Amsterdam Business School
Assurance on integrated reporting
Name: Sabba Anwar Student number: 10873732
Thesis supervisor: Dr. J.J.F. van Raak Date: 19 June 2016
Word count: 11,191
MSc Accountancy & Control, specialization Accountancy Faculty of Economics and Business, University of Amsterdam
Statement of Originality
This document is written by student Sabba Anwar 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.
Abstract
The purpose of this these is to investigate the role of internal motives of an organization to issue and assure an integrated report. In doing so it provides an overview of determinants that affects the choice to issue and assure an integrated report. Since the integrated report is a recent phenomenon on a voluntary bases, there is limited research done regarding integrated reporting and the motives to issue this report. This thesis provides a better understanding of the internal motives to issue an integrated report. The association is analyzed by using a dataset of 170 U.S. firms, in a timeline of 2013 till 2014 that published an integrated report or included the principles of integrated report in their sustainability report. The results reveal a positive relation between firm size and the decision to issue an integrated report and between a new appointed CEO and the decision to issue an integrated report.
Key words: Integrated report, assurance, GRI, internal motives, CEO characteristics, top management team
Contents
1 Introduction ... 5
2 Prior literature ... 8
2.1 Introduction ... 8
2.2 Integrated reporting and its developments ... 8
2.2.1 Integrated reporting ... 8
2.2.2 The development of the Integrated Report ... 9
2.3 Integrated reporting and its assurance ... 10
2.4 The upper echelons theory ... 11
2.5 Hypotheses Development ... 13 3 Research methodology ... 17 3.1 Introduction ... 17 3.2 Data ... 17 3.3 Methodology ... 17 4 Results ... 20 4.1 Introduction ... 20
4.2 Sample and statistics ... 20
4.2.1 Descriptive statistics ... 20
4.2.2 Two sample t-test ... 22
4.3 Results ... 22 4.3.1 Correlations ... 22 4.3.2 Regression ... 23 5 Conclusion ... 28 6 Bibliography ... 30 Appendix 1: Variables ... 36
1 Introduction
Reporting on corporate social and environmental responsibility occurs more frequently over the past decades. The latest development of reporting is the integrated reporting, a reporting approach that will become the base of every reporting (IIRC, 2013). The explanation about what integrated reporting is, is stated by the International Integrated Reporting Council (IIRC) as follows:
“… a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.” (IIRC, 2013)
The purpose of the integrated report is as quoted above, to provide an explanation to the providers of financial capital of how an organization creates value over time by providing financial and nonfinancial information. The integrated report is introduced by a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs with as long-term vision that integrated- management and thinking becomes the base of business practices which will result in financial stability and sustainability (IIRC, 2013).
The number of integrated reports published increased rapidly (Deloitte, 2015). According to the report 40 percent of the overall reports studied by Deloitte were Integrated Reports. The amount of integrated Report increased from 10 percent in 2013 to 35 percent in 2015. Even companies that did not issued an integrated report, did score high on the IR principles. Although the guiding principles of IR are well developed, some content elements, related to integrated thinking, remain a challenge. According to a survey of KPMG in Japan, the issued integrated report increased from 92 companies in 2013 to 142 companies in 2014 (KPMG, 2015). The industry of the companies issuing integrated reports were the highest in the electric equipment industry, following by pharmaceuticals and construction industry. The reporting companies worldwide increased from 20 percent (2011) to 51 percent (2013). These companies include corporate responsibility information in their annual report (KPMG, 2013). Even though, these companies include corporate responsibility information, only one out of the ten companies issues an integrated report.
According to the KPMG survey of Corporate Responsibility Reporting (2013) 59 percent of G250 companies invest in external assurance regarding their corporate responsibility information and two third of these companies choose a big accountancy firm. The mandatory reporting in South Africa shows that the involvement of CEO and other board members is a crucial element in creating value and thus the support of the board for IR is necessary to achieve value creation for an organization.
Even though there is an increase in the reporting behaviour of the integrated report, there are still some doubts about the success of integrated report. Flower (March 2015) compared the current proposals of the integrated report with its objective. Flower concluded that IIRC failed to implement the integrated report according to the objectives. He believes that the integrated report does not cover sustainability and has very few obligations on the preparer of the integrated report. He also believes that that the integrated report does not cover the impact of the organizations activities on the stakeholders. Where Flower argues that that there is limited disclosure requirements regarding the movements of capitals, Adams (March 2015) argues that this limitation is due to the underdeveloped stage of the integrated report. Adams also believe that the integrated reporting does have a significant affect. Others discuss that Integrated report can also be used to cover up misconduct (Hemingway & Maclagan, 2004). Organizations will try to deceive the stakeholders by convincing the stakeholders that the organizations operate sustainable, while they are not. While according to Kim et al. (2012,) organizations will be more conservative when they adopt a corporate social responsibility (CSR) strategy and will prioritise transparency toward stakeholders.
The internal motives for, and consequences of, firms choosing voluntary to issue an integrated report has to my knowledge not been examined yet. Several studies are done about the motives and consequences of corporate social reporting, but no research is done specifically for the integrated report and the internal factors that influence the decision-making. There is a lot of research done regarding to the theoretical development of the integrated reporting (Stubbs & Higgins, 2014) (Villiers, Rinaldi, & Unerman, 2014) (Higgins, Stubbs, & Love, 2014) (Brown & Dillard, 2014) (van Bommel, 2014) (Haller & van Staden, 2014). There is also research done about which countries and industries are more likely to assure their Sustainability Reporting by an accounting firm (Mock, Rao, & Srivastava, 2013) (Hodge & Subramaniam, 2009) (Simnett, Vanstraelen, & Chua, 2009). Research regarding assurance on sustainability reports is becoming trending, but research regarding voluntary assurance is still limited (Brammer & Pavelin, 2006) (Jensen & Berg, 2012) (Ruhnke & Gabriel, 2013). The decision for issuing an integrated report lies at the top level (Churet & Eccles, 2014). Therefore the characteristics of the top level have an influence on the decision to issue and assure an integrated report.
