The answers to questions on motivation (question 2.4. of the stakeholder engagement disclosures analysis tool), the involvement of stakeholders in the reporting process (question 4.1.) and decision-making of the company (question 4.2.) were analyzed to understand the intention of

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the stakeholder engagement, which is one of the aspects of the ladder of stakeholder management and engagement. The answers to the questions on stakeholder engagement methods (question 3.1.) and style of stakeholder engagement (question 3.3.) were analyzed to understand the style of dialogue through examples of stakeholder engagement methods in order to relate it to the corresponding aspect of the ladder. Style of the stakeholder engagement was especially decisive; as it is one of the key aspects of the ladder that determines the level the company is at. Through analysis of these five questions of the stakeholder engagement disclosures analysis tool and by using the theory and examples provided in Friedman and Miles (2006) the level of quality of stakeholder engagement was determined for each of the companies in the sample.

An element of subjectivity in the interpretation of the answers to the questions of the stakeholder engagement disclosures analysis tool exists. Given this, the researcher reviewed the answers after conducting the initial analysis of the sustainability reports and adjusted them where necessary.

After the data was collected from the sustainability reports by answering the questions of the analysis tool, the results were analyzed one question at a time and cross-analysis of questions was conducted to experiment with the data analysis and to provoke additional results. Statistics were created for the results where answer options were possible to categorize, for example, where answer options were yes or no. The questions, which asked for additional information, and where answers were collected as direct quotes from the reports, were analyzed by coding them into themes and by counting the frequency of key words. This allowed the identification of possible trends in the answers. For example, in the question regarding the stakeholder groups companies identified (question 2.2. of the stakeholder engagement disclosures analysis tool),

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the stakeholder groups mentioned in the reports were collected from the reports as qualitative data and the number of times a particular stakeholder group was mentioned was counted.

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4. Results

The results of the research and the analysis are discussed in the following sections. They are divided into six sub-sections, each presenting the results of one of the research questions of this paper.

4.1. Disclosures on stakeholder engagement and compliance with G4 Guidelines

While stakeholder engagement was mentioned in all of the 55 sustainability reports analyzed, a dedicated section on stakeholder engagement was not always included. In 43 reports (78%) a dedicated section on stakeholder engagement was included, while 12 reports (22%) mentioned stakeholder engagement only briefly in other sections of the report. So, while all companies in the sample clearly consider stakeholder engagement in relation to their operations, not all of them give the same prominence to it in their communication. This is also supported by the objectives of stakeholder engagement. Of reports that did not include a dedicated stakeholder engagement section, the majority (5 reports), did not aim to use stakeholder engagement to set strategic objectives or to define the content of the report. These reports did not provide details on whether the companies were planning to engage the stakeholders in the future.

The objective of stakeholder engagement was in 23 reports (42%) to set strategic objectives and to define the report content (see Table 3). This shows the companies’ commitment to integrating stakeholder concerns and sustainability into their strategy as well as openly communicating the progress made. This is the core of stakeholder management and can lead to improved financial performance of the company (Mellahi and Wood, 2003).

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Table 3. Objectives of the stakeholder engagement

Objective N %

Setting or reviewing strategic objectives 0 0%

Defining report content 21 38%

Both of the previous elements 23 42%

No reference to the previous elements 11 20%

Source: Sustainability reports included in the sample.

In 21 reports (38%) the main aim of engaging stakeholders was to identify the topics that matter to them in order to define the report content. While this produces reports communicating information on topics important to the stakeholders, it does imply that stakeholders are not truly incorporated in the strategic decision-making of the company. In 11 reports (20%) no reference was made to using stakeholder engagement for setting strategic objectives or to define the report content. This raises the concern that the report may not be particularly relevant to the stakeholders. None of the reports in the sample stated setting strategic objectives as the sole objective of the stakeholder engagement.

The disclosures on stakeholder engagement were in general in line with the disclosure requirements set out in Stakeholder Engagement disclosures G4-24, G4-25, G4-26 and G4-27, and Report Profile disclosure G4-31. The main challenges of companies seemed to be in fully addressing disclosure G4-27, which asks to disclose the key topics and concerns that have been raised through stakeholder engagement, and how the company responded to them. The description of key topics and concerns raised by the stakeholders was included in 44 reports (80%), but the description of the company’s response only in 22 reports (40%). This poses the danger of making the stakeholder engagement process one-sided with stakeholders raising issues but the company not explicitly explaining how it has addressed them.

The state and quality of stakeholder engagement disclosures in sustainability reports : exploring the current practices of European companies

MASTER THESIS