This thesis is based on an empirical research which aims to test what the determinants are of the top management team regarding issuing and assuring an integrated report by an audit firm and how these determinants are associated. There are a lot of studies done which explain the external factors that influence the decision to issue and assure an integrated report, but in my knowledge there is no research done regarding the factors internally in an organization. Therefor
this thesis contributes to the literature by providing an insight in the internal motives and decision making of an organization for issuing and/or assuring an integrated report and the relation between the TMT and the CEO regarding this decision. The research question formed for this thesis is:
“Which factors influence the extent of integrated reporting and the decision to hire an auditor?” The research question is answered by looking at firms that issued an integrated report or included the principles of integrated report and their bonus behavior and the characteristics of the CEO. The assumption made are that firm with relatively high bonus system would be less likely to issue an integrated report and that CEO’s that are not the founder and has financial expertise are more likely to issue an integrated report. A comparison is done between the bonus systems of firms that issue an integrated report with the firms that do not issue an integrated report. In addition, an examination of whether industry, return on asset (ROA), firm size, team size, gender, age, voting control and being audited by an auditing firm are explanatory variables in issuing an integrated report.
The results of this thesis show that there exists a statistically significant relationship between firm size and the likelihood of firms issuing an integrated report. This implies that the bigger a firm is, the higher the likelihood that these firms will issue an integrated report. The results also show a negative association between the status of the CEO and the decision to issue an integrated report. This implies that CEO’s that are not the founder of a firm, are more likely to issue an integrated report.
The remainder of the thesis is structured as follow. Chapter two provides a literature overview regarding the integrated report followed by the development of this reporting phenomena. After that, assurance of reporting will be discussed. The theory about the characteristics of the top management team, known as ‘the upper echelon theory’ will be discussed, followed by the hypothesis formed for the empirical study. Chapter three provides the research methodology and a description of the data used to do this research. The results will be discussed in chapter four and in chapter five the conclusion will be provided.
2 Prior literature
2.1 Introduction
In this chapter the prior literature regarding integrated reporting will be explained, followed by a discussion of the development of the integrated report during the years and the assurance of the integrated report by an audit firm. The ‘upper echelon theory’ will be explained, followed by the hypotheses development
2.2 Integrated reporting and its developments
2.2.1 Integrated reporting
Sustainability reports were published for the first time in the 1970s and were associated to social audits and human resource accounting (Simnett, Vanstraelen, & Chua, 2009). During the years the sustainability reporting developed the link to intellectual capital, environmental and triple bottom line reporting in 1990s. The aim of the sustainability report was to protect and/or enhance shareholder value and to ensure no negative impacts on the environment and society. In 2002, the Global Reporting Initiative (GRI) was introduced. By applying the principles and guidance of GRI, companies ensure that the report is focused and of value for internal and external stakeholders. The companies achieve this by applying the measures in a concise way to express strategic approach, management goals and performance results. During the years the need for a better communication regarding the concept of value increased where knowledge and human resources are considered as powerful as manufactured and physical assets in creating value. The integrated reporting was introduced.
The International Integrated Reporting Council (IIRC 2014c) introduced the Integrated Report in august 2010. The aim of this report was to create a new framework which would lead to creating value for the short, medium and long term. The framework provides information about the financial, environmental, social, and governance aspects of an organization. The primary purpose of an Integrated Report is to explain stakeholders how an organization creates value and contains financial and non-financial information. An integrated report benefits all stakeholders that are interested in the ability of an organization to create value. Even though, IIRC does not directly refer to sustainability, several studies found a direct link between integrated thinking and sustainability (Churet & Eccles, 2014)
While GRI focusses on the economic, environmental and social sustainability, IR focusses on the creation of value over the short, medium and long-term. IR is based on five guiding
principles: strategic focus, connectivity of information, future orientation, responsiveness and stakeholder inclusiveness and conciseness, reliability and materiality. The value creation manifests itself in the six capitals, which are: financial, manufactured, human, intellectual, natural and social. This implies that the consequences of all the actions taken by the top level are found in these capitals. The top level should make decisions based on the guiding principles.
2.2.2 The development of the Integrated Report
Several studies provided an understanding of the factors behind the adoption of sustainability reports. The drivers for issuing a sustainable report differs for each organization. According to Kolk (2010), country of origin influences the reporting behaviour. European organizations issue a sustainability report in a more early stage than the US companies. A statement made by several studies is that drivers, such as external pressure from the stakeholders group have an impact on the reporting behaviour of an organization (Kolk, 2010; Sustain ability/UNEP, 1998; Kolk 2005b). Reputational benefits, licenses to operate, the ability to communicate the corporate message internally and externally, and compliance with industry requirements are also drivers which motivates organization to report (Deegan, 2002). Also, Cavaco and Crifo (2014) found that the use of pillars of Corporate Social Responsibility (CSR) influences the association between the organization’s financial performance and their involvement in corporate social responsibility. Assurors have to convince their clients about the benefits of assuring a sustainability report (O'Dwyer, Owen, & Unerman, 2011). Seeking legitimacy can also be one of the drivers of deciding to report social and environmental information (Deegan & Blomquist, 2006).
The goal of the integrated report is that it will focus on the needs of managers regarding performance information (Burritt, 2012). Also the integrated report will focus on external investor concern regarding wealth. Integrated reports should assist with internal management decisions regarding the sustainability aspects. Hereby the focus will be on social, environmental, governance, economic risks and performances, and the future mind-set. The integrated report is expected to replace the annual report. The aim of the required and successfully adopted integrated report will be that the environmental aspect will become the base of every reporting (IIRC, 2013).
In order to create value, managers should consider integrated thinking (IIRC, 2013). Since the integrated report aims to provide information to the financial capital, the degree of integrated thinking lies inherently in the information communicated to the shareholders regarding the corporate social emphasis and the environmental performance (Churet & Eccles, 2014). The more an organization applies integrated thinking in several business activities, the more the information flow will be automatically connected into management reporting (IIRC, 2013).
According to several studies, integrated reporting has various positive impacts on organizations. According to Hampton (2012), integrated reporting reduces reputational risk and ensures organizations to make better financial and non-financial decisions. Integrated reporting enables organizations to gain forward looking information (Adams & Simnett, 2011) and improves systems and processes (Roberts, 2011).
Even though a lot of attention is given to sustainability reporting, still very few organizations adopt this reporting (Stubbs, Higgins, & Milne, 2013). Mostly multinationals have adopted sustainability reporting. Some of the reasons for not adopting sustainability reporting are that the manager found it unnecessary and irrelevant. Also due to the lack of pressure changes aren’t implemented regarding sustainability issues (Jensen & Berg, 2012). Corporate social responsibility has an impact on the organizations success through increased image attractiveness or stakeholder-company identification (Arendt & Brettel, 2010). Jensen et al. (2012) studied the determinants of traditional sustainability reporting versus integrated reporting by focussing on the institutional theory. This research is mainly focussed on the external factors that are determinant to issue an integrated report.
2.3 Integrated reporting and its assurance
There is limited research done regarding the motivation for the voluntary assurance. The findings of these studies differed from each other. A reason to demand assurance is due to the degree of non-controllable aspects in an organization (Abdel-Kahlik, 1993). By assuring a report, an organization counterbalances the aspects the organization was not able to control. Also assuring a report results in a more reliable and trustable view of the report and reduces information asymmetry (Blackwell et. al, 1998). This helps external parties to rely on the given information.
The need to increase the credibility is higher for the sustainability reports of organizations that operate in the industrial sector (Simnett et. al, 2009). He also found that organizations that are active in a stronger legal system are more likely to assure their sustainability report. Organizations with stakeholder pressure are likely to assure their sustainability reports. For organization it is less important to know if the assurance provider is a member of the auditing profession, but organizations from stakeholder-oriented countries would prefer that (Simnett et. al, 2009).
A sustainability report with an assurance results in a more credible report than when a sustainability report is not assured (Hodge & Subramaniam, 2009). This implies for the quantitative and non-quantitative information in the reports. According to ISAE 3000/ASAE 3000 standard, assurance can be classified as in ‘reasonable assurance’ and ‘limited assurance’. While reasonable
assurance results in reducing the risk to an acceptable low level and is in a positive form of expression of the practitioner’s outcome, limited assurance reduces the engagement risk to a level higher than that of a reasonable assurance in a negative form.
KPMG notices that assurance from an external organization of corporate responsibility information is settled as standard practice around the biggest organizations of the world (250) (KPMG, 2015). They also state that almost two thirds invest in assurance. Since 2013 there has not been a total improvement in the quality of Corporate Responsibility reports, but there is a minor increase in quality in Asia Pacific. KPMG found in their report that organizations are now more capable of identifying environmental and social opportunities and risks better.
Large wealthy organizations with different (dispersed) ownership are more likely to consider voluntary environmental disclosures (Brammer & Pavelin, 2006). The quality of these disclosures are positively correlated with firm size and the corporate environmental impact. Organizations with poor environmental performances can decide to make fair but limited disclosures due to the pressure regarding disclosures of higher quality (Patten, 2002a). Larger organizations are due to their size and wealth, capable of investing in quality of their environmental disclosures (Cowen et.al, 1987; Patten, 2002a). The findings of Brammer and Pavelin (2009) show that environmental performances do not have an impact on the decision to voluntarily include environmental disclosures, but have an impact on the quality of the disclosures.
2.4 The upper echelons theory
To understand the decisions taken by the management, an understanding of why organizations act as they do, is crucial. According to the upper echelons theory organizational outcomes (regarding to strategic choices and performance levels) are influenced by the managerial background characteristics (Hambrick & Mason, 1984).
The upper echelons theory states that the choices made by the executives are based on their personalized interpretations of the situations they are in. According to Hambrick and Mason (1984), the focus on the characteristics of the top management will have a stronger explanation regarding organizational outcomes than the customer focus. The reason for this is that the customer focus relies on the individual top executives. The upper echelon perspective does not focus on the top management but on the executive groups since this provide a better understanding of the organizational outcomes. For obtaining a better understanding of the organizational outcomes, demographic characteristics are also taken into account. Even though, some proxies are difficult to collect, researchers can provide a prediction of strategic action by
looking at different proxies, for example, functional background, and industry. Even though some actions are based on a psychological and social perspective, researchers did find evidence that demographic profiles are related to strategy and performance (Hambrick, 2007; Boeker, 1997; D’Aveni, 1990; Eisenhardt & Schoonhoven, 1990).
The two viewpoints of the upper echelons are the strategic management and the competing view of the population ecology. Hambrick et al. (2005) introduced a moderator of upper echelons prediction called; executive job demands. They show that the actions of executives are affected by the extent of heavy or minimal job demands. An executive under heavy job demand will be forced more to previous taken actions that succeeded due to certainty, while executives under minimal job demand will not feel forced, which will make their choices more according to the objectives of the organizations.
According to Hambrick et al. (2007), power distribution and behavioral integration will have an impact on the upper echelon predictions. Since an executive has more power than other executives, his/her saying will have more weight when the actions of the top management will be predicted. Behavioral integration results in top executives engaging collectively in information processing and decision making regarding to the upper echelons prediction. All the different characteristics of these executives make sure that different kind of knowledge is used when making a prediction. According to Smith et. al (2006) top management team’s (hereafter referred to “TMT”) power distribution can be a strong measurement of firm performance. According to their study the power distance is associated with the characteristics of the CEO. In their study the CEO of a firm with high performance was different from the second most powerful executive.
The upper echelons theory also can have an effect as that executives will be more drawn to settings that will suit their specialties. This causality can be explained as that the upper echelons theory predicts that the TMT’s possessing a high financial expertise will be more tended to invest a deal in financing and that the executives will be drawn to financing-intensive companies. The upper echelon can also result in that the executives react on the desires of the board and not by their own profiles. For example, if the board expects an environmental change, the new outsider CEO will act and think in the way he/she can achieve these environmental changes. So the changes will not be due to the managerial backgrounds and broad mindedness, but due to the expectations of the board. According to Smith et. al (2006) the CEO’s of firms with a high performance were older and had more industry knowledge than the second executive.
The CEO has an impact on the information communication of internal TMT. The CEO has been seen as a regular member of the TMT while the CEO has a separate impact on the TMT
and is seen as the leader of TMT. Therefore, several academics argue that the impact of the CEO should be measured individually (Minichilli et al., 2010). The functional background diversity increases performance more when a CEO shares experience with other members of the TMT (Buyl et. al, 2011). This also occurs when the CEO is not the founder of the organization and when the CEO has marketing experience. This shows that CEO characteristics have influence on the association between TMT functional background diversity and firm performance.
TMT’s with high level of integrative complexity are more likely to collect different kind of information and viewpoints for making strategic decisions (Wong et. al, 2011). According to Wong et. al (2011), TMTs with high level of integrative complexity have a higher corporate social performance than firms with a lower level of integrative complexity. Also firms that are more decentralized with a lower level of integrative complexity have higher corporate social performance than firms that are centralized. Also organizations located in countries with CSR legislation already in place are less likely to issue an additional report (Dilling, 2010). Otherwise the organizations have to allocate additional costs and resources to issue an additional report. According to Thorne et. al (2014) large firms are more likely to issue voluntarily a CSR report than the smaller firms. Larger firms are more political visible and issue a CSR report in response to external scrutiny of CSR policies by the stakeholders and try to convince the stakeholders that the activities of the firms are socially responsible. Researchers raise questions to examine if the top executives really matter to the company’s outcomes as the theory predicts, and if the top executives get classified as elites. Executives can have a positive and a negative impact on the strategic choice of a firm. This depends on how the executives performed in the favor of the organizations. Executives can make good and bad decisions, which in both ways have a big affect on the organizations health and wealth
2.5 Hypotheses Development
The decision to issue and assure an integrated report is purely on a voluntary basis (Stubbs & Higgins, 2014). Since the TMT provides predictions related to the organizations action, I assume that the decision to issue and assure an integrated report lies at this team. There is also a strong relationship between integrated reporting and management performance (Churet & Eccles, 2014). An organization issues an integrated report to inform their shareholders how the organization creates value on several aspects (de Villiers et. al, 2014).
A contrasting view is that the executives will have little influence because the organizations have to justify their choices towards society and regulations. Hereby Stakeholders have a great impact on the corporate behavior of an organization. Hemingway and Maclagan (2004) discuss
that organizations can use corporate social responsibility as a cover up for the corporate misconduct they are doing. By adopting Corporate Social Responsibility organizations show themselves as transparent to their stakeholder. This will give a trustable view to the stakeholder, while the organization is involved in earnings management. (Kim et. al, 2012). The study of prior et al. (2008) also finds a positive relation between earnings management and CSR for only regulated firms. Trébucq and Russ (2005) did not find a significant relation between CSR and earnings management. While these results differ, Chih et al. (2008) found that CSR organizations are more aggressive in accruals management but will less likely involve in earnings smoothing and earnings loss avoidance. The results of these studies differ due to different earnings management system in several countries or due to limited availability of data. Kim et al. (2012) do find that CSR organizations are less likely to involve in aggressive earnings management through discretionary accrual and/or real activities manipulation. They found organizations to be more conservative in accounting and operating decisions, which results in more transparent financial information.
According to the study of McGuire et al. (2003) there is a significant positive relation between the compensation of the CEO salary and CEO long term incentives with CSR weaknesses. This implies that organizations with large amount of CEO incentives and salary struggle with a weak CSR compared to organizations with a stronger CSR. On the other hand Mahoney and Thorn (2006) did not find a significant association between the compensation of the CEO salary and CSR weaknesses. Mahoney and Thorn (2006) conducted their research in Canadian setting while McGuire (2003) conducted the research by the U.S. institutional environment. Fabrizi et al. (2014) finds that CEO’s that are involved in equity investment and annual bonuses are less likely to get involve in CSR. The CEO’s private interest are particularly the same as of the shareholder this makes it very risky for the CEO to expose the CSR issues. The hypotheses formed according to this expectation is:
H1a: The likelihood to issue an integrated report will decrease if there is a high reliance on incentives in the organization.
H1b: The likelihood to assure an integrated report will decrease if there is a high reliance on incentives in the organization.
Ling et al. (2008) found that transformational CEOs play a significant role in shaping a couple of TMT characteristics. Waldman et al. (2006) also finds the same result as Ling et al. (2008), but the findings of Waldman regarding the intellectual stimulation only holds on strategically-oriented CSR. The CEOs are more likely to focus on CSR actions that have an impact on the strategic concerns, while CSR also consists a social concern factor. The value and behavior of CEOs does
influence the strategic choices the CEO makes regarding CSR. This shows that the influence of the CEO is crucial for the decision making purpose, because the characteristics of the CEO can influence the TMT (Buyl et. al, 2011).
If an executive is very powerful, then the expectation is that this executive will have an influence on the decision to issue and assure the integrated report by an auditing firm (Hambrick & Mason, 1984). The characteristics of the management’s actions are also dependent on if a board has hire a new external CEO to meet their expectation. According to Finkelstein (1992), CEO
which is also the owner of the firm has a higher concentration of formal power than non-founding CEOs. This results in a higher formal power asymmetry in a TMT with a founding CEO. The
findings of Fabrizi et al. (2014) show that a new CEO is significantly more involved with CSR so that the CEO can gain legitimacy towards a group of stakeholder. They also found that a CEO with low career concerns is more likely to involve in CSR. A powerful CEO is also more likely to involve in CSR, because the market pressure is low. Due to the low market pressure the CEO is more able to address concerns and possibility that goes beyond the interest of a group of shareholders. The hypotheses formed is:
H2: Companies with new CEO’s are more likely to change their CSR strategies.
An expectation according to the upper echelons theory is that if there is an executive that contains the knowledge needed for corporate responsibility, the likelihood to issue an integrated report will increase. And since the integrated report is a quite recent reporting choice, the expectation is that the executive will face a minimal job demand. Due to the minimal job demand the pressure upon the executive will be low and this will result in that the executive will be able to integrate the new reporting way comprehensively in the organizational system. Also, according to Hambrick and Mason (1984), the executive job demands stem from the factors: task challenges (difficulties of strategic conditions), performance challenges, and executive aspirations. Bunderson (2003) found that if the TMT’s functional background is consistence with that of the CEO, the ability for a more concise communication and decision-making shall increase.
According to the study of Buyl et al. (2014) the background characteristics of the TMT members do matter to measure their influence on strategic decision-making. Zhu (2013) found a positive relation between CSR and firm performance and between CSR and the TMT process. The CEO shapes the TMT by behavioral integration, providing long-term compensation and motivating the TMT to take risks (Sanchez-Marin & Baixauli-Soler, 2014). There has been a significant growth in hiring a CEO with financial expertise in the U.S.. CEOs with financial expertise get hired because this expertise enhances the capability and quality of a CEO in the
industry (Baatwah et al., 2015). The CEO is more able to have control over the probable consequences a certain strategic decion can have on the organization. And minimize certain (financial) consequences with the help of the financial expertise. This will please the financial shareholders. The following hypotheses are formed:
H3a: The likelihood to issue an integrated report increases if a CEO has financial expertise. H3b: The likelihood to assure an integrated report increases if a CEO has financial expertise.
3 Research methodology
3.1 Introduction
In this chapter the research methodology will be explained, followed by a discussion of the data used to do this research. The equation of the regression and the variables that will be used for investigating the determinants for issuing and assuring will be discussed. And a brief overview will be given regarding the abbreviations of the variables used in this thesis.
3.2 Data
The analysis will be done in two parts, consisting of a discussion of determinants to issue an integrated report, and determinants to assure an integrated report. The empirical analysis relies on every integrated report published in the US. Since voluntary disclosure is more adopted in developed and stable countries, data from the US will be gathered (Islam & Deegan, 2008). Unstable countries often motivate reporting by pressure and this makes it hard to analyze the association of the TMT with issuing a report. All the reports published between January 2013 to December 2014, were gathered and, additionally, the distinction between issued and assured were taken into account.
Since integrated reporting is a recent phenomenon, there is limited data available regarding the firms that issue an integrated report. Due to the voluntary choice and the cost of issuing an integrated report, a lot of firm include the principles of integrated report in their sustainability reports. This makes it harder to get a precise list of firms that issue an integrated report or include the principles of integrated report. The data regarding integrated report is collected from the Global Reporting Initiative (GRI) website. The GRI has data available of firms that issue a sustainability report according to the GRI standards and sustainability report that does not report according to the GRI guidelines. These sustainability reports also include principles of the integrated report. The sustainability reports that does not report according to the GRI guidelines and integrated reports are named as NON-GRI (GRI, 2016). This list of firms is used for the analyses.
3.3 Methodology
Descriptive statistics, correlations, multivariate tests and robustness tests will be performed to analyze the data and the equation that will be used to perform the regression analyses is as follow:
ε β β β _ β _ β β β _ β _ β _ β β β 12 11 10 8 7 6 5 4 3 2 1 0 INDUS ROA Auditor SIZE TEAM SIZE FIRM GENDER AGE EXP FINAN BACKCEO FUNC STAT CEO BONUS Assurance
Executives’ compensation is associated with CSR in Northern America, research has shown that a high bonus motivates the executives to act in a social responsible way (Mahoney & Thorn, 2006; Mcguire et al., 2003). The CSR report is the evaluation of the social responsible action taken by the executives. To test hypotheses 1a and 1b, the variable BONUS is included.
To test hypotheses two several variables regarding the CEO will be included. The status of a CEO regarding if he is the founder or a new CEO appointed by the board has an influence in the CSR strategy taken by this CEO (Finkelstein, 1992). Taken this into account the status of the CEO (CEO_STAT) is included as variable. A dummy is created for if a CEO is new, this will be one or otherwide zero. The functional background of the CEO also has an influence on how the CEO will operate to achieve CSR goals (Ling et. al, 2008). The variable functional background of the CEO (FUNC_BACKCEO) is also included. For this variable a dummy variable is created. If a CEO has only one functional background the dummy wil be one or otherwise zero.
Financial expertise of the CEO or the TMT does matter to measure their influence on strategic decision-making, thus the variable FINAN_EXP is included (Buyl et. al, 2014; Bunderson, 2003) to test hypotheses 3a and 3b. A dummy is created for this variable, if the CEO contains financial exprtise, this will be one or zero otherwise. Since age and industry knowledge of the CEO has an influence on the performance of the firm, the variable age (AGE) along with gender (GENDER) is included as control variables (Smith et. al, 2006).
Several studies (Waddock and Graves, 1997; McWilliams and Siegel, 2000; Prior et al., 2008) has shown that firm size is correlated with Corporate Social Responsibility performances. According to Hutton (2004) the key determinant of the future success of an organization is the market value. The market value makes it able for organizations to raise capital, recruit and retain key employees. The control variables in this analyses are FIRM_SIZE, TEAM_SIZE, and MB. FIRM_SIZE contains information about the market value of equity. TEAM_SIZE contains information regarding the size of the TMT team. These control variables are included because these variables can affect reporting behaviors of firms. Since the quality of assurance is important in assuring that reports are giving a fair and reliable view, the variable Auditor is included (Kim et. al, 2012). This variable contains information for if an organization has hired an auditor. And to isolate the effect of the ethical aspect of CSR on earnings management, the variable ROA will be included.
Another expectation is that the industry and the behavior of the competitors will be crucial for the decision to issue and assure an integrated report. Organizations that face a lot of risks concerning the environment and human forces will feel the necessity to inform their stakeholders about their value creation regarding the financial, manufactured, human, intellectual, natural and social capitals of the organization. For example, organizations active in the pharmaceutical industry are held responsible to inform the society how the organization creates value given the circumstances and risks in their business. According to Churet and Eccles (2014), 13% of the total healthcare (39) companies participated scored 40% higher than organizations with no evidence of integrated reporting. The 13% score contains organizations with low to medium evidence of integrated reporting. Therefore an additional control variables will be included. Information regarding which industry an organization operates in will be included as the variable INDUS.
4 Results
4.1 Introduction
In this chapter the results will be discussed provided with statistics and tables. A brief overview will be given regarding the interpretations of the tables and the results founded. The descriptive statistics, frequency tables and a paired t-test of the dataset will be discussed followed by a correlation test, regression analysis, and a corrected robusted regression analysis.
4.2 Sample and statistics
4.2.1 Descriptive statistics
To examine differences in bonus system between firms that issue an integrated report and firms that do not issue an integrated report, the simplest form of analysis is performed: descriptive statistics and t-test. Total observations gathered were 1,725 and 170 integrated reports.
Table 1.1 shows how the sample is selected. First, the firms that did not have an integrated report and firms of the IR list that were not present in the sample population, were removed. After that the duplicates were removed and firms that did not contain observation regarding the variables CEO_STAT, BONUS, Auditor, TeamSize, Financial expertise were removed. This resulted in a final sample of 170 IR firms and 1,725 observation in a period of two years.
TABLE 1.1 SAMPLE SELECTION # of Observations Sample IR 428 Sample population 9,037 Total sample 9,465
Observations – firms with IR not found in sample population 258 Observations – duplicates in firm observations and firms with no CEO status 7,482
Excluded observations (7,740)
Final sample used in regression analyses 1,725
Panel A in table 1.2 shows that all the variables are normally distributed except for the variable bonus, roa and control. The varbiable bonusses is not notmally distributed because the bonus system of every organization differs. The variable ROA differrs, because every return on assets of a firm differs. This is also the reason of control. Since these variables contain firms of
different sizes it is understandible that these variables differ. Panel B in table 1.2 shows the proportion of male and female (dummy one for male and otherewise zero) in the dataset. As noticable there are more male (92.23%) CEO present than female CEO in the dataset. This panel also shows the proportion of the CEO status (dummy variable, one for founder and zero for otherwise). It shows that a large amount (99.67%) of CEO’s are not the founder of the firm. Lastly, panel B shows that a large amount (96.41%) of the dataset is audited by a BIG4 firm or other auditingfirm (dummy auditor for 1 if it is a BIG4 and otherwise zero).
TABLE 1.2 STATISTICS
Panel A: Descriptive statistics
Variable N Mean Std. Dev. Min Max
GRI 1,725 0.0985507 0.2981443 0 0 Bonus 1,725 115.0464 641.9617 0 9978.064 Age 1,725 58.09681 6.510692 37 95 TeamSize 1,725 4.115942 1.11122 0 8 FirmSize 1,725 8.571704 1.486302 4.202652 12.99158 ROA 1,725 5.165336 8.173753 -229.943 39.856 Control 1,725 2.134835 8.047004 0 83.5
Panel B: Frequency table
Variable Dummy Freq. Percent
Male 1 134 7.77 0 1,591 92.23 Total 1,725 100 CeoStat 1 23 1.33 0 1,702 98.67 Total 1,725 100 Auditor 1 1,663 96.41 0 62 2.59 Total 1,725 100
4.2.2 Two sample t-test
Table 1.3 shows that the two sample t-test shows whether or not two populations have different mean values on some measure. The table above shows if there is a difference in mean for bonuses in an integrated report and in a non-integrated report population (with a null hypotheses of no differences). The table 1.3 shows a t-value of 0.2238. A t-value of 0 indicates that the sample results exactly equal to null hypotheses. The table 1.3 also shows that if the mean is lower than zero, the p-value will be 0.5885. The p-value of when the mean is not equal to zero is 0.8829. As the table below shows a p-value of 0.4115 when the mean is higher than zero, this implies that the p-value of the hypotheses are not significant with an alpha till 0.10. Thus, there is no significant evidence found that the mean of bonuses in the integrated report population and non-integrated report population does not differ. This is not in line with the expectations regarding bonus.
TABLE 1.3
TWO SAMPLE T-TEST
Bonus/IR
Group Obs. Mean Std. Err. Std. Dev. [95% Conf. Interval]
0 1,555 116.1905 16.22619 639.8554 84.36294 148.018 1 170 104.5814 50.583178 662.7653 4.234335 204.9284 combined 1,725 115.0464 15.45662 641.9617 84.73069 145.3621 diff 11.60911 51.87208 -90.12977 113.348 4.3 Results 4.3.1 Correlations
A multivariate analysis requires that there is no potential multicollinearity between the independent variables. To analyze if there is a multicollinearity, the Pierson correlation matrix is used. If the absolute value of the correlation is close to 0.8, collinearity is likely to exist. The correlation matrix shown in table 1.4, shows an overview for if the variables are correlated. Table 1.4 shows no
correlation between any variables. The highest value in the table is 0.2495 between the variable ROA and Firm size.
TABLE 1.4
PIERSON CORRELATION
IR Male Bonus CeoStat Age TeamSize FirmSize Auditor ROA Control
IR 1 Male 0.0160 1 Bonus -0.0054 0.0117 1 CeoStat -0.0384 -0.0040 -0.0156 1 Age -0.0001 -0.0246 0,0691 -0.0227 1 TeamSize 0.0653 -0.0301 -0.0099 -0.0258 -0.0001 1 FirmSize 0.2430 0.0276 0.1343 0.0432 0.0237 0.1198 1 Auditor 0.0534 -0.0328 0.0157 0.0224 -0.0804 0.1183 0.2038 1 ROA 0.0344 -0.0208 0.0010 0.0101 -0.0171 -0.0583 0.2495 0.0246 1 Control -0.0171 -0.0562 0.0011 -0.0260 0.1846 -0.0186 -0.1100 -0.1040 0.0687 1 Variable definitions: IR = Integrated report
Male = if the CEO is a male ;dummy for 1= male and 0= female
Bonus = If the firm uses bonuses
CeoStat = If the CEO is the founder of the firm; dummy 1= founder and 0= otherwise; TeamSize = total executives in a firm size as measured by
total assets;
FirmSize = measured by the market value of the firm Auditor = firms that are audited by an auditing firm ; dummy for 1= BIG4 firms as; Deloitte, EY, KPMG and PWC and 0=other auditing firms ROA =return on assets = net income / total assets Control = if the CEO has any voting control
4.3.2 Regression
The regression in table 1.5 examines the probability of issuing an integrated report based on the variables included. The main regression (Main) shows a negative coefficient for the variable BONUS (0,093). This variable has a marginally significant relation at a significance level of 0.10 (10%) with integrated report. This implies that firms that issue an integrated report have lesser bonuses. This finding is in line with the expectation of this variable (Mcguire, 2003; Fabrizi, 2014).
This result rejects my null hypotheses. This means that hypotheses 1a is supported. The main regression also shows a negative coefficient for the variable CEO_STAT (0,037). This coefficient shows a negative significant relation between the CEO status and integrated report at a significance level of 0.5 (5%). This means that if a CEO is the founder (dummy 1= founder and 0= no founder) he/she would be less likely to issue an integrated report. This finding is also in line with the expectation of this variable (Buyl et al., 2011; Finkelstein, 1992). This implies that hypotheses 2 is supported. Also the main regression shows a positive coefficient for the variable FIRMSIZE (0,000). This coefficient is highly significant at a significance level of 0.001 (1%). This states that there is a positive relation between market value and issuing an integrated report. This implies that the higher the market value, the more likely a firm will issue an integrated report. This is also in line with the expected signs for this variable (Hambrick & Mason, 1984). There is no significant association found for the variables MALE, AGE, TEAMSIZE, AUDITOR, ROA, and CONTROL with integrated report. The R-squared shows that 6.51% of the variation is explained by the model. The adjusted R-squared adjusts for the number of independent variable in a model and increases only if the new independent variable improves the analyses more than expected. The adjusted R-squared is around 6.02%. Which slightly decreased compare to the R-squared. Overall the explained variation by the model is low, an r-squared around 26% is preferred.
The variables were corrected on year and fixed effects, this resulted in the second row called Fixed Year. After the correction the analyses slightly changed. The negative coefficient of the variable BONUS did increase from 0.0093 to 0.0094 and is still marginally significant at a significance level of 0.10 (10%). This implies that after correction the variable BONUS is still negatively associated with integrated report, which is still in line with the expectation (Mcguire, 2003; Fabrizi, 2014). Thus, hypothesis 1a is still supported. Fixed Year also shows a negative coefficient for the variable CEO_STAT, this coefficient increased from 0.037 to 0.040 and is still significant at a significance level of 0.05 (5%). This implies that if the CEO is the founder he/she would be less likely to issue an integrated report. This finding is still in line with the expectations and thus hypotheses 2 is supported (Buyl et al, 2011). The coefficient of the variable FirmSize did stay the same after the correction and thus there is a positive significant relation between firm size and integrated report. While the R-squared remain the same, the adjusted R-squared did decrease from 6,02% to 5,97%.
The results of the correction on year, fixed effects, industry and robustness is shown in the column Robust. As notiacble below, the coefficient of the variable BONUS (increased from 0.094 to 0.120) is not significantly associated at a signifiance level of 0.10 (10%) with integrated report. This implies that hypotheses 1a is not supported anymore. This is not in line with the
expectations, but since not every research found a significant relation between bonus and CSR, this is understandible (Mahoney & Thorn, 2006). The output shows a negative coefficient for the variable CEO_STAT. The coefficient of CEO_STAT (decreased from 0.040 to 0.000) is highly significant at a significance level of 0.01 (1%) and is negatively associated with integrated report. Which is now strongly in line with the expectation and thus hyptheses 2 is supported. The coefficient of the variable FirmSize (0.000) is still positively associated with integrated report. This variable is highly siginificant with an alpha of 0.001 (1%). This implies that the bigger the firm value, the more likely the firm will issue an integrated report. This also in line with the expectations. The R-squared and (from 6,5% to 11.53%) adjusted R-squared (from 5.97% to 7.79%) increased comared to the Fixed Year results. This implies that including the corrections of fixed year, industry and robustness did increased the variation explained by the model.
The reults of the column Clustered shows the regression after the correction on year, robustness and clustering on company ID. This regression shows exactly the same results as the robustness analyses. This implies that there is a negative significant (0.000) association between the status of the CEO and the decision to issue an integrated report. Thus hypotheses 2 is supported (Buyl et al., 2011; Finkelstein, 1992). There is also a positive significant (0.000) association between the FirmSize and the decision to issue an integrated report. This is also in line with the expectations for this variable (Hambrick & Mason, 1984). Due to the corrections the association between the variable BONUS and integrated report is not significant anymore, and thus hypotheses 1 is not supported anymore. The R-squared and adjusted R-squared also remained the same.
The frequency table showed in table 1.2 (panel B) showed that none of the CEO’s consisted financial expertise that issued an integrated report. This finding is not in line with the expectation of this variable. This means that hypotheses 3a is not supported. According to this analyses financial expertise is not related to issuing an integrated report. Since there were different opinions found regarding the relation of financial expertise with integrated report, it is understandible that financial expertise does not have a significant affect on the decision-making of integrated report (Hambrick & Mason, 1984; Baatwah et al., 2015). There is also no significant evidence found that the variable TeamSize is related with integrated report. This is not in line with the expectation of this variable. There were also not enough observations for the variable functional background of the CEO (FUNC_BACKCEO) and thus this variable could not be analyzed. Also all the reports gathered were assured by an auditingfirm. Thus hypotheses 1b and 3b could not be analyzed.
For the variable Male, Age, Auditor, ROA and Control there was no prediction done and the output also does not show any significant value for these variables. This implies that these variables are irrelevant for examining the association of the internal motives and integrated reporting.
TABLE 1.5
MULTIPLE REGRESSIONS
Panel A: Expected signs variable
Variable Regression Male ? Bonus - CeoStat - Age ? TeamSize + FirmSize + Auditor ? ROA ? Control ? Panel B: Regressions
Main Fixed Year Robust Clustered
Male 0.011 0.011 0.011 0.011 (0.660) (0.660) (0.639) (0.663) Bonus -0.000* -0.000* -0.000 -0.000 (0.093) (0.094) (0.120) (0.117) CeoStat -0.127** -0.126** -0.126*** -0.126*** (0.037) (0.040) (0.000) (0.000) Age -0.000 -0.000 -0.000 -0.000 (0.761) (0.761) (0.731) (0.765) TeamSize 0.009 0.009 0.009 0.009 (0.179) (0.179) (0.116) (0.190) FirmSize 0.051*** 0.051*** 0.051*** 0.051*** (0.000) (0.000) (0.000) (0.000) Auditor 0.002 0.002 0.002 0.002 (0.956) (0.958) (0.909) (0.906) ROA -0.001 -0.001 -0.001 -0.001 (0.257) (0.256) (0.228) (0.253) Control 0.001 0.001 0.001 0.001
(0.556) (0.557) (0.565) (0.613) 2014.year -0.002 -0.002 -0.002 (0.898) (0.899) (0.869) Constant -0.360*** -0.359*** -0.359*** -0.359*** (0.000) (0.000) (0.000) (0.000) Observations 1,725 1,725 1,725 1,725 R-squared 0.065 0.065 0.1153 0.1153 Ad.R2 0.0602 0.0597 0.0779 0.0779 F-test 13.27 11.94 11.97 8.931 pval in parentheses *** p<0.01, ** p<0.05, * p<0.1 Variable definitions: IR = Integrated report
Male = if the CEO is a male ;dummy for 1= male and 0= female
Bonus = If the firm uses bonuses
CeoStat = If the CEO is the founder of the firm; dummy 1= founder and 0= otherwise; TeamSize = total executives in a firm size as measured by
total assets;
FirmSize = measured by the market value of the firm Auditor = firms that are audited by an auditing firm ; dummy for 1= BIG4 firms as; Deloitte, EY, KPMG and PWC and 0=other auditing firms ROA =return on assets = net income / total assets Control = if the CEO has any voting control
5 Conclusion
The International Integrated Reporting Council (IIRC 2014c) introduced the Integrated Report in august 2010. The aim of integrated report is to provide an explanation to financial capital providers how an organization creates value over time by providing financial and non-financial information over short, medium, and long term. Since the integrated report is on voluntary base, organizations can decide if they want to issue an integrated report. Since it is on voluntary base, organizations often instead of issuing an integrated report include the principles of integrated report to the sustainability report they already issue. Due to the high assurance cost, few organizations decide not to assure their integrated report.
There is a lot of research done regarding the external motives that influence the decision to issue an integrated report, but in my knowledge there is no research done regarding the internal motives to issue an integrated report. According to some researchers CSR reports could help organizations to hide misconduct and to convince the stakeholders that the organizations operated sustainable. They believe that organizations can deceive stakeholders with a CSR report. A lot of studies do show that stakeholders as NGO’s force organizations to think and act sustainable. An integrated report can only increase value in medium and long term if the reasons to issue an integrated report is legitimate. Therefore it is crucial to know what the relation of the internal motives is with issuing and assuring an integrated report. This thesis contributes to the literature by providing a relation between the internal motives and the decision making.
According to several surveys of the BIG4 accounting firms assurance on integrated report did increase in the past few years, but still not a lot of organizations issue an integrated report. Issuing an integrated report is a decision taken by the CEO and board of directors. The CEO gives tasks to the top management team (known from the echelon theory) of the organization. Together they compose their integrated report. Therefore it is important that the CEO characteristics and motives are the same as of the board of directors. It is also important that the CEO and the top management team consist the necessary knowledge to obtain a reliable and faithful integrated report. The next step is to assure the integrated report and since this is voluntary, it is important to know which factors influence the decision to assure the integrated report by an auditing firm. The CEO and the top management teams are being motivated to act according to CSR by several factors. This thesis provides an empirical overview of possible factors that have an influence on the decision making of the CEO and the top management team.
The association is analyzed by using a dataset of 170 U.S. firms. The findings show an overall negative significant association between CEO status and integrated report. This implies that if the CEO is the founder of the firm, than the CEO will be less likely to issue an integrated report. This is in line with the findings according to Hambrick and Mason (1984) and Finckelstein (1992). There is also a highly significant positive association found between market value and integrated report. This implies that how higher the market value of a firm is, the more likely the firm will issue an integrated report. This means that firms that are much bigger will be more drawn to issue an integrated report. This founding is according to the studies (Waddock and Graves, 1997; McWilliams and Siegel, 2000; Prior et al., 2008). The list of organizations that issue an integrated report were all assured by an auditing firm. Also none of the CEO’s of these firm consisted financial expertise. The analyses did find support for hypotheses two, but did not find any support for hypotheses one and three. This implies that there is no relation between financial expertise of a CEO with issuing an integrated report. Also every integrated report was assured. A probable reason for this can be that firms that already issued an integrated report are more likely to assure it as well. Since these organizations already issued an integrated report, it is understandable that they would like to show that their report gives a faithful and reliable view.
A limitation of this thesis was the small sample of organizations that issued an integrated report. Due to the voluntary base and including integrated report principles in sustainability reports, it was difficult to collect a precise list with the organizations that issue an integrated report or include the principles of integrated report in a sustainability report. Also several databases did not provide data of 2015, and since integrated reports started to issue in 2013, only data from 2013 till 2014 was available. Since the databases consisted firms with high market value, it is understandable that all the firms hired an auditor. Organizations that are financially healthy always let their reports assured. Due to this reason every integrated report was assured. Also there were not enough observations available for the variable functional background of the CEO. Due to this it was not possible to analyze this variable. Further research is required with the organization that are issuing an integrated report. A survey research or a qualitative research will help to understand the personal motives much better. Since the integrated report is still developing the motives to issue and assure an integrated report will change within years Villiers et al. (2014). Research that covers multiple years of organizations that issue an integrated report will help to give a more precise picture regarding the motives of the CEO and TMT. Interviews will make it easier to understand the personal motives of each CEO and the top management team.
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